-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E60AehGJXwtSnHmzGHurwZF3ooKwO+UX1Ifhs7tqeVybRxuQItWKO8ZcQOGx3d/c bLlgUQw48RSY/wfPDf2Y5Q== 0000950137-04-009653.txt : 20041109 0000950137-04-009653.hdr.sgml : 20041109 20041109142857 ACCESSION NUMBER: 0000950137-04-009653 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFS BANCORP INC CENTRAL INDEX KEY: 0001058438 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 332042093 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24611 FILM NUMBER: 041128915 BUSINESS ADDRESS: STREET 1: 707 RIDGE ROAD CITY: MUNSTER STATE: IN ZIP: 46321 BUSINESS PHONE: 2198365500 MAIL ADDRESS: STREET 1: 707 RIDGE ROAD CITY: MUNSTER STATE: IN ZIP: 46321 10-Q 1 c89426e10vq.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 September 30, 2004. 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-2 of the Exchange Act). YES [X] NO [ ] The Registrant had 12,341,822 shares of Common Stock issued and outstanding as of November 5, 2004. CFS BANCORP, INC. TABLE OF CONTENTS
Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited)..................................... 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 31 Item 4. Controls and Procedures.............................................. 32 PART II OTHER INFORMATION Item 1. Legal Proceedings.................................................... 33 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......... 33 Item 3. Defaults upon Senior Securities...................................... 33 Item 4. Submission of Matters to a Vote of Security Holders.................. 34 Item 5. Other Information.................................................... 34 Item 6. Exhibits............................................................. 35 Signature Page................................................................ 36 Certifications for Principal Executive Officer and Principal Financial Officer 37
2 CFS BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2004 DECEMBER 31, 2003 ------------------ ----------------- (Unaudited) (Dollars in thousands) ASSETS Cash and amounts due from depository institutions.................... $ 17,770 $ 18,213 Interest-bearing deposits............................................ 39,852 149,577 Federal funds sold................................................... 6,343 9,961 -------------- -------------- Cash and cash equivalents......................................... 63,965 177,751 Securities available-for-sale, at fair value......................... 284,939 326,304 Investment in Federal Home Loan Bank stock, at cost.................. 27,374 26,766 Loans receivable, net of unearned fees............................... 1,000,424 982,579 Allowance for losses on loans..................................... (16,506) (10,453) --------------- --------------- Net loans....................................................... 983,918 972,126 Accrued interest receivable.......................................... 5,966 6,624 Real estate owned.................................................... 590 206 Office properties and equipment...................................... 16,676 13,738 Investment in Bank-owned life insurance.............................. 33,001 31,926 Prepaid expenses and other assets.................................... 12,046 12,335 Intangible assets.................................................... 1,446 1,494 -------------- -------------- Total assets.................................................... $ 1,429,921 $ 1,569,270 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits............................................................. $ 847,353 $ 978,440 Borrowed money....................................................... 411,829 418,490 Advance payments by borrowers for taxes and insurance................ 8,206 5,595 Other liabilities.................................................... 10,131 10,792 -------------- -------------- Total liabilities................................................. 1,277,519 1,413,317 Stockholders' equity: Preferred stock, $0.01 par value; 15,000,000 shares authorized....... - - Common stock, $0.01 par value; 85,000,000 shares authorized; 23,423,306 shares issued as of September 30, 2004 and December 31, 2003; 12,310,222 and 12,200,015 shares outstanding as of September 30, 2004 and December 31, 2003, respectively............ 234 234 Additional paid-in capital........................................... 189,701 189,879 Retained earnings, substantially restricted.......................... 100,813 106,354 Treasury stock, at cost: 11,113,084 and 11,223,291 shares as of September 30, 2004 and December 31, 2003, respectively............ (131,578) (132,741) Unallocated common stock held by ESOP................................ (7,158) (7,158) Unearned common stock acquired by RRP................................ (148) (1,523) Accumulated other comprehensive income, net of tax................... 538 908 -------------- -------------- Total stockholders' equity........................................ 152,402 155,953 -------------- -------------- Total liabilities and stockholders' equity...................... $ 1,429,921 $ 1,569,270 ============== ==============
See accompanying notes. 3 CFS BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------- 2004 2003 2004 2003 ------------ ------------ ------------ -------- (Unaudited) (Dollars in thousands, except share and per share data) Interest income: Loans................................................ $ 14,541 $ 14,628 $ 42,388 $ 44,818 Securities........................................... 2,712 1,631 7,983 5,844 Other................................................ 338 745 1,514 2,683 ---------- ---------- ---------- ---------- Total interest income.............................. 17,591 17,004 51,885 53,345 Interest expense: Deposits............................................. 2,818 3,603 9,839 13,367 Borrowings........................................... 6,340 6,730 18,866 20,002 ---------- ---------- ---------- ---------- Total interest expense............................. 9,158 10,333 28,705 33,369 ---------- ---------- ---------- ---------- Net interest income before provision for losses on loans 8,433 6,671 23,180 19,976 Provision for losses on loans........................... 6,172 502 8,829 1,489 ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans. 2,261 6,169 14,351 18,487 Non-interest income: Service charges and other fees....................... 1,922 1,906 5,474 5,207 Commission income.................................... 204 202 527 520 Net realized gains on available-for-sale securities.. 126 326 81 325 Net gain (loss) on sale of office properties......... - 4 (1) 28 Income from Bank-owned life insurance................ 355 363 1,078 1,092 Other income......................................... 453 403 1,583 1,449 ---------- ---------- ---------- ---------- Total non-interest income.......................... 3,060 3,204 8,742 8,621 Non-interest expense: Compensation and employee benefits................... 5,772 4,666 15,235 13,467 Net occupancy expense................................ 501 562 1,759 1,764 Professional fees.................................... 775 393 2,420 1,353 Data processing...................................... 644 542 2,096 1,654 Furniture and equipment expense...................... 258 461 1,176 1,416 Marketing............................................ 229 262 812 726 Amortization of core deposit intangibles............. 16 - 49 - Other general and administrative expenses............ 2,488 1,205 4,948 3,523 ---------- ---------- ---------- ---------- Total non-interest expense......................... 10,683 8,091 28,495 23,903 ---------- ---------- ---------- ---------- Income (loss) before income taxes....................... (5,362) 1,282 (5,402) 3,205 Income tax expense (benefit)............................ (2,581) 315 (3,508) 886 ----------- ---------- ----------- ---------- Net income (loss).................................. $ (2,781) $ 967 $ (1,894) $ 2,319 =========== ========== =========== ========== Comprehensive income (loss)........................ $ (1,146) $ 1,151 $ (2,264) $ 3,567 =========== ========== =========== ========== Per share data: Basic earnings (loss) per share...................... $ (0.24) $ 0.09 $ (0.16) $ 0.21 Diluted earnings (loss) per share.................... (0.24) 0.08 (0.16) 0.20 Cash dividends declared per share.................... 0.11 0.11 0.33 0.33 Weighted average shares outstanding..................... 11,648,808 11,251,705 11,555,801 11,285,488 Weighted average diluted shares outstanding............. 11,905,252 11,658,617 11,866,131 11,705,965
See accompanying notes. 4 CFS BANCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL COMMON PAID IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK ----- ------- -------- ----- (Unaudited) (Dollars in thousands, except per share data) Balance January 1, 2003.............. $ 234 $ 189,786 $ 107,598 $(125,650) Net income........................... - - 2,319 - Other comprehensive income, net of tax: Change in unrealized appreciation on available-for-sale securities, net of reclassification adjustment Total comprehensive income........... Purchase of treasury stock........... - - - (9,203) Amortization or award under RRP...... - (47) - - Exercise of stock options............ - (258) - 1,559 Tax benefit related to stock options exercised............................ - 27 - - Dividends declared on common stock ($0.33 per share)................... - - (3,583) - --------- --------- ---------- --------- Balance September 30, 2003........... $ 234 $ 189,508 $ 106,334 $(133,294) ========= ========= ========= ========== Balance January 1, 2004.............. $ 234 $ 189,879 $ 106,354 $(132,741) Net loss............................. - - (1,894) - Other comprehensive loss, net of tax: Change in unrealized appreciation on available-for-sale securities, net of reclassification adjustment Total comprehensive loss............. Purchase of treasury stock........... - - - (869) Amortization or award under RRP...... - (20) - - Exercise of stock options............ - (296) - 2,032 Tax benefit related to stock options exercised............................ - 138 - - Dividends declared on common stock ($0. 33 per share)...................... - - (3,647) - --------- --------- ---------- --------- Balance September 30, 2004........... $ 234 $ 189,701 $ 100,813 $(131,578) ========= ========= ========= ==========
UNALLOC. UNEARNED ACCUM. COMMON COMMON OTHER STOCK STOCK COMPRE- HELD ACQUIRED HENSIVE BY ESOP BY RRP INCOME TOTAL ------- ------ ------ ----- (Dollars in thousands, except per share data) Balance January 1, 2003.............. $ (8,356) $ (2,827) $ (123) $ 160,662 Net income........................... - - - 2,319 Other comprehensive income, net of tax: Change in unrealized appreciation on available-for-sale securities, net of reclassification adjustment 1,248 1,248 --------- Total comprehensive income........... 3,567 Purchase of treasury stock........... - - - (9,203) Amortization or award under RRP...... - 1,302 - 1,255 Exercise of stock options............ - - - 1,301 Tax benefit related to stock options exercised............................ - - - 27 Dividends declared on common stock ($0.33 per share)................... - - - (3,583) --------- --------- --------- --------- Balance September 30, 2003........... $ (8,356) $ (1,525) $ 1,125 $ 154,026 ========== ========== ========= ========= Balance January 1, 2004.............. $ (7,158) $ (1,523) $ 908 $ 155,953 Net loss............................. - - - (1,894) Other comprehensive loss, net of tax: Change in unrealized appreciation on available-for-sale securities, net of reclassification adjustment (370) (370) --------- Total comprehensive loss............. (2,264) Purchase of treasury stock........... - - - (869) Amortization or award under RRP...... - 1,375 - 1,355 Exercise of stock options............ - - - 1,736 Tax benefit related to stock options exercised............................ - - - 138 Dividends declared on common stock ($0.33 per share)................... - - - (3,647) --------- --------- --------- --------- Balance September 30, 2004........... $ (7,158) $ (148) $ 538 $ 152,402 ========== ========== ========= =========
See accompanying notes. 5 CFS BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2004 2003 ---- ---- (Unaudited) (Dollars in thousands) Operating activities: Net income (loss).................................................. $ (1,894) $ 2,319 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for losses on loans................................... 8,829 1,489 Depreciation and amortization................................... 1,150 1,202 Net premium amortization on securities available-for-sale 2,044 5,358 Deferred income tax benefit..................................... (3,551) 925 Amortization of cost of stock benefit plans..................... 1,355 1,255 Tax benefit from exercises of nonqualified stock options........ 138 27 Proceeds from sale of loans held-for-sale....................... 9,415 8,707 Origination of loans held-for-sale.............................. (8,073) (11,576) Net gain realized on securities available-for-sale.............. (81) (325) Dividends received on Federal Home Loan Bank Stock.............. (933) (675) Increase in cash surrender value of Bank owned life insurance... (1,078) (574) Decrease (increase) in prepaid expenses and other assets........ 4,673 (3,755) (Decrease) increase in other liabilities........................ (431) 3,550 Other........................................................... 71 182 ---------- ---------- Net cash provided by operating activities..................... 11,634 8,109 ---------- ---------- Investing activities: Proceeds from maturities, paydowns and sales of securities.......... 205,032 456,273 Purchases of securities available-for-sale.......................... (166,193) (386,586) Redemption of Federal Home Loan Bank stock.......................... 325 17 Net loan originations and principal payments received............... (26,234) (49,576) Proceeds from sale of real estate owned............................. 3,585 1,644 Purchases of property and equipment................................. (4,068) (1,810) Disposal of property and equipment.................................. 29 630 ---------- ---------- Net cash provided by investing activities......................... 12,476 20,592 ---------- ---------- Financing activities: Proceeds from exercise of stock options............................. 1,736 1,301 Dividends paid on common stock...................................... (3,626) (3,518) Purchase of treasury stock.......................................... (869) (9,203) Net decrease in deposit accounts.................................... (131,087) (70,238) Net increase in advance payments by borrowers for taxes and Insurance......................................................... 2,611 635 Net decrease in borrowed funds...................................... (6,661) (30,898) ----------- ----------- Net cash flows used for financing activities.................... (137,896) (111,921) ----------- ----------- Decrease in cash and cash equivalents.................................. (113,786) (83,220) Cash and cash equivalents at beginning of period....................... 177,751 204,504 ---------- ---------- Cash and cash equivalents at end of period............................. $ 63,965 $ 121,284 ========== ========== Supplemental disclosure of non-cash activities: Loans transferred to real estate owned.............................. $ 3,919 $ 1,115 Cash paid for interest on deposits.................................. 10,103 13,579 Cash paid for interest on borrowings................................ 1,183 1,187 Cash paid for taxes................................................. - 1,439
