-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
DdGdzkvzDVyTTtTLAN2FA3Yz7AlBmGlu9APAcvFgQ+Azr3S0oeqhBiQyxDErRSqK
XvfVwPVtFFSVBlp9SMIj2Q==
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, 1999 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 incorporation or organization) (I.R.S. Employer 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 21, 2000, the aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on a share price of $30.00 per share (such price being the last known price at
which shares were sold on such date) was $72.3 million. At March 21, 2000, there were outstanding 2,642,094 of the registrant's Common Shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's 1999 Annual Report to Shareholders (Parts I and II) Portions of Registrant's Definitive Proxy Statement for the April 12, 2000 Annual Meeting of
Shareholders (Part III). PART I ITEM 1 - DESCRIPTION OF BUSINESS General CSB Bancorp, Inc. (the "Company") was incorporated under the laws of the State of Ohio on
June 28, 1991, at the direction of management of The Commercial 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 both fixed and 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. 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. Employees At December 31, 1999, the Bank employed 133 employees, 111 of which were employed on a
full-time basis. The Company has no separate employees not also employed by the Bank. No
employees are covered by collective bargaining agreements. Management considers its
employee relations to be good. 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. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999
that, effective March 11, 2000, permits bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. The Gramm-Leach-Bliley Act may significantly
change the competitive environment in which the Company conducts business. See "Supervision
and Regulation" for further discussion. 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. As a bank holding company, the Company is subject to supervision,
regulation and periodic examination by the Federal Reserve Board. The earnings of the
Company and 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. Financial Modernization On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act which,
effective March 11, 2000, permits bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. A bank holding company may become a financial
holding company if each of its subsidiary banks is well capitalized under regulatory prompt
corrective action provisions, is well managed, and has at least a satisfactory rating under the
Community Reinvestment Act (CRA) by filing a declaration that the bank holding company
wishes to become a financial holding company. No regulatory approval will be required for a
financial holding company to acquire a company, other than a bank or savings association,
engaged in activities that are financial in nature or incidental to activities that are financial in
nature, as determined by the Federal Reserve Board. The Gramm-Leach-Bliley Act defines "financial in nature" to include securities underwriting,
dealing and market making; sponsoring mutual funds and investment companies; insurance
underwriting and agency; merchant banking activities; and activities that the Board has
determined to be closely related to banking. Subsidiary banks of a financial holding company
must continue to be well capitalized and well managed in order to continue to engage in activities
that are financial in nature without regulatory actions or restrictions, which could include
divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding
company or a bank may not acquire a company that is engaged in activities that are financial in
nature unless each of the subsidiary banks of the financial holding company or the bank has CRA
rating of satisfactory or better. 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 1999 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 18 of the CSB
Bancorp Inc. 1999 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 19 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, 1999, 1998
and 1997. 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, 1999: (In thousands of dollars) or Less Five Years Ten Years Ten Years
(in thousands of dollars)
1999
1998
1997 Securities available for sale (at fair value)
U.S. Treasury securities
$ 4,009
$10,115
$16,094 U.S. Government corporations and agencies
23,347
14,941
10,013 Mortgage-related securities
1,000
---
--- Other securities
2,188
2,059
1,935
$30,544
$27,115
$28,042 Securities held to maturity (at amortized cost)
U.S. Treasury securities
$ 3,105
$10,125
$15,122 U.S. Government corporations and agencies
20,499
9,501
7,540 Obligations of states and political subdivisions
51,239
42,627
35,723
$74,843
$62,253
$58,385
Maturing
After One
After Five
One Year
Year Through
Years Through
After
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield Available for sale
U.S. Treasury
$3,007
6.05%
$ 1,002
6.17%
U.S. Government
corporations and
agencies
999
6.00
22,348
5.67
Mortgage-related
$1,000
6.40% Total
$4,006
6.04%
23,350
5.69%
$1,000
6.40% Held to maturity
U.S. Treasury
$3,003
6.26%
$102
7.70% U.S. Government
corporations and
agencies
999
6.18
$19,500
5.73%
Obligations of states
and political
subdivisions
1,355
6.15
17,898
4.53
$31,068
4.87%
918
5.01 Total
$5,357
6.22%
$37,398
5.16%
$31,068
4.87%
$1,020
5.28%
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, 1999.
III. Loan Portfolio
A. Types of Loans - Total loans on the balance sheet are comprised of the following classifications at December 31:
(In thousands of dollars) | 1999 | 1998 | 1997 | 1996 | 1995 |
Commercial | $86,186 | $86,971 | $80,428 | $72,917 | $67,836 |
Commercial real estate | 35,690 | 33,137 | 30,408 | 22,991 | 22,858 |
Residential real estate | 31,511 | 33,685 | 49,752 | 50,874 | 43,995 |
Residential real estate loans held for sale | 20,533 | 23,636 | --- | --- | --- |
Construction | 7,447 | 3,155 | 3,508 | 3,249 | 2,477 |
Installment and credit card | 17,645 | 16,992 | 16,393 | 15,110 | 15,453 |
Total loans | $199,012 | $197,576 | $180,489 | $165,141 | $152,619 |
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, 1999:
Maturing |
||||
(In thousands of dollars) | One Year or Less | One Through Five Years | After Five Years |
Total |
Commercial | $38,099 | $14,403 | $33,684 | $86,186 |
Commercial real estate | 2,667 | 2,765 | 30,258 | 35,690 |
Construction | 192 | 250 | 7,005 | 7,447 |
Total | $40,958 | $17,418 | $70,947 | $129,323 |
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, 1999.
(In thousands of dollars) | Fixed Rate | Variable Rate |
Total commercial, commercial real estate and construction loans due after one year | $28,236 | $60,129 |
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The following schedule summarizes nonaccrual, past due and restructured loans.
December 31
(In thousands of dollars) | 1999 | 1998 | 1997 | 1996 | 1995 |
(a) Loans accounted for on a
nonaccrual basis |
$ 529 | $ 567 | $ 494 | $ 174 | $ 228 |
(b) Accruing loans which are contractually past due 90 days or more as to interest or principal payments | 1,008 | 890 | 746 | 573 | 343 |
(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 | $1,537 | $1,457 | $1,240 | $ 747 | $ 571 |
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) | 1999 | 1998 | 1997 |
Balance of impaired loans at December 31 | $2,544 | $1,454 | $1,384 |
Less portion for which no allowance for loan loss is allocated | 562 | 142 | --- |
Portion of impaired loan balance for which an allowance for loan losses is allocated | 1,982 | 1,312 | 1,384 |
Portion of allowance for loan losses allocated to the impaired loan balance at December 31 | 485 | 412 | 437 |
Interest income recognized on impaired loans during the year represented $178,000 while $211,000 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, 1999, 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, 1999, 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, 1999, there are no other interest-bearing assets required to be disclosed under Item III.C.1. or 2. if such assets were loans.
IV. Summary Of Loan Loss Experience
A. The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31:
(In thousands of dollars) | 1999 | 1998 | 1997 | 1996 | 1995 |
LOANS | |||||
Average loans outstanding during period | $191,112 | $187,198 | $168,823 | $157,274 | 146,816 |
ALLOWANCE FOR LOAN LOSSES | |||||
Balance at beginning of period | 2,888 | 2,349 | 2,121 | 1,830 | 1,558 |
Loans charged off: | |||||
Commercial | (417) | (350) | (37) | (11) | (59) |
Commercial real estate | (0) | (37) | (0) | (0) | (113) |
Residential real estate | (4) | (76) | (0) | (0) | (0) |
Installment and credit card | (184) | (105) | (187) | (125) | (121) |
Total loans charged off | (605) | (568) | (224) | (136) | (293) |
Recoveries of loans previously charged off: | |||||
Commercial | 7 | 1 | 2 | 2 | 12 |
Commercial real estate | 0 | 0 | 0 | 0 | 0 |
Residential real estate | 1 | 15 | 9 | 0 | 0 |
Installment | 28 | 40 | 41 | 25 | 38 |
Total loan recoveries | 36 | 56 | 52 | 27 | 50 |
Net loans charged off | (569) | (512) | (172) | (109) | (243) |
Provision charged to operating expense | 1,100 | 1,051 | 400 | 400 | 515 |
Balance at end of period | 3,419 | 2,888 | 2,349 | 2,121 | 1,830 |
Ratio of net charge-offs to average loans outstanding for period | .30% | .27% | .10% | .07% | .17% |
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.
