U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
Commission file number 0-26650
CSB FINANCIAL GROUP, INC.
(Name of small business issuer in its charter)
Delaware 37-1336338
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 South Poplar, Centralia, Illinois 62801
---------------------------------------------------
(Address or principal executive offices) (Zip Code)
Registrant's telephone number, including area code (618) 532-1918
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the
Exchange Act:
Common Stock: par value $0.01 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
State issuer's revenues for its most recent fiscal year. $2,954,000
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at November 30, 1996 was $9,566,870. For purposes of this
determination only, directors and executive officers of the Registrant have been
presumed to be affiliates. The market value is based upon $10 per share, the
last sales price as quoted on The Nasdaq Stock Market for November 29, 1996.
The Registrant had 956,687 shares of Common Stock outstanding at
November 29, 1996, not including 78,313 shares held by the Registrant's Employee
Stock Ownership Plan which have not been committed to be released to
participants.
Transitional Small Business Disclosure Format: Yes No X
The Exhibit Index is located at page 2.
<PAGE>
INDEX
PART I Page
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I
Item 1. Description of Business.
On October 5, 1995, CSB Financial Group, Inc. (the "Company") acquired
all of the outstanding shares of Centralia Savings Bank (the "Bank") upon the
Bank's conversion from a state chartered mutual savings bank to a state
chartered stock savings bank. The Company purchased 100% of the outstanding
stock of the Bank using 50% of the net proceeds from the Company's initial stock
offering which was completed on October 5, 1995. The Company sold 1,035,000
shares of $0.01 par value common stock at a price of $8 per share, including
82,800 shares purchased by the Bank's Employee Stock Ownership Plan ("ESOP").
The ESOP shares were acquired by the Bank with proceeds from a Company loan
totaling $662. The gross proceeds of the offering were $8,280. After reducing
gross proceeds for conversion costs of $696, net proceeds totaled $7,584. The
Company's stock trades on the NASDAQ Small Caps market under the symbol "CSBF".
The acquisition of the Bank by the Company is being accounted for like
a "pooling of interests" under generally accepted accounting principles. The
application of the pooling of interests method records the assets and
liabilities of the merged entities on an historical cost basis with no goodwill
or other intangible assets being recorded.
The Company's assets at September 30, 1996 consist primarily of the
investment in the Bank of approximately $8.6 million and short-term marketable
securities of approximately $3.3 million. Currently, the Company does not
transact any material business other than through its subsidiary, the Bank.
Business of the Bank
The Bank is an Illinois-chartered stock savings bank regulated by the
Illinois Commissioner of Savings and Residential Finance (the "Commissioner").
The Bank was originally chartered in 1879 as a federally chartered savings and
loan association. The deposits of the Bank are insured up to the applicable
limits by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"). The Bank's primary market area consists of
Marion County, Illinois, which includes the cities of Carlyle and Centralia. The
Bank maintains two offices, one in Centralia and one in Carlyle, and provides a
full range of retail banking services at each office, with emphasis on one- to
four-family residential mortgage loans and consumer and commercial loans. At
September 30, 1996, the Bank had total assets, liabilities and stockholders'
equity of approximately $46.6 million, $38 million, and $8.6 million,
respectively.
The Bank's principal business consists of the acceptance of retail
deposits from the residents and small businesses surrounding its offices and the
investment of those deposits, together with funds generated from operations,
primarily in one- to four-family residential mortgage loans. The Bank also
invests in multifamily mortgage, commercial real estate, construction, land
development and other loans. At September 30, 1996, the Bank's gross loan
portfolio totaled $26.9 million of 57.8% of total assets. In addition to its
lending activities, the Bank also invests in U.S. Treasury securities,
government agency securities, local municipal securities and mortgage-backed
securities. At September 30, 1996, the Bank's securities portfolio totaled $12.9
million or 27.7% of total assets with $10.7 million classified as available for
sale, $2 million classified as held to maturity and $165,000 classified as
nonmarketable equity securities.
The Bank's revenues are derived principally from interest on its
mortgage, consumer and commercial loans, and, to a lesser extent, interest and
dividends on its securities. The Bank's primary sources of funds are deposits,
principal and interest payments and principal prepayments on loans. Through its
wholly-owned subsidiary, Centralia SLA, Inc., the Bank engages in the sale of
insurance services.
<PAGE>
On September 13, 1996, the Company acquired the Carlyle, Illinois
branch (the "branch") of Kankakee Federal Savings and Loan. The branch had
approximately $8.6 million in deposits at the date of acquisition. In addition
to assuming the deposit liabilities attributable to the branch, the Company
acquired certain assets associated with the branch, including the building.
The executive offices of the Company and Savings Bank are located at
200 South Poplar Street, Centralia, Illinois 62801 and the telephone number is
(618) 532-1918.
Composition of the Loan Portfolio. The Bank's historical lending
strategy has focused primarily on the origination of residential mortgage loans
secured by one- to four-family homes and consumer loans to customers with whom
the Bank already had a deposit or lending relationship. Beginning in May, 1994,
the Bank began offering consumer loans, primarily installment loans for the
purchase of automobiles, to the general public. The Bank also originates, from
time to time, multi-family and commercial real estate loans and commercial
non-real estate loans, although such loans presently constitute a relatively
small percentage of the Bank's total loan portfolio. The following table sets
forth in greater detail the composition of the Bank's loan portfolio by type of
loan as of the dates indicated:
<TABLE>
At September 30,
-----------------------------------------
1996 1995
------------------ ------------------
(In Thousands)
-----------------------------------------
Amount Percent Amount Percent
-----------------------------------------
<S> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family .................... $17,285 63.69% $13,086 66.72%
Multi-family ........................... 527 1.94% 535 2.73%
Commercial real estate ................. 823 3.03% 835 4.26%
Other loans secured by real estate ..... 1,091 4.02% 638 3.25%
------- -------
Total mortgage loans .............. 19,726 72.68% 15,094 76.96%
Commercial and Consumer Loans:
Commercial ............................. 1,462 5.39% 618 3.15%
Consumer ............................... 4,637 17.09% 3,323 16.95%
Home equity lines of credit ............ 998 3.68% 18 0.09%
Share loans ............................ 316 1.16% 559 2.85%
------- -------
Total commercial and consumer loans 7,413 27.32% 4,518 23.04%
Total loans ................................. 27,139 100.00% 19,612 100.00%
------- -------
Less:
Deferred fees .......................... 23 30
Unearned income on consumer loans ...... 68 192
Allowance for loan losses .............. 117 113
------- -------
Total loans, net ............................ $26,931 $19,277
======= =======
</TABLE>
The Bank had no loans held for sale at September 30, 1996 or 1995. As of
September 30, 1996, 45% of the Bank's loans had adjustable interest rates.
The types of loans that the Bank may originate are subject to federal
and state laws and regulations. Interest rates charged by the Bank are affected
by the demand for such loans and the supply of money available for lending
purposes and the rates offered by competitors. These factors are, in turn,
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board and legislative tax
policies.
<PAGE>
Loan Maturity
The following table shows the maturity of the Bank's loans at September
30, 1996. The table does not include the effect of future loan repayment
activity. While the Bank cannot project future loan prepayment activity, the
Bank anticipates that in periods of stable interest rates, prepayment activity
would be lower than prepayment activity experienced in periods of declining
interest rates. In general, the Bank originates adjustable and fixed-rate one-
to four-family loans with maturities from 15 to 30 years, one-to-four family
loans with balloon features which mature from 1 to 5 years, multi-family loans
with maturities from 1 to 5 years, adjustable-rate commercial real estate loans
with maturities of 20 to 25 years, commercial loans with maturities of 90 days
to one year, and consumer loans with maturities of 1 to 5 years.
<TABLE>
At September 30, 1996
---------------------------------------
Mortgage Commercial Consumer Total
Loans Loans Loans Loans
---------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Amounts due:
One year or less .............................. $ 5,074 $ 487 $ 504 $ 6,065
======================================
After one year:
More than one year to five years ........... $ 9,607 $ 849 $ 5,222 $15,678
More than five years to ten years .......... 674 126 225 1,025
More than ten years ........................ 4,371 -- -- 4,371
---------------------------------------
Total due after September 30, 1997 ...... $ 14,652 $ 975 $ 5,447 $21,074
=======================================
Interest rate terms on amounts due after one year:
Fixed ...................................... $ 6,740 $ 975 $ 5,447 $13,162
Adjustable ................................. 7,912 -- -- 7,912
</TABLE>
One- to Four-Family Loans. The primary lending activity of the Bank has
been the extension of first mortgage residential loans to enable borrowers to
purchase existing one- to four-family homes or to construct new one- to
four-family homes. At September 30, 1996 and 1995, the Bank's gross loan
portfolio consisted of approximately $17.3 million, or 63.69%, and $13.1
million, or 66.72%, respectively of loans secured by one- to four-family
residential real estate. The predominant type of first-mortgage residential loan
currently offered by the Savings Bank to loan customers is an adjustable rate
mortgage that adjusts on either a one-year or three-year basis with a 30 year
amortization.
Balloon loans were the predominant type of residential first mortgage
loan offered by the Savings Bank prior to September, 1994. Such loans are
amortized over a maximum period of 30 years for purposes of computing the
borrower's monthly mortgage payments. Under the terms of its standard balloon
loan, the Savings Bank is generally obligated, at the option of the borrower, to
refinance the loan at the time the balloon payment becomes due, provided that
the loan is current at such time. The initial interest rate on each balloon loan
offered by the Savings Bank is fixed at the rate prevailing at the time that the
loan is originated. Most of the balloon loans in the Savings Bank's portfolio
further provide that the interest rate will not increase by more than one to two
percentage points at the end of each balloon period and that the maximum
interest rate will not exceed the initial rate by more than three percentage
points either over the life of the mortgage or for as long as the home that is
being financed remains owner-occupied.
<PAGE>
The Bank has attempted to shift the balance between its ARMs and
balloon loans by ceasing to offer balloon loans to new customers and encouraging
the holders of existing balloon loans to replace such loans, upon maturity, with
ARMs. Management believes that the higher interest rate ceilings and the
interest rate floor included in its ARMS will result in less interest rate risk
to the Bank than the interest rate risk posed by its balloon loans.
The Bank's one- to four-family residential loan portfolio also contains
a limited number of fixed-rate loans. The Bank has extended, and expects to
continue to extend, from time to time, fixed-rate loans to customers who prefer
a fixed rate of interest. The Bank will not originate a fixed-rate loan unless
such loan complies with the underwriting standards of the Federal Home Loan
Mortgage Corporation ("FHLMC") and the FNMA. This will give the Bank the option
of either holding such fixed-rate loans in its portfolio or selling such loans
in the secondary mortgage market.
The Bank's reliance on ARMs and balloon loans, rather than fixed-rate
mortgage loans, makes the Bank's first-mortgage residential loan portfolio more
interest-rate sensitive. However, since the interest earned on ARMs or on
balloon loans which are refinanced on a one-, three- or five-year cycle varies
with prevailing interest rates, such loans do not offer the Bank as predictable
a cash flow as do longer-term, fixed-rate loans. ARMs and balloon loans which
are subject to refinancing on a one-, three- or five-year cycle may also carry
increased credit risk as the result of the imposition of higher monthly payments
upon borrowers during periods of rising interest rates. During such periods, the
risk of default on such loans may increase, due to the upward adjustment of
interest costs to the borrower. Management has attempted to minimize such risk
by qualifying borrowers at the maximum rate of interest payable under the terms
of the ARM or the refinanced balloon loan.
The loan-to-value ratio of most single-family first-mortgage loans made
by the Bank is 80%. If the loan-to-value ratio exceeds 85%, the Bank requires
private mortgage insurance to cover the excess over 85%. If private mortgage
insurance is obtained, the mortgage is limited to 95% of the lesser of the
appraised value or purchase price. The maximum loan-to-value ratio on a loan for
the construction of a new single-family residential home is 80%, and the maximum
loan-to-value ratio on loans on two- to four-family dwellings is 75%.
The Bank requires title insurance, or an attorney's opinion as to
title, and fire and casualty insurance coverage of the property securing any
mortgage loan originated or purchased by the Bank. All of the Bank's real estate
loans contain due-on-sale clauses which provide that if the mortgagor sells,
conveys or alienates the property underlying the mortgage note, the Bank has the
right at its option to declare the note immediately due and payable without
notice.
Multi-family Residential Lending. At September 30, 1996 and 1995, the
Bank's gross loan portfolio consisted of approximately $527,000, or 1.94%, and
$535,000 or 2.73%, respectively of loans secured by multi-family residential
real estate. Multi-family real estate loans are generally limited to 70% of the
appraised value of the property or the selling price, whichever is less. Loans
secured by multi-family real estate are generally larger and, like commercial
real estate loans, involve a greater degree of risk than one- to four-family
residential loans.
<PAGE>
Commercial Real Estate Loans. The Bank has historically made commercial
real estate loans on a limited basis. At September 30, 1996 and 1995, the Bank's
commercial real estate loan portfolio amounted to $823,000, or 3.03%, and
$835,000, or 4.26%, respectively of the Bank's gross loan portfolio. The Bank's
practice has been to underwrite such loans based on its analysis of the amount
of cash flow generated by the business in which the real estate is used and the
resulting ability of the borrower to meet its payment obligations. Although such
loans are secured by a first mortgage on the underlying property, the Savings
Bank also generally seeks to obtain a personal guarantee of the loan by the
owner of the business in which the property is used.
Commercial Loans. As of September 30, 1996 and 1995, the Bank's gross
loan portfolio consisted of approximately $1,462,000 or 5.39% and $618,000, or
3.15%, respectively of commercial loans secured by accounts receivable,
inventory, farm land or outstanding stock issued by a corporation. The Bank has
also made, from time to time, unsecured personal loans to the sole proprietors
of small businesses on the same terms and conditions on which it makes other
unsecured personal loans.
Consumer Loans. The Bank originates a variety of consumer loans,
generally consisting of installment loans for the purchase of motor vehicles and
boats, loans to purchase household goods, loans secured by savings accounts at
the Bank and unsecured personal loans. At September 30, 1996 and 1995, the
Bank's portfolio of consumer loans totaled approximately $5,951,000, or 21.93%,
and $3,900,000, or 19.89%, respectively of the Bank's gross loan portfolio. The
Bank may make a loan to finance the purchase of a new and previously untitled
motor vehicle or boat in an amount equal to the lesser of 5% over the factory
invoice price or 90% of the sticker price of the motor vehicle or boat. Loans
for the purchase of used motor vehicles are limited to the amount of the
wholesale price listed for the vehicle in the National Automobile Dealers'
Association used car guide. Any loan for the purchase of a motor vehicle or boat
is secured by the purchased vehicle or boat and is written to amortize over a
maximum period of between two and five years, depending on the age of the motor
vehicle or boat offered as collateral. Loans to finance the purchase of new
household goods may be made in an amount equal to 100% of the sales price of
such goods. Such loans are secured by the goods purchase. Loans for the purchase
of household goods may be amortized for a maximum period of four years. Loans
secured by a customer's savings account with the Savings Bank are limited to an
amount equal to 90% of the amount of the deposit. A loan that is secured by a
deposit with a specific maturity date is written with a term matching the
maturity date of the deposit. Unsecured personal loans are limited to $15,000
per borrower and to a term of three to five years. As a practical matter, most
such loans do not exceed $10,000 and are amortized over a period of three years.
Loan Processing. Upon receipt of a completed loan application from a
prospective borrower, the Savings Bank obtains a credit report from a credit
reporting agency and, depending on the type of loan, verifies employment, income
and other financial information received from the prospective borrower and
requests additional financial information, if necessary. If a loan in the amount
of $50,000 or more is secured by real estate, the Bank requires an independent
appraisal of the real estate. Real estate securing a loan of $50,000 or less is
appraised only by the Bank's internal appraisal committee. Once such information
and appraisals are complete, the application is submitted for underwriting by
designated staff. The application, together with the underwriter's
recommendations, is then forwarded for review and action to the President of the
Bank, the Loan Committee of the Board of Directors, or the Board of Directors as
a whole, depending on the size and nature of the loan.
The Board of Directors of the Bank has established the following
guidelines for loan approval authority for all loans originated by the Bank: (i)
any lending officer of the Bank may approve loans up to $75,000, (ii) the Bank's
President may approve loans up to $125,000, (iii) the Loan Committee of the
Board of Directors may approve loans up to $300,000, and (iv) the Board of
Directors may approve any loan in excess of $300,000 up to the Bank's applicable
legal lending limit.
<PAGE>
Loan Purchases and Sales. The Bank has occasionally purchased loans
originated by other financial institutions, secured by one- to four-family
residential properties or commercial real estate located outside of its primary
market area. At September 30, 1996 and 1995, the total balance outstanding on
first mortgage loans purchased by the Bank was $653,000 and $703,000,
respectively. At September 30, 1996 and 1995, the Bank did not have any loans
held as available for sale. Historically, the Bank has not sold any of its loans
into the secondary market.
Delinquencies
The Bank's collection procedures with respect to delinquent loans
include written notice of delinquency contact by letter or telephone by Bank
personnel. Most loan delinquencies are cured within 90 days and no legal action
is taken. With respect to mortgage loans, if the delinquency exceeds 180 days,
and in the case of consumer loans, if the delinquency exceeds 90 days, the Bank
institutes measure to enforce its remedies resulting from the default, including
the commencement of foreclosure action of the repossession of collateral.
