Page 1 of 68 pages
Exhibit Index on
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] 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 of (I.R.S. Employer
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. [x]
At March 11, 1999, the aggregate market value of the voting stock
held by nonaffiliates of the registrant, based on a share price of
$49.13 per share (such price being the average of the bid and
asked prices on such date) was $117.3 million.
At March 11, 1999, there were outstanding 2,649,298 of the
registrant's Common Shares.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 1998 Annual Report to Shareholders (Parts
I and II)
Portions of Registrant's Definitive Proxy Statement for the April
14, 1999 Annual Meeting of Shareholders (Part III)
<PAGE>
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 and 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, its deposits are insured by the Federal
Deposit Insurance Corporation and it 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, 1998, the Bank employed 124 employees, 104 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.
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 1998 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 23
of the CSB Bancorp Inc. 1998 Annual Report to
Shareholders (the "Annual Report") portions of which are
included as Exhibit 13 to this document, 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 24 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, 1998, 1997 and 1996.
<TABLE>
(In thousands of dollars) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Securities available for sale
(at fair value)
U.S. Treasury securities $10,115 $16,094 $11,073
U.S. Government corporations
and agencies 14,941 10,013 1,996
Other securities 2,059 1,935 1,821
------- ------- -------
$27,115 $28,042 $14,890
------- ------- -------
------- ------- -------
Securities held to maturity
(at amortized cost)
U.S. Treasury securities $10,125 $15,122 $11,031
U.S. Government corporations
and agencies 9,501 7,540 7,011
Obligations of states and
political subdivisions 42,627 35,723 19,440
Mortgage-backed securities -- -- 11
------- ------- -------
$62,253 $58,385 $37,493
------- ------- -------
------- ------- -------
</TABLE>
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, 1998:
<PAGE>
<TABLE>
(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
------ ----- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury $6,022 6.18% $ 4,093 6.08% -- -- -- --
U.S. Government
corporations
and agencies -- -- 14,941 5.95 -- -- -- --
------ ----- ------- -----
Total $6,022 6.18% $19,034 5.98% -- -- -- --
------ ----- ------- -----
------ ----- ------- -----
Held to maturity
U.S. Treasury $7,000 6.46% $ 3,023 6.26% -- -- $ 102 7.70%
U.S. Government
corporations
and agencies -- -- 9,501 5.66% -- -- -- --
Obligations of
states and
political
subdivisions 686 9.24 7,602 7.61 $19,990 7.22% 14,349 7.53
------ ----- ------ ----- ------ ----- ------ ------
Total $7,686 6.71% $20,126 6.49% $19,990 7.22% $14,451 7.53%
------ ----- ------ ----- ------ ----- ------ ------
------ ----- ------ ----- ------ ----- ------ ------
</TABLE>
<PAGE>
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, 1998.
III. Loan Portfolio
A. Types of Loans - Total loans on the balance sheet are
comprised of the following classifications at December 31:
<TABLE>
(In thousands of
dollars) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial $ 86,971 $ 80,428 $ 72,917 $ 67,836 $ 59,068
Commercial real
estate 33,137 30,408 22,991 22,858 22,700
Residential real
estate 33,685 49,752 50,874 43,995 39,167
Residential real
estate loans held
for sale 23,636 -- -- -- --
Construction 3,155 3,508 3,249 2,477 2,802
Installment and
credit card 16,992 16,393 15,110 15,453 13,507
-------- -------- -------- -------- --------
Total loans $197,576 $180,489 $165,141 $152,619 $137,244
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
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, 1998:
(In thousands One Year One Through After Five
of dollars) or Less Five Years Years Total
-------- ----------- ---------- ------
Commercial $38,237 $14,662 $34,072 $ 86,971
Commercial real
estate 1,967 2,884 28,286 33,137
Construction -- 250 2,905 3,155
------- ------- ------- --------
Total $40,204 $17,796 $65,263 $123,263
------- ------- ------- --------
------- ------- ------- --------
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, 1998.
Fixed Variable
(In thousands of dollars) Rate Rate
Total commercial, commercial
real estate and construction
loans due after one year $24,367 $58,692
------- -------
------- -------
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The
following schedule summarizes nonaccrual, past due
and restructured loans.
<PAGE>
<TABLE>
December 31
(In thousands of dollars) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
(a) Loans accounted
for on a
nonaccrual basis $ 571 $ 494 $ 174 $ 228 $ 611
(b) Accruing loans
which are
contractually past
due 90 days or more
as to interest or
principal payments 892 746 573 343 590
(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 $1,463 $1,240 $ 747 $ 571 $1,201
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
<PAGE>
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 is as follows:
(In thousands of dollars) 1998 1997 1996
Balance of impaired loans at
December 31 $1,454 $1,384 $961
Less portion for which no
allowance for loan loss is
allocated 142 -- --
------ ------ ----
Portion of impaired loan balance
for which an allowance for loan
losses is allocated $1,312 $1,384 $961
------ ------ ----
Portion of allowance for loan
losses allocated to the impaired
loan balance at December 31 $ 412 $ 437 $336
Interest income recognized in impaired loans during the
year represented $92,000 while $140,000 would have been
recognized had the loans been performing under their
contractual terms.
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, 1998, 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, 1998, 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, 1998,
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:
<PAGE>
<TABLE>
(In thousands of dollars) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
LOANS
Average loans outstanding during
period $187,198 $168,823 $157,274 $146,816 $131,440
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 2,349 $ 2,121 $ 1,830 $ 1,558 $ 1,312
Loans charged off:
Commercial (350) (37) (11) (59) (4)
Commercial real estate (37) (0) (0) (113) (34)
Residential real estate (76) (0) (0) (0) (0)
Installment and credit card (105) (187) (125) (121) (74)
-------- -------- -------- -------- --------
Total loans charged off (568) (224) (136) (293) (112)
-------- -------- -------- -------- --------
Recoveries of loans previously
charged off:
Commercial 1 2 2 12 9
Commercial real estate 0 0 0 0 0
Residential real estate 15 9 0 0 7
Installment 40 41 25 38 42
-------- -------- -------- -------- --------
Total loan recoveries 56 52 27 50 58
Net loans charged off (512) (172) (109) (243) (54)
Provision charged to operating
expense 1,051 400 400 515 300
-------- -------- -------- -------- --------
Balance at end of period $ 2,888 $ 2,349 $ 2,121 $ 1,830 $ 1,558
Ratio of net charge-offs to
average loans outstanding
for period .27% .10% .07% .17% .04%
/TABLE
<PAGE>
The 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.
<PAGE>
<TABLE>
--------------------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, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $1,181 44.02% $ 719 44.67% $ 634 44.15%
Commercial real estate 748 16.77 465 16.92 425 13.92
Residential real estate 302 29.01 245 27.30 109 30.81
Construction 0 1.60 0 1.95 0 1.97
Installment and credit
card 237 8.60 141 9.16 139 9.15
Unallocated 420 779 814
------ ------- ------ ------- ------ -------
Total $2,888 100.00% $2,349 100.00% $2,121 100.00%
------ ------- ------ ------- ------ -------
------ ------- ------ ------- ------ -------
</TABLE>
<TABLE>
Percentage of Percentage of
Loans in Each Loans in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
December 31, 1995 December 31, 1994
--------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Commercial $ 497 44.45% $ 710 43.04%
Commercial real estate 551 14.98 148 16.54
Residential real estate 148 28.83 118 28.54
Construction 0 1.62 0 2.04
Installment and credit
card 219 10.12 175 9.84
Unallocated 415 407
------ ------- ------ ------
Total $1,830 100.00% $1,558 100.00%
------ ------- ------ ------
------ ------- ------ ------
</TABLE>
<PAGE>
<TABLE>
V. Deposits
A. The following is a schedule of average deposit amounts
and average rates paid on each category for the periods indicated:
<CAPTION>>
Average Average
Amounts Outstanding Rate Paid
Year ended December 31 Year ended December 31
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
(In thousands of dollars)
Noninterest-bearing demand $ 23,813 $ 20,920 $ 20,140 N/A N/A N/A
Interest-bearing demand deposits 35,541 35,148 35,625 2.02% 1.99% 2.05%
Savings deposits 41,056 35,559 27,564 3.44 3.47 3.03
Time deposits 146,551 135,565 116,280 5.78 5.82 5.72
-------- -------- --------
Total deposits $246,961 $227,192 $199,609
-------- -------- --------
-------- -------- --------
</TABLE>
<PAGE>
D. The following is a schedule of maturities of time
certificates of deposit in amounts of $100,000 or more as of
December 31, 1998:
(In thousands of dollars)
Three months or less $ 8,736
Over three through six months 6,640
Over six through twelve months 15,910
Over twelve months 5,650
Total $36,936
C. and E. There were no foreign deposits in any period
presented.
VI. Return On Equity And Assets
1998 1997 1996
Return on average assets 1.43% 1.62% 1.65%
Return on average shareholders'
equity 14.39 17.32 17.47
Dividend payout ratio 37.45 29.88 27.67
Average shareholders' equity
to average assets 9.93 9.38 9.47
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, 1998, 1997 and 1996 were less than 30 percent of
shareholders' equity at December 31, 1998, 1997 and 1996.
