U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
Commission file number 0-26650
CSB FINANCIAL GROUP, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 37-1336338
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 South Poplar, Centralia, Illinois 62801
- --------------------------------------- ----------
(Address or principal executive offices) (Zip Code)
Registrant's telephone number, including area code (618) 532-1918
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share and related
Common Stock Purchase Rights
---------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
State issuer's revenues for its most recent fiscal year. $3,407,000
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at November 28, 1997 was $10,181,038. For purposes of this
determination only, directors and executive officers of the Registrant have been
presumed to be affiliates. The market value is based upon $12.50 per share, the
last sales price as quoted on the Nasdaq "Small Cap" market for November 28,
1997.
The Registrant had 814,483 shares of Common Stock outstanding at November 28,
1997, not including 28,968 shares held by the Registrant's Employee Stock
Ownership Plan which have not been allocated to participants.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
<PAGE>
Rider 1A
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Annual Report to Stockholders for the year ended September 30,
1997 is incorporated by reference to Part II of this Form 10-KSB.
The registrant's proxy statement for its 1998 annual meeting of stockholders
expected to be held on January 9, 1998 is incorporated by reference to Part III
of this Form 10-KSB.
The Exhibit Index is located at page 27 and 28.
<PAGE>
INDEX
PART I Page
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I
Item 1. Description of Business.
On October 5, 1995, CSB Financial Group, Inc. (the "Company") acquired all of
the outstanding shares of Centralia Savings Bank (the "Bank") upon the Bank's
conversion from a state chartered mutual savings bank to a state chartered stock
savings bank. The Company purchased 100% of the outstanding stock of the Bank
using 50% of the net proceeds from the Company's initial stock offering which
was completed on October 5, 1995. The Company sold 1,035,000 shares of $0.01 par
value common stock at a price of $8 per share, including 82,800 shares purchased
by the Bank's Employee Stock Ownership Plan ("ESOP"). The ESOP shares were
acquired by the Bank with proceeds from a Company loan totaling $662,000. The
gross proceeds of the offering were $8,280,000. After reducing gross proceeds
for conversion costs of $696,000 net proceeds totaled $7,584,000. The Company's
stock trades on the NASDAQ Small Caps market under the symbol "CSBF".
The acquisition of the Bank by the Company was accounted for like a "pooling of
interests" under generally accepted accounting principles. The application of
the pooling of interests method records the assets and liabilities of the merged
entities on an historical cost basis with no goodwill or other intangible assets
being recorded.
The Company's assets at September 30, 1997 consist primarily of the investment
in the Bank of $9.4 million and short-term marketable securities of $1.3
million. Currently, the Company does not transact any material business other
than through its subsidiary, the Bank.
Business of the Bank
The Bank is an Illinois-chartered stock savings bank regulated by the Illinois
Commissioner of Savings and Residential Finance (the "Commissioner"). The Bank
was originally chartered in 1879 as a federally chartered savings and loan
association. The deposits of the Bank are insured up to the applicable limits by
the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF"). The Bank's primary market area consists of Marion
County, Illinois, which includes the cities of Carlyle and Centralia. The Bank
maintains two offices, one in Centralia and one in Carlyle, and provides a full
range of retail banking services at each office, with emphasis on one- to
four-family residential mortgage loans, consumer and commercial loans. At
September 30, 1997, the Bank had total assets, liabilities and stockholders'
equity of $47.1 million, $37.7 million, and $9.4 million, respectively.
The Bank's principal business consists of the acceptance of retail deposits from
the residents and small businesses surrounding its offices and the investment of
those deposits, together with funds generated from operations, primarily in one-
to four-family residential mortgage loans. The Bank also invests in multifamily
mortgage, commercial real estate, construction, land development and other
loans. At September 30, 1997, the Bank's gross loan portfolio totaled $27.3
million or 57.96% of total assets. In addition to its lending activities, the
Bank also invests in U.S. Treasury securities, government agency securities,
local municipal securities and mortgage-backed securities. At September 30,
1997, the Bank's securities portfolio totaled $15.7 million or 33.33% of total
assets with $15.5 million classified as available for sale and $.2 million
classified as nonmarketable equity securities.
The Bank's revenues are derived principally from interest on its mortgage,
consumer and commercial loans, and, to a lesser extent, interest and dividends
on its securities. The Bank's primary sources of funds are deposits, principal
and interest payments, and principal prepayments on loans. Through its
wholly-owned subsidiary, Centralia SLA, Inc., the Bank engages in the sale of
insurance services.
<PAGE>
The executive offices of the Company and Savings Bank are located at 200 South
Poplar Street, Centralia, Illinois 62801 and the telephone number is (618)
532-1918.
Composition of the Loan Portfolio. The Bank's historical lending strategy has
focused primarily on the origination of residential mortgage loans secured by
one- to four-family homes and consumer loans to customers with whom the Bank
already had a deposit or lending relationship. Beginning in May, 1994, the Bank
began offering consumer loans, primarily installment loans for the purchase of
automobiles, to the general public. The Bank also originates, from time to time,
multi-family and commercial real estate loans and commercial non-real estate
loans, although such loans presently constitute a relatively small percentage of
the Bank's total loan portfolio. The following table sets forth in greater
detail the composition of the Bank's loan portfolio by type of loan as of the
dates indicated:
At September 30,
---------------------------------
1997 1996
---------------------------------
(In Thousands)
---------------------------------
Amount Percent Amount Percent
---------------------------------
Mortgage Loans:
One- to four-family .................... $18,677 68.36% $17,404 64.13%
Multi-family ........................... 367 1.34% 527 1.94%
Commercial real estate ................. 969 3.55% 1,296 4.78%
Other loans secured by real estate ..... 444 1.63% 499 1.84%
---------------------------------
Total mortgage loans .............. 20,457 74.87% 19,726 72.69%
Commercial and Consumer Loans:
Commercial ............................. 1,013 3.71% 1,462 5.39%
Consumer ............................... 4,771 17.46% 4,637 17.09%
Home equity lines of credit ............ 816 2.99% 998 3.68%
Share loans ............................ 266 0.97% 316 1.16%
---------------------------------
Total commercial and consumer loans 6,866 25.13% 7,413 27.31%
Total loans ....................... 27,323 100.00% 27,139 100.00%
======= =======
Less:
Deferred fees .......................... 15 23
Unearned income on consumer loans ...... 9 68
Allowance for loan losses .............. 165 117
------- -------
Total loans, net .................. 27,134 26,931
======= =======
The Bank had no loans held for sale at September 30, 1997 or 1996. As of
September 30, 1997, 49.55% of the Bank's loans had adjustable interest rates.
The types of loans that the Bank may originate are subject to federal and state
laws and regulations. Interest rates charged by the Bank are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board and legislative tax policies.
<PAGE>
Loan Maturity
The following table shows the maturity of the Bank's loans at September 30,
1997. The table does not include the effect of future loan repayment activity.
While the Bank cannot project future loan prepayment activity, the Bank
anticipates that in periods of stable interest rates, prepayment activity would
be lower than prepayment activity experienced in periods of declining interest
rates. In general, the Bank originates adjustable and fixed-rate one- to
four-family loans with maturities from 15 to 30 years, one-to-four family loans
with balloon features which mature from 1 to 5 years, multi-family loans with
maturities from 1 to 5 years, adjustable-rate commercial real estate loans with
maturities of 20 to 25 years, commercial loans with maturities of 90 days to one
year, and consumer loans with maturities of 1 to 5 years.
<TABLE>
At September 30, 1997
------------------------------------
Mortgage Commercial Consumer Total
Loans Loans Loans Loans
------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Amounts due:
One year or less .............................. $ 2,643 $ 161 $ 621 $3,425
====================================
After one year:
More than one year to five years ........... $ 3,617 $ 606 $ 5,175 $ 9,398
More than five years to ten years .......... 2,539 246 57 2,842
More than ten years ........................ 11,658 -- -- 11,658
-------------------------------------
Total due after September 30, 1998 ...... $17,814 $ 852 $ 5,232 $23,898
=====================================
Interest rate terms on amounts due after one year:
Fixed ...................................... $ 5,293 $ 243 $ 4,822 $10,358
Adjustable ................................. 12,521 609 410 13,540
</TABLE>
One- to Four-Family Loans. The primary lending activity of the Bank has been the
extension of first mortgage residential loans to enable borrowers to purchase
existing one- to four-family homes or to construct new one- to four-family
homes. At September 30, 1997 and 1996, the Bank's gross loan portfolio consisted
of approximately $18.7 million, or 68.36%, and $17.4 million, or 64.13%,
respectively of loans secured by one- to four-family residential real estate.
The predominant type of first-mortgage residential loan currently offered by the
Savings Bank to loan customers is an adjustable rate mortgage that adjusts on
either a one-year or three-year basis with a 30 year amortization.
Balloon loans were the predominant type of residential first mortgage loan
offered by the Savings Bank prior to September, 1994. Such loans are amortized
over a maximum period of 30 years for purposes of computing the borrower's
monthly mortgage payments. Under the terms of its standard balloon loan, the
Savings Bank is generally obligated, at the option of the borrower, to refinance
the loan at the time the balloon payment becomes due, provided that the loan is
current at such time. The initial interest rate on each balloon loan offered by
the Savings Bank is fixed at the rate prevailing at the time that the loan is
originated. Most of the balloon loans in the Savings Bank's portfolio further
provide that the interest rate will not increase by more than one to two
percentage points at the end of each balloon period and that the maximum
interest rate will not exceed the initial rate by more than three percentage
points either over the life of the mortgage or for as long as the home that is
being financed remains owner-occupied.
The Bank has attempted to shift the balance between its ARMs and balloon loans
by ceasing to offer balloon loans to new customers and encouraging the holders
of existing balloon loans to replace such loans, upon maturity, with ARMs.
Management believes that the higher interest rate ceilings and the interest rate
floor included in its ARMS will result in less interest rate risk to the Bank
than the interest rate risk posed by its balloon loans.
The Bank's one- to four-family residential loan portfolio also contains a
limited number of fixed-rate loans. The Bank has extended, and expects to
continue to extend, from time to time, fixed-rate loans to customers who prefer
a fixed rate of interest. The Bank will not originate a fixed-rate loan unless
such loan complies with the underwriting standards of the Federal Home Loan
Mortgage Corporation ("FHLMC") and the FNMA. This will give the Bank the option
of either holding such fixed-rate loans in its portfolio or selling such loans
in the secondary mortgage market.
<PAGE>
The Bank's reliance on ARMs and balloon loans, rather than fixed-rate mortgage
loans, makes the Bank's first-mortgage residential loan portfolio more
interest-rate sensitive. However, since the interest earned on ARMs or on
balloon loans which are refinanced on a one-, three- or five-year cycle varies
with prevailing interest rates, such loans do not offer the Bank as predictable
a cash flow as do longer-term, fixed-rate loans. ARMs and balloon loans which
are subject to refinancing on a one-, three- or five-year cycle may also carry
increased credit risk as the result of the imposition of higher monthly payments
upon borrowers during periods of rising interest rates. During such periods, the
risk of default on such loans may increase, due to the upward adjustment of
interest costs to the borrower. Management has attempted to minimize such risk
by qualifying borrowers at the maximum rate of interest payable under the terms
of the ARM or the refinanced balloon loan.
The loan-to-value ratio of most single-family first-mortgage loans made by the
Bank is 80%. If the loan-to-value ratio exceeds 85%, the Bank requires private
mortgage insurance to cover the excess over 85%. If private mortgage insurance
is obtained, the mortgage is limited to 95% of the lesser of the appraised value
or purchase price. The maximum loan-to-value ratio on a loan for the
construction of a new single-family residential home is 80%, and the maximum
loan-to-value ratio on loans on two- to four-family dwellings is 75%.
