CFS BANCSHARES, INC.
[PICTURE OF CFS BANCSHARES, INC. APPEARS HERE]
ANNUAL REPORT 2000
<PAGE>
MORE THAN YOU KNEW
TABLE OF CONTENTS
TO OUR SHAREHOLDERS................................................... 3
BOARD OF DIRECTORS.................................................... 4
BANK OFFICERS......................................................... 5
MANAGEMENT'S DISCUSSION AND ANALYSIS.................................. 6
SELECTED FINANCIAL DATA............................................... 13
INDEPENDENT AUDITORS' REPORT.......................................... 15
CONSOLIDATED FINANCIAL STATEMENTS..................................... 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................ 22
CORPORATE INFORMATION................................................. 45
....AND EVERYTHING YOU NEED IN A BANK.
<PAGE>
TO OUR SHAREHOLDERS
--------------------------------------------------------------------------------
[Picture of Bunny Stokes, Jr.,
Chairman and Chief Executive Officer
Appears Here]
CFS Bancshares, Inc. and its
subsidiary bank, Citizens Federal Savings
Bank have enjoyed a successful year in this
economic environment. The economy is gradually
slowing down and Federal Reserve policy makers
will perhaps have enough evidence by early
2001 to justify lowering short-term interest
rates.
Let me share with you some of the
goods news based on our performance in the
new millenium. At September 30, 2000, the
Company's total assets were $100,563,728 as
compared to $96,104,373 at September 30, 1999,
an increase of $4,459,355 or 4.64%. Our
deposits totaled $76,334,441 at September 30,
2000 compared to $75,180,323 at September 30,
1999, an increase of $1,154,118 or 1.54%.
We are moving in the right direction.
Our net income for the year ended September
30, 2000 was $499,320 compared to $385,587 for
the year ended September 30, 1999, an increase
of $113,733 or 29.50%.
Growing to over $100,000,000 in assets
is significant to us because we are now ranked as the largest African-American
owned financial institution in the state of Alabama.
Based on our liquidity and capital strength, our board of directors
declared a divdiend of $.75 per share to our shareholders as of December 8,
2000.
This is a challenging time for community banks. Our mission in the new millenium
will be to:
o Profitably acquire and increase core deposits;
o Use value-added strategies to retain customers and strengthen
relationships; and
o Seek ways to enhance our services and expand our bank into new
market areas.
Our promise is to provide you with the best service possible. We are
building for the future and want to thank you, our shareholders and customers,
for your loyal and continued support.
Sincerely,
/s/ Bunny Stokes, Jr.
Bunny Stokes, Jr.
Chairman of the Board and
Chief Executive Officer
3
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BOARD OF DIRECTORS
--------------------------------------------------------------------------------
[PICTURE OF BUNNY STOKES, JR.
Chairman/CEO
Burlington, Alabama
APPEARS HERE]
[PICTURE OF CHARLES A. LETT
Pastor, Calvary Missionary Baptist Church
Selma, Alabama
APPEARS HERE]
[PICTURE OF JOHN T. PORTER
Pastor, Emeritus
Sixth Avenue Baptist Church
Birmingham, Alabama
APPEARS HERE]
[PICTURE OF JAMES W. COLEMAN
Private Consultant
Eutaw, Alabama
APPEARS HERE]
[PICTURE OF BENJAMIN GREENE
Private Consultant
Birmingham, Alabama
APPEARS HERE]
[PICTURE OF DR. ROSS E. GARDNER
Board Certified Otolaryngologist
Birmingham, Alabama
APPEARS HERE]
[PICTURE OF ODDESSA WOOLFOLK
Private Consultant and Lecturer
Birmingham, Alabama
APPEARS HERE]
4
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BANK OFFICERS
--------------------------------------------------------------------------------
[PICTURE OF BUNNY STOKES, JR.
Chairman of the Board and
Chief Executive Officer
Burlington, Alabama
APPEARS HERE]
[PICTURE OF CYNTHIA D. NALLS
Executive Vice Preisdent
Chief Operations Officer
APPEARS HERE]
[PICTURE OF W. KENT MCGRIFF
Executive Vice President
Chief Financial Officer
APPEARS HERE]
5
<PAGE>
Management Discussion
--------------------------------------------------------------------------------
And Analysis
PROFILE
CFS Bancshares, Inc. ("CFS Bancshares" or "the Company") was organized by
Citizens Federal Savings Bank ("Citizens Federal" or "the Bank") to be a savings
and loan holding company. The Company was organized at the direction of the Bank
in January 1998 to acquire all of the capital stock of the Bank upon the
consummation of the reorganization of the Bank into the holding company form of
ownership, which was completed on June 30, 1998. The Company's stock became
registered under the Securities Exchange Act of 1934 on June 30, 1998. The
Company has no significant assets other than the corporate stock of the Bank.
For that reason the discussion in the annual report relates primarily to the
operations of the Bank.
Citizens Federal Savings Bank was chartered by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision (OTS) in September 1956, and has
been in operation since that time. The Bank is a member of the Federal Deposit
Insurance Corporation (FDIC) with its deposit accounts insured up to applicable
limits by the Savings Association Insurance Fund (SAIF) and of the Federal Home
Bank (FHLB). On March 28, 1983, Citizens Federal's charter was restated when it
converted from a federal mutual savings and loan association to a federal
capital stock association through the sale and issuance of 130,000 shares of
common stock. On October 10, 1983, the Bank converted from a federal stock
savings and loan association to a federal stock savings bank.
Citizens Federal's operations are conducted from its main office headquarters at
1700 3rd Avenue North, Birmingham, Alabama, and branch offices at 2100 Bessemer
Road, Birmingham, Alabama, and 213 Main Street, Eutaw, Alabama.
The Bank's primary business is the promotion of thrift through the solicitation
of savings accounts from its depositors and the general public, and the
promotion of home ownership through the granting of mortgage loans, principally
to finance the purchase and/or construction of residential dwellings and to a
lesser extent non-residential buildings located within its principal lending
area in Jefferson and Greene Counties, Alabama.
At the present time, there is neither an established market in which shares of
CFS Bancshares, Inc. capital stock are regularly traded nor any uniformly quoted
price for such shares. During 1989, the Bank's board of directors adopted an
Employee Stock Ownership Plan (ESOP) for the benefit of the Bank's employees. As
of September 30, 2000 the ESOP owned 30,790 shares or 23.69% of the Company's
outstanding common stock.
Based on recent trades known to the Company, the price per share of the
Company's stock is approximately $18.50 per share. The stock of CFS Bancshares,
Inc. is traded only sporadically and is not listed on any exchange. There have
been less than 15 transactions during the past two years of which the Company is
aware, all of which were at $18.50 per share. The Company paid annual dividends
of $.75 per share in December 1999 and 1998, respectively. A cash dividend of
$.75 per share was also declared by the board of directors of CFS Bancshares on
November 16, 2000, payable to all stockholders of record as of December 8, 2000.
As of December 8, 2000 the Bank had 319 shareholders.
6
<PAGE>
At September 30, 2000, the Company's total assets were $100,563,728 as compared
to $96,104,373 at September 30, 1999, an increase of $4,459,355 or 4.64%. The
increase in total assets resulted from an increase in net loans receivable of
$4,716,880 from $43,521,160 at September 30, 1999, to $48,238,040 at September
30, 2000, and a net increase in the Bank's total investment portfolio of
$4,369,974 from $38,534,066 at September 30, 1999, to $42,904,040 at September
30, 2000. The increase in loan and investments was partially offset by a
decrease in cash and cash equivalents of $4,095,096 from $7,689,451 at September
30, 1999, to $3,594,355 at September 30, 2000. The increase in net loans
receivable resulted from an increase in the volume of loans granted during the
year including the purchase of adjustable rate loans serviced by another
institution. The Bank's primary emphasis continues to be mortgage lending, as
10.06 million or 90.05% of the 11.17 million in loans granted or purchased
during the year were mortgage loans.
Deposits totaled $76,334,441at September 30, 2000, compared to $75,180,323 at
September 30, 1999, an increase of $1,154,118 or 1.54%. The increase was the
result of an increase of 3.13 million in jumbo certificates of deposit and was
partially offset by modest declines in all other categories of deposits. FHLB
advances at September 30, 2000, increased by $3,100,000 from $11,850,000 at
September 30, 1999, to $14,950,000. The increased borrowings include a
$3,000,000 advance to fund the purchase of adjustable rate loans during August
2000. The Bank's one to four family residential mortgage portfolio serves as
collateral for the FHLB advances.
