10-Q 1 c77126e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________. Commission file number: 0-24611 CFS Bancorp, Inc. (Exact name of registrant as specified in its charter) Delaware 35-2042093 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 707 Ridge Road, Munster, Indiana 46321 (Address of principal executive offices) (219) 836-5500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b of the Exchange Act). YES [X] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The Registrant had 12,196,347 shares of Common Stock issued and outstanding as of April 30, 2003. CFS BANCORP, INC. INDEX
Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition at March 31, 2003 and (Audited) December 31, 2002 3 Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002 4 Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended March 31, 2003 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 19 PART II OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities and Use of Proceeds 20 Item 3. Defaults upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20
2 CFS BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands)
March 31, 2003 December 31, 2002 -------------- ----------------- (Unaudited) ASSETS Cash and amounts due from depository institutions $ 14,272 $ 30,312 Interest-bearing deposits 114,104 105,479 Federal funds sold 86,585 74,350 ----------- ----------- Cash and cash equivalents 214,961 210,141 Investment securities available-for-sale 66,492 39,064 Mortgage-backed securities available-for-sale 260,493 296,638 Mortgage-backed securities held-to-maturity (fair value 2003 - $21,156; 2002 - $21,977) 20,577 21,402 Loans receivable, net 947,321 930,348 Investment in Federal Home Loan Bank stock, at cost 25,780 25,780 Office properties and equipment 13,494 13,835 Accrued interest receivable 6,899 6,597 Real estate owned 204 893 Investment in Bank-owned life insurance 31,371 31,009 Prepaid expenses and other assets 9,235 9,055 ----------- ----------- Total assets $ 1,596,827 $ 1,584,762 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 968,284 $ 954,222 Borrowed money 449,401 449,431 6,547 Advance payments by borrowers for taxes and insurance 6,547 4,410 Other liabilities 17,505 16,037 ----------- ----------- Total liabilities 1,441,737 1,424,100 ----------- ----------- Stockholders' Equity: Preferred stock, $.01 par value: Authorized shares - 15,000,000 Issued and outstanding shares - 0 at March 31, 2003 and December 31, 2002 -- -- Common stock, $.01 par value: Authorized shares - 85,000,000 Issued shares - 23,423,306 at March 31, 2003 and December 31, 2002 Outstanding shares - 12,267,197 and 12,674,597 at March 31, 2003 and December 31, 2002, respectively 234 234 Additional paid-in capital 189,699 189,786 Retained earnings, substantially restricted 107,058 107,598 Treasury stock, at cost: 11,156,109 and 10,748,709 shares at March 31, 2003, and December 31, 2002, respectively (131,508) (125,650) Unearned common stock acquired by ESOP (8,356) (8,356) Unearned common stock acquired by RRP (2,827) (2,827) Accumulated other comprehensive income (loss), net of tax 790 (123) ----------- ----------- Total stockholders' equity 155,090 160,662 ----------- ----------- Total liabilities and stockholders' equity $ 1,596,827 $ 1,584,762 =========== ===========
See accompanying notes 3 CFS BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited)
Three Months Ended March 31, --------------------------- 2003 2002 ----------- ----------- Interest income: Loans $ 15,240 $ 15,588 Mortgage-backed securities 2,047 4,666 Other investment securities 469 333 Other 847 1,391 ----------- ----------- Total interest income 18,603 21,978 Interest expense: Deposits 5,225 7,215 Borrowings 6,600 6,798 ----------- ----------- Total interest expense 11,825 14,013 ----------- ----------- Net interest income before provision for losses on loans 6,778 7,965 Provision for losses on loans 478 200 ----------- ----------- Net interest income after provision for losses on loans 6,300 7,765 Non-interest income: Loan fees 361 405 Fees on deposit accounts 1,117 538 Insurance commissions -- 288 Investment commissions 126 262 Net gain on sale of investment securities -- 247 Income from Bank-owned life insurance 362 348 Other income 284 158 ----------- ----------- Total non-interest income 2,250 2,246 Non-interest expense: Compensation and employee benefits 4,439 4,996 Net occupancy expense 622 595 Furniture and equipment expense 477 462 Data processing 429 352 Federal insurance premiums 42 44 Marketing 199 158 Other general and administrative expenses 1,375 1,179 ----------- ----------- Total non-interest expense 7,583 7,786 ----------- ----------- Income before income taxes 967 2,225 Income tax expense 313 661 ----------- ----------- Net income $ 654 $ 1,564 =========== =========== Per share data: Basic earnings per share $ 0.06 $ 0.13 Diluted earnings per share 0.06 0.12 Cash dividends declared per share 0.11 0.10 Weighted average shares outstanding 11,348,576 12,175,537 Weighted average diluted shares outstanding 11,815,045 12,670,862
