-----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, BeGU/BUmLTxqTcTewbstXVReW04p4FuFfd0K2dglSAgL8dAQFTkejJDupW4U+Jga YKUZS4pkmoIk/Ebn/oQ7VA== 0000743530-99-000054.txt : 19991217 0000743530-99-000054.hdr.sgml : 19991217 ACCESSION NUMBER: 0000743530-99-000054 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991216 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: ARS SEC ACT: SEC FILE NUMBER: 000-26650 FILM NUMBER: 99775971 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 ARS 1 ---------------------------------------- BUSINESS OF THE CORPORATION ---------------------------------------- CSB Financial Group, Inc. (the "Company") was organized as a Delaware corporation on December 12, 1994 to acquire all of the capital stock issued by Centralia Savings Bank (the "Bank"). The Company is engaged in the business of directing, planning and coordinating the business activities of the Bank. In the future, the Company may acquire or organize other operating subsidiaries, although there are no current plans or agreements to do so. The Bank is an Illinois-chartered stock savings bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") through the Savings Association Insurance Fund (the "SAIF"). The Bank was originally chartered in 1879 as a federally chartered savings and loan association, merged with another savings association in the 1970's and converted to a state-chartered savings bank on July 1, 1993 under its current name of Centralia Savings Bank. The Bank conducts its business through its office located at 200 South Poplar Street, Centralia, Illinois 62801, and its telephone number is (618) 532-1918. The Bank provides its customers with a broad range of community banking services. The Bank is primarily engaged in the business of attracting deposits from the general public and using such deposits to invest in one- to four-family residential mortgage loans, and, to a lesser extent, multi-family residential, consumer, commercial business and commercial real estate loans. In addition, the Bank invests in U.S. Government and Agency securities, state and municipal obligations and mortgage-backed securities. CSB FINANCIAL GROUP, INC. 200 South Poplar Centralia, Illinois 62801 (618) 532-1918 ---------------------------- PRESIDENT'S MESSAGE ---------------------------- Dear Fellow Shareholders: Highlights for 1999 include growth in total assets of $2.5 million, total deposits of $1.1 million and gross loans of $2.9 million with an additional $1.0 million in loan commitments at year-end. Our loan department had a productive year with loan originations of $15.4 million in new loans compared to $10.1 million in 1998, led primarily by the refinancing of residential real estate loans and new commercial loans. Quality of the loan portfolio improved during the fiscal year, with non-performing assets declining by 50% to $205,000. Our allowance for loan losses to total non-performing assets ratio also improved significantly from 42% to 108%. The consolidated net income declined $46,000, or 13%, to $299,000 at September 30, 1999. The decrease in income represented a $0.01 decrease in diluted earnings per share from 1998. Consolidated income before income taxes (excluding non-recurring items) for 1999 increased 11% to $516,000 as compared to $464,000 in 1998. The non-recurring items were related to the data processing and the Year-2000 conversion expenses of $85,000 incurred during the last six months of the fiscal year ended September 30, 1999. These non-recurring items approximated a $0.07 per share decline in the diluted earnings per share. The market price for CSB Financial Group, Inc.'s stock as of November 26, 1999 was $11.25 per share, an increase of 14% from the close of November 23, 1998. This is encouraging, due to the market volatility of bank stocks in the NASDAQ index. Our strategic plans for improving shareholders' return on equity were briefly delayed by isolated shareholder actions. The Board of Directors is committed to improving return on equity and implementing these strategic plans. In May 1999, the Company changed data processing servicers. The cost of the conversion of data to another servicer was significant. These costs were attributable to 12% of the noninterest expenses for the year. Of course, this change was made for three primary reasons: (1) to provide our customer base with enhanced services at a reasonable cost, (2) to ensure continued data processing capabilities during the century date change, and (3) to reduce our labor costs. We expect the data processing expenses to remain at prior year's levels, while providing more products and service benefits to our customers. One such service enhancement that saves time and labor for our checking account customers is the implementation of the imaging system for checking accountholders. This system provides a digital-image of every check and deposit on a customer's monthly checking account statement for easy retrieval and storage. When customers experienced the convenience of this statement, which was pre-punched to fit a provided binder, many commented they would not be satisfied with any other type of statement. The customer can also arrange to have a monthly statement prepared that combines the banking activities of several accounts on one statement. The century-date change, commonly referred to as "Year 2000" or "Y2K," is an event that has placed unusual demands on all businesses, especially those in the financial industry. As a result, the Company has devoted much time and resources to ensure our ability to meet our customers' financial needs. Our current data processing service completed its testing and achieved compliance in early 1998. Centralia Savings Bank developed, tested and implemented backup procedures to address ongoing operations in the unusual event there is a malfunction in the electrical or telecommunication systems. We completed an evaluation of all equipment, software applications, and third-party vendors to ensure there will be no interruptions in services. We have also evaluated all significant credit accounts to determine if alternate procedures are warranted to diminish any Y2K risks they may pose to the Company. We are confident in the results of our Y2K evaluations and we look forward to the New Year. The financial service industry will be experiencing a great deal of change due to the recent repeal of the Glass-Steagall Act. The offering of insurance and investment products/services will become an increasing portion of a bank's product offerings to its customer base. Technological advances will give customers access to their accounts through Internet services. The continued merger and acquisition between financial institutions will continue to change the landscape of the banking community. Through the coming months, our greatest challenge is to maintain a competitive advantage, identify the customer products and services to offer, select the means of distributing these products/services and improve the value of our shareholders' investment in this Company. Our greatest competitive advantage is that our customers know we are accessible and that decisions are made locally by managers and directors that live, work and participate in this community. The employees of the Company are well trained, experienced and loyal. They are dedicated to serving our customers and shareholders. Our success continues to be linked to the commitment and dedication of our employees and the support of our customers and shareholders. The Board of Directors has committed to programs targeting asset growth, leveraging capital and evaluating strategic alliance opportunities with the singular goal of providing the best value to our shareholders. We are confident and excited about our future as a community bank. We look forward to opportunities the future brings. On behalf of the board of directors, officers and staff of the Company, we thank you our shareholders for their investment and our customers for their business. Sincerely, /s/ A. John Byrne - ------------------------------------- A. John Byrne Chairman of the Board /s/ K. Gary Reynolds - ------------------------------------- K. Gary Reynolds President and Chief Executive Officer Management's Discussion and Analysis of Financial Condition & Results of Operations Management's discussion and analysis of financial condition and results of operations is intended to assist the reader in understanding the financial condition, changes in financial condition and results of operation for CSB Financial Group, Inc. (the "Company"). The information contained in this section should be read in conjunction with the Consolidated Financial Statements and the other sections contained herein. General On December 12, 1994, CSB Financial Group, Inc. was organized for the purpose of acquiring all of the outstanding stock of Centralia Savings Bank (the "Bank") upon conversion of the Bank from a mutual to a stock savings bank. The conversion was completed on October 5, 1995. The Company sold 1,035,000 shares of common stock in the initial stock offering at $8 per share. The Company purchased 100% of the outstanding common stock of the Bank using 50% of the $7,584,000 in net proceeds generated from the initial offering. The Company conducts no significant business other than through the Bank. The Bank has a wholly owned subsidiary, Centralia SLA, Inc., which provides insurance services. All references to the Company include the Bank and its subsidiary, unless otherwise indicated. References to the Company prior to October 5, 1995 are to the Bank and Centralia SLA, Inc., on a consolidated basis. In June, 1999, the Board of Directors authorized management to retain an independent third party to evaluate strategic alternatives for the Company. This action resulted from an unsolicited offer that was declined by the Board of Directors. Comparison of Operating Results for the Fiscal Years Ended September 30, 1999 and 1998 General. The operating results of the Company depend primarily on its net interest income, which is the difference between the interest income earned on interest-earning assets (primarily loans, investment securities and mortgage-backed securities) and interest expense incurred on interest-bearing liabilities (primarily deposits). The Company's net income also is affected by the establishment of provision for loan losses and the level of its non-interest income, including loan fees, deposit service charges, insurance commissions, gains and losses from the sale of assets as well as its other non-interest expenses and provisions for income taxes. The Company's net income for the fiscal year ended September 30, 1999 was $299,000 as compared to $345,000 for the fiscal year ended September 30, 1998. This represents a $46,000, or 13.3%, decrease in net income. Net Interest Income. The Company's net interest income for the fiscal years ended September 30, 1999 and 1998 were $1,718,000 and $1,666,000, respectively. This represents a $52,000, or 3.1%, increase in net interest income. This is primarily due