UNITED STATES SECURITY AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 ------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ___________________ Commission File Number: 0-26650 CSB FINANCIAL GROUP, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Illinois 37-1336338 - -------------------------------- --------------------------- (State or other jurisdiction (I.R.S. Employer ID Number) of incorporation or organization) 200 South Poplar, Centralia, Illinois 62801 - --------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (618) 532-1918 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Shares outstanding at August 4, 2000 - ----------------------------- ------------------------------------ Common Stock, Par Value $0.01 732,299 Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements - Consolidated Balance Sheets - Consolidated Statements of Income and Comprehensive Income - Consolidated Statements of Cash Flows - Notes to Unaudited Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES CSB FINANCIAL GROUP, INC. and SUBSIDIARY Consolidated Balance Sheets June 30, 2000 and September 30, 1999 (Unaudited in thousands, except share data) June 30, September 30, 2000 1999 - --------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents ..................................... $ 856 $ 871 Securities: Available for sale ......................................... 15,876 17,118 Nonmarketable equity securities ............................ 243 216 Loans ......................................................... 30,623 29,142 Allowance for loan losses ..................................... (222) (222) ------------------ Loans, net ...................................... 30,401 28,920 Premises and equipment ........................................ 622 683 Accrued interest receivable ................................... 466 318 Intangible assets ............................................. 493 539 Other assets .................................................. 94 255 ------------------ Total assets .................................... $49,051 $48,920 ================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Demand .................................................. $ 8,467 $ 8,563 Savings ................................................. 3,409 3,794 Time deposits > $100,000 ................................ 3,012 2,627 Other time deposits ..................................... 22,039 21,922 ------------------ Total deposits .................................. 36,927 36,906 ------------------ Advances from the Federal Home Loan Bank ................... 1,600 1,400 Other liabilities .......................................... 195 336 ------------------ Total liabilities ............................... 38,722 38,642 ------------------ COMMITMENTS, CONTINGENCIES AND CREDIT RISK STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value; 100,000 shares authorized; none issued Common stock, $0.01 par value; authorized 2,000,000 shares; 1,035,000 shares issued ................................. 10 10 Paid-in capital ............................................ 7,839 7,829 Retained earnings .......................................... 6,780 6,683 Accumulated other comprehensive income (loss) .............. (157) (53) Unearned employee stock ownership plan shares .............. (145) (160) Management recognition plan ................................ (481) (514) ------------------ 13,846 13,795 Less cost of treasury stock; 302,701 shares at June 30, 2000 and September 30, 1999 .................................. (3,517) (3,517) ------------------ Total stockholders' equity ...................... 10,329 10,278 ------------------ Total liabilities and stockholders' equity ...... $49,051 $48,920 ================== See Notes to Unaudited Consolidated Financial Statements. CSB Financial Group, Inc. Consolidated Statements of Income Nine Months Ended June 30, 2000 and 1999 (Unaudited, in thousands, except per share data) Nine Months Ended June 30, -------------------- 2000 1999 -------------------- Interest income: Loans and fees on loans ...................................... $ 1,758 $ 1,666 Securities ................................................... 792 764 -------------------- Total interest income ............................. 2,550 2,430 -------------------- Interest expense: Deposits ..................................................... 1,168 1,160 Borrowings ................................................... 39 - - -------------------- Total interest expense ............................ 1,207 1,160 -------------------- Net interest income ............................... 1,343 1,270 Provision for loan losses ....................................... 17 54 -------------------- Net interest income after provision for loan losses 1,326 1,216 -------------------- Noninterest income: Service charges on deposits .................................. 72 60 (Loss) on sale of securities, net ............................ (3) - - Other ........................................................ 40 38 -------------------- Total noninterest income .......................... 109 98 --------------------- Noninterest expense: Compensation and employee benefits ........................... 487 449 Occupancy and equipment ...................................... 