At September 30, 1996, delinquencies in the Bank's loan portfolio were
as follows:
At September 30, 1996
---------------------------------------------------
90 Days Total
30-89 Days(1) or More (1) Delinquent Loans
---------------- ---------------- ----------------
Number Principal Number Principal Number Principal
of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans Of Loans
---------------------------------------------------
(Dollars in Thousands)
Real estate loans ....... 11 $363 5 $115 16 $478
Commercial loans ........ -- -- 1 1 1 1
Consumer loans .......... 18 119 6 27 24 146
------------------------------------------------
Total .............. 29 $482 12 $143 41 $625
================================================
Delinquent loans to
to gross loans ....... 1.78% 0.53% 2.31%
===== ===== =====
<PAGE>
At September 30, 1995, delinquencies in the Bank's loan portfolio were
as follows:
At September 30, 1995
---------------------------------------------------
90 Days Total
30-89 Days (1) Or More (1) Delinquent Loans
---------------- ---------------- ----------------
Number Principal Number Principal Number Principal
of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans
---------------------------------------------------
(Dollars in Thousands)
Real estate loans ........... 3 $44 7 $213 10 $257
Commercial loans ............ -- -- 1 34 1 34
Consumer loans .............. 1 6 6 114 7 120
------------------------------------------------
Total .................. 4 $50 14 $361 18 $411
================================================
Delinquent loans to
to gross loans ........... 0.26% 1.84% 2.10%
===== ===== =====
(1) The Bank discontinues the accrual of interest on loans when the
borrower is delinquent as to a contractually due principal or interest
payment and the Bank's management deems collection to be unlikely. The
number of loans and principal balance includes nonaccrual loans.
Nonperforming Assets
The Bank places loans that are 90 days or more past due on nonaccrual
status unless such loans are adequately collateralized and in the process of
collection. Accrual of interest on a nonaccrual loan is resumed only when all
contractually past due payments are brought current and management believes that
the outstanding loan principal and contractually due interest are no longer
doubtful of collection.
Foreclosed properties are recorded at the fair value at the date of
foreclosure. Any subsequent reduction in the fair value of a foreclosed
property, along with expenses to maintain or dispose of a foreclosed property,
is charged against current earnings. As of September 30, 1996 and 1995, the Bank
had no foreclosed properties or "real estate owned."
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets for the periods indicated.
At
September 30,
--------------
1996 1995
--------------
(In Thousands)
Loans accounted for on a nonaccrual basis
One- to four-family loans .............................. $189 $198
Commercial loans ....................................... 1 34
Consumer loans ......................................... 45 103
--------------
Total nonaccrual loans ............................ $235 $335
--------------
Accruing loans which are contractually past due 90 days or more:
One- to four-family loans .............................. 15 15
Consumer loans ......................................... 2 11
-------------
Total 90 days past due and accruing interest ..... 17 26
-------------
Total nonaccrual and 90 days past due loans ....... 252 361
Real estate owned -- --
-------------
Total nonperforming assets ........................ $252 $361
=============
Total nonperforming assets to total assets ........ 0.50% 0.81%
=============
Classified Assets. FDIC policies require that each insured depository
institution review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, regulatory examiners have
the authority to identify problem assets and, if appropriate, require them to be
classified. The Bank reviews and classifies its assets at least quarterly. There
are three classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets, with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values, questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continued treatment of the asset as an asset on the
books of the institution is not warranted.
An insured institution is required to establish prudent general
allowances for the loan losses with respect to assets classified as substandard
or doubtful. The institution is required either to charge off assets classified
as loss or to establish a specific allowance for 100% of the portion of the
asset classified as loss.
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information available to management at such time. While management
believes the Bank's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that the
Bank's level of allowance for loan losses will be sufficient to cover future
loan losses incurred by the Bank or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. The allowance is
based upon a number of factors, including asset classifications, economic
trends, industry experience and trends, industry and geographic concentrations,
estimated collateral values, management's assessments of the credit risk
inherent in the portfolio, historical loan loss experience, and the Bank's
underwriting policies. As of September 30, 1996 and 1995, the Bank's allowance
for loan losses was 0.43% and 0.58%, respectively, of total loans. The Bank will
continue to monitor and modify its allowance for loan losses as conditions
dictate. Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's valuation allowance. These agencies may
require the Bank to establish additional valuation allowances, based on their
judgments of the information available at the time of the examination.
It is the policy of the Bank to charge off customer loans when it is
determined that they are no longer collectible. The policy for loans secured by
real estate, which comprise the bulk of the Bank's portfolio, is to establish
loss reserves in accordance with the Bank's loan classification process, based
on generally accepted accounting practices. It is the policy of the Bank to
obtain an appraisal on all real estate acquired through foreclosure at the time
of foreclosure.
The following table sets forth activity in the Bank's allowance for
loan losses for the periods set forth in the table.
Year Ended
September 30,
--------------
1996 1995
--------------
(In Thousands)
Balance at beginning of period ................................ $113 $ 99
Provision for loan losses ..................................... 64 80
Recoveries:
Consumer loans ........................................... 10 4
-------------
Total recoveries .................................... 10 4
-------------
Charge-offs:
One- to four-family loans ................................ -- 5
Consumer loans ........................................... 48 65
Commercial ............................................... 22 --
-------------
Total charge-offs ................................... 70 70
-------------
Net charge-offs ..................................... (60) (66)
-------------
Balance at end of period ...................................... $117 $113
=============
Ratio of allowance for loan losses to gross loans outstanding
at the end of the period ................................. 0.43% 0.58%
Ratio of net charge offs to average loans outstanding during
the period ............................................... 0.27% 0.36%
Ratio of allowance for loan losses to total nonperforming
assets at the end of the period .......................... 46.43% 31.30%
===============
<PAGE>
The following table sets forth the Bank's allocation of the allowance
for loan losses by category and the percent of the allocated allowance to the
total allowance for each specific loan category. The portion of the allowance
for loan losses allocated to each loan category does not represent the total
available for future losses which may occur within the loan category since the
total allowance for loan losses is a valuation reserve to the entire loan
portfolio.
<TABLE>
At September 30,
----------------------------------------------------------------------------------
1996 1995
------------------------------------- -----------------------------------------
As % Of As % of As % of As % of
Gross Loans in Gross Loans in
Loans in Category to Loans in Category to
Amount Category Gross Loans Amount Category Gross Loans
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage Loans:
One- to four-family .................. $ 10 0.05% 63.69% $ 25 0.19% 66.72%
Multi-family ......................... -- -- 1.94% -- -- 2.73%
Commercial real estate ............... -- -- 3.03% -- -- 4.26%
Other loans .......................... --
secured by
real estate ....................... -- -- 4.02% -- -- 3.25%
-------------------------------------------------------------------------------
Total morgage loans ............ 10 0.05% 72.68% 25 0.17% 76.96%
-------------------------------------------------------------------------------
Commercial and
Consumer Loans:
Commercial ........................ 26 1.78% 5.39% 22 3.56% 3.15%
Consumer .......................... 41 0.88% 17.09% 35 1.05% 16.95%
Home equity lines of credit ....... -- -- 3.68% -- -- 0.09%
Other consumer loans .............. -- -- 1.16% -- -- 2.85%
-------------------------------------------------------------------------------
Total commercial and
consumer loans ........... 67 0.90% 27.32% 57 1.26% 23.04%
-------------------------------------------------------------------------------
Total Allocated ......................... 77 0.28% 100.00% 82 0.42% 100.00%
======= =======
Unallocated ............................. 40 0.15% 31 0.16%
---------------------- ----------------------
Total allowance for loan losses ......... $117 0.43% $113 0.58%
====================== ======================
</TABLE>
<PAGE>
Investment Activities
The investment policies of the Company and the Bank, as established by
the respective Board of Directors, attempts to provide and maintain liquidity,
generate a favorable return on investments without incurring undue interest rate
and credit risk and complement the Company's lending activities. The investment
policies generally limit investments to government and federal agency-backed
securities and other non-government guaranteed securities, including corporate
debt obligations, that are investment grade. The investment policies provide
authority to invest in U.S. Treasury and U.S. Government guaranteed securities,
securities backed by federal agencies such as Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the
Federal Farm Credit Bureau ("FFCB"), mortgage-backed securities with maximum
maturities of 20 years which are backed by federal agency securities,
obligations of state and political subdivisions with at least an "A" rating,
certificates of deposit and securities issued by mutual funds which invest in
securities consistent with the Company's or Bank's allocable investments. The
investment policies provide that the President is authorized to execute all
transactions within specified limits which are reviewed by the Board of
Directors on a monthly basis. From time to time, the Board of Directors may
authorize the President to exceed the policy limitations. The Bank's Interest
Rate Risk Committee monitors compliance with the Bank's investment policy and
generally meets on a quarterly basis.
At September 30, 1996, the Company had $16.2 million in investment securities
consisting of $1.8 million invested in mortgage-backed securities, $13.4 million
invested in U.S. Government and agency, $752,000 invested in local municipal
securities, and $165,000 invested in FHLB stock. Investments in mortgage-backed
securities involve a risk that actual prepayments will exceed prepayments
estimated over the life of the security which may result in a loss of any
premium paid for such instruments thereby reducing the net yield on such
securities. In addition, if interest rates increase the market value of such
securities may be adversely affected, which, in turn, would adversely affect
stockholders' equity to the extent such securities are held as available for
sale.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators through intermediaries
(generally federal government-sponsored enterprises) that pool and repackage the
participation interest in the form of securities to investors such as the Bank.
Such federal government-sponsored enterprises, which guarantee the payment of
principal and interest to investors, include the FHLMC, FNMA and GNMA.
Mortgage-backed securities generally increase the quality of the Bank's assets
by virtue of the guarantees that back them. They are also more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Bank. The Bank has no investments in collateralized mortgage
obligations or real estate investment conduits. The Bank holds all
mortgage-backed securities as available for sale.
<PAGE>
The following tables set forth certain information regarding the
amortized cost and market values of the Company's securities at the dates
indicated.
<TABLE>
At September 30,
-------------------------------------
1996 1995
-------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------------
<S> <C> <C> <C> <C>
Available for Sale (In Thousands)
U.S. Government and agency securities .......... $13,477 $13,441 $ 2,000 $ 2,026
Obligations of states and political subdivisions 606 603 -- --
------------------------------------
Total Available for Sale ................. $14,083 $14,044 $ 2,000 $ 2,026
====================================
</TABLE>
<TABLE>
At September 30,
------------------------------------
1996 1995
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity (In Thousands)
U.S. Government and agency securities .......... $ - $ - $8,479 $ 8,455
Obligations of states and political subdivisions 149 143 165 169
Mortgage backed securities ..................... 1,838 1,948 2,335 2,517
----------------------------------
Total Held to Maturity ................... $1,987 $2,091 $10,979 $11,141
==================================
</TABLE>
<PAGE>
The following table sets forth information concerning the carrying value,
weighted average yields, and maturities of the Company's investment securities
at September 30, 1996.
<TABLE>
Less One
Than One Year To Five Years Five to Ten Years Over Ten Years Total
--------------- ---------------- -------------------- ---------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average Fair Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----------------------------------------------------------------------------------------------
Available for Sale (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
securities ..................... $ 6,020 6.06% $6,421 5.62% $ -- - $1,000 7.37% $13,441 5.95%
Obligations of states and
political subdivisions (2) .... -- -- -- -- 506 4.91% 97 4.70% 603 4.88%
----------------------------------------------------------------------------------------------
Total Available for Sale ......... $ 6,020 6.06% $6,421 5.62% $ 506 4.91% $1,097 7.13% $14,044 5.90%
==============================================================================================
</TABLE>
<TABLE>
Less
Than One Year One to Five Years Five to Ten Years Over Ten Years Total
------------------ ------------------- ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity (1)
Obligations of states and
political subdivisions (2) $ - - $ - - $ 41 5.30% $ 108 5.90% $ 149 5.73%
--------------------------------------------------------------------------------------------------
Total Held to Maturity $ - - $ - - $ 41 5.30% $ 108 5.90% $ 149 5.73%
==================================================================================================
<FN>
(1) Excludes mortgage-backed securities.
(2) These investments yield lower interest rates as they are exempt from
federal taxes.
</FN>
</TABLE>
<PAGE>
Deposit Activities and Other Sources of Funds
General. The Company's primary sources of funds for use in lending and
investing and for other general purposes are deposits at the Bank and proceeds
from principal and interest payments on loans, mortgage-backed securities and
investment securities. Contractual loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources.
Deposit Accounts. The Bank attracts deposits within its primary market
area by offering a variety of deposit accounts, including noninterest bearing
checking accounts, negotiable order of withdrawal ("NOW") accounts, money-market
accounts, passbook savings accounts and certificates of deposit. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates, and competition. Management
generally reviews on a weekly basis the interest rates set for its deposit
accounts. The Bank also relies on customer service and long-standing
relationships with customers to attract and retain deposits.
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal rates on each
category of deposits presented.
<TABLE>
At September 30,
----------------------------------------------------------------
1996 1995
------------------------------ ----------------------------
Percent of Weighted Percent of Weighted
Average Average Average Average
Average Total Nominal Average Total Nominal
Balance Deposits Rate Balance Deposits Rate
----------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Noninterest bearing $ 19 0.06% - $ 15 0.05% -
Interest-bearing (NOW) 4,393 14.83% 1.73% 3,720 13.06% 1.77%
Money market 1,918 6.48% 3.34% 2,698 9.48% 3.11%
Passbook 2,952 9.97% 3.08% 3,335 11.71% 2.49%
Certificates of deposit 20,333 68.66% 5.26% 18,701 65.70% 5.16%
----------------------------------------------------------------
Total deposit accounts $29,615 100.00% 4.40% $28,469 100.00% 4.21%
================================================================
</TABLE>
The following table indicates the amount of the Bank's jumbo
certificates of deposit and other time deposits of $100,000 or more by time
remaining until maturity as of September 30, 1996. Jumbo certificates of deposit
require minimum deposits of $100,000 and rates paid on such accounts are
negotiable.
Certificates
Maturity Period of
Deposits
- -------------------------------------------------
(In Thousands)
Less than three months $ 491
Three through six months 731
Six through twelve months -
Over twelve months 667
-------
Total $ 1,889
=======
<PAGE>
Borrowings. The Bank may rely on advances from the FHLB of Chicago in
the event of a reduction in available funds from other sources. The Bank is a
member of the FHLB of Chicago, which functions as a central reserve bank
providing credit for savings and loan associations and other member financial
institutions. As a member, the Bank is required to own capital stock in the FHLB
of Chicago and is authorized to apply for advances on the security of such stock
and certain of its mortgage-based loans and other assets, provided that certain
standards relating to creditworthiness have been met. The Bank has borrowed from
the FHLB of Chicago, from time to time, on an overnight basis. At September 30,
1996 and 1995, the Bank had no outstanding borrowings from the FHLB.
Subsidiary Activities
The Bank has one wholly-owned service corporation, Centralia SLA, an
Illinois corporation. Centralia SLA is engaged in the business of selling
mortgage life, mortgage disability, credit life and credit disability insurance
to mortgage and consumer loan customers of the Bank interested in buying such
insurance. As of September 30, 1996, the Bank's investment in Centralia SLA
amounted to approximately $13,000 or 0.03% of the Bank's total assets. Insurance
commissions accounted for $9,000 or approximately 2.0% of the Bank's pre-tax
income during the year. Management continues to place less emphasis on the sale
of insurance and anticipates that the amount of such income will continue to
decline over the next few years.
Competition
The Bank's deposit and lending base is presently concentrated in the
city of Centralia and the surrounding area, including Central City to the north,
Wamac to the South, Salem to the east and Hoffman to the west. This area
includes portions of the Illinois counties of Washington, Jefferson, Marion and
Clinton, which are primarily agricultural. Population growth in those four
counties has remained relatively flat in recent years. Management believes that,
in recent years, total deposits have grown only modestly and there has been
relatively little new construction or real estate development in the four-county
area. Management further believes that, as a result, any growth in the mortgage
lending business within the area has also been modest.
The Bank has five principal competitors for deposits and lending
business within the city of Centralia. All five competitors are branches or
subsidiaries of commercial banks. Of these five competitors, two are affiliated
with multi-bank holding companies based in St. Louis, one is affiliated with a
regional bank based in St. Louis, and the remaining two are branches of
independent, community banks which have their main offices in the neighboring
towns of Hoffman and Irvington. Each of the three St. Louis-based banks with
affiliates in Centralia have established those branches during the last five
years through the acquisition of formerly independent community banks. The
multi-bank holding companies and regional bank have substantially greater
financial resources and currently offer a larger array of financial services
than the Bank. Each of the independent banks also has a slightly larger asset
base than the Bank.
Given the relative lack of growth in its market area and the number and
greater resources of the banks with which it competes, the Bank has experienced,
and expects to continue to experience, strong competition in attracting deposits
and in its mortgage and consumer loan business. In order to retain existing and
attract new deposits, the Bank has historically paid deposit rates at the higher
end of the range offered by its competitors. All of the Bank's principal
competitors in Centralia are, moreover, branches or subsidiaries of commercial
banks with deposits insured under the BIF. Unlike the Bank, such competitors are
able to take advantage of the reduction in the insurance premiums to be paid on
BIF-insured deposits.
