10QSB 1 tenq.txt QUARTERLY REPORT 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 June 30, 2002 [ ] 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 June 30, 2002 $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 Condensed Consolidated Balance Sheets at June 30, 2002 and September 30, 2001 (unaudited) -3- Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended June 30, 2002 and 2001 (unaudited) -4- Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2002 and 2001 (unaudited) -6- Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended June 30, 2002 and 2001 (unaudited) -8- Notes to Condensed Consolidated Financial Statements -9- Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations -10- PART II - OTHER INFORMATION -16- SIGNATURES AND CERTIFICATION -17- CFS Bancshares, Inc. and Subsidiary Condensed Consolidated Balance Sheets (Unaudited) June 30, September 30, 2002 2001 ---- ---- Assets ------ Cash and amounts due from depository institutions $ 2,874,145 3,508,465 Federal funds sold and overnight deposits 504,541 2,610,541 ------------------- -------------- Total cash and cash equivalents 3,378,686 6,119,006 Interest-bearing deposits 149,353 163,142 Investment securities held to maturity (fair value of $793,769 and $1,244,186 respectively) 751,147 1,210,924 Investment securities available for sale, at fair value (cost of $59,150,077 and $46,448,236, respectively) 59,908,235 47,260,024 Federal Home Loan Bank stock 947,500 747,500 Loans receivable, net of allowance 37,639,992 41,109,567 Premises and equipment, net 3,386,705 3,450,612 Real estate acquired by foreclosure 599,492 267,413 Accrued interest receivable on investment securities 299,208 299,271 Accrued interest receivable on loans 291,473 321,442 Other assets 271,177 2,379,392 ------------------- -------------- Total assets $ 107,622,968 103,328,293 =================== ============== Liabilities and Stockholders' Equity ------------------------------------ Interest-bearing deposits $ 77,268,340 76,945,341 Advance payments by borrowers for taxes and insurance 175,949 270,788 Other liabilities 1,093,046 1,262,817 Employee Stock Ownership Plan debt 48,000 56,000 FHLB advances 18,950,000 14,950,000 ------------------- -------------- Total liabilities 97,535,335 93,484,946 Common stock subject to put option (27,986 shares) 1,287,356 1,175,412 Stockholders' equity: Common stock 1,392 1,392 Additional paid-in-capital 1,451,546 1,446,846 Retained earnings 6,890,055 6,739,788 Accumulated other comprehensive income 485,220 519,545 Unearned common stock held by ESOP (27,936) (39,636) ------------------- -------------- Total stockholders' equity 8,800,277 8,667,935 ------------------- -------------- Total liabilities and stockholders' equity $ 107,622,968 103,328,293 =================== ==============
See accompanying notes to condensed consolidated financial statements 3 CFS Bancshares, Inc. and Subsidiary Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Interest Income: Interest and fees on loans $ 814,818 976,610 2,597,212 3,146,365 Interest and dividend income on investment securities 83,341 165,088 307,364 488,116 Interest income on mortgage-backed securities 567,224 544,236 1,572,756 1,692,376 Other interest income 12,764 22,422 48,295 111,068 -------------- --------- --------- --------- Total interest income 1,478,147 1,708,356 4,525,627 5,437,925 Interest Expense: Interest on deposits 402,818 676,370 1,395,172 2,231,010 Interest on FHLB advances 230,871 204,067 667,955 639,031 -------------- --------- --------- --------- Total interest expense 633,689 880,437 2,063,127 2,870,041 Net interest income 844,458 827,919 2,462,500 2,567,884 Provision for loan losses - - - - -------------- --------- --------- --------- Net interest income after provision for loan losses 844,458 827,919 2,462,500 2,567,884 Other Income: Service charges on deposits 121,852 80,983 301,150 279,128 Gain (loss) on sale of assets (22,843) (1,924) (27,049) 799 Gain on sale of securities - 55,288 128,667 69,502 Other 6,898 8,289 19,792 21,209 -------------- --------- --------- --------- Total other Income 105,907 142,636 422,560 370,638 Other Expenses: Salaries and employee benefits 439,530 370,637 1,176,103 1,104,740 Net occupancy expense 30,586 29,329 107,885 102,513 Federal insurance premium 11,831 11,400 31,568 33,831 Data processing expenses 54,007 53,293 165,492 162,726 Professional services 129,751 46,006 266,331 160,151 Depreciation and amortization 42,665 59,535 126,036 189,233 Advertising expense 25,065 13,110 54,210 45,015 Office supplies 12,867 24,000 45,625 52,796 Insurance expense 13,838 17,596 48,722 51,197 Other 86,422 110,897 286,501 382,526 -------------- --------- --------- --------- Total other expense 846,562 735,803 2,308,473 2,284,728 -------------- --------- --------- --------- Income before income taxes 103,803 234,752 576,587 653,794
