-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfXLvZ1KbUkmM/CVdeTg8VeabirG83R6wn9dTp0+oyd1OqKFk0lI+8xOkud/vdIB mx3sgY5h0BKM+yRzgCioEQ== 0000743530-96-000136.txt : 19961231 0000743530-96-000136.hdr.sgml : 19961231 ACCESSION NUMBER: 0000743530-96-000136 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961227 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CSB FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000940006 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 371336338 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-26650 FILM NUMBER: 96687133 BUSINESS ADDRESS: STREET 1: 200 S POPLAR ST STREET 2: PO BOX 469 CITY: CENTRALIA STATE: IL ZIP: 62801 BUSINESS PHONE: 6185321918 MAIL ADDRESS: STREET 1: 200 S POPLAR STREET 2: PO BOX 469 CITY: CENTRALIA STATE: IL ZIP: 62801 10KSB 1 U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1996 Commission file number 0-26650 CSB FINANCIAL GROUP, INC. (Name of small business issuer in its charter) Delaware 37-1336338 - ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 South Poplar, Centralia, Illinois 62801 --------------------------------------------------- (Address or principal executive offices) (Zip Code) Registrant's telephone number, including area code (618) 532-1918 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock: par value $0.01 per share (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X State issuer's revenues for its most recent fiscal year. $2,954,000 The aggregate market value of the voting stock held by non-affiliates of the Registrant at November 30, 1996 was $9,566,870. For purposes of this determination only, directors and executive officers of the Registrant have been presumed to be affiliates. The market value is based upon $10 per share, the last sales price as quoted on The Nasdaq Stock Market for November 29, 1996. The Registrant had 956,687 shares of Common Stock outstanding at November 29, 1996, not including 78,313 shares held by the Registrant's Employee Stock Ownership Plan which have not been committed to be released to participants. Transitional Small Business Disclosure Format: Yes No X The Exhibit Index is located at page 2. 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 PART I Item 1. Description of Business. On October 5, 1995, CSB Financial Group, Inc. (the "Company") acquired all of the outstanding shares of Centralia Savings Bank (the "Bank") upon the Bank's conversion from a state chartered mutual savings bank to a state chartered stock savings bank. The Company purchased 100% of the outstanding stock of the Bank using 50% of the net proceeds from the Company's initial stock offering which was completed on October 5, 1995. The Company sold 1,035,000 shares of $0.01 par value common stock at a price of $8 per share, including 82,800 shares purchased by the Bank's Employee Stock Ownership Plan ("ESOP"). The ESOP shares were acquired by the Bank with proceeds from a Company loan totaling $662. The gross proceeds of the offering were $8,280. After reducing gross proceeds for conversion costs of $696, net proceeds totaled $7,584. The Company's stock trades on the NASDAQ Small Caps market under the symbol "CSBF". The acquisition of the Bank by the Company is being accounted for like a "pooling of interests" under generally accepted accounting principles. The application of the pooling of interests method records the assets and liabilities of the merged entities on an historical cost basis with no goodwill or other intangible assets being recorded. The Company's assets at September 30, 1996 consist primarily of the investment in the Bank of approximately $8.6 million and short-term marketable securities of approximately $3.3 million. Currently, the Company does not transact any material business other than through its subsidiary, the Bank. Business of the Bank The Bank is an Illinois-chartered stock savings bank regulated by the Illinois Commissioner of Savings and Residential Finance (the "Commissioner"). The Bank was originally chartered in 1879 as a federally chartered savings and loan association. The deposits of the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The Bank's primary market area consists of Marion County, Illinois, which includes the cities of Carlyle and Centralia. The Bank maintains two offices, one in Centralia and one in Carlyle, and provides a full range of retail banking services at each office, with emphasis on one- to four-family residential mortgage loans and consumer and commercial loans. At September 30, 1996, the Bank had total assets, liabilities and stockholders' equity of approximately $46.6 million, $38 million, and $8.6 million, respectively. The Bank's principal business consists of the acceptance of retail deposits from the residents and small businesses surrounding its offices and the investment of those deposits, together with funds generated from operations, primarily in one- to four-family residential mortgage loans. The Bank also invests in multifamily mortgage, commercial real estate, construction, land development and other loans. At September 30, 1996, the Bank's gross loan portfolio totaled $26.9 million of 57.8% of total assets. In addition to its lending activities, the Bank also invests in U.S. Treasury securities, government agency securities, local municipal securities and mortgage-backed securities. At September 30, 1996, the Bank's securities portfolio totaled $12.9 million or 27.7% of total assets with $10.7 million classified as available for sale, $2 million classified as held to maturity and $165,000 classified as nonmarketable equity securities. The Bank's revenues are derived principally from interest on its mortgage, consumer and commercial loans, and, to a lesser extent, interest and dividends on its securities. The Bank's primary sources of funds are deposits, principal and interest payments and principal prepayments on loans. Through its wholly-owned subsidiary, Centralia SLA, Inc., the Bank engages in the sale of insurance services. On September 13, 1996, the Company acquired the Carlyle, Illinois branch (the "branch") of Kankakee Federal Savings and Loan. The branch had approximately $8.6 million in deposits at the date of acquisition. In addition to assuming the deposit liabilities attributable to the branch, the Company acquired certain assets associated with the branch, including the building. The executive offices of the Company and Savings Bank are located at 200 South Poplar Street, Centralia, Illinois 62801 and the telephone number is (618) 532-1918. Composition of the Loan Portfolio. The Bank's historical lending strategy has focused primarily on the origination of residential mortgage loans secured by one- to four-family homes and consumer loans to customers with whom the Bank already had a deposit or lending relationship. Beginning in May, 1994, the Bank began offering consumer loans, primarily installment loans for the purchase of automobiles, to the general public. The Bank also originates, from time to time, multi-family and commercial real estate loans and commercial non-real estate loans, although such loans presently constitute a relatively small percentage of the Bank's total loan portfolio. The following table sets forth in greater detail the composition of the Bank's loan portfolio by type of loan as of the dates indicated: At September 30, ----------------------------------------- 1996 1995 ------------------ ------------------ (In Thousands) ----------------------------------------- Amount Percent Amount Percent ----------------------------------------- Mortgage Loans: One- to four-family .................... $17,285 63.69% $13,086 66.72% Multi-family ........................... 527 1.94% 535 2.73% Commercial real estate ................. 823 3.03% 835 4.26% Other loans secured by real estate ..... 1,091 4.02% 638 3.25% ------- ------- Total mortgage loans .............. 19,726 72.68% 15,094 76.96% Commercial and Consumer Loans: Commercial ............................. 1,462 5.39% 618 3.15% Consumer ............................... 4,637 17.09% 3,323 16.95% Home equity lines of credit ............ 998 3.68% 18 0.09% Share loans ............................ 316 1.16% 559 2.85% ------- ------- Total commercial and consumer loans 7,413 27.32% 4,518 23.04% Total loans ................................. 27,139 100.00% 19,612 100.00% ------- ------- Less: Deferred fees .......................... 23 30 Unearned income on consumer loans ...... 68 192 Allowance for loan losses .............. 117 113 ------- ------- Total loans, net ............................ $26,931 $19,277 ======= =======
The Bank had no loans held for sale at September 30, 1996 or 1995. As of September 30, 1996, 45% of the Bank's loans had adjustable interest rates. The types of loans that the Bank may originate are subject to federal and state laws and regulations. Interest rates charged by the Bank are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board and legislative tax policies. Loan Maturity The following table shows the maturity of the Bank's loans at September 30, 1996. The table does not include the effect of future loan repayment activity. While the Bank cannot project future loan prepayment activity, the Bank anticipates that in periods of stable interest rates, prepayment activity would be lower than prepayment activity experienced in periods of declining interest rates. In general, the Bank originates adjustable and fixed-rate one- to four-family loans with maturities from 15 to 30 years, one-to-four family loans with balloon features which mature from 1 to 5 years, multi-family loans with maturities from 1 to 5 years, adjustable-rate commercial real estate loans with maturities of 20 to 25 years, commercial loans with maturities of 90 days to one year, and consumer loans with maturities of 1 to 5 years. At September 30, 1996 --------------------------------------- Mortgage Commercial Consumer Total Loans Loans Loans Loans --------------------------------------- (In Thousands) Amounts due: One year or less .............................. $ 5,074 $ 487 $ 504 $ 6,065 ====================================== After one year: More than one year to five years ........... $ 9,607 $ 849 $ 5,222 $15,678 More than five years to ten years .......... 674 126 225 1,025 More than ten years ........................ 4,371 -- -- 4,371 --------------------------------------- Total due after September 30, 1997 ...... $ 14,652 $ 975 $ 5,447 $21,074 ======================================= Interest rate terms on amounts due after one year: Fixed ...................................... $ 6,740 $ 975 $ 5,447 $13,162 Adjustable ................................. 7,912 -- -- 7,912
One- to Four-Family Loans. The primary lending activity of the Bank has been the extension of first mortgage residential loans to enable borrowers to purchase existing one- to four-family homes or to construct new one- to four-family homes. At September 30, 1996 and 1995, the Bank's gross loan portfolio consisted of approximately $17.3 million, or 63.69%, and $13.1 million, or 66.72%, respectively of loans secured by one- to four-family residential real estate. The predominant type of first-mortgage residential loan currently offered by the Savings Bank to loan customers is an adjustable rate mortgage that adjusts on either a one-year or three-year basis with a 30 year amortization. Balloon loans were the predominant type of residential first mortgage loan offered by the Savings Bank prior to September, 1994. Such loans are amortized over a maximum period of 30 years for purposes of computing the borrower's monthly mortgage payments. Under the terms of its standard balloon loan, the Savings Bank is generally obligated, at the option of the borrower, to refinance the loan at the time the balloon payment becomes due, provided that the loan is current at such time. The initial interest rate on each balloon loan offered by the Savings Bank is fixed at the rate prevailing at the time that the loan is originated. Most of the balloon loans in the Savings Bank's portfolio further provide that the interest rate will not increase by more than one to two percentage points at the end of each balloon period and that the maximum interest rate will not exceed the initial rate by more than three percentage points either over the life of the mortgage or for as long as the home that is being financed remains owner-occupied. The Bank has attempted to shift the balance between its ARMs and balloon loans by ceasing to offer balloon loans to new customers and encouraging the holders of existing balloon loans to replace such loans, upon maturity, with ARMs. Management believes that the higher interest rate ceilings and the interest rate floor included in its ARMS will result in less interest rate risk to the Bank than the interest rate risk posed by its balloon loans. The Bank's one- to four-family residential loan portfolio also contains a limited number of fixed-rate loans. The Bank has extended, and expects to continue to extend, from time to time, fixed-rate loans to customers who prefer a fixed rate of interest. The Bank will not originate a fixed-rate loan unless such loan complies with the underwriting standards of the Federal Home Loan Mortgage Corporation ("FHLMC") and the FNMA. This will give the Bank the option of either holding such fixed-rate loans in its portfolio or selling such loans in the secondary mortgage market. The Bank's reliance on ARMs and balloon loans, rather than fixed-rate mortgage loans, makes the Bank's first-mortgage residential loan portfolio more interest-rate sensitive. However, since the interest earned on ARMs or on balloon loans which are refinanced on a one-, three- or five-year cycle varies with prevailing interest rates, such loans do not offer the Bank as predictable a cash flow as do longer-term, fixed-rate loans. ARMs and balloon loans which are subject to refinancing on a one-, three- or five-year cycle may also carry increased credit risk as the result of the imposition of higher monthly payments upon borrowers during periods of rising interest rates. During such periods, the risk of default on such loans may increase, due to the upward adjustment of interest costs to the borrower. Management has attempted to minimize such risk by qualifying borrowers at the maximum rate of interest payable under the terms of the ARM or the refinanced balloon loan. The loan-to-value ratio of most single-family first-mortgage loans made by the Bank is 80%. If the loan-to-value ratio exceeds 85%, the Bank requires private mortgage insurance to cover the excess over 85%. If private mortgage insurance is obtained, the mortgage is limited to 95% of the lesser of the appraised value or purchase price. The maximum loan-to-value ratio on a loan for the construction of a new single-family residential home is 80%, and the maximum loan-to-value ratio on loans on two- to four-family dwellings is 75%. The Bank requires title insurance, or an attorney's opinion as to title, and fire and casualty insurance coverage of the property securing any mortgage loan originated or purchased by the Bank. All of the Bank's real estate loans contain due-on-sale clauses which provide that if the mortgagor sells, conveys or alienates the property underlying the mortgage note, the Bank has the right at its option to declare the note immediately due and payable without notice. Multi-family Residential Lending. At September 30, 1996 and 1995, the Bank's gross loan portfolio consisted of approximately $527,000, or 1.94%, and $535,000 or 2.73%, respectively of loans secured by multi-family residential real estate. Multi-family real estate loans are generally limited to 70% of the appraised value of the property or the selling price, whichever is less. Loans secured by multi-family real estate are generally larger and, like commercial real estate loans, involve a greater degree of risk than one- to four-family residential loans. Commercial Real Estate Loans. The Bank has historically made commercial real estate loans on a limited basis. At September 30, 1996 and 1995, the Bank's commercial real estate loan portfolio amounted to $823,000, or 3.03%, and $835,000, or 4.26%, respectively of the Bank's gross loan portfolio. The Bank's practice has been to underwrite such loans based on its analysis of the amount of cash flow generated by the business in which the real estate is used and the resulting ability of the borrower to meet its payment obligations. Although such loans are secured by a first mortgage on the underlying property, the Savings Bank also generally seeks to obtain a personal guarantee of the loan by the owner of the business in which the property is used. Commercial Loans. As of September 30, 1996 and 1995, the Bank's gross loan portfolio consisted of approximately $1,462,000 or 5.39% and $618,000, or 3.15%, respectively of commercial loans secured by accounts receivable, inventory, farm land or outstanding stock issued by a corporation. The Bank has also made, from time to time, unsecured personal loans to the sole proprietors of small businesses on the same terms and conditions on which it makes other unsecured personal loans. Consumer Loans. The Bank originates a variety of consumer loans, generally consisting of installment loans for the purchase of motor vehicles and boats, loans to purchase household goods, loans secured by savings accounts at the Bank and unsecured personal loans. At September 30, 1996 and 1995, the Bank's portfolio of consumer loans totaled approximately $5,951,000, or 21.93%, and $3,900,000, or 19.89%, respectively of the Bank's gross loan portfolio. The Bank may make a loan to finance the purchase of a new and previously untitled motor vehicle or boat in an amount equal to the lesser of 5% over the factory invoice price or 90% of the sticker price of the motor vehicle or boat. Loans for the purchase of used motor vehicles are limited to the amount of the wholesale price listed for the vehicle in the National Automobile Dealers' Association used car guide. Any loan for the purchase of a motor vehicle or boat is secured by the purchased vehicle or boat and is written to amortize over a maximum period of between two and five years, depending on the age of the motor vehicle or boat offered as collateral. Loans to finance the purchase of new household goods may be made in an amount equal to 100% of the sales price of such goods. Such loans are secured by the goods purchase. Loans for the purchase of household goods may be amortized for a maximum period of four years. Loans secured by a customer's savings account with the Savings