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, 1999
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 Identification No.)
incorporation or organization)
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. $3,385,000
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at December 17, 1999 was $8,239,770. 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 $14.50 per share, the
last sales price as quoted on the OTC market for December 17, 1999.
The Registrant had 732,299 shares of Common Stock outstanding at December 17,
1999, not including 21,870 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,
1999 is incorporated by reference to Part II of this Form 10-KSB.
The registrant's proxy statement for its 2000 annual meeting of stockholders to
be held on January 14, 2000 is incorporated by reference to Part III of this
Form 10-KSB.
The Exhibit Index is located at pages 28 through 30.
<PAGE>
INDEX
PART I Page
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners
and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I
Item 1. Description of Business.
On October 5, 1995, CSB Financial Group, Inc. (the "Company") acquired
all of the outstanding shares of Centralia Savings Bank (the "Bank") upon the
Bank's conversion from a state chartered mutual savings bank to a state
chartered stock savings bank. The Company purchased 100% of the outstanding
stock of the Bank using 50% of the net proceeds from the Company's initial stock
offering which was completed on October 5, 1995. The Company sold 1,035,000
shares of $0.01 par value common stock at a price of $8 per share, including
82,800 shares purchased by the Bank's Employee Stock Ownership Plan ("ESOP").
The ESOP shares were acquired by the Bank with proceeds from a Company loan
totaling $662,000. The gross proceeds of the offering were $8,280,000. After
reducing gross proceeds for conversion costs of $696,000 net proceeds totaled
$7,584,000. The Company's stock trades on the NASDAQ Small Caps market under the
symbol "CSBF".
The acquisition of the Bank by the Company was accounted for 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, 1999 consist primarily of the
investment in the Bank of $10.0 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, 1999, the Bank had total assets, liabilities and stockholders'
equity of $48.8 million, $38.8 million, and $10.0 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, 1999, the Bank's gross loan
portfolio totaled $29.1 million or 59.69% 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, 1999, the Bank's securities portfolio totaled $17.3
million or 35.52% of total assets with $17.1 million classified as available for
sale and $ 216,000 classified as nonmarketable equity securities.
The Bank's revenues are derived principally from interest on its
mortgage, consumer and commercial loans, and, to a lesser extent, interest and
dividends on its securities. The Bank's primary sources of funds are deposits,
Federal Home Loan Bank advances, principal and interest payments, and principal
prepayments on loans. Through its wholly-owned subsidiary, Centralia SLA, Inc.,
the Bank engages in the sale of insurance services.
<PAGE>
The executive offices of the Company and Savings Bank are located at
200 South Poplar Street, Centralia, Illinois 62801 and the telephone number is
(618) 532-1918.
Composition of the Loan Portfolio. The Bank's historical lending
strategy has focused primarily on the origination of residential mortgage loans
secured by one- to four-family mortgages 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,
-----------------------------------
1999 1998
---------------- ----------------
(In Thousands)
Amount Percent Amount Percent
-----------------------------------
<S> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family .................... $21,225 72.83% $19,037 72.42%
Multi-family ........................... 639 2.19% 258 0.98%
Commercial real estate ................. 519 1.78% 1,120 4.26%
Other loans secured by real estate ..... 1,327 4.55% 283 1.07%
-----------------------------------
Total mortgage loans .............. 23,710 81.35% 20,698 78.73%
Commercial and Consumer Loans:
Commercial ............................. 1,164 3.99% 625 2.38%
Consumer ............................... 3,449 11.84% 4,095 15.58%
Home equity lines of credit ............ 649 2.23% 678 2.58%
Share loans ............................ 170 0.59% 193 0.73%
-----------------------------------
Total commercial and consumer loans 5,432 18.65% 5,591 21.27%
Total loans ....................... 29,142 100.00% 26,289 100.00%
======= =======
Less:
Deferred fees .......................... - - 6
Unearned income on consumer loans ...... - - 1
Allowance for loan losses .............. 222 171
------- -------
Total loans, net .................. $28,920 $ 26,111
======= ========
</TABLE>
The Bank had no loans held for sale at September 30, 1999 or 1998. As of
September 30, 1999, 34.3% of the Bank's loans had adjustable interest rates.
The types of loans that the Bank may originate are subject to federal and state
laws and regulations. Interest rates charged by the Bank are affected by the
demand for such loans and the supply of money available for lending purposes and
the rates offered by competitors. These factors are, in turn, affected by, among
other things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board and legislative tax policies.
<PAGE>
Loan Maturity
The following table shows the maturity of the Bank's loans at September 30,
1999. The table does not include the effect of future loan repayment activity.
While the Bank cannot project future loan prepayment activity, the Bank
anticipates that in periods of stable interest rates, prepayment activity would
be lower than prepayment activity experienced in periods of declining interest
rates. In general, the Bank originates adjustable and fixed-rate one- to
four-family loans with maturities from 15 to 30 years, one-to-four family loans
with balloon features which mature from 1 to 5 years, multi-family loans with
maturities from 1 to 5 years, adjustable-rate commercial real estate loans with
maturities of 20 to 25 years, commercial loans with maturities of 90 days to one
year, and consumer loans with maturities of 1 to 5 years.
<TABLE>
At September 30, 1999
-------------------------------------
Mortgage Commercial Consumer Total
Loans Loans Loans Loans
-------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Amounts due:
One year or less .............................. $ 1,348 $ 413 $ 430 $ 2,191
=====================================
After one year:
More than one year to five years .............. $ 3,252 $ 662 $ 3,798 $ 7,712
More than five years to ten years ............. 3,816 89 40 3,945
More than ten years ........................... 15,294 - - - - 15,294
-------------------------------------
Total due after September 30, 2000 ...... $22,362 $ 751 $ 3,838 $26,951
=====================================
Interest rate terms on amounts due after one year:
Fixed ...................................... $12,671 $ 600 $ 3,838 $17,109
Adjustable ................................. 9,691 151 - - 9,842
</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, 1999 and 1998, the Bank's gross loan portfolio consisted
of approximately $21.2 million, or 72.83%, and $19.0 million, or 72.42%,
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.
<PAGE>
The Bank has extended, and expects to continue to extend, from time to time,
fixed-rate loans to customers who prefer a fixed rate of interest. The Bank will
not originate a fixed-rate loan unless such loan complies with the underwriting
standards of the Federal Home Loan Mortgage Corporation ("FHLMC") and the FNMA.
This will give the Bank the option of either holding such fixed-rate loans in
its portfolio or selling such loans in the secondary mortgage market.
The Bank's reliance on ARMs and balloon loans, rather than fixed-rate mortgage
loans, makes the Bank's first-mortgage residential loan portfolio more
interest-rate sensitive. However, since the interest earned on ARMs or on
balloon loans which are refinanced on a one-, three- or five-year cycle varies
with prevailing interest rates, such loans do not offer the Bank as predictable
a cash flow as do longer-term, fixed-rate loans. ARMs and balloon loans which
are subject to refinancing on a one-, three- or five-year cycle may also carry
increased credit risk as the result of the imposition of higher monthly payments
upon borrowers during periods of rising interest rates. During such periods, the
risk of default on such loans may increase, due to the upward adjustment of
interest costs to the borrower. Management has attempted to minimize such risk
by qualifying borrowers at the maximum rate of interest payable under the terms
of the ARM or the refinanced balloon loan.
The loan-to-value ratio of most single-family first-mortgage loans made by the
Bank is 80%. If the loan-to-value ratio exceeds 85%, the Bank requires private
mortgage insurance to cover the excess over 85%. If private mortgage insurance
is obtained, the mortgage is limited to 95% of the lesser of the appraised value
or purchase price. The maximum loan-to-value ratio on a loan for the
construction of a new single-family residential home is 80%, and the maximum
loan-to-value ratio on loans on two- to four-family dwellings is 75%.
The Bank requires title insurance, or an attorney's opinion as to title, and
fire and casualty insurance coverage of the property securing any mortgage loan
originated or purchased by the Bank. All of the Bank's real estate loans contain
due-on-sale clauses which provide that if the mortgagor sells, conveys or
alienates the property underlying the mortgage note, the Bank has the right at
its option to declare the note immediately due and payable without notice.
Multi-family Residential Lending. At September 30, 1999 and 1998, the Bank's
gross loan portfolio consisted of approximately $639,000 or 2.19% and $258,000
or .98% 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, 1999 and 1998, the Bank's
commercial real estate loan portfolio amounted to $519,000, or 1.78%, and
$1,120,000, or 4.26%, respectively of the Bank's gross loan portfolio. The
Bank's practice has been to underwrite such loans based on its analysis of the
amount of cash flow generated by the business in which the real estate is used
and the resulting ability of the borrower to meet its payment obligations.
Although such loans are secured by a first mortgage on the underlying property,
the Savings Bank also generally seeks to obtain a personal guarantee of the loan
by the owner of the business in which the property is used.
Other Loans Secured by Real Estate. In addition to one- to- four family first
mortgage loans, the Savings Bank also makes loans secured by real estate in the
form of junior mortgages, interim construction loans, land development and
vacant land loans. At September 30, 1999 and 1998, the Bank's loan portfolio
consisted of $1.3 million, or 4.55% and $283,000, or 1.07%, respectively of the
Bank's gross loan portfolio. Other real estate loans are made on terms similar
to multi-family and commercial real estate loans.
Commercial Loans. As of September 30, 1999 and 1998, the Bank's gross loan
portfolio consisted of approximately $1.2 million or 3.99% and $625,000, or
2.38%, respectively of commercial loans secured by accounts receivable,
inventory, farm land or outstanding stock issued by a corporation. The Bank has
also made, from time to time, unsecured personal loans to the sole proprietors
of small businesses on the same terms and conditions on which it makes other
unsecured personal loans.
<PAGE>
Consumer Loans. The Bank originates a variety of consumer loans, generally
consisting of installment loans for the purchase of motor vehicles and boats,
loans to purchase household goods, loans secured by savings accounts at the Bank
and unsecured personal loans. At September 30, 1999 and 1998, the Bank's
portfolio of consumer loans totaled approximately $4.3 million, or 14.7%, and
$5.0 million, or 18.89%, respectively of the Bank's gross loan portfolio. The
Bank may make a loan to finance the purchase of a new and previously untitled
motor vehicle or boat in an amount equal to the lesser of 5% over the factory
invoice price or 90% of the sticker price of the motor vehicle or boat. Loans
for the purchase of used motor vehicles are limited to the amount of the
wholesale price listed for the vehicle in the National Automobile Dealers'
Association used car guide. Any loan for the purchase of a motor vehicle or boat
is secured by the purchased vehicle or boat and is written to amortize over a
maximum period of between two and five years, depending on the age of the motor
vehicle or boat offered as collateral. Loans to finance the purchase of new
household goods may be made in an amount equal to 100% of the sales price of
such goods. Such loans are secured by the goods purchase. Loans for the purchase
of household goods may be amortized for a maximum period of 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.
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, 1999 and 1998, the total balance outstanding on first mortgage
loans purchased by the Bank was $187,000 and $287,000, respectively. At
September 30, 1999 and 1998, 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
measures to enforce its remedies resulting from the default, including the
commencement of foreclosure action of the repossession of collateral.
