10QSB 1 fm10q123101-1057.txt FORM 10-QSB 12-31-01 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 -------------------------------------------------------------------------------- Form 10-QSB [x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE EXCHANGE ACT For the transition period from ____________ to ___________________. Commission File Number: 0-24625 CFS Bancshares, Inc. --------------------------------------------------- (Exact name of registrant as specified in charter) Delaware 63-1207881 --------------------------------------- ------------------------ (State or other jurisdiction of IRS Employer incorporation or organization) Identification Number 1700 3rd Avenue North Birmingham, Alabama 35203 ------------------------- ---------- (Address of principal Zip Code executive office) Registrant's telephone number, including area code: (205) 328-2041 Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 --- --- Number of shares outstanding of common stock as of December 31, 2001 $0.01 par value common stock 139,220 shares ---------------------------- ---------------- Class Outstanding CFS BANCSHARES, INC. AND SUBSIDIARY TABLE OF CONTENTS PART I - FINANCIAL INFORMATION: PAGE NO. Item 1 - Financial Statements Consolidated Balance Sheets at December 31, 2001 and September 30, 2001 (unaudited) -3- Consolidated Statements of Operations for the Three Months Ended December 31, 2001 and 2000 (unaudited) -4- Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2001 and 2000 (unaudited) -6- Consolidated Statements of Comprehensive Income for the Three Months Months Ended December 31, 2001 and 2000 (unaudited) -8- Notes to Consolidated Financial Statements -9- Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations -11- PART II - OTHER INFORMATION -13- SIGNATURES -14- CFS BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited)
December 31, September 30, 2001 2001 ---- ---- ASSETS ------ Cash and amounts due from depository institutions $ 4,989,789 3,508,465 Federal funds sold and overnight deposits 3,430,205 2,610,541 ------------- ------------ Total cash and cash equivalents 8,419,994 6,119,006 Interest bearing deposits 163,142 163,142 Investment securities held to maturity (fair value of $1,002,972 and $1,244,186 respectively) 972,631 1,210,924 Investment securities available for sale, at fair value (cost of $50,656,883 and $46,448,236, respectively) 50,993,935 47,260,024 Federal Home Loan Bank stock 947,500 747,500 Loans receivable, net of allowance 40,641,776 41,109,567 Premises and equipment, net 3,449,483 3,450,612 Real estate acquired by foreclosure 445,089 267,413 Accrued interest receivable on investment securities 250,062 299,271 Accrued interest receivable on loans 300,816 321,442 Other assets 396,104 2,379,392 ------------- ------------ Total assets $ 106,980,532 103,328,293 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Interest-bearing deposits $ 77,227,411 76,945,341 Advance payments by borrowers for taxes and insurance 71,405 270,788 Other liabilities 1,087,279 1,262,817 Employee Stock Ownership Plan debt 56,000 56,000 FHLB advances 18,950,000 14,950,000 ------------- ------------ Total liabilities 97,392,095 93,484,946 Common stock subject to put option (27,986 shares) 1,175,412 1,175,412 Stockholders' equity: Common stock 1,392 1,392 Additional paid-in-capital 1,449,196 1,446,846 Retained earnings 6,794,005 6,739,788 Accumulated other comprehensive income 206,218 519,545 Unearned common stock held by ESOP (37,786) (39,636) ------------- ------------ Total stockholders' equity 8,413,025 8,667,935 ------------- ------------ Total liabilities and stockholders' equity $ 106,980,532 103,328,293 ============= ============
See accompanying notes to consolidated financial statements. 3 CFS BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended December 31, 2001 2000 ---- ---- INTEREST INCOME: Interest and fees on loans $899,337 $1,038,243 Interest and dividend income on investment securities 119,968 160,878 Interest income on mortgage-backed securities 495,286 574,756 Other interest income 19,199 37,118 ----------- ----------- Total interest income 1,533,790 1,810,995 Interest on deposits 541,472 783,733 Interest on FHLB advances 208,804 231,010 ----------- ----------- Total interest expense 750,276 1,014,743 Net interest income 783,514 796,252 Provision for loan losses -- -- ----------- ----------- Net interest income after provision for loan losses 783,514 796,252 OTHER INCOME: Service charges on deposits 92,999 88,592 Gain on sale of assets -- 1,980 Gain on sale of securities 128,667 12,813 Other 5,112 5,483 ----------- ----------- Total other income 226,779 108,868 OTHER EXPENSES: Salaries and employee benefits 359,257 357,379 Net occupancy expense 37,110 34,962 Federal insurance premium 7,960 11,109 Data processing expenses 54,124 53,294 Professional services 97,228 87,422 Depreciation and amortization 41,306 65,261 Advertising expense 13,836 22,650 Office supplies 10,404 21,369 Insurance expense 18,399 16,641 Other 108,768 134,570 ----------- ----------- Total other expenses 748,393 804,657 ----------- ----------- Income before income taxes 261,900 100,463 Income tax expense 89,346 36,453 ----------- ----------- Net income $ 172,554 $ 64,010 =========== ===========