6 CFS BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF FINANCIAL STATEMENTS PRESENTATION The consolidated financial statements of CFS Bancorp, Inc. (including its consolidated subsidiaries, the Company) included herein are unaudited; however, such information reflects all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation for the interim periods. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results expected for the full year ending December 31, 2004. The accompanying consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations or cash flows in accordance with accounting principles generally accepted in the United States. The September 30, 2004 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2003 included in the Company's Annual Report on Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reported period. Actual results could differ from these estimates. Certain reclassifications have been made to prior period's consolidated financial statements to conform to the current period's consolidated financial statements. 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, because the exercise price of each of the Company's employees' stock options which have been granted equals the market price of the underlying stock on the date of grant, no compensation expense is recognized at the time of grant. 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. 7 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. The effects of applying FAS No. 123 in this pro forma disclosure are not indicative of future amounts.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------ 2004 2003 2004 2003 ---- ---- ---- ---- (Dollars in thousands except per share data) Net income (loss) (as reported)...................... $ (2,781) $ 967 $ (1,894) $ 2,319 Stock-based compensation expense determined using fair value method, net of tax.......... (125) (213) (417) (578) ---------- ----------- ----------- ----------- Pro forma net income (loss)..................... $ (2,906) $ 754 $ (2,311) $ 1,741 ========== ========== =========== ========== Basic earnings (loss) per share (as reported)... $ (0.24) $ 0.09 $ (0.16) $ 0.21 Pro forma basic earnings (loss) per share....... (0.25) 0.07 (0.20) 0.15 Diluted earnings (loss) per share (as reported). (0.24) 0.08 (0.16) 0.20 Pro forma diluted earnings (loss) per share..... (0.25) 0.06 (0.20) 0.15
The fair value of the option grants for the three and nine months ended September 30, 2004 and 2003 was estimated using the Black-Scholes option value model, with the following assumptions:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Dividend yield.................................. 3.2% 3.1% 3.2% 3.1% Expected volatility............................. 27.0 30.2 27.0 30.2 Risk-free interest.............................. 3.8 3.9 3.8 3.9 Original expected life.......................... 7 years 7 years 7 years 7 years
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. 3. COMPREHENSIVE INCOME Change in the fair value of securities available-for-sale is presented on a net basis on the Consolidated Statement of Changes in Stockholders' Equity. The following tables disclose the changes in the components of other accumulated comprehensive income (loss) for the nine months ended September 30, 2004 and 2003. 8
SEPTEMBER 30, 2004 -------------------------------------------- BEFORE TAX TAX AFTER TAX AMOUNT EFFECT AMOUNT ---------- ------ --------- (Dollars in thousands) Unrealized holding losses on securities available-for-sale: Unrealized holding losses, net.................... $ (458) $ 154 $ (304) Less: reclassification adjustment for net gains included in net losses.......................... 81 (15) 66 --------- --------- --------- Unrealized losses, net.............................. $ (539) $ 169 $ (370) ========= ========= =========
SEPTEMBER 30, 2003 -------------------------------------------- BEFORE TAX TAX AFTER TAX AMOUNT EFFECT AMOUNT ---------- ------ --------- (Dollars in thousands) Unrealized holding gains on securities available-for-sale: Unrealized holding gains, net..................... $ 2,136 $ (676) $ 1,460 Less: reclassification adjustment for net gains included in net income.......................... 325 (113) 212 --------- ---------- --------- Unrealized gains, net............................... $ 1,811 $ (563) $ 1,248 ========= ========== =========
4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2004 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2004 2003 2004 2003 ---- ---- ---- ---- (Dollars in thousands, except per share data) Net income (loss)................................... $ (2,781) $ 967 $ (1,894) $ 2,319 =========== =========== ============ =========== Weighted average common shares outstanding.......... 11,648,808 11,251,705 11,555,801 11,285,488 Common share equivalents (1)........................ 256,444 406,912 310,330 420,477 ----------- ----------- ------------ ----------- Weighted average common shares and common share equivalents outstanding..................... 11,905,252 11,658,617 11,866,131 11,705,965 =========== =========== ============ =========== Basic earnings (loss) per share..................... $ (0.24) $ 0.09 $ (0.16) $ 0.21 Diluted earnings (loss) per share................... (0.24) 0.08 (0.16) 0.20
- ------------------ (1) Assumes exercise of dilutive stock options and also a portion of the unearned awards under the RRP. 5. NEW ACCOUNTING PRONOUNCEMENTS The Meaning of Other-Than-Temporary and Its Application to Certain Investments In January 2003, the Emerging Issues Task Force (EITF) began a project to provide additional guidance on when a market value decline on debt and marketable equity securities should be considered other-than-temporary. Currently, declines in market value that are considered to be other-than-temporary require that a loss be recognized through the income 9 statement. The EITF issued additional guidance in March 2004 establishing criteria for recognition and measurement under this pronouncement to be effective for reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance. This additional guidance could have an impact on the Company's unrealized losses on securities available-for-sale. Currently, the FASB expects to issue the FSP no later than December 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS When used in this Form 10-Q or future filings by the Company with the SEC, in the Company's press releases or other public or stockholder communications, the words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions, or the negative thereof, are intended to identify "forward-looking statements" within the meaning of the Private Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit and other risks which are inherent in the Company's lending and investment activities, legislative changes, changes in operations, changes in the cost of funds, demand for loan products and financial services, changes in accounting principles and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. Such forward-looking statements are not guarantees of future performance. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. OVERVIEW During the third quarter of 2004, the Company's net interest income continued to improve increasing 26.4% to $8.4 million from $6.7 million for the third quarter of 2003. Net interest income for the nine months ended September 30, 2004 increased 16.0% to $23.2 million from $20.0 million for the comparable period in the prior year. The annualized net interest margin increased 33.5% to 2.43% from 1.82% for the third quarter of 2003 which was mainly a result of higher yields earned on securities coupled with a decrease in the interest rate paid on deposits. For the nine months ended September 30, 2004, the annualized net interest margin was 2.16%, up from 1.79% for the same period in 2003. Offsetting the increased net interest income was an increase in the provision for losses on loans. In connection with the Company's third quarter evaluation of the adequacy of its allowance for losses on loans, management identified eight loans with an estimated aggregate 10 impairment of $10.3 million. The estimated impairment along with management's assessment of the adequacy of the Company's allowance for losses on loans resulted in an additional $6.2 million provision for losses on loans during the third quarter of 2004 as compared to $502,000 for the same period in 2003. For the nine months ended September 30, 2004, the provision for losses on loans was $8.8 million, an increase from the provision for losses on loans of $1.5 million for the nine months ended September 30, 2003. As previously communicated, management of the Company continues to explore the possibility of refinancing its outstanding fixed-rate Federal Home Loan Bank (FHLB) borrowings. During the third quarter of 2004, the Company identified an opportunity to partially reduce the negative impact of these borrowings by prepaying $6.5 million of such borrowings which bore a 5.26% fixed interest rate. This prepayment resulted in a $485,000 charge to other non-interest expense. In addition to the above, the Company's financial results for the third quarter of 2004 were also adversely impacted by the following: - additional compensation expense of $1.0 million incurred as a result of the resignation of a senior executive officer; - an additional $585,000 impairment in the cost basis of a trust preferred security deemed to be other than temporarily impaired during the quarter; - the write-down of $421,000 in viatical receivables held by the Bank that were determined to be impaired; - additional legal expenses of $381,000 related to the Company's goodwill litigation; and - an increase in loan collection expenses of $231,000 compared to the third quarter of 2003. As a result, the Company reported a net loss of $2.8 million for the third quarter of 2004 as compared to net income of $967,000 reported for the third quarter of 2003. For the nine months ended September 30, 2004, the Company reported a net loss of $1.9 million as compared to net income of $2.3 million for the nine months ended September 30, 2003. The Company continued to increase its commercial loan portfolio. Loan originations remained high with over $107.0 million in new loans and lines of credit being originated during the three months ended September 30, 2004. Total loan originations for the nine months ended September 30, 2004 were $317.3 million. After strong growth in the Company's average core deposits of 5.1% during the second quarter of 2004, the Company had modest success in the continued growth of average core deposits, which growth amounted to 0.8%, during the third quarter of 2004 as the rise in general interest rates caused disintermediation in the Company's money market deposit accounts. Also during the third quarter of 2004, the Company opened two new Bank branch offices increasing its footprint in northwest Indiana and Chicago's southwestern suburbs. The Dyer, Indiana branch was opened on August 30 and provides additional convenience for our Dyer customers. On September 30, 2004, the Company opened a new Darien, Illinois branch facility 11 which included only the building and furniture and fixtures acquired from a Chicago-based bank. The Company has planned several marketing campaigns to generate new customers at both of these offices. CRITICAL ACCOUNTING POLICIES The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow and other modeling techniques. The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies along with the disclosures presented in the other financial statement notes and in this Management's Discussion and Analysis provide information on the methodology and policies relating to the valuation of significant assets and liabilities. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for losses on loans to be a critical accounting policy. Allowance for Losses on Loans. The Company maintains an allowance for losses on loans at a level management believes is sufficient to absorb credit losses inherent in the loan portfolio. The allowance for losses on loans represents the Company's estimate of probable losses in the loan portfolio at each balance sheet date and is based on the review of available and relevant information. The allowance for losses on loans contains allocations for probable losses that have been identified relating to specific borrowing relationships pursuant to Statement of Financial Accounting Standards No. (SFAS) 114, Accounting by Creditors for Impairment of a Loan, as well as probable losses for pools of loans pursuant to SFAS 5, Accounting for Contingencies. One component of the Company's allowance for losses on loans consists of expected losses resulting in specific credit allocations for individual loans. These specific credit allocations are based on regular analyses of all loans over a fixed-dollar amount where the internal credit rating 12 is at or below a predetermined classification. These analyses involve a high degree of judgment in estimating the amount of the loss associated with specific loans, including the estimation of the amount and timing of future cash flows and collateral values. Another component of the allowance for losses on loans reflects management's estimates of probable inherent but undetected losses within various pools of loans with similar characteristics. This component is based in part on certain loss factors applied to various loan pools as stratified by the Company. In determining the appropriate loss factors for these loan pools, management considers historical charge-offs and recoveries; levels of and trends in delinquencies, impaired loans and other classified loans; concentrations of credit within the commercial loan portfolios; volume and type of lending; and current and anticipated economic conditions. The allowance for losses on loans may also include a relatively small portion that remains unallocated. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. The Company assesses the adequacy of the allowance for losses on loans on a quarterly basis and adjusts the allowance for losses on loans by recording a provision for losses on loans in an amount sufficient to maintain the allowance at an appropriate level. The evaluation of the adequacy of the allowance for losses on loans is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events occur. To the extent that actual outcomes differ from management estimates, an additional provision for losses on loans could be required that could adversely affect earnings or the Company's financial position in future periods. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the provision for losses on loans for Citizens Financial Services, FSB (the Bank or Citizens) and the carrying value of its other non-performing assets, based on information available to them at the time of their examinations. Any of these agencies could require the Bank to make additional provisions for losses on loans in the future. AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID The following tables provide information regarding (i) the Company's interest income recognized from interest-earning assets and their related average yields; (ii) the amount of interest expense realized on interest-bearing liabilities and their related average rates; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods. 13