Management also believes that, in order to compete effectively for both
deposits and lending business, the Bank must enhance the retail services it
offers, so that its range of services is more comparable to the range offered by
its larger competitors. In providing such services, management hopes to be able
to capitalize on the Bank's ability, as a community bank, to identify and
respond more quickly to local customer needs. The Bank has expanded the retail
services it offers to customers to include, for example, travelers' checks,
money orders, debit cards and ATM services.
<PAGE>
Personnel
As of September 30, 1996, the Company had a total of fourteen full-time
employees and two part-time employees, all of whom were employed at the Bank
level. The Company's employees are not represented by a union or collective
bargaining group. The Company considers its relationship with its employees to
be satisfactory.
Regulation
General
Financial institutions and their holding companies are extensively
regulated under federal and state law by various regulatory authorities
including the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"), the FDIC and the Commissioner. The financial performance of the
Company and the Savings Bank may be affected by such regulation, although the
extent to which they may be affected cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to
financial institutions and their holding companies regulate, among other things,
the scope of business, investments, reserves against deposits, capital levels
relative to operations, the nature and amount of collateral for loans, the
establishment of branches, mergers, consolidations and dividends. The system of
supervision and regulation applicable to the Company and the Savings Bank
establishes a comprehensive framework for their operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors of the Savings Bank, rather than the stockholders of the Company.
The following references to material statutes and regulations affecting
the Company and the Bank are brief summaries thereof and are qualified in their
entirety by reference to such statutes and regulations. Any change in applicable
law or regulations may have a material effect on the business of the Company and
the Bank.
The Savings Bank
General. The Bank is an Illinois-chartered savings bank, the deposit
accounts of which are insured by the SAIF of the FDIC. As a SAIF-insured,
Illinois-chartered savings bank, the Bank is subject to the examination,
supervision, reporting and enforcement requirements of the Commissioner, as the
chartering authority for Illinois savings banks, and the FDIC, as administrator
of the SAIF, and to the statutes and regulations administered by the
Commissioner and the FDIC governing such matters as capital standards, mergers,
establishment of branch offices, subsidiary investments and activities and
general investment authority. The Bank is required to file reports with the
Commissioner and the FDIC concerning its activities and financial condition and
will be required to obtain regulatory approvals prior to entering into certain
transactions, including mergers with, or acquisitions of, other financial
institutions.
The Commissioner and the FDIC have extensive enforcement authority over
Illinois-chartered savings banks, such as the Bank. This enforcement authority
includes, among other things, the ability to issue cease-and-desist or removal
orders, to assess civil money penalties and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe and unsound practices.
The Commissioner has established a schedule for the assessment of
"supervisory fees" upon all Illinois savings banks to fund the operations of the
Commissioner. These supervisory fees are computed on the basis of each savings
bank's total assets (including consolidated subsidiaries) and are payable at the
end of each calendar quarter. A schedule of fees has also been established for
certain filings made by Illinois savings banks with the Commissioner. The
Commissioner also assesses fees for examinations conducted by the Commissioner's
staff, based upon the number of hours spent by the Commissioner's staff
performing the examination.
<PAGE>
The system of regulation and supervision applicable to the Bank
establishes a comprehensive framework for its operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors of the Bank. Changes in the regulatory framework could have a
material adverse effect on the Bank and its operations which, in turn, could
have a material adverse effect on the Company.
Deposit Insurance Premiums
Recent Developments Affecting Deposit Insurance Premiums. Deposits of
the Bank are currently insured by the FDIC under the SAIF. The FDIC also
maintains another insurance fund, the BIF, which primarily insures commercial
bank and some state savings bank deposits. Applicable law requires that the SAIF
and BIF funds each achieve and maintain a ratio of insurance reserves to total
insured deposits equal to 1.25%. In 1995, the BIF reached this 1.25% reserve
level, and the FDIC announced a reduction in BIF premiums for most banks. Based
on this reduction, the highest rated institutions (approximately 92 percent of
the nearly 11,000 BIF-insured banks) will pay the statutory annual minimum of
$2,000 for FDIC insurance. Rates for all other institutions were reduced to $.04
per $100 as well, leaving a premium range of $.03 to $.27 per $100 instead of
the previous $.04 to $.31 per $100. Currently, SAIF-member institutions pay
deposit insurance premiums based on a schedule of $0.23 to $0.31 per $100 of
deposits.
Effective September 30, 1996, legislation was enacted to fund the
Savings Association Insurance Fund (SAIF) by assessing SAIF insured institutions
a one-time special assessment of 65.7 basis points on March 31, 1995 deposits.
The assessment for the Bank is $188,000 as of September 30, 1996.
Additionally, as part of the purchase agreement with Kankakee Federal Savings
and Loan (Kankakee), the Company agreed to reimburse Kankakee for the portion of
Kankakee's assessment which related to the Carlyle, Illinois branch which was
approximately $54,000.
The $242,000 assessment payable is included in other liabilities. The
assessment for the Bank is not deductible for tax purposes until paid,
therefore, deferred tax assets of $94,000 have been provided for the tax impact
of the assessment.
Capital Requirements. Under the Illinois Savings Bank Act ("ISBA") and
the regulations of the Commissioner, an Illinois savings bank must maintain a
minimum level of total capital equal to the higher of 4% of total assets or the
amount required to maintain insurance of deposits by the FDIC. The Commissioner
has the authority to require an Illinois savings bank to maintain a higher level
of capital if the Commissioner deems such higher level necessary based on the
savings bank's financial condition, history, management or earnings prospects.
FDIC-insured institutions are required to follow certain capital
adequacy guidelines which prescribe minimum levels of capital and require that
institutions meet certain risk-based and leverage capital requirements. Under
the FDIC capital regulations, an FDIC-insured institution is required to meet
the following capital standards: (i) "Tier 1 capital" in an amount not less than
4% of average adjusted total assets; (ii) "Tier 1 capital" in an amount not less
than 4% of risk-weighted assets; and (iii) "total capital" in an amount not less
than 8% of risk-weighted assets.
FDIC-insured institutions in the strongest financial and managerial
condition (with a composite rating of "1" under the Uniform Financial
Institutions Rating System established by the Federal Financial Institutions
Examination Council) are required to maintain "Tier 1 capital" equal to at least
4% of total assets (the "leverage limit" requirement). For all other
FDIC-insured institutions, the minimum leverage limit requirement is 3% of total
assets plus at least an additional 100 to 200 basis points. Tier 1 capital is
defined to include the sum of common stockholders' equity, noncumulative
perpetual preferred stock (including any related surplus), and minority
interests in consolidated subsidiaries, less all intangible assets (other than
qualifying servicing rights, qualifying purchased credit-card relationships and
qualifying supervisory goodwill), certain identified losses (as defined in the
FDIC's regulations) and investments in certain subsidiaries.
<PAGE>
FDIC-insured institutions also are required to adhere to certain
risk-based capital guidelines which are designed to provide a measure of capital
more sensitive to the risk profiles of individual banks. Under the risk-based
capital guidelines, capital is divided into two tiers: core (Tier 1) capital, as
defined above, and supplementary (Tier 2) capital. Tier 2 capital is limited to
100% of core capital and includes cumulative perpetual preferred stock,
perpetual preferred stock for which the dividend rate is reset periodically
based on current credit standing, regardless of whether dividends are cumulative
or noncumulative, mandatory convertible securities, subordinated debt,
intermediate preferred stock and the allowance for possible loan and lease
losses. The allowance for possible loan and lease losses includable in Tier 2
capital is limited to a maximum of 1.25% of risk-weighted assets. Total capital
is the sum of Tier 1 and Tier 2 capital. The risk-based capital framework
assigns balance sheet assets to one of four broad risk categories which are
assigned risk-weights ranging from 0% to 100% based primarily on the degree of
credit risk associated with the obligor. Off-balance sheet items are converted
to an on-balance sheet "credit equivalent" amount utilizing certain conversion
factors. The sum of the four risk-weighted categories equals risk-weighted
assets. The following table presents the Bank's capital position relative to its
capital requirements on September 30, 1996.
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30,
1996:
Total Capital (to
Risk Weighted
Assets)
Consolidated $ 12,925,000 60.30% $ 1,715,000 = 8.0% N/A
Centralia
Savings
Bank $ 8,742,000 42.18% $ 1,658,000 = 8.0%= $ 2,072,000 = 10.0%
Tier I Capital (to
Risk Weighted
Assets)
Consolidated $ 12,087,000 56.39% $ 857,000 = 4.0% $ N/A
Centralia
Savings
Bank $ 7,903,000 38.14% = $ 829,000 = 4.0% = $ 1,243,000 = 6.0%
Tier I Capital (to
Average Assets)
Consolidated $ 12,087,000 27.72% $ 1,744,000 = 4.0% $ N/A
Centralia
Savings
Bank $ 7,903,000 19.67% = $ 1,607,000 = 4.0% = $ 2,009,000 = 5.0%
</TABLE>
<PAGE>
Dividends. Under the ISBA, dividends may be paid by the Bank out of its
net profits (i.e., earnings from current operations, investments and other
assets plus actual recoveries on loans, net of current expenses including
dividends or interest on deposits, additions to reserves as required by the
Commissioner, actual losses, accrued dividends on preferred stock, if any, and
all state and federal taxes). The written approval of the Commissioner must be
obtained, however, before the Bank may declare dividends in any calendar year in
an amount in excess of 50% of its net profits for that calendar year. In
addition, before declaring a dividend on its capital stock, the Bank must
transfer no less than one-half of its net profits of the preceding half year to
its paid-in surplus until it shall have paid-in surplus equal to 20% of its
capital stock. Finally, the Bank will be unable to pay dividends in an amount
which would reduce its capital below the greater of (i) the amount required by
the FDIC, (ii) the amount required by the Commissioner or (iii) the amount
required for the liquidation account to be established by the Bank in connection
with the Conversion. The Commissioner and the FDIC also have the authority to
prohibit the payment of any dividends by the Savings Bank if the Commissioner or
the FDIC determines that the distribution would constitute an unsafe or unsound
practice. For the fiscal year ended September 30, 1996, the Bank's net profits
were approximately $175,000 and the Savings Bank could have paid dividends
totaling $87,500 without the written approval of the Commissioner.
Community Reinvestment Act Requirements. The FDIC, the Federal Reserve
Board, the Office of Thrift Supervision ("OTS") and the Office of the
Comptroller of the Currency ("OCC") have jointly issued a final rule (the "Final
Rule") under the Community Reinvestment Act (the "CRA"). The Final Rule
eliminates the existing CRA regulation's twelve assessment factors and
substitutes a performance based evaluation system. The Final Rule will be phased
in over a period of time and become fully effective by July 1, 1997.
Under the Final Rule, an institution's performance in meeting the
credit needs of its entire community, including low- and moderate-income areas,
as required by the CRA, will generally be evaluated under three tests: the
"lending test," the "investment test," and the "service test." However, an
independent financial institution with assets of less than $250 million, or a
financial institution with assets of less than $250 million that is a subsidiary
of a holding company with assets of less than $1 billion, will be evaluated
under a streamlined assessment method based primarily on its lending record. The
streamlined test considers an institution's loan-to-deposit ratio adjusted for
seasonal variation and special lending activities, its percentage of loans and
other lending related activities in the assessment area, its record of lending
to borrowers of different income levels and businesses and farms of different
sizes, the geographic distribution of its loans, and its record of taking
action, if warranted, in response to written complaints. In lieu of being
evaluated under the three assessment tests or the streamlined test, a financial
institution can adopt a "strategic plan" and elect to be evaluated on the basis
of achieving the goals and benchmarks outlined in the strategic plan. Based upon
a review of the Final Rule, management of the Company does not anticipate that
the new CRA regulations will adversely affect the Savings Bank.
The Company
General. On October 5, 1995, the Company became the sole stockholder of
the Bank. As such, the Company is a bank holding company. As a bank holding
company, the Company is subject to regulation by the Federal Reserve Board under
the Bank Holding Company Act (BHCA). In accordance with Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances where the
Company might not do so absent such policy. Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve Board and is required to
file periodic reports of its operations and such additional information as the
Federal Reserve Board may require. Because the Bank is chartered under Illinois
law, the Company is also subject to registration with, and regulation by, the
Commissioner under the ISBA.
<PAGE>
The BHCA requires prior Federal Reserve Board approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than five percent of the voting shares or
substantially all the assets of any bank, or for a merger or consolidation of a
bank holding company with another bank holding company. With certain exceptions,
the BHCA prohibits a bank holding company from acquiring direct or indirect
ownership or control of voting shares of any company which is not a bank or bank
holding company and from engaging directly or indirectly in any activity other
than banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve Board has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
A bank holding company is a legal entity separate and distinct from its
subsidiary bank or banks. Normally, the major source of a holding company's
revenue is dividends a holding company receives from its subsidiary banks. The
right of a bank holding company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon their liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations for
federal funds purchased and securities sold under repurchase agreements, as well
as deposit liabilities. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, in the event of a loss suffered by the FDIC in
connection with a banking subsidiary of a bank holding company (whether due to a
default or the provision of FDIC assistance), other banking subsidiaries of the
holding company could be assessed for such loss.
Federal laws limit the transfer of funds by a subsidiary bank to its
holding company in the form of loans or extensions of credit, investments or
purchases of assets. Transfers of this kind are limited to ten percent of a
bank's capital and surplus with respect to each affiliate and to twenty percent
to all affiliates in the aggregate, and are also subject to certain collateral
requirements. These transactions, as well as other transactions between a
subsidiary bank and its holding company, must also be on terms substantially the
same as, or at least as favorable as, those prevailing at the time for
comparable transactions with non-affiliated companies or, in the absence of
comparable transactions, on terms or under circumstances, including credit
standards, that would be offered to, or would apply to, non-affiliated
companies.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines for bank holding companies (on a consolidated basis)
substantially similar to those of the FDIC for the Savings Bank. The Company's
Tier 1 and total capital significantly exceed the Federal Reserve Board's
capital adequacy requirements.
Other Regulations.
FDICIA. FDICIA was enacted on December 19, 1991. In addition to
providing for the recapitalization of the Bank Insurance Fund ("BIF") of the
FDIC, FDICIA represents a comprehensive and fundamental change to banking
supervision. FDICIA imposes relatively detailed standards and mandates the
development of additional regulations governing nearly every aspect of the
operations, management and supervision of banks and bank holding companies like
the Company and the Bank.
<PAGE>
As required by FDICIA, and subsequently amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, the federal banking
regulators adopted (effective August 9, 1995) interagency guidelines
establishing standards for safety and soundness for depository institutions on
matters such as internal controls, loan documentation, credit underwriting,
interest-rate risk exposure, asset growth, and compensation and other benefits
(the "Guidelines"). In addition, the federal banking regulators have proposed
asset quality and earnings standards to be added to the Guidelines. The agencies
expect to request a compliance plan from an institution whose failure to meet
one or more of the standards is of such severity that it could threaten the safe
and sound operation of the institution. FDIC regulations enacted under FDICIA
also require all depository institutions to be examined annually by the banking
regulators and depository institutions having $500 million or more in total
assets to have an annual independent audit, an audit committee comprised solely
of outside directors, and to hire outside auditors to evaluate the institution's
internal control structure and procedures and compliance with laws and
regulations relating to safety and soundness. The FDIC, in adopting the
regulations, reiterated its belief that every depository institution, regardless
of size, should have an annual independent audit and an independent audit
committee.
FDICIA requires the banking regulators to take prompt corrective action
with respect to depository institutions that fall below certain capital levels
and prohibits any depository institution from making any capital distribution
that would cause it to be considered undercapitalized. Regulations establishing
five capital categories of well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized
became effective December 19, 1992. Institutions that are not adequately
capitalized may be subjected to a broad range of restrictions on their
activities and will be required to submit a capital restoration plan which, to
be accepted by the regulators, must be guaranteed in part by any company having
control of the institution. Only well capitalized institutions and adequately
capitalized institutions receiving a waiver from the FDIC will be permitted to
accept brokered deposits, and only those institutions eligible to accept
brokered deposits may provide pass-through deposit insurance for participants in
employee benefit plans. In other respects, FDICIA provides for enhanced
supervisory authority, including greater authority for the appointment of a
conservator or receiver for undercapitalized institutions.
A range of other regulations adopted as a result of FDICIA include
requirements applicable to closure of branches; additional disclosures to
depositors with respect to terms and interest rates applicable to deposit
accounts; requirements for the banking agencies to adopt uniform regulations for
extensions of credit secured by real estate; modification of accounting
standards to conform to generally accepted accounting principles including the
reporting of off-balance sheet items and supplemental disclosure of estimated
fair market value of assets and liabilities in financial statements filed with
the banking regulators; increased penalties in making or failing to file
assessment reports with the FDIC; greater restrictions on extensions of credit
to directors, officers and principal stockholders; and increased reporting
requirements on agricultural loans and loans to small businesses.