<PAGE>
At September 30, 1999, delinquencies in the Bank's loan portfolio were as
follows:
<TABLE>
At September 30, 1999
-------------------------------------------------------------
Total
30-89 Days (1) 90 Days or More (1) Delinquent Loans
------------------- ------------------- -------------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans
-------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans ......... 4 $91 5 $145 9 $236
Commercial loans .......... 1 5 - - - - 1 5
Consumer loans ............ 20 135 10 60 30 195
-----------------------------------------------------------
25 231 15 205 40 436
===========================================================
Delinquent loans
to gross loans ........ 0.79% 0.70% 1.49%
===== ===== =====
</TABLE>
At September 30, 1998, delinquencies in the Bank's loan portfolio were as
follows:
<TABLE>
At September 30, 1998
-------------------------------------------------------------
Total
30-89 Days (1) 90 Days or More (1) Delinquent Loans
------------------- ------------------- -------------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans
-------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
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%
===== ===== =====
<FN>
(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.
</FN>
</TABLE>
<PAGE>
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, 1999 and 1998, the Bank had no "real
estate owned."
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets for the periods indicated.
At
September 30,
--------------
1999 1998
--------------
(In Thousands)
Loans accounted for on a nonaccrual basis
One- to four-family loans ................................. $145 $350
Consumer loans ............................................ 60 60
-------------
Total nonaccrual loans ............................... 205 410
-------------
Accruing loans which are contractually past due 90 days or more:
One- to four-family loans ................................. - - - -
Consumer loans ............................................ - - - -
-------------
Total 90 days past due and accruing interest ........ - - - -
-------------
Total nonaccrual and 90 days past due loans .......... 205 410
Real estate owned .............................................. - - - -
-------------
Total nonperforming assets ........................... $205 $410
=============
Total nonperforming assets to total assets ........... 0.42% 0.88%
=============
Classified Assets. FDIC policies require that each insured depository
institution review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, regulatory examiners have
the authority to identify problem assets and, if appropriate, require them to be
classified. The Bank reviews and classifies its assets at least quarterly. There
are three classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets, with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values, questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continued treatment of the asset as an asset on the
books of the institution is not warranted.
An insured institution is required to establish prudent general allowances for
the loan losses with respect to assets classified as substandard or doubtful.
The institution is required either to charge off assets classified as loss or to
establish a specific allowance for 100% of the portion of the asset classified
as loss.
<PAGE>
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, 1999 or 1998.
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, 1999 and 1998, the Bank's allowance
for loan losses was 0.76% and 0.65%, respectively, of gross loans. The Bank will
continue to monitor and modify its allowance for loan losses as conditions
dictate. Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's valuation allowance. These agencies may
require the Bank to establish additional valuation allowances, based on their
judgments of the information available at the time of the examination.
It is the policy of the Bank to charge off customer loans when it is determined
that they are no longer collectible. The policy for loans secured by real
estate, which comprise the bulk of the Bank's portfolio, is to establish loss
reserves in accordance with the Bank's loan classification process, based on
generally accepted accounting practices. It is the policy of the Bank to obtain
an appraisal on all real estate acquired through foreclosure at the time of
foreclosure.
<PAGE>
The following table sets forth activity in the Bank's allowance for loan losses
for the periods set forth in the table.
For the Fiscal Year
Ended September 30,
-------------------
1999 1998
-------------------
(In Thousands)
Balance at beginning of period ................... $ 171 $ 165
Provision for loan losses ........................ 72 63
Recoveries:
Consumer loans .............................. 18 4
-------------------
Total recoveries ....................... 18 4
-------------------
Charge-offs:
Consumer loans .............................. 39 61
-------------------
Total charge-offs ...................... 39 61
-------------------
Net charge-offs ........................ (21) (57)
-------------------
Balance at end of period ......................... $ 222 $ 171
===================
Ratio of allowance for loan losses to gross
loans outstanding at the end of the period ... 0.76% 0.65%
Ratio of net charge offs to average loans
outstanding during the period ................ 0.07% 0.21%
Ratio of allowance for loan losses to total
nonperforming loans at the end of the period . 108.29% 41.71%
<PAGE>
The following table sets forth the Bank's allocation of the allowance for loan
losses by category and the percent of the allocated allowance to the total
allowance for each specific loan category. The portion of the allowance for loan
losses allocated to each loan category does not represent the total available
for future losses which may occur within the loan category since the total
allowance for loan losses is a valuation reserve to the entire loan portfolio.
<TABLE>
At September 30,
-------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
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 . $ 52 0.24% 72.83% $ 62 0.32% 72.42%
Multi-family ........ - - - - 2.19% - - - - 0.98%
Commercial real
estate ........... - - - - 1.78% - - - - 4.26%
Other loans secured
by real estate ... - - - - 4.55% - - - - 1.07%
----------------------------------------------------------
Total mortgage
loans ....... 52 0.24% 81.35% 62 0.32% 78.73%
----------------------------------------------------------
Commercial and
Consumer Loans:
Commercial ....... 26 2.23% 3.99% 17 2.72% 2.38%
Consumer ......... 51 1.48% 11.84% 56 1.37% 15.58%
Home equity lines
of credit ..... - - - - 2.23% - - - - 2.58%
Other consumer
loans ......... - - - - 0.59% - - - - 0.73%
-----------------------------------------------------------
Total
commercial
and
consumer
loans ... 77 1.42% 18.65% 73 1.31% 21.27%
-----------------------------------------------------------
Total Allocated ........ 129 0.44% 100.00% 135 0.51% 100.00%
======= =======
Unallocated ............ 93 0.32% 36 0.14%
----------------- ----------------
Total allowance for
loan losses ......... $ 222 0.76% $ 171 0.65%
================= ================
</TABLE>
<PAGE>
Investment Activities
The investment policies of the Company and the Bank, as established by the
respective Board of Directors, attempts to provide and maintain liquidity,
generate a favorable return on investments without incurring undue interest rate
and credit risk, and complement the Company's lending activities. The Company
classifies all securities as available for sale. The investment policies provide
authority to invest in U.S. Treasury and U.S. Government guaranteed securities,
securities backed by federal agencies such as Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the
Federal Farm Credit Bureau ("FFCB"), mortgage-backed securities with maximum
maturities of 20 years which are backed by federal agency securities,
obligations of state and political subdivisions with at least an "A" rating,
certificates of deposit, and securities issued by mutual funds which invest in
securities consistent with the Company's or Bank's allocable investments. The
investment policies provide that the President is authorized to execute all
transactions within specified limits which are reviewed by the Board of
Directors on a monthly basis. From time to time, the Board of Directors may
authorize the President to exceed the policy limitations. The Bank's Interest
Rate Risk Committee monitors compliance with the Bank's investment policy and
generally meets on a quarterly basis.
At September 30, 1999, the Company had $17.3 million in investment securities
consisting of $.9 million invested in mortgage-backed securities, $1.0 million
in U.S. Treasury, $13.1 million invested in U.S. Government and agency, $1.6
million invested in obligations of state and political securities, $.5 million
invested in corporate 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,
-----------------------------------
1999 1998
----------------- -----------------
Available for Sale Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency securities .......... $13,182 $13,099 $ 9,752 $ 9,875
U.S. Treasury .................................. 1,000 1,002 4,000 4,016
Obligations of states and political subdivisions 1,642 1,626 1,643 1,684
Mortgage backed securities ..................... 880 909 1,288 1,356
Corporate securities ........................... 500 482 - - - -
----------------------------------
Total Available for Sale .................. $17,204 $17,118 $16,683 $16,931
==================================
</TABLE>
<PAGE>
At September 30, 1999 and 1998, the Company had investments in FHLB stock of
$216,000 and $215,000, 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, 1999. 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 ............................ $1,196 5.20% $8,720 5.90% $3,183 6.34% $ - - - - $13,099 5.91%
U.S. Treasury ........................... 1,002 5.50% - - - - - - - - - - - - 1,002 5.50%
Obligations of states and
political subdivisions (2) ........... - - - - 141 4.62% 1,291 4.77% 194 4.50% 1,626 4.51%
Corporate ............................... - - - - 482 5.75% - - - - - - - - 482 5.75%
-----------------------------------------------------------------------------------------
Total Available for Sale ................ $2,198 10.70% $9,343 5.88% $4,474 5.89% $ 194 4.50% $16,209 5.94%
=========================================================================================
<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, Federal Home Loan Bank
advances 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,
--------------------------------------------------------
1999 1998
--------------------------- ---------------------------
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 ..... $ 1,827 4.86% -- $ 1,451 4.03% --
Interest-bearing (NOW) .. 4,575 12.16% 1.55% 3,712 10.30% 1.75%
Money market ............ 2,960 7.87% 2.50% 3,550 9.85% 2.84%
Passbook savings ........... 3,604 9.58% 2.08% 3,435 9.53% 2.33%
Time deposits .............. 24,658 65.53% 5.09% 23,892 66.29% 5.71%
-------------------------------------------------------
Total deposit accounts $37,624 100.00% 3.92% $36,040 100.00% 4.47%
=======================================================
</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, 1999. Jumbo certificates of deposit require minimum
deposits of $100,000 and rates paid on such accounts are negotiable. At
September 30, 1999, total jumbo certificates were $2,627,000.
Time
Maturity Period Deposits
- ------------------------------------------------ --------------
(In Thousands)
Less than three months ......................... $ 591
Three through six months ....................... 200
Six through twelve months ...................... 524
Over twelve months ............................. 1,312
-------
Total ..................................... $ 2,627
=======
<PAGE>
Borrowings. The Bank may rely on advances from the FHLB of Chicago in the event
of a reduction in available funds from other sources. The Bank is a member of
the FHLB of Chicago, which functions as a central reserve bank providing credit
for savings and loan associations and other member financial institutions. As a
member, the Bank is required to own capital stock in the FHLB of Chicago and is
authorized to apply for advances on the security of such stock and certain of
its mortgage-based loans and other assets, provided that certain standards
relating to creditworthiness have been met. The Bank has borrowed from the FHLB
of Chicago, from time to time, on an overnight basis. At September 30, 1999, the
Bank had outstanding borrowings from the FHLB of $1.4 million. At September 30,
1998, the Bank had no outstanding borrowings from the FHLB.
Subsidiary Activities
The Bank has one wholly-owned service corporation, Centralia SLA, an Illinois
corporation. Centralia SLA is engaged in the business of selling mortgage life,
mortgage disability, credit life and credit disability insurance to mortgage and
consumer loan customers of the Bank. As of September 30, 1999, the Bank's
investment in Centralia SLA amounted to approximately $18,000 or .04% of the
Bank's total assets. Insurance commissions accounted for $12,000 or
approximately 2.4% of the Bank's pre-tax income during the year. Management
continues to place less emphasis on the sale of insurance and anticipates that
the amount of such income will continue to decline over the next few years.
Competition
The Bank's deposit and lending base is presently concentrated in the city of
Centralia and the surrounding area, including Central City to the north, Wamac
to the South, Salem to the east and Hoffman to the west. This area includes
portions of the Illinois counties of Washington, Jefferson, Marion and Clinton,
which are primarily agricultural. Population growth in those four counties has
remained relatively flat in recent years. Management believes that, in recent
years, total deposits have grown only modestly and there has been relatively
little new construction or real estate development in the four-county area.
Management further believes that, as a result, any growth in the mortgage
lending business within the area has also been modest.
