CFS BANCORP INC - 10-Q Quarterly Report

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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 June 30, 2002.

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 [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

The Registrant had 13,229,501 shares of Common Stock issued and outstanding as
of July 24, 2002.

CFS BANCORP, INC.

INDEX

Page No.
--------
PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Statements of Financial Condition at
June 30, 2002 and December 31, 2001 3

Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2002 and 2001 4

Consolidated Statement of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2002 5

Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 6

Notes to Consolidated Financial Statements 8

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14

Item 3. Quantitative and Qualitative Disclosures About Market
Risk 23

PART II OTHER INFORMATION

Item 1. Legal Proceedings 23

Item 2. Changes in Securities and Use of Proceeds 23

Item 3. Defaults upon Senior Securities 23

Item 4. Submission of Matters to a Vote of Security Holders 23

Item 5. Other Information 23

Item 6. Exhibits and Reports on Form 8-K 23

Exhibit 99.1 - Certification of Form 10-Q 25

2

CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)

June 30, 2002 December 31, 2001
------------- -----------------
(Unaudited)

ASSETS
Cash and amounts due from depository institutions $ 18,736 $ 28,250
Interest-bearing deposits 93,479 137,978
Federal funds sold 27,935 105,839
----------- -----------
Cash and cash equivalents 140,150 272,067

Investment securities available-for-sale 48,472 47,225
Mortgage-backed securities available-for-sale 312,288 276,158
Mortgage-backed securities held-to-maturity
(fair value 2002 - $31,026; 2001 - $37,744) 30,590 37,034
Loans receivable, net 924,339 883,352
Investment in Federal Home Loan Bank stock, at cost 26,025 26,165
Office properties and equipment 14,501 14,983
Accrued interest receivable 7,285 6,887
Real estate owned 1,715 1,128
Investment in bank-owned life insurance 30,792 30,052
Prepaid expenses and other assets 9,365 9,083
----------- -----------
Total assets $ 1,545,522 $ 1,604,134
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 894,606 $ 945,948
Borrowed money 459,808 462,658
Advance payments by borrowers for taxes and insurance 4,295 4,497
Other liabilities 17,427 19,747
----------- -----------
Total liabilities 1,376,136 1,432,850
----------- -----------

Stockholders' Equity:
Preferred stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 0
at June 30, 2002 and December 31, 2001 Common stock, $.01 par value:
Authorized shares - 85,000,000
Issued shares - 23,423,306
at June 30, 2002 and December 31, 2001
Outstanding shares - 13,257,348 and 13,626,146
at June 30, 2002 and December 31, 2001, respectively 234 234
Additional paid-in capital 189,440 189,547
Retained earnings, substantially restricted 106,166 105,064
Treasury stock, at cost: 10,165,958 and 9,797,160 shares
at June 30, 2002, and December 31, 2001, respectively (117,273) (112,167)
Unearned common stock acquired by ESOP (9,570) (9,570)
Unearned common stock acquired by RRP (2,874) (4,543)
Accumulated other comprehensive income, net of tax 3,263 2,719
----------- -----------
Total stockholders' equity 169,386 171,284
----------- -----------

Total liabilities and stockholders' equity $ 1,545,522 $ 1,604,134
=========== ===========

See accompanying notes.

3

CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----

Interest income:
Loans $ 15,748 $ 18,015 $ 31,336 $ 37,266
Mortgage-related securities 4,696 5,600 9,362 11,570
Other investment securities 523 2,608 856 5,902
Other 1,161 2,070 2,552 3,301
----------- ----------- ----------- -----------
Total interest income 22,128 28,293 44,106 58,039

Interest expense:
Deposits 6,097 10,961 13,312 21,857
Borrowings 6,881 7,432 13,679 15,099
----------- ----------- ----------- -----------
Total interest expense 12,978 18,393 26,991 36,956
Net interest income before
provision for losses on loans 9,150 9,900 17,115 21,083
Provision for losses on loans 350 450 550 900
----------- ----------- ----------- -----------
Net interest income after
provision for losses on loans 8,800 9,450 16,565 20,183

Non-interest income:
Loan fees 290 277 695 638
Fees on deposit accounts 909 656 1,447 1,145
Insurance commissions 376 240 664 472
Investment commissions 278 221 540 466
Gain on sale of available-for-sale
investment securities - net 24 451 271 590
Income from bank-owned life insurance 392 362 740 750
Other income 225 144 383 301
----------- ----------- ----------- -----------
Total non-interest income 2,494 2,351 4,740 4,362

Non-interest expense:
Compensation and employee benefits 5,094 4,895 10,090 9,676
Net occupancy expense 616 551 1,211 1,255
Furniture and equipment expense 476 496 938 1,034
Federal deposit insurance premiums 42 45 86 91
Data processing 584 321 936 643
Marketing 253 252 411 399
Other general and administrative expenses 1,387 1,484 2,566 2,711
----------- ----------- ----------- -----------
Total non-interest expense 8,452 8,044 16,238 15,809

