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: JUNE 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 2,640,061 shares outstanding at
August 3, 1998.
<PAGE>
CSB BANCORP, INC.
FORM 10-Q
QUARTER ENDED JUNE 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 DISCLOSURE
ABOUT MARKET RISK 19
Part II - Other Information
Other Information 20
Signatures 22
<PAGE>
<TABLE>
CSB BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits with banks $ 8,444,444 $ 8,090,785
Interest-bearing deposits with banks 168,479 31,257
Federal funds sold 8,643,000 6,213,000
---------- ----------
Total cash and cash equivalents 17,255,923 14,335,042
Time deposits with other institutions 3,000,000 3,000,000
Securities available for sale, at fair value 25,106,384 28,042,412
Securities held to maturity (Fair values of
$55,302,669 in 1998 and $59,773,637 in 1997) 53,992,662 58,385,434
Loans
Total loans 186,575,869 179,676,242
Allowance for loan losses 2,172,810 2,349,039
----------- -----------
Net loans 184,403,059 177,327,203
Premises and equipment, net 4,094,487 3,601,254
Accrued interest receivable and other assets 3,669,305 3,750,570
----------- -----------
Total assets $291,521,820 $288,441,915
=========== ===========
LIABILITIES
Deposits
Noninterest-bearing $ 22,777,879 $ 24,678,146
Interest-bearing 220,074,255 216,525,123
----------- -----------
Total deposits 242,852,134 241,203,269
Securities sold under repurchase agreements 7,576,622 7,290,759
Federal Home Loan Bank borrowings 10,626,129 11,686,863
Accrued interest payable and other liabilities 981,342 986,544
----------- -----------
Total liabilities 262,036,227 261,167,435
SHAREHOLDERS' EQUITY
Common stock, $6.25 par value: 9,000,000 shares
authorized; 1998 2,646,461 shares issued;
1997 1,314,591 shares issued 16,540,386 8,216,191
Additional paid-in capital 5,609,653 5,135,899
Retained earnings 7,320,711 13,907,908
Treasury stock at cost: 6,400 shares (56,000) (56,000)
Unrealized gain on securities available for sale 70,843 70,482
---------- -----------
Total shareholders' equity 29,485,593 27,274,480
---------- -----------
Total liabilities and shareholders' equity $291,521,820 $288,441,915
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $4,568,582 $4,066,951 $ 8,963,490 $ 8,101,361
Taxable securities 672,465 897,670 1,419,169 1,505,016
Nontaxable securities 467,097 344,309 922,601 621,999
Other 112,265 148,649 216,471 460,397
--------- -------- --------- ----------
Total interest income 5,820,409 5,457,579 11,521,731 10,688,773
Interest expense
Deposits 2,606,214 2,426,912 5,167,687 4,704,140
Other 232,980 240,058 477,199 479,086
--------- --------- ---------- ----------
Total interest expense 2,839,194 2,666,970 5,644,886 5,183,226
--------- --------- ---------- ----------
Net interest income 2,981,215 2,790,609 5,876,845 5,505,547
Provision for loan losses 98,735 98,736 196,385 200,424
------- ------- ------- --------
Net interest income after
provision
for loan losses 2,882,480 2,691,873 5,680,460 5,305,123
--------- --------- --------- ---------
Other income
Service charges on deposit
accounts 178,610 164,118 359,989 335,782
Gain on sale of loans 3,529 3,529 220,176
Other income 161,799 128,495 298,299 214,424
--------- -------- --------- --------
Total other income 343,938 292,613 661,817 770,382
Other expense
Salaries and employee
benefits 870,415 777,962 1,674,790 1,514,804
Occupancy expense 90,091 73,607 165,390 157,349
Equipment expense 129,978 114,026 244,168 221,949
State franchise tax 97,041 86,752 192,241 169,111
Other expense 572,053 488,802 1,068,013 970,674
-------- ------- ---------- ---------
Total other expense 1,759,578 1,541,149 3,344,602 3,033,887
--------- --------- ---------- ---------
Income before income taxes 1,466,840 1,443,337 2,997,675 3,041,618
Provision for income taxes 380,800 460,001 795,886 883,701
--------- --------- ---------- ---------
Net income $1,086,040 $ 983,336 $ 2,201,789 $ 2,157,917
========= ========= ========== =========
Basic and diluted earnings
per common share $ .41 $ .38 $ .84 $ .83
========= ========= ========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<TABLE>
CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 1,086,040 $ 983,336 $2,201,789 $2,157,917
Other comprehensive income,
Net of tax: Unrealized gains
(losses) arising during period (7,021) 84,333 361 (60)
--------- --------- --------- ---------
Comprehensive income $1,079,019 $1,067,669 $2,202,150 $2,157,857
========= ========= ========= =========