Allocation of the Allowance for Loan Losses
(In thousands of dollars) |
Allowance Amount |
Percentage of Loans in Each Category to Total Loans |
Allowance Amount |
Percentage of Loans in Each Category to Total Loans |
Allowance Amount |
Percentage of Loans in Each Category to Total Loans |
December 31, 1999 | December 31, 1998 | December 31, 1997 | ||||
Commercial | $1,114 | 43.31% | $1,181 | 44.02% | $719 | 44.67% |
Commercial real estate | 863 | 17.93 | 748 | 16.77 | 465 | 16.92 |
Residential real estate | 773 | 26.15 | 302 | 29.01 | 245 | 27.30 |
Construction | 0 | 3.74 | 0 | 1.60 | 0 | 1.95 |
Installment and credit card | 317 | 8.87 | 237 | 8.60 | 141 | 9.16 |
Unallocated | 352 | 420 | 779 | |||
Total | $3,419 | 100.00% | $2,888 | 100.00% | $2,349 | 100.00% |
Allowance Amount | Percentage of Loans in Each Category to Total Loans | Allowance Amount | Percentage of Loans in Each Category to Total Loans | |
December 31, 1996 | December 31, 1995 | |||
Commercial | $634 | 44.15% | $497 | 44.45% |
Commercial real estate | 425 | 13.92 | 551 | 14.98 |
Residential real estate | 109 | 30.81 | 148 | 28.83 |
Construction | 0 | 1.97 | 0 | 1.62 |
Installment and credit card | 139 | 9.15 | 219 | 10.12 |
Unallocated | 814 | 415 | ||
Total | $2,121 | 100.00% | $1,830 | 100.00% |
V. Deposits
A. The following is a schedule of average deposit amounts and average rates paid on each category for the periods indicated:
Average
Amounts Outstanding Year ended December 31 |
Average
Rate Paid Year ended December 31 | |||||
1999 | 1998 | 1997 | 1999 | 1998 | 1997 | |
(In thousands of dollars) | ||||||
Noninterest-bearing demand | $ 26,303 | $ 23,813 | $ 20,920 | N/A | N/A | N/A |
Interest-bearing demand deposits | 40,313 | 35,541 | 35,148 | 2.01% | 2.02% | 1.99% |
Savings deposits | 39,945 | 41,056 | 35,559 | 3.10 | 3.44 | 3.47 |
Time deposits | 162,320 | 146,551 | 135,565 | 5.43 | 5.78 | 5.82 |
Total deposits | $268,881 | $246,961 | $227,192 |
D. The following is a schedule of maturities of time certificates of deposit in amounts of $100,000 or more as of December 31, 1999:
(In thousands of dollars) | |
Three months or less | $14,172 |
Over three through six months | 9,031 |
Over six through twelve months | 13,838 |
Over twelve months | 6,284 |
Total | $43,325 |
C. and E. There were no foreign deposits in any period presented.
VI. Return On Equity and Assets
1999 | 1998 | 1997 | |
Return on average assets | 1.32% | 1.43% | 1.62% |
Return on average shareholders' equity | 13.14 | 14.39 | 17.32 |
Dividend payout ratio | 43.51 | 37.45 | 29.88 |
Average shareholders' equity to average assets | 10.08 | 9.93 | 9.38 |
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, 1999, 1998 and 1997 were less than 30 percent of shareholders' equity at December 31, 1999, 1998 and 1997.
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:
The Berlin Branch, 4585 S. R. 39, Suite B, Berlin, Ohio 44610 (leased)
The South Clay Branch, 91 S. Clay Street, Millersburg, Ohio 44654 (owned)
The Winesburg Branch, 2225 U.S. 62, Winesburg, Ohio 44590 (owned)
The Clinton Commons Branch, 2101 Glen Drive, Millersburg, Ohio 44654 (leased)
The Walnut Creek Branch, 4980 Old Pump Street, Walnut Creek, Ohio 44687 (owned)
The Charm Office, Corner of S.R. 557 and C.R. 70, Charm, Ohio 44617 (leased)
The Sugarcreek Office, 127 S. Broadway, Sugarcreek, Ohio 44681 (owned)
The Operations Center, 91 North Clay Street, Millersburg, Ohio 44654 (owned)
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 1999.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information contained in the section captioned "Common Stock and Shareholder Information" on page 27 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 15 and 16 of the Annual Report is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Information contained in the section captioned "1999 Financial Review" on pages 14 through 26, 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 24 and 25 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 28 through 45, 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 3 through 5 of the Company's proxy statement for the Company's 2000 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on March 10, 2000 (the "Proxy Statement") and information contained in the section captioned "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 3 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 6 and 7 of the Proxy Statement, the section captioned "EXECUTIVE COMPENSATION" on page 8 of the Proxy Statement and the section captioned "PERFORMANCE GRAPH" on page 9 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 page 2 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 10 of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 (incorporated by reference to Registrant's 1998 Form 10-K) |
3.2 | Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB) |
4 | Form of Certificate of Common Shares of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB) |
10 | Leases for the Clinton Commons, Berlin and Charm Branch Offices of The Commercial and Savings Bank (incorporated by reference to Registrant's Form 10-SB) |
11 | Statement Regarding Computation of Per Share Earnings |
13 | Excerpts of CSB Bancorp, Inc. 1999 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.
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 25, 2000.
Signatures | Title |
DOUGLAS D. AKINS*
Douglas D. Akins* |
President and Chief Executive Officer
(Principal Executive Officer) |
A. LEE MILLER*
A. Lee Miller* |
Senior Vice President and
Chief Financial Officer |
PAMELA S. BASINGER*
Pamela S. Basinger* |
Financial Officer and Principal
Accounting Officer |
DAVID W. KAUFMAN*
David W. Kaufman* |
Director |
J. THOMAS LANG*
J. Thomas Lang* |
Director |
H. RICHARD MAXWELL*
H. Richard Maxwell* |
Director |
DANIEL J. MILLER*
Daniel J. Miller* |
Director |
SAMUEL P. RIGGLE, JR.*
Samuel P. Riggle, Jr.* |
Director |
DAVID C. SPRANG*
David C. Sprang* |
Director |
SAMUEL M. STEIMEL*
Samuel M. Steimel* |
Director |
F. JOANNE VINCENT*
F. Joanne Vincent* |
Director |
*By: /s/DOUGLAS D. AKINS
Douglas D. Akins
as attorney-in-fact and on his own behalf
as Principal Executive Officer
INDEX TO EXHIBITS
Exhibit Number |
Description of Documents |
Sequential 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 (incorporated by reference to Registrant's 1998 Form 10-K). | N/A |
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 | 18 |
13 | Excerpts of the CSB Bancorp, Inc. 1999 Annual Report to Shareholders | 19 |
21 | Subsidiary of CSB Bancorp, Inc. | 54 |
23 | Consent of Crowe, Chizek and Company LLP | 55 |
24 | Powers of Attorney | 56 |
27 | Financial Data Schedule | N/A |
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Years ended December 31, | |||
1999 | 1998 | 1997 | |
Average basic common shares outstanding | 2,651,910 | 2,637,012 | 2,604,914 |
Average diluted common shares outstanding | 2,652,836 | 2,637,956 | 2,605,852 |
Net income | $4,266,286 | $4,230,644 | $4,407,200 |
Basic and diluted earnings per common share | $1.61 | $1.60 | $1.69 |
EXHIBIT 13
EXCERPTS OF CSB BANCORP, INC. 1999 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, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of three years in the period ended December 31, 1999. 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, 1999 and 1998, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
/S/ CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
January 14, 2000
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 | 1998 | |
ASSETS | ||
Cash and noninterest-earning deposits with banks | $ 10,525,878 | $ 10,440,120 |
Interest-earning demand deposits with banks | 257,199 | 315,067 |
Federal funds sold | 2,484,000 | 14,853,000 |
Total cash and cash equivalents | 13,267,077 | 25,608,187 |
Securities available for sale, at fair value | 30,544,038 | 27,115,456 |
Securities held to maturity (Fair values of $73,631,014 in 1999 and $63,981,883 in 1998) | 74,843,191 | 62,252,682 |
