-----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, V5IMf0Jlek1j9PiUeR+WOdpt6lvGSEuyYd41uMlISxhI7BxhwGavXL5t5AD6Ib6A jtryc1hChbUqJ1MIuuGweA== 0000906318-98-000102.txt : 19981116 0000906318-98-000102.hdr.sgml : 19981116 ACCESSION NUMBER: 0000906318-98-000102 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CSB BANCORP INC /OH CENTRAL INDEX KEY: 0000880417 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341687530 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21714 FILM NUMBER: 98748563 BUSINESS ADDRESS: STREET 1: 6 W JACKSON ST STREET 2: P O BOX 232 CITY: MILLERSBURG STATE: OH ZIP: 44654 BUSINESS PHONE: 3306749015 MAIL ADDRESS: STREET 1: 6 WEST JACKSON STREET CITY: MILLERSBURG STATE: OH ZIP: 44654 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: SEPTEMBER 30, 1998 OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-21714 CSB Bancorp, Inc. (Exact name of registrant as specified in its charter) Ohio 34-1687530 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 6 W. Jackson Street, P.O. Box 232, Millersburg, Ohio 44654 (Address of principal executive offices) (330) 674-9015 (Registrant's telephone number) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes ____ No Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common stock, $6.25 par value 2,642,780 shares outstanding at November 5, 1998 CSB BANCORP, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1998 Part I - Financial Information ITEM 1 - FINANCIAL STATEMENTS (Unaudited) Page Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Comprehensive Income 5 Condensed Consolidated Statements of Changes in Shareholders' Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to the Consolidated Financial Statements 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 18 Part II - Other Information Other Information 19 Signatures 20 CSB BANCORP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1998 1997 ASSETS Cash and noninterest-bearing deposits with banks $ 8,672,327 $ 8,090,785 Interest-bearing deposits with banks 156,624 31,257 Federal funds sold 12,273,000 6,213,000 ----------- ----------- Total cash and cash equivalents 21,101,951 14,335,042 Time deposits with other institutions 2,000,000 3,000,000 Securities available for sale, at fair value 22,780,174 28,042,412 Securities held to maturity (Fair values of $61,195,779 in 1998 and $59,773,637 in 1997) 59,162,524 58,385,434 Loans Total loans 189,545,203 179,676,242 Allowance for loan losses 2,649,179 2,349,039 ----------- ----------- Net loans 186,896,024 177,327,203 Premises and equipment, net 4,588,706 3,601,254 Accrued interest receivable and other assets 3,779,407 3,750,570 ----------- ----------- Total assets $300,308,786 $288,441,915 =========== =========== LIABILITIES Deposits Noninterest-bearing $ 23,351,303 $ 24,678,146 Interest-bearing 227,380,861 216,525,123 ----------- ----------- Total deposits 250,732,164 241,203,269 Securities sold under repurchase agreements 7,610,797 7,290,759 Federal Home Loan Bank borrowings 10,340,751 11,686,863 Accrued interest payable and other liabilities 1,190,520 986,544 ----------- ----------- Total liabilities 269,874,232 261,167,435 SHAREHOLDERS' EQUITY Common stock, $6.25 par value: 3,000,000 shares authorized; 1998 - 2,649,181 shares issued; 1997 - 1,314,591 shares issued 16,557,380 8,216,191 Additional paid-in capital 5,740,960 5,135,899 Retained earnings 8,032,587 13,907,908 Treasury stock at cost: 6,400 shares (56,000) (56,000) Unrealized gain on securities available for sale 159,627 70,482 ----------- ----------- Total shareholders' equity 30,434,554 27,274,480 ----------- ----------- Total liabilities and shareholders' equity $300,308,786 $288,441,915 =========== ===========
See notes to the consolidated financial statements. CSB BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Interest income Loans, including fees $4,548,683 $4,273,078 $13,512,173 $12,374,439 Taxable securities 641,923 819,573 2,061,092 2,324,589 Nontaxable securities 482,300 395,625 1,404,901 1,017,624 Other 199,753 125,928 416,224 586,325 --------- --------- ---------- ---------- Total interest income 5,872,659 5,614,204 17,394,390 16,302,977 --------- --------- ---------- ---------- Interest expense Deposits 2,685,993 2,538,126 7,853,680 7,242,266 Other 241,624 243,387 718,823 722,473 --------- --------- --------- ---------- Total interest expense 2,927,617 2,781,513 8,572,503 7,964,739 --------- --------- --------- ---------- Net interest income 2,945,042 2,832,691 8,821,887 8,338,238 Provision for loan losses 577,400 99,819 773,785 300,243 --------- --------- --------- ---------- Net interest