Non-performing assets, which include non-accrual loans and real estate acquired
by foreclosure (REO) increased $402,298 or 18.10% from $1,438,950 at September
30, 1999, to $1,841,248 at September 30, 2000, as non-accrual loans increased
from $1,391,680 at September 30, 1999, to $1,755,011 at September 30, 2000, and
REO increased by $38,967 from $47,270 at September 30, 1999, to $86,237 at
September 30, 2000. Due to the increase in the number and amount of
non-performing loans, management recorded an addition of $50,000 to the
allowance for loan losses during the year ended September 30, 2000. At September
30, 2000, non-performing assets represented 1.44% of total assets while
non-accrual loans represented 3.46% of gross loans outstanding, each of which
represents an increase from September 30, 1999, when non-performing assets
represented 1.50% of total assets while non-accrual loans were 3.03% of gross
loans outstanding.
Interest rate levels, the health of the economy (particularly the real estate
economy), securities transactions and the amount of non-performing assets affect
the Bank's financial condition and results of operations.
Comparison of years ended September 30, 2000 and September 30, 1999
GENERAL
Net income for the year ended September 30, 2000, was $499,320 compared to
$385,587 for the year ended September 30, 1999, an increase of $113,733 or
29.50%. The increase is primarily the result of decreases in provisions for loan
losses and an increase in net interest income. The provision for loan losses
decreased from $45,000 for the fiscal year ended September 30, 1999, to
($104,500) for the 2000 fiscal year. During the year ended September 30, 2000,
the Bank collected $154,500 of loans which had been previously charged off. This
recovery was offset by additions to the allowance of $50,000 to create the
negative provision in 2000. The Bank's operating results depend largely upon its
net interest margin, which is the difference between the income earned on loans
and investments, and the interest expense paid on deposits and borrowings,
divided by average total interest
7
<PAGE>
earning assets. The net interest margin is affected by the economic and market
factors that influence interest rates, loan demand and deposit flows. The
interest rate margin increased from 3.56% for the year ended September 30, 1999,
to 3.58% for the year ended September 30, 2000.
INTEREST INCOME
Net interest income before provision for loan losses increased by $180,103 or
6.00% from $3,003,472 for the year ended September 30, 1999, to $3,183,575 for
the 2000 fiscal year. Interest and fees on loans for the fiscal year ended
September 30, 2000, were $3,910,135 and $3,974,970 for the fiscal year ended
September 30, 1999, a decline of $64,835 or 1.63%. Interest and dividend income
on investment securities and interest income on mortgage backed securities
increased by $234,460 and $262,055, respectively, from $312,138 and $1,863,885,
respectively for fiscal 1999 to $546,598 and $2,125,940, respectively for the
2000 fiscal year end. The increases resulted from increases in the average
balance outstanding of investment securities and mortgage backed securities as
well as increases in the average rate of interest received on those respective
security groups. Combined interest income on federal funds sold and other
interest income increased by $21,000 or 20.19% when compared to fiscal year end
1999 as the result of an increase of approximately 92 basis points in the
average yield in federal funds and interest bearing deposits.
INTEREST EXPENSE
Total interest expense increased by $272,577 from $3,251,540 for the fiscal year
ended September 30, 1999, to $3,524,117 for the fiscal year ended September 30,
2000, an increase of 8.38%. The increase resulted from increases in market
interest rates which impact the rates paid on the Bank's interest bearing
liabilities and from increases in the average balance of interest bearing
liabilities outstanding. (See table of selected financial data for additional
detail). The average rate paid on interest bearing liabilities increased by 13
basis points from 3.93% for the fiscal year ended September 30, 1999, to 4.06%
for the 2000 fiscal year.
OTHER INCOME
Total other income decreased $82,731 or 15.37% for the year ended September 30,
2000 compared to the fiscal year ended September 30, 1999. The primary changes
between the 2000 fiscal year and the 1999 fiscal year occurred in the other
category and in gains and losses on the sale of investment securities. Other
income declined from $99,889 for the year ended September 30, 1999, to $46,293
for the 2000 fiscal year, a decrease of $53,596. During the 1999 fiscal year the
Bank recognized approximately $50,000 from the recapture of a litigation reserve
while there was no such item during the 2000 fiscal year. Gains on the sale of
investment securities declined $33,611 from a gain of $27,486 for the fiscal
year ended September 30, 1999, to a loss of $6,125 for the 2000 fiscal year.
OTHER EXPENSE
Total other expense consists of salaries and employee benefits, occupancy and
equipment expense, FDIC deposit insurance, data processing expense, legal and
professional services, advertising and other expenses. The costs of carrying and
administering non-performing assets is also included in other expense. Other
expense increased by $73,858 or 2.55% from $2,894,360 for the fiscal year ended
September 30, 1999, to $2,968,218 for the 2000 fiscal year. Two expense
categories, other and professional services, increased by $135,167 and $81,753
respectively
8
<PAGE>
from $345,673 and $172,103, respectively for the year ended September 30, 1999,
to $480,840 and $253,856, respectively for the 2000 fiscal year. The increase in
other includes increases in franchise and property tax of $57,576; bad check
expense of $19,996; contributions of $16,357; and write downs of foreclosed
assets of $8,180 for the fiscal year ended September 30, 2000, as compared to
fiscal 1999. The increase in franchise and property tax resulted from the
revamping of Alabama franchise tax law because prior law had been declared
unconstitutional, and from an increase in property tax resulting from recent
revaluation of property values. The increase in professional services was
primarily the result of an unsuccessful bid by the Bank for an institution
offered for sale by the FDIC and from legal expenses associated with the workout
of two classified loans.
Comparison of years ended September 30, 1999 and September 30, 1998
GENERAL
Net income for the year ended September 30, 1999 was $385,587 compared to
$218,950 for the year ended September 30, 1998 an increase of $166,637 or
76.11%. The increase is primarily the result of decreases in provisions for loan
losses and operating expenses and an increase in other income. The provision for
loan losses decreased from $176,000 for the fiscal year ended September 30, 1998
to $45,000 for the 1999 fiscal year as the amount of loans classified as loss
declined. The Bank's operating results depend largely upon its net interest
margin which is the difference between the income earned on loans and
investments, and the interest expense paid on deposits and borrowings, divided
by average total interest earning assets. The net interest margin is affected by
the economic and market factors that influence interest rates, loan demand and
deposit flows. The interest rate margin increased from 3.44% for the year ended
September 30, 1998 to 3.56% for the year ended September 30, 1999.
INTEREST INCOME
Net interest income before provision for loan losses decreased by $14,730 or
.49% from $3,018,202 for the year ended September 30, 1998 to $3,003,472 for the
1999 fiscal year. Average market interest rates during the fiscal year ended
September 30, 1999 were lower than those during the fiscal year ended September
30, 1998 and as a result there were declines both in interest received on
interest earning assets and interest paid on interest bearing liabilities during
the 1999 fiscal year when compared to the fiscal year ended September 30, 1998.
Interest and fees on loans decreased modestly between the fiscal year ended
September 30, 1998 and the 1999 fiscal year as the result of slight declines in
the average balance of loans outstanding and the average yield on loans
receivable. Interest and fees on loans for the fiscal year ended September 30,
1999 were $3,974,970 and $3,990,297 for the fiscal year ended September 30, 1998
a decline of $15,327 or .38%. Interest and dividend income on investment
securities and interest income on mortgage backed securities declined by
$166,374 and $20,758, respectively, from $478,512 and $1,884,643, respectively
for fiscal 1998 to $312,138 and $1,863,885, respectively for the 1999 fiscal
year end. The declines resulted from declines in the average balance outstanding
of investment securities and mortgage backed securities as well as declines in
the average rate of interest received on those respective security groups.
Interest income on federal funds sold and other interest income declined by
$47,384 and $38,146, respectively from $112,612 and $76,937 for the year ended
September 30, 1998 to $65,228 and $38,791, respectively for the 1999 fiscal
year. The declines were the result of decreases in both the average balance
outstanding as well as the average rate earned on the respective investments.
9
<PAGE>
INTEREST EXPENSE
Total interest expense decreased by $273,259 from $3,524,799 for the fiscal year
ended September 30, 1998 to $3,251,540 for the fiscal year ended September 30,
1999 a decrease of 7.75%. The decrease resulted from decreases in market
interest rates which impact the rates paid on the Bank's interest bearing
liabilities and from decreases in the average balance of interest bearing
liabilities outstanding. (See table of selected financial data for additional
detail). The average rate paid on interest bearing liabilities decreased by 20
basis points from 4.13% for the fiscal year ended September 30, 1998 to 3.93%
for the 1999 fiscal year.
OTHER INCOME
Total other income increased $48,329 or 9.86% for the year ended September 30,
1999 compared to the fiscal year ended September 30, 1998. The primary change
between the 1999 fiscal year and the 1998 fiscal year occurred in the other
category which increased from $38,699 for the year ended September 30, 1998 to
$99,889 for the year. The increase resulted from the recognition of income on
the recapture of a litigation reserve that had been set up approximately four
years ago. The matter was settled during the current fiscal year for
approximately $50,000 less than the amount of the reserve which had been
previously recorded.
