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, 1998
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.
State issuer's revenues for its most recent fiscal year. $3,438,000
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at December 18, 1998 was $5,282,469. 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 $9.00 per share, the
last sales price as quoted on the Nasdaq "Small Cap" market for December 18,
1998.
The Registrant had 732,920 shares of Common Stock outstanding at December 18,
1998, not including 24,371 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>
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Annual Report to Stockholders for the year ended September 30,
1998 is incorporated by reference to Part II of this Form 10-KSB.
The registrant's proxy statement for its 1999 annual meeting of stockholders to
be held on January 8, 1999 is incorporated by reference to Part III of this Form
10-KSB.
The Exhibit Index is located at pages 27 through 29.
<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 Ba\nk 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 similar to 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, 1998 consist primarily of the investment
in the Bank of $9.8 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, 1998, the Bank had total assets, liabilities and stockholders'
equity of $46.4 million, $36.6 million, and $9.8 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, 1998, the Bank's gross loan portfolio totaled $26.1
million or 56.2% 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,
1998, the Bank's securities portfolio totaled $17.2 million or 37.0% of total
assets with $17.0 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.
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.
<PAGE>
Composition of the Loan Portfolio. The Bank's historical lending strategy has
focused primarily on the origination of residential mortgage loans secured by
one- to four-family homes and consumer loans to customers with whom the Bank
already had a deposit or lending relationship. Beginning in May, 1994, the Bank
began offering consumer loans, primarily installment loans for the purchase of
automobiles, to the general public. The Bank also originates, from time to time,
multi-family and commercial real estate loans and commercial non-real estate
loans, although such loans presently constitute a relatively small percentage of
the Bank's total loan portfolio. The following table sets forth in greater
detail the composition of the Bank's loan portfolio by type of loan as of the
dates indicated:
<TABLE>
At September 30,
------------------------------------
1998 1997
---------------- -----------------
(In Thousands)
Amount Percent Amount Percent
------------------------------------
<S> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family .................... $19,037 72.42% $18,677 68.36%
Multi-family ........................... 258 0.98% 367 1.34%
Commercial real estate ................. 1,120 4.26% 969 3.55%
Other loans secured by real estate ..... 283 1.07% 444 1.63%
------------------------------------
Total mortgage loans .............. 20,698 78.73% 20,457 74.88%
Commercial and Consumer Loans:
Commercial ............................. 625 2.38% 1,013 3.71%
Consumer ............................... 4,095 15.58% 4,771 17.46%
Home equity lines of credit ............ 678 2.58% 816 2.99%
Share loans ............................ 193 0.73% 266 0.97%
------------------------------------
Total commercial and consumer loans 5,591 21.27% 6,866 25.13%
Total loans ....................... 26,289 100.00% 27,323 100.00%
======= =======
Less:
Deferred fees .......................... 6 15
Unearned income on consumer loans ...... 1 9
Allowance for loan losses .............. 171 165
------- -------
Total loans, net .................. 26,111 27,134
======= =======
</TABLE>
The Bank had no loans held for sale at September 30, 1998 or 1997. As of
September 30, 1998, 20.68% 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.
Loan Maturity
The following table shows the maturity of the Bank's loans at September 30,
1998. 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.
<PAGE>
<TABLE>
At September 30, 1998
--------------------------------------
Mortgage Commercial Consumer Total
Loans Loans Loans Loans
--------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Amounts due:
One year or less .............................. $ 3,153 $ 310 $ 454 $ 3,917
--------------------------------------
After one year:
More than one year to five years .............. $ 2,695 $ 215 $ 4,482 $ 7,392
More than five years to ten years ............. 3,402 100 30 3,532
More than ten years ........................... 11,448 - - - - 11,448
--------------------------------------
Total due after September 30, 1999 ...... $17,545 $ 315 $ 4,512 $22,372
======================================
Interest rate terms on amounts due after one year:
Fixed ...................................... $12,254 $ 169 $ 4,512 $16,935
Adjustable ................................. 5,291 146 - - 5,437
</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, 1998 and 1997, the Bank's gross loan portfolio consisted
of approximately $19.0 million, or 72.42%, and $18.7 million, or 68.36%,
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 has extended, and expects to continue to extend, from time to time,
fixed-rate loans to customers who prefer a fixed rate of interest. The Bank will
not originate a fixed-rate loan unless such loan complies with the underwriting
standards of the Federal Home Loan Mortgage Corporation ("FHLMC") and the FNMA.
This will give the Bank the option of either holding such fixed-rate loans in
its portfolio or selling such loans in the secondary mortgage market.
The Bank's reliance on ARMs and balloon loans, rather than fixed-rate mortgage
loans, makes the Bank's first-mortgage residential loan portfolio more
interest-rate sensitive. However, since the interest earned on ARMs or on
balloon loans which are refinanced on a one-, three- or five-year cycle varies
with prevailing interest rates, such loans do not offer the Bank as predictable
a cash flow as do longer-term, fixed-rate loans. ARMs and balloon loans which
are subject to refinancing on a one-, three- or five-year cycle may also carry
increased credit risk as the result of the imposition of higher monthly payments
upon borrowers during periods of rising interest rates. During such periods, the
risk of default on such loans may increase, due to the upward adjustment of
interest costs to the borrower. Management has attempted to minimize such risk
by qualifying borrowers at the maximum rate of interest payable under the terms
of the ARM or the refinanced balloon loan.
<PAGE>
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, 1998 and 1997, the Bank's
gross loan portfolio consisted of approximately $258,000 or .98% and $367,000 or
1.34% of loans secured by multi-family residential real estate, respectively.
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, 1998 and 1997, the Bank's
commercial real estate loan portfolio amounted to $1,120,000, or 4.26%, and
$969,000, or 3.55%, 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, 1998 and 1997, the Bank's gross loan
portfolio consisted of approximately $625,000 or 2.38% and $1,013,000, or 3.71%,
respectively of commercial loans secured by accounts receivable, inventory, farm
land or outstanding stock issued by a corporation. The Bank has also made, from
time to time, unsecured personal loans to the sole proprietors of small
businesses on the same terms and conditions on which it makes other unsecured
personal loans.
Consumer Loans. The Bank originates a variety of consumer loans, generally
consisting of installment loans for the purchase of motor vehicles and boats,
loans to purchase household goods, loans secured by savings accounts at the Bank
and unsecured personal loans. At September 30, 1998 and 1997 the Bank's
portfolio of consumer loans totaled approximately $4,966,000, or 18.89%, and
$5,853,000, or 21.42%, 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, such loans do not exceed $10,000 and
are amortized over a period of three years.
<PAGE>
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, 1998 and 1997, the total balance outstanding on first mortgage
loans purchased by the Bank was $287,000 and $671,000, respectively. At
September 30, 1998 and 1997, the Bank did not have any loans held for sale.
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, 1998, delinquencies in the Bank's loan portfolio were as
follows:
At September 30, 1998
----------------------------------------------------
90 Days Total Delinquent
30-89 Days (1) or More (1) 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 ........ 6 $ 80 12 $ 350 18 $ 430
Commercial loans
Consumer loans ........... 11 48 14 60 25 108
--------------------------------------------------
17 128 26 410 43 538
--------------------------------------------------
Delinquent loans
to gross loans ........ 0.49% 1.56% 2.05%
===== ===== =====
<PAGE>
At September 30, 1997, delinquencies in the Bank's loan portfolio were as
follows:
At September 30, 1997
--------------------------------------------------------
90 Days Total Delinquent
30-89 Days (1) or More (1) 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%
===== ===== =====
(1) The Bank discontinues the accrual of interest on loans when the
borrower is delinquent as to a contractually due principal or interest
payment and the Bank's management deems collection to be unlikely. The
number of loans and principal balance includes nonaccrual loans.
Nonperforming Assets
The Bank places loans that are 90 days or more past due on nonaccrual status
unless such loans are adequately collateralized and in the process of
collection. Accrual of interest on a nonaccrual loan is resumed only when all
contractually past due payments are brought current and management believes that
the outstanding loan principal and contractually due interest are no longer
doubtful of collection.
Foreclosed properties are recorded at the fair value at the date of foreclosure.
Any subsequent reduction in the fair value of a foreclosed property, along with
expenses to maintain or dispose of a foreclosed property, is charged against
current earnings. As of September 30, 1998, the Bank had no "real estate owned."
As of September 30, 1997, the Bank had one foreclosed property or "real estate
owned."
The following table sets forth information with respect to the Bank's
nonperforming assets for the periods indicated.
At
September 30,
-------------
1998 1997
--------------
(In Thousands)
Loans accounted for on a nonaccrual basis
One- to four-family loans ................................. $ 350 $ 143
Consumer loans ............................................ 60 55
------------
Total nonaccrual loans ............................... 410 198
------------
Accruing loans which are contractually past due 90 days or more:
One- to four-family loans ................................. - - 154
Consumer loans ............................................ - - 33
------------
Total 90 days past due and accruing interest ........ - - 187
------------
Total nonaccrual and 90 days past due loans .......... 410 385
Real estate owned .............................................. - - 28
------------
Total nonperforming assets ........................... $ 410 $ 413
============
Total nonperforming assets to total assets ........... 0.88% 0.85%
============
<PAGE>
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.
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, 1998 or 1997.
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, 1998 and 1997 the Bank's allowance
for loan losses was 0.65% and 0.60% 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.