</TABLE>
<TABLE>
CSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Balance at beginning of period $28,542,717 $24,518,736 $27,274,480 $23,426,480
Net income 1,086,040 983,336 2,201,789 2,157,917
Common stock issued under
the dividend reinvestment
program and 401(k) plan 127,681 79,794 536,264 302,766
Cash dividends ($.10 and $.20
per share in 1998; $.085 and
$.17 per share in 1997) (263,824) (221,227) (527,301) (442,131)
Change in unrealized gain/loss
on securities available for sale (7,021) 84,333 361 (60)
---------- ---------- ---------- ----------
Balance at end of period $29,485,593 $25,444,972 $29,485,593 $25,444,972
========== ========== ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<TABLE>
CSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Net cash from operating activities $ 2,617,544 $ 1,359,203
Cash flows from investing activities
Securities available for sale
Proceeds from maturities 7,000,000 3,000,000
Purchases (4,003,044) (18,957,238)
Securities held to maturity
Proceeds from maturities, calls and repayments 6,179,734 4,906,150
Purchases (1,805,037) (20,118,784)
Net change in loans (7,745,245) (12,313,578)
Loan sale proceeds 489,529 10,766,167
Purchase of premises and equipment, net (695,557) (437,076)
----------- -----------
Net cash from investing activities (579,620) (33,154,359)
----------- ------------
Cash from financing activities
Net change in deposits 1,648,865 13,086,173
Net change in repurchase agreements 285,863 321,871
Principle reductions on FHLB borrowings (1,060,734) (773,066)
Advance on FHLB borrowings 1,289,309
Shares issued for 401(k) Plan 454,181 180,434
Cash dividends paid, net of dividend reinvestment (445,218) (319,799)
----------- -----------
Net cash from financing activities 882,957 13,784,922
----------- -----------
Net change in cash and cash equivalents 2,920,881 (18,010,234)
Beginning cash and cash equivalents 14,335,042 30,317,756
---------- -----------
Ending cash and cash equivalents $17,255,923 $ 12,307,522
========== ===========
Supplemental disclosures
Interest paid $ 5,666,920 $ 5,192,682
Income taxes paid 775,000 983,866
</TABLE>
See accompanying 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 June 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
judgement, 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 Company's financial
statements.
On April 30, 1998, a two-for-one stock split in the form of a 100%
stock dividend was distributed to shareholders of record as of March
31, 1998. All share and per share data was restated to reflect the
stock split.
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. All prior EPS data has been restated to conform to the
new method. Basic 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 2,637,702 and 2,631,830 for the three
and six month periods ended June 30, 1998 and 2,602,846 and
2,597,778 for the three and six month periods ended June 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 2,638,658 and 2,632,753 for the three and
six month periods ended June 30, 1998 and 2,603,538 and 2,598,470
for the three and six month periods ended June 30, 1997. There was
no per share dilution as a result of the stock options in 1997 or
1998.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
129 and, 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. 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.
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>
June 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 $10,023,324 $ 69,957 $ 0 $10,093,281
U.S. Government agencies 12,980,123 42,151 (4,771) 13,017,503
----------- --------- -------- ----------
Total debt securities 23,003,447 112,108 (4,771) 23,110,784
Other securities 1,995,600 0 0 1,995,600
Total securities available
for sale $24,999,047 $ 112,108 $ (4,771) $25,106,384
========== ========== ========= ===========
Held to maturity
U.S. Treasury securities $12,125,645 $ 119,197 $ 0 $12,244,842
U.S. Government agencies 4,989,779 18,346 (2,500) 5,005,625
Obligations of state and
political subdivisions 36,877,238 1,188,195 (13,231) 38,052,202
---------- ---------- -------- -----------
Total debt securities
held to maturity $53,992,662 $1,325,738 $(15,731) $55,302,669
========== ========= ========= ===========
NOTE 2 - SECURITIES (Continued)
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 six months of 1998 or 1997.
<TABLE>
The amortized cost and fair values of debt securities
at June 30, 1998, by contractual maturity, are shown below.