OTHER EXPENSE
Total other expense consists of salaries and employee benefits, occupancy and
equipment expense, FDIC deposit insurance, data processing expense, legal and
professional services, advertising and other expenses. The costs of carrying and
administering non-performing assets is also included in other expense. Other
expense decreased by $87,196 or 2.92% from $2,981,556 for the fiscal year ended
September 30, 1998 to $2,894,360 for the 1999 fiscal year. Two expense
categories, depreciation and amortization and advertising expense, increased by
$24,023 and $25,244, respectively from $277,258 and $137,931, respectively for
the year ended September 30, 1998 to $301,281 and $163,175, respectively for the
1999 fiscal year. The increase in depreciation occurred primarily as the result
of purchases of new computer equipment related to a change of data processing
firms during the final quarter of the fiscal year ended September 30, 1998. The
increase in advertising resulted from an increase in the sponsorship of
community events during the 1999 fiscal year as compared to previous years. The
increases described above were offset by decreases in professional services of
$53,071 and in other expense of $81,915 when comparing the year ended September
30, 1999 to the prior fiscal year. Professional services decreased from $225,174
for the fiscal year ended September 30, 1998 to $172,103 for the 1999 fiscal
year. During fiscal 1998 the Bank reorganized into the holding company form of
ownership and incurred additional legal and accounting expenses. Decreases in
the other category occurred in several different areas. The most significant
single item was a decrease related to the write-down of an investment in a small
business investment corporation. The Bank wrote off a $25,000 investment during
the year ended September 30, 1998 while there was no such item during the 1999
year.
10
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The Bank's primary sources of liquidity are deposits, loan payments, maturing
investment securities, principal and interest payments on investments,
mortgage-backed securities and CMOs, and advances from the Federal Home Loan
Bank of Atlanta. Management believes it is prudent to maintain an investment
portfolio that not only provides a source of income, but also provides a source
of liquidity through its principal payments and maturities to meet lending
demands and fluctuations in deposit flows. The various sources of liquidity are
utilized to fund withdrawals, new loans and other investments, as well as to pay
expenses of operations. Management believes that the Bank's various sources of
funds are adequate to meet its commitments in the ordinary course of business.
The Bank is required under applicable federal regulations to maintain specified
levels of cash and liquid investments equal to a required percentage of net
withdrawable deposit accounts. The Bank exceeded all regulatory liquidity
requirements during the years ended September 30, 2000, and 1999.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
at right) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of September 30, 2000, that
the Bank meets all capital adequacy requirements and meets the requirements to
be classified as "well capitalized."
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $8,780,000 17.6% $3,997,304 8.0% $4,996,630 10.0%
Tier I capital
(to risk weighted assets) $8,610,000 17.2% $1,998,652 4.0% $2,997,978 6.0%
Tier I capital
(to average assets) $8,610,000 8.8% $3,933,362 4.0% $4,916,703 5.0%
</TABLE>
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IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation. Unlike most industrial companies, virtually all the
assets and liabilities of the thrift institution 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. Because the Bank's
primary assets are loans and investment securities, which include more fixed
rate, fixed term loans and securities than adjustable rate loans and
investments, changes in interest rates in the economy have a gradual impact on
yield on assets. The Bank's principal liability is deposit accounts, which are
primarily short term in nature and, therefore, adjust rapidly with changes in
the economy. In general, periods of high inflation are accompanied by high
interest rates. When rates move up rapidly, the Bank's cost of funds increases
rapidly while the yield on its assets increases slowly, resulting in a negative
impact on net income. Conversely, during periods of low inflation, lower and
more moderate interest rates are normally present, which results in a low cost
of funds and a more favorable impact on net income.
CONTINGENCIES AND COMMITMENTS
The Bank is defending various claims arising out of the conduct of its business.
While the ultimate results of these claims cannot be predicted with certainty,
in the opinion of management, the ultimate disposition of these matters will not
have a significant effect on the consolidated financial position of the Company.
[PICTURE APPEARS HERE]
Information About Forward-Looking Statements
Any statement contained in this report which is not a historical fact, or which
might otherwise be considered an opinion or projection concerning the Bank or
its business, whether expressed or implied, is meant as and should be considered
a forward-looking statement as that term is defined in the Private Securities
Litigation Reform Act of 1996. Forward-looking statement are based on
assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described in
the Bank's filings with the Securities and Exchange Commission, including this
Annual Report on Form 10-KSB. If any of these assumptions or opinions prove
incorrect, any forward-looking statements made on the basis of such assumptions
or opinions may also prove materially incorrect in one or more respects.
12
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SELECTED FINANCIAL DATA
(Dollars in thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
At September 30,
-------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEETS
Total assets 100,564 96,104 92,166 99,640 85,997
Loans, net 48,238 43,521 45,413 42,573 30,532
Investment securities 42,904 38,534 35,461 44,718 41,611
Deposits 76,334 75,180 73,892 76,346 76,793
Borrowed funds 14,950 11,850 9,200 9,200 --
Stockholders' equity 8,223 7,763 7,908 7,798 7,312
Shares outstanding
(actual number) 130,000 130,000 130,000 130,000 130,000
Book value per share 63.25 59.71 60.83 59.98 56.25
<CAPTION>
Years ended September 30,
-------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
OPERATIONS
<S> <C> <C> <C> <C> <C>
Interest income 6,708 6,255 6,543 6,016 5,967
Interest expense 3,524 3,252 3,525 3,127 3,169
Net interest income 3,184 3,003 3,018 2,889 2,798
Provision for loan loss (104) 45 176 -- --
Net gain (loss) on securities (6) 27 47 141 --
Other noninterest income 461 511 443 475 380
SAIF special assessment expense -- -- -- -- 494
Other noninterest expense 2,968 2,894 2,981 2,947 2,979
Income (loss) before income taxes 775 602 351 558 (295)
Income tax (benefit) expense 276 217 132 (200) 102
Net income (loss) 499 386 219 358 (193)
PER SHARE INFORMATION
Basic earnings per share 3.94 3.05 1.72 2.75 (1.49)
Basic weighted average shares outstanding 126,621 126,419 127,218 130,000 130,000
Diluted earnings per share 3.71 2.89 1.57 2.75 (1.49)
Diluted weighted average shares outstanding 134,421 133,619 139,018 130,000 130,000
Cash dividends declared .75 .75 .75 .75 .75
</TABLE>
<TABLE>
<CAPTION>
At or for the years ended September 30,
---------------------------------------
OTHER DATA 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average yield on interest earning assets 7.67% 7.48% 7.56% 7.63% 7.49%
Average rate on deposits and borrowed funds 4.13% 3.90% 4.13% 4.01% 4.14%
Interest rate spread 3.54% 3.58% 3.43% 3.62% 3.35%
Return on average assets .52% .41% 0.23% 0.42% -0.22%
Return on average stockholders' equity 6.40% 4.98% 2.77% 4.80% -2.56%
Equity to assets ratio 8.18% 8.08% 8.58% 7.83% 8.50%
Dividend payout ratio 19.53% 25.29% 44.53% 27.23% n/a
</TABLE>
13
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AVERAGE BALANCE SHEETS AND INTEREST MARGINS
The following table set forth certain information relating to the Bank's
average balance sheets, including interest earning assets, interest bearing
liabilities and net interest margin.
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended September 30,
--------------------- -------------------------
2000 1999 1998
Average Yield or Average Yield or Average Yield or
------- -------- ------- -------- ------- --------
Balance Rate Balance Rate balance rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds and interest bearing deposits 2,195 5.67% 2,188 4.75% 3,406 5.57%
Investments securities held to maturity (1) 5,180 6.19% 6,744 6.22% 8,187 6.39%
Investment securities available for sale 36,025 6.53% 30,853 5.70% 31,180 5.90%
Loans, net (2) 44,986 8.58% 44,247 8.69% 44,920 8.88%
------ ---- ------ ---- ------ ----
Total interest earning assets 88,386 7.54% 84,032 7.41% 87,693 7.50%
Loan loss allowances (285) (461) (447)
Non-interest earnings assets 8,079 8,080 7,711
------ ------ ------
Total assets 96,180 92,112 94,957
------ ------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits 74,954 3.78% 73,502 3.70% 75,374 3.90%
FHLB advances 11,836 5.89% 9,385 5.68% 9,913 5.93%
------ ---- ------ ---- ------ ----
Total interest bearing liabilities 86,790 4.06% 82,887 3.93% 85,287 4.13%
Accrued interest on deposits 285 338 287
Other liabilities 1,305 1,096 1,481
Stockholders' equity 7,800 7,791 7,902
------ ------ ------
Total liabilities and stockholders'
equity 96,180 92,112 94,957
------ ------ ------
Interest rate spread 3.48% 3.48% 3.37%
Net interest margin (3) 3.58% 3.56% 3.44%
<FN>
(1) Includes Federal Home Loan Bank stock
(2) Loan yields calculated using average balance of gross loans
(3) Net interest income before loan loss provision divided by total average
interest earning assets.