Bank are limited to an amount equal to 90% of the amount of the deposit. A loan that is secured by a deposit with a specific maturity date is written with a term matching the maturity date of the deposit. Unsecured personal loans are limited to $15,000 per borrower and to a term of three to five years. As a practical matter, most such loans do not exceed $10,000 and are amortized over a period of three years. Loan Processing. Upon receipt of a completed loan application from a prospective borrower, the Savings Bank obtains a credit report from a credit reporting agency and, depending on the type of loan, verifies employment, income and other financial information received from the prospective borrower and requests additional financial information, if necessary. If a loan in the amount of $50,000 or more is secured by real estate, the Bank requires an independent appraisal of the real estate. Real estate securing a loan of $50,000 or less is appraised only by the Bank's internal appraisal committee. Once such information and appraisals are complete, the application is submitted for underwriting by designated staff. The application, together with the underwriter's recommendations, is then forwarded for review and action to the President of the Bank, the Loan Committee of the Board of Directors, or the Board of Directors as a whole, depending on the size and nature of the loan. The Board of Directors of the Bank has established the following guidelines for loan approval authority for all loans originated by the Bank: (i) any lending officer of the Bank may approve loans up to $75,000, (ii) the Bank's President may approve loans up to $125,000, (iii) the Loan Committee of the Board of Directors may approve loans up to $300,000, and (iv) the Board of Directors may approve any loan in excess of $300,000 up to the Bank's applicable legal lending limit. Loan Purchases and Sales. The Bank has occasionally purchased loans originated by other financial institutions, secured by one- to four-family residential properties or commercial real estate located outside of its primary market area. At September 30, 1996 and 1995, the total balance outstanding on first mortgage loans purchased by the Bank was $653,000 and $703,000, respectively. At September 30, 1996 and 1995, the Bank did not have any loans held as available for sale. Historically, the Bank has not sold any of its loans into the secondary market. Delinquencies The Bank's collection procedures with respect to delinquent loans include written notice of delinquency contact by letter or telephone by Bank personnel. Most loan delinquencies are cured within 90 days and no legal action is taken. With respect to mortgage loans, if the delinquency exceeds 180 days, and in the case of consumer loans, if the delinquency exceeds 90 days, the Bank institutes measure to enforce its remedies resulting from the default, including the commencement of foreclosure action of the repossession of collateral. At September 30, 1996, delinquencies in the Bank's loan portfolio were as follows: At September 30, 1996 --------------------------------------------------- 90 Days Total 30-89 Days(1) or More (1) Delinquent Loans ---------------- ---------------- ---------------- Number Principal Number Principal Number Principal of Balance of Balance of Balance Loans of Loans Loans of Loans Loans Of Loans --------------------------------------------------- (Dollars in Thousands) Real estate loans ....... 11 $363 5 $115 16 $478 Commercial loans ........ -- -- 1 1 1 1 Consumer loans .......... 18 119 6 27 24 146 ------------------------------------------------ Total .............. 29 $482 12 $143 41 $625 ================================================ Delinquent loans to to gross loans ....... 1.78% 0.53% 2.31% ===== ===== ===== At September 30, 1995, delinquencies in the Bank's loan portfolio were as follows: At September 30, 1995 --------------------------------------------------- 90 Days Total 30-89 Days (1) Or More (1) Delinquent Loans ---------------- ---------------- ---------------- Number Principal Number Principal Number Principal of Balance of Balance of Balance Loans of Loans Loans of Loans Loans of Loans --------------------------------------------------- (Dollars in Thousands) Real estate loans ........... 3 $44 7 $213 10 $257 Commercial loans ............ -- -- 1 34 1 34 Consumer loans .............. 1 6 6 114 7 120 ------------------------------------------------ Total .................. 4 $50 14 $361 18 $411 ================================================ Delinquent loans to to gross loans ........... 0.26% 1.84% 2.10% ===== ===== ===== (1) The Bank discontinues the accrual of interest on loans when the borrower is delinquent as to a contractually due principal or interest payment and the Bank's management deems collection to be unlikely. The number of loans and principal balance includes nonaccrual loans. Nonperforming Assets The Bank places loans that are 90 days or more past due on nonaccrual status unless such loans are adequately collateralized and in the process of collection. Accrual of interest on a nonaccrual loan is resumed only when all contractually past due payments are brought current and management believes that the outstanding loan principal and contractually due interest are no longer doubtful of collection. Foreclosed properties are recorded at the fair value at the date of foreclosure. Any subsequent reduction in the fair value of a foreclosed property, along with expenses to maintain or dispose of a foreclosed property, is charged against current earnings. As of September 30, 1996 and 1995, the Bank had no foreclosed properties or "real estate owned." The following table sets forth information with respect to the Bank's nonperforming assets for the periods indicated. At September 30, -------------- 1996 1995 -------------- (In Thousands) Loans accounted for on a nonaccrual basis One- to four-family loans .............................. $189 $198 Commercial loans ....................................... 1 34 Consumer loans ......................................... 45 103 -------------- Total nonaccrual loans ............................ $235 $335 -------------- Accruing loans which are contractually past due 90 days or more: One- to four-family loans .............................. 15 15 Consumer loans ......................................... 2 11 ------------- Total 90 days past due and accruing interest ..... 17 26 ------------- Total nonaccrual and 90 days past due loans ....... 252 361 Real estate owned -- -- ------------- Total nonperforming assets ........................ $252 $361 ============= Total nonperforming assets to total assets ........ 0.50% 0.81% ============= Classified Assets. FDIC policies require that each insured depository institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, regulatory examiners have the authority to identify problem assets and, if appropriate, require them to be classified. The Bank reviews and classifies its assets at least quarterly. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets, with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values, questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continued treatment of the asset as an asset on the books of the institution is not warranted. An insured institution is required to establish prudent general allowances for the loan losses with respect to assets classified as substandard or doubtful. The institution is required either to charge off assets classified as loss or to establish a specific allowance for 100% of the portion of the asset classified as loss. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information available to management at such time. While management believes the Bank's allowance for loan losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurances can be given that the Bank's level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Bank or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses. The allowance is based upon a number of factors, including asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, management's assessments of the credit risk inherent in the portfolio, historical loan loss experience, and the Bank's underwriting policies. As of September 30, 1996 and 1995, the Bank's allowance for loan losses was 0.43% and 0.58%, respectively, of total loans. The Bank will continue to monitor and modify its allowance for loan losses as conditions dictate. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank's valuation allowance. These agencies may require the Bank to establish additional valuation allowances, based on their judgments of the information available at the time of the examination. It is the policy of the Bank to charge off customer loans when it is determined that they are no longer collectible. The policy for loans secured by real estate, which comprise the bulk of the Bank's portfolio, is to establish loss reserves in accordance with the Bank's loan classification process, based on generally accepted accounting practices. It is the policy of the Bank to obtain an appraisal on all real estate acquired through foreclosure at the time of foreclosure. The following table sets forth activity in the Bank's allowance for loan losses for the periods set forth in the table. Year Ended September 30, -------------- 1996 1995 -------------- (In Thousands) Balance at beginning of period ................................ $113 $ 99 Provision for loan losses ..................................... 64 80 Recoveries: Consumer loans ........................................... 10 4 ------------- Total recoveries .................................... 10 4 ------------- Charge-offs: One- to four-family loans ................................ -- 5 Consumer loans ........................................... 48 65 Commercial ............................................... 22 -- ------------- Total charge-offs ................................... 70 70 ------------- Net charge-offs ..................................... (60) (66) ------------- Balance at end of period ...................................... $117 $113 ============= Ratio of allowance for loan losses to gross loans outstanding at the end of the period ................................. 0.43% 0.58% Ratio of net charge offs to average loans outstanding during the period ............................................... 0.27% 0.36% Ratio of allowance for loan losses to total nonperforming assets at the end of the period .......................... 46.43% 31.30% =============== 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. At September 30, ---------------------------------------------------------------------------------- 1996 1995 ------------------------------------- ----------------------------------------- As % Of As % of As % of As % of Gross Loans in Gross Loans in Loans in Category to Loans in Category to Amount Category Gross Loans Amount Category Gross Loans ---------------------------------------------------------------------------------- (Dollars in Thousands) Mortgage Loans: One- to four-family .................. $ 10 0.05% 63.69% $ 25 0.19% 66.72% Multi-family ......................... -- -- 1.94% -- -- 2.73% Commercial real estate ............... -- -- 3.03% -- -- 4.26% Other loans .......................... -- secured by real estate ....................... -- -- 4.02% -- -- 3.25% ------------------------------------------------------------------------------- Total morgage loans ............ 10 0.05% 72.68% 25 0.17% 76.96% ------------------------------------------------------------------------------- Commercial and Consumer Loans: Commercial ........................ 26 1.78% 5.39% 22 3.56% 3.15% Consumer .......................... 41 0.88% 17.09% 35 1.05% 16.95% Home equity lines of credit ....... -- -- 3.68% -- -- 0.09% Other consumer loans .............. -- -- 1.16% -- -- 2.85% ------------------------------------------------------------------------------- Total commercial and consumer loans ........... 67 0.90% 27.32% 57 1.26% 23.04% ------------------------------------------------------------------------------- Total Allocated ......................... 77 0.28% 100.00% 82 0.42% 100.00% ======= ======= Unallocated ............................. 40 0.15% 31 0.16% ---------------------- ---------------------- Total allowance for loan losses ......... $117 0.43% $113 0.58% ====================== ======================
Investment Activities The investment policies of the Company and the Bank, as established by the respective Board of Directors, attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk and complement the Company's lending activities. The investment policies generally limit investments to government and federal agency-backed securities and other non-government guaranteed securities, including corporate debt obligations, that are investment grade. The investment policies provide authority to invest in U.S. Treasury and U.S. Government guaranteed securities, securities backed by federal agencies such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal Farm Credit Bureau ("FFCB"), mortgage-backed securities with maximum maturities of 20 years which are backed by federal agency securities, obligations of state and political subdivisions with at least an "A" rating, certificates of deposit and securities issued by mutual funds which invest in securities consistent with the Company's or Bank's allocable investments. The investment policies provide that the President is authorized to execute all transactions within specified limits which are reviewed by the Board of Directors on a monthly basis. From time to time, the Board of Directors may authorize the President to exceed the policy limitations. The Bank's Interest Rate Risk Committee monitors compliance with the Bank's investment policy and generally meets on a quarterly basis. At September 30, 1996, the Company had $16.2 million in investment securities consisting of $1.8 million invested in mortgage-backed securities, $13.4 million invested in U.S. Government and agency, $752,000 invested in local municipal securities, and $165,000 invested in FHLB stock. Investments in mortgage-backed securities involve a risk that actual prepayments will exceed prepayments estimated over the life of the security which may result in a loss of any premium paid for such instruments thereby reducing the net yield on such securities. In addition, if interest rates increase the market value of such securities may be adversely affected, which, in turn, would adversely affect stockholders' equity to the extent such securities are held as available for sale. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators through intermediaries (generally federal government-sponsored enterprises) that pool and repackage the participation interest in the form of securities to investors such as the Bank. Such federal government-sponsored enterprises, which guarantee the payment of principal and interest to investors, include the FHLMC, FNMA and GNMA. Mortgage-backed securities generally increase the quality of the Bank's assets by virtue of the guarantees that back them. They are also more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Bank. The Bank has no investments in collateralized mortgage obligations or real estate investment conduits. The Bank holds all mortgage-backed securities as available for sale. The following tables set forth certain information regarding the amortized cost and market values of the Company's securities at the dates indicated. At September 30, ------------------------------------- 1996 1995 ------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------------------------------------- Available for Sale (In Thousands) U.S. Government and agency securities .......... $13,477 $13,441 $ 2,000 $ 2,026 Obligations of states and political subdivisions 606 603 -- -- ------------------------------------ Total Available for Sale ................. $14,083 $14,044 $ 2,000 $ 2,026 ====================================
At September 30, ------------------------------------ 1996 1995 ---------------- ------------------ Amortized Fair Amortized Fair Cost Value Cost Value ------------------------------------ Held to Maturity (In Thousands) U.S. Government and agency securities .......... $ - $ - $8,479 $ 8,455 Obligations of states and political subdivisions 149 143 165 169 Mortgage backed securities ..................... 1,838 1,948 2,335 2,517 ---------------------------------- Total Held to Maturity ................... $1,987 $2,091 $10,979 $11,141 ==================================
The following table sets forth information concerning the carrying value, weighted average yields, and maturities of the Company's investment securities at September 30, 1996. Less One Than One Year To Five Years Five to Ten Years Over Ten Years Total --------------- ---------------- -------------------- ---------------- ----------------- Weighted Weighted Weighted Weighted Weighted Fair Average Fair Average Fair Average Fair Average Fair Average Value Yield Value Yield Value Yield Value Yield Value Yield ---------------------------------------------------------------------------------------------- Available for Sale (Dollars in Thousands) U.S. Government and agency securities ..................... $ 6,020 6.06% $6,421 5.62% $ -- - $1,000 7.37% $13,441 5.95% Obligations of states and political subdivisions (2) .... -- -- -- -- 506 4.91% 97 4.70% 603 4.88% ---------------------------------------------------------------------------------------------- Total Available for Sale ......... $ 6,020 6.06% $6,421 5.62% $ 506 4.91% $1,097 7.13% $14,044 5.90% ==============================================================================================
Less Than One Year One to Five Years Five to Ten Years Over Ten Years Total ------------------ ------------------- ------------------ ------------------ ------------------ Weighted Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield --------------------------------------------------------------------------------------------------- Held to Maturity (1) Obligations of states and political subdivisions (2) $ - - $ - - $ 41 5.30% $ 108 5.90% $ 149 5.73% -------------------------------------------------------------------------------------------------- Total Held to Maturity $ - - $ - - $ 41 5.30% $ 108 5.90% $ 149 5.73% ================================================================================================== (1) Excludes mortgage-backed securities. (2) These investments yield lower interest rates as they are exempt from federal taxes.