<TABLE>
For the Fiscal
Year Ended
September 30,
----------------
1997 1996
----------------
(In Thousands)
<S> <C> <C>
Balance at beginning of period ................................................... $ 165 $ 117
Provision for loan losses ........................................................ 63 90
Recoveries:
Consumer loans .............................................................. 4 1
----------------
Total recoveries ....................................................... 4 1
----------------
Charge-offs:
One- to four-family loans ................................................... - - 2
Consumer loans .............................................................. 61 37
Commercial .................................................................. - - 4
----------------
Total charge-offs ...................................................... 61 43
----------------
Net charge-offs ........................................................ (57) (42)
----------------
$ 171 $ 165
================
Ratio of allowance for loan losses to gross loans outstanding at the end
of the period ................................................................. 0.65% 0.60%
Ratio of net charge offs to average loans outstanding during the period .......... 0.21% 0.15%
Ratio of allowance for loan losses to total nonperforming loans at the
end of the period ............................................................. 41.71% 42.86%
</TABLE>
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.
<PAGE>
<TABLE>
At September 30,
------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
As % of % of As % of % 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 . $ 62 0.32% 72.42% $ 10 0.05% 68.36%
Multi-family ........ - - - - 0.98% - - - - 1.34%
Commercial real
estate ........... - - - - 4.26% - - - - 3.55%
Other loans secured
by real estate ... - - - - 1.07% - - - - 1.63%
--------------------------------------------------------
Total mortgage
loans ....... 62 0.32% 78.73% 10 0.05% 74.87%
--------------------------------------------------------
Commercial and
Consumer Loans:
Commercial ....... 17 2.72% 2.38% 19 1.88% 3.71%
Consumer ......... 56 1.37% 15.58% 67 1.40% 17.46%
Home equity lines
of credit ..... - - - - 2.58% - - - - 2.99%
Other consumer
loans ......... - - - - 0.73% - - - - 0.97%
--------------------------------------------------------
Total commercial
and consumer
loans ........ 73 1.31% 21.27% 86 1.25% 25.13%
--------------------------------------------------------
Total Allocated ........ 135 0.51% 100.00% 96 0.35% 100.00%
======= =======
Unallocated ............ 36 0.14% 69 0.25%
------------- ---------------
Total allowance for
loan losses ......... $ 171 0.65% $ 165 0.60%
============= ===============
</TABLE>
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.
<PAGE>
At September 30, 1998, the Company had $17.2 million in investment securities
consisting of $1.4 million invested in mortgage-backed securities, $13.9 million
invested in U.S. Government and agency, $1.7 million invested in obligations of
state and political 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.
The following tables set forth certain information regarding the amortized cost
and market values of the Company's securities at the dates indicated. The
Company holds all securities as available for sale.
<TABLE>
At September 30,
------------------------------------
1998 1997
------------------ -----------------
Available for Sale Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency securities .......... $13,752 $13,891 $14,619 $14,669
Obligations of states and political subdivisions 1,643 1,684 748 770
Mortgage backed securities ..................... 1,288 1,356 1,232 1,338
----------------------------------
Total Available for Sale .................. $16,683 $16,931 $16,599 $16,777
==================================
</TABLE>
At September 30, 1998 and 1997, the Company had investments in FHLB stock of
$215,000 and $210,000, 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, 1998. 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 have been
excluded from the maturity schedule below.
The Federal Home Loan Bank stock is considered a nonmarketable equity security
for reporting purposes. As such, the stock has no maturity date and therefore
has been excluded from the maturity schedule below.
<TABLE>
Less Than One Year One to Five Years Five to Ten Years Over Ten Years Total
--------------------------------------------------------------------------------------------------
Available for Sale (1) Weighted Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average Fair Average
Value Yield (3) Value Yield (3) Value Yield (3) Value Yield (3) Value Yield (3)
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
securities $ 3,008 5.46% $ 7,572 6.05% $ 3,311 6.40% $ - - - - $13,891 6.00%
Obligations of states and
political subdivisions (2) - - - - 41 5.30% 1,438 4.48% 205 4.50% 1,684 4.31%
-------------------------------------------------------------------------------------------------
Total Available for Sale $ 3,008 5.46% $ 7,613 6.05% $ 4,749 5.82% $ 205 4.50% $15,575 5.82%
=================================================================================================
<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 amortized 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,
----------------------------------------------------------
1998 1997
--------------------------- -----------------------------
Percent of Weighted
Average Average Average
Average Total Interest Average Total Interest
Balance Deposits Rate Balance Deposits Rate
----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Noninterest bearing ..... $ 1,451 4.03% -- $ 1,001 2.80% --
Interest-bearing (NOW) .. 3,712 10.30% 1.75% 5,098 14.27% 1.85%
Money market ............ 3,550 9.85% 2.84% 3,818 10.69% 2.98%
Passbook savings ........... 3,435 9.53% 2.33% 3,590 10.05% 2.40%
Time deposits .............. 23,892 66.29% 5.71% 22,213 62.19% 5.54%
-----------------------------------------------------------
Total deposit accounts $36,040 100.00% 4.47% $35,720 100.00% 4.27%
===========================================================
</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, 1998. Jumbo certificates of deposit require minimum
deposits of $100,000 and rates paid on such accounts are negotiable. At
September 30, 1998, total jumbo certificates were $1,680,000.
Time
Maturity Period Deposits
- -------------------------------------- ---------
(In Thousands)
Less than three months $ 629
Three through six months 105
Six through twelve months 450
Over twelve months 496
--------
Total $ 1,680
========
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, 1998 and
1997, the Bank had no outstanding borrowings from the FHLB.
<PAGE>
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, 1998, the Bank's
investment in Centralia SLA amounted to approximately $24,000 or .05% of the
Bank's total assets. Insurance commissions accounted for $5,000 or approximately
1.08% 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.
Personnel
As of September 30, 1998, the Company had a total of 17 full-time employees and
2 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.
<PAGE>
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.
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
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 $0.00 to $0.27 per $100 of deposits.
<PAGE>
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.
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, 1998 and 1997 ($ in thousands).
<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, 1998:
Total Capital (to Risk Weighted Assets)
Consolidated ...................................... $ 9,546 46.2% $1,655 8.0% N/A
Bank .............................................. $ 9,239 44.7% $1,655 8.0% $2,069 10.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated ...................................... $ 9,375 45.3% $ 827 4.0% $ N/A
Bank .............................................. $ 9,067 43.8% $ 827 4.0% $1,241 6.0%
Tier I Capital (to Average Adjusted Assets)
Consolidated ...................................... $ 9,375 19.8% $1,899 4.0% $ N/A
Bank .............................................. $ 9,067 19.4% $1,869 4.0% $2,337 5.0%
As of September 30, 1997:
Total Capital (to Risk Weighted Assets)
Consolidated ...................................... $11,047 51.2% $1,727 8.0% N/A
Bank .............................................. $ 8,777 41.0% $1,714 8.0% $2,143 10.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated ...................................... $10,882 50.4% $864 4.0% N/A
Bank .............................................. $ 8,612 40.2% $857 4.0% $1,286 6.0%
Tier I Capital (to Average Adjusted Assets)
Consolidated ...................................... $10,882 22.9% $1,897 4.0% N/A
Bank .............................................. $ 8,612 19.0% $1,809 4.0% $2,261 5.0%
</TABLE>
<PAGE>
Dividends. Under the ISBA, dividends may be paid by the Bank out of its net
profits (i.e., earnings from current operations, investments, and other assets
plus actual recoveries on loans, net of current expenses including dividends or
interest on deposits, additions to reserves as required by the Commissioner,
actual losses, accrued dividends on preferred stock, if any, and all state and
federal taxes). The written approval of the Commissioner must be obtained,
however, before the Bank may declare dividends in any calendar year in an amount
in excess of 50% of its net profits for that calendar year. In addition, before
declaring a dividend on its capital stock, the Bank must transfer no less than
one-half of its net profits of the preceding half year to its paid-in surplus
until it shall have paid-in surplus equal to 20% of its capital stock. Finally,
the Bank will be unable to pay dividends in an amount which would reduce its
capital below the greater of (i) the amount required by the FDIC, (ii) the
amount required by the Commissioner or (iii) the amount required for the
liquidation account to be established by the Bank in connection with the
Conversion. The Commissioner and the FDIC also have the authority to prohibit
the payment of any dividends by the Savings Bank if the Commissioner or the FDIC
determines that the distribution would constitute an unsafe or unsound practice.
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.
<PAGE>
A bank holding company is a legal entity separate and distinct from its
subsidiary bank or banks. Normally, the major source of a holding company's
revenue is dividends a holding company receives from its subsidiary banks. The
right of a bank holding company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon their liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations for
federal funds purchased and securities sold under repurchase agreements, as well
as deposit liabilities. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, in the event of a loss suffered by the FDIC in
connection with a banking subsidiary of a bank holding company (whether due to a
default or the provision of FDIC assistance), other banking subsidiaries of the
holding company could be assessed for such loss.
Federal laws limit the transfer of funds by a subsidiary bank to its holding
company in the form of loans or extensions of credit, investments, or purchases
of assets. Transfers of this kind are limited to ten percent of a bank's capital
and surplus with respect to each affiliate and to twenty percent to all
affiliates in the aggregate, and are also subject to certain collateral
requirements. These transactions, as well as other transactions between a
subsidiary bank and its holding company, must also be on terms substantially the
same as, or at least as favorable as, those prevailing at the time for
comparable transactions with non-affiliated companies or, in the absence of
comparable transactions, on terms or under circumstances, including credit
standards, that would be offered to, or would apply to, non-affiliated
companies.
