Back to GetFilings.com
Page 1 of 65 pages
Exhibit Index on
page 17
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
___X_____ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
__________ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-21714
CSB BANCORP, INC.
(Name of registrant in its charter)
OHIO 34-1687530
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6 West Jackson Street
Millersburg, Ohio 44654
(Address of principal executive offices) (Zip code)
(330) 674-9015
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, $6.25 par value
(Title of class)
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 by check mark if disclosure of delinquent filers in
response to item 405 of Regulation S-K is not contained herein and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
______
At March 12, 1998, the aggregate market value of the voting stock
held by nonaffiliates of the registrant, based on a share price of
$61.50 per share (such price being the average of the bid and asked
prices on such date) was $73,083,000.
At March 12, 1998, there were 1,317,387 of the registrant's Common
Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 1997 Annual Report to Shareholders (Parts
I and II)
Portions of Registrant's Definitive Proxy Statement for the April 8,
1998 Annual Meeting of Shareholders (Part III)
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
General
CSB Bancorp, Inc. (the "Company") was incorporated under the laws of
the State of Ohio on June 28, 1991, at the direction of management
of The Commercial & Savings Bank (the "Bank") for the purpose of
becoming a bank holding company by acquiring all outstanding shares
of the Bank. The Company acquired all such shares of the Bank
following an interim bank merger, which transaction was consummated
on January 31, 1992. The Bank is a commercial bank chartered under
the laws of the State of Ohio and was organized in 1879. The Bank
is the wholly-owned subsidiary of the Company and its only
significant asset.
The Bank provides retail and commercial banking services to its
customers, including checking and savings accounts, time deposits,
IRAs, safe deposit facilities, personal loans, commercial loans,
real estate mortgage loans, installment loans, night depository
facilities and trust services. The Bank is a member of the Federal
Reserve System, is insured by the Federal Deposit Insurance
Corporation and is regulated by the Ohio Division of Financial
Institutions.
The Company, through the Bank, grants residential real estate,
commercial real estate, consumer and commercial loans to customers
located primarily in Holmes County and portions of surrounding
counties in Ohio. The general economic conditions in the Company's
market area have been sound. Unemployment statistics have generally
been among the lowest in the state of Ohio and real estate values
have been stable to rising.
Certain risks are involved in granting loans, primarily related to
the borrowers' ability and willingness to repay the debt. Before
the Bank extends a new loan to a customer, these risks are assessed
through a review of the borrower's past and current credit history,
collateral being used to secure the transaction in the event the
customer does not repay the debt, borrower's character and other
factors. Once the decision has been made to extend credit, the
Bank's independent loan review function monitors these factors
throughout the life of the loan. All credit relationships of
$500,000 or more are reviewed quarterly. Relationships of $250,000
to $499,999 are reviewed semi-annually, and a sample of ten
relationships of $100,000 to $249,999 is reviewed quarterly. In
addition, any loan identified as a problem credit by management or
during the loan review is assigned to the Bank's "watch loan list,"
and is subject to ongoing review by the loan review function to
ensure appropriate action is taken when deterioration has occurred.
Commercial loans are primarily variable rate and include operating
lines of credit and term loans made to small businesses primarily
based on their ability to repay the loan from the cash flow of the
business. Such loans are typically secured by business assets such
as equipment and inventory, and occasionally by the business owner's
principal residence. When the borrower is not an individual, the
Bank generally obtains the personal guarantee of the business owner.
As compared to consumer lending, which includes single-family
residence, personal installment loans and automobile loans,
commercial lending entails significant additional risks. These
loans typically involve larger loan balances, are generally
dependent on the cash flow of the business, and thus may be subject
to a greater extent to adverse conditions in the general economy or
in a specific industry. Management reviews the borrower's cash
flows when deciding whether to grant the credit to evaluate whether
estimated future cash flows will be adequate to service principal
and interest of the new obligation in addition to existing
obligations.
Commercial real estate loans are primarily secured by borrower-occupied
business
real estate and are dependent on the ability of
the related business to generate adequate cash flow to service the
debt. Such loans primarily carry adjustable interest rates.
Commercial real estate loans are generally originated with a loan-to-value ratio
of 75% or less. Management performs much the same
analysis when deciding whether to grant a commercial real estate
loan as when deciding whether to grant a commercial loan.
Residential real estate loans carry an approximately equal amount of
fixed versus variable rates, and are secured by the borrower's
residence. Such loans are made based on the borrower's ability to
make repayment from employment and other income. Management
assesses the borrower's ability to repay the debt through review of
credit history and ratings, verification of employment and other
income, review of debt-to-income ratios and other measures of
repayment ability. The Bank generally makes these loans in amounts
of 90% or less of the value of collateral. An appraisal is obtained
from a qualified real estate appraiser for substantially all loans
secured by real estate. Construction loans are secured by
residential and business real estate that generally will be occupied
by the borrower on completion. While not contractually required to
do so, the Bank usually makes the permanent loan at the end of the
construction phase. Construction loans also are made in amounts of
90% or less of the value of the collateral.
Installment loans to individuals include loans secured by
automobiles and other consumer assets, including second mortgages on
personal residences. Consumer loans for the purchase of new
automobiles generally do not exceed 80% of the purchase price of the
car. Loans for used cars generally do not exceed average wholesale
or trade-in values as stipulated in a recent auto-industry used-car
price guide. Credit card and overdraft protection loans are
unsecured personal lines of credit to individuals of demonstrated
good credit character with reasonably assured sources of income and
satisfactory credit histories. Consumer loans generally involve
more risk than residential mortgage loans because of the type and
nature of collateral and, in certain types of consumer loans,
absence of collateral. Since these loans are generally repaid from
ordinary income of the individual or family unit, repayment may be
adversely affected by job loss, divorce, ill health or by general
decline in economic conditions. The Bank assesses the borrower's
ability to make repayment through a review of credit history, credit
ratings, debt-to-income ratios and other measures of repayment
ability.
Employees
At December 31, 1997, the Bank employed 107 employees, 94 of which
were employed on a full-time basis. The Company has no separate
employees not also employed by the Bank.
Competition
The Bank operates in a highly-competitive industry due to Ohio law
permitting statewide branching by banks, savings and loan
associations and credit unions. Ohio law also permits nationwide
interstate banking on a reciprocal basis. In its primary market
area of Holmes and surrounding counties, the Bank competes for new
deposit dollars and loans with several other commercial banks, both
large regional banks and smaller community banks, as well as savings
and loan associations, credit unions, finance companies, insurance
companies, brokerage firms and investment companies. The ability to
generate earnings is impacted, in part, by competitive pricing on
loans and deposits and by changes in the rates on various U.S.
Treasury and State and political subdivision issues which comprise
a significant portion of the Bank's investment portfolio, and which
rates are used as indices on several loan products. The Bank
believes its presence in the Holmes County area, as the financial
institution with the largest local asset base, provides the Bank
with a competitive advantage due to its large asset base and ability
to make loans and provide services to the local community.
Supervision and Regulation
The Bank is subject to supervision, regulation and periodic
examination by the State of Ohio Superintendent of Financial
Institutions and the Federal Reserve Board. Because the Federal
Deposit Insurance Corporation insures its deposits, the Bank is also
subject to certain regulations of that federal agency. The earnings
of the Bank are affected by state and federal laws and regulations,
and by policies of various regulatory authorities. These policies
include, for example, statutory maximum lending rates, requirements
on maintenance of reserves against deposits, domestic monetary
policies of the Board of Governors of the Federal Reserve System,
United States fiscal policy, international currency regulations and
monetary policies, certain restrictions on banks' relationships with
many phases of the securities business and capital adequacy and
liquidity restraints.
Year 2000 Issue
Many computer programs use only two digits to identify a year in the
date field and were apparently designed and developed without
considering the impact of the upcoming change in the century. Such
programs could erroneously read entries for the Year 2000 as the
Year 1900. This could result in major systems failures and
miscalculations. Rapid and accurate data processing is essential to
the operations of the financial institutions, such as the Company.
The Company has formed a Year 2000 committee to assess the extent to
which it and its outside vendors may be adversely affected by the
Year 2000 problems. Management has determined that most programs
are or will be capable of identifying the turn of the century. The
issue is closely monitored by management and full compliance is
expected by the end of 1998. While the Company does not anticipate
that any Year 2000 computer problems or expenses required to correct
such problems will materially affect its financial condition or
results of operations, no assurance can be given in this regard.
Statistical Disclosures
The following schedules present, for the periods indicated, certain
financial and statistical information of the Company as required
under the Securities and Exchange Commission's Industry Guide 3, or
a specific reference as to the location of required disclosures in
the Company's 1997 Annual Report to Shareholders (the "Annual
Report").
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential
A&B. Average Balance Sheet and Related Analysis of Net Interest
Earnings
The information set forth under the heading "Average Balances, Rates
and Yields" on page 17 and 18 of the CSB Bancorp Inc. 1997 Annual
Report to Shareholders (the "Annual Report") is incorporated herein
by reference.
C. Interest Differential
The information set forth under the heading "Rate/Volume Analysis of
Changes in Income and Expense" on page 18 of the Annual Report is
incorporated herein by reference.
II. SECURITIES PORTFOLIO
A. The following is a schedule of the carrying value of securities
at December 31, 1997, 1996 and 1995.
