ITEM 1 - DESCRIPTION OF BUSINESS
General
CSB Bancorp, Inc. (the "Company") was incorporated under the laws of the State of Ohio on June 28, 1991, at the direction of management of The Commercial and Savings Bank (the "Bank") for the purpose of becoming a bank holding company by acquiring all outstanding shares of the Bank. The Company acquired all such shares of the Bank following an interim bank merger, which transaction was consummated on January 31, 1992. The Bank is a commercial bank chartered under the laws of the State of Ohio and was organized in 1879. The Bank is the wholly-owned subsidiary of the Company and its only significant asset.
The Bank provides retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, night depository facilities and trust services. The Bank is a member of the Federal Reserve System, its deposits are insured by the Federal Deposit Insurance Corporation and it is regulated by the Ohio Division of Financial Institutions.
The Company, through the Bank, grants residential real estate, commercial real estate, consumer and commercial loans to customers located primarily in Holmes County and portions of surrounding counties in Ohio. The general economic conditions in the Company's market area have been sound. Unemployment statistics have generally been among the lowest in the state of Ohio and real estate values have been stable to rising.
Certain risks are involved in granting loans, primarily related to the borrowers' ability and willingness to repay the debt. Before the Bank extends a new loan to a customer, these risks are assessed through a review of the borrower's past and current credit history, collateral being used to secure the transaction in the event the customer does not repay the debt, borrower's character and other factors. Once the decision has been made to extend credit, the Bank's independent loan review function monitors these factors throughout the life of the loan. All credit relationships of $500,000 or more are reviewed quarterly. Relationships of $250,000 to $499,999 are reviewed semi-annually, and a sample of ten relationships of $100,000 to $249,999 is reviewed quarterly. In addition, any loan identified as a problem credit by management or during the loan review is assigned to the Bank's "watch loan list," and is subject to ongoing review by the loan review function to ensure appropriate action is taken when deterioration has occurred.
Commercial loans are primarily variable rate and include operating lines of credit and term loans made to small businesses primarily based on their ability to repay the loan from the cash flow of the business. Such loans are typically secured by business assets such as equipment and inventory, and occasionally by the business owner's principal residence. When the borrower is not an individual, the Bank generally obtains the personal guarantee of the business owner. As compared to consumer lending, which includes single-family residence, personal installment loans and automobile loans, commercial lending entails significant additional risks. These loans typically involve larger loan balances, are generally dependent on the cash flow of the business, and thus may be subject to a greater extent to adverse conditions in the general economy or in a specific industry. Management reviews the borrower's cash flows when deciding whether to grant the credit to evaluate whether estimated future cash flows will be adequate to service principal and interest of the new obligation in addition to existing obligations.
Commercial real estate loans are primarily secured by borrower- occupied business real estate and are dependent on the ability of the related business to generate adequate cash flow to service the debt. Such loans primarily carry adjustable interest rates. Commercial real estate loans are generally originated with a loan- to-value ratio of 75% or less. Management performs much the same analysis when deciding whether to grant a commercial real estate loan as when deciding whether to grant a commercial loan.
Residential real estate loans carry an approximately equal amount of fixed versus variable rates, and are secured by the borrower's residence. Such loans are made based on the borrower's ability to make repayment from employment and other income. Management assesses the borrower's ability to repay the debt through review of credit history and ratings, verification of employment and other income, review of debt-to-income ratios and other measures of repayment ability. The Bank generally makes these loans in amounts of 90% or less of the value of collateral. An appraisal is obtained from a qualified real estate appraiser for substantially all loans secured by real estate. Construction loans are secured by residential and business real estate that generally will be occupied by the borrower on completion. While not contractually required to do so, the Bank usually makes the permanent loan at the end of the construction phase. Construction loans also are made in amounts of 90% or less of the value of the collateral.
Installment loans to individuals include loans secured by automobiles and other consumer assets, including second mortgages on personal residences. Consumer loans for the purchase of new automobiles generally do not exceed 80% of the purchase price of the car. Loans for used cars generally do not exceed average wholesale or trade-in values as stipulated in a recent auto- industry used-car price guide. Credit card and overdraft protection loans are unsecured personal lines of credit to individuals of demonstrated good credit character with reasonably assured sources of income and satisfactory credit histories. Consumer loans generally involve more risk than residential mortgage loans because of the type and nature of collateral and, in certain types of consumer loans, absence of collateral. Since these loans are generally repaid from ordinary income of the individual or family unit, repayment may be adversely affected by job loss, divorce, ill health or by general decline in economic conditions. The Bank assesses the borrower's ability to make repayment through a review of credit history, credit ratings, debt-to-income ratios and other measures of repayment ability.