Capital Requirements. The Federal Reserve Board has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the FDIC for the Savings Bank. The Company's Tier 1 and
total capital significantly exceed the Federal Reserve Board's capital adequacy
requirements.
Other Regulations.
FDICIA. FDICIA was enacted on December 19, 1991. In addition to providing for
the recapitalization of the Bank Insurance Fund ("BIF") of the FDIC, FDICIA
represents a comprehensive and fundamental change to banking supervision. FDICIA
imposes relatively detailed standards and mandates the development of additional
regulations governing nearly every aspect of the operations, management and
supervision of banks and bank holding companies like the Company and the Bank.
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.
<PAGE>
FDICIA requires the banking regulators to take prompt corrective action with
respect to depository institutions that fall below certain capital levels and
prohibits any depository institution from making any capital distribution that
would cause it to be considered undercapitalized. Regulations establishing five
capital categories of well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized
became effective December 19, 1992. Institutions that are not adequately
capitalized may be subjected to a broad range of restrictions on their
activities and will be required to submit a capital restoration plan which, to
be accepted by the regulators, must be guaranteed in part by any company having
control of the institution. Only well capitalized institutions and adequately
capitalized institutions receiving a waiver from the FDIC will be permitted to
accept brokered deposits, and only those institutions eligible to accept
brokered deposits may provide pass-through deposit insurance for participants in
employee benefit plans. In other respects, FDICIA provides for enhanced
supervisory authority, including greater authority for the appointment of a
conservator or receiver for undercapitalized institutions.
A range of other regulations adopted as a result of FDICIA include requirements
applicable to closure of branches; additional disclosures to depositors with
respect to terms and interest rates applicable to deposit accounts; requirements
for the banking agencies to adopt uniform regulations for extensions of credit
secured by real estate; modification of accounting standards to conform to
generally accepted accounting principles including the reporting of off-balance
sheet items and supplemental disclosure of estimated fair market value of assets
and liabilities in financial statements filed with the banking regulators;
increased penalties in making or failing to file assessment reports with the
FDIC; greater restrictions on extensions of credit to directors, officers and
principal stockholders; and increased reporting requirements on agricultural
loans and loans to small businesses.
As required by FDICIA, the FDIC has established a risk-based assessment system
for the deposit insurance provided to depositors at depository institutions
whereby assessments to each institution are calculated upon the probability that
the insurance fund will incur a loss with respect to the institution, the likely
amount of such loss, and the revenue needs of the insurance fund. Under the
system, deposit insurance premiums are based upon an institution's assignment to
one of three capital categories and a further assignment to one of three
supervisory subcategories within each capital category. The result is a nine
category assessment system with initial assessment rates ranging from
twenty-three cents to thirty-one cents per one hundred dollars of deposits in an
institution. The classification of an institution into a category will depend,
among other things, on the results of off-site surveillance systems, capital
ratio, and 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.
<PAGE>
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.
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
Reporting Comprehensive Income Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income," 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. In addition to an enterprise's
net income, change in equity components under comprehensive income reporting
would also include such items as the net change in unrealized gain or loss on
available for sale securities and foreign currency translation adjustments. 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 years beginning after December 15, 1997.
The Company only has one segment and, therefore, the Statement will not have an
impact on the Company's financial statements.
Accounting for Derivative Instruments and Hedging Activities Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133) establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This statement applies to all entities. FAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Earlier application is encouraged. The statement is not to be applied
retroactively to financial statements of prior periods. The Company does not
believe the adoption of FAS 133 will have a material impact on the consolidated
financial statements.
Reclassifications Certain reclassifications have been made to the balances as of
September 30, 1997, with no effect on net income, to be consistent with the
classifications adopted for September 30, 1998.
<PAGE>
Year 2000 Compliance
The year 2000 has posed a unique set of challenges to those industries reliant
on information technology. As a result of methods employed by early programmers,
many software applications and operational programs may be unable to distinguish
the year 2000 from the year 1900. If not effectively addressed, this problem
could result in the production of inaccurate data, or, in the worst cases, the
inability of the systems to continue to function altogether. Financial
institutions are particularly vulnerable due to the industry's dependence on
electronic data processing systems. In 1997, the Company started the process of
identifying the hardware and software issues required to be addressed to assure
year 2000 compliance. The Company began by assessing the issues related to the
year 2000 and the potential for those issues to adversely affect the Company's
operations and those of its subsidiaries.
Since that time, the Company has established a Year 2000 Compliance Team (the
Team) composed of representatives from key areas throughout the organization. It
is the mission of this Team to identify areas subject to complications related
to the year 2000 and to initiate remedial measures designed to eliminate any
adverse effects on the Company's operations. The Team has identified all
mission-critical software and hardware that may be adversely affected by the
year 2000 and has required vendors to represent that the systems and products
provided are or will be year 2000 compliant.
The Company expects that all mission critical software will be upgraded to
achieve year 2000 compliance and tested by December 31, 1998. In addition, the
Team is developing contingency plans to address systems which do not become year
2000 compliant by December 31, 1998.
Management has determined that if a business interruption as a result of Year
2000 issue occurred, such an interruption could be material. The primary effort
required to prevent a potential business interruption is to assure the Company's
third party processor is year 2000 compliant. As a cost saving measure,
management has contracted with a different third party processor to convert data
before June 30, 1999. This third party processor has stated that Year 2000
remediation and testing efforts have been successfully completed.
The Company is committed to a plan for achieving compliance, focusing not only
on its own data processing systems, but also on its loan customers. The Team has
taken steps to educate and assist its customers with identifying their year 2000
compliance problems. In addition, the Team has proposed policy and procedure
changes to help identify potential risks to the Company and to gain an
understanding of how customers are managing the risks associated with the year
2000.
Management believes that the organization has an effective year 2000 compliance
program in place and that additional expenditures required to bring its systems
into compliance will not have a materially adverse effect on the Company's
operations, cash flow, or financial condition. Management expects total
additional out-of-pocket expenditures to be approximately $131,000. This
includes costs to upgrade equipment specifically for the purpose of year 2000
compliance and certain administrative expenditures. However, the year 2000
problem is pervasive and complex and can potentially affect any computer
process. Accordingly, no assurance can be given that year 2000 compliance can be
achieved without additional unanticipated expenditures and uncertainties that
might affect future financial results.
The Federal banking regulators have established standards for achieving year
2000 compliance for federally insured depository institutions. If an institution
fails to meet any of the established standards, its primary regulator may issue
an order directing the institution to cure the deficiency. Until the deficiency
cited in the regulator's order is cured, the regulator may restrict the
institution's growth rate and take any action the regulator deems appropriate.
<PAGE>
Executive Officers of the Registrant
The following table sets forth certain information as of September 30, 1998 with
respect to the executive officers of the Company and the Savings Bank.
Name Age Position
- --------------------------------------------------------------------------------
K. Gary Reynolds 47 President and Chief Executive Officer of
the Company and the Savings Bank
Stephen J. Greene 40 Vice President of the Savings Bank
Larry D. Griffin 51 Branch Manager, Centralia 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.
Larry D. Griffin has been the manager and loan officer of the Carlyle branch
since his employment in February 1997. Prior to that time, he was employed by
Banker's Systems, Inc. as an account executive for over 15 years, where he was
responsible for providing regulatory assistance and legal documentation to
financial institutions throughout central and southern Illinois.
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, 1998. At September 30, 1998, the
Company's premises had an aggregate net book value of approximately $339.
Lease Expiration Net Book
Location Year Opened Owned/Leased Date Value
- --------------------------------------------------------------------------------
(In Thousands)
Main office
200 South Poplar Street 1975 Owned N/A $ 104
Centralia, Illinois
Branch office
801 12th Street 1996 (1) Owned N/A 235
Carlyle, Illinois -------
$ 339
=======
(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, 1998.
<PAGE>
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 1998 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
1998 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, 1998 and 1997, together with the report of
McGladrey & Pullen, LLP appears in the 1998 Annual Report to Stockholders and is
incorporated herein by reference.
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 8, 1999.
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 8, 1999.
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 8, 1999.
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 8, 1999.
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.
<PAGE>
Exhibit No. Exhibit
3.1 Certificate of Incorporation of CSB Financial Group, Inc.
(incorporated herein by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form SB-2 as originally
filed on March 1, 1995, Registration No. 33-89842)
3.2 Bylaws of CSB Financial Group, Inc. (incorporated herein by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form SB-2 as originally filed on March 1, 1995,
Registration No. 33-89842)
4.1 Specimen Stock Certificate of CSB Financial Group, Inc.
(incorporated herein by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-A filed on August
21, 1995, Registration No. 0-26650)
4.2 Articles IV, V, VI, XIV and XVI of CSB Financial Group, Inc.'s
Certificate of Incorporation (see Exhibit 3.1 above)
4.3 Articles II and IV of CSB Financial Group, Inc.'s Bylaws (see
Exhibit 3.2 above)
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 reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form SB-2 as originally
filed on March 1, 1995, Registration No. 33-89842)
10.2 Credit Agreement between CSB Financial Group, Inc. and Centralia
Savings Bank Employee Stock Ownership Plan (incorporated herein
by reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form SB-2 as originally filed on March 1, 1995,
Registration No. 33-89842)
10.3 CSB Financial Group, Inc. 1995 Stock Option and Incentive Plan
(incorporated herein by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form SB-2 as originally
filed on March 1, 1995, Registration No. 33-89842)
10.4 CSB Financial Group, Inc. 1997 Nonqualified Stock Option Plan
(incorporated herein by reference to Exhibit 10.4 to Form 10-KSB
for the period ending September 30, 1997 as originally filed on
December 29, 1997)
10.5 CSB Financial Group, Inc. Management Development and Recognition
Plan and Trust Agreement, as amended (incorporated herein by
reference to Exhibit 10.4 to Form 10-KSB for the period ending
September 30, 1997 as originally filed on December 29, 1997)
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. 1998 Annual Report to Stockholders
21.1 Subsidiaries of the Registrant (incorporated herein by reference
to Exhibit 21.1 to the Registrant's Registration Statement on
Form SB-2 as originally filed on March 1, 1995, Registration No.