The Bank has five principal competitors for deposits and lending business within
the city of Centralia. All five competitors are branches or subsidiaries of
commercial banks. Of these five competitors, one is affiliated with a multi-bank
holding company based in St. Louis, one is affiliated with a regional bank based
in St. Louis, one is affiliated with a multi-bank holding based in Charlotte,
N.C., and the remaining two are branches of independent community banks which
have their main offices in the neighboring towns of Hoffman and Irvington. The
multi-bank holding companies and regional bank have substantially greater
financial resources and currently offer a larger array of financial services
than the Bank. Each of the independent banks also has a slightly larger asset
base than the Bank.
Given the relative lack of growth in its market area and the number and greater
resources of the banks with which it competes, the Bank has experienced, and
expects to continue to experience, strong competition in attracting deposits and
in its mortgage and consumer loan business. In order to retain existing and
attract new deposits, the Bank has historically paid deposit rates at the higher
end of the range offered by its competitors. All of the Bank's principal
competitors in Centralia are, moreover, branches or subsidiaries of commercial
banks with deposits insured under the BIF. Unlike the Bank, such competitors are
able to take advantage of the reduction in the insurance premiums to be paid on
BIF-insured deposits.
Management also believes that, in order to compete effectively for both deposits
and lending business, the Bank must enhance the retail services it offers, so
that its range of services is more comparable to the range offered by its larger
competitors. In providing such services, management hopes to be able to
capitalize on the Bank's ability, as a community bank, to identify and respond
more quickly to local customer needs. The Bank has expanded the retail services
it offers to customers to include, for example, travelers' checks, money orders,
debit cards and ATM services.
<PAGE>
Personnel
As of September 30, 1999, the Company had a total of 17 full-time employees and
3 part-time employees, all of whom were employed at the Bank level. The
Company's employees are not represented by a union or collective bargaining
group. The Company considers its relationship with its employees to be
satisfactory.
Regulation
General
Financial institutions and their holding companies are extensively regulated
under federal and state law by various regulatory authorities including the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board"),
the FDIC and the Commissioner. The financial performance of the Company and the
Savings Bank may be affected by such regulation, although the extent to which
they may be affected cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things, the scope
of business, investments, reserves against deposits, capital levels relative to
operations, the nature and amount of collateral for loans, the establishment of
branches, mergers, consolidations, and dividends. The system of supervision and
regulation applicable to the Company and the Savings Bank establishes a
comprehensive framework for their operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the depositors of the
Savings Bank, rather than the stockholders of the Company.
The following references to material statutes and regulations affecting the
Company and the Bank are brief summaries thereof and are qualified in their
entirety by reference to such statutes and regulations. Any change in applicable
law or regulations may have a material effect on the business of the Company and
the Bank.
The Savings Bank
General. The Bank is an Illinois-chartered savings bank, the deposit accounts of
which are insured by the SAIF of the FDIC. As a SAIF-insured, Illinois-chartered
savings bank, the Bank is subject to the examination, supervision, reporting and
enforcement requirements of the Commissioner, as the chartering authority for
Illinois savings banks, and the FDIC, as administrator of the SAIF, and to the
statutes and regulations administered by the Commissioner and the FDIC governing
such matters as capital standards, mergers, establishment of branch offices,
subsidiary investments and activities and general investment authority. The Bank
is required to file reports with the Commissioner and the FDIC concerning its
activities and financial condition and will be required to obtain regulatory
approvals prior to entering into certain transactions, including mergers with,
or acquisitions of, other financial institutions.
The Commissioner and the FDIC have extensive enforcement authority over
Illinois-chartered savings banks, such as the Bank. This enforcement authority
includes, among other things, the ability to issue cease-and-desist or removal
orders, to assess civil money penalties and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe and unsound practices.
The Commissioner has established a schedule for the assessment of "supervisory
fees" upon all Illinois savings banks to fund the operations of the
Commissioner. These supervisory fees are computed on the basis of each savings
bank's total assets (including consolidated subsidiaries) and are payable at the
end of each calendar quarter. A schedule of fees has also been established for
certain filings made by Illinois savings banks with the Commissioner. The
Commissioner also assesses fees for examinations conducted by the Commissioner's
staff, based upon the number of hours spent by the Commissioner's staff
performing the examination.
<PAGE>
The system of regulation and supervision applicable to the Bank establishes a
comprehensive framework for its operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and the depositors of the Bank.
Changes in the regulatory framework could have a material adverse effect on the
Bank and its operations which, in turn, could have a material adverse effect on
the Company.
Deposit Insurance Premiums
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.
Capital Requirements. Under the Illinois Savings Bank Act ("ISBA") and the
regulations of the Commissioner, an Illinois savings bank must maintain a
minimum level of total capital equal to the higher of 4% of total assets or the
amount required to maintain insurance of deposits by the FDIC. The Commissioner
has the authority to require an Illinois savings bank to maintain a higher level
of capital if the Commissioner deems such higher level necessary based on the
savings bank's financial condition, history, management or earnings prospects.
FDIC-insured institutions are required to follow certain capital adequacy
guidelines which prescribe minimum levels of capital and require that
institutions meet certain risk-based and leverage capital requirements. Under
the FDIC capital regulations, an FDIC-insured institution is required to meet
the following capital standards: (i) "Tier 1 capital" in an amount not less than
4% of average total assets; (ii) "Tier 1 capital" in an amount not less than 4%
of risk-weighted assets; and (iii) "total capital" in an amount not less than 8%
of risk-weighted assets.
FDIC-insured institutions in the strongest financial and managerial condition
(with a composite rating of "1" under the Uniform Financial Institutions Rating
System established by the Federal Financial Institutions Examination Council)
are required to maintain "Tier 1 capital" equal to at least 4% of total assets
(the "leverage limit" requirement). For all other FDIC-insured institutions, the
minimum leverage limit requirement is 3% of total assets plus at least an
additional 100 to 200 basis points. Tier 1 capital is defined to include the sum
of common stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus), and minority interests in consolidated
subsidiaries, less all intangible assets (other than qualifying servicing
rights, qualifying purchased credit-card relationships and qualifying
supervisory goodwill), certain identified losses (as defined in the FDIC's
regulations) and investments in certain subsidiaries.
<PAGE>
FDIC-insured institutions also are required to adhere to certain risk-based
capital guidelines which are designed to provide a measure of capital more
sensitive to the risk profiles of individual banks. Under the risk-based capital
guidelines, capital is divided into two tiers: core (Tier 1) capital, as defined
above, and supplementary (Tier 2) capital. Tier 2 capital is limited to 100% of
core capital and includes cumulative perpetual preferred stock, perpetual
preferred stock for which the dividend rate is reset periodically based on
current credit standing, regardless of whether dividends are cumulative or
noncumulative, mandatory convertible securities, subordinated debt, intermediate
preferred stock and the allowance for possible loan and lease losses. The
allowance for possible loan and lease losses includable in Tier 2 capital is
limited to a maximum of 1.25% of risk-weighted assets. Total capital is the sum
of Tier 1 and Tier 2 capital. The risk-based capital framework assigns balance
sheet assets to one of four broad risk categories which are assigned
risk-weights ranging from 0% to 100% based primarily on the degree of credit
risk associated with the obligor. Off-balance sheet items are converted to an
on-balance sheet "credit equivalent" amount utilizing certain conversion
factors. The sum of the four risk-weighted categories equals risk-weighted
assets. The following table presents the Bank's capital position relative to its
capital requirements on September 30, 1999 and 1998 ($ 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, 1999:
Total Capital (to Risk Weighted
Assets)
Consolidated ...................... $10,014 43.9% $ 1,825 8.0% N/A
Bank .............................. $ 9,769 42.8% $ 1,825 8.0% $2,281 10.0%
Tier I Capital (to Risk Weighted
Assets)
Consolidated ...................... $ 9,792 42.9% $ 913 4.0% $ N/A
Bank .............................. $ 9,547 41.9% $ 913 4.0% $1,369 6.0%
Tier I Capital (to Average
Adjusted Assets)
Consolidated ...................... $ 9,792 20.3% $ 1,930 4.0% $ N/A
Bank .............................. $ 9,547 19.8% $ 1,930 4.0% $2,412 5.0%
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%
</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.
<PAGE>
The BHCA requires prior Federal Reserve Board approval for, among other things,
the acquisition by a bank holding company of direct or indirect ownership or
control of more than five percent of the voting shares or substantially all the
assets of any bank, or for a merger or consolidation of a bank holding company
with another bank holding company. With certain exceptions, the BHCA prohibits a
bank holding company from acquiring direct or indirect ownership or control of
voting shares of any company which is not a bank or bank holding company and
from engaging directly or indirectly in any activity other than banking or
managing or controlling banks or performing services for its authorized
subsidiaries. A bank holding company may, however, engage in or acquire an
interest in a company that engages in activities which the Federal Reserve Board
has determined by regulation or order to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
A bank holding company is a legal entity separate and distinct from its
subsidiary bank or banks. Normally, the major source of a holding company's
revenue is dividends a holding company receives from its subsidiary banks. The
right of a bank holding company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon their liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations for
federal funds purchased and securities sold under repurchase agreements, as well
as deposit liabilities. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, in the event of a loss suffered by the FDIC in
connection with a banking subsidiary of a bank holding company (whether due to a
default or the provision of FDIC assistance), other banking subsidiaries of the
holding company could be assessed for such loss.
Federal laws limit the transfer of funds by a subsidiary bank to its holding
company in the form of loans or extensions of credit, investments, or purchases
of assets. Transfers of this kind are limited to ten percent of a bank's capital
and surplus with respect to each affiliate and to twenty percent to all
affiliates in the aggregate, and are also subject to certain collateral
requirements. These transactions, as well as other transactions between a
subsidiary bank and its holding company, must also be on terms substantially the
same as, or at least as favorable as, those prevailing at the time for
comparable transactions with non-affiliated companies or, in the absence of
comparable transactions, on terms or under circumstances, including credit
standards, that would be offered to, or would apply to, non-affiliated
companies.
Capital Requirements. The Federal Reserve Board has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the FDIC for the Savings Bank. The Company's Tier 1 and
total capital significantly exceed the Federal Reserve Board's capital adequacy
requirements.
In June, 1999, the Board of Directors authorized management to retain an
independent third party to evaluate strategic alternatives for the Company. This
action resulted from an unsolicited offer that was declined by the Board of
Directors.
Other Regulations.
FDICIA. FDICIA was enacted on December 19, 1991. In addition to providing for
the recapitalization of the Bank Insurance Fund ("BIF") of the FDIC, FDICIA
represents a comprehensive and fundamental change to banking supervision. FDICIA
imposes relatively detailed standards and mandates the development of additional
regulations governing nearly every aspect of the operations, management and
supervision of banks and bank holding companies like the Company and the Bank.
<PAGE>
As required by FDICIA, and subsequently amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, the federal banking
regulators adopted (effective August 9, 1995) interagency guidelines
establishing standards for safety and soundness for depository institutions on
matters such as internal controls, loan documentation, credit underwriting,
interest-rate risk exposure, asset growth, and compensation and other benefits
(the "Guidelines"). In addition, the federal banking regulators have proposed
asset quality and earnings standards to be added to the Guidelines. The agencies
expect to request a compliance plan from an institution whose failure to meet
one or more of the standards is of such severity that it could threaten the safe
and sound operation of the institution. FDIC regulations enacted under FDICIA
also require all depository institutions to be examined annually by the banking
regulators and depository institutions having $500 million or more in total
assets to have an annual independent audit, an audit committee comprised solely
of outside directors, and to hire outside auditors to evaluate the institution's
internal control structure and procedures and compliance with laws and
regulations relating to safety and soundness. The FDIC, in adopting the
regulations, reiterated its belief that every depository institution, regardless
of size, should have an annual independent audit and an independent audit
committee.