See accompanying notes to condensed consolidated financial statements 4 CFS Bancshares, Inc. and Subsidiary Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Income tax expense 34,562 80,788 196,040 232,805 -------------- --------- --------- --------- Net Income $ 69,241 153,964 380,547 420,989 ============== ========= ========= ========= Basic earnings per common share $ 0.51 1.21 2.78 3.32 ============== ========= ========= ========= Basic average shares outstanding 136,799 126,871 136,749 126,771 ============== ========= ========= ========= Diluted earnings per common share $ 0.49 1.14 2.74 3.13 ============== ========= ========= ========= Diluted average shares outstanding 141,643 134,671 139,068 134,571 ============== ========= ========= ========= Dividends declared and paid per common share $ - - 0.85 0.75 ============== ========= ========= =========
See accompanying notes to condensed consolidated financial statements 5 CFS Bancshares, Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended June 30, 2002 2001 ---- ---- Cash flows from operating activities: Net income $ 380,547 420,989 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 126,036 189,233 Compensation expense recognized on ESOP allocation 13,800 12,000 Net amortization of premium on investment securities 156,222 76,576 Gain on sale or call of investment securities available for sale (128,667) (69,502) Loss on sale of real estate acquired by foreclosure 31,875 1,875 Decrease in deferred gain on sale of REO (4,826) (2,674) Decrease in accrued interest receivable 30,032 34,453 Decrease (increase) in other assets 267,295 (101,687) Decrease in accrued interest on deposits (53,787) (127,885) Decrease in other liabilities (143,037) (17,965) -------------- ----------- Net cash provided by operating activities 675,490 415,413 Cash flows from investing activities: Proceeds from interest-bearing deposits 13,789 - Purchase of FHLB stock (200,000) - Purchase of investment securities available for sale (21,629,010) (17,065,225) Proceeds from sale of investment securities available for sale 2,025,000 3,871,940 Proceeds from call of investment securities held to maturity - 500,000 Proceeds from call of investment securities available for sale 1,840,920 3,000,000 Proceeds from principal collected on investment securities held to maturity 457,698 1,517,807 Proceeds from principal collected on investment securities available for sale 6,876,691 2,750,000 Net change in loans 3,097,422 5,781,606 Purchase of premises and equipment (62,129) (46,905) Improvements to real estate acquired by foreclosure (26,424) - Proceeds from sale of real estate acquired by foreclosure 34,623 25,917 -------------- ----------- Net cash provided by (used in) investing activities (7,571,420) 335,140
See accompanying notes to condensed consolidated financial statements 6 CFS Bancshares, Inc. and Subsidiary Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended June 30, 2002 2001 ---- ---- Cash flows from financing activities: Net increase in interest-bearing deposits 376,786 2,056,471 Decrease in advance payments by borrowers for taxes and insurance (94,839) (67,705) Proceeds from FHLB advances 4,000,000 - Repayment of ESOP debt (8,000) (8,000) Cash dividends (118,337) (97,500) -------------- ----------- Net cash provided by financing activities 4,155,610 1,883,266 Net increase (decrease) in cash and cash equivalents (2,740,320) 2,633,819 Cash and cash equivalents at beginning of period 6,119,006 3,594,355 -------------- ----------- Cash and cash equivalents at end of period $ 3,378,686 $ 6,228,174 ============== =========== Supplemental information on cash payments: Interest paid $ 2,116,914 $ 2,997,926 Income taxes paid 370,924 206,000 Supplemental information on noncash transactions: Loans transferred to real estate acquired by foreclosure $ 372,153 $ 38,256
See accompanying notes to condensed consolidated financial statements 7 CFS Bancshares, Inc. and Subsidiary Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three months ended Nine months ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net income $ 69,241 153,964 380,547 420,989 Other comprehensive income, before tax: Unrealized holding (losses) gains arising during the period 673,872 (94,146) 75,037 1,176,839 Less reclassification adjustment for gains on securities available for sale - 55,288 128,667 69,502 ----------- -------- ------- --------- Total other comprehensive income (loss), before tax 673,872 (149,434) (53,630) 1,107,337 Income tax expense (benefit) related to other comprehensive income: Unrealized holding gain (loss) on available for sale securities 233,100 (33,887) 24,442 423,667 Less reclassification adjustment for gains on securities available for sale - 19,909 43,747 25,026 ----------- -------- ------- --------- Total income tax expense (benefit) related to other comprehensive income 233,100 (53,796) (19,305) 398,641 ----------- -------- ------- --------- Total other comprehensive income (loss), net of tax 440,772 (95,638) (34,325) 708,696 ----------- -------- ------- --------- Total comprehensive income $ 510,013 58,326 346,222 1,129,685 =========== ======== ======= =========