See accompanying notes to consolidated financial statements. 4 CFS BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended December 31, 2001 2000 ---- ---- Basic earnings per common share $ 1.26 $ 0.51 =========== =========== Basic average shares outstanding 136,599 125,870 =========== =========== Diluted earnings per common share $ 1.26 0.48 =========== =========== Diluted average shares outstanding 136,599 133,070 =========== =========== Dividends declared and paid per common share $ 0.85 0.75 =========== ===========
See accompanying notes to consolidated financial statements. 5 CFS BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended December 31, 2001 2000 ---- ---- Cash flows from operating activities: Net income $ 172,554 64,010 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 41,306 65,261 Compensation expense recognized on ESOP allocation 4,200 4,000 Net amortization of premium on investment securities 26,335 8,416 Gain on sale of investment securities available for sale (128,667) (12,813) Decrease in deferred gain on sale of foreclosed real estate -- (1,980) Decrease (increase) in accrued interest receivable 69,835 (24,962) Decrease (increase) in other assets 143,288 (119,673) Decrease in accrued interest on deposits (16,471) (54,959) Decrease in other liabilities (54,305) (115,868) ----------- ----------- Net cash provided by (used in) operating activities 258,075 (188,568) ----------- ----------- Cash flows from investing activities: Purchase of investment securities available for sale (8,172,739) (3,283,621) Purchase of FHLB stock (200,000) -- Net change in loans 290,115 1,261,531 Proceeds from sale of investment securities available for sale 2,025,000 2,878,190 Proceeds from call of investment securities available for sale 1,840,000 -- Proceeds from principal collected on investment securities held to maturity 237,874 817,701 Proceeds from principal collected on investment securities available for sale 2,041,842 712,555 Purchase of premises and equipment -- (25,637) ----------- ----------- Net cash (used in) provided by investing activities (1,937,908) 2,360,719 ----------- -----------
See accompanying notes to consolidated financial statements. 6 CFS BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended December 31, 2001 2000 ---- ---- Cash flows from financing activities: Increase in interest bearing deposits 298,541 504,082 Advances from FHLB 4,000,000 -- Decrease in advance payments by borrowers for taxes and insurance (199,383) (172,968) Cash dividends (118,337) (97,500) ----------- ----------- Net cash provided by financing activities 3,980,821 233,614 ----------- ----------- Net increase in cash and cash equivalents 2,300,988 2,405,765 Cash and cash equivalents at beginning of period 6,119,006 3,594,355 ----------- ----------- Cash and cash equivalents at end of period $ 8,419,994 6,000,120 =========== =========== Supplemental information on cash payments: Interest paid $ 557,943 838,692 Taxes paid $ -- 136,000 Supplemental information on noncash activities: Loans transferred to real estate acquired by foreclosure $ 177,676 --
See accompanying notes to consolidated financial statements. 7 CFS BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three months ended December 31, 2001 2000 ---- ---- Net income $ 172,554 64,010 Other comprehensive income, before tax: Unrealized holding gain (loss) arising during the period (346,071) 744,935 Less reclassification adjustment for gain on securities available for sale 128,667 12,813 --------- -------- Total other comprehensive income (loss), before tax (474,738) 732,122 --------- -------- Income tax expense (benefit) related to other comprehensive income: Unrealized holding gain (loss) on available for sale securities (117,664) 267,920 Less reclassification adjustment for gains on securities available for sale 43,747 4,356 --------- -------- Total income tax expense (benefit) related to other comprehensive income (161,411) 263,564 --------- -------- Total other comprehensive income (loss), net of tax (313,327) 468,558 --------- -------- Total comprehensive income (loss) $(140,773) 532,568 ========= ========
