UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 1998
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-21714
CSB Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Ohio 34-1687530
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
6 W. Jackson Street, P.O. Box 232, Millersburg, Ohio 44654
(Address of principal executive offices)
(330) 674-9015
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.
X Yes ____ No
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable
date.
Common stock, $6.25 par value 2,642,780 shares outstanding at
November 5, 1998
CSB BANCORP, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS (Unaudited) Page
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity 6
Condensed Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial Statements 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK 18
Part II - Other Information
Other Information 19
Signatures 20
<PAGE>
<TABLE>
CSB BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits with banks $ 8,672,327 $ 8,090,785
Interest-bearing deposits with banks 156,624 31,257
Federal funds sold 12,273,000 6,213,000
----------- -----------
Total cash and cash equivalents 21,101,951 14,335,042
Time deposits with other institutions 2,000,000 3,000,000
Securities available for sale, at fair value 22,780,174 28,042,412
Securities held to maturity (Fair values of
$61,195,779 in 1998 and $59,773,637 in 1997) 59,162,524 58,385,434
Loans
Total loans 189,545,203 179,676,242
Allowance for loan losses 2,649,179 2,349,039
----------- -----------
Net loans 186,896,024 177,327,203
Premises and equipment, net 4,588,706 3,601,254
Accrued interest receivable and other assets 3,779,407 3,750,570
----------- -----------
Total assets $300,308,786 $288,441,915
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 23,351,303 $ 24,678,146
Interest-bearing 227,380,861 216,525,123
----------- -----------
Total deposits 250,732,164 241,203,269
Securities sold under repurchase agreements 7,610,797 7,290,759
Federal Home Loan Bank borrowings 10,340,751 11,686,863
Accrued interest payable and other liabilities 1,190,520 986,544
----------- -----------
Total liabilities 269,874,232 261,167,435
SHAREHOLDERS' EQUITY
Common stock, $6.25 par value: 3,000,000 shares
authorized; 1998 - 2,649,181 shares issued;
1997 - 1,314,591 shares issued 16,557,380 8,216,191
Additional paid-in capital 5,740,960 5,135,899
Retained earnings 8,032,587 13,907,908
Treasury stock at cost: 6,400 shares (56,000) (56,000)
Unrealized gain on securities available for sale 159,627 70,482
----------- -----------
Total shareholders' equity 30,434,554 27,274,480
----------- -----------
Total liabilities and shareholders' equity $300,308,786 $288,441,915
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
<TABLE>
CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $4,548,683 $4,273,078 $13,512,173 $12,374,439
Taxable securities 641,923 819,573 2,061,092 2,324,589
Nontaxable securities 482,300 395,625 1,404,901 1,017,624
Other 199,753 125,928 416,224 586,325
--------- --------- ---------- ----------
Total interest income 5,872,659 5,614,204 17,394,390 16,302,977
--------- --------- ---------- ----------
Interest expense
Deposits 2,685,993 2,538,126 7,853,680 7,242,266
Other 241,624 243,387 718,823 722,473
--------- --------- --------- ----------
Total interest expense 2,927,617 2,781,513 8,572,503 7,964,739
--------- --------- --------- ----------
Net interest income 2,945,042 2,832,691 8,821,887 8,338,238
Provision for loan losses 577,400 99,819 773,785 300,243
--------- --------- --------- ----------
Net interest income after
provision
for loan losses 2,367,642 2,732,872 8,048,102 8,037,995
--------- --------- --------- ----------
Other income
Service charges on deposit
accounts 175,693 180,225 535,682 516,006
Gain on sale of loans 6,011 - 9,540 220,176
Gain on sale of REO 77,579 - 77,579
Other income 240,573 179,106 538,872 393,530
--------- --------- --------- ---------
Total other income 499,856 359,331 1,161,673 1,129,712
--------- --------- --------- ---------
Other expense
Salaries and employee benefits 875,571 777,766 2,550,361 2,292,570
Occupancy expense 80,851 76,942 246,241 234,291
Equipment expense 118,139 121,134 362,307 343,083
State franchise tax 95,082 87,078 287,323 256,189
Other expense 506,082 468,234 1,574,095 1,438,907
--------- --------- --------- ---------
Total other expense 1,675,725 1,531,154 5,020,327 4,565,040
--------- --------- --------- ---------
Income before income taxes 1,191,773 1,561,049 4,189,448 4,602,667
Provision for income taxes 215,799 408,700 1,011,685 1,292,401
--------- --------- --------- ---------
Net income $ 975,974 $1,152,349 $3,177,763 $3,310,266
========= ========= ========= =========
Basic and diluted earnings
per common share $ 0.37 $ 0.44 $ 1.21 $ 1.28
========= ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 975,974 $1,152,349 $3,177,763 $3,310,266
Other comprehensive income,
Net of tax: Unrealized gains
arising during period 88,784 51,862 89,145 51,802
--------- --------- --------- ----------
Comprehensive income $1,064,758 $1,204,211 $3,266,908 $3,362,068
========= ========= ========= ==========
</TABLE>
See notes to the consolidated financial statements.