See accompanying notes 4 CFS BANCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands) (Unaudited)
Unearned Unearned Accumulated Common Common Other Additional Stock Stock Comprehensive Common Paid-In Retained Treasury Acquired Acquired Income Stock Capital Earnings Stock by ESOP by RRP (Loss) Total ------ ---------- -------- ------- -------- -------- ------------- -------- Balance January 1, 2003 $234 $189,786 $107,598 $(125,650) $(8,356) $(2,827) $(123) $160,662 Net income -- -- 654 -- -- -- -- 654 Other comprehensive income, net of tax: Change in unrealized appreciation on available-for-sale securities, net of reclassification adjustment 913 913 -------- Total comprehensive income 1,567 Purchase of treasury stock -- -- -- (6,417) -- -- -- (6,417) Exercise of stock options -- (113) -- 559 -- -- -- 446 Tax benefit related to stock options exercised -- 26 -- -- -- -- -- 26 Dividends declared on common stock -- -- (1,194) -- -- -- -- (1,194) ---- -------- -------- --------- ------- ------- ---- -------- Balance March 31, 2003 $234 $189,699 $107,058 $(131,508) $(8,356) $(2,827) $790 $155,090 ==== ======== ======== ========= ======= ======= ==== ========
See accompanying notes 5 CFS BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Three Months Ended March 31, ------------------------ 2003 2002 --------- --------- Operating activities: Net income $ 654 $ 1,564 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on loans 478 200 Depreciation expense 443 471 Tax benefit from exercise of stock options 26 -- Deferred income taxes (benefit) (642) 813 Change in deferred income 134 349 Increase in interest receivable (302) (634) Decrease in accrued interest payable (48) (98) Proceeds from sale of loans held-for-sale 3,571 4,133 Origination of loans held-for-sale (4,329) (2,889) Net gain on sale of available-for-sale securities -- (247) Decrease in prepaid expenses and other assets 2,320 843 Increase (decrease) in other liabilities 1,359 (2,176) --------- --------- Net cash provided by operating activities 3,664 2,329 --------- --------- Investing activities: Available for sale investment securities: Purchases (66,975) (110,115) Repayments 39,900 108,442 Sales -- 834 Available for sale mortgage-related securities: Purchases (51,580) (41,861) Repayments 86,265 36,229 Held to maturity mortgage-related securities: Repayments 807 4,298 Purchase of Federal Home Loan Bank stock -- (10) Redemption of FHLB stock -- 10 Loan originations and principal payments on loans - net (16,963) (213) Additional costs on real estate owned -- (54) Proceeds from sale of real estate owned 825 350 Purchases of property and equipment (138) (542) Disposal of property and equipment 36 279 --------- --------- Net cash used in investing activities (7,823) (2,353) --------- --------- Financing activities: Proceeds from exercise of stock options 446 280 Dividends paid on common stock (1,267) (1,050) Purchase of treasury stock (6,417) (3,410) Net increase in passbook and money market accounts 34,348 33,120 Net decrease in certificates of deposit (20,238) (49,120) Net increase in advance payments by borrowers for taxes and insurance 2,137 1,236 Net decrease in borrowed funds (30) (28) --------- --------- Net cash flows used by financing activities 8,979 (18,972) --------- --------- Increase (decrease) in cash and cash equivalents 4,820 (18,996) Cash and cash equivalents at beginning of period 210,141 272,067 --------- --------- Cash and cash equivalents at end of period $ 214,961 $ 253,071 ========= =========
6 CFS BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF FINANCIAL STATEMENTS PRESENTATION The accompanying consolidated financial statements were prepared in accordance with instructions to Form 10-Q and therefore do not include all the information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, all normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of financial statements have been included. These financial statements should be read in conjunction with the audited financial statements and the notes thereto for the period ended December 31, 2002 contained in the CFS Bancorp, Inc. (the "Company") annual report to the stockholders. The results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 2. STOCK BASED COMPENSATION The Company accounts for its stock options in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued by Employees (APB No. 25). Under APB No. 25, as the exercise price of the Company's employees' stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Compensation expense for shares granted under the Recognition and Retention Plan ("RRP") is ratably recognized over the period of service, usually the vesting period, based on the fair value of the stock on the date of grant. Pursuant to Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation (FAS No. 123), pro forma net income and pro forma earnings per share are presented in the following table as if the fair value method of accounting for stock-based compensation plans had been utilized.
