Exhibit 13
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PN 713.00.01+YOUR LOCAL PARTNER130 YEARS STRONGExhibit 13CSB BANCORP, INC.2009ANNUAL REPORTClient files were created with InDesign and are located at:DESKTOP_O_Drive\Composition\BCL\BCL39078_BCL1\ORIGINAL |
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YOUR LOCAL PARTNER130 YEARS STRONGCSB BANCORP, INC.Orrville High Street Banking Center Gnadenhutten Banking Center New Philadelphia Banking Center North Canton Banking CenterOpened September 2009Joined CSB November 2008Joined CSB November 2008Joined CSB November 2008OUR VISIBLE COMMUNITY PARTNERSHIPPartners in expansion. We certainly have a great history, but we have an even greater vision for our future. Four additional banking centers in 11 months, a strong financial performance, great community relationships, and a healthy on-going lending strategy all point toward one positive future — yours and ours. And our plan for our partnership is to only grow stronger.Supporting livestock auctionsSharing in practical ways in our communitiesInvesting in educationTuscarawas County 4-H Auction55 Advantage Club food drive for food pantryWest Holmes Financial Series |
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YOUR LOCAL PARTNER130 YEARS STRONGCSB BANCORP, INC.2009ANNUAL REPORT2009 Financial Highlights Highlights0. 4 2009 Letter to Shareholders Shareholders . 5Board of Directors 9 2009 Financial Review10 Report on Management’s Assessment of Internal Control over Financial Reporting.25 Report of Independent Registered Public Accounting Firm 26 Consolidated Balance Sheets.27 Consolidated Statements of Income. 28 Consolidated Statements of Shareholders’ Equity 29 Consolidated Statements of Cash Flows.30 Summary of Significant Accounting Policies 32 Notes to Consolidated Financial Statements 37 Officers of The Commercial & Savings Bank 56 Banking Center Information 57 Shareholder & General Inquiries58 |
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2009 FINANCIAL HIGHLIGHTS
% | ||||||||||||
FOR THE YEAR ENDED DECEMBER 31 | 2009 | 2008 | CHANGE | |||||||||
(Dollars in thousands, except per share data) | ||||||||||||
CONSOLIDATED RESULTS | ||||||||||||
Net interest income | $ | 15,765 | $ | 13,878 | 14 | % | ||||||
Net interest income-fully taxable-equivalent (“FTE”) basis | 15,974 | 14,009 | 14 | |||||||||
Noninterest income | 3,215 | 3,033 | 6 | |||||||||
Provision for loan losses | 1,337 | 333 | 301 | |||||||||
Noninterest expense | 12,718 | 11,311 | 12 | |||||||||
Net income | 3,391 | 3,537 | –4 | |||||||||
AT YEAR-END | ||||||||||||
Loans, net | $ | 309,423 | $ | 312,897 | –1 | % | ||||||
Assets | 450,666 | 424,657 | 6 | |||||||||
Deposits | 329,486 | 305,453 | 8 | |||||||||
Shareholders’ equity | 45,822 | 43,468 | 5 | |||||||||
Cash dividends declared | 0.72 | 0.72 | 0 | |||||||||
Book value | 16.76 | 15.89 | 5 | |||||||||
Tangible book value | 15.95 | 15.17 | 5 | |||||||||
Market price | 15.25 | 15.00 | 2 | |||||||||
Basic and diluted earnings per share | 1.24 | 1.43 | –13 | |||||||||
FINANCIAL PERFORMANCE | ||||||||||||
Return on average assets | 0.79 | % | 0.99 | % | ||||||||
Return on average equity | 7.51 | 9.23 | ||||||||||
Net interest margin, FTE | 3.93 | 4.13 | ||||||||||
Efficiency ratio | 66.22 | 66.17 | ||||||||||
CAPITAL RATIOS | ||||||||||||
Risk-based capital: | ||||||||||||
Tier 1 | 14.50 | % | 14.40 | % | ||||||||
Total | 15.70 | 15.50 | ||||||||||
Leverage | 9.70 | 10.40 |
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 LETTER TO SHAREHOLDERS
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Paula J. Meiler | Eddie L. Steiner | Rick L. Ginther | Paul D. Greig | |||
Senior Vice President, | President, | President, | Senior Vice President, | |||
Chief Financial Officer | Chief Executive Officer, | Chief Executive Officer, | Chief Operations/ | |||
CSB Bancorp, Inc. | The Commercial & | Information Officer | ||||
Savings Bank |
Dear Fellow Shareholder
Looking back, we realize that despite its challenges, 2009 was a good year for CSB Bancorp and its shareholders. Net income totaled $3.4 million and the Company paid more than $1.9 million in cash dividends. We are therefore pleased to provide you with this report of the Company’s financial performance and condition.
While more than a fourth of the nation’s banks lost money in 2009, CSB remained profitable and our net income declined by only 4%. The Company’s book value per share increased by 5% and total return on the Company’s stock exceeded 6%. Cash dividends per share remained unchanged from the prior two years, and the dividend yield equated to 4.7% at year-end, based on the closing price of the Company’s stock.
Still, the year just ended was far from “business as usual.” Our results reflect difficult conditions in our markets and the banking industry. The very low interest rate environment, soft loan demand, increased provision for loan losses, rising compliance costs, and substantially higher FDIC insurance premiums all impacted this year’s results.
We are addressing each of these challenges in the same way we conduct all aspects of governing and operating the Company. We maintain honesty and integrity in all our dealings. We use a consistently conservative approach toward risk management. We strive for continuous improvement and effective cost management. We try to give our customers the very best in service. We take intentional steps that support growth within our existing markets and into surrounding areas. As you read this report, we believe you will see that our results reflect these efforts.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 LETTER TO SHAREHOLDERS
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The Economic Backdrop
2009 was the second consecutive year of very challenging economic conditions around the globe. The sustained economic slowdown that began late in 2007 has taken an increasing toll through all levels of American society, affecting the financial strength of many individuals, businesses, not-for-profit organizations, governmental units and banks.
High levels of unemployment and “underemployment” have been particularly thorny aspects of this recession, creating financial stress for many households and curtailing consumer demand for goods and services. While the government has increased spending dramatically in an effort to jump-start the economy, there are few bright spots as of yet and a period of fairly slow economic growth is generally foreseen for the next couple of years.
Local economic conditions during 2009 were similar to those of the nation as a whole. Unemployment in our primary market area was about double what it averaged over the prior nine years, and at the time of this writing approximates the national average of 10%. Construction and manufacturing were among the industries with notable slowdowns in our markets during the past year.
At the end of 2009, no clear trend of local economic recovery had yet materialized. It may take a considerable period of time for employment and commercial activity to return to more normalized levels, and for many businesses and individuals to regain financial momentum.
Financial Performance
Our 2009 financial results reflect higher earnings potential from the Company’s increased size, but net income was held in check by the strong recessionary conditions that continued unabated throughout the year.
Average total assets increased 20% to $440 million, with average loans, deposits and equity all increasing by about 20% as well. Much of this growth came with the October 31, 2008 acquisition of Indian Village Bancorp, Inc. The markets we entered as a result of this acquisition, Gnadenhutten, New Philadelphia and North Canton, are important to our future growth and we are pleased with progress to date.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 LETTER TO SHAREHOLDERS
Total revenues increased more than 12% to $19 million. Net interest income grew by 13% and noninterest income increased by 6%. However, this increased revenue stream was offset by additional loan loss provisions, higher costs for FDIC insurance, and by a 10% increase in personnel expense to support the Company’s larger size. The Company was able to hold its efficiency ratio steady in spite of the aforementioned increases in costs.
Credit Quality
The prolonged slump in the economy has affected the overall quality of our loan portfolio. We are thankful to have incurred only modest net charge-offs, approximating 0.21% of average loan balances in 2009. At year-end, 2% of our loan balances were delinquent. Close to one half of the delinquent balances are on nonaccrual status. Industry numbers show that our rate of delinquencies and nonperforming loan levels are about one-half the national average.
We continue to work with borrowers who are experiencing financial difficulties. We think many, if not most, of these borrowers will eventually emerge in satisfactory condition. Still, the longer it takes for the overall economy to recover, the greater the degree of pressure on borrowers and the loan portfolio. We have increased the Allowance for Loan Losses in accordance with our assessment of potential future losses embedded in the loan portfolio.
Expanding Market Penetration
In September 2009, we opened a banking center on West High Street in Orrville. This is our second banking center in the greater Orrville area, and the location is designed to provide convenient access for customers in the downtown area.
CSB now has a total of thirteen retail banking centers serving Holmes, Tuscarawas, Wayne and Stark counties in Ohio. Our deposit market share increased in each of those counties during 2009. We remain the largest independent community bank in our primary market area.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 LETTER TO SHAREHOLDERS
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Positioned for Tomorrow
CSB’s core earnings momentum and capital position provide a solid foundation to handle the inevitable cycles of economic and industry turbulence. We are committed to maintaining our strong community bank presence and reliable financial services in the markets we serve.
Our strength also affords the ability to consider expansion opportunities at a time when many banks cannot. We seek prudent growth opportunities with acceptable risk, both within our present markets and in nearby areas.
We will continue to do our best to create value for shareholders, customers and the communities we serve. We welcome your comments and input, and hope to see you at the Company’s annual shareholders’ meeting on April 21, 2010.
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Eddie L. Steiner | John R. Waltman | |
President and | Chairman, | |
Chief Executive Officer | Board of Directors |
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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BOARD OF DIRECTORS
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L—R, STANDING | ||||||||
John R. Waltman | Eddie L. Steiner | Jeffery A. Robb, Sr. | J. Thomas Lang | Daniel J. Miller | ||||
Attorney, Of Counsel | President, | President, | Veterinarian, Dairy Farmer, | Retired Physician, | ||||
Critchfield, Critchfield | Chief Executive Officer, | Robb Companies, Inc. | Spring Hill Farms, Inc. | East Holmes Family Care, Inc. | ||||
& Johnston | CSB Bancorp, Inc. | |||||||
Chairman of the Board, | Chairman of the Board, | |||||||
CSB Bancorp, Inc. | The Commercial & Savings Bank | |||||||
L—R, SEATED | ||||||||
Robert K. Baker | Ronald E. Holtman | |||||||
Co-owner and Controller, | Attorney, | |||||||
Bakerwell, Inc. | Logee, Hostetler, Stutzman & Lehman |
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
INTRODUCTION
CSB Bancorp, Inc. (the “Company” or “CSB”) was incorporated under the laws of the State of Ohio in 1991 and is a registered bank holding company. The Company’s wholly-owned subsidiaries are The Commercial and Savings Bank (the “Bank”) and CSB Investment Services, LLC. 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 its primary Regulators are the Ohio Division of Financial Institutions and the Federal Reserve Board.
The Company, through the Bank, provides retail and commercial banking services to its customers including checking and savings accounts, time deposits, cash management, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, IRAs, night depository facilities, trust, and brokerage services. Its customers are located primarily in Holmes, Tuscarawas, Wayne, Stark and portions of surrounding counties in Ohio.
The Company’s market area has historically exhibited relatively stable economic conditions; however, a pronounced slowdown in economic activity has been evident since the latter half of 2008. Unemployment levels in Holmes County have generally been among the lowest in the State of Ohio, while the balance of the Company’s market area typically experiences unemployment levels similar to the state average. Unemployment in the Company’s market area during 2009 was virtually double the average of the previous nine years. Moderate reductions in real estate values have also developed as a result of the prevailing recessionary conditions.
Effective as of the close of business on October 31, 2008, CSB completed the merger of Indian Village Bancorp, Inc. (“Indian Village”) with and into CSB pursuant to the terms of the Agreement and Plan of Merger dated May 14, 2008. Immediately following the merger, Indian Village Community Bank was merged with and into The Commercial and Savings Bank of Millersburg. The former Indian Village banking centers are located in Gnadenhutten, New Philadelphia and North Canton, Ohio. The Company paid a combination of stock and cash as set forth in the definitive agreement and plan of merger for each outstanding common share of Indian Village, resulting in merger consideration of approximately $8.1 million, including direct acquisition costs. The transaction was accounted for using the purchase method of accounting (see Note 3 — Business Combination).