33-89842)
23.1 Consent of McGladrey & Pullen, LLP
27.1 Financial Data Schedule
<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 15, 1998
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
Officer and Principal Accounting Officer)
/s/ Wesley N. Breeze /s/ Michael Donnewald
- ------------------------------------------ ---------------------------
Wesley N. Breeze, Director Michael Donnewald, Director
/s/ Larry M. Irvin /s/ W. Harold Monken
- ------------------------------------------- ---------------------------
Larry M. Irvin, Director W. Harold Monken, Director
---------------------------
BUSINESS OF THE CORPORATION
---------------------------
CSB Financial Group, Inc. (the "Company") was organized as a Delaware
corporation on December 12, 1994 to acquire all of the capital stock issued by
Centralia Savings Bank (the "Bank"). The Company is engaged in the business of
directing, planning and coordinating the business activities of the Bank. In the
future, the Company may acquire or organize other operating subsidiaries,
although there are no current plans or agreements to do so.
The Bank is an Illinois-chartered stock savings bank. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC")
through the Savings Association Insurance Fund (the "SAIF"). The Bank was
originally chartered in 1879 as a federally chartered savings and loan
association, merged with another savings association in the 1970's and converted
to a state-chartered savings bank on July 1, 1993 under its current name of
Centralia Savings Bank. The Bank conducts its business through its office
located at 200 South Poplar Street, Centralia, Illinois 62801, and its telephone
number is (618) 532-1918.
The Bank provides its customers with a broad range of community banking
services. The Bank is primarily engaged in the business of attracting deposits
from the general public and using such deposits to invest in 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 Fellow Shareholders:
It is my privilege to report to you on the highlights of this past year and to
share our strategies for the future goals of CSB Financial Group, Inc. and
subsidiary.
I am pleased to report the diluted earnings per share has increased $.15 to $.42
per share. Net income for the year increased $100,000 to $345,000. This increase
was primarily accomplished through reductions in professional fees and other
noninterest expenses.
In August 1998 the Board of Directors announced and implemented a repurchase
program to acquire up 82,000 shares of its own common stock. This repurchase
program is the reason for the $1,523,000 decline in stockholders' equity to
$10,129,000 at September 30, 1998. As of the date of these financials, the
Company has completed the repurchase of 302,080 shares, or 29.2%, of the initial
common stock issuance.
The stock market has proven that it can shift rapidly and with velocity.
Technology has provided investors with a connection to other world markets, a
continuous flow of information on world events and the ability to make
investment decisions in the blink of an eye. The recent downturn in the stock
market has shown us how quickly this can occur. The stock market declines have
been the harshest on the small and mid-capitalization stocks and, in particular,
your company's stock. The Company's stock price had a high of $14.00, a low of
$9.00, and closed the year at $9.75. It is important to note that this setback
occurs during a time of improved performance for CSB Financial Group, Inc. It is
even more important to note that the stock market is a cyclical business. We
must not confuse stock price with operating performance.
This past year has seen a record-breaking event in the level of mortgage
interest rates. Mortgage customers, desiring to reduce their real estate costs,
have sought new financing of their residential mortgage loans. Centralia Savings
Bank originated in excess of $5,000,000 in real estate loans during the fiscal
year 1998. The bank sold the majority of these loans into the secondary real
estate markets in exchange for origination fees. The bank plans to retain
residential real estate loans during 1999 and annually evaluate the
interest-rate risks and earnings impact of this strategy.
The board of directors and management recently completed its planning session
for fiscal year 1999. We have identified a number of strategies, all focused on
improving return on equity. Management is confident these strategies will
provide for loan growth, minimizing the marginal costs of funding the growth,
reducing operating expenses, and continuing our repurchase of the Company's
stock.
On behalf of the board of directors, management and staff of the Company, 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, 1998
was $345,000 as compared to $245,000 for the fiscal year ended September 30,
1997. This represents a $100,000, or 40.8%, increase in net income.
Net Interest Income. The Company's net interest income for the fiscal
years ended September 30, 1998 and 1997 were $1,666,000 and $1,611,000,
respectively. This represents a $55,000, or 3.4%, increase in net interest
income. This is primarily due to an increase in the yield on earning assets.
Interest income increased $51,000, or 1.6%, from $3,253,000 for the
fiscal year ended September 30, 1997 compared to $3,304,000 for the fiscal year
ended September 30, 1998. The increase resulted primarily from a 23 basis point
increase in the average rate earned on the Company's interest-earning assets.
The average balances of mortgage loans increased $79,000 combined with
the 40 basis point increase in the average yield on such loans resulted in a
$86,000 increase in the interest income between fiscal years. The average
balance of investment securities increased $1,520,000 combined with a 20 basis
point increase in the average yield on investment securities resulted in an
increase in interest income of $120,000 between fiscal years. These increases
more than offset the decreases in the other average interest bearing assets. The
$213,000 decrease in the average balance of consumer loans combined with a 72
basis point decrease in the average yield of these loans resulted in a $60,000
decrease in interest income between the fiscal years. The $178,000 decrease in
the average balance of commercial loans was offset by a 130 basis point increase
in the average yield resulting in a decrease of $3,000 in interest income. The
$364,000 decrease in the average balance of mortgage-backed securities combined
with a 21 basis point decrease in the average yield resulted in a $37,000
decrease in interest income between fiscal years.
<PAGE>
Interest expense decreased $4,000, or .2%, to $1,638,000 for the fiscal
year ended September 30, 1998 from $1,642,000 for fiscal year ended September
30, 1997.
Provision for Loan Losses. The Company's provision for loan losses for
the fiscal year ended September 30, 1998 was $63,000, compared to $90,000 for
the fiscal year ended September 30, 1997. Management evaluates the adequacy of
the Company's allowance for loan losses on a quarterly basis and may, based on
such review, adjust the amount of the provision for loan losses.
Classified loans are considered as part of this review.
Non-Interest Income. The Company's non-interest income for the fiscal
year ended September 30, 1998 was $134,000, as compared to $154,000 for the
fiscal year ended September 30, 1997. This represents a decrease of $20,000, or
13.0%, in non-interest income. The decrease resulted primarily from a $49,000
decrease in gains on sale of securities combined with a $9,000 increase in
service charges on deposits and a $20,000 increase in other non-interest income
fees.
Non-Interest Expense. The Company's non-interest expense for the fiscal
year ended September 30, 1998 was $1,273,000, as compared to $1,319,000 for the
fiscal year ended September 30, 1997. The $46,000 decrease in non-interest
expense is due to decreased expenses related to professional fees.
Compensation and Employee Benefits expense increased $3,000 to $631,000
for the fiscal year ended September 30, 1998. This increase was primarily due to
an increase of $41,000 in salaries related to an increase in the number of
employees offset by a decrease in the Company's contribution to the Employee
Stock Ownership Plan (ESOP). The consolidated financial statements reflect a
charge of $32,000 relating to contributions to the ESOP as compared to $69,000
for the fiscal year ended September 30, 1997. The Company records compensation
expense related to the ESOP in accordance with SOP 93-6. As a result, to the
extent the value of the Company's common stock appreciates, compensation expense
related to the ESOP could increase.
Data processing expense increased $8,000 to $103,000 for the fiscal
year ended September 30, 1998. This increase was primarily attributed to an
increase in the per-item processing costs and the increased need for and
associated costs of management reports.
Professional fees decreased $45,000 to $83,000 for fiscal year ended
September 30, 1998 from $128,000 for fiscal year ended September 30, 1997. The
primary causes for the decrease relate to professional fees for regulatory
reporting which were incurred in 1997 but not in 1998.
Other non-interest expenses decreased $12,000 to $345,000 for the
fiscal year ended September 30, 1998 as compared to $357,000 for the fiscal year
ended September 30, 1997.
Provision for Income Taxes. The Company's provision for income taxes
for the fiscal year ended September 30, 1998 was $119,000, as compared to
$111,000 for the fiscal year ended September 30, 1997. This represents a $8,000,
or 7.2%, increase in the provision for income taxes.
Comparison of Financial Condition as of September 30, 1998 and 1997
General. At September 30, 1998, the Company's total assets were $46.4
million, a decrease of $2.1 million, or 4.4%, as compared to $48.5 million at
September 30, 1997. The decrease resulted from a decrease in cash and cash
equivalents of $1.1 million, or 42.4%, a decrease in other assets of $114,000
and a $1.0 million decrease in loans receivable, net of the allowance for loan
losses which offset the $159,000 increase in investment securities. The
repurchase of the Company's common stock between fiscal years was the primary
cause for this decrease.
Loans. Loans, net of the allowance for loan losses, at September 30,
1998 were $26.1 million, a decrease of $1,023,000, or 3.8%, compared to $27.1
million for the fiscal year ended September 30, 1997. Mortgage loans increased
$241,000, or 1.2%, consumer loans decreased $676,000, or 14.2%, as compared to
the fiscal year ended September 30, 1997. Commercial loans decreased $388,000,
or 38.3%, to $625,000 for the year ended September 30, 1997 as compared to
$1,013,000 for the year ended September 30, 1997. Home equity lines of credit
and share loans decreased $138,000 and $73,000, respectively. This was a
decrease of 16.9% and 27.4% as compared to fiscal year ended September 30, 1997.