As required by FDICIA, the FDIC has established a risk-based assessment
system for the deposit insurance provided to depositors at depository
institutions whereby assessments to each institution are calculated upon the
probability that the insurance fund will incur a loss with respect to the
institution, the likely amount of such loss, and the revenue needs of the
insurance fund. Under the system, deposit insurance premiums are based upon an
institution's assignment to one of three capital categories and a further
assignment to one of three supervisory subcategories within each capital
category. The result is a nine category assessment system with initial
assessment rates ranging from twenty-three cents to thirty-one cents per one
hundred dollars of deposits in an institution. The classification of an
institution into a category will depend, among other things, on the results of
off-site surveillance systems, capital ratio, and CAMEL rating (a supervisory
rating of capital, asset quality, management, earnings and liquidity).
<PAGE>
The CDR Act. On September 23, 1994, the Riegle Community Development
and Regulatory Improvement Act of 1994 (the "CDR Act") was enacted. The CDR Act
includes more than 50 regulatory relief provisions designed to streamline the
regulatory process for banks and thrifts and to eliminate certain duplicative
regulations and paperwork requirements established after, and largely as a
result of, the savings and loan debacle. Well run community banks with less than
$250 million in assets will be examined every 18 months rather than annually.
The application process for forming a bank holding company has been greatly
reduced. Also, the requirement that call report data be published in local
newspapers has been eliminated.
Also, the CDR Act establishes dual programs and provides funding in the
amount of $382 million to provide for development services, lending and
investment in distressed urban and rural areas by community development
financial institutions and banks. In addition, the CDR Act includes provisions
relating to flood insurance reform, money laundering, regulation of high-cost
mortgages, and small business and commercial real estate loan securitization.
The Branching Act. On September 29, 1994, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Branching Act") was enacted.
Under the Branching Act, beginning September 29, 1995, adequately capitalized
and adequately managed bank holding companies are allowed to acquire banks
across state lines, without regard to whether the transaction is prohibited by
state law, however, they are required to maintain the acquired institutions as
separately chartered institutions. Any state law relating to the minimum age of
target banks (not to exceed five years) will be preserved. Under the Branching
Act, the Federal Reserve Board will not be permitted to approve any acquisition
if, after the acquisition, the bank holding company would control more than 10%
of the deposits of insured depository institutions nationwide or 30% or more of
the deposits in the state where the target bank is located. The Federal Reserve
Board could approve an acquisition, notwithstanding the 30% limit, if the state
waives the limit either by statute, regulation or order of the appropriate state
official.
In addition, under the Branching Act beginning on June 1, 1997, banks
will be permitted to merge with one another across state lines and thereby
create a main bank with branches in separate states. After establishing branches
in a state through an interstate merger transaction, the bank could establish
and acquire additional branches at any location in the state where any bank
involved in the merger could have established or acquired branches under
applicable federal or state law.
The responsible federal agency will not be permitted to approve any
merger if, after the merger, the resulting entity would control more than 10% of
the deposits of insured depository institutions nationwide or 30% or more of the
deposits in any state affected by the merger. The responsible agency could
approve a merger, notwithstanding the 30% limit, if the home state waives the
limit either by statute, regulation or order of the appropriate state official.
Under the Branching Act, states may adopt legislation permitting
interstate mergers before June 1, 1997. In contrast, states may adopt
legislation before June 1, 1997, subject to certain conditions, opting out of
interstate branching. If a state opts out of interstate branching, no
out-of-state bank may establish a branch in that state through an acquisition or
de novo, and a bank whose home state opts out may not participate in an
interstate merger transaction. Illinois has adopted legislation permitting
interstate mergers beginning on June 1, 1997.
Impact of New Accounting Standards
Accounting for mortgage servicing rights In May 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard No.
122 (Statement 122), "Accounting for Mortgage Servicing Rights." Statement 122
requires the Company to recognize as separate assets rights to service mortgage
loans for others, however those servicing rights are acquired. If the Company
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained, the Company should allocate the total cost of the mortgage loans to
mortgage servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values. The mortgage servicing rights should be
amortized in proportion to and over the period of estimated net servicing
income.
<PAGE>
Statement 122 is effective for fiscal years beginning after December
15, 1995. The Company will be required to adopt Statement 122 for the fiscal
year ending September 30, 1997. The Company believes the adoption of Statement
122 will not have a material impact on the consolidated financial statements.
Accounting for stock-based compensation In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard No.
123 (FAS 123), "Accounting for Stock-Based Compensation". FAS 123 established a
fair value based method of accounting for stock options and other equity
instruments.
FAS 123 permits the continued use of the intrinsic value method
included in Accounting Principals Board Opinion 25 (APB-25), "Accounting for
Stock Issued to Employees", but regardless of the method used to account for the
compensation cost associated with stock option or similar plans, it requires
employers to disclose information required by FAS 123.
The Company plans to adopt the disclosure requirements of FAS 123. The
disclosure requirement of FAS 123 is effective for fiscal years beginning after
December 15, 1995. The Company will be required to include these disclosures in
their financial statements for the year ended September 30, 1997.
Accounting for transfers and servicing of financial assets and
extinguishments of liabilities In June 1996, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 125 (FAS 125),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities".
FAS 125 requires that an entity should only recognize those assets that
it controls and liabilities it has incurred. Assets should be recognized until
control has been surrendered, and liabilities should be recognized until they
have been extinguished. Recognition of financial assets and liabilities will not
be affected by the sequence of transactions unless the effect of the
transactions is to maintain effective control over a transferred financial
asset.
FAS 125 is effective for transactions after December 31, 1996. The
Company believes the adoption of FAS 125 will not have a material effect on the
consolidated financial statements.
Reclassifications Certain reclassifications have been made to the
balances as of September 30, 1995, with no effect on net income, to be
consistent with the classifications adopted for September 30, 1996.
Executive Officers of the Registrant
The following table sets forth certain information as of September 30,
1996 with respect to the executive officers of the Company and the Savings Bank.
Name Age Position
- ------------------ --- ----------------------------------------
K. Gary Reynolds 45 President and Chief Executive Officer of
the Company and the Savings Bank
Stephen J. Greene 38 Vice President of the Savings Bank
K. Gary Reynolds has been the president and chief executive officer of
the Savings Bank since May, 1994 and the president and chief executive officer
of the Company since its formation. Prior to that time, he was an examiner with
the OCC.
Stephen J. Greene has been a vice president of the Savings Bank since
January, 1995. Mr. Greene was an examiner with the OCC from November, 1993 to
December, 1994. Prior to that time, he was a vice president of Mercantile Bank
of Centralia, N.A. where his responsibilities included managing a $25 million
loan portfolio consisting of residential real estate loans and consumer loans.
<PAGE>
Item 2. Description of Property
The following table sets forth information concerning the main office
and the branch office of the Bank, at September 30, 1996. At September 30, 1996,
the Company's premises had an aggregate net book value of approximately
$347,000.
Lease
Expiration Net Book
Location Year Opened Owned/Leased Date Value
- --------------------------------------------------------------------------------
(In
Thousands)
Main office
200 South Poplar Street 1975 Owned N/A $107
Centralia, Illinois
Branch office
801 12th Street 1996 (1) Owned N/A 240
Carlyle, Illinois ----
$347
====
(1) The Carlyle branch was purchased during September 1996. The branch's
original opening date was 1989.
Item 3. Legal Proceedings
The Company is, from time to time, a party to legal proceedings arising
in the ordinary course of its business, including legal proceedings to enforce
its rights against borrowers. The Company is not currently a party to any legal
proceedings which could reasonably be expected to have a material adverse effect
on the consolidated financial condition or operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1996.
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Information relating to the market for Registrant's common stock and
related stockholder matters appears under "Shareholder Information" in the 1996
Annual Report and is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
The above captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1996 Annual Report to Stockholders and is incorporated herein by reference.
Item 7. Financial Statements
The consolidated financial statements of CSB Financial Group, Inc. and
subsidiary as of September 30, 1996 and 1995, together with the report of
McGladrey & Pullen, LLP appears in the 1996 Annual Report to Stockholders and is
incorporated herein by reference.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company hereby incorporates by reference the information called for
by item 8 of Form 10KSB from the Form 8-K dated April 17, 1996 filed by the
Company with the SEC in connection with the dismissal of Larsson, Woodyard &
Henson, LLP as the Company's independent auditors and the engagement of
McGladrey & Pullen, LLP as the Company's independent auditors for the fiscal
year ending December 31, 1996.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information relating to directors and executive officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on January 10, 1997.
Item 10. Executive Compensation
The information relating to executive compensation is incorporated
herein by reference to the Registrant's Proxy Statement for the Annual Meeting
of Stockholders to be held on January 10, 1997.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on January 10,
1997.
Item 12. Certain Relationships and Related Transactions
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on January 10, 1997.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index and exhibits attached.
(b) Form 8-K
No Reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this Form 10-KSB.
Exhibit No. Exhibit
3.1 Certificate of Incorporation of CSB Financial Group, Inc.
(incorporated herein - by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form SB-2 as originally
filed on March 1, 1995, Registration No. 33-89842)
3.2 Bylaws of CSB Financial Group, Inc. (incorporated herein by
reference to - Exhibit 3.2 to the Registrant's Registration
Statement on Form SB-2 as originally filed on March 1, 1995,
Registration No. 33-89842)
4.1 Specimen Stock Certificate of CSB Financial Group, Inc.
(incorporated herein - by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-A filed on August
21, 1995, Registration No. 0-26650)
4.2 Articles IV, V, VI, XIV and XVI of CSB Financial Group, Inc.'s
Certificate - of Incorporation (see Exhibit 3.1 above)
4.3 Articles II and IV of CSB Financial Group, Inc.'s Bylaws (see
Exhibit 3.2 - above)
10.1 Centralia Savings Bank Employee Stock Ownership Plan
(incorporated herein by - by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form SB-2 as originally
filed on March 1, 1995, Registration No. 33-89842)
10.2 Credit Agreement between CSB Financial Group, Inc. and Centralia
Savings - Bank Employee Stock Ownership Plan (incorporated herein
by reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form SB-2 as originally filed on March 1, 1995,
Registration No. 33-89842)
10.3 CSB Financial Group, Inc. 1995 Stock Option and Incentive Plan
(incorporated - herein by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form SB-2 as originally
filed on March 1, 1995, Registration No. 33-89842)
10.4 CSB Financial Group, Inc. Management Development and Recognition
Plan and - and Trust Agreement (incorporated herein by reference
to Exhibit 10.4 to the Registrant's Registration Statement on
Form SB-2 as originally filed on March 1, 1995, Registration No.
33-89842)
10.5 Employment Agreement between Centralia Savings Bank and K. Gary -
Reynolds (incorporated herein by reference to Exhibit 10.5 to the
Registrant's Registration Statement on Form SB-2 as originally
filed on March 1, 1995, Registration No. 33-89842)
13.1 CSB Financial Group, Inc. 1996 Annual Report to Stockholders -
21.1 Subsidiaries of the Registrant (incorporated herein by reference
to Exhibit - 21.1 to the Registrant's Registration Statement on
Form SB-2 as originally filed on March 1, 1995, Registration No.
33-89842)
23.1 Consent of Larsson, Woodyard & Henson, LLP -
23.2 Consent of McGladrey & Pullen, LLP -
27.1 Financial Data Schedule -
99.1 Report of Larrson, Woodyard & Henson, LLP on the Registrant's
financial - statements for the fiscal year ended September 30,
1995
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CSB FINANCIAL GROUP, INC.
(Registrant)
Date: December 20, 1996
By: /s/ K. Gary Reynolds
----------------------------
K. Gary Reynolds, President,
Chief Executive Officer and
Director
In accordance with the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ K. Gary Reynolds /s/ A. John Byrne
- ----------------------------------------- ------------------------
K. Gary Reynolds, President, Chief A. John Byrne, Director
Executive Officer and Director (Principal
Executive Officer, Principal Financial Date: December 20, 1996
Officer and Principal Accounting Officer)
Date: December 20, 1996
/s/ Wesley N. Breeze /s/ Michael Donnewald
- -------------------------- ---------------------------
Wesley N. Breeze, Director Michael Donnewald, Director
Date: December 20, 1996 Date: December 20, 1996
/s/ Larry M. Irvin /s/ W. Harold Monken
- -------------------------- ----------------------------
Larry M. Irvin, Director W. Harold Monken, Director
Date: December 20, 1996 Date: December 20, 1996
----------------------------------------
BUSINESS OF THE CORPORATION
----------------------------------------
CSB Financial Group, Inc. (the "Company") was organized as a Delaware
corporation on December 12, 1994 to acquire all of the capital stock issued by
Centralia Savings Bank (the "Bank"). The Company is engaged in the business of
directing, planning and coordinating the business activities of the Bank. In the
future, the Company may acquire or organize other operating subsidiaries,
although there are no current plans or agreements to do so.
The Bank is an Illinois-chartered stock savings bank. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC")
through the Savings Association Insurance Fund (the "SAIF"). The Bank was
originally chartered in 1879 as a federally chartered savings and loan
association, merged with another savings association in the 1970's and converted
to a state-chartered savings bank on July 1, 1993 under its current name of
Centralia Savings Bank. The Bank conducts its business through its office
located at 200 South Poplar Street, Centralia, Illinois 62801, and its telephone
number is (618) 532-1918.
The Bank provides its customers with a broad range of community banking
services. The Bank is primarily engaged in the business of attracting deposits
from the general public and using such deposits to invest in oneto four-family
residential mortgage loans, and, to a lesser extent, multi-family residential,
consumer, commercial business and commercial real estate loans. In addition, the
Bank invests in U.S. Government and Agency securities, state and municipal
obligations and mortgage-backed securities.
<PAGE>
CSB FINANCIAL GROUP, INC.
200 South Poplar
Centralia, Illinois 62801
(618) 532-1918
----------------------------
PRESIDENT'S MESSAGE
----------------------------
December 20, 1996
Dear Stockholders:
This past year brought many changes to the Bank and new products and
services to our customers. In October 1995, we completed our stock offering in
connection with the Bank's conversion to the stock form of ownership and the
simultaneous formation of a bank holding company, CSB Financial Group, Inc. The
conversion raised $7.6 million in new equity capital through the issuance of
1,035,000 shares of common stock of CSB Financial Group, Inc. In February 1996,
the Bank announced its plans to purchase the full-service office of Kankakee
Federal Savings Bank located in Carlyle, Illinois. This transaction was
completed on September 13, 1996 and provided $4.9 million in new assets.
Finally, in October 1996, CSB Financial Group, Inc. announced that it was
implementing a repurchase program whereby the Company would repurchase up to
93,150 shares, or 9%, of its outstanding common stock. This repurchase program
represented an attractive use of capital relative to other investment
alternatives.
Our focus on new products and services for the consumer included a home
equity line of credit, an automated-teller machine (ATM) at the main office, a
debit card, and an approved credit card program. Each of these products and
services helps improve the visibility of the Bank and provides a service our
customers have desired from a local community bank.
During the year, our market analysis was completed and we established a
strategy for the Bank's future growth. We plan to use a portion of the
conversion proceeds to take advantage of growth opportunities as they become
available. We will emphasize new consumer products and services that will
improve or enhance the financial condition of the Bank.
The Company's net income decreased from $317,000 in 1995 to $235,000 in
1996, a 26 percent decline. A one-time special assessment of $188,000 to
recapitalize the SAIF deposit insurance fund was the key factor in the decline
in net income. The Company experienced asset growth of 12 percent to $50 million
as of September 30, 1996. It is important to note that the Company achieved the
asset growth without impairing asset quality.
We are optimistic about our future prospects. We believe the Company is
positioned in the Centralia and Carlyle markets to produce improved earnings. It
is our intention to continue to build on our strong base and continue to develop
the expertise necessary to improve earnings through increased market share.
On behalf of the board of directors, management and the staff of CSB
Financial Group, Inc., I thank you for your continued support.
Sincerely,
/s/ K. Gary Reynolds
-------------------------------------
K. Gary Reynolds
President and Chief Executive Officer
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is intended to assist the reader in understanding the financial
condition, changes in financial condition and results of operation for CSB
Financial Group, Inc. (the "Company"). The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and the
other sections contained herein.
General
On December 12, 1994, CSB Financial Group, Inc. was organized for the
purpose of acquiring all of the outstanding stock of Centralia Savings Bank (the
"Bank") upon conversion of the Bank from a mutual to a stock savings bank. The
conversion was completed on October 5, 1995. The Company sold 1,035,000 shares
of common stock in the initial stock offering at $8 per share. The Company
purchased 100% of the outstanding common stock of the Bank using 50% of the
$7,584,000 in net proceeds generated from the initial offering.
The Company conducts no significant business other than through the
Bank. The Bank has a wholly owned subsidiary, Centralia SLA, Inc., which
provides insurance services. All references to the Company include the Bank and
its subsidiary, unless otherwise indicated. References to the Company prior to
October 5, 1995 are to the Bank and Centralia SLA, Inc., on a consolidated
basis.
Comparison of Operating Results for the Fiscal Years Ended September 30, 1996
and 1995
General. The operating results of the Company depend primarily on its
net interest income, which is the difference between the interest income earned
on interest-earning assets (primarily loans, investment securities and
mortgage-backed securities) and interest expense incurred on interest-bearing
liabilities (primarily deposits). The Company's net income also is affected by
the establishment of provision for loan losses and the level of its non-interest
income, including loan fees, deposit service charges, insurance commissions,
gains and losses from the sale of assets as well as its other non-interest
expenses and provisions for income taxes.