The Bank requires title insurance, or an attorney's opinion as to title, and
fire and casualty insurance coverage of the property securing any mortgage loan
originated or purchased by the Bank. All of the Bank's real estate loans contain
due-on-sale clauses which provide that if the mortgagor sells, conveys or
alienates the property underlying the mortgage note, the Bank has the right at
its option to declare the note immediately due and payable without notice.
Multi-family Residential Lending. At September 30, 1997 and 1996, the Bank's
gross loan portfolio consisted of approximately $367,000, or 1.34%, and $527,000
or 1.94%, respectively of loans secured by multi-family residential real estate.
Multi-family real estate loans are generally limited to 70% of the appraised
value of the property or the selling price, whichever is less. Loans secured by
multi-family real estate are generally larger and, like commercial real estate
loans, involve a greater degree of risk than one- to four-family residential
loans.
Commercial Real Estate Loans. The Bank has historically made commercial real
estate loans on a limited basis. At September 30, 1997 and 1996, the Bank's
commercial real estate loan portfolio amounted to $969,000, or 3.55%, and
$1,296,000, or 4.78%, respectively of the Bank's gross loan portfolio. The
Bank's practice has been to underwrite such loans based on its analysis of the
amount of cash flow generated by the business in which the real estate is used
and the resulting ability of the borrower to meet its payment obligations.
Although such loans are secured by a first mortgage on the underlying property,
the Savings Bank also generally seeks to obtain a personal guarantee of the loan
by the owner of the business in which the property is used.
Commercial Loans. As of September 30, 1997 and 1996, the Bank's gross loan
portfolio consisted of approximately $1,013,000 or 3.71% and $1,462,000, or
5.39%, respectively of commercial loans secured by accounts receivable,
inventory, farm land or outstanding stock issued by a corporation. The Bank has
also made, from time to time, unsecured personal loans to the sole proprietors
of small businesses on the same terms and conditions on which it makes other
unsecured personal loans.
<PAGE>
Consumer Loans. The Bank originates a variety of consumer loans, generally
consisting of installment loans for the purchase of motor vehicles and boats,
loans to purchase household goods, loans secured by savings accounts at the Bank
and unsecured personal loans. At September 30, 1997 and 1996, the Bank's
portfolio of consumer loans totaled approximately $5,853,000, or 21.42%, and
$5,951,000, or 21.93%, respectively of the Bank's gross loan portfolio. The Bank
may make a loan to finance the purchase of a new and previously untitled motor
vehicle or boat in an amount equal to the lesser of 5% over the factory invoice
price or 90% of the sticker price of the motor vehicle or boat. Loans for the
purchase of used motor vehicles are limited to the amount of the wholesale price
listed for the vehicle in the National Automobile Dealers' Association used car
guide. Any loan for the purchase of a motor vehicle or boat is secured by the
purchased vehicle or boat and is written to amortize over a maximum period of
between two and five years, depending on the age of the motor vehicle or boat
offered as collateral. Loans to finance the purchase of new household goods may
be made in an amount equal to 100% of the sales price of such goods. Such loans
are secured by the goods purchase. Loans for the purchase of household goods may
be amortized for a maximum period of five years. Loans secured by a customer's
savings account with the Savings Bank are limited to an amount equal to 90% of
the amount of the deposit. A loan that is secured by a deposit with a specific
maturity date is written with a term matching the maturity date of the deposit.
Unsecured personal loans are limited to $15,000 per borrower and to a term of
three to five years. As a practical matter, most such loans do not exceed
$10,000 and are amortized over a period of three years.
Loan Processing. Upon receipt of a completed loan application from a prospective
borrower, the Savings Bank obtains a credit report from a credit reporting
agency and, depending on the type of loan, verifies employment, income and other
financial information received from the prospective borrower and requests
additional financial information, if necessary. If a loan in the amount of
$50,000 or more is secured by real estate, the Bank requires an independent
appraisal of the real estate. Real estate securing a loan of $50,000 or less is
appraised only by the Bank's internal appraisal committee. Once such information
and appraisals are complete, the application is submitted for underwriting by
designated staff. The application, together with the underwriter's
recommendations, is then forwarded for review and action to the President of the
Bank, the Loan Committee of the Board of Directors, or the Board of Directors as
a whole, depending on the size and nature of the loan.
The Board of Directors of the Bank has established the following guidelines for
loan approval authority for all loans originated by the Bank: (i) any lending
officer of the Bank may approve loans up to $75,000, (ii) the Bank's President
may approve loans up to $125,000, (iii) the Loan Committee of the Board of
Directors may approve loans up to $300,000, and (iv) the Board of Directors may
approve any loan in excess of $300,000 up to the Bank's applicable legal lending
limit.
Loan Purchases and Sales. The Bank has occasionally purchased loans originated
by other financial institutions, secured by one- to four-family residential
properties or commercial real estate located outside of its primary market area.
At September 30, 1997 and 1996, the total balance outstanding on first mortgage
loans purchased by the Bank was $671,000 and $653,000, respectively. At
September 30, 1997 and 1996, the Bank did not have any loans held as available
for sale. Historically, the Bank has not sold any of its loans into the
secondary market.
<PAGE>
Delinquencies
The Bank's collection procedures with respect to delinquent loans include
written notice of delinquency contact by letter or telephone by Bank personnel.
Most loan delinquencies are cured within 90 days and no legal action is taken.
With respect to mortgage loans, if the delinquency exceeds 180 days, and in the
case of consumer loans, if the delinquency exceeds 90 days, the Bank institutes
measure to enforce its remedies resulting from the default, including the
commencement of foreclosure action of the repossession of collateral.
At September 30, 1997, delinquencies in the Bank's loan portfolio were as
follows:
At September 30, 1997
--------------------------------------------------------
Total
30-89 Days(1) 89 Days or More(1) Delinquent Loans
------------------ ----------------- -----------------
Number Principal Number Principal Number Principal
Of Balance Of Balance Of Balance
Loans of Loans Loans Of Loans Loans Of Loans
-------------------------------------------------------
(Dollars in Thousands)
Real estate loans ..... 7 $ 92 8 $255 15 $347
Commercial loans -- -- -- -- -- --
Consumer loans ........ 18 125 13 71 31 196
------------------------------------------------------
25 217 21 326 46 543
======================================================
Delinquent loans
to gross loans ..... 0.79% 1.41% 2.20%
===== ===== =====
At September 30, 1996, delinquencies in the Bank's loan portfolio were as
follows:
At September 30, 1997
--------------------------------------------------------
Total
30-89 Days(1) 89 Days or More(1) Delinquent Loans
------------------ ----------------- -----------------
Number Principal Number Principal Number Principal
Of Balance Of Balance Of Balance
Loans of Loans Loans Of Loans Loans Of Loans
-------------------------------------------------------
(Dollars in Thousands)
Real estate loans ... 11 $363 5 $115 16 $478
Commercial loans .... -- -- 1 1 1 1
Consumer loans ...... 18 119 6 27 24 146
---------------------------------------------------
29 $482 12 $143 41 $625
===================================================
Delinquent loans
to gross loans ... 1.78% 0.53% 2.31%
===== ===== =====
(1) The Bank discontinues the accrual of interest on loans when the borrower is
delinquent as to a contractually due principal or interest payment and the
Bank's management deems collection to be unlikely. The number of loans and
principal balance includes nonaccrual loans.
Nonperforming Assets
The Bank places loans that are 90 days or more past due on nonaccrual status
unless such loans are adequately collateralized and in the process of
collection. Accrual of interest on a nonaccrual loan is resumed only when all
contractually past due payments are brought current and management believes that
the outstanding loan principal and contractually due interest are no longer
doubtful of collection.
<PAGE>
Foreclosed properties are recorded at the fair value at the date of foreclosure.
Any subsequent reduction in the fair value of a foreclosed property, along with
expenses to maintain or dispose of a foreclosed property, is charged against
current earnings. As of September 30, 1997, the Bank had one foreclosed property
or "real estate owned." As of September 30, 1996, the Bank had no "real estate
owned."
The following table sets forth information with respect to the Bank's
nonperforming assets for the periods indicated.
At
September 30,
------------
1997 1996
------------
(In Thousands)
Loans accounted for on a nonaccrual basis
One- to four-family loans ................................. $ 143 $ 189
Commercial loans .......................................... -- 1
Consumer loans ............................................ 55 45
------------
Total nonaccrual loans ............................... 198 235
------------
Accruing loans which are contractually past due 90 days or more:
One- to four-family loans ................................. 154 15
Consumer loans ............................................ 33 2
------------
Total 90 days past due and accruing interest ........ 187 17
------------
Total nonaccrual and 90 days past due loans .......... 385 252
Real estate owned .............................................. 28 --
-----------
Total nonperforming assets ........................... $ 413 $ 252
===========
Total nonperforming assets to total assets ........... 0.85% 0.50%
===========
Classified Assets. FDIC policies require that each insured depository
institution review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, regulatory examiners have
the authority to identify problem assets and, if appropriate, require them to be
classified. The Bank reviews and classifies its assets at least quarterly. There
are three classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets, with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values, questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continued treatment of the asset as an asset on the
books of the institution is not warranted.
An insured institution is required to establish prudent general allowances for
the loan losses with respect to assets classified as substandard or doubtful.
The institution is required either to charge off assets classified as loss or to
establish a specific allowance for 100% of the portion of the asset classified
as loss.
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.
<PAGE>
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 Loan Losses. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risks
inherent in its loan portfolio and the general economy. The allowance for loan
losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information available to management at such time. While management
believes the Bank's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time, no assurances can be given that the
Bank's level of allowance for loan losses will be sufficient to cover future
loan losses incurred by the Bank or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. The allowance is
based upon a number of factors, including asset classifications, economic
trends, industry experience and trends, industry and geographic concentrations,
estimated collateral values, management's assessments of the credit risk
inherent in the portfolio, historical loan loss experience, and the Bank's
underwriting policies. As of September 30, 1997 and 1996 the Bank's allowance
for loan losses was 0.60% and 0.43% respectively, of gross loans. The Bank will
continue to monitor and modify its allowance for loan losses as conditions
dictate. Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's valuation allowance. These agencies may
require the Bank to establish additional valuation allowances, based on their
judgments of the information available at the time of the examination.
It is the policy of the Bank to charge off customer loans when it is determined
that they are no longer collectible. The policy for loans secured by real
estate, which comprise the bulk of the Bank's portfolio, is to establish loss
reserves in accordance with the Bank's loan classification process, based on
generally accepted accounting practices. It is the policy of the Bank to obtain
an appraisal on all real estate acquired through foreclosure at the time of
foreclosure.
<PAGE>
The following table sets forth activity in the Bank's allowance for loan losses
for the periods set forth in the table.
For the
Fiscal Year Ended
September 30,
------------------
1997 1996
------------------
(In Thousands)
Balance 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)
-----------------
$ 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
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%
=================
The following table sets forth the Bank's allocation of the allowance for loan
losses by category and the percent of the allocated allowance to the total
allowance for each specific loan category. The portion of the allowance for loan
losses allocated to each loan category does not represent the total available
for future losses which may occur within the loan category since the total
allowance for loan losses is a valuation reserve to the entire loan portfolio.