(In thousands of dollars) 1997 1996 1995
Securities available for sale
(at fair value)
U.S. Treasury securities $16,094 $11,073 $11,104
U.S. Government corporations
and agencies 10,013 1,996 6,010
Other securities 1,935 1,821 888
------ ------ -------
$28,042 $14,890 $18,002
====== ====== =======
Securities held to maturity
(at amortized cost)
U.S. Treasury securities $15,122 $11,031 $10,047
U.S. Government corporations
and agencies 7,540 7,011 8,024
Obligations of states and
political subdivisions 35,723 19,440 17,069
Mortgage-backed securities -- 11 1,499
------ ------ ------
$58,385 $37,493 $36,639
====== ====== ======
B. The following is a schedule of maturities for each category of
debt securities and the related weighted average yield of such
securities as of December 31, 1997:
(In thousands of dollars)
Maturing
After One After Five
One Year Year Through Years Through After
or Less Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
Available for sale
U.S. Treasury $6,000 5.56% $10,095 6.22%
U.S. Government
corporations
and agencies 2,000 5.80 8,013 6.46
----- ---- ------ ----
Total $8,000 5.62% $18,108 6.33%
===== ==== ====== ====
Held to maturity
U.S. Treasury $4,994 5.48% $10,026 6.45% $ 102 7.86%
U.S. Government
corporations
and agencies 2,002 6.41 5,538 5.98 7.36
Obligations of
states and
political
subdivisions 1,005 9.19 4,493 8.62 $14,740 7.62% 15,485 7.36
----- ---- ----- ------ ------ ----- ------ ----
Total $8,001 6.17% $20,057 6.80% $14,740 7.62% $15,587 7.36%
===== ==== ====== ===== ====== ===== ======
The weighted average yields are calculated using amortized cost of
investments and are based on coupon rates for securities purchased
at par value, and on effective interest rates considering
amortization or accretion if securities were purchased at a premium
or discount. The weighted average yield on tax exempt obligations
is presented on a taxable-equivalent basis based on the Company's
marginal federal income tax rate of 34%. Other securities consist
of Federal Reserve Bank and Federal Home Loan Bank stock bearing no
stated maturity or yield and are not included in this analysis.
C. Excluding holdings of U.S. Treasury securities and other
agencies and corporations of the U.S. Government, there were no
investments in securities of any one issuer which exceeded 10% of
the Company's consolidated shareholders' equity at December 31,
1997.
III. LOAN PORTFOLIO
A. Types of Loans - Total loans on the balance sheet are comprised
of the following classifications at December 31:
(In thousands 1997 1996 1995 1994 1993
of dollars)
Commercial $ 80,261 $ 72,917 $ 67,836 $ 59,068 $ 57,254
Commercial
real estate 30,408 22,991 22,858 22,700 21,272
Residential real
estate 49,049 50,874 43,995 39,167 31,465
Construction 3,508 3,249 2,477 2,802 2,523
Installment and
credit card 16,450 15,110 15,453 13,507 12,398
------- ------ ------- ------- ------
Total loans $179,676 $165,141 $152,619 $137,244 $124,912
======= ======= ======= ======= =======
B. Maturities and Sensitivities of Loans to Changes in Interest
Rates - The following is a schedule of maturities of loans based on
contract terms and assuming no amortization or prepayments,
excluding real estate mortgage and installment loans, as of December
31, 1997:
Maturing
One Year One Through After Five
(In thousands or Less Five Years Years Total
of dollars)
Commercial $34,420 $15,532 $30,309 $ 80,261
Commercial
real estate 1,426 1,714 27,268 30,408
Construction 3,508 3,508
------ ------- ------- -------
Total $39,354 $17,246 $57,577 $114,177
====== ======= ======= =======
The following is a schedule of fixed rate and variable rate
commercial, commercial real estate and real estate construction
loans due after one year from December 31, 1997.
Fixed Variable
(In thousands of dollars) Rate Rate
Total commercial,
commercial real estate and
construction loans due after
one year $7,444 $67,379
===== ======
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The following
schedule summarizes nonaccrual, past due and restructured loans.
December 31
(In thousands of dollars) 1997 1996 1995 1994 1993
(a) Loans accounted for on a
nonaccrual basis $ 494 $174 $228 $ 611 $302
(b) Accruing loans which are
contractually past due
90 days or more as to
interest or principal
payments 746 573 343 590 394
(c) Loans which are "troubled
debt restructuring" as
defined in Statement of
Financial Accounting
Standards No. 15
(exclusive of loans in
(a) or (b) above): -0- -0- -0- -0- -0-
----- ----- ---- ---- ----
Totals $1,240 $747 $571 $1,201 $696
===== ====== ==== ===== ===
The policy for placing loans on nonaccrual status is to cease
accruing interest on loans when management believes that collection
of interest is doubtful, when commercial loans are past due as to
principal and interest 90 days or more or when mortgage and consumer
loans are past due as to principal and interest 120 days or more,
except that in certain circumstances interest accruals are continued
on loans deemed by management to be fully collectible. In such
cases, loans are individually evaluated in order to determine
whether to continue income recognition after 90 days beyond due
date. When loans are placed on nonaccrual, any accrued interest is
charged against interest income.
(d) Impaired Loans - Information regarding impaired loans at
December 31, 1997, 1996 and 1995 is as follows:
(In thousands of dollars) 1997 1996 1995
Balance of impaired loans at December 31 $1,384 $961 $228
Less portion for which no allowance
for loan loss is allocated 0 0 0
---- ---- ----
Portion of impaired loan balance for
which an allowance for loan losses
is allocated $1,384 $961 $225
===== ==== ====
Portion of allowance for loan losses
allocated to the impaired loan
balance at December 31 $ 437 $336 $ 40
===== ==== ====
Interest income recognized in impaired loans during the year
represented $76,000 while $106,000 would have been recognized under
the contractual terms of the loans.
Impaired loans are comprised of commercial and commercial real
estate loans, and are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at ,fair
value of the collateral if the loan is collateral dependent. A
portion of the allowance for loan losses is allocated to impaired
loans.
Smaller-balance homogeneous loans are evaluated for impairment in
total. Such loans include residential first-mortgage loans secured
by one- to four-family residences, residential construction loans,
and automobile, home equity and second-mortgage loans less than
$100,000. Such loans are included in nonaccrual and past due
disclosures in (a) and (b) above, but not in the impaired loan
totals. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When analysis
of borrower operating results and financial condition indicates that
underlying cash flows of the borrower's business are not adequate to
meet its debt service requirements, the loan is evaluated for
impairment. Impaired loans, or portions thereof, are charged off
when deemed uncollectible.
2. Potential Problem Loans - At December 31, 1997, no loans were
identified that management has serious doubts about the borrowers'
ability to comply with present loan repayment terms and that are not
included in item III.C.1. above.
3. Foreign Outstandings - There were no foreign outstandings during
any period presented.
4. Loan Concentrations - As of December 31, 1997, there are no
concentrations of loans greater than 10% of total loans that are not
otherwise disclosed as a category of loans in Item III.A. above.
D. Other Interest-Bearing Assets - As of December 31, 1997, there
are no other interest-bearing assets required to be disclosed under
Item III.C.1. or 2. if such assets were loans.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following schedule presents an analysis of the allowance for loan losses, average loan data
and related ratios for the years ended December 31:
(In thousands of dollars) 1997 1996 1995 1994 1993
LOANS
Average loans
outstanding during
period $168,823 $157,274 $146,816 $131,440 $121,332
======= ======= ======= ======= =======
ALLOWANCE FOR LOAN
LOSSES
Balance at beginning of
period $ 2,121 $ 1,830 $ 1,558 $ 1,312 $ 1,203
Loans charged off:
Commercial (37) (11) (59) (4) (196)
Commercial real
estate (0) (0) (113) (34) (0)
Residential real
estate (0) (0) (0) (0) (5)
Installment and credit
card (187) (125) (121) (74) (164)
--------- ------- ------- ------ -------
Total loans
charged off (224) (136) (293) (112) (365)
========= ======= ======= ====== =======
Recoveries of loans
previously charged off:
Commercial 2 2 12 9 6
Commercial real
estate 0 0 0 0 0
Residential real
estate 9 0 0 7 7
Installment 41 25 38 42 71
------- ------ ------ ------ ------
Total loan
recoveries 52 27 50 58 84
------ ------- ------ ------ ------
Net loans charged off (172) (109) (243) (54) (281)
Provision charged to
operating expense 400 400 515 300 390
------ ------- ------- ------ ------
Balance at end of period $ 2,349 $ 2,121 $ 1,830 $ 1,558 $ 1,312
======= ======= ======== ====== =======
Ratio of net charge-offs to
average loans outstanding
for period .10% .07% .17% .04% .23%
Allowance for loan losses balance and provision charged to expense
are determined by management based on periodic reviews of the loan
portfolio, past loan loss experience, economic conditions and
various other circumstances subject to change over time. In making
this judgment, management reviews selected large loans, as well as
impaired loans, other delinquent, nonaccrual and problem loans and
loans to industries experiencing economic difficulties. The
collectibility of these loans is evaluated after considering current
operating results and financial position of the borrower, estimated
market value of collateral, guarantees and the Company's collateral
position versus other creditors. Judgments, which are necessarily
subjective, as to the probability of loss and amount of such loss
are formed on these loans, as well as other loans taken together.
B. The following schedule is a breakdown of the allowance for loan
losses allocated by type of loan and related ratios.
While management's periodic analysis of the adequacy of the
allowance for loan losses may allocate portions of the allowance for
specific problem-loan situations, the entire allowance is available
for any loan charge-offs that occur.
Allocation of the Allowance for Loan Losses
(In thousands of dollars) Percentage of Percentage of Percentage of
Loans in Each Loans in Each Loans in Each
Allowance Category to Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans Amount Total Loans
December 31, 1997 December 31, 1996 December 31, 1995
Commercial $ 719 44.67% $ 634 44.15% $ 497 44.45%
Commercial real
estate 465 16.92 425 13.92 551 14.98
Residential real
estate 245 27.30 109 30.81 148 28.83
Construction 0 1.95 0 1.97 0 1.62
Installment and
credit card 141 9.16 139 9.15 219 10.12
Unallocated 779 814 415
----- ------ ----- ------- ------ -----
Total $2,349 100.00% $2,121 100.00% $1,830 100.00%
===== ====== ===== ======== ====== =======
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
December 31, 1994 December 31, 1993
Commercial $ 710 43.04% $ 266 45.84%
Commercial real
estate 148 16.54 257 17.03
Residential real
estate 118 28.54 102 25.19
Construction 0 2.04 0 2.02
Installment and
credit card 175 9.84 149 9.92
Unallocated 407 538
----- ----- ---- -----
Total $1,558 100.00% $1,312 100.00%
===== ====== ===== ======
V. DEPOSITS
A. The following is a schedule of average deposit amounts and average rates paid on each category
for the periods indicated:
Average Average
Amounts Outstanding Rate Paid
Year ended December 31 Year ended December 31
1997 1996 1995 1997 1996 1995
(In thousands of dollars)
Noninterest-bearing
demand $ 20,920 $ 20,140 $ 19,122 N/A N/A N/A
Interest-bearing demand
deposits 35,148 35,625 36,396 1.99% 2.05% 2.18%
Savings deposits 35,559 27,564 26,819 3.47 3.03 3.03
Time deposits 135,565 116,280 109,582 5.82 5.72 5.80
------- ------- ------- ---- ------ ------
Total deposits $227,192 $199,609 $191,919
======= ======= =======
D. The following is a schedule of maturities of time certificates of
deposit in amounts of $100,000 or more as of December 31, 1997:
(In thousands of dollars)
Three months or less $ 6,352
Over three through six months 6,384
Over six through twelve months 12,669
Over twelve months 5,239
-------
Total $30,644
=======
C. and E. There were no foreign deposits in any period presented.
VI. RETURN ON EQUITY AND ASSETS
1997 1996 1995
Return on average assets 1.62% 1.65% 1.69%
Return on average shareholders' equity 17.32 17.47 19.17
Dividend payout ratio 29.88 27.67 23.13
Average shareholders' equity to
average assets 9.38 9.47 8.80
VII. SHORT-TERM BORROWINGS
This item is not required for the Company because the average
outstanding balance of short-term borrowings for the years ending
December 31, 1997, 1996 and 1995 were less than 30 percent of
shareholders' equity at December 31, 1997, 1996 and 1995.