See accompanying notes to condensed consolidated financial statements 8 CFS BANCSHARES, INC. AND SUBSIDIARY Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (none of which are other than normal recurring accruals) necessary for a fair statement of financial position of the Company and its subsidiary and the results of operations for the three-month and nine-month periods ended June 30, 2002 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 2001 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 and nine months ended June 30, 2002 and 2001. Three months ended Nine months ended June 30, June 30, 2002 2001 2002 2001 --------------------------------------------- Weighted average common shares outstanding 136,899 126,871 136,799 126,771 Net effect of the assumed exercise of stock options based on the treasury stock method using average market price for the quarter 4,744 7,800 2,269 7,800 --------------------------------------------- Total weighted average common shares and potential common stock outstanding 141,643 134,671 139,068 134,571 =============================================
4. Recent Accounting Pronouncements In May 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 145, "Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements. These recissions eliminate the requirement to report gains and losses from the extinguishment of debt as an extraordinary item, net of any related income tax effect. This statement also amends SFAS No. 13, "Accounting for Leases" to eliminate an inconsistency between the required accounting for sale-leaseback transactions and 9 the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this statement are effective May 15, 2002. The Company does not expect the changes in the accounting pronouncements described above to have a material impact on its financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this statement are to be applied prospectively to exit or disposal activities initiated for fiscal years beginning after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its financial statements. Item 2. Management's Discussion and Analysis CFS Bancshares, Inc. ("the Company") has no significant assets other than the stock of Citizens Federal Savings Bank ("the Bank" or "Bank"). For that reason, substantially all of the discussion in the Form 10-QSB relates to the operations of the Bank. On May 30, 2002 the Company entered into an Agreement and Plan of Merger with Citizens Bancshares Corporation, a corporation organized and existing under the laws of the State of Georgia, with its principal office located in Atlanta, Georgia. Under the terms of the agreement the shareholders of CFS Bancshares, Inc. are entitled to receive $64.69 per share if the transaction closes in September 2002 and an additional $0.07 per share for each month beyond September. The expenses incurred to date by the Company in negotiating the merger are included in operating expenses in the appropriate category. REVIEW OF RESULTS OF OPERATIONS OVERVIEW Net income for the nine months ended June 30, 2002 was $380,547, a decrease of $40,442 or 9.61% when compared to the nine months ended June 30, 2001. Earnings per diluted share were $2.74 for the current nine-month period compared to $3.13 per diluted share for the prior year. The decrease in net income resulted from increases in expenses associated with negotiating the merger agreement described above. Expenses directly associated with the merger agreement include salary expense of $52,250, legal expense of $84,625 and other professional services of $22,407 for both the three-month and nine-month period ended June 30, 2002. Net income for the three months ended June 30, 2002 was $69,241, a decrease of $84,723 or 55.03% as compared to net income during the three months ended June 30, 2001 of $153,964. Earnings per diluted share for the quarter declined from $1.14 for the three months ended June 30, 2001 to $0.49 for the three months ended June 30, 2002. 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 Company's deposits and a portion of its FHLB advances are primarily short term in nature and reprice faster than the Company's interest- earning assets, consisting mainly of loans and mortgage-backed securities, which generally have longer 10 maturities. The mix of the Company'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 Company's interest-bearing liabilities decreased 125 basis points from 4.14% for the nine month period ended June 30, 2001 to 2.89% during the nine-month period ended June 30, 2002, while the yield on interest-earning assets decreased 152 basis points from 7.69% for the nine month period ended June 30, 2001 to 6.17% for the comparable period in the current fiscal year. The Company's net interest income decreased by $105,384 or 4.10% from $2,567,884 for the nine month period ended June 30, 2001 to $2,462,500 for the nine-month period in the current fiscal year. Net interest income for the three months ended June 30, 2002 increased by $16,539 or 2.00% from $827,919 for the three months ended June 30, 2001 to $844,458 for the three months ended June 30, 2002. The decrease in net interest income for the nine-month period ended June 30, 2002 resulted primarily from decreases in interest and fees on loans and was caused by a decline in the average balance of loans outstanding as well as a decline in the average interest rates earned on loans and securities. OTHER INCOME Other income increased from $370,638 for the nine month period ended June 30, 2001 to $422,560 for the comparable period in the current fiscal year as a result of an increase in the gain on sales of securities. During the nine-month period ended June 30, 2002 the Company recognized gains on the sale of securities available for sale of $128,667 as compared to gains during the nine-month period in the prior fiscal year of $69,502. For the three-month period other income decreased by $36,729 from $142,636 for the three months ended June 30, 2001 to $105,907 for the three-month period ended June 30, 2002, primarily as the result of a decline in gains on the sale of securities. During the three months ended June 30, 2001 the Company recognized $55,288 from the sale of investment securities available for sale while there were no such gains during the three-month period ended June 30, 2002. Service charges on deposits increased by $40,689 from $80,983 for the three months ended June 30, 2001 to $121,852 for the comparable three-month period in the current fiscal year. The increase resulted primarily from across the board increases in transaction account fees that became effective on April 01, 2002. OTHER EXPENSE During the nine-month period ended June 30, 2002 the Company's other expense increased by 1.04% or $23,745 from $2,284,728 for the nine-month period ended June 30, 2001 to $2,308,473 for the comparable period in the current year. As previously discussed the Company's expenses increased during the current year as the result of merger negotiations that resulted in a signed merger agreement on May 30, 2002. The expenses associated with the merger include salaries in the form of bonuses of $52,250 and legal expense and other professional services totalling $107,032 and are responsible for increases in those two categories of expenses. Expenses which declined include depreciation and other expense which declined $63,197 and $96,025, respectively when comparing the nine month period ended June 30, 2002 to the nine month period ended June 30, 2001. Much of the furniture and equipment the Company purchased in 1996 upon moving to a new main office headquarters became fully depreciated at the end of the fiscal year ended September 30, 2001. As a result, the Company's depreciation expense declined when comparing the nine-month period ended June 30, 2002 to the same period for the prior fiscal year. Other expense decreased as a result of a recovery in March 2002 of an overpayment for insurance of $18,610 which occurred during the prior fiscal year and from declines in expenses associated with legal matters which occurred during fiscal 2001. During the nine-month 11 period ended June 30, 2001 the Company expensed insurance deductibles of approximately $45,000 related to a legal issue. There were no such expenses during the current fiscal year. For the three-month period other expense increased by $110,759 from $735,803 for the three-month period ended June 30, 2001 to $846,562 for the three-period ended June 30, 2002 as the result of merger expenses previously discussed. Declines occurred in depreciation and other expense which decreased by $16,870 and $24,475 when comparing the three-month period ended June 30, 2002 to the three-month period ended June 30, 2001. See the discussion for the nine-month periods above for details. REVIEW OF FINANCIAL CONDITION Significant factors affecting the Company's financial condition from September 30, 2001 to June 30, 2002 are detailed below: Assets Total assets increased $4,294,675 or 4.16% from $103,328,293 at September 30, 2001 to $107,622,968 at June 30, 2002. Significant changes in asset balances include investment securities available for sale which increased by $12,648,211 or 26.76% from $47,260,024 at September 30, 2001 to $59,908,235 at June 30, 2002 and decreases in net loans receivable and other assets. Net loans receivable decreased from $41,109,567 at September 30, 2001 to $37,639,992 at June 30, 2002, a decrease of $3,469,575 or 8.44%. The decrease in net loans receivable resulted from an increase in the amount of prepayments on the existing portfolio due to the decline in interest rates and from decreases in the amount of loans originated. 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 that had been called by the issuer but not yet settled. The Company received the funds for the security during the early part of October 2001. Liabilities Total liabilities increased $4,050,389 or 4.33% between September 30, 2001 and June 30, 2002. The increase resulted from increases in Federal Home Loan Bank (FHLB) advances and in the Company's interest-bearing deposits. FHLB advances increased by $4,000,000 from $14,950,000 at September 30, 2001 to $18,950,000 at June 30, 2002. The increase in FHLB advances was used to purchase mortgage-backed securities which also serve as collateral for the $4,000,000 advance. Interest-bearing deposits increased by $322,999 from $76,945,341 at September 30, 2001 to $77,268,340 at June 30, 2002. The increase in deposits occurred in the Company's transaction (checking and savings) accounts. Liquidity The Company'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 Company 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 Company's various sources of funds are adequate to meet its liquidity requirement in the ordinary course of business. 