Deposit Activities and Other Sources of Funds General. The Company's primary sources of funds for use in lending and investing and for other general purposes are deposits at the Bank and proceeds from principal and interest payments on loans, mortgage-backed securities and investment securities. Contractual loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. Deposit Accounts. The Bank attracts deposits within its primary market area by offering a variety of deposit accounts, including noninterest bearing checking accounts, negotiable order of withdrawal ("NOW") accounts, money-market accounts, passbook savings accounts and certificates of deposit. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. Management generally reviews on a weekly basis the interest rates set for its deposit accounts. The Bank also relies on customer service and long-standing relationships with customers to attract and retain deposits. The following table sets forth the distribution of the Bank's deposit accounts at the dates indicated and the weighted average nominal rates on each category of deposits presented. At September 30, ---------------------------------------------------------------- 1996 1995 ------------------------------ ---------------------------- Percent of Weighted Percent of Weighted Average Average Average Average Average Total Nominal Average Total Nominal Balance Deposits Rate Balance Deposits Rate ---------------------------------------------------------------- (Dollars in Thousands) Transaction accounts: Noninterest bearing $ 19 0.06% - $ 15 0.05% - Interest-bearing (NOW) 4,393 14.83% 1.73% 3,720 13.06% 1.77% Money market 1,918 6.48% 3.34% 2,698 9.48% 3.11% Passbook 2,952 9.97% 3.08% 3,335 11.71% 2.49% Certificates of deposit 20,333 68.66% 5.26% 18,701 65.70% 5.16% ---------------------------------------------------------------- Total deposit accounts $29,615 100.00% 4.40% $28,469 100.00% 4.21% ================================================================
The following table indicates the amount of the Bank's jumbo certificates of deposit and other time deposits of $100,000 or more by time remaining until maturity as of September 30, 1996. Jumbo certificates of deposit require minimum deposits of $100,000 and rates paid on such accounts are negotiable. Certificates Maturity Period of Deposits - ------------------------------------------------- (In Thousands) Less than three months $ 491 Three through six months 731 Six through twelve months - Over twelve months 667 ------- Total $ 1,889 ======= Borrowings. The Bank may rely on advances from the FHLB of Chicago in the event of a reduction in available funds from other sources. The Bank is a member of the FHLB of Chicago, which functions as a central reserve bank providing credit for savings and loan associations and other member financial institutions. As a member, the Bank is required to own capital stock in the FHLB of Chicago and is authorized to apply for advances on the security of such stock and certain of its mortgage-based loans and other assets, provided that certain standards relating to creditworthiness have been met. The Bank has borrowed from the FHLB of Chicago, from time to time, on an overnight basis. At September 30, 1996 and 1995, the Bank had no outstanding borrowings from the FHLB. Subsidiary Activities The Bank has one wholly-owned service corporation, Centralia SLA, an Illinois corporation. Centralia SLA is engaged in the business of selling mortgage life, mortgage disability, credit life and credit disability insurance to mortgage and consumer loan customers of the Bank interested in buying such insurance. As of September 30, 1996, the Bank's investment in Centralia SLA amounted to approximately $13,000 or 0.03% of the Bank's total assets. Insurance commissions accounted for $9,000 or approximately 2.0% of the Bank's pre-tax income during the year. Management continues to place less emphasis on the sale of insurance and anticipates that the amount of such income will continue to decline over the next few years. Competition The Bank's deposit and lending base is presently concentrated in the city of Centralia and the surrounding area, including Central City to the north, Wamac to the South, Salem to the east and Hoffman to the west. This area includes portions of the Illinois counties of Washington, Jefferson, Marion and Clinton, which are primarily agricultural. Population growth in those four counties has remained relatively flat in recent years. Management believes that, in recent years, total deposits have grown only modestly and there has been relatively little new construction or real estate development in the four-county area. Management further believes that, as a result, any growth in the mortgage lending business within the area has also been modest. The Bank has five principal competitors for deposits and lending business within the city of Centralia. All five competitors are branches or subsidiaries of commercial banks. Of these five competitors, two are affiliated with multi-bank holding companies based in St. Louis, one is affiliated with a regional bank based in St. Louis, and the remaining two are branches of independent, community banks which have their main offices in the neighboring towns of Hoffman and Irvington. Each of the three St. Louis-based banks with affiliates in Centralia have established those branches during the last five years through the acquisition of formerly independent community banks. The multi-bank holding companies and regional bank have substantially greater financial resources and currently offer a larger array of financial services than the Bank. Each of the independent banks also has a slightly larger asset base than the Bank. Given the relative lack of growth in its market area and the number and greater resources of the banks with which it competes, the Bank has experienced, and expects to continue to experience, strong competition in attracting deposits and in its mortgage and consumer loan business. In order to retain existing and attract new deposits, the Bank has historically paid deposit rates at the higher end of the range offered by its competitors. All of the Bank's principal competitors in Centralia are, moreover, branches or subsidiaries of commercial banks with deposits insured under the BIF. Unlike the Bank, such competitors are able to take advantage of the reduction in the insurance premiums to be paid on BIF-insured deposits. Management also believes that, in order to compete effectively for both deposits and lending business, the Bank must enhance the retail services it offers, so that its range of services is more comparable to the range offered by its larger competitors. In providing such services, management hopes to be able to capitalize on the Bank's ability, as a community bank, to identify and respond more quickly to local customer needs. The Bank has expanded the retail services it offers to customers to include, for example, travelers' checks, money orders, debit cards and ATM services. Personnel As of September 30, 1996, the Company had a total of fourteen full-time employees and two part-time employees, all of whom were employed at the Bank level. The Company's employees are not represented by a union or collective bargaining group. The Company considers its relationship with its employees to be satisfactory. Regulation General Financial institutions and their holding companies are extensively regulated under federal and state law by various regulatory authorities including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the FDIC and the Commissioner. The financial performance of the Company and the Savings Bank may be affected by such regulation, although the extent to which they may be affected cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and the Savings Bank establishes a comprehensive framework for their operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors of the Savings Bank, rather than the stockholders of the Company. The following references to material statutes and regulations affecting the Company and the Bank are brief summaries thereof and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and the Bank. The Savings Bank General. The Bank is an Illinois-chartered savings bank, the deposit accounts of which are insured by the SAIF of the FDIC. As a SAIF-insured, Illinois-chartered savings bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the Commissioner, as the chartering authority for Illinois savings banks, and the FDIC, as administrator of the SAIF, and to the statutes and regulations administered by the Commissioner and the FDIC governing such matters as capital standards, mergers, establishment of branch offices, subsidiary investments and activities and general investment authority. The Bank is required to file reports with the Commissioner and the FDIC concerning its activities and financial condition and will be required to obtain regulatory approvals prior to entering into certain transactions, including mergers with, or acquisitions of, other financial institutions. The Commissioner and the FDIC have extensive enforcement authority over Illinois-chartered savings banks, such as the Bank. This enforcement authority includes, among other things, the ability to issue cease-and-desist or removal orders, to assess civil money penalties and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe and unsound practices. The Commissioner has established a schedule for the assessment of "supervisory fees" upon all Illinois savings banks to fund the operations of the Commissioner. These supervisory fees are computed on the basis of each savings bank's total assets (including consolidated subsidiaries) and are payable at the end of each calendar quarter. A schedule of fees has also been established for certain filings made by Illinois savings banks with the Commissioner. The Commissioner also assesses fees for examinations conducted by the Commissioner's staff, based upon the number of hours spent by the Commissioner's staff performing the examination. The system of regulation and supervision applicable to the Bank establishes a comprehensive framework for its operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors of the Bank. Changes in the regulatory framework could have a material adverse effect on the Bank and its operations which, in turn, could have a material adverse effect on the Company. Deposit Insurance Premiums Recent Developments Affecting Deposit Insurance Premiums. Deposits of the Bank are currently insured by the FDIC under the SAIF. The FDIC also maintains another insurance fund, the BIF, which primarily insures commercial bank and some state savings bank deposits. Applicable law requires that the SAIF and BIF funds each achieve and maintain a ratio of insurance reserves to total insured deposits equal to 1.25%. In 1995, the BIF reached this 1.25% reserve level, and the FDIC announced a reduction in BIF premiums for most banks. Based on this reduction, the highest rated institutions (approximately 92 percent of the nearly 11,000 BIF-insured banks) will pay the statutory annual minimum of $2,000 for FDIC insurance. Rates for all other institutions were reduced to $.04 per $100 as well, leaving a premium range of $.03 to $.27 per $100 instead of the previous $.04 to $.31 per $100. Currently, SAIF-member institutions pay deposit insurance premiums based on a schedule of $0.23 to $0.31 per $100 of deposits. Effective September 30, 1996, legislation was enacted to fund the Savings Association Insurance Fund (SAIF) by assessing SAIF insured institutions a one-time special assessment of 65.7 basis points on March 31, 1995 deposits. The assessment for the Bank is $188,000 as of September 30, 1996. Additionally, as part of the purchase agreement with Kankakee Federal Savings and Loan (Kankakee), the Company agreed to reimburse Kankakee for the portion of Kankakee's assessment which related to the Carlyle, Illinois branch which was approximately $54,000. The $242,000 assessment payable is included in other liabilities. The assessment for the Bank is not deductible for tax purposes until paid, therefore, deferred tax assets of $94,000 have been provided for the tax impact of the assessment. Capital Requirements. Under the Illinois Savings Bank Act ("ISBA") and the regulations of the Commissioner, an Illinois savings bank must maintain a minimum level of total capital equal to the higher of 4% of total assets or the amount required to maintain insurance of deposits by the FDIC. The Commissioner has the authority to require an Illinois savings bank to maintain a higher level of capital if the Commissioner deems such higher level necessary based on the savings bank's financial condition, history, management or earnings prospects. FDIC-insured institutions are required to follow certain capital adequacy guidelines which prescribe minimum levels of capital and require that institutions meet certain risk-based and leverage capital requirements. Under the FDIC capital regulations, an FDIC-insured institution is required to meet the following capital standards: (i) "Tier 1 capital" in an amount not less than 4% of average adjusted total assets; (ii) "Tier 1 capital" in an amount not less than 4% of risk-weighted assets; and (iii) "total capital" in an amount not less than 8% of risk-weighted assets. FDIC-insured institutions in the strongest financial and managerial condition (with a composite rating of "1" under the Uniform Financial Institutions Rating System established by the Federal Financial Institutions Examination Council) are required to maintain "Tier 1 capital" equal to at least 4% of total assets (the "leverage limit" requirement). For all other FDIC-insured institutions, the minimum leverage limit requirement is 3% of total assets plus at least an additional 100 to 200 basis points. Tier 1 capital is defined to include the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus), and minority interests in consolidated subsidiaries, less all intangible assets (other than qualifying servicing rights, qualifying purchased credit-card relationships and qualifying supervisory goodwill), certain identified losses (as defined in the FDIC's regulations) and investments in certain subsidiaries. FDIC-insured institutions also are required to adhere to certain risk-based capital guidelines which are designed to provide a measure of capital more sensitive to the risk profiles of individual banks. Under the risk-based capital guidelines, capital is divided into two tiers: core (Tier 1) capital, as defined above, and supplementary (Tier 2) capital. Tier 2 capital is limited to 100% of core capital and includes cumulative perpetual preferred stock, perpetual preferred stock for which the dividend rate is reset periodically based on current credit standing, regardless of whether dividends are cumulative or noncumulative, mandatory convertible securities, subordinated debt, intermediate preferred stock and the allowance for possible loan and lease losses. The allowance for possible loan and lease losses includable in Tier 2 capital is limited to a maximum of 1.25% of risk-weighted assets. Total capital is the sum of Tier 1 and Tier 2 capital. The risk-based capital framework assigns balance sheet assets to one of four broad risk categories which are assigned risk-weights ranging from 0% to 100% based primarily on the degree of credit risk associated with the obligor. Off-balance sheet items are converted to an on-balance sheet "credit equivalent" amount utilizing certain conversion factors. The sum of the four risk-weighted categories equals risk-weighted assets. The following table presents the Bank's capital position relative to its capital requirements on September 30, 1996. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------- ------------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------------- As of September 30, 1996: Total Capital (to Risk Weighted Assets) Consolidated $ 12,925,000 60.30% $ 1,715,000 = 8.0% N/A Centralia Savings Bank $ 8,742,000 42.18% $ 1,658,000 = 8.0%= $ 2,072,000 = 10.0% Tier I Capital (to Risk Weighted Assets) Consolidated $ 12,087,000 56.39% $ 857,000 = 4.0% $ N/A Centralia Savings Bank $ 7,903,000 38.14% = $ 829,000 = 4.0% = $ 1,243,000 = 6.0% Tier I Capital (to Average Assets) Consolidated $ 12,087,000 27.72% $ 1,744,000 = 4.0% $ N/A Centralia Savings Bank $ 7,903,000 19.67% = $ 1,607,000 = 4.0% = $ 2,009,000 = 5.0%
Dividends. Under the ISBA, dividends may be paid by the Bank out of its net profits (i.e., earnings from current operations, investments and other assets plus actual recoveries on loans, net of current expenses including dividends or interest on deposits, additions to reserves as required by the Commissioner, actual losses, accrued dividends on preferred stock, if any, and all state and federal taxes). The written approval of the Commissioner must be obtained, however, before the Bank may declare dividends in any calendar year in an amount in excess of 50% of its net profits for that calendar year. In addition, before declaring a dividend on its capital stock, the Bank must transfer no less than one-half of its net profits of the preceding half year to its paid-in surplus until it shall have paid-in surplus equal to 20% of its capital stock. Finally, the Bank will be unable to pay dividends in an amount which would reduce its capital below the greater of (i) the amount required by the FDIC, (ii) the amount required by the Commissioner or (iii) the amount required for the liquidation account to be established by the Bank in connection with the Conversion. The Commissioner and the FDIC also have the authority to prohibit the payment of any dividends by the Savings Bank if the Commissioner or the FDIC determines that the distribution would constitute an unsafe or unsound practice. For the fiscal year ended September 30, 1996, the Bank's net profits were approximately $175,000 and the Savings Bank could have paid dividends totaling $87,500 without the written approval of the Commissioner. Community Reinvestment Act Requirements. The FDIC, the Federal Reserve Board, the Office of Thrift Supervision ("OTS") and the Office of the Comptroller of the Currency ("OCC") have jointly issued a final rule (the "Final Rule") under the Community Reinvestment Act (the "CRA"). The Final Rule eliminates the existing CRA regulation's twelve assessment factors and substitutes a performance based evaluation system. The Final Rule will be phased in over a period of time and become fully effective by July 1, 1997. Under the Final Rule, an institution's performance in meeting the credit needs of its entire community, including low- and moderate-income areas, as required by the CRA, will generally be evaluated under three tests: the "lending test," the "investment test," and the "service test." However, an independent financial institution with assets of less than $250 million, or a financial institution with assets of less than $250 million that is a subsidiary of a holding company with assets of less than $1 billion, will be evaluated under a streamlined assessment method based primarily on its lending record. The streamlined test considers an institution's loan-to-deposit ratio adjusted for seasonal variation and special lending activities, its percentage of loans and other lending related activities in the assessment area, its record of lending to borrowers of different income levels and businesses and farms of different sizes, the geographic distribution of its loans, and its record of taking action, if warranted, in response to written complaints. In lieu of being evaluated under the three assessment tests or the streamlined test, a financial institution can adopt a "strategic plan" and elect to be evaluated on the basis of achieving the goals and benchmarks outlined in the strategic plan. Based upon a review of the Final Rule, management of the Company does not anticipate that the new CRA regulations will adversely affect the Savings Bank. The Company General. On October 5, 1995, the Company became the sole stockholder of the Bank. As such, the Company is a bank holding company. As a bank holding company, the Company is subject to regulation by the Federal Reserve Board under the Bank Holding Company Act (BHCA). In accordance with Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not do so absent such policy. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve Board and is required to file periodic reports of its operations and such additional information as the Federal Reserve Board may require. Because the Bank is chartered under Illinois law, the Company is also subject to registration with, and regulation by, the Commissioner under the ISBA. The BHCA requires prior Federal Reserve Board approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than five percent of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the Federal Reserve Board has determined by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company is a legal entity separate and distinct from its subsidiary bank or banks. Normally, the major source of a holding company's revenue is dividends a holding company receives from its subsidiary banks. The right of a bank holding company to participate as a stockholder in any distribution of assets of its subsidiary banks upon their liquidation or reorganization or otherwise is subject to the prior claims of creditors of such subsidiary banks. The subsidiary banks are subject to claims by creditors for long-term and short-term debt obligations, including substantial obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, in the event of a loss suffered by the FDIC in connection with a banking subsidiary of a bank holding company (whether due to a default or the provision of FDIC assistance), other banking subsidiaries of the holding company could be assessed for such loss. Federal laws limit the transfer of funds by a subsidiary bank to its holding company in the form of loans or extensions of credit, investments or purchases of assets. Transfers of this kind are limited to ten percent of a bank's capital and surplus with respect to each affiliate and to twenty percent to all affiliates in the aggregate, and are also subject to certain collateral requirements. These transactions, as well as other transactions between a subsidiary bank and its holding company, must also be on terms substantially the same as, or at least as favorable as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms or under circumstances, including credit standards, that would be offered to, or would apply to, non-affiliated companies. Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the FDIC for the Savings Bank. The Company's Tier 1 and total capital significantly exceed the Federal Reserve Board's capital adequacy requirements. Other Regulations. FDICIA. FDICIA was enacted on December 19, 1991. In addition to providing for the recapitalization of the Bank Insurance Fund ("BIF") of the FDIC, FDICIA represents a comprehensive and fundamental change to banking supervision. FDICIA imposes relatively detailed standards and mandates the development of additional regulations governing nearly every aspect of the operations, management and supervision of banks and bank holding companies like the Company and the Bank. As required by FDICIA, and subsequently amended by the Riegle Community Development and Regulatory Improvement Act of 1994, the federal banking regulators adopted (effective August 9, 1995) interagency guidelines establishing standards for safety and soundness for depository institutions on matters such as internal controls, loan documentation, credit underwriting, interest-rate risk exposure, asset growth, and compensation and other benefits (the "Guidelines"). In addition, the federal banking regulators have proposed asset quality and earnings standards to be added to the Guidelines. The agencies expect to request a compliance plan from an institution whose failure to meet one or more of the standards is of such severity that it could threaten the safe and sound operation of the institution. FDIC regulations enacted under FDICIA also require all depository institutions to be examined annually by the banking regulators and depository institutions having $500 million or more in total assets to have an annual independent audit, an audit committee comprised solely of outside directors, and to hire outside auditors to evaluate the institution's internal control structure and procedures and compliance with laws and regulations relating to safety and soundness. The FDIC, in adopting the regulations, reiterated its belief that every depository institution, regardless of size, should have an annual independent audit and an independent audit committee. FDICIA requires the banking regulators to take prompt corrective action with respect to depository institutions that fall below certain capital levels and prohibits any depository institution from making any capital distribution that would cause it to be considered undercapitalized. Regulations establishing five capital categories of well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized became effective December 19, 1992. Institutions that are not adequately capitalized may be subjected to a broad range of restrictions on their activities and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution. Only well capitalized institutions and adequately capitalized institutions receiving a waiver from the FDIC will be permitted to accept brokered deposits, and only those institutions eligible to accept brokered deposits may provide pass-through deposit insurance for participants in employee benefit plans. In other respects, FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for undercapitalized institutions. A range of other regulations adopted as a result of FDICIA include requirements applicable to closure of branches; additional disclosures to depositors with respect to terms and interest rates applicable to deposit accounts; requirements for the banking agencies to adopt uniform regulations for extensions of credit secured by real estate; modification of accounting standards to conform to generally accepted accounting principles including the reporting of off-balance sheet items and supplemental disclosure of estimated fair market value of assets and liabilities in financial statements filed with the banking regulators; increased penalties in making or failing to file assessment reports with the FDIC; greater restrictions on extensions of credit to directors, officers and principal stockholders; and increased reporting requirements on agricultural loans and loans to small businesses. As required by FDICIA, the FDIC has established a risk-based assessment system for the deposit insurance provided to depositors at depository institutions whereby assessments to each institution are calculated upon the probability that the insurance fund will incur a loss with respect to the institution, the likely amount of such loss, and the revenue needs of the insurance fund. Under the system, deposit insurance premiums are based upon an institution's assignment to one of three capital categories and a further assignment to one of three supervisory subcategories within each capital category. The result is a nine category assessment system with initial assessment rates ranging from twenty-three cents to thirty-one cents per one hundred dollars of deposits in an institution. The classification of an institution into a category will depend, among other things, on the results of off-site surveillance systems, capital ratio, and CAMEL rating (a supervisory rating of capital, asset quality, management, earnings and liquidity). The CDR Act. On September 23, 1994, the Riegle Community Development and Regulatory Improvement Act of 1994 (the "CDR Act") was enacted. The CDR Act includes more than 50 regulatory relief provisions designed to streamline the regulatory process for banks and thrifts and to eliminate certain duplicative regulations and paperwork requirements established after, and largely as a result of, the savings and loan debacle. Well run community banks with less than $250 million in assets will be examined every 18 months rather than annually. The application process for forming a bank holding company has been greatly reduced. Also, the requirement that call report data be published in local newspapers has been eliminated. Also, the CDR Act establishes dual programs and provides funding in the amount of $382 million to provide for development services, lending and investment in distressed urban and rural areas by community development financial institutions and banks. In addition, the CDR Act includes provisions relating to flood insurance reform, money laundering, regulation of high-cost mortgages, and small business and commercial real estate loan securitization. The Branching Act. On September 29, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Branching Act") was enacted. Under the Branching Act, beginning September 29, 1995, adequately capitalized and adequately managed bank holding companies are allowed to acquire banks across state lines, without regard to whether the transaction is prohibited by state law, however, they are required to maintain the acquired institutions as separately chartered institutions. Any state law relating to the minimum age of target banks (not to exceed five years) will be preserved. Under the Branching Act, the Federal Reserve Board will not be permitted to approve any acquisition if, after the acquisition, the bank holding company would control more than 10% of the deposits of insured depository institutions nationwide or 30% or more of the deposits in the state where the target bank is located. The Federal Reserve Board could approve an acquisition, notwithstanding the 30% limit, if the state waives the limit either by statute, regulation or order of the appropriate state official. In addition, under the Branching Act beginning on June 1, 1997, banks will be permitted to merge with one another across state lines and thereby create a main bank with branches in separate states. After establishing branches in a state through an interstate merger transaction, the bank could establish and acquire additional branches at any location in the state where any bank involved in the merger could have established or acquired branches under applicable federal or state law. The responsible federal agency will not be permitted to approve any merger if, after the merger, the resulting entity would control more than 10% of the deposits of insured depository institutions nationwide or 30% or more of the deposits in any state affected by the merger. The responsible agency could approve a merger, notwithstanding the 30% limit, if the home state waives the limit either by statute, regulation or order of the appropriate state official. Under the Branching Act, states may adopt legislation permitting interstate mergers before June 1, 1997. In contrast, states may adopt legislation before June 1, 1997, subject to certain conditions, opting out of interstate branching. If a state opts out of interstate branching, no out-of-state bank may establish a branch in that state through an acquisition or de novo, and a bank whose home state opts out may not participate in an interstate merger transaction. Illinois has adopted legislation permitting interstate mergers beginning on June 1, 1997. Impact of New Accounting Standards Accounting for mortgage servicing rights In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 122 (Statement 122), "Accounting for Mortgage Servicing Rights." Statement 122 requires the Company to recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. If the Company acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained, the Company should allocate the total cost of the mortgage loans to mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The mortgage servicing rights should be amortized in proportion to and over the period of estimated net servicing income. Statement 122 is effective for fiscal years beginning after December 15, 1995. The Company will be required to adopt Statement 122 for the fiscal year ending September 30, 1997. The Company believes the adoption of Statement 122 will not have a material impact on the consolidated financial statements. Accounting for stock-based compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 (FAS 123), "Accounting for Stock-Based Compensation". FAS 123 established a fair value based method of accounting for stock options and other equity instruments. FAS 123 permits the continued use of the intrinsic value method included in Accounting Principals Board Opinion 25 (APB-25), "Accounting for Stock Issued to Employees", but regardless of the method used to account for the compensation cost associated with stock option or similar plans, it requires employers to disclose information required by FAS 123. The Company plans to adopt the disclosure requirements of FAS 123. The disclosure requirement of FAS 123 is effective for fiscal years beginning after December 15, 1995. The Company will be required to include these disclosures in their financial statements for the year ended September 30, 1997. Accounting for transfers and servicing of financial assets and extinguishments of liabilities In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 125 (FAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". FAS 125 requires that an entity should only recognize those assets that it controls and liabilities it has incurred. Assets should be recognized until control has been surrendered, and liabilities should be recognized until they have been extinguished. Recognition of financial assets and liabilities will not be affected by the sequence of transactions unless the effect of the transactions is to maintain effective control over a transferred financial asset. FAS 125 is effective for transactions after December 31, 1996. The Company believes the adoption of FAS 125 will not have a material effect on the consolidated financial statements. Reclassifications Certain reclassifications have been made to the balances as of September 30, 1995, with no effect on net income, to be consistent with the classifications adopted for September 30, 1996. Executive Officers of the Registrant The following table sets forth certain information as of September 30, 1996 with respect to the executive officers of the Company and the Savings Bank. Name Age Position - ------------------ --- ---------------------------------------- K. Gary Reynolds 45 President and Chief Executive Officer of the Company and the Savings Bank Stephen J. Greene 38 Vice President of the Savings Bank K. Gary Reynolds has been the president and chief executive officer of the Savings Bank since May, 1994 and the president and chief executive officer of the Company since its formation. Prior to that time, he was an examiner with the OCC. Stephen J. Greene has been a vice president of the Savings Bank since January, 1995. Mr. Greene was an examiner with the OCC from November, 1993 to December, 1994. Prior to that time, he was a vice president of Mercantile Bank of Centralia, N.A. where his responsibilities included managing a $25 million loan portfolio consisting of residential real estate loans and consumer loans. Item 2. Description of Property The following table sets forth information concerning the main office and the branch office of the Bank, at September 30, 1996. At September 30, 1996, the Company's premises had an aggregate net book value of approximately $347,000. Lease Expiration Net Book Location Year Opened Owned/Leased Date Value - -------------------------------------------------------------------------------- (In Thousands) Main office 200 South Poplar Street 1975 Owned N/A $107 Centralia, Illinois Branch office 801 12th Street 1996 (1) Owned N/A 240 Carlyle, Illinois ---- $347 ==== (1) The Carlyle branch was purchased during September 1996. The branch's original opening date was 1989. Item 3. Legal Proceedings The Company is, from time to time, a party to legal proceedings arising in the ordinary course of its business, including legal proceedings to enforce its rights against borrowers. The Company is not currently a party to any legal proceedings which could reasonably be expected to have a material adverse effect on the consolidated financial condition or operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended September 30, 1996. PART II Item 5. Market for Common Equity and Related Shareholder Matters Information relating to the market for Registrant's common stock and related stockholder matters appears under "Shareholder Information" in the 1996 Annual Report and is incorporated herein by reference. Item 6. Management's Discussion and Analysis or Plan of Operations The above captioned information appears under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1996 Annual Report to Stockholders and is incorporated herein by reference. Item 7. Financial Statements The consolidated financial statements of CSB Financial Group, Inc. and subsidiary as of September 30, 1996 and 1995, together with the report of McGladrey & Pullen, LLP appears in the 1996 Annual Report to Stockholders and is incorporated herein by reference. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Company hereby incorporates by reference the information called for by item 8 of Form 10KSB from the Form 8-K dated April 17, 1996 filed by the Company with the SEC in connection with the dismissal of Larsson, Woodyard & Henson, LLP as the Company's independent auditors and the engagement of McGladrey & Pullen, LLP as the Company's independent auditors for the fiscal year ending December 31, 1996. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The information relating to directors and executive officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 10, 1997. Item 10. Executive Compensation The information relating to executive compensation is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 10, 1997. Item 11. Security Ownership of Certain Beneficial Owners and Management The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 10, 1997. Item 12. Certain Relationships and Related Transactions The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 10, 1997. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index and exhibits attached. (b) Form 8-K No Reports on Form 8-K were filed during the last quarter of the fiscal year covered by this Form 10-KSB. Exhibit No. Exhibit 3.1 Certificate of Incorporation of CSB Financial Group, Inc. (incorporated herein - by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form SB-2 as originally filed on March 1, 1995, Registration No. 33-89842) 3.2 Bylaws of CSB Financial Group, Inc. (incorporated herein by reference to - Exhibit 3.2 to the Registrant's Registration Statement on Form SB-2 as originally filed on March 1, 1995, Registration No. 33-89842) 4.1 Specimen Stock Certificate of CSB Financial Group, Inc. (incorporated herein - by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A filed on August 21, 1995, Registration No. 0-26650) 4.2 Articles IV, V, VI, XIV and XVI of CSB Financial Group, Inc.'s Certificate - of Incorporation (see Exhibit 3.1 above) 4.3 Articles II and IV of CSB Financial Group, Inc.'s Bylaws (see Exhibit 3.2 - above) 10.1 Centralia Savings Bank Employee Stock Ownership Plan (incorporated herein by - by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form SB-2 as originally filed on March 1, 1995, Registration No. 33-89842) 10.2 Credit Agreement between CSB Financial Group, Inc. and Centralia Savings - Bank Employee Stock Ownership Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form SB-2 as originally filed on March 1, 1995, Registration No. 33-89842) 10.3 CSB Financial Group, Inc. 1995 Stock Option and Incentive Plan (incorporated - herein by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form SB-2 as originally filed on March 1, 1995, Registration No. 33-89842) 10.4 CSB Financial Group, Inc. Management Development and Recognition Plan and - and Trust Agreement (incorporated herein by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form SB-2 as originally filed on March 1, 1995, Registration No. 33-89842) 10.5 Employment Agreement between Centralia Savings Bank and K. Gary - Reynolds (incorporated herein by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form SB-2 as originally filed on March 1, 1995, Registration No. 33-89842) 13.1 CSB Financial Group, Inc. 1996 Annual Report to Stockholders - 21.1 Subsidiaries of the Registrant (incorporated herein by reference to Exhibit - 21.1 to the Registrant's Registration Statement on Form SB-2 as originally filed on March 1, 1995, Registration No. 33-89842) 23.1 Consent of Larsson, Woodyard & Henson, LLP - 23.2 Consent of McGladrey & Pullen, LLP - 27.1 Financial Data Schedule - 99.1 Report of Larrson, Woodyard & Henson, LLP on the Registrant's financial - statements for the fiscal year ended September 30, 1995 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CSB FINANCIAL GROUP, INC. (Registrant) Date: December 20, 1996 By: /s/ K. Gary Reynolds ---------------------------- K. Gary Reynolds, President, Chief Executive Officer and Director In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ K. Gary Reynolds /s/ A. John Byrne - ----------------------------------------- ------------------------ K. Gary Reynolds, President, Chief A. John Byrne, Director Executive Officer and Director (Principal Executive Officer, Principal Financial Date: December 20, 1996 Officer and Principal Accounting Officer) Date: December 20, 1996 /s/ Wesley N. Breeze /s/ Michael Donnewald - -------------------------- --------------------------- Wesley N. Breeze, Director Michael Donnewald, Director Date: December 20, 1996 Date: December 20, 1996 /s/ Larry M. Irvin /s/ W. Harold Monken - -------------------------- ---------------------------- Larry M. Irvin, Director W. Harold Monken, Director Date: December 20, 1996 Date: December 20, 1996 EX-13 2 ---------------------------------------- BUSINESS OF THE CORPORATION ---------------------------------------- CSB Financial Group, Inc. (the "Company") was organized as a Delaware corporation on December 12, 1994 to acquire all of the capital stock issued by Centralia Savings Bank (the "Bank"). The Company is engaged in the business of directing, planning and coordinating the business activities of the Bank. In the future, the Company may acquire or organize other operating subsidiaries, although there are no current plans or agreements to do so. The Bank is an Illinois-chartered stock savings bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") through the Savings Association Insurance Fund (the "SAIF"). The Bank was originally chartered in 1879 as a federally chartered savings and loan association, merged with another savings association in the 1970's and converted to a state-chartered savings bank on July 1, 1993 under its current name of Centralia Savings Bank. The Bank conducts its business through its office located at 200 South Poplar Street, Centralia, Illinois 62801, and its telephone number is (618) 532-1918. The Bank provides its