97 71 Data processing .............................................. 109 116 Audit, legal and other professional .......................... 344 61 Other ........................................................ 333 293 -------------------- Total noninterest expense ......................... 1,370 990 -------------------- Income before income taxes ........................ 65 324 Income taxes (benefit) .......................................... (32) 100 -------------------- Net income ........................................ $ 97 $ 224 ==================== Earnings per share Basic ........................................................ $ 0.13 0.31 =================== Diluted ...................................................... $ 0.13 0.31 =================== Weighted average shares outstanding Basic ........................................................ 724,900 718,919 ==================== Diluted ...................................................... 749,640 728,441 ==================== See Notes to Unaudited Consolidated Financial Statements. CSB Financial Group, Inc. Consolidated Statements of comprehensive income (LOSS) Nine Months Ended June 30,2000 and 1999 (Unaudited, in thousands, except per share data) Nine Months Ended June 30, ------------------ 2000 1999 ------------------ Net income ....................................................... $ 97 $ 224 Change in unrealized gain (loss) on securities available for sale, net of tax of $(64) and $(134) ................................ (106) (218) Less: Reclassification adjustment, net of tax of $1 and $0 ...... 2 - - ------------------ (104) (218) ------------------ Comprehensive income (loss) ...................................... $ (7) $ 6 ================== See Notes to Unaudited Consolidated Financial Statements. CSB Financial Group, Inc. Consolidated Statements of Income Three Months Ended June 30, 2000 and 1999 (Unaudited, in thousands, except per share data) Three Months Ended June 30, -------------------- 2000 1999 -------------------- Interest income: Loans and fees on loans ...................................... $ 605 $ 572 Securities ................................................... 253 236 -------------------- Total interest income ............................. 858 808 -------------------- Interest expense: Deposits ..................................................... 386 363 Borrowings ................................................... 3 - - -------------------- Total interest expense ............................ 389 363 Net interest income ............................... 469 445 Provision for loan losses ....................................... - - 18 -------------------- Net interest income after provision for loan losses 469 427 -------------------- Noninterest income: Service charges on deposits .................................. 22 21 (Loss) on sale of securities ................................. (4) - - Other ........................................................ 23 13 -------------------- Total noninterest income .......................... 41 34 -------------------- Noninterest expense: Compensation and employee benefits ........................... 151 123 Occupancy and equipment ...................................... 45 24 Data processing .............................................. 25 22 Audit, legal and other professional .......................... 222 15 Other ........................................................ 162 136 -------------------- Total noninterest expense ......................... 605 320 -------------------- Income (loss) before income taxes ................. (95) 141 Income taxes (benefit) .......................................... (53) 46 -------------------- Net income (loss) ................................. $ (42) $ 95 ==================== Earnings (loss) per share Basic ........................................................ $ (0.06) $ 0.13 ==================== Diluted ...................................................... $ (0.06) $ 0.13 ==================== Weighted average shares outstanding Basic ........................................................ 725,509 719,091 ==================== Diluted ...................................................... 753,992 728,613 ==================== See Notes to Unaudited Consolidated Financial Statements. CSB Financial Group, Inc. Consolidated Statements of Comprehensive Income (Loss) Three Months Ended June 30, 2000 and 1999 (Unaudited, in thousands, except per share data) Three Months Ended June 30, ------------------ 2000 1999 ----------------- Net income (loss) ................................................ $ (42) $ 95 Change in unrealized gain (loss) on securities available for sale, net of tax of $31 and $(1) .................................... 50 (1) Less: Reclassification adjustment, net of tax of $1 and $0 ...... 3 - - ------------------ 53 (1) ------------------ Comprehensive income ............................................. $ 11 $ 94 ================== See Notes to Unaudited Consolidated Financial Statements. CSB Financial Group, Inc. Consolidated Statements of Cash Flows Nine Months Ended June 30, 2000 and 1999 (Unaudited, in thousands) Nine Months Ended June 30, 2000 1999 ----------------- Cash Flows from Operating Activities: Net income ................................................... $ 97 $ 224 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ................................. 