FDICIA requires the banking regulators to take prompt corrective action with
respect to depository institutions that fall below certain capital levels and
prohibits any depository institution from making any capital distribution that
would cause it to be considered undercapitalized. Regulations establishing five
capital categories of well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized
became effective December 19, 1992. Institutions that are not adequately
capitalized may be subjected to a broad range of restrictions on their
activities and will be required to submit a capital restoration plan which, to
be accepted by the regulators, must be guaranteed in part by any company having
control of the institution. Only well capitalized institutions and adequately
capitalized institutions receiving a waiver from the FDIC will be permitted to
accept brokered deposits, and only those institutions eligible to accept
brokered deposits may provide pass-through deposit insurance for participants in
employee benefit plans. In other respects, FDICIA provides for enhanced
supervisory authority, including greater authority for the appointment of a
conservator or receiver for undercapitalized institutions.
A range of other regulations adopted as a result of FDICIA include requirements
applicable to closure of branches; additional disclosures to depositors with
respect to terms and interest rates applicable to deposit accounts; requirements
for the banking agencies to adopt uniform regulations for extensions of credit
secured by real estate; modification of accounting standards to conform to
generally accepted accounting principles including the reporting of off-balance
sheet items and supplemental disclosure of estimated fair market value of assets
and liabilities in financial statements filed with the banking regulators;
increased penalties in making or failing to file assessment reports with the
FDIC; greater restrictions on extensions of credit to directors, officers and
principal stockholders; and increased reporting requirements on agricultural
loans and loans to small businesses.
As required by FDICIA, the FDIC has established a risk-based assessment system
for the deposit insurance provided to depositors at depository institutions
whereby assessments to each institution are calculated upon the probability that
the insurance fund will incur a loss with respect to the institution, the likely
amount of such loss, and the revenue needs of the insurance fund. Under the
system, deposit insurance premiums are based upon an institution's assignment to
one of three capital categories and a further assignment to one of three
supervisory subcategories within each capital category. The result is a nine
category assessment system with initial assessment rates ranging from
twenty-three cents to thirty-one cents per one hundred dollars of deposits in an
institution. The classification of an institution into a category will depend,
among other things, on the results of off-site surveillance systems, capital
ratio, and CAMELS rating (a supervisory rating of capital, asset quality,
management, earnings, liquidity and sensitivity to market risk).
<PAGE>
The CDR Act. On September 23, 1994, the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "CDR Act") was enacted. The CDR Act
includes more than 50 regulatory relief provisions designed to streamline the
regulatory process for banks and thrifts and to eliminate certain duplicative
regulations and paperwork requirements established after, and largely as a
result of, the savings and loan debacle. Well run community banks with less than
$250 million in assets will be examined every 18 months rather than annually.
The application process for forming a bank holding company has been greatly
reduced. Also, the requirement that call report data be published in local
newspapers has been eliminated.
Also, the CDR Act establishes dual programs and provides funding in the amount
of $382 million to provide for development services, lending and investment in
distressed urban and rural areas by community development financial institutions
and banks. In addition, the CDR Act includes provisions relating to flood
insurance reform, money laundering, regulation of high-cost mortgages, and small
business and commercial real estate loan securitization.
The Branching Act. On September 29, 1994, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Branching Act") was enacted. Under the
Branching Act, beginning September 29, 1995, adequately capitalized and
adequately managed bank holding companies are allowed to acquire banks across
state lines, without regard to whether the transaction is prohibited by state
law, however, they are required to maintain the acquired institutions as
separately chartered institutions. Any state law relating to the minimum age of
target banks (not to exceed five years) will be preserved. Under the Branching
Act, the Federal Reserve Board will not be permitted to approve any acquisition
if, after the acquisition, the bank holding company would control more than 10%
of the deposits of insured depository institutions nationwide or 30% or more of
the deposits in the state where the target bank is located. The Federal Reserve
Board could approve an acquisition, notwithstanding the 30% limit, if the state
waives the limit either by statute, regulation or order of the appropriate state
official.
In addition, under the Branching Act beginning on June 1, 1997, banks 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.
Pending Legislation. On November 4, 1999, the United States Congress approved
legislation that would allow bank holding companies to engage in a wider range
of nonbanking activities, including greater authority to engage in securities
and insurance activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank
holding company that elects to become a financial holding company may engage in
any activity that the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), in consultation with the Secretary of the Treasury,
determines by regulation or order is (i) financial in nature, (ii) incidental to
any such financial activity, or (iii) complementary to any such financial
activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The Act specifies
certain activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the Federal Reserve under section 4(c)(8) of the Bank Holding Company Act. A
bank holding company may elect to be treated as a financial holding company only
if all depository institution subsidiaries of the holding company are
well-capitalized, well-managed and have at least a satisfactory rating under the
Community Reinvestment Act.
<PAGE>
National banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.
The Act must be signed by the President before it will take effect. At this
time, the Company is unable to predict the impact the Act may have on the
Company and its subsidiary.
Impact of New Accounting Standards
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. In June 1999, Statement
of Financial Accounting Standard No. 137 was issued to extend the effective date
by one year to all fiscal quarters of fiscal years beginning after June 15,
2000. The Company does not believe the adoption of FAS 133, as amended by FAS
137, will have a material impact on the consolidated financial statements.
Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise Statement of
Financial Accounting Standard No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" (FAS 134) changes the way mortgage banking firms
account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. The Statement is effective
for financial statements for the first fiscal quarter beginning after December
15, 1998. The Company does not securitize mortgages and is not a Mortgage
Banking Enterprise and therefore, FAS 134 will not have an impact on the
consolidated financial statements.
Reclassifications Certain reclassifications have been made to the balances as of
September 30, 1999, with no effect on net income, to be consistent with the
classifications adopted for September 30, 1998.
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.
<PAGE>
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.
All mission critical software was upgraded and tested to achieve year 2000
compliance. In addition, the Team developed contingency plans to address systems
which do not become year 2000 compliant.
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 contracted with a different third party processor and converted data
during the quarter ended 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. To date, year 2000 compliance
expenditures have amounted to $40,000. Management expects total additional
out-of-pocket expenditures to be less than $25,000. 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.
Executive Officers of the Registrant
The following table sets forth certain information as of September 30, 1999 with
respect to the executive officers of the Company and the Savings Bank.
Name Age Position
- --------------------------------------------------------------------------------
K. Gary Reynolds 48 President and Chief Executive Officer of
the Company and the Savings Bank
Stephen J. Greene 41 Vice President of the Savings Bank
Larry D. Griffin 52 Branch Manager, Centralia Savings Bank
<PAGE>
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.
<PAGE>
Item 2. Description of Property
The following table sets forth information concerning the main office and the
branch office of the Bank at September 30, 1999. At September 30, 1999, the
Company's premises had an aggregate net book value of approximately $337.
Lease
Expiration Net Book
Location Year Opened Owned/Leased Date Value
- --------------------------------------------------------------------------------
(In Thousands)
Main office
200 South Poplar Street 1975 Owned N/A $ 97
Centralia, Illinois
Branch office
801 12th Street 1996 (1) Owned N/A 240
Carlyle, Illinois --------
$ 337
========
(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.
In May 1999, a shareholder of CSB Financial Inc. filed a class action lawsuit in
a Delaware court against the Company, its top executive and its directors for
breach of fiduciary duty for failure to put an acquisition offer to shareholder
vote. The class action is seeking buyout of current shares at $14.75 (offered
purchase price).
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, 1999.
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 1999 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
1999 Annual Report to Stockholders and is incorporated herein by reference.
<PAGE>
Item 7. Financial Statements
The consolidated financial statements of CSB Financial Group, Inc. and
subsidiary as of September 30, 1999 and 1998, together with the report of
McGladrey & Pullen, LLP appears in the 1999 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 14, 2000.
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 14, 2000.
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 14, 2000.
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 14, 2000.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index below and exhibits attached.
(b) Form 8-K
No Reports on Form 8-K were filed during the last quarter of the fiscal year
covered by this Form 10-KSB.
<TABLE>
Exhibit No. Exhibit Page No.
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation of CSB Financial Group, Inc. (incorporated herein
by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form
SB-2 as originally filed on March 1, 1995, Registration No. 33-89842)
3.2 Bylaws of CSB Financial Group, Inc. (incorporated herein by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form SB-2 as
originally filed on March 1, 1995, Registration No. 33-89842)
4.1 Specimen Stock Certificate of CSB Financial Group, Inc. (incorporated herein
by reference to Exhibit 1 to the Registrant's Registration Statement on Form
8-A filed on August 21, 1995, Registration No. 0-26650)
4.2 Articles IV, V, VI, XIV and XVI of CSB Financial Group, Inc.'s Certificate
of Incorporation (see Exhibit 3.1 above)
4.3 Articles II and IV of CSB Financial Group, Inc.'s Bylaws (see Exhibit 3.2
above)
<PAGE>
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. 1999 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
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CSB FINANCIAL GROUP, INC.
(Registrant)
Date: December 23, 1999
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:
Highlights for 1999 include growth in total assets of $2.5 million, total
deposits of $1.1 million and gross loans of $2.9 million with an additional $1.0
million in loan commitments at year-end. Our loan department had a productive
year with loan originations of $15.4 million in new loans compared to $10.1
million in 1998, led primarily by the refinancing of residential real estate
loans and new commercial loans. Quality of the loan portfolio improved during
the fiscal year, with non-performing assets declining by 50% to $205,000. Our
allowance for loan losses to total non-performing assets ratio also improved
significantly from 42% to 108%.
The consolidated net income declined $46,000, or 13%, to $299,000 at September
30, 1999. The decrease in income represented a $0.01 decrease in diluted
earnings per share from 1998. Consolidated income before income taxes (excluding
non-recurring items) for 1999 increased 11% to $516,000 as compared to $464,000
in 1998. The non-recurring items were related to the data processing and the
Year-2000 conversion expenses of $85,000 incurred during the last six months of
the fiscal year ended September 30, 1999. These non-recurring items approximated
a $0.07 per share decline in the diluted earnings per share.
The market price for CSB Financial Group, Inc.'s stock as of November 26, 1999
was $11.25 per share, an increase of 14% from the close of November 23, 1998.
This is encouraging, due to the market volatility of bank stocks in the NASDAQ
index. Our strategic plans for improving shareholders' return on equity were
briefly delayed by isolated shareholder actions. The Board of Directors is
committed to improving return on equity and implementing these strategic plans.
In May 1999, the Company changed data processing servicers. The cost of the
conversion of data to another servicer was significant. These costs were
attributable to 12% of the noninterest expenses for the year. Of course, this
change was made for three primary reasons: (1) to provide our customer base with
enhanced services at a reasonable cost, (2) to ensure continued data processing
capabilities during the century date change, and (3) to reduce our labor costs.
We expect the data processing expenses to remain at prior year's levels, while
providing more products and service benefits to our customers. One such service
enhancement that saves time and labor for our checking account customers is the
implementation of the imaging system for checking accountholders. This system
provides a digital-image of every check and deposit on a customer's monthly
checking account statement for easy retrieval and storage. When customers
experienced the convenience of this statement, which was pre-punched to fit a
provided binder, many commented they would not be satisfied with any other type
of statement. The customer can also arrange to have a monthly statement prepared
that combines the banking activities of several accounts on one statement.