FORWARD-LOOKING STATEMENTS
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 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 because of various risk factors as discussed in this annual report and the Company’s annual report on Form 10-K. 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.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial information:
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||||||
Statements of income: | ||||||||||||||||||||
Total interest income | $ | 22,105 | $ | 20,621 | $ | 21,231 | $ | 20,045 | $ | 17,358 | ||||||||||
Total interest expense | 6,340 | 6,743 | 7,905 | 6,877 | 4,812 | |||||||||||||||
Net interest income | 15,765 | 13,878 | 13,326 | 13,168 | 12,546 | |||||||||||||||
Provision for loan losses | 1,337 | 333 | 472 | 302 | 283 | |||||||||||||||
Net interest income after provision for loan losses | 14,428 | 13,545 | 12,854 | 12,866 | 12,263 | |||||||||||||||
Noninterest income | 3,215 | 3,033 | 3,035 | 2,592 | 2,581 | |||||||||||||||
Noninterest expenses | 12,718 | 11,311 | 10,701 | 10,915 | 10,803 | |||||||||||||||
Income before income taxes | 4,925 | 5,267 | 5,188 | 4,543 | 4,041 | |||||||||||||||
Income tax provision | 1,534 | 1,730 | 1,674 | 1,433 | 1,168 | |||||||||||||||
Net income | $ | 3,391 | $ | 3,537 | $ | 3,514 | $ | 3,110 | $ | 2,873 | ||||||||||
Per share of common stock: | ||||||||||||||||||||
Basic income per share | $ | 1.24 | $ | 1.43 | $ | 1.42 | $ | 1.23 | $ | 1.09 | ||||||||||
Diluted income per share | 1.24 | 1.43 | 1.42 | 1.23 | 1.09 | |||||||||||||||
Dividends | 0.72 | 0.72 | 0.72 | 0.64 | 0.56 | |||||||||||||||
Book value | 16.76 | 15.89 | 14.82 | 14.03 | 13.64 | |||||||||||||||
Average basic common shares outstanding | 2,734,799 | 2,482,335 | 2,467,110 | 2,526,914 | 2,638,697 | |||||||||||||||
Average diluted common shares outstanding | 2,734,799 | 2,482,335 | 2,467,812 | 2,532,592 | 2,642,301 | |||||||||||||||
Year-end balances: | ||||||||||||||||||||
Loans, net | $ | 309,423 | $ | 312,897 | $ | 254,073 | $ | 229,825 | $ | 212,574 | ||||||||||
Securities | 80,621 | 81,888 | 74,526 | 70,241 | 81,220 | |||||||||||||||
Total assets | 450,666 | 424,657 | 350,270 | 327,240 | 320,989 | |||||||||||||||
Deposits | 329,486 | 305,453 | 259,386 | 260,178 | 255,403 | |||||||||||||||
Borrowings | 73,773 | 73,889 | 53,329 | 30,521 | 29,485 | |||||||||||||||
Shareholders’ equity | 45,822 | 43,468 | 36,278 | 35,070 | 35,170 | |||||||||||||||
Average balances: | ||||||||||||||||||||
Loans, net | $ | 313,726 | $ | 260,132 | $ | 239,405 | $ | 222,952 | $ | 218,187 | ||||||||||
Securities | 75,597 | 70,680 | 66,966 | 74,994 | 71,866 | |||||||||||||||
Total assets | 427,613 | 357,667 | 327,771 | 319,749 | 316,612 | |||||||||||||||
Deposits | 304,902 | 257,478 | 253,221 | 247,543 | 249,007 | |||||||||||||||
Borrowings | 75,734 | 60,472 | 37,278 | 35,824 | 30,083 | |||||||||||||||
Shareholders’ equity | 45,184 | 38,308 | 35,772 | 34,766 | 36,290 | |||||||||||||||
Selected ratios: | ||||||||||||||||||||
Net interest margin, tax equivalent basis | 3.93 | % | 4.13 | % | 4.35 | % | 4.45 | % | 4.35 | % | ||||||||||
Return on average total assets | 0.79 | 0.99 | 1.07 | 0.97 | 0.91 | |||||||||||||||
Return on average shareholders’ equity | 7.51 | 9.23 | 9.82 | 8.95 | 7.92 | |||||||||||||||
Average shareholders’ equity as a percent of average total assets | 10.57 | 10.71 | 10.91 | 10.87 | 11.46 | |||||||||||||||
Net loan charge-offs (recoveries) as a percent of average loans | 0.21 | (0.01 | ) | 0.20 | 0.06 | 0.19 | ||||||||||||||
Allowance for loan losses as a percent of loans at year-end | 1.29 | 1.07 | 1.01 | 1.12 | 1.14 | |||||||||||||||
Shareholders’ equity as a percent of total year-end assets | 10.17 | 10.24 | 10.36 | 10.72 | 10.96 | |||||||||||||||
Dividend payout ratio | 58.06 | 50.99 | 50.41 | 51.89 | 51.47 |
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
RESULTS OF OPERATIONS
Net Income
CSB’s 2009 net income was $3,391,000 while basic and diluted earnings per share were $1.24, as compared to $3,537,000 or $1.43 per share for the year of 2008. Earnings per share for 2009 included the full effect of the issuance of additional shares of stock for the purchase of Indian Village Bancorp, Inc. (“Indian Village”). Net income decreased 4.1% during 2009 as compared to 2008, due primarily to the $1.0 million increase to the provision for loan losses and higher noninterest expenses due primarily to increased FDIC assessments and a larger infrastructure from the addition of Indian Village. Partially offsetting the credit cost and other expense increases were a 13.6% increase in net interest income from a larger balance sheet resulting from the Indian Village acquisition and a 6.0% increase in noninterest income primarily from increased gains on sale of mortgage loans into the secondary market. Additionally, the Company had an 11.3% reduction in the provision for income taxes in 2009 as compared to 2008 due to a lower effective tax rate. Return on average assets was 0.79% in 2009 compared to 0.99% in 2008, and return on average shareholders’ equity was 7.51% in 2009 as compared to 9.23% in 2008.
Net income for 2008 was $3,537,000, an increase of $23,000 or 0.7% from 2007. Basic and diluted net income per share was $1.43 and $1.42 for the years ended December 31, 2008 and 2007, respectively. Return on average assets was 0.99% in 2008 compared to 1.07% in 2007, and return on average shareholders’ equity was 9.23% in 2008 compared to 9.82% in 2007.
Net Interest Income | ||||||||||||
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Net interest income | $ | 15,765 | $ | 13,878 | $ | 13,326 | ||||||
Taxable equivalent adjustment (1) | 209 | 131 | 144 | |||||||||
Net interest income, fully taxable equivalent | $ | 15,974 | $ | 14,009 | $ | 13,470 | ||||||
Net interest yield | 3.88 | % | 4.09 | % | 4.31 | % | ||||||
Taxable equivalent adjustment (1) | .05 | % | .04 | % | .04 | % | ||||||
Net interest yield—taxable equivalent | 3.93 | % | 4.13 | % | 4.35 | % | ||||||
(1) | Taxable equivalent adjustments have been computed assuming a 34% tax rate. |
Net interest income is the largest source of the Company’s revenue and consists of the difference between interest income generated on earning assets and interest expense incurred on liabilities (deposits and short-term and long-term borrowings). Volumes, interest rates and composition of interest-earning assets and interest-bearing liabilities affect net interest income.
Interest income increased $1.5 million, or 7.2% in 2009 as compared to 2008. The increase in interest income was primarily due to the increase in the volume of assets from Indian Village. Interest and fees on loans increased $1.5 million, or 8.9% in 2009, mainly due to the increase in average loan balances of $54.3 million, or 20.7%. The volume increase was partially offset by loan yields decreasing 63 basis points with interest rates at or near historical lows in 2009.
Interest income for the year of 2008 was $20.6 million, a decrease of $610,000 or 2.9% from $21.2 million reflected for the year ended December 31, 2007. Interest and fees on loans decreased $1.0 million, or 5.6%, to $17.0 million from $18.0 million in 2007. The decrease is mainly attributable to a decrease of 98 basis points average yield as compared to 2007. Interest income on securities increased $298,000 as the average balance in investments increased by $3.7 million in 2008 and the average yield increased 17 basis points. Other interest income rose $95,000 to $121,000 as the volume of overnight federal funds increased in 2008.
Interest expense decreased $403,000, or 6.0%, for 2009 as compared to 2008, due to a decline in the average rate paid for the year from 2.45% in 2008 to 1.90% in 2009. Interest expense on deposits decreased $531,000, or 11.0% in 2009. The decrease in interest expense occurred even though the average balances of interest-bearing deposits and borrowed funds increased by $58.9 million, or 21.4% in 2009 as compared to 2008. The increase in the average balances of interest-bearing liabilities was mainly from the acquisition of Indian Village.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
Interest expense for 2008 was $6.7 million, a decline of $1.2 million or 14.7% from 2007. Interest rates paid on interest bearing liabilities fell 73 basis points to 2.45% from 3.18% during the year while rates managed by the Federal Reserve Board fell 400 basis points. Interest expense on borrowed funds increased $354,000 to $1.9 million in 2008 primarily due to the increase in the average balance of borrowed funds of $23.2 million to $60.5 million. This increase included the assumption of $17.6 million fair value borrowings from the Indian Village acquisition.
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 BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS | ||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||
AVERAGE | AVERAGE | AVERAGE | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | BALANCE1 | INTEREST | RATE2 | BALANCE1 | INTEREST | RATE2 | BALANCE1 | INTEREST | RATE2 | |||||||||||||||||||||||||||||
Interest-earning assets | ||||||||||||||||||||||||||||||||||||||
Federal funds sold | $ | 195 | $ | 0 | 0.15 | % | $ | 5,645 | $ | 121 | 2.13 | % | $ | 458 | $ | 25 | 5.44 | % | ||||||||||||||||||||
Interest-earning deposits | 13,520 | 31 | 0.23 | 115 | 1 | 1.13 | 62 | 2 | 2.58 | |||||||||||||||||||||||||||||
Securities: | ||||||||||||||||||||||||||||||||||||||
Taxable | 67,019 | 3,218 | 4.80 | 65,109 | 3,252 | 5.00 | 61,673 | 2,928 | 4.75 | |||||||||||||||||||||||||||||
Tax exempt | 8,578 | 317 | 3.70 | 5,571 | 225 | 4.01 | 5,293 | 251 | 4.75 | |||||||||||||||||||||||||||||
Loans3 | 317,254 | 18,539 | 5.84 | 262,933 | 17,022 | 6.47 | 241,979 | 18,025 | 7.45 | |||||||||||||||||||||||||||||
Total interest-earning assets | 406,566 | 22,105 | 5.44 | % | 339,373 | 20,621 | 6.08 | % | 309,465 | 21,231 | 6.86 | % | ||||||||||||||||||||||||||
Noninterest-earning assets | ||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 7,951 | 10,523 | 10,980 | |||||||||||||||||||||||||||||||||||
Bank premises and equipment, net | 8,696 | 7,691 | 7,719 | |||||||||||||||||||||||||||||||||||
Other assets | 7,928 | 2,881 | 2,181 | |||||||||||||||||||||||||||||||||||
Allowance for loan losses | (3,528 | ) | (2,801 | ) | (2,574 | ) | ||||||||||||||||||||||||||||||||
Total assets | $ | 427,613 | $ | 357,667 | $ | 327,771 | ||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||
Demand deposits | $ | 46,107 | 45 | 0.10 | % | $ | 45,166 | 133 | 0.29 | % | $ | 45,606 | 257 | 0.56 | % | |||||||||||||||||||||||
Savings deposits | 58,672 | 244 | 0.42 | 45,591 | 376 | 0.82 | 41,123 | 511 | 1.24 | |||||||||||||||||||||||||||||
Time deposits | 153,735 | 4,017 | 2.61 | 124,123 | 4,328 | 3.49 | 124,752 | 5,585 | 4.48 | |||||||||||||||||||||||||||||
Borrowed funds | 75,734 | 2,034 | 2.69 | 60,472 | 1,906 | 3.15 | 37,278 | 1,552 | 4.16 | |||||||||||||||||||||||||||||
Total interest-bearing liabilities | 334,248 | 6,340 | 1.90 | % | 275,352 | 6,743 | 2.45 | % | 248,759 | 7,905 | 3.18 | % | ||||||||||||||||||||||||||
Noninterest-bearing liabilities and shareholders’ equity | ||||||||||||||||||||||||||||||||||||||
Demand deposits | 46,388 | 42,598 | 41,740 | |||||||||||||||||||||||||||||||||||
Other liabilities | 1,793 | 1,409 | 1,500 | |||||||||||||||||||||||||||||||||||
Shareholders’ equity | 45,184 | 38,308 | 35,772 | |||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 427,613 | $ | 357,667 | $ | 327,771 | ||||||||||||||||||||||||||||||||
Net interest income | $ | 15,765 | $ | 13,878 | $ | 13,326 | ||||||||||||||||||||||||||||||||
Net interest margin | 3.88 | % | 4.09 | % | 4.31 | % | ||||||||||||||||||||||||||||||||
Net interest spread | 3.54 | % | 3.63 | % | 3.68 | % |
(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 nonaccrual loans. |
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
RATE/VOLUME ANALYSIS OF CHANGES IN INCOME AND EXPENSE1 | ||||||||||||||||||||||||
2009 v. 2008 | 2008 v. 2007 | |||||||||||||||||||||||
NET INCREASE | NET INCREASE | |||||||||||||||||||||||
(Dollars in thousands) | (DECREASE) | VOLUME | RATE | (DECREASE) | VOLUME | RATE | ||||||||||||||||||
Increase (decrease) in interest income: | ||||||||||||||||||||||||
Federal funds sold | $ | (121 | ) | $ | (8 | ) | $ | (113 | ) | $ | 95 | $ | 110 | $ | (15 | ) | ||||||||
Interest-earning deposits | 30 | 31 | (1 | ) | — | 1 | (1 | ) | ||||||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | (34 | ) | 92 | (126 | ) | 326 | 172 | 154 | ||||||||||||||||
Tax exempt | 92 | 111 | (19 | ) | (28 | ) | 11 | (39 | ) | |||||||||||||||
Loans | 1,517 | 3,174 | (1,657 | ) | (1,003 | ) | 1,357 | (2,360 | ) | |||||||||||||||
Total interest income change | 1,484 | 3,400 | (1,916 | ) | (610 | ) | 1,651 | (2,261 | ) | |||||||||||||||
Increase (decrease) in interest expense: | ||||||||||||||||||||||||
Demand deposits | (88 | ) | 1 | (89 | ) | (124 | ) | (1 | ) | (123 | ) | |||||||||||||
Savings deposits | (132 | ) | 54 | (186 | ) | (135 | ) | 37 | (172 | ) | ||||||||||||||
Time deposits | (311 | ) | 774 | (1,085 | ) | (1,257 | ) | (22 | ) | (1,235 | ) | |||||||||||||
Other borrowed funds | 128 | 410 | (282 | ) | 354 | 731 | (377 | ) | ||||||||||||||||
Total interest expense change | (403 | ) | 1,239 | (1,642 | ) | (1,162 | ) | 745 | (1,907 | ) | ||||||||||||||
Net interest income | $ | 1,887 | $ | 2,161 | $ | (274 | ) | $ | 552 | $ | 906 | $ | (354 | ) | ||||||||||
(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. |
Provision for Loan Losses
The provision for loan losses is determined by management as the amount required to bring the allowance to a level considered appropriate to absorb probable future net charge-offs inherent in the loan portfolio as of period end. The provision for loan losses was $1,337,000 for 2009, $333,000 and $472,000 for 2008 and 2007. Higher provision expense in 2009 reflects adverse economic conditions which have led to an increase in charge-offs and nonperforming loans. See “Financial Condition – Allowance for Loan Losses” for additional discussion and information relative to the provision for loan losses.
