----------------------------------------
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 offices
located at 200 South Poplar Street, Centralia, Illinois 62801, telephone number
(618) 532-1918, and 801 12th Street, Carlyle, Illinois 62231, telephone number
(618) 594-2478.
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 one- to 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
----------------------------
Dear Stockholders:
This past year was an exciting year for CSB Financial Group, Inc. and
the staff of Centralia Savings Bank. It presented various operational challenges
and marketing opportunities for the bank. In September 1996, we acquired the
Carlyle branch office of Kankakee Federal Savings Bank and in October 1996, we
implemented an automated teller machine (ATM) system with debit or credit card
capacity and national access capabilities. These additional operational
activities tested and tempered our available resources.
CSB Financial Group, Inc. announced and implemented two separate
repurchase programs whereby the Company would repurchase up to 257,975 shares,
or 24.9%, of its outstanding common stock. These repurchase programs represented
an attractive use of capital relative to other investment alternatives. As of
October 30, 1997, the Company has completed the repurchase of 236,675 shares, or
22.9%, of the initial common stock issuance.
The operational performance of the Company and its subsidiary was
anticipated in this transitional year. We expected the costs associated with the
Carlyle office operations, the recurring costs of professional and regulatory
services related to being a publicly traded company and the initial costs of
implementing the ATM system would be an onus to this year's earnings.
We have developed a series of consumer loan programs which are
positioned for the Carlyle market and are expected to produce earnings results
during the next fiscal year. While the costs of professional, regulatory and ATM
service are inevitable, we continually strive to minimize their impact on
earnings. Also, during the fourth quarter of 1997, we took steps to reduce the
expense impact of our stock-based employee benefit programs.
We are enthusiastic about the future operations of CSB Financial Group,
Inc. and Centralia Savings Bank. As a new fiscal year begins, we are seeking
ways to enhance shareholder value. We will be scrutinizing the advantages of
offering insurance and stock brokerage services. We will be evaluating our data
processing needs and reviewing the alternative solutions. And, we will be
looking at the timing of a dividend program.
On behalf of the board of directors, management and 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, 1997
and 1996
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, 1997
was $245,000 as compared to $235,000 for the fiscal year ended September 30,
1996. This represents a $10,000, or 4.3%, increase in net income.
Net Interest Income. The Company's net interest income for the fiscal
years ended September 30, 1997 and 1996 were $1,611,000 and $1,592,000,
respectively. This represents a $19,000, or 1.2%, 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.
Interest income increased $360,000, or 12.4%, from $2,893,000 for the
fiscal year ended September 30, 1996 compared to $3,253,000 for the fiscal year
ended September 30, 1997. The increase resulted primarily from a $4.0 million
increase in the average balance of the Company's interest-earning assets. The
increase in the average balances of interest earning assets was due to a $4.9
million increase in the loan portfolio.
The average balances of mortgage loans increased $3.6 million combined
with the 28 basis point increase in the average yield on such loans resulted in
a $322,000 increase in the interest income between fiscal years. Additionally,
the $1.5 million increase in the average balance of consumer loans combined with
the 68 basis point increase in the average yield of these loans resulted in a
$158,000 increase in interest income between the fiscal years. The average
balance of commercial loans decreased by $119,000 from the prior year while the
average yield on commercial loans increased 18 basis points resulting an $8,000
decrease in interest income.
<PAGE>
The average yield of the investment portfolio decreased 21 basis points
while the average balance increased by $179,000 resulting in a $19,000 decrease
in interest income. The $679,000 decrease in the average balance of
mortgage-backed securities offset the 14 basis point increase in the average
yield of these securities resulting in a $62,000 decrease in interest income
between fiscal years.
Interest expense increased $341,000, or 26.2%, to $1,642,000 for the
fiscal year ended September 30, 1997 from $1,301,000 for the fiscal year ended
September 30, 1996. This increase primarily resulted from a $5.1 million
increase in the average balance of interest-bearing liabilities combined with a
33 basis point increase in the average cost of these same interest-bearing
liabilities. The primary cause of the increase in interest expense is an
increase in the average balance of certificate of deposits of $1,880,000
combined with a 75 basis point increase in the cost of these funds.
Provision for Loan Losses. The Company's provision for loan losses for
the fiscal year ended September 30, 1997 was $90,000, compared to $64,000 for
the fiscal year ended September 30, 1996. 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. Nonperforming
loans are considered as part of this review. Nonperforming loans totaled
$385,000 as of September 30, 1997 as compared to $252,000 as of September 30,
1996.
Non-Interest Income. The Company's non-interest income for the fiscal
year ended September 30, 1997 was $154,000, as compared to $61,000 for the
fiscal year ended September 30, 1996. This represents a $93,000, or 152.5%,
increase in non-interest income. The increase resulted primarily from a $54,000
increase in gain on sale of securities combined with a $25,000 increase in
service charges on deposits and a $14,000 increase in other non-interest income
fees.
Non-Interest Expense. The Company's non-interest expense for the fiscal
year ended September 30, 1997 was $1,319,000, as compared to $1,148,000 for the
fiscal year ended September 30, 1996. The $171,000 increase in non-interest
expense is due to a $182,000 increase in compensation and employee benefits, a
$32,000 increase in occupancy and equipment, a $25,000 increase in data
processing, a $15,000 increase in professional fees, and a $152,000 increase in
the other noninterest expenses. These increases were partially offset by a
decrease of $235,000 in the SAIF deposit insurance.
Compensation and Employee Benefits expense increased $182,000 to
$628,000 for the fiscal year ended September 30, 1997. This increase was
primarily due to the acquisition of the Carlyle branch in September 1996.
SAIF deposit insurance decreased by $235,000 for the fiscal year ended
September 30, 1997. During the fiscal year ended September 30, 1996, the Bank
paid a one time special FDIC assessment of $188,000 and reimbursed the seller of
the Carlyle branch $54,000 for the assessment related to those deposits. The
decrease in the SAIF deposit insurance was due to a lower premium rate in 1997
which resulted from the recapitalization of the Savings Association Insurance
Fund.