Total loans | 198,280,304 | 196,711,716 |
Less allowance for loan losses | (3,418,797) | (2,887,721) |
Loans, net | 194,861,507 | 193,823,995 |
Premises and equipment, net | 8,941,975 | 5,372,876 |
Accrued interest receivable and other assets | 4,088,680 | 3,328,722 |
Total assets | $326,546,468 | $317,501,918 |
LIABILITIES | ||
Deposits | ||
Noninterest-bearing | $29,047,575 | $27,359,102 |
Interest bearing | 240,891,867 | 238,387,456 |
Total deposits | 269,939,442 | 265,746,558 |
Securities sold under repurchase agreements | 12,835,554 | 9,770,519 |
Federal Home Loan Bank borrowings | 9,709,831 | 10,111,119 |
Accrued interest payable and other liabilities | 859,963 | 1,013,623 |
Total liabilities | 293,344,790 | 286,641,819 |
SHAREHOLDERS' EQUITY |
||
Common stock, $6.25 par value: 9,000,000 shares authorized; 1999 - 2,667,791 shares issued; 1998 - 2,654,441 shares issued | 16,673,693 | 16,590,255 |
Additional paid-in capital | 6,387,800 | 5,963,191 |
Retained earnings | 10,702,853 | 8,292,636 |
Treasury stock at cost: 1999 - 8,807 shares; 1998 - 6,400 shares | (173,802) | (56,000) |
Accumulated other comprehensive income | (388,866) | 70,017 |
Total shareholders' equity | 33,201,678 | 30,860,099 |
Total liabilities and shareholders' equity | $326,546,468 | $317,501,918 |
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
1999 |
1998 |
1997 | |
Interest income | |||
Loans, including fees | $17,714,902 | $18,087,424 | 16,798,385 |
Taxable securities | 3,078,731 | 2,744,169 | 3,119,155 |
Nontaxable securities | 2,308,239 | 1,923,459 | 1,456,779 |
Other | 605,154 | 648,931 | 737,669 |
Total interest income | 23,707,026 | 23,403,983 | 22,111,988 |
Interest expense | |||
Deposits | 10,869,276 | 10,603,600 | 9,828,445 |
Other | 812,866 | 959,335 | 984,142 |
Total income expense | 11,682,142 | 11,562,935 | 10,812,587 |
Net interest income | 12,024,884 | 11,841,048 | 11,299,401 |
Provision for loan losses | 1,100,055 | 1,050,979 | 400,063 |
Net interest income after provision for loan losses | 10,924,829 | 10,790,069 | 10,899,338 |
Other income | |||
Service charges on deposit accounts | 772,133 | 716,992 | 685,369 |
Merchant fees | 241,538 | 165,144 | 117,990 |
Trust services | 302,586 | 211,878 | 108,735 |
Other income | 432,838 | 351,969 | 314,897 |
Gain on sale of loans | 308,424 | 14,378 | 220,200 |
Security gains | 6,369 | 64 | 46 |
Gain on sale of other real estate owned | 155,134 | ||
Total other income | 2,063,888 | 1,615,559 | 1,447,237 |
Other expenses | |||
Salaries and employee benefits | 3,911,510 | 3,438,817 | 3,203,405 |
Occupancy expense | 423,609 | 324,900 | 314,932 |
Equipment expense | 397,319 | 484,672 | 462,890 |
Office supplies | 200,316 | 187,136 | 176,785 |
State franchise tax | 353,523 | 382,359 | 343,239 |
Other expenses | 2,287,214 | 2,026,315 | 1,813,723 |
Total other expenses | 7,573,491 | 6,844,199 | 6,314,974 |
Income before income taxes | 5,415,226 | 5,561,429 | 6,031,601 |
Provision for income taxes | 1,148,940 | 1,330,785 | 1,624,401 |
Net income | $4,266,286 | $4,230,644 | $4,407,200 |
Basic and diluted earnings per common share | $1.61 | $1.60 | $1.69 |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income | Total Shareholders' Equity | |
Balance, January 1, 1997 | $ 8,114,826 | $4,520,502 | $10,818,500 | $(56,000) | $ 28,652 | $23,426,480 |
Comprehensive income | ||||||
Net income | 4,407,200 | 4,407,200 | ||||
Other comprehensive income, net of tax | 41,830 | 41,830 | ||||
Total comprehensive income | 4,449,030 | |||||
Common stock issued: | ||||||
Under dividend reinvestment program | 48,711 | 328,701 | 377,412 | |||
Under 401(k) plan | 52,654 | 286,696 | 339,350 | |||
Cash dividends declared ($.505 per share) | (1,317,792) | (1,317,792) | ||||
Balance, December 31, 1997 | 8,216,191 | 5,135,899 | 13,907,908 | (56,000) | 70,482 | 27,274,480 |
Comprehensive income | ||||||
Net income | 4,230,644 | 4,230,644 | ||||
Other comprehensive income, net of tax | (465) | (465) | ||||
Total comprehensive income | 4,230,179 | |||||
Common stock issued: | ||||||
Under dividend reinvestment program | 56,153 | 414,238 | 470,391 | |||
Under 401(k) plan | 56,433 | 413,054 | 469,487 | |||
Cash dividends declared ($.60 per share) | (1,584,438) | (1,584,438) | ||||
Stock split (100% stock dividend) | 8,261,478 | (8,261,478) | ||||
Balance, December 31, 1998 | 16,590,255 | 5,963,191 | 8,292,636 | (56,000) | 70,017 | 30,860,099 |
Comprehensive income | ||||||
Net income | 4,266,286 | 4,266,286 | ||||
Other comprehensive income, net of tax | (458,883) | (458,883) | ||||
Total comprehensive income | 3,807,403 | |||||
Common stock issued: | ||||||
Under dividend reinvestment program | 69,199 | 328,607 | 397,806 | |||
Under 401(k) plan | 14,239 | 96,002 | 110,241 | |||
Cash dividends declared ($.70 per share) | (1,856,069) | (1,856,069) | ||||
Purchase of 2,407 treasury shares | (117,802) | (117,802) | ||||
Balance, December 31, 1999 | $16,673,693 | $6,387,800 | $10,702,853 | $(173,802) | $(388,866) | $33,201,678 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
1999 | 1998 | 1997 | |
Cash flows from operating activities | |||
Net income | $ 4,266,286 | $ 4,230,644 | $ 4,407,200 |
Adjustments to reconcile net income to net cash from operating activities | |||
Security amortization and accretion | 88,697 | (50,335) | (40,711) |
Depreciation | 360,121 | 398,058 | 385,148 |
Gain on sale of other real estate owned | (155,134) | ||
Gain on sale of loans | (308,424) | (14,378) | (220,200) |
Loan sale proceeds | 13,501,374 | 1,514,878 | |
Originations of loans held for sale | (10,195,992) | (7,140,639) | |
Investment security gains | (6,369) | (64) | (46) |
FHLB stock dividends | (129,600) | (123,900) | (113,300) |
Provision for loan losses | 1,100,055 | 1,050,979 | 400,063 |
Deferred income taxes | 53,573 | (136,000) | 1,763 |
Changes in | |||
Net deferred loan fees | 132,606 | (51,812) | 85,415 |
Accrued interest receivable | (112,113) | 413,825 | (942,064) |
Accrued interest payable | (7,820) | 23,691 | 33,255 |
Other assets and liabilities | (436,153) | (33,351) | 81,924 |
Net cash from operating activities | 8,306,241 | (73,538) | 4,078,447 |
Cash flows from investing activities | |||
Net change in time deposits with financial institutions | 3,000,000 | ||
Securities available for sale | |||
Proceeds from maturities and repayments | 11,013,639 | 12,056,364 | 11,000,000 |
Purchases | (16,024,022) | (10,952,355) | (23,952,022) |
Securities held to maturity | |||
Proceeds from maturities and repayments | 9,932,898 | 10,026,163 | 12,161,211 |
Purchases | (21,589,616) | (13,896,868) | (33,035,725) |
Loan sale proceeds | 10,766,167 | ||
Loan originations, net of payments | (5,586,843) | (11,855,820) | (25,338,195) |
Property and equipment expenditures | (3,784,214) | (2,169,680) | (1,423,186) |
Proceeds from sale of other real estate | 336,134 | ||
Net cash from investing activities | (26,038,158) | (13,456,062) | (49,821,750) |
Cash flows from financing activities | |||
Net increase in deposits | 4,192,884 | 24,543,289 | 27,863,685 |
Net increase in securities sold under repurchase agreements | 3,065,035 | 2,479,760 | 2,552,586 |
Advances on FHLB borrowings | 1,000,000 | 1,289,309 | |
Principal reductions on FHLB borrowings | (1,401,288) | (1,575,744) | (1,343,961) |
Shares issued for 401(k) plan | 110,241 | 469,487 | 339,350 |
Purchase of treasury shares | (117,802) | ||
Cash dividends paid | (1,458,263) | (1,114,047) | (940,380) |
Net cash from financing activities | 5,390,807 | 24,802,745 | 29,760,589 |
Net change in cash and cash equivalents | (12,341,110) | 11,273,145 | (15,982,714) |
Cash and cash equivalents at beginning of year | 25,608,187 | 14,335,042 | 30,317,756 |
Cash and cash equivalents at end of year | $13,267,077 | $25,608,187 | $14,335,042 |
Cash paid during the year for: | |||
Interest | $11,689,962 | $11,539,244 | $10,779,000 |
Income taxes | 1,363,000 | 1,385,000 | 1,751,000 |
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.