ITEM 2 - PROPERTIES
The Bank owns and operates its main office at Six West Jackson
Street, Millersburg, Ohio 44654. The Bank also operates seven
branches and two other properties are owned or leased as noted
below:
1. The Berlin Branch, 4585 S. R. 39, Suite B, Berlin, Ohio 44610
(leased)
2. The South Clay Branch, 91 S. Clay Street, Millersburg, Ohio 44654
(owned)
3. The Winesburg Branch, 2225 U.S. 62, Winesburg, Ohio 44590 (owned)
4. The Clinton Commons Branch, 2101 Glen Drive, Millersburg, Ohio
44654 (leased)
5. The Walnut Creek Branch, 4980 Old Pump Street, Walnut Creek, Ohio
44687 (owned)
6. The Charm Office, Corner of S.R. 557 and C.R. 70, Charm, Ohio
44617 (leased)
7. The Sugarcreek Office, 127 S. Broadway, Sugarcreek, Ohio 44681
(owned)
8. The Operations Center, 52 South Clay Street, Millersburg, Ohio
44654 (leased)
9. 51 North Clay Street, Millersburg, Ohio 44654 (owned; planned to
be developed for operations center)
10. The Shreve Office, 333 W. South Street, Shreve, OH 44676
(owned)
The Bank considers its physical properties to be in good operating
condition and suitable for the purposes for which they are being
used. All properties owned by the Bank are unencumbered by any
mortgage or security interest and are adequately insured, in
management's opinion.
ITEM 3 - LEGAL PROCEEDINGS
There is no pending litigation, other than routine litigation
incidental to the business of the Company and Bank, or of a material
nature involving or naming the Company or Bank as a defendant.
Further, there are no material legal proceedings in which any
director, executive officer, principal shareholder or affiliate of
the Company is a party or has a material interest that is adverse to
the Company or Bank. None of the routine litigation in which the
Company or Bank is involved is expected to have a material adverse
impact on the financial position or results of operations of the
Company or Bank.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of 1997.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information contained in the section captioned "Common Stock" on
page 24 of the Annual Report is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
Information contained in the section captioned "Five-Year Selected
Consolidated Financial Data" on pages 15 and 16 of the Annual Report
is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" on pages 15 through 23, inclusive, of the Annual Report
is incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The following information was furnished to each shareholder of the
Company with the proxy statement and annual report mailed on or
about March 13, 1998:
CSB Bancorp, Inc.
Quantitative and Qualitative Disclosures About Market Risk
December 31, 1997
A new rule issued by the Securities and Exchange Commission requires
"qualitative and quantitative" disclosure about market risks
encountered by companies. The only significant market risk to which
CSB Bancorp, Inc. (the "Company") is exposed is interest rate risk.
The business of the Company and the composition of its balance sheet
consists of investments in interest-earning assets (primarily loans
and securities), which are funded by interest-bearing liabilities
(deposits and borrowings). These financial instruments have varying
levels of sensitivity to changes in the market rates of interest,
resulting in market risk. None of the Company's financial
instruments are held for trading purposes.
The Company manages interest rate risk regularly through its Asset-Liability
Management Committee (ALCO). One method the Company uses
to manage its interest rate risk is a rate sensitivity gap analysis,
which monitors the relationship between the maturity and repricing
of its interest-earning assets and interest-bearing liabilities.
The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A
"positive gap" occurs when the amount of interest-rate-sensitive
assets maturing or repricing within a given period exceeds the
amount of interest-sensitive-liabilities maturing or repricing
within the same period. Conversely, a negative gap occurs when the
amount of interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period of
rising interest rates, a negative gap would adversely affect net
interest income, while a positive gap would result in an increase in
net interest income. Conversely, during a period of falling
interest rates, a negative gap would result in an increase in net
interest income, while a positive gap would negatively affect net
interest income.
Management monitors its gap position on a monthly basis with the
goal to increase its net interest income slightly in a rising
interest rate environment, in order to maintain earnings at an
acceptable level when additional funding of the Company's loan loss
reserve may be necessary. This has historically been accomplished
through offering loan products that are either short-term in nature
or which carry variable rates of interest. Interest rates of the
majority of the Company's commercial loan portfolio vary based on
the prime commercial lending rates published by The Wall Street
Journal, while interest rates of the majority of its real estate
loan portfolio vary depending on the six-month U.S. Treasury rates.
Beginning in 1995, the Company granted a limited amount of fixed
rate real estate loans to reduce the impact of this positive
interest rate gap. The Company's securities portfolio is primarily
fixed rate and short-term in nature. The Company's investment in
structured notes, securities with imbedded options and securities
with prepayment risk is not a material part of the securities
portfolio. The Company holds no mortgage derivative products. As
a result of its gap position, the Company may be vulnerable to
decreases in its net interest income and the net market value of its
portfolio equity when market rates of interest decrease. The
Company's interest income and the market values of its financial
instruments is most affected by changes in short- and medium-term
interest rates, such as the 6-month U.S. Treasury rates and prime
commercial lending rates.
Recently, the Company began monitoring its interest rate risk
through a sensitivity analysis, whereby it measures potential
changes in its future earnings and the fair values of its financial
instruments that may result from one or more hypothetical changes in
interest rates. This analysis is performed by estimating the
expected cash flows of the Company's financial instruments using
interest rates in effect at year-end 1997. For the fair value
estimates, the cash flows are then discounted to year-end to arrive
at an estimated present value of the Company's financial
instruments. Hypothetical changes in interest rates are then
applied to the financial instruments, and the cash flows and fair
values are again estimated using these hypothetical rates. For the
net interest income estimates, the hypothetical rates are applied to
the financial instruments based on the assumed cash flows. The
Company applies these interest rate "shocks" to its financial
instruments up and down 200 basis points in 100 basis point
increments.
The following table presents an analysis of the potential
sensitivity of the Company's 1998 net interest income to sudden and
sustained 100 basis-point changes in market interest rates:
Change in Net Interest Dollar Percentage
Interest Rates Income Change Change
(Dollars in Thousands)
+200 $12,138 $693 6.1%
+100 12,064 619 5.4
0 11,445 0 0.0
-100 10,973 (472) (4.1)
-200 10,666 (779) (6.8)
SIGNIFICANT ASSUMPTIONS AND OTHER CONSIDERATIONS
The above analysis is based on numerous assumptions, including
relative levels of market interest rates, loan prepayments and
reactions of depositors to changes in interest rates, and should not
be relied upon as being indicative of actual results. Further, the
analysis does not necessarily contemplate all actions the Company
may undertake in response to changes in interest rates.
Securities owned by the Company will generally repay at their stated
maturity. A portion of the Company's loans are residential mortgage
loans which permit the borrower to prepay the principal balance of
the loan prior to maturity without penalty. The likelihood of
prepayment depends on a number of factors, including the current
interest rate and interest rate index (if any) on the loan, the
financial ability of the borrower to refinance, the economic benefit
to be obtained from refinancing, availability of refinancing at
attractive terms, as well as economic and other factors in specific
geographic areas which affect the sales and price levels of
residential property. In a changing interest rate environment,
prepayments may increase or decrease on fixed- and adjustable-rate
loans depending on the current relative levels and expectations of
future short- and long-term interest rates. Prepayments on
adjustable-rate residential mortgage loans generally increase when
long-term interest rates fall or are at historically low levels
relative to short-term interest rates, thus making fixed-rate loans
more desirable.
While savings and checking deposits generally may be withdrawn upon
the customer's request without prior notice, a continuing
relationship with customers resulting in future deposits and
withdrawals is generally predictable, resulting in a dependable and
uninterrupted source of funds. No change in the rates on such
deposits is assumed when market rates increase or decrease 100 basis
points. When market rates increase or decrease 200 basis points,
the analysis assumes a corresponding 50 basis point change in the
rates paid on such deposits. Short-term borrowings have fixed
maturities. Time deposits generally have early withdrawal penalties
which discourage customer withdrawal prior to maturity. Advances
from the Federal Home Loan Bank do not carry prepayment penalties,
but are expected to be repaid in accordance with their contractual
terms.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information contained in the consolidated financial statements and
related notes and the report of independent auditors thereon, on
pages 25 through 41, inclusive, of the Annual Report, is
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No changes in or disagreements with the independent accountants on
accounting and financial disclosure have occurred.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS, OF THIS REGISTRANT
Information contained in the section captioned "ELECTION OF
DIRECTORS" on pages 4 through 7 of the Company's proxy statement for
the Company's 1998 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission on or about March 13, 1998 (the
"Proxy Statement") and information in the paragraph beginning on
page 4 and ending on page 5 of the Proxy Statement is incorporated
herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information contained in the section captioned "EXECUTIVE
COMPENSATION" on page 12 through 13 of the Proxy Statement is
incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information contained in the section captioned "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 2 through 3 of
the Proxy Statement is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained in the section captioned "CERTAIN
TRANSACTIONS" on page 15 of the Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit
Number Description of Document
3.1 Amended Articles of Incorporation of CSB Bancorp, Inc.
(incorporated by reference to Registrant's 1994 Form 10-KSB)
3.2 Proposal amending Article Fourth of the Amended Articles
of Incorporation approved by Shareholders on October 2, 1996.