ITEM 2 - PROPERTIES
The Bank owns and operates its main office at Six West Jackson
Street, Millersburg, Ohio 44654. The Bank also operates eight
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;
operations center under construction)
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 1998.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information contained in the section captioned "Common Stock and
Shareholder Information" on pages 31 and 32 of the Annual Report
is incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
Information contained in the section captioned "Selected Financial
Data" on pages 20 and 21 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 "1998 Financial
Review" on pages 19 through 31, inclusive, of the Annual Report is
incorporated herein by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Information contained in the section captioned "Quantitative and
Qualitative Disclosures About Market Risk" on pages 29 and 30 of
the Annual Report is incorporated herein by reference.
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 33 through 56, 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 THE 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 1999 Annual Meeting of Shareholders filed with
the Securities and Exchange Commission on or about March 12, 1999
(the "Proxy Statement") and information contained in the section
captioned "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE" on pages 3 and 4 of the Proxy Statement is
incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information contained in the section captioned "REPORT OF THE
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION" on pages 8 and 9 of the Proxy Statement, the section
captioned "EXECUTIVE COMPENSATION" on page 10 of the Proxy
Statement and the section captioned "PERFORMANCE GRAPH" on page 11
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 and 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 12 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)
3.1.1 Amended form of Article Fourth of Amended Articles
of Incorporation, as effective April 9, 1998.
3.2 Code of Regulations of CSB Bancorp, Inc.
(incorporated by reference to Registrant's Form
10-SB)
<PAGE>
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 CSB Bancorp, Inc. 1998 Annual Report to
Shareholders
21 Subsidiary of CSB Bancorp, Inc.
23 Consent of Crowe, Chizek and Company LLP
24 Powers 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.
<PAGE>
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,
1999.
Signatures Title
/s/ DOUGLAS D. AKINS* President (Principal Executive
Douglas D. Akins* Officer)
/s/ A. LEE MILLER* Senior Vice President and
A. Lee Miller Chief Financial Officer
/s/ PAMELA S. BASINGER* Financial Officer and Principal
Pamela S. Basinger* Accounting Officer
/s/ DAVID W. KAUFMAN* Director
David W. Kaufman*
/s/ J. THOMAS LANG* Director
J. Thomas Lang*
/s/ VIVIAN A. McCLELLAND* Director
Vivian A. McClelland*
/s/ H. RICHARD MAXWELL* Director
H. Richard Maxwell*
<PAGE>
/s/ 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<PAGE>
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
3.1.1 Amended form of Article Fourth of
Amended Articles of Incorporation,
as effective April 9, 1998. 19
3.2 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 20
13 Excerpts of the CSB Bancorp, Inc.
1998 Annual Report to Shareholders 21
21 Subsidiary of CSB Bancorp, Inc. 64
23 Consent of Crowe, Chizek and
Company LLP 65
24 Powers of Attorney 66
27 Financial Data Schedule 67
EXHIBIT 3.1.1
AMENDED ARTICLE FOURTH OF
AMENDED ARTICLES OF INCORPORATION
FOURTH: The authorized number of shares of the Corporation
is nine million (9,000,000) 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
<TABLE>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Average basic common
shares outstanding 2,637,012 2,604,914 2,577,044
---------- ---------- ----------
Average diluted common
shares outstanding 2,637,956 2,605,852 2,577,044
---------- ---------- ----------
Net income $4,230,644 $4,407,200 $3,859,466
---------- ---------- ----------
Basic and diluted
earnings per common
share $ 1.60 $ 1.69 $ 1.50
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
EXHIBIT 13
EXCERPTS OF CSB BANCORP, INC. 1998 ANNUAL REPORT TO SHAREHOLDERS
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, 1998 and 1997, and related
consolidated statements of income, comprehensive income, changes
in shareholders' equity and cash flows for each of three years in
the period ended December 31, 1998. 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, 1998
and 1997, and the consolidated results of its operations and cash
flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/S/ CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
January 14, 1999
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and noninterest-bearing deposits with banks $ 10,440,120 $ 8,090,785
Interest-bearing demand deposits with banks 315,06 731,257
Federal funds sold 14,853,000 6,213,000
------------ ------------
Total cash and cash equivalents 25,608,187 14,335,042
Time deposits with other institutions 3,000,000
Securities available for sale, at fair value 27,115,456 28,042,412
Securities held to maturity (Fair values of
$63,981,883 in 1998 and $59,773,637 in 1997) 62,252,682 58,385,434
Loans, net 193,823,995 177,327,203
Premises and equipment, net 5,372,876 3,601,254
Accrued interest receivable and other assets 3,328,722 3,750,570
------------ ------------
Total assets $317,501,918 $288,441,915
LIABILITIES
Deposits
Noninterest-bearing $ 27,359,102 $ 24,678,146
Interest-bearing 238,387,456 216,525,123
------------ ------------
Total deposits 265,746,558 241,203,269
Securities sold under repurchase agreements 9,770,519 7,290,759
Federal Home Loan Bank borrowings 10,111,119 11,686,863
Accrued interest payable and other liabilities 1,013,623 986,544
------------ ------------
Total liabilities 286,641,819 261,167,435
SHAREHOLDERS' EQUITY
Common stock, $6.25 par value: 1998-9,000,000 shares
authorized, 2,654,441 shares issued; 1997 3,000,000
<PAGE>
shares authorized, 1,314,591 issued 16,590,255 8,216,191
Additional paid-in capital 5,963,191 5,135,899
Retained earnings 8,292,636 13,907,908
Treasury stock at cost: 1998 - 6,400 shares;
1997 3,200 shares (56,000) (56,000)
Accumulated other comprehensive income 70,017 70,482
------------ ------------
Total shareholders' equity 30,860,099 27,274,480
------------ ------------
Total liabilities and shareholders' equity $317,501,918 $288,441,915
------------ ------------
------------ ------------
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans, including fees $18,087,424 $16,798,385 $15,759,724
Taxable securities 2,744,169 3,119,155 1,932,408
Nontaxable securities 1,923,459 1,456,779 1,029,655
Other 648,931 737,669 758,384
---------- ---------- ----------
Total interest income 23,403,983 22,111,988 19,480,171
Interest expense
Deposits 10,603,600 9,828,445 8,213,452
Other 959,335 984,142 614,617
---------- ---------- ----------
Total interest expense 11,562,935 10,812,587 8,828,069
---------- ---------- ----------
Net interest income 11,841,048 11,299,401 10,652,102
Provision for loan losses 1,050,979 400,063 400,000
---------- ---------- ----------
Net interest income after provision for
loan losses 10,790,069 10,899,338 10,252,102
---------- ---------- ----------
Other income
Service charges on deposit accounts 716,992 685,369 627,635
Merchant fees 165,144 117,990 155,311
Trust services 211,878 108,735 62,574
Other income 351,969 314,897 254,188
Gain on sale of loans 14,378 220,200
Security gains 64 46 11,949
Gain on sale of other real estate owned 155,134 116,090
---------- ---------- ----------
Total other income 1,615,559 1,447,237 1,227,747
Other expenses
Salaries and employee benefits 3,438,817 3,203,405 2,999,258
Occupancy expense 324,900 314,932 346,936
Equipment expense 484,672 462,890 469,828
Office supplies 187,136 176,785 239,791
State franchise tax 382,359 343,239 299,675
Other expenses 2,026,315 1,813,723 1,664,895
---------- ---------- ----------
Total other expenses 6,844,199 6,314,974 6,020,383
---------- ---------- ----------
Income before income taxes 5,561,429 6,031,601 5,459,466
Provision for income taxes 1,330,785 1,624,401 1,600,000
---------- ---------- ----------
Net income $4,230,644 $4,407,200 $3,859,466
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted earnings per common share $ 1.60 $ 1.69 $ 1.50
---------- ---------- ----------
---------- ---------- ----------
/TABLE
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income $4,230,644 $4,407,200 $3,859,466
Other comprehensive income, net of tax:
Unrealized holding gains and losses on
available-for-sale securities (423) 41,860 (32,765)
Less reclassification adjustment for gains
recognized in income (42) (30) (7,886)
---------- ---------- ----------
Unrealized gains/losses on
securities, net (465) 41,830 (40,651)
---------- ---------- ----------
Comprehensive income $4,230,179 $4,449,030 $3,818,815
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
Unrealized
Gain/(Loss)
on Total
Additional Securities Share-
Common Paid-in Retained Treasury Available holders'
Stock Capital Earnings Stock For Sale Equity
------ ---------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1996 $ 4,026,738 $4,236,952 $12,065,770 $(56,000) $ 69,303 $20,342,763
Net income 3,859,466 3,859,466
Common stock issued:
Under dividend re-
investment program 39,038 240,069 279,107
Under 401(k) plan 5,903 43,481 49,384
Cash dividends declared
($.415 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
<PAGE>
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
($.505 per share) (1,317,792) (1,317,792)
Change in unrealized gain
on securities available
for sale 41,830 41,830
----------- ---------- ----------- --------- -------- -----------
Balance December 31, 1997 8,216,191 5,135,899 13,907,908 (56,000) 70,482 27,274,480
Net income 4,230,644 4,230,644
Common stock issued:
Under dividend re-
investment program 56,153 414,238 470,391
Under 401(k) plan 56,433 413,054 469,487
Cash dividends declared
($.60 per share) (1,584,438) (1,584,438)
Stock split (100% stock
dividend) 8,261,478 (8,261,478)
Change in unrealized gain
on securities available
for sale (465) (465)
----------- ---------- ----------- --------- -------- -----------
Balance December 31,1998 $16,590,255 $5,963,191 $ 8,292,636 $(56,000) $ 70,017 $30,860,099
----------- ---------- ----------- --------- -------- -----------
----------- ---------- ----------- --------- -------- -----------