<TABLE>
At September 30,
-----------------------------------------------------------------------------
1997 1996
------------------------------------ ----------------------------------
As % of As % of As % of As % of
Gross Loans in Gross Loans in
Loans in Category to Loans in Category to
Amount Category Gross Loans Amount Category Gross Loans
-----------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family ................. $ 10 0.05% 68.36% $ 10 0.06% 64.13%
Multi-family ........................ -- -- 1.34% -- -- 1.94%
Commercial real estate .............. -- -- 3.55% -- -- 4.78%
Other loans secured by real estate .. -- -- 1.63% -- -- 1.84%
-------------------------------------------------------------------------
Total mortgage loans .......... 10 0.05% 74.87% 10 0.06% 72.69%
-------------------------------------------------------------------------
Commercial and
Consumer Loans:
Commercial ....................... 19 1.88% 3.71% 26 1.78% 5.39%
Consumer ......................... 67 1.40% 17.46% 41 0.88% 17.09%
Home equity lines of credit ...... -- -- 2.99% -- -- 3.68%
Other consumer loans ............. -- -- 0.97% -- -- 1.16%
-------------------------------------------------------------------------
Total commercial and
consumer loans .......... 86 1.25% 25.13% 67 0.90% 27.31%
-------------------------------------------------------------------------
Total Allocated ........................ 96 0.35% 100.00% 77 0.28% 100.00%
======= =======
Unallocated ............................ 69 0.25% 40 0.15%
------------------ -----------------
Total allowance for
loan losses ......................... $165 0.60% $117 0.43%
================== =================
</TABLE>
<PAGE>
Investment Activities
The investment policies of the Company and the Bank, as established by the
respective Board of Directors, attempts to provide and maintain liquidity,
generate a favorable return on investments without incurring undue interest rate
and credit risk, and complement the Company's lending activities. The Company
classifies all securities as available for sale. The investment policies provide
authority to invest in U.S. Treasury and U.S. Government guaranteed securities,
securities backed by federal agencies such as Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the
Federal Farm Credit Bureau ("FFCB"), mortgage-backed securities with maximum
maturities of 20 years which are backed by federal agency securities,
obligations of state and political subdivisions with at least an "A" rating,
certificates of deposit, and securities issued by mutual funds which invest in
securities consistent with the Company's or Bank's allocable investments. The
investment policies provide that the President is authorized to execute all
transactions within specified limits which are reviewed by the Board of
Directors on a monthly basis. From time to time, the Board of Directors may
authorize the President to exceed the policy limitations. The Bank's Interest
Rate Risk Committee monitors compliance with the Bank's investment policy and
generally meets on a quarterly basis.
At September 30, 1997, the Company had $17.0 million in investment securities
consisting of $1.3 million invested in mortgage-backed securities, $14.7 million
invested in U.S. Government and agency, $.8 million invested in local municipal
securities, and $.2 million invested in FHLB stock. Investments in
mortgage-backed securities involve a risk that actual prepayments will exceed
prepayments estimated over the life of the security which may result in a loss
of any premium paid for such instruments thereby reducing the net yield on such
securities. In addition, if interest rates increase the market value of such
securities may be adversely affected, which, in turn, would adversely affect
stockholders' equity to the extent such securities are held as available for
sale.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators through intermediaries (generally
federal government-sponsored enterprises) that pool and repackage the
participation interest in the form of securities to investors such as the Bank.
Such federal government-sponsored enterprises, which guarantee the payment of
principal and interest to investors, include the FHLMC, FNMA and GNMA.
Mortgage-backed securities generally increase the quality of the Bank's assets
by virtue of the guarantees that back them. They are also more liquid than
individual mortgage loans and may be used to collateralize borrowings or other
obligations of the Bank. The Bank has no investments in collateralized mortgage
obligations or real estate investment conduits.
<PAGE>
The following tables set forth certain information regarding the amortized cost
and market values of the Company's securities at the dates indicated.
<TABLE>
At September 30,
-------------------------------------
1997 1996
-------------------------------------
Available for Sale Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency securities ......................... $14,619 $14,669 $13,477 $13,441
Obligations of states and political subdivisions .............. 748 770 606 603
Mortgage backed securities .................................... 1,232 1,338 -- --
------------------------------------
Total Available for Sale ................................. $16,599 $16,777 $14,083 $14,044
====================================
Held to Maturity
U.S. Government and agency securities ......................... $ -- $ -- $ -- $ --
Obligations of states and political subdivisions .............. -- -- 149 143
Mortgage backed securities .................................... -- -- 1,838 1,948
------------------------------------
$ -- $ -- $ 1,987 $ 2,091
====================================
</TABLE>
At September 30, 1997 and 1996, the Company had investments in FHLB stock of
$210,000 and $165,000, respectively.
The following table sets forth information concerning the carrying value,
weighted average yields, and maturities of the Company's investment securities
at September 30, 1997.
<TABLE>
Less Than One Year One to Five Years Five to Ten Years Over Ten Years
------------------- ----------------- ----------------- ---------------
Available for Sale (1) Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average
Value Yield (3) Value Yield (3) Value Yield (3) Value Yield (3)
---------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency securities ...... $ 2,710 5.08% $9,948 6.41% $2,011 7.01% $14,669 6.24%
Obligations of states and
political subdivisions (2) .............. -- -- 41 5.30% 729 5.02% 770 5.03%
-------------------------------------------------------------------------------
Total Available for Sale ................... $ 2,710 5.08% $9,989 6.40% $2,740 6.49% $$15,439 6.18%
===============================================================================
<FN>
(1) Excludes mortgage-backed securities and FHLB stock.
(2) These investments yield lower interest rates as they are exempt from federal
taxes.
(3) Weighted average yields are calculated based on historical cost.
</FN>
</TABLE>
<PAGE>
Deposit Activities and Other Sources of Funds
General. The Company's primary sources of funds for use in lending and investing
and for other general purposes are deposits at the Bank and proceeds from
principal and interest payments on loans, mortgage-backed securities, and
investment securities. Contractual loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources.
Deposit Accounts. The Bank attracts deposits within its primary market area by
offering a variety of deposit accounts, including noninterest bearing checking
accounts, negotiable order of withdrawal ("NOW") accounts, money-market
accounts, passbook savings accounts and certificates of deposit. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates, and competition. Management
generally reviews on a weekly basis the interest rates set for its deposit
accounts. The Bank also relies on customer service and long-standing
relationships with customers to attract and retain deposits.
The following table sets forth the distribution of the Bank's deposit accounts
at the dates indicated and the weighted average nominal rates on each category
of deposits presented.
<TABLE>
At September 30,
-----------------------------------------------------------
1997 1996
----------------------------- ----------------------------
Average Average
Average Total Interest Average Total Interest
Balance Deposits Rate Balance Deposits Rate
-----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Noninterest bearing ..... $ 1,001 2.80% --% $ 19 0.06% --%
Interest-bearing (NOW) .. 5,098 14.27% 1.85% 4,393 14.83% 1.85%
Money market ............ 3,818 10.69% 2.98% 1,918 6.48% 2.65%
Passbook ................ 3,590 10.05% 2.40% 2,952 9.97% 2.40%
Certificates of deposit . 22,213 62.19% 5.54% 20,333 68.66% 5.21%
-----------------------------------------------------------
Total deposit accounts $35,720 100.00% 4.27% $29,615 100.00% 4.26%
===========================================================
</TABLE>
The following table indicates the amount of the Bank's jumbo certificates of
deposit and other time deposits of $100,000 or more by time remaining until
maturity as of September 30, 1997. Jumbo certificates of deposit require minimum
deposits of $100,000 and rates paid on such accounts are negotiable. At
September 30, 1997, total jumbo certificates were $1,085,000.
Certificates
of
Maturity Period Deposits
- ------------------------------------------------ --------------
(In Thousands)
Less than three months ......................... $ 187
Three through six months ....................... 200
Six through twelve months ...................... 179
Over twelve months ............................. 519
------
Total ..................................... $1,085
======
<PAGE>
Borrowings. The Bank may rely on advances from the FHLB of Chicago in the event
of a reduction in available funds from other sources. The Bank is a member of
the FHLB of Chicago, which functions as a central reserve bank providing credit
for savings and loan associations and other member financial institutions. As a
member, the Bank is required to own capital stock in the FHLB of Chicago and is
authorized to apply for advances on the security of such stock and certain of
its mortgage-based loans and other assets, provided that certain standards
relating to creditworthiness have been met. The Bank has borrowed from the FHLB
of Chicago, from time to time, on an overnight basis. At September 30, 1997 and
1996, the Bank had no outstanding borrowings from the FHLB.
Subsidiary Activities
The Bank has one wholly-owned service corporation, Centralia SLA, an Illinois
corporation. Centralia SLA is engaged in the business of selling mortgage life,
mortgage disability, credit life and credit disability insurance to mortgage and
consumer loan customers of the Bank. As of September 30, 1997, the Bank's
investment in Centralia SLA amounted to approximately $19,000 or .04% of the
Bank's total assets. Insurance commissions accounted for $9,000 or approximately
2.5% of the Bank's pre-tax income during the year. Management continues to place
less emphasis on the sale of insurance and anticipates that the amount of such
income will continue to decline over the next few years.
Competition
The Bank's deposit and lending base is presently concentrated in the city of
Centralia and the surrounding area, including Central City to the north, Wamac
to the South, Salem to the east and Hoffman to the west. This area includes
portions of the Illinois counties of Washington, Jefferson, Marion and Clinton,
which are primarily agricultural. Population growth in those four counties has
remained relatively flat in recent years. Management believes that, in recent
years, total deposits have grown only modestly and there has been relatively
little new construction or real estate development in the four-county area.
Management further believes that, as a result, any growth in the mortgage
lending business within the area has also been modest.
The Bank has five principal competitors for deposits and lending business within
the city of Centralia. All five competitors are branches or subsidiaries of
commercial banks. Of these five competitors, one is affiliated with a multi-bank
holding company based in St. Louis, one is affiliated with a regional bank based
in St. Louis, one is affiliated with a multi-bank holding based in Charlotte,
N.C., and the remaining two are branches of independent community banks which
have their main offices in the neighboring towns of Hoffman and Irvington. The
multi-bank holding companies and regional bank have substantially greater
financial resources and currently offer a larger array of financial services
than the Bank. Each of the independent banks also has a slightly larger asset
base than the Bank.
Given the relative lack of growth in its market area and the number and greater
resources of the banks with which it competes, the Bank has experienced, and
expects to continue to experience, strong competition in attracting deposits and
in its mortgage and consumer loan business. In order to retain existing and
attract new deposits, the Bank has historically paid deposit rates at the higher
end of the range offered by its competitors. All of the Bank's principal
competitors in Centralia are, moreover, branches or subsidiaries of commercial
banks with deposits insured under the BIF. Unlike the Bank, such competitors are
able to take advantage of the reduction in the insurance premiums to be paid on
BIF-insured deposits.
Management also believes that, in order to compete effectively for both deposits
and lending business, the Bank must enhance the retail services it offers, so
that its range of services is more comparable to the range offered by its larger
competitors. In providing such services, management hopes to be able to
capitalize on the Bank's ability, as a community bank, to identify and respond
more quickly to local customer needs. The Bank has expanded the retail services
it offers to customers to include, for example, travelers' checks, money orders,
debit cards and ATM services.
<PAGE>
Personnel
As of September 30, 1997, the Company had a total of fifteen full-time employees
and three part-time employees, all of whom were employed at the Bank level. The
Company's employees are not represented by a union or collective bargaining
group. The Company considers its relationship with its employees to be
satisfactory.