Business Segments: 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.
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 include cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions. In 1998, the Corporation transferred $17,996,000 of loans from the residential real estate portfolio to the residential real estate loans held for sale portfolio.
Cash Reserve Requirements: The Company is required by the Federal Reserve to maintain reserves consisting of cash on hand and noninterest-earning balances on deposit with the Federal Reserve Bank. The required reserve balance at December 31, 1999 and 1998 was $3,346,000 and $2,663,000.
Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in shareholders' equity, net of tax. 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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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's useful lives on a straight-line basis.
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 $69,000 and $0 at December 31, 1999 and 1998.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 basis 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.
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:
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1999 | 1998 | 1997 | |
Weighted average common shares outstanding (basic) | 2,651,910 | 2,637,012 | 2,604,914 |
Dilutive effect of assumed exercise of stock options | 926 | 944 | 938 |
Weighted average common shares outstanding (diluted) | 2,652,836 | 2,637,956 | 2,605,852 |
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.
New Accounting Pronouncements: Beginning January 1, 2001, 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 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 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.
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.
NOTE 2 - SECURITIES
Year-end securities are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |
1999 | ||||
Available for sale | ||||
U.S. Treasury securities | $4,005,693 | $3,420 | $ (90) | $4,009,023 |
Obligations of U.S. government corporations and agencies | 23,939,139 | 1,112 | (593,482) | 23,346,769 |
Mortgage-related securities | 1,000,000 | (154) | 999,846 | |
Total debt securities | 28,944,832 | 4,532 | (593,726) | 28,355,638 |
Other securities | 2,188,400 | 2,188,400 | ||
Total securities available for sale | $31,133,232 | $4,532 | $(593,726) | $30,544,038 |
Held to maturity | ||||
U.S. Treasury securities | $3,104,636 | $15,309 | $3,119,945 | |
Obligations of U.S. government corporations and agencies | 20,499,017 | $(569,065) | 19,929,952 | |
Obligations of states and political subdivisions | 51,239,538 | 228,859 | (887,280) | 50,581,117 |
Total securities held to maturity | $74,843,191 | $244,168 | $(1,456,345) | $73,631,014 |
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 |
The amortized cost and fair value of debt securities at year-end 1999, by contractual maturity, are shown below.
Amortized Cost | Fair Value | |
Available for sale | ||
Due in one year or less | $4,004,172 | $4,005,895 |
Due after one through five years | 23,940,660 | 23,349,897 |
Mortgage-related securities | 1,000,000 | 999,846 |
Total debt securities available for sale | $28,944,832 | $28,355,638 |
Held to maturity | ||
Due in one year or less | $5,357,229 | $5,378,004 |
Due after one year through five years | 37,397,599 | 36,658,432 |
Due after five years through ten years | 31,068,036 | 30,583,241 |
Due after ten years | 1,020,327 | 1,011,337 |
Total debt securities held to maturity | $74,843,191 | $73,631,014 |
No securities were sold during any period presented. Securities called or settled by the issuer resulted in gains of $6,369, $64, and $46 in 1999, 1998 and 1997.
Securities with a carrying value of approximately $58,704,000 and $52,830,000 were pledged as of December 31, 1999 and 1998, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.
NOTE 3 - LOANS
Year-end loans are as follows.
1999 | 1998 | |
Commercial | $ 86,185,570 | $ 86,971,202 |
Commercial real estate | 35,690,254 | 33,136,841 |
Residential real estate | 31,511,348 | 33,684,743 |
Residential real estate loans held for sale | 20,533,301 | 23,636,259 |
Installment and credit card | 17,644,690 | 16,992,208 |
Construction | 7,446,805 | 3,154,733 |
Subtotal | 199,011,968 | 197,575,986 |
Less: Allowance for loan losses | (3,418,797) | (2,887,721) |
Net deferred loan fees | (731,664) | (864,270) |
Loans, net | $194,861,507 | $193,823,995 |
Activity in the allowance for loan losses for the year was as follows.
1999 | 1998 | 1997 | |
Beginning balance | $2,887,721 | $2,349,039 | $2,120,845 |
Provision for loan losses | 1,100,055 | 1,050,979 | 400,063 |
Loans charged off | (605,149) | (568,597) | (223,945) |
Recoveries | 36,170 | 56,300 | 52,076 |
Ending balance | $3,418,797 | $2,887,721 | $2,349,039 |
Impaired loans were as follows.
1999 | 1998 | |
Year-end loans with no allowance for loan losses allocated | $562,088 | $141,509 |
Year-end loans with allowance for loan losses allocated | 1,982,472 | 1,453,837 |
Amount of the allowance allocated | 484,853 | 412,284 |
Average of impaired loans during the year | 2,857,586 | 1,608,251 |
Interest income recognized during impairment | 177,864 | 92,014 |
Cash-basis interest income recognized | 168,045 | 71,888 |
Nonperforming loans, including certain impaired loans and smaller-balance homogenous loans such as residential mortgage and consumer loans that are collectively evaluated for impairment, were as follows at year-end.
1999 | 1998 | |
Loans past due over 90 days still accruing interest | $1,008,000 | $890,000 |
Nonaccrual loans | 529,000 | 567,000 |
Loans serviced for others totaled $23,512,000 at year-end 1999 and $15,089,000 at year-end 1998.
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment are as follows.
1999 | 1998 | |
Land and improvements | $1,135,883 | $ 990,877 |
Buildings and improvements | 8,218,472 | 3,477,490 |
Furniture and equipment | 3,673,452 | 3,000,397 |
Leasehold improvements | 79,978 | 79,978 |
Facilities under construction | 1,629,823 | |
Total | 13,107,785 | 9,178,565 |
Accumulated depreciation | (4,165,810) | (3,805,689) |
Premises and equipment, net | $8,941,975 | $5,372,876 |
The Bank leases certain office locations. Total rental expense under these leases was $81,945 in 1999, $94,154 in 1998, and $90,674 in 1997. Future minimum-lease payments are not material.
NOTE 5 - INTEREST-BEARING DEPOSITS
Interest-bearing deposits at year-end are as follows.
1999 | 1998 | |
Demand | $ 43,055,596 | $ 40,653,899 |
Statement and passbook savings | 37,507,777 | 42,808,891 |
Certificates of deposit: | ||
In excess of $100,000 | 43,325,094 | 36,935,960 |
Other | 117,003,400 | 117,988,706 |
Total | $240,891,867 | $238,387,456 |
At year-end 1999, stated maturities of time deposits were as follows.
2000 | $125,771,068 |
2001 | 22,225,070 |
2002 | 6,390,299 |
2003 | 5,199,499 |
2004 | 742,558 |
Total | $160,328,494 |
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 1999 and 1998, 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.
2000 | $1,248,327 |
2001 | 2,107,807 |
2002 | 981,957 |
2003 | 869,268 |
2004 | 435,130 |
Thereafter | 4,067,342 |
$9,709,831 |
At December 31, 1999, the FHLB borrowings are collateralized by the Company's FHLB stock owned and $14,565,000 of qualifying mortgage loans. Based upon the amount of FHLB stock owned, the Bank has the ability to obtain up to $38 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.
1999 | 1998 | |
Average balance during the year | $ 9,932,976 | $ 7,787,240 |
Average interest rate during the year | 3.10% | 3.54% |
Maximum month-end balance during the year | $13,874,000 | $10,137,000 |
NOTE 7 - INCOME TAXES
The provision for income taxes was as follows.