3.3 Code of Regulations of CSB Bancorp, Inc. (incorporated by
reference to Registrant's Form 10-SB)
4 Form of Certificate of Common Shares of CSB Bancorp, Inc.
(incorporated by reference to Registrant's Form 10-SB)
10 Leases for the Clinton Commons, Berlin and Charm Branch
Offices of The Commercial and Savings Bank (incorporated by
reference to Registrant's Form 10-SB)
11 Statement Regarding Computation of Per Share Earnings
13 Excerpt from CSB Bancorp, Inc. 1997 Annual Report to
Shareholders
21 Subsidiary of CSB Bancorp, Inc.
23 Consent of Crowe, Chizek and Company LLP
24 Power of Attorney
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 BANCORP, INC.
By: /s/DOUGLAS D. AKINS
Douglas D. Akins, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on March 30, 1998.
Signatures Title
DOUGLAS D. AKINS* President (Principal Executive Officer)
Douglas D. Akins*
A. LEE MILLER* Senior Vice President and
A. Lee Miller Chief Financial Officer
PAMELA S. BASINGER* Financial Officer and Principal
Pamela S. Basinger* Accounting Officer
DAVID W. KAUFMAN* Director
David W. Kaufman*
J. THOMAS LANG* Director
J. Thomas Lang*
VIVIAN A. McCLELLAND* Director
Vivian A. McClelland*
H. RICHARD MAXWELL* Director
H. Richard Maxwell*
DANIEL J. MILLER* Director
Daniel J. Miller*
SAMUEL P. RIGGLE, JR. * Director
Samuel P. Riggle, Jr.*
DAVID C. SPRANG* Director
David C. Sprang*
SAMUEL M. STEIMEL* Director
Samuel M. Steimel*
*By: /s/DOUGLAS D. AKINS
Douglas D. Akins
as attorney-in-fact and on his own behalf as Principal Executive
Officer
INDEX TO EXHIBITS
Exhibit Sequential
Number Description of Document Page
3.1 Amended Articles of Incorporation of
CSB Bancorp, Inc. (incorporated by
reference to Registrant's 1994 Form 10-KSB). N/A
3.2 Proposal amending Article Fourth of the
Amended Articles of Incorporation approved
by Shareholders on October 2, 1996. 23
3.3 Code of Regulations of CSB Bancorp, Inc.
(incorporated by reference to Registrant's
Form 10-SB). N/A
4 Form of Certificate of Common Shares of CSB
Bancorp, Inc. (incorporated by reference to
Registrant's Form 10-SB). N/A
10 Leases for the Clinton Commons, Berlin and
Charm Branch Offices of The Commercial
and Savings Bank (incorporated by reference
to Registrant's Form 10-SB). N/A
11 Statement Regarding Computation of Per Share
Earnings 24
13 CSB Bancorp, Inc. 1997 Annual Report to
Shareholders 25
21 Subsidiary of CSB Bancorp, Inc. 61
23 Consent of Crowe, Chizek and Company LLP 62
24 Power of Attorney 63
27 Financial Data Schedule 64
EXHIBIT 3.2
PROPOSAL AMENDING
ARTICLE FOURTH OF THE
AMENDED ARTICLES OF INCORPORATION
WITH RESPECT TO THE COMMON SHARES OF CSB
RESOLVED, that Article Fourth of the Amended Articles of
Incorporation of CSB Bancorp, Inc. be amended to read as follows:
FOURTH: The authorized number of shares of the Corporation is three
million (3,000,000) all of which shall be with a par value of Six
Dollars and Twenty-Five Cents ($6.25) each
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Years ended December 31,
1997 1996(1) 1995(1)
Average basic shares outstanding 1,302,457 1,288,522 1,279,002
========= ========= =========
Average diluted shares outstanding 1,302,926 1,288,522 1,279,002
========= ========= =========
Net income $4,407,200 $3,859,466 $3,592,252
========= ========= =========
Basic and diluted earnings per
common share $ 3.38 $ 3.00 $ 2.81
========= ========= =========
(1) Restated to reflect the October 1996 two-for-one stock split
paid in the form of a 100% stock dividend.
EXHIBIT 13
CSB BANCORP, INC. 1997 ANNUAL REPORT
TO SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
CSB Bancorp, Inc. (the "Company") was incorporated under the laws of
the State of Ohio in 1991 to become a one-bank holding company for
its wholly-owned subsidiary, The Commercial and Savings Bank (the
"Bank"). The Bank is chartered under the laws of the State of Ohio
and was organized in 1879. The Bank is a member of the Federal
Reserve System, insured by the Federal Deposit Insurance Corporation
and regulated by the Ohio Division of Financial Institutions and the
Federal Reserve Bank.
The Company, through the Bank, provides retail and commercial
banking services to its customers including checking and savings
accounts, time deposits, safe deposit facilities, personal loans,
commercial loans, real estate mortgage loans, installment loans,
IRAs, night depository facilities and trust services. Its customers
are located primarily in Holmes County and portions of surrounding
counties in Ohio. The general economic conditions in the Company's
market area have been very sound. Unemployment statistics have
generally been among the lowest in the state of Ohio and the area
has experienced stable to rising real estate values.
The following discussion is presented to aid in understanding the
Company's consolidated financial condition and results of
operations, and should be read in conjunction with the audited
consolidated financial statements and related notes. In addition to
the historical information, the following discussion contains
forward-looking statements that involve risks and uncertainties,
including regulatory policy changes, interest rate fluctuations,
loan demand and other risks. Economic circumstances, operations and
actual strategies and results in future time periods may differ
materially from those currently expected. Such forward looking
statements represent management's judgement as of the current date.
The Company disclaims, any intent or obligation to update such
forward looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein but also include
changes in the economy and interest rates in the nation and in the
Company's general market area. Management is aware of no market or
institutional trends, events or uncertainties that are expected to
have a material effect on liquidity, capital resources or operations
except as discussed herein. There are no current recommendations by
regulatory authorities that would have such effect if implemented.
FIVE YEAR Selected CONSOLIDATED Financial Data
1997 1996 1995 1994 1993
(in thousands of dollars, except shares, per share data and ratios)
Statements of earnings:
Total interest income $ 22,112 $ 19,480 $ 18,305 $ 13,654 $ 12,066
Total interest expense 10,813 8,828 8,034 5,602 5,173
--------- --------- --------- --------- ---------
Net interest income 11,299 10,652 10,271 8,052 6,893
Provisions for loan
losses 400 400 515 300 390
--------- --------- -------- --------- --------
Net interest income
after provision
for loan losses 10,899 10,252 9,756 7,752 6,503
Total noninterest
income 1,447 1,228 1,002 830 910
Total noninterest
expenses 6,315 6,021 5,722 5,306 5,101
------ -------- ------- --------- -------
Earnings before federal
income taxes 6,031 5,459 5,036 3,276 2,312
Federal income tax
expense 1,624 1,600 1,444 821 435
------- -------- ------- --------- -------
Net earnings $ 4,407 $ 3,859 $ 3,592 $ 2,455 $ 1,877
========= ======== ======== ========= ========
Per share of common
stock (1)
Basic and diluted
earnings $ 3.38 $ 3.00 $ 2.81 $ 1.92 $ 1.47
Dividends 1.01 .83 .65 .50 .44
Book value 20.80 18.09 15.83 13.38 12.09
Average basic common
shares
outstanding (2) 1,302,457 1,288,522 1,279,002 1,276,800 1,278,132
Average diluted common
shares outstanding 1,302,926 1,288,522 1,279,002 1,276,800 1,278,132
Year-end balances:
Loans, net $ 177,327 $ 163,020 $ 150,789 $ 135,686 $ 123,600
Securities 86,428 52,384 54,641 48,888 46,316
Total assets 288,442 254,135 233,210 204,407 184,316
Deposits 241,203 213,340 206,255 185,680 167,902
Borrowings 18,978 16,480 5,913 930 526
Shareholders' equity 27,274 23,426 20,343 17,078 15,432
Average balances:
Loans, net $ 166,596 $ 155,298 $ 145,109 $ 130,032 $ 120,144
Securities 77,318 50,129 49,698 44,620 37,865
Total assets 271,237 233,353 213,077 188,434 171,910
Deposits 227,192 199,609 191,919 169,792 155,479
Borrowings 17,312 10,632 1,563 1,777 1,232
Shareholders' equity 25,444 22,095 18,743 16,263 14,999
Year ended December 31,
1997 1996 1995 1994 1993
(in thousands of dollars, except shares, per share data and ratios)
Selected ratios:
Net yield on average
interest-bearing assets 4.36% 4.79% 5.07% 4.53% 4.26%
Return on average total
assets 1.62 1.65 1.69 1.30 1.09
Return on average
shareholders' equity 17.32 17.47 19.17 15.10 12.51
Average shareholders'
equity as a percent
of average total
assets 9.38 9.47 8.80 8.63 8.73
Net loan charge-offs
as a percent
of average loans .10 .07 .16 .04 .23
Allowance for possible
loan losses as a percent
of loans at year-end 1.31 1.28 1.20 1.13 1.05
Shareholders' equity as
a percent of total year-
end assets 9.46 9.21 8.72 8.35 8.37
Notes to selected financial data:
(1) Year ended December 31, 1994 includes benefit from cumulative effect at January 1, 1994 of
change in method of accounting for income taxes of $90 or $.28 per share.
(2) Restated for 1996 stock split paid in the form of a 100% stock dividend.
RESULTS OF OPERATIONS
Net income increased $548,000 in 1997 to $4.4 million. Earnings per
share was $3.38 and $3.00 per share for the years ended December 31,
1997 and 1996, respectively. Net interest income was the driving
component for the increase in net income. Performance ratios
decreased somewhat because of increased liquidity and growing
capital through earnings retention. Return on average assets was
1.62% in 1997 as compared to 1.65% in 1996, and return on average
shareholder's equity dropped to 17.32% in 1997, from 17.47% during
1996.