Regulation
General
Financial institutions and their holding companies are extensively regulated
under federal and state law by various regulatory authorities including the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board"),
the FDIC and the Commissioner. The financial performance of the Company and the
Savings Bank may be affected by such regulation, although the extent to which
they may be affected cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers, consolidations, and dividends. The system of supervision and
regulation applicable to the Company and the Savings Bank establishes a
comprehensive framework for their operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the depositors of the
Savings Bank, rather than the stockholders of the Company.
The following references to material statutes and regulations affecting the
Company and the Bank are brief summaries thereof and are qualified in their
entirety by reference to such statutes and regulations. Any change in applicable
law or regulations may have a material effect on the business of the Company and
the Bank.
The Savings Bank
General. The Bank is an Illinois-chartered savings bank, the deposit accounts of
which are insured by the SAIF of the FDIC. As a SAIF-insured, Illinois-chartered
savings bank, the Bank is subject to the examination, supervision, reporting and
enforcement requirements of the Commissioner, as the chartering authority for
Illinois savings banks, and the FDIC, as administrator of the SAIF, and to the
statutes and regulations administered by the Commissioner and the FDIC governing
such matters as capital standards, mergers, establishment of branch offices,
subsidiary investments and activities and general investment authority. The Bank
is required to file reports with the Commissioner and the FDIC concerning its
activities and financial condition and will be required to obtain regulatory
approvals prior to entering into certain transactions, including mergers with,
or acquisitions of, other financial institutions.
The Commissioner and the FDIC have extensive enforcement authority over
Illinois-chartered savings banks, such as the Bank. This enforcement authority
includes, among other things, the ability to issue cease-and-desist or removal
orders, to assess civil money penalties and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe and unsound practices.
The Commissioner has established a schedule for the assessment of "supervisory
fees" upon all Illinois savings banks to fund the operations of the
Commissioner. These supervisory fees are computed on the basis of each savings
bank's total assets (including consolidated subsidiaries) and are payable at the
end of each calendar quarter. A schedule of fees has also been established for
certain filings made by Illinois savings banks with the Commissioner. The
Commissioner also assesses fees for examinations conducted by the Commissioner's
staff, based upon the number of hours spent by the Commissioner's staff
performing the examination.
<PAGE>
The system of regulation and supervision applicable to the Bank establishes a
comprehensive framework for its operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the depositors of the Bank.
Changes in the regulatory framework could have a material adverse effect on the
Bank and its operations which, in turn, could have a material adverse effect on
the Company.
Deposit Insurance Premiums
Recent Developments Affecting Deposit Insurance Premiums. Deposits of the Bank
are currently insured by the FDIC under the SAIF. The FDIC also maintains
another insurance fund, the BIF, which primarily insures commercial bank and
some state savings bank deposits. Applicable law requires that the SAIF and BIF
funds each achieve and maintain a ratio of insurance reserves to total insured
deposits equal to 1.25%. In 1995, the BIF reached this 1.25% reserve level, and
the FDIC announced a reduction in BIF premiums for most banks. Based on this
reduction, the highest rated institutions (approximately 92 percent of the
nearly 11,000 BIF-insured banks) will pay the statutory annual minimum of $2,000
for FDIC insurance. Rates for all other institutions were reduced to $.04 per
$100 as well, leaving a premium range of $.03 to $.27 per $100 instead of the
previous $.04 to $.31 per $100. Currently, SAIF-member institutions pay deposit
insurance premiums based on a schedule of $0.23 to $0.31 per $100 of deposits.
Effective September 30, 1996, legislation was enacted to fund the Savings
Association Insurance Fund (SAIF) by assessing SAIF insured institutions a
one-time special assessment of 65.7 basis points on March 31, 1995 deposits.
The assessment for the Bank 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.
Capital Requirements. Under the Illinois Savings Bank Act ("ISBA") and the
regulations of the Commissioner, an Illinois savings bank must maintain a
minimum level of total capital equal to the higher of 4% of total assets or the
amount required to maintain insurance of deposits by the FDIC. The Commissioner
has the authority to require an Illinois savings bank to maintain a higher level
of capital if the Commissioner deems such higher level necessary based on the
savings bank's financial condition, history, management or earnings prospects.
FDIC-insured institutions are required to follow certain capital adequacy
guidelines which prescribe minimum levels of capital and require that
institutions meet certain risk-based and leverage capital requirements. Under
the FDIC capital regulations, an FDIC-insured institution is required to meet
the following capital standards: (i) "Tier 1 capital" in an amount not less than
4% of average total assets; (ii) "Tier 1 capital" in an amount not less than 4%
of risk-weighted assets; and (iii) "total capital" in an amount not less than 8%
of risk-weighted assets.
FDIC-insured institutions in the strongest financial and managerial condition
(with a composite rating of "1" under the Uniform Financial Institutions Rating
System established by the Federal Financial Institutions Examination Council)
are required to maintain "Tier 1 capital" equal to at least 4% of total assets
(the "leverage limit" requirement). For all other FDIC-insured institutions, the
minimum leverage limit requirement is 3% of total assets plus at least an
additional 100 to 200 basis points. Tier 1 capital is defined to include the sum
of common stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus), and minority interests in consolidated
subsidiaries, less all intangible assets (other than qualifying servicing
rights, qualifying purchased credit-card relationships and qualifying
supervisory goodwill), certain identified losses (as defined in the FDIC's
regulations) and investments in certain subsidiaries.
<PAGE>
FDIC-insured institutions also are required to adhere to certain risk-based
capital guidelines which are designed to provide a measure of capital more
sensitive to the risk profiles of individual banks. Under the risk-based capital
guidelines, capital is divided into two tiers: core (Tier 1) capital, as defined
above, and supplementary (Tier 2) capital. Tier 2 capital is limited to 100% of
core capital and includes cumulative perpetual preferred stock, perpetual
preferred stock for which the dividend rate is reset periodically based on
current credit standing, regardless of whether dividends are cumulative or
noncumulative, mandatory convertible securities, subordinated debt, intermediate
preferred stock and the allowance for possible loan and lease losses. The
allowance for possible loan and lease losses includable in Tier 2 capital is
limited to a maximum of 1.25% of risk-weighted assets. Total capital is the sum
of Tier 1 and Tier 2 capital. The risk-based capital framework assigns balance
sheet assets to one of four broad risk categories which are assigned
risk-weights ranging from 0% to 100% based primarily on the degree of credit
risk associated with the obligor. Off-balance sheet items are converted to an
on-balance sheet "credit equivalent" amount utilizing certain conversion
factors. The sum of the four risk-weighted categories equals risk-weighted
assets. The following table presents the Bank's capital position relative to its
capital requirements on September 30, 1997 ($ in thousands).
<TABLE>
To Be Well
Capitalized
Under
For Prompt
Capital Corrective
Adequacy Action
Actual Purposes 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%
</TABLE>
Dividends. Under the ISBA, dividends may be paid by the Bank out of its net
profits (i.e., earnings from current operations, investments, and other assets
plus actual recoveries on loans, net of current expenses including dividends or
interest on deposits, additions to reserves as required by the Commissioner,
actual losses, accrued dividends on preferred stock, if any, and all state and
federal taxes). The written approval of the Commissioner must be obtained,
however, before the Bank may declare dividends in any calendar year in an amount
in excess of 50% of its net profits for that calendar year. In addition, before
declaring a dividend on its capital stock, the Bank must transfer no less than
one-half of its net profits of the preceding half year to its paid-in surplus
until it shall have paid-in surplus equal to 20% of its capital stock. Finally,
the Bank will be unable to pay dividends in an amount which would reduce its
capital below the greater of (i) the amount required by the FDIC, (ii) the
amount required by the Commissioner or (iii) the amount required for the
liquidation account to be established by the Bank in connection with the
Conversion. The Commissioner and the FDIC also have the authority to prohibit
the payment of any dividends by the Savings Bank if the Commissioner or the FDIC
determines that the distribution would constitute an unsafe or unsound practice.
For the fiscal year ended September 30, 1997, the Bank's net profits were
approximately $216,000 and the Savings Bank could have paid dividends totaling
$108,000 without the written approval of the Commissioner.
<PAGE>
Community Reinvestment Act Requirements. The FDIC, the Federal Reserve Board,
the Office of Thrift Supervision ("OTS") and the Office of the Comptroller of
the Currency ("OCC") have jointly issued a final rule (the "Final Rule") under
the Community Reinvestment Act (the "CRA"). The Final Rule eliminates the
existing CRA regulation's twelve assessment factors and substitutes a
performance based evaluation system. The Final Rule became fully effective July
1, 1997.
Under the Final Rule, an institution's performance in meeting the credit needs
of its entire community, including low- and moderate-income areas, as required
by the CRA, are generally evaluated under three tests: the "lending test," the
"investment test," and the "service test." However, an independent financial
institution with assets of less than $250 million, or a financial institution
with assets of less than $250 million that is a subsidiary of a holding company
with assets of less than $1 billion, will be evaluated under a streamlined
assessment method based primarily on its lending record. The streamlined test
considers an institution's loan-to-deposit ratio adjusted for seasonal variation
and special lending activities, its percentage of loans and other lending
related activities in the assessment area, its record of lending to borrowers of
different income levels and businesses and farms of different sizes, the
geographic distribution of its loans, and its record of taking action, if
warranted, in response to written complaints. In lieu of being evaluated under
the three assessment tests or the streamlined test, a financial institution can
adopt a "strategic plan" and elect to be evaluated on the basis of achieving the
goals and benchmarks outlined in the strategic plan. Management of the Company
does not believe that the new CRA regulations will adversely affect the Savings
Bank.
The Company
General. On October 5, 1995, the Company became the sole stockholder of the
Bank. As such, the Company is a bank holding company. As a bank holding company,
the Company is subject to regulation by the Federal Reserve Board under the Bank
Holding Company Act (BHCA). In accordance with Federal Reserve Board policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might
not do so absent such policy. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve Board and is required to file periodic
reports of its operations and such additional information as the Federal Reserve
Board may require. Because the Bank is chartered under Illinois law, the Company
is also subject to registration with, and regulation by, the Commissioner under
the ISBA.
The BHCA requires prior Federal Reserve Board approval for, among other things,
the acquisition by a bank holding company of direct or indirect ownership or
control of more than five percent of the voting shares or substantially all the
assets of any bank, or for a merger or consolidation of a bank holding company
with another bank holding company. With certain exceptions, the BHCA prohibits a
bank holding company from acquiring direct or indirect ownership or control of
voting shares of any company which is not a bank or bank holding company and
from engaging directly or indirectly in any activity other than banking or
managing or controlling banks or performing services for its authorized
subsidiaries. A bank holding company may, however, engage in or acquire an
interest in a company that engages in activities which the Federal Reserve Board
has determined by regulation or order to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
A bank holding company is a legal entity separate and distinct from its
subsidiary bank or banks. Normally, the major source of a holding company's
revenue is dividends a holding company receives from its subsidiary banks. The
right of a bank holding company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon their liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations for
federal funds purchased and securities sold under repurchase agreements, as well
as deposit liabilities. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, in the event of a loss suffered by the FDIC in
connection with a banking subsidiary of a bank holding company (whether due to a
default or the provision of FDIC assistance), other banking subsidiaries of the
holding company could be assessed for such loss.
<PAGE>
Federal laws limit the transfer of funds by a subsidiary bank to its holding
company in the form of loans or extensions of credit, investments, or purchases
of assets. Transfers of this kind are limited to ten percent of a bank's capital
and surplus with respect to each affiliate and to twenty percent to all
affiliates in the aggregate, and are also subject to certain collateral
requirements. These transactions, as well as other transactions between a
subsidiary bank and its holding company, must also be on terms substantially the
same as, or at least as favorable as, those prevailing at the time for
comparable transactions with non-affiliated companies or, in the absence of
comparable transactions, on terms or under circumstances, including credit
standards, that would be offered to, or would apply to, non-affiliated
companies.