Noninterest Income
YEAR ENDED DECEMBER 31 | ||||||||||||||||||||||||||||
CHANGE FROM 2008 | CHANGE FROM 2007 | |||||||||||||||||||||||||||
(Dollars in thousands) | 2009 | AMOUNT | % | 2008 | AMOUNT | % | 2007 | |||||||||||||||||||||
Service charges on deposit accounts | $ | 1,234 | $ | (39 | ) | (3.1 | )% | $ | 1,273 | $ | 42 | 3.4 | % | $ | 1,231 | |||||||||||||
Trust services | 547 | (99 | ) | (15.3 | ) | 646 | (85 | ) | (11.6 | ) | 731 | |||||||||||||||||
Debit card interchange fees | 393 | 76 | 24.0 | 317 | 41 | 14.9 | 276 | |||||||||||||||||||||
Credit card fee income | 74 | (92 | ) | (55.4 | ) | 166 | (96 | ) | 36.6 | 262 | ||||||||||||||||||
Insurance recovery | — | — | N.M. | — | (187 | ) | N.M. | 187 | ||||||||||||||||||||
Securities gain (loss) | 82 | 117 | N.M. | (35 | ) | (52 | ) | N.M. | 17 | |||||||||||||||||||
Gain on sale of loans, including MSRs | 463 | 175 | 60.8 | 288 | 270 | N.M. | 18 | |||||||||||||||||||||
Gain (loss) sale of other real estate | (28 | ) | (31 | ) | N.M. | 3 | 4 | N.M. | (1 | ) | ||||||||||||||||||
Other | 450 | 75 | 20.0 | 375 | 61 | 19.4 | 314 | |||||||||||||||||||||
Total noninterest income | $ | 3,215 | $ | 182 | 6.0 | % | $ | 3,033 | $ | (2 | ) | (0.1 | )% | $ | 3,035 | |||||||||||||
N.M., not a meaningful value
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
Noninterest income increased $182,000, or 6.0% for 2009 as compared to 2008. Service charges on deposits declined $39,000, or 3.1% for 2009 as compared to 2008. This decrease is a result of a decline in overdraft fee income as consumers have overdrawn their accounts less frequently. Trust fees declined in 2009 as compared to the prior year due to lower market-related fees for assets under management. The average market value of trust assets under management during 2009 and 2008 was $53.2 million and $58.2 million, respectively. The market value of total trust assets at December 31, 2009 and 2008 was $57.6 million and $51.0 million, respectively. Debit card interchange fees increased $76,000 or 24.0% due primarily to the acquisition of Indian Village. Gain on sale of loans was higher in 2009 due to volume increases in 1–4 family residential mortgages sold into the secondary market as interest rates remained at extremely low levels. Securities gains increased primarily from the sale of certain private label CMOs whose values recovered during 2009. Other income increased $75,000 or 20.0% primarily from a full year accretion in CSV life insurance acquired in the Indian Village transaction.
Total noninterest income decreased $2,000 or 0.1% in 2008 from 2007. Service charges on deposit accounts rose $42,000 or 3.4% as fees were increased in 2008. Trust service fee income declined $85,000 in 2008 primarily the result of the fair market value of the assets under management declining, therefore reducing the driver for fee income. Debit card interchange fees increased $41,000 or 14.9%, primarily the result of a full year under a new third party vendor which provided increased interchange fees. The securities loss was the result of a $35,000 other-than-temporary impairment recognized on an equity investment. The gain on sale of loans recognizes the $267,000 gain on sale of the credit card portfolio during first quarter 2008. Other income reflected an increase of $61,000 or 19.4%. This included increases in accretion in CSV life insurance of $17,000, a $24,000 increase recognized on an administrative services agreement, an $11,000 increase in noncustomer ATM fees, and a $6,000 increase in wire transfer fees.
Noninterest Expenses
YEAR ENDED DECEMBER 31 | ||||||||||||||||||||||||||||
CHANGE FROM 2008 | CHANGE FROM 2007 | |||||||||||||||||||||||||||
(Dollars in thousands) | 2009 | AMOUNT | % | 2008 | AMOUNT | % | 2007 | |||||||||||||||||||||
Salaries and employee benefits | $ | 6,900 | $ | 639 | 10.2 | % | $ | 6,261 | $ | 407 | 7.0 | % | $ | 5,854 | ||||||||||||||
Occupancy expense | 1,014 | (20 | ) | (1.9 | ) | 1,034 | 301 | 41.1 | 733 | |||||||||||||||||||
Equipment expense | 539 | 19 | 3.6 | 520 | 16 | 3.2 | 504 | |||||||||||||||||||||
Professional and directors’ fees | 641 | 129 | 25.2 | 512 | (68 | ) | 11.7 | 580 | ||||||||||||||||||||
Franchise tax expense | 506 | 69 | 15.8 | 437 | 20 | 4.8 | 417 | |||||||||||||||||||||
Marketing and public relations | 350 | (14 | ) | (3.8 | ) | 364 | (9 | ) | (2.5 | ) | 373 | |||||||||||||||||
Telecommunications | 206 | (15 | ) | (6.8 | ) | 221 | (4 | ) | (1.8 | ) | 225 | |||||||||||||||||
Amortization of intangible assets | 65 | 54 | N.M. | 11 | 11 | N.M. | — | |||||||||||||||||||||
FDIC assessment | 542 | 477 | 733.8 | 65 | 35 | N.M. | 30 | |||||||||||||||||||||
Other | 1,955 | 69 | 3.7 | 1,886 | (99 | ) | (5.0 | ) | 1,985 | |||||||||||||||||||
Total noninterest expenses | $ | 12,718 | $ | 1,407 | 12.4 | % | $ | 11,311 | $ | 610 | 5.7 | % | $ | 10,701 | ||||||||||||||
N.M., not a meaningful value
Noninterest expense increased $1.4 million in 2009 as compared to 2008, due to the acquisition of Indian Village and the related expenses of operating a larger organization and the increases in FDIC assessments in 2009. Salaries and benefits increased by $639,000 or 10.2% in 2009 as compared to 2008. The increases were primarily due to the Indian Village acquisition and normal increases in employee compensation and benefits. The number of full-time equivalent (“FTE”) employees of 144 at December 31, 2009, compares to 124 FTE count prior to the addition of Indian Village and was unchanged from December 31, 2008. Professional fees increased due to higher legal collection costs associated with delinquent and nonperforming loans and additional accounting costs due to the increase in size of the Company.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
Total noninterest expense increased $610,000 or 5.7% during 2008. Salaries and employee benefits increased $407,000 or 7.0% in 2008, a result of increased medical costs of approximately $40,000 or 10% in 2008, increases to retirement and incentive accruals, overtime paid during the acquisition and systems conversion of Indian Village, and salary and benefit costs arising from the acquisition of Indian Village beginning November 1, 2008 of approximately $83,000. Occupancy and equipment expense rose $317,000 in 2008 primarily the result of a $250,000 write-down of the downtown Millersburg building. The office located on the square in Millersburg is the former main office that has been designated as a disaster recovery site and is currently used for storage. The increase in occupancy expense for the three Indian Village acquired offices during 2008 approximates $38,000. Professional and directors’ fees decreased $68,000 or 11.7% during 2008, primarily the result of a reduction in outside service fees for overdraft privilege of $28,000, director’s fees of $13,000, and audit and other professional fees of $27,000. Other expenses decreased $64,000 from 2007, primarily due to the result of the sale of the credit card portfolio during the first quarter of 2008. Credit card expenses decreased $195,000, ATM third party vendor fees decreased $41,000 and trust and brokerage other expense decreased $16,000. Increases in other expenses were recognized as follows: $60,000 increase in stationery and printing, a result of the Indian Village conversion and implementation of electronic image capture, $35,000 increase in FDIC premiums, and $38,000 increase in correspondent bank fees and software expense as the bank sends and receives all checks for clearing electronically. Total noninterest expenses related to the Indian Village conversion including overtime were $137,000 in 2008.
Income Taxes
The provision for income taxes amounted to $1,534,000 in 2009 (effective rate 31.1%) as compared to $1,729,400 in 2008 (effective rate of 32.8%), and $1,674,200 in 2007 (effective rate of 32.3%). The decrease in the effective tax rate during 2009 as compared to 2008 is due primarily to a higher percentage of tax-exempt income to total income.
FINANCIAL CONDITION
Total assets of the Company were $450.7 million at December 31, 2009, compared to $424.7 million at December 31, 2008, representing an increase of $26.0 million or 6.1%. Net loans decreased $3.5 million or 1.1%, while investment securities decreased $1.3 million or 1.5% and interest-earning deposits with other banks increased $30.9 million. Deposits increased $24.0 million or 7.9%, while other borrowings from the Federal Home Loan Bank (FHLB) decreased by $6.0 million, or 11.7%.
Securities
Total investment securities decreased $1.3 million or 1.5% to $80.6 million at year-end 2009. The decline was due primarily to sales, calls and maturities of government agencies and pay-downs of mortgage-backed securities. CSB’s portfolio is primarily comprised of agency mortgage-backed securities, other government agencies and corporations debt, and obligations of state and political subdivisions. Restricted securities consist primarily of FHLB stock. During 2009, increases occurred in government agency and corporation debt, state and political subdivisions and restricted securities.
The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations or trust preferred securities and only an immaterial amount of nonagency collateralized mortgage obligations. Total gross unrealized security losses within the portfolio were an immaterial 0.5% of total available-for-sale securities at December 31, 2009, reflecting interest rate fluctuations, not credit downgrades.
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.
Loans
Total loans decreased $2.8 million or 0.9% during 2009. The decline in residential real estate loans reflects CSB’s selling most new residential mortgages in the secondary market and to a lesser extent the impact of a decline in the housing market on overall mortgage lending activity. Attractive interest rates in the secondary market drove increased consumer demand for 1–4 family fixed rate residential mortgages during 2009 and the Company sold $20.6 million of originated mortgages into the secondary market. This demand for low fixed rate mortgages included some refinancing of the bank’s in-house mortgage portfolio, leading to a decline in residential mortgage balances.
Demand for home equity loans remained strong in 2009, with balances increasing $5.0 million. However, demand for installment lending declined and we believe consumers will continue to deleverage by paying down debt and increasing savings during 2010.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
Commercial loans increased with new loan originations being made in the new market areas. Commercial real estate loan balances decreased as a result of scheduled repayments and sales of property, coupled with a lower-than-normal level of business expansions in the Company’s market area. Management anticipates the Company’s local service areas will exhibit slow economic growth with modest commercial loan demand in 2010.
Commercial and commercial real estate loans comprise approximately 57% of the total portfolio, increasing from 54% at year-end 2008. Residential real estate decreased from 40% to approximately 37% between December 31, 2008 and 2009. Construction loans increased from 3.6% to 4.4% of the total portfolio between 2008 and 2009. The Company is well within the respective regulatory guidelines for investment in construction development and investment property loans that are not owner occupied.
During 2008, the acquisition of Indian Village did not materially change the composition of the loan portfolio while adding $56.7 million in fair-valued loans on the acquisition date. After a review of its increasing vendor costs and lack of organic growth within the Company’s credit card portfolio, the Company sold its credit card portfolio during the first quarter 2008. Proceeds from the sale were $2.5 million with $267,000 gain on sale recognized.
Most of the Bank’s lending activity is with customers primarily located within Holmes, Tuscarawas, Wayne and Stark Counties in Ohio. Credit concentrations, including commitments, as determined using North American Industry Classification Codes (NAICS), to the four largest industries compared to total loans at December 31, 2009 included $18.8 million, or 6.0% of total loans to lessors of residential buildings or dwellings; $18.5 million or 5.9% of total loans to owners of nonresidential real estate; $15.0 million or 4.8% of total loans to logging, sawmills and timber tract operations; $10.4 million or 3.3% of total loans to borrowers in the hotel, motel and lodging business. These loans are generally secured by real property and equipment, and repayment is expected from operational cash flow. Credit losses arising from the Bank’s lending experience in all four industries compare favorably with the Bank’s loss experience on its loan portfolio as a whole. Credit evaluation is based on an evaluation of cash flow coverage of principal and interest payments and the adequacy of the collateral received.
Nonperforming Assets, Impaired Loans and Loans Past Due 90 Days Or More
Nonperforming assets consist of nonaccrual loans, loans past due 90 days and still accruing and other real estate acquired through or in lieu of foreclosure. Other impaired loans include certain loans that are internally classified as substandard or doubtful. Loans are placed on nonaccrual status when they become past due 90 days or more unless they are both well secured and in the process of collection.
NONPERFORMING ASSETS | FOR THE YEAR ENDED | |||||||
(Dollars in thousands) | 2009 | 2008 | ||||||
Nonaccrual loans: | ||||||||
Commercial | $ | 102 | $ | 20 | ||||
Commercial real estate | 1,499 | 1,113 | ||||||
Residential real estate | 2,185 | 1,094 | ||||||
Loans past due 90 days and still accruing | 355 | 416 | ||||||
Total nonperforming loans | 4,141 | 2,643 | ||||||
Other real estate owned | 162 | 79 | ||||||
Total nonperforming assets | $ | 4,303 | $ | 2,722 | ||||
Nonperforming assets as a percentage of: loans + other real estate | 1.37 | % | 0.86 | % |
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
Allowance 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, 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 the 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 in part subjective, as to the probability of loss and the amount of loss on these loans as well as other loans taken together. The Bank’s Allowance for Loan Losses Policy includes, among other items, provisions for classified loans and a provision for the remainder of the portfolio based on historical data, including past charge-offs.
ALLOWANCE FOR LOAN LOSSES | FOR THE YEAR ENDED | |||||||
(Dollars in thousands) | 2009 | 2008 | ||||||
Beginning balance of allowance for loan losses | $ | 3,394 | $ | 2,586 | ||||
Provision for loan losses | 1,337 | 333 | ||||||
Addition from acquisition | — | 458 | ||||||
Charge-offs: | ||||||||
Commercial | 320 | 55 | ||||||
Commercial real estate | 254 | 10 | ||||||
Consumer | 93 | 36 | ||||||
Residential real estate and home equity | 177 | 19 | ||||||
Deposit accounts | 41 | 28 | ||||||
Credit cards | — | 6 | ||||||
Total charge-offs | 885 | 154 | ||||||
Recoveries: | ||||||||
Commercial | 55 | 6 | ||||||
Commercial real estate | 86 | 4 | ||||||
Consumer | 49 | 131 | ||||||
Residential real estate and home equity | — | 10 | ||||||
Deposit accounts | 19 | 13 | ||||||
Credit cards | 5 | 7 | ||||||
Total recoveries | 214 | 171 | ||||||
Net charge-offs (recoveries) | 671 | (17 | ) | |||||
Ending balance of allowance for loan losses | $ | 4,060 | $ | 3,394 | ||||
Net charge-offs (recoveries) as a percentage of average total loans | 0.21 | % | (0.01 | )% | ||||
Allowance for loan losses as a percent of total loans | 1.29 | % | 1.07 | % | ||||
Allowance for loan losses to total nonperforming loans | 0.98 | × | 1.28 | × | ||||
Components of the allowance for loan losses: | ||||||||
General reserves | $ | 3,695 | $ | 3,059 | ||||
Specific reserves | 365 | 335 | ||||||
Total allowance for loan losses | $ | 4,060 | $ | 3,394 | ||||
The allowance for loan losses totaled $4.1 million or 1.29% of total loans at year-end 2009 as compared to $3.4 million or 1.07% of total loans at year-end 2008. Net charge-offs for 2009 totaled $671,000 as compared to net recoveries of $17,000 in 2008 and net charge-offs of $493,000 in 2007.
The Bank maintains an internal watch list on which it places loans where management’s analysis of the borrower’s operating results and financial condition indicates that the borrower’s cash flows are inadequate to meet its debt service requirements, and loans where there exists an increased risk that such a shortfall may occur.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
Nonperforming loans, which consist of loans past due 90 days or more and nonaccrual loans aggregated $4.1 million or 1.3% of loans at year-end 2009 as compared to $2.6 million or 0.8% of loans at year-end 2008. Impaired loans were $2.1 million at year-end 2009 as compared to $2.4 million at year-end 2008. The increase in nonperforming loans reflects the rising unemployment levels and slowdown of economic growth in the Company’s market areas in 2009. Management has assigned loss allocations to absorb the estimated losses on these impaired loans, and these allocations are included in the total allowance for loan losses balance.