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------------------- 2004 2003 ---------------------------------------- ------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Interest-earning assets: Loans receivable (1)........... $ 1,004,586 $ 14,541 5.76% $ 976,415 $ 14,628 5.94% Securities (2)................. 322,772 2,712 3.34 277,000 1,631 2.34 Other interest-earning assets(3) 51,293 338 2.62 200,526 745 1.47 ----------- ----------- ----------- ----------- Total interest-earning assets 1,378,651 17,591 5.08 1,453,941 17,004 4.64 Non-interest earning assets....... 71,589 69,373 ----------- ----------- Total assets...................... $ 1,450,240 $ 1,523,314 =========== =========== Interest-bearing liabilities: Deposits: Checking accounts............ $ 95,373 58 0.24% $ 94,156 71 0.30% Money market accounts........ 141,040 329 0.93 140,054 328 0.93 Savings accounts............. 207,144 175 0.34 214,158 231 0.43 Certificates of deposit...... 365,699 2,256 2.45 416,700 2,973 2.83 ----------- ----------- ----------- ----------- Total deposits............. 809,256 2,818 1.39 865,068 3,603 1.65 Borrowings..................... 420,312 6,340 6.00 448,093 6,730 5.96 ----------- ----------- ----------- ----------- Total interest-bearing liabilities................ 1,229,568 9,158 2.96 1,313,161 10,333 3.12 ----------- ----------- Non-interest bearing deposits..... 46,121 36,987 Non-interest bearing liabilities.. 19,054 18,846 ----------- ----------- Total liabilities................. 1,294,743 1,368,994 Stockholders' equity.............. 155,497 154,320 ----------- ----------- Total liabilities and stockholders' equity.............. $ 1,450,240 $ 1,523,314 =========== =========== Net interest-earning assets....... $ 149,083 $ 140,780 =========== =========== Net interest income / interest rate spread..................... $ 8,433 2.12% $ 6,671 1.52% =========== ========== =========== ========== Net interest margin............... 2.43% 1.82% ========== ========== Ratio of average interest-earning assets to average interest-bearing liabilities... 112.12% 110.72% ========== ==========
- ---------------------- (1) The average balance of loans receivable is net of unearned fees and includes non-performing loans, interest on which is recognized on a cash basis. (2) Average balances of securities are based on historical costs. (3) Includes money market accounts, federal funds sold, interest-earning bank deposits and FHLB stock. 14
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------------------- 2004 2003 ----------------------------------------- ------------------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST ------- -------- ---------- ------- -------- ---------- (Dollars in thousands) Interest-earning assets: Loans receivable (1).............. $ 996,515 $ 42,388 5.68% $ 958,413 $ 44,818 6.25% Securities (2).................... 331,704 7,983 3.21 311,627 5,844 2.51 Other interest-earning assets (3). 106,866 1,514 1.89 220,006 2,683 1.63 ----------- ----------- ----------- ----------- Total interest-earning assets 1,435,085 51,885 4.83 1,490,046 53,345 4.79 Non-interest earning assets.......... 72,722 68,873 ----------- ----------- Total assets......................... $ 1,507,807 $ 1,558,919 =========== =========== Interest-bearing liabilities: Deposits: Checking accounts............... $ 95,135 182 0.26% $ 92,636 359 0.52% Money market accounts........... 134,602 922 0.91 140,788 1,398 1.33 Savings accounts................ 207,358 560 0.36 214,368 1,119 0.70 Certificates of deposit......... 432,502 8,175 2.52 451,663 10,491 3.11 ----------- ----------- ----------- ----------- Total deposits................ 869,597 9,839 1.51 899,455 13,367 1.99 Borrowings........................ 419,075 18,866 6.01 448,954 20,002 5.96 ----------- ----------- ----------- ----------- Total interest-bearing liabilities................... 1,288,672 28,705 2.98 1,348,409 33,369 3.31 ----------- ----------- Non-interest bearing deposits........ 43,232 35,721 Non-interest bearing liabilities..... 18,593 19,125 ----------- ----------- Total liabilities.................... 1,350,497 1,403,255 Stockholders' equity................. 157,310 155,664 ----------- ----------- Total liabilities and stockholders' equity ................ $ 1,507,807 $ 1,558,919 =========== =========== Net interest-earning assets.......... $ 146,413 $ 141,637 =========== =========== Net interest income / interest rate spread........................ $ 23,180 1.85% $ 19,976 1.48% =========== ========== =========== ========== Net interest margin.................. 2.16% 1.79% ========== ========== Ratio of average interest-earning assets to average interest-bearing liabilities...... 111.36% 110.50% ========== ==========
(1) The average balance of loans receivable is net of unearned fees and includes non-performing loans, interest on which is recognized on a cash basis. (2) Average balances of securities are based on historical costs. (3) Includes money market accounts, federal funds sold, interest-earning bank deposits and FHLB stock. 15 RATE /VOLUME ANALYSIS The following tables detail the effects of changing rates and volumes on the Company's net interest income. Information is provided with respect to (i) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); (ii) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (iii) changes in rate/volume (changes in rate multiplied by changes in volume).
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO 2003 ------------------------------------------------------------ INCREASE (DECREASE) DUE TO ------------------------------------------------------------ TOTAL NET RATE/ INCREASE / RATE VOLUME VOLUME (DECREASE) ---- ------ ------ ---------- (Dollars in thousands) Interest-earning assets: Loans receivable............................ $ (495) $ 422 $ (14) $ (87) Securities.................................. 696 270 115 1,081 Other interest-earning assets............... 576 (554) (429) (407) ---------- ---------- ---------- ---------- Total net change in income on interest-earning assets................. 777 138 (328) 587 Interest-bearing liabilities: Deposits: Checking accounts......................... (14) 1 - (13) Money market accounts..................... (1) 2 - 1 Savings accounts.......................... (50) (8) 2 (56) Certificates of deposit................... (402) (364) 49 (717) ---------- ---------- ---------- ---------- Total deposits.......................... (467) (369) 51 (785) Borrowings.................................. 29 (417) (2) (390) ---------- ---------- ---------- ---------- Total net change in expense on interest-bearing liabilities............ (438) (786) 49 (1,175) ---------- ---------- ---------- ---------- Net change in net interest income.............. $ 1,215 $ 924 $ (377) $ 1,762 ========== ========== ========== ==========
16
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO 2003 ------------------------------------------------------------ INCREASE (DECREASE) DUE TO ------------------------------------------------------------ TOTAL NET RATE/ INCREASE / RATE VOLUME VOLUME (DECREASE) ---- ------ ------ ---------- (Dollars in thousands) Interest-earning assets: Loans receivable............................ $ (4,051) $ 1,782 $ (161) $ (2,430) Securities.................................. 1,655 377 107 2,139 Other interest-earning assets............... 434 (1,380) (223) (1,169) ---------- ----------- ----------- ----------- Total net change in income on interest-earning assets................. (1,962) 779 (277) (1,460) Interest-bearing liabilities: Deposits: Checking accounts......................... (182) 10 (5) (177) Money market accounts..................... (434) (61) 19 (476) Savings accounts.......................... (540) (37) 18 (559) Certificates of deposit................... (1,954) (445) 83 (2,316) ----------- ----------- ---------- ----------- Total deposits.......................... (3,110) (533) 115 (3,528) Borrowings.................................. 209 (1,331) (14) (1,136) ---------- ----------- ----------- ----------- Total net change in expense on interest-bearing liabilities............ (2,901) (1,864) 101 (4,664) ----------- ----------- ---------- ----------- Net change in net interest income.............. $ 939 $ 2,643 $ (378) $ 3,204 ========== ========== =========== ==========
RESULTS OF OPERATIONS Net Income (Loss). The Company had a net loss for the third quarter of 2004 totaling $2.8 million, as compared to net income of $967,000 reported in the comparable quarter of the previous year. The Company's net loss for the nine months ended September 30, 2004 was $1.9 million, as compared to net income of $2.3 million for the first nine months of 2003. The reduced net income levels from the comparable periods in the prior year were primarily the result of the impact of the increased provision for losses on loans and non-recurring charges recorded during the third quarter of 2004. Net Interest Income. Net interest income is the principal source of earnings for the Company and consists of interest income earned on loans and investment securities less interest expense paid on deposits and borrowed funds. Net interest income is a function of the Company's interest rate spread, which is the difference between the average yield earned on the Company's interest-earning assets and the average rate paid on its interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's net interest margin (which is net interest income as a percentage of average interest-earning assets) improved to 2.43% for the three months ended September 30, 2004 as compared to 1.82% for the same period in 2003. Net interest margin for the first nine months of 2004 was 2.16%, up from 1.79% during the first nine months of 2003. 17 The Company's net interest income for the third quarter of 2004 increased 26.4% to $8.4 million from $6.7 million for the third quarter of 2003. Net interest income for the nine months ended September 30, 2004 increased 16.0% to $23.2 million from $20.0 million for the comparable period in the prior year. The increase in net interest income was primarily due to higher yields on securities and other interest-earning assets along with a reduction in the average cost of deposits. The Company expects its net interest income and net interest margin to modestly improve during the remainder of 2004 as a result of continued loan growth, increased core deposits and higher interest rates. Interest Income. Total interest income of $17.6 million for the three months ended September 30, 2004 increased by $587,000 from $17.0 million for the third quarter of 2003. Interest income for the first nine months of 2004 totaled $51.9 million compared to $53.3 million for the first nine months of 2003. Although the average balance of interest-earning assets decreased 5.2% and 3.7%, respectively, for the quarter and nine months ended September 30, 2004 from the comparable previous year periods, interest income increased for the same periods as a result of reduced premium amortization on the Company's securities portfolio combined with a decrease in total funds invested in low-yielding overnight funds. The Company's average yield on interest-earning assets increased 9.5% during the third quarter of 2004 to 5.08% from 4.64% during the third quarter of 2003. For the nine months ended September 30, 2004, the average yield on interest-earning assets was 4.83%, slightly up from 4.79% for the comparable prior year period. The average yields on loans receivable decreased 18 basis points during the third quarter of 2004 from the third quarter of 2003 and 57 basis points during the first nine months of 2004 from the first nine months of 2003. The main reason for the decreased loan yields was a result of the lower interest rate environment experienced during 2003 which caused borrowers to refinance at lower rates coupled with the effects of the increase in non-accrual loans during 2004 from 2003. This decrease in average yields on loans was partially offset by an increase in the average yields on the Company's securities and other interest-earning assets. The average yield on securities increased to 3.34% for the three months ended September 30, 2004 from 2.34% from the comparable prior year period. For the nine months ended September 30, 2004, the average yield on securities increased to 3.21% from 2.51% from the nine months