Capital Requirements. The Federal Reserve Board has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the FDIC for the Savings Bank. The Company's Tier 1 and
total capital significantly exceed the Federal Reserve Board's capital adequacy
requirements.
Other Regulations.
FDICIA. FDICIA was enacted on December 19, 1991. In addition to providing for
the recapitalization of the Bank Insurance Fund ("BIF") of the FDIC, FDICIA
represents a comprehensive and fundamental change to banking supervision. FDICIA
imposes relatively detailed standards and mandates the development of additional
regulations governing nearly every aspect of the operations, management and
supervision of banks and bank holding companies like the Company and the Bank.
As required by FDICIA, and subsequently amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, the federal banking
regulators adopted (effective August 9, 1995) interagency guidelines
establishing standards for safety and soundness for depository institutions on
matters such as internal controls, loan documentation, credit underwriting,
interest-rate risk exposure, asset growth, and compensation and other benefits
(the "Guidelines"). In addition, the federal banking regulators have proposed
asset quality and earnings standards to be added to the Guidelines. The agencies
expect to request a compliance plan from an institution whose failure to meet
one or more of the standards is of such severity that it could threaten the safe
and sound operation of the institution. FDIC regulations enacted under FDICIA
also require all depository institutions to be examined annually by the banking
regulators and depository institutions having $500 million or more in total
assets to have an annual independent audit, an audit committee comprised solely
of outside directors, and to hire outside auditors to evaluate the institution's
internal control structure and procedures and compliance with laws and
regulations relating to safety and soundness. The FDIC, in adopting the
regulations, reiterated its belief that every depository institution, regardless
of size, should have an annual independent audit and an independent audit
committee.
FDICIA requires the banking regulators to take prompt corrective action with
respect to depository institutions that fall below certain capital levels and
prohibits any depository institution from making any capital distribution that
would cause it to be considered undercapitalized. Regulations establishing five
capital categories of well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized
became effective December 19, 1992. Institutions that are not adequately
capitalized may be subjected to a broad range of restrictions on their
activities and will be required to submit a capital restoration plan which, to
be accepted by the regulators, must be guaranteed in part by any company having
control of the institution. Only well capitalized institutions and adequately
capitalized institutions receiving a waiver from the FDIC will be permitted to
accept brokered deposits, and only those institutions eligible to accept
brokered deposits may provide pass-through deposit insurance for participants in
employee benefit plans. In other respects, FDICIA provides for enhanced
supervisory authority, including greater authority for the appointment of a
conservator or receiver for undercapitalized institutions.
<PAGE>
A range of other regulations adopted as a result of FDICIA include requirements
applicable to closure of branches; additional disclosures to depositors with
respect to terms and interest rates applicable to deposit accounts; requirements
for the banking agencies to adopt uniform regulations for extensions of credit
secured by real estate; modification of accounting standards to conform to
generally accepted accounting principles including the reporting of off-balance
sheet items and supplemental disclosure of estimated fair market value of assets
and liabilities in financial statements filed with the banking regulators;
increased penalties in making or failing to file assessment reports with the
FDIC; greater restrictions on extensions of credit to directors, officers and
principal stockholders; and increased reporting requirements on agricultural
loans and loans to small businesses.
As required by FDICIA, the FDIC has established a risk-based assessment system
for the deposit insurance provided to depositors at depository institutions
whereby assessments to each institution are calculated upon the probability that
the insurance fund will incur a loss with respect to the institution, the likely
amount of such loss, and the revenue needs of the insurance fund. Under the
system, deposit insurance premiums are based upon an institution's assignment to
one of three capital categories and a further assignment to one of three
supervisory subcategories within each capital category. The result is a nine
category assessment system with initial assessment rates ranging from
twenty-three cents to thirty-one cents per one hundred dollars of deposits in an
institution. The classification of an institution into a category will depend,
among other things, on the results of off-site surveillance systems, capital
ratio, and CAMELS rating (a supervisory rating of capital, asset quality,
management, earnings, liquidity and sensitivity to market risk).
The CDR Act. On September 23, 1994, the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "CDR Act") was enacted. The CDR Act
includes more than 50 regulatory relief provisions designed to streamline the
regulatory process for banks and thrifts and to eliminate certain duplicative
regulations and paperwork requirements established after, and largely as a
result of, the savings and loan debacle. Well run community banks with less than
$250 million in assets will be examined every 18 months rather than annually.
The application process for forming a bank holding company has been greatly
reduced. Also, the requirement that call report data be published in local
newspapers has been eliminated.
Also, the CDR Act establishes dual programs and provides funding in the amount
of $382 million to provide for development services, lending and investment in
distressed urban and rural areas by community development financial institutions
and banks. In addition, the CDR Act includes provisions relating to flood
insurance reform, money laundering, regulation of high-cost mortgages, and small
business and commercial real estate loan securitization.
The Branching Act. On September 29, 1994, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Branching Act") was enacted. Under the
Branching Act, beginning September 29, 1995, adequately capitalized and
adequately managed bank holding companies are allowed to acquire banks across
state lines, without regard to whether the transaction is prohibited by state
law, however, they are required to maintain the acquired institutions as
separately chartered institutions. Any state law relating to the minimum age of
target banks (not to exceed five years) will be preserved. Under the Branching
Act, the Federal Reserve Board will not be permitted to approve any acquisition
if, after the acquisition, the bank holding company would control more than 10%
of the deposits of insured depository institutions nationwide or 30% or more of
the deposits in the state where the target bank is located. The Federal Reserve
Board could approve an acquisition, notwithstanding the 30% limit, if the state
waives the limit either by statute, regulation or order of the appropriate state
official.
In addition, under the Branching Act beginning on June 1, 1997, banks are
permitted to merge with one another across state lines and thereby create a main
bank with branches in separate states. After establishing branches in a state
through an interstate merger transaction, the bank could establish and acquire
additional branches at any location in the state where any bank involved in the
merger could have established or acquired branches under applicable federal or
state law.
<PAGE>
The responsible federal agency will not be permitted to approve any merger if,
after the merger, the resulting entity would control more than 10% of the
deposits of insured depository institutions nationwide or 30% or more of the
deposits in any state affected by the merger. The responsible agency could
approve a merger, notwithstanding the 30% limit, if the home state waives the
limit either by statute, regulation or order of the appropriate state official.
Impact 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 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.
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.
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.
<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 adverse impact on the
Company and the Bank's financial condition, liquidity, or results of operations.
Executive Officers of the Registrant
The following table sets forth certain information as of September 30, 1997 with
respect to the executive officers of the Company and the Savings Bank.
Name Age Position
- --------------------------------------------------------------------------------
K. Gary Reynolds 46 President and Chief Executive Officer of
the Company and the Savings Bank
Stephen J. Greene 39 Vice President of the Savings Bank
K. Gary Reynolds has been the president and chief executive officer of the
Savings Bank since May, 1994 and the president and chief executive officer of
the Company since its formation. Prior to that time, he was an examiner with the
OCC.
Stephen J. Greene has been a vice president of the Savings Bank since January,
1995. Mr. Greene was an examiner with the OCC from November, 1993 to December,
1994. Prior to that time, he was a vice president of Mercantile Bank of
Centralia, N.A. where his responsibilities included managing a $25 million loan
portfolio consisting of residential real estate loans and consumer loans.
<PAGE>
Item 2. Description of Property
The following table sets forth information concerning the main office and the
branch office of the Bank at September 30, 1997. At September 30, 1997, the
Company's premises had an aggregate net book value of approximately $344,000.
Lease Expiration Net Book
Location Year Opened Owned/Leased Date Value
- --------------------------------------------------------------------------------
(In Thousands)
Main office
200 South Poplar Street 1975 Owned N/A $ 110
Centralia, Illinois
Branch office
801 12th Street 1996 (1) Owned N/A 234
---------
Carlyle, Illinois
$ 344
=========
(1) The Carlyle branch was purchased during September 1996. The branch's
original opening date was 1989.
Item 3. Legal Proceedings
The Company is, from time to time, a party to legal proceedings arising in the
ordinary course of its business, including legal proceedings to enforce its
rights against borrowers. The Company is not currently a party to any legal
proceedings which could reasonably be expected to have a material adverse effect
on the consolidated financial condition or operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended September 30, 1997.
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Information relating to the market for Registrant's common stock and related
stockholder matters appears under "Corporate Information" in the 1997 Annual
Report to stockholders and is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
The above captioned information appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1997 Annual Report to Stockholders and is incorporated herein by reference.
Item 7. Financial Statements
The consolidated financial statements of CSB Financial Group, Inc. and
subsidiary as of September 30, 1997 and 1996, together with the report of
McGladrey & Pullen, LLP appears in the 1997 Annual Report to Stockholders and is
incorporated herein by reference.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information relating to directors and executive officers of the Registrant
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on January 9, 1998.
Item 10. Executive Compensation
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 9, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on January 9, 1998.
Item 12. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on January 9, 1998.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index below and exhibits attached.
(b) Form 8-K
No Reports on Form 8-K were filed
during the last quarter of the fiscal year covered by
this Form 10-KSB.
<TABLE>
Exhibit No. Exhibit Page No.
- ----------- ------------------------------------------------------------------------------ --------
<S> <C> <C>
3.1 Certificate of Incorporation of CSB Financial Group, Inc. (incorporated herein
by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form
SB-2 as originally filed on March 1, 1995, Registration No. 33-89842)
3.2 Bylaws of CSB Financial Group, Inc. (incorporated herein by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form SB-2 as
originally filed on March 1, 1995, Registration No. 33-89842)
4.1 Specimen Stock Certificate of CSB Financial Group, Inc. (incorporated herein
by reference to Exhibit 1 to the Registrant's Registration Statement on Form
8-A filed on August 21, 1995, Registration No. 0-26650)
4.2 Articles IV, V, VI, XIV and XVI of CSB Financial Group, Inc.'s Certificate
of Incorporation (see Exhibit 3.1 above)
4.3 Articles II and IV of CSB Financial Group, Inc.'s Bylaws (see Exhibit 3.2
above)
4.4 Rights Agreement dates June 13, 1997 between CSB Financial Group, Inc. and
Registrar and Transfer Company, as Rights Agent. Included as Exhibit A to such
Rights Agreement is a form of Rights Certificate (incorporated herein by
reference to Exhibit 1 to the Registrant's Registration statement in form 8-A
filed on June 13, 1997)
10.1 Centralia Savings Bank Employee Stock Ownership Plan (incorporated herein by
by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form
SB-2 as originally filed on March 1, 1995, Registration No. 33-89842)
10.2 Credit Agreement between CSB Financial Group, Inc. and Centralia Savings
Bank Employee Stock Ownership Plan (incorporated herein by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form SB-2 as
originally filed on March 1, 1995, Registration No. 33-89842)
<PAGE>
10.3 CSB Financial Group, Inc. 1995 Stock Option and Incentive Plan (incorporated
herein by reference to Exhibit 10.3 to the Registrant's Registration Statement
on
Form SB-2 as originally filed on March 1, 1995, Registration No. 33-89842)
10.4 CSB Financial Group, Inc. 1997 Nonqualified Stock Option Plan
10.5 CSB Financial Group, Inc. Management Development and Recognition Plan
and Trust Agreement, as amended
10.6 Employment Agreement between Centralia Savings Bank and K. Gary
Reynolds (incorporated herein by reference to Exhibit 10.7 to the Registrant's
Registration Statement on Form SB-2 as originally filed on March 1, 1995,
Registration No. 33-89842)
13.1 CSB Financial Group, Inc. 1997 Annual Report to Stockholders
21.1 Subsidiaries of the Registrant (incorporated herein by reference to Exhibit
21.1 to the Registrant's Registration Statement on Form SB-2 as originally
filed on March 1, 1995, Registration No. 33-89842)
23.2 Consent of McGladrey & Pullen, LLP
27.1 Financial Data Schedule
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CSB FINANCIAL GROUP, INC.