<TABLE>
CSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Balance at beginning of period $29,485,593 $25,444,972 $27,274,480 $23,426,480
Net income 975,974 1,152,349 3,177,763 3,310,266
Common stock issued under
the dividend reinvestment
program and 401(k) plan 148,300 173,635 684,564 476,401
Cash dividends ($.10 and $.30
per share in 1998; $.085 and
$.255 per share in 1997) (264,097) (221,902) (791,398) (664,033)
Change in unrealized gain/loss
on securities available for sale 88,784 51,862 89,145 51,802
----------- ---------- --------- ----------
Balance at end of period $30,434,554 $26,600,916 $30,434,554 $26,600,916
=========== ========== ========== ==========
</TABLE>
See notes to the consolidated financial statements.
<TABLE>
CSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Net cash from operating activities $ 4,466,152 $ 2,779,919
Cash flows from investing activities
Net change in time deposits with
other institutions 1,000,000 -
Securities available for sale
Proceeds from maturities 11,500,000 7,000,000
Purchases (6,061,574) (21,959,913)
Securities held to maturity
Proceeds from maturities, calls and
repayments 7,179,734 9,181,211
Purchases (7,986,984) (24,109,272)
Net change in loans (11,414,523) (19,629,433)
Loan sale proceeds 979,540 10,766,167
Purchase of premises and equipment, net (1,291,423) (715,954)
----------- ------------
Net cash from investing activities (6,095,230) (39,467,194)
Cash from financing activities
Net change in deposits 9,528,895 20,188,685
Net change in repurchase agreements 320,038 1,055,246
Advances on FHLB borrowings - 1,289,309
Principal payments on FHLB borrowings (1,346,112) (1,090,500)
Shares issued for 401(k) Plan 523,060 288,483
Cash dividends paid, net of dividend
reinvestment (629,894) (476,115)
----------- -----------
Net cash from financing activities 8,395,987 21,255,108
----------- -----------
Net change in cash and cash equivalents 6,766,909 (15,432,167)
Beginning cash and cash equivalents 14,335,042 30,317,756
---------- -----------
Ending cash and cash equivalents $ 21,101,951 $ 14,885,589
========== ===========
Supplemental disclosures
Interest paid $ 8,580,996 $ 7,956,723
Income taxes paid 975,000 1,323,866
</TABLE>
See notes to the consolidated financial statements.
<PAGE>
CSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying 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.
These interim financial statements are prepared without audit and
reflect all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the
consolidated financial position of CSB at September 30, 1998, and
results of operations and cash flows for the periods presented. The
accompanying consolidated financial statements do not contain all
necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the
circumstances. The Annual Report for CSB for the year ended
December 31, 1997, contains consolidated financial statements and
related notes which should be read in conjunction with the
accompanying consolidated financial statements.
The Company is engaged in the business of commercial and retail
banking and trust services, with operations conducted through its
main office and eight 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.
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.
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 loans 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
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 second mortgage loans less than
$100,000. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment.
The Company records income tax expense based on the amount of tax
due on its tax return plus deferred taxes computed based on the
expected future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities, using
enacted tax rates.
Basic Earnings Per Share ("EPS") is based on net income divided by
the weighted average number of shares outstanding during the period.
Diluted EPS shows the dilutive effect of additional common shares
issuable under stock options. The weighted average number of shares
outstanding for basic EPS was 2,640,766 and 2,634,841 for the three
and nine month periods ended September 30, 1998 and 2,609,234 and
2,601,638 for the three and nine month periods ended September 30,
1997. The weighted average number of shares outstanding for diluted
EPS, which includes the effect of stock options granted using the
treasury stock method, was 2,641,767 and 2,635,797 for the three and
nine month periods ended September 30, 1998 and 2,609,940 and
2,602,344 for the three and nine month periods ended September 30,
1997.