Net income for 1996 was $3.9 million or $3.00 per share, as compared
to $3.6 million or $2.81 per share for 1995. This equated to a
return on average assets of 1.65% in 1996 and 1.69% in 1995, while
the return on average shareholders' equity for the same periods was
17.47% and 19.17%.
Net Interest Income
Net interest income is the largest component of the Company's net
income, and consists of the difference between income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Volumes, interest rates and composition of
interest-earning assets and interest-bearing liabilities primarily
affect net interest income.
Net interest income for 1997 was $11.3 million, increasing $647,000
from $10.7 million in 1996. Contributing to the increase was a $1.0
million, or 6.6% increase in interest and fees on loans, mostly
attributable to the 7.3% growth in average loans, as the yield on
loans decreased during 1997. Interest income on securities
increased $1.6 million, or 54.5%, to $4.6 million as compared $3.0
million for the previous year. This increase was due primarily to
an increase of the average balance of $27.2 million, or 54.2%, over
the previous year. A portion of this increase was a result of the
$10.8 million proceeds from the sale of loans being reinvested in
securities. Other interest income decreased $20,000 to $738,000 in
1997 compared to $758,000 in 1996, primarily as a result of a $2.0
million decrease in the average balance of these interest bearing
liquid assets. These assets usually carry less credit and interest-rate risk,
and, therefore, provide lower yields than securities or
loans.
The Company's interest expense on deposits increased $1.6 million to
$9.8 million in 1997, compared to $8.2 million in 1996. Average
time deposits grew $19.3 million or 16.6% in 1997, as the Company
offered a promotional rate on one-year certificates. Deposit
interest rates increased during 1997 as overall cost of funds
increased to 4.84% compared to 4.64% in 1996. Late in 1995, the
Company began to originate fixed-rate mortgage loans through a
matched funds program with the FHLB. Advances with maturities
similar to the loans establish a fixed interest rate spread of
approximately 200 basis points for the estimated duration of the
loans. In February, 1997, the Company sold $10.8 million of these
fixed-rate mortgage loans and management decided not to pay off the
related advance. Instead, new loans of $8.2 million were originated
under this program during 1997.
Net interest income for 1996 was $10.7 million increasing by
$381,000 from $10.3 million in 1995. Contributing to the increase
was a $675,000, or 4.5% increase in interest and fees on loans,
mostly attributable to the 7.1% growth in average loans, as the
yield on loans decreased 1996. As the prime lending rate decreased
during the latter part of 1995 and early 1996, so did the yield of
the commercial loan portfolio. Prime rate stabilized through the
remainder of 1996.
The following tables provide detailed analysis of changes in average
balances, yields, and net interest income identifying that portion
of the changes due to change in average volume versus that portion
due to change in average rates.
AVERAGE BALANCES, RATES AND YIELDS
(Dollars in thousands) 1997 1996 1995
Average Average Average
Balance(1) Interest Rate(2) Balance(1) Interest Rate(2) Balance(1) Interest Rate(2)
Interest-bearing Assets
Federal funds sold 9,295 513 5.52 9,194 481 5.23 5,872 344 5.85%
Interest-bearing deposits 3,547 225 6.34 5,611 277 4.94 127 3 2.71
Securities:
Taxable 49,420 3,119 6.31 31,759 1,932 6.08 33,785 1,943 5.75
Tax exempt 27,898 1,457 5.22 18,370 1,030 5.61 15,913 930 5.85
Loans (3) 168,823 16,798 9.95 157,274 15,760 10.02 146,816 15,085 10.27
------- ------ ------- ------ -------- -------
Total interest-earning
assets 258,983 22,112 8.54 222,208 19,480 8.77% 202,513 18,305 9.04%
Noninterest-bearing assets
Cash and due from banks 7,972 7,334 6,839
Bank premises and
equipment, net 3,020 3,057 2,852
Other assets 3,489 2,730 2,510
Allowance for loan losses (2,227) (1,976) (1,707)
-------- ------- -------
Total assets $271,237 $233,353 $213,007
Interest-bearing liabilities
Demand deposits 35,148 701 1.99 $ 35,625 731 2.05% $ 36,396 795 2.18%
Savings deposits 35,559 1,233 3.47 27,564 836 3.03 26,819 812 3.03
Time deposits 135,565 7,895 5.82 116,280 6,646 5.72 109,582 6,361 5.80
Other borrowed funds 17,312 984 5.68 10,632 615 5.78 1,563 66 4.24
------- ----- -------- ----- ------- ------
Total interest-bearing
liabilities 223,584 10,813 4.84% 190,101 8,828 4.64% 174,360 8,034 4.61%
Noninterest-bearing
liabilities
Demand deposits 20,920 20,140 19,122
Other liabilities 1,289 1,017 782
Shareholders' equity 25,444 22,095 18,743
------- -------- --------
Total liabilities and
equity $271,237 $233,353 $213,007
======= ======== ========
Net interest income $11,299 $10,652 $10,271
======= ======= =======
Net interest margin 4.36% 4.79% 5.07%
==== ==== ====
(1) Average balances have been computed on an average daily basis.
(2) Average rates have been computed based on the amortized cost of the
corresponding assets or liability.
(3) Average loan balances include nonaccruing loans.
RATE/VOLUME ANALYSIS OF CHANGES IN INCOME AND EXPENSE (1)
(Dollars in thousands) 1997 v. 1996 1996 v. 1995
Change in Change in
Income/ Volume Rate Income/ Volume Rate
Expense Effect Effect Expense Effect Effect
Interest Income
Federal funds sold $ 32 $ 5 $ 27 $ 137 $ 169 $ (32)
Interest-bearing
deposits (52) (118) 66 274 269 5
Securities:
Taxable 1,187 1,112 75 (11) (204) 193
Tax exempt 427 502 (75) 100 135 (35)
Loans 1,038 1,150 (112) 675 1,025 (350)
----- ------ ------ ----- ------- -------
Total interest
income 2,632 2,651 (19) 1,175 1,394 (219)
----- ----- ------ ------- ------- --------
Interest Expense
Demand deposits (30) (10) (20) (64) (17) (47)
Savings deposits 397 266 131 24 24
Time deposits 1,249 1,121 128 285 390 (105)
Other borrowed funds 369 380 (11) 549 547 2
----- ----- ----- ------ -------- --------
Total interest
expense 1,985 1,757 228 794 944 (150)
----- ----- ----- ------ ------- -------
Net Interest Income $ 647 $ 894 $(247) $ 381 $ 450 $ (69)
===== ===== ===== ======= ======= =======
(1) Changes attributable to both volume and rate, which cannot be segregated,
have been allocated based on the absolute value of the
change due to volume and the change due to rate.
The following table reconciles net interest income as shown in the
financial statements to taxable-equivalent net-interest income:
1997 1996 1995
Net interest income $11,299 $10,652 $10,271
Taxable equivalent
adjustment (1) 640 464 423
------- ------- -------
Net interest income
- - fully taxable equivalent $11,939 $11,116 $10,694
======= ======= ========
Net interest yield 4.36% 4.79% 5.07%
Taxable equivalent
adjustment (1) .25 .21 .21
------- ------- -------
Net interest yield
- - taxable equivalent 4.61% 5.00% 5.28%
======= ====== =======
(1) Taxable equivalent adjustments have been computed assuming a
34% tax rate.
Provision for Loan Losses
As the loan portfolio grows, management continues to provide for
losses inherent in the portfolio. The provision for loan losses was
$400,000 in 1997 and 1996, a decrease from $515,000 in 1995. See
"Financial Condition - Allowance and Provision for Loan Losses."
Other Income
Total other income increased to $1.4 million in 1997 compared to
$1.2 million in 1996, an increase of 17.9%. The increase was
primarily due to a $220,000 gain on sale of loans. During 1997,
management decided to sell $10.8 million of fixed-rate residential
mortgage loans that were identified as held for sale at year end
1996. Also contributing to the increase was a $46,000, or 73%,
increase in trust fee income to $108,000 and a $51,000, or 14%,
increase in NSF and returned check charges. These increases were
partially offset by a $37,000, or 24%, decrease in merchant fee
income and the $116,000 gain on sale of real estate owned in 1996.
There were no security sales during the three-year period ended
December 31, 1997. During 1996, approximately $22,000 of security
gains were realized on the settlement of bonds issued by the
Washington Public Power Supply System (WPPSS). The Company wrote
these bonds down to their estimated market values in the 1980's when
the issuer defaulted on certain obligations. Management believes no
additional amounts will be recovered from the WPPSS issues in the
future. Additionally, losses of $10,000 were realized on the call
of agency securities during 1996 and prepayments of mortgage-backed
securities.
Total other income increased $226,000 to $1.2 million in 1996. Most
of the increase is attributed to a $116,000 gain on the sale of
other real estate owned by the Bank. Fees generated by the trust
department increased to $63,000 in 1996 from $17,000 in 1995, its
first year of operation. Deposit portfolio growth also contributed
to the increase of other income through service charges on deposit
accounts.
Other Expenses
Noninterest expense increased $295,000, or 4.9%, during 1997
compared to 1996. Such expenses increased $298,000, or 5.2%, in
1996 compared to 1995. The largest component of noninterest expense
is salaries and employee benefits, which increased $204,000 or 6.8%
in 1997 and $226,000 or 6.7% in 1996. The increases were from
normal salary adjustments and the addition of staff members to
service the Company's growing customer base. The Bank's state
franchise tax, which is based on a percentage of shareholders'
equity, continues to increase as equity grows through earnings
retention. FDIC premiums decreased from $209,000 in 1992 to $2,000
in 1996, then increased to $27,000 in 1997, due to legislation
passed in 1996, changing the rate banks pay on deposits for deposit
insurance. Management anticipates this rate will remain stable in
the foreseeable future.
Income Taxes
The provision for income taxes remained stable at $1.6 million in
1997 and 1996, an increase over the $1.4 million in 1995, primarily
resulting from the increase in income before income taxes. The
Company's effective tax rate was 26.9% in 1997 compared to 29.3% in
1996 and 28.7% in 1995. The decrease in 1997 was due to the $9.5
million, or 51.9% increase, in the average balance of tax exempt
securities.