customers with a broad range of community banking services. The Bank is primarily engaged in the business of attracting deposits from the general public and using such deposits to invest in oneto four-family residential mortgage loans, and, to a lesser extent, multi-family residential, consumer, commercial business and commercial real estate loans. In addition, the Bank invests in U.S. Government and Agency securities, state and municipal obligations and mortgage-backed securities. CSB FINANCIAL GROUP, INC. 200 South Poplar Centralia, Illinois 62801 (618) 532-1918 ---------------------------- PRESIDENT'S MESSAGE ---------------------------- December 20, 1996 Dear Stockholders: This past year brought many changes to the Bank and new products and services to our customers. In October 1995, we completed our stock offering in connection with the Bank's conversion to the stock form of ownership and the simultaneous formation of a bank holding company, CSB Financial Group, Inc. The conversion raised $7.6 million in new equity capital through the issuance of 1,035,000 shares of common stock of CSB Financial Group, Inc. In February 1996, the Bank announced its plans to purchase the full-service office of Kankakee Federal Savings Bank located in Carlyle, Illinois. This transaction was completed on September 13, 1996 and provided $4.9 million in new assets. Finally, in October 1996, CSB Financial Group, Inc. announced that it was implementing a repurchase program whereby the Company would repurchase up to 93,150 shares, or 9%, of its outstanding common stock. This repurchase program represented an attractive use of capital relative to other investment alternatives. Our focus on new products and services for the consumer included a home equity line of credit, an automated-teller machine (ATM) at the main office, a debit card, and an approved credit card program. Each of these products and services helps improve the visibility of the Bank and provides a service our customers have desired from a local community bank. During the year, our market analysis was completed and we established a strategy for the Bank's future growth. We plan to use a portion of the conversion proceeds to take advantage of growth opportunities as they become available. We will emphasize new consumer products and services that will improve or enhance the financial condition of the Bank. The Company's net income decreased from $317,000 in 1995 to $235,000 in 1996, a 26 percent decline. A one-time special assessment of $188,000 to recapitalize the SAIF deposit insurance fund was the key factor in the decline in net income. The Company experienced asset growth of 12 percent to $50 million as of September 30, 1996. It is important to note that the Company achieved the asset growth without impairing asset quality. We are optimistic about our future prospects. We believe the Company is positioned in the Centralia and Carlyle markets to produce improved earnings. It is our intention to continue to build on our strong base and continue to develop the expertise necessary to improve earnings through increased market share. On behalf of the board of directors, management and the staff of CSB Financial Group, Inc., I thank you for your continued support. Sincerely, /s/ K. Gary Reynolds ------------------------------------- K. Gary Reynolds President and Chief Executive Officer MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is intended to assist the reader in understanding the financial condition, changes in financial condition and results of operation for CSB Financial Group, Inc. (the "Company"). The information contained in this section should be read in conjunction with the Consolidated Financial Statements and the other sections contained herein. General On December 12, 1994, CSB Financial Group, Inc. was organized for the purpose of acquiring all of the outstanding stock of Centralia Savings Bank (the "Bank") upon conversion of the Bank from a mutual to a stock savings bank. The conversion was completed on October 5, 1995. The Company sold 1,035,000 shares of common stock in the initial stock offering at $8 per share. The Company purchased 100% of the outstanding common stock of the Bank using 50% of the $7,584,000 in net proceeds generated from the initial offering. The Company conducts no significant business other than through the Bank. The Bank has a wholly owned subsidiary, Centralia SLA, Inc., which provides insurance services. All references to the Company include the Bank and its subsidiary, unless otherwise indicated. References to the Company prior to October 5, 1995 are to the Bank and Centralia SLA, Inc., on a consolidated basis. Comparison of Operating Results for the Fiscal Years Ended September 30, 1996 and 1995 General. The operating results of the Company depend primarily on its net interest income, which is the difference between the interest income earned on interest-earning assets (primarily loans, investment securities and mortgage-backed securities) and interest expense incurred on interest-bearing liabilities (primarily deposits). The Company's net income also is affected by the establishment of provision for loan losses and the level of its non-interest income, including loan fees, deposit service charges, insurance commissions, gains and losses from the sale of assets as well as its other non-interest expenses and provisions for income taxes. On September 13, 1996, the Company purchased the Carlyle branch office from Kankakee Federal Savings Bank, Kankakee, Illinois. The purchase of the Carlyle branch was accounted for using the purchase method of accounting. Therefore, the operating results for the branch are included in the consolidated financial statements for the period subsequent to the acquisition date. The Company's net income for the fiscal year ended September 30, 1996 was $235,000 as compared to $317,000 for the fiscal year ended September 30, 1995. This represents a $82,000, or 25.9%, decrease in net income. Net Interest Income. The Company's net interest income for the fiscal years ended September 30, 1996 and 1995 were $1,592,000 and $1,246,000, respectively. This represents a $346,000, or 27.8%, increase in net interest income. This is primarily due to the increase in the volume of earning assets exceeding the increase in interest-bearing liabilities. Interest income increased $444,000, or 18.1%, from $2,449,000 for the fiscal year ended September 30, 1995 compared to $2,893,000 for the fiscal year ended September 30, 1996. The increase resulted primarily from a $7.8 million increase in the average balance of the Company's interest-earning assets, despite a 30 basis point decrease in average yields of such assets. The increase in the average balances of interest earning assets was due to the investment of the additional funds received from the stock conversion. The average balance of mortgage loans increased $1.9 million combined with the 27 basis point increase in the average yield on such loans causing a $179,000 increase in interest income between the fiscal years. The average balances increased for both consumer loans and investment securities by $1.6 million and $2.7 million, respectively. These increases more than offset the 40 basis point decline and 60 basis point decline in the average yield on such earning-assets, resulting in a $120,000 increase and $92,000 increase in interest income, respectively. The average balance of mortgage-backed securities decreased $435,000 combined with the 40 basis point decrease in average yields contributed to a $51,000 decrease in interest income. The increase in the average balance of loans and investments between the fiscal years was primarily the result of the utilization of cash received in the stock conversion. The increases in average loan balances was also funded by interest-bearing deposits and repayments on mortgage and consumer loans. Interest expense increased $98,000, or 8.1%, to $1,301,000 for the fiscal year ended September 30, 1996 from $1,203,000 for fiscal year ended September 30, 1995. This increase primarily resulted from a 19 basis point increase in the average cost of interest-bearing liabilities combined with a $1.0 million increase in average balance of the Company's interest-bearing liabilities. Provision for Loan Losses. The Company's provision for loan losses for the fiscal year ended September 30, 1996 was $64,000, compared to $80,000 for the fiscal year ended September 30, 1995. Management evaluates the adequacy of the Company's allowance for loan losses on a quarterly basis and may, based on such review, adjust the amount of the provision for loan losses. Classified loans are considered as part of this review. Non-Interest Income. The Company's non-interest income for the fiscal year ended September 30, 1996 was $61,000, as compared to $72,000 for the fiscal year ended September 30, 1995. This represents an $11,000, or 15.3%, decrease in non-interest income. Non-Interest Expense. The Company's non-interest expense for the fiscal year ended September 30, 1996 was $1,148,000, as compared to $740,000 for the fiscal year ended September 30, 1995. The $408,000 increase in non-interest expense is due to increased expenses related to the employee stock ownership plan, the one-time SAIF assessment and professional fees relating to regulatory reporting. Compensation and Employee Benefits expense increased $55,000 to $446,000 for the fiscal year ended September 30, 1996. This increase was primarily due to the Company's contribution to the Employee Stock Ownership Plan (ESOP). The consolidated financial statements reflect a charge of $92,000 relating to contributions to the ESOP. These contributions are accounted for as compensation and employee benefits expense which will increase non-interest expense. The Company records compensation expense related to the ESOP in accordance with SOP 93-6. As a result, to the extent the value of the Company's common stock appreciates, compensation expense related to the ESOP could increase. The SAIF Deposit Insurance expense increased $191,000 to $255,000 for the fiscal year ended September 30, 1996 as compared to $64,000 for fiscal year ended September 30, 1995. The primary cause for the increase was the one-time special FDIC assessment of $188,000 to recapitalize the SAIF insurance fund. Professional fees increased $90,000 to $113,000 for fiscal year ended September 30, 1996 from $23,000 for fiscal year ended September 30, 1995. The primary causes for the increase were professional fees relating to regulatory reporting and a market study for branch expansion. Other non-interest expenses increased $64,000 to $205,000 for the fiscal year ended September 30, 1996 as compared to $141,000 for the fiscal year ended September 30, 1995. The primary cause for the increase were expenses relating to the operations of the holding company. Provision for Income Taxes. The Company's provision for income taxes for the fiscal year ended September 30, 1996 was $206,000, as compared to $181,000 for the fiscal year ended September 30, 1995. This represents a $25,000, or 13.8%, increase in the provision for income taxes. Comparison of Financial Condition as of September 30, 1996 and 1995 General. At September 30, 1996, the Company's total assets were $50.0 million, an increase of $5.4 million, or 12.1%, as compared to $44.6 million at September 30, 1995. The increase resulted from an increase in investment securities of $3.0 million, or 22.7%, an increase in loans receivable, net of the allowance for loan losses, of $7.7 million, or 39.7%, a decrease in cash and cash equivalents of $6.1 million, or 56.3%, and an increase in the remaining assets of $583,000, or 46.9%. The primary cause of the increases in loans receivable and other non-interest earning assets was the Company's acquisition of the Carlyle branch office from Kankakee Federal Savings Bank. This acquisition, as of September 13, 1996, resulted in an increase in loans receivable of $3.8 million, fixed assets of $295,000, intangible assets of $722,000, other assets of $24,000, deposits of $8.6 million, other liabilities of $114,000, and cash of $3.9 million. The decrease in cash and cash equivalents between fiscal years was used to fund loan growth and investment purchases. Loans Receivable. Loans receivable, net of the allowance for loan losses, at September 30, 1996 were $26.9 million, an increase of $7.7 million, or 39.7%, compared to $19.2 million for the fiscal year ended September 30, 1995. Mortgage loans increased $4.6 million, or 30.7%, and consumer loans increased $2.0 million, or 52.6%, as compared to the fiscal year ended September 30, 1995. Commercial loans increased $844,000, or 136.6%, to $1,462,000 for the year ended September 30, 1996 as compared to $618,000 for the year ended September 30, 1995. The Carlyle branch office acquisition accounted for $2.6 million in mortgage loans, $1.2 million in consumer loans and $62,000 in commercial loans. Average loan balances for 1996 amounted to $22.3 million, an increase of $4.2 million, or 23.4%, over the previous fiscal year. The Company hired Mr. Stephen J. Greene to manage and supervise the lending portfolio and to continue the Bank's emphasis on consumer and commercial lending. Mr. Greene's experience includes serving as a commercial retail lending officer for a commercial bank. The residential mortgage loans increased $4.2 million during 1996, or 30.8%, to $17.8 million as compared to the fiscal year ended September 30, 1995. During 1996, loan originations for residential mortgage loans amounted to $3.9 million as compared to $2.2 million in originations for the prior fiscal year. Residential mortgage loans represents 65.6% of gross loans. Consumer loans, consisting primarily of automobile loans, made up 21.9 % of gross loans, commercial loans made up 5.4% of gross loans, and non-residential real estate loans comprised 7.1% of the portfolio at September 30, 1996. Allowance for Loan Losses. An allowance for loan losses is maintained at a level considered adequate by management to absorb potential loan losses as determined by evaluations of the loan portfolio on a continuing basis. This evaluation by management includes consideration of past loan loss experience, changes in the composition of the loan portfolio, the volume and condition of the loan portfolio as well as the financial condition of specific borrowers and current economic conditions. Loans with principal and interest payments contractually due but not yet paid are reviewed at least semimonthly and are placed on a nonaccrual status when scheduled payments remain unpaid for 90 days or more, unless the loan is both well secured and is in the process of collection. Nonperforming loans as of September 30, 1996 amounted to $252,000 or .5% of total assets as compared to $361,000 or .8% of total assets as of September 30, 1995. The following table sets forth an analysis of the Company's gross allowance for possible loan losses for the periods indicated. For the Fiscal Year Ended September 30, --------------------- 1996 1995 --------------------- (In Thousands) Allowance at beginning of period ................. $ 113 $ 99 Provision for loan losses ........................ 64 80 Recoveries: Consumer loans ............................... 10 4 --------------------- Total recoveries ....................... 10 4 --------------------- Charge-offs: One- to four-family loans .................... -- 5 Consumer loans ............................... 48 65 Commercial ................................... 22 -- --------------------- Total charge-offs ...................... 70 70 --------------------- Net charge-offs ........................ (60) (66) --------------------- Balance at end of period ............... $ 117 $ 113 ===================== Ratio of allowance for loan losses to gross loans outstanding at the end of the period 0.43% 0.58% Ratio of net charge offs to average loans outstanding net during the period 0.27% 0.36% Ratio of allowance for loan losses to total nonperforming assets at the end of the period 46.43% 31.30% Investment Securities. Investment securities represented 32.4% of total assets as of September 30, 1996 compared to 29.6% of total assets as of September 30, 1995. Investment securities increased $3.0 million, 22.7%, from $13.2 million to $16.2 million as of September 30, 1996. At September 30, 1996, the Company held approximately $16.2 million in investment securities of which $14.0 million were held as available for sale, $2.0 million were held to maturity, and $165,000 were non-marketable equity securities. Of the $16.2 million in investment securities, $13.4 million, or 83.0%, were U. S. Government and agency securities, $752,000, or 4.6%, were obligations of state and political subdivisions, $165,000, or 1.0%, were non-marketable equity securities and $1.8 million, or 11.4%, were mortgage-backed securities. Deposits. At September 30, 1996, total deposits amounted to $36.9 million, or 73.8%, of total assets. Total deposits increased $7.4 million, or 24.9% from September 30, 1995. Deposits of $8.6 million assumed in the acquisition of the Carlyle branch on September 13, 1996 were the primary cause for the increase in deposits. Return on Equity and Assets Net income for the fiscal year ended September 30, 1996 was $235,000 as compared to $317,000 for the fiscal year ended September 30, 1995. Return on average assets (ROA) for the year ended September 30, 1996 was .55% as compared to .92% for the year ended September 30, 1995. The cause for the decrease in ROA was due to the one-time SAIF assessment which decreased net income for the year ended September 30, 1996 by $188,000. Return on average equity (ROE) for the year ended September 30, 1996 was 1.87% as compared to 5.81% for the year ended September 30, 1995. The causes for the decrease in ROE were the one-time SAIF assessment which decreased net income for the year ended September 30, 1996 by $188,000 and the conversion of the Bank from a mutual to a stock organization which increased equity by $7.0 million, net of conversion expenses and unearned employee stock ownership plan shares. The average equity to average assets ratio as of September 30, 1996 was 29.6% as compared to 15.78% September 30, 1995. The primary cause for the increase was the conversion of the Bank from a mutual to a stock organization on October 5, 1995 which increased equity by $7.0 million, net of conversion expenses and unearned employee stock ownership plan shares. Average Balance Sheet The following table presents the average balance sheet for the Company for the years ended September 30, 1996 and 1995, the interest on interest earning assets and interest bearing liabilities and the related average yield or cost. The yields and costs are derived by dividing income or expense by the average balance of the related asset or liability for the periods shown. Average balances were determined from averaging month-end balances. For the Fiscal Year Ended September 30, -------------------------------------------------------------------- 1996 1995 ---------------------------------- ------------------------------- (In Thousands) Average Interest & Yield/ Average Interest & Yield/ Balance Dividends Cost Balance Dividends Cost -------------------------------------------------------------------- Interest-earning assets: Mortgage loans (5) $ 16,542 1,222 7.39% 14,656 1,043 7.12% Commercial loans (5) 1,258 107 8.51% 544 71 13.05% Consumer loans (5) 4,491 363 8.08% 2,867 243 8.48% ------------------------- ------------------------ Total loans, net $ 22,291 1,692 7.59% 18,067 1,357 7.51% Mortgage-backed securities $ 2,091 197 9.42% 2,526 248 9.82% Investment securities (2)(3)(6) 14,013 842 6.01% 11,346 750 6.61% Daily interest-bearing deposits 2,728 150 5.50% 1,375 81 5.89% FHLB stock (3) 176 12 6.82% 191 13 6.81% ------------------------- ------------------------ Total interest-earning assets $ 41,299 2,893 7.01% 33,505 2,449 7.31% Non-interest earning assets: Office properties and equipment, net $ 282 251 Real estate, net - 4 Other non-interest earning assets 867 833 ------------- ------------ Total assets $ 42,448 34,593 ============ ============ Interest-bearing liabilities: Passbook accounts $ 2,952 91 3.08% 3,335 83 2.49% NOW accounts 4,393 76 1.73% 3,720 66 1.77% Money market accounts 1,918 64 3.34% 2,698 84 3.11% Certificates of deposit 20,333 1,070 5.26% 18,701 965 5.16% ------------------------- ------------------------ Total deposits $ 29,596 1,301 4.40% 28,454 $ 1,198 4.21% FHLB advances - - 0.00% 105 5 4.76% ------------------------- ------------------------ Total interest-bearing liabilities $ 29,596 1,301 4.40% 28,559 1,203 4.21% Non-interest bearing liabilities: Non-interest bearing deposits $ 19 294 Other liabilities 273 282 ------------- ------------ Total liabilities $ 29,888 29,135 Stockholders' equity 12,560 5,458 ------------- ------------ Total liabilities and retained $ 42,448 34,593 earnings ============ ============ Net interest income 1,592 1,246 ============ ============ Interest rate spread (4) 2.61% 3.10% Net interest margin (1) 3.85% 3.72% Ratio of average interest-earning assets to average interest-bearing liabilities 139.54% 117.32% (1) Net interest income as a percentage of average interest-earning assets. (2) Includes available for sale and held to maturity investment securities. (3) Interest is classified as interest income on investments in the Consolidated Statement of Income. (4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities. (5) Average volume includes nonaccrual loans. (6) Includes securities purchased under agreements to resell.