income after provision for loan losses 2,367,642 2,732,872 8,048,102 8,037,995 --------- --------- --------- ---------- Other income Service charges on deposit accounts 175,693 180,225 535,682 516,006 Gain on sale of loans 6,011 - 9,540 220,176 Gain on sale of REO 77,579 - 77,579 Other income 240,573 179,106 538,872 393,530 --------- --------- --------- --------- Total other income 499,856 359,331 1,161,673 1,129,712 --------- --------- --------- --------- Other expense Salaries and employee benefits 875,571 777,766 2,550,361 2,292,570 Occupancy expense 80,851 76,942 246,241 234,291 Equipment expense 118,139 121,134 362,307 343,083 State franchise tax 95,082 87,078 287,323 256,189 Other expense 506,082 468,234 1,574,095 1,438,907 --------- --------- --------- --------- Total other expense 1,675,725 1,531,154 5,020,327 4,565,040 --------- --------- --------- --------- Income before income taxes 1,191,773 1,561,049 4,189,448 4,602,667 Provision for income taxes 215,799 408,700 1,011,685 1,292,401 --------- --------- --------- --------- Net income $ 975,974 $1,152,349 $3,177,763 $3,310,266 ========= ========= ========= ========= Basic and diluted earnings per common share $ 0.37 $ 0.44 $ 1.21 $ 1.28 ========= ========= ========= =========
CSB BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Net income $ 975,974 $1,152,349 $3,177,763 $3,310,266 Other comprehensive income, Net of tax: Unrealized gains arising during period 88,784 51,862 89,145 51,802 --------- --------- --------- ---------- Comprehensive income $1,064,758 $1,204,211 $3,266,908 $3,362,068 ========= ========= ========= ==========
See notes to the consolidated financial statements. CSB BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Balance at beginning of period $29,485,593 $25,444,972 $27,274,480 $23,426,480 Net income 975,974 1,152,349 3,177,763 3,310,266 Common stock issued under the dividend reinvestment program and 401(k) plan 148,300 173,635 684,564 476,401 Cash dividends ($.10 and $.30 per share in 1998; $.085 and $.255 per share in 1997) (264,097) (221,902) (791,398) (664,033) Change in unrealized gain/loss on securities available for sale 88,784 51,862 89,145 51,802 ----------- ---------- --------- ---------- Balance at end of period $30,434,554 $26,600,916 $30,434,554 $26,600,916 =========== ========== ========== ==========
See notes to the consolidated financial statements. CSB BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 1998 1997 Net cash from operating activities $ 4,466,152 $ 2,779,919 Cash flows from investing activities Net change in time deposits with other institutions 1,000,000 - Securities available for sale Proceeds from maturities 11,500,000 7,000,000 Purchases (6,061,574) (21,959,913) Securities held to maturity Proceeds from maturities, calls and repayments 7,179,734 9,181,211 Purchases (7,986,984) (24,109,272) Net change in loans (11,414,523) (19,629,433) Loan sale proceeds 979,540 10,766,167 Purchase of premises and equipment, net (1,291,423) (715,954) ----------- ------------ Net cash from investing activities (6,095,230) (39,467,194) Cash from financing activities Net change in deposits 9,528,895 20,188,685 Net change in repurchase agreements 320,038 1,055,246 Advances on FHLB borrowings - 1,289,309 Principal payments on FHLB borrowings (1,346,112) (1,090,500) Shares issued for 401(k) Plan 523,060 288,483 Cash dividends paid, net of dividend reinvestment (629,894) (476,115) ----------- ----------- Net cash from financing activities 8,395,987 21,255,108 ----------- ----------- Net change in cash and cash equivalents 6,766,909 (15,432,167) Beginning cash and cash equivalents 14,335,042 30,317,756 ---------- ----------- Ending cash and cash equivalents $ 21,101,951 $ 14,885,589 ========== =========== Supplemental disclosures Interest paid $ 8,580,996 $ 7,956,723 Income taxes paid 975,000 1,323,866
See notes to the consolidated financial statements. CSB BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include accounts of CSB Bancorp, Inc. and its wholly-owned subsidiary, The Commercial and Savings Bank (together referred to as the "Company"). All significant intercompany transactions and balances have been eliminated. These interim financial statements are prepared without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of CSB at September 30, 1998, and results of operations and cash flows for the periods presented. The accompanying consolidated financial statements do not contain all necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances. The Annual Report for CSB for the year ended December 31, 1997, contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements. The