Income before income taxes 2,842 3,757 5,067 8,736
Income tax expense 859 1,094 1,520 2,750
----------- ----------- ----------- -----------

Net income $ 1,983 $ 2,663 $ 3,547 $ 5,986
=========== =========== =========== ===========

Per share data:
Basic earnings per share $ 0.16 $ 0.18 $ 0.29 $ 0.40
Diluted earnings per share 0.16 0.18 0.28 0.40
Cash dividends declared per share 0.10 0.09 0.20 0.18
Weighted average shares outstanding 12,147,733 14,653,346 12,161,635 14,812,600
Weighted average diluted shares outstanding 12,669,255 15,029,024 12,670,059 15,114,337

See accompanying notes

4

CFS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)

Common Common Accumulated
Additional Stock Stock Other
Common Paid-In Retained Treasury Acquired Acquired Comprehensive
Stock Capital Earnings Stock by ESOP by RRP Income Total
----- ------- -------- ----- ------- ------ ------ -----

Balance January 1, 2001 $ 234 $ 189,547 $ 105,064 ($112,167) ($ 9,570) $ 4,543) $ 2,719 $ 171,284

Net income -- -- 3,547 -- -- -- -- 3,547
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net
of reclassification adjustment -- -- -- -- -- -- 544 544
------
Total comprehensive income 4,091

Purchase of treasury stock -- -- -- (5,740) -- -- -- (5,740)

Exercise of stock options -- (107) -- 634 -- -- -- 527

Amoritization of awards granted under
Recognition and Retention Plan -- -- (60) -- -- 1,669 -- 1,609

Dividends declared on common stock -- -- (2,385) -- -- -- -- (2,385)
----------------------------------------------------------------------------------------
Balance June 30, 2002 $ 234 $ 189,440 $ 106,166 ($117,273) ($ 9,570) ($ 2,874) $ 3,263 $ 169,386
====== ========= ========= ========= ========= ========= ========= =========

See accompanying notes

5

CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

Six Months Ended June 30,
2002 2001
---- ----

Net income $ 3,547 $ 5,986
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for losses on loans 550 900
Depreciation expense 920 1,006
Deferred income taxes (benefit) 1,351 (552)
Amortization of cost of stock benefit plans 1,609 1,424
Change in deferred income 904 148
(Increase) decrease in interest receivable (398) 2,464
Decrease in accrued interest payable (211) (679)
Proceeds from sale of loans held for sale 5,246 2,872
Origination of loans held for sale (4,261) (2,741)
Net gain on sale of available-for-sale securities (271) (590)
Increase in prepaid expenses and other assets (2,777) (1,151)
Decrease in other liabilities (3,449) (2,275)
--------- ---------

Net cash provided by operating activities 2,760 6,812
--------- ---------

Investing activities:
Available-for-sale investment securities:
Purchases (169,338) (107,296)
Repayments 167,183 70,750
Sales 1,011 8,957
Held to maturity investment securities:
Repayments and maturities -- 100,000
Available-for-sale mortgage-related securities:
Purchases (98,496) (14,117)
Repayments 63,538 18,413
Sales -- 14,102
Held to maturity mortgage-related securities:
Repayments 6,388 13,895
Purchase of Federal Home Loan Bank stock (19) (56)
Redemption of Federal Home Loan Bank stock 159 266
Loan originations and principal payments on loans, net (44,939) 67,556
Additional costs on real estate owned (81) (149)
Proceeds from sale of real estate owned 1,008 924
Purchases of property and equipment (874) (566)
Disposals of property and equipment 435 144
--------- ---------
Net cash provided by (used in) investing activities (74,025) 172,823
--------- ---------

6

CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)

Six Months
Ended June 30,
2002 2001
---- ----

Financing activities:
Proceeds from exercise of stock options 527 355
Dividends paid on common stock (1,188) (2,720)
Purchase of treasury stock (5,740) (8,340)
Net increase in NOW, passbook and money
market accounts 41,278 16,264
Net increase (decrease) in certificates of deposit (92,477) 42,329
Net decrease in advance payments by
borrowers for taxes and insurance (202) (341)
Net decrease in borrowed funds (2,850) (47,173)
--------- ---------
Net cash flows provided by financing activities (60,652) 374
--------- ---------
Increase (decrease) in cash and cash equivalents (131,917) 180,009
Cash and cash equivalents at beginning of period 272,067 59,259
--------- ---------
Cash and cash equivalents at end of period $ 140,150 $ 239,265
========= =========

Supplemental disclosure of non-cash activities:
Transfer of loans to real estate owned $ 1,514 $ 1,109

See accompanying notes

7

CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF FINANCIAL STATEMENTS PRESENTATION

The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q and therefore do not include all the information
or footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. However, all normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of financial
statements have been included. These financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the
period ended December 31, 2001 contained in the CFS Bancorp, Inc. (the
"Company") annual report to stockholders. The results for the three and six
months ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002.