to an increase in the net interest rate spread. Interest income decreased $51,000, or 1.54%, from $3,304,000 for the fiscal year ended September 30, 1998 compared to $3,253,000 for the fiscal year ended September 30, 1999. The decrease resulted primarily from a 29 basis point decrease in the average rate earned on the Company's interest-earning assets. The $99,000 decrease in interest on securities and other interest earning assets was partially offset by the $48,000 increase in interest and fees on loans. The decrease in interest on securities and other interest earning assets was a result of a decrease in average balances of $490,000 and yields of 40 basis points. As yields on investment securities continued to decline, management chose to invest funds in loans with an average yield of 7.84% rather than mortgage backed securities or investment securities with average yields of 8.13% and 5.69%, respectively. Interest expense decreased $103,000, or 6.29%, to $1,535,000 for the fiscal year ended September 30, 1999 from $1,638,000 for fiscal year ended September 30, 1998. The $1.2 million increase in average balances was more than offset by the 47 basis point decrease in cost of funds. Provision for Loan Losses. The Company's provision for loan losses for the fiscal year ended September 30, 1999 was $72,000, compared to $63,000 for the fiscal year ended September 30, 1998. Management evaluates the adequacy of the Company's allowance for loan losses on a quarterly basis and may, based on such review, adjust the amount of the provision for loan losses. Classified loans are considered as part of this review. Non-Interest Income. The Company's non-interest income for the fiscal year ended September 30, 1999 was $132,000, as compared to $134,000 for the fiscal year ended September 30, 1998. This represents a decrease of $2,000, or 1.49%, in non-interest income. The decrease resulted primarily from a $5,000 decrease in gains on sale of securities offset by a $1,000 increase in service charges on deposits and a $2,000 increase in other non-interest income. Non-Interest Expense. The Company's non-interest expense for the fiscal year ended September 30, 1999 was $1,347,000, as compared to $1,273,000 for the fiscal year ended September 30, 1998. The $74,000, or 5.81%, increase in non-interest expense is principally due to additional costs incurred in the conversion of data processing service centers. Compensation and Employee Benefits expense increased $20,000, or 3.17%, to $651,000 for the fiscal year ended September 30, 1999. This increase was primarily due to an increase of $17,000 in group insurance premiums. Data processing expense increased $55,000, or 53.40%, to $158,000 for the fiscal year ended September 30, 1999. This increase was primarily attributable to costs associated with the conversion of data processing service centers. Other non-interest expenses decreased $14,000, or 4.06%, to $331,000 for the fiscal year ended September 30, 1999 as compared to $345,000 for the fiscal year ended September 30, 1998. Provision for Income Taxes. The Company's provision for income taxes for the fiscal year ended September 30, 1999 was $132,000, as compared to $119,000 for the fiscal year ended September 30, 1998. This represents a $13,000, or 10.9%, increase in the provision for income taxes. Comparison of Financial Condition as of September 30, 1999 and 1998 General. At September 30, 1999, the Company's total assets were $48.9 million, an increase of $2.5 million, or 5.4%, as compared to $46.4 million at September 30, 1998. The increase resulted from a $2.8 million increase in loans receivable, net of the allowance for loan losses, which offset the $.7 decrease in cash and cash equivalents. The increase in loans was funded by a $1.1 million increase in deposits and $1.4 million in borrowings. Loans. Loans, net of the allowance for loan losses, at September 30, 1999 were $28.9 million, an increase of $2.8 million, or 10.8%, compared to $26.1 million for the fiscal year ended September 30, 1998. Mortgage loans increased $3.0 million, or 14.55%, consumer loans decreased $646,000, or 15.78%, as compared to the fiscal year ended September 30, 1998. Commercial loans increased $539,000, or 86.24%, to $1.2 million for the year ended September 30, 1999 as compared to $625,000 for the year ended September 30, 1998. Home equity lines of credit and share loans remained relatively stable. Average loan balances for 1999 amounted to $28.5 million as compared to $26.9 million in the previous fiscal year. The Company continues to emphasize mortgage lending, however, management is also making more loans on commercial real estate and commercial operations. The residential mortgage loans increased $1.9 million during 1999, or 10.00%, to $21.2 million as compared to $19.3 million for the fiscal year ended September 30, 1998. During 1999, loan originations for residential mortgage loans amounted to $7.6 million as compared to $5.2 million in originations for the prior fiscal year. Residential mortgage loans represent 72.83% of gross loans. Consumer loans, consisting primarily of automobile loans, made up 11.84% of gross loans, commercial loans made up 3.99% of gross loans, home equity lines of credit and share loans made up 2.81% of gross loans, commercial real estate loans made up 1.78% of gross loans, and non-residential real estate loans comprised 6.75% of the portfolio at September 30, 1999. Allowance for Loan Losses. An allowance for loan losses is maintained at a level considered adequate by management to absorb potential loan losses as determined by evaluations of the loan portfolio on a continuing basis. This evaluation by management includes consideration of past loan loss experience, changes in the composition of the loan portfolio, the volume and condition of the loan portfolio as well as the financial condition of specific borrowers and current economic conditions. Loans with principal and interest payments contractually due but not yet paid are reviewed at least semimonthly and are placed on a nonaccrual status when scheduled payments remain unpaid for 90 days or more, unless the loan is both well secured and is in the process of collection. Nonperforming loans as of September 30, 1999 amounted to $205,000 or .42% of total assets as compared to $410,000 or .88% of total assets as of September 30, 1998. The following table sets forth an analysis of the Company's gross allowance for loan losses for the periods indicated. For the Fiscal Year Ended September 30, -------------------- 1999 1998 -------------------- (In Thousands) Allowance at beginning of period ................. $ 171 $ 165 Provision for loan losses ........................ 72 63 Recoveries: Consumer loans ............................... 18 4 Total recoveries ....................... 18 4 Charge-offs: Consumer loans ............................... 39 61 Total charge-offs ...................... 39 61 Net charge-offs ........................ (21) (57) Balance at end of period ............... $ 222 $ 171 Ratio of allowance for loan losses to gross loans outstanding at the end of the period ........... 0.76% 0.65% Ratio of net charge offs to average loans outstanding net during the period .............. 0.07% 0.21% Ratio of allowance for loan losses to total nonperforming assets at the end of the period .. 108.29% 41.71% Investment Securities. Investment securities represented 35.43% of total assets as of September 30, 1999 compared to 36.93% of total assets as of September 30, 1998. Investment securities increased $188,000, 1.10%, from $17.1 million to $17.3 million as of September 30, 1999. At September 30, 1999, the Company held approximately $17.3 million in investment securities of which $17.1 million were held as available for sale, and $216,000 were non-marketable equity securities. Of the $17.3 million in investment securities, $13.1 million, or 75.57%, were U. S. Government and agency securities, $1.0 million, or 5.78%, were U.S. Treasury securities, $1.6 million, or 9.38%, were obligations of state and political subdivisions, $216,000, or 1.25%, were non-marketable equity securities, $482,000, or 2.78% were corporate securities and $909,000, or 5.24%, were mortgage-backed securities. Deposits. At September 30, 1999, total deposits amounted to $36.9 million, or 75.44%, of total assets. Total deposits increased $1.1 million, or 2.93% from September 30, 1998. The increase resulted from an increase of $947,000, $407,000 and $20,000 in time deposits greater than $100,000, savings and demand deposits, respectively, offset by a $323,000 decrease in other time deposits. Borrowings. At September 30, 1999, total borrowings totaled $1.4 million, or 2.86% of total assets, and consisted of advances on a line of credit from the Federal Home Loan Bank of Chicago. The borrowings were made in September 1999 to fund loan growth. The Company had no borrowings outstanding at September 30, 1998. Return on Equity and Assets Net income for the fiscal year ended September 30, 1999 was $299,000 as compared to $345,000 for the fiscal year ended September 30, 1998. Return on average assets (ROA) for the year ended September 30, 1999 was .62% as compared to .73% for the year ended September 30, 1998. The cause for the decrease in ROA was principally due to an increase in noninterest expenses. Return on average equity (ROE) for the year ended September 30, 1999 was 2.93% as compared to 3.24% for the year ended September 30, 1998. The cause for the decrease in ROE was due to decreased net income and a decrease in the fair value of securities available for sale. The average equity to average assets ratio as of September 30, 1999 was 21.18% as compared to 22.35% as of September 30, 1998. The primary cause for the decrease was the decreased net income and the decrease in the fair value of securities available for sale. Average Balance Sheet The following table presents the average balance sheet for the Company for the years ended September 30, 1999 and 1998, the interest on interest earning assets and interest bearing liabilities and the related average yield or cost. The yields and costs are derived by dividing income or expense by the average balance of the related asset or liability for the periods shown. Average balances were determined from averaging month-end balances. For the Fiscal Year Ended September 30, ----------------------------------------------------------- 1999 1998 ---------------------------- ---------------------------- (In Thousands) Average Interest & Yield/ Average Interest & Yield/ Balance Dividends Cost Balance Dividends Cost ----------------------------------------------------------- Interest-earning assets: Mortgage loans (5) ........................ $22,506 $ 1,634 7.26% $20,201 $ 1,630 8.07% Commercial loans (5) ...................... 1,968 210 10.67% 961 96 9.99% Consumer loans (5) ........................ 4,045 391 9.67% 5,736 461 8.04% ------------------ ------------------ Total loans, net .................... $28,519 $ 2,235 7.84% $26,898 2,187 8.13% Mortgage-backed securities (3) ............ $ 1,046 $ 85 8.13% $ 1,048 98 9.35% Investment securities (2)(3) .............. 15,312 871 5.69% 15,712 943 6.00% Daily interest-bearing deposits ........... 617 48 7.78% 706 62 8.78% FHLB stock ................................ 214 14 6.54% 213 14 6.57% ------------------ ------------------ Total interest-earning assets ....... $45,708 $ 3,253 7.12% $44,577 3,304 7.41% Non-interest earning assets: Office properties and equipment, net ...... $ 630 $ 603 Real estate, net .......................... 7 5 Other non-interest earning assets ......... 1,911 2,377 ------- ------- Total assets ........................ $48,256 $47,562 ======= ======= Interest-bearing liabilities: Passbook accounts ......................... $ 3,604 $ 74 2.05% $ 3,435 82 2.39% NOW accounts .............................. 4,575 86 1.88% 3,712 69 1.86% Money market accounts ..................... 2,960 99 3.34% 3,550 134 3.77% Certificates of deposit ................... 24,658 1,274 5.17% 23,892 1,353 5.66% ------------------ ------------------ Total deposits ...................... $35,797 $ 1,533 4.28% $34,589 1,638 4.74% FHLB Advances ............................. 34 2 5.88% - - - - - - ------------------ ------------------ Total interest-bearing .............. $35,831 $ 1,535 4.28% $34,589 $ 1,638 4.74% liabilities Non-interest bearing liabilities: Non-interest bearing deposits ............. $ 1,827 $ 1,451 Other liabilities ......................... 378 890 ------- ------- Total liabilities ................... $38,036 $36,930 Stockholders' equity ........................ 10,220 10,632 ------- ------- Total liabilities and stockholders' equity ............ $48,256 $47,562 ======= ======= Net interest income ......................... $ 1,718 $ 1,666 ======= ======= Interest rate spread (4) .................... 2.84% 2.67% Net interest margin (1) ..................... 3.76% 3.74% Ratio of average interest-earning assets to average interest-bearing liabilities ............................... 127.57% 128.88% (1) Net interest income as a percentage of average interest-earning assets. (2) Includes available for sale investment securities. (3) Interest is classified as interest income on securities in the Consolidated Statement of Income. (4) Difference between weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities. (5) Average volume includes nonaccrual loans.
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). 1999 Compared to 1998 1998 Compared to 1997 Increase (Decrease) Due To Increase (Decrease) Due To -------------------------- -------------------------- Rate Volume Net Rate Volume Net -------------------------- -------------------------- (In Thousands) (In Thousands) Interest-earning assets: Mortgage loans .............. $ (163) $ 167 $ 4 $ 80 $ 6 $ 86 Commercial loans ............ 7 107 114 15 (18) (3) Consumer loans .............. 93 (163) (70) (43) (17) (60) ------------------------ ------------------------ Total loans ........... (63) 111 48 52 (29) 23 Mortgage-backed securities .. (13) - - (13) (3) (34) (37) Investment and other securities ................ (49) (23) (72) 29 91 120 Interest-bearing deposits ... (7) (7) (14) 83 (139) (56) FHLB stock .................. - - - - - - (1) 2 1 ------------------------ ------------------------ Total net change income on interest-earning assets .............. (132) 81 (51) 160 (109) 51 ------------------------ ------------------------ Interest-bearing liabilities: Passbook .................... (11) 3 (8) (6) (4) (10) Interest-bearing demand (NOW) accounts ............ 1 16 17 - - (26) (26) Money market deposit accounts .................. (15) (20) (35) 23 (10) 13 Certificates of deposit ..... (117) 38 (79) (76) 95 19 FHLB Advances ............... - - 2 2 - - - - - - ------------------------ ------------------------ Total net change in expense on interest- bearing liabilities . (142) 39 (103) (59) 55 (4) ------------------------ ------------------------ Net change in net interest income ..... $ 10 $ 42 $ 52 $ 219 $ (164) $ 55 ======================== ========================
Asset and Liability Management The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest-rate sensitive", and by monitoring an institution's interest-rate sensitivity gap. An asset or liability can be considered to be interest-rate sensitive within a specific time period if it will mature or reprice within that time period. The interest-rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period, and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that same time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. At September 30, 1999, the Company's interest-bearing liabilities either maturing or repricing within one year exceeded its interest-earning assets either maturing or repricing within one year by $(1.6) million, representing a cumulative one-year interest-rate sensitivity gap of negative (3.25)%. During periods of rising interest rates, it is expected that the yield on the Company's interest-earning assets would rise more slowly than the cost on its interest-bearing liabilities, which would be expected to have a negative effect on net interest income. A decrease in interest rates would have the opposite effect on net interest income, as the interest rates paid on interest-bearing liabilities would fall more rapidly than would the interest rates earned on interest-earning assets. The primary function of asset and liability management is to maintain an appropriate balance between liquidity on the one hand, and interest-earning assets and liabilities on the other. The appropriate balance will enable the Company to produce stable net income during changing interest-rate cycles. In recent years, the Company's assets have been comprised primarily of one-to-four-family residential mortgage balloon payment notes along with long-term investment and mortgage-backed securities, while its liabilities have been comprised primarily of short-term certificates of deposit. The majority of the Company's balloon payment notes have maturities of three years, while a small number have maturities of either one or five years. The balloon payment notes are not interest-rate sensitive in a rapidly increasing interest-rate environment because the interest rate remains fixed for up to five years regardless of an increase in market interest rates. Furthermore, although the interest rate on the balloon payment notes may be changed if the note is renewed at the end of the term, the balloon payment notes have interest rate caps of one or two percentage points over the initial rate of interest. Consequently, if interest rates increase by an amount exceeding the interest rate cap during the term of the note, the Company may be forced to renew the notes at interest rates below the prevailing market rate. Since the first calendar quarter of 1995, the adjustable-rate-mortgage (ARM) has replaced the standard balloon payment loan as the principal type of mortgage loan offered to new residential first-mortgage customers of the Company. The ARM's have higher interest rate ceilings than the balloon payment loans, along with interest rate floors, and will accordingly provide the Company with increased interest rate protection. Beginning in February 1996, the Company initiated a program of converting the balloon mortgage loans to comparable ARM mortgage loans. As the balloon mortgage loans mature, they are converted to an ARM. Because the majority of the Company's deposits are in higher yielding short-term certificates of deposit (which can be expected to reprice upon maturity), an increase in market interest rates will have a more dramatic effect on the Company's cost of funds than if such deposits were in transaction or passbook savings account. The interest rates on the Company's certificates of deposit tend to increase more quickly and in greater increments than the interest rates on its transaction or passbook savings accounts. The Company's investment securities portfolio had an average maturity of 4.4 years, excluding mortgage-backed securities, as of September 30, 1999. Accordingly, the Company's investment securities portfolio could be made less interest-rate sensitive by increasing the average maturity of the portfolio. Liquidity and Capital Resources The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, payments on investment and mortgage-backed securities and sales of Company stock. While scheduled maturities of loans and investment and mortgage-backed securities are predictable sources of funds, deposit flows, mortgage prepayments and the Company's ability to renew balloon payment notes are greatly influenced by general interest rates, economic conditions and competition. The primary investing activity of the Company is the origination of one-to-four-family residential mortgage loans. During each of the fiscal years ended September 30, 1999 and 1998, the Company originated one-to-four-family residential mortgage loans in the amount of $7.6 million and $5.2 million, respectively. These activities were funded primarily by Federal Home Loan Bank advances and deposit growth. The net cash used in investing activities for the fiscal year ended September 30, 1999 totaled $3.5 million. Investment activities included the purchase of investment securities which totaled $7.1 million and $13.0 million for the fiscal year ended September 30, 1999 and 1998, respectively and the origination of loans, net of paydowns, of $2.9 million for the year ended September 30, 1999. Sources of cash for investing activities was provided by operating activities, maturities and sales of securities, and cash and cash equivalents held at the beginning of the fiscal year. Investment activities included the sale of investment securities which totaled $500,000 and $5.2 million for the fiscal years ended September 30, 1999 and 1998, respectively. Investment activities also included maturities and paydowns on investment securities which totaled $6.1 million and $7.8 million for the fiscal years ended September 30, 1999 and 1998, respectively. The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, satisfy financial commitments and take advantage of investment opportunities. During the fiscal year ended September 30, 1999 and 1998, the Company used its sources of funds primarily to fund loan commitments. At September 30, 1999, the Company had commitments to extend credit in the amount of $2.3 million. These commitments were comprised of variable-rate and fixed-rate commitments in the amounts of $1,173,000 and $1,146,000, respectively. The range of rates on fixed-rate commitments was 7.75% to 10.5%. At September 30, 1999, certificates of deposits totaled $24.5 million, or 66.52% of total deposits, as compared to $23.9 million, or 66.73% of total deposits for fiscal year ended September 30, 1998. Time deposits over $100,000 accounted for $2.6 million and $1.7 million, respectively, of the certificate of deposit totals. Historically, the Company has been able to retain a significant amount of its maturing deposits by increasing