FINANCIAL CONDITION
Total assets of the Company were $288.4 million at December 31,
1997, compared to $254.1 million at December 31, 1996, representing
an increase of 13.5%. This growth was primarily in loans and
securities, which were funded by increases in the Company's deposits
from its local customer base. Changes in the consolidated balance
sheets and factors that caused those changes are discussed below.
Securities
Total securities increased $34.0 million, or 65.0% from $52.4
million at year-end 1996 to $86.4 million at year-end 1997. During
1997, the Company invested proceeds from the sale of fixed-rate
mortgage loans and funds obtained through the growth in deposits
into tax exempt securities and short term U.S. Government and agency
securities. The distribution of the securities portfolio at year-end 1997
consisted of U.S. Treasury securities - 36.1%, U.S.
government corporations and agencies - 20.3%, obligations of state
and political subdivisions - 41.3% and other securities 2.3%.
Since one of the primary functions of the securities portfolio is to
provide a source of liquidity, it is structured such that maturities
and cash flows satisfy the Company's liquidity needs and
asset/liability management requirements. At December 31, 1997,
18.5% of the portfolio matures within one year.
Securities classified as held to maturity under Statement of
Financial Accounting Standards (SFAS) No. 115 are carried at
amortized cost. Management has the positive intent and ability to
hold these securities to maturity. Securities classified as
available for sale include those that may be sold before maturity
for liquidity, asset/liability management or other reasons. The
Company classifies all equity securities as available for sale.
Loans
Total loans of $179.7 million were recorded as of December 31, 1997
as compared to $165.1 million at year-end 1996, representing an
increase of 8.8%. While the mix of loans within this portfolio
remained relatively stable, the Company experienced increases of
$7.3 million, or 10.1%, in commercial loans, $7.4 million, or 32.3%,
in commercial real estate loans and $1.3 million, or 8.9%, in
installment and credit card loans. As of December 31, 1997
agriculture production loans and loans secured by farmland totaled
approximately $12.6 million and are included in the commercial,
commercial real estate and residential real estate categories.
Unsecured credit card loans totaled $1.3 million, or .7% of loans
at year-end 1997.
In late 1995, the Company began to originate fixed-rate mortgage
loans using a match-funding program using FHLB advances of similar
maturity. At December 31, 1997, the balance of loans originated
under this program totaled approximately $8.6 million. Management
anticipates continued lending of mortgage loans under this program
as customer demand for fixed-rate loans is strong. The majority of
the remainder of the Company's residential real estate loan
portfolio consists of loans that reprice every 6 months based on a
short-term Treasury bill index.
Demand for commercial business loans, as well as both commercial and
residential real estate loans, was strong in 1996 and continued
through 1997. Management is, also, seeking loan growth through
alternative programs for customers, such as a limited amount of
accounts receivable financing. Management anticipates the Company's
local service area will experience continued economic strength and
a continued need for this type of lending into 1998.
Allowance and Provision for Loan Losses
The allowance for loan losses is maintained at a level considered
adequate to cover loan losses that are currently anticipated based
on past loss experience, general economic conditions, changes in mix
and size of the loan portfolio, information about specific borrower
situations, and other factors and estimates which are subject to
change over time. Management periodically reviews selected large
loans, delinquent and other problem loans, and selected other loans.
Collectibility of these loans is evaluated by considering current
financial position and performance of the borrower, estimated market
value of the collateral, Company's collateral position in
relationship to other creditors, guarantees and other potential
sources of repayment. Management forms judgments, which are
subjective, as to the probability of loss and the amount of loss on
these loans as well as other loans taken together.
The allowance for loan losses totaled $2.3 million or 1.31% of total
loans at December 31, 1997, up from $2.1 million or 1.28% of total
loans at December 31, 1996. Net charge-offs for 1997 totaled
$172,000, down from $109,000 in 1996, and compared to $242,000 in
1995. As with all loans that have been charged-off, management is
continuing collection efforts and future recoveries may occur. The
provision for loan losses amounted to $400,000 in 1997 and 1996, a
decrease from $515,000 in 1995. Management reviews the level of the
allowance for loan losses and the corresponding provision based on
the portfolio mix and the level of nonperforming loans.
Nonperforming loans consist of loans which the accrual of interest
has been discontinued and loans past due 90 days or more. Such
loans totaled approximately $1.2 million, or .69%, of total loans at
December 31, 1997, as compared to $747,000 or .45%, of total loans
at December 31, 1996. The allowance for loan losses as a percentage
of nonperforming loans was 189.4% and 283.9% at year-end 1997 and
1996, respectively. Given the Company's collateral position,
management anticipates little loss related to the nonperforming
loans.
In addition to nonperforming loans, management regularly identifies
and monitors, through its credit officers and its loan review
function, loans for which it has concerns about the borrowers'
future ability to meet repayment terms. Loans on management's
"watch list" not included in the nonperforming loans discussed above
totaled $10.1 million at year end 1997, compared to $8.8 million at
year end 1996. These loans are considered in management's analysis
of the allowance for loan losses and include substantially all loans
adversely classified for regulatory purposes.
Premises and Equipment
Net premises and equipment increased by $1.0 million to $3.6 million
at year-end 1997 from $2.6 million at year-end 1996. During 1997,
the Company invested $735,000 toward the construction of a new
branch facility in Shreve, Ohio. The Branch is scheduled to open in
March, 1998. Also, plans are near completion for the construction
of the new operations center, which should be completed in 1999.
Deposits
The Company's deposits are obtained from individuals and businesses
located in its market area. Total deposits increased 13.1% to
$241.2 million at December 31, 1997, compared to $213.3 million at
December 31, 1996. Noninterest-bearing balances increased to $24.7
million at December 31, 1997, as compared to $21.4 million at
December 31, 1996. Interest-bearing demand and savings deposits
increased $24.6 million, or 12.8% at December 31, 1997, compared to
1996. The growth was partially due to $8.0 million in public funds
from a local school district for the construction of a new high
school. These funds are expected to be withdrawn over a period of
24 months, and have been invested is securities with similar
maturities. Additional growth was obtained through a $7.7 million,
or 7.5%, increase in certificates of deposit under $100,000 and a
$6.0 million, or 24.2%, increase in certificates of deposit greater
than $100,000.
CAPITAL RESOURCES
Total shareholders' equity increased from $23.4 million at December
31, 1996 to $27.3 million at December 31, 1997. Contributing to
this increase was net income of $4.4 million, offset by $1.3 million
of dividends paid to shareholders. Because of the dividend
reinvestment program, shareholders' equity increased $279,000 during
1996 and $377,000 in 1997. The Company also allows participants in
its 401(k) profit sharing plan to elect the plan to purchase and
hold shares of the Company's common stock in their accounts.
Because of this plan, equity increased $49,000 during 1996 and
$339,000 during 1997. In October 1996, the Company declared a two-for-one stock
split paid in the form of a 100% stock dividend.
Accordingly, the transaction was capitalized at the par value of the
Company's stock and resulted in a shift of capital of $4.0 million
from retained earnings to common stock.
Banking regulations have established minimum capital ratios for
banks and bank holding companies. Among the requirements the
Company and its subsidiary bank must meet a risk-based capital
requirement, which defines two tiers of capital and compares each to
the Company's "risk-weighted assets." The Company's assets and
certain off-balance-sheet items, such as loan commitments, are each
assigned a risk factor so assets with potentially higher credit risk
require more capital support than assets with lower risk. These
regulations require the Company to have a minimum total risk-based
capital ratio of 8%, at least half of which must be Tier 1 capital.
The Company's Tier 1 capital is its shareholders' equity before any
unrealized gain or loss on securities available for sale, while
total risk-based capital includes Tier 1 capital and a limited
amount of the allowance for loan losses. In addition, a bank or
bank holding company's leverage ratio (which for the Company equals
its shareholders' equity before any unrealized gain or loss on
securities available for sale divided by average assets) must be
maintained at a minimum of 3% to 5%. The Company's actual and
required capital amounts are disclosed in Note 12 to the
consolidated financial statements.
Dividends paid by the Company's bank subsidiary are the primary
source of funds available to the Company for payment of dividends to
shareholders and for other working capital needs. The payment of
dividends by the Bank to the Company is subject to restrictions by
its regulatory authorities, which generally limit dividends to
current and prior two years retained earnings, as defined by
regulation. In addition, dividend payments may not reduce
regulatory capital levels below the minimum regulatory guidelines
discussed above. At December 31, 1997, approximately $9.1 million
is available for payment of dividends by the Bank to the Company
under the most restrictive of these guidelines.
LIQUIDITY
Liquidity refers to the Company's ability to generate sufficient
cash to fund current loan demand, meet deposit withdrawals, pay
operating expenses and meet other obligations. The Company's
primary sources of liquidity are cash and cash equivalents, which
totaled $14.3 million at December 31, 1997, a decrease of $16.0
million from year-end 1996. Net income, securities available for
sale and repayments and maturities of securities held to maturity
and loans also serve as forms of liquidity. Cash and cash
equivalents, time deposits with banks and securities maturing within
one year represent 11.6% of total assets at December 31, 1997 as
compared to 19.5% at year-end 1996. Other sources of liquidity the
Company could use to help to ensure funds are available when needed
include, but are not limited to, purchase of federal funds, advances
from the FHLB, adjustments of interest rates to attract deposits and
borrowing at the Federal Reserve discount window. Management
believes that its sources of liquidity are adequate to meet the
needs of the Company.
As summarized in the consolidated statements of cash flows, one of
the most significant investing activity for the Company is net loan
originations as management continues to seek strong loan growth.
Purchases of securities were made with funds received from
securities maturing throughout the year, the first quarter sale of
mortgage loans and deposit growth. In 1997, the Company's primary
financing activity was funds received from retail deposit growth.
This growth accounted for cash infusions of $27.9 million in 1997,
$7.1 million in 1996 and $20.6 million in 1995.
ASSET/LIABILITY MANAGEMENT
Asset/liability management is the process of managing the Company's
exposure to changes in interest rates. One measure of interest-rate-risk
exposure is the Company's "gap," or the difference between
interest rate-sensitive assets and liabilities maturing or repricing
within a certain period. A financial institution with a positive
interest rate sensitivity gap for a given period has an amount of
interest-earning assets maturing or otherwise repricing within the
period which exceeds the amount of interest-bearing liabilities
maturing or otherwise repricing within the same period.