<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 $ 9,984,459 $10,007,805 $ 8,936,581 $ 8,979,204
Due from one to five years 13,018,988 13,102,979 13,521,694 13,753,233
Due from five to ten years 0 0 15,795,000 16,389,695
Due after ten years 0 0 15,739,387 16,180,537
Mortgage-backed 0 0 0 0
--------- ---------- ---------- ----------
$23,003,447 $23,110,784 $53,992,662 $55,302,669
========== ========== ========== ===========
/TABLE
<PAGE>
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consisted of the following:
June 30, 1998 December 31, 1997
Commercial $ 82,652,945 $ 80,260,550
Commercial real estate 30,787,270 30,407,670
Residential real estate 52,582,193 49,049,948
Installment and credit card 16,553,312 16,450,211
Construction 4,000,149 3,507,863
---------- ------------
Total loans $186,575,869 $179,676,242
=========== ============
During the first six months of 1998, the Company received $490,000
in proceeds from mortgage loan sales. A gain of $3,529 was
recognized on this sale. During the first six months of 1997, the
Company received $10.8 million in proceeds from mortgage loan sales.
A gain of $220,176 was recognized on this sale.
Activity in the allowance for loan losses for the six months ended
June 30, 1998 and 1997 is as follows:
1998 1997
Beginning balance $2,349,039 $2,120,845
Provision for loan losses 196,385 200,424
Loans charged off (389,005) (124,835)
Recoveries 16,391 27,490
--------- ---------
Ending balance $2,172,810 $2,223,924
========= =========
Impaired loans at June 30, 1998 and December 31, 1997 is as follows:
June 30, December 31,
1998 1997
Loans with no allowance for
loan losses
allocated $ 72,944 $ 0
Loans with allowance for
loan losses
allocated 1,325,004 1,384,000
Amount of allowance allocated 175,407 437,000
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans for the six months ended June 30, 1998 and 1997, is
as follows:
1998 1997
Average of impaired loans $1,391,000 $1,174,000
Interest income recognized
during impairment 35,301 35,849
Cash basis interest income recognized 34,212 30,851
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 June 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 $15.9 million of qualifying mortgage loans at June
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 June 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 $30.4 million and $29.0 million,
substantially all of which carried adjustable rates of interest.
Commitments under outstanding standby letters of credit amounted to
$747,000 at June 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 $490,000 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 OPERATIONS
ITEM 2 - 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 June 30, 1998,
compared to December 31, 1997, and the consolidated results of
operations for the quarterly period ending June 30, 1998 compared to
the same period 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 $7.3 million during the
first half 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 June 30, 1998, approximately 24% of the securities
portfolio matures within one year.
Total loans increased $6.9 million, or 3.8%, during the first six
months of 1998. Residential real estate loans increased $3.5
million, or 7.2% and commercial loans increased $2.4 million, or
3.0%. 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 and based
on the Prime rate and may be unsecured or collateralized by business
or farm equipment. These loans are generally of higher risk than
residential mortgage loans.
As a percentage of loans, the allowance for loan losses was 1.16% at
June 30, 1998 and 1.31% at December 31, 1997. Impaired loans were
approximately $1.4 million, or 0.75% of total loans, at June 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 $493,000, or 13.7%, during the
first six 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 June 30, 1998, the ratio of net loans to deposits was 75.9%,
compared to 73.5% at the end of 1997 due to the increase in loans
discussed earlier. Total deposits increased $1.6 million, or 0.7%
during the first six months of 1998. Historically, the Company has
experienced a decline in overall deposit balances during the first
half of the year.
Total shareholders' equity was increased in part by year-to-date net
income of $2.2 million, less $527,000 of cash dividends declared.
The cash dividend represents 24% of net income for the first half 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 $536,000 during
the first half of 1998.
The Company and its subsidiary meet all regulatory capital
requirements and are considered to be "well capitalized" at June 30,
1998. The Company's ratio of total capital to risk-weighted assets
was 17.23% at June 30, 1998, while Tier 1 risk-based capital ratio
was 16.05%. 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 10.24% at June 30, 1998, which exceeds
the regulatory minimum of 3% to 5%.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1998 was $2.2 million,
or $0.84 per share, remaining comparable to $2.2 million or $0.83
per share earned during the same period last year, an increase of
$44,000, or 2.0%. Second quarter net income was $1.1 million, or
$0.41 per share, in 1998, compared to $983,000, or $0.385 per share
for the second quarter of 1997. The primary factor contributing to
this increase was the increase in net interest income.
Net interest income was $5.9 million for the first six months of
1998, a 6.7% increase from 1997. Interest and fees on loans
increased $862,000, or 10.6%, which resulted primarily from a higher
average balance of loans. Also, as deposit funds were invested in
securities from federal funds sold, interest on securities increased
$215,000 and other interest income decreased $244,000 for the first
half of 1998, compared to the first half of 1997. Net interest
income for the second quarter of 1998 totaled $3.0 million, up 6.8%
from $2.8 million in the second quarter of 1997. Most of this
increase resulted from the increase in total loans. Income from
taxable investments decreased $225,000 or 25.1% from the second
quarter of 1997 to 1998, while income from nontaxable securities
increased $123,000 or 35.7% for the same period.