The century-date change, commonly referred to as "Year 2000" or "Y2K," is an
event that has placed unusual demands on all businesses, especially those in the
financial industry. As a result, the Company has devoted much time and resources
to ensure our ability to meet our customers' financial needs. Our current data
processing service completed its testing and achieved compliance in early 1998.
Centralia Savings Bank developed, tested and implemented backup procedures to
address ongoing operations in the unusual event there is a malfunction in the
electrical or telecommunication systems. We completed an evaluation of all
equipment, software applications, and third-party vendors to ensure there will
be no interruptions in services. We have also evaluated all significant credit
accounts to determine if alternate procedures are warranted to diminish any Y2K
risks they may pose to the Company. We are confident in the results of our Y2K
evaluations and we look forward to the New Year.
<PAGE>
The financial service industry will be experiencing a great deal of change due
to the recent repeal of the Glass-Steagall Act. The offering of insurance and
investment products/services will become an increasing portion of a bank's
product offerings to its customer base. Technological advances will give
customers access to their accounts through Internet services. The continued
merger and acquisition between financial institutions will continue to change
the landscape of the banking community.
Through the coming months, our greatest challenge is to maintain a competitive
advantage, identify the customer products and services to offer, select the
means of distributing these products/services and improve the value of our
shareholders' investment in this Company. Our greatest competitive advantage is
that our customers know we are accessible and that decisions are made locally by
managers and directors that live, work and participate in this community.
The employees of the Company are well trained, experienced and loyal. They are
dedicated to serving our customers and shareholders. Our success continues to be
linked to the commitment and dedication of our employees and the support of our
customers and shareholders. The Board of Directors has committed to programs
targeting asset growth, leveraging capital and evaluating strategic alliance
opportunities with the singular goal of providing the best value to our
shareholders.
We are confident and excited about our future as a community bank. We look
forward to opportunities the future brings. On behalf of the board of directors,
officers and staff of the Company, we thank you our shareholders for their
investment and our customers for their business.
Sincerely,
/s/ A. John Byrne
- -------------------------------------
A. John Byrne
Chairman of the Board
/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.
In June, 1999, the Board of Directors authorized management to retain
an independent third party to evaluate strategic alternatives for the Company.
This action resulted from an unsolicited offer that was declined by the Board of
Directors.
Comparison of Operating Results for the Fiscal Years Ended September 30, 1999
and 1998
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.
The Company's net income for the fiscal year ended September 30, 1999
was $299,000 as compared to $345,000 for the fiscal year ended September 30,
1998. This represents a $46,000, or 13.3%, decrease in net income.
Net Interest Income. The Company's net interest income for the fiscal
years ended September 30, 1999 and 1998 were $1,718,000 and $1,666,000,
respectively. This represents a $52,000, or 3.1%, increase in net interest
income. This is primarily due to an increase in the net interest rate spread.
Interest income decreased $51,000, or 1.54%, from $3,304,000 for the
fiscal year ended September 30, 1998 compared to $3,253,000 for the fiscal year
ended September 30, 1999. The decrease resulted primarily from a 29 basis point
decrease in the average rate earned on the Company's interest-earning assets.
The $99,000 decrease in interest on securities and other interest
earning assets was partially offset by the $48,000 increase in interest and fees
on loans. The decrease in interest on securities and other interest earning
assets was a result of a decrease in average balances of $490,000 and yields of
40 basis points. As yields on investment securities continued to decline,
management chose to invest funds in loans with an average yield of 7.84% rather
than mortgage backed securities or investment securities with average yields of
8.13% and 5.69%, respectively.
<PAGE>
Interest expense decreased $103,000, or 6.29%, to $1,535,000 for the
fiscal year ended September 30, 1999 from $1,638,000 for fiscal year ended
September 30, 1998. The $1.2 million increase in average balances was more than
offset by the 47 basis point decrease in cost of funds.
Provision for Loan Losses. The Company's provision for loan losses for
the fiscal year ended September 30, 1999 was $72,000, compared to $63,000 for
the fiscal year ended September 30, 1998. 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, 1999 was $132,000, as compared to $134,000 for the
fiscal year ended September 30, 1998. This represents a decrease of $2,000, or
1.49%, in non-interest income. The decrease resulted primarily from a $5,000
decrease in gains on sale of securities offset by a $1,000 increase in service
charges on deposits and a $2,000 increase in other non-interest income.
Non-Interest Expense. The Company's non-interest expense for the fiscal
year ended September 30, 1999 was $1,347,000, as compared to $1,273,000 for the
fiscal year ended September 30, 1998. The $74,000, or 5.81%, increase in
non-interest expense is principally due to additional costs incurred in the
conversion of data processing service centers.
Compensation and Employee Benefits expense increased $20,000, or 3.17%,
to $651,000 for the fiscal year ended September 30, 1999. This increase was
primarily due to an increase of $17,000 in group insurance premiums.
Data processing expense increased $55,000, or 53.40%, to $158,000 for
the fiscal year ended September 30, 1999. This increase was primarily
attributable to costs associated with the conversion of data processing service
centers.
Other non-interest expenses decreased $14,000, or 4.06%, to $331,000
for the fiscal year ended September 30, 1999 as compared to $345,000 for the
fiscal year ended September 30, 1998.
Provision for Income Taxes. The Company's provision for income taxes
for the fiscal year ended September 30, 1999 was $132,000, as compared to
$119,000 for the fiscal year ended September 30, 1998. This represents a
$13,000, or 10.9%, increase in the provision for income taxes.
Comparison of Financial Condition as of September 30, 1999 and 1998
General. At September 30, 1999, the Company's total assets were $48.9
million, an increase of $2.5 million, or 5.4%, as compared to $46.4 million at
September 30, 1998. The increase resulted from a $2.8 million increase in loans
receivable, net of the allowance for loan losses, which offset the $.7 decrease
in cash and cash equivalents. The increase in loans was funded by a $1.1 million
increase in deposits and $1.4 million in borrowings.
Loans. Loans, net of the allowance for loan losses, at September 30,
1999 were $28.9 million, an increase of $2.8 million, or 10.8%, compared to
$26.1 million for the fiscal year ended September 30, 1998. Mortgage loans
increased $3.0 million, or 14.55%, consumer loans decreased $646,000, or 15.78%,
as compared to the fiscal year ended September 30, 1998. Commercial loans
increased $539,000, or 86.24%, to $1.2 million for the year ended September 30,
1999 as compared to $625,000 for the year ended September 30, 1998. Home equity
lines of credit and share loans remained relatively stable.
<PAGE>
Average loan balances for 1999 amounted to $28.5 million as compared to
$26.9 million in the previous fiscal year. The Company continues to emphasize
mortgage lending, however, management is also making more loans on commercial
real estate and commercial operations.
The residential mortgage loans increased $1.9 million during 1999, or
10.00%, to $21.2 million as compared to $19.3 million for the fiscal year ended
September 30, 1998. During 1999, loan originations for residential mortgage
loans amounted to $7.6 million as compared to $5.2 million in originations for
the prior fiscal year.
Residential mortgage loans represent 72.83% of gross loans. Consumer
loans, consisting primarily of automobile loans, made up 11.84% of gross loans,
commercial loans made up 3.99% of gross loans, home equity lines of credit and
share loans made up 2.81% of gross loans, commercial real estate loans made up
1.78% of gross loans, and non-residential real estate loans comprised 6.75% of
the portfolio at September 30, 1999.
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, 1999 amounted to $205,000 or
.42% of total assets as compared to $410,000 or .88% of total assets as of
September 30, 1998.
The following table sets forth an analysis of the Company's gross
allowance for loan losses for the periods indicated.
For the Fiscal Year
Ended September 30,
--------------------
1999 1998
--------------------
(In Thousands)
Allowance at beginning of period ................. $ 171 $ 165
Provision for loan losses ........................ 72 63
Recoveries:
Consumer loans ............................... 18 4
Total recoveries ....................... 18 4
Charge-offs:
Consumer loans ............................... 39 61
Total charge-offs ...................... 39 61
Net charge-offs ........................ (21) (57)
Balance at end of period ............... $ 222 $ 171
Ratio of allowance for loan losses to gross loans
outstanding at the end of the period ........... 0.76% 0.65%
Ratio of net charge offs to average loans
outstanding net during the period .............. 0.07% 0.21%
Ratio of allowance for loan losses to total
nonperforming assets at the end of the period .. 108.29% 41.71%
<PAGE>
Investment Securities. Investment securities represented 35.43% of
total assets as of September 30, 1999 compared to 36.93% of total assets as of
September 30, 1998. Investment securities increased $188,000, 1.10%, from $17.1
million to $17.3 million as of September 30, 1999. At September 30, 1999, the
Company held approximately $17.3 million in investment securities of which $17.1
million were held as available for sale, and $216,000 were non-marketable equity
securities. Of the $17.3 million in investment securities, $13.1 million, or
75.57%, were U. S. Government and agency securities, $1.0 million, or 5.78%,
were U.S. Treasury securities, $1.6 million, or 9.38%, were obligations of state
and political subdivisions, $216,000, or 1.25%, were non-marketable equity
securities, $482,000, or 2.78% were corporate securities and $909,000, or 5.24%,
were mortgage-backed securities.
Deposits. At September 30, 1999, total deposits amounted to $36.9
million, or 75.44%, of total assets. Total deposits increased $1.1 million, or
2.93% from September 30, 1998. The increase resulted from an increase of
$947,000, $407,000 and $20,000 in time deposits greater than $100,000, savings
and demand deposits, respectively, offset by a $323,000 decrease in other time
deposits.
Borrowings. At September 30, 1999, total borrowings totaled $1.4
million, or 2.86% of total assets, and consisted of advances on a line of credit
from the Federal Home Loan Bank of Chicago. The borrowings were made in
September 1999 to fund loan growth. The Company had no borrowings outstanding at
September 30, 1998.
Return on Equity and Assets
Net income for the fiscal year ended September 30, 1999 was $299,000 as
compared to $345,000 for the fiscal year ended September 30, 1998.
Return on average assets (ROA) for the year ended September 30, 1999
was .62% as compared to .73% for the year ended September 30, 1998. The cause
for the decrease in ROA was principally due to an increase in noninterest
expenses.
Return on average equity (ROE) for the year ended September 30, 1999
was 2.93% as compared to 3.24% for the year ended September 30, 1998. The cause
for the decrease in ROE was due to decreased net income and a decrease in the
fair value of securities available for sale.
The average equity to average assets ratio as of September 30, 1999 was
21.18% as compared to 22.35% as of September 30, 1998. The primary cause for the
decrease was the decreased net income and the decrease in the fair value of
securities available for sale.
Average Balance Sheet
The following table presents the average balance sheet for the Company
for the years ended September 30, 1999 and 1998, the interest on interest
earning assets and interest bearing liabilities and the related average yield or
cost. The yields and costs are derived by dividing income or expense by the
average balance of the related asset or liability for the periods shown. Average
balances were determined from averaging month-end balances.