Company is engaged in the business of commercial and retail banking and trust services, with operations conducted through its main office and eight branches located in Millersburg, Ohio, and nearby communities. These communities are the source of substantially all deposit, loan and trust activities. The majority of the Company's income is derived from commercial and retail lending activities and investments in securities. To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, realization of deferred tax assets, fair value of certain securities and determination and carrying value of impaired loans are particularly subject to change. The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loans that, in management's judgment, should be charged-off. Loan impairment is reported when full payment under the loan terms is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) impairment when payments are delayed, typically 90 days or more, or when the internal grading system indicates a doubtful classification. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one- to four-family residences, residential construction loans and automobile, home equity and second mortgage loans less than $100,000. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. The Company records income tax expense based on the amount of tax due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Basic Earnings Per Share ("EPS") is based on net income divided by the weighted average number of shares outstanding during the period. Diluted EPS shows the dilutive effect of additional common shares issuable under stock options. The weighted average number of shares outstanding for basic EPS was 2,640,766 and 2,634,841 for the three and nine month periods ended September 30, 1998 and 2,609,234 and 2,601,638 for the three and nine month periods ended September 30, 1997. The weighted average number of shares outstanding for diluted EPS, which includes the effect of stock options granted using the treasury stock method, was 2,641,767 and 2,635,797 for the three and nine month periods ended September 30, 1998 and 2,609,940 and 2,602,344 for the three and nine month periods ended September 30, 1997. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 is effective for the Company in 1998. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The information required by SFAS 130 is included in these financial statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," changes the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises report selected information about reportable segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 becomes effective for the Company in 1998. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" - SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving off-setting changes in fair value or cash flows. SFAS 133 does not allow hedging of a security which is classified as held to maturity, accordingly, upon adoption of SFAS 133, companies may reclassify any security from held to maturity to available for sale if they wish to be able to hedge the security in the future. SFAS 133 is effective for fiscal years beginning after June 15, 1999 with early adoption encouraged for any fiscal quarter beginning July 1, 1998 or later, with no retroactive application. Management does not expect the adoption SFAS 133 to have a significant impact on the Corporation's financial statements. NOTE 2 - SECURITIES The amortized cost and fair values of securities are as follows:
September 30, 1998 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale Debt securities U.S. Treasury securities $10,021,508 $ 147,710 $ - $10,169,219 U.S. Government agencies 10,490,107 94,149 - 10,584,255 ---------- --------- ------- ---------- Total debt securities 20,511,615 241,859 - 20,753,474 Other securities 2,026,700 - - 2,026,700 ---------- --------- ------- ---------- Total securities available for sale $22,538,315 $ 241,859 $ - $22,780,174 ========== ========= ======== ========== Held to maturity U.S. Treasury securities $12,125,064 $ 181,248 $ - $12,306,312 U.S. Government agencies 6,990,514 47,215 - 7,037,729 Obligations of state and political subdivisions 40,046,946 1,805,462 (670) 41,851,738 ---------- --------- ------- ---------- Total debt securities held to maturity $59,162,524 $2,033,925 $ (670) $61,195,779 ========== ========= ======= ==========
NOTE 2 - SECURITIES (Continued)