the interest rates earned by the certificates of deposit. Because deposit insurance premiums paid by commercial banks on BIF-insured deposits have been drastically reduced, the Company may find it more difficult to retain such deposits. Management believes it will have adequate resources to fund maturing deposits and withdrawals from additional deposits, proceeds of scheduled repayments of loans as well as from payments received on investment and mortgage-backed securities. Capital. The Company is required to maintain a specific amount of capital pursuant to the regulations of the Commissioner of Savings and Residential Finance and the Federal Deposit Insurance Corporation (FDIC). As of September 30, 1999, the Company was in compliance with all regulatory capital requirements with a Tier 1 capital to risk-weighted assets ratio of 42.93%, compared to the minimum ratio required of 4.0%, total capital to risk-weighted assets ratio of 43.90% compared to the minimum ratio required of 8.0% and a Tier 1 capital to average assets ratio of 20.29% compared to the minimum ratio required of 4.0%. The Company continues to maintain a strong capital position to support its capital requirements. Stockholders' equity increased $149,000 to $10.3 million as of September 30, 1999. This increase was due primarily to net income of $299,000 offset by a decrease in unrealized gain on securities available for sale of $207,000. Impact of New Accounting Pronouncements Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133) establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This statement applies to all entities. FAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is encouraged. The statement is not to be applied retroactively to financial statements of prior periods. In June 1999, Statement of Financial Accounting Standard No. 137 was issued to extend the effective date by one year to all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not believe the adoption of FAS 133, as amended by FAS 137, will have a material impact on the consolidated financial statements. Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise Statement of Financial Accounting Standard No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (FAS 134) changes the way mortgage banking firms account for certain securities and other interests they retain after securitizing mortgage loans that were held for sale. The Statement is effective for financial statements for the first fiscal quarter beginning after December 15, 1998. The Company does not securitze mortgages and is not a Mortgage Banking Enterprise and therefore, FAS 134 will not have an impact on the consolidated financial statements. Recent Regulatory Developments Deposit Insurance Premiums. Deposits of the Bank are currently insured by the FDIC under the SAIF. The FDIC also maintains another insurance fund, the BIF, which primarily insures commercial bank and some state savings bank deposits. Applicable law requires that the SAIF and BIF funds each achieve and maintain a ratio of insurance reserves to total insured deposits equal to 1.25%. In 1995, the BIF reached this 1.25% reserve level, and the FDIC announced a reduction in BIF premiums for most banks. Based on this reduction, the highest rated institutions (approximately 92 percent of the nearly 11,000 BIF-insured banks) will pay the statutory annual minimum of $2,000 for FDIC insurance. Rates for all other institutions were reduced to $.04 per $100 as well, leaving a premium range of $.03 to $.27 per $100 instead of the previous $.04 to $.31 per $100. Currently, SAIF-member institutions pay deposit insurance premiums based on a schedule of $0.00 to $0.27 per $100 of deposits. The assessment for the Bank was $21,000 as of September 30, 1999. FICO Assessment. The Financing Corporation (FICO), established by the Competitive Equality Banking Act of 1987, is a mixed-ownership government corporation whose sole purpose was to function as a financing vehicle for the Federal Savings & Loan Insurance Corporation (FSLIC). Effective December 12, 1991, as provided by the Resolution Trust Corporation Refinancing, Restructuring and Improvement Act of 1991, the FICO's ability to issue new debt was terminated. Outstanding FICO bonds, which are 30-year noncallable bonds with a principal amount of approximately $8.1 billion, mature in 2017 through 2019. The FICO has assessment authority, separate from the FDIC's authority to assess risk-based premiums for deposit insurance, to collect funds from FDIC-insured institutions sufficient to pay interest on FICO bonds. The FDIC acts as collection agent for the FICO. The Deposit Insurance Funds Act 1996 (DIFA) authorized the FICO to assess both BIF- and SAIF-insured deposits, and required the BIF rate to equal one-fifth the SAIF rate through year-end 1999, or until the insurance funds are merged, whichever occurs first. Thereafter, BIF- and SAIF-insured deposits will be assessed at the same rate by FICO. The FICO assessment rate is adjusted quarterly to reflect changes in the assessment bases of the respective funds based on quarterly Call Report and Thrift Financial Report submissions. The quarterly FICO rates since enactment of DIFA have ranged from 1.164 to 1.30 basis points for BIF institutions and 5.82 to 6.50 basis points for SAIF institutions. Income Tax Regulations Affecting Bad Debt Reserve. Under existing provisions of the Internal Revenue Code and similar sections of the Illinois income tax law, qualifying thrifts may claim bad debt deductions based on the greater of (1) a specified percentage of taxable income, as defined, or (2) actual loss experience. If, in the future, any of the accumulated bad debt deductions are used for any purpose other than to absorb bad debt losses, gross taxable income may result and income taxes may be payable. The Small Business Job Protection Act became law on August 20, 1996. One of the provisions in this law repealed the reserve method of accounting for bad debts for thrift institutions so that the bad debt deduction described in the preceding paragraph will no longer be effective for tax years beginning after December 31, 1995. The change in the law requires that the tax bad debt reserves accumulated after September 30, 1988 be recaptured into taxable income over a six-year period. The start of the six-year period can be delayed for up to two years if the Company meets certain residential lending thresholds. Deferred taxes have been provided on the portion of the tax reserve for loan loss that must be recaptured. Pending Legislation. On November 4, 1999, the United States Congress approved legislation that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become a financial holding company may engage in any activity that the Board of Governors of the Federal Reserve System (the "Federal Reserve"), in consultation with the Secretary of the Treasury, determines by regulation or order is (i) financial in nature, (ii) incidental to any such financial activity, or (iii) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Act specifies certain activities that are deemed to be financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment, or economic advisory services; underwriting, dealing in or making a market in, securities; and any activity currently permitted for bank holding companies by the Federal Reserve under section 4(c)(8) of the Bank Holding Company Act. A bank holding company may elect to be treated as a financial holding company only if all depository institution subsidiaries of the holding company are well-capitalized, well-managed and have at least a satisfactory rating under the Community Reinvestment Act. National banks are also authorized by the Act to engage, through "financial subsidiaries," in any activity that is permissible for a financial holding company (as described above) and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank's outstanding investments in financial subsidiaries). The Act provides that state banks may invest in financial subsidiaries (assuming they have the requisite investment authority under applicable state law) subject to the same conditions that apply to national bank investments in financial subsidiaries. The Act must be signed by the President before it will take effect. At this time, the Company is unable to predict the impact the Act may have on the Company and its subsidiary. Effect of Inflation and Changing Prices The Consolidated Financial Statements and Notes thereto included herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or the same extent as the prices of goods and services. Year 2000 Compliance The year 2000 has posed a unique set of challenges to those industries reliant on information technology. As a result of methods employed by early programmers, many software applications and operational programs may be unable to distinguish the year 2000 from the year 1900. If not effectively addressed, this problem could result in the production of inaccurate data, or, in the worst cases, the inability of the systems to continue to function altogether. Financial institutions are particularly vulnerable due to the industry's dependence on electronic data processing systems. In 1997, the Company started the process of identifying the hardware and software issues required to be addressed to assure year 2000 compliance. The Company began by assessing the issues related to the year 2000 and the potential for those issues to adversely affect the Company's operations and those of its subsidiaries. Since that time, the Company has established a Year 2000 Compliance Team (the Team) composed of representatives from key areas throughout the organization. It is the mission of this Team to identify areas subject to complications related to the year 2000 and to initiate remedial measures designed to eliminate any adverse effects on the Company's operations. The Team has identified all mission-critical software and hardware that may be adversely affected by the year 2000 and has required vendors to represent that the systems and products provided are or will be year 2000 compliant. All mission critical software was upgraded and tested to achieve year 2000 compliance. In addition, the Team developed contingency plans to address systems which do not become year 2000 compliant. Management has determined that if a business interruption as a result of Year 2000 issue occurred, such an interruption could be material. The primary effort required to prevent a potential business interruption is to assure the Company's third party processor is year 2000 compliant. As a cost saving measure, management contracted with a different third party processor and converted data during the quarter ended June 30, 1999. This third party processor has stated that Year 2000 remediation and testing efforts have been successfully completed. The Company is committed to a plan for achieving compliance, focusing not only on its own data processing systems, but also on its loan customers. The Team has taken steps to educate and assist its customers