</FN>
</TABLE>
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
CFS Bancshares, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CFS Bancshares,
Inc. and subsidiaries (the Company) as of September 30, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended September 30, 2000. 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 auditing standards generally accepted
in the United States of America. 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 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 CFS Bancshares, Inc.
and subsidiaries as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
November 17, 2000
15
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 and 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------- ------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,918,542 4,811,709
Federal funds sold and overnight deposits 675,813 2,877,742
------------- ------------
Total cash and cash equivalents 3,594,355 7,689,451
Interest-earning deposits in other financial institutions 163,142 161,524
Investment securities held to maturity (fair value of
$3,506,924 and 4,919,789, respectively) 3,527,879 4,929,808
Investment securities available for sale, at fair value (cost of
$40,099,815 and $34,389,879, respectively) 39,376,161 33,604,258
Federal Home Loan Bank stock 747,500 592,500
Loans receivable, net 48,238,040 43,521,160
Premises and equipment, net 3,644,836 3,871,433
Real estate acquired by foreclosure, net 86,237 47,270
Accrued interest receivable on investment securities 149,907 122,584
Accrued interest receivable on mortgage-backed securities 185,749 169,254
Accrued interest receivable on loans 324,482 317,617
Other assets 525,440 1,077,514
------------- ------------
Total assets $ 100,563,728 96,104,373
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest-bearing deposits $ 76,334,441 75,180,323
Advance payments by borrowers for taxes and insurance 267,533 257,724
Other liabilities 725,003 981,602
Employee stock ownership plan debt 64,000 72,000
FHLB advances 14,950,000 11,850,000
------------- ------------
Total liabilities 92,340,977 88,341,649
Stockholders' equity:
Serial preferred stock; 300,000 shares authorized; none outstanding -- --
Common stock of $1 par value; 700,000 shares authorized;
130,000 shares issued and outstanding 130,000 130,000
Additional paid-in capital 1,184,758 1,180,060
Retained earnings-substantially restricted 7,422,368 7,020,548
Accumulated other comprehensive income (loss) (463,139) (502,798)
Unearned common stock held by ESOP (51,236) (65,086)
------------- ------------
Total stockholders' equity 8,222,751 7,762,724
------------- ------------
Commitments and contingencies (notes 13 and 14) -- --
------------- ------------
Total liabilities and stockholders' equity $ 100,563,728 96,104,373
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended September 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 3,910,135 3,974,970 3,990,297
Interest and dividend income on investment securities 546,598 312,138 478,512
Interest income on mortgage-backed securities 2,125,940 1,863,885 1,884,643
Interest income on federal funds sold 58,876 65,228 112,612
Other interest income 66,143 38,791 76,937
----------- ----------- -----------
Total interest income 6,707,692 6,255,012 6,543,001
Interest expense:
Interest on deposits 2,827,735 2,719,276 2,937,155
Interest on FHLB advances 696,382 532,264 587,644
----------- ----------- -----------
Total interest expense 3,524,117 3,251,540 3,524,799
----------- ----------- -----------
Net interest income 3,183,575 3,003,472 3,018,202
Provision for (recovery of) loan losses (104,500) 45,000 176,000
----------- ----------- -----------
Net interest income after provision for loan losses 3,288,075 2,958,472 2,842,202
----------- ----------- -----------
Other income:
Service charges on deposit accounts 415,469 410,993 404,746
(Losses) gains on sales and calls of investment securities (6,125) 27,486 46,594
Other 46,293 99,889 38,699
----------- ----------- -----------
Total other income 455,637 538,368 490,039
----------- ----------- -----------
Other expense:
Salaries and employee benefits 1,372,332 1,333,455 1,330,058
Net occupancy expense 120,853 115,754 128,439
Federal insurance premiums 56,786 97,494 100,106
Data processing expenses 208,665 229,336 226,734
Professional services 253,856 172,103 225,174
Depreciation and amortization 281,325 301,281 277,258
Advertising expense 70,302 163,175 137,931
Office supplies 57,198 75,420 67,759
Insurance expense 66,061 60,669 60,509
Other 480,840 345,673 427,588
----------- ----------- -----------
Total other expense 2,968,218 2,894,360 2,981,556
----------- ----------- -----------
Income before income taxes 775,494 602,480 350,685
Income tax expense 276,174 216,893 131,735
----------- ----------- -----------
Net income $ 499,320 385,587 218,950
=========== =========== ===========
Basic earnings per share $ 3.94 3.05 1.72
=========== =========== ===========
Basic weighted average shares outstanding 126,621 126,419 127,218
=========== =========== ===========
Diluted earnings per share $ 3.71 2.89 1.61
=========== =========== ===========
Diluted weighted average shares outstanding 134,421 133,619 136,018
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years ended September 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Accumulated Unearned
Retained other common
Additional earnings - comprehensive stock Total
Common paid-in substantially income held by stockholders' Comprehensive
stock capital restricted (loss) ESOP equity income (loss)
------- ---------- ------------- ------------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $ 130,000 1,160,760 6,611,011 27,038 (130,941) 7,797,868
Net income -- -- 218,950 -- -- 218,950 $ 218,950
Unrealized loss on investment
securities available for
sale, net -- -- -- (19,436) -- (19,436) (19,436)
---------
Comprehensive income $ 199,514
=========
Purchase of Employee Stock
Ownership Plan shares -- -- -- -- (63,700) (63,700)
Difference between fair
value and cost of Employee
Stock Ownership Plan shares
committed to be released -- 6,400 -- -- -- 6,400
Release of Employee Stock
Ownership Plan shares -- -- -- -- 65,470 65,470
Cash dividends declared
($.75 per share) -- -- (97,500) -- -- (97,500)
-------- --------- --------- -------- ------- ---------
Balance at September 30, 1998 130,000 1,167,160 6,732,461 7,602 (129,171) 7,908,052
Net income -- -- 385,587 -- -- 385,587 $ 385,587
Unrealized loss on investment
securities available for
sale, net -- -- -- (510,400) -- (510,400) (510,400)
---------
Comprehensive loss $(124,813)
=========
Difference between fair
value and cost of Employee
Stock Ownership Plan shares
committed to be released -- 12,900 -- -- -- 12,900
Release of Employee Stock
Ownership Plan shares -- -- -- -- 64,085 64,085
Cash dividends declared
($.75 per share) -- -- (97,500) -- -- (97,500)
-------- --------- --------- -------- ------- ---------
Balance at September 30, 1999 130,000 1,180,060 7,020,548 (502,798) (65,086) 7,762,724
Net income -- -- 499,320 -- -- 499,320 $ 499,320
Unrealized gain on investment
securities available for
sale, net -- -- -- 39,659 -- 39,659 39,659
---------
Comprehensive income $ 538,979
=========
Difference between fair
value and cost of Employee
Stock Ownership Plan shares
committed to be released -- 4,698 -- -- -- 4,698
Release of Employee Stock
Ownership Plan shares -- -- -- -- 13,850 13,850
Cash dividends declared
($.75 per share) -- -- (97,500) -- -- (97,500)
-------- --------- --------- -------- ------- ---------
Balance at September 30, 2000 $130,000 1,184,758 7,422,368 (463,139) (51,236) 8,222,751
======== ========= ========= ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 499,320 385,587 218,950
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for (recovery of) loan losses (104,500) 45,000 176,000
Depreciation and amortization 281,325 301,281 277,258
Net amortization of premium and accretion
of discount on investment securities 46,066 134,208 85,517
Net accretion of discount on loans (50,188) (61,607) (78,356)
Compensation expense recognized on
ESOP shares allocation 18,548 36,162 85,700
Loss (gain) on sale of investment securities
available for sale, net 4,083 (25,850) (43,717)
Loss (gain) on sale of investment securities held to
maturity, net 2,042 -- --
Gain on call of investment securities
available for sale, net -- (1,636) (2,877)
Loss (gain) on sale of real estate acquired by foreclosure (16,552) (5,482) 4,243
Charge-off of investment security held to maturity -- -- 25,000
Decrease (increase) in accrued interest receivable (50,683) 31,858 (1,513)
Decrease (increase) in other assets 529,765 (336,694) (98,083)
Increase (decrease) in other liabilities (256,599) 261,920 (146,797)
Increase (decrease) in accrued interest on deposits 88,647 38,448 (24,394)
--------- --------- ---------
Net cash provided by operating activities 991,274 803,195 476,931
--------- --------- ---------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 2000, 1999, and 1998
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from investing activities:
Increase in interest-earning
deposits in other financial institutions $ (1,618) (2,009) (1,941)
Proceeds from sale of investment securities held to maturity 81,232 -- --
Purchases of investment securities held to maturity -- (502,656) --
Purchase of mortgage - backed securities
held to maturity -- (953,886)
Proceeds from principal collected on mortgage-
backed securities and collateralized mortgage 1,305,991 2,837,205 2,418,154
obligations held to maturity
Proceeds from sale of investment securities
available for sale 1,309,941 1,550,760 5,890,772
Proceeds from maturity or call of investment
securities available for sale 146,336 2,661,567 5,692,097
Purchases of investment securities available for sale (1,897,478) (6,884,031) (1,135,691)
Purchases of mortgage-backed securities available for sale (8,646,922) (12,512,826) (16,330,001)
Proceeds from principal collected on mortgage-backed
securities and collateralized mortgage obligations 3,340,701 9,826,447 7,652,962
available for sale
Redemption (purchase) of FHLB stock (155,000) 77,500 (210,000)
Net change in loans (4,638,190) 1,781,327 (3,023,540)
Proceeds from sale of premises and equipment 1,782 -- --
Purchase of premises and equipment (56,510) (141,718) (105,310)
Proceeds from sale of real estate acquired by foreclosure 57,346 145,450 121,305