(Registrant)
Date: December 20, 1997
By: /s/ K. Gary Reynolds
------------------------------------
K. Gary Reynolds, President,
Chief Executive Officer and Director
In accordance with the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ K. Gary Reynolds /s/ A. John Byrne
- -------------------------------------------- --------------------------
K. Gary Reynolds, President, Chief A. John Byrne, Director
Executive Officer and Director (Principal
Executive Officer, Principal Financial Date: December 20, 1997
Officer and Principal Accounting Officer)
Date: December 20, 1997
/s/ Wesley N. Breeze /s/ Michael Donnewald
- -------------------------------------------- ---------------------------
Wesley N. Breeze, Director Michael Donnewald, Director
Date: December 20, 1997 Date: December 20, 1997
/s/ Larry M. Irvin /s/ W. Harold Monken
- -------------------------------------------- ---------------------------
Larry M. Irvin, Director W. Harold Monken, Director
Date: December 20, 1997 Date: December 20, 1997
Exhibit 10.4
CSB FINANCIAL GROUP, INC.
1997 NONQUALIFIED STOCK OPTION PLAN
<PAGE>
CSB FINANCIAL GROUP, INC.
1997 NONQUALIFIED STOCK OPTION PLAN
Table of Contents
Page
1. Purpose
2. Definitions
3. Shares Available under the Plan
4. Stock Options
5. Transferability
6. Change in Control
7. Adjustments
8. Fractional Shares
9. Withholding Taxes
10. Effect of Termination of Employment
11. Administration of the Plan
12. Amendments and Other Matters
13. Governing Law
<PAGE>
CSB FINANCIAL GROUP, INC.
1997 NONQUALIFIED STOCK OPTION PLAN
1. Purpose. The purpose of this CSB Financial Group, Inc. 1997
Nonqualified Stock Option Plan (the "Plan") is to attract and retain directors,
officers and other key employees of CSB Financial Group, Inc. (the
"Corporation") and its Subsidiaries and to provide such persons with incentives
and rewards for superior performance. The effective date of this Plan is January
9, 1997.
2. Definitions. (a) As used in this Plan:
"Board" means the Board of Directors of the Corporation.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Committee" means a committee of not less than two
"Non-Employee Directors" (as defined in Rule 16b-3(b)(3)(i) under Section 16(b)
of the Exchange Act) appointed by and serving at the pleasure of the Board.
"Common Shares" means (i) shares of the Common Stock, par
value $.01 per share, of the Corporation and (ii) any security into which Common
Shares may be converted by reason of any transaction or event of the type
referred to in Section 7 of this Plan.
"Date of Grant" means the date specified by the Board on which
a grant of Stock Options shall become effective, which shall not be earlier than
the date on which the Board takes action with respect thereto.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
"Market Value per Share" means the fair market value of the
Common Shares as determined by the Board from time to time.
"Nonqualified Option" means a Stock Option that is not
intended to qualify as a tax-qualified option under Section 422 of the Code.
"Optionee" means the person so designated in an Option
Agreement.
"Option Agreement" means the written contract evidencing Stock
Options granted under this Plan.
"Option Price" means the purchase price payable upon the
exercise of a Stock Option.
"Participant" means a person who is selected by the Board to
receive benefits under this Plan and (i) is at that time a director or an
officer (including officers who are also directors) or other key employees of
the Corporation or any Subsidiary or (ii) has agreed to commence serving in any
such capacity.
"Stock Option" means the right to purchase Common Shares from
the Corporation upon the exercise of a Nonqualified Option granted pursuant to
Section 4 of this Plan.
"Subsidiary" means a corporation, partnership, joint venture,
unincorporated association or other entity in which the Corporation has a direct
or indirect ownership or other equity interest.
(b) As used in this Plan, the terms "employed" and
"employment" shall be deemed to refer to service as a nonemployee director, as
well as to a traditional employment relationship, as the case may be.
1. Shares Available under the Plan. 2. Subject to adjustment
as provided in Section 7 of this Plan, the aggregate number of Common Shares
covered by outstanding Stock Options granted under this Plan and issued or
transferred upon the exercise or payment thereof shall not exceed 103,500.
Common Shares issued or transferred under this Plan may be Common Shares of
original issuance or Common Shares held in treasury or a combination thereof.
<PAGE>
1. For the purposes of this Section 3:
1. Upon payment in cash of the benefit provided by any Stock
Option granted under this Plan, any Common Shares that were covered by
that award shall again be available for issuance or transfer hereunder.
2. Common Shares covered by any Stock Option granted under
this Plan shall be deemed to have been issued or transferred, and shall
cease to be available for future issuance or transfer in respect of any
Stock Option granted hereunder, at the earlier of the time when they
are actually issued or transferred or the time when dividends or
dividend equivalents are paid thereon.
3. Stock Options. The Board may from time to time authorize
grants to Participants of Stock Options upon such terms and conditions
as the Board may determine in accordance with the following provisions:
1. Each grant shall specify the number of Common Shares to
which it pertains.
2. Each grant shall specify an Option Price per Common Share,
which shall be equal to or greater than the fair market value per share
on the Date of Grant.
3. Each grant shall specify the form of consideration to be
paid in satisfaction of the Option Price and the manner of payment of
such consideration, which may include (i) cash in the form of currency
or check or other cash equivalent acceptable to the Corporation, (ii)
nonforfeitable, unrestricted Common Shares that are already owned by
the optionee and have a value at the time of exercise that is equal to
the Option Price, (iii) any other legal consideration that the Board
may deem appropriate, on such basis as the Board may determine in
accordance with this Plan and (iv) any combination of the foregoing.
4. Any grant may provide for deferred payment of the Option
Price from the proceeds of sale through a broker on the date of
exercise of some or all of the Common Shares to which the exercise
relates.
5. Successive grants may be made to the same Participant
regardless of whether any Stock Options previously granted to the
Participant remain unexercised.
6. Each grant may specify a period or periods of continuous
employment of the Optionee by the Corporation or any Subsidiary that
are necessary before the Stock Options or installments thereof shall
become exercisable.
7. On or after the Date of Grant of any Stock Option, the
Board may provide for the payment to the Optionee of dividend
equivalents thereon in cash or Common Shares on a current, deferred or
contingent basis, or the Board may provide that any dividend
equivalents shall be credited against the Option Price.
8. No Stock Option granted pursuant to this Section 4 may be
exercised more than 10 years from the Date of Grant.
9. Each Stock Option shall be evidenced by a written agreement
(the "Option Agreement") specifying the Option Price, the terms for
payment of the Option Price, the duration of the Stock Option, and the
number of shares of Common Stock to which the Stock Option pertains. An
Option Agreement also may contain an installment exercise schedule, a
noncompetition agreement, a confidentiality provision, provisions for
forfeiture in the event of termination of the Participant's employment
with the Corporation or any of its subsidiaries, and such other
restrictions, conditions and terms, as the Committee shall determine.
Option Agreements need not be identical.
10. The Committee, in its discretion, shall have the power to
accelerate the dates for exercise of any or all Stock Options, or any
part thereof, granted under the Plan.
5. Transferability. (a) Any grant of a Stock Option under this Plan may
permit the transfer thereof by the Participant upon such terms and conditions as
the Board shall specify.
(b) Any grant made under this Plan may provide that all or any
part of the Common Shares that are to be issued or transferred by the
Corporation upon the exercise of Stock Options shall be subject to further
restrictions upon transfer.
<PAGE>
6. Change in Control. (a) Notwithstanding any of the
provisions of the Plan or any Option Agreement, upon a Change in Control of the
Corporation (as defined in Section 6(b)) all outstanding Stock Options shall
become fully exercisable and all restrictions thereon shall terminate in order
that Optionees may fully realize the benefits thereunder. Further, the
Committee, as constituted before such Change in Control, is authorized, and has
sole discretion, as to any Stock Option, either at the time such Option is
granted hereunder or any time thereafter, to take any one or more of the
following actions: (i) provide for the purchase of any such Stock Option, upon
the Optionee's request, for an amount of cash equal to the difference between
the exercise price and the then fair market value of the Common Stock covered
thereby had such Stock Option been currently exercisable; (ii) make such
adjustment to any such Stock Option then outstanding as the Committee deems
appropriate to reflect such Change in Control; and (iii) cause any such Stock
Option then outstanding to be assumed, by the acquiring or surviving
corporation, after such Change in Control.
(b) The term "Change in Control" shall mean the occurrence, at
any time during the specified term of a Stock Option granted under this Plan, of
any of the following events:
(i) The Corporation is merged or consolidated or reorganized
into or with another corporation or other legal person (an "Acquiror")
and as a result of such merger, consolidation or reorganization less
than 50% of the outstanding voting securities or other capital
interests of the surviving, resulting or acquiring corporation or other
person are owned in the aggregate by the shareholders of the
Corporation, directly or indirectly, immediately prior to such merger,
consolidation or reorganization, other than the Acquiror or any
corporation or other person controlling, controlled by or under common
control with the Acquiror;
(ii) The Corporation sells all or substantially all of its
business and/or assets to an Acquiror, of which less than 50% of the
outstanding voting securities or other capital interests are owned in
the aggregate by the shareholders of the Corporation, directly or
indirectly, immediately prior to such sale, other than the Acquiror or
any corporation or other person controlling, controlled by or under
common control with the Acquiror; or
(iii) The election to the Board, without the recommendation or
approval of the incumbent Board, of the lesser of (i) three Directors
or (ii) Directors constituting a majority of the number of Directors of
the Corporation then in office.
7. Adjustments. The Board may make or provide for such
adjustments in the number of Common Shares covered by outstanding Stock Options
granted hereunder, the Option Prices per Common Share applicable to any such
Stock Options, and the kind of shares (including shares of another issuer)
covered thereby, as the Board may in good faith determine to be equitably
required in order to prevent dilution or expansion of the rights of Participants
that otherwise would result from (a) any stock dividend, stock split,
combination of shares, recapitalization or other change in the capital structure
of the Corporation or (b) any merger, consolidation, spin-off, spin-out,
split-off, split-up, reorganization, partial or complete liquidation or other
distribution of assets, issuance of warrants or other rights to purchase
securities or any other corporate transaction or event having an effect similar
to any of the foregoing. In the event of any such transaction or event, the
Board may provide in substitution for any or all outstanding Stock Options under
this Plan such alternative consideration as it may in good faith determine to be
equitable under the circumstances and may require in connection therewith the
surrender of all Stock Options so replaced. Moreover, the Board may on or after
the Date of Grant provide in the Option Agreement that the holder of the award
may elect to receive an equivalent award in respect of securities of the
surviving entity of any merger, consolidation or other transaction or event
having a similar effect, or the Board may provide that the holder will
automatically be entitled to receive such an equivalent award. The Board may
also make or provide for such adjustments in the maximum number of Common Shares
specified in Section 3(a) of this Plan as the Board may in good faith determine
to be appropriate in order to reflect any transaction or event described in this
Section 7.
8. Fractional Shares. The Corporation shall not be required to
issue any fractional Common Shares pursuant to this Plan. The Board may provide
for the elimination of fractions or for the settlement thereof in cash.