ended September 30, 2003. These increases were mainly a result of reduced levels of premium amortization during 2004 as the prepayments of mortgage loans underlying the mortgage-related securities slowed significantly. The average yields on other interest-earning assets increased to 2.62% for the three months ended September 30, 2004 from 1.47% for the comparable prior year period and to 1.89% for the nine months ended September 30, 2004 from 1.63% for the comparable prior year period. These increases were a direct result of a decrease in total funds invested in lower-yielding overnight funds during the 2004 periods. Interest Expense. Total interest expense of $9.2 million for the three months ended September 30, 2004 represented a decrease of $1.2 million from $10.3 million incurred for the third quarter of 2003. Interest expense was $28.7 million for the nine months ended September 18 30, 2004, a decrease of $4.7 million from $33.4 million for the nine months ended September 30, 2003. The average balance of interest-bearing liabilities decreased 6.4% and the average cost of interest-bearing liabilities decreased 16 basis points during the third quarter of 2004 as compared to the third quarter of 2003. For the nine months ended September 30, 2004, the average balance of interest-bearing liabilities decreased 4.4% and the average cost of interest-bearing liabilities decreased 33 basis points as compared to the nine months ended September 30, 2003. The average cost of interest-bearing deposits for the quarter ended September 30, 2004 was down 26 basis points to 1.39% from 1.65% for the third quarter of 2003. The average cost of these deposits was also down 48 basis points to 1.51% for the nine months ended September 30, 2004 from 1.99% for the same period in 2003. The lower cost of deposits for the third quarter of 2004 was mainly a result of higher cost deposits repricing at lower rates. The decrease for the nine months ended September 30, 2004 was mainly a result of over $180 million of above-market rate certificates of deposit either being repriced to lower current market rates or withdrawn at maturity during 2004. Also contributing to the lower cost of deposits was a 4.4% increase in the average balance of low-cost core deposits for the three months ended September 30, 2004 from the levels existing at December 31, 2003. Provision for losses on loans. The Company's provision for losses on loans was $6.2 million for the third quarter of 2004 as compared to $502,000 for the third quarter of 2003. The provision for the nine months ended September 30, 2004 was $8.8 million, up from $1.5 million for the comparable period in 2003. In connection with the Company's third quarter evaluation of the adequacy of its allowance for losses on loans, the Company obtained updated information, including in some instances new appraisals, on its non-performing loans. Based on the new information, management identified eight loans that required a reserve allocation because of a change in either the borrower's ability to perform their obligations under the terms and conditions of the loan agreements or the estimated value of the collateral. The total principal amount of these eight loans was $31.9 million. With respect to these eight loans, the Company identified an impairment reserve of $10.3 million, an increase from the $3.8 million reserve in the aggregate for these loans at June 30, 2004. Non-interest income. Non-interest income was $3.1 million for the quarter ended September 30, 2004, a decrease of $144,000 from the third quarter of 2003. The Company's non-interest income for the third quarter of 2003 included $326,000 of net realized gains on securities available-for-sale compared to $126,000 for the third quarter of 2004. Due primarily to increased usage of the Company's ATMs and check cards, the Company realized a $36,000 increase in other income during the third quarter of 2004 from the quarter ended September 30, 2003. Service charges and other fees were also up by $16,000 during the quarter ended September 30, 2004 compared to quarter ended September 30, 2003 as a result of the Company modifying certain fees on deposit accounts. This modification went into effect on September 1, 2004. Non-interest income was $8.7 million for the first nine months of 2004, up $121,000 from $8.6 million for the first nine months of 2003. Non-interest income for the first nine months of 2003 included $325,000 in net realized gains on securities available-for-sale compared to $81,000 for the first nine months of 2004. The increase in non-interest income from the 2003 19 period was primarily related to an increase in service charges and other fees as a result of fees realized from the Company's Overdraft Protection Program. Net realized gains on available-for-sale securities were $126,000 for the third quarter of 2004, down $200,000 from the third quarter of 2003. During the 2004 quarter, the Company sold approximately $55 million in securities available-for-sale resulting in a realized gain of $711,000. The assets were sold to take advantage of a rapid flattening of the yield curve. A portion of the proceeds were used for the early repayment of FHLB Chicago advances with the remainder to be used for general bank purposes including, but not limited to, loan growth, reinvestment in other securities, and possible repayment or refinancing of additional FHLB advances. Partially offsetting these realized gains, the Company identified an additional $585,000 impairment in the cost basis of a $764,000 trust preferred security that was deemed to be other than temporarily impaired. For further discussion related to this impaired security, see the "Securities" section in this Form 10-Q. For the nine months ended September 30, 2004, net realized gains on available-for-sale securities were $81,000, compared to $325,000 for the same prior year period. The decrease in the gains was mainly a result of the write-downs in the cost basis of the trust preferred security previously mentioned which offset the net realized gains on the sale of over $128 million in securities for the nine months ended September 30, 2004. Non-interest expense. Non-interest expense for the third quarter and first nine months of 2004 was $10.7 million and $28.5 million, respectively, representing increases of $2.6 million and $4.6 million, respectively, from the third quarter and first nine months of 2003. Included in the increase were the legal expenses associated with the Company's goodwill litigation case that went to trial during June 2004. The legal expenses incurred during the third quarter and first nine months of 2004 related to this case were $381,000 and $1.2 million, respectively, which were significantly higher than those incurred for the same periods in 2003. The Company estimates that the legal expenses related to this case will be less than $100,000 for the remainder of 2004. See Item 1 of Part II in this Form 10-Q for a discussion of the status of the litigation. Also adding to the increase in non-interest expense for the quarter and nine months ended September 30, 2004, the Company incurred charges as follows: - compensation expense of $1.0 million related to the resignation of a senior executive officer; - a prepayment penalty of $485,000 for the early repayment of $6.5 million in FHLB Chicago advances; - the write-down of $421,000 in viatical receivables to $537,000 held by the Bank that were determined to be impaired; and - an increase in loan collection expenses of $231,000. The prepayment penalty, write-down of the viatical receivables, and increased loan collection expenses are included in other general and administrative expenses. Income Tax Expense. The Company's income tax benefit for the three months ended September 30, 2004 was $2.6 million compared to income tax expense of $315,000 for the three 20 months ended September 30, 2003. The income tax benefit for the nine months ended September 30, 2004 was $3.5 million compared to income tax expense of $886,000 for the nine months ended September 30, 2003. The significant decrease in income tax expense was a result of the lower pre-tax income for the three and nine month periods ended September 30, 2004 combined with the application of available tax credits, the effects of permanent tax differences on the Company's pre-tax earnings, and the reversal of tax accruals no longer considered necessary. The Company anticipates that these available tax credits, permanent tax differences, and reversals of tax accruals will continue to have a favorable impact on the income tax expense for the remainder of 2004. CHANGES IN FINANCIAL CONDITION General. At September 30, 2004, the Company's total assets had decreased by $139.3 million to $1.43 billion from $1.57 billion at December 31, 2003. The significant changes in the composition of the balance sheet during the nine months ended September 30, 2004 included a decrease in cash and cash equivalents of $113.8 million. This decrease was a result of a decrease in total deposits of $131.1 million and an increase in net loans receivable of $17.8 million. Securities. The amortized cost of the Company's securities and their fair values were as follows at September 30, 2004 and December 31, 2003:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ---- (Dollars in thousands) At September 30, 2004: Agency securities, corporate bonds, and commercial paper................................ $ 157,600 $ 642 $ (299) $ 157,943 Mortgage-backed securities........................ 61,461 730 (74) 62,117 Collateralized mortgage obligations............... 58,218 234 (122) 58,330 Trust preferred securities........................ 5,116 - (129) 4,987 Equity securities................................. 1,725 6 (169) 1,562 ----------- ----------- ------------ ----------- $ 284,120 $ 1,612 $ (793) $ 284,939 =========== =========== ============ =========== At December 31, 2003: Agency securities, corporate bonds, and commercial paper................................ $ 132,127 $ 692 $ - $ 132,819 Mortgage-backed securities........................ 108,468 888 (255) 109,101 Collateralized mortgage obligations............... 75,245 626 (73) 75,798 Trust preferred securities........................ 6,148 - (562) 5,586 Equity securities................................. 2,958 178 (136) 3,000 ----------- ----------- ------------ ----------- $ 324,946 $ 2,384 $ (1,026) $ 326,304 =========== =========== ============ ===========
During the third quarter of 2004, approximately $55 million of available-for-sale securities were sold realizing a net gain on the sales of $711,000. The assets were sold to take advantage of a flattening yield curve. Partially offsetting the gains on sales of securities, the Company identified an additional $585,000 impairment in a trust preferred security with a cost basis of $764,000. The write-down to fair value was made when the issuer announced in September 2004 the continuation of interest deferral on the trust preferred securities coupled 21 with the sale of a significant portion of the issuer's assets, the continuing restructuring objectives, and regulatory restrictions on the issuer. Management does not believe that any other unrealized loss on the Company's securities as of September 30, 2004 represents an other-than-temporary impairment. The unrealized losses reported for the remainder of the portfolio were attributable to changes in interest rates. Loans. Loans receivable, net of unearned fees, and the percentage of loans by category are presented below as of September 30, 2004 and December 31, 2003:
SEPTEMBER 30, 2004 DECEMBER 31, 2003 ----------------------- ----------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE ------ ---------- ------ ---------- (Dollars in thousands) Commercial and construction loans: Commercial real estate............................ $ 403,907 40.4% $ 429,883 43.7% Construction and land development................. 156,073 15.6 125,636 12.8 Commercial and industrial......................... 51,292 5.1 36,222 3.7 ----------- ------ ----------- ------ Total commercial loans............................ 611,272 61.1 591,741 60.2 Retail loans: Single-family residential......................... 285,479 28.5 316,774 32.2 Home equity loans................................. 95,739 9.6 71,360 7.3 Other............................................. 7,934 0.8 2,704 0.3 ----------- ------ ----------- ------ Total retail loans................................ 389,152 38.9 390,838 39.8 ----------- ------ ----------- ------ Total loans receivable.............................. $ 1,000,424 100.0% $ 982,579 100.0% =========== ====== =========== ======
Total loans increased 1.8% during the first nine months of 2004 as the Company's efforts to increase total commercial loans continued. Total commercial loans grew over 3% since December 31, 2003. Total loan originations, net of principal repayments, for the nine months ended September 30, 2004 were $26.2 million. Allowance for Losses on Loans. At September 30, 2004, the Bank's allowance for losses on loans amounted to $16.5 million or 50.1% of the Bank's non-performing loans and 1.65% of its total loans receivable. Management of the Bank believes that, as of September 30, 2004, the allowance for losses on loans was adequate. The following is a summary of changes in the allowance for losses on loans for the periods presented:
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2004 2003 ---- ---- (Dollars in thousands) Balance at beginning of period...................... $ 10,453 $ 8,721 Provision for losses on loans....................... 8,829 1,489 Charge-offs......................................... (2,999) (473) Recoveries.......................................... 223 173 ------------ ------------ Balance at end of period............................ $ 16,506 $ 9,910 ============ ============
22 See additional discussion for the increased provision for losses on loans under the sub-heading "Provision for Losses on Loans" above. During the third quarter of 2004, the Company charged-off two commercial loans totaling $762,000. Prior to their charge-off, these two loans were already classified and had combined reserve provisions totaling $513,000 at the beginning of the third quarter of 2004. Non-performing Assets. The following table provides information relating to the Company's non-performing assets as of the dates indicated. The Company has no loans past due greater than 90 days that are still accruing interest at either date presented below.