Improvements to real estate acquired by foreclosure (3,761) -- (399)
---------- ---------- ----------
Net cash provided by (used in) investing activities (9,156,150) (2,116,870) 968,408
---------- ---------- ----------
Cash flows from financing activities:
Net increase (decrease) in interest-bearing deposits 1,065,471 1,249,686 (2,429,143)
Cash dividends (97,500) (97,500) (97,500)
Increase (decrease) in advance payments by
borrowers for taxes and insurance 9,809 (42,924) (23,526)
Net proceeds from FHLB advances 3,100,000 2,650,000 --
Repayment of ESOP debt (8,000) (73,471) (63,000)
---------- ---------- ----------
Net cash provided by (used in) financing activities 4,069,780 3,685,791 (2,613,169)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (4,095,096) 2,372,166 (1,167,830)
Cash and cash equivalents at beginning of year 7,689,451 5,317,285 6,485,115
---------- ---------- ----------
Cash and cash equivalents at end of year $ 3,594,355 7,689,451 5,317,285
========== ========== ==========
Supplemental information on cash payments:
Interest paid $ 3,435,470 3,204,876 3,538,547
========== ========== ==========
Income taxes paid $ 337,500 -- 110,000
========== ========== ==========
Supplemental information on noncash investing and financing activities:
Loans transferred to real estate acquired by foreclosure $ 75,998 127,604 88,779
========== ========== ==========
Real estate sold and financed by the Bank $ -- -- 121,305
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CFS Bancshares, Inc. is a holding company for Citizens Federal Savings
Bank (the Bank) and the Bank's wholly-owned subsidiary, Citizens Service
Corporation - collectively the Company. The holding company was formed
June 30, 1998 and all outstanding shares of the Bank were exchanged for
shares of the holding company upon formation. The exchange was recorded
as a pooling of interests whereby the historical basis of the Bank's
accounts were carried over to the holding company. The Bank is a
federally chartered stock savings bank regulated by the Office of Thrift
Supervision (OTS) and certain other federal agencies. The Bank provides a
full range of banking services to customers through its offices in
Birmingham and Eutaw, Alabama. The Bank is subject to competition from
other financial institutions in the market in which it operates. The
following is a description of the more significant accounting and
reporting policies which the Company follows in preparing and presenting
its financial statements:
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CFS
Bancshares, Inc. and its subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation.
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America. In preparing the financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
One estimate that is particularly susceptible to a significant
change in the near term relates to the determination of the
allowance for loan losses. A significant portion of the Bank's
mortgage loans are secured by real estate in Alabama, primarily in
Jefferson County and the surrounding areas. The ultimate
collectibility of the loan portfolio is susceptible to changes in
market conditions in Alabama.
Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about
information available to them at the time of their examination.
(Continued)
21
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(B) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from financial institutions and
federal funds sold. Generally, federal funds are purchased and
sold for one-day periods.
(C) INVESTMENT SECURITIES
The Bank classifies its investment securities in two categories:
available for sale or held to maturity. Held to maturity
securities are those securities for which the Bank has the ability
and intent to hold the security until maturity. All other
securities are classified as available for sale.
Available for sale securities are recorded at fair value. Held to
maturity securities are recorded at cost adjusted for the
amortization or accretion of premiums and discounts. Unrealized
holding gains and losses, net of the related income tax effects,
on securities available for sale are excluded from earnings and
are reported as a separate component of stockholders' equity until
realized.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a charge to earnings and the establishment of
a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of
the related investment security as an adjustment to yield using
the level-yield method and prepayment assumptions. Dividend and
interest income are recognized when earned. Realized gains and
losses for investment securities sold are included in earnings and
are derived using the specific identification method for
determining the cost of the security sold.
The investment in the stock of the Federal Home Loan Bank is
required of insured institutions that utilize the services of the
Federal Home Loan Bank. The stock has no quoted fair value and no
ready market exists. However, the Federal Home Loan Bank has
historically repurchased the stock at cost. Accordingly, the stock
is reported in the financial statements at cost.
(D) LOANS AND INTEREST INCOME
Loans receivable are stated at their unpaid principal balance less
the undisbursed portion of loans in process, unearned interest
income and an allowance for loan losses. Interest income on loans
is recorded using a simple interest method. It is the general
policy of the Bank to discontinue the accrual of interest when
principal or interest payments are delinquent 90 days or more or
the ultimate collection of either is in doubt. Unearned discount
on loans purchased is accreted to income over the remaining life
of the loans purchased using the level-yield method.
(Continued)
22
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
At September 30, 2000, approximately 23 percent of the Bank's loan
portfolio consists of mortgage loans to churches. The Bank's
exposure to credit loss in the event of nonperformance by the
parties to financial instruments for mortgage loans to churches is
represented by the contractual amounts of these instruments.
(E) ALLOWANCE FOR LOAN LOSSES
Additions to the allowance for loan losses are based on
management's evaluation of the loan portfolio under current
economic conditions, including such factors as the volume and
character of loans outstanding, past loss experience, and such
other factors which, in management's judgment, deserve recognition
in estimating loan losses. Loans are charged to the allowance
when, in the opinion of management, such loans are deemed to be
uncollectible. Provisions for loan losses and recoveries of loans
previously charged to the allowance are added to the allowance.
One of the procedures used by management in establishing the
allowance for loan losses is the evaluation of potential
impairment on selected loans. A loan is considered impaired when,
based on current information and events, it is probable that the
Bank will be unable to collect all amounts due according to the
contractual terms of the note agreement. Impaired loans are
measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate, or at the loan's
observable market price, or the fair value of the collateral if
the loan is collateral dependent. Loans that are determined to be
impaired require a valuation allowance equivalent to the amount of
impairment. Impairment losses are included in the allowance for
loan losses through a charge to the provision for loan losses.
Cash receipts on impaired loans which are accruing interest are
applied to principal and interest under the contractual terms of
the loan agreement. Cash receipts on impaired loans for which the
accrual of interest has been discontinued are applied to reduce
the principal amount of such loans until the principal has been
recovered and are recognized as interest income thereafter.
(F) LOAN FEES
Loan origination fees and certain direct loan origination costs
are deferred and recognized over the lives of the related loans as
a yield adjustment using a method which approximates the
level-yield method.
(G) REAL ESTATE ACQUIRED BY FORECLOSURE
For real estate acquired through foreclosure, a new cost basis is
established at the lower of cost or fair value, adjusted for
estimated costs to sell, at the time of foreclosure. Subsequent to
foreclosure, foreclosed assets are carried at the lower of fair
value less estimated costs to sell or cost, with the difference
recorded as a valuation allowance, on an individual asset basis.
Changes in the valuation allowance are recognized as charges or
credits to earnings.
(Continued)
23
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(H) INCOME TAXES
The Company provides for income taxes based upon pretax income,
adjusted for permanent differences between reported and taxable
earnings. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be realized or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the enactment date.
(I) PREMISES AND EQUIPMENT
Land is stated at cost. Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is provided over the
estimated useful lives of the respective assets on primarily the
straight-line method.
(J) EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan (ESOP) which
has borrowed funds from another financial institution to acquire
common stock of the Company. The Company has committed to make
contributions to the plan that, when combined with dividends on
unallocated shares, are sufficient to fund interest and principal
payments on the ESOP debt. Unallocated shares are reflected as
unearned ESOP shares in stockholders' equity. Shares are released
and allocated to participants as principal payments are made on
the loans. The Company records compensation expense equal to the
fair value of the committed-to-be-released shares.
(K) COMPREHENSIVE INCOME
The Company adopted Financial Accounting Standard No. 130
Reporting Comprehensive Income, ("FAS130") in 1999 and, as
required, has reflected total comprehensive income in all periods
presented in the consolidated financial statements.
(2) CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS
The Bank is required to maintain certain daily reserve balances in
accordance with the Federal Reserve Board requirements. The Bank exceeded
the required balances of approximately $25,000 at September 30, 2000 and
1999.