Employees
At December 31, 1998, the Bank employed 124 employees, 104 of which were employed on a full-time basis. The Company has no separate employees not also employed by the Bank.
Competition
The Bank operates in a highly-competitive industry due to Ohio law permitting statewide branching by banks, savings and loan associations and credit unions. Ohio law also permits nationwide interstate banking on a reciprocal basis. In its primary market area of Holmes and surrounding counties, the Bank competes for new deposit dollars and loans with several other commercial banks, both large regional banks and smaller community banks, as well as savings and loan associations, credit unions, finance companies, insurance companies, brokerage firms and investment companies. The ability to generate earnings is impacted, in part, by competitive pricing on loans and deposits and by changes in the rates on various U.S. Treasury and State and political subdivision issues which comprise a significant portion of the Bank's investment portfolio, and which rates are used as indices on several loan products. The Bank believes its presence in the Holmes County area, as the financial institution with the largest local asset base, provides the Bank with a competitive advantage due to its large asset base and ability to make loans and provide services to the local community.
Supervision and Regulation
The Bank is subject to supervision, regulation and periodic examination by the State of Ohio Superintendent of Financial Institutions and the Federal Reserve Board. Because the Federal Deposit Insurance Corporation insures its deposits, the Bank is also subject to certain regulations of that federal agency. The earnings of the Bank are affected by state and federal laws and regulations, and by policies of various regulatory authorities. These policies include, for example, statutory maximum lending rates, requirements on maintenance of reserves against deposits, domestic monetary policies of the Board of Governors of the Federal Reserve System, United States fiscal policy, international currency regulations and monetary policies, certain restrictions on banks' relationships with many phases of the securities business and capital adequacy and liquidity restraints.
Statistical Disclosures
The following schedules present, for the periods indicated, certain financial and statistical information of the Company as required under the Securities and Exchange Commission's Industry Guide 3, or a specific reference as to the location of required disclosures in the Company's 1998 Annual Report to Shareholders (the "Annual Report").
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential
A&B. Average Balance Sheet and Related Analysis of Net Interest Earnings: The information set forth under the heading "Average Balances, Rates and Yields" on page 23 of the CSB Bancorp Inc. 1998 Annual Report to Shareholders (the "Annual Report") portions of which are included as Exhibit 13 to this document, is incorporated herein by reference.
C. Interest Differential: The information set forth under the heading "Rate/ Volume Analysis of Changes in Income and Expense" on page 24 of the Annual Report is incorporated herein by reference.
II. Securities Portfolio
A. The following is a schedule of the carrying value of securities at December 31, 1998, 1997 and 1996.
B. The following is a schedule of maturities for each category of debt securities and the related weighted average yield of such securities as of December 31, 1998:
The weighted average yields are calculated using amortized cost of investments and are based on coupon rates for securities purchased at par value, and on effective interest rates considering amortization or accretion if securities were purchased at a premium or discount. The weighted average yield on tax exempt obligations is presented on a taxable-equivalent basis based on the Company's marginal federal income tax rate of 34%. Other securities consist of Federal Reserve Bank and Federal Home Loan Bank stock bearing no stated maturity or yield and are not included in this analysis.
C. Excluding holdings of U.S. Treasury securities and other agencies and corporations of the U.S. Government, there were no investments in securities of any one issuer which exceeded 10% of the Company's consolidated shareholders' equity at December 31, 1998.
III. Loan Portfolio
A. Types of Loans - Total loans on the balance sheet are comprised of the following classifications at December 31:
B. Maturities and Sensitivities of Loans to Changes in Interest Rates - The following is a schedule of maturities of loans based on contract terms and assuming no amortization or prepayments, excluding real estate mortgage and installment loans, as of December 31, 1998:
(In thousands One Year One Through After Five of dollars) or Less Five Years Years Total -------- ----------- ---------- ------ Commercial $38,237 $14,662 $34,072 $ 86,971 Commercial real estate 1,967 2,884 28,286 33,137 Construction -- 250 2,905 3,155 ------- ------- ------- -------- Total $40,204 $17,796 $65,263 $123,263 ------- ------- ------- -------- ------- ------- ------- -------- The following is a schedule of fixed rate and variable rate commercial, commercial real estate and real estate construction loans due after one year from December 31, 1998.