Other Assets
Net premises and equipment decreased $117,000 to $8.4 million at year-end 2009 as depreciation expense exceeded new purchases. Other real estate owned at December 31, 2009 was $162,000 as compared to $79,000 owned at December 31, 2008. At December 31, 2009 the Company recognized a net deferred tax asset of $622,000 as compared to a net deferred tax asset of $1.6 million at December 31, 2008. The change in the Company’s net deferred tax position resulted primarily from the increase in net deferred tax liabilities on unrealized gains on securities available for sale. CSB prepaid three (3) years of FDIC insurance assessments, resulting in a prepaid asset of $1,457,000.
Deposits
The Company’s deposits are obtained primarily from individuals and businesses located in its market area. For deposits, the Company must compete with products offered by other financial institutions as well as other investment options such as mutual funds. Total deposits increased $24.0 million to $329.5 million at year-end 2009 as compared to $305.5 million at year-end 2008. Noninterest-bearing deposits increased $4.9 million or 10.0% to $54.0 million at year-end 2009. Interest-bearing deposits increased $19.1 million or 7.5% to $275.5 million at year-end 2009. Interest-bearing demand deposits increased $10.4 million to $57.9 million at year-end 2009, while money market savings accounts increased by $14.2 million and traditional savings deposits increased $701,000 from year-end 2008. Time deposits in excess of $100,000 decreased $2.7 million while other certificates of deposit decreased $3.5 million. Brokered CDs totaling $3.2 million acquired with Indian Village matured and were paid off.
Other Funding Sources
The Company obtains additional funds through securities sold under repurchase agreements and advances from the FHLB and overnight borrowings from the FHLB or other financial institutions. Securities sold under repurchase agreements increased $7.9 million, while FHLB advances decreased $8.0 million during 2009.
CAPITAL RESOURCES
Total shareholders’ equity increased to $45.8 million at December 31, 2009 as compared to $43.5 million at December 31, 2008. This increase was primarily due to $3.4 million net income in 2009, which was partially offset by the payment of cash dividends of $2.0 million. The Board of Directors announced a Stock Repurchase Program on July 7, 2005 that would allow the repurchase of up to 10% of the Company’s common shares outstanding. Repurchased shares are to be held as treasury stock and would be available for general corporate purposes. At December 31, 2009 approximately 41,000 shares could still be repurchased under the current authorized Program. No shares were purchased in 2009.
Banking regulations have established minimum capital ratios for banks and bank holding companies. Therefore, the Company and the 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 and Bank’s actual and required capital amounts are disclosed in Note 12 to the consolidated financial statements.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
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 year net income and the prior two years net retained earnings, as defined by regulation. In addition, dividend payments generally cannot reduce regulatory capital levels below the minimum regulatory guidelines discussed above.
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 source of liquidity is cash and cash equivalents, which totaled $42.7 million at December 31, 2009, an increase of $30 million from $12.7 million at December 31, 2008. Net income, securities available for sale, and loan repayments also serve as sources of liquidity. Cash and cash equivalents and securities maturing within one year represent 15.0% of total assets at year-end 2009, as compared to 6.6% of total assets at year-end 2008. Other sources of liquidity 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 both the short-term and long-term needs of the Company.
As summarized in the consolidated statements of cash flows, the most significant investing activities for the Company in 2009 included net loan repayments of $1.9 million, the maturities and calls of securities totaling $35.1 million, offset by $32.2 million in securities purchases. The Company’s financing activities included a $24.0 million increase in deposits, a $7.9 million increase in securities sold under agreements to repurchase and a $5.6 million net repayment of FHLB advances.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The most 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 consist 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 is held for trading purposes.
The Board of Directors establishes policies and operating limits with respect to interest rate risk. The Company manages interest rate risk regularly through its Asset Liability Committee. The Committee meets on a monthly basis and reviews various asset and liability management information including, but not limited to, the Bank’s liquidity position, projected sources and uses of funds, interest rate risk position and economic conditions.
The Company monitors its interest rate risk through modeling, 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 2009 and 2008. Income simulation analysis is used to measure the sensitivity of forecasted net interest income to changes in market rates over a one-year time horizon. The economic value of equity (EVE) is calculated by subjecting the period-end balance sheet on a quarterly basis to changes in interest rates and measuring the impact of the changes on the values of the assets and liabilities. 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.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
Net Interest Income at Risk
DECEMBER 31, 2009 | ||||||||||||||||||||
CHANGE IN | NET INTEREST | DOLLAR | ||||||||||||||||||
INTEREST RATES | INCOME | CHANGE | PERCENTAGE | BOARD | ||||||||||||||||
(BASIS POINTS) | (Dollars in thousands) | CHANGE | POLICY LIMITS | |||||||||||||||||
+200 | $ | 17,287 | $ | 849 | 5.2 | % | ± 15.0 | % | ||||||||||||
+100 | 16,739 | 301 | 1.8 | ± 10.0 | ||||||||||||||||
0 | 16,438 | — | — | |||||||||||||||||
–100 | N/A | N/A | N/A | ± 10.0 | ||||||||||||||||
–200 | N/A | N/A | N/A | ± 15.0 |
DECEMBER 31, 2008 | ||||||||||||||||||||
CHANGE IN | NET INTEREST | DOLLAR | ||||||||||||||||||
INTEREST RATES | INCOME | CHANGE | PERCENTAGE | BOARD | ||||||||||||||||
(BASIS POINTS) | (Dollars in thousands) | CHANGE | POLICY LIMITS | |||||||||||||||||
+200 | $ | 16,084 | $ | 651 | 4.2 | % | ± 15.0 | % | ||||||||||||
+100 | 15,786 | 353 | 2.3 | ± 10.0 | ||||||||||||||||
0 | 15,433 | — | — | |||||||||||||||||
–100 | 15,532 | 99 | 0.6 | ± 10.0 | ||||||||||||||||
–200 | N/A | N/A | N/A | ± 15.0 |
Management reviews Net Interest Income at Risk with the Board on a periodic basis. The Company was within all Board-approved limits at December 31, 2009 and 2008.
Economic Value of Equity at Risk
CHANGE IN | ||||||||||||
INTEREST RATES | PERCENTAGE | BOARD | ||||||||||
(BASIS POINTS) | CHANGE | POLICY LIMITS | ||||||||||
December 31, 2009 | ||||||||||||
+200 | – 4.1 | % | ± 20 | % | ||||||||
+100 | – 0.5 | ± 15 | ||||||||||
–100 | N/A | ± 15 | ||||||||||
–200 | N/A | ± 20 | ||||||||||
December 31, 2008 | ||||||||||||
+200 | – 18.1 | % | ± 20 | % | ||||||||
+100 | – 6.8 | ± 15 | ||||||||||
–100 | N/A | ± 15 | ||||||||||
–200 | N/A | ± 20 |
Management reviews Economic Value of Equity at Risk with the Board on a periodic basis. The Company was within all Board-approved limits at December 31, 2009 and 2008.
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.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
U.S. Treasury securities, obligations of U.S. Government corporations and agencies and obligations of states and political subdivisions will generally repay at their stated maturity, or if callable prior to their final maturity date. Mortgage-backed security payments increase when interest rates are low and decrease when interest rates rise. 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 and commercial 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-term and long-term interest rates. Prepayments on adjustable rate 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. Time deposits generally have early withdrawal penalties, which discourage customer withdrawal prior to maturity. Short-term borrowings have fixed maturities. Certain advances from the FHLB carry prepayment penalties and are expected to be repaid in accordance with their contractual terms.
FAIR VALUE MEASUREMENTS
The Company discloses the estimated fair value of its financial instruments at December 31, 2009 in Note 16 to the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS
The following table summarizes the Bank’s loan commitments, including letters of credit, as of December 31, 2009:
AMOUNT OF COMMITMENT TO EXPIRE PER PERIOD | ||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
TOTAL | LESS THAN | 1 TO 3 | 3 TO 5 | OVER 5 | ||||||||||||||||
TYPE OF COMMITMENT | AMOUNT | 1 YEAR | YEARS | YEARS | YEARS | |||||||||||||||
Commercial lines-of-credit | $ | 33,498 | $ | 32,538 | $ | 916 | $ | 30 | $ | 14 | ||||||||||
Real estate lines-of-credit | 22,725 | 144 | 1,696 | 5,344 | 15,541 | |||||||||||||||
Consumer lines-of-credit | 897 | 897 | — | — | — | |||||||||||||||
Overdraft Privilege | 5,491 | 5,491 | — | — | — | |||||||||||||||
Commercial real estate loan commitment | 3,600 | 3,600 | — | — | — | |||||||||||||||
Letters of credit | 1,213 | 583 | 630 | — | — | |||||||||||||||
Total commitments | $ | 67,424 | $ | 43,253 | $ | 3,242 | $ | 5,374 | $ | 15,555 | ||||||||||
As indicated in the preceding table, the Bank had $67.4 million in total loan commitments at the end of 2009, with $43.3 million of that amount expiring within one year. All lines-of-credit represent either fee-paid or legally binding loan commitments for the loan categories noted. Letters of credit are also included in the amounts noted in the table since the Bank requires that each letter of credit be supported by a loan agreement. The commercial and consumer lines represent both unsecured and secured obligations. The real estate lines are secured by mortgages on residential and nonresidential property. It is anticipated that a significant portion of these lines will expire without being drawn upon.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
The following table summarizes the Company’s other contractual obligations, exclusive of interest, as of December 31, 2009:
PAYMENT DUE BY PERIOD | ||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
TOTAL | LESS THAN | 1 TO 3 | 3 TO 5 | OVER 5 | ||||||||||||||||
CONTRACTUAL OBLIGATIONS | AMOUNT | 1 YEAR | YEARS | YEARS | YEARS | |||||||||||||||
Total time deposits | $ | 148,014 | $ | 78,784 | $ | 60,466 | $ | 8,565 | $ | 199 | ||||||||||
Short-term borrowings | 28,764 | 28,764 | — | — | — | |||||||||||||||
Other borrowings | 45,010 | 22,102 | 10,237 | 403 | 12,267 | |||||||||||||||
Operating leases | 277 | 133 | 144 | — | — | |||||||||||||||
Total obligations | $ | 222,065 | $ | 129,783 | $ | 70,847 | $ | 8,968 | $ | 12,466 | ||||||||||
The other borrowings noted in the preceding table represent borrowings from the Federal Home Loan Bank of Cincinnati. The notes require payment of interest on a monthly basis with principal due in monthly installments or at maturity, depending upon the issue. The obligations bear stated fixed interest rates and stipulate a prepayment penalty if the note’s interest rate exceeds the current market rate for similar borrowings at the time of repayment. As the notes mature, the Bank evaluates the liquidity and interest rate circumstances at that time to determine whether to pay off or renew the note. The evaluation process typically includes the strength of current and projected customer loan demand, the Bank’s federal funds sold or purchased position, projected cash flows from maturing investment securities, the current and projected market interest rate environment, local and national economic conditions, and customer demand for the Bank’s deposit product offerings.
CRITICAL ACCOUNTING POLICIES
The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the commercial banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements. These estimates, assumptions, and judgments are based upon the information available as of the date of the financial statements.
The most significant accounting policies followed by the Company are presented in the Summary of Significant Accounting Policies. These policies, along with the other disclosures presented in the Notes to Consolidated Financial Statements and the 2009 Financial Review, provide information about how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the determination of the other-than-temporary impairment on investment securities and the allowance for loan losses as the accounting areas that require the most subjective and complex estimates, assumptions, and judgments and, as such, could be the most subject to revision as new information becomes available.
Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
As previously noted in the section entitled Allowance for Loan Losses, management performs analysis to assess the adequacy of its allowance for loan losses. This analysis encompasses a variety of factors including the potential loss exposure for individually reviewed loans, the historical loss experience, the volume of nonperforming loans (i.e., loans in nonaccrual status or past due 90 days or more), the volume of loans past due, any significant changes in lending or loan review staff, an evaluation of current and future local and national economic conditions, any significant changes in the volume or mix of loans within each category, a review of the significant concentrations of credit, and any legal, competitive, or regulatory concerns.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein have been prepared in accordance with U.S. 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 the Company’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.OB” 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 interdealer prices, without markup, markdown or commission and may not represent actual transactions. The table specifies cash dividends declared by the Company to its shareholders during 2009 and 2008. No assurances can be given that future dividends will be declared, or if declared, what the amount of any such dividends will be. Additional information concerning restrictions over the payment of dividends is included in Note 12 of the consolidated financial statements.
QUARTER ENDED | �� | HIGH | LOW | DIVIDENDS DECLARED | ||||||||
March 31, 2009 | $ | 14.50 | $ | 12.25 | $ | 492,264 | ||||||
June 30, 2009 | 17.00 | 13.26 | 492,264 | |||||||||
September 30, 2009 | 16.00 | 14.25 | 492,264 | |||||||||
December 31, 2009 | 15.50 | 14.57 | 492,264 | |||||||||
March 31, 2008 | $ | 17.90 | $ | 15.75 | $ | 439,353 | ||||||
June 30, 2008 | 18.00 | 15.75 | 435,969 | |||||||||
September 30, 2008 | 16.25 | 14.40 | 435,957 | |||||||||
December 31, 2008 | 16.00 | 14.00 | 492,264 |
As of December 31, 2009, the Company had 1,352 shareholders and 2,734,799 outstanding shares of common stock.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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2009 FINANCIAL REVIEW
REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of CSB Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Management has designed our internal control over financial reporting to provide reasonable assurance that our published financial statements are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles.
Management is required by paragraph (c) of Rule 13a-15 of the Securities Exchange Act of 1934, as amended, to assess the effectiveness of our internal control over financial reporting as of each year-end. In making this assessment, management used the Internal Control-Integrated Framework issued in July 1994 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management conducted the required assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009. Based upon this assessment, management believes that our internal control over financial reporting is effective as of December 31, 2009.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
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Eddie L Steiner | Paula J. Meiler | |||
President, Chief Executive Officer | Senior Vice President, Chief Financial Officer |
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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The Board of Directors and Shareholders
CSB Bancorp, Inc.
CSB Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of CSB Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statement of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that 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 financial position of CSB Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assertions about the effectiveness of CSB Bancorp, Inc.’s internal control over financial reporting as of December 31, 2009, included in the accompanying “Report On Management’s Assessment of Internal Control Over Financial Reporting” and, accordingly, we do not express an opinion thereon.