1999 | 1998 | 1997 | |
Current | $1,095,367 | $1,466,785 | $1,622,638 |
Deferred | 53,573 | (136,000) | 1,763 |
Total income tax provision | $1,148,940 | $1,330,785 | $1,624,401 |
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:
1999 | 1998 | 1997 | |
Income taxes computed at the statutory federal tax rate | $1,841,177 | $1,890,886 | $2,050,744 |
Add (subtract) tax effect of tax exempt interest income | (790,141) | (659,445) | (494,561) |
Nondeductible interest expense | 113,760 | 99,699 | 72,695 |
Other | (15,856) | (354) | (4,477) |
Total income tax provision | $1,148,940 | $1,330,786 | $1,624,401 |
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.
1999 | 1998 | 1997 | |
Allowance for loan losses | $1,009,669 | $829,103 | $645,951 |
Deferred loan fees | 1,517 | 19,678 | 72,246 |
Unrealized loss on securities available for sale | 200,324 | ||
Other | 33,866 | 131,380 | 124,614 |
Deferred tax asset | 1,245,376 | 980,161 | 842,811 |
Accretion | (15,679) | (38,505) | (51,294) |
Depreciation | (86,160) | (14,438) | (36,171) |
FHLB stock dividend | (159,154) | (114,308) | (71,808) |
Unrealized gain on securities available for sale | (36,070) | (36,309) | |
Other | (39,015) | (14,293) | (20,921) |
Deferred tax liability | (300,008) | (217,614) | (216,503) |
Net deferred tax asset | $945,368 | $762,547 | $626,308 |
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 1999, 1998 and 1997 was $93,000, $116,000 and $113,000.
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, 1,200 of the options were exercisable on December 31, 1999 with the remaining 600 becoming exercisable on January 1, 2000. Expense recorded for the options is not material. The options outstanding have a remaining contractual life of seven 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, 1998 and 1999, 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.
1999 |
1998 | |||
Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | |
Commitments to make loans (at market rates) | $ 342,570 | $ 3,546,000 | $1,230,165 | $ 1,326,760 |
Unused lines of credit and letters of credit | 2,433,226 | 40,671,438 | 3,105,699 | 28,532,674 |
Commitments to make loans are generally made for periods of 60 days or less. The fixed-rate loan commitment has an interest rate of 9.75% at year-end 1999.
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 1999.
Balance at January 1, 1999 | $2,683,609 |
New loans and advances | 1,616,000 |
Repayments | (1,974,980) |
Other changes | (61,614) |
Balance at December 31, 1999 | $2,263,015 |
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 1999 and 1998 were $2,837,837 and $4,079,973.
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.
At year-end, the capital requirements were met. Actual capital levels, in thousands, and minimum required levels were:
Actual |
Minimum Required for Capital Adequacy Purposes |
Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations | ||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |
1999 | ||||||
Total capital (to risk-weighted assets) | ||||||
Consolidated | $36,257 | 16.99% | $17,076 | 8.0% | $21,345 | 10.0% |
Bank | 33,322 | 15.69 | 16,988 | 8.0 | 21,235 | 10.0 |
Tier 1 capital (to risk-weighted assets) | ||||||
Consolidated | 33,580 | 15.73 | 8,538 | 4.0 | 12,807 | 6.0 |
Bank | 30,658 | 14.44 | 8,494 | 4.0 | 12,741 | 6.0 |
Tier 1 capital (to average assets) | ||||||
Consolidated | 33,580 | 10.30 | 13,041 | 4.0 | 16,301 | 5.0 |
Bank | 30,658 | 9.42 | 13,017 | 4.0 | 16,271 | 5.0 |
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 |
Amount | Ratio | Amount | Ratio | Amount | Ratio | |
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 |
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-years 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 $7.8 million at December 31, 1999.
NOTE 12 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Following are condensed parent company financial statements.
Year-end Condensed Balance Sheets
1999 | 1998 | |
Assets: | ||
Cash deposited with subsidiary | $2,335,796 | $1,984,849 |
Investment in subsidiary | 30,279,728 | 28,311,026 |
Securities held to maturity | 498,181 | 497,993 |
Other assets | 87,973 | 66,231 |
Total assets | $33,201,678 | $30,860,099 |
Equity | $33,201,678 | $30,860,099 |
Condensed Statements of Income
1999 | 1998 | 1997 | |
Interest on securities | $ 24,837 | $ 24,837 | $ 20,356 |
Dividends from subsidiary | 1,856,069 | 1,584,231 | 1,817,792 |
Other income | 6,010 | ||
Total income | 1,880,906 | 1,609,068 | 1,844,158 |
Operating expenses | 63,948 | 92,536 | 80,043 |
Income before taxes and equity in undistributed earnings of subsidiary | 1,816,958 | 1,516,532 | 1,764,115 |
Income tax benefit | 21,742 | 13,568 | |
Equity in undistributed earnings of subsidiary | 2,427,586 | 2,714,112 | 2,629,517 |
Net income | $4,266,286 | $4,230,644 | $4,407,200 |
Condensed Statements of Cash Flows
1999 | 1998 | 1997 | |
Cash flows from operating activities | |||
Net income | $4,266,286 | $4,230,644 | $4,407,200 |
Adjustments to reconcile net income to cash provided by operations | |||
Security accretion | (187) | (187) | |
Equity in undistributed income of subsidiary | (2,427,586) | (2,714,112) | (2,629,517) |
Change in other assets | (21,742) | (1,134) | |
Net cash from operating activities | 1,816,771 | 1,516,345 | 1,776,549 |
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 | 110,241 | 469,487 | 339,350 |
Purchase of treasury shares | (117,802) | ||
Cash dividends paid | (1,458,263) | (1,114,047) | (940,380) |
Net cash from financing activities | (1,465,824) | (644,560) | (601,030) |
Net change in cash | 350,947 | 861,608 | 623,713 |
Cash at beginning of year | 1,984,849 | 1,123,241 | 499,528 |
Cash at end of year | $2,335,796 | $1,984,849 | $1,123,241 |
NOTE 13 - OTHER COMPREHENSIVE INCOME
Other comprehensive income is summarized as follows:
1999 | 1998 | 1997 | |
Unrealized holding gains (losses) on available-for-sale securities | $(694,299) | $(639) | $63,425 |
Less reclassification adjustment for losses (gains) recognized in income | (983) | (64) | (46) |
Net unrealized holding gains (losses) | (695,282) | (703) | 63,379 |
Tax effect | 236,399 | 238 | (21,549) |
Other comprehensive income (loss) | $(458,883) | $(465) | $41,830 |
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year-end are as follows, in thousands.
1999 |
1998 | |||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |
Financial assets: | ||||
Cash and equivalents | $13,267 | $13,267 | $25,608 | $25,608 |
Securities available for sale | 30,544 | 30,544 | 27,115 | 27,115 |
Securities held to maturity | 74,843 | 73,631 | 62,253 | 63,982 |
Loans, net of allowance for loan losses | 194,862 | 195,585 | 193,824 | 194,975 |
Accrued interest receivable | 2,394 | 2,394 | 2,282 | 2,282 |
Financial liabilities: | ||||
Demand and savings deposits | $(109,611) | $(109,611) | $(110,822) | $(110,822) |
Time deposits | (160,328) | (158,781) | (154,925) | (156,072) |
Repurchase agreements | (12,836) | (12,836) | (9,771) | (9,771) |
FHLB borrowings | (9,710) | (9,710) | (10,111) | (10,111) |
Accrued interest payable | (473) | (473) | (480) | (480) |
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.
CSB BANCORP, INC.
1999 Financial Review
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. 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. Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations are not related to historical results, but 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. The Company does not undertake, and specifically disclaims any obligation to publicly release the result of any revisions to any forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date of such statements.
RESULTS OF OPERATIONS
Net income totaled $4.3 million, an increase of $36,000 from 1998. Earnings per share were $1.61 and $1.60 for the years ended December 31, 1999 and 1998. Return on average assets was 1.32% in 1999 as compared to 1.43% in 1998, and return on average shareholders' equity was 13.14% in 1999, and 14.39% in 1998.