On September 13, 1996, the Company purchased the Carlyle branch office
from Kankakee Federal Savings Bank, Kankakee, Illinois. The purchase of the
Carlyle branch was accounted for using the purchase method of accounting.
Therefore, the operating results for the branch are included in the consolidated
financial statements for the period subsequent to the acquisition date.
The Company's net income for the fiscal year ended September 30, 1996
was $235,000 as compared to $317,000 for the fiscal year ended September 30,
1995. This represents a $82,000, or 25.9%, decrease in net income.
Net Interest Income. The Company's net interest income for the fiscal
years ended September 30, 1996 and 1995 were $1,592,000 and $1,246,000,
respectively. This represents a $346,000, or 27.8%, increase in net interest
income. This is primarily due to the increase in the volume of earning assets
exceeding the increase in interest-bearing liabilities.
<PAGE>
Interest income increased $444,000, or 18.1%, from $2,449,000 for the
fiscal year ended September 30, 1995 compared to $2,893,000 for the fiscal year
ended September 30, 1996. The increase resulted primarily from a $7.8 million
increase in the average balance of the Company's interest-earning assets,
despite a 30 basis point decrease in average yields of such assets. The increase
in the average balances of interest earning assets was due to the investment of
the additional funds received from the stock conversion.
The average balance of mortgage loans increased $1.9 million combined
with the 27 basis point increase in the average yield on such loans causing a
$179,000 increase in interest income between the fiscal years. The average
balances increased for both consumer loans and investment securities by $1.6
million and $2.7 million, respectively. These increases more than offset the 40
basis point decline and 60 basis point decline in the average yield on such
earning-assets, resulting in a $120,000 increase and $92,000 increase in
interest income, respectively. The average balance of mortgage-backed securities
decreased $435,000 combined with the 40 basis point decrease in average yields
contributed to a $51,000 decrease in interest income. The increase in the
average balance of loans and investments between the fiscal years was primarily
the result of the utilization of cash received in the stock conversion. The
increases in average loan balances was also funded by interest-bearing deposits
and repayments on mortgage and consumer loans.
Interest expense increased $98,000, or 8.1%, to $1,301,000 for the
fiscal year ended September 30, 1996 from $1,203,000 for fiscal year ended
September 30, 1995. This increase primarily resulted from a 19 basis point
increase in the average cost of interest-bearing liabilities combined with a
$1.0 million increase in average balance of the Company's interest-bearing
liabilities.
Provision for Loan Losses. The Company's provision for loan losses for
the fiscal year ended September 30, 1996 was $64,000, compared to $80,000 for
the fiscal year ended September 30, 1995. Management evaluates the adequacy of
the Company's allowance for loan losses on a quarterly basis and may, based on
such review, adjust the amount of the provision for loan losses. Classified
loans are considered as part of this review.
Non-Interest Income. The Company's non-interest income for the fiscal
year ended September 30, 1996 was $61,000, as compared to $72,000 for the fiscal
year ended September 30, 1995. This represents an $11,000, or 15.3%, decrease in
non-interest income.
Non-Interest Expense. The Company's non-interest expense for the fiscal
year ended September 30, 1996 was $1,148,000, as compared to $740,000 for the
fiscal year ended September 30, 1995. The $408,000 increase in non-interest
expense is due to increased expenses related to the employee stock ownership
plan, the one-time SAIF assessment and professional fees relating to regulatory
reporting.
Compensation and Employee Benefits expense increased $55,000 to
$446,000 for the fiscal year ended September 30, 1996. This increase was
primarily due to the Company's contribution to the Employee Stock Ownership Plan
(ESOP). The consolidated financial statements reflect a charge of $92,000
relating to contributions to the ESOP. These contributions are accounted for as
compensation and employee benefits expense which will increase non-interest
expense. The Company records compensation expense related to the ESOP in
accordance with SOP 93-6. As a result, to the extent the value of the Company's
common stock appreciates, compensation expense related to the ESOP could
increase.
<PAGE>
The SAIF Deposit Insurance expense increased $191,000 to $255,000 for
the fiscal year ended September 30, 1996 as compared to $64,000 for fiscal year
ended September 30, 1995. The primary cause for the increase was the one-time
special FDIC assessment of $188,000 to recapitalize the SAIF insurance fund.
Professional fees increased $90,000 to $113,000 for fiscal year ended
September 30, 1996 from $23,000 for fiscal year ended September 30, 1995. The
primary causes for the increase were professional fees relating to regulatory
reporting and a market study for branch expansion.
Other non-interest expenses increased $64,000 to $205,000 for the
fiscal year ended September 30, 1996 as compared to $141,000 for the fiscal year
ended September 30, 1995. The primary cause for the increase were expenses
relating to the operations of the holding company.
Provision for Income Taxes. The Company's provision for income taxes
for the fiscal year ended September 30, 1996 was $206,000, as compared to
$181,000 for the fiscal year ended September 30, 1995. This represents a
$25,000, or 13.8%, increase in the provision for income taxes.
Comparison of Financial Condition as of September 30, 1996 and 1995
General. At September 30, 1996, the Company's total assets were $50.0
million, an increase of $5.4 million, or 12.1%, as compared to $44.6 million at
September 30, 1995. The increase resulted from an increase in investment
securities of $3.0 million, or 22.7%, an increase in loans receivable, net of
the allowance for loan losses, of $7.7 million, or 39.7%, a decrease in cash and
cash equivalents of $6.1 million, or 56.3%, and an increase in the remaining
assets of $583,000, or 46.9%. The primary cause of the increases in loans
receivable and other non-interest earning assets was the Company's acquisition
of the Carlyle branch office from Kankakee Federal Savings Bank. This
acquisition, as of September 13, 1996, resulted in an increase in loans
receivable of $3.8 million, fixed assets of $295,000, intangible assets of
$722,000, other assets of $24,000, deposits of $8.6 million, other liabilities
of $114,000, and cash of $3.9 million. The decrease in cash and cash equivalents
between fiscal years was used to fund loan growth and investment purchases.
Loans Receivable. Loans receivable, net of the allowance for loan
losses, at September 30, 1996 were $26.9 million, an increase of $7.7 million,
or 39.7%, compared to $19.2 million for the fiscal year ended September 30,
1995. Mortgage loans increased $4.6 million, or 30.7%, and consumer loans
increased $2.0 million, or 52.6%, as compared to the fiscal year ended September
30, 1995. Commercial loans increased $844,000, or 136.6%, to $1,462,000 for the
year ended September 30, 1996 as compared to $618,000 for the year ended
September 30, 1995. The Carlyle branch office acquisition accounted for $2.6
million in mortgage loans, $1.2 million in consumer loans and $62,000 in
commercial loans.
Average loan balances for 1996 amounted to $22.3 million, an increase
of $4.2 million, or 23.4%, over the previous fiscal year. The Company hired Mr.
Stephen J. Greene to manage and supervise the lending portfolio and to continue
the Bank's emphasis on consumer and commercial lending. Mr. Greene's experience
includes serving as a commercial retail lending officer for a commercial bank.
The residential mortgage loans increased $4.2 million during 1996, or
30.8%, to $17.8 million as compared to the fiscal year ended September 30, 1995.
During 1996, loan originations for residential mortgage loans amounted to $3.9
million as compared to $2.2 million in originations for the prior fiscal year.
<PAGE>
Residential mortgage loans represents 65.6% of gross loans. Consumer
loans, consisting primarily of automobile loans, made up 21.9 % of gross loans,
commercial loans made up 5.4% of gross loans, and non-residential real estate
loans comprised 7.1% of the portfolio at September 30, 1996.
Allowance for Loan Losses. An allowance for loan losses is maintained
at a level considered adequate by management to absorb potential loan losses as
determined by evaluations of the loan portfolio on a continuing basis. This
evaluation by management includes consideration of past loan loss experience,
changes in the composition of the loan portfolio, the volume and condition of
the loan portfolio as well as the financial condition of specific borrowers and
current economic conditions. Loans with principal and interest payments
contractually due but not yet paid are reviewed at least semimonthly and are
placed on a nonaccrual status when scheduled payments remain unpaid for 90 days
or more, unless the loan is both well secured and is in the process of
collection.
Nonperforming loans as of September 30, 1996 amounted to $252,000 or
.5% of total assets as compared to $361,000 or .8% of total assets as of
September 30, 1995.
The following table sets forth an analysis of the Company's gross
allowance for possible loan losses for the periods indicated.
For the Fiscal Year
Ended September 30,
---------------------
1996 1995
---------------------
(In Thousands)
Allowance at beginning of period ................. $ 113 $ 99
Provision for loan losses ........................ 64 80
Recoveries:
Consumer loans ............................... 10 4
---------------------
Total recoveries ....................... 10 4
---------------------
Charge-offs:
One- to four-family loans .................... -- 5
Consumer loans ............................... 48 65
Commercial ................................... 22 --
---------------------
Total charge-offs ...................... 70 70
---------------------
Net charge-offs ........................ (60) (66)
---------------------
Balance at end of period ............... $ 117 $ 113
=====================
Ratio of allowance for loan losses to gross loans
outstanding at the end of the period 0.43% 0.58%
Ratio of net charge offs to average loans outstanding
net during the period 0.27% 0.36%
Ratio of allowance for loan losses to total
nonperforming assets at the end of the period 46.43% 31.30%
<PAGE>
Investment Securities. Investment securities represented 32.4% of total
assets as of September 30, 1996 compared to 29.6% of total assets as of
September 30, 1995. Investment securities increased $3.0 million, 22.7%, from
$13.2 million to $16.2 million as of September 30, 1996. At September 30, 1996,
the Company held approximately $16.2 million in investment securities of which
$14.0 million were held as available for sale, $2.0 million were held to
maturity, and $165,000 were non-marketable equity securities. Of the $16.2
million in investment securities, $13.4 million, or 83.0%, were U. S. Government
and agency securities, $752,000, or 4.6%, were obligations of state and
political subdivisions, $165,000, or 1.0%, were non-marketable equity securities
and $1.8 million, or 11.4%, were mortgage-backed securities.
Deposits. At September 30, 1996, total deposits amounted to $36.9
million, or 73.8%, of total assets. Total deposits increased $7.4 million, or
24.9% from September 30, 1995. Deposits of $8.6 million assumed in the
acquisition of the Carlyle branch on September 13, 1996 were the primary cause
for the increase in deposits.
Return on Equity and Assets
Net income for the fiscal year ended September 30, 1996 was $235,000
as compared to $317,000 for the fiscal year ended September 30, 1995.
Return on average assets (ROA) for the year ended September 30, 1996
was .55% as compared to .92% for the year ended September 30, 1995. The cause
for the decrease in ROA was due to the one-time SAIF assessment which decreased
net income for the year ended September 30, 1996 by $188,000.
Return on average equity (ROE) for the year ended September 30, 1996
was 1.87% as compared to 5.81% for the year ended September 30, 1995. The causes
for the decrease in ROE were the one-time SAIF assessment which decreased net
income for the year ended September 30, 1996 by $188,000 and the conversion of
the Bank from a mutual to a stock organization which increased equity by $7.0
million, net of conversion expenses and unearned employee stock ownership plan
shares.
The average equity to average assets ratio as of September 30, 1996 was
29.6% as compared to 15.78% September 30, 1995. The primary cause for the
increase was the conversion of the Bank from a mutual to a stock organization on
October 5, 1995 which increased equity by $7.0 million, net of conversion
expenses and unearned employee stock ownership plan shares.
Average Balance Sheet
The following table presents the average balance sheet for the Company
for the years ended September 30, 1996 and 1995, the interest on interest
earning assets and interest bearing liabilities and the related average yield or
cost. The yields and costs are derived by dividing income or expense by the
average balance of the related asset or liability for the periods shown. Average
balances were determined from averaging month-end balances.
<PAGE>
<TABLE>
For the Fiscal Year Ended September 30,
--------------------------------------------------------------------
1996 1995
---------------------------------- -------------------------------
(In Thousands)
Average Interest & Yield/ Average Interest & Yield/
Balance Dividends Cost Balance Dividends Cost
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (5) $ 16,542 1,222 7.39% 14,656 1,043 7.12%
Commercial loans (5) 1,258 107 8.51% 544 71 13.05%
Consumer loans (5) 4,491 363 8.08% 2,867 243 8.48%
------------------------- ------------------------
Total loans, net $ 22,291 1,692 7.59% 18,067 1,357 7.51%
Mortgage-backed securities $ 2,091 197 9.42% 2,526 248 9.82%
Investment securities (2)(3)(6) 14,013 842 6.01% 11,346 750 6.61%
Daily interest-bearing deposits 2,728 150 5.50% 1,375 81 5.89%
FHLB stock (3) 176 12 6.82% 191 13 6.81%
------------------------- ------------------------
Total interest-earning assets $ 41,299 2,893 7.01% 33,505 2,449 7.31%
Non-interest earning assets:
Office properties and equipment, net $ 282 251
Real estate, net - 4
Other non-interest earning assets 867 833
------------- ------------
Total assets $ 42,448 34,593
============ ============
Interest-bearing liabilities:
Passbook accounts $ 2,952 91 3.08% 3,335 83 2.49%
NOW accounts 4,393 76 1.73% 3,720 66 1.77%
Money market accounts 1,918 64 3.34% 2,698 84 3.11%
Certificates of deposit 20,333 1,070 5.26% 18,701 965 5.16%
------------------------- ------------------------
Total deposits $ 29,596 1,301 4.40% 28,454 $ 1,198 4.21%
FHLB advances - - 0.00% 105 5 4.76%
------------------------- ------------------------
Total interest-bearing liabilities $ 29,596 1,301 4.40% 28,559 1,203 4.21%
Non-interest bearing liabilities:
Non-interest bearing deposits $ 19 294
Other liabilities 273 282
------------- ------------
Total liabilities $ 29,888 29,135
Stockholders' equity 12,560 5,458
------------- ------------
Total liabilities and retained $ 42,448 34,593
earnings ============ ============
Net interest income 1,592 1,246
============ ============
Interest rate spread (4) 2.61% 3.10%
Net interest margin (1) 3.85% 3.72%
Ratio of average interest-earning assets
to average interest-bearing liabilities 139.54% 117.32%
<FN>
(1) Net interest income as a percentage of average interest-earning assets.
(2) Includes available for sale and held to maturity investment securities.
(3) Interest is classified as interest income on investments in the
Consolidated Statement of Income.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Average volume includes nonaccrual loans.
(6) Includes securities purchased under agreements to resell.
</FN>
</TABLE>
<PAGE>
Rate and Volume Analysis
The following table sets forth the effects of changing interest rates
and volumes of interest earning assets and interest bearing liabilities on net
interest income for the Company. The combined rate-volume variances are included
in the total volume variance. In addition to this schedule, a two year average
balance sheet and an analysis of net interest income setting forth (i) average
assets, liabilities and stockholder's equity; (ii) interest income earned on
interest earning assets and interest expense incurred on interest-bearing
liabilities; (iii) average yields earned on interest-earning assets and average
rates incurred on interest-bearing liabilities; (iv) the net interest margin
(i.e. the average yield earned on interest earning assets less the average rate
incurred on interest-bearing liabilities); and (v) the net yield on
interest-earning assets (i.e. net interest income divided by average
interest-earning assets).
<TABLE>
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Due to Increase (Decrease) Due to
Rate Volume Net Rate Volume Net
-------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans ........................... $ 40 $ 139 $ 179 $ (49) $ (19) $ (68)
Commercial loans ......................... (25) 61 36 0 71 71
Consumer loans ........................... (11) 131 120 (45) 30 (15)
-------------------------------------------------------------------------------
Total loans ........................ 4 331 335 (94) 82 (12)
Mortgage-backed securities ............... (10) (41) (51) 6 (85) (79)
Investment and other
securities ............................. (68) 160 92 5 60 65
Interest-bearing deposits ................ (5) 74 69 41 (28) 13
FHLB stock ............................... -- (1) (1) 2 (2) --
-------------------------------------------------------------------------------
Total net change income
on interest-earning
assets ........................... (79) 523 444 (40) 27 (13)
-------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook ................................. 20 (12) 8 (4) -- (4)
Interest-bearing demand
(NOW) accounts ......................... (2) 12 10 (13) (1) (14)
Money market deposit
accounts ............................... 6 (26) (20) 7 (28) (21)
Certificates of deposit .................. 19 86 105 119 35 154
FHLB advances ............................ -- (5) (5) -- 5 5
-------------------------------------------------------------------------------
Total net change in
expense on interest-
bearing liabilities .............. 43 55 98 109 11 120
-------------------------------------------------------------------------------
Net change in net
interest income .................. $ (122) $ 468 $ 346 $ (149) $ 16 $ (133)
===============================================================================
</TABLE>
<PAGE>
Asset and Liability Management
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest-rate sensitive", and
by monitoring an institution's interest-rate sensitivity gap. An asset or
liability can be considered to be interest-rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest-rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period, and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that same time period. A gap is considered positive when the amount of
interest-rate sensitive assets exceeds the amount of interest-rate sensitive
liabilities. A gap is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest income
while a positive gap would tend to adversely affect net interest income.