/TABLE
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 4,230,644 $ 4,407,200 $ 3,859,466
Adjustments to reconcile net income to net
cash from operating activities
Security amortization and accretion (50,335) (40,711) 36,105
Depreciation 398,058 385,148 428,307
Gain on sale of other real estate owned (155,134) (116,090)
Gain on sale of loans (14,378) (220,200)
Investment security gains (46) (11,949)
FHLB stock dividends (123,900) (113,300)
Provision for loan losses 1,050,979 400,063 400,000
Deferred income taxes 1,763 (72,705)
Changes in
Net deferred loan fees (51,812) 85,415 28,199
Accrued interest receivable 413,825 (942,064) (41,128)
Accrued interest payable 23,691 33,255 11,006
Other assets and liabilities (169,351) 81,924 337,256
----------- ----------- -----------
Net cash from operating activities 5,552,287 4,078,447 4,858,467
----------- ----------- -----------
Cash flows from investing activities
Net change in time deposits with financial
institutions 3,000,000 (3,000,000)
Securities available for sale
Proceeds from maturities and repayments 12,056,300 11,000,000 10,000,000
Purchases (10,952,355) (23,952,022) (7,917,347)
Securities held to maturity
Proceeds from maturities and repayments 10,026,163 12,161,211 9,100,731
Purchases (13,896,868) (33,035,725) (8,949,808)
Loan sale proceeds 1,514,878 10,766,167
Loan originations, net of payments (18,996,459) (25,338,195) (12,659,533)
Property and equipment expenditures (2,169,680) (1,423,186) (322,093)
Proceeds from sale of other real estate 336,134 242,090
------------ ------------- ------------
Net cash from investing activities (19,081,887) (49,821,750) (13,505,960)
------------ ------------- ------------
/TABLE
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from financing activities
Net increase in deposits $24,543,289 $27,863,685 $ 7,084,091
Net increase in securities sold under
repurchase agreements 2,479,760 2,552,586 775,240
Advances on FHLB borrowings 1,289,309 10,072,667
Principal reductions on FHLB borrowings (1,575,744) (1,343,961) (281,348)
Shares issued for 401(k) plan 469,487 339,350 49,384
Cash dividends paid (1,114,047) (940,380) (784,482)
----------- ------------ ------------
Net cash from financing activities 24,802,745 29,760,589 16,915,552
----------- ------------ ------------
Net change in cash and cash equivalents 11,273,145 (15,982,714) 8,268,059
Cash and cash equivalents at beginning of year 14,335,042 30,317,756 22,049,697
----------- ------------ ------------
Cash and cash equivalents at end of year $25,608,187 $14,335,042 $30,317,756
----------- ------------ ------------
----------- ------------ ------------
Cash paid during the year for:
Interest $11,539,244 $10,779,000 $ 8,817,000
Income taxes 1,385,000 1,751,000 1,469,000
/TABLE
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The
consolidated financial statements include CSB Bancorp, Inc. and
its wholly-owned subsidiary, The Commercial and Savings Bank,
together referred to as "the Company". Intercompany transactions
and balances are eliminated in consolidation.
The Company provides financial services 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. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary
lending products are residential mortgage, commercial, and
installment loans. Substantially all loans are secured by
specific items of collateral including business assets, consumer
assets and real estate. Commercial loans are expected to be
repaid from cash flow from operations of businesses. Real estate
loans are secured by both residential and commercial real estate.
While the Company's chief decision-makers monitor the revenue
streams of the various Company products and services, operations
are managed and financial performance is evaluated on a Company-
wide basis. Accordingly, all of the Company's banking operations
are considered by management to be aggregated in one reportable
operating segment.
The following is a summary of accounting policies adopted by CSB
Bancorp, Inc., which have a significant effect on the financial
statements.
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, fair value of
financial instruments and determination and carrying value of
impaired loans are particularly subject to change.
Cash Flows: Cash and cash equivalents includes cash, deposits
with other financial institutions under 90 days, and federal funds
sold. Net cash flows are reported for loan and deposit
transactions.
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, 1998 and 1997
was $2,663,000 and $2,230,000.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. Trading securities are carried
at fair value, with changes in unrealized holding gains and losses
included in income. Other securities such as Federal Home Loan
Bank stock are carried at cost.
Interest income includes amortization of purchase premium or
discount. Gains and losses on sales are based on the amortized
cost of the security sold. Securities are written down to fair
value when a decline in fair value is not temporary.
Loans: Loans are reported at the principal balance outstanding,
net of unearned interest, deferred loan fees and costs, and an
allowance for loan losses. Loans held for sale are reported at
the lower of cost or market, on an aggregate basis.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan
term. Interest income is not reported when full loan repayment is
in doubt, typically when the loan is impaired or 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 for probable credit losses, increased by the
provision for loan losses and decreased by charge-offs less
recoveries. Management estimates the allowance balance required
using past loan loss experience, known and inherent risks in the
nature and volume of 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.
A loan is impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance
loans of similar nature such as residential mortgage, consumer,
and credit card loans, and on an individual loan basis for other
loans. 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 rate or
at the fair value of collateral if repayment is expected solely
from the collateral.
Premises and Equipment: Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed over the
asset useful lives on a straight-line basis.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Servicing Rights: Servicing rights are recognized as assets for
purchased rights and for the allocated value of retained servicing
rights on loans sold. Servicing rights are expensed in proportion
to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the rights,
using groupings of the underlying loans as to interest rates and
then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a
valuation allowance. Servicing rights were not material during
any period presented.
Other Real Estate: Real estate owned, other than that used in the
normal course of business, is recorded at fair value at
acquisition. Any reduction from carrying value of the related
loan to fair value at the time of acquisition is accounted for as
a loan loss. After acquisition, a valuation allowance reduces the
carrying value to the lower of the initial amount or fair value
less estimated costs to sell. Other real estate owned included on
the balance sheets was $0 and $181,000 at December 31, 1998 and
1997.
Long-Term Assets: These assets are reviewed for impairment when
events indicate their carrying amount may not be recoverable from
future undiscounted cash flows. If impaired, the assets are
recorded at discounted amounts.
Repurchase Agreements: Substantially all repurchase agreement
liabilities represent amounts advanced by various customers.
Securities are pledged to cover these liabilities, which are not
covered by federal deposit insurance.
Stock Compensation: Employee compensation expense under stock
option plans is reported if options are granted below market price
at grant date. Pro forma disclosures of net income and earnings
per share are shown to measure expense for options granted after
1994, using an option-pricing model to estimate fair value.
Income Taxes: Income tax expense is the total of the current-year
income tax due or refundable and the change in deferred tax assets
and liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Financial Instruments: Financial instruments include credit
instruments, such as commitments to make loans and standby letters
of credit, issued to meet customer-financing needs. The face
amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay.
Stock Split: On April 30, 1998, a 2-for-1 stock split was
distributed to shareholders in the form of a 100% stock dividend.
All per share data was restated to reflect the stock split.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Basic earnings per common share is net
income divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share
include the dilutive effect of additional potential common shares
issuable under stock options. Earnings and dividends per share
are restated for all stock splits and dividends through the date
of issue of the financial statements.
The weighted average number of common shares outstanding for basic
and diluted earnings per share computations were as follows:
1998 1997 1996
Weighted average common
shares outstanding
(basic) 2,637,012 2,604,914 2,577,044
Dilutive effect of assumed
exercise of stock options 944 938 --
--------- --------- ---------
Weighted average common
shares outstanding
(diluted) 2,637,956 2,605,852 2,577,044
--------- --------- ---------
--------- --------- ---------
Comprehensive Income: Comprehensive income consists of net income
and other comprehensive income. Other comprehensive income
includes unrealized gains and losses on securities available for
sale, which are also recognized as separate components of equity.
The accounting standard that requires reporting comprehensive
income first applies for 1998, with prior information restated to
be comparable.
New Accounting Pronouncements: Beginning January 1, 2000, a new
accounting standard will require all derivatives to be recorded at
fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting
gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is
not expected to have a material effect but the effect since the
Company currently has no derivative holdings.
Loss Contingencies: Loss contingencies, including claims and
legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated.
Management does not believe there now are such matters that will
have a material effect on the financial statements.