with identifying their year 2000 compliance problems. In addition, the Team has proposed policy and procedure changes to help identify potential risks to the Company and to gain an understanding of how customers are managing the risks associated with the year 2000. Management believes that the organization has an effective year 2000 compliance program in place and that additional expenditures required to bring its systems into compliance will not have a materially adverse effect on the Company's operations, cash flow, or financial condition. To date, year 2000 compliance expenditures have amounted to $40,000. Management expects total additional out-of-pocket expenditures to be less than $25,000. This includes costs to upgrade equipment specifically for the purpose of year 2000 compliance and certain administrative expenditures. However, the year 2000 problem is pervasive and complex and can potentially affect any computer process. Accordingly, no assurance can be given that year 2000 compliance can be achieved without additional unanticipated expenditures and uncertainties that might affect future financial results. The Federal banking regulators have established standards for achieving year 2000 compliance for federally insured depository institutions. If an institution fails to meet any of the established standards, its primary regulator may issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the institution's growth rate and take any action the regulator deems appropriate. CSB FINANCIAL GROUP, INC. Consolidated Financial Statements With Independent Auditor's Report Years Ended September 30, 1999 and 1998 CSB FINANCIAL GROUP, INC. Contents - -------------------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets Consolidated statements of income Consolidated statements of stockholders' equity Consolidated statements of cash flows Notes to consolidated financial statements - -------------------------------------------------------------------------------- Independent Auditor's Report To the Stockholders and Board of Directors CSB Financial Group, Inc. Centralia, Illinois We have audited the accompanying consolidated balance sheets of CSB Financial Group, Inc. and subsidiary as of September 30, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CSB Financial Group, Inc. and subsidiary as of September 30, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Champaign, Illinois October 28, 1999 CSB FINANCIAL GROUP, INC. and SUBSIDIARY Consolidated Balance Sheets September 30, 1999 and 1998 (in thousands, except share data) 1999 1998 - ------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents ..................................... $ 871 $ 1,542 Securities: Available for sale ......................................... 17,118 16,931 Nonmarketable equity securities ............................ 216 215 Loans, net of allowance for loan losses of $222 in 1999 and $171 in 1998 ............................................... 28,920 26,111 Premises and equipment ........................................ 683 607 Accrued interest receivable ................................... 318 304 Intangible assets ............................................. 539 600 Other assets .................................................. 255 113 ------------------ Total assets .................................... $48,920 $46,423 ================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Demand .................................................. $ 8,563 $ 8,543 Savings ................................................. 3,794 3,387 Time deposits of $100,000 or more ....................... 2,627 1,680 Other time deposits ..................................... 21,922 22,245 ------------------ Total deposits .................................. 36,906 35,855 Other liabilities .......................................... 191 169 Advances from the Federal Home Loan Bank ................... 1,400 - - Deferred income taxes ...................................... 145 270 ------------------ Total liabilities ............................... 38,642 36,294 ------------------ COMMITMENTS, CONTINGENCIES AND CREDIT RISK STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value; 100,000 shares authorized; none issued and outstanding ............................. - - - - Common stock, $0.01 par value; authorized 2,000,000 shares; 1,035,000 shares issued ................................. 10 10 Paid-in capital ............................................ 7,829 7,823 Retained earnings .......................................... 6,683 6,384 Accumulated other comprehensive income ..................... (53) 154 Unearned employee stock ownership plan shares .............. (160) (180) Management recognition plan ................................ (514) (551) ------------------ 13,795 13,640 Less cost of treasury stock; 1999 302,701 shares; 1998 302,080 shares ..................................... (3,517) (3,511) ------------------ Total stockholders' equity ...................... 10,278 10,129 ------------------ Total liabilities and stockholders' equity ...... $48,920 $46,423 ==================
See Notes to Consolidated Financial Statements. CSB FINANCIAL GROUP, INC. and SUBSIDIARY CONSOLIDATED Statements of Income Years Ended September 30, 1999 and 1998 (in thousands, except share data) 1999 1998 - ---------------------------------------------------------------------------------- Interest income: Loans and fees on loans ....................................... $2,235 $2,187 Securities: Taxable .................................................... 880 988 Nontaxable ................................................. 76 53 Other ......................................................... 62 76 -------------- 3,253 3,304 -------------- Interest expense: Deposits ...................................................... 1,533 1,638 Borrowings .................................................... 2 - - -------------- 1,535 1,638 -------------- Net interest income ................................ 1,718 1,666 Provision for loan losses ........................................ 72 63 -------------- Net interest income after provision for loan losses 1,646 1,603 -------------- Noninterest income: Service charges on deposits ................................... 82 81 Gain on sale of securities .................................... - - 5 Other ......................................................... 50 48 -------------- 132 134 -------------- Noninterest expense: Compensation and employee benefits ............................ 651 631 Occupancy and equipment ....................................... 106 89 Data processing ............................................... 158 103 SAIF deposit insurance ........................................ 21 22 Professional fees ............................................. 80 83 Other ......................................................... 331 345 -------------- 1,347 1,273 -------------- Income before income taxes ......................... 431 464 Income taxes ..................................................... 132 119 -------------- Net income ......................................... $ 299 $ 345 -------------- Earnings per share: Basic ......................................................... $ 0.42 $ 0.43 Diluted ....................................................... $ 0.41 $ 0.42
See Notes to Consolidated Financial Statements. CSB FINANCIAL GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended September 30, 1999 and 1998 (In thousands, except share data) Accu- mulated Unearned Other Employee Compre- Stock Management Preferred Common Paid-In Retained hensive Ownership Recognition Treasury Stock Stock Capital Earnings Income Plan Shares Plan Stock Total ----------------------------------------------------------------------------------------- Balance at September 30, 1997 ............. $ - - $ 10 $7,813 $6,039 $ 110 $ (202) $ (589) $(1,529) $11,652 Net income ............................. - - - - - - 345 - - - - - - - - 345 Comprehensive Income: Change in unrealized gain (loss) on securities available for sale, net of tax of $26 ..................... - - - - - - - - 47 - - - - - - 47 Realized gain on securities sold during the year, net of tax of $2 . - - - - - - - - (3) - - - - - - (3) ------ ------- Comprehensive income ................... - - - - - - - - 44 - - - - - - 389 ------ ------- Employee stock ownership plan shares allocated ......................... - - - - 10 - - - - 22 - - - - 32 Management recognition plan shares allocated ......................... - - - - - - - - - - - - 38 - - 38 Purchase of treasury stock ............. - - - - - - - - - - - - - - (1,982) (1,982) --------------------------------------------------------------------------------------- Balance at September 30, 1998 ............. - - 10 7,823 6,384 154 (180) (551) (3,511) 10,129 Net income ............................. - - - - - - 299 - - - - - - - - 299 Comprehensive Income: Change in unrealized gain (loss) on securities available for sale, net of tax of $(127) .................. - - - - - - - - (207) - - - - - - (207) ------ -------- Comprehensive income ................... - - - - - - - - (207) - - - - - - 92 ------ -------- Employee stock ownership plan shares allocated ............................ - - - - 6 - - - - 20 - - - - 26 Management recognition plan shares allocated ............................ - - - - - - - - - - - - 37 - - 37 Purchase of treasury stock ............. - - - - - - - - - - - - - - (6) (6) ---------------------------------------------------------------------------------------- Balance at September 30, 1999 ........... $ - - $ 10 $7,829 $6,683 $ (53) $ (160) $ (514) $(3,517) $10,278 ========================================================================================