<PAGE>
<TABLE>
For the Fiscal Year Ended September 30,
-----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
(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) ........................ $22,506 $ 1,634 7.26% $20,201 $ 1,630 8.07%
Commercial loans (5) ...................... 1,968 210 10.67% 961 96 9.99%
Consumer loans (5) ........................ 4,045 391 9.67% 5,736 461 8.04%
------------------ ------------------
Total loans, net .................... $28,519 $ 2,235 7.84% $26,898 2,187 8.13%
Mortgage-backed securities (3) ............ $ 1,046 $ 85 8.13% $ 1,048 98 9.35%
Investment securities (2)(3) .............. 15,312 871 5.69% 15,712 943 6.00%
Daily interest-bearing deposits ........... 617 48 7.78% 706 62 8.78%
FHLB stock ................................ 214 14 6.54% 213 14 6.57%
------------------ ------------------
Total interest-earning assets ....... $45,708 $ 3,253 7.12% $44,577 3,304 7.41%
Non-interest earning assets:
Office properties and equipment, net ...... $ 630 $ 603
Real estate, net .......................... 7 5
Other non-interest earning assets ......... 1,911 2,377
------- -------
Total assets ........................ $48,256 $47,562
======= =======
Interest-bearing liabilities:
Passbook accounts ......................... $ 3,604 $ 74 2.05% $ 3,435 82 2.39%
NOW accounts .............................. 4,575 86 1.88% 3,712 69 1.86%
Money market accounts ..................... 2,960 99 3.34% 3,550 134 3.77%
Certificates of deposit ................... 24,658 1,274 5.17% 23,892 1,353 5.66%
------------------ ------------------
Total deposits ...................... $35,797 $ 1,533 4.28% $34,589 1,638 4.74%
FHLB Advances ............................. 34 2 5.88% - - - - - -
------------------ ------------------
Total interest-bearing .............. $35,831 $ 1,535 4.28% $34,589 $ 1,638 4.74%
liabilities
Non-interest bearing liabilities:
Non-interest bearing deposits ............. $ 1,827 $ 1,451
Other liabilities ......................... 378 890
------- -------
Total liabilities ................... $38,036 $36,930
Stockholders' equity ........................ 10,220 10,632
------- -------
Total liabilities and
stockholders' equity ............ $48,256 $47,562
======= =======
Net interest income ......................... $ 1,718 $ 1,666
======= =======
Interest rate spread (4) .................... 2.84% 2.67%
Net interest margin (1) ..................... 3.76% 3.74%
Ratio of average interest-earning
assets to average interest-bearing
liabilities ............................... 127.57% 128.88%
<FN>
(1) Net interest income as a percentage of average interest-earning assets.
(2) Includes available for sale investment securities.
(3) Interest is classified as interest income on securities 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.
</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>
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------- --------------------------
Rate Volume Net Rate Volume Net
-------------------------- --------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans .............. $ (163) $ 167 $ 4 $ 80 $ 6 $ 86
Commercial loans ............ 7 107 114 15 (18) (3)
Consumer loans .............. 93 (163) (70) (43) (17) (60)
------------------------ ------------------------
Total loans ........... (63) 111 48 52 (29) 23
Mortgage-backed securities .. (13) - - (13) (3) (34) (37)
Investment and other
securities ................ (49) (23) (72) 29 91 120
Interest-bearing deposits ... (7) (7) (14) 83 (139) (56)
FHLB stock .................. - - - - - - (1) 2 1
------------------------ ------------------------
Total net change income
on interest-earning
assets .............. (132) 81 (51) 160 (109) 51
------------------------ ------------------------
Interest-bearing liabilities:
Passbook .................... (11) 3 (8) (6) (4) (10)
Interest-bearing demand
(NOW) accounts ............ 1 16 17 - - (26) (26)
Money market deposit
accounts .................. (15) (20) (35) 23 (10) 13
Certificates of deposit ..... (117) 38 (79) (76) 95 19
FHLB Advances ............... - - 2 2 - - - - - -
------------------------ ------------------------
Total net change in
expense on interest-
bearing liabilities . (142) 39 (103) (59) 55 (4)
------------------------ ------------------------
Net change in net
interest income ..... $ 10 $ 42 $ 52 $ 219 $ (164) $ 55
======================== ========================
</TABLE>
<PAGE>
Asset and Liability Management
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest-rate sensitive", and
by monitoring an institution's interest-rate sensitivity gap. An asset or
liability can be considered to be interest-rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest-rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period, and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that same time period. A gap is considered positive when the amount of
interest-rate sensitive assets exceeds the amount of interest-rate sensitive
liabilities. A gap is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest income
while a positive gap would tend to adversely affect net interest income.
At September 30, 1999, 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 $(1.6) million,
representing a cumulative one-year interest-rate sensitivity gap of negative
(3.25)%. 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.
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.
<PAGE>
The Company's investment securities portfolio had an average maturity
of 4.4 years, excluding mortgage-backed securities, as of September 30, 1999.
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, 1999 and 1998, the Company originated one-to-four-family
residential mortgage loans in the amount of $7.6 million and $5.2 million,
respectively. These activities were funded primarily by Federal Home Loan Bank
advances and deposit growth.
The net cash used in investing activities for the fiscal year ended
September 30, 1999 totaled $3.5 million. Investment activities included the
purchase of investment securities which totaled $7.1 million and $13.0 million
for the fiscal year ended September 30, 1999 and 1998, respectively and the
origination of loans, net of paydowns, of $2.9 million for the year ended
September 30, 1999. 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 $500,000 and $5.2
million for the fiscal years ended September 30, 1999 and 1998, respectively.
Investment activities also included maturities and paydowns on investment
securities which totaled $6.1 million and $7.8 million for the fiscal years
ended September 30, 1999 and 1998, 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, 1999 and 1998, the Company used its
sources of funds primarily to fund loan commitments. At September 30, 1999, the
Company had commitments to extend credit in the amount of $2.3 million. These
commitments were comprised of variable-rate and fixed-rate commitments in the
amounts of $1,173,000 and $1,146,000, respectively. The range of rates on
fixed-rate commitments was 7.75% to 10.5%.
At September 30, 1999, certificates of deposits totaled $24.5 million,
or 66.52% of total deposits, as compared to $23.9 million, or 66.73% of total
deposits for fiscal year ended September 30, 1998. Time deposits over $100,000
accounted for $2.6 million and $1.7 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, 1999, the Company was in compliance with all regulatory capital
requirements with a Tier 1 capital to risk-weighted assets ratio of 42.93%,
compared to the minimum ratio required of 4.0%, total capital to risk-weighted
assets ratio of 43.90% compared to the minimum ratio required of 8.0% and a Tier
1 capital to average assets ratio of 20.29% compared to the minimum ratio
required of 4.0%.
<PAGE>
The Company continues to maintain a strong capital position to support
its capital requirements. Stockholders' equity increased $149,000 to $10.3
million as of September 30, 1999. This increase was due primarily to net income
of $299,000 offset by a decrease in unrealized gain on securities available for
sale of $207,000.
Impact of New Accounting Pronouncements
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. In June 1999, Statement
of Financial Accounting Standard No. 137 was issued to extend the effective date
by one year to all fiscal quarters of fiscal years beginning after June 15,
2000. The Company does not believe the adoption of FAS 133, as amended by FAS
137, will have a material impact on the consolidated financial statements.
Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
Statement of Financial Accounting Standard No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" (FAS 134) changes the way
mortgage banking firms account for certain securities and other interests they
retain after securitizing mortgage loans that were held for sale. The Statement
is effective for financial statements for the first fiscal quarter beginning
after December 15, 1998. The Company does not securitze mortgages and is not a
Mortgage Banking Enterprise and therefore, FAS 134 will not have an 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 $21,000 as of September 30, 1999.
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.
<PAGE>
Income Tax Regulations Affecting Bad Debt Reserve. Under existing
provisions of the Internal Revenue Code and similar sections of the Illinois
income tax law, qualifying thrifts may claim bad debt deductions based on the
greater of (1) a specified percentage of taxable income, as defined, or (2)
actual loss experience. If, in the future, any of the accumulated bad debt
deductions are used for any purpose other than to absorb bad debt losses, gross
taxable income may result and income taxes may be payable.
The Small Business Job Protection Act became law on August 20, 1996.
One of the provisions in this law repealed the reserve method of accounting for
bad debts for thrift institutions so that the bad debt deduction described in
the preceding paragraph will no longer be effective for tax years beginning
after December 31, 1995. The change in the law requires that the tax bad debt
reserves accumulated after September 30, 1988 be recaptured into taxable income
over a six-year period. The start of the six-year period can be delayed for up
to two years if the Company meets certain residential lending thresholds.
Deferred taxes have been provided on the portion of the tax reserve for loan
loss that must be recaptured.
Pending Legislation. On November 4, 1999, the United States Congress
approved legislation that would allow bank holding companies to engage in a
wider range of nonbanking activities, including greater authority to engage in
securities and insurance activities. Under the Gramm-Leach-Bliley Act (the
"Act"), a bank holding company that elects to become a financial holding company
may engage in any activity that the Board of Governors of the Federal Reserve
System (the "Federal Reserve"), in consultation with the Secretary of the
Treasury, determines by regulation or order is (i) financial in nature, (ii)
incidental to any such financial activity, or (iii) complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The Act
specifies certain activities that are deemed to be financial in nature,
including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting and selling insurance; providing
financial, investment, or economic advisory services; underwriting, dealing in
or making a market in, securities; and any activity currently permitted for bank
holding companies by the Federal Reserve under section 4(c)(8) of the Bank
Holding Company Act. A bank holding company may elect to be treated as a
financial holding company only if all depository institution subsidiaries of the
holding company are well-capitalized, well-managed and have at least a
satisfactory rating under the Community Reinvestment Act.
National banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.
The Act must be signed by the President before it will take effect. At
this time, the Company is unable to predict the impact the Act may have on the
Company and its subsidiary.
<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.
All mission critical software was upgraded and tested to achieve year
2000 compliance. In addition, the Team developed contingency plans to address
systems which do not become year 2000 compliant.
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 contracted with a different third party processor and
converted data during the quarter ended 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.
<PAGE>
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. To date, year 2000
compliance expenditures have amounted to $40,000. Management expects total
additional out-of-pocket expenditures to be less than $25,000. 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>
CSB FINANCIAL GROUP, INC.