Dividend Restriction: Banking regulations require maintaining
certain capital levels and may limit the dividends paid by the
bank to the holding company or by the holding company to
shareholders.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments: Fair values of financial
instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in a separate note.
Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
Financial Statement Presentation: Certain items in the prior
year's financial statements have been reclassified to correspond
with the current year's presentation.
<PAGE>
<TABLE>
NOTE 2 - SECURITIES
Year-end securities are as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1998
Available for sale
U.S. Treasury securities $10,018,642 $ 96,670 $10,115,312
Obligations of U.S. government
corporations and agencies 14,931,926 56,205 $(46,787) 14,941,344
Total debt securities 24,950,568 152,875 (46,787) 25,056,656
Other securities 2,058,800 2,058,800
----------- ---------- --------- -----------
Total securities available
for sale $27,009,368 $ 152,875 $(46,787) $27,115,456
----------- ---------- --------- -----------
----------- ---------- --------- -----------
Held to Maturity
U.S. Treasury securities $10,124,422 $ 121,297 $10,245,719
Obligations of U.S. government
corporations and agencies 9,501,449 21,675 $(35,929) 9,487,195
Obligations of states and
Political Subdivisions 42,626,811 1,667,490 (45,332) 44,248,969
----------- ---------- --------- -----------
Total securities held to maturity $62,252,682 $1,810,462 $(81,261) $63,981,883
----------- ---------- --------- -----------
----------- ---------- --------- -----------
</TABLE>
<TABLE>
NOTE 2 - SECURITIES (Continued)
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1997
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>
The amortized cost and fair value of debt securities available for
sale at year-end 1998, by contractual maturity, are shown below.
Amortized Fair
Cost Value
Available for sale
Due in one year or less $ 5,998,280 $ 6,022,343
Due after one through five years 18,952,288 19,034,313
----------- -----------
Total debt securities available
for sale $24,950,568 $25,056,656
----------- -----------
----------- -----------
Held to maturity
Due in one year or less $ 7,686,333 $ 7,742,808
Due after one year through
five years 20,126,439 20,449,406
Due after five years through
ten years 27,365,977 28,465,299
Due after ten years 7,073,933 7,324,370
----------- -----------
Total debt securities held to
maturity $62,252,682 $63,981,883
----------- -----------
----------- -----------
No securities were sold during any period presented. Securities
called or settled by the issuer resulted in gains of $64, $46 and
$11,949 in 1998, 1997 and 1996.
Securities with a carrying value of approximately $52,830,000 and
$46,065,000 were pledged as of December 31, 1998 and 1997, to
secure public deposits, as well as other deposits and borrowings
as required or permitted by law.
<PAGE>
<TABLE>
NOTE 3 - LOANS
<CAPTION>
Year-end loans are as follows.
1998 1997
<S> <C> <C>
Commercial $ 86,971,202 $ 80,427,826
Commercial real estate 33,136,841 30,407,670
Residential real estate 33,684,743 49,752,415
Residential real estate loans held
for sale 23,636,259
Installment and credit card 16,992,208 16,392,926
Construction 3,154,733 3,507,863
------------ ------------
Subtotal 197,575,986 180,488,700
Less: Allowance for loan losses (2,887,721) (2,349,039)
Net deferred loan fees (864,270) (812,458)
------------ ------------
Loans, net $193,823,995 $177,327,203
------------ ------------
------------ ------------
</TABLE>
Activity in the allowance for loan losses for the year was as follows.
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Beginning balance $2,349,039 $2,120,845 $1,830,250
Provision for loan losses 1,050,979 400,063 400,000
Loans charged off (568,597) (223,945) (136,524)
Recoveries 56,300 52,076 27,119
Ending balance $2,887,721 $2,349,039 $2,120,845
/TABLE
<PAGE>
NOTE 3 - LOANS (Continued)
<TABLE>
Impaired loans were as follows.
<CAPTION>
1998 1997
<S> <C> <C>
Year-end loans with no allowance for loan losses
allocated $ 141,509 $ 0
Year-end loans with allowance for loan losses
allocated 1,453,837 1,384,000
Amount of the allowance allocated 412,284 437,000
Average of impaired loans during the year 1,608,251 1,230,000
Interest income recognized during impairment 92,014 76,000
Cash-basis interest income recognized 71,888 59,000
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT
<TABLE>
Year-end premises and equipment are as follows.
<CAPTION>
1998 1997
<S> <C> <C>
Land and improvements $ 990,877 $ 980,700
Buildings and improvements 3,477,490 2,516,855
Furniture and equipment 3,000,397 2,698,844
Leasehold improvements 79,978 79,979
Facilities under construction 1,629,823 747,802
---------- ----------
Total 9,178,565 7,024,180
Accumulated depreciation (3,805,689) (3,422,926)
---------- ----------
Premises and equipment, net $5,372,876 $3,601,254
</TABLE>
The Bank leases certain office locations. Total rental
expense under these leases was $94,154
in 1998, $90,674 in 1997, and $89,324 in 1996. Future
minimum-lease payments are not
material.
NOTE 5 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits at year-end are as follows.
<TABLE>
1998 1997
<S> <C> <C>
Demand $ 40,653,899 $ 36,810,301
Statement and passbook savings 42,808,891 39,235,884
Certificates of deposit:
In excess of $100,000 36,935,960 30,643,934
Other 117,988,706 109,835,004
------------ ------------
Total $238,387,456 $216,525,123
------------ ------------
------------ ------------
</TABLE>
<PAGE>
Included in savings deposits is an $8.8 million account from a
local school district that represents the proceeds of a bond
issuance for the construction of a new facility. The district is
expected to withdraw funds in the very near future.
At year-end 1998, stated maturities of time deposits were as
follows.
1999 $123,856,750
2000 18,002,424
2001 4,167,496
2002 3,463,610
2003 5,434,386
------------
Total $154,924,666
NOTE 6 - BORROWINGS
The Company borrows from the Federal Home Loan Bank (FHLB) to fund
certain fixed-rate residential real estate loans. These
borrowings carry fixed interest rates ranging from 5.60% to 7.15%
at year-end 1998 and 1997, with 10-, 15- or 20-year maturities.
Monthly principal and interest payments are due on the borrowings.
In addition, a principal curtailment of 10% of outstanding
principal balance is due on the anniversary date of each
borrowing. Future required principal payments, including
curtailments, are as follows.
1999 $ 1,405,062
2000 1,248,327
2001 1,107,807
2002 981,957
2003 869,268
Thereafter 4,498,698
------------
$ 10,111,119
------------
------------
At December 31, 1998, the FHLB borrowings are collateralized by
the Company's FHLB stock owned and $15,167,000 of qualifying
mortgage loans. Based upon the amount of FHLB stock owned, the
Bank has the ability to obtain up to $36 million of advances from
the FHLB.
Securities sold under agreements to repurchase generally mature
within three months from the transaction date. Physical control
is maintained for all securities sold under repurchase agreements.
Information concerning securities sold under agreements to
repurchase is summarized as follows.
1998 1997
Average balance during the year $ 7,787,240 $5,135,407
Average interest rate during the year 3.54% 3.92%
Maximum month-end balance during
the year $10,136,815 $8,480,023
NOTE 7 - INCOME TAXES
The provision for income taxes consists of the following:
1998 1997 1996
Current $1,466,786 $1,622,638 $1,672,705
Deferred (136,000) 1,763 (72,705)
----------- ---------- -----------
Total income tax
provision $1,330,786 $1,624,401 $1,600,000
The differences between the financial statement provision and
amounts computed by applying the statutory federal income tax rate
of 34% to income before income taxes are as follows:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Income taxes computed
at the statutory
federal tax rate $1,890,886 $2,050,744 $1,856,218
Add (subtract) tax
effect of Tax exempt
interest income (659,445) (494,561) (348,771)
Nondeductible interest
expense 99,699 72,695 43,677
Other (354) (4,477) 48,876
----------- ---------- ----------
Total income tax
provision $1,330,786 $1,624,401 $1,600,000
---------- ---------- ----------
---------- ---------- ----------
/TABLE
<PAGE>
NOTE 7 - INCOME TAXES (Continued)
The tax effects of principal temporary differences and the
resulting deferred tax assets and liabilities that comprise the
net deferred tax asset included in other assets on the balance
sheet are as follows at year-end.
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Allowance for loan losses $ 829,103 $ 645,951 $ 568,365
Deferred loan fees 19,678 72,246 114,578
Other 107,311 124,614 75,152
--------- --------- ---------
Deferred tax asset 956,092 842,811 758,095
--------- --------- ---------
Accretion (38,505) (51,294) (36,383)
Depreciation (14,438) (36,171) (34,382)
Unrealized gain on
securities available
for sale (36,070) (36,309) (14,760)
Other (104,532) (92,729) (22,950)
--------- --------- ---------
Deferred tax liability (193,545) (216,503) (108,475)
--------- --------- ---------
Net deferred tax asset $ 762,547 $ 626,308 $ 649,620
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has sufficient taxes paid in and available for
recovery to warrant recording the full deferred tax asset without
a valuation allowance.