At September 30, 1996, the Company's interest-bearing liabilities
either maturing or repricing within one year exceeded its interest-earning
assets either maturing or repricing within one year by $4.0 million,
representing a cumulative one-year interest-rate sensitivity gap of negative
8.7%. During periods of rising interest rates, it is expected that the yield on
the Company's interest-earning assets would rise more slowly than the cost on
its interest-bearing liabilities, which would be expected to have a negative
effect on net interest income. A decrease in interest rates would have the
opposite effect on net interest income, as the interest rates paid on
interest-bearing liabilities would fall more rapidly than would the interest
rates earned on interest-earning assets.
The primary function of asset and liability management is to maintain
an appropriate balance between liquidity on the one hand, and interest-earning
assets and liabilities on the other. The appropriate balance will enable the
Company to produce stable net income during changing interest-rate cycles.
In recent years, the Company's assets have been comprised primarily of
one-to-four-family residential mortgage balloon payment notes along with
long-term investment and mortgage-backed securities, while its liabilities have
been comprised primarily of short-term certificates of deposit. The majority of
the Company's balloon payment notes have maturities of three years, while a
small number have maturities of either one or five years. The balloon payment
notes are not interest-rate sensitive in a rapidly increasing interest-rate
environment because the interest rate remains fixed for up to five years
regardless of an increase in market interest rates. Furthermore, although the
interest rate on the balloon payment notes may be changed if the note is renewed
at the end of the term, the balloon payment notes have interest rate caps of one
or two percentage points over the initial rate of interest. Consequently, if
interest rates increase by an amount exceeding the interest rate cap during the
term of the note, the Company may be forced to renew the notes at interest rates
below the prevailing market rate.
Since the first calendar quarter of 1995, the adjustable-rate-mortgage
(ARM) has replaced the standard balloon payment loan as the principal type of
mortgage loan offered to new residential first-mortgage customers of the
Company. The ARM's have higher interest rate ceilings than the balloon payment
loans, along with interest rate floors, and will accordingly provide the Company
with increased interest rate protection. Beginning in February 1996, the Company
initiated a program of converting the balloon mortgage loans to comparable ARM
mortgage loans. As the balloon mortgage loans mature, they are converted to an
ARM. It is anticipated the balloon mortgage loan portfolio will be converted to
ARM mortgage loans by the end of fiscal year 1998.
<PAGE>
Because the majority of the Company's deposits are in higher yielding
short-term certificates of deposit (which can be expected to reprice upon
maturity), an increase in market interest rates will have a more dramatic effect
on the Company's cost of funds than if such deposits were in transaction or
passbook savings account. The interest rates on the Company's certificates of
deposit tend to increase more quickly and in greater increments than the
interest rates on its transaction or passbook savings accounts.
The Company's investment securities portfolio had an average maturity
of two years or less, excluding mortgage-backed securities, as of September 30,
1996. Accordingly, the Company's investment securities portfolio could be made
more interest-rate sensitive by reducing the average maturity of the portfolio.
The Company is in the process of creating a shorter-term investment securities
portfolio with more evenly staggered maturities. The Company also intends to
attract longer-term certificates of deposits by pricing such deposits
competitively on a case-by-case basis, thereby making the Company's liabilities
less interest-rate sensitive.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds
from principal and interest payments on loans, payments on investment and
mortgage-backed securities and sales of Company stock. While scheduled
maturities of loans and investment and mortgage-backed securities are
predictable sources of funds, deposit flows, mortgage prepayments and the
Company's ability to renew balloon payment notes are greatly influenced by
general interest rates, economic conditions and competition.
The primary investing activity of the Company is the origination of
one-to-four-family residential mortgage loans. During each of the fiscal years
ended September 30, 1996 and 1995, the Company originated one-to-four-family
residential mortgage loans in the amount of $3.9 million and $2.2 million,
respectively. These activities were funded primarily by principal repayments on
loans, payments on mortgage-backed securities and maturities of investment
securities.
The net cash used for investing activities for the fiscal year ended
September 30, 1996 totaled $3.4 million. Investment activities included the
purchase of investment securities which totaled $8.6 million and $44,000 for the
fiscal year ended September 30, 1996 and 1995, respectively. The cash for these
investing activities was provided by proceeds received in the mutual-to-stock
conversion and cash acquired in the Carlyle office acquisition. Other sources of
cash for investing activities was provided by operating activities and cash and
cash equivalents held at the beginning of the fiscal year.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
satisfy financial commitments and take advantage of investment opportunities.
During the fiscal year ended September 30, 1996 and 1995, the Company used its
sources of funds primarily to fund loan commitments, pay maturing certificates
of deposits and satisfy deposit withdrawals. At September 30, 1996, the Company
had commitments to extend credit in the amount of $1.13 million. These
commitments were comprised of variable-rate and fixed-rate commitments in the
amounts of $248,000 and $882,000, respectively. The range of rates on fixed-rate
commitments was 7.5% to 11.0%.
<PAGE>
At September 30, 1996, certificates of deposits totaled $24.3 million,
or 66.0% of total deposits, as compared to $19.6 million, or 66.5% of total
deposits for fiscal year ended September 30, 1995. Time deposits over $100,000
accounted for $1.9 million and $1.5 million, respectively, of the certificate of
deposit totals. Historically, the Company has been able to retain a significant
amount of its maturing deposits by increasing the interest rates earned by the
certificates of deposit. Because deposit insurance premiums paid by commercial
banks on BIF-insured deposits have been drastically reduced, the Company may
find it more difficult to retain such deposits. Management believes it will have
adequate resources to fund maturing deposits and withdrawals from additional
deposits, proceeds of scheduled repayments of loans as well as from payments
received on investment and mortgage-backed securities.
Capital. The Company is required to maintain a specific amount of
capital pursuant to the regulations of the Commissioner of Savings and
Residential Finance and the Federal Deposit Insurance Corporation (FDIC). As of
September 30, 1996, the Company was in compliance with all regulatory capital
requirements with a Tier 1 capital to risk-weighted assets ratio of 56.4%,
compared to the minimum ratio required of 4.0%, total capital to risk-weighted
assets ratio of 60.3% compared to the minimum ratio required of 8.0% and a Tier
1 capital to average assets ratio of 27.7% compared to the minimum ratio
required of 4.0%.
The Company continues to maintain a strong capital position to support
its capital requirements. Stockholders' equity increased $7.2 million to $12.8
million as of September 30, 1996. This increase was primarily due to the
conversion of the Company, on October 5, 1995, from a mutual state savings bank
to a stock savings bank. The Company sold 1,035,000 shares of common stock at an
initial price of $8.00 per share. The conversion transaction, net of expenses
and unearned employee stock ownership plan shares, increased capital by $7.0
million. The capital position was also increased as a result of net income of
$235,000.
Impact of New Accounting Pronouncements
Accounting for mortgage servicing rights In May 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard No.
122 (Statement 122), "Accounting for Mortgage Servicing Rights." Statement 122
requires the Company to recognize as separate assets rights to service mortgage
loans for others, however those servicing rights are acquired. If the Company
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securities those loans with servicing rights
retained, the Company should allocate the total cost of the mortgage loans to
mortgage servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values. The mortgage servicing rights should be
amortized in proportion to and over the period of estimated net servicing
income.
Statement 122 is effective for fiscal years beginning after December
15, 1995. The Company will be required to adopt Statement 122 for the fiscal
year ending September 30, 1997. The Company believes the adoption of Statement
122 will not have a material impact on the consolidated financial statements.
Accounting for stock-based compensation In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard No.
123 (FAS 123), "Accounting for Stock-Based Compensation". FAS 123 established a
fair value based method of accounting for stock options and other equity
instruments.
<PAGE>
FAS 123 permits the continued use of the intrinsic value method
included in Accounting Principals Board Opinion 25 (APB-25), "Accounting for
Stock Issued to Employees", but regardless of the method used to account for the
compensation cost associated with stock option or similar plans, it requires
employers to disclose information required by FAS 123.
The Company plans to adopt the disclosure requirements of FAS 123. The
disclosure requirement of FAS 123 is effective for fiscal years beginning after
December 15, 1995. The Company will be required to include these disclosures in
their financial statements for the year ended September 30, 1997.
Accounting for transfers and servicing of financial assets and
extinguishments of liabilities In June 1996, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 125 (FAS 125),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities".
FAS 125 requires that an entity should only recognize those assets that
it controls and liabilities it has incurred. Assets should be recognized until
control has been surrendered, and liabilities should be recognized until they
have been extinguished. Recognition of financial assets and liabilities will not
be affected by the sequence of transactions unless the effect of the
transactions is to maintain effective control over a transferred financial
asset.
FAS 125 is effective for transactions after December 31, 1996. The
Company believes the adoption of FAS 125 will not have a material effect on the
consolidated financial statements.
Recent Regulatory Developments
Deposit Insurance Premiums. Deposits of the Bank are currently insured
by the FDIC under the SAIF. The FDIC also maintains another insurance fund, the
BIF, which primarily insures commercial bank and some state savings bank
deposits. Applicable law requires that the SAIF and BIF funds each achieve and
maintain a ratio of insurance reserves to total insured deposits equal to 1.25%.
In 1995, the BIF reached this 1.25% reserve level, and the FDIC announced a
reduction in BIF premiums for most banks. Based on this reduction, the highest
rated institutions (approximately 92 percent of the nearly 11,000 BIF-insured
banks) will pay the statutory annual minimum of $2,000 for FDIC insurance. Rates
for all other institutions were reduced to $.04 per $100 as well, leaving a
premium range of $.03 to $.27 per $100 instead of the previous $.04 to $.31 per
$100. Currently, SAIF-member institutions pay deposit insurance premiums based
on a schedule of $0.23 to $0.31 per $100 of deposits.
Effective September 30, 1996, legislation was enacted to fund the
Savings Association Insurance Fund (SAIF) by assessing SAIF insured institutions
a one-time special assessment of 65.7 basis points on March 31, 1995 deposits.
The assessment for the Bank is $188,000 as of September 30, 1996.
Additionally, as part of the purchase agreement with Kankakee Federal Savings
and Loan (Kankakee), the Company agreed to reimburse Kankakee for the portion of
Kankakee's assessment which related to the Carlyle, Illinois branch which was
approximately $54,000.
The $242,000 assessment payable is included in other liabilities. The
assessment for the Bank is not deductible for tax purposes until paid,
therefore, deferred tax assets of $94,000 have been provided for the tax impact
of the assessment.
<PAGE>
Income Tax Regulations Affecting Bad Debt Reserve. Under existing
provisions of the Internal Revenue Code and similar sections of the Illinois
income tax law, qualifying thrifts may claim bad debt deductions based on the
greater of (1) a specified percentage of taxable income, as defined, or (2)
actual loss experience. If, in the future, any of the accumulated bad debt
deductions are used for any purpose other than to absorb bad debt losses, gross
taxable income may result and income taxes may be payable.
The Small Business Job Protection Act became law on August 20, 1996.
One of the provisions in this law repealed the reserve method of accounting for
bad debts for thrift institutions so that the bad debt deduction described in
the preceding paragraph will no longer be effective for tax years beginning
after December 31, 1995. The change in the law requires that the tax bad debt
reserves accumulated after September 30, 1988 be recaptured into taxable income
over a six-year period. The start of the six-year period can be delayed for up
to two years if the Company meets certain residential lending thresholds.
Deferred taxes have been provided on the portion of the tax reserve for loan
loss that must be recaptured.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto included herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or the same extent as the prices of goods and services.
<PAGE>
--------------------------------
CORPORATE INFORMATION
--------------------------------
<TABLE>
<S> <C>
Holding Company Form 10-KSB Annual Report
CSB Financial Group, Inc. Copies of CSB Financial Group, Inc.'s Form
200 South Poplar Street 10-KSB annual report as filed with the
Centralia, Illinois 62801 Securities and Exchange Commission and other
published reports may be obtained without
Subsidiaries charge by writing our corporate headquarters:
Centralia Savings Bank
200 South Poplar Street CSB Financial Group, Inc.
Centralia, Illinois 62801 200 South Poplar Street
Centralia, Illinois 62801
Centralia SLA, Inc. Attention: K. Gary Reynolds
200 South Poplar Street
Centralia, Illinois 62801 Registrar and Transfer Agent
The Registrar and Transfer Company
Stock Information ("Registrar") maintains all stockholder records. The Common
Stock of the Holding Company is Registrar handles stock transfer and registration,
quoted on the Nasdaq "SmallCap" market under address changes, corrections/changes in
the symbol "CSBF" since its subsidiary, taxpayer identification numbers, and Form 1099
Centralia Savings Bank, converted to stock form tax reporting questions. If you require assistance in October 1995.
assistance or have any questions, please contact
Registrar by mail or phone:
As of September 30, 1995, the Holding Company
had not issued any capital stock and, Registrar and Transfer Company
consequently, there was no market for its Common 10 Commerce Drive
Stock. On October 5, 1995, the Company issued Cranford, New Jersey 07016
1,035,000 shares of its Common Stock at a
purchase price of $8.00 per share in connection Annual Meeting
with the conversion of the Savings Bank from a The annual meeting of stockholders of CSB
state chartered mutual savings bank to a state Financial Group, Inc. will be held on January
chartered capital stock savings bank. The closing 10, 1997 at 10:00 a.m. at 200 South Poplar Street,
price per share for the Holding Company's Street, Centralia, Illinois.
Common Stock as reported on the Nasdaq
"SmallCap" market on December 2, 1996 Independent Auditors
$10.0625. The Holding Company has not paid McGladrey & Pullen, LLP
cash dividends on its Common Stock. 1806 Fox Drive
Champaign, Illinois 61820
Stock Pricing History
The following table sets forth the high and low Special Counsel
sales prices as reported on the Nasdaq Schiff Hardin & Waite
"SmallCap" market during the past year. 7200 Sears Tower
Chicago, Illinois 60606
</TABLE>
Fiscal 1996 High Low
- --------------------------------------------------------
First Quarter 9 5/8 8
Second Quarter 9 3/8 8 3/4
Third Quarter 9 5/8 9
Fourth Quarter 9 5/8 9
<PAGE>
----------------------------------------
DIRECTORS
CSB Financial Group, Inc.
and
Centralia Savings Bank
----------------------------------------
Wesley N. Breeze
Owner and Operator, Byrd Watson Drug Store
A. John Byrne
Retired
Michael Donnewald
President, Donnewald Distributing Co.
Larry M. Irvin
Chairman of the Board, Centralia Savings Bank
Owner and Operator, Irvin Funeral Homes, Ltd.
W. Harold Monken
Auto Dealer, Centralia, Illinois
K. Gary Reynolds
President and Chief Executive Officer, Centralia Savings Bank
----------------------------------------
OFFICERS
CSB Financial Group, Inc.
----------------------------------------
K. Gary Reynolds
President and Chief Executive Officer
----------------------------------------
OFFICERS
Centralia Savings Bank
----------------------------------------
K. Gary Reynolds
President and Chief Executive Officer
Stephen J. Greene
Vice President
Joanne S. Ticknor
Secretary and Treasurer
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
CSB Financial Group, Inc.