See Notes to Consolidated Financial Statements. CSB FINANCIAL GROUP, INC. and SUBSIDIARY CONSOLIDATED Statements of Cash Flows Years Ended September 30, 1999 and 1998 (in thousands) 1999 1998 - ------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income ...................................................... $ 299 $ 345 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .................................... 72 63 Provision for depreciation ................................... 49 38 Amortization of intangible assets ............................ 61 60 Employee stock ownership plan compensation expense ........... 26 32 Management recognition plan compensation expense ............. 37 38 Deferred income taxes ........................................ 2 - - Gain on sale of securities ................................... - - (5) Loss on sale of other real estate owned ...................... - - 3 Amortization and accretion of securities ..................... 11 (1) Change in assets and liabilities: (Increase) in accrued interest receivable .................. (14) (14) (Increase) decrease in other assets ........................ (142) 46 Increase in other liabilities .............................. 22 117 ------------------- Net cash flows from operating activities ............. 423 722 ------------------- Cash Flows from Investing Activities Securities available for sale: Purchases .................................................... (7,143) (13,004) Proceeds from sales .......................................... 500 5,154 Proceeds from maturities and paydowns ........................ 6,111 7,772 Nonmarketable equity securities: Purchases of nonmarketable equity securities ................. (1) (5) Loan originations, net of principal payments on loans ........... (2,881) 981 Proceeds from the sale of other real estate owned ............... - - 3 Purchases of premises and equipment ............................. (125) (43) ------------------- Net cash flows from investing activities ............. (3,539) 858 ------------------- Cash Flows from Financing Activities Net increase (decrease) in demand deposits and savings accounts . $ 427 $ (538) Net increase (decrease) in time deposits ........................ 624 (193) Purchase of treasury stock ...................................... (6) (1,982) Proceeds from Federal Home Loan Bank advances ................... 1,400 - - ------------------- Net cash flows from financing activities ............. 2,445 (2,713) ------------------- Net decrease in cash and cash equivalents ............ (671) (1,133) Cash and cash equivalents, beginning of year ....................... 1,542 2,675 ------------------- Cash and cash equivalents, end of year ............................. $ 871 $ 1,542 =================== Cash paid during the year for: Interest ........................................................ $ 1,526 $ 1,626 =================== Income taxes, net of refunds .................................... $ 59 $ 15 =================== Supplemental Disclosures of Investing and Financing Activities: Change in unrealized gain (loss) on securities available for sale $ (334) $ 70 =================== Change in deferred income taxes attributable to the unrealized gain (loss) on securities available for sale ................. $ (127) $ 26 =================== Loans originated to facilitate sale of other real estate owned ..... $ - - $ 21 ===================
See Notes to Consolidated Financial Statements. CSB FINANCIAL GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies Nature of operations CSB Financial Group, Inc. (the Company) is the holding company of its wholly-owned subsidiary, Centralia Savings Bank (the Bank). Centralia Savings Bank is a state chartered stock savings bank, converted from mutual form on October 5, 1995, located in Marion County, Illinois. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) through the Savings Association Insurance Fund (SAIF). The Bank is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those agencies. Principles of presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiary, Centralia SLA. Centralia SLA, Inc.'s principal business activity is to provide insurance services. For purposes of the consolidated financial statements, all material intercompany amounts have been eliminated. In preparing the consolidated financial statements, Company management is required to make estimates and assumptions which significantly affect the amounts reported in the consolidated financial statements. Significant estimates which are particularly susceptible to change in a short period of time include the determination of the allowance for loan losses and valuation of real estate and other properties acquired in connection with foreclosures or in satisfaction of amounts due from borrowers on loans. Actual results could differ from those estimates. Effective October 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130, "Comprehensive Income," which was issued in June of 1997. Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components, but has no effect on the Company's net income or total stockholders' equity. Statement No. 130 requires unrealized gains and losses on the Company's available for sale securities, which prior to adoption were reported separately in stockholders' equity, to be included in comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement No. 130. The accounting and reporting policies of the Company conform to generally accepted accounting principles and general practice within the banking industry. Following is a description of the more significant policies which the Company follows in preparing and presenting its financial statements. Cash and cash equivalents For purposes of reporting cash flows, the Company considers all cash on hand, deposit accounts and money-market funds to be cash equivalents. Securities available for sale Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. The difference between fair value and amortized cost, adjusted for amortization of premium and accretion of discounts, which are recognized in interest income using the interest method over their contractual lives, results in an unrealized gain or loss. Unrealized gains or losses are reported as accumulated other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Nonmarketable equity securities Nonmarketable equity securities consist of the Banks' required investment in the capital stock of the Federal Home Loan Bank. This investment is carried at cost as the fair value is not readily determinable. Loans Loans are stated at the principal amount outstanding less unearned interest income and an allowance for loan losses. Interest income on principally all loans is credited to income based on the principal balance outstanding. The Company's policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal. Interest income on these loans is recognized to the extent payments are received, and the principal is considered fully collectible. Loans are considered impaired when, based on current information and events, it is probable the Company will not be able to collect all amounts due. The portion of the allowance for loans losses applicable to impaired loans would be computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans or of collateral value is reported as part of the provision for loan losses expense in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses expense that otherwise would be reported. Management had not classified any loans as impaired as of September 30, 1999 or 1998. Allowance for loan losses The allowance for loan losses is established through a provision for loan losses charged to operating expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers' ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examination. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the related assets principally on the straight-line basis. Intangible assets Core deposit intangible and goodwill were recorded as part of the acquisition of the Carlyle branch. Core deposit intangible is being amortized by the straight line method over a ten year period. Goodwill is being amortized by the straight line method over a fifteen year period. Income taxes Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Earnings per common share Basic earnings per share is computed by dividing net income for the year by the weighted average number of shares outstanding of 719,245 and 797,237 for 1999 and 1998, respectively. Diluted earnings per share is determined by dividing net income for the year by the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents assume exercise of stock options and use of proceeds to purchase treasury stock at the average market price for the period. Unallocated shares of the ESOP are not considered outstanding. The weighted average shares outstanding for purposes of computing diluted earnings per share were 728,767 and 824,296 for 1999 and 1998, respectively. Reclassifications Certain reclassifications have been made to the balances as of September 30, 1998, with no effect on net income, to be consistent with the classifications adopted for September 30, 1999. Effect of New Accounting Standards Accounting for Derivative Instruments and Hedging Activities Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133) establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. This Statement applies to all entities. FAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier application is encouraged. The Statement is not to be applied retroactively to financial statements of prior periods. In June 1999, Statement of Financial Accounting Standard No. 137 was issued to extend the effective date by one year to all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not believe the adoption of FAS 133, as amended by FAS 137, will have a material impact on the consolidated financial statements. Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise Statement of Financial Accounting Standard No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (FAS 134) changes the way mortgage banking firms account for certain securities and other interests they retain after securitizing mortgage loans that were held for sale. The Statement is effective for financial statements for the first fiscal quarter beginning after December 15, 1998. The Company does not securitize mortgages and is not a Mortgage Banking Enterprise and therefore, FAS 134 will not have an impact on the consolidated financial statements Note 2. Securities Amortized cost and fair values of securities available for sale are as follows: Gross Gross Amortized Unrealized Unrealized Fair September 30, 1999 Cost Gains Losses Value - ------------------ --------------------------------------- Obligations of states and political subdivisions .............................. $ 1,642 $ 12 $ 28 $ 1,626 U.S. Government and agency ................... 13,182 25 108 13,099 U.S. Treasury ................................ 1,000 2 - - 1,002 Mortgage backed securities ................... 880 39 10 909 Corporate Securities ......................... 500 - - 18 482 -------------------------------------- $17,204 $ 78 $ 164 $17,118 ====================================== September 30, 1998 - ------------------ Obligations of states and political subdivisions .............................. $ 1,643 $ 44 $ 3 $ 1,684 U.S. Government and agency ................... 9,752 123 - - 9,875 U.S. Treasury ................................ 4,000 16 - - 4,016 Mortgage backed securities ................... 1,288 73 5 1,356 -------------------------------------- $16,683 $ 256 $ 8 $16,931 ======================================