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. The
information required by SFAS 130 is included in these financial
statements.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" - SFAS 133 requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value.
Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must
be highly effective in achieving off-setting changes in fair value
or cash flows. SFAS 133 does not allow hedging of a security which
is classified as held to maturity, accordingly, upon adoption of
SFAS 133, companies may reclassify any security from held to
maturity to available for sale if they wish to be able to hedge the
security in the future. SFAS 133 is effective for fiscal years
beginning after June 15, 1999 with early adoption encouraged for any
fiscal quarter beginning July 1, 1998 or later, with no retroactive
application. Management does not expect the adoption SFAS 133 to
have a significant impact on the Corporation's financial statements.
<PAGE>
<TABLE>
NOTE 2 - SECURITIES
The amortized cost and fair values of securities are as follows:
<CAPTION>
September 30, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale
Debt securities
U.S. Treasury securities $10,021,508 $ 147,710 $ - $10,169,219
U.S. Government agencies 10,490,107 94,149 - 10,584,255
---------- --------- ------- ----------
Total debt securities 20,511,615 241,859 - 20,753,474
Other securities 2,026,700 - - 2,026,700
---------- --------- ------- ----------
Total securities available
for sale $22,538,315 $ 241,859 $ - $22,780,174
========== ========= ======== ==========
Held to maturity
U.S. Treasury securities $12,125,064 $ 181,248 $ - $12,306,312
U.S. Government agencies 6,990,514 47,215 - 7,037,729
Obligations of state and
political subdivisions 40,046,946 1,805,462 (670) 41,851,738
---------- --------- ------- ----------
Total debt securities
held to maturity $59,162,524 $2,033,925 $ (670) $61,195,779
========== ========= ======= ==========
</TABLE>
<PAGE>
<TABLE>
NOTE 2 - SECURITIES (Continued)
<CAPTION>
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale
Debt securities
U.S. Treasury securities $16,021,859 $ 72,864 $ (349) $16,094,374
Obligations of U.S. government
corporations and agencies 9,978,862 40,872 (6,596) 10,013,138
---------- --------- -------- ----------
Total debt securities available
for sale 26,000,721 113,736 (6,945) 26,107,512
Other securities 1,934,900 - - 1,934,900
---------- --------- -------- ----------
Total securities available
for sale $27,935,621 $ 113,736 $ (6,945) $28,042,412
========== ========= ======== ==========
Held to maturity
U.S. Treasury securities $15,121,855 $ 130,739 $ (1,095) $15,251,499
Obligations of U.S. government
corporations and agencies 7,540,006 11,870 (6,343) 7,545,533
Obligations of states and
political subdivisions 35,723,573 1,262,675 (9,643) 36,976,605
---------- --------- -------- -----------
Total securities held to
maturity $58,385,434 $1,405,284 $(17,081) $59,773,637
========== ========= ======== ==========
</TABLE>
No securities were sold during the first nine months
of 1998 or 1997.
The amortized cost and fair values of debt securities
at September 30, 1998, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Available-for-sale securities Held-to-maturity securities
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 7,497,854 $ 7,545,312 $ 9,100,534 $ 9,149,891
Due from one to five years 13,013,761 13,208,162 15,355,879 15,682,618
Due from five to ten years - - 18,640,955 19,616,025
Due after ten years - - 16,065,156 16,747,245
Mortgage-backed - - - -
---------- ---------- ---------- ----------
$20,511,615 $20,753,474 $59,162,524 $61,195,779
========== ========== ========== ==========
</TABLE>
<PAGE>
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consisted of the following:
September 30, 1998 December 31, 1997
Commercial $ 82,920,280 $ 80,260,550
Commercial real estate 31,276,136 30,407,670
Residential real estate 54,821,422 49,049,948
Installment and credit card 16,506,585 16,450,211
Construction 4,020,780 3,507,863
---------- -----------
Total loans $189,545,203 $179,676,242
=========== ===========
During the first nine months of 1998, the Company received $980,000
in proceeds from mortgage loan sales. A gain of $9,540 was
recognized on these sales. During the first nine months of 1997,
the Company received $10.8 million in proceeds from mortgage loan
sales. A gain of $220,000 was recognized on this sale. The Company
has identified $18.0 million of loans held for sale as of September
30, 1998.