Accordingly, in a rising interest rate environment, financial
institutions with positive interest rate sensitivity gaps generally
will experience greater increases in the yield on their assets than
in the cost of their liabilities, as the Company experienced in
early 1995. Conversely, in an environment of falling interest
rates, yield on assets of institutions with positive interest-rate-sensitivity
gaps generally will decrease more rapidly than the costs
of their funds. Changes in interest rates generally will have the
opposite effect on financial institutions with negative interest-rate-
sensitivity gaps.
Management monitors its gap position on a monthly basis with the
goal to make slightly more money in a rising interest rate
environment in order to maintain earnings at an acceptable level
when additional funding of the Company's loan loss reserve may be
necessary. At December 31, 1997, the percentage of rate sensitive
assets to liabilities repricing within one year was 75.6%, compared
to 92.4% and 91.9% at December 31, 1996 and 1995. This shift was
related to a strong increase in tax exempt securities maturing or
repricing in over five years funded through growth in deposits
maturing or repricing within one year. Though nearly all fixed-rate
loans originated with FHLB advances are held for sale at December
31, 1997, management intends to use fixed-rate borrowings in the
future to mitigate the volatility of liability repricing.
Management's goal is to continue to increase the Company's asset
sensitivity to slightly above 100% of liabilities repricing in less
than one year. While the interest rate environment of recent years
has proven beneficial to the Company, decreases in market rates of
interest have generally adversely affected the net income of the
Company.
The table below provides a measure of the Company's interest rate
sensitivity at December 31, 1997. The amount of assets and
liabilities shown which reprice or mature in a period were
determined based on contractual terms of the asset or liability.
Demand deposits and savings accounts reprice at management's
discretion and such accounts are therefore included in the amount
repricing within three months. This table may not reflect actual
impact on the Company of changes in interest rates because the
repricing of various categories of rate-sensitive assets and
liabilities are subject to other factors, such as competition,
customer performance, and management influence.
INTEREST RATE SENSITIVITY ANALYSIS
Within Three to 1 to 5 Over
(In Thousands of Dollars) 3 Months 12 Months Years 5 Years Total
Rate Sensitive Assets (RSA)
Interest-bearing demand
deposits $ 31 $ 31
Time deposits with banks $ 3,000 3,000
Federal funds sold 6,231 6,231
Debt securities 7,153 $ 8,847 38,166 $30,327 84,493
Loans 66,444 60,921 15,436 36,875 179,676
-------- ------- -------- ------ --------
Total RSA 79,859 69,768 56,602 67,202 273,431
-------- ------- -------- ------- --------
Rate Sensitive Liabilities (RSL)
Demand deposits 36,810 36,810
Savings 39,236 39,236
Certificates of deposit
In excess of $100,000 6,352 19,053 5,239 30,644
Other 19,876 67,817 22,142 109,835
Repurchase agreements 7,291 7,291
FHLB advances 394 1,183 4,710 5,400 11,687
-------- ------- ------- ------ -------
Total RSL 109,959 88,053 32,091 5,400 235,503
-------- ------- ------- ------ -------
Rate Sensitivity Gap $(30,100) $(18,285) $ 24,511 $61,802 $ 37,928
======== ======= ======= ====== =======
Cumulative Rate Sensitivity Gap $(30,100) $(48,385) $(23,874) $37,928 $ 37,928
======== ======= ======= ====== =======
RSA/RSL 72.6% 79.2% 176.4% 1,244.5%
======== ======= ======= =======
Cumulative Rate Sensitivity
Gap to total RSA (11.0)% (17.7)% (8.7)% 13.8%
======== ======= ======== ========
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company disclosed the estimated fair value of its financial
instruments at December 31, 1997 and 1996 in Note 14 to the
consolidated financial statements. Fair value of the Company's
financial instruments experienced modest changes in 1997 relative to
their carrying values due to the relatively stable interest-rate
environment. Estimated fair value of loans remained relatively
stable, at 99.8% of the carrying value at December 31, 1997,
compared to 100.6% of the carrying value at December 31, 1996. The
fair value of securities held to maturity increased slightly from
101.3% of carrying value at year-end 1996 to 102.4% at year-end
1997. Estimated fair value of time deposits decreased slightly from
100.9% of carrying value at December 31, 1996 to 100.3% at December
31, 1997.
Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was adopted by the Company in 1997.
SFAS 125 revises the accounting for transfers of financial assets
such as loans and securities, and for distinguishing between sales
and secured borrowings. The adoption of the portions of SFAS No.
125 relating to securities lending, repurchase agreements and other
similar transactions are not required to be adopted until 1998.
SFAS 125 did not have a material impact on the Bank's financial
statements, nor are the portions to be adopted in 1998 expected to
materially impact the financial statements.
SFAS No. 128, "Earnings Per Share," became effective for the company
in 1997. SFAS 128 requires dual presentation of basic and diluted
earnings per share ("EPS") for entities with complex capital
structures. Basic EPS includes no dilution and is computed by
dividing income available to common shareholders by the weighted-average common
shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in
earnings such as stock options, warrants or other similar items.
Since the Company first granted stock options in 1997, SFAS No. 128
did not require restatement of prior periods. The pronouncement did
not result in dilution of 1997 EPS.
SFAS No. 129, "Disclosures of Information about Capital Structure,"
consolidated existing accounting guidance relating to disclosure
about a company's capital structure. Public companies generally
have always been required to make disclosures now required by SFAS
129and, therefore, SFAS 129 did not impact the Company's
disclosures.
SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 is effective for the
Company in 1998. Reclassification of financial statements for
earlier periods provided for comparative purposes is required.
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," changes the way public business enterprises
report information about operating segments in annual financial
statements and requires those enterprises report selected
information about reportable segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS 131 becomes effective for the Company in 1998.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting
principles, requiring measurement of financial position and results
of operations primarily in terms of historical dollars without
considering changes in the relative purchasing power of money over
time due to inflation. Unlike most industrial companies, most
assets and liabilities of the Company are monetary in nature.
Therefore, interest rates have a more significant impact on a
financial institution'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 prices of goods and
services. The liquidity, maturity structure and quality of the
Company's assets and liabilities are critical to maintenance of
acceptable performance levels.
COMMON STOCK
Common shares of the Company are not traded on an established
market. The table below represents the range of high and low prices
paid for transactions known to the Company, as well as cash
dividends declared. Management does not have knowledge of prices
paid on all transactions, all of which were private. Because of the
lack of an established market, these prices may not reflect the
prices at which stock would trade in an active market. These
quotations reflect inter-dealer prices, without mark-up, markdown or
commission and may not represent actual transactions. All the
prices below have been restated to reflect the October 1996 two-for-one stock
split paid in the form of a 100% stock dividend. While
management expects to maintain its policy of paying regular cash
dividends in the future, no assurances can be given that dividends
will be declared, or if declared, what the amount of any such
dividends will be. Additional information concerning the payment of
dividends is included in Note 12 of the consolidated financial
statements.
Dividends
Quarter Ended High Low Declared
March 31, 1996 $32.25 $30.82 $160,679
June 30, 1996 33.25 30.82 160,920
September 30, 1996 33.25 31.57 161,149
December 31, 1996 42.50 31.57 580,841
March 31, 1997 44.50 42.00 220,904
June 30, 1997 45.50 40.00 221,227
September 30, 1997 50.00 42.83 221,902
December 31, 1997 65.00 50.00 653,759
As of December 31, 1997, CSB Bancorp, Inc. had approximately 806
shareholders and 1,311,391 outstanding shares of common stock.
ANNUAL AND OTHER REPORTS; SHAREHOLDER AND GENERAL INQUIRIES
CSB Bancorp, Inc. is required to file an annual report on Form 10-K
annually with the Securities and Exchange Commission. Copies of the
Form 10-K annual report and the Company's quarterly reports may be
obtained without charge by contacting:
A. Lee Miller, Chief Financial Officer
CSB Bancorp, Inc.
6 West Jackson Street
Millersburg, Ohio 44654
(330) 674-9015
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
CSB Bancorp, Inc.