Three Months Ended March 31, -------------------- 2003 2002 -------- ------- Net Income (as reported) $654 $1,564 Pro forma net income 461 1,375 Diluted earnings per share (as reported) .06 .12 Pro forma diluted earnings per share .04 .11
The fair value of the option grants for the three months ended March 31, 2003 and 2002 was estimated using the Black Scholes option value model, with the following assumptions: dividend yield 3.1% in 2003 and 2.9% in 2002, expected volatility of 30.2% in both 2003 and 2002, risk free interest of 3.9% in 2003 and 5.1%, and an original expected life of ten years for all options granted. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models such as the Black-Scholes require the input of highly subjective assumptions including the expected stock price volatility. The Company's stock options have characteristics significantly different from traded options and, inasmuch as changes in the subjective input assumptions can materially affect the fair value estimate, in Management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 7 3. LOAN PORTFOLIO The Company's loan portfolio consisted of the following at the dates indicated:
March 31, 2003 December 31, 2002 ------------------------ -------------------------- (Dollars in thousands) Mortgage loans: Amount Percent Amount Percent -------- ---------- -------- ---------- Single-family residential $363,441 38.00% $386,050 41.11% Multi-family residential 74,708 7.81 71,170 7.58 Commercial real estate 303,010 31.68 271,426 28.91 Construction and land development: Single-family residential 13,872 1.45 12,118 1.29 Multi-family residential 63,786 6.67 63,893 6.80 Commercial and land development 91,937 9.61 88,951 9.47 Home equity 49,325 5.16 45,106 4.81 -------- ------ --------- ------ Total mortgage loans 960,079 100.38 938,714 99.97 Other loans: Commercial 42,138 4.41 40,034 4.26 Consumer 2,704 .28 2,610 .28 Undisbursed portion of loan proceeds (45,658) (4.78) (39,704) (4.23) Deferred loan fees (2,788) (.29) (2,632) (.28) -------- ------ --------- ------ Total loans receivable 956,475 100.00% 939,022 100.00% -------- ------ --------- ------ Less: Allowance for losses on loans 9,154 8,674 ---------- -------- Loans receivable, net $947,321 $930,348 ========== ========
8 4. INVESTMENT SECURITIES Amortized cost of investment securities and their fair values were as follows (in thousands):
Available-for-sale at March 31, 2003: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Callable agency securities, corporate bonds and commercial paper $55,894 $310 $ -- $56,204 Trust preferred securities 4,932 -- 632 4,300 Equity securities 6,380 64 456 5,988 ------- ---- ------ ------- $67,206 $374 $1,088 $66,492 ======= ==== ====== =======
Available-for-sale at December 31, 2002: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Callable agency securities, corporate bonds and commercial paper $30,767 $320 $ -- $31,087 Trust preferred securities 4,931 -- 531 4,400 Equity securities 4,400 83 906 3,577 ------- ---- ------ ------- $40,098 $403 $1,437 $39,064 ======= ==== ====== =======
9 5. MORTGAGE-BACKED SECURITIES The amortized cost of mortgage-backed securities and their fair values are as follows (in thousands):
Available-for-sale at March 31, 2003: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Participation certificates $ 80,524 $1,467 $ 65 $ 81,926 Real estate mortgage investment conduits and collateralized mortgage obligations 178,091 747 271 178,567 -------- ------ ----- -------- $258,615 $2,214 $ 336 $260,493 ======== ====== ===== ========
Available-for-sale at December 31, 2002: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Participation certificates $ 64,084 $ 820 $136 $ 64,768 Real estate mortgage investment conduits and collateralized mortgage obligations 231,752 862 744 231,870 -------- ------ ---- -------- $295,836 $1,682 $880 $296,638 ======== ====== ==== ========
Held-to-maturity at March 31, 2003: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Participation certificates $19,846 $543 $ 7 $20,382 Real estate mortgage investment conduits and collateralized mortgage obligations 731 43 -- 774 ------- ---- --- ------- $20,577 $586 $ 7 $21,156 ======= ==== === =======
Held-to-maturity at December 31, 2002: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Participation certificates $20,651 $ $520 $ 10 $21,161 Real estate mortgage investment conduits and collateralized mortgage obligations 751 65 -- 816 ------- ------ ----- ------- $21,402 $ 585 $ 10 $21,977 ======= ====== ===== =======
10 6. DEPOSITS The following table sets forth the dollar amount of deposits and the percentage of total deposits in various types of deposits offered by the Bank at the dates indicated.