Other non-interest expenses increased $152,000 to $357,000 for the
fiscal year ended September 30, 1997 as compared to $205,000 for the fiscal year
ended September 30, 1996. The primary reason for the increase was the
acquisition of the Carlyle branch in September 1996 including amortization of
intangible assets totaling $62,000 and general operating expenses for that
branch.
Provision for Income Taxes. The Company's provision for income taxes
for the fiscal year ended September 30, 1997 was $111,000, as compared to
$206,000 for the fiscal year ended September 30, 1996. This represents a
$95,000, or 46.1%, decrease in the provision for income taxes.
<PAGE>
Comparison of Financial Condition as of September 30, 1997 and 1996
General. At September 30, 1997, the Company's total assets were $48.5
million, a decrease of $1.5 million, or 3.0%, as compared to $50.0 million at
September 30, 1996. The decrease resulted from a decrease in cash and cash
equivalents of $2.1 million, or 43.9%, which was partially offset by the
$491,000 increase in investment securities, and the $203,000 increase in loans,
net of the allowance for loan losses. The decrease in cash and cash equivalents
was primarily due to the repurchase of the Company's common stock during the
year ended September 30, 1997.
Loans. Loans, net of the allowance for loan losses, at September 30,
1997 were $27.1 million, an increase of $203,000, or 0.7%, compared to $26.9
million for the fiscal year ended September 30, 1996. Mortgage loans increased
$731,000, or 3.7%, and consumer loans increased $134,000, or 2.9%, as compared
to the fiscal year ended September 30, 1996. Commercial loans decreased
$449,000, or 30.7%, to $1,013,000 for the year ended September 30, 1997 as
compared to $1,462,000 for the year ended September 30, 1996. Home equity lines
of credit and share loans decreased $182,000 and $50,000, respectively. This was
a decrease of 18.2% and 15.8%, respectively, as compared to fiscal year ended
September 30, 1997. Personnel changes and competitive pressures at the Carlyle
branch during the first two quarters of fiscal year 1997 were the primary cause
for the nominal growth in net loans.
Average loan balances for 1997 amounted to $27.2 million, an increase
of $4.9 million, or 22.1%, over the previous fiscal year. The Company continues
to emphasize consumer and commercial lending. The increase in average balances
between fiscal years is attributed to the Carlyle branch office acquisition in
September 1996. This acquisition accounted for $2.6 million in mortgage loans,
$1.2 million in consumer loans and $62,000 in commercial loans.
The residential mortgage loans increased $1.1 million during 1997, or
6.2%, to $19.0 million as compared to $17.9 million for the fiscal year ended
September 30, 1996. During 1997, loan originations for residential mortgage
loans amounted to $2.1 million as compared to $3.9 million in originations for
the prior fiscal year.
Residential mortgage loans represents 69.7% of gross loans. Consumer
loans, consisting primarily of automobile loans, made up 21.4% of gross loans,
commercial loans made up 3.7% of gross loans, and non-residential real estate
loans comprised 5.2% of the portfolio at September 30, 1997.
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, 1997 amounted to 385,000 or .8%
of total assets as compared to $252,000 or .50% of total assets as of September
30, 1996.
<PAGE>
The following table sets forth an analysis of the Company's gross
allowance for possible loan losses for the periods indicated.
<TABLE>
For the
Fiscal Year
Ended
September 30,
--------------
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Allowance at beginning of period .......................................... $ 117 $ 113
Provision for loan losses ................................................. 90 64
Recoveries:
Consumer loans ........................................................ 1 10
--------------
Total recoveries ................................................ 1 10
--------------
Charge-offs:
One- to four-family loans ............................................. 2 --
Consumer loans ........................................................ 37 48
Commercial ............................................................ 4 22
--------------
Total charge-offs ............................................... 43 70
--------------
Net charge-offs ................................................. (42) (60)
--------------
Balance at end of period ........................................ $ 165 $ 117
===============
Ratio of allowance for loan losses to gross loans outstanding at
the end of the period ................................................. 0.60% 0.43%
Ratio of net charge offs to average loans outstanding net during the period 0.15% 0.27%
Ratio of allowance for loan losses to total nonperforming loans
at the end of the period .............................................. 42.86% 46.43%
</TABLE>
Securities. Securities represented 35.0% of total assets as of
September 30, 1997 compared to 32.4% of total assets as of September 30, 1996.
Securities increased $791,000, 4.9%, from $16.2 million to $17.0 million as of
September 30, 1997. At September 30, 1997, the Company held approximately $17.0
million in securities of which $16.8 million were held as available for sale,
and $210,000 were non-marketable equity securities. Of the $17.0 million in
securities, $14.7 million, or 86.4%, were U. S. Government and agency
securities, $770,000, or 4.5%, were obligations of state and political
subdivisions, $210,000, or 1.2%, were non-marketable equity securities and $1.3
million, or 7.9%, were mortgage-backed securities.
Deposits. At September 30, 1997, total deposits amounted to $36.6
million, or 75.4%, of total assets. Total deposits decreased $268,000, or 0.7%
from September 30, 1996. A $804,000 decline in time deposits greater than
$100,000 coupled with a $384,000 decline in savings deposits partially offset a
$319,000 and $601,000 increase in demand deposits and other time deposits,
respectively.
Return on Equity and Assets
Net income for the fiscal year ended September 30, 1997 was $245,000 as
compared to $235,000 for the fiscal year ended September 30, 1996.
Return on average assets (ROA) for the year ended September 30, 1997
was .51% as compared to .55% for the year ended September 30, 1996.
Return on average equity (ROE) for the year ended September 30, 1997
was 2.05% as compared to 1.87% for the year ended September 30, 1996. The stock
repurchase programs implemented by the Company during the year ended September
30, 1997 had a positive impact on ROE. The Company purchased 174,175 shares of
its common stock from the open market.
The average equity to average assets ratio as of September 30, 1997 was
24.9% as compared to 29.6% as of September 30, 1996. The primary cause for the
decrease was the repurchase of the Company's common stock.