2. LOAN PORTFOLIO

The Company's loan portfolio consisted of the following at the dates indicated:

June 30, 2002 December 31, 2001
------------- -----------------
(Dollars in thousands)
Mortgage loans: Amount % Amount %
------ --- ------ ---

Single-family residential $ 469,165 50.31% $ 535,197 60.07%
Multi-family residential 70,898 7.60 51,635 5.80
Commercial real estate 210,871 22.61 142,663 16.01
Construction and land
development:
Single-family residential 13,637 1.46 17,208 1.93
Multi-family residential 55,361 5.94 26,443 2.97
Commercial and land development 86,129 9.24 76,168 8.55
Home equity 45,901 4.92 41,416 4.65
------------------- -------------------
Total mortgage loans 951,962 102.08 890,730 99.98

Other loans:
Commercial 32,220 3.46 23,996 2.69
Consumer 2,268 .24 2,066 .23
Undisbursed portion of
loan proceeds (51,674) (5.54) (24,454) (2.75)
Deferred loan fees (2,227) (.24) (1,324) (.15)
------------------- -------------------
Total loans receivable 932,549 100.00% 891,014 100.00%
------------------- -------------------

Less:
Allowance for losses on loans 8,210 7,662
--------- ---------
Loans receivable, net $ 924,339 $ 883,352
========= =========

8

3. INVESTMENT SECURITIES

Amortized cost of investment securities and their fair values were as follows
(in thousands):

Available-for-Sale at June 30, 2002:

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----

Callable agency securities, corporate
bonds and commercial paper $37,952 $ 167 $ 5 $38,114
Trust preferred securities 4,930 -- 480 4,450
Equity securities 6,169 514 775 5,908
------- ------- ------- -------
$49,051 $ 681 $ 1,260 $48,472
======= ======= ======= =======

Available-for-Sale at December 31, 2001:

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----

Callable agency securities, corporate
bonds and commercial paper $33,169 $ 12 $ 33 $33,148
Trust preferred securities 4,929 -- 534 4,395
Equity securities 7,489 611 454 7,646
Asset-backed notes 2,026 10 -- 2,036
------- ------- ------- -------
$47,613 $ 633 $ 1,021 $47,225
======= ======= ======= =======

9

4. MORTGAGE-BACKED SECURITIES

The amortized cost of mortgage-backed securities and their fair values are as
follows (in thousands):

Available-for-Sale at June 30, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----

Participation certificates $ 57,546 $ 1,729 $ 40 $ 59,235
Real estate mortgage investment conduits
and collateralized mortgage obligations 248,364 4,711 22 253,053
------- ----- -- -------
$305,910 $ 6,440 $ 62 $312,288
======== ======== ======== ========

Available-for-Sale at December 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 32,089 $ 1,215 $ 79 $ 33,225
Real estate mortgage investment conduits
and collateralized mortgage obligations 239,776 3,439 282 242,933
------- ----- -- -------
$271,865 $ 4,654 $ 361 $276,158
======== ======== ======== ========

Held-to-Maturity at June 30, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 26,974 $ 411 $ 30 $ 27,355
Real estate mortgage investment conduits
and collateralized mortgage obligations 3,616 55 - 3,671
------- ----- -- -------
$ 30,590 $ 466 $ 30 $ 31,026
======== ======== ======== ========

Held-to-Maturity at December 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 28,644 $ 659 $ 69 $29,234
Real estate mortgage investment conduits
and collateralized mortgage obligations 8,390 125 5 8,510
------- ----- -- -------
$ 37,034 $ 784 $ 74 $37,744
======== ======= ======= =======

10

5. DEPOSITS

The following table sets forth the dollar amount of deposits and the percentage
of total deposits in various types of deposits offered by the Bank at the dates
indicated.

June 30, 2002 December 31, 2001
------------- -----------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
(Dollars in thousands)

NOW accounts:
Noninterest-bearing $29,072 3.25% $26,970 2.85%
Interest-bearing 85,931 9.60 81,217 8.59
Money market accounts 109,853 12.29 89,205 9.44
Savings accounts 216,979 24.26 203,165 21.49
Certificates of deposit:
$100,000 or less 367,666 41.12 416,675 44.07
Over $100,000 84,744 9.48 128,212 13.56
-------- ------ -------- ------
Deposits $894,245 100.00% $945,444 100.00%
Accrued interest 361 504
-------- --------
Total $894,606 $945,948
======== ========

6. NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangibles Assets, (collectively the "Statements") effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill (and intangible assets deemed to have indefinite lives) will no longer
be amortized but will be subject to annual impairment tests in accordance with
the Statements. Other identified intangible assets will continue to be amortized
over the useful lives.