December 31, 1997 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale Debt securities U.S. Treasury securities $16,021,859 $ 72,864 $ (349) $16,094,374 Obligations of U.S. government corporations and agencies 9,978,862 40,872 (6,596) 10,013,138 ---------- --------- -------- ---------- Total debt securities available for sale 26,000,721 113,736 (6,945) 26,107,512 Other securities 1,934,900 - - 1,934,900 ---------- --------- -------- ---------- Total securities available for sale $27,935,621 $ 113,736 $ (6,945) $28,042,412 ========== ========= ======== ========== Held to maturity U.S. Treasury securities $15,121,855 $ 130,739 $ (1,095) $15,251,499 Obligations of U.S. government corporations and agencies 7,540,006 11,870 (6,343) 7,545,533 Obligations of states and political subdivisions 35,723,573 1,262,675 (9,643) 36,976,605 ---------- --------- -------- ----------- Total securities held to maturity $58,385,434 $1,405,284 $(17,081) $59,773,637 ========== ========= ======== ==========
No securities were sold during the first nine months of 1998 or 1997. The amortized cost and fair values of debt securities at September 30, 1998, by contractual maturity, are shown below.
Available-for-sale securities Held-to-maturity securities Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less $ 7,497,854 $ 7,545,312 $ 9,100,534 $ 9,149,891 Due from one to five years 13,013,761 13,208,162 15,355,879 15,682,618 Due from five to ten years - - 18,640,955 19,616,025 Due after ten years - - 16,065,156 16,747,245 Mortgage-backed - - - - ---------- ---------- ---------- ---------- $20,511,615 $20,753,474 $59,162,524 $61,195,779 ========== ========== ========== ==========
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following: September 30, 1998 December 31, 1997 Commercial $ 82,920,280 $ 80,260,550 Commercial real estate 31,276,136 30,407,670 Residential real estate 54,821,422 49,049,948 Installment and credit card 16,506,585 16,450,211 Construction 4,020,780 3,507,863 ---------- ----------- Total loans $189,545,203 $179,676,242 =========== =========== During the first nine months of 1998, the Company received $980,000 in proceeds from mortgage loan sales. A gain of $9,540 was recognized on these sales. During the first nine months of 1997, the Company received $10.8 million in proceeds from mortgage loan sales. A gain of $220,000 was recognized on this sale. The Company has identified $18.0 million of loans held for sale as of September 30, 1998. Activity in the allowance for loan losses for the nine months ended September 30, 1998 and 1997 is as follows: 1998 1997 Beginning balance $2,349,039 $2,120,845 Provision for loan losses 773,785 300,243 Loans charged off (516,732) (189,132) Recoveries 43,087 41,373 --------- ---------- Ending balance $2,649,179 $2,273,329 ========= ========== Impaired loans at September 30, 1998 and December 31, 1997 is as follows: September 30, December 31, 1998 1997 Loans with no allowance for loan losses allocated $ 72,944 $ 0 Loans with allowance for loan losses allocated 1,639,101 1,384,000 Amount of allowance allocated 505,961 437,000 NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Impaired loans for the nine months ended September 30, 1998 and 1997, is as follows: 1998 1997 Average of impaired loans $1,498,000 $1,173,000 Interest income recognized during impairment 58,945 54,801 Cash basis interest income recognized 57,994 45,899 NOTE 4 - FEDERAL HOME LOAN BANK BORROWINGS The Company borrows from the Federal Home Loan Bank (FHLB) to fund certain fixed-rate residential real estate loans. At September 30, 1998, the Company had 189 outstanding borrowings from the FHLB. These borrowings carry fixed interest rates ranging from 5.60% to 7.15% and maturities of 10, 15, and 20 years. The Company matches each borrowing against a fixed-rate mortgage loan with a similar maturity. Monthly principal and interest payments are due on the borrowings. In addition, a principal curtailment of 10% of the outstanding principal balance is due on the anniversary date of each borrowing. FHLB borrowings are collateralized by FHLB stock and a blanket pledge on $15.5 million of qualifying mortgage loans at September 30, 1998. NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet customer financing needs. These financial instruments include commitments to make or purchase loans, undisbursed lines of credit, undisbursed credit card balances and letters of credit. The Company's exposure to credit loss in case of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Company follows the same credit policy to make such commitments as it uses for those loans recorded on the balance sheet. At September 30, 1998 and December 31, 1997, commitments to make loans, primarily in the form of undisbursed portions of approved lines of credit, amounted to approximately $34.8 million and $29.0 million, substantially all of which carried adjustable rates of interest. Commitments under outstanding standby letters of credit amounted to $652,000 at September 30, 1998 and $820,000 at December 31, 1997. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained relating to these commitments is determined using management's credit evaluation of the borrower and may include real estate, vehicles, business assets, deposits and other items. NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES (Continued) The Company sold $980,000 in residential mortgage loans during 1998 and $10.8 million during 1997. The Company has agreed to repurchase individual loans if they become delinquent by greater than ninety days. A recourse obligation has been established by management based on past loan loss experience and other factors. This liability is not material. Occasionally, various contingent liabilities arise that are not recorded in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, ultimate disposition of these matters is not expected to have a material affect on financial condition or results of operations. CSB BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion focuses on the consolidated financial condition of CSB Bancorp, Inc. (the Company) at September 30, 1998, compared to December 31, 1997, and the consolidated results of operations for the quarterly and year-to-date periods ending September 30, 1998, compared to the same periods in 1997. The purpose of this discussion is to provide the reader with a more thorough understanding of the consolidated financial statements. This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes. Forward-looking statements contained in this discussion involve risks and uncertainties and are subject to change based on various important factors. Actual results could differ from those expressed or implied. The Company is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on the liquidity, capital resources or operations except as discussed herein. Also, the Company is not aware of any current recommendations by regulatory authorities that would have such effect if implemented. FINANCIAL CONDITION Total securities decreased approximately $4.5 million during the first nine months of 1998 as maturing investment securities were used to fund loan activity. Since one of the primary functions of the securities portfolio is to provide a source of liquidity, it is structured such that security maturities and cash flows satisfy the Company's liquidity needs and asset-liability management requirements. At September 30, 1998, approximately 20% of the securities portfolio matures within one year. Total loans increased $9.9 million, or 5.5%, during the first nine months of 1998. Residential real estate loans increased $5.8 million, or 11.8% and commercial loans increased $2.7 million, or 3.3%. These increases were primarily a result of increased loan demand in the Company's service area as the local economy remains strong. The commercial loans are generally variable-rate, based on the Prime rate and may be unsecured or collateralized by business or farm equipment. These loans are generally of higher credit risk than residential mortgage loans. The Company identified $18.0 million in loans held for sale as of September 30, 1998. As a percentage of loans, the allowance for loan losses was 1.40% at September 30, 1998 and 1.31% at December 31, 1997. Impaired loans were approximately $1.7 million, or 0.90% of total loans, at September 30, 1998, compared to 0.77% of loans at December 31, 1997. These credits are considered in management's analysis of the allowance for loan losses. Premises and equipment increased $987,000, or 27.4%, during the first nine months of 1998.This was primarily due to the completion of the Shreve office, which opened in March 1998. Additional investment was made in the design and plan of the new operations center, which should be completed in 1999. At September 30, 1998, the ratio of net loans to deposits was 74.5%, compared to 73.5% at the end of 1997 due to the increase in loans discussed earlier. Total deposits increased $9.5 million, or 4.0% during the first nine months of 1998. The increase is due primarily to a $8.3 million, or 5.9%, increase in certificates of deposit. Total shareholders' equity was increased in part by year-to-date net income of $3.2 million, less $791,000 of cash dividends declared. The cash dividend represents 25% of net income for the first nine months of 1998. Also contributing to capital was the dividend reinvestment program (DRIP) and the purchase of