<PAGE>
9. Withholding Taxes. To the extent that the Corporation is
required to withhold federal, state, local or foreign taxes in connection with
any payment made or benefit realized by a Participant or other person under this
Plan, and the amounts available to the Corporation for the withholding are
insufficient, it shall be a condition to the receipt of any such payment or the
realization of any such benefit that the Participant or such other person make
arrangements satisfactory to the Corporation for payment of the balance of any
taxes required to be withheld. At the discretion of the Board, any such
arrangements may include relinquishment of a portion of any such payment or
benefit. The Corporation and any Participant or such other person may also make
similar arrangements with respect to the payment of any taxes with respect to
which withholding is not required.
10. Effect of Termination of Employment. (a) Except as
provided in Sections 6, 10(b), or by the Committee, in its sole discretion, any
unvested Stock Option held by an optionee whose employment with the Corporation
and its subsidiaries or service on the Board is terminated for any reason, shall
terminate on the date of termination of employment or service on the Board.
(b) Notwithstanding any other provision of this Plan to the
contrary, in the event of termination of employment by reason of death,
disability, normal retirement, early retirement with the consent of the
Corporation, termination of employment to enter public service with the consent
of the Corporation or leave of absence approved by the Corporation, or in the
event of hardship or other special circumstances, of a Participant who holds a
Stock Option that is not immediately and fully exercisable, all Stock Options
held by such optionee shall become immediately exercisable. Furthermore, in
connection with the circumstances set forth in this paragraph (b) the Committee
may take any action that it deems to be equitable under the circumstances or in
the best interests of the Corporation, including without limitation waiving or
modifying any limitation or requirement with respect to any award under this
Plan. For purposes of this Section 10(b), "disability" shall mean the inability
of an individual to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which is expected to result
in death or which has lasted or can be expected to last for a continuous period
not less than twelve (12) months. The Committee, in its sole discretion, shall
determine the date of any disability.
(c) Unless exercised, a Participant's vested Stock Options
shall terminate and expire 90 days from the date the Participant's employment
terminates for any reason. Stock Options, including, without limitation, vested
Stock Options, shall terminate if the Participant's employment is terminated for
cause. A Participant's employment shall be deemed terminated for cause if, and
only if, the Participant has: (i) wilfully neglected any material duties of
Participant's employment or has performed such duties in a grossly incompetent
manner; (ii) engaged in wilful misconduct in the performance of his duties as an
employee including, but without limiting the generality of the foregoing,
misappropriation of funds or property of the Corporation or securing or
attempting to secure personally any profit in connection with any transaction
entered into, or proposed to be entered into, by the Corporation; (iii) engaged
in conduct which could result in prejudice to the interests of the Corporation
if he were retained in his position with the Corporation; or (iv) violated the
terms of any non-competition agreement or confidentiality agreement at any time
executed by Participant for the benefit of the Corporation.
(d) Stock Options are granted to a Participant in order to
induce the Participant to become or continue as an employee or director of the
Corporation. Upon the termination of Participant's employment for any reason or
service as a director (including, without limitation, death, disability,
resignation, retirement, or at the election of the Corporation), the Corporation
shall have the option (the "Corporation Option"), exercisable by written notice
to Participant within 180 days after such termination of employment or service
as a director, to purchase all shares of Common Stock owned by a Participant as
a result of his exercise of Stock Options ("Owned Shares") and to terminate all
vested stock options not terminated pursuant to this Section 10. If the
Corporation exercises the Corporation Option, it shall pay Participant on or
before the Settlement Date (as hereinafter defined) an amount equal to : (A) the
product of (i) the sum of all underlying shares covered by vested Stock Options
and all Owned Shares, times (ii) the average closing sales price for a share of
Common Stock as reported on The Nasdaq Stock Market for the period ended twenty
(20) days prior to termination of employment, minus (B) the Option Price of
underlying shares not paid by Participant. On the Settlement Date, Participant
shall deliver to the Corporation any Owned Shares being purchased by the
Corporation pursuant to such exercise concurrently with payment for such Owned
Shares by the Corporation. The "Settlement Date" shall be within thirty (30)
days after the Corporation exercises the Corporation Option.
<PAGE>
11. Administration of the Plan. (a) This Plan shall be
administered by the Board, which may delegate any or all of its authority
hereunder to the Committee. To the extent of any such delegation, references in
this Plan to the Board shall be deemed to refer to the Committee, unless the
context requires otherwise. A majority of the Board shall constitute a quorum,
and the acts of the members of the Board who are present at any meeting thereof
at which a quorum is present, or acts unanimously approved by the members of the
Board in writing, shall be the acts of the Board. Subject to the express
provisions of the Plan, the Committee may interpret the Plan, prescribe, amend
and rescind rules and regulations relating to it, determine Stock Option grants
and the terms and provisions of Participants' Option Agreements (which need not
be identical), and make such other determinations as it deems necessary or
advisable for the administration of the Plan.
(b) The interpretation and construction by the Board of any
provision of this Plan or any agreement, notification or document evidencing the
grant of Stock Options and any determination by the Board pursuant to any
provision of this Plan or any such agreement, notification or document, shall be
final and conclusive. No member of the Board shall be liable for any such action
taken or determination made in good faith.
12. Amendments and Other Matters. (a) This Plan may be amended
from time to time by the Board without the approval of the Corporation's
shareholders, unless applicable law or the rules of The Nasdaq Stock Market or
stock exchange on which the Corporation's stock is listed or quoted requires
shareholder approval.
(b) With the concurrence of the affected Participant, the
Board may cancel any agreement evidencing Stock Options granted under this Plan.
In the event of any such cancellation, the Board may authorize the granting of
new Stock Options, which may or may not cover the same number of Common Shares
as had been covered by the canceled Stock Options, at such Option Price, in such
manner and subject to such other terms, conditions and discretion as would have
been permitted under this Plan had the canceled Stock Options not been granted.
(c) The Board may grant under this Plan any Stock Option
authorized under this Plan in exchange for the surrender and cancellation of an
award that was not granted under this Plan, including but not limited to an
award that was granted by the Corporation or a Subsidiary, or by another
corporation that is acquired by the Corporation or a Subsidiary by merger or
otherwise, prior to the adoption of this Plan by the Board, and any such award
or combination of awards so granted under this Plan may or may not cover the
same number of Common Shares as had been covered by the canceled award and shall
be subject to such other terms, conditions and discretion as would have been
permitted under this Plan had the canceled award not been granted.
(d) This Plan shall not confer upon any Participant any right
with respect to continuance of employment with the Corporation or any Subsidiary
and shall not interfere in any way with any right that the Corporation or any
Subsidiary would otherwise have to terminate any Participant's employment at any
time.
13. Governing Law. The Plan, and all Option Agreements
hereunder, shall be construed in accordance with and governed by the laws of the
State of Illinois.
Exhibit 10.5
CSB FINANCIAL GROUP, INC.
MANAGEMENT DEVELOPMENT AND RECOGNITION
PLAN AND TRUST AGREEMENT, AS AMENDED
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01. CSB Financial Group, Inc. (the "Company") hereby establishes the
Management Development and Recognition Plan (the "Plan") and Trust (the "Trust")
upon the terms and conditions hereinafter stated in this Management Development
and Recognition Plan and Trust Agreement (the "Agreement").
1.02. The Trustees hereby accept this Trust and agree to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01. The purpose of the Plan is to retain personnel of experience and
ability in key positions by providing such key employees with a proprietary
interest in the Company as compensation for their contributions to the Company
and its Subsidiaries and as an incentive to make such contributions in the
future.
ARTICLE III
DEFINITIONS
The following words and phrases, when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Whenever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01. "Bank" means Centralia Savings Bank, an Illinois state-chartered
savings bank, and its successors and assigns. The Bank, with the consent of the
Board, has agreed to participate in this Plan.
3.02. "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under the Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, the Recipient's estate.
3.03. "Board" means the Board of Directors of the Company.
3.04. "Committee" means the Committee appointed by the Board pursuant
to Article IV hereof.
3.05. "Common Stock" means shares of the common stock, $.01 par value
per share, of the Company.
3.06. "Company" means CSB Financial Group, Inc., a Bank Holding Company
registered under Section 3(a)(1) of the Bank Holding Company Act of 1956, as
amended, that owns 100% of the Capital Stock of Centralia Savings Bank.
3.07. "Director" means a member of the Board of Directors of the
Company or the Bank.
3.08. "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of a Recipient to perform the work
customarily assigned to him. A medical doctor selected or approved by the Board
must advise the Committee that it is either not possible to determine when such
Disability will terminate or that it appears probable that such Disability will
be permanent during the remainder of the Recipient's lifetime.
3.09. "Effective Date" means the date shareholders of the Company
approve the Plan.
3.10. "Employee" means any person who is currently employed by the
Company, the Bank or a Subsidiary, including officers.
3.11. "Plan Shares" means shares of Common Stock held in the Trust and
issued or issuable to a Recipient pursuant to the Plan.
<PAGE>
3.12. "Plan Share Award" means a right granted under this Plan to earn
Plan Shares.
3.13. "Recipient" means an Employee or Non-Employee Director who
receives a Plan Share Award under the Plan.
3.14. "Retirement" means retirement at the normal or early retirement
date as set forth in the Centralia Savings Bank Employee Stock Ownership Plan.
3.15. "Subsidiary" means any other entity of which the Company is the
direct or indirect beneficial owner of not less than fifty percent (50%) of all
issued and outstanding equity interests. A Subsidiary may, with the consent of
the Board, agree to participate in this Plan.
3.16. "Trustee" means those persons (normally members of the Committee)
nominated by the Committee and approved by the Board pursuant to Sections 4.01
and 4.02 to hold legal title to the Plan assets for the purposes set forth
herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01. Role of the Committee. The Plan shall be administered and
interpreted by the Committee, which shall be appointed by the Board. The
Committee shall be comprised of two (2) or more members of the Board who are
"non-employee directors" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934. The Committee shall have all of the powers allocated to it
in this and other Sections of the Plan. The Committee shall have the power to
interpret and construe the terms and provisions of the Plan or of any Plan Share
Award granted hereunder, and all such interpretations and constructions by the
Committee shall be final and binding. The Committee, in its sole discretion,
shall determine the Employees and Directors of the Company and its Subsidiaries
to whom, and the time or times at which Plan Share Awards will be granted, the
number of Plan Share Awards, the expiration date of each Plan Share Award, the
cancellation of the Plan Share Award (with the consent of the holder thereof)
and the other terms and conditions of the grant of the Plan Share Award. The
terms and conditions of the Plan Share Awards need not be the same with respect
to each Recipient or with respect to each Plan Share Award.
The Committee shall act by vote or written consent of a
majority of its members. Subject to the express provisions and limitations of
the Plan, the Committee may adopt such rules, regulations and procedures as it
deems appropriate for the conduct of its affairs. The Committee shall report its
actions and decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year. The Committee shall
appoint one or more individuals (normally from among its members) to act as
Trustees in accordance with the provisions of this Plan and Trust and the terms
of Article VIII hereof.
4.02. Role of the Board. The members of the Committee and the Trustee
or the Trustees shall be appointed or approved by the Board. The Board may, in
its discretion, from time to time, remove members from or add members to the
Committee and may remove, replace or add Trustees. The Board may not revoke any
Plan Share Award already made without the consent of the Recipient.