Commercial and consumer lending have declined due to increased competition on
rates and a shift in management's focus towards mortgage lending.
<PAGE>
Average loan balances for 1998 amounted to $26.9 million as compared to
$27.2 million in the previous fiscal year. The Company continues to emphasize
mortgage lending.
The residential mortgage loans increased $251,000 during 1998, or 1.3%,
to $19.3 million as compared to the fiscal year ended September 30, 1997. During
1998, loan originations for residential mortgage loans amounted to $5.2 million
as compared to $2.1 million in originations for the prior fiscal year.
Residential mortgage loans represent 73.4% of gross loans. Consumer
loans, consisting primarily of automobile loans, made up 15.6% of gross loans,
commercial loans made up 2.4% of gross loans, home equity lines of credit and
share loans made up 3.3% of gross loans, and non-residential real estate loans
comprised 5.3% of the portfolio at September 30, 1998.
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, 1998 amounted to $410,000 or
.88% of total assets as compared to $385,000 or .79% of total assets as of
September 30, 1997.
The following table sets forth an analysis of the Company's gross
allowance for loan losses for the periods indicated.
<TABLE>
For the Fiscal Year
Ended September 30,
-------------------
1998 1997
-----------------
(In Thousands)
<S> <C> <C>
Allowance at beginning of period .......................................... $ 165 $ 117
Provision for loan losses ................................................. 63 90
Recoveries:
Consumer loans ........................................................ 4 1
-----------------
Total recoveries ................................................ 4 1
-----------------
Charge-offs:
One- to four-family loans ............................................. - - 2
Consumer loans ........................................................ 61 37
Commercial ............................................................ - - 4
-----------------
Total charge-offs ............................................... 61 43
-----------------
Net charge-offs ................................................. (57) (42)
-----------------
Balance at end of period ........................................ $ 171 $ 165
=================
Ratio of allowance for loan losses to gross loans outstanding at
the end of the period ................................................. .65% 0.60%
Ratio of net charge offs to average loans outstanding net during the period .18% 0.15%
Ratio of allowance for loan losses to total nonperforming assets
at the end of the period .............................................. 41.71% 42.86%
</TABLE>
<PAGE>
Investment Securities. Investment securities represented 36.9% of total
assets as of September 30, 1998 compared to 35.0% of total assets as of
September 30, 1997. Investment securities increased $159,000, .9%, from $17.0
million to $17.2 million as of September 30, 1998. At September 30, 1998, the
Company held approximately $17.2 million in investment securities of which $16.9
million were held as available for sale, and $215,000 were non-marketable equity
securities. Of the $17.2 million in investment securities, $13.9 million, or
81.0%, were U. S. Government and agency securities, $1.7 million, or 9.8%, were
obligations of state and political subdivisions, $215,000, or 1.3%, were
non-marketable equity securities and $1.4 million, or 7.9%, were mortgage-backed
securities.
Deposits. At September 30, 1998, total deposits amounted to $35.9
million, or 77.2%, of total assets. Total deposits decreased $731,000, or 2.0%
from September 30, 1997. A $595,000 increase in time deposits greater than
$100,000 offset by $530,000 decrease in demand deposits, an $8,000 decrease in
savings, and a $788,000 decrease in other time deposits.
Return on Equity and Assets
Net income for the fiscal year ended September 30, 1998 was $345,000 as
compared to $245,000 for the fiscal year ended September 30, 1997.
Return on average assets (ROA) for the year ended September 30, 1998
was .73% as compared to .51% for the year ended September 30, 1997. The cause
for the increase in ROA was due to a decrease in professional fees relating to
regulatory reporting and compensation expenses related to the Company's benefit
plans.
Return on average equity (ROE) for the year ended September 30, 1998
was 3.24% as compared to 2.05% for the year ended September 30, 1997. The cause
for the increase in ROE was due to increased net income and stock repurchase
programs implemented by the Company. During the fiscal year, the Company
purchased 169,305 shares of its common stock from the open market.
The average equity to average assets ratio as of September 30, 1998 was
22.4% as compared to 24.9% as of September 30, 1997. The primary cause for the
decrease was the repurchase of the Company's common stock.
<PAGE>
Average Balance Sheet
The following table presents the average balance sheet for the Company
for the years ended September 30, 1998 and 1997, 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.
<TABLE>
For the Fiscal Year Ended September 30,
--------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------
(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) $ 20,201 $ 1,630 8.07% $ 20,122 $ 1,544 7.67%
Commercial loans (5) 961 96 9.99% 1,139 99 8.69%
Consumer loans (5) 5,736 461 8.04% 5,949 521 8.76%
-------------------------- --------------------------
Total loans, net $ 26,898 $ 2,187 8.13% $ 27,210 $ 2,164 7.95%
Mortgage-backed securities $ 1,048 $ 98 9.35% $ 1,412 $ 135 9.56%
Investment securities (2)(3)(6) 15,712 943 6.00% 14,192 823 5.80%
Daily interest-bearing deposits 706 62 8.78% 2,285 118 5.16%
FHLB stock (3) 213 14 6.57% 187 13 6.95%
-------------------------- --------------------------
Total interest-earning assets $ 44,577 $ 3,304 7.41% $ 45,286 $ 3,253 7.18%
Non-interest earning assets:
Office properties and equipment, net $ 603 $ 607
Real estate, net 5 5
Other non-interest earning assets 2,377 2,145
------------- -------------
Total assets $ 47,562 $ 48,043
============= =============
Interest-bearing liabilities:
Passbook accounts $ 3,435 $ 82 2.39% $ 3,590 $ 92 2.56%
NOW accounts 3,712 69 1.86% 5,098 95 1.86%
Money market accounts 3,550 134 3.77% 3,818 121 3.17%
Certificates of deposit 23,892 1,353 5.66% 22,213 1,334 6.01%
-------------------------- --------------------------
Total interest-bearing $ 34,589 $ 1,638 4.74% $ 34,719 $ 1,642 4.73%
liabilities
Non-interest bearing liabilities:
Non-interest bearing deposits $ 1,451 $ 1,001
Other liabilities 890 355
------------- -------------
Total liabilities $ 36,930 $ 36,075
Stockholders' equity 10,632 11,968
------------- -------------
Total liabilities and
stockholders' equity $ 47,562 $ 48,043
============= =============
Net interest income $ 1,666 $ 1,611
============= =============
Interest rate spread (4) 2.67% 2.45%
Net interest margin (1) 3.74% 3.56%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 128.88% 130.44%
<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>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Increase (Decrease)
Due To Due To
Rate Volume Net Rate Volume Net
---------------------- ---------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans .............. $ 80 $ 6 $ 86 $ 47 $ 275 $ 322
Commercial loans ............ 15 (18) (3) 2 (10) (8)
Consumer loans .............. (43) (17) (60) 30 128 158
----------------------------------------------
Total loans ........... 52 (29) 23 79 393 472
Mortgage-backed securities .. (3) (34) (37) 3 (65) (62)
Investment and other
securities ................ 29 91 120 (29) 10 (19)
Interest-bearing deposits ... 83 (139) (56) (9) (23) (32)
FHLB stock .................. (1) 2 1 - - 1 1
----------------------------------------------
Total net change income
on interest-earning
assets .............. 160 (109) 51 44 316 360
----------------------------------------------
Interest-bearing liabilities:
Passbook .................... (6) (4) (10) (15) 16 1
Interest-bearing demand
(NOW) accounts ............ - - (26) (26) 6 13 19
Money market deposit
accounts .................. 23 (10) 13 35 22 57
Certificates of deposit ..... (76) 95 19 76 188 264
----------------------------------------------
Total net change in
expense on interest-
bearing liabilities . (59) 55 (4) 102 239 341
----------------------------------------------
Net change in net
interest income ..... $ 219 $(164) $ 55 $ (58) $ 77 $ 19
==============================================
</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.
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.
<PAGE>
At September 30, 1998, 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 $6.6 million,
representing a cumulative one-year interest-rate sensitivity gap of negative
14.17%. 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 4.6 years, excluding mortgage-backed securities, as of September 30, 1998.
Accordingly, the Company's investment securities portfolio could be made less
interest-rate sensitive by increasing the average maturity of the portfolio.
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, 1998 and 1997, the Company originated one-to-four-family
residential mortgage loans in the amount of $5.2 million and $2.1 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 provided by investing activities for the fiscal year ended
September 30, 1998 totaled $858,000. Investment activities included the purchase
of investment securities which totaled $13.0 million and $10.0 million for the
fiscal year ended September 30, 1998 and 1997, respectively. Sources of cash for
investing activities was provided by operating activities, maturities and sales
of securities, and cash and cash equivalents held at the beginning of the fiscal
year. Investment activities included the sale of investment securities which
totaled $5.2 million and $2.7 million for the fiscal years ended September 30,
1998 and 1997, respectively. Investment activities also included maturities and
paydowns on investment securities which totaled $7.8 million and $6.6 million
for the fiscal years ended September 30, 1998 and 1997, respectively.
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, 1998 and 1997, the Company used its
sources of funds primarily to fund loan commitments, pay maturing certificates
of deposits and satisfy deposit withdrawals. At September 30, 1998, 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 $275,000 and $1,008,000, respectively. The range of rates on
fixed-rate commitments was 8.25% to 11.50%.