Average Balance Sheet
The following table presents the average balance sheet for the Company
for the years ended September 30, 1997 and 1996, 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,
-------------------------------------------------------------
1997 1996
-------------------------------------------------------------
(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) .......................... $ 20,122 $ 1,544 7.67% $ 16,542 $ 1,222 7.39%
Commercial loans (5) ........................ 1,139 99 8.69% 1,258 107 8.51%
Consumer loans (5) .......................... 5,949 521 8.76% 4,491 363 8.08%
------------------- ------------------
Total loans, net ...................... $ 27,210 $ 2,164 7.95% $ 22,291 $ 1,692 7.59%
Mortgage-backed securities (3) .............. 1,412 135 9.56% $ 2,091 $ 197 9.42%
Investment securities (2)(3)(6) ............. 14,192 823 5.80% 14,013 842 6.01%
Interest-bearing deposits ................... 2,285 118 5.16% 2,728 150 5.50%
FHLB stock (3) .............................. 187 13 6.95% 176 12 6.82%
------------------- ------------------
Total interest-earning assets ......... $ 45,286 $ 3,253 7.18% $ 41,299 $ 2,893 7.01%
Non-interest earning assets:
Office properties and equipment, net ........ $ 607 $ 282
Real estate, net ............................ 5 --
Other non-interest earning assets ........... 2,145 867
-------- --------
Total assets .......................... $ 48,043 $ 42,448
======== ========
Interest-bearing liabilities:
Passbook accounts ........................... $ 3,590 $ 92 2.56% $ 2,952 $ 91 3.08%
NOW accounts ................................ 5,098 95 1.86% 4,393 76 1.73%
Money market accounts ....................... 3,818 121 3.17% 1,918 64 3.34%
Certificates of deposit ..................... 22,213 1,334 6.01% 20,333 1,070 5.26%
------------------- -------------------
Total deposits ........................ $ 34,719 $ 1,642 4.73% $ 29,596 $ 1,301 4.40%
Total interest-bearing ................ $ 34,719 $ 1,642 4.73% $ 29,596 $ 1,301 4.40%
liabilities
Non-interest bearing liabilities:
Non-interest bearing deposits ............... $ 1,001 $ 19
Other liabilities ........................... 355 273
-------- --------
Total liabilities ..................... 36,075 $ 29,888
Stockholders' equity .......................... 11,968 12,560
-------- --------
Total liabilities and retained
earnings ............................ $ 48,043 $ 42,448
======== ========
Net interest income ........................... $ 1,611 $ 1,592
======== ========
Interest rate spread (4) ...................... 2.45% 2.61%
Net interest margin (1) ....................... 3.56% 3.85%
Ratio of average interest-earning assets
to average interest-bearing liabilities ..... 130.44% 139.54%
<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>
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Due To Increase (Decrease) Due To
Rate Volume Net Rate Volume Net
------------------------ ------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans .............. $ 47 $ 275 $ 322 $ 40 $ 139 $ 179
Commercial loans ............ 2 (10) (8) (25) 61 36
Consumer loans .............. 30 128 158 (11) 131 120
-----------------------------------------------------
Total loans ........... 79 393 472 4 331 335
Mortgage-backed securities .. 3 (65) (62) (10) (41) (51)
Investment securities ...... (29) 10 (19) (68) 160 92
Interest-bearing deposits ... (9) (23) (32) (5) 74 69
FHLB stock .................. -- 1 1 -- (1) (1)
-----------------------------------------------------
Total net change income
on interest-earning
assets .............. 44 316 360 (79) 523 444
-----------------------------------------------------
Interest-bearing liabilities:
Passbook .................... (15) 16 1 20 (12) 8
NOW accounts ................ 6 13 19 (2) 12 10
Money market accounts ....... (3) 60 57 6 (26) (20)
Certificates of deposit ..... 152 112 264 19 81 100
-----------------------------------------------------
Total net change in
expense on interest-
bearing liabilities . 140 201 341 43 55 98
-----------------------------------------------------
Net change in net
interest income ..... $ (96) $ 115 $ 19 $ (122) $ 468 $ 346
=====================================================
</TABLE>
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.
<PAGE>
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, 1997, 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 $2.8 million,
representing a cumulative one-year interest-rate sensitivity gap of negative
5.9%. 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.
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 3.3 years, excluding mortgage-backed securities, as of September 30, 1997.
The Company is in the process of creating an 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, 1997 and 1996, the Company originated one-to-four-family
residential mortgage loans in the amount of $2.1 million and $3.9 million,
respectively. These activities were funded primarily by principal repayments on
loans, payments on mortgage-backed securities and maturities of investment
securities.
<PAGE>
The net cash used for investing activities for the fiscal year ended
September 30, 1997 totaled $553,000. Investment activities included the purchase
of securities which totaled $10.1 million and $8.6 million for the fiscal year
ended September 30, 1997 and 1996, respectively. 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, 1997 and 1996, the Company used its
sources of funds primarily to fund loan commitments, pay maturing certificates
of deposits and satisfy deposit withdrawals. At September 30, 1997, the Company
had commitments to extend credit in the amount of $1.3 million. These
commitments were comprised of variable-rate and fixed-rate commitments in the
amounts of $330,000 and $933,000, respectively. The range of rates on fixed-rate
commitments was 8.25% to 11.25%.
At September 30, 1997, certificates of deposits totaled $24.1 million,
or 65.9% of total deposits, as compared to $24.3 million, or 66.0% of total
deposits for fiscal year ended September 30, 1996. Time deposits over $100,000
accounted for $1.1 million and $1.9 million as of September 30, 1997 and 1996,
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, 1997, the Company was in compliance with all regulatory capital
requirements with a Tier 1 capital to risk-weighted assets ratio of 50.4%,
compared to the minimum ratio required of 4.0%, total capital to risk-weighted
assets ratio of 51.2% compared to the minimum ratio required of 8.0% and a Tier
1 capital to average assets ratio of 22.9% 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 decreased $1.1 million to $11.7
million as of September 30, 1997. This decrease was due to the repurchase $1.6
million of the Company's common stock.
Impact of New Accounting Pronouncements
Earnings per Share Statement of Financial Accounting Standard No. 128,
"Earnings per Share" (FAS 128), was issued in February 1997 by the Financial
Accounting Standards Board. The standard replaces the presentation of primary
earnings per share (EPS) with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures. Basic EPS is computed as net income
available to common stockholders divided by the weighted average common shares
outstanding. The standard is effective for financial statements issued for
periods ending after December 15, 1997. The Company does not believe the
adoption of the standard will have a material impact on the consolidated
financial statements.