The Company applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement did not result in any changes to
reported earnings since the Company currently has no goodwill nor intangible
assets with indefinite lives.

FASB Statement No. 144, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," (FAS No. 144) was issued in October
2001 and addresses how and when to measure impairment on long-lived assets and
how to account for long-lived assets that an entity plans to dispose of either
through sale, abandonment, exchange, or distribution to owners. The new
provisions supersede FAS No. 121, which addressed asset impairment, and certain
provisions of APB Opinion 30 related to reporting the effects of the disposal of
a business segment and requires expected future operating losses from
discontinued operations to be recorded in the period in which the losses are
incurred rather than the measurement date. Under FAS No. 144, more dispositions
may qualify for discontinued operations treatment in the income statement. The
provisions of FAS No. 144 became effective for the Company on January 1, 2002,
and did not have an impact on the Company's financial position or results of
operations.

11

7. EARNINGS PER SHARE

Set forth below is information with respect to calculation of basic and diluted
earnings per share for the periods indicated.

Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands, except per share data)

Net income $ 1,983 $ 2,663 $ 3,547 $ 5,986

Weighted average number of common shares outstanding 13,333,516 16,117,753 13,441,871 16,362,210
Average ESOP shares not committed to be released (912,133) (1,031,757) (927,086) (1,046,710)
Average RRP shares not vested (273,650) (432,650) (353,150) (502,900)
------------ ------------ ------------ ------------
Weighted average number of shares outstanding
for basic earnings per share computation purposes 12,147,733 14,653,346 12,161,635 14,812,600
Dilutive effects of employee stock options 521,522 375,678 508,424 301,737
------------ ------------ ------------ ------------
Weighted average shares and common share equivalents
outstanding for diluted earnings per share purposes 12,669,255 15,029,024 12,670,059 15,114,337
============ ============ ============ ============

Basic earnings per share $ 0.16 $ 0.18 $ 0.29 $ 0.40
Diluted earnings per share 0.16 0.18 0.28 0.40

8. COMPREHENSIVE INCOME

Comprehensive income is the total of reported net income and all other revenues,
expenses, gains and losses that under generally accepted accounting principles
are not includable in reported net income but are reflected in stockholders'
equity.

The following table presents the Company's comprehensive income:

Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands)

Net income $1,983 $2,663 $3,547 $5,986
Net change in unrealized gain (loss) on
securities available-for-sale, net 1,774 (680) 544 3,468
------ ------ ------ ------
Comprehensive income $3,757 $1,983 $4,091 $9,454
====== ====== ====== ======

12

9. NON-PERFORMING ASSETS

The following table sets forth information with respect to non-performing assets
at the dates indicated:

June 30, 2002 December 31, 2001
------------- -----------------
(Dollars in thousands)

Non-accrual loans:
Mortgage loans:
Construction and land development $12,991 $ 1,361
Single-family residential 6,711 8,579
Multi-family residential 59 36
Non-residential 1,609 1,798
Home equity 253 692
Other loans:
Commercial 1,294 1,117
Consumer 662 291
------- -------
Total non-performing loans 23,579 13,874
Real estate owned 1,715 1,128
------- -------
Total non-performing assets $25,294 $15,002
======= =======

Non-performing assets to total assets 1.64% 0.94%
Non-performing loans to total loans 2.53 1.56

The following table is a summary of changes in the allowance for loan losses for
the six months ended June 30, 2002, the year ended December 31, 2001 and the six
months ended June 30, 2001:

Six Months Ended Year Ended Six Months Ended
June 30, 2002 December 31, 2001 June 30, 2001
------------- ----------------- -------------
(Dollars in thousands)

Balance at beginning of period $7,662 $7,187 $7,187
Provision for loan losses 550 1,150 900
Charge-offs (86) (855) (813)
Recoveries 84 180 38
------ ------ ------
Balance at end of period $8,210 $7,662 $7,312
====== ====== ======

Allowance for loan losses to total
non-performing loans at end of period 34.82% 55.23% 58.67%
Allowance for loan losses to total loans
at end of period 0.88 0.86 0.76

13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD LOOKING STATEMENTS

This Form 10-Q contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, and may be identified by
the use of such words as "believe," "expect," "anticipate," "should," "planned,"
"estimated" and "potential." Examples of forward-looking statements include, but
are not limited to, management's intentions, beliefs, or expectations, estimates
with respect to the financial condition, results of operations and business of
the Company that are subject to various factors which could cause actual results
to differ materially from these estimates. These factors include, but are not
limited to, the positive net earnings effects of various tax strategies,
anticipated future opportunities for use of liquidity, restructuring of the loan
portfolio and fixed-income portfolio, increased emphasis on business banking and
commercial lending, Federal Reserve Board interest rate cuts and interest rate
environment, the process improvement program, the consolidation and relocation
of branch offices, the resolution of the large construction loan delinquency,
outsourcing of the investment services function, general economic conditions,
changes in interest rates, deposit flows, loan demand, real estate values and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting the Company's operations,
pricing, products, and services. Many of such factors are not subject to the
Company's control. Stockholders are cautioned that any such forward-looking
statements included herein are not guarantees of future performance and involve
risks and uncertainties and that actual results may differ materially from those
contemplated by such forward-looking statements. The Company undertakes no
obligation to update or revise any forward-looking statements to reflect changes
in assumptions, the occurrence of unanticipated events or changes to future
operating results that occur subsequently to the date such forward-looking
statements are made.