March 31, 2003 December 31, 2002 -------------- ----------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in thousands) Checking accounts: Noninterest-bearing $33,561 3.47% $31,318 3.28% Interest-bearing 90,588 9.36 90,905 9.53 Money market accounts 151,859 15.69 121,693 12.76 Saving accounts 214,626 22.17 212,370 22.26 Certificates of deposit: $100,000 or less 372,308 38.46 380,493 39.90 Over $100,000 105,029 10.85 117,082 12.27 -------- ------ -------- ------ Deposits 967,971 100.00% 953,861 100.00% Accrued interest 313 361 -------- -------- Total $968,284 $954,222 ======== ========
7. RECENT ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards Board Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim and annual periods ending after December 15, 2002, as were adopted in financial statements for the year ended December 31, 2002. Implementation of the remaining provisions of FIN 45 during the first quarter of 2003 did not have a material impact on its financial position or results of operation. 11 8. EARNINGS PER SHARE Set forth below is information with respect to calculation of basic and diluted earnings per share for the periods indicated.
Three Months Ended ------------------ March 31, 2003 March 31, 2002 -------------- -------------- (Dollars in thousands, except per share data) Net income $ 654 $ 1,564 Weighted average number of common shares outstanding 12,417,248 13,550,226 Average ESOP shares not committed to be released (820,672) (942,039) Average RRP shares not vested (248,000) (432,650) ------------ ------------ Weighted average number of shares outstanding for basic earnings per share computation purposes 11,348,576 12,175,537 Dilutive effects of employee stock options 466,469 495,325 ------------ ------------ Weighted average shares and common share equivalents outstanding for diluted earnings per share purposes 11,815,045 12,670,862 ============ ============ Basic earnings per share $ 0.06 $ 0.13 Diluted earnings per share 0.06 0.12
9. COMPREHENSIVE INCOME Comprehensive income is the total of reported net income and all other revenues, expenses, gains and losses that under generally accepted accounting principles are not includable in reported net income but are reflected in stockholders' equity. The following table presents the Company's comprehensive income:
Three Months Ended ------------------ March 31, 2003 March 31, 2002 -------------- -------------- (Dollars in thousands) Net income $ 654 $ 1,564 Net change in unrealized gain (loss) on securities available-for-sale, net 913 (1,230) ------- ------- Comprehensive income $ 1,567 $ 334 ======= =======
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential." Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services. CHANGES IN FINANCIAL CONDITION Total assets were $1.6 billion at both March 31, 2003 and December 31, 2002 while total liabilities were $1.4 billion at both dates. Stockholders' equity was $155.1 million at March 31, 2003 compared to $160.7 million at December 31, 2002. Cash and cash equivalents increased to $215.0 million at March 31, 2003 from $210.1 million at December 31, 2002. Investment securities available-for-sale were $66.5 million at March 31, 2003 compared to $39.1 million at December 31, 2002. Mortgage-backed securities available-for-sale were $260.5 million at March 31, 2003 compared to $296.6 million at December 31, 2002, while mortgage-backed securities held-to-maturity were $20.6 million at March 31, 2003 compared to $21.4 million at December 31, 2002. Loans receivable were $947.3 million at March 31, 2003 compared to $930.3 million at December 31, 2002. While loans receivable increased only $17.0 million or 1.8 percent, the Company continued its strategy of changing the composition of its loan portfolio by reducing the percentage of single-family residential loans and increasing the balances of commercial, commercial real estate and multi-family residential loans. Deposits were $968.3 million at March 31, 2003 compared to $954.2 million at December 31, 2002. The increase of $14.1 million primarily was the result of a $30.2 million increase in money market accounts partially offset by a $20.2 million decrease in certificates of deposit. Borrowed money was $449.4 million at both March 31, 2003 and December 31, 2002. Stockholders' equity was $155.1 million at March 31, 2003 compared to $160.7 million at December 31, 2002. This $5.6 million reduction was the result primarily of a $5.9 million increase in treasury stock due the repurchase by the Company of 455,200 shares of its common stock and the $913,000 increase in accumulated other comprehensive income during the first quarter of 2003 due to the increase in unrealized gains on securities available-for-sale. 13 AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances.