Activity in the allowance for loan losses for the nine months ended
September 30, 1998 and 1997 is as follows:
1998 1997
Beginning balance $2,349,039 $2,120,845
Provision for loan losses 773,785 300,243
Loans charged off (516,732) (189,132)
Recoveries 43,087 41,373
--------- ----------
Ending balance $2,649,179 $2,273,329
========= ==========
Impaired loans at September 30, 1998 and December 31, 1997 is as
follows:
September 30, December 31,
1998 1997
Loans with no allowance for loan losses
allocated $ 72,944 $ 0
Loans with allowance for loan losses
allocated 1,639,101 1,384,000
Amount of allowance allocated 505,961 437,000
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans for the nine months ended September 30, 1998 and
1997, is as follows:
1998 1997
Average of impaired loans $1,498,000 $1,173,000
Interest income recognized
during impairment 58,945 54,801
Cash basis interest income recognized 57,994 45,899
NOTE 4 - FEDERAL HOME LOAN BANK BORROWINGS
The Company borrows from the Federal Home Loan Bank (FHLB) to fund
certain fixed-rate residential real estate loans. At September 30,
1998, the Company had 189 outstanding borrowings from the FHLB.
These borrowings carry fixed interest rates ranging from 5.60% to
7.15% and maturities of 10, 15, and 20 years. The Company matches
each borrowing against a fixed-rate mortgage loan with a similar
maturity. Monthly principal and interest payments are due on the
borrowings. In addition, a principal curtailment of 10% of the
outstanding principal balance is due on the anniversary date of each
borrowing. FHLB borrowings are collateralized by FHLB stock and a
blanket pledge on $15.5 million of qualifying mortgage loans at
September 30, 1998.
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet customer
financing needs. These financial instruments include commitments to
make or purchase loans, undisbursed lines of credit, undisbursed
credit card balances and letters of credit. The Company's exposure
to credit loss in case of nonperformance by the other party to the
financial instrument is represented by the contractual amount of
those instruments. The Company follows the same credit policy to
make such commitments as it uses for those loans recorded on the
balance sheet.
At September 30, 1998 and December 31, 1997, commitments to make
loans, primarily in the form of undisbursed portions of approved
lines of credit, amounted to approximately $34.8 million and $29.0
million, substantially all of which carried adjustable rates of
interest. Commitments under outstanding standby letters of credit
amounted to $652,000 at September 30, 1998 and $820,000 at December
31, 1997. Since many commitments to make loans expire without being
used, the amount does not necessarily represent future cash
commitments. Collateral obtained relating to these commitments is
determined using management's credit evaluation of the borrower and
may include real estate, vehicles, business assets, deposits and
other items.
NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES
(Continued)
The Company sold $980,000 in residential mortgage loans during 1998
and $10.8 million during 1997. The Company has agreed to repurchase
individual loans if they become delinquent by greater than ninety
days. A recourse obligation has been established by management
based on past loan loss experience and other factors. This
liability is not material.
Occasionally, various contingent liabilities arise that are not
recorded in the financial statements, including claims and legal
actions arising in the ordinary course of business. In the opinion
of management, after consultation with legal counsel, ultimate
disposition of these matters is not expected to have a material
affect on financial condition or results of operations.
CSB BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion focuses on the consolidated financial
condition of CSB Bancorp, Inc. (the Company) at September 30, 1998,
compared to December 31, 1997, and the consolidated results of
operations for the quarterly and year-to-date periods ending
September 30, 1998, compared to the same periods in 1997. The
purpose of this discussion is to provide the reader with a more
thorough understanding of the consolidated financial statements.
This discussion should be read in conjunction with the interim
consolidated financial statements and related footnotes.
Forward-looking statements contained in this discussion involve
risks and uncertainties and are subject to change based on various
important factors. Actual results could differ from those expressed
or implied. The Company is not aware of any trends, events or
uncertainties that will have or are reasonably likely to have a
material effect on the liquidity, capital resources or operations
except as discussed herein. Also, the Company is not aware of any
current recommendations by regulatory authorities that would have
such effect if implemented.