SEPTEMBER 30, DECEMBER 31, 2004 2003 ------------- ------------ (Dollars in thousands) Non-accrual loans: Commercial loans: Commercial real estate.......................... $ 20,884 $ 11,460 Construction and land development............... 6,021 4,180 Commercial and industrial....................... 293 1,205 ------------- ------------- Total commercial loans.......................... 27,198 16,845 Retail loans: Single-family residential....................... 5,566 5,584 Home equity..................................... 164 272 Other........................................... 48 19 ------------- ------------- Total retail loans.............................. 5,778 5,875 ------------- ------------- Total non-accruing loans........................ 32,976 22,720 Other real estate owned, net......................... 590 206 ------------- ------------- Total non-performing assets....................... $ 33,566 $ 22,926 ============= ============= Performing troubled debt restructurings.............. $ 42 $ 296 Non-performing assets to total assets................ 2.35% 1.46% Non-performing loans to total loans.................. 3.30 2.32 Total non-performing assets and troubled debt restructurings to total assets.................... 2.35 1.48
The increase in non-performing commercial real estate loans from December 31, 2003 to September 30, 2004 was primarily related to the following: - One loan totaling $8.8 million which is secured by a hotel in Michigan and was transferred to non-accrual status during the third quarter of 2004. The Company is negotiating a forbearance agreement to obtain additional collateral of 15.4 acres of adjacent land along with requiring a hotel consultant to assist with the hotel's operation. As of September 30, 2004, the loan was considered an impaired loan with an estimated loss allocation of $811,000. - An $8.7 million loan which is secured by a full-service hotel in the Chicago metropolitan area which was transferred to non-accrual status during the second 23 quarter of 2004. Management is reviewing its options for this loan and considering various alternatives including receiving additional collateral or selling the loan to a third party. The loan was considered impaired as of September 30, 2004 with an estimated loss allocation of $3.5 million. - Two loans totaling $2.2 million which were transferred to non-accrual status during the second quarter of 2004. These loans are secured by a golf course in Indiana. The Company has filed a foreclosure action; however, management believes the loans will pay off prior to any judicial sale. Based on the collateral value, the Company believes there is no risk of loss related to these two loans as of September 30, 2004. Partially offsetting the increase in non-performing commercial real estate loans from December 31, 2003 to September 30, 2004 were the following: - the foreclosure on and transfer of a $4.5 million motel loan to real estate owned prior to it being sold in the second quarter of 2004; and - the full payoff during the second quarter of 2004 of a $3.8 million loan secured by a strip mall that was transferred to non-performing status during the fourth quarter of 2003. Included in the non-performing construction and land development loans are the following loans: - A $2.9 million loan participation that was transferred to non-accrual status during the third quarter of 2004 at the direction of the Office of Thrift Supervision (OTS). This loan was purchased from a lending company that has filed for bankruptcy and is under investigation for fraud. During October 2004, the underlying loan was paid off in full; however, the proceeds are being held by the bankruptcy trustee pending resolution of the case. A creditor's plan has been set for confirmation in December 2004; therefore, the Company expects resolution of the case to occur by the end of 2004 with the proceeds being received shortly thereafter. However, there is no assurance the plan will be confirmed by that time or that the case will be resolved by the end of 2004. The Company has identified this loan as an impaired asset with a loss allocation estimated at $715,000. While the Company currently believes its $2.9 million loan is not substantially at risk of loss, the Company has nevertheless established this loss allocation in accordance with OTS requirements. - A $2.8 million loan secured by a 144 unit apartment complex located in Indiana. A receiver was appointed for this project and the Company filed a foreclosure action prior to September 30, 2004. This loan has been identified as an impaired asset with an estimated loss allocation of $1.3 million. The Company also has impaired loans that were performing as of September 30, 2004. These loans consist of the following: - A $4.7 million commercial real estate loan secured by a hotel within the greater Chicagoland area. Despite insufficient debt service coverage, the loan is current due 24 to guarantor support. The Company continues to monitor the loan to ensure the loan remains current. The loan was considered impaired as of September 30, 2004 with an estimated loss allocation of $1.6 million. - Three commercial real estate loans totaling $3.5 million which are secured by a first mortgage on a golf course in northwest Indiana and a third mortgage on a separate golf course in northwest Indiana. Although the borrowers continue to make monthly payments, the loans continue to be between 30 and 90 days past due. The estimated loss allocation associated with these loans was $1.5 million as of September 30, 2004. - Two commercial and industrial loans, one of which was a line of credit, to the same borrower totaling $1.0 million which are secured by the business assets of a direct mail advertising service company in Virginia. The Company signed a forbearance agreement to allow the borrower time to market the business for sale. In conjunction with the forbearance, the borrowers paid off the $150,000 line of credit subsequent to September 30, 2004. The Company has identified an estimated loss allocation of $790,000 associated with these loans. Deposits and Borrowed Money. The following table sets forth the dollar amount and the percentage of total deposits in each deposit category offered by the Bank at the dates indicated.
SEPTEMBER 30, 2004 DECEMBER 31, 2003 --------------------------- -------------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE ----------- ---------- ----------- ---------- (Dollars in thousands) Checking accounts: Non-interest bearing.............................. $ 45,576 5.4% $ 40,017 4.1% Interest-bearing.................................. 91,049 10.7 91,385 9.3 Money market accounts................................ 137,566 16.2 123,799 12.7 Savings accounts..................................... 203,686 24.1 204,312 20.9 ----------- ------ ----------- ------ Core deposits................................... 477,877 56.4 459,513 47.0 Certificates of deposit: $100,000 or less.................................. 287,328 33.9 396,433 40.5 Over $100,000..................................... 82,148 9.7 122,494 12.5 ----------- ------ ----------- ------ Time deposits................................... 369,476 43.6 518,927 53.0 ----------- ------ ----------- ------ Total Deposits................................ $ 847,353 100.0% $ 978,440 100.0% =========== ====== =========== ======
Deposits were $847.4 million at September 30, 2004 compared to $978.4 million at December 31, 2003. The decrease of $131.1 million was primarily the result of a reduction of $149.5 million in certificates of deposit, partially offset by an increase in core deposits of $18.4 million. The decrease in the certificates was primarily due to the runoff of above-market rate certificates as these certificates matured primarily during the second quarter of 2004. The Company has made progress in reducing the cost of its deposits by increasing its non-interest bearing deposits by 13.9% since December 31, 2003. Total core deposits are also up 4.0% as of September 30, 2004 compared to December 31, 2003. These increases are a direct result of the Company's promotional efforts and retail incentive programs which focused on the generation of low-cost core deposits. 25 Borrowed money consists of the following:
SEPTEMBER 30, 2004 DECEMBER 31, 2003 ------------------- ------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE RATE AMOUNT RATE AMOUNT -------- ---------- -------- --------- (Dollars in thousands) Secured advances from FHLB - Indianapolis: Maturing in 2010 - fixed-rate 5.92% $ 400,000 5.92% $ 400,000 Maturing in 2014 - fixed-rate 6.71 1,227 6.71 1,244 Maturing in 2018 - fixed-rate 5.54 2,911 5.54 2,911 Maturing in 2019 - fixed-rate 6.32 7,691 6.32 7,835 Secured advances from FHLB - Chicago: Maturing in 2008 - fixed-rate - - 5.26 6,500 ---------- --------- $ 411,829 $ 418,490 ========== ========= Weighted-average stated interest rate 5.93% 5.92%
Advances with final maturities in 2010 contain quarterly call dates by the FHLB through maturity. Advances maturing in 2019 are amortizing notes. Management of the Company continues to explore the possibility of refinancing the fixed-rate FHLB borrowings as the high cost of these advances continued to have a significant adverse impact on the Company's net interest margin. As such, the Company identified an opportunity to partially reduce the negative impact of these borrowings by prepaying $6.5 million of advances maturing in 2008 which bore a 5.26% fixed interest rate. The early repayment of these advances resulted in a $485,000 charge to other non-interest expense during the quarter ended September 30, 2004. The Company continues to analyze the potential risks and rewards of prepaying all or a portion of its remaining advances. The prepayment penalty is calculated and set by the FHLB pursuant to a predetermined specified formula. As of September 30, 2004, the prepayment penalty for all of the remaining $411.8 million in advances was estimated at $46.2 million. As part of the analysis of potential risks and rewards, the Company's Asset/Liability Committee (ALCO) is evaluating various options to generate the liquidity needed to pay the principal amount of the borrowings due along with the penalty. The Committee's analysis includes the potential use of new fixed-rate FHLB advances with maturities ranging from one to three years, new variable-rate FHLB advances, brokered and retail deposits, and asset sales to generate the needed liquidity. If the advances are prepaid, the penalty would have a significant adverse impact on the Company's financial results for the quarter and the year in which the debt is repaid; however, the Company would begin to realize reduced interest expense and a corresponding increase in its net interest margin. There can be no assurances that the Company will prepay any of its remaining advances. The Company cannot provide any assurance as to the total amount of the prepayment penalty in the event that the Company does prepay either a portion or all of these borrowings. 26 Pursuant to collateral agreements with the Federal Home Loan Bank of Indianapolis (FHLB-IN), advances are secured by the following assets as of September 30, 2004:
AMOUNT DESCRIPTION OF COLLATERAL PLEDGED - ------------------------- ----------- (Dollars in thousands) FHLB-IN stock $ 27,374 Residential first mortgage loans 290,216 Commercial first mortgage loans 231,984 Mortgage-backed securities 153,307 Agency securities 43,354 ----------- $ 746,235 ===========
As of September 30, 2004, the Company had two lines of credit with a maximum of $25.0 million and $15.0 million, respectively, in unsecured overnight federal funds at the market rate for the purchase of federal funds at the time of a request. During the third quarter, these lines were used for liquidity purposes. As of September 30, 2004, these lines had a zero balance. The maximum amount borrowed during the third quarter of 2004 was $10.5 million and the weighted-average rate paid was 1.76%. Capital Resources. Stockholders' equity was $152.4 million at September 30, 2004 compared to $156.0 million at December 31, 2003. The decrease was primarily due to: - the net loss of $1.9 million for the nine months; - a decrease of $370,000 in unrealized gains on available-for-sale securities, net of tax; - dividends declared during the first nine months of 2004 totaling $3.6 million; and - repurchases of the Company's common stock during the first nine months of 2004 totaling $869,000. Partially offsetting the above decreases in stockholders' equity, the Company also realized during the first nine months of 2004: - vesting of $1.4 million of common stock under the Company's Recognition and Retention Plan (RRP); and - stock option exercises totaling $1.7 million. At September 30, 2004, the Bank's regulatory capital was in excess of regulatory limits set by the OTS. The current requirements and the Bank's actual levels at September 30, 2004 and at December 31, 2003 are provided below: 27
TO BE WELL-CAPITALIZED UNDER PROMPT FOR CAPITAL ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES PROVISIONS ------------------ --------------------- ---------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ------ ------- ------ -------- ----- (Dollars in thousands) As of September 30, 2004: Risk-based $140,337 12.82% $87,567 >8.00% $109,458 >10.00% Tangible 128,612 9.07 21,274 >1.50 21,987 >2.00 Core 128,612 9.07 56,730 >4.00 70,913 >5.00 As of December 31, 2003: Risk-based $141,974 13.04% $87,083 >8.00% $108,854 >10.00% Tangible 131,521 8.46 23,307 >1.50 31,076 >2.00 Core 131,521 8.46 62,152 >4.00 77,690 >5.00
LIQUIDITY AND COMMITMENTS The Company's liquidity, represented by cash and cash equivalents, is a product of operating, investing and financing activities. The Company's primary historical sources of funds are: - deposits, - scheduled payments of amortizing loans and mortgage-related securities, - prepayments and maturities of outstanding loans and mortgage-related securities, - maturities of investment securities and other short-term investments, - funds provided from operations, and o borrowings from the FHLB. Scheduled payments from the amortization of loans, mortgage-related securities, maturing investment securities, and short-term investments are relatively predictable sources of funds, while deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions and competitive rate offerings. In addition, the Company invests excess funds in federal funds sold and other short-term interest-earning assets which provide liquidity to meet lending requirements. At September 30, 2004, the Company had cash and cash equivalents of $64.0 million which was a decrease of $113.8 million from December 31, 2003. The decrease was mainly caused by the following: - a decrease in total deposits of $131.1 million; - loan originations, net of principal payments received, of $26.2 million; - decrease in borrowed funds of $6.7 million; - purchases of property and equipment totaling $4.1 million; and - dividends paid of $3.6 million. 28 Cash flows from operating activities also provided $11.6 million of liquidity and net proceeds from maturities, paydowns and sales of securities provided $38.8 million to slightly offset the above decreases in cash and cash equivalents. The Company uses its sources of funds primarily to meet its ongoing commitments, fund loan commitments, pay maturing certificates of deposit and savings withdrawals, and maintain a securities portfolio. The Company anticipates that it will continue to have sufficient funds to meet its current commitments. Should the Company choose to repay additional FHLB advances prior to maturity, the Company expects that it would generate additional liquidity through various options including using brokered certificates of deposit, borrowing from the FHLB and utilizing the liquidity in its securities portfolio. The liquidity needs of the parent company, CFS Bancorp, Inc., consist primarily of operating expenses, dividend payments to stockholders and stock repurchases. The primary sources of liquidity are cash and cash equivalents, securities available-for-sale and dividends from the Bank. Under regulations of the OTS, without prior approval, the dividends from the Bank are limited to the extent of the Bank's cumulative earnings for the year plus the net earnings (adjusted by prior distributions) of the prior two calendar years. On a parent company-only basis, at September 30, 2004, the Company had $6.9 million in cash and cash equivalents along with $5.4 million in securities available-for-sale. CONTRACTUAL OBLIGATIONS. The following table presents significant fixed and determinable contractual obligations to third parties by payment date as of September 30, 2004.