At September 30, 1998, certificates of deposits totaled $23.9 million,
or 66.7% of total deposits, as compared to $24.1 million, or 65.9% of total
deposits for fiscal year ended September 30, 1997. Time deposits over $100,000
accounted for $1.7 million and $1.1 million, respectively, of the certificate of
deposit totals. Historically, the Company has been able to retain a significant
amount of its maturing deposits by increasing the interest rates earned by the
certificates of deposit. Because deposit insurance premiums paid by commercial
banks on BIF-insured deposits have been drastically reduced, the Company may
find it more difficult to retain such deposits. Management believes it will have
adequate resources to fund maturing deposits and withdrawals from additional
deposits, proceeds of scheduled repayments of loans as well as from payments
received on investment and mortgage-backed securities.
Capital. The Company is required to maintain a specific amount of
capital pursuant to the regulations of the Commissioner of Savings and
Residential Finance and the Federal Deposit Insurance Corporation (FDIC). As of
September 30, 1998, the Company was in compliance with all regulatory capital
requirements with a Tier 1 capital to risk-weighted assets ratio of 45.3%,
compared to the minimum ratio required of 4.0%, total capital to risk-weighted
assets ratio of 46.2% compared to the minimum ratio required of 8.0% and a Tier
1 capital to average assets ratio of 19.8% 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 $1.5 million to $10.1
million as of September 30, 1998. This decrease was due to the repurchase of the
Company's common stock which totaled $2.0 million, offset by net income of
$345,000 and employee benefit plan items totaling $70,000 and a $44,000 increase
in unrealized gain on securities available for sale.
Impact of New Accounting Pronouncements
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>
Accounting for Derivative Instruments and Hedging Activities Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133) establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This statement applies to all entities. FAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Earlier application is encouraged. The statement is not to be applied
retroactively to financial statements of prior periods. The Company does not
believe the adoption of FAS 133 will have a material impact on the consolidated
financial statements.
Recent Regulatory Developments
Deposit Insurance Premiums. Deposits of the Bank are currently insured
by the FDIC under the SAIF. The FDIC also maintains another insurance fund, the
BIF, which primarily insures commercial bank and some state savings bank
deposits. Applicable law requires that the SAIF and BIF funds each achieve and
maintain a ratio of insurance reserves to total insured deposits equal to 1.25%.
In 1995, the BIF reached this 1.25% reserve level, and the FDIC announced a
reduction in BIF premiums for most banks. Based on this reduction, the highest
rated institutions (approximately 92 percent of the nearly 11,000 BIF-insured
banks) will pay the statutory annual minimum of $2,000 for FDIC insurance. Rates
for all other institutions were reduced to $.04 per $100 as well, leaving a
premium range of $.03 to $.27 per $100 instead of the previous $.04 to $.31 per
$100. Currently, SAIF-member institutions pay deposit insurance premiums based
on a schedule of $0.00 to $0.27 per $100 of deposits.
The assessment for the Bank was $22,000 as of September 30, 1998.
FICO Assessment. The Financing Corporation (FICO), established by the
Competitive Equality Banking Act of 1987, is a mixed-ownership government
corporation whose sole purpose was to function as a financing vehicle for the
Federal Savings & Loan Insurance Corporation (FSLIC). Effective December 12,
1991, as provided by the Resolution Trust Corporation Refinancing, Restructuring
and Improvement Act of 1991, the FICO's ability to issue new debt was
terminated. Outstanding FICO bonds, which are 30-year noncallable bonds with a
principal amount of approximately $8.1 billion, mature in 2017 through 2019.
The FICO has assessment authority, separate from the FDIC's authority
to assess risk-based premiums for deposit insurance, to collect funds from
FDIC-insured institutions sufficient to pay interest on FICO bonds. The FDIC
acts as collection agent for the FICO. The Deposit Insurance Funds Act 1996
(DIFA) authorized the FICO to assess both BIF- and SAIF-insured deposits, and
required the BIF rate to equal one-fifth the SAIF rate through year-end 1999, or
until the insurance funds are merged, whichever occurs first. Thereafter, BIF-
and SAIF-insured deposits will be assessed at the same rate by FICO.
The FICO assessment rate is adjusted quarterly to reflect changes in
the assessment bases of the respective funds based on quarterly Call Report and
Thrift Financial Report submissions. The quarterly FICO rates since enactment of
DIFA have ranged from 1.164 to 1.30 basis points for BIF institutions and 5.82
to 6.50 basis points for SAIF institutions.
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.
<PAGE>
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.
Year 2000 Compliance
The year 2000 has posed a unique set of challenges to those industries
reliant on information technology. As a result of methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the year 2000 from the year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable due to the industry's
dependence on electronic data processing systems. In 1997, the Company started
the process of identifying the hardware and software issues required to be
addressed to assure year 2000 compliance. The Company began by assessing the
issues related to the year 2000 and the potential for those issues to adversely
affect the Company's operations and those of its subsidiaries.
Since that time, the Company has established a Year 2000 Compliance
Team (the Team) composed of representatives from key areas throughout the
organization. It is the mission of this Team to identify areas subject to
complications related to the year 2000 and to initiate remedial measures
designed to eliminate any adverse effects on the Company's operations. The Team
has identified all mission-critical software and hardware that may be adversely
affected by the year 2000 and has required vendors to represent that the systems
and products provided are or will be year 2000 compliant.
The Company expects that all mission critical software will be upgraded
to achieve year 2000 compliance and tested by December 31, 1998. In addition,
the Team is developing contingency plans to address systems which do not become
year 2000 compliant by December 31, 1998.
Management has determined that if a business interruption as a result
of Year 2000 issue occurred, such an interruption could be material. The primary
effort required to prevent a potential business interruption is to assure the
Company's third party processor is year 2000 compliant. As a cost saving
measure, management has contracted with a different third party processor to
convert data before June 30, 1999. This third party processor has stated that
Year 2000 remediation and testing efforts have been successfully completed.
The Company is committed to a plan for achieving compliance, focusing
not only on its own data processing systems, but also on its loan customers. The
Team has taken steps to educate and assist its customers with identifying their
year 2000 compliance problems. In addition, the Team has proposed policy and
procedure changes to help identify potential risks to the Company and to gain an
understanding of how customers are managing the risks associated with the year
2000.
Management believes that the organization has an effective year 2000
compliance program in place and that additional expenditures required to bring
its systems into compliance will not have a materially adverse effect on the
Company's operations, cash flow, or financial condition. Management expects
total additional out-of-pocket expenditures to be approximately $131,000. This
includes costs to upgrade equipment specifically for the purpose of year 2000
compliance and certain administrative expenditures. However, the year 2000
problem is pervasive and complex and can potentially affect any computer
process. Accordingly, no assurance can be given that year 2000 compliance can be
achieved without additional unanticipated expenditures and uncertainties that
might affect future financial results.
The Federal banking regulators have established standards for achieving
year 2000 compliance for federally insured depository institutions. If an
institution fails to meet any of the established standards, its primary
regulator may issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's growth rate and take any action the regulator deems
appropriate.
<PAGE>
---------------------
CORPORATE INFORMATION
---------------------
<TABLE>
<S> <C>
Holding Company Form 10-KSB Annual Report
CSB Financial Group, Inc. Copies of CSB Financial Group, Inc.'s Form
200 South Poplar Street 10-KSB annual report as filed with the
Centralia, Illinois 62801 Securities and Exchange Commission and other
published reports may be obtained without
Subsidiaries charge by writing our corporate headquarters:
Centralia Savings Bank
200 South Poplar Street CSB Financial Group, Inc.
Centralia, Illinois 62801 200 South Poplar Street
Centralia, Illinois 62801
Centralia SLA, Inc. Attention: K. Gary Reynolds
200 South Poplar Street
Centralia, Illinois 62801 Registrar and Transfer Agent
The Registrar and Transfer Company
Stock Information ("Registrar") maintains all stockholder records.
The Common Stock of the Holding Company is Registrar handles stock transfer and registration,
quoted on the Nasdaq "SmallCap" market under address changes, corrections/changes in
the symbol "CSBF" since its subsidiary, taxpayer identification numbers, and Form 1099
Centralia Savings Bank, converted to stock form tax reporting questions. If you require assistance
in October 1995. assistance or have any questions, please contact
Registrar by mail or phone:
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 8,
"SmallCap" market on November 23, 1998 was 1999 at 10:00 a.m. at 801 12th Street, Carlyle,
$9.875. 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 1998 High Low Schiff Hardin & Waite
- -------------------------------------------------- 7200 Sears Tower
First Quarter $ 14.00 $ 12.25 Chicago, Illinois 60606
Second Quarter $13.625 $12.875
Third Quarter $ 14.00 $ 13.00
Fourth Quarter $ 12.75 $ 9.00
</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
<PAGE>
CSB FINANCIAL GROUP, INC.
Consolidated Financial Statements
With Independent Auditor's Report
Years Ended September 30, 1998 and 1997
<PAGE>
CSB FINANCIAL GROUP, INC.