NOTE 8 - EMPLOYEE BENEFITS
Profit Sharing Plan: The Company maintains a contributory profit
sharing plan covering substantially all its employees who meet
certain age and service requirements. Under the plan, the Company
contributes 3% of each eligible participant's compensation during
the year and matches participant contributions up to 2% of each
participant's compensation during the year. Both of these
contributions are dependent on availability of sufficient net
income from current or prior years. Additional contributions may
be made as approved by the Board of Directors. Expense under this
plan for 1998, 1997 and 1996 was $116,000, 113,000, and $104,000.
Stock Option Plan: On January 1, 1997, the Board of Directors
granted options to purchase 1,800 shares of common stock at an
exercise price of $9.05 to an officer of the Company. One-third
of the options awarded becomes exercisable on each of the first
three anniversaries of the date of grant. Therefore, the first
600 options become exercisable on January 1, 1998, and are the
only options exercisable at year-end. Expense recorded for the
options is not material. The options outstanding have a remaining
contractual life of eight years. The options granted had an
estimated value of $12 per share. Had compensation cost for stock
options been recorded, net income would have decreased
approximately $4,000 in 1997 and 1998, with no impact on earnings
per share.
NOTE 9 - COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES
Some financial instruments, such as loan commitments, credit
lines, letters of credit, and overdraft protection, are issued to
meet customer-financing needs. These are agreements to provide
credit or to support the credit of others, as long as conditions
established in the contract are met, and usually have expiration
dates. Commitments may expire without being used. Off-balance-
sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The
same credit policies are used to make such commitments as are used
for loans, including obtaining collateral at exercise of the
commitment.
Financial instruments with off-balance-sheet risk were as follows
at year-end.
1998 1997
Fixed Variable Fixed Variable
Rate Rate Rate Rate
Commitments to make
loans (at market
rates) $1,230,165 $ 1,326,760
Unused lines of
credit and
letters of
credit 3,105,699 28,532,674 $4,163,960 $25,636,963
Commitments to make loans are generally made for periods of 60
days or less. The fixed rate loan commitments have interest rates
ranging from 6.75% to 9.75% and maturities ranging from 15 years
to 30 years.
The Company sold $10.8 million in residential mortgage loans
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, the
ultimate disposition of these matters is not expected to have a
material affect on financial condition or results of operations.
NOTE 10 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, loans are granted to executive
officers, directors and their related business interests. The
following is an analysis of activity of related party loans, for
loans aggregating $60,000 or more to any one related party, for
1998.
Balance at January 1, 1998 $1,223,803
New loans and advances 1,870,394
Repayments (360,659)
Other changes (49,929)
Balance at December 31, 1998 $2,683,609
Other changes represent loans applicable to one reporting period
that are excludable from the other reporting period.
Deposits from executive officers, directors and their related
business interests at year-end 1998 and 1997 were $4,079,973 and
$3,970,740.
NOTE 11 - REGULATORY MATTERS
The Company and Bank are subject to regulatory capital
requirements administered by federal banking agencies. Capital
adequacy guidelines and prompt corrective-action regulations
involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting
practices.
The prompt corrective action regulations provide five
classifications, including well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized, although these terms are not used to
represent overall financial condition. If only adequately
capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited,
as is asset growth and expansion and plans for capital restoration
are required. In the most recent notifications received by the
Company and the Bank, each was categorized as well capitalized.
There are no conditions or events since those notifications that
management believes have changed the Company's or the Bank's
category.
<PAGE>
<TABLE>
NOTE 11 - REGULATORY MATTERS
At year-end, the capital requirements were met. Actual
capital levels, in thousands, and minimum required levels were:
<CAPTION>
Minimum
Required To Be
Minimum Required Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital (to risk-
weighted assets)
Consolidated $33,218 17.12% $15,526 8.0% $19,408 10.0%
Bank 30,669 15.83 15,504 8.0 19,380 10.0
Tier 1 capital (to risk-
weighted assets)
Consolidated 30,786 15.86 7,763 4.0 11,645 6.0
Bank 28,237 14.57 7,751 4.0 11,628 6.0
Tier 1 capital (to
average assets)
Consolidated 30,786 9.88 12,465 4.0 15,581 5.0
Bank 28,237 9.08 12,443 4.0 15,554 5.0
1997
Total capital (to risk-
weighted assets)
Consolidated $29,401 16.70% $14,086 8.0% $17,607 10.0%
Bank 27,647 15.15 14,039 8.0 17,549 10.0
Tier 1 capital (to risk-
weighted assets)
Consolidated 27,198 15.45 7,043 4.0 10,564 6.0
Bank 25,521 14.54 7,020 4.0 10,530 6.0
Tier 1 capital (to
average assets)
Consolidated 27,198 9.56 11,382 4.0 14,228 5.0
Bank 25,521 8.99 11,360 4.0 14,200 5.0
</TABLE>
<PAGE>
The Company's primary source of funds with which to pay dividends
is dividends received from the Bank. The payment of dividends by
the Bank to the Company is subject to restrictions by its
regulatory agency. These restrictions generally limit dividends
to current and prior two-year's retained earnings. Also,
dividends may not reduce capital levels below the minimum
regulatory requirements disclosed above. Under the most
restrictive of these requirements, the Company estimates retained
earnings available for payment of dividends by the Bank to the
Company approximate $8.2 million at December 31, 1998.
NOTE 12 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Following are condensed parent company financial statements.
<TABLE>
Year-end Condensed Balance Sheets
<CAPTION>
1998 1997
<S> <C> <C>
Assets:
Cash deposited with subsidiary $ 1,984,849 $ 1,123,241
Investment in subsidiary 28,311,026 25,597,379
Securities held to maturity 497,993 497,806
Other assets 66,231 56,054
----------- -----------
Total assets $30,860,099 $27,274,480
----------- -----------
----------- -----------
Equity $30,860,099 $27,274,480
----------- -----------
----------- -----------
</TABLE>
<TABLE>
Condensed Statements of Income
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest on securities $ 24,837 $ 20,356
Dividends from subsidiary 1,584,231 1,817,792 $1,063,595
Other income 6,010
---------- ---------- ----------
Total income 1,609,068 1,844,158 1,063,595
Operating expenses 92,536 80,043 116,347
---------- ---------- ----------
Income before taxes and
equity in undistributed
earnings of subsidiary 1,516,532 1,764,115 947,248
Income tax benefit 13,568 28,902
Equity in undistributed
earnings of subsidiary 2,714,112 2,629,517 2,883,316
---------- ---------- ----------
Net income $4,230,644 $4,407,200 $3,859,466
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<PAGE>
NOTE 12 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
Condensed Statements of Cash Flows
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating
activities
Net income $4,230,644 $ 4,407,200 $ 3,859,466
Adjustments to reconcile
net income to cash
provided by operations
Security accretion (187)
Equity in undistributed
income of subsidiary (2,714,112) (2,629,517) (2,883,316)
Change in other assets (1,134) 11,057
------------ ------------ -----------
Net cash from operating
activities 1,516,345 1,776,549 987,207
------------ ------------ -----------
Cash flows from investing
activities
Purchases of Securities
held to maturity (497,806)
Property expenditures (10,177) (54,000)
----------- ------------
Net cash from investing
activities (10,177) (551,806)
Cash flows from financing
activities
Shares issued for 401(k)
plan 469,487 339,350 49,384
Cash dividends paid (1,114,047) (940,380) (784,482)
------------ ------------ -----------
Net cash from financing
activities (644,560) (601,030) (735,098)
------------ ------------ -----------
Net change in cash 861,608 623,713 252,109
Cash at beginning of year 1,123,241 499,528 247,419
------------ ------------ -----------
Cash at end of year $1,984,849 $ 1,123,241 $ 499,528
</TABLE>
<PAGE>
<TABLE>
NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year-end are as follows, in thousands.
<CAPTION>
1998 1997
Carrying Carrying
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial assets
Cash and equivalents $ 25,608 $ 25,608 $ 14,335 $ 14,335
Time deposits with
other institutions 3,000 3,000
Securities available
for sale 27,115 27,115 28,042 28,042
Securities held to
maturity 62,253 63,982 58,385 59,774
Loans, net of allowance
for loan losses 193,824 194,975 177,327 176,914
Accrued interest
receivable 2,282 2,282 2,696 2,696
Financial liabilities
Demand and savings
deposits $(110,822)$(110,822) $(100,724) $(100,724)
Time deposits (154,925) (156,072) (140,479) (140,917)
Repurchase agreements (9,771) (9,771) (7,291) (7,291)
FHLB borrowings (10,111) (10,111) (11,687) (11,764)
Accrued interest
payable (480) (480) (457) (457)
</TABLE>
The following methods and assumptions were used to estimate fair
values for financial instruments. The carrying amount is
considered to approximate fair value for cash and short-term
instruments, demand deposits, short-term borrowings, accrued
interest, and variable rate loans or deposits that reprice
frequently. Securities fair values are based on quoted market
prices or, if no quotes are available, on the rate and term of the
security and on information about the issuer. For fixed rate
loans or deposits and for variable rate loans or deposits with
infrequent repricing, the fair value is estimated by discounted
cash flow analysis using current market rates for the estimated
life and credit risk. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying
collateral values, where applicable. The fair value of debt is
based on currently available rates for similar financing. The
fair value of off-balance sheet items is not material.