If SFAS 128 had been in effect during the year ending September 30,
1997, the following per share amounts would have been reported:
Year Ended
September 30, 1997
-----------------------
Basic earnings per share $0.28
Diluted earnings per share $0.27
Disclosure of Information about Capital Structure Statement of
Financial Accounting Standard No. 129, "Disclosure of Information about Capital
Structure" (FAS 129), was issued in February 1997 by the Financial Accounting
Standards Board. The standard requires an entity to explain the pertinent rights
and privileges of the various securities outstanding. The standard is effective
for financial statement periods ending after December 15, 1997. The Company does
not believe the adoption of the standard will have a material impact on the
consolidated financial statements.
<PAGE>
Reporting Comprehensive Income Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income" (FAS 130), was issued in July
1997 by the Financial Accounting Standards Board. The standard establishes
reporting of comprehensive income for general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period and all other events and circumstances from nonowner sources.
The standard is effective for financial statement periods beginning after
December 15, 1997. The Company does not believe the adoption of the standard
will have a material impact on the consolidated financial statements.
Disclosures about Segments of an Enterprise and Related Information
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (FAS 131), was issued in July 1997 by
the Financial Accounting Standards Board. The standard requires the Corporation
to disclose the factors used to identify reportable segments including the basis
of organization, differences in products and services, geographic areas, and
regulatory environments. FAS 131 additionally requires financial results to be
reported in the financial statements for each reportable segment. The standard
is effective for financial statement periods beginning after December 15, 1997.
The Company does not believe they will have any reportable segments.
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 was $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.
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>
Year 2000 Compliance
The Year 2000 compliance issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the century
date change occurs, date-sensitive systems may either fail or not operate
properly unless the underlying programs are modified or replaced.
The Bank has initiated a program to assure that all computer
applications will be Year 2000 compliant. This program includes the monitoring
and testing of the Bank's outside data processing provider and other vendors
Year 2000 compliance progress.
The Bank is continuing to assess the extent of programming changes
required to address this issue. Although final cost estimates have not been
determined, it is not expected that these expenses will have a material impact
on the Company's or the Bank's financial condition, liquidity, or results of
operations.
<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 sheets of CSB Financial
Group, Inc. and subsidiary as of September 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years 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 audits.
We conducted our audits 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 audits provide 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, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
Champaign, Illinois
October 24, 1997
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
(in thousands, except share data)
<TABLE>
ASSETS
1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks ........................................... $ 1,687 $ 598
Interest-bearing deposits ......................................... 988 4,168
-------------------
Cash and cash equivalents ........................... 2,675 4,766
Securities:
Held to maturity ............................................... -- 1,987
Available for sale ............................................. 16,777 14,044
Nonmarketable equity securities ................................ 210 165
Securities purchased under agreements to resell ................... -- 300
Loans, net of allowance for loan losses of $165 in 1997 and
$117 in 1996 ................................................... 27,134 26,931
Premises and equipment ............................................ 602 594
Accrued interest receivable ....................................... 290 331
Intangible assets ................................................. 660 722
Other assets ...................................................... 186 176
-------------------
Total assets ........................................ $ 48,534 $ 50,016
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand ...................................................... $ 9,073 $ 8,754
Savings ..................................................... 3,395 3,779
Time deposits > $100,000 .................................... 1,085 1,889
Other time deposits ......................................... 23,033 22,432
-------------------
Total deposits ...................................... 36,586 36,854
Other liabilities .............................................. 52 297
Deferred income taxes .......................................... 244 81
-------------------
Total liabilities ................................... 36,882 37,232
-------------------
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;
1,035,000 shares issued ..................................... 10 10
Paid-in capital ................................................ 7,813 7,586
Retained earnings .............................................. 6,039 5,794
Unrealized gain (loss) on securities available for sale, net of
income tax effect ........................................... 110 (24)
Unearned employee stock ownership plan shares .................. (202) (582)
Management recognition plan .................................... (589)
-------------------
13,181 12,784
Less cost of treasury stock; 1997 132,775 shares ............... (1,529) --
-------------------
Total stockholders' equity .......................... 11,652 12,784
-------------------
Total liabilities and stockholders' equity .......... $ 48,534 $ 50,016
===================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1997 and 1996
(in thousands, except share data)
<TABLE>
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans and fees on loans ....................................... $ 2,164 $ 1,692
Securities:
Taxable .................................................... 936 1,026
Nontaxable ................................................. 35 25
Other ......................................................... 118 150
------------------
3,253 2,893
------------------
Interest expense:
Deposits ...................................................... 1,642 1,301
------------------
Net interest income ................................ 1,611 1,592
Provision for loan losses ........................................ 90 64
------------------
Net interest income after provision for loan losses 1,521 1,528
------------------
Noninterest income:
Service charges on deposits ................................... 72 47
Gain on sale of securities .................................... 54 --
Other ......................................................... 28 14
------------------
154 61
------------------
Noninterest expense:
Compensation and employee benefits ............................ 628 446
Occupancy and equipment ....................................... 91 59
Data processing ............................................... 95 70
SAIF deposit insurance ........................................ 20 255
Professional fees ............................................. 128 113
Other ......................................................... 357 205
------------------
1,319 1,148
------------------
Income before income taxes ......................... 356 441
Income taxes ..................................................... 111 206
------------------
Net income ......................................... $ 245 $ 235
==================
Earnings per share ................................. $ 0.27 $ 0.25
==================
Weighted average shares outstanding ................ 900,784 958,648
===================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997 and 1996
(In thousands, except share data)
<TABLE>
Preferred Common Paid-In
Stock Stock Capital
--------------------------------
<S> <C> <C> <C>
Balance at September 30, 1995 ................... $ -- $ -- $ --
Net proceeds from 1,035,000 shares of common
stock issued in conversion ................ -- 10 7,574
Employee stock ownership plan shares allocated -- -- 12