12 Loan Quality A key to long term earnings growth for the Company is maintenance of a high quality loan portfolio. The Company'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 June 30, 2002 the Company had $990,474 in assets classified as substandard including assets acquired by foreclosure or repossession of $599,492, no assets classified as doubtful and $105,405 in assets classified as loss. A specific loan loss allowance has been established for all loans classified as a loss. At September 30, 2001 the Company had $935,215 in assets classified as substandard including assets acquired by foreclosure or repossession of $267,413, no assets classified as doubtful, and $155,475 in assets classified as loss. The allowance for loan losses was $367,201 at June 30, 2002. 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 required as circumstances warrant. The following table summarizes the activity in the allowance for loan losses for the nine month periods ended June 30: 2002 2001 ------- ------- Provision charged to expense - - Balance at beginning of year $396,768 342,156 Loans charged off (75,010) (32,153) Recoveries 45,443 68,933 ------- ------- Net (charge-offs) recoveries (29,567) 36,780 Balance at end of period $367,201 378,936 ======== ======= At June 30, 2002 and 2001, the carrying amounts of nonaccrual loans were $692,228 and $1,041,325, respectively. Included in these nonaccrual loans at June 30, 2002 and 2001, are loans that are considered to be impaired, which totaled $105,405 and $248,979, respectively. The specific allowance related to these impaired loans was $105,405 and $155,475, respectively. The average carrying amounts of impaired loans during the second quarter of 2002 and 2001 were $177,192 and $248,979, respectively. No interest income was recognized on impaired or nonaccrual loans for the three-month periods ended June 30, 2002 and June 30, 2001. 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 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 necessary, 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 13 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 Company's loan portfolio. The Company'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 that most of the loan portfolio is backed 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 Company 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 Company's filings with the Securities and Exchange Commission, including the 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. 14 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. At June 30, 2002 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) $9,682,371 21.62% 3,582,248 8.00% 4,477,810 10.00% Tier I capital (to risk weighted assets) $9,531,027 21.29% 1,791,124 4.00% 2,686,686 6.00% Tier I capital (to average assets) $9,531,027 9.04% 4,219,025 4.00% 5,273,781 5.00%
Reconciliation of Bank capital: Risk Weighted Tier I Capital Capital Total stockholders' equity (GAAP) $8,800,277 $8,800,277 Stock subject to put option 1,287,356 1,287,356 Holding company equity (71,386) (71,386) Unrealized gain on securities - AFS (485,220) (485,220) Allowance for loan losses 261,796 - Equity investments (110,452) ---------- ---------- Total $9,682,371 $9,531,027 ========== ========== 15 CFS BANCSHARES, INC. AND SUBSIDIARY PART II OTHER INFORMATION Item 1: Legal Proceedings The Company 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 consolidated financial position or operating results of the Company. Item 2: Change in Securities Not Applicable Item 3: Default upon Senior Securities Not Applicable Item 4: Submission of Matters to a Vote of Security Holders None Item 5: Other Information: None Item 6: Exhibits and Reports on Form 8-K On May 31, 2002 the Company filed a Form 8-K pursuant to "Item 5. Other Events" to report the execution of the Agreement and Plan of Merger with Citizens Bancshares Corporation on May 30, 2002. No financial statements were required to be filed with the Form 8-K. A copy of the Agreement and Plan of Merger was included as an exhibit to the Form 8-K. 16 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: 08/12/02 By: /s/ Bunny Stokes, Jr. ------------------------- ------------------------------- Bunny Stokes, Jr. Chairman/CEO (principal executive officer) Date: 08/12/02 By: /s/ W. Kent McGriff ------------------------- ------------------------------- W. Kent McGriff Executive Vice President (principal financial and accounting officer) CERTIFICATION The undersigned executive officers of the Registrant hereby certify that this Form 10-QSB fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained herein fairly presents, in all material respects, the financial condition and results of operations of the registrant. By: /s/ Bunny Stokes, Jr. ------------------------------- Bunny Stokes, Jr. Chairman/CEO By: /s/ W. Kent McGriff ------------------------------- W. Kent McGriff Executive Vice President (principal financial and accounting officer) 17