stock by the Company's 401(k) retirement plan which increased equity approximately $685,000 during the first nine months of 1998. The Company and its subsidiary meet all regulatory capital requirements and are considered to be "well capitalized" at September 30, 1998. The Company's ratio of total capital to risk-weighted assets was 17.47% at September 30, 1998, while Tier 1 risk-based capital ratio was 16.22%. Regulatory minimums call for a total risk-based capital ratio of 8%, at least one-half of which must be Tier 1 capital. The Company's leverage ratio was 10.14% at September 30, 1998, which exceeds the regulatory minimum of 3% to 5%. RESULTS OF OPERATIONS Net income for the nine months ended September 30, 1998 was $3.2 million, or $1.21 per share, remaining comparable to $3.3 million or $1.28 per share earned during the same period last year, a decrease of $133,000 or 4.0%. Third quarter net income was $976,000, or $0.37 per share, in 1998, compared to $1.2 million, or $0.44 per share for the third quarter of 1997. The primary factor contributing to this decrease was the increase in the provision for loan losses. Net interest income was $8.8 million for the first nine months of 1998, a 5.8% increase from 1997. Interest and fees on loans increased $1.1 million or 9.2%, which resulted primarily from a higher average balance of loans. Interest income on all securities was comparable to the same period in 1997, while shifting from income on taxable securities to nontaxable securities. Net interest income for the third quarter of 1998 totaled $2.9 million, up 4.0% from $2.8 million in the third quarter of 1997. Most of this increase resulted from the increase in total loans. Income from taxable investments decreased $178,000 or 21.7% from the third quarter of 1997 to the third quarter of 1998, while income from nontaxable securities increased $87,000 or 21.9% for the same period. Interest expense increased $608,000, or 7.6% for the nine months ended September 30, 1998, compared to the nine months ended September 30, 1997. This increase was the result of increases in the average balance of NOW accounts, savings and certificates of deposit. For the third quarter of 1998 compared to the same period in 1997, interest expense increased $146,000 or 5.3%. The changes were primarily volume related. The provision for loan losses was $577,000 for the third quarter of 1998 and $774,000 during the first nine months of 1998. This represents increases of $478,000 and $474,000 over the three month and nine month periods, respectively, of 1997. The increase in the provision is based on management's analysis of the loan portfolio, including but not limited to, impaired loans, the increase in loans charged off, loan growth and the portfolio mix. Other income increased approximately $32,000 or 2.8% for the first nine months of 1998 and $141,000 or 39.1% for the third quarter of 1998, compared to the respective periods in 1997. The decrease in gain on sale of loans was more than offset by the gain on sale of REO and an increase in other income, which was due to increased trust and financial services income. Other expenses increased $455,000 or 10.0% for the nine months ended September 30, 1998 and $145,000, or 9.4%, for the three months ended September 30, 1998, compared to the same periods in 1997. Management continues to monitor the Company's efficiency ratio by maintaining increases in other operating costs at low levels. Salaries and employee benefits increased by 11.2% in the nine month period and 12.6% for the third quarter, and state franchise taxes increased as a result of 1997 earnings retention. The increase in salaries and employee benefits is in part due to normal merit increases and the staffing of the new branch office in Shreve, Ohio. Ohio's state franchise tax for financial institutions is based on the level of capital at the previous year-end. The provisions for income taxes of $7.0 million for the first nine months and $216,000 during the third quarter reflected an effective rate of 24.1% and 18.1%, compared to effective rates of 31.9% and 29.1% for the same time periods in 1997. The decrease in effective rates resulted from increased nontaxable interest income. YEAR 2000 ISSUE Certain statements contained in this section of "Management's Discussion and Analysis of Financial Condition and Results of Operation" that are not related to historical results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties. Any forward-looking statements made by the Company herein and in future reports and statements are not guarantees of future performance and actual results