Change in unrealized gain (loss) on securities
available for sale ........................ -- -- --
Net income ................................... -- -- --
--------------------------------
Balance at September 30, 1996 ................... -- 10 7,586
Employee stock ownership plan shares allocated -- -- 20
Purchase of treasury stock
Grant of 62,100 shares for management
recognition plan .......................... -- -- 207
Management recognition plan shares allocated
Change in unrealized gain (loss) on securities
available for sale ........................ -- -- --
Net income ................................... -- -- --
--------------------------------
Balance at September 30, 1997 ................... $ -- $ 10 $ 7,813
================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997 and 1996
(In thousands, except share data)
<TABLE>
--------------------------------------------------------------------------
Unrealized Unearned
Gain (Loss) Employee
on Securities Stock Management
Retained Available Ownership Recognition Treasury
Earnings for Sale Plan Shares Plan Stock Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 ................ $ 5,559 $ 16 $ -- $ -- $ -- $ 5,575
Net proceeds from 1,035,000 shares of
common stock issued in conversion ........ -- -- (662) -- -- 6,922
Employee stock ownership plan shares allocated -- -- 80 -- -- 92
Change in unrealized gain (loss) on securities
available for sale ......................... -- (40) -- -- -- (40)
Net income ................................... 235 -- -- -- -- 235
--------------------------------------------------------------------------
Balance at September 30, 1996 ................ 5,794 (24) (582) -- -- 12,784
Employee stock ownership plan shares allocated -- -- 49 -- -- 69
Purchase of treasury stock ................... -- -- 331 -- (1,943) (1,612)
Grant of 62,100 sahres for management
recognition plan ........................... -- -- -- (621) 414 --
Management recognition plan shares allocated . -- -- -- 32 -- 32
Change in unrealized gain (loss) on securities
available for sale ......................... -- 134 -- -- -- 134
Net income ................................... 245 -- -- -- -- 245
--------------------------------------------------------------------------
Balance at September 30, 1997 ................ $ 6,039 $ 110 $ (202) $ (589) $ (1,529) $ 11,652
==========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997 and 1996
(in thousands)
<TABLE>
1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 245 $ 235
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses .................................... 90 64
Provision for depreciation ................................... 40 20
Amortization of intangible assets ............................ 62 --
Employee stock ownership plan compensation expense ........... 69 92
Management recognition plan compensation expense ............. 32 --
Deferred income taxes ........................................ 80 (56)
Gain on sale of securities ................................... (54) --
Amortization and accretion of securities ..................... (36) (3)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable ......... 41 (23)
Decrease in other assets ................................... 18 528
Decrease in other liabilities .............................. (245) (4)
--------------------
Net cash flows from operating activities ............. 342 853
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases .................................................... (10,124) (7,978)
Proceeds from sales .......................................... 2,726 --
Proceeds from maturities and paydowns ........................ 6,600 4,527
Securities held to maturity:
Purchases .................................................... -- (596)
Proceeds from maturities ..................................... -- 986
Proceeds from sales .......................................... 359 --
Nonmarketable equity securities:
Purchases of nonmarketable equity securities ................. (45) --
(Increase) decrease in securities purchased under agreements
to resell .................................................... 300 (300)
Loan originations, net of principal payments on loans ........... (321) (3,873)
Purchases of premises and equipment ............................. (48) (67)
Purchase of branch, net of cash acquired ........................ -- 3,852
--------------------
Net cash flows from investing activities ............. (553) (3,449)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) stock conversion deposits ................... $ -- $ (9,193)
Proceeds from sale of common stock, net of offering cost ....... -- 6,922
Net decrease in demand deposits, NOW accounts
passbook savings accounts .................................... (65) (1,043)
Net decrease in time deposits ................................... (203) (230)
Purchase of treasury stock ...................................... (1,612) --
--------------------
Net cash flows from financing activities ............. (1,880) (3,544)
--------------------
Net decrease in cash and cash equivalents ............ (2,091) (6,140)
Cash and cash equivalents, beginning of year ....................... 4,766 10,906
--------------------
Cash and cash equivalents, end of year ............................. $ 2,675 $ 4,766
====================
Cash paid during the year for:
Interest ........................................................ $ 1,643 $ 1,295
====================
Income taxes .................................................... $ 47 $ 264
====================
</TABLE>
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997 and 1996
(in thousands)
<TABLE>
1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Investing and Financing Activities:
Change in unrealized gain (loss) on securities available for sale $ 217 $ (65)
====================
Change in deferred income taxes attributable to the unrealized
gain (loss) on securities available for sale ................. $ 83 $ (25)
====================
Transfer of securities from held to maturity to available for sale . $ 1,657 $ 8,602
====================
Transfer to other real estate owned ................................ $ 28 $ --
====================
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
NOTES 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. 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.
<PAGE>
Nonmarketable equity securities Nonmarketable equity securities consist of the
Banks' required investment in the capital stock of the Federal Home Loan Bank.
This investment is carried at cost as the fair value is not readily
determinable.
Loans Loans are stated at the principal amount outstanding less unearned
interest income and an allowance for loan losses. Interest income on principally
all 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.
Loans are 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 would 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
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, 1997 or 1996.
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.
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.
Intangible assets Core deposit intangible and goodwill were recorded as part of
the acquisition of the Carlyle branch in 1996. Core deposit intangible is being
amortized by the straight line method over a ten year period. Goodwill is being
amortized by the straight line method over a fifteen year period.
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.
<PAGE>
Earnings per common share Earnings per share are determined by dividing net
income for the period by the weighted average number of shares of common stock
and common stock equivalents outstanding. Common stock equivalents assume
exercise of stock options and use of proceeds to purchase treasury stock at the
average market price for the period. Unallocated shares of the ESOP are not
considered outstanding.
Reclassifications Certain reclassifications have been made to the balances as of
September 30, 1996, with no effect on net income, to be consistent with the
classifications adopted for September 30, 1997.
Effect of New Accounting Standards
Earnings per Share Statement of Financial Accounting Standard No. 128,
"Earnings per Share" (FAS 128), was issued in February 1997 by the Financial
Accounting Standards Board. The Statement replaces the presentation of
primary earnings per share (EPS) with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for entities with complex capital structures. Basic EPS is computed
as net income available to common stockholders divided by the weighted
average common shares outstanding. The Statement is effective for financial
statements issued for periods ending after December 15, 1997. The Company
does not believe the adoption of the Standard will have a material impact on
the consolidated financial statements.