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. 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. 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.
RESULTS OF OPERATIONS
Net income totaled $4.2 million, a decrease of $177,000 from 1997.
Earnings per share were $1.60 and $1.69 for the year ended
December 31, 1998 and 1997. Return on average assets was 1.43% in
1998 as compared to $1.62% in 1997, and return on average
shareholders' equity dripped to 14.39% in 1998, from 17.32% during
1997.
Net income for 1997 was $4.4 million or $1.69 per share, as
compared to $3.9 million or $1.50 per share for 1996. This
equated to a return on average assets of 1.62% in 1997 and 1.65%
in 1996, while the return on average shareholders' equity for the
same periods was 17.32% and 17.47%.
<PAGE>
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 1998 was $11.8 million, increasing
$542,000 from $11.3 million in 1997. Contributing to the increase
was a $1.3 million, or 7.7% increase in interest and fees on
loans, mostly attributable to the 10.9% increase in average loans.
Interest income on securities increased $92,000, or 2.0%, to $4.7
million as compared to the previous year of $4.6 million. This
increase was due primarily to an increase of the average balance
of $5.1 million, or 6.6%, as compared to the previous period.
Other interest income decreased $89,000 to $649,000 in 1998
compared to $738,000 in 1997, primarily as a result of a $707,000
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 $775,000 to
$10.6 million in 1998, compared to $9.8 million in 1997. Deposit
interest rates decreased during 1998 as overall cost of funds
decreased to 4.79% in 1998, compared to 4.84% in 1997. 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 $17.2
million and $8.2 million were originated under this program during
1998 and 1997, respectively.
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 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.
<PAGE>
<TABLE>
AVERAGE BALANCES, RATES AND YIELDS
<CAPTION>
(Dollars in thousands) 1998 1997
Average Average
Balance(1) Interest Rate(2) Balance(1) Interest Rate(2)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing Assets
Federal funds sold $ 9,568 $ 503 5.26% $ 9,295 $ 513 5.52%
Interest-bearing deposits 2,567 146 5.69 3,547 225 6.34
Securities:
Taxable 44,280 2,744 6.20 49,420 3,119 6.31
Tax exempt 38,126 1,924 5.05 27,898 1,457 5.22
Loans(3) 187,198 18,087 9.66 168,823 16,798 9.95
-------- ------- ----- -------- ------- -----
Total interest-earning
assets 281,739 23,404 8.31 258,983 22,112 8.54
Noninterest-bearing assets
Cash and due from banks 8,794 7,972
Bank premises and
equipment, net 4,410 3,020
Other assets 3,748 3,489
Allowance for loan losses (2,452) (2,227)
Total assets $296,239 $271,237
-------- --------
Interest-bearing
liabilities
Demand deposits $ 35,541 $ 717 2.02% $ 35,148 $ 701 1.99%
Savings deposits 41,056 1,413 3.44 35,559 1,233 3.47
Time deposits 146,551 8,474 5.78 135,565 7,895 5.82
Other borrowed funds 18,440 959 5.20 17,312 984 5.68
-------- ------- ----- -------- ------- -----
<PAGE>
Total interest-bearing
liabilities 241,588 11,563 4.79% 223,584 10,813 4.84%
------- -------
Noninterest-bearing
liabilities
Demand deposits 23,813 20,920
Other liabilities 1,436 1,289
Shareholders' equity 29,402 25,444
-------- --------
Total liabilities and
equity $296,239 $271,237
-------- --------
-------- --------
Net interest income $ 11,841 $11,299
-------- -------
-------- -------
Net interest margin 4.20% 4.36%
----- -----
----- -----
<FN>
(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.
</TABLE>
<PAGE>
<TABLE>
AVERAGE BALANCES, RATES AND YIELDS
<CAPTION>
(Dollars in thousands) 1996
Average
Balance(1) Interest Rate(2)
<S> <C> <C> <C>
Interest-bearing Assets
Federal funds sold $ 9,194 $ 481 5.23%
Interest-bearing deposits 5,611 277 4.94
Securities:
Taxable 31,759 1,932 6.08
Tax exempt 18,370 1,030 5.61
Loans(3) 157,274 15,760 10.02
-------- ------- -----
Total interest-earning
assets 222,208 19,480 8.77
Noninterest-bearing assets
Cash and due from banks 7,334
Bank premises and
equipment, net 3,057
Other assets 2,730
Allowance for loan losses (1,976)
Total assets $233,353
--------
Interest-bearing
liabilities
Demand deposits $ 35,625 $ 731 2.05%
Savings deposits 27,564 836 3.03
Time deposits 116,280 6,646 5.72
Other borrowed funds 10,632 615 5.78
-------- ------- -----
<PAGE>
Total interest-bearing
liabilities 190,101 8,828 4.64%
-------
Noninterest-bearing
liabilities
Demand deposits 20,140
Other liabilities 1,017
Shareholders' equity 22,095
--------
Total liabilities and
equity $233,353
--------
--------
Net interest income $ 10,652
--------
--------
Net interest margin 4.79%
-----
-----
<FN>
(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.
</TABLE>
<PAGE>
<TABLE>
RATE/VOLUME ANALYSIS OF CHANGES IN INCOME AND EXPENSE (1)
<CAPTION>
1998 v. 1997 1997 v. 1996
Change in Change in
Income/ Volume Rate Income/ Volume Rate
Expense Effect Effect Expense Effect Effect
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Federal funds sold $ (9,715) $ 14,752 $ (24,467) $ 31,456 $ 5,353 $ 26,103
Interest-bearing
deposits (79,024) (57,440) (21,584) (52,169) (118,286) 66,117
Securities:
Taxable (374,986) (319,451) (55,535) 1,186,746 1,112,154 74,592
Tax exempt 466,680 497,955 (31,275) 427,123 501,758 (74,635)
Loans 1,289,039 1,786,594 (497,555) 1,038,661 1,149,863 (111,202)
----------- ---------- ---------- ---------- ---------- -----------
Total interest income 1,291,994 1,922,410 (630,416) 2,631,817 2,650,842 (19,025)
----------- ---------- ---------- ---------- ---------- -----------
Interest Expense
Demand deposits 16,376 2,813 (6,437) (29,943) (9,694) (20,249)
Savings deposits 188,473 190,358 (1,885) 396,705 265,832 130,873
Time deposits 570,306 635,026 (64,720) 1,248,231 1,101,915 146,316
Other borrowed funds (24,807) 61,764 (86,571) 369,525 379,900 (10,375)
----------- ---------- ---------- ---------- ---------- -----------
Total interest expense 750,348 909,961 (159,613) 1,984,518 1,737,953 246,565
Net Interest Income $541,646 $1,012,449 $(470,803) $ 647,299 $ 912,889 $ (265,590)
----------- ---------- ---------- ---------- ---------- -----------
----------- ---------- ---------- ---------- ---------- -----------
<FN>
(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.
/TABLE
<PAGE>
The following table reconciles net interest income as shown in the
financial statements to taxable-equivalent net-interest income:
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Net interest income $11,841,048 $11,299,401 $10,652,102
Taxable equivalent
adjustment(1) 839,814 640,317 464,252
----------- ----------- -----------
Net interest income -
fully taxable equivalent $12,680,862 $11,939,718 $11,116,354
----------- ----------- -----------
----------- ----------- -----------
Net interest yield 4.20% 4.36% 4.79%
Taxable equivalent
adjustment(1) .30 .25 .21
----------- ----------- -----------
Net interest yield -
taxable equivalent 4.50% 4.61% 5.00%
----------- ----------- -----------
----------- ----------- -----------
<FN>
(1) Taxable equivalent adjustments have been computed assuming a
34% tax rate.
</TABLE>
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 $1.1 million in 1998, an increase from $400,000 in 1997 and
1996. See "Financial Condition - Allowance for Loan Losses."
Other Income
Total other income increased to $1.6 million in 1998 compared to
$1.4 million in 1997, an increase of 11.6%. This increase was
primarily due to the gain on sale of real estate owned of
$155,000, an increase in merchant fee income of $47,000, or 39.9%,
and trust services income increase of $103,000 or 94.9%. These
increases more than offset the decrease of $206,000, or 93.5%, in
gain on sale of loans. There were no security sales during the
three-year period ended December 31, 1998.
Total other income increased $200,000 to $1.4 million in 1997.
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 mortgage loans that were identified as held for sale,
resulting in the aforementioned gain. Other income also increased
due to 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. During 1996, approximately $22,000 of
security gains was 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.