See accompanying notes to consolidated financial statements. 8 CFS BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (none of which are other than normal recurring accruals) necessary for a fair presentation of financial position of the Company and the results of operations for the three month periods ended December 31, 2000 and 2001. The results contained in these statements are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-KSB for the year ended September 30, 2001. 2. RECLASSIFICATIONS Certain items in the 2000 consolidated financial statements have been reclassified to conform to current year classifications. 3. NET INCOME PER SHARE Presented below is a summary of the components used to calculate diluted earnings per share for the three months ended December 31, 2001 and 2000:
2001 2000 ---- ---- Weighted average common shares outstanding 136,599 125,870 Net effect of the assumed exercise of stock options based on the treasury stock method using average market price for the quarter -- 7,200 ------- ------- Total weighted average common shares and potential common stock outstanding 136,599 133,070 ======= =======
4. SUBSEQUENT EVENTS On January 24, 2002 shareholders voted to approve the CFS Bancshares, Inc. Stock Option and Incentive Plan. Accordingly on 01/24/2002 the Company granted 10,450 options to acquire the Company's stock. The options are immediately vested and exercisable at the fair value of the Company as defined in the stock option and incentive plan. 9 MANAGEMENT DISCUSSION AND ANALYSIS ---------------------------------- REVIEW OF RESULTS OF OPERATIONS OVERVIEW -------- Net income for the three months ended December 31, 2001 was $172,554 an increase of $108,544 or 169.57% when compared to the three months ended December 31, 2000. The increase in net earnings resulted primarily from an increase in gains on sale of securities available for sale. NET INTEREST INCOME ------------------- Net interest income is the difference between the interest and fees earned on loans, securities and other interest earning assets (interest income) and the interest paid on deposits and FHLB advances (interest expense). The Bank's deposits and a portion of its FHLB advances are primarily short term in nature and reprice faster than the Bank's interest earning assets, consisting mainly of loans and mortgage backed securities, which generally have longer maturities. The mix of the Bank's interest earning assets and deposits and FHLB advances along with the trend of market interest rates have a substantial impact on the change in net interest margin. The cost of the Bank's interest bearing liabilities decreased 120 basis points from 4.44% for the three month period ended December 31, 2000 to 3.24% during the three month period ended December 31, 2001 while the yield on interest earning assets decreased 136 basis points from 7.82% for the three month period ended December 31, 2000 to 6.46% for the comparable period in the current fiscal year. The decline in the yields on interest earning assets resulted from declines in the average balance of net loans receivable, as well as a decline in the average market interest rates between December 2000 and December 2001. The decrease in the net interest spread of 16 basis points was partially offset by increases in the average balances of net interest earning assets when comparing the three month period ended December 31, 2001 to the three month period ended December 31, 2000. The Bank's net interest income decreased by $12,738 or 1.60% from $796,252 for the three month period ended December 31, 2000 to $783,514 for the three month period in the current fiscal year. OTHER INCOME ------------ Other income increased from $108,868 for the three month period ended December 31, 2000 to $226,779 for the comparable period in the current fiscal year. The increase resulted from an increase in the gain on sale of investment securities available for sale. During the three month period ended December 31, 2001 the Bank sold fixed rate investment securities with a par balance of $2,000,000 for a net gain of $128,667. The Bank recognized gains on the sale of investment securities during the three month period ended December 31, 2000 of $12,813. OTHER EXPENSE ------------- The Bank's other expense decreased by 6.99% or $56,264 from $804,657 for the three month period ended December 31, 2000 to $748,393 for the comparable period in the current year. Decreases in depreciation and amortization, office supplies and other expense of $23,955, $10,965 and $25,802 respectively, were primarily responsible for the overall decline in operating expense for the three months ended December 31, 2001 as compared to the three months ended December 31, 2000. A significant amount of the furniture and equipment purchased when the Bank relocated its main office during 1996 has been fully depreciated which led to the decrease in depreciation expense. During the three months ended December 31, 2000 the Bank incurred expenses equal to insurance deductibles related to two legal matters. There were no such expenses during the current fiscal year and as a result other expense decreased. 