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Wexford, Pennsylvania
March 11, 2010
March 11, 2010
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
2009 | 2008 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | ||||||||
Cash and due from banks | $ | 8,803,514 | $ | 8,698,917 | ||||
Interest-earning deposits in other banks | 33,857,933 | 2,961,153 | ||||||
Federal funds sold | — | 1,086,000 | ||||||
Total cash and cash equivalents | 42,661,447 | 12,746,070 | ||||||
Securities | ||||||||
Available-for-sale, at fair value | 75,157,451 | 76,655,816 | ||||||
Restricted stock, at cost | 5,463,100 | 5,231,800 | ||||||
Total securities | 80,620,551 | 81,887,616 | ||||||
Loans held for sale | 340,150 | — | ||||||
Loans | 313,482,342 | 316,290,412 | ||||||
Less allowance for loan losses | 4,059,575 | 3,393,685 | ||||||
Net loans | 309,422,767 | 312,896,727 | ||||||
Premises and equipment, net | 8,353,869 | 8,470,855 | ||||||
Core deposit intangible | 469,000 | 534,000 | ||||||
Goodwill | 1,725,422 | 1,448,029 | ||||||
Bank-owned life insurance | 2,853,945 | 2,748,909 | ||||||
Accrued interest receivable and other assets | 4,218,830 | 3,924,976 | ||||||
TOTAL ASSETS | $ | 450,665,981 | $ | 424,657,182 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 53,974,358 | $ | 49,058,592 | ||||
Interest-bearing | 275,511,744 | 256,394,147 | ||||||
Total deposits | 329,486,102 | 305,452,739 | ||||||
Short-term borrowings | 28,763,604 | 22,891,593 | ||||||
Other borrowings | 45,009,781 | 50,997,537 | ||||||
Accrued interest payable and other liabilities | 1,584,432 | 1,846,841 | ||||||
Total liabilities | 404,843,919 | 381,188,710 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; outstanding 2,734,799 shares in 2009 and 2008 | 18,628,767 | 18,628,767 | ||||||
Additional paid-in capital | 9,993,812 | 9,986,499 | ||||||
Retained earnings | 21,146,199 | 19,723,972 | ||||||
Treasury stock at cost – 245,803 shares in 2009 and 2008 | (5,014,541 | ) | (5,014,541 | ) | ||||
Accumulated other comprehensive income | 1,067,825 | 143,775 | ||||||
Total shareholders’ equity | 45,822,062 | 43,468,472 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 450,665,981 | $ | 424,657,182 | ||||
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2009, 2008 and 2007
2009 | 2008 | 2007 | ||||||||||
INTEREST AND DIVIDEND INCOME | ||||||||||||
Loans, including fees | $ | 18,538,930 | $ | 17,021,867 | $ | 18,025,190 | ||||||
Taxable securities | 3,216,403 | 3,252,073 | 2,927,840 | |||||||||
Nontaxable securities | 318,693 | 225,287 | 251,551 | |||||||||
Other | 30,861 | 121,499 | 26,540 | |||||||||
Total interest and dividend income | 22,104,887 | 20,620,726 | 21,231,121 | |||||||||
INTEREST EXPENSE | ||||||||||||
Deposits | 4,306,121 | 4,836,598 | 6,352,732 | |||||||||
Short-term borrowings | 270,894 | 569,854 | 1,185,377 | |||||||||
Other borrowings | 1,763,201 | 1,336,365 | 366,630 | |||||||||
Total interest expense | 6,340,216 | 6,742,817 | 7,904,739 | |||||||||
NET INTEREST INCOME | 15,764,671 | 13,877,909 | 13,326,382 | |||||||||
PROVISION FOR LOAN LOSSES | 1,337,044 | 333,094 | 472,100 | |||||||||
Net interest income, after provision for loan losses | 14,427,627 | 13,544,815 | 12,854,282 | |||||||||
NONINTEREST INCOME | ||||||||||||
Service charges on deposit accounts | 1,234,513 | 1,273,094 | 1,231,020 | |||||||||
Trust services | 546,918 | 645,941 | 730,715 | |||||||||
Debit card interchange fees | 393,260 | 317,392 | 276,467 | |||||||||
Credit card, other fee income | 73,619 | 165,727 | 261,784 | |||||||||
Insurance recovery | — | — | 186,526 | |||||||||
Securities gain (loss), net | 151,890 | — | 16,830 | |||||||||
Other-than-temporary impairment losses | (70,000 | ) | (35,000 | ) | — | |||||||
Gain on sale of loans, net | 463,175 | 287,902 | 18,348 | |||||||||
Gain (loss) on sale of other real estate owned, net | (28,000 | ) | 3,300 | (994 | ) | |||||||
Other | 449,922 | 374,531 | 313,929 | |||||||||
Total noninterest income | 3,215,297 | 3,032,887 | 3,034,625 | |||||||||
NONINTEREST EXPENSES | ||||||||||||
Salaries and employee benefits | 6,900,025 | 6,261,348 | 5,853,523 | |||||||||
Occupancy expense | 1,014,198 | 1,033,780 | 732,850 | |||||||||
Equipment expense | 538,698 | 520,596 | 504,356 | |||||||||
Professional and director fees | 640,874 | 511,768 | 579,923 | |||||||||
Franchise tax expense | 506,370 | 437,250 | 416,712 | |||||||||
Marketing and public relations | 350,146 | 363,891 | 372,902 | |||||||||
Telecommunications | 205,823 | 220,663 | 225,284 | |||||||||
Amortization of intangible assets | 65,000 | 11,000 | — | |||||||||
FDIC assessment expense | 542,300 | 64,585 | 29,500 | |||||||||
Other expenses | 1,954,207 | 1,886,351 | 1,985,743 | |||||||||
Total noninterest expenses | 12,717,641 | 11,311,232 | 10,700,793 | |||||||||
Income before income taxes | 4,925,283 | 5,266,470 | 5,188,114 | |||||||||
FEDERAL INCOME TAX PROVISION | 1,534,000 | 1,729,400 | 1,674,200 | |||||||||
NET INCOME | $ | 3,391,283 | $ | 3,537,070 | $ | 3,513,914 | ||||||
NET INCOME PER SHARE | ||||||||||||
Basic | $ | 1.24 | $ | 1.43 | $ | 1.42 | ||||||
Diluted | $ | 1.24 | $ | 1.43 | $ | 1.42 | ||||||
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2009, 2008 and 2007
ADDITIONAL | ACCUMULATED OTHER | |||||||||||||||||||||||
PAID-IN | RETAINED | TREASURY | COMPREHENSIVE | |||||||||||||||||||||
COMMON STOCK | CAPITAL | EARNINGS | STOCK | INCOME (LOSS) | TOTAL | |||||||||||||||||||
BALANCE AT DECEMBER 31, 2006 | $ | 16,673,667 | $ | 6,427,765 | $ | 16,248,608 | $ | (3,696,102 | ) | $ | (583,618 | ) | $ | 35,070,320 | ||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 3,513,914 | — | — | 3,513,914 | ||||||||||||||||||
Change in net unrealized gain, net of reclassification adjustments and related income tax provision | — | — | — | — | 344,517 | 344,517 | ||||||||||||||||||
Total comprehensive income | 3,858,431 | |||||||||||||||||||||||
Stock-based compensation expense | — | 24,554 | — | — | — | 24,554 | ||||||||||||||||||
Issuance of 40 shares from treasury | — | — | (586 | ) | 1,230 | — | 644 | |||||||||||||||||
Purchase of 51,597 treasury shares | — | — | — | (904,410 | ) | — | (904,410 | ) | ||||||||||||||||
Cash dividends declared, $.72 per share | — | — | (1,771,491 | ) | — | — | (1,771,491 | ) | ||||||||||||||||
BALANCE AT DECEMBER 31, 2007 | 16,673,667 | 6,452,319 | 17,990,445 | (4,599,282 | ) | (239,101 | ) | 36,278,048 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 3,537,070 | — | — | 3,537,070 | ||||||||||||||||||
Change in net unrealized gain, net of reclassification adjustments and related income tax provision | — | — | — | — | 382,876 | 382,876 | ||||||||||||||||||
Total comprehensive income | 3,919,946 | |||||||||||||||||||||||
Stock-based compensation expense | — | 15,000 | — | — | — | 15,000 | ||||||||||||||||||
Issuance of 312,816 shares for acquisition | 1,955,100 | 3,519,180 | — | — | — | 5,474,280 | ||||||||||||||||||
Purchase of 25,641 treasury shares | — | — | — | (415,259 | ) | — | (415,259 | ) | ||||||||||||||||
Cash dividends declared, $.72 per share | — | — | (1,803,543 | ) | — | — | (1,803,543 | ) | ||||||||||||||||
BALANCE AT DECEMBER 31, 2008 | 18,628,767 | 9,986,499 | 19,723,972 | (5,014,541 | ) | 143,775 | 43,468,472 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | 3,391,283 | — | — | 3,391,283 | ||||||||||||||||||
Change in net unrealized gain, net of reclassification adjustments and related income tax provision | — | — | — | — | 924,050 | 924,050 | ||||||||||||||||||
Total comprehensive income | 4,315,333 | |||||||||||||||||||||||
Stock-based compensation expense | — | 7,313 | — | — | — | 7,313 | ||||||||||||||||||
Cash dividends declared, $.72 per share | — | — | (1,969,056 | ) | — | — | (1,969,056 | ) | ||||||||||||||||
BALANCE AT DECEMBER 31, 2009 | $ | 18,628,767 | $ | 9,993,812 | $ | 21,146,199 | $ | (5,014,541 | ) | $ | 1,067,825 | $ | 45,822,062 | |||||||||||
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009, 2008 and 2007
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 3,391,283 | $ | 3,537,070 | $ | 3,513,914 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization of premises, equipment and software | 758,502 | 734,053 | 685,832 | |||||||||
Building impairment | 134,000 | 250,000 | — | |||||||||
Deferred income taxes | 402,900 | (46,900 | ) | (113,050 | ) | |||||||
Provision for loan losses | 1,337,044 | 333,094 | 472,100 | |||||||||
Gain on sale of loans, net | (463,175 | ) | (287,902 | ) | (18,348 | ) | ||||||
Securities (gain) loss, net | (151,890 | ) | — | (16,830 | ) | |||||||
(Gain) loss on sale of other real estate owned, net | 28,000 | (3,300 | ) | 994 | ||||||||
Security amortization, net of accretion | 103,685 | 104,901 | 26,141 | |||||||||
Other-than-temporary impairment of investments | 70,000 | 35,000 | — | |||||||||
Secondary market loan sale proceeds | 21,004,609 | 2,152,806 | 1,474,148 | |||||||||
Originations of secondary market loans held-for-sale | (20,985,623 | ) | (2,132,362 | ) | (1,455,800 | ) | ||||||
Stock compensation expense | 7,313 | 15,000 | 24,554 | |||||||||
Effects of changes in operating assets and liabilities: | ||||||||||||
Net deferred loan costs | 78,391 | 41,916 | 7,495 | |||||||||
Accrued interest receivable | 70,378 | 370,772 | 4,717 | |||||||||
Accrued interest payable | (95,753 | ) | (212,800 | ) | 24,910 | |||||||
Prepaid FDIC assessment | (1,482,308 | ) | 59,311 | (7,265 | ) | |||||||
Other assets and liabilities | (780,993 | ) | (384,117 | ) | (328,518 | ) | ||||||
Net cash provided by operating activities | $ | 3,426,363 | $ | 4,566,542 | $ | 4,294,994 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Securities available-for-sale: | ||||||||||||
Proceeds from maturities and repayments | $ | 33,768,512 | $ | 35,582,233 | $ | 15,634,028 | ||||||
Proceeds from sale | 1,305,425 | — | — | |||||||||
Purchases | (32,197,290 | ) | (31,641,213 | ) | (19,406,047 | ) | ||||||
Purchase of restricted stock | (231,300 | ) | (114,900 | ) | — | |||||||
Loan originations, net of repayments | 1,863,826 | (4,743,118 | ) | (25,027,508 | ) | |||||||
Net cash from acquisition | — | 6,762,056 | — | |||||||||
Proceeds from sale of credit cards | — | 2,513,671 | — | |||||||||
Proceeds from sale of other real estate | 83,500 | 105,000 | 196,881 | |||||||||
Property, equipment and software acquisitions | (670,950 | ) | (513,633 | ) | (492,856 | ) | ||||||
Net cash provided by (used in) investing activities | $ | 3,921,723 | $ | 7,950,096 | $ | (29,095,502 | ) | |||||
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009, 2008 and 2007
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Net change in deposits | $ | 24,245,740 | $ | (12,759,396 | ) | $ | (791,630 | ) | ||||
Net change in short-term borrowings | (2,000,000 | ) | (2,700,000 | ) | (300,000 | ) | ||||||
Net change in securities sold under repurchase agreements | 7,872,011 | (1,713,564 | ) | (416,920 | ) | |||||||
Federal Home Loan Bank borrowings: | ||||||||||||
Proceeds | 4,000,000 | 8,000,000 | 24,000,000 | |||||||||
Repayments | (9,581,404 | ) | (572,168 | ) | (475,511 | ) | ||||||
Purchase of treasury shares | — | (415,259 | ) | (904,410 | ) | |||||||
Issuance of treasury shares | — | — | 644 | |||||||||
Cash dividends paid | (1,969,056 | ) | (1,803,543 | ) | (1,771,491 | ) | ||||||
Net cash provided by (used in) financing activities | $ | 22,567,291 | $ | (11,963,930 | ) | $ | 19,340,682 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 29,915,377 | 552,708 | (5,459,826 | ) | ||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | 12,746,070 | 12,193,362 | 17,653,188 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 42,661,447 | $ | 12,746,070 | $ | 12,193,362 | ||||||
SUPPLEMENTAL DISCLOSURES | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 7,054,700 | $ | 6,700,616 | $ | 7,879,829 | ||||||
Income taxes | 920,000 | 1,786,000 | 2,065,000 | |||||||||
Noncash investing activities: | ||||||||||||
Transfer of loans to other real estate owned | $ | 194,700 | $ | 20,000 | $ | 299,575 | ||||||
SUMMARY OF BUSINESS ACQUISITION | ||||||||||||
Fair value of tangible assets acquired | $ | — | $ | 81,303,000 | $ | — | ||||||
Fair value of core deposit intangible acquired | — | 545,000 | — | |||||||||
Fair value of liabilities assumed | — | (77,740,000 | ) | — | ||||||||
Stock issued for the purchase of acquired company’s common stock | — | (5,474,000 | ) | — | ||||||||
Cash paid in the acquisition | — | (2,232,000 | ) | — | ||||||||
Deferred tax asset | — | 1,873,000 | — | |||||||||
Goodwill recognized | $ | — | $ | (1,725,000 | ) | $ | — | |||||
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CSB Bancorp, Inc. (the “Company” or “CSB”) was incorporated in 1991 in the State of Ohio, and is a registered bank holding company. The Company’s wholly-owned subsidiaries are The Commercial and Savings Bank (the Bank) and CSB Investment Services, LLC. The Company, through its subsidiaries, operates in one industry segment; the commercial banking industry.