may differ materially from those in forward-looking statements as a result of various factors. These factors include the ability of the Company and its key service providers, vendors, suppliers, customers and governmental entities to replace, modify or upgrade computer systems in ways that adequately address the Year 2000 issue discussed below. Special factors that might cause actual results to vary materially from the results anticipated include the ability to identify and correct all relevant computer codes and embedded chips, unanticipated difficulties or delays in the implementation of the Company's plans and the ability of third parties to adequately address their own Year 2000 issues. Many computer programs use only two digits to identify a year in the date field and were apparently designed and developed without considering the impact of the upcoming change in the century. Such programs could erroneously read entries for the Year 2000 as the Year 1900. This could result in major systems failures and miscalculations. Rapid and accurate data processing is essential to the operations of financial institutions, such as the Company. In 1997, the Company formed a Year 2000 Committee to assess the extent to which its information technology, non-information technology and its outside vendors may be adversely affected by the Year 2000 problems. Management has identified systems as mission critical or non-mission critical. Vendors of all mission critical systems have been contacted regarding the status of the renovation and validation of the systems. The Company is currently in the process of testing these mission critical systems. In addition to reviewing its own systems, the Company also recognizes it could incur losses if loan payments are delayed due to Year 2000 problems affecting any of the Company's significant borrowers or impairing the payroll systems of large employers in the Company's primary market area. Because the Company's loan portfolio is highly diversified with regard to individual borrowers and types of businesses and the Company's primary market area is not significantly dependent on one employer or industry, the Company does not expect any significant or prolonged Year 2000 related difficulties. In addition, the Company is providing information to its customers about the Year 2000 issue. At the present time, management estimates that the costs associated with completing the comprehensive Year 2000 plan will be approximately $250,000. This includes hardware and software upgrades, testing, training, and other out-of-pocket expenses. The budget does not include in-house personnel costs. Management is in the process of developing contingency plans for mission critical systems, where applicable. These contingency plans include both remediation and business resumption plans. ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK There have been no material changes in the quantitative and qualitative disclosures about market risks as of September 30, 1998 from that presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. CSB BANCORP, INC. FORM 10-Q Quarter ended September 30, 1998 PART II - OTHER INFORMATION Item 1 - Legal Proceedings: There are no matters required to be reported under this item. Item 2 - Changes in Securities: There are no matters required to be reported under this item. Item 3 - Defaults Upon Senior Securities: There are no matters required to be reported under this item. Item 4 - Submission of Matters to a Vote of Security Holders: There are no matters required to be reported under this item. Item 5 - Other Information: There are no matters required to be reported under this item. Item 6 - Exhibits and Reports on Form 8-K: (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter for which this report is filed. CSB BANCORP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CSB BANCORP, INC. (Registrant) Date: November 12, 1998 /s/ Douglas D. Akins (Signature) Douglas D. Akins President Chief Executive Officer Date: November 12, 1998 /s/ A. Lee Miller (Signature) A. Lee Miller Senior Vice President Chief Financial Officer CSB BANCORP, INC. Index to Exhibits Exhibit Sequential Number Description of Document Page 27 Financial Data Schedule EX-27 2
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 9-MOS DEC-31-1998 SEP-30-1998 8,672 2,157 12,273 0 22,780 59,163 61,196 189,545 2,649 300,309 250,732 7,611 1,190 10,341 0 0 16,557 13,878 300,309 13,512 3,466 416 17,394 7,854 8,572 8,822 774 0 5,020 4,189 3,178 0 0 3,178 1.21 1.21 4.29 812 2,085 0 0 2,349 517 43 2,649 2,202 0 447
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