10 REVIEW OF FINANCIAL CONDITION ----------------------------- Significant factors affecting the Bank's financial condition between September 30, 2001 and December 31, 2001 are detailed below: ASSETS ------ Total assets increased $3,652,239 or 3.53% from $103,328,293 at September 30, 2001 to $106,980,532 at December 31, 2001. Increases in cash and cash equivalents of $2,300,988 and investment securities available for sale of $3,733,911 were partially offset by a decrease in other assets of $1,983,288. Other, assets which had a balance of $2,379,392 at September 30, 2001, included a receivable for securities with a par value of $1,840,000 which had been called by the issuer but not yet settled. The Bank received the funds for the called security during the early part of October 2001. LIABILITIES ----------- Total liabilities increased $3,911,349 or 4.18% between September 30, 2001 and December 31, 2001. The increase resulted from an increase in the Bank's advances from the Federal Home Loan Bank of Atlanta which increased by $4,000,000 from $14,950,000 at September 30, 2001 to $18,950,000 at December 31, 2001. The additional funding from the FHLB was used to purchase mortgage backed securities. LIQUIDITY --------- The Bank's primary sources of liquidity are deposits, loan payments, maturing investment securities, principal and interest payments on investments, mortgage-backed securities and CMOs, and advances from the Federal Home Loan Bank of Atlanta. Additionally, the Bank has short-term investments that could be readily liquidated to meet funding requirements and also maintains lines of credit with two correspondent banks to meet any requirements caused by short-term fluctuations in liquidity needs. Management believes that the Bank's various sources of funds are adequate to meets its liquidity requirements in the ordinary course of business. LOAN QUALITY ------------ A key to long term earnings growth for Citizens Federal Savings Bank is maintenance of a high quality loan portfolio. The Bank's directive in this regard is carried out through its policies and procedures for review of loans. The goals and results of these policies and procedures are to provide a sound basis for new credit extensions and an early recognition of problem assets to allow the most flexibility in their timely disposition. At December 31, 2001 the Bank had $1,036,019 in assets classified as substandard including assets acquired by foreclosure or repossession of $445,089, no assets classified as doubtful, and $155,475 in assets classified as loss. A specific loan loss allowance has been established for all loans classified as loss. At September 30, 2001 the Bank had $935,215 in assets classified as substandard including real estate acquired by foreclosure of $267,413, no assets classified as doubtful, and $155,475 in assets classified as loss. The allowance for loan losses was $382,344 at December 31, 2001 and $396,768 at September 30, 2001. Management believes that the current allowance for loan losses is adequate to cover any potential future loan losses which exist in the loan portfolio, although there can be no assurance that further increases in the loan loss allowance will not be made as circumstances warrant. 11 CRITICAL ACCOUNTING POLICIES Management has determined that the accounting for loan loss allowances is a critical accounting policy with respect to the determination of financial condition and reporting of results of operations. Management determines the required allowances by classifying loans according to credit quality and collateral security and applying historical loss percentages to each category. Additionally, as necesary, management determines specific allowances related to impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if the loan is collateral dependent. A key component in the accounting policy is management's ability to timely identify changes in credit quality which may impact the Company's financial results. Management recognizes that in making loans, credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan. Management's policy is to maintain an appropriate allowance for estimated losses on the portfolio as a whole. The allowances are based on estimates of the historical loan