If SFAS 128 had been in effect during the year ending September 30, 1997, the
following per share amounts would have been reported:
Year Ended
September 30, 1997
-----------------------
Basic earnings per share $0.28
Diluted earnings per share $0.27
Disclosure of Information about Capital Structure Statement of Financial
Accounting Standard No. 129, "Disclosure of Information about Capital
Structure" (FAS 129), was issued in February 1997 by the Financial Accounting
Standards Board. The Standard requires an entity to explain the pertinent
rights and privileges of the various securities outstanding. The Standard is
effective for financial statement periods ending after December 15, 1997. The
Company does not believe the adoption of the Standard will have a material
impact on the consolidated financial statements.
Reporting Comprehensive Income Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" (FAS 130), was issued in July 1997 by
the Financial Accounting Standards Board. The standard establishes reporting
of comprehensive income for general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period and all other events and circumstances from
nonowner sources. The Standard is effective for financial statement periods
beginning after December 15, 1997. The Company does not believe the adoption
of the Standard will have a material impact on the consolidated financial
statements.
Disclosures about Segments of an Enterprise and Related Information Statement
of Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131), was issued in July 1997 by the
Financial Accounting Standards Board. The standard requires the Corporation
to disclose the factors used to identify reportable segments including the
basis of organization, differences in products and services, geographic
areas, and regulatory environments. FAS 131 additionally requires financial
results to be reported in the financial statements for each reportable
segment. The Standard is effective for financial statement periods beginning
after December 15, 1997. The Company does not believe the adoption of the
Standard will have a material impact on the consolidated financial
statements.
<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 in a manner
similar to 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:
<TABLE>
Gross Gross
Available for Sale Amortized Unrealized Unrealized Fair
September 30, 1997 Cost Gains Losses Value
---------------------------------------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions .............................. $ 748 $ 22 $ -- $ 770
U.S. Government and agency ................... 14,619 65 15 14,669
Mortgage backed securities ................... 1,232 106 -- 1,338
--------------------------------------
$16,599 $ 193 $ 15 $16,777
======================================
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
======================================
Obligations of states and political
subdivisions .............................. $ 149 $ -- $ 6 $ 143
Mortgage backed securities ................... 1,838 111 1 1,948
--------------------------------------
$ 1,987 $ 111 $ 7 $ 2,091
======================================
</TABLE>
The amortized cost and fair value of securities available for sale at September
30, 1997, 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, 1997
--------------------
Available for Sale
--------------------
Amortized Fair
Cost Value
--------------------
Less than one year ...................................... $ 2,716 $ 2,710
Due after one year through five years ................... 9,944 9,989
Due after five years through ten years .................. 2,707 2,740
Due after ten years
Mortgage-backed securities .............................. 1,232 1,338
----------------
$16,599 $16,777
================
<PAGE>
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". For the year ended September 30, 1996, 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
during 1996.
During the first quarter of the year ending September 30, 1997, the Company
transferred $1,657 of securities classified as held-to-maturity to the
available-for-sale classification and recorded $27 as a component of equity, net
of $17 of deferred taxes. In accordance with the requirements of Statement of
Financial Accounting Standards No. 115, these securities are now accounted for
at fair value.
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 years ended September 30, 1997
and 1996.
Gross realized gains from the sale of securities available for sale were $54
during 1997.
Note 4. Loans
Loans are summarized as follows:
September 30,
------------------
1997 1996
------------------
Mortgage loans:
One to four family ........................... $19,044 $17,931
Commercial real estate ....................... 969 1,296
Other loans secured by real estate ........... 444 499
------------------
Total mortgage loans .............. 20,457 19,726
------------------
Commercial and consumer loans:
Commercial loans ............................. 1,013 1,462
Consumer loans ............................... 4,771 4,637
Home equity lines of credit .................. 816 998
Share loans .................................. 266 316
------------------
Total commercial and consumer loans 6,866 7,413
------------------
Less:
Allowance for loan losses .................... (165) (117)
Deferred loan fees ........................... (15) (23)
Unearned income on consumer loans ............ (9) (68)
------------------
(189) (208)
------------------
Loans, net ........................ $27,134 $26,931
==================
<PAGE>
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.
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 1997 is as follows:
Balance as of October 1, 1996 ................................ $ 934
New loans ................................................. 282
Repayments ................................................ (218)
-----
Balance as of September 30, 1997 ............................. $ 998
=====
Note 5. Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
Year Ended
September 30,
--------------------
1997 1996
--------------------
Balance, beginning .......................... $ 117 $ 113
Provision charged to income .............. 90 64
Charge-offs .............................. (43) (70)
Recoveries ............................... 1 10
--------------------
Balance, ending ............................. $ 165 $ 117
====================
Note 6. Premises and Equipment
Premises and equipment consist of:
September 30,
-------------------
1997 1996
-------------------
Land ........................................... $ 136 $ 136
Office building ................................ 476 454
Furniture and equipment ........................ 389 363
-------------------
1,001 953
Less accumulated depreciation .................. (399) (359)
-------------------
$ 602 $ 594
===================
Note 7. Deposits
At September 30, 1997, the scheduled maturities of time deposits are as follows:
Year Ended September 30: Amount
- ------------------------------------------------------
1998 ................................ $10,856
1999 ................................ 10,176
2000 ................................ 1,832
2001 ................................ 616
2002 and thereafter ................ 638
-------
$24,118
=======
<PAGE>
Note 8. Income Taxes
Income taxes for the years ended September 30, 1997 and 1996, consists of the
following components:
Current Deferred Total
-------------------------------
1997
Federal ................................ $ 31 $ 80 $ 111
State .................................. -- -- --
-------------------------------
$ 31 $ 80 $ 111
===============================
1996
Federal ................................ $ 214 $ (38) $ 176
State .................................. 48 (18) 30
-------------------------------
$ 262 $ (56) $ 206
===============================
The Company and its subsidiary file consolidated federal income tax returns.