17 54 Provision for depreciation ................................ 72 32 Amortization of intangible assets ......................... 46 46 Employee stock ownership plan compensation expense ........ 25 19 Management recognition plan compensation expense .......... 33 27 Deferred income taxes ..................................... (105) 2 Loss on sale of securities ................................ 3 - - Amortization and accretion on securities .................. - - 9 Change in assets and liabilities: (Increase) in accrued interest receivable ............... (148) (119) (Increase) decrease in other assets ..................... 161 (104) (Decrease) increase in other liabilities ................ 19 (11) ----------------- Net cash provided by operating activities ......... 220 179 ----------------- Cash Flows from Investing Activities: Securities available for sale: Purchases ................................................. (2,283) (4,651) Proceeds from sales ....................................... 2,288 - - Proceeds from maturities and paydowns ..................... 1,075 6,029 Nonmarketable equity securities: Purchases of nonmarketable equity securities .............. (27) (1) Increase in loans ............................................ (1,498) (3,199) Purchase of premises and equipment ........................... (11) (129) ----------------- Net cash (used in) investing activities ........... (456) (1,951) ----------------- Cash Flows from Financing Activities: Increase in deposits ......................................... $ 21 $ 1,797 Proceeds from advances from the Federal Home Loan Bank ....... 1,600 - - Payments on advances from the Federal Home Loan Bank ......... (1,400) - - Purchase of treasury stock ................................... - - (5) ----------------- Net cash provided by financing activities ......... 221 1,792 Increase (decrease) in cash and cash equivalents .. (15) 20 Cash and cash equivalents at beginning of period ................ 871 1,542 ----------------- Cash and cash equivalents at end of period ...................... $ 856 $ 1,562 ================= Supplemental Disclosures: Cash paid for: Interest .................................................. $ 1,187 $ 1,171 Income taxes .............................................. $ 144 $ 17 Change in gross unrealized gain/loss on securities available for sale .................................................. $ 159 $ 352 Change in deferred taxes on unrealized gain/loss on securities available for sale ........................................ $ (55) $ (134) See Notes to Unaudited Consolidated Financial Statements. CSB Financial Group, Inc. Notes to Unaudited Consolidated Financial Statements (In Thousands, Except Per Share Data) Note 1. Background Information On October 5, 1995, CSB Financial Group, Inc. (the "Company") acquired all of the outstanding shares of Centralia Savings Bank (the "Bank") upon the Bank's conversion from a state chartered mutual savings bank to a state chartered capital stock savings bank. Centralia Savings Bank is located in Centralia, Illinois and serves customers in Illinois counties of Clinton and Marion. The Company purchased 100% of the outstanding capital stock of the Bank using 50% of the net proceeds from the Company's initial stock offering which was completed on October 5, 1995. The Company sold 1,035,000 shares of $0.01 par value common stock at a price of $8 per share, including 82,800 shares purchased by the Bank's Employee Stock Ownership Plan ("ESOP"). The ESOP shares were acquired by the Bank with proceeds from a Company loan totaling $662,400. The gross proceeds of the offering were $8,280,000. After reducing gross proceeds for conversion costs of $696,000, net proceeds totaled $7,584,000. The Company's stock was traded on the NASDAQ Small Caps market under the symbol "CSBF" until December 31, 1998, at which time the Company transferred the quotation of its common stock to the OTC Bulletin Board under the same symbol. The acquisition of the Bank by the Company was accounted for as a "pooling of interests" under generally accepted accounting principles. The application of the pooling of interests method records the assets and liabilities of the merged entities on a historical cost basis with no goodwill or other intangible assets being recorded. Note 2. Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of CSB Financial Group, Inc., its wholly owned subsidiary, Centralia Savings Bank, the Bank, and the Bank's wholly-owned subsidiary, Centralia SLA. Centralia SLA, Inc.'s principal business activity is to provide insurance services. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Bank's annual report on Form 10-KSB for the year ended September 30, 1999. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-QSB and, therefore, do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. In the opinion of management of the Company, the unaudited consolidated financial statements reflect all adjustments necessary to present fairly the financial position of the Company at June 30, 2000 the results of operations for the three months ended June 30, 2000 and 1999, and the results of operations and cash flows for the nine months ended June 30, 2000 and 1999. All adjustments to the financial statements were normal and recurring in nature. Operating results for the nine months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. Note 3. Earnings Per Share Basic earnings (loss) per share ("EPS") is computed as net income (loss) available to common stockholders divided by the weighted average common shares outstanding and vested shares of the Management Recognition Plan. Diluted EPS is computed as net income (loss) available to common stockholders divided by the weighted average common shares outstanding, common stock equivalents, and shares awarded under the Management Recognition Plan weighted to reflect the portion of the period the shares were outstanding. The following reflects earnings per share calculations for basic and diluted methods: For the Nine Months Ended June 30, ------------------ 2000 1999 ------------------ Net income available to common shareholders .......................................... $ 97 $ 224 Basic diluted potential common shares: Weighted average shares outstanding ............................................... 713,308 711,053 Management recognition plan shares vested ......................................... 11,592 7,866 ------------------- Basic average shares outstanding ..................................................... 724,900 718,919 ------------------- Diluted potential common shares: Management recognition plan shares granted, but not vested ........................ 5,796 9,522 Stock option equivalents .......................................................... 18,944 - - ------------------- Diluted average shares outstanding ................................................... 749,640 728,441 ------------------- Basic earnings per share ............................................................. $ 0.13 $ 0.31 =================== Diluted earnings per share ........................................................... $ 0.13 $ 0.31 =================== For the Three Months Ended June 30, ------------------- 2000 1999 ------------------- Net income (loss) available to common shareholders ................................... $ (42) $ 95 Basic diluted potential common shares: Weighted average shares outstanding ............................................... 713,917 711,225 Management recognition plan shares vested ......................................... 11,592 7,866 ------------------- Basic weighted average shares outstanding ............................................ 725,509 719,091 ------------------- Diluted potential common shares: Management recognition plan shares granted, but not vested ........................ 5,796 9,522 Stock option equivalents .......................................................... 22,687 ------------------- Diluted average shares outstanding ................................................... 753,992 728,613 ------------------- Basic earnings (loss) per share ...................................................... $ (0.06) $ 0.13 ================== Diluted earnings (loss) per share .................................................... $ (0.06) $ 0.13 =================== Note 4. Employee Stock Ownership Plan The ESOP acquired 82,800 shares of the Company's stock for future allocation to employees as part of the mutual to stock conversion process. The purchase was funded with a loan from the Company. Shares are allocated to all eligible employees as the debt is repaid based on a prorata share of total eligible compensation. Employees 21 or older with at least 1,000 hours of service in a twelve month period are eligible to participate. Benefits will vest over a five year period and in full after five years of qualified service. As shares are committed to be released from unallocated shares, the Bank recognizes compensation expense equal to the current market price of the shares, and the shares become outstanding for purposes of calculating earnings per share. The Bank recognized compensation expense for the ESOP of $25 and $19 for the nine months ended June 30, 2000 and 1999, respectively. Dividends received, if any, by the ESOP on unallocated shares will be used for debt service. In July 1997, the Company repurchased 41,400 shares of common stock from the ESOP. The ESOP used the proceeds received from the repurchase to reduce outstanding debt to the Company. The balance in unearned ESOP shares was reduced by the cost of the shares sold to the Company. As of June 30, 2000 and September 30, 1999, the ESOP held 18,181 and 20,021, respectively, of non-committed shares with a fair value of $273 and $195, respectively. Note 5. Stock Option Plan The Company has a stock option plan (SOP) which was established in 1996 with 103,500 shares of common stock. The options are granted by a Committee, comprised of directors, to key employees and directors based on their services. The exercise price of options granted must be at least equal to the fair market value of the common stock on the date the option is granted. The options granted under the plan become exercisable at a rate of 20 percent per year commencing one year after the grant date and 20 percent on each