The Bank, an Ohio-chartered bank organized in 1879, provides financial services through its fourteen Banking Centers located in Holmes, Tuscarawas, Wayne and Stark Counties and nearby communities. These communities are the source of substantially all deposit, loan and trust activities. The majority of the Bank’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 business. Real estate loans are secured by both residential and commercial real estate.
Significant accounting policies followed by the Company are presented below:
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
In preparing consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. The most significant estimates susceptible to change in the near term relate to management’s determination of the allowance for loan losses and the fair value of financial instruments.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Bank has established a trust department and the assets held by the Bank in fiduciary or agency capacities for its customers are not included in the consolidated balance sheets as such items are not assets of the Bank.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold which mature overnight or within three days.
CASH RESERVE REQUIREMENTS
The Bank 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, 2009 and 2008 was $400,000.
SECURITIES
Securities designated as available-for-sale are carried at fair value with unrealized gains and losses on such securities, net of applicable income taxes, recognized as other comprehensive income (loss).
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity based on the interest method. Such amortization and accretion is included in interest and dividends on securities.
Investments in Federal Home Loan Bank and Federal Reserve Bank stock are classified as restricted securities, carried at cost, and evaluated for impairment.
Gains and losses on sales of securities are accounted for on a trade date basis, using the specific identification method, and are included in noninterest income. Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its market value and management’s intent and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors that are considered in determining management’s intent and ability is a review of the Company’s capital adequacy, interest rate risk position and liquidity. The assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and management’s intent and ability require considerable judgment. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the consolidated statement of income.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LOANS
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, generally are stated at their outstanding principal amount, adjusted for charge-offs, the allowance for loan losses and any deferred loan fees or costs on originated loans. Interest is accrued based upon the daily outstanding principal balance. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield over the life of the related loan.
Interest income is not reported when full repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.
OTHER REAL ESTATE OWNED
Other real estate acquired through or in lieu of foreclosure is initially recorded at fair value, less estimated costs to sell, and any loan balance in excess of fair value is charged to the allowance for loan losses. Subsequent valuations are periodically performed and write-downs are included in other operating expense, as are gains or losses upon sale and expenses related to maintenance of the properties. Other real estate owned amounted to $162,200 and $79,000 at December 31, 2009 and 2008, respectively.
PREMISES AND EQUIPMENT
Premises and equipment is stated at cost less accumulated depreciation and amortization. Upon the sale or disposition of the assets, the difference between the depreciated cost and proceeds is charged or credited to income. Depreciation and amortization is determined based on the estimated useful lives of the individual assets (typically 20 to 40 years for buildings and 3 to 10 years for equipment) and is computed using both accelerated and straight-line methods.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
Goodwill is not amortized, but is tested at least annually for impairment, in the fourth quarter or more frequently if indicators of impairment are present. The evaluation for impairment involves comparing the estimated current fair value of the reporting unit to its carrying value, including goodwill. If the estimated current fair value of a reporting unit exceeds its carrying value, no additional testing is required and an impairment loss is not recorded. CSB uses market capitalization and multiples of tangible book value methods to determine the estimated current fair value of its reporting unit. Based on this analysis no impairment was recorded in 2009.
The core deposit intangible assets are assigned useful lives, which are amortized on a straight-line basis over their weighted average lives. The Company periodically reviews the intangible asset for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights (“MSRs”) represent the right to service loans for third party investors. MSRs are accounted for pursuant to the provisions of ASC Topic 860, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” and “Accounting for Servicing of Financial Assets,” which requires that a company recognize as a separate asset the rights to service mortgage loans for others, regardless of how those servicing rights are acquired. MSRs are recognized upon the sale of mortgage loans to a third party investor with the servicing rights retained by CSB. Originated MSRs are recorded at allocated fair value at the time of the sale of the loans to the third party investor. MSRs are amortized in proportion to and over the estimated period of net servicing income. MSRs are carried at amortized cost, less a valuation allowance for impairment, if any. MSRs are evaluated on a discounted earnings basis to determine the present value of future earnings of the underlying serviced mortgages. All assumptions are reviewed annually or more frequently if necessary and adjusted to reflect current and anticipated market conditions.
BANK-OWNED LIFE INSURANCE
The cash surrender value of these policies is included as an asset on the consolidated balance sheets and any increases in the cash surrender value are recorded as noninterest income on the consolidated statements of income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit, which would be recorded as noninterest income.
REPURCHASE AGREEMENTS
Substantially all securities sold under repurchase agreements represent amounts advanced by various customers. Securities owned by the Bank are pledged to cover those obligations, which are not deposits and not covered by federal deposit insurance.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated tax return. Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities, reported for financial statement purposes and their tax bases. Deferred tax assets are recognized for temporary differences that will be deductible in future years’ tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years’ tax returns.
The Bank, domiciled in Ohio, is not currently subject to state and local income taxes.
STOCK-BASED COMPENSATION
The Company sponsors a stock-based compensation plan, administered by a committee, under which incentive stock options may be granted periodically to certain employees. The Company recorded compensation expense of $7,313, $15,000 and $24,554 for the years ended December 31, 2009, 2008 and 2007, respectively. The total income tax benefit recognized in the accompanying consolidated statements of income related to stock-based compensation was $2,486, $5,100 and $8,348 in 2009, 2008 and 2007, respectively. Shares issued in connection with stock option exercises may be issued from available treasury shares or from market purchases.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
2009 | 2008 | 2007 | ||||||||||
Risk-free interest rate | 2.53 | % | 3.52 | % | N/A | |||||||
Dividend yield | 4.80 | % | 4.47 | % | ||||||||
Volatility | 18.40 | % | 12.00 | % | ||||||||
Expected option life | 5.0 yrs. | 5.0 yrs. |
As of December 31, 2009, there was no unrecognized compensation cost related to unvested share-based compensation awards granted. All shares are vested.
Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The 2002 Plan authorized the issuance of 75,000 shares. The Plan was amended April 27, 2005 to authorize the issuance of 200,000 shares. The time period during which any option is exercisable under the Plan is determined by the committee but shall not continue beyond the expiration of ten years after the date the option is awarded.
The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. CSB estimates the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature. Option grants for 1,000, 2,000, and 0 shares of CSB common stock were granted for the years ended December 31, 2009, 2008, and 2007, respectively.
COMPREHENSIVE INCOME
U.S. generally accepted accounting principles require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
PER SHARE DATA
Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted income per common share includes the dilutive effect of additional potential common shares issuable under stock options.
The weighted average number of common shares outstanding for basic and diluted earnings per share computations were as follows:
2009 | 2008 | 2007 | ||||||||||
Weighted average common shares outstanding | 2,980,602 | 2,719,922 | 2,667,786 | |||||||||
Average treasury shares | (245,803 | ) | (237,587 | ) | (200,676 | ) | ||||||
Total weighted average common shares outstanding (basic) | 2,734,799 | 2,482,335 | 2,467,110 | |||||||||
Dilutive effect of assumed exercise of stock options | — | — | 702 | |||||||||
Weighted average common shares outstanding (diluted) | 2,734,799 | 2,482,335 | 2,467,812 | |||||||||
Dividends per share are based on the number of shares outstanding at the declaration date.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were 40,195 stock options to purchase common stock for $15.00 to $18.00 per share that were antidilutive at December 31, 2009. There were 40,720 stock options to purchase common stock for $16.05 to $19.00 per share that were antidilutive at December 31, 2008 and there were 42,760 stock options to purchase common stock for $17.50 to $19.00 per share that were antidilutive at December 31, 2007.
ACCOUNTING DEVELOPMENTS
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009–01,Topic 105 – Generally Accepted Accounting Principles – FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles.The Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. The Company adopted this standard for the interim reporting period ending September 30, 2009.
In April 2009, the FASB issued new guidance impacting ASC Topic 820,Fair Value Measurements and Disclosures.This ASC provides additional guidance in determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The adoption of this new guidance did not have a material effect on the Company’s results of operations or financial position.
In September 2006, the FASB issued an accounting standard related to fair value measurements, which was effective for the Company on January 1, 2008. This standard defined fair value, established a framework for measuring fair value, and expanded disclosure requirements about fair value measurements. The provisions of this accounting standard became effective for the Company’s financial assets and financial liabilities on January 1, 2008 and for nonfinancial assets and nonfinancial liabilities on January 1, 2009. This accounting standard was subsequently codified into ASC Topic 820,Fair Value Measurements and Disclosures.See Note 15 for the necessary disclosures.
In August 2009, the FASB issued ASU No. 2009–05,Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009–05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009–05 is effective for the first reporting period (including interim periods) beginning fourth quarter 2009. The adoption of this new guidance did not have a material impact on the Company’s financial position or results of operations.
In April 2009, the FASB issued new guidance impacting ASC 825–10–50,Financial Instruments,which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. This guidance amended existing GAAP to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company has presented the necessary disclosures in Note 16 herein.
In April 2009, the FASB issued new guidance impacting ASC 320–10,Investments – Debt and Equity Securities,which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. This guidance is effective for interim and annual periods ending after June 15, 2009.
In June 2009, the FASB issued an accounting standard related to the accounting for transfers of financial assets, which is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. This standard enhances reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. This standard eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. This standard also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. This accounting standard was subsequently codified into ASC Topic 860,Transfers and Servicing.The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATION OF COMPARATIVE AMOUNTS
Certain comparative amounts from the prior years have been reclassified to conform to current year classifications. Such classifications had no effect on net income or shareholders’ equity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SECURITIES
Securities consist of the following at December 31, 2009 and 2008:
GROSS | GROSS | |||||||||||||||
AMORTIZED | UNREALIZED | UNREALIZED | FAIR | |||||||||||||
COST | GAINS | LOSSES | VALUE | |||||||||||||
December 31, 2009 | ||||||||||||||||
Available-for-sale: | ||||||||||||||||
U.S. Treasury security | $ | 100,130 | $ | 54 | $ | — | $ | 100,184 | ||||||||
Obligations of U.S. Government corporations and agencies | 14,164,378 | 10,812 | 142,085 | 14,033,105 | ||||||||||||
Mortgage-backed securities | 49,705,578 | 1,828,018 | 176,149 | 51,357,447 | ||||||||||||
Obligations of states and political subdivisions | 9,504,636 | 131,356 | 22,182 | 9,613,810 | ||||||||||||
Total debt securities | 73,474,722 | 1,970,240 | 340,416 | 75,104,546 | ||||||||||||
Equity securities | 64,811 | 209 | 12,115 | 52,905 | ||||||||||||
Total available-for-sale | 73,539,533 | 1,970,449 | 352,531 | 75,157,451 | ||||||||||||
Restricted stock | 5,463,100 | — | — | 5,463,100 | ||||||||||||
Total securities | $ | 79,002,633 | $ | 1,970,449 | $ | 352,531 | $ | 80,620,551 | ||||||||
December 31, 2008 | ||||||||||||||||
Available-for-sale: | ||||||||||||||||
U.S. Treasury security | $ | 99,988 | $ | 473 | $ | — | $ | 100,461 | ||||||||
Obligations of U.S. Government corporations and agencies | 12,447,301 | 93,055 | — | 12,540,356 | ||||||||||||
Mortgage-backed securities | 56,697,763 | 618,677 | 417,495 | 56,898,945 | ||||||||||||
Obligations of states and political subdivisions | 7,045,468 | 77,901 | 83,073 | 7,040,296 | ||||||||||||
Total debt securities | 76,290,520 | 790,106 | 500,568 | 76,580,058 | ||||||||||||
Equity securities | 147,458 | 645 | 72,345 | 75,758 | ||||||||||||
Total available-for-sale | 76,437,978 | 790,751 | 572,913 | 76,655,816 | ||||||||||||
Restricted stock | 5,231,800 | — | — | 5,231,800 | ||||||||||||
Total securities | $ | 81,669,778 | $ | 790,751 | $ | 572,913 | $ | 81,887,616 | ||||||||
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SECURITIES (CONTINUED)
The amortized cost and fair value of securities at December 31, 2009, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED | FAIR | |||||||
COST | VALUE | |||||||
Available-for-sale: | ||||||||
Due in one year or less | $ | 2,688,420 | $ | 2,701,588 | ||||
Due after one through five years | 7,429,744 | 7,473,983 | ||||||
Due after five through ten years | 15,897,104 | 15,995,153 | ||||||
Due after ten years | 47,459,454 | 48,933,822 | ||||||
Total debt securities available-for-sale | $ | 73,474,722 | $ | 75,104,546 | ||||
Securities with a carrying value of approximately $58,372,061 and $55,418,731 were pledged at December 31, 2009 and 2008, respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.
Restricted stock primarily consists of investments in Federal Home Loan Bank of Cincinnati and Federal Reserve Bank of Cleveland stock. The Bank’s investment in Federal Home Loan Bank stock amounted to $4,961,800 at December 31, 2009 and 2008.
The following table shows the proceeds from sales of available-for-sale securities and the gross realized gains and losses on the sales of those securities that have been included in earnings as a result of the sales. Gains or losses on the sales of available-for-sale securities are recognized upon sale and are determined by the specific identification method.
FOR THE YEARS ENDED DECEMBER 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Proceeds | $ | 1,305,425 | $ | — | $ | — | ||||||
Realized gains | 152,467 | — | 16,830 | |||||||||
Realized losses | 577 | — | — | |||||||||
Impairment losses | 70,000 | 35,000 | — | |||||||||
Net securities gains (losses) | $ | 81,890 | $ | (35,000 | ) | $ | 16,830 | |||||
The income tax provision applicable to realized gains amounted to $51,839 in 2009, $0 in 2008, and $5,722 in 2007. The income tax benefit applicable to realized losses and impairment losses amounted to $23,996 in 2009 and $11,900 for other-than-temporary impairment in 2008. There were no tax benefits recognized from gross realized losses in 2007.