Under provisions of the Internal Revenue Code and similar sections of the
Illinois income tax law for the years beginning before January 1, 1996,
qualifying thrifts could claim bad debt deductions based on the greater of (1) a
specified percentage of taxable income, as defined, or (2) actual loss
experience.
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, 1997 and 1996, 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, 1997 and 1996.
Income tax expense differed from the statutory federal rate of 34% for the years
ended September 30, 1997 and 1996, as follows:
1997 1996
----------------
Statutory rate applied to earnings before income tax ...... $ 121 $ 150
Increase in income taxes resulting from:
State income taxes, net of federal income tax benefit .. -- 20
Tax exempt interest income ............................. (13) (8)
Other .................................................. 3 44
----------------
$ 111 $ 206
================
<PAGE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
1997 1996
---------------
Unrealized loss on securities available for sale .... $ -- $ 15
Allowance for loan losses - book .................... 64 45
SAIF assessment ..................................... -- 94
Illinois net operating loss carryforward ............ 43 --
---------------
Total deferred tax assets ............. 107 154
---------------
Unrealized gain on securities available for sale .... (68)
Allowance for loan losses - tax ..................... (76) (79)
Cash basis adjustment ............................... (96) (124)
FHLB stock basis .................................... (7) (8)
Premises and equipment basis ........................ (24) (14)
Other ............................................... (80) (10)
---------------
Total deferred tax liabilities ........ (351) (235)
---------------
Net deferred tax liabilities .......... $ (244) $ (81)
===============
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, 1997 and 1996:
September 30,
----------------------------------
1997 1996
----------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------
Assets:
Cash and cash equivalents ...... $ 2,675 $ 2,675 $ 4,766 $ 4,766
Securities held to maturity .... -- -- 1,987 2,091
Securities available for sale .. 16,777 16,777 14,044 14,044
Securities purchased under
agreements to resell ........ -- -- 300 300
Nonmarketable equity securities 210 210 165 165
Accrued interest receivable .... 290 290 331 331
Loans .......................... 27,134 27,210 26,931 26,793
Liabilities:
Deposits ....................... 36,586 36,649 36,854 36,894
Accrued interest payable ....... 13 13 14 14
The following methods and assumptions were used by the Company in estimating the
fair value disclosures for financial instruments:
Cash and cash equivalents The carrying values reported in the balance sheet for
cash and cash equivalents, including cash and due from banks and interest
earning deposits approximate their fair values.
<PAGE>
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
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, 1997, that the
Bank meets all capital adequacy requirements to which it is subject.
<PAGE>
As of September 30, 1997, 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, 1997:
Total Capital (to Risk Weighted
Assets)
Consolidated ............. $11,047 51.17% $1,727 8.0% N/A
Bank ..................... $ 8,777 40.96% $1,714 8.0% $2,143 10.0%
Tier I Capital (to Risk Weighted
Assets)
Consolidated ............. $10,882 50.40% $ 864 4.0% $ N/A
Bank ..................... $ 8,612 40.19% $ 857 4.0% $1,286 6.0%
Tier I Capital (to Average
Adjusted Assets)
Consolidated ............. $10,882 22.94% $1,897 4.0% $ N/A
Bank ..................... $ 8,612 19.04% $1,809 4.0% $2,261 5.0%
As of September 30, 1996:
Total Capital (to Risk Weighted
Assets)
Consolidated ............. $12,203 56.92% $1,715 8.0% $ N/A
Bank ..................... $ 8,020 38.70% $1,658 8.0% $2,072 10.0%
Tier I Capital (to Risk Weighted
Assets)
Consolidated ............. $12,086 56.39% $ 857 4.0% $ N/A
Bank ..................... $ 7,903 38.15% $ 829 4.0% $1,243 6.0%
Tier I Capital (to Average
Adjusted Assets)
Consolidated ............. $12,086 27.72% $1,744 4.0% $ N/A
Bank ..................... $ 7,903 19.67% $1,607 4.0% $2,009 5.0%
</TABLE>
Note 11. Officer, Director and Employee Benefit Plans
Employee Stock Ownership Plan (ESOP)
In conjunction with the conversion, an ESOP was created and 82,800 shares of the
Company's stock were purchased for future allocation to employees. The purchase
was funded with a loan from the Company.
Shares are allocated to all eligible employees as the debt is repaid based on a
prorata share of total eligible compensation. Employees 21 or older with at
least 1,000 hours of service in a twelve month period are eligible to
participate. Benefits will vest over a five year period and in full after five
years of qualified service.
<PAGE>
As shares are committed to be released from unallocated shares, the Bank
recognizes compensation expense equal to the current market price of the shares,
and the shares become outstanding for purposes of calculating earnings per
share. The Bank recognized compensation expense for the ESOP of $69 and $92 for
the years ended September 30, 1997 and 1996, respectively.
Dividends received, if any, by the ESOP on unallocated shares will be used for
debt service.
In July 1997, the Company repurchased 41,400 shares of common stock from the
ESOP. The ESOP used the proceeds received from the repurchase to reduce
outstanding debt to the Company. The balance in unearned ESOP shares was reduced
by the cost of the shares sold to the Company.
The following table reflects the shares held by the plan as of September 30,
1997 and 1996:
1997 1996
----------------
Shares allocated to participants ............................ 11,968 4,487
Unallocated shares .......................................... 29,432 78,313
----------------
Total ......................................... 41,400 82,800
================
Shares committed to be released ............................ 16,292 5,611
Non committed shares (Fair value as of September 30, 1997
and 1996 $309 and $733) ................................. 25,108 77,189
----------------
Total ........................................ 41,400 82,800
================
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, if
any, 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. The Board of Directors determines the annual 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 based on the
prorata share of eligible compensation for the plan year. There have been no
contributions for the years ended September 30, 1997 and 1996.
Management Recognition Plan (MRP) The MRP was approved as of October 10, 1996.
The MRP purchased, with funds provided by the Company, 62,100 shares in the open
market during January 1997. Directors, officers, and employees become vested in
the shares of common stock awarded to them under the MRP at a rate of 20 percent
per year, commencing one year after the grant date, and 20 percent on each
anniversary date thereof for the following four years. As of September 30, 1997,
18,630 shares have been awarded to officers, directors, and employees.