Centralia, Illinois
We have audited the accompanying consolidated balance sheet of CSB Financial
Group, Inc. and subsidiary as of September 30, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
financial statements of CSB Financial Group, Inc. and subsidiary, for the year
ended September 30, 1995, were audited by other auditors whose report dated
October 20, 1995, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CSB
Financial Group, Inc. and subsidiary as of September 30, 1996, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
October 18, 1996
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
(in thousands, except share data)
ASSETS
1996 1995
- --------------------------------------------------------------------------------
Cash and due from banks ...................................... $ 598 $ 321
Interest-bearing deposits .................................... 4,168 10,585
----------------
Cash and cash equivalents ...................... 4,766 10,906
Securities held to maturity (fair value of $2,091 for 1996 and
$11,141 for 1995) ......................................... 1,987 10,979
Securities available for sale ................................ 14,044 2,026
Securities purchased under agreements to resell .............. 300
Nonmarketable equity securities .............................. 165 192
Loans ........................................................ 27,048 19,390
Allowance for loan losses .................................... (117) (113)
----------------
Loans, net ..................................... 26,931 19,277
Premises and equipment ....................................... 594 252
Accrued interest receivable .................................. 331 290
Intangible assets ............................................ 722 - -
Other assets ................................................. 176 698
----------------
Total assets ................................... $50,016 $44,620
================
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
(in thousands, except share data)
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES:
Deposits:
Demand ......................................................... $ 8,754 $ 6,515
Savings ........................................................ 3,779 3,360
Time deposits > $100,000 ....................................... 1,889 1,468
Other time deposits ............................................ 22,432 18,160
------------------
Total deposits ......................................... 36,854 29,503
------------------
Stock conversion deposits ......................................... 9,193
Other liabilities ................................................. 297 187
Deferred income taxes ............................................. 81 162
------------------
Total liabilities ...................................... 37,232 39,045
------------------
COMMITMENTS, CONTINGENCIES AND CREDIT RISK
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 100,000 shares authorized;
none issued and outstanding - - - -
Common stock, $0.01 par value; authorized 2,000,000 shares;
1996 1,035,000 shares issued and outstanding ................... 10 - -
Paid-in capital ................................................... 7,586 - -
Retained earnings, substantially restricted ....................... 5,794 5,559
Less:
Unrealized gain (loss) on securities available for sale, net of
income tax effect ............................................ (24) 16
Unearned employee stock ownership plan shares .................. (582) - -
------------------
Total stockholders' equity ............................. 12,784 5,575
------------------
Total liabilities and stockholders' equity ............. $50,016 $44,620
==================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1996 and 1995
(in thousands, except share data)
<TABLE>
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans and fees on loans ....................................... $ 1,692 $ 1,357
Interest and dividends on securities:
Taxable .................................................... 1,026 1,004
Nontaxable ................................................. 25 7
Other interest income ......................................... 150 81
-----------------
2,893 2,449
-----------------
Interest expense:
Deposits ...................................................... 1,301 1,198
Other borrowings .............................................. - - 5
-----------------
1,301 1,203
-----------------
Net interest income ................................ 1,592 1,246
Provision for loan losses ........................................ 64 80
-----------------
Net interest income after provision for loan losses 1,528 1,166
-----------------
Noninterest income:
Service charges on deposits ................................... 47 44
Other ......................................................... 14 28
-----------------
61 72
-----------------
Noninterest expense:
Compensation and employee benefits ............................ 446 391
Occupancy expense and furniture and fixtures expense .......... 59 55
Data processing ............................................... 70 66
SAIF deposit insurance ........................................ 255 64
Professional fees ............................................. 113 23
Other ......................................................... 205 141
-----------------
1,148 740
-----------------
Income before income taxes ......................... 441 498
Income taxes ..................................................... 206 181
-----------------
Net income ......................................... $ 235 $ 317
=================
Earnings per share ................................. $ 0.25 $ - -
=================
Weighted average number of shares .................. 958,648 - -
=================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1996 and 1995
(In thousands, except share data)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized Unearned
Gain (Loss) Employee
on Securities Stock
Preferred Common Paid-In Retained Available Ownership
Stock Stock Capital Earnings For Sale Plan Shares Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 ................. $ - - $ - - $ - - $ 5,242 $ 28 $ - - $ 5,270
Change in unrealized gain (loss) on
securities available for sale ........... - - - - - - - - (12) - - (12)
Net income ................................. - - - - - - 317 - - - - 317
---------------------------------------------------------------------------------
Balance at September 30, 1995 ................. - - - - - - 5,559 16 - - 5,575
Net proceeds from 1,035,000 shares of
common stock issued in conversion ....... - - 10 7,574 - - - - (662) 6,922
Employee stock ownership plan shares
allocated ............................... - - - - 12 - - - - 80 92
Change in unrealized gain (loss) on
securities available for sale ........... - - - - - - - - (40) - - (40)
Net income ................................. - - - - - - 235 - - - - 235
----------------------------------------------------------------------------------
Balance at September 30, 1996 ................. $ - - $ 10 $ 7,586 $ 5,794 $ (24) $ (582) $ 12,784
==================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996 and 1995
(in thousands)
<TABLE>
1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................ $ 235 $ 317
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of premium (discount) on securities, net .. (3) (10)
Employee stock ownership plan compensation expense ..... 92 - -
Provision for loan losses .............................. 64 80
(Decrease) in deferred income taxes .................... (56) (15)
Depreciation ........................................... 20 20
Change in assets and liabilities:
(Increase) in accrued interest receivable ............ (23) (75)
(Increase) decrease in other assets .................. 528 (585)
Increase (decrease) in other liabilities ............. (4) 86
------------------
Net cash from operating activities ............. 853 (182)
------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations, net of principal payments on loans ..... (3,873) (2,489)
Purchase of securities held to maturity ................... (596) (44)
Purchase of securities available for sale ................. (7,978) - -
Proceeds from maturity of securities held to maturity ..... 986 1,772
Proceeds from maturity of securities available for sale ... 4,527 - -
Purchase of security under agreement to resell ............ (300) - -
Purchases of premises and equipment ....................... (67) (187)
Proceeds from the sale of OREO ............................ - - 32
Purchase of branch, net of cash acquired .................. 3,852 - -
------------------
Net cash from investing activities ............. (3,449) (747)
------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) stock conversion deposits ............. (9,193) 9,193
Proceeds from sale of common stock, net of offering cost . 6,922 - -
Net (decrease) in demand deposits, NOW accounts
passbook savings accounts .............................. (1,043) (273)
Net increase (decrease) in time deposits .................. (230) 2,072
Payment of Federal Home Loan Bank advances ................ (360)
------------------
Net cash from financing activities ............. (3,544) 10,632
------------------
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996 and 1995
(in thousands)
1996 1995
- -----------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents .................................. $(6,140) $ 9,703
Cash and cash equivalents, beginning of year ................. 10,906 1,203
------------------
Cash and cash equivalents, end of year ....................... $ 4,766 $10,906
==================
Cash paid during the year for:
Interest .................................................. $ 1,295 $ 1,254
==================
Income taxes .............................................. $ 264 $ 244
==================
Supplemental Disclosures of Investing and Financing Activities:
Change in unrealized gain (loss) on securities available
for sale ................................................. $ (65) $ (16)
==================
Change in deferred income taxes attributable to the
unrealized gain (loss) on securities available for sale . $ (25) $ (4)
==================
Transfer of securities from held to maturity to available
for sale ................................................. $ 8,602 $ - -
==================
Assets acquired:
Loans ...................................................... $ 3,845 $ - -
Premises and equipment ..................................... 295 - -
Accrued interest receivable ................................ 18 - -
Intangible assets .......................................... 722 - -
Other assets .............................................. 6 - -
Liabilities assumed:
Demand deposits ............................................ (2,764) - -
Savings deposits ........................................... (937) - -
Time deposits .............................................. (4,923) - -
Other liabilities .......................................... (114) - -
------------------
Purchase of branch, net of cash acquired ........ $(3,852) $ - -
==================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
Nature of operations CSB Financial Group, Inc. (the Company) is the holding
company of its wholly-owned subsidiary, Centralia Savings Bank (the Bank).
Centralia Savings Bank is a state chartered stock savings bank, converted from
mutual form on October 5, 1995, located in Marion County, Illinois. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation (FDIC) through
the Savings Association Insurance Fund (SAIF). The Bank is subject to the
regulations of certain federal and state agencies and undergoes periodic
examinations by those agencies.
Principles of presentation The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, the Bank,
and the Bank's wholly-owned subsidiary, Centralia SLA. Centralia SLA, Inc.'s
principal business activity is to provide insurance services. For purposes of
the consolidated financial statements, all material intercompany amounts have
been eliminated.
In preparing the consolidated financial statements, Company management is
required to make estimates and assumptions which significantly affect the
amounts reported in the consolidated financial statements. Significant estimates
which are particularly susceptible to change in a short period of time include
the determination of the allowance for loan losses and valuation of real estate
and other properties acquired in connection with foreclosures or in satisfaction
of amounts due from borrowers on loans. Actual results could differ from those
estimates.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practice within the savings and loan
industry. Following is a description of the more significant policies which the
Company follows in preparing and presenting its financial statements.
Cash and cash equivalents For purposes of reporting cash flows, the Company
considers all cash on hand, deposit accounts and money-market funds to be cash
equivalents.
Securities held to maturity Securities classified as held to maturity are those
debt securities the Company has the positive intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premium and accretion of discount, which are recognized in
interest income using the interest method over the period to maturity.
Securities available for sale Securities classified as available for sale are
those debt securities that the Company intends to hold for an indefinite period
of time, but not necessarily to maturity and marketable equity securities. Any
decision to sell a security classified as available for sale would be based on
various factors, including significant movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. The difference between fair value
and amortized cost, adjusted for amortization of premium and accretion of
discounts, which are recognized in interest income using the interest method
over their contractual lives, results in an unrealized gain or loss. Unrealized
gains or losses are reported as increases or decreases in stockholders equity,
net of the related deferred tax effect. Realized gains or losses, determined on
the basis of the cost of specific securities sold, are included in earnings.
Securities purchased under agreements to resell Securities purchased under
agreements to resell are carried at cost and consist of mortgage backed
securities. As of September 30, 1996, the agreement is a 91 day agreement.
Securities purchased under agreements to resell averaged approximately $300,000
during 1996.
<PAGE>
Loans Loans are stated at the principal amount outstanding less unearned
interest income and an allowance for loan losses. Unearned income on consumer
loans is recognized as income based on the interest method. Interest income on
substantially all other loans is credited to income based on the principal
balance outstanding.
Loan origination fees and certain direct loan origination costs are being
deferred and recognized over the life of the related loans as an adjustment to
interest income using the interest method. Net deferred fees are included as
components of the carrying value of the loan.
The Company's policy is to discontinue the accrual of interest income on any
loan when, in the opinion of management, there is reasonable doubt as to the
timely collectibility of interest or principal. Interest income on these loans
is recognized to the extent payments are received, and the principal is
considered fully collectible.
Allowance for losses The allowance for loan losses is established through a
provision for loan losses charged to operating expenses. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and current economic conditions that
may affect the borrowers' ability to pay. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses,
and may require the Bank to make additions to the allowance based on their
judgment about information available to them at the time of their examination.
<PAGE>
Accounting by creditors for the impairment of a loan On October 1, 1995, the
Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by FAS 118, which requires loans to be considered impaired
when, based on current information and events, it is probable the Company will
not be able to collect all amounts due. The portion of the allowance for loans
losses applicable to impaired loans is to be computed based on the present value
of the estimated future cash flows of interest and principal discounted at the
loan's effective interest rate or on the fair value of the collateral for
collateral dependent loans. The entire change in present value of expected cash
flows of impaired loans or of collateral value is to be reported as bad debt
expense in the same manner in which impairment initially was recognized or as a
reduction in the amount of bad debt expense that otherwise would be reported.
Management had not classified any loans as impaired as of September 30, 1996.
Premises and equipment Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is provided over the estimated useful
lives of the related assets principally on the straight-line basis.
Income taxes Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Earnings per common share Earnings per share is computed based upon the weighted
average common shares outstanding during the period plus shares committed to be
released by the employee stock ownership plan. Unallocated shares of the
Employee Stock Ownership Plan are not considered common shares outstanding.
Accounting for mortgage servicing rights In May 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 122
(Statement 122), "Accounting for Mortgage Servicing Rights." Statement 122
requires the Company to recognize as separate assets rights to service mortgage
loans for others, however those servicing rights are acquired. If the Company
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securities those loans with servicing rights
retained, the Company should allocate the total cost of the mortgage loans to
mortgage servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values. The mortgage servicing rights should be
amortized in proportion to and over the period of estimated net servicing
income.
Statement 122 is effective for fiscal years beginning after December 15, 1995.
The Company will be required to adopt Statement 122 for the fiscal year ending
September 30, 1997. The Company believes the adoption of Statement 122 will not
have a material impact on the consolidated financial statements.
Accounting for stock-based compensation In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard No.
123 (FAS 123), "Accounting for Stock-Based Compensation". FAS 123 established a
fair value based method of accounting for stock options and other equity
instruments.
FAS 123 permits the continued use of the intrinsic value method included in
Accounting Principals Board Opinion 25 (APB-25), "Accounting for Stock Issued to
Employees", but regardless of the method used to account for the compensation
cost associated with stock option or similar plans, it requires employers to
disclose information required by FAS 123.
The Company plans to adopt the disclosure requirements of FAS 123. The
disclosure requirement of FAS 123 is effective for fiscal years beginning after
December 15, 1995. The Company will be required to include these disclosures in
their financial statements for the year ended September 30, 1997.
Accounting for transfers and servicing of financial assets and extinguishments
of liabilities In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 125 (FAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
<PAGE>
FAS 125 requires that an entity should only recognize those assets that it
controls and liabilities it has incurred. Assets should be recognized until
control has been surrendered, and liabilities should be recognized until they
have been extinguished. Recognition of financial assets and liabilities will not
be affected by the sequence of transactions unless the effect of the
transactions is to maintain effective control over a transferred financial
asset.
FAS 125 is effective for transactions after December 31, 1996. The Company
believes the adoption of FAS 125 will not have a material effect on the
consolidated financial statements.
Reclassifications Certain reclassifications have been made to the balances as of
September 30, 1995, with no effect on net income, to be consistent with the
classifications adopted for September 30, 1996.
<PAGE>
Note 2. Conversion to Stock Ownership
On October 5, 1995, CSB Financial Group, Inc. (the "Company") acquired all of
the outstanding shares of Centralia Savings Bank (the "Bank") upon the Bank's
conversion from a state chartered mutual savings bank to a state chartered
capital stock savings bank. The company purchased 100% of the outstanding
capital stock of the bank using 50% of the net proceeds from the Company's
initial stock offering which was completed on October 5, 1995. The Company sold
1,035,000 shares of $0.01 par value common stock at a price of $8 per share,
including 82,800 shares purchased by the Bank's Employee Stock Ownership Plan
("ESOP"). The ESOP shares were acquired by the Bank with proceeds from a Company
loan totaling $662. The gross proceeds of the offering were $8,280. After
reducing gross proceeds for conversion costs of $696 net proceeds totaled
$7,584. The Company's stock trades on the NASDAQ Small Cap market under the
symbol "CSBF".
The acquisition of the Bank by the Company is being accounted for like a
"pooling of interests" under generally accepted accounting principles. The
application of the pooling of interest method records the assets and liabilities
of the merged entities on a historical cost basis with no goodwill or other
intangible assets being recorded.
Note 3. Securities
Amortized cost and fair values of securities are as follows:
September 30, 1996
---------------------------------------
Held to Maturity
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------
Obligations of states
and political subdivisions .... $ 149 $ - - $ 6 $ 143
Mortgage backed securities ......... 1,838 111 1 1,948
--------------------------------------
$1,987 $ 111 $ 7 $ 2,091
======================================
<PAGE>
September 30, 1996
--------------------------------------
Available for Sale
--------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------
Obligations of states and
political subdivisions $ 606 $ 3 $ 6 $ 603
U.S. Government and agency 13,477 22 58 13,441
---------------------------------------
$14,083 $ 25 $ 64 $ 14,044
=======================================
September 30, 1995
---------------------------------------
Held to Maturity
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------
Obligations of states and
political subdivisions $ 165 $ 4 $ - - $ 169
Mortgage backed securities 2,335 182 - - 2,517
U.S. Government and agency 8,479 38 62 8,455
---------------------------------------
$10,979 $ 224 $ 62 $11,141
=======================================
September 30, 1995
---------------------------------------
Available for Sale
---------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------
U.S. Government and agency $ 2,000 $ 26 $ - - $ 2,026
======================================
<PAGE>
The amortized cost and fair value of securities held to maturity and available
for sale at September 30, 1996, by contractual maturity, are shown below.
Maturities may differ from contractual maturities in mortgage-backed securities
because the mortgages underlying the securities may be called or repaid without
any penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary:
As of September 30, 1996
----------------------------------
Available
Held to Maturity for Sale
----------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------
Less than one year ......................... $ - - $ - - $ 6,013 $ 6,020
Due after one year through five years ...... - - - - 6,465 6,421
Due after five years through ten years ..... 41 41 508 506
Due after ten years ........................ 108 102 1,097 1,097
Mortgage-backed securities ................. 1,838 1,948 - - - -
----------------------------------
$ 1,987 $ 2,091 $14,083 $14,044
==================================
There were no gains or losses on the sale of securities for the years ended
September 30, 1996 and 1995.
During 1995, the Financial Accounting Standards Board decided to allow all
enterprises to make a one-time reassessment of the classification of securities
under FAS 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company transferred debt securities with an amortized cost of
$8,602 from the held-to-maturity classification to the available-for-sale
classification and recorded, as a component of equity, an unrealized gain of
$48, net of $30 of deferred taxes.
As a member of the Federal Home Loan Bank system, the Bank is required to
maintain an investment in capital stock of the Federal Home Loan Bank in an
amount equal to 1% of its outstanding home loans. No ready market exists for the
Bank stock, and it has no quoted market value. For disclosure purposes, such
stock is assumed to have a market value which is equal to cost.
There were no securities pledged as collateral for public deposits or for other
purposes as required or permitted by law for the year ended September 30, 1996
and securities with a carrying value of $500 were pledged for the year ended
September 30, 1995.