The amortized cost and fair value of securities available for sale, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary: As of September 30, 1999 ------------------- Amortized Fair Cost Value ------------------ Less than one year ......................... $ 2,205 $ 2,198 Due after one year through five years ...... 9,369 9,343 Due after five years through ten years ..... 4,546 4,475 Due after ten years ........................ 204 193 Mortgage-backed securities ................. 880 909 ----------------- $17,204 $17,118 ================= As a member of the Federal Home Loan Bank system, the Bank is required to maintain an investment in capital stock of the Federal Home Loan Bank in an amount equal to 1% of its outstanding home loans. No ready market exists for the Bank stock, and it has no quoted market value. For disclosure purposes, such stock is assumed to have a market value which is equal to cost. The Company had securities with a carrying value of $200 and $150, respectively, pledged as collateral for public deposits for the years ended September 30, 1999 and 1998. Gross realized gains and losses from the sale of securities available for sale follow: Years Ended September 30, ------------------ 1999 1998 ------------------ Gross gains ............................. $ - - $ 6 Gross losses ............................ - - (1) ------------------ Net gain .................. $ - - $ 5 ================== Note 3. Loans Loans are summarized as follows: September 30, ------------------ 1999 1998 ------------------ Mortgage loans: One to four family ........................... $21,225 $19,037 Commercial real estate ....................... 519 1,120 Other loans secured by real estate ........... 1,966 541 ------------------ Total mortgage loans .............. 23,710 20,698 ------------------ Commercial and consumer loans: Commercial loans ............................. 1,164 625 Consumer loans ............................... 3,449 4,095 Home equity lines of credit .................. 649 678 Share loans .................................. 170 193 ------------------ Total commercial and consumer loans 5,432 5,591 ------------------ Less: Allowance for loan losses .................... (222) (171) Deferred loan fees ........................... - - (6) Unearned income on consumer loans ............ - - (1) ------------------ (222) (178) ------------------ Loans, net ........................ $28,920 $26,111 ================== The Bank generally originates single-family residential loans within its primary lending area, Marion County. The Bank's underwriting policies require such loans to be made at 80% loan-to-value based upon appraised values unless private mortgage insurance is obtained. These loans are secured by the underlying properties. At September 30, 1999 and 1998, the Company had approximately $205 and $410 of loans for which the accrual of interest had been discontinued. In the normal course of business, the Bank makes loans to its executive officers, directors and employees, and to companies and individuals affiliated with officers, directors and employees of the Bank and the Company. In the opinion of management, these loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties. The activity in these loans is as follows: Balance as of October 1, 1998 .............................. $ 1,050 New loans ............................................... 2,174 Repayments .............................................. (2,012) ------- Balance as of September 30, 1999 ........................... $ 1,212 ======= Note 4. Allowance for Loan Losses The following is an analysis of the allowance for loan losses: Year Ended September 30, ------------------ 1999 1998 ------------------ Balance, beginning .......................... $ 171 $ 165 Provision charged to income .............. 72 63 Charge-offs .............................. (39) (61) Recoveries ............................... 18 4 ------------------ Balance, ending ............................. $ 222 $ 171 ================== Note 5. Premises and Equipment Premises and equipment consist of: September 30, ----------------- 1999 1998 ----------------- Land ............................................ $ 136 $ 136 Office building ................................. 492 479 Furniture and equipment ......................... 541 429 ----------------- 1,169 1,044 Less accumulated depreciation ................... (486) (437) ----------------- $ 683 $ 607 ================= Note 6. Deposits At September 30, 1999, the scheduled maturities of time deposits are as follows: Year Ended September 30: Amount - ------------------------ ------- 2000 $11,972 2001 8,982 2002 2,091 2003 954 2004 464 Thereafter 86 ------- $24,549 ======= Note 7. Advances from the Federal Home Loan Bank At September 30, 1999, the Company had $1,400 of advances on its line of credit with the Federal Home Loan Bank at a rate of 5.89%, interest payable monthly. The investment securities held in safekeeping at the Federal Home Loan Bank are used as collateral on the line and their carrying value dictates the total amount the Company is allowed to borrow on their line. Note 8. Income Taxes Income taxes consist of: For the Year Ended ------------------- September 30, ------------------ 1999 1998 ------------------ Current ............................... $ 130 $ 119 Deferred .............................. 2 - - ------------------ Total ................... $ 132 $ 119 ================== The Company and its subsidiary file consolidated federal income tax returns. Under provisions of the Internal Revenue Code and similar sections of the Illinois income tax law for the years beginning before January 1, 1996, qualifying thrifts could claim bad debt deductions based on the greater of (1) a specified percentage of taxable income, as defined, or (2) actual loss experience. The Small Business Job Protection Act became law on August 20, 1996. One of the provisions in this law repealed the reserve method of accounting for bad debts for thrift institutions so that the bad debt deduction described in the preceding paragraph will no longer be effective for tax years beginning after December 31, 1995. The change in the law requires that the tax bad debt reserves accumulated after September 30, 1988 be recaptured into taxable income over a six-year period. The start of the six-year period can be delayed for up to two years if the Company meets certain residential lending thresholds. Deferred taxes have been provided on the portion of the tax reserve for loan loss that must be recaptured. Retained earnings at September 30, 1999 and 1998, includes approximately $867 of the tax reserve which accumulated prior to 1988, for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $336 as of September 30, 1999 and 1998. Income tax expense differed as follows: Year Ended September 30, ----------------- 1999 1998 ----------------- Maximum statutory rate applied to earnings before income tax ................................ $ 151 $ 162 Increase in income taxes resulting from: Tax exempt interest income ...................... (27) (19) Other ........................................... 8 (24) ----------------- $ 132 $ 119 ================= The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows: Year Ended September 30, --------------- 1999 1998 --------------- Allowance for loan losses - book .................... $ 86 $ 66 Illinois net operating loss carryforward ............ 37 22 Unrealized loss on securities available for sale .... 33 - - --------------- Total deferred tax assets ............. 156 88 --------------- Unrealized gain on securities available for sale .... - - (94) Allowance for loan losses - tax ..................... (76) (92) Cash basis adjustment ............................... (119) (95) FHLB stock basis .................................... (7) (7) Premises and equipment basis ........................ (36) (23) Other ............................................... (63) (47) --------------- Total deferred tax liabilities ........ (301) (358) --------------- Net deferred tax liabilities .......... $ (145) $ (270) =============== Note 9. Fair Value of Financial Instruments The Company provides disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company and its subsidiary. The following table reflects a comparison of carrying values and the fair values of the financial instruments: September 30, ---------------------------------- 1999 1998 ---------------------------------- Carrying Fair Carrying Fair Value Value Value Value ---------------------------------- Assets: Cash and cash equivalents ...... $ 871 $ 871 $ 1,542 $ 1,542 Securities available for sale .. 17,118 17,118 16,931 16,931 Nonmarketable equity securities 216 216 215 215 Accrued interest receivable .... 318 318 304 304 Loans .......................... 28,920 27,770 26,111 26,013 Liabilities: Deposits ....................... 36,906 36,996 35,855 35,909 Advances from FHLB ............. 1,400 1,400 - - - - Accrued interest payable ....... 21 21 12 12 The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments: Cash and cash equivalents The carrying values reported in the balance sheet for cash and cash equivalents, including cash and due from banks and interest earning deposits approximate their fair values. Securities Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of accrued interest receivable approximates its fair value. The carrying value for nonmarketable equity securities approximates their fair values. Loans For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed-rate loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying value of accrued interest receivable approximates its fair value. Deposits The fair value disclosed for demand deposits are, by definition, equal to the amount payable on demand at the balance sheet date. The carrying values for variable-rate, demand deposits and savings deposit accounts approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying value of accrued interest payable approximates its fair value. Advances from the Federal Home Loan Bank The carrying amounts of advances on the line of credit from the Federal Home Loan Bank approximates their fair values. Off-balance-sheet instruments Fair values for the Bank's off-balance-sheet instruments, which consist of commitments to extend credit and standby letters of credit, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value for such financial instruments is nominal. Note 10. Capital Ratios The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 1999, that the Company meets all capital adequacy requirements to which it is subject. As of September 30, 1999, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions ---------------- --------------- ----------------- Amount Ratio Amount Ratio Amount Ratio --------------------------------------------------- As of September 30, 1999: Total Capital (to Risk Weighted Assets) Consolidated ..................... $10,014 43.9% $1,825 8.0% N/A Bank ............................. $ 9,769 42.8% $1,825 8.0% $2,281 10.0% Tier I Capital (to Risk Weighted Assets) Consolidated ..................... $ 9,792 42.9% $ 913 4.0% N/A Bank ............................. $ 9,547 41.9% $ 913 4.0% $1,369 6.0% Tier I Capital (to Average Adjusted Assets) Consolidated ..................... $ 9,792 20.3% $1,930 4.0% N/A Bank ............................. $ 9,547 19.8% $1,930 4.0% $2,412 5.0% As of September 30, 1998: Total Capital (to Risk Weighted Assets) Consolidated ..................... $ 9,546 46.2% $1,655 8.0% N/A Bank ............................. $ 9,239 44.7% $1,655 8.0% $2,069 10.0% Tier I Capital (to Risk Weighted Assets) Consolidated ..................... $ 9,375 45.3% $ 827 4.0% N/A Bank ............................. $ 9,067 43.8% $ 827 4.0% $1,241 6.0% Tier I Capital (to Average Adjusted Assets) Consolidated ..................... $ 9,375 19.8% $1,899 4.0% N/A Bank ............................. $ 9,067 19.4% $1,899 4.0% $2,337 5.0%