The following table presents gross unrealized losses and fair value of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009 and 2008:
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SECURITIES (CONTINUED)
SECURITIES IN A CONTINUOUS UNREALIZED LOSS POSITION | ||||||||||||||||||||||||
LESS THAN | 12 MONTHS | |||||||||||||||||||||||
12 MONTHS | OR MORE | TOTAL | ||||||||||||||||||||||
GROSS | GROSS | GROSS | ||||||||||||||||||||||
UNREALIZED | FAIR | UNREALIZED | FAIR | UNREALIZED | FAIR | |||||||||||||||||||
LOSSES | VALUE | LOSSES | VALUE | LOSSES | VALUE | |||||||||||||||||||
2009 | ||||||||||||||||||||||||
Obligations of U.S. Corporations and Agencies | $ | 142,085 | $ | 10,007,915 | $ | — | $ | — | $ | 142,085 | $ | 10,007,915 | ||||||||||||
Mortgage-backed securities | 5,798 | 48,622 | 170,351 | 2,107,044 | 176,149 | 2,155,666 | ||||||||||||||||||
Obligations of state & political subdivisions | 22,182 | 3,033,076 | — | — | 22,182 | 3,033,076 | ||||||||||||||||||
Total debt securities | 170,065 | 13,089,613 | 170,351 | 2,107,044 | 340,416 | 15,196,657 | ||||||||||||||||||
Equity securities | — | — | 12,115 | 41,620 | 12,115 | 41,620 | ||||||||||||||||||
Total temporarily impaired securities | $ | 170,065 | $ | 13,089,613 | $ | 182,466 | $ | 2,148,664 | $ | 352,531 | $ | 15,238,277 | ||||||||||||
2008 | ||||||||||||||||||||||||
Mortgage-backed securities | $ | 312,520 | $ | 9,327,561 | $ | 104,975 | $ | 1,101,425 | $ | 417,495 | $ | 10,428,986 | ||||||||||||
Obligations of state & political subdivisions | 83,073 | 4,291,747 | — | — | 83,073 | 4,291,747 | ||||||||||||||||||
Total debt securities | 395,593 | 13,619,308 | 104,975 | 1,101,425 | 500,568 | 14,720,733 | ||||||||||||||||||
Equity securities | — | — | 72,345 | 64,038 | 72,345 | 64,038 | ||||||||||||||||||
Total temporarily impaired securities | $ | 395,593 | $ | 13,619,308 | $ | 177,320 | $ | 1,165,463 | $ | 572,913 | $ | 14,784,771 | ||||||||||||
There were twenty-two (22) securities in an unrealized loss position at December 31, 2009, six (6) of which were in a continuous loss position for twelve months or more. At least quarterly, the Company conducts a comprehensive security-level impairment assessment. The assessments are based on the nature of the securities, the extent and duration of the securities, the extent and duration of the loss, management’s intent to sell or if it is more likely than not that management will be required to sell a security before recovery of its amortized cost basis, which may be maturity. Management believes the Company will fully recover the cost of these securities and it does not intend to sell these securities and likely will not be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, management concluded that these securities were not other-than-temporarily impaired at December 31, 2009 and has recognized the total amount of the impairment in other comprehensive income, net of tax. A $70,000 other-than-temporary impairment was recognized on an equity investment during 2009 and the equity investment was sold prior to December 31, 2009.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – LOANS
Loans consist of the following at December 31, 2009 and 2008:
2009 | 2008 | |||||||
Commercial | $ | 69,350,408 | $ | 61,859,176 | ||||
Commercial real estate | 107,794,230 | 109,284,157 | ||||||
Residential real estate | 114,881,413 | 125,148,884 | ||||||
Installment and credit card | 7,464,121 | 8,676,948 | ||||||
Construction | 13,761,260 | 11,238,597 | ||||||
Deferred loan costs | 230,910 | 82,650 | ||||||
Total Loans | $ | 313,482,342 | $ | 316,290,412 | ||||
The following represents a summary of the activity in the allowance for loan losses for the years ended December 31, 2009, 2008 and 2007:
2009 | 2008 | 2007 | ||||||||||
Beginning balance | $ | 3,393,685 | $ | 2,585,901 | $ | 2,607,118 | ||||||
Provision for loan losses | 1,337,044 | 333,094 | 472,100 | |||||||||
Loans charged-off | (884,554 | ) | (154,299 | ) | (612,723 | ) | ||||||
Recoveries | 213,400 | 170,850 | 119,406 | |||||||||
Addition from acquisition | — | 458,139 | — | |||||||||
Ending balance | $ | 4,059,575 | $ | 3,393,685 | $ | 2,585,901 | ||||||
Impaired loans were as follows for December 31, 2009 and 2008:
2009 | 2008 | |||||||
Year-end loans accounted for under ASC Topic 310 | $ | 874,339 | $ | 816,270 | ||||
Year-end loans with no allowance for loan losses allocated | 181,192 | 20,381 | ||||||
Year-end loans with allowance for loan losses allocated | 1,023,329 | 1,568,393 | ||||||
Amount of the allowance allocated | 343,283 | 335,492 |
2009 | 2008 | 2007 | ||||||||||
Average of impaired loans during the year | $ | 1,866,796 | $ | 469,712 | $ | 729,699 | ||||||
Interest income recognized during impairment | 17,328 | 8,439 | 25,876 | |||||||||
Cash-basis interest income recognized | 15,703 | 7,890 | 25,674 | |||||||||
Accrued interest not recognized | 96,306 | 24,937 | 35,166 |
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 December 31, 2009 and 2008:
2009 | 2008 | |||||||
Loans past due over 90 days still accruing interest | $ | 354,683 | $ | 415,861 | ||||
Nonaccrual loans | 3,785,846 | 2,226,867 | ||||||
Interest income on nonaccrual loans not recognized | 194,290 | 52,517 |
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – LOANS (CONTINUED)
Loans serviced for others approximated $39,856,000 and $27,726,000 at December 31, 2009 and 2008, respectively.
Mortgage Servicing Rights
For the years ended December 31, 2009 and 2008, the Company had outstanding mortgage servicing rights (MSRs) of $138,036 and $63,014, respectively. The servicing asset acquired in the Indian Village acquisition was $63,497. The fair value of the MSRs exceeded carrying value at December 31, 2009 and 2008. Accordingly, no valuation allowance was recorded. On December 31, 2009, the Company had $38.0 million residential mortgage loans with servicing retained as compared to $23.2 million with servicing retained at December 31, 2008.
NOTE 3 – BUSINESS COMBINATION
After the close of business, on October 31, 2008, CSB completed the acquisition of Indian Village Bancorp Inc. (“Indian Village”). Indian Village operated as a bank holding company with three branch offices located in Tuscarawas and Stark Counties in north central Ohio. The primary reasons for the merger with Indian Village were to enhance shareholder value, to improve CSB’s competitive position in the financial services industry and to further expand its existing branch network in Ohio. The Company’s 2008 Consolidated Financial Statements include the results of operation of Indian Village after October 31, 2008, the date of acquisition.
The aggregate purchase price for Indian Village was approximately $8.1 million and was consummated through the exchange of a combination of CSB common stock at a rate of 0.7611 shares for each Indian Village share outstanding and $4.375 per share in cash. The acquisition was completed through the issuance of 312,816 shares of CSB newly issued common stock and the payment of $2.2 million in cash inclusive of the $430,000 paid for Indian Village’s outstanding stock options, 401(k) and specific ESOP stock. Direct costs of $194,000 were accounted for as part of the purchase price and included in goodwill associated with the merger.
Following is a reconciliation of the purchase price allocation:
FAIR VALUE OF | ||||
(Dollars in thousands) | NET ASSETS ACQUIRED | |||
Loans | $ | 56,206 | ||
Other tangible assets | 27,392 | |||
Goodwill | 1,725 | |||
Core deposit intangible | 545 | |||
Deposits | (58,880 | ) | ||
Borrowings | (17,616 | ) | ||
Other liabilities | (1,244 | ) | ||
Total purchase price | $ | 8,128 | ||
Goodwill and other intangible assets were allocated to The Commercial and Savings Bank. The Indian Village core deposit intangible has a weighted-average useful life of approximately 10 years.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — BUSINESS COMBINATION (CONTINUED)
The following unaudited summary information presents the consolidated results of operations of CSB on apro formabasis, as if the Indian Village acquisition had occurred at the beginning of 2008.
(in thousands, except per share amounts) | 2008 | |||
Net interest income | $ | 15,858 | ||
Provision for loan losses | 1,130 | |||
Net interest income after provision for loan losses | 14,728 | |||
Noninterest income | 3,188 | |||
Noninterest expense | 14,310 | |||
Income before income taxes | 3,606 | |||
Federal income tax provision | 1,219 | |||
Net income | $ | 2,387 | ||
Net income per common share | ||||
Basic | $ | 0.87 | ||
Diluted | $ | 0.87 | ||
Average common shares outstanding: | ||||
Basic | 2,743,015 | |||
Diluted | 2,743,015 |
Thepro formaresults include amortization of fair value adjustments on loans, deposits, and other borrowings, and amortization of newly created intangible assets and post-merger acquisition related expenses. Thepro formaresults for 2008 also include certain nonrecurring items including additional compensation and severance benefits, professional fees, and deconversion costs that were expensed as incurred at Indian Village prior to the acquisition and do not represent ongoing costs of the fully integrated combined organization. Thepro formaresults presented do not reflect cost savings or revenue enhancements anticipated from the acquisition, and are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.
NOTE 4 — PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31, 2009 and 2008:
2009 | 2008 | |||||||
Land and improvements | $ | 1,417,762 | $ | 1,267,762 | ||||
Buildings and improvements | 9,606,409 | 9,009,325 | ||||||
Furniture and equipment | 6,222,622 | 6,023,404 | ||||||
Leasehold improvements | 172,483 | 675,484 | ||||||
17,419,276 | 16,975,975 | |||||||
Accumulated depreciation | 9,065,407 | 8,505,120 | ||||||
Premises and equipment, net | $ | 8,353,869 | $ | 8,470,855 | ||||
The Bank leases certain office locations. Total rental expense under these leases approximated $160,000, $139,000, and $125,000 in 2009, 2008, and 2007, respectively. Future minimum lease payments at December 31, 2009 aggregate $277,110 and are due as follows: 2010, $133,203; 2011, $108,170 and 2012, $35,737.
Depreciation expense amounted to $630,443, $585,959, and $583,012 for the years ended December 31, 2009, 2008, and 2007, respectively.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill totaled $1.7 million at December 31, 2009, all of which related to the acquisition of Indian Village during 2008. (see Note 3 — Business Combination). In 2009, the increase in goodwill relates to subsequent revisions of preacquisition estimates and assumptions recorded in 2008, which have resulted in adjustments in goodwill as a result of purchase accounting adjustments in connection with the Indian Village acquisition.
The following table shows a rollforward of goodwill:
Goodwill acquired October 31, 2008 | $ | 1,448,029 | ||
Balance as of December 31, 2008 | 1,448,029 | |||
Adjustments to goodwill during the period | 277,393 | |||
Balance as of December 31, 2009 | $ | 1,725,422 | ||
Core Deposit Intangible
During 2008, the Company recorded a core deposit intangible totaling $545,000 with the acquisition of Indian Village. The core deposit intangible asset will be amortized over an estimated life of ten years. Amortization expense related to the core deposit intangible asset totaled $65,000 and $11,000 in 2009 and 2008, respectively. The following table shows the core deposit intangible and the related accumulated amortization:
DECEMBER 31, | ||||||||
2009 | 2008 | |||||||
Gross carrying amount | $ | 545,000 | $ | 545,000 | ||||
Accumulated amortization | (76,000 | ) | (11,000 | ) | ||||
Net carrying amount | $ | 469,000 | $ | 534,000 | ||||
The estimated aggregate future amortization expense for the core deposit asset remaining as of December 31, 2009 is as follows:
Core deposit amortization | ||||
2010 | $ | 63,000 | ||
2011 | 61,000 | |||
2012 | 59,000 | |||
2013 | 56,000 | |||
2014 | 52,000 | |||
Thereafter | 178,000 | |||
$ | 469,000 | |||
NOTE 6 — INTEREST-BEARING DEPOSITS
Interest-bearing deposits at December 31, 2009 and 2008 are as follows: |
2009 | 2008 | |||||||
Demand | $ | 57,941,477 | $ | 47,515,178 | ||||
Savings | 69,556,055 | 54,654,402 | ||||||
Time deposits: | ||||||||
In excess of $100,000 | 45,739,746 | 48,458,513 | ||||||
Other | 102,274,466 | 105,766,054 | ||||||
Total interest-bearing deposits | $ | 275,511,744 | $ | 256,394,147 | ||||
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — INTEREST-BEARING DEPOSITS (CONTINUED)
At December 31, 2009, stated maturities of time deposits were as follows: |
2009 | ||||
2010 | $ | 78,783,645 | ||
2011 | 45,809,507 | |||
2012 | 14,657,009 | |||
2013 | 5,744,072 | |||
2014 | 2,820,822 | |||
2015 and beyond | 199,157 | |||
Total | $ | 148,014,212 | ||
NOTE 7 — BORROWINGS
Short-term borrowings
Short-term borrowings include overnight repurchase agreements, federal funds purchased and short-term advances through the Federal Home Loan Bank (FHLB). The outstanding balances and related information for short-term borrowings are summarized as follows:
2009 | 2008 | |||||||
Balance at year-end | $ | 28,763,604 | $ | 22,891,593 | ||||
Average balance outstanding | 25,443,564 | 25,761,283 | ||||||
Maximum month-end balance | 30,163,621 | 28,826,290 | ||||||
Weighted-average rate at year-end | 0.76 | % | 1.52 | % | ||||
Weighted-average rate during the year | 1.06 | 2.23 |
Average balances outstanding during the year represent daily average balances, and average interest rates represent interest expenses divided by the related average balances.