Note 4. Loans
Loans are summarized as follows:
September 30,
-----------------
1996 1995
-----------------
Mortgage loans:
One to four family .................................. $17,812 $13,621
Commercial real estate .............................. 823 835
Other loans secured by real estate .................. 1,091 638
-----------------
Total mortgage loans ..................... 19,726 15,094
-----------------
Commercial and consumer loans:
Commercial loans .................................... 1,462 618
Consumer loans ...................................... 4,637 3,323
Home equity lines of credit ......................... 998 18
Share loans ......................................... 316 559
-----------------
Total commercial and consumer loans ...... 7,413 4,518
-----------------
Less:
Allowance for loan losses ........................... (117) (113)
Deferred loan fees .................................. (23) (30)
Unearned income on consumer loans ................... (68) (192)
------------------
(208) (335)
------------------
Loans, net .............................. $26,931 $19,277
==================
<PAGE>
Management had not identified any impaired loans as of September 30, 1996
In the normal course of business, the bank makes loans to its executive
officers, directors and employees, and to companies and individuals affiliated
with officers, directors and employees of the bank and the Company. In the
opinion of management, these loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties. The activity in these loans
during 1996 is as follows:
Balance as of October 1, 1995 ................................ $ 876
New loans ................................................. 351
Repayments ................................................ (293)
-----
Balance as of September 30, 1996 ............................. $ 934
=====
Note 5. Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
Year Ended
September 30,
----------------
1996 1995
----------------
Balance, beginning .......................... $ 113 $ 99
Provision charged to income .............. 64 80
Charge-offs .............................. (70) (70)
Recoveries ............................... 10 4
----------------
Balance, ending ............................. $ 117 $ 113
================
Note 6. Premises and Equipment
Premises and equipment consist of:
September 30,
--------------------
1996 1995
--------------------
Land .................................................. $ 136 $ 86
Office building ....................................... 454 210
Furniture and equipment ............................... 363 295
--------------------
953 591
Less accumulated depreciation ......................... (359) (339)
--------------------
$ 594 $ 252
====================
Note 7. Deposits
At September 30, 1996, the scheduled maturities of CD's are as follows:
Year Ended September 30: Amount
- --------------------------------------------------------------------------------
1997 $16,553
1998 3,739
1999 2,514
2000 1,115
2001 and thereafter 400
-------
$24,321
=======
<PAGE>
Note 8. Income Taxes
Income taxes for the years ended September 30, 1996 and 1995, consists of the
following components:
Current Deferred Total
-------------------------
1996
Federal ........................................ $214 $(38) $176
State .......................................... 48 (18) 30
------------------------
$262 $(56) $206
========================
1995
Federal ........................................ $196 $(10) $186
State .......................................... - - (5) (5)
------------------------
$196 $(15) $181
========================
Under existing provisions of the Internal Revenue Code and similar sections of
the Illinois income tax law, qualifying thrifts may claim bad debt deductions
based on the greater of (1) a specified percentage of taxable income, as
defined, or (2) actual loss experience. If, in the future, any of the
accumulated bad debt deductions are used for any purpose other than to absorb
bad debt losses, gross taxable income may result and income taxes may be
payable.
The Small Business Job Protection Act became law on August 20, 1996. One of the
provisions in this law repealed the reserve method of accounting for bad debts
for thrift institutions so that the bad debt deduction described in the
preceding paragraph will no longer be effective for tax years beginning after
December 31, 1995. The change in the law requires that the tax bad debt reserves
accumulated after September 30, 1988 be recaptured into taxable income over a
six-year period. The start of the six-year period can be delayed for up to two
years if the Company meets certain residential lending thresholds. Deferred
taxes have been provided on the portion of the tax reserve for loan loss that
must be recaptured.
Retained earnings at September 30, 1996 and 1995, includes approximately $867 of
the tax reserve which accumulated prior to 1988, for which no deferred federal
income tax liability has been recognized. This amount represents an allocation
of income to bad-debt deductions for tax purposes only. Reduction of amounts so
allocated for purposes other than tax bad-debt losses or adjustments arising
from carryback of net operating losses would create income for tax purposes
only, which would be subject to the then-current corporate income tax rate. The
unrecorded deferred income tax liability on the above amounts was approximately
$336 as of September 30, 1996 and 1995.
Income tax expense differed from the statutory federal rate of 34% for the years
ended September 30, 1996 and 1995, as follows:
1996 1995
----------------
Statutory rate applied to earnings before income tax .... $ 150 $ 170
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit . 20 (3)
Other ................................................. 36 14
----------------
$ 206 $ 181
================
<PAGE>
The net deferred tax liability in the accompanying balance sheets include the
following amounts of deferred tax assets and liabilities:
1996 1995
-------------------
Deferred tax liability ........................... $ (235) $ (206)
Deferred tax asset ............................... 154 44
Valuation allowance for deferred tax assets
-------------------
$ (81) $ (162)
===================
The tax effect of principal temporary differences are shown in the following
table:
1996 1995
----------------------
Securities market value allowance .................. $ 15 $ (10)
Cash basis adjustment .............................. (124) (105)
Allowance for loan losses - book ................... 45 44
Allowance for loan losses - tax .................... (79) (57)
FHLB stock basis ................................... (8) (8)
Premises and equipment basis ....................... (14) (14)
SAIF assessment .................................... 94 - -
Other .............................................. (10) (12)
---------------------
$ (81) $ (162)
=====================
Note 9. Fair Value of Financial Instruments
Financial Accounting Standard Board Statement of Financial Accounting Standard
No. 107 (FAS 107), "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. FAS 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company and its subsidiary.
The following table reflects a comparison of carrying values and the fair values
of the financial instruments as of September 30, 1996:
Carrying Fair
Value Value
----------------
Assets:
Cash and cash equivalents ........................ $ 4,766 $ 4,766
Securities held to maturity ...................... 1,987 2,091
Securities available for sale .................... 14,044 14,044
Securities purchased under agreements to resell .. 300 300
Nonmarketable equity securities .................. 165 165
Accrued interest receivable ...................... 331 331
Loans ............................................ 26,931 26,793
Liabilities:
Deposits ......................................... 36,854 36,894
Accrued interest payable ......................... 14 14
<PAGE>
The following methods and assumptions were used by the Company in estimating the
fair value disclosures for financial instruments:
Cash and due from banks The carrying values reported in the balance sheet for
cash and due from banks, including interest earning deposits approximate their
fair values. The carrying value for securities purchased under agreements to
resell and nonmarketable equity securities approximates their fair values.
Securities Fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying value of accrued
interest receivable approximates its fair value. The carrying value for equity
securities purchased under agreements to resell and nonmarketable equity
securities approximates their fair values.
Loans For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for fixed-rate loans are estimated using discounted cash flow analyses using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The carrying value of accrued interest receivable
approximates its fair value.
Deposits The fair value disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the balance sheet date. The carrying values
for variable-rate, demand deposits and savings deposit accounts approximate
their fair values at the balance sheet date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits. The
carrying value of accrued interest payable approximates its fair value.
Off-balance-sheet instruments Fair values for the Bank's off-balance-sheet
instruments, which consist of commitments to extend credit and standby letters
of credit, are based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing. The fair value for such financial instruments
is nominal.
Note 10. Capital Ratios
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1996, that the
Bank meets all capital adequacy requirements to which it is subject.
<PAGE>
As of September 30, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------- ----------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30,
1996:
Total Capital (to
Risk Weighted
Assets)
Consolidated $ 12,925 60.30% $ 1,715 = 8.0% N/A
Centralia
Savings
Bank $ 8,742 42.18% = $ 1,658 = 8.0% = $ 2,072 = 10.0%
Tier I Capital (to
Risk Weighted
Assets)
Consolidated $ 12,087 56.39% $ 857 = 4.0% $ N/A
Centralia
Savings
Bank $ 7,903 38.14% = $ 829 = 4.0% = $ 1,243 = 6.0%
Tier I Capital (to
Average Assets)
Consolidated $ 12,087 27.72% $ 1,744 = 4.0% $ N/A
Centralia
Savings
Bank $ 7,903 19.67% = $ 1,607 = 4.0% = $ 2,009 = 5.0%
</TABLE>
In order to grant priority to eligible account holders in the event of future
liquidation, the Bank, at the time of conversion, established a liquidation
account in an amount equal to regulatory capital as of September 30, 1995. This
amount was $5,575,000. In the event of a future liquidation of the Bank,
eligible account holders who continue to maintain their deposit accounts shall
be entitled to receive a distribution from the liquidation account. The total
amount of the liquidation account will be decreased as the balance of the
eligible account holders are reduced subsequent to the conversion, based on an
annual determination of such balances. The Bank may not declare or pay a cash
dividend to the Company on, or repurchase any of, its capital stock if the
effect thereof would cause the net worth of the Bank to be reduced below the
amount required for the liquidation account.
The Illinois Savings Bank Act (ISBA) capital distribution regulations restrict
the Bank's cash dividend payments or other capital distributions. The ISBA
regulations generally provide that an institution can make capital distributions
during a calendar year up to 50% of its net income to date during the fiscal
year. Any additional capital distributions would require prior notice to the
Commissioner. The Company is not subject to these regulatory restrictions on the
payment of dividends to its stockholders, however, the ability of the Company to
pay future dividends will depend on dividends from the Bank.
<PAGE>
Note 11. Officer, Director and Employee Benefit Plans
Employee Stock Ownership Plan In connection with the conversion, the Bank
formed, for eligible employees, an employee stock ownership plan ("ESOP"). The
ESOP obtained a term loan from the Company and purchased 82,800 shares of $0.01
par value common stock at the subscription price of $8 per share. Employees who
are 21 or older who have completed at least 1,000 hours of service in a twelve
month period are eligible to participate. A participant is 100% vested after
five years of credited service.
The Bank makes contributions to the ESOP equal to the ESOP's debt service less
dividends received by the ESOP. Dividends received by the ESOP on unallocated
shares are used to pay debt service. The ESOP shares were pledged as collateral
for its debt. As the debt is repaid, shares are released from collateral and
allocated to active employees, based on the ratio of debt service paid to total
original principal plus the interest to be paid. As shares are committed to be
released from collateral, the Bank reports compensation expense equal to the
current market price of the shares, and the shares become outstanding for
earnings-per-share calculation. ESOP compensation expense was $92 for the year
ended September 30, 1996.
The following table reflects the shares held by the plan as of September 30,
1996:
Shares allocated to participants .................................... 4,487
Unallocated shares (Fair value at September 30, 1996 $743,974) ...... 78,313
------
Total ................................................. 82,800
------
Shares committed to be released ..................................... 5,611
======
Since the ESOP borrowed from the Company to purchase the shares of common stock,
the loan obligation is considered unearned employee stock ownership plan shares
and is reflected as a reduction of stockholders' equity.
The Board of Directors of the Company may direct payment of cash dividends be
paid in cash to the participants or to be credited to participant accounts and
invested.
Profit Sharing Plan The bank has a noncontributory defined contribution
profit-sharing plan for all employees who have attained age 21 and one year of
service. Nondeductible voluntary contributions are permitted, but none have been
made to date. Annually, the Board of Directors determined the contribution to
the plan which is allocated to those employees who worked more than 500 hours
during the plan year or who are employed at the end of the plan year. The
allocations are made without regard to hours of service completed during the
plan year. The allocation of the contribution is in proportion to each
participant's compensation for the plan year. There have been no contributions
for the years ended September 30, 1996 and 1995.
Management Recognition Plan At the annual stockholder's meeting on May 22, 1996
the Management Recognition Plan ("MRP") was approved. The MRP intends to
purchase with funds provided by the Company, whether in the open market or from
the Holding Company in the form of newly issued shares, 41,400 shares, or 4% of
the aggregate number of shares of Common Stock issued and sold in connection
with the Conversion for issuance to officers, directors, and employees of the
Holding Company. Directors, officers, and employees become vested in the shares
of common stock awarded to them under the MRP at a rate of 20% per year,
commencing one year after the grant date, and 20% on each anniversary date
thereof for the following four years. As of September 30, 1996 there have been
no shares purchased for the management recognition plan.
<PAGE>
Stock Option Plan At the annual stockholder's meeting on May 22, 1996 the Stock
Option Plan ("SOP") was approved. The board has reserved an amount of stock
equal to, 103,500 shares, or 10% of the common stock sold in the conversion for
issuance under the SOP. The options will be granted by a Committee, comprised of
directors, to key employees and directors based on their services. Upon approval
of the SOP each nonemployee director was awarded a nondiscretionary grant of a
ten-year nonstatutory option to purchase 5,175 shares of common stock. The
exercise price of options granted must be at least equal to the fair market
value of the common stock on the date the option is granted. The options granted
under the plan become exercisable at a rate of 20 percent per year commencing
one year after the grant date and 20 percent on each anniversary date for the
following four years. As of September 30, 1996, 25,875 options had been granted.
Employment Agreement The Bank has entered into an employment agreement with an
executive officer which is renewable on November 30 of each year. The term of
the agreement will be automatically renewed for another one-year period, unless
the Board of Directors of the Bank gives the executive officer notice 90 days
prior to the anniversary date.
Note 12. Commitments, Contingencies, and Credit Risk
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the Company's financial
statements.
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheet. The contractual
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit written is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Financial
instruments whose contract amounts represent credit risk at September 30, 1996
follows:
Range of
Variable Rates on
Rate Fixed Rate Total Fixed Rate
Commitments Commitments Commitments Commitments
-----------------------------------------------
Commitment to extend credit .... $ 248 $ 882 $ 1,130 7.5% - 11%
The Company does not engage in the use of interest rate swaps, futures, forwards
or option contracts, or other financial instruments with similar
characteristics.
Stock Repurchase Program On October 10, 1996, the Company's Board of Directors
approved a stock repurchase program whereby the Company would repurchase up to
93,150 shares, or 9%, of its outstanding common stock.
<PAGE>
Note 13. Concentration of Credit Risk
The Bank generally originates single-family residential loans within its primary
lending area, Marion County. The Bank's underwriting policies require such loans
to be made at 80% loan-to-value based upon appraised values unless private
mortgage insurance is obtained. These loans are secured by the underlying
properties.
Note 14. Branch Acquisition
On September 13, 1996, the Company acquired the Carlyle, Illinois branch (the
"branch") of Kankakee Federal Savings and Loan. The branch had approximately
$8.6 million in deposits at the date of acquisition. In addition to assuming the
deposit liabilities attributable to the branch, the Company acquired certain
assets associated with the branch, including the building. The operations of the
branch are included in the Company's Consolidated Statements of Income from the
acquisition date and reflect the application of the purchase method of
accounting.
Under this method of accounting, the aggregate cost to the Company of the branch
was allocated to the assets acquired and the liabilities assumed, based on their
estimated fair value as of September 13, 1996. Goodwill in the amount of $343
and core deposit intangible in the amount of $378 was recorded by the Bank in
connection with the branch. The goodwill and core deposit intangible will be
amortized on a straight-line basis over fifteen years and ten years,
respectively.
Note 15. Savings Association Insurance Fund
Effective September 30, 1996, legislation was enacted to fund the Savings
Association Insurance Fund (SAIF) by assessing SAIF insured institutions a
one-time special assessment of 65.7 basis points on March 31, 1995 deposits.
The assessment for the bank is $188 as of September 30, 1996. Additionally, as
part of the purchase agreement with Kankakee Federal Savings and Loan
(Kankakee), the Company agreed to reimburse Kankakee for the portion of
Kankakee's assessment which related to the Carlyle, Illinois branch which
amounts to $54.
The $242 assessment payable is included in other liabilities in the accompanying
balance sheet. The assessment for the Bank is not deductible for tax purposes
until paid, therefore, deferred tax assets of $94 have been provided for the tax
impact of the assessment.
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Annual Report on Form 10-KSB of CSB Financial
Group, Inc. for the fiscal year ended September 30, 1996 of our report dated
October 20, 1995, on Centralia Savings Bank's 1995 consolidated financial
statements.
/s/ Larsson, Woodyard & Henson, LLP
Paris, Illinois
December 10, 1996
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this Annual Report on Form
10-KSB of CSB Financial Group, Inc. for the year ending September 30, 1996 of
our report dated October 18, 1996, which appears on Page 16 of the Annual Report
to shareholders.
/S/ McGLADREY & PULLEN, LLP
Champaign, Illinois
December 27, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 FORM 10-K OF CSB FINANCIAL GROUP, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 598
<INT-BEARING-DEPOSITS> 4,168
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,044
<INVESTMENTS-CARRYING> 1,987
<INVESTMENTS-MARKET> 2,091
<LOANS> 27,048
<ALLOWANCE> 117
<TOTAL-ASSETS> 50,016
<DEPOSITS> 36,854
<SHORT-TERM> 0
<LIABILITIES-OTHER> 378
<LONG-TERM> 0
0
0
<COMMON> 10
<OTHER-SE> 12,774
<TOTAL-LIABILITIES-AND-EQUITY> 50,016
<INTEREST-LOAN> 1,692
<INTEREST-INVEST> 1,051
<INTEREST-OTHER> 150
<INTEREST-TOTAL> 2,893
<INTEREST-DEPOSIT> 1,301
<INTEREST-EXPENSE> 1,301
<INTEREST-INCOME-NET> 1,592
<LOAN-LOSSES> 64
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,148
<INCOME-PRETAX> 441
<INCOME-PRE-EXTRAORDINARY> 235
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<YIELD-ACTUAL> 3.85
<LOANS-NON> 235
<LOANS-PAST> 17
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 113
<CHARGE-OFFS> 70
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 117
<ALLOWANCE-DOMESTIC> 117
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 40
</TABLE>
Independent Auditor's Report
To the Board of Directors
Centralia Savings Bank
and Subsidiary
Centralia, Illinois
We have audited the accompanying consolidated statement of financial condition
of Centralia Savings Bank and Subsidiary as of September 30, 1995 and the
related consolidated statements of income, retained earnings, and cash flows for
the years ended September 30, 1995 and 1994. These consolidated financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Centralia Savings Bank and Subsidiary as of September 30, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Bank
changed its method of accounting for certain investments in debt and equity
securities during the year ended September 30, 1994 to adopt the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
/s/ Larsson, Woodyard & Henson, LLP
October 20, 1995