PAYMENTS DUE BY PERIOD --------------------------------------------------------------------- OVER ONE OVER THREE ONE YEAR THROUGH THROUGH OVER FIVE OR LESS THREE YEARS FIVE YEARS YEARS TOTAL --------- ----------- ---------- --------- --------- (Dollars in thousands) FHLB advances (1)...... $ 218 $ 483 $ 554 $ 410,574 $ 411,829 Operating leases....... 562 767 166 - 1,495 --------- --------- --------- --------- --------- $ 780 $ 1,250 $ 720 $ 410,574 $ 413,324 ========= ========= ========= ========= =========
- ---------- (1) Does not include interest expense at the weighted-average stated rate of 5.93% for the periods presented. See the "Deposits and Borrowed Money" section for further discussion surrounding the Company's FHLB advances. The Company's operating lease obligations reflected above include the future minimum rental payments, by year, required under the lease terms for premises and equipment. Many of these leases contain renewal options, and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specific prices. The Company also has commitments to fund maturing certificates of deposit which are scheduled to mature within one year or less. These deposits totaled $303.1 million at September 29 30, 2004. Based on historical experience and the fact that these deposits are at current market rates, management believes that a significant portion of the maturing deposits will remain with the Bank. OFF-BALANCE SHEET OBLIGATIONS. The Company 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 involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of non-performance by the third party for commitments to extend credit and letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table details the amounts and expected maturities of significant commitments as of September 30, 2004.
OVER ONE OVER THREE ONE YEAR THROUGH THROUGH OVER FIVE OR LESS THREE YEARS FIVE YEARS YEARS TOTAL --------- ----------- ---------- --------- --------- (Dollars in thousands) Commitments to extend credit: Commercial........................ $ 20,798 $ - $ - $ - $ 20,798 Retail............................ 14,609 - - - 14,609 Commitments to purchase loans: Commercial........................ 28,500 - - - 28,500 Retail............................ - - - - - Commitments to fund unused construction loans................ 51,881 - - - 51,881 Commitments to fund unused lines of credit: Commercial........................ 46,378 - - - 46,378 Retail............................ 82,002 - - - 82,002 Letters of credit................... 6,962 1,016 2,866 - 10,844 Credit enhancements................. - 6,533 14,303 28,027 48,863 --------- --------- --------- --------- --------- $ 251,130 $ 7,549 $ 17,169 $ 28,027 $ 303,875 ========= ========= ========= ========= =========
The above listed commitments do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. Letters of credit include credit enhancements which are related to the issuance by municipalities of taxable and nontaxable revenue bonds. The proceeds from the sale of such bonds are loaned to for-profit and not-for-profit companies for economic development projects. In order for the bonds to receive a triple-A rating which provides for a lower interest rate, the FHLB-IN issues, in favor of the bond trustee, an Irrevocable Direct Pay Letter of Credit for the account of the Bank. Since the Bank, in accordance with the terms and conditions of a Reimbursement Agreement between the FHLB-IN and the Bank, would be required to reimburse the FHLB-IN for draws against the Letter of Credit, these facilities are analyzed, appraised, secured by real estate mortgages, and monitored as if the Bank funded the project initially. 30 The Company has not used, and has no intention of using, any significant off-balance sheet financing arrangements for liquidity purposes. In addition, the Company has not had, and has no intention to have, any significant transactions, arrangements or other relationships with any unconsolidated, limited purpose entities that could materially affect the Company's liquidity or capital resources. The Company has not traded in and has no intention of trading in derivatives or commodity contracts. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Bank, like other financial institutions, is subject to interest rate risk (IRR). IRR refers to the risk that changes in market interest rates might adversely affect net interest income or the net portfolio value (NPV) of its assets, liabilities, and off-balance sheet contracts. IRR is primarily the result of an imbalance between the price sensitivity of the Bank's interest-earning assets and its interest-bearing liabilities. These imbalances can be caused by differences in the maturity, repricing, and coupon characteristics of assets and liabilities as well as options (such as loan prepayment options). The Bank maintains a written Asset/Liability Management Policy that establishes written guidelines for the asset/liability management function, including the management of net interest margin and interest rate risk. The Asset/Liability Management Policy falls under the authority of the Board of Directors who in turn assigns its formulation, revision, and administration to the Asset/Liability Committee (ALCO). The ALCO meets monthly and consists of certain senior officers of the Bank and one outside director. The results of the monthly meetings are reported to the Board of Directors. The primary duties of the ALCO are to develop reports and establish procedures to measure and monitor IRR, verify compliance with Board-approved IRR tolerance limits, take appropriate actions to mitigate those risks, monitor and discuss the status and results of implemented strategies and tactics, monitor the Bank's capital position, review the current and prospective liquidity positions, and monitor alternative funding sources. While maintaining its interest rate spread objectives, the Bank attempts to reduce interest rate risk with a variety of strategies designed to maintain what the Bank believes to be an appropriate relationship between its assets and liabilities. First, the Bank emphasizes the origination or purchase of real estate mortgage loans and commercial loans with adjustable interest rates or fixed rates of interest for an initial term of three or five years that convert to an adjustable interest rate based on various indices plus a margin for the remainder of the loan's contractual term. These indices include prime or the constant maturity of United States Treasury obligations. At September 30, 2004, the Bank had approximately $730.3 million of adjustable-rate loans in its loan portfolio. Second, the Bank's securities portfolio consists primarily of securities that have expected average lives of five years or less at time of purchase. Third, the Bank has a substantial amount of savings, demand deposit and money market accounts which the Bank believes may be less sensitive to changes in interest rates than certificate of deposit accounts. At September 30, 2004, the Bank had $477.9 million of these types of accounts. The Bank utilizes the OTS NPV model as its primary method of monitoring its exposure to IRR. The NPV represents the excess of the present value of expected cash flows from assets over the present value of expected cash flows from liabilities. The NPV model estimates the sensitivity of the Bank's NPV over a series of instantaneous and sustained parallel shifts in interest rates. On a quarterly basis, the ALCO reviews the calculations of NPV as adjusted for expected cash flows from off-balance sheets contracts, if any, for compliance with Board-approved tolerance limits. 31 The table below presents, as of September 30, 2004 and December 31, 2003, an analysis of the Bank's IRR as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve in 100 basis point (1%) increments, up to 300 basis points (3%) and down 100 basis points in accordance with OTS regulations. As illustrated in the table, the Bank's NPV in the base case (0 basis point change) increased $725,000 from $138.2 million as of December 31, 2003 to $138.9 million as of September 30, 2004.
Net Portfolio Value --------------------------------------------------------------------- September 30, 2004 December 31, 2003 --------------------------------- ------------------------------ $ Amount $ Change % Change $ Amount $ Change % Change -------- -------- -------- -------- -------- -------- Assumed Change in Interest Rates (Basis Points) (dollars in thousands) +300 $136,695 $ (2,218) (1.6%) $118,872 $(19,316) (14.0%) +200 142,881 3,969 2.9 130,804 (7,385) (5.3) +100 144,128 5,215 3.8 147,771 9,582 6.9 0 138,913 -- -- 138,188 -- -- -100 126,158 (12,755) (9.2) 130,281 (7,908) (5.7)
As modeled above, a decrease in interest rates of 100 basis points or an increase in interest rates of 300 basis points would have an adverse impact on the Bank's NPV while an increase in interest rates of 100 basis points or 200 basis points would have a positive impact on the Bank's NPV as of September 30, 2004. The changes in the interest rate risk profile of the Bank as of September 30, 2004 from December 31, 2003 is primarily due to the changes in interest rates and changes in the mix of interest-earning assets and interest-bearing liabilities. As of September 30, 2004 and December 31, 2003, the Bank was within the Board-approved tolerance limits in each rate scenario. This NPV model is a static model and does not consider potential adjustments of strategies by management on a dynamic basis in a volatile rate environment in order to protect or conserve equity values. As such, actual results may vary from the modeled results. The above analysis includes the assets and liabilities of the Bank only. Inclusion of Holding Company assets and liabilities would increase NPV nominally at all levels. ITEM 4. CONTROLS AND PROCEDURES No change in the Company's internal control over financial reporting (as defined in Rule 13a - 15(f) or 15(d) - 15(f) under the Securities Exchange Act of 1934, as amended) occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of its disclosure controls and procedures (as defined in Rules 13a - 15(e) or 15(d) - 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is 32 recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and are operating in an effective manner. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Bank's suit that was filed against the U.S. government during 1993 went to trial in June 2004 in the U.S. Court of Claims. The Bank had already been granted summary judgment on its breach of contract claim, leaving for trial the issue of damages. The trial concluded in early July 2004. The Bank anticipates a ruling in the first half of 2005 following additional briefings. The Bank is unable to predict the outcome of its damage claim against the United States and the amount of damages that may be awarded to the Bank, if any, in the event that a judgment is rendered in the Bank's favor. Consequently, the Bank cannot give assurances as to the results of this claim or the timing of any proceedings in relation thereto. The cost, including attorneys' fees, experts' fees and related expenses, of the litigation was approximately $381,000 for the third quarter of 2004. The Bank estimates that the expenses related to this case will be less than $100,000 for the remainder of 2004. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) - (b) Not applicable. (c) The following table presents information related to purchases made by or on behalf of the Company of shares of the Company's common stock during the indicated periods.