CHANGES IN FINANCIAL CONDITION

At June 30, 2002 the Company's total assets amounted to $1.5 billion or
approximately $58.6 million less than at December 31, 2001, while total
liabilities decreased $56.7 million and stockholders' equity decreased $1.9
million over this same period.

Cash and cash equivalents were $140.2 million at June 30, 2002 compared to
$272.1 million at December 31, 2001. The decrease of $131.9 million was used
primarily to fund origination of commercial and multi-family real estate
mortgage loans, purchase mortgage-backed securities and fund certificate
withdrawals as the Company continued implementation of its strategic plan.

Investment securities available-for-sale were $48.5 million at June 30, 2002
compared to $47.2 million at December 31, 2001. Mortgage-backed securities
available-for-sale were $312.3 million at June 30, 2002 compared to $276.2
million at December 31, 2001 while mortgage-backed securities held-to-maturity
were $30.6 million at June 30, 2002 compared to $37.0 million at December 31,
2001. This net increase in investment and mortgage-backed securities of $30.9
million is a result of the Company investing in mortgage-backed securities
available-for-sale with yields greater than were being earned while these funds
were in cash and cash-equivalents. However, the cash flows

14

from these mortgage-backed securities are anticipated to be received over a
relatively short period of time.

Loans receivable increased to $924.3 million at June 30, 2002 from $883.4
million at December 31, 2001. This net increase of $40.9 million resulted from
using cash and cash equivalents to fund new loan originations. The net reduction
of $69.6 million in single-family residential mortgage and construction loans
reflected the continuing shift in the composition of the Company's loan
portfolio into higher levels of investment in commercial, commercial real
estate, multi-family real estate and home equity loans.

Deposits decreased $51.3 million to $894.6 at June 30, 2002 from $945.9 million
at December 31, 2001. The reduction was the result of a reduction of $92.5
million in certificates of deposit being partially offset by an increase in core
deposits of $41.2 million.

Borrowed money was $459.8 million at June 30, 2002 compared to $462.7 million at
December 31, 2001. Borrowed funds consist of advances from the Federal Home Loan
Banks of Indianapolis and Chicago and Community Investment Program funds from
the Federal Home Loan Bank of Indianapolis.

Stockholders' equity was $169.4 million at June 30, 2002 compared to $171.3
million at December 31, 2001. The $1.9 million net reduction was the result
primarily of the repurchase of $5.8 million of the Company's common stock offset
by $705,000 of options exercised during the first six months of 2002. This net
decrease in stockholders' equity of $5.1 million resulting from the Company's
stock repurchase activity was partially offset by $1.7 million of shares held in
the RRP Trust becoming vested and issued to plan participants, $1.1 million
added to retained earnings from net income less dividends paid to stockholders
and an increase of $544,000 in accumulated other comprehensive income.

15

AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances.

Three Months Ended June 30,
--------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------------------------------------------------------------------------------

Interest-earning assets:
Loans Receivable (1)
Real estate loans $881,066 $15,325 6.96% $935,611 $17,609 7.53%
Other loans 29,317 423 5.77% 20,065 406 8.09%
------------------------ ---------------------------
Total loans 910,383 15,748 6.92% 955,676 18,015 7.54%
Securities (2) 378,340 5,219 5.52% 496,639 8,208 6.61%
Other interest-earning assets (3) 204,567 1,161 2.27% 180,926 2,070 4.58%
------------------------ ---------------------------
Total interest-earning assets 1,493,290 22,128 5.93% 1,633,241 28,293 6.93%

Non-interest earning assets 79,037 80,264
------------- --------------
Total assets $1,572,327 $1,713,505
============= ==============

Interest-bearing liabilities:
Deposits:
NOW and money market accounts $192,589 $ 655 1.36% $144,776 $ 885 2.45%
Passbook accounts 217,778 694 1.27% 203,312 1,284 2.53%
Certificates of deposit 468,350 4,748 4.06% 599,013 8,792 5.87%
------------------------ ---------------------------
Total deposits 878,717 6,097 2.78% 947,101 10,961 4.63%

Total borrowings 462,180 6,881 5.96% 501,645 7,432 5.93%
------------------------ ---------------------------
Total interest-bearing liabilities 1,340,897 12,978 3.87% 1,448,746 18,393 5.08%