Compensation expense is recognized on a straight line basis over the vesting
period for shares awarded under the plan.
Stock Rights In June 1997, the Board of Directors adopted a Rights Agreement.
Under the Agreement, the Board declared a dividend of one right for each
outstanding share of Common Stock to stockholders of record on June 23, 1997.
There was no fair value attached to these rights as of the grant date. The
rights are not exercisable until the Distribution date which is defined as the
earlier of the tenth business day after a public announcement that a person or
group of affiliated or associated persons acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of Common
Stock of the Company or the tenth business day after the commencement or
announcement of an intention to make a tender offer or exchange offer that would
result in any person or group or affiliated or associated persons becoming an
acquiring person. Each right enables the registered holder to purchase from the
Company one share of Common Stock at a price of $36.
Stock Option Plans
The Company has two stock option plans which may grant options to purchase
common stock at the market price on the date of the grant. The options will be
granted by a committee comprised of directors.
<PAGE>
Options for up to 103,500 shares may be granted to employees and directors under
the Stock Option Plan approved May 22, 1996 and options for up to 103,500 shares
may be granted to key employees and directors under the 1997 Nonqualified Stock
Option Plan.
The options under the Stock Option Plan become exercisable at a rate of 20
percent per year commencing one year after the grant date. At September 30,
1997, 51,750 options had been granted.
The terms of the options under the Nonqualified Stock Option Plan and the
exercise schedule are at the discretion of the Committee. At September 30, 1997,
no options had been granted.
A summary of the status of the Company's fixed stock option plan as of September
30, 1997 and 1996 and changes during the years ending on those dates is
presented below:
1997 1996
------------------ -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------------------------------
Options outstanding, beginning
of the year ....................... 25,875 $ 9.08 $ -- $ --
Options granted ...................... 25,875 9.36 25,875 9.08
Options exercised .................... -- -- -- --
--------------------------------------
Options outstanding, end of year ..... 51,750 $ 9.22 $25,875 $ 9.08
======================================
Options exercisable .................. 5,175 --
Weighted-average fair value of options
granted during the year ........... $ 3.33 $ 3.02
The fair value of each grant is estimated at the grant date using the
Black-Sholes option-pricing model with the following weighted-average
assumptions for grants in 1997 and 1996: dividend rate of 0%; price volatility
of 9.34% and a risk free interest rate of 6.10%.
Employee Stock Plans
At September 30, 1997, the Company has three stock based compensation plans
which were described above. As permitted by generally accepted accounting
principles, grants under these plans are accounted for following APB Opinion No.
25 and related interpretations. Accordingly, no compensation expense was
recognized for grants under the Stock Option Plan and $32 of compensation
expense was recognized under the MRP.
Had compensation cost for the stock-based compensation plan been determined
based on the grant date fair values of awards (the method described in FASB
Statement No. 123), reported net income and earnings per common share would have
been reduced to the proforma amounts shown below.
1997 1996
-------------------
Net income:
As reported ....................... $ 245 $ 235
Proforma .......................... 193 227
Earning per share:
As reported ....................... $ 0.27 $ 0.25
Proforma .......................... 0.21 0.24
<PAGE>
The following table summarizes information about fixed stock options outstanding
at September 30, 1997:
Options Options
Outstanding Exercisable
----------------------------- ------------
Weighted
Average
Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
- ---------------------------------------------------------
$ 9.08 25,875 8.7 5,175
9.36 25,875 9.1 --
------------------------------------------
51,750 8.9 5,175
==========================================
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, 1997
follows:
<TABLE>
Variable Fixed Range of Rates
Rate Rate Total on Fixed Rate
Commitments Commitments Commitments Commitments
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitment to extend credit $ 330 $ 933 $ 1,263 8.25% - 11.25%
</TABLE>
The Bank generally originates single-family residential loans within its primary
lending area, Marion County. The Bank's underwriting policies require such fixed
rate loans to be made at 80% loan-to-value and variable rate loans to be made at
85% loan-to-value based upon appraised values unless private mortgage insurance
is obtained.
These loans are secured by the underlying properties.
The Company does not engage in the use of interest rate swaps, futures, forwards
or option contracts, or other financial instruments with similar
characteristics.
<PAGE>
Note 13. 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 $344
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 14. 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 was $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
amounted to $54.
The $242 assessment payable is included in other liabilities as of September 30,
1996 in the accompanying balance sheet. The assessment for the Bank was not
deductible for tax purposes until paid, therefore, deferred tax assets of $94
were provided for the tax impact of the assessment as of September 30, 1996.
<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 Registrat handles stock transfer and registration,
quoted on the Nasdaq "SmallCap" market under address changes, corrections/changes in
the symbol "CSBF" since its subsidiaryu, taxpayer identification numbers, and Form 1099
Centralia Savings Bank, converted to stock form tax reporting questions. If you require assistance
in October 1995. or have any questions, please contact Registrat
by mail or phone:
On October 5, 1995, the Company issued
1,035,000 shares of its Common Stock at a Registrar and Transfer Company
purchase price of $8.00 per share in connection 10 Commerce Drive
with the conversion of the Savings Bank from a Cranford, New Jersey 07016
state chartered mutual savings bank to a state
chartered capital stock savings bank. The closing Annual Meeting
price per share for the Holding Company's The annual meeting of stockholders of CSB
Common Stock as reported on the Nasdaq Financial Group, Inc. will be held on January 9,
"SmallCap" market on November 28, 1997 1998 at 10:00 a.m. at 801 12th Street, Carlyle,
$12.50. The Holding Company has not paid Illinois.
cash dividends on its Common Stock.
Independent Auditors
Stock Pricing History McGladrey & Pullen, LLP
The following table sets forth the high and low 1806 Fox Drive
sales prices as reported on the Nasdaq Champaign, Illinois 61820
"SmallCap" market during the past year.
Special Counsel
Fiscal 1997 High Low Schiff Hardin & Waite
- -------------------------------------------------------- 7200 Sears Tower
First Quarter 10 1/2 9 5/8 Chicago, Illinois 60606
Second Quarter 11 3/8 10
Third Quarter 12 1/2 11
Fourth Quarter 12 1/2 11 3/4
</TABLE>
<PAGE>
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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