Fixed Variable (In thousands of dollars) Rate Rate Total commercial, commercial real estate and construction loans due after one year $24,367 $58,692 ------- ------- ------- -------
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The following schedule summarizes nonaccrual, past due and restructured loans.
The policy for placing loans on nonaccrual status is to cease accruing interest on loans when management believes that collection of interest is doubtful, when commercial loans are past due as to principal and interest 90 days or more or when mortgage and consumer loans are past due as to principal and interest 120 days or more, except that in certain circumstances interest accruals are continued on loans deemed by management to be fully collectible. In such cases, loans are individually evaluated in order to determine whether to continue income recognition after 90 days beyond due date. When loans are placed on nonaccrual, any accrued interest is charged against interest income.
(d) Impaired Loans - Information regarding impaired loans at December 31 is as follows:
(In thousands of dollars) 1998 1997 1996
Balance of impaired loans at December 31 $1,454 $1,384 $961
Less portion for which no allowance for loan loss is allocated 142 -- -- ------ ------ ---- Portion of impaired loan balance for which an allowance for loan losses is allocated $1,312 $1,384 $961 ------ ------ ----
Portion of allowance for loan losses allocated to the impaired loan balance at December 31 $ 412 $ 437 $336
Interest income recognized in impaired loans during the year represented $92,000 while $140,000 would have been recognized had the loans been performing under their contractual terms.
Impaired loans are comprised of commercial and commercial real estate loans, and are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first-mortgage loans secured by one- to four-family residences, residential construction loans, and automobile, home equity and second-mortgage loans less than $100,000. Such loans are included in nonaccrual and past due disclosures in (a) and (b) above, but not in the impaired loan totals. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
2. Potential Problem Loans - At December 31, 1998, no loans were identified that management has serious doubts about the borrowers' ability to comply with present loan repayment terms and that are not included in item III.C.1. above.
3. Foreign Outstandings - There were no foreign outstandings during any period presented.
4. Loan Concentrations - As of December 31, 1998, there are no concentrations of loans greater than 10% of total loans that are not otherwise disclosed as a category of loans in Item III.A. above.
D. Other Interest-Bearing Assets - As of December 31, 1998, there are no other interest-bearing assets required to be disclosed under Item III.C.1. or 2. if such assets were loans.
IV. Summary Of Loan Loss Experience
A. The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31:
D. The following is a schedule of maturities of time certificates of deposit in amounts of $100,000 or more as of December 31, 1998:
(In thousands of dollars) Three months or less $ 8,736 Over three through six months 6,640 Over six through twelve months 15,910 Over twelve months 5,650
Total $36,936
C. and E. There were no foreign deposits in any period presented.
VI. Return On Equity And Assets
1998 1997 1996
Return on average assets 1.43% 1.62% 1.65% Return on average shareholders' equity 14.39 17.32 17.47 Dividend payout ratio 37.45 29.88 27.67 Average shareholders' equity to average assets 9.93 9.38 9.47
VII. Short-Term Borrowings
This item is not required for the Company because the average outstanding balance of short-term borrowings for the years ending December 31, 1998, 1997 and 1996 were less than 30 percent of shareholders' equity at December 31, 1998, 1997 and 1996.
ITEM 2
ITEM 2 - PROPERTIES
The Bank owns and operates its main office at Six West Jackson Street, Millersburg, Ohio 44654. The Bank also operates eight branches and two other properties are owned or leased as noted below:
1. The Berlin Branch, 4585 S. R. 39, Suite B, Berlin, Ohio 44610 (leased) 2. The South Clay Branch, 91 S. Clay Street, Millersburg, Ohio 44654 (owned) 3. The Winesburg Branch, 2225 U.S. 62, Winesburg, Ohio 44590 (owned) 4. The Clinton Commons Branch, 2101 Glen Drive, Millersburg, Ohio 44654 (leased) 5. The Walnut Creek Branch, 4980 Old Pump Street, Walnut Creek, Ohio 44687 (owned) 6. The Charm Office, Corner of S.R. 557 and C.R. 70, Charm, Ohio 44617 (leased) 7. The Sugarcreek Office, 127 S. Broadway, Sugarcreek, Ohio 44681 (owned) 8. The Operations Center, 52 South Clay Street, Millersburg, Ohio 44654 (leased) 9. 51 North Clay Street, Millersburg, Ohio 44654 (owned; operations center under construction) 10. The Shreve Office, 333 W. South Street, Shreve, OH 44676 (owned)
The Bank considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. All properties owned by the Bank are unencumbered by any mortgage or security interest and are adequately insured, in management's opinion.