Three Months Ended March 31, -------------------------------------------------------------------------------- 2003 2003 ---------------------------------------- ------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ----------- ------------ ---------- ----------- ---------- ------------ (Dollars in thousands) Interest - earning assets: Loans Receivable (1) Real estate loans $ 904,375 $ 14,693 6.50% $ 862,877 $ 15,194 7.04% Other loans 40,259 547 5.43 27,341 394 5.76 ---------- --------- ---------- ---------- Total loans 944,634 15,240 6.45 890,218 15,588 7.00 Securities 366,331 2,516 2.75 359,433 4,999 5.56 Other interest-earning assets (2) 206,977 847 1.64 265,347 1,391 2.10 ---------- --------- ---------- ---------- Total interest-earning assets 1,517,942 18,603 4.90 1,514,998 21,978 5.80 Non-interest earning assets 77,736 89,748 ---------- ---------- Total assets $1,595,678 $1,604,746 ========== =========== Interest-bearing liabilities: Deposits: Checking and money market accounts $ 224,276 695 1.24 $ 178,217 675 1.52 Passbook accounts 213,439 511 0.96 210,898 775 1.47 Certificates of deposit 487,415 4,019 3.30 518,904 5,765 4.44 ---------- --------- ---------- ---------- Total deposits 925,130 5,225 2.26 908,019 7,215 3.18 Total borrowings 449,406 6,600 5.87 462,635 6,789 5.88 ---------- --------- ---------- ---------- Total interest-bearing liabilities 1,374,536 11,825 3.44 1,370,654 14,013 4.09 Non-interest bearing liabilities (3) 63,524 63,343 ---------- ---------- Total liabilities 1,438,060 1,433,997 Net worth 157,618 170,749 ---------- ---------- Total liabilities and retained income $1,595,678 $1,604,746 ========== ========== Net interest-earning assets $ 143,406 $ 144,344 ========== ========== Net interest income/interest rate spread $ 6,778 1.46% $ 7,965 1.71% ========= ====== ========== ====== Net interest margin 1.79% 2.10% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 110.43% 110.53% ====== ======
(1) The average balance of loans receivable includes non-performing loans, interest on which is recognized on a cash basis. (2) Includes money market accounts, federal funds sold and interest-earning bank deposits. (3) Consists primarily of demand deposit accounts. 14 RATE /VOLUME ANALYSIS The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (changes in rate multiplied by changes in volume).