(Continued)
24
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(3) INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
held to maturity at September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------ -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Agencies $ 500,000 496,360 500,000 495,584
Mortgage-backed securities 1,877,722 1,868,204 2,926,248 2,924,910
Collateralized mortgage
obligations 1,150,157 1,142,360 1,503,560 1,499,295
---------- ---------- ---------- ----------
$3,527,879 3,506,924 4,929,808 4,919,789
========== ========== ========== ==========
</TABLE>
The amortized cost and approximate fair value of investment securities
available for sale at September 30, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ 8,804,664 8,529,274 7,035,432 6,733,203
Equity securities 3,102,882 3,057,864 3,749,765 3,708,398
Mortgage-backed securities 14,262,037 13,913,202 15,146,285 14,763,824
Collateralized mortgage
obligations 13,930,232 13,875,821 8,458,397 8,398,833
----------- ----------- ----------- -----------
$40,099,815 39,376,161 34,389,879 33,604,258
=========== =========== =========== ===========
</TABLE>
(Continued)
25
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
The gross unrealized gains and losses of investment securities held to
maturity at September 30, 2000 and 1999, are as follows:
<TABLE>
<CAPTION>
2000 1999
----------------- -------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ -- 3,640 -- 4,416
Mortgage-backed securities 1,805 11,323 7,430 8,768
Collateralized mortgage
obligations -- 7,797 439 4,703
------- ------- ------- -------
$ 1,805 22,760 7,869 17,887
======= ======= ======= =======
</TABLE>
The gross unrealized gains and losses of investment securities available
for sale at September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $ 26,860 302,250 183 302,412
Equity securities -- 45,018 -- 41,367
Mortgage-backed securities 18,523 367,357 8,629 391,091
Collateralized mortgage
obligations 72,025 126,436 81,576 141,140
-------- -------- -------- --------
$117,408 841,061 90,388 876,010
======== ======== ======== ========
</TABLE>
(Continued)
26
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
The U.S. Government Agency security held to maturity with amortized cost
of $500,000 and approximate fair value of $496,360 matures on July 16,
2001.
The amortized cost and approximate fair value of debt investment
securities available for sale at September 30, 2000, by contractual
maturities are shown below. Actual maturities could differ from
contractual maturities due to call or prepayment provisions.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due from one to five years $ 2,989,503 2,899,982
Due from five to ten years 5,815,161 5,629,292
Mortgage-backed securities and collateralized
mortgage obligations 28,192,269 27,789,023
----------- -----------
$36,996,933 36,318,297
=========== ===========
</TABLE>
Proceeds from sales of investment securities available for sale were
$1,309,941, $1,550,760, and $5,890,772, for the years ended September 30,
2000, 1999 and 1998, respectively. Gross gains (losses) of ($4,083),
$25,850, and $43,717 were realized on those sales for the years ended
September 30, 2000, 1999 and 1998, respectively.
Proceeds from sales of investment securities held to maturity were
$81,232 for the year ended September 30, 2000. The amortized cost of the
sold investment securities held to maturity was $83,274 resulting in
gross losses of $2,042 for the year ended September 30, 2000. The sale of
the investment security held to maturity in 2000 occurred after the Bank
collected over 85% of the principal outstanding. There were no investment
securities held to maturity sold during 1999 and 1998.
Investment securities with amortized cost of $36,041,628 and $24,024,553
at September 30, 2000 and 1999, respectively, were pledged to secure
public deposits as required by law and for other purposes. Additionally,
in accordance with Office of Thrift Supervision regulations, the Bank is
required to maintain a certain percentage (4 percent at September 30,
2000), of its withdrawable deposits and current borrowings in cash, U.S.
Treasury obligations, or other approved investments which are readily
convertible into cash. The Bank met this liquidity requirement at
September 30, 2000.
(Continued)
27
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(4) LOANS
At September 30, 2000 and 1999, the Bank had the following net loans:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Total loans $50,712,916 45,904,206
Plus unearned premium on loans purchased 18,877 3,067
Less: Unamortized loan origination fees 635,214 614,963
Undisbursed portion of loans in process 1,516,383 1,460,993
Allowance for loan losses 342,156 310,157
----------- -----------
2,474,876 2,383,046
----------- -----------
Net loans $48,238,040 43,521,160
=========== ===========
</TABLE>
The composition of the total loan portfolio was as follows:
2000 1999
----------- -----------
Residential real estate mortgage $32,424,554 29,353,617
Consumer installment 1,318,057 1,602,367
Non residential mortgage 15,763,271 14,039,105
Commercial 1,207,034 909,117
----------- -----------
Total loans $50,712,916 45,904,206
=========== ===========
A summary of the transactions in the allowance for loan losses for the
years ended September 30, 2000, 1999, and 1998 follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year $ 310,157 553,797 630,423
Net charge-offs
Gross charge-offs (84,401) (326,590) (314,990)
Gross recoveries 220,900 37,950 62,364
Provision charged to earnings (104,500) 45,000 176,000
--------- --------- ---------
Balance at end of year $ 342,156 310,157 553,797
========= ========= =========
</TABLE>
(Continued)
28
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
Loans on which the accrual of interest had been discontinued or reduced
amounted to $1,755,011 and $1,391,680 as of September 30, 2000 and 1999,
respectively. If these loans had been current throughout their terms,
interest income would have been increased by $66,594, $62,189, and
$114,980, for 2000, 1999 and 1998, respectively.
Impaired loans at September 30, 2000 and 1999 totaled $148,075 and
$149,121, respectively. The allowance amounts, which were $54,572 and
$54,589 in 2000 and 1999, respectively, were primarily determined using
the fair value of the related collateral. The average recorded investment
in impaired loans for the years ended September 30, 2000, 1999 and 1998,
was $149,078, $221,001, and $300,639, respectively. The interest income
recognized on impaired loans for the years ended September 30, 2000,
1999, and 1998 was approximately $85, $3,744 and $410, respectively.
During 2000, certain officers and directors of the Company, including
their immediate families and companies with which they are associated,
were loan customers of the Bank. Such loans are made in the ordinary
course of business at normal credit terms, including interest rate and
collateral requirements, and do not present more than a normal credit
risk. The following is a summary of activity during 2000 with respect to
the aggregate loans to these individuals and their associates:
Balance at September 30, 1999 $1,213,737
New loans 642,735
Repayments 117,170
----------
Balance at September 30, 2000 $1,739,302
==========
(Continued)
29
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
2000 1999
---------- ----------
Land $ 733,242 733,242
Buildings and leasehold improvements 3,038,911 3,038,911
Furniture, fixtures and equipment 2,197,013 2,144,070
---------- ----------
5,969,166 5,916,223
Less: accumulated depreciation 2,324,330 2,044,790
---------- ----------
$3,644,836 3,871,433
========== ==========
(6) REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate acquired by foreclosure, net, as of September 30, 2000 and
1999 totaled $86,237 and $47,270, respectively. There were no
transactions in the allowance for losses on the real estate acquired by
foreclosure in 2000 or 1999.
(7) INTEREST-BEARING DEPOSITS
At September 30, 2000 and 1999, the composition of interest-bearing
deposits and applicable interest rates were as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
NOW accounts (2000 - .43%, 1999 - .42%) $ 8,755,081 8,385,107
Super NOW accounts (2000 - 2.27%, 1999 - 2.25%) 4,699,077 5,038,147
Passbook savings (2000 - 2.49%, 1999 - 2.49%) 16,464,242 17,455,461
Time deposits:
Certificates of deposit less than $100,000 (2000 - 4.37% to 8.00%,
1999 - 4.00% to 8.00%) 18,572,682 19,678,305
Certificates of deposit greater than $100,000 (2000 -5.93%,
1999 - 4.75%) 27,585,937 24,454,528
----------- -----------
Total time deposits 46,158,619 44,132,833
Accrued interest on deposits 257,422 168,775
----------- -----------
Total deposits $76,334,441 75,180,323
=========== ===========
</TABLE>
(Continued)
30
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
Weighted average interest rates on deposit accounts were as follows at
September 30, 2000 and 1999:
2000 1999
---- ----
NOW and demand deposit accounts .43% .42%
Super NOW accounts 2.27% 2.25%
Passbook savings accounts 2.49% 2.49%
Certificates of deposit less than $100,000 5.09% 4.91%
Certificates of deposit greater than $100,000 5.93% 4.75%
Total 4.12% 3.06%
Interest on deposits is summarized as follows:
2000 1999 1998
---------- ---------- ----------
NOW accounts $ 40,317 36,040 86,957
Super NOW accounts 107,477 97,103 96,667
Passbook savings 416,499 435,261 478,354
Time deposits 2,263,442 2,150,872 2,275,177
---------- ---------- ----------
$2,827,735 2,719,276 2,937,155
========== ========== ==========
The amounts and maturities of time deposits at September 30, 2000 and
1999 are as follows:
2000 1999
----------- -----------
Within one year $38,924,656 37,499,384
After one but within two years 4,381,218 2,689,716
After two but within three years 2,164,490 2,358,971
After three but within four years 365,486 1,264,611
After four but within five years 282,622 216,517
Greater than five years 40,147 103,634
----------- -----------
$46,158,619 44,132,833
=========== ===========
(Continued)
31
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(8) BORROWED FUNDS
The Company was liable to the Federal Home Loan Bank of Atlanta on the
following advances at September 30, 2000:
FIXED
INTEREST
MATURITY DATE RATE 2000
-------------------------------------- ---------- -----------
March 2001 6.94% $ 3,000,000
March 2002 6.70% 1,000,000
April 2002 6.70% 1,750,000
September 2004 5.71% 5,000,000
June 2008 5.51% 4,200,000
-----------
Total (weighted average rate of 6.08%) $14,950,000
===========
At September 30, 2000, the advances were collateralized by a blanket
pledge of first-mortgage residential loans. The September 2004 advance
and the June 2008 advance are callable in September 2001 and June 2003,
respectively.