anniversary date for the following four years. As of June 30, 2000, 61,750 options had been granted. A Nonqualified Stock Option Plan (SOP) was established in 1997 with 103,500 shares of common stock. The options are granted by a committee, comprised of directors, to key employees and directors based on their services. The exercise price of the option granted must be at least equal to the fair market value of the common stock on the date the option is granted. The terms of the options and the exercise schedule are at the discretion of the committee and option agreements need not be identical. As of June 30, 2000, no options had been granted. Note 6. Management Recognition Plan The Management Recognition Plan ("MRP") was approved October 10, 1996 and amended on January 9, 1997. Directors, officers, and employees become vested in the shares of common stock awarded to them under the MRP at a rate of 20% per year, commencing one year after the grant date, and 20% on the anniversary date thereof for the following four years. As of June 30, 2000, 17,388 shares have been awarded to officers, directors, and employees. MRP compensation expense was $33 and $27 for the nine months ended June 30, 2000 and 1999, respectively. Compensation expense is recognized over the vesting period for shares awarded under the plan. Note 7. Reclassifications Certain reclassifications have been made to the balances for the period ending June 30, 1999, with no effect on net income, to be consistent with the classifications adopted for June 30, 2000. Note 8. 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. The issuance of FAS 137 in June 1999 extended the application date to all fiscal quarters of fiscal years beginning after June 15, 2000. The issuance of FAS 138 in June 2000 amended and clarified various issues within FAS 133. The Company does not believe the adoption of FAS 133, as amended by FAS 137 and FAS 138, will have a material impact on the consolidated financial statements. Note 9. Subsequent Event On January 26, 2000, the Company signed a definitive agreement with Midland States Bancorp, Inc. Under the terms of the agreement, Midland States Bancorp, Inc. agreed to purchase all of the issued and outstanding shares of common stock of CSB Financial Group, Inc. for an aggregate cash consideration of $11.7 million or $16.00 per share, subject to certain adjustments. The transaction was consummated July 14, 2000 effective as of close of business June 30, 2000. The June 30, 2000 financial statements reflect the various acquisition related expenses incurred as a result of this transaction, net of the anticipated tax effect. CSB Financial Group, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations (In Thousands, Except Per Share Data) - -------------------------------------------------------------------------------- General The principal assets of the Company are its investment in the Bank's common stock and the net proceeds from the sale of the Company's common stock in connection with the conversion. The Company's principal revenue source is interest and dividends on its investments. The principal business of the Bank consists of attracting deposits from the general public and using these funds to originate mortgage loans secured by one- to four-family residences located primarily in Centralia, Illinois and surrounding areas. The Bank engages in various forms of consumer and commercial lending and invests in mortgage-backed U.S. Government and federal agency securities, local municipal issues, and interest-bearing deposits. The Bank's profitability depends primarily on its net interest income, which is the difference between the interest income it earns on its loans and investment portfolio and its cost of funds, which consists mainly of interest paid on deposits. Net interest income is affected by the relative amounts of interest-earning assets, interest-bearing liabilities, and the interest rates earned or paid on these balances. The Bank's profitability is also affected by the level of noninterest income and expense. Noninterest income consists primarily of late charges and other fees. Noninterest expense consists of salaries and benefits, occupancy related expenses, deposit insurance premiums paid to the SAIF, and other operating expenses. The operations of the Bank are significantly influenced by general economic conditions and related monetary and fiscal policies of financial institutions' regulatory agencies. Deposit flows and the cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting loan demand and the availability of funds. Business Strategy The business strategy is to operate as a well capitalized, profitable and independent community savings bank dedicated to financing home ownership and consumer needs in its primary market area. The Bank has implemented this strategy by: (1) closely monitoring the needs of customers and providing quality service; (2) emphasizing consumer-oriented banking by originating construction and permanent loans on residential and commercial real estate and consumer loans, and by offering other financial services and products; (3) improving and maintaining high asset quality; (4) maintaining capital in excess of regulatory requirements; and (5) managing interest rate risk by