Consolidated Financial Statements
With Independent Auditor's Report
Years Ended September 30, 1999 and 1998
<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, 1999 and 1998, 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, 1999 and 1998, 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 28, 1999
<PAGE>
CSB FINANCIAL GROUP, INC. and SUBSIDIARY
Consolidated Balance Sheets
September 30, 1999 and 1998
(in thousands, except share data)
<TABLE>
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ..................................... $ 871 $ 1,542
Securities:
Available for sale ......................................... 17,118 16,931
Nonmarketable equity securities ............................ 216 215
Loans, net of allowance for loan losses of $222 in 1999 and
$171 in 1998 ............................................... 28,920 26,111
Premises and equipment ........................................ 683 607
Accrued interest receivable ................................... 318 304
Intangible assets ............................................. 539 600
Other assets .................................................. 255 113
------------------
Total assets .................................... $48,920 $46,423
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand .................................................. $ 8,563 $ 8,543
Savings ................................................. 3,794 3,387
Time deposits of $100,000 or more ....................... 2,627 1,680
Other time deposits ..................................... 21,922 22,245
------------------
Total deposits .................................. 36,906 35,855
Other liabilities .......................................... 191 169
Advances from the Federal Home Loan Bank ................... 1,400 - -
Deferred income taxes ...................................... 145 270
------------------
Total liabilities ............................... 38,642 36,294
------------------
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 ............................................ 7,829 7,823
Retained earnings .......................................... 6,683 6,384
Accumulated other comprehensive income ..................... (53) 154
Unearned employee stock ownership plan shares .............. (160) (180)
Management recognition plan ................................ (514) (551)
------------------
13,795 13,640
Less cost of treasury stock; 1999 302,701 shares;
1998 302,080 shares ..................................... (3,517) (3,511)
------------------
Total stockholders' equity ...................... 10,278 10,129
------------------
Total liabilities and stockholders' equity ...... $48,920 $46,423
==================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. and SUBSIDIARY
CONSOLIDATED Statements of Income
Years Ended September 30, 1999 and 1998
(in thousands, except share data)
<TABLE>
1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans and fees on loans ....................................... $2,235 $2,187
Securities:
Taxable .................................................... 880 988
Nontaxable ................................................. 76 53
Other ......................................................... 62 76
--------------
3,253 3,304
--------------
Interest expense:
Deposits ...................................................... 1,533 1,638
Borrowings .................................................... 2 - -
--------------
1,535 1,638
--------------
Net interest income ................................ 1,718 1,666
Provision for loan losses ........................................ 72 63
--------------
Net interest income after provision for loan losses 1,646 1,603
--------------
Noninterest income:
Service charges on deposits ................................... 82 81
Gain on sale of securities .................................... - - 5
Other ......................................................... 50 48
--------------
132 134
--------------
Noninterest expense:
Compensation and employee benefits ............................ 651 631
Occupancy and equipment ....................................... 106 89
Data processing ............................................... 158 103
SAIF deposit insurance ........................................ 21 22
Professional fees ............................................. 80 83
Other ......................................................... 331 345
--------------
1,347 1,273
--------------
Income before income taxes ......................... 431 464
Income taxes ..................................................... 132 119
--------------
Net income ......................................... $ 299 $ 345
--------------
Earnings per share:
Basic ......................................................... $ 0.42 $ 0.43
Diluted ....................................................... $ 0.41 $ 0.42
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1999 and 1998
(In thousands, except share data)
<TABLE>
Accu-
mulated Unearned
Other Employee
Compre- Stock Management
Preferred Common Paid-In Retained hensive Ownership Recognition Treasury
Stock Stock Capital Earnings Income Plan Shares Plan Stock Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 ............. $ - - $ 10 $7,813 $6,039 $ 110 $ (202) $ (589) $(1,529) $11,652
Net income ............................. - - - - - - 345 - - - - - - - - 345
Comprehensive Income:
Change in unrealized gain (loss) on
securities available for sale, net
of tax of $26 ..................... - - - - - - - - 47 - - - - - - 47
Realized gain on securities sold
during the year, net of tax of $2 . - - - - - - - - (3) - - - - - - (3)
------ -------
Comprehensive income ................... - - - - - - - - 44 - - - - - - 389
------ -------
Employee stock ownership plan shares
allocated ......................... - - - - 10 - - - - 22 - - - - 32
Management recognition plan shares
allocated ......................... - - - - - - - - - - - - 38 - - 38
Purchase of treasury stock ............. - - - - - - - - - - - - - - (1,982) (1,982)
---------------------------------------------------------------------------------------
Balance at September 30, 1998 ............. - - 10 7,823 6,384 154 (180) (551) (3,511) 10,129
Net income ............................. - - - - - - 299 - - - - - - - - 299
Comprehensive Income:
Change in unrealized gain (loss) on
securities available for sale, net
of tax of $(127) .................. - - - - - - - - (207) - - - - - - (207)
------ --------
Comprehensive income ................... - - - - - - - - (207) - - - - - - 92
------ --------
Employee stock ownership plan shares
allocated ............................ - - - - 6 - - - - 20 - - - - 26
Management recognition plan shares
allocated ............................ - - - - - - - - - - - - 37 - - 37
Purchase of treasury stock ............. - - - - - - - - - - - - - - (6) (6)
----------------------------------------------------------------------------------------
Balance at September 30, 1999 ........... $ - - $ 10 $7,829 $6,683 $ (53) $ (160) $ (514) $(3,517) $10,278
========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CSB FINANCIAL GROUP, INC. and SUBSIDIARY
CONSOLIDATED Statements of Cash Flows
Years Ended September 30, 1999 and 1998
(in thousands)
<TABLE>
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income ...................................................... $ 299 $ 345
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses .................................... 72 63
Provision for depreciation ................................... 49 38
Amortization of intangible assets ............................ 61 60
Employee stock ownership plan compensation expense ........... 26 32
Management recognition plan compensation expense ............. 37 38
Deferred income taxes ........................................ 2 - -
Gain on sale of securities ................................... - - (5)
Loss on sale of other real estate owned ...................... - - 3
Amortization and accretion of securities ..................... 11 (1)
Change in assets and liabilities:
(Increase) in accrued interest receivable .................. (14) (14)
(Increase) decrease in other assets ........................ (142) 46
Increase in other liabilities .............................. 22 117
-------------------
Net cash flows from operating activities ............. 423 722
-------------------
Cash Flows from Investing Activities
Securities available for sale:
Purchases .................................................... (7,143) (13,004)
Proceeds from sales .......................................... 500 5,154
Proceeds from maturities and paydowns ........................ 6,111 7,772
Nonmarketable equity securities:
Purchases of nonmarketable equity securities ................. (1) (5)
Loan originations, net of principal payments on loans ........... (2,881) 981
Proceeds from the sale of other real estate owned ............... - - 3
Purchases of premises and equipment ............................. (125) (43)
-------------------
Net cash flows from investing activities ............. (3,539) 858
-------------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits and savings accounts . $ 427 $ (538)
Net increase (decrease) in time deposits ........................ 624 (193)
Purchase of treasury stock ...................................... (6) (1,982)
Proceeds from Federal Home Loan Bank advances ................... 1,400 - -
-------------------
Net cash flows from financing activities ............. 2,445 (2,713)
-------------------
Net decrease in cash and cash equivalents ............ (671) (1,133)
Cash and cash equivalents, beginning of year ....................... 1,542 2,675
-------------------
Cash and cash equivalents, end of year ............................. $ 871 $ 1,542
===================
Cash paid during the year for:
Interest ........................................................ $ 1,526 $ 1,626
===================
Income taxes, net of refunds .................................... $ 59 $ 15
===================
Supplemental Disclosures of Investing and Financing Activities:
Change in unrealized gain (loss) on securities available for sale $ (334) $ 70
===================
Change in deferred income taxes attributable to the unrealized
gain (loss) on securities available for sale ................. $ (127) $ 26
===================
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.
Effective October 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Comprehensive Income," which was issued in June of
1997. Statement No. 130 establishes new rules for the reporting and display of
comprehensive income and its components, but has no effect on the Company's net
income or total stockholders' equity. Statement No. 130 requires unrealized
gains and losses on the Company's available for sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of Statement No. 130.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practice within the banking 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 accumulated other comprehensive income, 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.
<PAGE>
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.
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 part of the provision for loan losses expense in the same manner in
which impairment initially was recognized or as a reduction in the amount of
provision for loan losses expense that otherwise would be reported. Management
had not classified any loans as impaired as of September 30, 1999 or 1998.
Allowance for loan 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. 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 Basic earnings per share is computed by dividing net
income for the year by the weighted average number of shares outstanding of
719,245 and 797,237 for 1999 and 1998, 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 728,767 and 824,296
for 1999 and 1998, respectively.
<PAGE>
Reclassifications Certain reclassifications have been made to the balances as of
September 30, 1998, with no effect on net income, to be consistent with the
classifications adopted for September 30, 1999.
Effect of New Accounting Standards
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. In June 1999, Statement of
Financial Accounting Standard No. 137 was issued to extend the effective date
by one year to all fiscal quarters of fiscal years beginning after June 15,
2000. The Company does not believe the adoption of FAS 133, as amended by FAS
137, will have a material impact on the consolidated financial statements.
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise Statement of
Financial Accounting Standard No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise" (FAS 134) changes the way mortgage banking
firms account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. The Statement is
effective for financial statements for the first fiscal quarter beginning
after December 15, 1998. The Company does not securitize mortgages and is not
a Mortgage Banking Enterprise and therefore, FAS 134 will not have an 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, 1999 Cost Gains Losses Value
- ------------------ ---------------------------------------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions .............................. $ 1,642 $ 12 $ 28 $ 1,626
U.S. Government and agency ................... 13,182 25 108 13,099
U.S. Treasury ................................ 1,000 2 - - 1,002
Mortgage backed securities ................... 880 39 10 909
Corporate Securities ......................... 500 - - 18 482
--------------------------------------
$17,204 $ 78 $ 164 $17,118
======================================
September 30, 1998
- ------------------
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
======================================
</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,
1999
-------------------
Amortized Fair
Cost Value
------------------
Less than one year ......................... $ 2,205 $ 2,198
Due after one year through five years ...... 9,369 9,343
Due after five years through ten years ..... 4,546 4,475
Due after ten years ........................ 204 193
Mortgage-backed securities ................. 880 909
-----------------
$17,204 $17,118
=================
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 $200 and $150, respectively,
pledged as collateral for public deposits for the years ended September 30, 1999
and 1998.
Gross realized gains and losses from the sale of securities available for sale
follow:
Years Ended
September 30,
------------------
1999 1998
------------------
Gross gains ............................. $ - - $ 6
Gross losses ............................ - - (1)
------------------
Net gain .................. $ - - $ 5
==================
<PAGE>
Note 3. Loans
Loans are summarized as follows:
September 30,
------------------
1999 1998
------------------
Mortgage loans:
One to four family ........................... $21,225 $19,037
Commercial real estate ....................... 519 1,120
Other loans secured by real estate ........... 1,966 541
------------------
Total mortgage loans .............. 23,710 20,698
------------------
Commercial and consumer loans:
Commercial loans ............................. 1,164 625
Consumer loans ............................... 3,449 4,095
Home equity lines of credit .................. 649 678
Share loans .................................. 170 193
------------------
Total commercial and consumer loans 5,432 5,591
------------------
Less:
Allowance for loan losses .................... (222) (171)
Deferred loan fees ........................... - - (6)
Unearned income on consumer loans ............ - - (1)
------------------
(222) (178)
------------------
Loans, net ........................ $28,920 $26,111
==================
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, 1999 and 1998, the Company had approximately $205 and $410 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, 1998 .............................. $ 1,050
New loans ............................................... 2,174
Repayments .............................................. (2,012)
-------
Balance as of September 30, 1999 ........................... $ 1,212
=======
<PAGE>
Note 4. Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
Year Ended
September 30,
------------------
1999 1998
------------------
Balance, beginning .......................... $ 171 $ 165
Provision charged to income .............. 72 63
Charge-offs .............................. (39) (61)
Recoveries ............................... 18 4
------------------
Balance, ending ............................. $ 222 $ 171
==================
Note 5. Premises and Equipment
Premises and equipment consist of:
September 30,
-----------------
1999 1998
-----------------
Land ............................................ $ 136 $ 136
Office building ................................. 492 479
Furniture and equipment ......................... 541 429
-----------------
1,169 1,044
Less accumulated depreciation ................... (486) (437)
-----------------
$ 683 $ 607
=================
Note 6. Deposits
At September 30, 1999, the scheduled maturities of time deposits are as follows:
Year Ended September 30: Amount
- ------------------------ -------
2000 $11,972
2001 8,982
2002 2,091
2003 954
2004 464
Thereafter 86
-------
$24,549
=======
<PAGE>
Note 7. Advances from the Federal Home Loan Bank
At September 30, 1999, the Company had $1,400 of advances on its line of credit
with the Federal Home Loan Bank at a rate of 5.89%, interest payable monthly.