Net income for 1998 was $4.2 million or $1.60 per share, as compared to $4.4 million or $1.69 per share for 1997. This equated to a return on average assets of 1.43% in 1998 and 1.62% in 1997, while the return on average shareholders' equity for the same periods was 14.39% and 17.32%.
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.
Interest income for 1999 was $23.7 million, increasing $303,000 from $23.4 million in 1998. Interest and fees on loans was $17.7 million, a decrease of $373,000, or 2.1%, from the previous year mostly attributable to the decrease in the average yield on loans from 9.66% to 9.27%. Interest income on securities increased $719,000, or 15.4%, to $5.4 million as compared to the previous year of $4.7 million. This increase was due primarily to an increase of the average balance of $17.6 million, or 21.3%, as compared to the previous period. Other interest income decreased $44,000 to $605,000 in 1999 compared to $649,000 in 1998, primarily as a result of a decrease in the average rate earned on these interest-earning liquid assets, to 4.97% in the current period from 5.35% in the previous period. These assets usually carry less credit and interest rate risk, and, therefore, provide lower yields than securities or loans.
Interest income for 1998 was $23.4 million, increasing $1.3 million from $22.1 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-earning liquid assets.
The Company's interest expense on deposits increased $266,000 to $10.9 million in 1999, compared to $10.6 million in 1998 due primarily to the increased volume of deposits during 1999 compared to 1998. Deposit interest rates decreased during 1999 as overall cost of funds decreased to 4.46% in 1999, compared to 4.79% in 1998. Late in 1995, the Company began to originate fixed-rate mortgage loans through a matched funds program with the Federal Home Loan Bank of Cincinnati (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 March 1999, the Company sold $12.1 million of these fixed-rate mortgage loans and management decided not to pay off the related advance. Instead, new loans remained in the portfolio throughout the year.
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. In February 1997, the Company sold $10.8 million of fixed-rate mortgage loans under the aforementioned program 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 1999 was $12.0 million, increasing $184,000 from $11.8 million in 1998. This increase is due, in part, to the increase of $1.2 million in net interest-earning assets over interest-bearing liabilities. Net interest income for 1998 increased from $11.3 million to $11.8 million, an increase of $542,000. This increase was also a result of a $4.8 million increase in interest-earning assets over interest-bearing liabilities.
The following tables provide detailed analysis of changes in average balances, yields, and net interest income identifying that portion of the changes due to change in average volume versus that portion due to change in average rates.
AVERAGE BALANCES, RATES AND YIELDS
(Dollars in thousands) | 1999 | 1998 | 1997 | ||||||
Average Balance(1) |
Interest |
Rate(2) |
Average Balance(1) |
Interest |
Rate(2) |
Average Balance(1) |
Interest |
Rate(2) | |
Interest-earning Assets | |||||||||
Federal funds sold | $ 12,154 | $ 604 | 4.97% | $ 9,568 | $ 503 | 5.26% | $ 9,295 | $ 513 | 5.52% |
Interest-earning deposits | 31 | 1 | 3.23 | 2,567 | 146 | 5.69 | 3,547 | 225 | 6.34 |
Securities: | |||||||||
Taxable | 52,202 | 3,079 | 5.90 | 44,280 | 2,744 | 6.20 | 49,420 | 3,119 | 6.31 |
Tax exempt | 47,791 | 2,308 | 4.83 | 38,126 | 1,924 | 5.05 | 27,898 | 1,457 | 5.22 |
Loans(3) | 191,112 | 17,715 | 9.27 | 187,198 | 18,087 | 9.66 | 168,823 | 16,798 | 9.95 |
Total interest-earning assets | 303,290 | 23,707 | 7.82 | 281,739 | 23,404 | 8.31 | 258,983 | 22,112 | 8.54% |
Noninterest-earning assets | |||||||||
Cash and due from banks | 10,319 | 8,794 | 7,972 | ||||||
Bank premises and equipment, net | 7,559 | 4,410 | 3,020 | ||||||
Other assets | 4,073 | 3,748 | 3,489 | ||||||
Allowance for loan losses | (3,219) | (2,452) | (2,227) | ||||||
Total assets | $322,022 | $296,239 | $271,237 | ||||||
Interest-bearing liabilities | |||||||||
Demand deposits | $ 40,313 | $ 811 | 2.01% | $ 35,541 | $ 717 | 2.02% | $ 35,148 | $ 701 | 1.99% |
Savings deposits | 39,945 | 1,238 | 3.10 | 41,056 | 1,413 | 3.44 | 35,559 | 1,233 | 3.47 |
Time deposits | 162,320 | 8,820 | 5.43 | 146,551 | 8,474 | 5.78 | 135,565 | 7,895 | 5.82 |
Other borrowed funds | 19,357 | 813 | 4.20 | 18,440 | 959 | 5.20 | 17,312 | 984 | 5.68 |
Total interest-bearing liabilities | 261,935 | 11,682 | 4.46% | 241,588 | 11,563 | 4.79% | 223,584 | 10,813 | 4.84% |
Noninterest-bearing liabilities and shareholders' equity | |||||||||
Demand deposits | 26,303 | 23,813 | 20,920 | ||||||
Other liabilities | 1,330 | 1,436 | 1,289 | ||||||
Shareholders' equity | 32,454 | 29,402 | 25,444 | ||||||
Total liabilities and equity | $322,022 | $296,239 | $271,237 | ||||||
Net interest income | $12,025 | $11,841 | $11,299 | ||||||
Net interest margin | 3.96% | 4.20% | 4.36% |
(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 asset or liability.
(3) Average loan balances include nonaccruing loans.
RATE/VOLUME ANALYSIS OF CHANGES IN INCOME AND EXPENSE (1)
(Dollars in thousands) | 1999 v. 1998 | 1998 v. 1997 | ||||
Change in Income/ Expense |
Volume Effect |
Rate Effect |
Change in Income/ Expense |
Volume Effect |
Rate Effect | |
Interest Income | ||||||
Federal funds sold | $ 101 | $ 130 | $ (29) | $ (10) | $ 15 | $ (25) |
Interest-earning deposits | (145) | (101) | (44) | (79) | (57) | (22) |
Securities: | ||||||
Taxable | 335 | 472 | (137) | (375) | (320) | (55) |
Tax exempt | 384 | 470 | (86) | 467 | 498 | (31) |
Loans | (372) | 373 | (745) | 1,289 | 1,786 | (497) |
Total interest income | 303 | 1,344 | (1,041) | 1,292 | 1,922 | (630) |
Interest expense | ||||||
Demand deposits | 94 | 96 | (2) | 16 | 23 | (7) |
Savings deposits | (175) | (37) | (138) | 189 | 190 | (1) |
Time deposits | 346 | 877 | (531) | 570 | 635 | (65) |
Other borrowed funds | (146) | 46 | (192) | (25) | 62 | (87) |
Total interest expense | 119 | 982 | (863) | 750 | 910 | (160) |
Net interest income | $184 | $362 | $(178) | $542 | $1,012 | $(470) |
(1) Changes attributable to both volume and rate, which cannot be segregated, have been allocated based on the absolute value of the change due to volume and the change due to rate.
The following table reconciles net interest income as shown in the financial statements to taxable-equivalent net-interest income:
1999 | 1998 | 1997 | |
Net interest income | $12,024,884 | $11,841,048 | $11,299,401 |
Taxable equivalent adjustment(1) | 1,024,820 | 839,814 | 640,317 |
Net interest income - fully taxable equivalent | $13,049,704 | $12,680,862 | $11,939,718 |
Net interest yield | 3.96% | 4.20% | 4.36% |
Taxable equivalent adjustment(1) | .34 | .30 | .25 |
Net interest yield - taxable equivalent | 4.30% | 4.50% | 4.61% |
(1) Taxable equivalent adjustments have been computed assuming a 34% tax rate.
Provision for Loan Losses
As the loan portfolio grows, management continues to provide for losses inherent in the portfolio. The provision for loan losses was $1.1 million in 1999 and 1998, and $400,000 in 1997. See "Financial Condition - Allowance for Loan Losses."
Other Income
Total other income increased to $2.1 million in 1999 compared to $1.6 million in 1998, an increase of $448,000 or 27.8%. This increase was primarily due to an increase in gain on sale of loans of $294,000, an increase in merchant fee income of $76,000, or 46.3%, and trust services income increase of $91,000 or 42.8%. These increases more than offset the decrease of $155,000, from the gain on sale of other real estate owned in 1998. There were no security sales during the three-year period ended December 31, 1999.