Other Expenses
Noninterest expense increased $529,000, or 8.4%, during 1998. The
largest component of noninterest expense is salaries and employee
benefits, which increased $235,000 or 7.3% in 1998. The increases
were from normal salary adjustments and the addition of staff
members to service the Company's growing customer base and to
staff a new branch opened in 1998. 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 increased from $2,000 in 1996, to $27,000 in 1997,
due to legislation passed in 1996, increasing 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 decreased to $1.3 million in 1998,
from $1.6 million in 1997 and 1996, primarily from a reduction in
income before income taxes. In addition, the Company's effective
tax rate was 23.9% in 1998, a decrease from 26.9% in 1997 and
29.3% in 1996. The decrease in 1998 was due to the $10.2 million,
or 36.7% increase, in the average balance of tax exempt
securities.
FINANCIAL CONDITION
Total assets of the Company were $317.5 million at December 31,
1998, compared to $288.4 million at December 31, 1997,
representing an increase of 10.1%. This growth was due to
increased loan activity for the year funded by increases in
deposits. Changes in the consolidated balance sheets and factors
that caused those changes are discussed below.
Securities
Total securities increased $2.9 million, or 3.4% from $86.4
million at year-end 1997 to $89.4 million at year-end 1998. During
1998, the Company reinvested proceeds of maturing and called
securities. The distribution of the securities portfolio at year-
end 1998 consisted of U.S. Treasuries (22.7%), U.S. government
corporations and agencies (27.3%), obligations of state and
political subdivisions (47.7%) and other securities (2.3%). The
Bank increased its holdings of FHLB stock to $1.8 million through
stock dividends during 1998.
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,
1998, 15% of the portfolio matures within one year.
<PAGE>
Securities classified as held to maturity under Statement of
Financial Accounting Standards (SFAS) No. 115 are carried at
amortized cost, and include securities management has the positive
intent and ability to hold 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 $197.6 million were recorded as of December 31,
1998 as compared to $180.5 million at year-end 1997, representing
an increase of 9.5%.
While the mix of loans within this portfolio remained relatively
stable, the Company experienced increases of $6.5 million, or
8.1%, in commercial loans, $2.7 million, or 9.0%, in commercial
real estate loans and $7.6 million, or 15.2%, increase in
residential real estate loans. As of December 31, 1998
agriculture production loans and loans secured by farmland totaled
approximately $14.1 million and are included in the commercial,
commercial real estate and residential real estate categories.
Credit card loans, which are primarily unsecured, totaled $1.5
million, or .8%, of loans at year-end 1998.
The Company originates fixed-rate mortgage loans using a match-
funding program using FHLB advances of similar maturity. At
December 31, 1998, the balance of loans originated under this
program totaled approximately $23.6 million. These loans have been
identified as held for sale by the Company. 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 1998, as it was
in 1997. Management believes the Company's local service area
will experience continued economic strength and a continued need
for its type of lending products into 1999.
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, the 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 $2.9 million or
1.47% of total loans at December 31, 1998, up from $2.3 million or
1.31% of total loans at December 31, 1997. Net charge-offs for
1998 totaled $512,000, up from $172,000 in 1997 and $109,000 in
1996. 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 $1.1 million in 1998, an
increase from $400,000 in 1997. The increase was in response to
increased charge offs and nonperforming loans in 1998 and the
overall increase in the amount of the total loan portfolio,
particularly in commercial and commercial real estate loans. The
increase in charge-offs in primarily due to a loan relationship
that originated in the late 1980s. 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 past due 90 days or more
which totaled approximately $1.5 million or .86%, of total loans
at December 31, 1998, as compared to $1.2 million or .69%, of
total loans at December 31, 1997. The allowance for loan losses
as a percentage of nonperforming loans was 192.5% and 189.4% at
year-end 1998 and 1997, respectively. Given the Company's
collateral position, management anticipates little loss related to
the nonperforming loans.
Premises and Equipment
Net premises and equipment increased by $1.8 million to $5.4
million at year-end 1998 from $3.6 million at year-end 1997.
During 1998, the Company completed construction of the new Shreve
Office, which opened in March 1998. Also, construction has begun
on the new operations center to be located in Millersburg.
Construction costs recorded through December 31, 1998, were
approximately $1.6 million.
Deposits
The Company's deposits are obtained from individuals and
businesses located in its market area. Total deposits increased
10.2% to $265.7 million at December 31, 1998, compared to $241.2
million at December 31, 1997. Noninterest-bearing balances
increased to $27.4 million at December 31, 1998, as compared to
$24.7 million at December 31, 1997. Interest-bearing deposits
increased $21.9 million, or 10.1%, at December 31, 1998, compared
to 1997. This growth was on all deposit products. Demand deposits
increased $3.8 million, or 10.4%, while statement and passbook
savings increased $3.6 million, or 9.1%. Additional growth was
obtained through certificates of deposit in excess of $100,000,
increasing by $6.3 million, or 20.5%, and other time certificates
increasing 8.2 million, or 7.4%.
CAPITAL RESOURCES
Total shareholders' equity increased from $27.3 million at
December 31, 1997 to $30.9 million at December 31, 1998.
Contributing to this was net income of $4.2 million, offset by
dividends paid of $1.6 million. Because of the dividend
reinvestment program, shareholders' equity increased $470,000 in
1998 and $377,000 in 1997. The Company also established a plan
whereby participants in the Company's 401(k) profit sharing plan
may elect under the plan to purchase and hold shares of the
Company's common stock in their accounts. Because of this plan,
equity increased $339,000 during 1997 and $469,000 in 1998. 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. An April 1998, two-for-one
stock split paid in the form of a 100% stock dividend resulted in
a shift of $8.3 million from retained earnings to common stock.
Banking regulations have established minimum capital ratios for
banks and bank holding companies. Therefore, 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 will
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 11 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, 1998, approximately $8.2 million
is available for payment of dividends by the Bank to the Company
under the most restrictive of these guidelines.
<PAGE>
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 $25.6 million at December 31, 1998, an increase of $11.3
million from year-end 1997. Net income, securities available for
sale and repayments and maturities of securities held to maturity
and loans serve as forms of liquidity. Cash and cash equivalents,
and securities maturing within one year represent 12.4% of total
assets at December 31, 1998, as compared to 11.6% at year-end
1997. 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, the
most significant investing activity for the Company is net loan
originations as management continues to seek strong loan growth.
Purchases of securities were generally made with funds received
from securities maturing throughout the year. In 1998, the
Company's primary financing activity was funds received through
deposit growth. This growth accounted for cash infusions of $24.5
million in 1998, $27.9 million in 1997 and $7.1 million in 1996.
YEAR 2000 ISSUE
Certain statements contained in this section of Management's
Discussion and Analysis of Financial Condition and Results of
Operations 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 involved 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 because 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.
<PAGE>
Many computer programs use only two digits to identify a year in
the date field and were apparently design 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 and technology, noninformation
technology and its outside vendors may be adversely affected by
the Year 2000 problems. Management has identified systems as
mission critical or nonmission critical. Vendors of all mission-
critical systems have been contacted regarding the status of the
renovation and validation of the systems. The Company has
completed testing approximately 40% of these mission-critical
systems as of December 31, 1998. The Company anticipates
completion of all testing on mission-critical applications by
March 31, 1999.
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 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.
Management established a budget of $250,000 for costs associated
with completing the comprehensive Year 2000 plan. This includes
hardware and software upgrades, testing, training and other out-
of-pocket expenses. The budget does not include in-house
personnel costs. Through December 31, 1998, the Company had
incurred $15,000 of operating expenses and $19,000 of capital
expenditures for Year 2000. In addition to these costs, the
Company has estimated it has incurred $65,000 of internal
personnel costs through December 31, 1998.
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.
These contingency plans will be based on the results of the above-
mentioned testing. The Company plans to complete the design of
contingency plans by June 30, 1999.
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The only significant market risk to which 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 exceed 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.
The Company monitors 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 1998. 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 estimated
sensitivity of the Company's annual net interest income to sudden
and sustained 100 basis-point changes in market interest rates at
December 31, 1998 and 1997:
<TABLE>
1998
Change in Net Interest Dollar Percentage
Interest Rates Income Change Change
(Dollars in Thousands)
<S> <C> <C> <C>
+200 $13,032 $ 861 7.1%
+100 12,841 670 5.5
0 12,171 0 0.0
-100 11,520 (651) (5.4)
-200 10,900 (1,271) (10.4)
</TABLE>
<TABLE>
1997
Change in Net Interest Dollar Percentage
Interest Rates Income Change Change
(Dollars in Thousands)
<S> <C> <C> <C>
+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)
/TABLE
<PAGE>
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 is 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company disclosed the estimated fair value of its financial
instruments at December 31, 1998 and 1997 in Note 13 to the
consolidated financial statements. Fair value of the Company's
financial instruments experienced modest changes in 1998 due to
the relatively stable interest-rate environment. Estimated fair
value of loans increased slightly to 100.6% of the carrying value
at December 31, 1998 from 99.8% of the carrying value at December
31, 1997. The fair value of securities held to maturity remained
relatively stable at 102.8% of carrying value at December 31,
1998, compared to 102.4% of carrying value at year-end 1997.
Estimated fair value of time deposits increased from 100.3% of
carrying value at December 31, 1997 to 100.7% at December 31,
1998.