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). 1996 Compared to 1995 1995 Compared to 1994 Increase (Decrease) Due to Increase (Decrease) Due to Rate Volume Net Rate Volume Net ------------------------------------------------------------------------------- (In Thousands) Interest-earning assets: Mortgage loans ........................... $ 40 $ 139 $ 179 $ (49) $ (19) $ (68) Commercial loans ......................... (25) 61 36 0 71 71 Consumer loans ........................... (11) 131 120 (45) 30 (15) ------------------------------------------------------------------------------- Total loans ........................ 4 331 335 (94) 82 (12) Mortgage-backed securities ............... (10) (41) (51) 6 (85) (79) Investment and other securities ............................. (68) 160 92 5 60 65 Interest-bearing deposits ................ (5) 74 69 41 (28) 13 FHLB stock ............................... -- (1) (1) 2 (2) -- ------------------------------------------------------------------------------- Total net change income on interest-earning assets ........................... (79) 523 444 (40) 27 (13) ------------------------------------------------------------------------------- Interest-bearing liabilities: Passbook ................................. 20 (12) 8 (4) -- (4) Interest-bearing demand (NOW) accounts ......................... (2) 12 10 (13) (1) (14) Money market deposit accounts ............................... 6 (26) (20) 7 (28) (21) Certificates of deposit .................. 19 86 105 119 35 154 FHLB advances ............................ -- (5) (5) -- 5 5 ------------------------------------------------------------------------------- Total net change in expense on interest- bearing liabilities .............. 43 55 98 109 11 120 ------------------------------------------------------------------------------- Net change in net interest income .................. $ (122) $ 468 $ 346 $ (149) $ 16 $ (133) ===============================================================================
Asset and Liability Management The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest-rate sensitive", and by monitoring an institution's interest-rate sensitivity gap. An asset or liability can be considered to be interest-rate sensitive within a specific time period if it will mature or reprice within that time period. The interest-rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period, and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that same time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. At September 30, 1996, the Company's interest-bearing liabilities either maturing or repricing within one year exceeded its interest-earning assets either maturing or repricing within one year by $4.0 million, representing a cumulative one-year interest-rate sensitivity gap of negative 8.7%. During periods of rising interest rates, it is expected that the yield on the Company's interest-earning assets would rise more slowly than the cost on its interest-bearing liabilities, which would be expected to have a negative effect on net interest income. A decrease in interest rates would have the opposite effect on net interest income, as the interest rates paid on interest-bearing liabilities would fall more rapidly than would the interest rates earned on interest-earning assets. The primary function of asset and liability management is to maintain an appropriate balance between liquidity on the one hand, and interest-earning assets and liabilities on the other. The appropriate balance will enable the Company to produce stable net income during changing interest-rate cycles. In recent years, the Company's assets have been comprised primarily of one-to-four-family residential mortgage balloon payment notes along with long-term investment and mortgage-backed securities, while its liabilities have been comprised primarily of short-term certificates of deposit. The majority of the Company's balloon payment notes have maturities of three years, while a small number have maturities of either one or five years. The balloon payment notes are not interest-rate sensitive in a rapidly increasing interest-rate environment because the interest rate remains fixed for up to five years regardless of an increase in market interest rates. Furthermore, although the interest rate on the balloon payment notes may be changed if the note is renewed at the end of the term, the balloon payment notes have interest rate caps of one or two percentage points over the initial rate of interest. Consequently, if interest rates increase by an amount exceeding the interest rate cap during the term of the note, the Company may be forced to renew the notes at interest rates below the prevailing market rate. Since the first calendar quarter of 1995, the adjustable-rate-mortgage (ARM) has replaced the standard balloon payment loan as the principal type of mortgage loan offered to new residential first-mortgage customers of the Company. The ARM's have higher interest rate ceilings than the balloon payment loans, along with interest rate floors, and will accordingly provide the Company with increased interest rate protection. Beginning in February 1996, the Company initiated a program of converting the balloon mortgage loans to comparable ARM mortgage loans. As the balloon mortgage loans mature, they are converted to an ARM. It is anticipated the balloon mortgage loan portfolio will be converted to ARM mortgage loans by the end of fiscal year 1998. Because the majority of the Company's deposits are in higher yielding short-term certificates of deposit (which can be expected to reprice upon maturity), an increase in market interest rates will have a more dramatic effect on the Company's cost of funds than if such deposits were in transaction or passbook savings account. The interest rates on the Company's certificates of deposit tend to increase more quickly and in greater increments than the interest rates on its transaction or passbook savings accounts. The Company's investment securities portfolio had an average maturity of two years or less, excluding mortgage-backed securities, as of September 30, 1996. Accordingly, the Company's investment securities portfolio could be made more interest-rate sensitive by reducing the average maturity of the portfolio. The Company is in the process of creating a shorter-term investment securities portfolio with more evenly staggered maturities. The Company also intends to attract longer-term certificates of deposits by pricing such deposits competitively on a case-by-case basis, thereby making the Company's liabilities less interest-rate sensitive. Liquidity and Capital Resources The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, payments on investment and mortgage-backed securities and sales of Company stock. While scheduled maturities of loans and investment and mortgage-backed securities are predictable sources of funds, deposit flows, mortgage prepayments and the Company's ability to renew balloon payment notes are greatly influenced by general interest rates, economic conditions and competition. The primary investing activity of the Company is the origination of one-to-four-family residential mortgage loans. During each of the fiscal years ended September 30, 1996 and 1995, the Company originated one-to-four-family residential mortgage loans in the amount of $3.9 million and $2.2 million, respectively. These activities were funded primarily by principal repayments on loans, payments on mortgage-backed securities and maturities of investment securities. The net cash used for investing activities for the fiscal year ended September 30, 1996 totaled $3.4 million. Investment activities included the purchase of investment securities which totaled $8.6 million and $44,000 for the fiscal year ended September 30, 1996 and 1995, respectively. The cash for these investing activities was provided by proceeds received in the mutual-to-stock conversion and cash acquired in the Carlyle office acquisition. Other sources of cash for investing activities was provided by operating activities and cash and cash equivalents held at the beginning of the fiscal year. The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, satisfy financial commitments and take advantage of investment opportunities. During the fiscal year ended September 30, 1996 and 1995, the Company used its sources of funds primarily to fund loan commitments, pay maturing certificates of deposits and satisfy deposit withdrawals. At September 30, 1996, the Company had commitments to extend credit in the amount of $1.13 million. These commitments were comprised of variable-rate and fixed-rate commitments in the amounts of $248,000 and $882,000, respectively. The range of rates on fixed-rate commitments was 7.5% to 11.0%. At September 30, 1996, certificates of deposits totaled $24.3 million, or 66.0% of total deposits, as compared to $19.6 million, or 66.5% of total deposits for fiscal year ended September 30, 1995. Time deposits over $100,000 accounted for $1.9 million and $1.5 million, respectively, of the certificate of deposit totals. Historically, the Company has been able to retain a significant amount of its maturing deposits by increasing the interest rates earned by the certificates of deposit. Because deposit insurance premiums paid by commercial banks on BIF-insured deposits have been drastically reduced, the Company may find it more difficult to retain such deposits. Management believes it will have adequate resources to fund maturing deposits and withdrawals from additional deposits, proceeds of scheduled repayments of loans as well as from payments received on investment and mortgage-backed securities. Capital. The Company is required to maintain a specific amount of capital pursuant to the regulations of the Commissioner of Savings and Residential Finance and the Federal Deposit Insurance Corporation (FDIC). As of September 30, 1996, the Company was in compliance with all regulatory capital requirements with a Tier 1 capital to risk-weighted assets ratio of 56.4%, compared to the minimum ratio required of 4.0%, total capital to risk-weighted assets ratio of 60.3% compared to the minimum ratio required of 8.0% and a Tier 1 capital to average assets ratio of 27.7% compared to the minimum ratio required of 4.0%. The Company continues to maintain a strong capital position to support its capital requirements. Stockholders' equity increased $7.2 million to $12.8 million as of September 30, 1996. This increase was primarily due to the conversion of the Company, on October 5, 1995, from a mutual state savings bank to a stock savings bank. The Company sold 1,035,000 shares of common stock at an initial price of $8.00 per share. The conversion transaction, net of expenses and unearned employee stock ownership plan shares, increased capital by $7.0 million. The capital position was also increased as a result of net income of $235,000. Impact of New Accounting Pronouncements Accounting for mortgage servicing rights In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 122 (Statement 122), "Accounting for Mortgage Servicing Rights." Statement 122 requires the Company to recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. If the Company acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securities those loans with servicing rights retained, the Company should allocate the total cost of the mortgage loans to mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The mortgage servicing rights should be amortized in proportion to and over the period of estimated net servicing income. Statement 122 is effective for fiscal years beginning after December 15, 1995. The Company will be required to adopt Statement 122 for the fiscal year ending September 30, 1997. The Company believes the adoption of Statement 122 will not have a material impact on the consolidated financial statements. Accounting for stock-based compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 (FAS 123), "Accounting for Stock-Based Compensation". FAS 123 established a fair value based method of accounting for stock options and other equity instruments. FAS 123 permits the continued use of the intrinsic value method included in Accounting Principals Board Opinion 25 (APB-25), "Accounting for Stock Issued to Employees", but regardless of the method used to account for the compensation cost associated with stock option or similar plans, it requires employers to disclose information required by FAS 123. The Company plans to adopt the disclosure requirements of FAS 123. The disclosure requirement of FAS 123 is effective for fiscal years beginning after December 15, 1995. The Company will be required to include these disclosures in their financial statements for the year ended September 30, 1997. Accounting for transfers and servicing of financial assets and extinguishments of liabilities In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 125 (FAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". FAS 125 requires that an entity should only recognize those assets that it controls and liabilities it has incurred. Assets should be recognized until control has been surrendered, and liabilities should be recognized until they have been extinguished. Recognition of financial assets and liabilities will not be affected by the sequence of transactions unless the effect of the transactions is to maintain effective control over a transferred financial asset. FAS 125 is effective for transactions after December 31, 1996. The Company believes the adoption of FAS 125 will not have a material effect on the consolidated financial statements. Recent Regulatory Developments Deposit Insurance Premiums. Deposits of the Bank are currently insured by the FDIC under the SAIF. The FDIC also maintains another insurance fund, the BIF, which primarily insures commercial bank and some state savings bank deposits. Applicable law requires that the SAIF and BIF funds each achieve and maintain a ratio of insurance reserves to total insured deposits equal to 1.25%. In 1995, the BIF reached this 1.25% reserve level, and the FDIC announced a reduction in BIF premiums for most banks. Based on this reduction, the highest rated institutions (approximately 92 percent of the nearly 11,000 BIF-insured banks) will pay the statutory annual minimum of $2,000 for FDIC insurance. Rates for all other institutions were reduced to $.04 per $100 as well, leaving a premium range of $.03 to $.27 per $100 instead of the previous $.04 to $.31 per $100. Currently, SAIF-member institutions pay deposit insurance premiums based on a schedule of $0.23 to $0.31 per $100 of deposits. Effective September 30, 1996, legislation was enacted to fund the Savings Association Insurance Fund (SAIF) by assessing SAIF insured institutions a one-time special assessment of 65.7 basis points on March 31, 1995 deposits. The assessment for the Bank is $188,000 as of September 30, 1996. Additionally, as part of the purchase agreement with Kankakee Federal Savings and Loan (Kankakee), the Company agreed to reimburse Kankakee for the portion of Kankakee's assessment which related to the Carlyle, Illinois branch which was approximately $54,000. The $242,000 assessment payable is included in other liabilities. The assessment for the Bank is not deductible for tax purposes until paid, therefore, deferred tax assets of $94,000 have been provided for the tax impact of the assessment. Income Tax Regulations Affecting Bad Debt Reserve. Under existing provisions of the Internal Revenue Code and similar sections of the Illinois income tax law, qualifying thrifts may claim bad debt deductions based on the greater of (1) a specified percentage of taxable income, as defined, or (2) actual loss experience. If, in the future, any of the accumulated bad debt deductions are used for any purpose other than to absorb bad debt losses, gross taxable income may result and income taxes may be payable. The Small Business Job Protection Act became law on August 20, 1996. One of the provisions in this law repealed the reserve method of accounting for bad debts for thrift institutions so that the bad debt deduction described in the preceding paragraph will no longer be effective for tax years beginning after December 31, 1995. The change in the law requires that the tax bad debt reserves accumulated after September 30, 1988 be recaptured into taxable income over a six-year period. The start of the six-year period can be delayed for up to two years if the Company meets certain residential lending thresholds. Deferred taxes have been provided on the portion of the tax reserve for loan loss that must be recaptured. Effect of Inflation and Changing Prices The Consolidated Financial Statements and Notes thereto included herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or the same extent as the prices of goods and services. -------------------------------- CORPORATE INFORMATION -------------------------------- Holding Company Form 10-KSB Annual Report CSB Financial Group, Inc. Copies of CSB Financial Group, Inc.'s Form 200 South Poplar Street 10-KSB annual report as filed with the Centralia, Illinois 62801 Securities and Exchange Commission and other published reports may be obtained without Subsidiaries charge by writing our corporate headquarters: Centralia Savings Bank 200 South Poplar Street CSB Financial Group, Inc. Centralia, Illinois 62801 200 South Poplar Street Centralia, Illinois 62801 Centralia SLA, Inc. Attention: K. Gary Reynolds 200 South Poplar Street Centralia, Illinois 62801 Registrar and Transfer Agent The Registrar and Transfer Company Stock Information ("Registrar") maintains all stockholder records. The Common Stock of the Holding Company is Registrar handles stock transfer and registration, quoted on the Nasdaq "SmallCap" market under address changes, corrections/changes in the symbol "CSBF" since its subsidiary, taxpayer identification numbers, and Form 1099 Centralia Savings Bank, converted to stock form tax reporting questions. If you require assistance in October 1995. assistance or have any questions, please contact Registrar by mail or phone: As of September 30, 1995, the Holding Company had not issued any capital stock and, Registrar and Transfer Company consequently, there was no market for its Common 10 Commerce Drive Stock. On October 5, 1995, the Company issued Cranford, New Jersey 07016 1,035,000 shares of its Common Stock at a purchase price of $8.00 per share in connection Annual Meeting with the conversion of the Savings Bank from a The annual meeting of stockholders of CSB state chartered mutual savings bank to a state Financial Group, Inc. will be held on January chartered capital stock savings bank. The closing 10, 1997 at 10:00 a.m. at 200 South Poplar Street, price per share for the Holding Company's Street, Centralia, Illinois. Common Stock as reported on the Nasdaq "SmallCap" market on December 2, 1996 Independent Auditors $10.0625. The Holding Company has not paid McGladrey & Pullen, LLP cash dividends on its Common Stock. 1806 Fox Drive Champaign, Illinois 61820 Stock Pricing History The following table sets forth the high and low Special Counsel sales prices as reported on the Nasdaq Schiff Hardin & Waite "SmallCap" market during the past year. 7200 Sears Tower Chicago, Illinois 60606
Fiscal 1996 High Low - -------------------------------------------------------- First Quarter 9 5/8 8 Second Quarter 9 3/8 8 3/4 Third Quarter 9 5/8 9 Fourth Quarter 9 5/8 9 ---------------------------------------- DIRECTORS CSB Financial Group, Inc. and Centralia Savings Bank ---------------------------------------- Wesley N. Breeze Owner and Operator, Byrd Watson Drug Store A. John Byrne Retired Michael Donnewald President, Donnewald Distributing Co. Larry M. Irvin Chairman of the Board, Centralia Savings Bank Owner and Operator, Irvin Funeral Homes, Ltd. W. Harold Monken Auto Dealer, Centralia, Illinois K. Gary Reynolds President and Chief Executive Officer, Centralia Savings Bank ---------------------------------------- OFFICERS CSB Financial Group, Inc. ---------------------------------------- K. Gary Reynolds President and Chief Executive Officer ---------------------------------------- OFFICERS Centralia Savings Bank ---------------------------------------- K. Gary Reynolds President and Chief Executive Officer Stephen J. Greene Vice President Joanne S. Ticknor Secretary and Treasurer INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors CSB Financial Group, Inc. Centralia, Illinois We have audited the accompanying consolidated balance sheet of CSB Financial Group, Inc. and subsidiary as of September 30, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of CSB Financial Group, Inc. and subsidiary, for the year ended September 30, 1995, were audited by other auditors whose report dated October 20, 1995, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CSB Financial Group, Inc. and subsidiary as of September 30, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Champaign, Illinois October 18, 1996 CSB FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, 1996 and 1995 (in thousands, except share data) ASSETS 1996 1995 - -------------------------------------------------------------------------------- Cash and due from banks ...................................... $ 598 $ 321 Interest-bearing deposits .................................... 4,168 10,585 ---------------- Cash and cash equivalents ...................... 4,766 10,906 Securities held to maturity (fair value of $2,091 for 1996 and $11,141 for 1995) ......................................... 1,987 10,979 Securities available for sale ................................ 14,044 2,026 Securities purchased under agreements to resell .............. 300 Nonmarketable equity securities .............................. 165 192 Loans ........................................................ 27,048 19,390 Allowance for loan losses .................................... (117) (113) ---------------- Loans, net ..................................... 26,931 19,277 Premises and equipment ....................................... 594 252 Accrued interest receivable .................................. 331 290 Intangible assets ............................................ 722 - - Other assets ................................................. 176 698 ---------------- Total assets ................................... $50,016 $44,620 ================ See Notes to Consolidated Financial Statements. CSB FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS September 30, 1996 and 1995 (in thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 - ------------------------------------------------------------------------------------------- LIABILITIES: Deposits: Demand ......................................................... $ 8,754 $ 6,515 Savings ........................................................ 3,779 3,360 Time deposits > $100,000 ....................................... 1,889 1,468 Other time deposits ............................................ 22,432 18,160 ------------------ Total deposits ......................................... 36,854 29,503 ------------------ Stock conversion deposits ......................................... 9,193 Other liabilities ................................................. 297 187 Deferred income taxes ............................................. 81 162 ------------------ Total liabilities ...................................... 37,232 39,045 ------------------ COMMITMENTS, CONTINGENCIES AND CREDIT RISK STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value; 100,000 shares authorized; none issued and outstanding - - - - Common stock, $0.01 par value; authorized 2,000,000 shares; 1996 1,035,000 shares issued and outstanding ................... 10 - - Paid-in capital ................................................... 7,586 - - Retained earnings, substantially restricted ....................... 5,794 5,559 Less: Unrealized gain (loss) on securities available for sale, net of income tax effect ............................................ (24) 16 Unearned employee stock ownership plan shares .................. (582) - - ------------------ Total stockholders' equity ............................. 12,784 5,575 ------------------ Total liabilities and stockholders' equity ............. $50,016 $44,620 ==================