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.
Other Expenses
Total other expenses increased $729,000, or 10.7%, during 1999. The largest component of noninterest expense is salaries and employee benefits, which increased $473,000 or 13.7% in 1999. The increases were from normal salary adjustments and the addition of staff members to service the Company's growing customer base. Increases in occupancy and equipment expense are expected in the future as a result of depreciation from the Company's new Operations Center that was placed into service in 1999.
Income Taxes
The provision for income taxes decreased to $1.1 million in 1999, from $1.3 million in 1998, primarily from a reduction in income before income taxes and the increase in the average balance of tax exempt securities of $9.7 million. The Company's effective tax rate was 21.2% in 1999, a decrease from 23.9% in 1998 and 26.9% in 1997. 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 $326.5 million at December 31, 1999, compared to $317.5 million at December 31, 1998, representing an increase of $9.0 million, or 2.8%. This growth was due to increased loan activity for the year funded by increases in deposits and securities sold under repurchase agreements. Changes in the consolidated balance sheets and factors that caused those changes are discussed below.
Securities
Total securities increased $16.0 million, or 17.9% from $89.4 million at year-end 1998 to $105.4 million at year-end 1999. During 1999, the Company reinvested proceeds of maturing and called securities, as well as shifted federal funds sold into higher-yielding securities and invested funds from the sale of mortgage loans in 1999. The distribution of the securities portfolio at year-end 1999 consisted of U.S. Treasuries, U.S. government corporations and agencies, obligations of state and political subdivisions and other securities. The Company increased its holdings of FHLB stock to $1.9 million through stock dividends during 1999.
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, 1999, 8.9% of the portfolio matures within one year.
Securities classified as held to maturity under Statement of Financial Accounting Standards (SFAS) No. 115 are carried at amortized cost, and include securities that 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 $199.0 million were recorded as of December 31, 1999 as compared to $197.6 million at year-end 1998, representing an increase of 0.7%.
While the mix of loans within this portfolio remained relatively stable, the Company experienced a decrease of $786,000, or 0.9%, in commercial loans, an increase of $2.6 million, or 7.7%, in commercial real estate loans and $2.2 million, or 6.5%, decrease in residential real estate loans. As of December 31, 1999 agriculture production loans and loans secured by farmland totaled approximately $13.3 million and are included in the commercial, commercial real estate and residential real estate categories. Credit card loans, which are primarily unsecured, totaled $1.9 million, or 1.0%, of loans at year-end 1999.
The Company originates fixed-rate mortgage loans using a match-funding program utilizing FHLB advances of similar maturity. At December 31, 1999, the balance of loans originated under this program totaled approximately $20.5 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 six 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 stable in 1999. Management believes the Company's local service area will experience continued economic strength and a continued need for its type of lending products into 2000.
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 $3.4 million or 1.72% of total loans at December 31, 1999, up from $2.9 million or 1.47% of total loans at December 31, 1998. Net charge-offs for 1999 totaled $569,000, up from $512,000 in 1998 and $172,000 in 1997. 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 1999 and 1998. These amounts were in response to increased charge-offs and impaired loans in 1999 and 1998, and the overall increase in the amount of the total loan portfolio, particularly in commercial and commercial real estate loans. 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 .77%, of total loans at December 31, 1999, as compared to $1.5 million or .74%, of total loans at December 31, 1998. The allowance for loan losses as a percentage of nonperforming loans was 222.4% and 198.2% at year-end 1999 and 1998.
Premises and Equipment
Net premises and equipment increased by $3.6 million to $8.9 million at year-end 1999 from $5.4 million at year-end 1998. During 1998, the Company completed construction of the new Shreve Office, which opened in March 1998. Also, construction was completed on the new Operations Center in 1999, located in Millersburg. The increase in premises and equipment in 1999 was primarily due to the new Operations Center.
Deposits
The Company's deposits are obtained from individuals and businesses located in its market area. Total deposits increased 1.6% to $269.9 million at December 31, 1999, compared to $265.7 million at December 31, 1998. Noninterest-bearing balances increased to $29.0 million at December 31, 1999, as compared to $27.4 million at December 31, 1998. Interest-bearing deposits increased $2.5 million, or 1.1%, at December 31, 1999, compared to 1998. This growth was on all deposit products and was after the withdrawal of $7.0 million, which was on deposit during construction of a new high school in a local school district. Demand deposits increased $2.4 million, or 5.9%, while statement and passbook savings decreased $5.3 million, or 12.4%. Additional growth was obtained through certificates of deposit in excess of $100,000, increasing by $6.4 million, or 17.3%.
CAPITAL RESOURCES
Total shareholders' equity increased from $30.9 million at December 31, 1998 to $33.2 million at December 31, 1999. Contributing to this was net income of $4.3 million, offset by dividends paid of $1.9 million. Because of the dividend reinvestment program, shareholders' equity increased $398,000 in 1999 and $470,000 in 1998. 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 $469,000 during 1998 and $110,000 in 1999. 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 such that 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 4%. 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 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, 1999, approximately $7.8 million is available for payment of dividends by the Bank to the Company under the most restrictive of these guidelines.
LIQUIDITY
Liquidity refers to the Company's ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, pay operating expenses and meet other obligations. The Company's primary sources of liquidity are cash and cash equivalents, which totaled $13.3 million at December 31, 1999, a decrease of $12.3 million from year-end 1998. Net income, securities available for sale, maturities/calls of securities held to maturity and loan repayments also serve as sources of liquidity. Cash and cash equivalents, and securities maturing within one year represent 7.0% of total assets at December 31, 1999, as compared to 12.4% at year-end 1998. 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 in 1999 included the purchase of securities totaling $37.6 million, maturities and calls of securities totaling $20.9 million, and net loan originations of $5.6 million as management continues to seek loan growth. The Company's primary financing activity was funds received through deposit growth. This growth accounted for cash infusions of $4.2 million in 1999, $24.5 million in 1998 and $27.9 million in 1997. Additional funds were received through additions to securities sold under repurchase agreements.
YEAR 2000 ISSUE
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. In addition to reviewing its own systems, the Company also recognized 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 provided information to its customers about the Year 2000 issue.
Through December 31, 1999, the Company incurred $26,000 of operating expenses and $54,000 of capital expenditures for Year 2000 preparations, including hardware and software upgrades, testing, training and other out-of-pocket expenses. In addition to these costs, the Company has estimated it has incurred $120,000 of internal personnel costs through December 31, 1999. The Company does not anticipate any additional significant expenses relating to Year 2000.
The Company experienced no disruption to its operations because of the Year 2000. Management will continue to monitor activity over the course of the year for possible effects on its operations and customers. Certain critical dates, as identified by the Company and regulators, fall in 2000. While these dates have been tested, the Company will review operations during these periods.
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 committee. One method the Company uses to manage its interest rate risk is a rate sensitivity gap analysis, which monitors the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A "positive gap" occurs when the amount of interest rate sensitive assets maturing or repricing within a given period exceeds the amount of interest sensitive liabilities maturing or repricing within the same period. Conversely, a "negative gap" occurs when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income.