Note 11. Officer, Director and Employee Benefit Plans Employee Stock Ownership Plan (ESOP) The ESOP holds 41,400 shares of the Company's common stock for allocation to employees. The ESOP borrowed from the Company to purchase the common stock. The loan obligation is considered unearned employee stock ownership plan shares and is reflected as a reduction of stockholders' equity. The following table reflects the status of the shares held by the plan: September 30, ---------------- 1999 1998 ---------------- Shares allocated ............................................ 19,530 17,029 Shares released to be allocated ............................. 1,849 1,842 Unreleased shares (Fair value as of September 30, 1999 and 1998 $195 and $281) .................................. 20,021 22,529 --------------- 41,400 41,400 =============== Shares are allocated to all eligible employees as the debt is repaid based on a prorata share of total eligible compensation. Employees 21 or older with at least 1,000 hours of service in a twelve month period are eligible to participate. Benefits will vest over a five year period and in full after five years of qualified service. As shares are committed to be released from unallocated shares, the Bank recognizes compensation expense equal to the current market price of the shares, and the shares become outstanding for purposes of calculating earnings per share. The Bank recognized compensation expense for the ESOP of $26 and $32 for the years ended September 30, 1999 and 1998, respectively. The Board of Directors of the Company may direct payment of cash dividends, if any, be paid in cash to the participants or be credited to participant accounts and invested. Dividends received, if any, by the ESOP on unallocated shares are used for debt service. Profit Sharing Plan The Bank has a noncontributory defined contribution profit-sharing plan for all employees who have attained age 21 and one year of service. Nondeductible voluntary contributions are permitted, but none have been made to date. The Board of Directors determines the annual contribution to the plan which is allocated to those employees who worked more than 500 hours during the plan year or who are employed at the end of the plan year based on the prorata share of eligible compensation for the plan year. There have been no contributions for the years ended September 30, 1999 and 1998. Management Recognition Plan (MRP) The MRP purchased, with funds provided by the Company, 62,100 shares. Directors, officers, and employees become vested in the shares of common stock awarded to them under the MRP at a rate of 20 percent per year, commencing one year after the grant date, and 20 percent on each anniversary date thereof for the following four years. As of September 30, 1999 and 1998, 17,388 shares and 18,009 shares, respectively, have been awarded to officers, directors, and employees. Compensation expense is recognized on a straight line basis over the vesting period for shares awarded under the plan. Compensation expense of $37 and $38 was recognized for the years ended September 30, 1999 and 1998, respectively. Stock Rights In June 1997, the Board of Directors adopted a Rights Agreement. Under the Agreement, the Board declared a dividend of one right for each outstanding share of Common Stock to stockholders of record on June 23, 1997. There was no fair value attached to these rights as of the grant date. The rights are not exercisable until the Distribution date which is defined as the earlier of the tenth business day after a public announcement that a person or group of affiliated or associated persons acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock of the Company or the tenth business day after the commencement or announcement of an intention to make a tender offer or exchange offer that would result in any person or group or affiliated or associated persons becoming an acquiring person. Each right enables the registered holder to purchase from the Company one share of Common Stock at a price of $36. Stock Option Plans The Company has two stock option plans which may grant options to purchase common stock at the market price on the date of the grant. The options will be granted by a committee comprised of directors. Options for up to 103,500 shares may be granted to employees and directors under the Stock Option Plan approved May 22, 1996 and options for up to 103,500 shares may be granted to key employees and directors under the 1997 Nonqualified Stock Option Plan. The options under the Stock Option Plan become exercisable at a rate of 20 percent per year commencing one year after the grant date. At September 30, 1999 and 1998, 35,875 options had been granted. The terms of the options under the Nonqualified Stock Option Plan and the exercise schedule are at the discretion of the Committee. At September 30, 1999 and 1998, 25,875 options had been granted. A summary of the status of the Company's fixed stock option plan and changes during the years ending September 30, 1999 and 1998 is presented below: September 30, --------------------------------------- 1999 1998 ------------------ ------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------------ ------------------- Options outstanding, beginning of the year ....................... 61,750 $ 9.75 51,750 $ 9.22 Options granted ...................... - - - - 10,000 12.51 Options exercised .................... - - - - - - - - ------------------------------------- Options outstanding, end of year ..... 61,750 $ 9.75 61,750 $ 9.75 ===================================== Options exercisable .................. 27,875 15,525 Weighted-average fair value of options granted during the year ........... $ - - $ 4.37 The fair value of each grant is estimated at the grant date using the Black-Sholes option-pricing model with the following weighted-average assumptions for grants in 1998: dividend rate of 0%; price volatility of 20.44% and a risk free interest rate of 4.59%. As permitted by generally accepted accounting principles, grants under these plans are accounted for following APB Opinion No. 25 and related interpretations. Had compensation cost for the stock-based compensation plan been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123), reported net income and earnings per common share would have been reduced to the proforma amounts shown below. 1999 1998 ------------------ Net income: As reported .......................... $ 299 $ 345 Proforma ............................. 273 302 Basic earnings per share: As reported .......................... $ 0.42 $ 0.43 Proforma ............................. 0.38 0.38 Diluted earning per share: As reported .......................... $ 0.41 $ 0.42 Proforma ............................. 0.37 0.37 The following table summarizes information about fixed stock options outstanding at September 30, 1999: Number Options Outstanding Excercisable ------------------------------------------- Weighted Average Remaining Exercise Number Contractual Number Price Outstanding Life Exercisable - -------------------------------------------------------- $ 9.08 25,875 6.7 15,525 9.36 25,875 7.1 10,350 12.51 10,000 8.0 2,000 ------ ------ 61,750 27,875 ====== ====== Note 12. Commitments, Contingencies and Credit Risk The Company is, from time to time, a party to legal proceedings arising in the ordinary course of its business, including legal proceedings to enforce its rights against borrowers. The Company is not currently a party to any legal proceedings which could reasonably be expected to have a material adverse effect on the consolidated financial condition or operations of the Company. In May 1999, a shareholder of CSB Financial Inc. filed a class action lawsuit in a Delaware court against the Company, its top executive and its directors for breach of fiduciary duty for failure to put an acquisition offer to shareholder vote. The class action is seeking buyout of current shares at $14.75 (offered purchase price). The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent credit risk at September 30, 1999 and 1998 follow: Range of Rates Variable Rate Fixed Rate Total on Fixed Rate Commitments Commitments Commitments Commitments ------------------------------------------------------- Commitment to extend credit: 1999 $1,173 $1,146 $2,319 7.75% - 10.5% 1998 275 1,008 1,283 8.25% - 11.5% The Bank generally originates single-family residential loans within its primary lending area, Marion County. The Bank's underwriting policies require such fixed rate loans to be made at 80% loan-to-value and variable rate loans to be made at 85% loan-to-value based upon appraised values unless private mortgage insurance is obtained. These loans are secured by the underlying properties. The Company does not engage in the use of interest rate swaps, futures, forwards or option contracts, or other financial instruments with similar characteristics. -------------------------------- 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 was Registrar handles stock transfer and registration, quoted on the Nasdaq "SmallCap" market under address changes, corrections/changes in the symbol "CSBF" until December 31, 1998, at which taxpayer identification numbers, and Form 1099 time the Company transferred the quotation to the OTC tax reporting questions. If you require assistance Bulletin Board under the same symbol. assistance or have any questions, please contact Registrar by mail or phone: On October 5, 1995, the Company issued 1,035,000 shares of its Common Stock at a Registrar and Transfer Company purchase price of $8.00 per share in connection 10 Commerce Drive with the conversion of the Savings Bank from a Cranford, New Jersey 07016 state chartered mutual savings bank to a state chartered capital stock savings bank. The closing Annual Meeting price per share for the Holding Company's The annual meeting of stockholders of CSB Common Stock as reported on the OTC Financial Group, Inc. will be held on January 14, Bulletin Board market on November 26, 1999 2000 at 10:00 a.m. at 801 12th Street, Carlyle, was $11.25. The Holding Company has not Illinois. paid cash dividends on its Common Stock. Independent Auditors Stock Pricing History McGladrey & Pullen, LLP The following table sets forth the high and low 1806 Fox Drive sales prices as reported on the Nasdaq Champaign, Illinois 61820 "SmallCap" and OTC Bulletin Board market during the past year. Special Counsel Schiff Hardin & Waite Fiscal 1999 High Low 7200 Sears Tower - -------------------------------------------------- Chicago, Illinois 60606 First Quarter $10.50 $8.75 Second Quarter $ 9.25 $8.875 Third Quarter $12.875 $9.125 Fourth Quarter $10.625 $9.875
---------------------------------------- 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 -----END PRIVACY-ENHANCED MESSAGE-----