Contents
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
- --------------------------------------------------------------------------------
<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, 1998 and 1997, 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, 1998 and 1997, 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 30, 1998
<PAGE>
CSB FINANCIAL GROUP, INC. and SUBSIDIARY
Consolidated Balance Sheets
September 30, 1998 and 1997
(in thousands, except share data)
<TABLE>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks .......................................... $ 763 $ 1,687
Interest-bearing deposits ........................................ 779 988
------------------
Cash and cash equivalents .......................... 1,542 2,675
Securities:
Available for sale ............................................ 16,931 16,777
Nonmarketable equity securities ............................... 215 210
Loans, net of allowance for loan losses of $171 in 1998 and
$165 in 1997 .................................................. 26,111 27,134
Premises and equipment ........................................... 607 602
Accrued interest receivable ...................................... 304 290
Intangible assets ................................................ 600 660
Other assets ..................................................... 113 186
------------------
Total assets ............................................ $46,423 $48,534
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand ..................................................... $ 8,543 $ 9,073
Savings .................................................... 3,387 3,395
Time deposits > $100,000 ................................... 1,680 1,085
Other time deposits ........................................ 22,245 23,033
------------------
Total deposits ..................................... 35,855 36,586
Other liabilities ............................................. 169 52
Deferred income taxes ......................................... 270 244
------------------
Total liabilities .................................. 36,294 36,882
------------------
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 ............................................... 7,823 7,813
Retained earnings ............................................. 6,384 6,039
Unrealized gain on securities available for sale, net of income
tax effect ................................................. 154 110
Unearned employee stock ownership plan shares ................. (180) (202)
Management recognition plan ................................... (551) (589)
------------------
13,640 13,181
Less cost of treasury stock; 1998 302,080 shares;
1997 132,775 shares ........................................ (3,511) (1,529)
------------------
Total stockholders' equity ......................... 10,129 11,652
------------------
Total liabilities and stockholders' equity ......... $46,423 $48,534
==================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. and SUBSIDIARY
CONSOLIDATED Statements of Income
Years Ended September 30, 1998 and 1997
(in thousands, except share data)
<TABLE>
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans and fees on loans ....................................... $2,187 $2,164
Securities:
Taxable .................................................... 988 936
Nontaxable ................................................. 53 35
Other ......................................................... 76 118
--------------
3,304 3,253
--------------
Interest expense:
Deposits ...................................................... 1,638 1,642
--------------
Net interest income ................................ 1,666 1,611
Provision for loan losses ........................................ 63 90
--------------
Net interest income after provision for loan losses 1,603 1,521
--------------
Noninterest income:
Service charges on deposits ................................... 81 72
Gain on sale of securities .................................... 5 54
Other ......................................................... 48 28
--------------
134 154
--------------
Noninterest expense:
Compensation and employee benefits ............................ 631 628
Occupancy and equipment ....................................... 89 91
Data processing ............................................... 103 95
SAIF deposit insurance ........................................ 22 20
Professional fees ............................................. 83 128
Other ......................................................... 345 357
--------------
1,273 1,319
--------------
Income before income taxes ......................... 464 356
Income taxes ..................................................... 119 111
--------------
Net income ......................................... $ 345 $ 245
==============
Earnings per share:
Basic ......................................................... $ 0.43 $ 0.28
==============
Diluted ....................................................... $ 0.42 $ 0.27
==============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1998 and 1997
(In thousands, except share data)
- --------------------------------------------------------------------------------
Preferred Common Paid-In
Stock Stock Capital
-------------------------
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
Employee stock ownership plan shares allocated ... - - - - 10
Purchase of treasury stock ....................... - - - - - -
Management recognition plan shares allocated ..... - - - - - -
Change in unrealized gain (loss) on securities
available for sale ............................ - - - - - -
Net income ....................................... - - - - - -
-------------------------
Balance at September 30, 1998 ....................... $ - - $ 10 $ 7,823
=========================
See Notes to Consolidated Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
Unrealized Unearned
Gain (Loss) Employee
on Securities Stock Management
Retained Available Ownership Recognition Treasury
Earnings for Sale Plan Shares Plan Stock Total
- --------------------------------------------------------------------------------
$ 5,794 $ (24) $ (582) $ - - $ - - $ 12,784
- - - - 49 - - - - 69
- - - - 331 - - (1,943) (1,612)
- - - - - - (621) 414 - -
- - - - - - 32 - - 32
- - 134 - - - - - - 134
245 - - - - - - - - 245
- ------------------------------------------------------------------------
6,039 110 (202) (589) (1,529) 11,652
- - - - 22 - - - - 32
- - - - - - - - (1,982) (1,982)
- - - - - - 38 - - 38
- - 44 - - - - - - 44
345 - - - - - - - - 345
- ------------------------------------------------------------------------
$ 6,384 $ 154 $ (180) $ (551) $ (3,511) $ 10,129
========================================================================
<PAGE>
CSB FINANCIAL GROUP, INC. and SUBSIDIARY
CONSOLIDATED Statements of Cash Flows
Years Ended September 30, 1998 and 1997
(in thousands)
<TABLE>
1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income ...................................................... $ 345 $ 245
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses .................................... 63 90
Provision for depreciation ................................... 38 40
Amortization of intangible assets ............................ 60 62
Employee stock ownership plan compensation expense ........... 32 69
Management recognition plan compensation expense ............. 38 32
Deferred income taxes ........................................ - - 80
Gain on sale of securities ................................... (5) (54)
Loss on sale of other real estate owned ...................... 3 - -
Amortization and accretion of securities ..................... (1) (36)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable ......... (14) 41
Decrease in other assets ................................... 46 18
Increase (decrease) in other liabilities ................... 117 (245)
-------------------
Net cash flows from operating activities ............. 722 342
-------------------
Cash Flows from Investing Activities
Securities available for sale:
Purchases .................................................... (13,004) (10,124)
Proceeds from sales .......................................... 5,154 2,726
Proceeds from maturities and paydowns ........................ 7,772 6,600
Securities held to maturity:
Proceeds from sales .......................................... - - 359
Nonmarketable equity securities:
Purchases of nonmarketable equity securities ................. (5) (45)
(Increase) decrease in securities purchased under agreements
to resell .................................................... - - 300
Loan originations, net of principal payments on loans ........... 981 (321)
Proceeds from the sale of other real estate owned ............... 3
Purchases of premises and equipment ............................. (43) (48)
-------------------
Net cash flows from investing activities ............. 858 (553)
-------------------
Cash Flows from Financing Activities
Net (decrease) in demand deposits, NOW accounts
passbook savings accounts .................................... $ (538) $ (65)
Net (decrease) in time deposits ................................. (193) (203)
Purchase of treasury stock ...................................... (1,982) (1,612)
-------------------
Net cash flows from financing activities ............. (2,713) (1,880)
-------------------
Net decrease in cash and cash equivalents ............ (1,133) (2,091)
Cash and cash equivalents, beginning of year ....................... 2,675 4,766
-------------------
Cash and cash equivalents, end of year ............................. $ 1,542 $ 2,675
===================
Cash paid during the year for:
Interest ........................................................ $ 1,626 $ 1,643
===================
Income taxes, net of refunds .................................... $ 15 $ 47
===================
Supplemental Disclosures of Investing and Financing Activities:
Change in unrealized gain (loss) on securities available for sale $ 70 $ 217
===================
Change in deferred income taxes attributable to the unrealized
gain (loss) on securities available for sale ................. $ 26 $ 83
===================
Transfer of securities from held to maturity to available for sale . $ - - $ 1,657
===================
Transfer to other real estate owned ................................ $ - - $ 28
===================
Loans originated to facilitate sale of other real estate owned ..... $ 21 $ - -
===================
</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 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.
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.
<PAGE>
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, 1998 or 1997.
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.
Earnings per common share In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per Share" (FAS 128). FAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the FAS 128 requirements. Basic earnings per share is computed by dividing net
income for the year by the weighted average number of shares outstanding of
797,237 and 874,661 for 1998 and 1997, respectively. Diluted earnings per share
is determined by dividing net income for the year 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. The weighted average shares outstanding
for purposes of computing diluted earnings per share were 824,296 and 900,784
for 1998 and 1997, respectively.
Reclassifications Certain reclassifications have been made to the balances as of
September 30, 1997, with no effect on net income, to be consistent with the
classifications adopted for September 30, 1998.
<PAGE>
Effect of New Accounting Standards
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 only has one segment and, therefore,
this Standard will have no effect on the consolidated financial statements.
Accounting for Derivative Instruments and Hedging Activities Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133) establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This statement applies to all entities. FAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application is encouraged. The statement is not to be applied retroactively
to financial statements of prior periods. The Company does not believe the
adoption of FAS 133 will have a material impact on the consolidated financial
statements.
Note 2. Securities
Amortized cost and fair values of securities available for sale are as follows:
<TABLE>
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1998 Cost Gains Losses Value
---------------------------------------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions ............................... $ 1,643 $ 44 $ 3 $ 1,684
U.S. Government and agency .................... 9,752 123 - - 9,875
U.S. Treasury ................................. 4,000 16 - - 4,016
Mortgage backed securities .................... 1,288 73 5 1,356
--------------------------------------
$16,683 $ 256 $ 8 $16,931
======================================
September 30, 1997
Obligations of states and political
subdivisions ............................... $ 748 $ 22 $ - - $ 770
U.S. Government and agency .................... 8,906 61 - - 8,967
U.S. Treasury ................................. 5,713 4 15 5,702
Mortgage backed securities .................... 1,232 106 - - 1,338
--------------------------------------
$16,599 $ 193 $ 15 $16,777
======================================
</TABLE>
<PAGE>
The amortized cost and fair value of securities available for sale, 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, 1998
------------------------
Available for Sale
------------------
Amortized Fair
Cost Value
------------------
Less than one year ...................................... $ 2,999 $ 3,008
Due after one year through five years ................... 7,547 7,613
Due after five years through ten years .................. 4,645 4,749
Due after ten years ..................................... 204 205
Mortgage-backed securities .............................. 1,288 1,356
-----------------
$16,683 $16,931
=================
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 $30 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.