emphasizing the origination of loans with adjustable rates or shorter terms and investments in short-term and liquid investments. The Bank has adopted various new business strategies intended to increase its presence in its primary market area, thereby increasing its lending activities and sources of income. Acquisition On January 26, 2000, the Company signed a definitive agreement with Midland States Bancorp, Inc. Under the terms of the agreement, Midland States Bancorp, Inc. agreed to purchase all of the issued and outstanding shares of common stock of CSB Financial Group, Inc. for an aggregate cash consideration of $11.7 million or $16.00 per share, subject to certain adjustments. The transaction was consummated July 14, 2000 effective as of close of business June 30, 2000. The June 30, 2000 financial statements reflect the various acquisition related expenses incurred as a result of this transaction, net of the anticipated tax effect. Liquidity and Capital Resources The Company's primary sources of funds consists of deposits, repayment and prepayment of loans, maturities of investments and interest-bearing deposits. Scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predictable, influenced by general interest rates, economic conditions, and competition. The Company uses its liquidity resources principally to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, to maintain liquidity, and to meet operating expenses. Management believes that loan repayments and other sources of funds will be adequate to meet the Company's liquidity needs for the immediate future. A portion of the Company's liquidity consists of cash and cash equivalents, which include investments in highly liquid, short-term deposits. The level of these assets is dependent on the Company's operating, investing, lending, and financing activities during any given period. At June 30, 2000 and September 30, 1999, cash and cash equivalents totaled $856 and $871, respectively. Liquidity management is both a daily and long-term function of business management. If the Company requires funds beyond its ability to generate them internally, the Company may borrow additional funds from the FHLB. At June 30, 2000, the Company had $1.6 million in outstanding advances from the FHLB. At June 30, 2000, the Company had $1.5 million of outstanding commitments on revolving lines of credit. Regulatory Capital Federally insured savings associations such as the Bank are required to maintain a minimum level of regulatory capital. The Corporation and its subsidiary have capital ratios which substantially exceed all regulatory requirements. The Corporation's capital ratios are shown below. June 30, September 30, Minimum 2000 1999 Requirements ----------------------------------------- Total capital to risk weighted assets 41.40% 43.90% 8.0% Tier I capital to risk weighted assets 40.50% 42.90% 4.0% Tier I capital to average assets 20.60% 20.30% 4.0% Financial Condition Total assets increased $131 to $49,051 at June 30, 2000 from $48,920 at September 30, 1999. The principal cause of this increase was an increase of $1,481 in the loan portfolio, partially offset by a decrease in securities available for sale of $1,242. The new loans were funded by the sale of existing securities and the overall increase in deposits and FHLB advances of $21 and $200, respectively. Gross loans have increased $1,481 from $29,142 at September 30, 1999 to $30,623 at June 30, 2000. The growth in the loan portfolio is comprised primarily of commercial lending. Securities decreased $1,242 since September 30, 1999. The decrease is due to maturities of U.S. Treasury securities, sales of mortgage backed securities and an overall decline in market values. All securities are held as available for sale. Results of Operations Three months ended June 30, 2000 compared to three months ended June 30, 1999 Net Income - The Company's net income (loss) for the three months ended June 30, 2000 and 1999 was $(42) and $95, respectively. The increase in net interest income and other noninterest income, along with a decrease in the provision for loan losses and income tax expense, was offset by increased other noninterest expense, primarily due to acquisition related professional fees. Interest Income - Interest income increased for the three months ended June 30, 2000 by $50 to $858 from $808 for the three months ended June 30, 1999. The increase is due to increasing yields and increases in average loan balances for the respective periods due to current market conditions. Interest Expense - Interest expense increased for the three months ended June 30, 2000 by $26 to $389 from $363 for the three months ended June 30, 1999. The increase is due to increasing yields and increases in average deposit balances for the respective periods. Interest on funds borrowed in the current period accounted for $3 of additional interest expense in 2000. Net Interest Income - Net interest income after the provision for loan loss for the three months ended June 30, 2000 increased by $42 to $469 from $427 for the three months ended June 30, 1999. Noninterest expense - Noninterest expense increased for the three months ended June 30, 2000 by $285 to $605 from $320 for the three months ended June 30, 1999. The principal reason