ITEM 3
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
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of 1998.
PART II
ITEM 5
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information contained in the section captioned "Common Stock and Shareholder Information" on pages 31 and 32 of the Annual Report is incorporated herein by reference.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
Information contained in the section captioned "Selected Financial Data" on pages 20 and 21 of the Annual Report is incorporated herein by reference.
ITEM 7
ITEM 7 - MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Information contained in the section captioned "1998 Financial Review" on pages 19 through 31, inclusive, of the Annual Report is incorporated herein by reference.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information contained in the section captioned "Quantitative and Qualitative Disclosures About Market Risk" on pages 29 and 30 of the Annual Report is incorporated herein by reference.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information contained in the consolidated financial statements and related notes and the report of independent auditors thereon, on pages 33 through 56, inclusive, of the Annual Report is incorporated herein by reference.
ITEM 9
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
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained in the section captioned "ELECTION OF DIRECTORS" on pages 4 through 7 of the Company's proxy statement for the Company's 1999 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on or about March 12, 1999 (the "Proxy Statement") and information contained in the section captioned "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on pages 3 and 4 of the Proxy Statement is incorporated herein by reference.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Information contained in the section captioned "REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION" on pages 8 and 9 of the Proxy Statement, the section captioned "EXECUTIVE COMPENSATION" on page 10 of the Proxy Statement and the section captioned "PERFORMANCE GRAPH" on page 11 of the Proxy Statement, is incorporated herein by reference.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained in the section captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 2 and 3 of the Proxy Statement is incorporated herein by reference.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained in the section captioned "CERTAIN TRANSACTIONS" on page 12 of the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit Number Description of Document
3.1 Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to Registrant's 1994 Form 10-KSB)
3.1.1 Amended form of Article Fourth of Amended Articles of Incorporation, as effective April 9, 1998.
3.2 Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB)
4 Form of Certificate of Common Shares of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB)
10 Leases for the Clinton Commons, Berlin and Charm Branch Offices of The Commercial and Savings Bank (incorporated by reference to Registrant's Form 10-SB)
11 Statement Regarding Computation of Per Share Earnings
13 CSB Bancorp, Inc. 1998 Annual Report to Shareholders
21 Subsidiary of CSB Bancorp, Inc.
23 Consent of Crowe, Chizek and Company LLP
24 Powers of Attorney
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CSB BANCORP, INC.
By: /s/DOUGLAS D. AKINS Douglas D. Akins, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on March 30, 1999.
Signatures Title
/s/ DOUGLAS D. AKINS* President (Principal Executive Douglas D. Akins* Officer)
/s/ A. LEE MILLER* Senior Vice President and A. Lee Miller Chief Financial Officer
/s/ PAMELA S. BASINGER* Financial Officer and Principal Pamela S. Basinger* Accounting Officer
/s/ DAVID W. KAUFMAN* Director David W. Kaufman*
/s/ J. THOMAS LANG* Director J. Thomas Lang*
/s/ VIVIAN A. McCLELLAND* Director Vivian A. McClelland*
/s/ H. RICHARD MAXWELL* Director H. Richard Maxwell*
/s/ SAMUEL M. STEIMEL* Director Samuel M. Steimel*
*By: /s/DOUGLAS D. AKINS Douglas D. Akins as attorney-in-fact and on his own behalf as Principal Executive Officer INDEX TO EXHIBITS
Exhibit Sequential Number Description of Document Page
3.1 Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to Registrant's 1994 Form 10-KSB). N/A
3.1.1 Amended form of Article Fourth of Amended Articles of Incorporation, as effective April 9, 1998. 19
3.2 Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB). N/A
4 Form of Certificate of Common Shares of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB). N/A
10 Leases for the Clinton Commons, Berlin and Charm Branch Offices of The Commercial and Savings Bank (incorporated by reference to Registrant's Form 10-SB). N/A
11 Statement Regarding Computation of Per Share Earnings 20
13 Excerpts of the CSB Bancorp, Inc. 1998 Annual Report to Shareholders 21
21 Subsidiary of CSB Bancorp, Inc. 64
23 Consent of Crowe, Chizek and Company LLP 65
24 Powers of Attorney 66
27 Financial Data Schedule 67