(9) INCOME TAXES
For the years ended September 30, 2000, 1999, and 1998, income tax
expense (benefit) consists of the following:
2000 1999 1998
--------- --------- ---------
Current:
Federal $ 274,210 113,290 88,604
State 19,219 12,037 --
--------- --------- ---------
293,429 125,327 88,604
--------- --------- ---------
Deferred:
Federal (14,845) 84,509 37,606
State (2,410) 7,057 5,525
--------- --------- ---------
(17,255) 91,566 43,131
--------- --------- ---------
$ 276,174 216,893 131,735
========= ========= =========
(Continued)
32
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
The income tax expense above represents an effective tax rate of 35.6
percent, 36.0 percent and 37.6 percent for 2000, 1999, and 1998,
respectively. The actual income tax expense for 2000, 1999, and 1998
differs from the "expected" income tax expense for those years which is
computed by applying the U.S. Federal corporate income tax rate of 34.0
percent for 2000, 1999, and 1998 to income before income taxes as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" income tax expense $ 263,668 204,844 119,233
State tax, net of federal effect 11,095 9,400 4,208
Dividends paid to ESOP (7,845) (7,845) (6,824)
Other, net 9,256 10,494 15,118
--------- --------- ---------
$ 276,174 216,893 131,735
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 2000 and 1999 are presented below:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Unrealized loss on investment securities available for sale $260,512 282,821
Loans - unearned loan fee income 14,381 17,574
Nonaccrual interest 125,033 75,815
Foreclosed property 21,726 31,649
Prepaid expenses and accruals 11,791 5,585
Other 10,583 20,425
-------- --------
444,026 433,869
-------- --------
Deferred tax liabilities:
Loan - allowance for loan losses 46,186 12,101
FHLB stock 40,942 40,942
Premises and equipment - differences in depreciation expense 15,422 31,636
Loan basis - book to tax difference 93,704 93,704
Other 102 2,763
-------- --------
196,356 181,146
-------- --------
Net deferred tax asset $247,670 252,723
======== ========
</TABLE>
(Continued)
33
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
Management believes results of future operations will generate sufficient
taxable income and resulting tax liabilities to realize the deferred tax
asset. There was no valuation allowance at September 30, 2000 or 1999, or
any change in the valuation allowance during the years ended September
30, 2000, 1999 or 1998.
(10) EMPLOYEE BENEFIT PLANS
The Company sponsors an Employee Stock Ownership Plan (ESOP). The ESOP is
available to all employees who have met certain age and service
requirements. Contributions to the plan are determined by the board of
directors, based on a percentage of the total payroll and certain
limitations as to the deductibility for tax purposes. The Company intends
to make contributions to the Plan that, when combined with dividends on
unallocated shares, are sufficient to fund interest and principal
payments on the ESOP debt. The ESOP has borrowed funds on three occasions
to purchase shares of common stock of the Bank for the benefit of the
ESOP participants.
The common stock of the Company acquired by the ESOP is held as
collateral for the loans. As of September 30, 2000, the ESOP holds 30,790
(23.69 percent) shares of the Company's outstanding stock, of which
27,586 shares have been allocated to the participants. The Company makes
contributions to the ESOP which are used to make loan interest and
principal payments. Shares are released and allocated to the participants
prorata with the paydowns on the ESOP debt. All dividends paid on
allocated and unallocated shares are used to reduce interest expense
related to the ESOP debt.
The first ESOP loan (1989 loan) was paid off as of September 30, 1999.
The second ESOP loan (1995 loan) was paid off as of September 30, 1999.
The third ESOP loan (1998 loan) is repayable in monthly installments of
interest at the prime rate and annual installments of principal in the
amount of $8,000. The loan originated on March 9, 1998 to purchase 4005
shares (1998 shares). The principal outstanding at September 30, 2000 and
1999 was $64,000 and 72,000, respectively. Unearned shares at year-end
2000 and 1999 totaled 2,971 and 3,371 with fair values of $118,840 and
$141,582 respectively.
Contributions to fund the installments on the 1989 loan have been
recorded as compensation expense. Such contributions approximated
$13,000, and $46,000, in 1999 and 1998 respectively. The fair value of
the committed-to-be-released 1995 and 1998 shares are also reported as
compensation expense. Such shares totaled 400, 860, and 760 for 2000,
1999, and 1998, respectively. The related compensation expense
approximated $18,000, $36,000, and $39,000, in 2000, 1999, and 1998,
respectively.
(Continued)
34
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
The Bank also sponsors a 401(k) retirement plan (401(k)). The 401(k) is a
trusteed, salary reduction plan which is available to all employees who
have completed one year of service and have attained the age of 21.
401(k) participants may elect to defer a percentage of their compensation
each year up to a certain dollar limit established by law. The Bank's
management may make a discretionary matching contribution equal to a
percentage of the amount of salary reduction 401(k) participants elected
to defer. Such discretionary contributions for the years ended September
30, 2000, 1999, and 1998 were $28,536, $27,078 and $24,994, respectively.
The Bank also provides major medical and dental coverage funded through
pre-tax withholdings from the participants.
(11) NET INCOME PER SHARE
Presented below is a summary of the components used to calculate diluted
earnings per share for the years ended September 30, 2000, 1999, and
1998:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Diluted earnings per share:
Weighted average common shares
outstanding $126,621 126,419 127,218
Net effect of the assumed exercise of
stock options-based on the treasury
stock method using average market
price for the year 7,800 7,200 8,800
-------- -------- --------
Total weighted average common shares
and potential common stock outstanding $134,421 133,619 136,018
======== ======== ========
</TABLE>
(Continued)
35
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(12) COMPREHENSIVE INCOME
Presented below is a summary of other comprehensive income (loss) for
the years ended September 30, 2000, 1999, and 1998:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Other comprehensive income (loss) before tax:
Unrealized holding gain (loss) on
investment securities available for sale
arising during the period, net $ 66,051 (770,055) 14,201
Reclassification adjustment for gains (losses)
on investment securities available for sale
realized in net income (4,083) 27,486 46,594
-------- -------- --------
Other comprehensive income (loss), before
income taxes 61,968 (797,541) (32,393)
-------- -------- --------
Income tax expense (benefit) related to other comprehensive income:
Unrealized holding gain (loss) on
investment securities available for sale
arising during the period, net (23,942) (276,147) 5,681
Reclassification adjustment for gains (losses)
on investment securities available for sale
realized in net income (1,633) 10,994 18,638
-------- -------- --------
Total income tax expense (benefit)
related to other comprehensive
income (22,309) (287,141) (12,957)
-------- -------- --------
Other comprehensive income (loss) $ 39,659 (510,400) (19,436)
======== ======== ========
</TABLE>
(Continued)
36
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(13) STOCKHOLDERS' EQUITY
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
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 qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulations to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital to risk-weighted
assets, and of Tier I capital to average assets as set forth in the table
below.
<TABLE>
<CAPTION>
FOR CAPITAL ADEQUACY
ACTUAL PURPOSES WELL CAPITALIZED
------------------- ------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Total capital
(to risk weighted
assets) $8,780,000 17.6% 3,997,304 8.0% 4,996,630 10.0%
Tier I capital
(to risk weighted
assets) 8,610,000 17.2% 1,998,652 4.0% 2,997,978 6.0%
Tier I capital
(to average assets) 8,610,000 8.8% 3,933,362 4.0% 4,916,703 5.0%
As of September 30, 1999:
Total capital
(to risk weighted
assets) $8,295,000 17.8% 3,732,880 8.0% 4,666,100 10.0%
Tier I capital
(to risk weighted
assets) 8,165,000 17.5% 1,866,440 4.0% 2,799,660 6.0%
Tier I capital
(to average assets) 8,165,000 8.7% 3,763,408 4.0% 4,704,260 5.0%
</TABLE>
(Continued)
37
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
Savings institutions with more than a "normal" level of interest rate
risk are required to maintain additional total capital. A savings
institution with a greater than normal interest rate risk is required to
deduct specified amounts from total capital, for purposes of determining
its compliance with risk-based capital requirements. The Bank was in
compliance with capital standards at September 30, 2000 and 1999.