for the increase is the increase in professional fees of $207 due to acquisition related expenses. Increases in compensation and benefits, occupancy, data processing expenses and other noninterest expense were $28, $21, $3 and $26, respectively. Nine months ended June 30, 2000 compared to nine months ended June 30, 1999 Net Income -The Company's net income for the nine months ended June 30, 2000 was $97 compared to $224 for the nine months ended June 30, 1999. The decrease is due primarily to an increase in professional fees due to acquisition related expenses, net of taxes. Interest Income - Interest income increased $120 from $2,430 to $2,550, or by 4.94% during the nine months of 2000 compared to the respective period of 1999. This increase resulted from an increase in the average loan balance outstanding, offset by a slight decrease in average yield on loans. Interest Expense - Interest expense increased $47 or 4.05%, to $1,207 for the nine months ended June 30, 2000 from $1,160 for the same period in 1999. The increase resulted from $39 in interest expense on borrowed funds in 2000 which were not necessary in 1999. Net Interest Income - Net interest income for the nine months ended June 30, 2000 and 1999 was $1,343 and $1,270, respectively. Noninterest Income - Noninterest income increased $11 or 11.2% for the nine months ended June 30, 2000, primarily as a result of increased service charges on deposits. Noninterest Expense - Noninterest expense increased for the nine months ended June 30, 2000 by $380, or 38.38% to $1,370 from $990 for the nine months ended June 30, 1999. The principal reason for the increase is the increase in professional fees of $283 due to acquisition related expenses. Increases in compensation and benefits, occupancy and other noninterest expense of $38, $26 and $40, respectively, were partially offset by a decrease in data processing expenses of $7. Provision for Loan Losses - The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation considers numerous factors including, general economic conditions, loan portfolio composition, prior loss experience, the estimated fair value of the underlying collateral and other factors that warrant recognition in providing for an adequate loan loss allowance. During the nine months ended June 30, 2000 and 1999, the provision for loan losses was $17 and $54, respectively. Allowance for Loan Losses - The allowance for loan losses was $222, or .72% of loans receivable at June 30, 2000, compared to $222, or .76% of loans receivable at September 30, 1999. The level of nonperforming loans was .17% of total loans at June 30, 2000 compared to .70% as of September 30, 1999. The allowance for loan losses is established through a provision for loan losses charged to expense. 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 evaluation of the collectibility of loans and prior loss experience. The evaluation also takes 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 examinations. Net charge-offs amounted to $17 during the first nine months of fiscal year 2000, compared to net charge-offs of $10 during the first nine months of 1999. Loans are considered impaired when, based on current information and events, it is probable that the Bank will not be able to collect all amounts due. The portion of the allowance for loan losses applicable to impaired loans has been 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 the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of the provision for loan losses that otherwise would be reported. As of June 30, 2000 and September 30, 1999, management had not identified any loans as impaired. Nonperforming Assets At June 30, 2000, the Bank had $51, of nonperforming assets, representing .10% of total assets. On September 30, 1999, the Bank had $205 of nonperforming assets, representing .42% of total assets. Impact on Inflation and Changing Prices The unaudited consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time because of inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. PART II - OTHER INFORMATION Item 1. Legal Proceedings 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). During the third quarter of the fiscal year, a $65,000 settlement was reached between the parties. The Company has accrued the non-insured portion of the settlement totaling $32,500 in losses plus legal fees as of June 30, 2000. No additional losses are expected as a result of this litigation. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- A special meeting of stockholders was held on July 14, 2000 to approve and adopt the Agreement and Plan of Merger between CSB Financial Group, Inc. and Midland States Bancorp, Inc. The proposal was approved with a vote of 607,402 (82.9%) shares for, 450 (.1%) shares against and no shares abstaining. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8K Exhibits: None. Reports on Form 8K: None. SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CSB Financial Group, Inc. Date: 8/11/00 ------------------------------ /s/ K. Gary Reynolds ------------------------------------- K. Gary Reynolds Chief Executive Officer and Director Date: 8/11/00 ------------------------------- /s/ Joanne Ticknor ------------------------------------- Joanne Ticknor Secretary and Treasurer