Interest expense increased $462,000, or 8.9% for the six months
ended June 30, 1998, compared to the six months ended June 30, 1997.
This increase was the result of increased volumes on interest-bearing accounts
and slightly higher rates. For the second quarter
of 1998 compared to the same period in 1997, interest expense
increased $172,000 or 6.5%. The changes were primarily volume
related.
The provision for loan losses was $99,000 for the second quarter of
1998 and $196,000 during the first half of 1998, remaining virtually
unchanged from the provisions for comparable periods in 1997. These
provisions were made in recognition of continued loan origination
volume, primarily in the commercial loan portfolio which typically
carries a higher risk of loan loss.
Other income for the first half of 1998 decreased approximately
$109,000, primarily as a result of the $220,000 gain on the sale of
loans in 1997 discussed above. The decrease was partially offset by
an $84,000, or 39.1% increase in other income, primarily as a result
of an increase in trust and financial services income. Noninterest
income for the second quarter of 1998 increased $51,000, or 17.5%.
Other expenses increased $218,000 or 14.2% for the three months
ended June 30, 1998 and $311,000, or 10.2%, for the six months ended
June 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 11.9% in the second quarter and 10.6%
for the six month period, 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 $381,000 for the second quarter and $796,000 during the first
half of 1998 reflected an effective rate of 26.0% and 26.6%,
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
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 its information technology, non information technology and its
outside vendors may be adversely affected by the Year 2000 problems.
Management is in the process of determining which 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. The
Company is in the process of designing a contingency plan for each
mission-critical application. The completion of this plan is
scheduled for September 30, 1998.
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 June 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 June 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:
On April 8, 1998, the Company held the Annual Meeting of
Shareholders at which the following issues were voted on:
Shareholders voted upon the election of three (3) directors for
Class I Nominees for three-year terms expiring in 2000. The results
of the voting on these matters were as follows:
Nominee Votes for Withheld
David W. Kaufman 1,149,226 7,789
H. Richard Maxwell 1,060,350 105,623
Samuel M. Steimel 1,149,844 7,170
One (1) director was elected for a one-year term expiring in 1999:
Douglas D. Akins 1,150,699 6,316
The following are directors who were not up for election at the
meeting and whose terms of office as directors continued after the
meeting:
J. Thomas Lang
Vivian A. McClelland
Daniel J. Miller
Samuel P. Riggle, Jr.
David C. Sprang
Shareholders voted on an increase in the authorized shares from
3,000,000 to 9,000,000. The results of the voting were as follows:
Votes for Votes against Withheld
1,025,349 131,013 612
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
3.1 Amended Articles of Incorporation of CSB Bancorp,
Inc. (incorporated by reference to Registrant's 1994 Form 10-KSB).
3.2 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
(reference is hereby made to Consolidated Statements of Income on
page 5 hereof.)
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: August 13, 1998 /s/ Douglas D. Akins
(Signature)
Douglas D. Akins
President
Chief Executive Officer
Date: August 13, 1998 /s/ A. Lee Miller
(Signature)
A. Lee Miller
Senior Vice President
Chief Financial Officer
<PAGE>
CSB BANCORP, INC.
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).
3.2 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 (reference is hereby
made to Consolidated Statements of
Income on page 5 hereof.)
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS 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
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8444
<INT-BEARING-DEPOSITS> 3168
<FED-FUNDS-SOLD> 8643
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25106
<INVESTMENTS-CARRYING> 53993
<INVESTMENTS-MARKET> 55302
<LOANS> 186576
<ALLOWANCE> 2173
<TOTAL-ASSETS> 291522
<DEPOSITS> 242852
<SHORT-TERM> 7577
<LIABILITIES-OTHER> 981
<LONG-TERM> 10626
0
0
<COMMON> 16540
<OTHER-SE> 12945
<TOTAL-LIABILITIES-AND-EQUITY> 291522
<INTEREST-LOAN> 8964
<INTEREST-INVEST> 2342
<INTEREST-OTHER> 216
<INTEREST-TOTAL> 11522
<INTEREST-DEPOSIT> 5168
<INTEREST-EXPENSE> 5645
<INTEREST-INCOME-NET> 5877
<LOAN-LOSSES> 196
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3345
<INCOME-PRETAX> 2998
<INCOME-PRE-EXTRAORDINARY> 2998
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2202
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
<YIELD-ACTUAL> 4.26
<LOANS-NON> 512
<LOANS-PAST> 709
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2349
<CHARGE-OFFS> 389
<RECOVERIES> 17
<ALLOWANCE-CLOSE> 2173
<ALLOWANCE-DOMESTIC> 1630
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 543
</TABLE>