Retained earnings at September 30, 2000 and 1999, include approximately
$2,200,000 for which no provision for income tax has been made. This
amount represents allocations of income to bad debt deductions for tax
computation purposes. If, in the future, this portion of retained
earnings is used for any purpose other than to absorb tax bad debt
losses, income taxes may be imposed at the then applicable rates. An
additional $1,400,000 of retained earnings is also restricted at
September 30, 2000 and 1999, as a result of the liquidation account
established upon conversion to a stock company. No dividends may be paid
to stockholders if such dividends would reduce the net worth of the Bank
below the amount required by the liquidation account.
(14) CONTINGENCIES
The Company is defending various lawsuits and claims arising out of the
conduct of its business. While the ultimate results of these lawsuits and
claims cannot be predicted with certainty, in the opinion of management,
the ultimate disposition of these matters will not have a significant
effect on the consolidated financial position or results of operations of
the Company.
(15) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. Such instruments involve elements of credit risk in excess of the
amounts recognized in the financial statements.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of these instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
(Continued)
38
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
The off-balance sheet financial instruments whose contract amounts
represent credit risk as of September 30, 2000, are as follows:
Commitments to extend credit $1,868,000
Commitments to fund lines of credit 104,746
----------
$1,972,746
==========
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
(16) STOCK OPTION PLAN
In 1991, under the terms of the Bank's incentive stock option plan, the
Bank granted 12,000 common stock options to officers and key employees.
The exercise price for the options is equal to $14.00 per share. All
options are exercisable through 2001. As of September 30, 2000, no
options had been exercised.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table provides fair values of the Bank's financial
instruments at September 30, 2000 and 1999. Fair value estimates are made
at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale
at one time the Bank's entire holdings of a particular financial
instrument. Because no market exists for a portion of the Bank's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates. Fair value estimates are based on existing on and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates. The assumptions used in the
estimation of the fair value of the Bank's financial instruments are
explained below. Where quoted market prices are not available, fair
values are based on estimates using discounted cash flow and other
valuation techniques.
(Continued)
39
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
Discounted cash flows can be significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
The following fair value estimates cannot be substantiated by comparison
to independent markets and should not be considered representative of the
liquidation value of the Bank's financial instruments, but rather a
good-faith estimate of the fair value of financial instruments held by
the Bank.
The following methods and assumptions were used by the Bank in estimating
the fair value of its financial instruments:
Cash and Cash Equivalents and Interest-earning Deposits in Other Banks --
Fair value equals the carrying value of such assets due to their nature.
Investment Securities and Accrued Interest Receivable -- The fair value
of investments is based on quoted market prices. The carrying amount of
related accrued interest receivable approximates its fair value.
Federal Home Loan Bank Stock -- The Federal Home Loan Bank has
historically repurchased its stock at cost. Therefore, the carrying
amount is considered a reasonable estimate of its fair value.
Loans Receivable -- The fair value of loans is calculated using
discounted cash flows by loan type. The discount rate used to determine
the present value of the loan portfolio is an estimated market discount
rate that reflects the credit and interest rate risk inherent in the loan
portfolio. The estimated maturity is based on the Bank's historical
experience with repayments adjusted to estimate the effect of current
market conditions. The carrying amount of related accrued interest
receivable approximates its fair value.
Deposits -- Fair values for certificates of deposit have been determined
using discounted cash flows. The discount rate used is based on estimated
market rates for deposits of similar remaining maturities. The carrying
amount of all other deposits, due to their short-term nature, approximate
their fair values. The carrying amount of related accrued interest
payable approximates its fair value.
(Continued)
40
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
FHLB Advances and ESOP Debt -- Fair value has been determined using
discounted cash flows. The discount rate used is based on estimated
current rates for advances with similar maturities.
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,594,355 3,594,355 7,689,451 7,689,451
Interest-earning deposits in
other banks 163,142 163,142 161,524 161,524
Investment securities 43,627,694 42,883,085 38,534,066 38,524,047
Federal Home Loan Bank
stock 747,500 747,500 592,500 592,500
Loans receivable, net 48,238,040 47,407,000 43,521,160 43,944,273
Accrued interest receivable 660,138 660,138 609,455 609,455
Financial liabilities:
Deposits, including accrued
interest payable 76,334,441 76,147,822 75,180,323 74,821,998
FHLB advances 14,950,000 14,956,000 11,850,000 11,829,688
ESOP debt 64,000 64,000 72,000 72,000
</TABLE>
(18) DIVIDENDS FROM SUBSIDIARY
Dividends paid by the subsidiary bank are the primary source of funds
available to the Company for payment of dividends to its stockholders and
for other needs. Applicable federal and state statutes and regulations
impose restrictions on the amounts of dividends that may be declared by
the subsidiary bank. In addition, the subsidiary bank is also required to
maintain minimum amounts of capital to total "risk-weighted" assets, as
defined by banking regulators. Capital adequacy considerations could
further limit the availability of dividends from the subsidiary bank. At
September 30, 2000, the Bank could have declared dividends of
approximately $3,447,000 without prior approval of regulatory
authorities. Accordingly, at September 30, 2000, approximately $4,785,000
of the parent's investment in its subsidiary was restricted from transfer
in the form of dividends.
(Continued)
41
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(19) PARENT COMPANY FINANCIAL INFORMATION
The condensed financial information for CFS Bancshares, Inc. (Parent
Company Only) is presented as follows:
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
Cash $ 54,271 100,000
Investment in subsidiary Bank 8,232,480 7,765,663
----------- -----------
Total assets $ 8,286,751 7,865,663
=========== ===========
LIABILITIES
Note payable (ESOP debt) $ 64,000 72,000
Other liabilities -- 30,939
----------- -----------
Total liabilities 64,000 102,939
----------- -----------
STOCKHOLDERS' EQUITY
Serial preferred stock -- --
Common stock 130,000 130,000
Additional paid-in capital 1,184,758 1,180,060
Retained earnings 7,422,368 7,020,548
Accumulated other comprehensive income (loss) (463,139) (502,798)
Unearned common stock held by ESOP (51,236) (65,086)
----------- -----------
Total stockholders' equity 8,222,751 7,762,724
----------- -----------
Total liabilities and stockholders' equity $ 8,286,751 7,865,663
=========== ===========
</TABLE>
(Continued)
42
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND
1999 AND FOR THE PERIOD FROM JUNE 30, 1998
(INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Income:
Cash dividends from Bank $ 97,500 97,500 100,000
Interest income 484 -- --
-------- -------- --------
Total income 97,984 97,500 100,000
Expense 15,274 -- 30,939
-------- -------- --------
Earnings before equity in undistributed
earnings of subsidiary 82,710 97,500 69,061
Equity in undistributed earnings of
subsidiary 416,610 288,087 149,889
-------- -------- --------
Net earnings $499,320 385,587 218,950
======== ======== ========
</TABLE>
(Continued)
43
<PAGE>
CFS BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000, 1999 and 1998
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
AND FOR THE PERIOD FROM JUNE 30, 1998
(INCEPTION) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 499,320 385,587 218,950
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Equity in undistributed earnings of
subsidiary (416,610) (288,087) (149,889)
(Decrease) increase in other liabilities (30,939) -- 30,939
--------- --------- ---------
Net cash provided by operating
activities 51,771 97,500 100,000
--------- --------- ---------
Cash flows from financing activities:
Cash dividends paid (97,500) (97,500) --
--------- --------- ---------
(97,500) (97,500) --
--------- --------- ---------
Net increase in cash (45,729) -- 100,000
Cash at beginning of year 100,000 100,000 --
--------- --------- ---------
Cash at end of year $ 54,271 100,000 100,000
========= ========= =========
</TABLE>
(Continued)
44
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
1700 3rd Avenue North
Birmingham, Alabama 35203
(205) 328-2041 STOCK TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
FIVE POINTS WEST OFFICE Cranford, New Jersey 07016
2100 Bessemer Road
Birmingham, Alabama 35208 INDEPENDENT AUDITORS
(205) 214-3000 KPMG LLP
Certified Public Accountants
EUTAW OFFICE Financial Center, Suite 1200
213 Main Street Birmingham, Alabama 35203
Eutaw, Alabama 35462
(205) 372-9307 ANNUAL MEETING
The Annual Meeting of
CFS Bancshares, Inc. will be held
January 24, 2001 at 2:00 P.M.
Second Floor Auditorium at
300 North 18th Street
Birmingham, Alabama 35203
SPECIAL COUNSEL
Stradley Ronon Housley Kantarian
& Bronstein, LLP
1220 19th Street NW, Suite 700
Washington, D.C. 20036
FORM 10-KSB
A copy of Form 10-KSB, including financial statement schedules as filed with the
Securities and Exchange Commission will be furnished without charge to
stockholders of the record date upon written request to Secretary, CFS
Bancshares, Inc., Post Office Box 10022, Birmingham, Alabama 35202.
45