The Company had securities with a carrying value of $150,159 pledged as
collateral for public deposits or for other purposes as required or permitted by
law for the years ended September 30, 1998. The Company had no securities
pledged during 1997.
Gross realized gains and losses from the sale of securities available for sale
follow:
Years Ended
September 30,
----------------
1998 1997
----------------
Gross gains ........................... $ 6 $ 54
Gross losses .......................... (1) - -
----------------
Net gain ................ $ 5 $ 54
================
<PAGE>
Note 3. Loans
Loans are summarized as follows:
September 30,
------------------
1998 1997
------------------
Mortgage loans:
One to four family ........................... $19,295 $19,044
Commercial real estate ....................... 1,120 969
Other loans secured by real estate ........... 283 444
------------------
Total mortgage loans .............. 20,698 20,457
------------------
Commercial and consumer loans:
Commercial loans ............................. 625 1,013
Consumer loans ............................... 4,095 4,771
Home equity lines of credit .................. 678 816
Share loans .................................. 193 266
------------------
Total commercial and consumer loans 5,591 6,866
------------------
Less:
Allowance for loan losses .................... (171) (165)
Deferred loan fees ........................... (6) (15)
Unearned income on consumer loans ............ (1) (9)
------------------
(178) (189)
------------------
Loans, net ........................ $26,111 $27,134
==================
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.
At September 30, 1998 and 1997, the Company had approximately $410,000 and
$198,000 of loans for which the accrual of interest had been discontinued.
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 is
as follows:
Balance as of October 1, 1997 .............................. $ 998
New loans ............................................... 222
Repayments .............................................. (170)
-------
Balance as of September 30, 1998 ........................... $ 1,050
=======
<PAGE>
Note 4. Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
Year Ended September 30,
------------------------
1998 1997
------------------------
Balance, beginning .......................... $ 165 $ 117
Provision charged to income .............. 63 90
Charge-offs .............................. (61) (43)
Recoveries ............................... 4 1
------------------
Balance, ending ............................. $ 171 $ 165
==================
Note 5. Premises and Equipment
Premises and equipment consist of:
September 30,
------------------
1998 1997
------------------
Land ...................................................... $ 136 $ 136
Office building ........................................... 479 476
Furniture and equipment ................................... 429 389
-----------------
1,044 1,001
Less accumulated depreciation ............................. (437) (399)
-----------------
$ 607 $ 602
=================
Note 6. Deposits
At September 30, 1998, the scheduled maturities of time deposits are as follows:
Year Ended September 30: Amount
- --------------------------------------------------------------------------------
1999 $ 17,583
2000 3,773
2001 1,057
2002 877
2003 and thereafter 635
----------
$ 23,925
==========
Note 7. Income Taxes
Income taxes consist of:
For the Year Ended
September 30,
----------------------
1998 1997
----------------------
Current ................................. $ 119 $ 31
Deferred ................................ - - 80
----------------------
Total ..................... $ 119 $ 111
======================
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.
<PAGE>
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, 1998 and 1997, 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, 1998 and 1997.
Income tax expense differed as follows:
Year Ended
September 30,
---------------
1998 1997
---------------
Statutory rate applied to earnings before income tax ........... $ 158 $ 121
Increase in income taxes resulting from:
Tax exempt interest income .................................. (18) (13)
Other ....................................................... (21) 3
--------------
$ 119 $ 111
==============
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are as follows:
Year Ended
September 30,
---------------
1998 1997
---------------
Allowance for loan losses - book .................... $ 66 $ 64
Illinois net operating loss carryforward ............ 22 43
---------------
Total deferred tax assets ............. 88 107
---------------
Unrealized gain on securities available for sale .... (94) (68)
Allowance for loan losses - tax ..................... (92) (76)
Cash basis adjustment ............................... (95) (96)
FHLB stock basis .................................... (7) (7)
Premises and equipment basis ........................ (23) (24)
Other ............................................... (47) (80)
---------------
Total deferred tax liabilities ........ (358) (351)
---------------
Net deferred tax liabilities .......... $ (270) $ (244)
===============
<PAGE>
Note 8. Fair Value of Financial Instruments
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:
September 30, 1998 September 30, 1997
------------------ -------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------
Assets:
Cash and cash equivalents ...... $ 1,542 $ 1,542 $ 2,675 $ 2,675
Securities available for sale .. 16,931 16,931 16,777 16,777
Nonmarketable equity securities 215 215 210 210
Accrued interest receivable .... 304 304 290 290
Loans .......................... 26,111 26,013 27,134 27,210
Liabilities:
Deposits ....................... 35,855 35,909 36,586 36,649
Accrued interest payable ....... 12 12 13 13
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.
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
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.
<PAGE>
Note 9. 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, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1998, 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, 1998:
Total Capital (to Risk Weighted
Assets)
Consolidated $ 9,546 46.2% $ 1,655 8.0% N/A
Bank $ 9,239 44.7% $ 1,655 8.0% $ 2,069 10.0%
Tier I Capital (to Risk Weighted
Assets)
Consolidated $ 9,375 45.3% $ 827 4.0% N/A
Bank $ 9,067 43.8% $ 827 4.0% $ 1,241 6.0%
Tier I Capital (to Average
Adjusted Assets)
Consolidated $ 9,375 19.8% $ 1,899 4.0% N/A
Bank $ 9,067 19.4% $ 1,869 4.0% $ 2,337 5.0%
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>
<PAGE>
Note 10. 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.
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 $32 and $69 for
the years ended September 30, 1998 and 1997, 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:
September 30,
----------------
1998 1997
----------------
Shares allocated .............................................. 17,029 11,968
Shared released to be allocated ............................... 1,842 4,324
Unreleased shares (Fair value as of September 30, 1998 and 1997
$281 and $309) ............................................. 22,529 25,108
----------------
41,400 41,400
================
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, 1998 and
1997.
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, 1998
and 1997, 18,009 shares and 18,630 shares, respectively, 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.
<PAGE>
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.
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, 1998
and 1997, 35,875 and 25,875 options had been granted, respectively.
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, 1998
and 1997, 25,875 options had been granted.
A summary of the status of the Company's fixed stock option plan and changes
during the years ending on those dates is presented below:
<TABLE>
September 30,
--------------------------------------------
1998 1997
------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning
of the year 51,750 $ 9.22 25,875 $ 9.08
Options granted 10,000 12.51 25,875 9.36
Options exercised - - - - - - - -
--------------------------------------------
Options outstanding, end of year 61,750 $ 9.75 51,750 $ 9.22
============================================
Options exercisable 15,525 5,175
Weighted-average fair value of options
granted during the year $ 4.37 $ 3.33
</TABLE>
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 1998 and 1997: dividend rate of 0%; price volatility
of 20.44% and a risk free interest rate of 4.59%.
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
$38 and $32 of compensation expense was recognized under the MRP for the years
ended September 30, 1998 and 1997, respectively.
<PAGE>
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.
1998 1997
----------------
Net income:
As reported ......................... $ 345 $ 245
Proforma ............................ 302 193
Basic earnings per share:
As reported ......................... $ 0.43 $ 0.28
Proforma ............................ 0.38 0.22
Diluted earning per share:
As reported ......................... $ 0.42 $ 0.27
Proforma ............................ 0.37 0.21
The following table summarizes information about fixed stock options outstanding
at September 30, 1998:
Options
Options Outstanding Exercisable
----------------------------------------------
Weighted
Average
Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
- -----------------------------------------------------------------
$ 9.08 25,875 7.7 10,350
9.36 25,875 8.1 5,175
12.51 10,000 9.0
----------------------------------------------
61,750 8.1 15,525
==============================================
Note 11. 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, 1998
follows:
<TABLE>
Range of Rates
Variable Rate Fixed Rate Total on Fixed Rate
Commitments Commitments Commitments Commitments
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitment to extend credit:
1998 $ 275 $ 1,008 $ 1,283 8.25% - 11.5%
1997 330 933 1,263 8.25% - 11.25%
</TABLE>
<PAGE>
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.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Form 10KSB of our
report dated October 30, 1998, which appears on page 19 of the 1998 Annual
Report to Shareholders of CSB Financial Group, Inc., for the year ended
September 30, 1998.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
December 19, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 FOR 10-KSB OF CSB FINANCIAL GROUP, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 763
<INT-BEARING-DEPOSITS> 779
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,931
<INVESTMENTS-CARRYING> 215
<INVESTMENTS-MARKET> 215
<LOANS> 26,282
<ALLOWANCE> 171
<TOTAL-ASSETS> 46,423
<DEPOSITS> 35,855
<SHORT-TERM> 0
<LIABILITIES-OTHER> 169
<LONG-TERM> 0
0
0
<COMMON> 10
<OTHER-SE> 10,119
<TOTAL-LIABILITIES-AND-EQUITY> 46,423
<INTEREST-LOAN> 2,187
<INTEREST-INVEST> 1,041
<INTEREST-OTHER> 76
<INTEREST-TOTAL> 3,304
<INTEREST-DEPOSIT> 1,638
<INTEREST-EXPENSE> 1,638
<INTEREST-INCOME-NET> 1,666
<LOAN-LOSSES> 63
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 1,273
<INCOME-PRETAX> 464
<INCOME-PRE-EXTRAORDINARY> 345
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 345
<EPS-PRIMARY> .43
<EPS-DILUTED> .42
<YIELD-ACTUAL> 3.74
<LOANS-NON> 410
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 165
<CHARGE-OFFS> 61
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 171
<ALLOWANCE-DOMESTIC> 171
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