See Notes to Consolidated Financial Statements. CSB FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Years Ended September 30, 1996 and 1995 (in thousands, except share data) 1996 1995 - -------------------------------------------------------------------------------------- Interest income: Loans and fees on loans ....................................... $ 1,692 $ 1,357 Interest and dividends on securities: Taxable .................................................... 1,026 1,004 Nontaxable ................................................. 25 7 Other interest income ......................................... 150 81 ----------------- 2,893 2,449 ----------------- Interest expense: Deposits ...................................................... 1,301 1,198 Other borrowings .............................................. - - 5 ----------------- 1,301 1,203 ----------------- Net interest income ................................ 1,592 1,246 Provision for loan losses ........................................ 64 80 ----------------- Net interest income after provision for loan losses 1,528 1,166 ----------------- Noninterest income: Service charges on deposits ................................... 47 44 Other ......................................................... 14 28 ----------------- 61 72 ----------------- Noninterest expense: Compensation and employee benefits ............................ 446 391 Occupancy expense and furniture and fixtures expense .......... 59 55 Data processing ............................................... 70 66 SAIF deposit insurance ........................................ 255 64 Professional fees ............................................. 113 23 Other ......................................................... 205 141 ----------------- 1,148 740 ----------------- Income before income taxes ......................... 441 498 Income taxes ..................................................... 206 181 ----------------- Net income ......................................... $ 235 $ 317 ================= Earnings per share ................................. $ 0.25 $ - - ================= Weighted average number of shares .................. 958,648 - - =================
See Notes to Consolidated Financial Statements. CSB FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended September 30, 1996 and 1995 (In thousands, except share data) - ---------------------------------------------------------------------------------------------------------------------------------- Unrealized Unearned Gain (Loss) Employee on Securities Stock Preferred Common Paid-In Retained Available Ownership Stock Stock Capital Earnings For Sale Plan Shares Total --------------------------------------------------------------------------------- Balance at September 30, 1994 ................. $ - - $ - - $ - - $ 5,242 $ 28 $ - - $ 5,270 Change in unrealized gain (loss) on securities available for sale ........... - - - - - - - - (12) - - (12) Net income ................................. - - - - - - 317 - - - - 317 --------------------------------------------------------------------------------- Balance at September 30, 1995 ................. - - - - - - 5,559 16 - - 5,575 Net proceeds from 1,035,000 shares of common stock issued in conversion ....... - - 10 7,574 - - - - (662) 6,922 Employee stock ownership plan shares allocated ............................... - - - - 12 - - - - 80 92 Change in unrealized gain (loss) on securities available for sale ........... - - - - - - - - (40) - - (40) Net income ................................. - - - - - - 235 - - - - 235 ---------------------------------------------------------------------------------- Balance at September 30, 1996 ................. $ - - $ 10 $ 7,586 $ 5,794 $ (24) $ (582) $ 12,784 ==================================================================================
See Notes to Consolidated Financial Statements. CSB FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended September 30, 1996 and 1995 (in thousands) 1996 1995 - ----------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................ $ 235 $ 317 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premium (discount) on securities, net .. (3) (10) Employee stock ownership plan compensation expense ..... 92 - - Provision for loan losses .............................. 64 80 (Decrease) in deferred income taxes .................... (56) (15) Depreciation ........................................... 20 20 Change in assets and liabilities: (Increase) in accrued interest receivable ............ (23) (75) (Increase) decrease in other assets .................. 528 (585) Increase (decrease) in other liabilities ............. (4) 86 ------------------ Net cash from operating activities ............. 853 (182) ------------------ CASH FLOWS FROM INVESTING ACTIVITIES Loan originations, net of principal payments on loans ..... (3,873) (2,489) Purchase of securities held to maturity ................... (596) (44) Purchase of securities available for sale ................. (7,978) - - Proceeds from maturity of securities held to maturity ..... 986 1,772 Proceeds from maturity of securities available for sale ... 4,527 - - Purchase of security under agreement to resell ............ (300) - - Purchases of premises and equipment ....................... (67) (187) Proceeds from the sale of OREO ............................ - - 32 Purchase of branch, net of cash acquired .................. 3,852 - - ------------------ Net cash from investing activities ............. (3,449) (747) ------------------ CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) stock conversion deposits ............. (9,193) 9,193 Proceeds from sale of common stock, net of offering cost . 6,922 - - Net (decrease) in demand deposits, NOW accounts passbook savings accounts .............................. (1,043) (273) Net increase (decrease) in time deposits .................. (230) 2,072 Payment of Federal Home Loan Bank advances ................ (360) ------------------ Net cash from financing activities ............. (3,544) 10,632 ------------------ CSB FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended September 30, 1996 and 1995 (in thousands) 1996 1995 - ----------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents .................................. $(6,140) $ 9,703 Cash and cash equivalents, beginning of year ................. 10,906 1,203 ------------------ Cash and cash equivalents, end of year ....................... $ 4,766 $10,906 ================== Cash paid during the year for: Interest .................................................. $ 1,295 $ 1,254 ================== Income taxes .............................................. $ 264 $ 244 ================== Supplemental Disclosures of Investing and Financing Activities: Change in unrealized gain (loss) on securities available for sale ................................................. $ (65) $ (16) ================== Change in deferred income taxes attributable to the unrealized gain (loss) on securities available for sale . $ (25) $ (4) ================== Transfer of securities from held to maturity to available for sale ................................................. $ 8,602 $ - - ================== Assets acquired: Loans ...................................................... $ 3,845 $ - - Premises and equipment ..................................... 295 - - Accrued interest receivable ................................ 18 - - Intangible assets .......................................... 722 - - Other assets .............................................. 6 - - Liabilities assumed: Demand deposits ............................................ (2,764) - - Savings deposits ........................................... (937) - - Time deposits .............................................. (4,923) - - Other liabilities .......................................... (114) - - ------------------ Purchase of branch, net of cash acquired ........ $(3,852) $ - - ==================
See Notes to Consolidated Financial Statements. CSB FINANCIAL GROUP, INC. AND SUBSIDIARY NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies Nature of operations CSB Financial Group, Inc. (the Company) is the holding company of its wholly-owned subsidiary, Centralia Savings Bank (the Bank). Centralia Savings Bank is a state chartered stock savings bank, converted from mutual form on October 5, 1995, located in Marion County, Illinois. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) through the Savings Association Insurance Fund (SAIF). The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those agencies. Principles of presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiary, Centralia SLA. Centralia SLA, Inc.'s principal business activity is to provide insurance services. For purposes of the consolidated financial statements, all material intercompany amounts have been eliminated. In preparing the consolidated financial statements, Company management is required to make estimates and assumptions which significantly affect the amounts reported in the consolidated financial statements. Significant estimates which are particularly susceptible to change in a short period of time include the determination of the allowance for loan losses and valuation of real estate and other properties acquired in connection with foreclosures or in satisfaction of amounts due from borrowers on loans. Actual results could differ from those estimates. The accounting and reporting policies of the Company conform to generally accepted accounting principles and general practice within the savings and loan industry. Following is a description of the more significant policies which the Company follows in preparing and presenting its financial statements. Cash and cash equivalents For purposes of reporting cash flows, the Company considers all cash on hand, deposit accounts and money-market funds to be cash equivalents. Securities held to maturity Securities classified as held to maturity are those debt securities the Company has the positive intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, which are recognized in interest income using the interest method over the period to maturity. Securities available for sale Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity and marketable equity securities. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. The difference between fair value and amortized cost, adjusted for amortization of premium and accretion of discounts, which are recognized in interest income using the interest method over their contractual lives, results in an unrealized gain or loss. Unrealized gains or losses are reported as increases or decreases in stockholders equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Securities purchased under agreements to resell Securities purchased under agreements to resell are carried at cost and consist of mortgage backed securities. As of September 30, 1996, the agreement is a 91 day agreement. Securities purchased under agreements to resell averaged approximately $300,000 during 1996. Loans Loans are stated at the principal amount outstanding less unearned interest income and an allowance for loan losses. Unearned income on consumer loans is recognized as income based on the interest method. Interest income on substantially all other loans is credited to income based on the principal balance outstanding. Loan origination fees and certain direct loan origination costs are being deferred and recognized over the life of the related loans as an adjustment to interest income using the interest method. Net deferred fees are included as components of the carrying value of the loan. The Company's policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Interest income on these loans is recognized to the extent payments are received, and the principal is considered fully collectible. Allowance for losses The allowance for loan losses is established through a provision for loan losses charged to operating expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers' ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examination. Accounting by creditors for the impairment of a loan On October 1, 1995, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by FAS 118, which requires loans to be considered impaired when, based on current information and events, it is probable the Company will not be able to collect all amounts due. The portion of the allowance for loans losses applicable to impaired loans is to be computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans or of collateral value is to be reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Management had not classified any loans as impaired as of September 30, 1996. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the related assets principally on the straight-line basis. Income taxes Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Earnings per common share Earnings per share is computed based upon the weighted average common shares outstanding during the period plus shares committed to be released by the employee stock ownership plan. Unallocated shares of the Employee Stock Ownership Plan are not considered common shares outstanding. Accounting for mortgage servicing rights In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 122 (Statement 122), "Accounting for Mortgage Servicing Rights." Statement 122 requires the Company to recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. If the Company acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securities those loans with servicing rights retained, the Company should allocate the total cost of the mortgage loans to mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. The mortgage servicing rights should be amortized in proportion to and over the period of estimated net servicing income. Statement 122 is effective for fiscal years beginning after December 15, 1995. The Company will be required to adopt Statement 122 for the fiscal year ending September 30, 1997. The Company believes the adoption of Statement 122 will not have a material impact on the consolidated financial statements. Accounting for stock-based compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 (FAS 123), "Accounting for Stock-Based Compensation". FAS 123 established a fair value based method of accounting for stock options and other equity instruments. FAS 123 permits the continued use of the intrinsic value method included in Accounting Principals Board Opinion 25 (APB-25), "Accounting for Stock Issued to Employees", but regardless of the method used to account for the compensation cost associated with stock option or similar plans, it requires employers to disclose information required by FAS 123. The Company plans to adopt the disclosure requirements of FAS 123. The disclosure requirement of FAS 123 is effective for fiscal years beginning after December 15, 1995. The Company will be required to include these disclosures in their financial statements for the year ended September 30, 1997. Accounting for transfers and servicing of financial assets and extinguishments of liabilities In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 125 (FAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". FAS 125 requires that an entity should only recognize those assets that it controls and liabilities it has incurred. Assets should be recognized until control has been surrendered, and liabilities should be recognized until they have been extinguished. Recognition of financial assets and liabilities will not be affected by the sequence of transactions unless the effect of the transactions is to maintain effective control over a transferred financial asset. FAS 125 is effective for transactions after December 31, 1996. The Company believes the adoption of FAS 125 will not have a material effect on the consolidated financial statements. Reclassifications Certain reclassifications have been made to the balances as of September 30, 1995, with no effect on net income, to be consistent with the classifications adopted for September 30, 1996. Note 2. Conversion to Stock Ownership On October 5, 1995, CSB Financial Group, Inc. (the "Company") acquired all of the outstanding shares of Centralia Savings Bank (the "Bank") upon the Bank's conversion from a state chartered mutual savings bank to a state chartered capital stock savings bank. The company purchased 100% of the outstanding capital stock of the bank using 50% of the net proceeds from the Company's initial stock offering which was completed on October 5, 1995. The Company sold 1,035,000 shares of $0.01 par value common stock at a price of $8 per share, including 82,800 shares purchased by the Bank's Employee Stock Ownership Plan ("ESOP"). The ESOP shares were acquired by the Bank with proceeds from a Company loan totaling $662. The gross proceeds of the offering were $8,280. After reducing gross proceeds for conversion costs of $696 net proceeds totaled $7,584. The Company's stock trades on the NASDAQ Small Cap market under the symbol "CSBF". The acquisition of the Bank by the Company is being accounted for like a "pooling of interests" under generally accepted accounting principles. The application of the pooling of interest method records the assets and liabilities of the merged entities on a historical cost basis with no goodwill or other intangible assets being recorded. Note 3. Securities Amortized cost and fair values of securities are as follows: September 30, 1996 --------------------------------------- Held to Maturity --------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------- Obligations of states and political subdivisions .... $ 149 $ - - $ 6 $ 143 Mortgage backed securities ......... 1,838 111 1 1,948 -------------------------------------- $1,987 $ 111 $ 7 $ 2,091 ====================================== September 30, 1996 -------------------------------------- Available for Sale -------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------- Obligations of states and political subdivisions $ 606 $ 3 $ 6 $ 603 U.S. Government and agency 13,477 22 58 13,441 --------------------------------------- $14,083 $ 25 $ 64 $ 14,044 ======================================= September 30, 1995 --------------------------------------- Held to Maturity --------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------- Obligations of states and political subdivisions $ 165 $ 4 $ - - $ 169 Mortgage backed securities 2,335 182 - - 2,517 U.S. Government and agency 8,479 38 62 8,455 --------------------------------------- $10,979 $ 224 $ 62 $11,141 ======================================= September 30, 1995 --------------------------------------- Available for Sale --------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------- U.S. Government and agency $ 2,000 $ 26 $ - - $ 2,026 ====================================== The amortized cost and fair value of securities held to maturity and available for sale at September 30, 1996, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary: As of September 30, 1996 ---------------------------------- Available Held to Maturity for Sale ---------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ----------------------------------- Less than one year ......................... $ - - $ - - $ 6,013 $ 6,020 Due after one year through five years ...... - - - - 6,465 6,421 Due after five years through ten years ..... 41 41 508 506 Due after ten years ........................ 108 102 1,097 1,097 Mortgage-backed securities ................. 