FINANCIAL CONDITION
Total securities decreased approximately $4.5 million during the
first nine months of 1998 as maturing investment securities were
used to fund loan activity. Since one of the primary functions of
the securities portfolio is to provide a source of liquidity, it is
structured such that security maturities and cash flows satisfy the
Company's liquidity needs and asset-liability management
requirements. At September 30, 1998, approximately 20% of the
securities portfolio matures within one year.
Total loans increased $9.9 million, or 5.5%, during the first nine
months of 1998. Residential real estate loans increased $5.8
million, or 11.8% and commercial loans increased $2.7 million, or
3.3%. These increases were primarily a result of increased loan
demand in the Company's service area as the local economy remains
strong. The commercial loans are generally variable-rate, based on
the Prime rate and may be unsecured or collateralized by business or
farm equipment. These loans are generally of higher credit risk
than residential mortgage loans. The Company identified $18.0
million in loans held for sale as of September 30, 1998.
As a percentage of loans, the allowance for loan losses was 1.40% at
September 30, 1998 and 1.31% at December 31, 1997. Impaired loans
were approximately $1.7 million, or 0.90% of total loans, at
September 30, 1998, compared to 0.77% of loans at December 31, 1997.
These credits are considered in management's analysis of the
allowance for loan losses.
Premises and equipment increased $987,000, or 27.4%, during the
first nine months of 1998.This was primarily due to the completion
of the Shreve office, which opened in March 1998. Additional
investment was made in the design and plan of the new operations
center, which should be completed in 1999.
At September 30, 1998, the ratio of net loans to deposits was 74.5%,
compared to 73.5% at the end of 1997 due to the increase in loans
discussed earlier. Total deposits increased $9.5 million, or 4.0%
during the first nine months of 1998. The increase is due primarily
to a $8.3 million, or 5.9%, increase in certificates of deposit.
Total shareholders' equity was increased in part by year-to-date net
income of $3.2 million, less $791,000 of cash dividends declared.
The cash dividend represents 25% of net income for the first nine
months of 1998. Also contributing to capital was the dividend
reinvestment program (DRIP) and the purchase of stock by the
Company's 401(k) retirement plan which increased equity
approximately $685,000 during the first nine months of 1998.
The Company and its subsidiary meet all regulatory capital
requirements and are considered to be "well capitalized" at
September 30, 1998. The Company's ratio of total capital to
risk-weighted assets was 17.47% at September 30, 1998, while Tier 1
risk-based capital ratio was 16.22%. Regulatory minimums call for
a total risk-based capital ratio of 8%, at least one-half of which
must be Tier 1 capital. The Company's leverage ratio was 10.14% at
September 30, 1998, which exceeds the regulatory minimum of 3% to
5%.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 1998 was $3.2
million, or $1.21 per share, remaining comparable to $3.3 million or
$1.28 per share earned during the same period last year, a decrease
of $133,000 or 4.0%. Third quarter net income was $976,000, or
$0.37 per share, in 1998, compared to $1.2 million, or $0.44 per
share for the third quarter of 1997. The primary factor
contributing to this decrease was the increase in the provision for
loan losses.
Net interest income was $8.8 million for the first nine months of
1998, a 5.8% increase from 1997. Interest and fees on loans
increased $1.1 million or 9.2%, which resulted primarily from a
higher average balance of loans. Interest income on all securities
was comparable to the same period in 1997, while shifting from
income on taxable securities to nontaxable securities. Net interest
income for the third quarter of 1998 totaled $2.9 million, up 4.0%
from $2.8 million in the third quarter of 1997. Most of this
increase resulted from the increase in total loans. Income from
taxable investments decreased $178,000 or 21.7% from the third
quarter of 1997 to the third quarter of 1998, while income from
nontaxable securities increased $87,000 or 21.9% for the same
period.
Interest expense increased $608,000, or 7.6% for the nine months
ended September 30, 1998, compared to the nine months ended
September 30, 1997. This increase was the result of increases in
the average balance of NOW accounts, savings and certificates of
deposit. For the third quarter of 1998 compared to the same period
in 1997, interest expense increased $146,000 or 5.3%. The changes
were primarily volume related.
The provision for loan losses was $577,000 for the third quarter of
1998 and $774,000 during the first nine months of 1998. This
represents increases of $478,000 and $474,000 over the three month
and nine month periods, respectively, of 1997. The increase in the
provision is based on management's analysis of the loan portfolio,
including but not limited to, impaired loans, the increase in loans
charged off, loan growth and the portfolio mix.