Three Months Ended March 31, 2003 compared to Three Months Ended March 31, 2002 ------------------------------------------------------ (Dollars in thousands) Increase (decrease) due to ------------------------------------------------------ Total Net Rate/ Increase Rate Volume Volume (Decrease) ------------------------------------------------------ Interest-earning assets: Loans receivable: Real estate loans $(1,175) $731 $(57) $(501) Other loans (23) 186 (10) 153 ------- ------ ----- ------- (1,198) 917 (67) (348) Securities (2,530) 96 (49) (2,483) Other interest-earning assets (305) (306) 67 (544) ------- ------ ----- ------- Total net change in income on interest-earning assets (4,033) 707 (49) (3,375) Interest-bearing liabilities: Deposits: Checking and money markets accounts (123) 175 (32) 20 Passbook accounts (270) 9 (3) (264) Certificates of deposit (1,486) (350) 90 (1,746) ------- ------ ----- ------- Total deposits (1,879) (166) 55 (1,990) Borrowings (4) (194) -- (198) ------- ------ ----- ------- Total net change in expense on interest-bearing liabilities (1,883) (360) 55 (2,188) ------- ------ ----- ------- Net change in net interest income $(2,150) $1,067 $(104) $(1,187) ======= ====== ===== =======
15 RESULTS OF OPERATIONS The Company reported net income of $654,000 or $0.06 per diluted share for the three months ended March 31, 2003 compared to $1.6 million or $0.12 per diluted share for the three months ended March 31, 2002. Net interest income for the first quarter of 2003 was $6.8 million compared to $8.0 million for the same period in 2002. The decrease in net interest income primarily reflects the compression of interest rate spreads (from 1.71 percent to 1.46 percent) and net interest margin (from 2.10 percent to 1.79 percent) when comparing the first quarter of 2003 and the first quarter of 2002 due primarily to declines in the weighted average yields on interest-earning assets. Also contributing to the decrease in net interest income, when comparing the first quarter of 2003 to the first quarter of 2002, was the acceleration of prepayments of mortgage loans underlying mortgage-backed securities. Many of these securities were purchased at a premium to par. These premiums are amortized against income based on an assumed level yield. As prepayments and repayments of the underlying mortgages accelerated, the rate of amortization of these premiums was accelerated, resulting in approximately $550,000 of additional premiums being amortized against income over and above scheduled amounts during the first quarter of 2003. The Company's interest income was $18.6 million and $22.0 million for the three months ended March 31, 2003 and 2002, respectively. The average balances of both loans receivable and securities increased while the average balance of other interest-earning assets decreased when comparing the first quarter of 2003 to the first quarter of 2002. Increased interest income resulting from the increases in average balances was more than offset by the reduction in average yields on all interest-earning categories in the first quarter of 2003 when compared to the first quarter of 2002. Interest expense was $11.8 million and $14.0 million for the three months ended March 31, 2003 and 2002, respectively. Average balances of checking and savings accounts increased during the three months ended March 31, 2003 compared to the three months ended March 31, 2002, while the average balances of certificates of deposit and borrowings decreased when comparing these same periods. The resultant net increase in average balances was more than offset by the reduction in average costs paid on all interest-bearing liabilities during the first quarter of 2003 when compared to the first quarter of 2002. The Company's provision for loan losses for the three months ended March 31, 2003 was $478,000 compared to $200,000 for the same period in 2002. The Company establishes provisions for losses on loans, which are charged to operations, in order to maintain the allowances for losses on loans at a level which is deemed appropriate to absorb losses inherent in the portfolio. The Company has increased its emphasis in recent years on construction and land development loans, multi-family residential real estate loans, commercial loans, and commercial real estate loans, all of which are generally deemed to involve more risk of loss than single-family residential real estate loans. As a result the Company continued to increase its allowance for losses on loans as a percentage of total loans. Included in the 2003 provision is $28,000 relating to overdrafts of deposit products from a new program which began in the third quarter of 2002. Non-performing loans increased by $1.5 million when comparing March 31, 2003 to December 31, 2002. This increase was primarily the result of the commercial loans of one borrower for $994,000 becoming more than 90 days delinquent as the borrower awaited receipt of insurance proceeds as a result of a fire loss. These proceeds were received in April 2003, and the loans were repaid in full. 16 The following table sets forth information with respect to non-performing assets at the dates indicated:
March 31, 2003 December 31, 2002 -------------- ----------------- (Dollars in thousands) Non-accrual loans: Mortgage loans: Construction and land development $ 146 $ 1,323 Single-family residential 6,954 7,294 Multi-family residential 290 36 Non-residential 5,873 5,621 Home equity 568 324 Other loans: Commercial 2,005 692 Consumer 23 35 -- -- Total non-performing loans 16,859 15,325 Real estate owned 204 893 ------- ------- Total non-performing assets $17,063 $16,218 ======= ======= Non-performing assets to total assets 1.07% 1.02% Non-performing loans to total loans 1.76 1.56
The following table is a summary of changes in the allowance for loan losses for the three months ended March 31, 2003 and the year ended December 31, 2002:
Three Months Ended Year Ended March 31, 2003 December 31, 2002 ------------------ ----------------- (Dollars in thousands) Balance at beginning of period $8,674 $7,662 Provision for loan losses 478 1,956 Charge-offs (136) (1,183) Recoveries 138 239 ------ ------ Balance at end of period $9,154 $8,674 ====== ====== Allowance for loan losses to total non-performing loans at end of period 54.30% 56.60% Allowance for loan losses to total loans at end of period 0.96 0.92
17 Non-interest income for the three months ended March 31, 2002 was $2.3 million compared to $2.2 million for the same period in 2002. There was no income from insurance commissions during the first quarter of 2003 compared to $288,000 during the first quarter of 2002 as a result of the sale of the insurance agency's assets during the fourth quarter of 2002. Income from investment commissions was $126,000 during the three months ended March 31, 2003 compared to $262,000 for the three months ended March 31, 2002. This change reflects the Company's decision to outsource the sale of non-deposit products beginning in August 2002. Although the commission income during the first quarter of 2003 was less than the comparable quarter in 2002, due to changing operations in the area of non-deposit products, the Company was able to eliminate most expenses related to insurance and investment commissions. Non-interest expense related to insurance commissions in the three months ended March 31, 2003 was zero compared to $321,000 for the three months ended March 31, 2002. Non-interest expense for the three months ended March 31, 2003 pertaining to investment commissions was $13,000 compared to $267,000 for the same period in 2002. There were no gains on the sale of investment securities during the first quarter of 2003 compared to $247,000 during the first quarter of 2002. These reductions of income during the first quarter of 2003 when compared to the first quarter of 2002 were offset by increased fees on deposit accounts. Income from these fees during the three months ended March 31, 2003 was $1.1 million compared to $538,000 for the three months ended March 31, 2002. Non-interest expense for the three months ended March 31, 2003 was $7.6 million compared to $7.8 million for the same period in 2002. Compensation and employee benefits were $4.4 million for the first quarter of 2003 compared to $5.0 million for the same period in 2002. The primary reason for the reduction in compensation and benefit expense was certain efficiencies realized by the Company upon the restructuring of its non-depository product functions as described in the preceding paragraph. This reduction was partially offset by increases in other areas. Income tax expense was $313,000 for the three months ended March 31, 2003 compared to $661,000 for the same period in 2002. This decrease is primarily due to reduced income in the first quarter of 2003 compared to the first quarter of 2002. The effective tax rate for all of 2003 is expected to approximate that of 2002. LIQUIDITY AND COMMITMENTS The Company's liquidity, represented by cash and cash equivalents, is a product of its operating, investing, and financing activities. The Company's primary sources of funds are deposits, borrowings, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-related securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates. In addition, the Company invests excess funds in federal funds sold and other short-term interest earning assets which provide liquidity to meet lending requirements. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as federal funds. The Company uses its sources of funds primarily to meet its ongoing commitments, pay maturing certificates of deposit and savings withdrawals, fund loan commitments, and maintain a portfolio of mortgage-backed and mortgage-related securities and investment securities. At March 31, 2003 the total approved investment and loan origination commitments outstanding amounted to $104.4 million. At the same date, the unadvanced portion of construction loans amounted to $45.4 million. Investment securities scheduled to mature in one year or less at March 31, 2002 were $25.7 million. 18 Based on historical experience, the Company believes that a significant portion of maturing deposits will remain with the Company. The Company anticipates that it will continue to have sufficient funds, together with borrowings, to meet its current commitments. At March 31, 2003 the Bank's regulatory capital was significantly in excess of regulatory limits set by the Office of Thrift Supervision. The current requirements and the Bank's actual levels at March 31, 2003 are set forth below (dollars in thousands):