MAXIMUM NUMBER OF TOTAL NUMBER OF SHARES THAT MAY YET SHARES PURCHASED AS BE TOTAL NUMBER PART OF PUBLICLY PURCHASED UNDER OF SHARES AVERAGE PRICE ANNOUNCED PLANS THE PLANS OR PERIOD PURCHASED PAID PER SHARE OR PROGRAMS PROGRAMS (8) - -------------------- ------------ -------------- ------------------- ------------------- July 1-31, 2004 -- $ -- -- 1,181,268 August 1-31, 2004 -- -- -- 1,181,268 September 1-30, 2004 1,112 13.53 1,112 1,180,156 ----- ------- --------- Total 1,112 $ 13.53 1,112 1,180,156 ===== ======= =========
- -------------- (1) The Company instituted a repurchase program for 1,200,000 shares in March 2003 which was publicly announced on March 17, 2003. Prior to July 1, 2004, a total of 18,732 shares had been repurchased under that program. A total of 1,112 shares were purchased in September 2004 under this program. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 33 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. 34 ITEM 6. EXHIBITS (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 Employment Agreement entered into between Citizens Financial Services, FSB and Thomas F. Prisby** 10.2 Employment Agreement entered into between Citizens Financial Services, FSB and James W. Prisby** 10.4 Employment Agreement entered into between CFS Bancorp, Inc. and Thomas F. Prisby** 10.5 Employment Agreement entered into between CFS Bancorp, Inc. and James W. Prisby** 10.7 CFS Bancorp, Inc. Amended and Restated 1998 Stock Option Plan*** 10.8 CFS Bancorp, Inc. Amended and Restated 1998 Recognition and Retention Plan and Trust Agreement*** 10.9 CFS Bancorp, Inc. 2003 Stock Option Plan**** 10.10 Employment Agreement entered into between Citizens Financial Services, FSB and Charles V. Cole***** 10.11 Employment Agreement entered into between Citizens Financial Services, FSB and Thomas L. Darovic***** 10.12 Employment Agreement entered into between CFS Bancorp, Inc. and Charles V. Cole***** 10.13 Employment Agreement entered into between CFS Bancorp, Inc. and Thomas L. Darovic***** 10.14 Separation Agreement entered into between Citizens Financial Services, FSB, CFS Bancorp and James W. Prisby 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32.0 Section 1350 Certifications - ------------- * 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 quarterly report on Form 10-Q for the quarterly period ended September 30, 2003. *** 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. ***** Incorporated by Reference from the Company's annual report on Form 10-K for the year ended December 31, 2003. 35 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CFS BANCORP, INC. Date: November 9, 2004 By: /s/ Thomas F. Prisby ----------------------------------------- Thomas F. Prisby, Chairman and Chief Executive Officer Date: November 9, 2004 By: /s/ Charles V. Cole ----------------------------------------- Charles V. Cole, Executive Vice President and Chief Financial Officer 36 EX-10.14 2 c89426exv10w14.txt SEPARATION AGREEMENT EXHIBIT 10.14 SEVERANCE AGREEMENT AND RELEASE This Severance Agreement and Release ("Agreement") is between Citizens Financial Services, FSB, a federally chartered savings bank doing business in Indiana, and CFS Bancorp, Inc., an Indiana corporation (collectively, "Citizens"), and James W. Prisby ("Executive"), a resident of the State of Indiana: I. RECITATIONS 1.01. Executive currently serves as the Vice Chairman of the Board of Directors and President and Chief Operating Officer of Citizens, and is a Director of Citizens. 1.02. Executive agrees to resign his employment with Citizens and his service as a Director on Citizens' Board of Directors in consideration of the payment and benefits set forth in Section IV of this Agreement. II. INTENTION OF THE PARTIES 2.01. Citizens and Executive intend and expect that Executive shall surrender and renounce all privileges and rights that derive from his employment by Citizens (including, but not limited to, the privileges and rights derived under the Employment Agreement, dated July 21, 2003, between Executive and CFS Bancorp, Inc. and the Employment Agreement, dated July 21, 2003, between Executive and Citizens Financial Services, FSB), and the separation thereof, and service as a Director of Citizens, except any and all rights Executive has pursuant to any pension or other retirement benefit plan, profit sharing, stock option, employee stock ownership, or other plans (the "Plans") in which Executive participated as of the Resignation Date subject to and in accordance with the applicable provisions thereof. III. AGREEMENTS OF EXECUTIVE 3.01. RESIGNATION. Executive's employment with Citizens will terminate on August 20, 2004 (the "Resignation Date"). Effective on the Resignation Date, Executive will be relieved of all duties for and responsibilities with Citizens. Executive hereby resigns any and all officer, director and other positions with Citizens or any of its affiliates or Plans effective on the Resignation Date. 3.02. CONSIDERATION. With the exception of Executive's accrued, but unused (if any), vacation time, the severance payment and benefits set forth in Section IV of this Agreement shall be the only payment and benefits stemming from Executive's employment with Citizens to which he shall be entitled following his resignation. Executive agrees that such payment is in addition to any other payments (if any) owed Executive by Citizens. 3.03. NO ADMISSION OF LIABILITY. Executive agrees that the payment and benefits set forth in Section IV of this Agreement shall not be deemed or construed at any time for any purpose as an admission of liability or violation of any applicable law by Citizens. Liability for any and all claims is expressly denied by Citizens. 3.04. RELEASE. Executive agrees that in consideration of the payment and benefits set forth in Section IV of this Agreement, Executive hereby releases and forever discharges Citizens and its officers, directors, representatives, successors and assigns, and all persons acting by, through, under, or in concert with any of them, from all legal and equitable causes of action, that exist or have accrued as of the date of this Agreement, whether known or unknown, suspected or unsuspected including, but not limited to, all charges, complaints, claims, demands, liabilities, and obligations of any kind or nature that could be asserted against Citizens by reason of Executive's employment relationship with Citizens, or separation thereof, or by Executive's shareholder relationship with Citizens. This irrevocable and unconditional release includes, but is not limited to, claims arising pursuant to the Civil Rights Act of 1866; Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act, as amended ("ADEA"); the Older Workers Benefit Protection Act ("OWBPA"); the Americans with Disabilities Act; the Family and Medical Leave Act; the Employee Retirement Income Security Act of 1974, as amended; the Fair Labor Standards Act; the Indiana Wage Payment Act; the Indiana Wage Claims Act; the Indiana Civil Rights Act; any state wage and hour laws; any state contract or tort law including, but not limited to, wrongful termination, breach of contract, breach of fiduciary duty, and infliction of emotional distress; any claims for attorneys' fees; or claims for any rights to future employment, wages and benefits with Citizens other than those set forth herein. This is not a release or discharge of any of Citizens' continuing obligations set forth in this Agreement. 3.05. NO HOSTILE ACTION. Executive agrees that he will not, without the prior written consent of Citizens: (a) acquire, offer to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, any voting securities or direct or indirect rights to acquire any voting securities of Citizens or any subsidiary thereof, or any successor to or person in control of Citizens, or any assets of Citizens, or any subsidiary or division thereof or of any such successor or controlling person beyond Executive's beneficial ownership of shares of common stock (including stock options) of Citizens as of the Resignation Date; (b) make, or in any way participate in, directly or indirectly, any "solicitation" of "proxies" (as such terms are used in the rules of the Securities and Exchange Commission), devote or seek to advise or influence any person or entity with respect to the voting of, any voting securities of Citizens; (c) make any public announcement with respect to, or submit a proposal for, or offer of (with or without conditions), any transaction or shareholder proposal involving Citizens or its securities or assets; (d) form, join or in any way participate in a "group" (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) in connection with any of the foregoing; or (e) request Citizens to amend or waive any provision of this paragraph. Executive will promptly advise Citizens of any inquiry or proposal made to him with respect to any of the foregoing. 2 3.06. CONFIDENTIALITY, NONCOMPETITION AND NONSOLICITATION. (a) For a period of three (3) years from the date of execution of this Agreement, Executive shall not, at any time or place, either directly or indirectly, engage in any business or activity in competition with the business affairs or interests of Citizens or be a director, officer or consultant to any bank, savings and loan association, credit union, thrift, savings bank or similar institution in the Chicago-Gary-Kenosha CMSA (as reported by the U.S. Census Bureau). For purposes of this Agreement, "Competition" is defined as activities typically engaged in by financial institutions, including, but not limited to, lending, deposit taking, and investments. (b) For the purposes of this Agreement, directly or indirectly engaging in a business activity in competition with the business or affairs of Citizens includes, but is not limited to, serving or acting as an owner, partner, agent, beneficiary or employee of any person, firm or corporate entity so engaged; except nothing herein contained shall be deemed to prevent or limit the right of Executive to invest any of his surplus funds in the capital stock or other securities of any corporation whose stock or securities are publicly owned or are regularly traded on any public exchange, nor shall anything herein contained be deemed to prevent Executive from investing or limit Executive's right to invest his surplus funds in real estate. (c) Until such time as the information is generally known in the public domain, all information relating to the business of Citizens, including, but not limited to, that business obtained or serviced by Executive and all customer listings, contact lists, expiration cards, asset reports, instruments, documents, papers and other material used in connection with such business, shall be considered confidential and proprietary information of Citizens, and shall be the exclusive property of Citizens. Executive shall keep all such information and material confidential. Executive shall return any such information in his possession as of his Resignation Date, including all copies he has made thereof. Executive represents that he has not directly or indirectly provided such information to any third parties prior to returning the information to Citizens. (d) Executive agrees that for a period of three (3) years following his Resignation Date, he will not: (i) solicit any of Citizens' current customers or clients, defined as customers or clients doing business with Citizens in the two (2) year period prior to Executive's Resignation Date, for the purpose of engaging in any activity which could be considered "Competition" as defined herein; (ii) divulge the names of any of Citizens' current customers or clients to any other person, corporation or entity; (iii) divulge to anyone, except Citizens or its representatives, any information regarding Citizens' management strategies, marketing information or goals, policies and/or other information regarding the affairs of Citizens, 3 all of which Executive is hereby obligated to keep secret, however and whenever such information comes to his attention; and (iv) either directly or indirectly induce or solicit any person to leave the employ of Citizens. 3.07. CONFIDENTIALITY OF AGREEMENT. Executive agrees that the terms of this Agreement are confidential in nature and he will not share the terms of this Agreement with anyone other than his family, accountant, lawyer or financial advisor. 3.08. NON-DISPARAGEMENT. Executive agrees that he shall make no disparaging comments about Citizens or any of its officers or directors to any third parties following the execution of this Agreement. 3.09. VOLUNTARY EXECUTION. Executive acknowledges and agrees that he is executing this Agreement of his own free will and is not executing this Agreement under any type of coercion or duress. 