Other income increased approximately $32,000 or 2.8% for the first
nine months of 1998 and $141,000 or 39.1% for the third quarter of
1998, compared to the respective periods in 1997. The decrease in
gain on sale of loans was more than offset by the gain on sale of
REO and an increase in other income, which was due to increased
trust and financial services income.
Other expenses increased $455,000 or 10.0% for the nine months ended
September 30, 1998 and $145,000, or 9.4%, for the three months ended
September 30, 1998, compared to the same periods in 1997.
Management continues to monitor the Company's efficiency ratio by
maintaining increases in other operating costs at low levels.
Salaries and employee benefits increased by 11.2% in the nine month
period and 12.6% for the third quarter, and state franchise taxes
increased as a result of 1997 earnings retention. The increase in
salaries and employee benefits is in part due to normal merit
increases and the staffing of the new branch office in Shreve, Ohio.
Ohio's state franchise tax for financial institutions is based on
the level of capital at the previous year-end. The provisions for
income taxes of $7.0 million for the first nine months and $216,000
during the third quarter reflected an effective rate of 24.1% and
18.1%, compared to effective rates of 31.9% and 29.1% for the same
time periods in 1997. The decrease in effective rates resulted from
increased nontaxable interest income.
YEAR 2000 ISSUE
Certain statements contained in this section of "Management's
Discussion and Analysis of Financial Condition and Results of
Operation" that are not related to historical results are
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve
a number of risks and uncertainties. Any forward-looking statements
made by the Company herein and in future reports and statements are
not guarantees of future performance and actual results may differ
materially from those in forward-looking statements as a result of
various factors. These factors include the ability of the Company
and its key service providers, vendors, suppliers, customers and
governmental entities to replace, modify or upgrade computer systems
in ways that adequately address the Year 2000 issue discussed below.
Special factors that might cause actual results to vary materially
from the results anticipated include the ability to identify and
correct all relevant computer codes and embedded chips,
unanticipated difficulties or delays in the implementation of the
Company's plans and the ability of third parties to adequately
address their own Year 2000 issues.
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 financial institutions, such as the Company.
In 1997, the Company formed a Year 2000 Committee to assess the
extent to which its information technology, non-information
technology and its outside vendors may be adversely affected by the
Year 2000 problems. Management has identified systems as mission
critical or non-mission critical. Vendors of all mission critical
systems have been contacted regarding the status of the renovation
and validation of the systems. The Company is currently in the
process of testing these mission critical systems.
In addition to reviewing its own systems, the Company also
recognizes it could incur losses if loan payments are delayed due to
Year 2000 problems affecting any of the Company's significant
borrowers or impairing the payroll systems of large employers in the
Company's primary market area. Because the Company's loan portfolio
is highly diversified with regard to individual borrowers and types
of businesses and the Company's primary market area is not
significantly dependent on one employer or industry, the Company
does not expect any significant or prolonged Year 2000 related
difficulties. In addition, the Company is providing information to
its customers about the Year 2000 issue.
At the present time, management estimates that the costs associated
with completing the comprehensive Year 2000 plan will be
approximately $250,000. This includes hardware and software
upgrades, testing, training, and other out-of-pocket expenses. The
budget does not include in-house personnel costs.
Management is in the process of developing contingency plans for
mission critical systems, where applicable. These contingency plans
include both remediation and business resumption plans.
ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the quantitative and
qualitative disclosures about market risks as of September 30, 1998
from that presented in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
CSB BANCORP, INC.
FORM 10-Q
Quarter ended September 30, 1998
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
There are no matters required to be reported under this item.
Item 2 - Changes in Securities:
There are no matters required to be reported under this item.
Item 3 - Defaults Upon Senior Securities:
There are no matters required to be reported under this item.
Item 4 - Submission of Matters to a Vote of Security Holders:
There are no matters required to be reported under this item.
Item 5 - Other Information:
There are no matters required to be reported under this item.
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed during
the quarter for which this report is filed.
CSB BANCORP, INC.
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: November 12, 1998 /s/ Douglas D. Akins
(Signature)
Douglas D. Akins
President
Chief Executive Officer
Date: November 12, 1998 /s/ A. Lee Miller
(Signature)
A. Lee Miller
Senior Vice President
Chief Financial Officer
CSB BANCORP, INC.
Index to Exhibits
Exhibit Sequential
Number Description of Document Page
27 Financial Data Schedule
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
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