Millersburg, Ohio
We have audited the accompanying consolidated balance sheets of CSB
Bancorp, Inc. as of December 31, 1997 and 1996, and related
consolidated statements of income, changes in shareholders' equity
and cash flows for each of three years in the period ended December
31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these 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 amounts and
disclosures in the financial statements. An audit also includes
assessing accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe 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 Bancorp, Inc. as of December 31, 1997 and
1996, and the consolidated results of its operations and cash flows
for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
January 15, 1998
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
ASSETS
Cash and noninterest-bearing deposits with banks $ 8,090,785 $ 7,647,790
Interest-bearing demand deposits with banks 31,257 5,669,966
Federal funds sold 6,213,000 17,000,000
---------- ----------
Total cash and cash equivalents 14,335,042 30,317,756
Time deposits with other institutions 3,000,000 3,000,000
Securities available for sale, at fair value 28,042,412 14,890,413
Securities held to maturity (Fair values of
$59,773,637 in 1997 and $37,970,342 in 1996) 58,385,434 37,493,467
Loans
Total loans 179,676,242 165,141,298
Allowance for loan losses 2,349,039 2,120,845
----------- -----------
Net loans 177,327,203 163,020,453
Premises and equipment, net 3,601,254 2,563,216
Accrued interest receivable and other assets 3,750,570 2,849,875
----------- -----------
Total assets $288,441,915 $254,135,180
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 24,678,146 $ 21,391,610
Interest-bearing 216,525,123 191,947,974
----------- -----------
Total deposits 241,203,269 213,339,584
Securities sold under repurchase agreements 7,290,759 4,738,173
Federal Home Loan Bank borrowings 11,686,863 11,741,515
Accrued interest payable and other liabilities 986,544 889,428
----------- -----------
Total liabilities 261,167,435 230,708,700
SHAREHOLDERS' EQUITY
Common stock, $6.25 par value: 3,000,000 shares
authorized; 1997 - 1,314,591 shares issued;
1996 - 1,298,372 issued 8,216,191 8,114,826
Additional paid-in capital 5,135,899 4,520,502
Retained earnings 13,907,908 10,818,500
Treasury stock at cost: 3,200 shares (56,000) (56,000)
Unrealized gain on securities available for sale 70,482 28,652
----------- -----------
Total shareholders' equity 27,274,480 23,426,480
----------- -----------
Total liabilities and shareholders' equity $288,441,915 $254,135,180
=========== ===========
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
Interest income
Loans, including fees $16,798,385 $15,759,724 $15,084,865
Taxable securities 3,119,155 1,932,408 1,942,729
Nontaxable securities 1,456,779 1,029,655 930,362
Other 737,669 758,384 347,012
---------- ---------- ----------
Total interest income 22,111,988 19,480,171 18,304,968
Interest expense
Deposits 9,828,445 8,213,452 7,967,587
Other 984,142 614,617 66,289
---------- ---------- ----------
Total interest expense 10,812,587 8,828,069 8,033,876
---------- ---------- ----------
Net interest income 11,299,401 10,652,102 10,271,092
Provision for loan losses 400,063 400,000 514,709
---------- ---------- ----------
Net interest income after provision for loan
losses 10,899,338 10,252,102 9,756,383
---------- ---------- ----------
Other income
Service charges on deposit accounts 685,369 627,635 573,130
Merchant fees 117,990 155,311 175,855
Other income 423,632 316,762 229,328
Gain on sale of loans 220,200
Security gains 46 11,949 23,743
Gain on sale of other real estate owned 116,090
---------- ---------- ---------
Total other income 1,447,237 1,227,747 1,002,056
Other expenses
Salaries and employee benefits 3,203,405 2,999,258 2,810,218
Occupancy expense 314,932 346,936 354,946
Equipment expense 462,890 469,828 403,916
Office supplies 176,785 239,791 170,442
Federal deposit insurance premiums 26,517 2,000 209,311
State franchise tax 343,239 299,675 255,430
Other expenses 1,787,206 1,662,895 1,517,717
--------- --------- ---------
Total other expenses 6,314,974 6,020,383 5,721,980
--------- --------- ----------
Income before income taxes 6,031,601 5,459,466 5,036,459
Provision for income taxes 1,624,401 1,600,000 1,444,207
--------- --------- ----------
Net income $ 4,407,200 $ 3,859,466 $ 3,592,252
========= ========= ==========
Basic and diluted earnings per common share $ 3.38 $ 3.00 $ 2.81
========= ========= ==========
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
Unrealized
Gain/(Loss) on
Additional Securities Total
Common Paid-in Retained Treasury Available Shareholders'
Stock Capital Earnings Stock For Sale Equity
Balance, January 1,
1995 $4,000,000 $4,000,000 $ 9,305,474 $(56,000) $(171,920) $17,077,554
Net income 3,592,252 3,592,252
Common stock issued:
Under dividend re-
investment program 22,457 199,016 221,473
Under 401(k) plan 4,281 37,936 42,217
Cash dividends declared
($.65 per share) (831,956) (831,956)
Change in unrealized
loss on securities
available for sale 241,223 241,223
---------- ---------- --------- -------- -------- ---------
Balance, December
31, 1995 4,026,738 4,236,952 12,065,770 (56,000) 69,303 20,342,763
Net income 3,859,466 3,859,466
Common stock issued:
Under dividend re-
investment program 39,038 240,069 279,107
Under 401(k) plan 5,903 43,481 49,384
Cash dividends declared
($.83 per share) (1,063,589) (1,063,589)
Stock split (100% stock
dividend) 4,043,147 (4,043,147)
Change in unrealized
gain on securities
available for sale (40,651) (40,651)
---------- --------- ---------- --------- --------- ------------
Balance, December
31, 1996 8,114,826 4,520,502 10,818,500 (56,000) 28,652 23,426,480
Net income 4,407,200 4,407,200
Common stock issued:
Under dividend re-
investment program 48,711 328,701 377,412
Under 401(k) plan 52,654 286,696 339,350
Cash dividends declared
($1.01 per share) (1,317,792) (1,317,792)
Change in unrealized
gain on securities
available for sale 41,830 41,830
---------- --------- ----------- --------- -------- ----------
Balance, December
31, 1997 $8,216,191 $5,135,899 $13,907,908 $(56,000) $ 70,482 $27,274,480
========== ========== =========== ========= ======== ===========
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating activities
Net income $ 4,407,200 $ 3,859,466 $ 3,592,252
Adjustments to reconcile net income to net
cash from operating activities
Security amortization and accretion (40,711) 36,105 98,851
Depreciation 385,148 428,307 331,927
Gain on sale of other real estate owned (116,090)
Gain on sale of loans (220,200)
Investment security gains (46) (11,949) (23,743)
FHLB stock dividends (113,300)
Provision for loan losses 400,063 400,000 514,709
Deferred income taxes 1,763 (72,705) (48,921)
Changes in
Net deferred loan fees 85,415 28,199 (62,141)
Accrued interest receivable (942,064) (41,128) (348,909)
Accrued interest payable 33,255 11,006 123,781
Other assets and liabilities 81,924 337,256 (176,231)
--------- --------- ---------
Net cash from operating activities 4,078,447 4,858,467 4,001,575
--------- --------- ---------
Cash flows from investing activities
Purchase of time deposits with financial
institutions (3,000,000)
Securities available for sale
Proceeds from maturities 11,000,000 10,000,000 7,000,000
Purchases (23,952,022) (7,917,347) (10,607,058)
Securities held to maturity
Proceeds from maturities and
repayments 12,161,211 9,100,731 11,178,470
Purchases (33,035,725) (8,949,808) (13,057,229)
Loan sale proceeds 10,766,167 306,802
Loan originations, net of payments (25,338,195) (12,659,533) (15,862,449)
Property and equipment expenditures (1,423,186) (322,093) (587,624)
Proceeds from sale of other real estate 242,090
------------ ----------- ------------
Net cash from investing activities (49,821,750) (13,505,960) (21,629,088)
------------ ----------- ------------
Cash flows from financing activities
Net increase in deposits $ 27,863,685 $ 7,084,091 $ 20,575,357
Net increase in securities sold under
repurchase agreements 2,552,586 775,240 3,033,426
Advances on FHLB borrowings 1,289,309 10,072,667 1,950,196
Principal reductions on FHLB borrowings (1,343,961) (281,348)
Shares issued for 401(k) plan 339,350 49,384 42,217
Cash dividends paid (940,380) (784,482) (610,483)
------------ ----------- -------------
Net cash from financing activities 29,760,589 16,915,552 24,990,713
------------ ----------- -------------
Net change in cash and cash equivalents (15,982,714) 8,268,059 7,363,200
Cash and cash equivalents at beginning
of year 30,317,756 22,049,697 14,686,497
----------- ----------- -------------
Cash and cash equivalents at end of year $ 14,335,042 $ 30,317,756 $ 22,049,697
=========== =========== =============
Cash paid during the year for:
Interest $ 10,779,000 $ 8,817,000 $ 7,910,000
Income taxes 1,751,000 1,469,000 1,575,000
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of accounting policies adopted by CSB
Bancorp, Inc. which have a significant effect on the financial
statements.
Consolidation Policy and Nature of Operations: The consolidated
financial statements include accounts of CSB Bancorp, Inc. and its
wholly-owned subsidiary, The Commercial and Savings Bank (together
referred to as the "Company"). All significant intercompany
transactions and balances have been eliminated.
The Company is engaged in the business of commercial and retail
banking and trust services, with operations conducted through its
main office and seven branches located in Millersburg, Ohio, and
nearby communities. These communities are the source of
substantially all deposit, loan and trust activities. The majority
of the Company's income is derived from commercial and retail
lending activities and investments in securities.
Use of Estimates: To prepare financial statements in conformity
with generally accepted accounting principles, management makes
estimates and assumptions based on available information. These
estimates and assumptions affect amounts reported in the financial
statements and the disclosures provided, and future results could
differ. The allowance for loan losses, realization of deferred tax
assets, fair value of certain securities and determination and
carrying value of impaired loans are particularly subject to change.
Cash Reserve Requirements: The Company is required by the Federal
Reserve to maintain reserves consisting of cash on hand and
noninterest-bearing balances on deposit with the Federal Reserve
Bank. The required reserve balance at December 31, 1997 and 1996
was $2,230,000 and $1,888,000.
Securities: Securities are classified as held to maturity and
carried at amortized cost when management has the positive intent
and ability to hold them to maturity. Securities are classified as
available for sale when they might be sold before maturity.
Securities available for sale are carried at fair value, with
unrealized holding gains and losses reported separately in
shareholders' equity, net of tax. Securities are classified as
trading when held for short term periods in anticipation of market
gains, and are carried at fair value. Securities are written down
to fair value when a decline in fair value is not temporary.
Realized gains and losses resulting from the sale of securities are
computed by the specific identification method. Interest and
dividend income, adjusted by amortization of purchase premium or
discount, is included in earnings.
Loans: Loans are reported at the principal balance outstanding, net
of deferred loan fees and costs. Interest income is reported on the
interest method and includes amortization of net deferred loan fees
and costs over the loan term. Loans held for sale are reported at
the lower of cost or market value on an aggregate basis.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income is not reported when full loan repayment is in
doubt, typically when payments are past due over 90 days. Payments
received on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a
valuation allowance, increased by the provision for loan losses and
decreased by charge-offs less recoveries. Management estimates the
allowance required based on past loan loss experience, known and
inherent risks in the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions and
other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan
that, in management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms
is not expected. If a loan is impaired, a portion of the allowance
is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing interest
rate or at the fair value of collateral if repayment is expected
solely from the collateral. Loans are evaluated for impairment when
payments are delayed, typically 90 days or more, or when the
internal grading system indicates a doubtful classification.
Smaller-balance homogeneous loans are evaluated for impairment in
total. Such loans include residential first-mortgage loans secured
by one- to four-family residences, residential construction loans
and automobile, home equity and other consumer loans less than
$100,000. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment.
Premises and Equipment: Premises and equipment are stated at cost
less accumulated depreciation. These assets are reviewed for
impairment when events indicat