Non-interest bearing liabilities (4) 62,964 64,903
------------- --------------
Total liabilities 1,403,861 1,513,649
Net worth 168,466 199,856
------------- --------------
Total liabilities and stockholders'
equity $1,572,327 $1,713,505
============= ==============

Net interest-earning assets $152,393 $184,495
============= ==============
Net interest income/interest rate spread $9,150 2.06% $9,900 1.85%
====================== ============================
Net interest margin 2.45% 2.42%
=========== ===============
Ratio of average interest-earning assets to
average interest-bearing liabilities 111.37% 112.73%
=========== ===============

(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Average balances of securities available-for-sale are based on historical
costs.
(3) Includes money market accounts, federal funds sold and interest-earning
bank deposits.
(4) Consists primarily of demand deposit accounts.

16

Six Months Ended June 30,
--------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------------------------------------------------------------------------------

Interest-earning assets:
Loans Receivable (1)
Real estate loans $872,021 $30,159 7.00% $954,349 $36,403 7.63%
Other loans 28,335 817 5.77% 20,345 863 8.48%
------------------------- ---------------------------
Total loans 900,356 31,336 6.96% 974,694 37,266 7.65%
Securities (2) 368,938 10,218 5.54% 518,529 17,472 6.74%
Other interest-earning assets (3) 235,273 2,552 2.17% 132,205 3,301 4.99%
------------------------- ---------------------------
Total interest-earning assets 1,504,567 44,106 5.86% 1,625,428 58,039 7.14%

Non-interest earning assets 83,676 81,359
------------- -------------
Total assets $1,588,243 $1,706,787
============= =============

Interest-bearing liabilities:
Deposits:
NOW and money market accounts $185,442 $1,330 1.43% $137,596 $1,688 2.45%
Passbook accounts 214,356 1,469 1.37% 204,809 2,678 2.62%
Certificates of deposit 493,489 10,513 4.26% 589,297 17,491 5.94%
------------------------- ---------------------------
Total deposits 893,287 13,312 2.98% 931,702 21,857 4.69%

Total borrowings 462,406 13,679 5.92% 511,253 15,099 5.91%
------------------------- ---------------------------
Total interest-bearing liabilities 1,355,693 26,991 3.98% 1,442,955 36,956 5.12%

Non-interest bearing liabilities (4) 62,949 64,065
------------- -------------
Total liabilities 1,418,642 1,507,020
Net worth 169,601 199,767
------------- -------------
Total liabilities and stockholders'
equity $1,588,243 $1,706,787
============= =============

Net interest-earning assets $148,874 $182,473
============= =============
Net interest income/interest rate spread $17,115 1.88% $21,083 2.02%
======================= ==============================
Net interest margin 2.28% 2.59%
=========== ================
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.98% 112.65%
=========== ================

17

RATE /VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company for the three months ended June 30, 2002 compared
to 2001. Information is provided with respect to (i) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) effects on interest income attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) changes in rate/volume (changes in rate
multiplied by changes in volume).

Three Months Ended June 30,
2002 compared to 2001
-----------------------------------------------------------------
(Dollars in thousands)
Increase (decrease) due to
-----------------------------------------------------------------
Total Net
Rate/ Increase
Rate Volume Volume (Decrease)
-------------- ------------------ --------------- ---------------

Interest-earning assets:
Loans receivable:
Real estate loans ($1,337) ($1,027) $78 ($2,286)
Other loans (117) 188 (54) 17
----------------------------------------------------------------
Total loans receivable (1,454) (839) 24 (2,269)

Securities (1,356) (1,955) 323 (2,988)
Other interest-earning assets (1,043) 270 (136) (909)
----------------------------------------------------------------

Total net change in income on
interest-earning assets (3,853) (2,524) 211 (6,166)

Interest-bearing liabilities:
Deposits:
NOW and money markets accounts (393) 293 (130) (230)
Passbook accounts (636) 91 (45) (590)
Certificates of deposit (2,719) (1,918) 593 (4,044)
----------------------------------------------------------------
Total deposits (3,748) (1,534) 418 (4,864)

Borrowings 37 (585) (3) (551)
----------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (3,711) (2,119) 415 (5,415)
----------------------------------------------------------------

Net change in net interest income ($142) ($405) ($204) ($751)
================================================================

18

RATE /VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company for the six months ended June 30, 2002 compared
to 2001. Information is provided with respect to (i) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate);
(ii) effects on interest income attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) changes in rate/volume (changes in rate
multiplied by changes in volume).