loss experience, evaluation of economic conditions and regular periodic reviews of the Bank's loan portfolio. The Bank's loan portfolio consists mostly of residential and non-residential real estate. Management believes that the effects of any reasonably likely changes in the economy would be limited somewhat due to the fact the loan portfolio is collateralized by real estate. INFORMATION ABOUT FORWARD LOOKING STATEMENTS -------------------------------------------- Any statement contained in this report which is not a historical fact, or which might otherwise be considered an opinion or projection concerning the Bank or its business, whether expressed or implied, is meant as and should be considered a forward-looking statement as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and opinions concerning a variety of known and unknown risks, including but not necessarily limited to changes in market conditions, natural disasters and other catastrophic events, increased competition, changes in availability and cost of reinsurance, changes in governmental regulations, and general economic conditions, as well as other risks more completely described in the Bank's filings with the Securities and Exchange Commission, including this Annual Report on Form 10-KSB. If any of these assumptions or opinions prove incorrect, any forward-looking statement made on the basis of such assumptions or opinions may also prove materially incorrect in one or more respects. CAPITAL ADEQUACY AND RESOURCES ------------------------------ Management is committed to maintaining capital at a level sufficient to protect stockholders and depositors, provide for reasonable growth, and fully comply with all regulatory requirements. Management's strategy to maintain this goal is to retain sufficient earnings while providing a reasonable return to stockholders in the form of dividends and return on equity. The Office of Thrift Supervision has issued guidelines identifying minimum regulatory "tangible" capital equal to 1.50% of adjusted total assets, a minimum 3.00% core capital ratio and a minimum risk based capital of 8.00% of risk weighted assets. The Bank has provided the majority of its capital requirements through the retention of earnings. 12 At December 31, 2001 the Bank satisfied all regulatory requirements. The Bank's compliance with the current standards is as follows:
For capital Well Actual adequacy purposes capitalized ------- ----------------- ---------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total capital (to risk weighted assets) $9,318,181 20.02% 3,722,640 8.00% 4,653,300 10.00% Tier I capital (to risk weighted assets) $9,202,351 19.78% 1,861,320 4.00% 2,791,980 6.00% Tier I capital (to average assets) $9,202,351 8.93% 4,119,837 4.00% 5,149,796 5.00% Reconciliation of capital: Risk Weighted Tier I Capital Capital Total stockholders' equity (GAAP) $9,408,569 $9,408,569 Unrealized gain on securities - AFS (206,218) (206,218) Allowance for loan losses 227,000 -- Equity investments (111,170) Total $9,318,181 $9,202,351
13 CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARY PART II OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The Bank is defending various lawsuits and claims. In the opinion of management the ultimate disposition of these matters will not have a significant effect on the financial position of the Bank. ITEM 2: CHANGE IN SECURITIES None ITEM 3: DEFAULT UPON SENIOR SECURITIES Not Applicable ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of CFS Bancshares, Inc. was held on January 24, 2002 for the purpose of considering and acting upon the election of three directors of the Company and the approval of the CFS Bancshares, Inc. 2001 Stock Option and Incentive Plan. The result of the election in which 104,812 out of 139,220 possible votes were received was as follows:
Votes ----- Votes Withheld or Broker ----- ----------- ------ For Abstained Non-Vote --- --------- -------- Bunny Stokes, Jr. as Director 104,812 None None Dr. Ross E. Gardner as Director 104,812 None None Cynthia N. Day as Director 104,812 None None 2001 Stock Option Plan 102,612 25 2,175
ITEM 5: OTHER INFORMATION: None ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K None 14 CFS BANCSHARES INC. AND SUBSIDIARY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CFS BANCSHARES, INC. (Registrant) Date:February 12, 2002 By:/s/ Bunny Stokes, Jr. -------------------------- --------------------------------- Bunny Stokes, Jr. Chairman/CEO (principal executive officer) Date:February 12, 2002 By:/s/ W. Kent McGriff -------------------------- --------------------------------- W. Kent McGriff Executive Vice President (principal financial and accounting officer) 14