ACCOUNTING STANDARDS
A new standard, "Accounting for Derivative Instruments and hedging
Activities" 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 offsetting changes n fair
value or cash flows. The new standard does not allow hedging of a
security which is classified as held to maturity. Upon adoption
of the standard, companies are allowed to transfer securities from
held to maturity to available for sale if they wish to be able to
hedge the securities in the future. The standard 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 of this standard to have a significant impact on the
Corporation's financial statements.
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.
<PAGE>
COMMON STOCK AND SHAREHOLDER INFORMATION
Common shares of the Company are not traded on an established
market. Shares are traded through broker/dealers under the symbol
"CSBB" and through private transactions. The table below
represents the range of high and low prices paid for transactions
known to the Company. Management does not have knowledge of
prices paid on all transactions. 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 April 1998 two-for-
one stock splits paid in the form of 100% stock dividends. The
chart also specifies cash dividends paid by the Company to its
shareholders during 1998 and 1997. 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 11 of the consolidated financial
statements.
Dividends
Quarter Ended High Low Declared
March 31, 1997 $22.25 $21.00 $220,904
June 30, 1997 22.75 20.00 221,227
September 30, 1997 25.00 21.42 221,902
December 31, 1997 32.50 25.00 653,759
March 31, 1998 50.00 27.50 263,477
June 30, 1998 60.00 32.50 263,824
September 30, 1998 65.00 50.00 264,097
December 31, 1998 60.00 47.00 792,626
As of December 31, 1998, CSB Bancorp, Inc. had approximately 1,000
shareholders and 2,648,041 outstanding shares of common stock.
TRANSFER AGENT
CSB Bancorp, Inc. acts as its own transfer agent for its common
stock.
Transfer agent:
Shirley J. Roberts
CSB Bancorp, Inc.
6 West Jackson Street
Millersburg, Ohio 44654
1-800-654-9015
<PAGE>
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
SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information.
<TABLE>
1998 1997 1996 1995 1994
(in thousands of dollars, except shares, per share data and
ratios)
<S> <C> <C> <C> <C> <C>
Statements of earnings:
Total interest income $ 23,404 $ 22,112 $ 19,480 $ 18,305 $ 13,654
Total interest expense 11,563 10,813 8,828 8,034 5,602
---------- ---------- ---------- ---------- ----------
Net interest income 11,841 11,299 10,652 10,271 8,052
Provisions for loan losses 1,051 400 400 515 300
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 10,790 10,899 10,252 9,756 7,752
Security gains 12 24 6
Other income 1,616 1,447 1,216 978 824
---------- ---------- ---------- ---------- ----------
Total noninterest income 1,616 1,447 1,228 1,002 830
Total noninterest
expenses 6,844 6,315 6,021 5,722 5,306
---------- ---------- ---------- ---------- ----------
Earnings before federal
income taxes 5,562 6,031 5,459 5,036 3,276
Federal income tax
expense(1) 1,331 1,624 1,600 1,444 821
Net earnings $ 4,231 $ 4,407 $ 3,859 $ 3,592 $ 2,455
<PAGE>
Per share of common stock(2)
Basic and diluted earnings $ 1.60 $ 1.69 $ 1.50 $ 1.41 $ .96
Dividends .60 .51 .42 .33 .25
Book value 11.65 10.35 9.05 7.92 6.69
Average basic common shares
outstanding(2) 2,637,011 2,604,914 2,577,044 2,558,004 2,553,600
Average diluted common shares
outstanding 2,637,956 2,605,852 2,577,044 2,558,004 2,553,600
Year-end balances:
Loans, net (includes held
for sale) $ 193,824 $ 177,327 $ 163,020 $ 150,789 $ 135,686
Securities 89,368 86,428 52,384 54,641 48,888
Total assets 317,502 288,442 254,135 233,210 204,407
Deposits 265,747 241,203 213,340 206,255 185,680
Borrowings 19,882 18,978 16,480 5,913 930
Shareholders' equity 30,860 27,275 23,426 20,343 17,078
Average balances:
Loans, net $ 184,746 $ 166,596 $ 155,298 $ 145,109 $ 130,032
Securities 82,406 77,318 50,129 49,698 44,620
Total assets 296,239 271,237 233,353 213,077 188,434
Deposits 246,961 227,192 199,609 191,919 169,792
Borrowings 18,440 17,312 10,632 1,563 1,777
Shareholders' equity 29,402 25,444 22,095 18,743 16,263
/TABLE
<PAGE>
<TABLE>
Year ended December 31,
1998 1997 1996 1995 1994
(in thousands of dollars, except shares, per share data and
ratios)
<S> <C> <C> <C> <C> <C>
Selected ratios:
Net yield on average
interest-bearing assets 4.20% 4.36% 4.79% 5.07% 4.53%
Return on average total
assets 1.43 1.62 1.65 1.69 1.30
Return on average
shareholders' equity 14.39 17.32 17.47 19.17 15.10
Average shareholders'
equity as a percent of
average total assets 9.93 9.38 9.47 8.80 8.63
Net loan charge-offs as
a percent of average
loans .27 .10 .07 .16 .04
Allowance for possible
loan losses as a percent
of loans at year-end 1.46 1.30 1.28 1.20 1.13
Shareholders' equity as
a percent of total year-
end assets 9.72 9.46 9.21 8.72 8.35
<FN>
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 $90,000 or $.04 per share.
(2) Restated for 1998 and 1996 stock splits paid in the form of
a 100% stock dividend.
</TABLE>
EXHIBIT 21
SUBSIDIARY OF CSB BANCORP, INC.
The Commercial and Savings Bank, Millersburg, Ohio, an Ohio-
chartered commercial bank (100% owned.)
EXHIBIT 23
CONSENT OF CROWE, CHIZEK AND COMPANY LLP
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the
prospectuses constituting part of the registration statements on
Form S-3 for the CSB Bancorp, Inc. Share Owner Dividend
Reinvestment Plan and on Form S-8 for The Commercial & Savings
Bank of Millersburg Profit Sharing and 401(k) Savings Retirement
Plan and Trust of our report dated January 14, 1999 on the
consolidated balance sheets of CSB Bancorp, Inc. as of December
31, 1998 and 1997 and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1998, which
report is included in this Form 10-K.
/S/ CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
March 26, 1999
EXHIBIT 24
POWERS OF ATTORNEY
WHEREAS, CSB BANCORP, INC., an Ohio corporation (the
"Company"), proposes to file with the Securities and Exchange
Commission, pursuant to the provisions of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder,
an Annual Report to Shareholders on Form 10-K ("Form 10-K"), with
respect to the Company's 1998 fiscal year; and
WHEREAS, the undersigned is [an Officer] [a Director] [a
Director and Officer] of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and
appoints Douglas D. Akins [her] [his] attorney in fact, for [her]
[him] and in [her] [his] name, place and stead and in [her] [his]
office and capacity with the Company, to execute and file such
Form 10-K and exhibits, and thereafter to execute and file any
amended Form 10-K, hereby giving and granting to said attorney
full power and authority to do and perform each and every act and
thing whatsoever requisite and necessary to be done in and about
the premises as fully to all intents and purposes as [she] [he]
might or could do if personally present at the doing thereof,
hereby ratifying and confirming all that said attorney may or
shall lawfully do or cause to be done by virtue hereof.
This authority hereby granted is limited to the execution and
delivery of such Form 10-K or amendment thereto, unless earlier
revoked by me or expressly extended by me in writing, shall remain
in force and effective only until such Form 10-K or any amendment
thereto is filed.
IN WITNESS WHEREOF, the undersigned has hereunto set [her]
[his] hand this _____ day of March 1999.
_________________________________
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,440
<INT-BEARING-DEPOSITS> 315
<FED-FUNDS-SOLD> 14,853
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,115
<INVESTMENTS-CARRYING> 62,253
<INVESTMENTS-MARKET> 63,982
<LOANS> 196,712
<ALLOWANCE> 2,888
<TOTAL-ASSETS> 317,502
<DEPOSITS> 265,747
<SHORT-TERM> 9,771
<LIABILITIES-OTHER> 1,014
<LONG-TERM> 10,111
0
0
<COMMON> 16,590
<OTHER-SE> 14,270
<TOTAL-LIABILITIES-AND-EQUITY> 317,502
<INTEREST-LOAN> 18,087
<INTEREST-INVEST> 4,668
<INTEREST-OTHER> 649
<INTEREST-TOTAL> 23,404
<INTEREST-DEPOSIT> 10,604
<INTEREST-EXPENSE> 11,563
<INTEREST-INCOME-NET> 11,841
<LOAN-LOSSES> 1,051
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,884
<INCOME-PRETAX> 5,561
<INCOME-PRE-EXTRAORDINARY> 4,231
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,231
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 4.20
<LOANS-NON> 571
<LOANS-PAST> 892
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,349
<CHARGE-OFFS> 568
<RECOVERIES> 56
<ALLOWANCE-CLOSE> 2,888
<ALLOWANCE-DOMESTIC> 2,468
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 420
</TABLE>