Six Months Ended June 30,
2002 compared to 2001
-----------------------------------------------------------------
(Dollars in thousands)
Increase (decrease) due to
-----------------------------------------------------------------
Total Net
Rate/ Increase
Rate Volume Volume (Decrease)
-----------------------------------------------------------------

Interest-earning assets:
Loans receivable:
Real estate loans ($3,003) ($3,141) $259 ($5,885)
Other loans (277) 339 (108) (46)
----------------------------------------------------------------
Total loans receivable (3,280) (2,802) 151 (5,931)

Securities (3,110) (5,040) 897 (7,253)
Other interest-earning assets (1,867) 2,574 (1,456) (749)
----------------------------------------------------------------

Total net change in income on
interest-earning assets (8,257) (5,268) (408) (13,933)

Interest-bearing liabilities:
Deposits:
NOW and money markets accounts (701) 587 (244) (358)
Passbook accounts (1,274) 125 (60) (1,209)
Certificates of deposit (4,937) (2,844) 803 (6,978)
----------------------------------------------------------------
Total deposits (6,912) (2,132) 499 (8,545)

Borrowings 25 (1,442) (3) (1,420)
----------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (6,887) (3,574) 496 (9,965)
----------------------------------------------------------------

Net change in net interest income ($1,370) ($1,694) ($904) ($3,968)
================================================================

19

RESULTS OF OPERATIONS

The Company reported net income of $2.0 million or $0.16 per diluted share for
the three months ended June 30, 2002 compared to $2.7 million or $0.18 per
diluted share for the three months ended June 30, 2001. Net income for the six
months ended June 30, 2002 was $3.5 million or $0.28 per diluted share compared
to $6.0 million or $0.40 per diluted share for the same period in 2001.

Net interest income for the second quarter of 2002 was $9.2 million compared to
$9.9 million for the second quarter of 2001. Net interest income for the first
six months of 2002 was $17.1 million compared to $21.1 million for the same
period in 2001. For the six months ended June 30, 2002 compared to the first six
months in 2001 the interest rate spread was 1.88 percent compared to 2.02
percent respectively, while the net interest margin was 2.28 percent compared to
2.59 percent, respectively. For the three months ended June 30, 2002 compared to
the same period in 2001, the interest rate spread was 2.06 percent compared to
1.85 percent, respectively, while the net interest margin was 2.45 percent
compared to 2.42 percent, respectively. Both the interest rate spread and the
interest margin improved in the second quarter of 2002 as the Company redeployed
cash and cash equivalents into higher yielding interest-earning assets.

Interest income for the second quarter of 2002 was $22.1 million compared to
$28.3 million for the second quarter of 2001. Interest income for the first six
months of 2002 was $44.1 million compared to $58.0 million for the first six
months of 2001. The primary reasons for the decreases in the 2002 periods were
the reduction in the average balances of investment securities and loans
combined with an increase in the average balance of cash and cash equivalents
which have a lower yield. In addition, all interest-earning assets realized
lower average yields earned in the three months and six months ended June 30,
2002 compared to the same periods in 2001 as a result of the eleven rate
reductions made during 2001 by the Federal Reserve Board.

Interest expense for the three months ended June 30, 2002 was $13.0 million
compared to $18.4 million for the same period in 2001. Interest expense for the
six months ended June 30, 2002 was $27.0 million compared to $37.0 million for
the six months ended June 30, 2001. The decreases in the three and six months
ended June 30, 2002 compared to the same periods in 2001 were the result of
lower average balances and lower rates of interest paid on deposits.

The Company's provision for loan losses for the three months ended June 30, 2002
was $350,000 compared to $450,000 for the three months ended June 30, 2001. The
provision for loan losses for the six months ended June 30, 2002 was $550,000
compared to $900,000 for the six months ended June 30, 2001. The decreases for
the three and six months ended June 30, 2002 compared to 2001 were mainly due to
the reduction in the overall average balance of loans receivable. Though the
provisions in both periods of 2002 were less than 2001, the loan loss reserve as
a percentage of total loans increased from 0.76 percent to 0.88 percent when
comparing the six months ended June 30, 2001 to June 30, 2002. Management
believes that as of June 30, 2002 the allowance for loan losses was adequate;
however, no assurances can be given that future charge-offs and/or additional
provisions will not be needed. As the Company redeploys cash and cash
equivalents into loans during the remainder of 2002 and anticipate that the
average balance of loans will increase, the provision for loan losses is
expected to increase from the levels of the first six months of the year.

Non-performing loans increased significantly from $13.9 million at December 31,
2001 to $23.6 million at June 30, 2002 due primarily to a $11.4 million
construction loan on an apartment complex becoming 90 days delinquent at the end
of June 2002. This property consists of 14 buildings with 173 units. The complex
is 80.0 percent complete with approximately 60.0 percent of the total units
rented. Absent this loan, the non-performing loans would have decreased

20

approximately $1.7 million from December 31, 2001 to June 30, 2002. Management
of the Bank has been working with this borrower to resolve the delinquency and
currently does not expect to incur any loss on this loan.