Required Capital Actual Capital Excess Capital -------------------- ---------------------- -------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Tangible capital $23,724 1.50% $132,206 8.36% $108,492 6.86% Core capital 63,264 4.00 132,216 8.36 69,539 4.36 Risk-based capital 84,049 8.00 141,370 13.46 57,321 5.46
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK For a discussion of the Company's asset and liability management policies as well as the potential impact of interest rate changes upon the market value of the Company's portfolio equity, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's annual report to stockholders for the year ended December 31, 2002. There has been no material change in the Company's assets and liability position or the market value of the Company's portfolio equity since December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Company's management, including its chief executive officer and chief financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures within 90 days of the filing date of this quarterly report, and based on their evaluation, the Company's chief executive officer and chief financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company's management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS FROM REGISTERED SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) An annual meeting of stockholders of the Company was held on April 29, 2003 ("Annual Meeting"). (b) Not applicable. (c) There were 12,289,297 shares of Common Stock of the Company eligible to be voted at the Annual Meeting, and 10,690,613 shares were represented at the meeting by the holders thereof, which constituted a quorum. The items voted upon at the Annual Meeting and the vote for each proposal were as follows: (1) Election of directors for a three-year term. Gene Diamond 9,809,970 FOR 880,643 WITHHELD James W. Prisby 9,799,392 FOR 891,221 WITHHELD Charles R. Webb 9,798,522 FOR 892,091 WITHHELD
(2) To adopt the 2003 Stock Option Plan. 8,449,174 FOR 1,872,712 AGAINST 318,727 ABSTAIN
(3) To ratify the appointment of Ernst & Young LLP as independent auditors of the Company for the year ending December 31, 2003. 10,236,562 FOR 186,928 AGAINST 267,123 ABSTAIN
(d) Not applicable. ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits (filed herewith unless otherwise noted). 3.1 Certificate of Incorporation of CFS Bancorp, Inc.* 3.2 Bylaws of CFS Bancorp, Inc.* 4.0 Form of Stock Certificate of CFS Bancorp, Inc.* 10.1 Form of Employment Agreement entered into between Citizens Financial Services, FSB and each of Thomas F. Prisby, James W. Prisby and John T. Stephens* 20 10.2 Form of Employment Agreement entered into between CFS Bancorp, Inc. and each of Thomas F. Prisby, James W. Prisby and John T. Stephens* 10.5 CFS Bancorp, Inc. Amended and Restated 1998 Stock Option Plan** 10.6 CFS Bancorp, Inc. Amended and Restated 1998 Recognition and Retention Plan and Trust Agreement** 10.7 CFS Bancorp, Inc. 2003 Stock Option Plan*** 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 -------- * Incorporated by Reference from the Company's Registration Statement on Form S-1 filed on March 26, 1998, as amended and declared effective on May 14, 1998. ** Incorporated by Reference from the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders filed on March 23, 2001. *** Incorporated by Reference from the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders filed on March 31, 2003. (b) Reports filed on Form 8-K. On January 31, 2003 the Company filed a Current Report on Form 8-K in connection with its reporting of its earnings for the quarter and fiscal year ended December 31, 2003. On March 18, 2003 the Company filed a Current Report on Form 8-K in connection with the announcement that its Board of Directors has approved the repurchase of approximately 10% of its shares outstanding. On March 28, 2003, the Company filed a Current Report on Form 8-K in connection with the announcement of its quarterly dividend. SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CFS BANCORP, INC. Date: May 14, 2003 By: /s/ Thomas F. Prisby ------------------------------- Thomas F. Prisby, Chairman and Chief Executive Officer Date: May 14, 2003 By: /s/ John T. Stephens ------------------------------- John T. Stephens, Executive Vice President and Chief Financial Officer 21 CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas F. Prisby, the Chairman of the Board and Chief Executive Officer of CFS Bancorp, Inc, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CFS Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 By: /s/ Thomas F. Prisby ------------------- ---------------------------------- Thomas F. Prisby Chairman of the Board and Chief Executive Officer 22 CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John T. Stephens, the Executive Vice President and Chief Financial Officer of CFS Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of CFS Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 By: /s/ John T. Stephens -------------------- ------------------------------- John T. Stephens Executive Vice President and Chief Financial Officer 23