1,838 1,948 - - - - ---------------------------------- $ 1,987 $ 2,091 $14,083 $14,044 ================================== There were no gains or losses on the sale of securities for the years ended September 30, 1996 and 1995. During 1995, the Financial Accounting Standards Board decided to allow all enterprises to make a one-time reassessment of the classification of securities under FAS 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company transferred debt securities with an amortized cost of $8,602 from the held-to-maturity classification to the available-for-sale classification and recorded, as a component of equity, an unrealized gain of $48, net of $30 of deferred taxes. As a member of the Federal Home Loan Bank system, the Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank in an amount equal to 1% of its outstanding home loans. No ready market exists for the Bank stock, and it has no quoted market value. For disclosure purposes, such stock is assumed to have a market value which is equal to cost. There were no securities pledged as collateral for public deposits or for other purposes as required or permitted by law for the year ended September 30, 1996 and securities with a carrying value of $500 were pledged for the year ended September 30, 1995. Note 4. Loans Loans are summarized as follows: September 30, ----------------- 1996 1995 ----------------- Mortgage loans: One to four family .................................. $17,812 $13,621 Commercial real estate .............................. 823 835 Other loans secured by real estate .................. 1,091 638 ----------------- Total mortgage loans ..................... 19,726 15,094 ----------------- Commercial and consumer loans: Commercial loans .................................... 1,462 618 Consumer loans ...................................... 4,637 3,323 Home equity lines of credit ......................... 998 18 Share loans ......................................... 316 559 ----------------- Total commercial and consumer loans ...... 7,413 4,518 ----------------- Less: Allowance for loan losses ........................... (117) (113) Deferred loan fees .................................. (23) (30) Unearned income on consumer loans ................... (68) (192) ------------------ (208) (335) ------------------ Loans, net .............................. $26,931 $19,277 ================== Management had not identified any impaired loans as of September 30, 1996 In the normal course of business, the bank makes loans to its executive officers, directors and employees, and to companies and individuals affiliated with officers, directors and employees of the bank and the Company. In the opinion of management, these loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. The activity in these loans during 1996 is as follows: Balance as of October 1, 1995 ................................ $ 876 New loans ................................................. 351 Repayments ................................................ (293) ----- Balance as of September 30, 1996 ............................. $ 934 ===== Note 5. Allowance for Loan Losses The following is an analysis of the allowance for loan losses: Year Ended September 30, ---------------- 1996 1995 ---------------- Balance, beginning .......................... $ 113 $ 99 Provision charged to income .............. 64 80 Charge-offs .............................. (70) (70) Recoveries ............................... 10 4 ---------------- Balance, ending ............................. $ 117 $ 113 ================ Note 6. Premises and Equipment Premises and equipment consist of: September 30, -------------------- 1996 1995 -------------------- Land .................................................. $ 136 $ 86 Office building ....................................... 454 210 Furniture and equipment ............................... 363 295 -------------------- 953 591 Less accumulated depreciation ......................... (359) (339) -------------------- $ 594 $ 252 ==================== Note 7. Deposits At September 30, 1996, the scheduled maturities of CD's are as follows: Year Ended September 30: Amount - -------------------------------------------------------------------------------- 1997 $16,553 1998 3,739 1999 2,514 2000 1,115 2001 and thereafter 400 ------- $24,321 ======= Note 8. Income Taxes Income taxes for the years ended September 30, 1996 and 1995, consists of the following components: Current Deferred Total ------------------------- 1996 Federal ........................................ $214 $(38) $176 State .......................................... 48 (18) 30 ------------------------ $262 $(56) $206 ======================== 1995 Federal ........................................ $196 $(10) $186 State .......................................... - - (5) (5) ------------------------ $196 $(15) $181 ======================== Under existing provisions of the Internal Revenue Code and similar sections of the Illinois income tax law, qualifying thrifts may claim bad debt deductions based on the greater of (1) a specified percentage of taxable income, as defined, or (2) actual loss experience. If, in the future, any of the accumulated bad debt deductions are used for any purpose other than to absorb bad debt losses, gross taxable income may result and income taxes may be payable. The Small Business Job Protection Act became law on August 20, 1996. One of the provisions in this law repealed the reserve method of accounting for bad debts for thrift institutions so that the bad debt deduction described in the preceding paragraph will no longer be effective for tax years beginning after December 31, 1995. The change in the law requires that the tax bad debt reserves accumulated after September 30, 1988 be recaptured into taxable income over a six-year period. The start of the six-year period can be delayed for up to two years if the Company meets certain residential lending thresholds. Deferred taxes have been provided on the portion of the tax reserve for loan loss that must be recaptured. Retained earnings at September 30, 1996 and 1995, includes approximately $867 of the tax reserve which accumulated prior to 1988, for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad-debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad-debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $336 as of September 30, 1996 and 1995. Income tax expense differed from the statutory federal rate of 34% for the years ended September 30, 1996 and 1995, as follows: 1996 1995 ---------------- Statutory rate applied to earnings before income tax .... $ 150 $ 170 Increase in income taxes resulting from: State income taxes, net of federal income tax benefit . 20 (3) Other ................................................. 36 14 ---------------- $ 206 $ 181 ================ The net deferred tax liability in the accompanying balance sheets include the following amounts of deferred tax assets and liabilities: 1996 1995 ------------------- Deferred tax liability ........................... $ (235) $ (206) Deferred tax asset ............................... 154 44 Valuation allowance for deferred tax assets ------------------- $ (81) $ (162) =================== The tax effect of principal temporary differences are shown in the following table: 1996 1995 ---------------------- Securities market value allowance .................. $ 15 $ (10) Cash basis adjustment .............................. (124) (105) Allowance for loan losses - book ................... 45 44 Allowance for loan losses - tax .................... (79) (57) FHLB stock basis ................................... (8) (8) Premises and equipment basis ....................... (14) (14) SAIF assessment .................................... 94 - - Other .............................................. (10) (12) --------------------- $ (81) $ (162) ===================== Note 9. Fair Value of Financial Instruments Financial Accounting Standard Board Statement of Financial Accounting Standard No. 107 (FAS 107), "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company and its subsidiary. The following table reflects a comparison of carrying values and the fair values of the financial instruments as of September 30, 1996: Carrying Fair Value Value ---------------- Assets: Cash and cash equivalents ........................ $ 4,766 $ 4,766 Securities held to maturity ...................... 1,987 2,091 Securities available for sale .................... 14,044 14,044 Securities purchased under agreements to resell .. 300 300 Nonmarketable equity securities .................. 165 165 Accrued interest receivable ...................... 331 331 Loans ............................................ 26,931 26,793 Liabilities: Deposits ......................................... 36,854 36,894 Accrued interest payable ......................... 14 14 The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments: Cash and due from banks The carrying values reported in the balance sheet for cash and due from banks, including interest earning deposits approximate their fair values. The carrying value for securities purchased under agreements to resell and nonmarketable equity securities approximates their fair values. Securities Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of accrued interest receivable approximates its fair value. The carrying value for equity securities purchased under agreements to resell and nonmarketable equity securities approximates their fair values. Loans For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed-rate loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying value of accrued interest receivable approximates its fair value. Deposits The fair value disclosed for demand deposits are, by definition, equal to the amount payable on demand at the balance sheet date. The carrying values for variable-rate, demand deposits and savings deposit accounts approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying value of accrued interest payable approximates its fair value. Off-balance-sheet instruments Fair values for the Bank's off-balance-sheet instruments, which consist of commitments to extend credit and standby letters of credit, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value for such financial instruments is nominal. Note 10. Capital Ratios The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 1996, that the Bank meets all capital adequacy requirements to which it is subject. As of September 30, 1996, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------------------- ----------------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------------------------------------- As of September 30, 1996: Total Capital (to Risk Weighted Assets) Consolidated $ 12,925 60.30% $ 1,715 = 8.0% N/A Centralia Savings Bank $ 8,742 42.18% = $ 1,658 = 8.0% = $ 2,072 = 10.0% Tier I Capital (to Risk Weighted Assets) Consolidated $ 12,087 56.39% $ 857 = 4.0% $ N/A Centralia Savings Bank $ 7,903 38.14% = $ 829 = 4.0% = $ 1,243 = 6.0% Tier I Capital (to Average Assets) Consolidated $ 12,087 27.72% $ 1,744 = 4.0% $ N/A Centralia Savings Bank $ 7,903 19.67% = $ 1,607 = 4.0% = $ 2,009 = 5.0%
In order to grant priority to eligible account holders in the event of future liquidation, the Bank, at the time of conversion, established a liquidation account in an amount equal to regulatory capital as of September 30, 1995. This amount was $5,575,000. In the event of a future liquidation of the Bank, eligible account holders who continue to maintain their deposit accounts shall be entitled to receive a distribution from the liquidation account. The total amount of the liquidation account will be decreased as the balance of the eligible account holders are reduced subsequent to the conversion, based on an annual determination of such balances. The Bank may not declare or pay a cash dividend to the Company on, or repurchase any of, its capital stock if the effect thereof would cause the net worth of the Bank to be reduced below the amount required for the liquidation account. The Illinois Savings Bank Act (ISBA) capital distribution regulations restrict the Bank's cash dividend payments or other capital distributions. The ISBA regulations generally provide that an institution can make capital distributions during a calendar year up to 50% of its net income to date during the fiscal year. Any additional capital distributions would require prior notice to the Commissioner. The Company is not subject to these regulatory restrictions on the payment of dividends to its stockholders, however, the ability of the Company to pay future dividends will depend on dividends from the Bank. Note 11. Officer, Director and Employee Benefit Plans Employee Stock Ownership Plan In connection with the conversion, the Bank formed, for eligible employees, an employee stock ownership plan ("ESOP"). The ESOP obtained a term loan from the Company and purchased 82,800 shares of $0.01 par value common stock at the subscription price of $8 per share. Employees who are 21 or older who have completed at least 1,000 hours of service in a twelve month period are eligible to participate. A participant is 100% vested after five years of credited service. The Bank makes contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. Dividends received by the ESOP on unallocated shares are used to pay debt service. The ESOP shares were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the ratio of debt service paid to total original principal plus the interest to be paid. As shares are committed to be released from collateral, the Bank reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings-per-share calculation. ESOP compensation expense was $92 for the year ended September 30, 1996. The following table reflects the shares held by the plan as of September 30, 1996: Shares allocated to participants .................................... 4,487 Unallocated shares (Fair value at September 30, 1996 $743,974) ...... 78,313 ------ Total ................................................. 82,800 ------ Shares committed to be released ..................................... 5,611 ====== Since the ESOP borrowed from the Company to purchase the shares of common stock, the loan obligation is considered unearned employee stock ownership plan shares and is reflected as a reduction of stockholders' equity. The Board of Directors of the Company may direct payment of cash dividends be paid in cash to the participants or to be credited to participant accounts and invested. Profit Sharing Plan The bank has a noncontributory defined contribution profit-sharing plan for all employees who have attained age 21 and one year of service. Nondeductible voluntary contributions are permitted, but none have been made to date. Annually, the Board of Directors determined the contribution to the plan which is allocated to those employees who worked more than 500 hours during the plan year or who are employed at the end of the plan year. The allocations are made without regard to hours of service completed during the plan year. The allocation of the contribution is in proportion to each participant's compensation for the plan year. There have been no contributions for the years ended September 30, 1996 and 1995. Management Recognition Plan At the annual stockholder's meeting on May 22, 1996 the Management Recognition Plan ("MRP") was approved. The MRP intends to purchase with funds provided by the Company, whether in the open market or from the Holding Company in the form of newly issued shares, 41,400 shares, or 4% of the aggregate number of shares of Common Stock issued and sold in connection with the Conversion for issuance to officers, directors, and employees of the Holding Company. Directors, officers, and employees become vested in the shares of common stock awarded to them under the MRP at a rate of 20% per year, commencing one year after the grant date, and 20% on each anniversary date thereof for the following four years. As of September 30, 1996 there have been no shares purchased for the management recognition plan. Stock Option Plan At the annual stockholder's meeting on May 22, 1996 the Stock Option Plan ("SOP") was approved. The board has reserved an amount of stock equal to, 103,500 shares, or 10% of the common stock sold in the conversion for issuance under the SOP. The options will be granted by a Committee, comprised of directors, to key employees and directors based on their services. Upon approval of the SOP each nonemployee director was awarded a nondiscretionary grant of a ten-year nonstatutory option to purchase 5,175 shares of common stock. The exercise price of options granted must be at least equal to the fair market value of the common stock on the date the option is granted. The options granted under the plan become exercisable at a rate of 20 percent per year commencing one year after the grant date and 20 percent on each anniversary date for the following four years. As of September 30, 1996, 25,875 options had been granted. Employment Agreement The Bank has entered into an employment agreement with an executive officer which is renewable on November 30 of each year. The term of the agreement will be automatically renewed for another one-year period, unless the Board of Directors of the Bank gives the executive officer notice 90 days prior to the anniversary date. Note 12. Commitments, Contingencies, and Credit Risk In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company's financial statements. The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent credit risk at September 30, 1996 follows: Range of Variable Rates on Rate Fixed Rate Total Fixed Rate Commitments Commitments Commitments Commitments ----------------------------------------------- Commitment to extend credit .... $ 248 $ 882 $ 1,130 7.5% - 11% The Company does not engage in the use of interest rate swaps, futures, forwards or option contracts, or other financial instruments with similar characteristics. Stock Repurchase Program On October 10, 1996, the Company's Board of Directors approved a stock repurchase program whereby the Company would repurchase up to 93,150 shares, or 9%, of its outstanding common stock. Note 13. Concentration of Credit Risk The Bank generally originates single-family residential loans within its primary lending area, Marion County. The Bank's underwriting policies require such loans to be made at 80% loan-to-value based upon appraised values unless private mortgage insurance is obtained. These loans are secured by the underlying properties. Note 14. Branch Acquisition On September 13, 1996, the Company acquired the Carlyle, Illinois branch (the "branch") of Kankakee Federal Savings and Loan. The branch had approximately $8.6 million in deposits at the date of acquisition. In addition to assuming the deposit liabilities attributable to the branch, the Company acquired certain assets associated with the branch, including the building. The operations of the branch are included in the Company's Consolidated Statements of Income from the acquisition date and reflect the application of the purchase method of accounting. Under this method of accounting, the aggregate cost to the Company of the branch was allocated to the assets acquired and the liabilities assumed, based on their estimated fair value as of September 13, 1996. Goodwill in the amount of $343 and core deposit intangible in the amount of $378 was recorded by the Bank in connection with the branch. The goodwill and core deposit intangible will be amortized on a straight-line basis over fifteen years and ten years, respectively. Note 15. Savings Association Insurance Fund Effective September 30, 1996, legislation was enacted to fund the Savings Association Insurance Fund (SAIF) by assessing SAIF insured institutions a one-time special assessment of 65.7 basis points on March 31, 1995 deposits. The assessment for the bank is $188 as of September 30, 1996. Additionally, as part of the purchase agreement with Kankakee Federal Savings and Loan (Kankakee), the Company agreed to reimburse Kankakee for the portion of Kankakee's assessment which related to the Carlyle, Illinois branch which amounts to $54. The $242 assessment payable is included in other liabilities in the accompanying balance sheet. The assessment for the Bank is not deductible for tax purposes until paid, therefore, deferred tax assets of $94 have been provided for the tax impact of the assessment. EX-23 3 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in the Annual Report on Form 10-KSB of CSB Financial Group, Inc. for the fiscal year ended September 30, 1996 of our report dated October 20, 1995, on Centralia Savings Bank's 1995 consolidated financial statements. /s/ Larsson, Woodyard & Henson, LLP Paris, Illinois December 10, 1996 EX-23 4 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in this Annual Report on Form 10-KSB of CSB Financial Group, Inc. for the year ending September 30, 1996 of our report dated October 18, 1996, which appears on Page 16 of the Annual Report to shareholders. /S/ McGLADREY & PULLEN, LLP Champaign, Illinois December 27, 1996 EX-27 5
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1996 FORM 10-K OF CSB FINANCIAL GROUP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR SEP-30-1996 SEP-30-1996 598 4,168 0 0 14,044 1,987 2,091 27,048 117 50,016 36,854 0 378 0 0 0 10 12,774 50,016 1,692 1,051 150 2,893 1,301 1,301 1,592 64 0 1,148 441 235 0 0 235 .25 .25 3.85 235 17 0 0 113 70 10 117 117 0 40
EX-99 6 Independent Auditor's Report To the Board of Directors Centralia Savings Bank and Subsidiary Centralia, Illinois We have audited the accompanying consolidated statement of financial condition of Centralia Savings Bank and Subsidiary as of September 30, 1995 and the related consolidated statements of income, retained earnings, and cash flows for the years ended September 30, 1995 and 1994. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Centralia Savings Bank and Subsidiary as of September 30, 1995 and 1994, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, the Bank changed its method of accounting for certain investments in debt and equity securities during the year ended September 30, 1994 to adopt the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. /s/ Larsson, Woodyard & Henson, LLP October 20, 1995 -----END PRIVACY-ENHANCED MESSAGE-----