The investment securities held in safekeeping at the Federal Home Loan Bank are
used as collateral on the line and their carrying value dictates the total
amount the Company is allowed to borrow on their line.
Note 8. Income Taxes
Income taxes consist of:
For the Year Ended
-------------------
September 30,
------------------
1999 1998
------------------
Current ............................... $ 130 $ 119
Deferred .............................. 2 - -
------------------
Total ................... $ 132 $ 119
==================
The Company and its subsidiary file consolidated federal income tax returns.
Under provisions of the Internal Revenue Code and similar sections of the
Illinois income tax law for the years beginning before January 1, 1996,
qualifying thrifts could claim bad debt deductions based on the greater of (1) a
specified percentage of taxable income, as defined, or (2) actual loss
experience.
The Small Business Job Protection Act became law on August 20, 1996. One of the
provisions in this law repealed the reserve method of accounting for bad debts
for thrift institutions so that the bad debt deduction described in the
preceding paragraph will no longer be effective for tax years beginning after
December 31, 1995. The change in the law requires that the tax bad debt reserves
accumulated after September 30, 1988 be recaptured into taxable income over a
six-year period. The start of the six-year period can be delayed for up to two
years if the Company meets certain residential lending thresholds. Deferred
taxes have been provided on the portion of the tax reserve for loan loss that
must be recaptured.
Retained earnings at September 30, 1999 and 1998, 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, 1999 and 1998.
Income tax expense differed as follows:
Year Ended
September 30,
-----------------
1999 1998
-----------------
Maximum statutory rate applied to earnings
before income tax ................................ $ 151 $ 162
Increase in income taxes resulting from:
Tax exempt interest income ...................... (27) (19)
Other ........................................... 8 (24)
-----------------
$ 132 $ 119
=================
<PAGE>
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,
---------------
1999 1998
---------------
Allowance for loan losses - book .................... $ 86 $ 66
Illinois net operating loss carryforward ............ 37 22
Unrealized loss on securities available for sale .... 33 - -
---------------
Total deferred tax assets ............. 156 88
---------------
Unrealized gain on securities available for sale .... - - (94)
Allowance for loan losses - tax ..................... (76) (92)
Cash basis adjustment ............................... (119) (95)
FHLB stock basis .................................... (7) (7)
Premises and equipment basis ........................ (36) (23)
Other ............................................... (63) (47)
---------------
Total deferred tax liabilities ........ (301) (358)
---------------
Net deferred tax liabilities .......... $ (145) $ (270)
===============
Note 9. Fair Value of Financial Instruments
The Company provides 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. Certain financial instruments and all
nonfinancial instruments are excluded from the disclosure. 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,
----------------------------------
1999 1998
----------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------
Assets:
Cash and cash equivalents ...... $ 871 $ 871 $ 1,542 $ 1,542
Securities available for sale .. 17,118 17,118 16,931 16,931
Nonmarketable equity securities 216 216 215 215
Accrued interest receivable .... 318 318 304 304
Loans .......................... 28,920 27,770 26,111 26,013
Liabilities:
Deposits ....................... 36,906 36,996 35,855 35,909
Advances from FHLB ............. 1,400 1,400 - - - -
Accrued interest payable ....... 21 21 12 12
The following methods and assumptions were used by the Company in estimating the
fair value disclosures for financial instruments:
<PAGE>
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.
Advances from the Federal Home Loan Bank The carrying amounts of advances on the
line of credit from the Federal Home Loan Bank approximates their fair values.
Off-balance-sheet instruments Fair values for the Bank's off-balance-sheet
instruments, which consist of commitments to extend credit and standby letters
of credit, are based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing. The fair value for such financial instruments
is nominal.
Note 10. Capital Ratios
The Company 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
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company'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 Company 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, 1999, that the
Company meets all capital adequacy requirements to which it is subject.
<PAGE>
As of September 30, 1999, 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
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------- --------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total Capital (to Risk Weighted
Assets)
Consolidated ..................... $10,014 43.9% $1,825 8.0% N/A
Bank ............................. $ 9,769 42.8% $1,825 8.0% $2,281 10.0%
Tier I Capital (to Risk Weighted
Assets)
Consolidated ..................... $ 9,792 42.9% $ 913 4.0% N/A
Bank ............................. $ 9,547 41.9% $ 913 4.0% $1,369 6.0%
Tier I Capital (to Average
Adjusted Assets)
Consolidated ..................... $ 9,792 20.3% $1,930 4.0% N/A
Bank ............................. $ 9,547 19.8% $1,930 4.0% $2,412 5.0%
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% $1,899 4.0% $2,337 5.0%
</TABLE>
Note 11. Officer, Director and Employee Benefit Plans
Employee Stock Ownership Plan (ESOP) The ESOP holds 41,400 shares of the
Company's common stock for allocation to employees. The ESOP borrowed from the
Company to purchase the common stock. The loan obligation is considered unearned
employee stock ownership plan shares and is reflected as a reduction of
stockholders' equity.
The following table reflects the status of the shares held by the plan:
September 30,
----------------
1999 1998
----------------
Shares allocated ............................................ 19,530 17,029
Shares released to be allocated ............................. 1,849 1,842
Unreleased shares (Fair value as of September 30, 1999
and 1998 $195 and $281) .................................. 20,021 22,529
---------------
41,400 41,400
===============
<PAGE>
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 $26 and $32 for
the years ended September 30, 1999 and 1998, respectively.
The Board of Directors of the Company may direct payment of cash dividends, if
any, be paid in cash to the participants or be credited to participant accounts
and invested. Dividends received, if any, by the ESOP on unallocated shares are
used for debt service.
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, 1999 and
1998.
Management Recognition Plan (MRP) The MRP purchased, with funds provided by the
Company, 62,100 shares. 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, 1999
and 1998, 17,388 shares and 18,009 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.
Compensation expense of $37 and $38 was recognized for the years ended September
30, 1999 and 1998, respectively.
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, 1999
and 1998, 35,875 options had been granted.
The terms of the options under the Nonqualified Stock Option Plan and the
exercise schedule are at the discretion of the Committee. At September 30, 1999
and 1998, 25,875 options had been granted.
<PAGE>
A summary of the status of the Company's fixed stock option plan and changes
during the years ending September 30, 1999 and 1998 is presented below:
September 30,
---------------------------------------
1999 1998
------------------ -------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------ -------------------
Options outstanding, beginning
of the year ....................... 61,750 $ 9.75 51,750 $ 9.22
Options granted ...................... - - - - 10,000 12.51
Options exercised .................... - - - - - - - -
-------------------------------------
Options outstanding, end of year ..... 61,750 $ 9.75 61,750 $ 9.75
=====================================
Options exercisable .................. 27,875 15,525
Weighted-average fair value of options
granted during the year ........... $ - - $ 4.37
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: dividend rate of 0%; price volatility of 20.44%
and a risk free interest rate of 4.59%.
As permitted by generally accepted accounting principles, grants under these
plans are accounted for following APB Opinion No. 25 and related
interpretations. 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.
1999 1998
------------------
Net income:
As reported .......................... $ 299 $ 345
Proforma ............................. 273 302
Basic earnings per share:
As reported .......................... $ 0.42 $ 0.43
Proforma ............................. 0.38 0.38
Diluted earning per share:
As reported .......................... $ 0.41 $ 0.42
Proforma ............................. 0.37 0.37
The following table summarizes information about fixed stock options outstanding
at September 30, 1999:
Number
Options Outstanding Excercisable
-------------------------------------------
Weighted
Average
Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
- --------------------------------------------------------
$ 9.08 25,875 6.7 15,525
9.36 25,875 7.1 10,350
12.51 10,000 8.0 2,000
------ ------
61,750 27,875
====== ======
<PAGE>
Note 12. Commitments, Contingencies and Credit Risk
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.
In May 1999, a shareholder of CSB Financial Inc. filed a class action lawsuit in
a Delaware court against the Company, its top executive and its directors for
breach of fiduciary duty for failure to put an acquisition offer to shareholder
vote. The class action is seeking buyout of current shares at $14.75 (offered
purchase price).
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, 1999
and 1998 follow:
Range of Rates
Variable Rate Fixed Rate Total on Fixed Rate
Commitments Commitments Commitments Commitments
-------------------------------------------------------
Commitment to extend
credit:
1999 $1,173 $1,146 $2,319 7.75% - 10.5%
1998 275 1,008 1,283 8.25% - 11.5%
The Bank generally originates single-family residential loans within its primary
lending area, Marion County. The Bank's underwriting policies require such fixed
rate loans to be made at 80% loan-to-value and variable rate loans to be made at
85% loan-to-value based upon appraised values unless private mortgage insurance
is obtained. These loans are secured by the underlying properties.
The Company does not engage in the use of interest rate swaps, futures, forwards
or option contracts, or other financial instruments with similar
characteristics.
<PAGE>
--------------------------------
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 was Registrar handles stock transfer and registration,
quoted on the Nasdaq "SmallCap" market under address changes, corrections/changes in
the symbol "CSBF" until December 31, 1998, at which taxpayer identification numbers, and Form 1099
time the Company transferred the quotation to the OTC tax reporting questions. If you require assistance
Bulletin Board under the same symbol. 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 OTC Financial Group, Inc. will be held on January 14,
Bulletin Board market on November 26, 1999 2000 at 10:00 a.m. at 801 12th Street, Carlyle,
was $11.25. The Holding Company has not Illinois.
paid 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" and OTC Bulletin Board market
during the past year. Special Counsel
Schiff Hardin & Waite
Fiscal 1999 High Low 7200 Sears Tower
- -------------------------------------------------- Chicago, Illinois 60606
First Quarter $10.50 $8.75
Second Quarter $ 9.25 $8.875
Third Quarter $12.875 $9.125
Fourth Quarter $10.625 $9.875
</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
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Form 10KSB of our
report dated October 28, 1999 which appears on page 18 of the 1999 Annual Report
to Shareholders of CSB Financial Group, Inc., for the year ended September 30,
1999.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
December 20, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 FORM 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-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 871
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,118
<INVESTMENTS-CARRYING> 216
<INVESTMENTS-MARKET> 216
<LOANS> 29,142
<ALLOWANCE> 222
<TOTAL-ASSETS> 48,920
<DEPOSITS> 36,906
<SHORT-TERM> 0
<LIABILITIES-OTHER> 336
<LONG-TERM> 1,400
0
0
<COMMON> 10
<OTHER-SE> 10,268
<TOTAL-LIABILITIES-AND-EQUITY> 48,920
<INTEREST-LOAN> 2,235
<INTEREST-INVEST> 956
<INTEREST-OTHER> 62
<INTEREST-TOTAL> 3,253
<INTEREST-DEPOSIT> 1,533
<INTEREST-EXPENSE> 1,535
<INTEREST-INCOME-NET> 1,718
<LOAN-LOSSES> 72
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,347
<INCOME-PRETAX> 431
<INCOME-PRE-EXTRAORDINARY> 299
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 299
<EPS-BASIC> .42
<EPS-DILUTED> .41
<YIELD-ACTUAL> 3.76
<LOANS-NON> 205
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 171
<CHARGE-OFFS> 39
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 222
<ALLOWANCE-DOMESTIC> 222
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