Management monitors its gap position on a monthly basis with the goal to increase its net interest income slightly in a rising interest rate environment, in order to maintain earnings at an acceptable level when additional funding of the Company's loan loss reserve may be necessary. This has historically been accomplished through offering loan products that are either short-term in nature or which carry variable rates of interest. Interest rates of the majority of the Company's commercial loan portfolio vary based on the prime commercial lending rates published by The Wall Street Journal, while interest rates of the majority of its real estate loan portfolio vary depending on the six-month U.S. Treasury rates. Beginning in 1995, the Company granted a limited amount of fixed-rate real estate loans to reduce the impact of this positive interest-rate gap. The Company's securities portfolio is primarily fixed-rate and short-term in nature. The Company's investment in structured notes, securities with imbedded options and securities with prepayment risk is not a material part of the securities portfolio. The Company holds no mortgage derivative products. As a result of its gap position, the Company may be vulnerable to decreases in its net interest income and the net market value of its portfolio equity when market rates of interest decrease. The Company's interest income and the market values of its financial instruments is most affected by changes in short- and medium-term interest rates, such as the six 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 1999 and 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, 1999 and 1998:
1999 |
|||
Change in Interest Rates | Net Interest
Income |
Dollar
Change |
Percentage
Change |
(Dollars in Thousands) |
|||
+200 | $11,883 | $ 284 | 2.4% |
+100 | 12,053 | 454 | 3.9 |
0 | 11,599 | 0 | 0.0 |
-100 | 11,104 | (495) | (4.3) |
-200 | 10,630 | (969) | (8.4) |
1998 |
|||
Change in Interest Rates | Net Interest
Income |
Dollar
Change |
Percentage
Change |
(Dollars in Thousands) |
|||
+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) |
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. Many of the Company's loans permit the borrower to prepay the principal balance prior to maturity without penalty. The likelihood of prepayment depends on a number of factors, including 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. Certain advances from the FHLB carry prepayment penalties and 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, 1999 and 1998 in Note 14 to the consolidated financial statements. Fair value of the Company's financial instruments experienced modest changes in 1999 due to the relatively stable interest-rate environment. Estimated fair value of loans decreased slightly to 100.4% of the carrying value at December 31, 1999 from 100.6% of the carrying value at December 31, 1998. The fair value of securities held to maturity decrease to 98.4% of carrying value at December 31, 1999, from 102.8% of carrying value at year-end 1998. Estimated fair value of time deposits decreased from 100.7% of carrying value at December 31, 1998 to 99.0% at December 31, 1999.
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 in 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 the Company in 2001, with early adoption encouraged at the beginning of any fiscal quarter, with no retroactive application. Management does not expect the adoption of this standard to have a significant impact on the Company'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.
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. Prices below have been restated to reflect the April 1998 two-for-one stock split paid in the form of a 100% stock dividend. The chart also specifies cash dividends paid by the Company to its shareholders during 1999 and 1998. 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.
Quarter Ended |
High |
Low |
Dividends
Declared |
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 |
March 31, 1999 | 55.00 | 47.00 | 317,916 |
June 30, 1999 | 55.00 | 40.00 | 318,243 |
September 30, 1999 | 45.00 | 33.50 | 318,236 |
December 31, 1999 | 36.00 | 30.75 | 901,674 |
As of December 31, 1999, CSB Bancorp, Inc. had approximately 1,100 shareholders and 2,658,984 outstanding shares of common stock.
TRANSFER AGENT
CSB Bancorp, Inc. acts as its own transfer agent for its common stock.
CSB Bancorp, Inc.
Attn: Shirley J. Roberts
6 West Jackson Street
Millersburg, Ohio 44654
Phone (330) 674-9015 or (800) 654-9015
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
Phone (330) 674-9015 or (800) 654-9015
The annual meeting of shareholders will be held at the Carlisle Village Inn in Walnut Creek, Ohio on Wednesday, April 12, 2000 beginning at 7:00 p.m.
SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial information.
1999 | 1998 | 1997 | 1996 | 1995 | |
(Dollars in thousands, except per share data) | |||||
Statements of earnings: | |||||
Total interest income | $ 23,707 | $ 23,404 | $ 22,112 | $ 19,480 | $ 18,305 |
Total interest expense | 11,682 | 11,563 | 10,813 | 8,828 | 8,034 |
Net interest income | 12,025 | 11,841 | 11,299 | 10,652 | 10,271 |
Provisions for loan losses | 1,100 | 1,051 | 400 | 400 | 515 |
Net interest income after provision for loan losses | 10,925 | 10,790 | 10,899 | 10,252 | 9,756 |
Total other income | 2,063 | 1,616 | 1,447 | 1,228 | 1,002 |
Total other expenses | 7,573 | 6,844 | 6,315 | 6,021 | 5,722 |
Income before federal income taxes | 5,415 | 5,562 | 6,031 | 5,459 | 5,036 |
Provision for income taxes | 1,149 | 1,331 | 1,624 | 1,600 | 1,444 |
Net income | 4,266 | 4,231 | 4,407 | 3,859 | 3,592 |
Per share of common stock(1) | |||||
Basic and diluted earnings | $ 1.61 | $ 1.60 | $ 1.69 | $ 1.50 | $ 1.41 |
Dividends | .70 | .60 | .51 | .42 | .33 |
Book value | 12.45 | 11.65 | 10.35 | 9.05 | 7.92 |
Average basic common shares outstanding(1) | 2,651,910 | 2,637,011 | 2,604,914 | 2,577,044 | 2,558,004 |
Average diluted common shares outstanding | 2,652,836 | 2,637,956 | 2,605,852 | 2,577,044 | 2,558,004 |
Year-end balances: | |||||
Loans, net (includes held for sale) | 194,862 | 193,824 | 177,327 | 163,020 | 150,789 |
Securities | 105,387 | 89,368 | 86,428 | 52,384 | 54,641 |
Total assets | 326,546 | 317,502 | 288,442 | 254,135 | 233,210 |
Deposits | 269,939 | 265,747 | 241,203 | 213,340 | 206,255 |
Borrowings | 22,545 | 19,882 | 18,978 | 16,480 | 5,913 |
Shareholders' equity | 33,202 | 30,860 | 27,275 | 23,426 | 20,343 |
Average balances: | |||||
Loans, net | 187,893 | 184,746 | 166,596 | 155,298 | 145,109 |
Securities | 99,993 | 82,406 | 77,318 | 50,129 | 49,698 |
Total assets | 322,022 | 296,239 | 271,237 | 233,353 | 213,077 |
Deposits | 268,881 | 246,961 | 227,192 | 199,609 | 191,919 |
Borrowings | 19,357 | 18,440 | 17,312 | 10,632 | 1,563 |
Shareholders' equity | 32,454 | 29,402 | 25,444 | 22,095 | 18,743 |
Selected ratios: | |||||
Net yield on average interest-earning assets | 3.96% | 4.20% | 4.36% | 4.79% | 5.07% |
Return on average total assets | 1.32 | 1.43 | 1.62 | 1.65 | 1.69 |
Return on average shareholders' equity | 13.14 | 14.39 | 17.32 | 17.47 | 19.17 |
Average shareholders' equity as a percent of average total assets | 10.08 | 9.93 | 9.38 | 9.47 | 8.80 |
Net loan charge-offs as a percent of average loans | .30 | .27 | .10 | .07 | .16 |
Allowance for possible loan losses as a percent of loans at year-end | 1.72 | 1.46 | 1.30 | 1.28 | 1.20 |
Shareholders' equity as a percent of total year-end assets | 10.17 | 9.72 | 9.46 | 9.21 | 8.72 |
Notes to selected financial data:
(1) Restated for 1998 and 1996 stock splits paid in the form of a 100% stock dividend.
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, 2000 on the consolidated balance sheets of CSB Bancorp, Inc. as of December 31, 1999 and 1998 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, 1999, which report is incorporated by reference in this Form 10-K.
/S/ CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
March 25, 2000
EXHIBIT 24
POWER 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 and 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 1999 fiscal year; and
WHEREAS, the undersigned is an [Officer/Director] of the Company;
NOW, THEREFORE, the undersigned hereby constitutes and appoints Douglas D. Akins [his/her] attorney in fact, for [her and in her][him and in his] name, place and stead and in her 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 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 [his/her] hand this ___ day of March, 2000.
STATE OF OHIO
COUNTY OF HOLMES
On the ____ day of March, 2000, personally appeared before me ______________, to me known to be the person described within and who executed the foregoing instrument, and [he/she] duly acknowledged to me that [he/she] executed and delivered the same for the purposes herein expressed.
WITNESS my hand and official seal this ________ day of March, 2000.
/s/ H. RICHARD MAXWELL /s/ SAMUEL P. RIGGLE, JR.
H. Richard Maxwell Samuel P. Riggle, Jr.
/s/ DANIEL J. MILLER /s/ F. JOANNE VINCENT
Daniel J. Miller F. Joanne Vincent
/s/ SAMUEL M. STEIMEL /s/ SHIRLEY J. ROBERTS
Samuel M. Steimel Shirley J. Roberts
/s/ DAVID C. SPRANG /s/ A. LEE MILLER
David C. Sprang A. Lee Miller
/s/ J. THOMAS LANG /s/ DOUGLAS D. AKINS
J. Thomas Lang Douglas D. Akins
/s/ DAVID W. KAUFMAN /s/ ROBERT E. BOSS
David W. Kaufman Robert E. Boss
/s/ PAMELA S. BASINGER /s/ STANLEY E. YODER
Pamela S. Basinger Stanley E. Yoder