4.03. Limitation on Liability. No member of the Board or the Committee
shall be liable for any determination made in good faith with respect to the
Plan or any Plan Shares or Plan Share Awards it grants. If a member of the Board
or the Committee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Company and
its Subsidiaries shall indemnify such member against expense (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such member in connection with such action, suit or
proceeding if the member acted in good faith and in the manner he reasonably
believed to be in the best interests of the Company and its Subsidiaries and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
<PAGE>
ARTICLE V
CONTRIBUTIONS
5.01. Amount and Timing of Contributions. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the
Company and its Subsidiaries to the Trust established under this Plan. Such
amounts shall be paid to the Trust at the time of contribution. No contributions
by Employees or Recipients shall be permitted.
5.02. Investment of Trust Assets After Conversion. The Trustee shall
invest the Trust's assets exclusively in the Company's Common Stock provided,
however, that the Trust shall not purchase more than 4% of the total shares of
Common Stock issued until after October 5, 1996. After such date, the Trustee
may purchase in the aggregate no more than 6% of the total shares of Common
Stock issued. Any earnings received with respect to Common Stock held by the
Plan shall be held in an interest bearing account. Any earnings received with
respect to Common Stock subject to a Plan Share Award shall be held in an
interest bearing account on behalf of the individual Recipient.
ARTICLE VI
ELIGIBILITY AND ALLOCATIONS
6.01. Eligibility. Officers and key management Employees of the
Company, the Bank and its Subsidiaries are eligible to receive Plan Share
Awards. Non-employee Directors also may receive Plan Share Awards pursuant to
Article X hereof and discretionary grants made by the Committee from time to
time.
6.02. Allocations. The number of Shares covered by Plan Share Awards
may not exceed the number of shares purchased by the Trustee prior to the grant
of such Awards, and provided further that in no event shall any Awards be made
which will violate the Certificate of Incorporation or Bylaws of the Company,
the Articles of Incorporation or Bylaws or Plan of Conversion of the Bank, or
any applicable federal or state law or regulation. In the event Plan Shares are
forfeited for any reason, the Committee may determine which of the Employees
will be granted additional Plan Shares to be awarded from forfeited Plan Shares.
In selecting those Employees to whom Plan Share Awards will be granted and the
number of Shares covered by such Awards, the Committee shall consider the
position and responsibilities of the eligible Employees, the value of their
services to the Company and the Bank and its Subsidiaries, and any other factors
the Committee may deem relevant, including the recommendations of the Chairman
of the Board.
6.03. Form of Allocation. As promptly as practicable after a
determination is made pursuant to Section 6.02 that a Plan Share Award is to be
issued, the Committee shall notify the Recipient in writing of the grant of the
Award, the number of Plan Shares covered by the Award and the terms upon which
the Plan Shares subject to the Award may be earned. The date on which the
Committee so notifies the Recipient shall be considered the date of grant of the
Plan Share Award. The Committee shall maintain records as to all grants of Plan
Share Awards under the Plan.
6.04. Allocations Not Required. Notwithstanding anything to the
contrary in Sections 6.01 and 6.02, no Employee or Director shall have any right
or entitlement to receive a Plan Share Award hereunder, such Awards being at the
total discretion of the Committee, nor shall the salaried Employees as a group
have such a right.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES
VOTING RIGHTS
7.01. Earning Plan Shares: Forfeitures. Unless the Committee shall
specifically state to the contrary at the time a Plan Share Award is granted,
Plan Shares subject to an Award shall be earned by a Recipient in five equal
annual installments over the first five years after the date of grant, if the
Employee remains employed with the Company or a Subsidiary continuously
throughout such period, provided, however, that the Committee may provide for a
less rapid earnings rate than that set forth herein for all Awards or for any
given Award. If the employment of a Recipient is terminated prior to the fifth
anniversary (or such later date as the Committee shall determine) of the date of
grant of an Award for any reason (except as specifically provided in subsections
(a) and (b) below), the Recipient shall forfeit the right to earn any shares
subject to the Award which have not theretofore been earned. No fractional
shares shall be issued.
<PAGE>
(a) Exception for Terminations Due to Death or Disability.
Notwithstanding the general rule contained in this Section, Plan Shares
subject to a Plan Share Award held by a Recipient whose employment with
the Company or a Subsidiary terminates due to Death or Disability, or
any part of such Award that has not theretofore been earned, shall be
deemed earned as of the Recipient's last day of employment with the
Company or a Subsidiary.
(b) Revocation for Misconduct. Notwithstanding anything herein
to the contrary, the Board may, by resolution, immediately revoke,
rescind and terminate any Plan Share Award, or portion thereof,
previously awarded under this Plan, to the extent Plan Shares have not
been delivered thereunder to the Recipient, whether or not yet earned,
in the case of an Employee or Director who is discharged from the
Company or a Subsidiary for cause (as hereinafter defined), or who is
discovered after termination of employment to have engaged in conduct
that would have justified termination for cause. "Cause" is defined as
personal dishonesty, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated
duties, or the willful violation of any law, rule or regulation (other
than traffic violations or similar offenses) which results in a
material loss to the Company or its Subsidiaries, or final cease and
desist order.
7.02. Distribution of Plan Shares. Plan Shares shall be distributed to
the Recipient or his Beneficiary, as the case may be, as soon as is practicable
after a Plan Share Award is made. All Plan Shares shall be distributed in the
form of Common Stock. One share of Common Stock shall be given for each Plan
Share earned and payable.
7.03. Voting and Dividend Rights. No Recipient shall have any voting or
dividend rights or other rights of a stockholder with respect to any Plan Shares
covered by a Plan Share Award prior to the time said Plan Shares are actually
distributed to him. When cash dividends are paid with respect to Plan Shares
allocated to a Recipient, such Recipient shall be entitled to receive an amount
equal to such cash dividend. Stock dividends with respect to shares allocated to
a Recipient shall be distributed when the Plan Shares with respect to which they
are declared are so distributable.
ARTICLE VIII
TRUST
8.01. Trust. The Trustees shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
the Plan.
8.02. Management of Trust. It is the intent of this Plan and Trust that
the Trustees shall have complete authority and discretion with respect to the
management, control and investment of the Trust, and that the Trustee shall
invest all assets of the Trust in Common Stock to the fullest extent
practicable, except to the extent that the Trustees determined that the holding
of monies in cash or cash equivalents is necessary to meet the obligations of
the Trust. In performing their duties, the Trustees shall have the power to do
all things and execute such instruments as may be deemed necessary or proper,
including the following powers:
(a) To invest up to 100% of all Trust assets in Common Stock
of the Company without regard to any law now or hereafter in force
limiting investments for trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust and
Common Stock shall be newly issued shares, Treasury shares or shares
purchased by the Plan in the open market.
(b) To invest any Trust assets not otherwise invested in
accordance with (a) above in such savings accounts, deposits and
certificates of deposit (including those issued by the Company or a
Subsidiary), obligations of the United States government or its
agencies or such other investments as shall be considered the
equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at
any time held or acquired by the Trust.
<PAGE>
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of
the Trust).
(e) To hold cash without interest in such amounts as may be,
in the opinion of the Trustees, reasonable for the proper operation of
the Plan and Trust.
(f) To employ brokers, agents, custodians, consultants and
accountants.
(g) To hire counsel to render advice with respect to their
rights, duties and obligations hereunder, and such other legal services
or representations as they may deem desirable.
(h) To hold funds and securities representing the amounts to
be distributed, to a Recipient or his Beneficiary as a consequence of a
dispute as to the disposition thereof, whether in a segregated account
or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustees
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.03. Records and Accounts. The Trustees shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04. Earnings. All earnings, gains and losses with respect to Trust
assets shall be allocated, in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. In particular, any earnings on cash dividends
received with respect to shares of Common Stock shall be allocated to accounts
for Recipients, if such shares are the subject of outstanding Plan Share Awards,
or, otherwise to a reserve established by the Plan.
8.05. Expenses. All costs and expenses incurred in the operation and
administration of this Plan shall be borne by the Company and its Subsidiaries.
8.06. Indemnification. The Company and its Subsidiaries shall
indemnify, defend and hold the Trustees harmless against all claims, expenses
and liabilities arising out of or related to the exercise of the Trustees'
powers and the discharge of their duties hereunder, unless the same shall be due
to their gross negligence or willful misconduct.
ARTICLE IX
MISCELLANEOUS
9.01. Amendment and Termination of Plan. The Board may, by resolution,
at any time, amend or terminate the Plan. The power to amend or terminate shall
include the power to direct the Trustees to return to the Company or the Bank
all or any part of the assets of the Trust, as well as shares of Common Stock
and other assets subject to Plan Share Awards but not yet earned by the
Employees to whom they are allocated.
9.02. Nontransferable. Plan Share Awards and rights to Plan Shares
shall not be transferable by a Recipient and, during the lifetime of the
Recipient, Plan Shares may only be earned by and paid to the Recipient who was
notified in writing of the Award by the Committee pursuant to Section 6.03. No
Recipient or Beneficiary shall have any right in or claim to any assets of the
Plan or Trust, nor shall the Company or any Subsidiary be subject to any claim
for benefits hereunder.
9.03. Employment Rights. Neither the Plan nor any grant of a Plan Share
Award or Plan Shares hereunder nor any action taken by the Trustees, the
Committee or the Board in connection with the Plan shall create any right on the
part of any Employee to continue in the employ of the Company, the Bank or a
Subsidiary.
9.04. Governing Law. The Plan and Trust shall be governed by the laws
of the State of Illinois.
<PAGE>
9.05. Term of Plan. This Plan shall remain in effect until the earlier
of: (1) termination by the Board of Directors; (2) the distribution to
Recipients, Beneficiaries, the Company or the Bank of all assets of the Trust;
or (3) 21 years from the Effective Date. Termination of the Plan shall not,
unless expressly specified, affect any Plan Share Awards previously granted, and
such Awards shall remain valid and in effect until they have been paid, or by
their terms expire or are forfeited.
ARTICLE X
OUTSIDE DIRECTOR AWARDS
Each non-Employee Director on the Effective Date shall be granted a
Plan Share Award equal to 2,070 shares, subject to availability, to vest in five
equal annual installments beginning with the first anniversary of the Effective
Date.
----------------------------------------
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>
----------------------------------------
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
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in this Annual Report on Form
10-KSB of CSB Financial Group, Inc. for the year ending September 30, 1997
of our report dated October 24, 1997, which appears in the Annual Report to
shareholders.
/S/ McGLADREY & PULLEN, LLP
Champaign Il
December 26, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 10-KSB OF CSB FINANCIAL GROUP, INC. AND IS QUALIFIED IN ITS
ENTIRITY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,687
<INT-BEARING-DEPOSITS> 988
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,987
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 27,299
<ALLOWANCE> 165
<TOTAL-ASSETS> 48,534
<DEPOSITS> 36,586
<SHORT-TERM> 0
<LIABILITIES-OTHER> 52
<LONG-TERM> 0
0
0
<COMMON> 10
<OTHER-SE> 11,642
<TOTAL-LIABILITIES-AND-EQUITY> 48,534
<INTEREST-LOAN> 2,164
<INTEREST-INVEST> 971
<INTEREST-OTHER> 118
<INTEREST-TOTAL> 3,253
<INTEREST-DEPOSIT> 1,642
<INTEREST-EXPENSE> 1,642
<INTEREST-INCOME-NET> 1,611
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 54
<EXPENSE-OTHER> 1,319
<INCOME-PRETAX> 356
<INCOME-PRE-EXTRAORDINARY> 245
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 3.56
<LOANS-NON> 198
<LOANS-PAST> 187
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 117
<CHARGE-OFFS> 43
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 165
<ALLOWANCE-DOMESTIC> 96
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 69
</TABLE>