Non-interest income for the three months ended June 30, 2002 was $2.5 million
compared to $2.4 million for the three months ended June 30, 2001 and amounted
to $4.7 million for the six months ended June 30, 2002 compared to $4.4 million
for the same period in 2001. The increases in non-interest income in both the
three and six month periods of 2002 compared to 2001 partially reflects
increases in fee income as a result of the process improvement program the
Company implemented in 2001. This overall improvement in non-interest income was
partially offset by an approximate $300,000 reduction in the net gain on sale of
investment securities available-for-sale during the second three months of 2002
compared to the same period of 2001 and also in the six months ended June 30,
2002 when compared to the six months ended June 30, 2001.

Non-interest expense was $8.5 million for the three months ended June 30, 2002
compared to $8.0 million for three months ended June 30, 2001. Non-interest
expense was $16.2 million for the first six months of 2002 compared to $15.8
million for the same period in 2001. For both the three months and the six
months ended June 30, 2002 compared to the same periods in 2001, increases in
compensation and employee benefits of $280,000 resulting from staff
restructuring within the Bank and the Investment Division, increases in pension
expense of $219,000 and $438,000 for the three and six months ended June 30,
2002, respectively, resulting from the Bank's pension plan no longer being
considered fully funded and increases in data processing expenses related to the
changing of processing to a proof of deposit environment accounted for the
majority of the differences.

Income tax expense for the three months ended June 30, 2002 was $859,000 or 30.2
percent of income before income taxes compared to $1.1 million or 29.1 percent
of income before income taxes for the three months ended June 30, 2001. For the
six months ended June 30, 2002 income tax expense was $1.5 million or 30.0
percent of income before income taxes compared to $2.8 million or 31.5 percent
for the same period in 2001. The decline in the Company's effective tax rate for
the six months ended June 30, 2002 was due to implementation of various tax
strategies over the past few years. The Company estimates that its effective
rate for the remainder of 2002 will be approximately 30.0 percent.

LIQUIDITY AND COMMITMENTS

The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing, and financing activities. The Company's primary
sources of funds are deposits, borrowings, amortization prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments and funds provided from
operations. While scheduled payments from the amortization of loans and
mortgage-related securities and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates. In addition, the
Company invests excess funds in federal funds sold and other short-term interest
earning assets which provide liquidity to meet lending requirements.

Liquidity management is both a daily and long term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds. The Company uses its sources of funds primarily to meet
its ongoing commitments, pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed
and mortgage-related securities and investment securities. At June 30, 2002 the
total approved investment and loan origination commitments outstanding amounted
to $95.0 million. At the same

21

date, the unadvanced portion of construction loans amounted to $51.7 million.
Investment securities scheduled to mature in one year or less at June 30, 2002
were $11.3 million.

Based on historical experience, the Company believes that a significant portion
of maturing deposits will remain with the Company. The Company anticipates that
it will continue to have sufficient funds, together with borrowings, to meet its
current commitments.

At June 30, 2002 the Bank's regulatory capital was significantly in excess of
regulatory limits set by the Office of Thrift Supervision. The current
requirements and the Bank's actual levels at June 30, 2002 are set forth below
(dollars in thousands):

Required Capital Actual Capital Excess Capital

Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------

Tangible capital $22,805 1.50% $133,761 8.80% $110,956 7.30%

Core capital 60,813 4.00 133,761 8.80 72,948 4.80

Risk-based capital 76,453 8.00 141,971 14.86 65,518 6.86

22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio equity, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's annual report to
stockholders for the year ended December 31, 2001. There has been no material
change in the Company's assets and liability position or the market value of the
Company's portfolio equity since December 31, 2001.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) List of Exhibits (filed herewith unless otherwise noted)

3.1 Certificate of Incorporation of CFS Bancorp, Inc.*
3.2 Bylaws of CFS Bancorp, Inc.*
4.0 Form of Stock Certificate of CFS Bancorp, Inc.*
10.1 Form of Employment Agreement entered into between Citizens Financial
Services, FSB and each of Thomas F. Prisby, James W. Prisby and John T.
Stephens*
10.2 Form of Employment Agreement entered into between CFS Bancorp, Inc. and
each of Thomas F. Prisby, James W. Prisby and John T. Stephens*
10.5 CFS Bancorp, Inc. Amended and Restated 1998 Stock Option Plan**
10.6 CFS Bancorp, Inc. Amended and Restated 1998 Recognition and Retention
Plan and Trust Agreement**
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as adapted pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.

- ------------

* Incorporated by Reference from the Company's Registration Statement on
Form S-1 filed on March 26, 1998, as amended and declared effective on
May 14, 1998.
** Incorporated by Reference from the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders filed on March 23, 2001.

23

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: August 14, 2002 By: /s/
--------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer

Date: August 14, 2002 By: /s/
--------------------------------------------
John T. Stephens, Executive Vice
President and
Chief Financial Officer

24