3.10. CONSIDERATION AND WAIVER PERIOD. Executive acknowledges and agrees that Citizens has informed him that he has a period of time of not less than twenty-one (21) days within which to consider this Agreement or a reasonable facsimile thereof. Executive acknowledges that he has been advised by Citizens that, in the event he executes this document, he is entitled to revoke his waiver of rights or claims arising under the ADEA and OWBPA within seven (7) days after executing this document and that said waiver will not and does not become effective or enforceable until the seven (7) day revocation period has expired. This revocation must be in writing and personally delivered, or sent by certified mail, postmarked no later than the seventh (7th) day following the execution of this Agreement, to Thomas F. Prisby, CFS Bancorp, Inc., 707 Ridge Road, Munster, Indiana 46321. IV. AGREEMENTS OF CITIZENS 4.01. SEVERANCE PAYMENT. Following the expiration of any applicable waiting periods provided in Section 3.10 hereof (provided Executive has not made a revocation pursuant to Section 10 hereof), and in consideration of Executive's resignation and the surrender of all rights Executive may have against Citizens that stem from his employment with or service as an officer or director of Citizens, or the termination thereof, or as a shareholder of Citizens, Citizens shall pay Executive in cash or cash equivalent funds, less all withholdings required by federal, state and local law, the following amounts: (a) Six Hundred Thousand Dollars ($600,000.00) within ten (10) days following the date of executive of this Agreement; and (b) Four Hundred Thousand Dollars ($400,000.00) on January 3, 2005. Such payment will be in addition to amounts otherwise owed to Executive by Citizens and is in consideration for the covenants set forth in this Agreement. Any earned but unpaid portion of Executive's base salary, at his then-effective annual rate, plus any amounts accrued by 4 Executive under Citizens' accrued vacation program through the Resignation Date will be paid to him on the payroll date that coincides with or immediately follows the Resignation Date. 4.02. BENEFITS. Executive shall be entitled, following his Resignation Date, to receive such benefits as are provided under the Plans in which he participated as of his Resignation Date, subject to and in accordance with the applicable provisions thereof. 4.03. COBRA OR RETIREE HEALTH COVERAGE. Executive is entitled, under the Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"), to continued health insurance coverage to the same extent that he was covered on his Resignation Date. He shall be advised of those rights pursuant to a COBRA notification letter. The qualifying date for COBRA will be the same as Executive's Resignation Date. In the event Executive chooses to elect retiree health insurance coverage offered by Citizens, such coverage will be provided pursuant to the terms of that plan. 4.04. INDEMNIFICATION. Citizens shall indemnify and hold Executive harmless from any claims, lawsuits or actions filed against him, which accrued while he was serving as an officer or Director of Citizens, pursuant to the terms and conditions of the indemnification provisions of Citizens' By-Laws and/or Articles of Incorporation or Charter as in effect on the Resignation Date. Citizens shall also indemnify and hold Executive harmless from any claims, lawsuits, or actions filed against him in his capacity as a director, officer, employee or agent of another corporation, association, partnership, joint venture, trust or other enterprise where Executive serves in such capacity at the request of Citizens, accruing prior to or including Executive's Resignation Date, pursuant to the terms and conditions of the indemnification provisions of Citizens' By-Laws and/or Articles of Incorporation or Charter as in effect on the Resignation Date. 4.05. NON-DISPARAGEMENT. Citizens agrees that it, through its officers and directors, shall make no disparaging comments about Executive to any third parties following the execution of this Agreement. Executive acknowledges that Citizens does not have total control over comments made to third parties by employees in their individual capacities. However, to avoid any non-authorized comments, Executive agrees to only refer prospective employers to an officer or Director of Citizens for an employment recommendation. 4.06. NO ADMISSION OF LIABILITY. Citizens agrees that this Agreement shall not be deemed or construed at any time for any purpose as an admission of liability or violation of any applicable law by Executive. Liability for any and all claims is expressly denied by Executive. 4.07. AUTHORIZATION. Citizens has the requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder, subject to the terms and conditions hereof. V. AGREEMENT OF ALL PARTIES 5.01. FURTHER ASSURANCES. Each of the parties hereto shall do, execute, acknowledge, and deliver or cause to be done, executed, acknowledged, and delivered at any time and from time to time upon the request of any other parties hereto, all such further acts, documents, and 5 instruments as may be reasonably required to effect any of the transactions contemplated by this Agreement. 5.02. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither party hereto may assign this Agreement without the prior written consent of the other party. Notwithstanding the foregoing, this Agreement may be assigned, without the prior consent of Executive, to a successor of Citizens (and Executive hereby consents to the assignment of the restrictive covenants under this Agreement to a purchaser of all or substantially all of the assets of Citizens or a transferee, by merger or otherwise, of all or substantially all of the businesses and assets of Citizens) and, upon Executive's death, this Agreement shall inure to the benefit of and be enforceable by Executive's executors, administrators, representatives, heirs, distributees, devisees, and legatees and all amounts payable hereunder shall be paid to such persons or the estate of Executive. 5.03. WAIVER; AMENDMENT. No provision or obligation of this Agreement may be waived or discharged unless such waiver or discharge is agreed to in writing and signed by Citizens and Executive. The waiver by any party hereto of a breach of or noncompliance with any provision of this Agreement shall not operate or be construed as a continuing waiver or a waiver of any other or subsequent breach or noncompliance hereunder. Except as expressly provided otherwise herein, this Agreement may be amended, modified, or supplemented only by a written agreement executed by Citizens and Executive. 5.04. HEADINGS. The headings in this Agreement have been inserted solely for ease of reference and shall not be considered in the interpretation, construction, or enforcement of this Agreement. 5.05. SEVERABILITY. All provisions of this Agreement are severable from one another, and the unenforceability or invalidity of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions of this Agreement; provided, however, that should any judicial body interpreting this Agreement deem any provision to be unreasonably broad in time, territory, scope, or otherwise, the parties intend for the judicial body, to the greatest extent possible, to reduce the breadth of the provision to the maximum legally allowable parameters rather than deeming such provision totally unenforceable or invalid. 5.06. NO COUNTERPARTS. This Agreement may not be executed in counterparts. 5.07. GOVERNING LAW; JURISDICTION; VENUE. This Agreement shall be governed by and construed in accordance with the laws of the State of Indiana, without reference to the choice of law principles or rules thereof. The parties hereto irrevocably consent to the jurisdiction and venue of the state court for the State of Indiana located in Hammond, Indiana, or the Federal District Court for the Northern District of Indiana, Hammond Division, located in Lake County, Indiana, and agree that all actions, proceedings, litigation, disputes or claims relating to or arising out of this Agreement shall be brought and tried only in such courts. 5.08. ENTIRE AGREEMENT. This Agreement constitutes the entire and sole agreement between Citizens and Executive with respect to Executive's resignation and there are no other 6 agreements or understandings either written or oral with respect thereto. The parties agree that the (i) the Employment Agreement, dated July 21, 2003, between Executive and CFS Bancorp, Inc. and (ii) the Employment Agreement, dated July 21, 2003, between Executive and Citizens Financial Services, FSB, will be terminated effective as of the Resignation Date and of no further force or effect or liability thereunder. 5.09. CONSTRUCTION. The rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Whenever in this Agreement a singular word is used, it also shall include the plural wherever required by the context and vice-versa. All reference to the masculine, feminine, or neuter genders shall include any other gender, as the context requires. 5.10. ATTORNEYS' FEES. The prevailing party shall be entitled to reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements) in connection with any legal action to interpret or enforce any provision of this Agreement or for any breach of this Agreement. 5.11. TAXES AND OTHER AMOUNTS. All taxes (other than Citizens' portion of employment taxes) on the payments specified in Section 4.01 hereof and all other amounts payable to Executive hereunder and under the Plans and other benefit plans and programs will be paid by Executive. Citizens will be entitled to withhold from such payments and benefits (i) applicable income, employment and other taxes required to be withheld therefrom; (ii) amounts authorized by Executive; and (iii) other required or appropriate and customary amounts. 5.12. REVIEW AND CONSULTATION. Citizens and Executive hereby acknowledge and agree that each (i) has read this Agreement in its entirety prior to executing it; (ii) understands the provisions and effects of this Agreement; (iii) has consulted with such attorneys, accountants, and financial and other advisors as it or he has deemed appropriate in connection with their respective execution of this Agreement; and (iv) has executed this Agreement voluntarily. EXECUTIVE HEREBY UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT THIS AGREEMENT HAS BEEN PREPARED BY COUNSEL TO CITIZENS AND THAT HE HAS NOT RECEIVED ANY ADVICE, COUNSEL, OR RECOMMENDATION WITH RESPECT TO THIS AGREEMENT FROM CITIZENS OR ITS COUNSEL. 7 IN WITNESS WHEREOF, this Severance Agreement and Release is executed as of the day and year stated below. EXECUTIVE CITIZENS FINANCIAL SERVICES, FSB /s/ James W. Prisby By: /s/ Brian L. Goins - -------------------------------- -------------------------------- James W. Prisby Printed: Brian L. Goins --------------------------- Title: Vice President - Corporate Counsel ----------------------------- Date: August 20, 2004 Date: August 20, 2004 -------------------------------- ------------------------------ CFS BANCORP, INC. By: /s/ Brian L. Goins -------------------------------- Printed: Brian L. Goins --------------------------- Title: Vice President - Corporate Counsel ----------------------------- Date: August 20, 2004 ------------------------------ 8 EX-31.1 3 c89426exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Thomas F. Prisby, Chairman of the Board and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CFS Bancorp, Inc. (Registrant); 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 9, 2004 /s/ Thomas F. Prisby ----------------------------------------- Thomas F. Prisby Chairman of the Board and Chief Executive Officer 37 EX-31.2 4 c89426exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, Charles V. Cole, Executive Vice President and Chief Financial Officer certify that: 1. I have reviewed this quarterly report on Form 10-Q of CFS Bancorp, Inc. (Registrant); 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 9, 2004 /s/ Charles V. Cole ---------------------------------- Charles V. Cole Executive Vice President and Chief Financial Officer 38 EX-32 5 c89426exv32.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32.0 SECTION 1350 CERTIFICATIONS I, Thomas F. Prisby, Chairman of the Board and Chief Executive Officer, and Charles V. Cole, Executive Vice President and Chief Financial Officer, of CFS Bancorp, Inc. (Company), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) The Quarterly Report on Form 10-Q of the Company for the three months ended September 30, 2004 (Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m(a) or 78o(d), and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 9, 2004 By: /s/ Thomas F. Prisby -------------------------------- Thomas F. Prisby Chairman of the Board and Chief Executive Officer Date: November 9, 2004 By: /s/ Charles V. Cole -------------------------------- Charles V. Cole Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to CFS Bancorp, Inc. and will be retained by CFS Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 39 -----END PRIVACY-ENHANCED MESSAGE-----