Other borrowings
The following table sets forth information concerning other borrowings: |
STATED INTEREST | ||||||||||||||||||||||||
MATURITY RANGE | WEIGHTED AVERAGE | RATE RANGE | AT DECEMBER 31 | |||||||||||||||||||||
DESCRIPTION | FROM | TO | INTEREST RATE | FROM | TO | 2009 | 2008 | |||||||||||||||||
Fixed rate | 1/19/10 | 12/21/17 | 4.08 | % | 1.82 | % | 6.23 | % | $ | 42,198,367 | $ | 47,104,719 | ||||||||||||
Fixed rate amortizing | 12/01/10 | 3/01/17 | 5.04 | % | 3.40 | % | 7.15 | % | 2,811,414 | 3,892,818 | ||||||||||||||
$ | 45,009,781 | $ | 50,997,537 | |||||||||||||||||||||
Maturities of other borrowings at December 31, 2009, are summarized as follows:
WEIGHTED- | ||||||||
YEAR ENDING DECEMBER 31, | AMOUNT | AVERAGE RATE | ||||||
2010 | $ | 22,102,133 | 3.39 | % | ||||
2011 | 3,747,602 | 3.36 | ||||||
2012 | 6,490,196 | 2.55 | ||||||
2013 | 212,962 | 6.06 | ||||||
2014 | 189,782 | 6.03 | ||||||
2015 and beyond | 12,267,106 | 3.67 | ||||||
$ | 45,009,781 | 3.37 | % | |||||
Monthly principal and interest payments are due on the fixed rate amortizing borrowings; additionally a 10% principal curtailment is due on the borrowing’s anniversary date. FHLB borrowings are secured by a blanket collateral agreement. At December 31, 2009 the Company has the capacity to borrow an additional $19.2 million from the FHLB.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — INCOME TAXES
The provision for income taxes consists of the following for the years ended December 31, 2009, 2008 and 2007:
2009 | 2008 | 2007 | ||||||||||
Current | $ | 1,131,100 | $ | 1,776,300 | $ | 1,787,250 | ||||||
Deferred | 402,900 | (46,900 | ) | (113,050 | ) | |||||||
Total income tax provision | $ | 1,534,000 | $ | 1,729,400 | $ | 1,674,200 | ||||||
The income tax provision attributable to income from operations differs from the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes as follows:
2009 | 2008 | 2007 | ||||||||||
Expected provision using statutory federal income tax rate | $ | 1,674,600 | $ | 1,790,600 | $ | 1,763,900 | ||||||
Tax-exempt income on state and municipal securities and political subdivision loans | (138,300 | ) | (86,100 | ) | (94,760 | ) | ||||||
Interest expense associated with carrying certain state and municipal securities and political subdivision loans | 7,900 | 7,900 | 9,400 | |||||||||
Other | (10,200 | ) | 17,000 | (4,340 | ) | |||||||
Total income tax provision | $ | 1,534,000 | $ | 1,729,400 | $ | 1,674,200 | ||||||
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are as follows:
2009 | 2008 | |||||||
Allowance for loan losses | $ | 1,472,500 | $ | 1,274,500 | ||||
Net operating loss carryforward | 983,800 | 1,087,800 | ||||||
Purchase accounting adjustments | — | 295,300 | ||||||
Capital loss carryforward | 35,400 | 93,200 | ||||||
Other | 83,900 | 65,300 | ||||||
2,575,600 | 2,816,100 | |||||||
Valuation allowance on deferred tax assets | (35,400 | ) | (93,200 | ) | ||||
Deferred tax assets | 2,540,200 | 2,722,900 | ||||||
Depreciation of premises and equipment | (226,300 | ) | (210,500 | ) | ||||
Federal Home Loan Bank stock dividends | (736,200 | ) | (736,200 | ) | ||||
Deferred loan fees | (80,500 | ) | (77,700 | ) | ||||
Unrealized gain on securities available for sale | (550,100 | ) | (74,100 | ) | ||||
Prepaid FDIC assessments and other | (205,300 | ) | (98,400 | ) | ||||
Other | (119,900 | ) | (25,200 | ) | ||||
Deferred tax liabilities | (1,918,300 | ) | (1,222,100 | ) | ||||
Net deferred tax asset | $ | 621,900 | $ | 1,500,800 | ||||
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — INCOME TAXES (CONTINUED)
The Company acquired net operating loss tax carryforwards of approximately $3,335,000 and a capital loss carryforward of $274,000 in 2008, utilizing $379,000 and $63,000 of the net operating loss during 2009 and 2008, respectively. The net operating loss carryforward can be used to offset future taxable income and will begin to expire in tax years 2021 through 2027. The capital loss carryforward expired in 2009.
The Company believes it is more likely than not that the benefit of deferred tax assets will be realized with the possible exception of the capital loss carryforward due to expire in 2014. A valuation allowance for the capital loss carryforward is reflected at December 31, 2009. No additional valuation allowance is deemed necessary in view of certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.
The Company adopted the provisions of ASC Topic 740,Accounting for Uncertainty in Income Taxes.ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC Topic 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. Adoption of ASC Topic 740 did not have a significant impact on the Company’s financial statements. In accordance with ASC Topic 740, interest or penalties incurred for income taxes will be recorded as a component of income tax expense.
NOTE 9 — EMPLOYEE BENEFITS
The Company sponsors a contributory 401(k) profit-sharing plan covering substantially all employees who meet certain age and service requirements. The Plan permits investing in the Company’s common stock subject to various limitations and provides for discretionary profit sharing and matching contributions. The discretionary profit-sharing contribution is determined annually by the Board of Directors and amounted to 2.50% of each eligible participant’s compensation for 2009 and 2.75% of each eligible participant’s compensation for 2008 and 2007, respectively. The Plan also provides for a 50% Bank match of participant contributions up to a maximum of 2% of each participant’s annual compensation. Expense under the Plan amounted to approximately $229,700, $214,300 and $166,700 for 2009, 2008 and 2007, respectively.
During 2009, the Board of Directors extended options to purchase 1,000 shares originally expiring in 2009 through August 2014 at an exercise price of $15.00. During 2008, the Board of Directors extended options to purchase 2,000 shares originally expiring in 2008 through July 2013 at an exercise price of $16.10. No stock options were granted in 2007.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — EMPLOYEE BENEFITS (CONTINUED)
The following summarizes stock options activity for the years ended December 31, 2009, 2008 and 2007:
2009 | 2008 | 2007 | ||||||||||||||||||||||
WEIGHTED | WEIGHTED | WEIGHTED | ||||||||||||||||||||||
AVERAGE | AVERAGE | AVERAGE | ||||||||||||||||||||||
EXERCISE | EXERCISE | EXERCISE | ||||||||||||||||||||||
SHARES | PRICE | SHARES | PRICE | SHARES | PRICE | |||||||||||||||||||
Outstanding at beginning of year | 40,720 | $ | 17.55 | 50,840 | $ | 17.64 | 51,245 | $ | 17.63 | |||||||||||||||
Granted | 1,000 | 15.00 | 2,000 | 16.10 | — | — | ||||||||||||||||||
Exercised | — | — | — | — | (40 | ) | (16.05 | ) | ||||||||||||||||
Forfeited | (1,525 | ) | (17.98 | ) | (12,120 | ) | (17.77 | ) | (365 | ) | (16.05 | ) | ||||||||||||
Outstanding at end of year | 40,195 | $ | 17.47 | 40,720 | $ | 17.55 | 50,840 | $ | 17.64 | |||||||||||||||
Options exercisable at year-end | 40,195 | $ | 17.47 | 34,768 | $ | 17.45 | 32,984 | $ | 17.45 | |||||||||||||||
Weighted-average fair value of options granted during year | $ | 1.40 | $ | 1.09 | N/A |
Options outstanding at December 31, 2009 were as follows:
OUTSTANDING | EXERCISABLE | |||||||||||||||
WEIGHTED | ||||||||||||||||
AVERAGE | WEIGHTED | |||||||||||||||
RANGE OF | REMAINING | AVERAGE | ||||||||||||||
EXERCISABLE | CONTRACTUAL LIFE | EXERCISE | ||||||||||||||
PRICES | NUMBER | (YEARS) | NUMBER | PRICE | ||||||||||||
$15.00 | 1,000 | 4.55 | 1,000 | $ | 15.00 | |||||||||||
16.05 | 7,435 | 2.96 | 7,435 | 16.05 | ||||||||||||
16.10 | 2,000 | 3.53 | 2,000 | 16.10 | ||||||||||||
18.00 | 29,760 | 6.16 | 29,760 | 18.00 | ||||||||||||
Outstanding at year-end | 40,195 | 5.40 | 40,195 | $ | 17.47 | |||||||||||
The total intrinsic value of outstanding in-the-money stock options and outstanding in-the-money exercisable stock options was $250 and $0 at December 31, 2009 and 2008, respectively. The total intrinsic value of stock options exercised was $0 in 2009 and 2008 and $225 in 2007. The total fair value of share awards vested was $8,900 in 2009, $17,179 in 2008 and $22,273 in 2007.
NOTE 10 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily loan commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The contract amount of these instruments reflects the extent of involvement the Bank has in these financial instruments. The Bank’s exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments. The Bank uses the same credit policies in making loan commitments as it does for on-balance sheet loans.
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The following financial instruments whose contract amount represents credit risk were outstanding at December 31, 2009 and 2008:
CONTRACT AMOUNT | ||||||||
2009 | 2008 | |||||||
Commitments to extend credit | $ | 66,211,000 | $ | 61,019,000 | ||||
Letters of credit | $ | 1,213,000 | $ | 772,000 | ||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, obtained if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable; recognized inventory; property, plant and equipment; and income-producing commercial properties.
Letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party and are reviewed for renewal at expiration. All letters of credit outstanding at December 31, 2009 are due on demand or expire in 2010. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank requires collateral supporting these commitments when deemed appropriate.
NOTE 11 — RELATED-PARTY TRANSACTIONS
In the ordinary course of business, loans are granted by the Bank to executive officers, directors and their related business interests consistent with Federal Reserve Regulation O. The following is an analysis of activity of related-party loans for the year ending December 31, 2009:
2009 | ||||
Balance at beginning of year | $ | 5,597,649 | ||
New loans and advances | 286,150 | |||
Repayments, including loans sold | (955,250 | ) | ||
Balance at end of year | $ | 4,928,549 | ||
Deposits from executive officers, directors and their related business interests at December 31, 2009 and 2008 were approximately $11,262,000 and $4,447,000, respectively.
NOTE 12 — REGULATORY MATTERS
The Company (on a consolidated basis) and Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2009 and 2008, that the Company and Bank met or exceeded all capital adequacy requirements to which they are subject.
As of December 31, 2009, the most recent notification from federal and state banking agencies categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no known conditions or events since that notification that Management believes have changed the Bank’s category.
The actual capital amounts and ratios of the Company and Bank as of December 31, 2009 and 2008, are also presented in the following table:
MINIMUM | MINIMUM REQUIRED | |||||||||||||||||||||||
REQUIRED | TO BE WELL | |||||||||||||||||||||||
FOR CAPITAL | CAPITALIZED UNDER | |||||||||||||||||||||||
ADEQUACY | PROMPT CORRECTIVE | |||||||||||||||||||||||
ACTUAL | PURPOSES | ACTION REGULATIONS | ||||||||||||||||||||||
(Dollars in thousands) | AMOUNT | RATIO | AMOUNT | RATIO | AMOUNT | RATIO | ||||||||||||||||||
As of December 31, 2009 | ||||||||||||||||||||||||
Total capital | ||||||||||||||||||||||||
(to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | $ | 46,229 | 15.7 | % | $ | 23,552 | 8.0 | % | $ | 29,440 | 10.0 | % | ||||||||||||
Bank | 45,269 | 15.4 | 23,541 | 8.0 | 29,426 | 10.0 | ||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||
(to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | 42,546 | 14.5 | 11,776 | 4.0 | 17,664 | 6.0 | ||||||||||||||||||
Bank | 41,586 | 14.1 | 11,770 | 4.0 | 17,655 | 6.0 | ||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||
(to average assets) | ||||||||||||||||||||||||
Consolidated | 42,546 | 9.7 | 17,499 | 4.0 | 21,874 | 5.0 | ||||||||||||||||||
Bank | 41,586 | 9.5 | 17,491 | 4.0 | 21,864 | 5.0 | ||||||||||||||||||
As of December 31, 2008 | ||||||||||||||||||||||||
Total capital | ||||||||||||||||||||||||
(to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | $ | 44,683 | 15.5 | % | $ | 23,011 | 8.0 | % | $ | 28,764 | 10.0 | % | ||||||||||||
Bank | 43,600 | 15.2 | 22,968 | 8.0 | 28,711 | 10.0 | ||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||
(to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | 41,289 | 14.4 | 11,505 | 4.0 | 17,258 | 6.0 | ||||||||||||||||||
Bank | 40,206 | 14.0 | 11,484 | 4.0 | 17,226 | 6.0 | ||||||||||||||||||
Tier I capital | ||||||||||||||||||||||||
(to average assets) | ||||||||||||||||||||||||
Consolidated | 41,289 | 10.4 | 15,955 | 4.0 | 19,944 | 5.0 | ||||||||||||||||||
Bank | 40,206 | 10.1 | 15,929 | 4.0 | 19,912 | 5.0 |
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — REGULATORY MATTERS (CONTINUED)
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 agencies. These restrictions generally limit dividends to current year net income and prior two-years net retained earnings. Also, dividends may not reduce capital levels below the minimum regulatory requirements disclosed in the prior table. Under these provisions, at January 1, 2010, the Bank could dividend $1,933,000 to the Company. The Company does not anticipate the financial need to obtain this approval due to its current cash balances and ability to access the credit markets. Federal law prevents the Company from borrowing from the Bank unless loans are secured by specific obligations. Further, such secured loans are limited to an amount not exceeding ten percent of the Bank’s common stock and capital surplus.
NOTE 13 — CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009 are as follows:
CONDENSED BALANCE SHEETS | 2009 | 2008 | ||||||
ASSETS | ||||||||
Cash deposited with subsidiary bank | $ | 646,347 | $ | 601,525 | ||||
Investment in subsidiary bank | 44,870,127 | 42,384,823 | ||||||
Securities available-for-sale | 52,905 | 75,758 | ||||||
Other assets | 267,883 | 589,094 | ||||||
Total assets | $ | 45,837,262 | $ | 43,651,200 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Other liabilities | $ | 15,200 | $ | 182,728 | ||||
Total shareholders’ equity | 45,822,062 | 43,468,472 | ||||||
Total liabilities and shareholders’ equity | $ | 45,837,262 | $ | 43,651,200 | ||||
CONDENSED STATEMENTS OF INCOME | 2009 | 2008 | 2007 | |||||||||
Interest on securities | $ | 1,454 | $ | 2,084 | $ | 11,242 | ||||||
Other income | — | 24,072 | — | |||||||||
Dividends from subsidiary | 2,200,000 | 3,500,000 | 2,500,000 | |||||||||
Securities gain | 810 | — | 5,430 | |||||||||
Other-than-temporary impairment losses | (70,000 | ) | (35,000 | ) | — | |||||||
Total income | 2,132,264 | 3,491,156 | 2,516,672 | |||||||||
Operating expenses | 517,699 | 421,797 | 450,030 | |||||||||
Income before taxes and undistributed equity income of subsidiary | 1,614,565 | 3,069,359 | 2,066,642 | |||||||||
Income tax benefit | (176,000 | ) | (135,000 | ) | (150,000 | ) | ||||||
Equity earnings in subsidiary, net of dividends | 1,600,718 | 332,711 | 1,297,272 | |||||||||
Net income | $ | 3,391,283 | $ | 3,537,070 | $ | 3,513,914 | ||||||
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 3,391,283 | $ | 3,537,070 | $ | 3,513,914 | ||||||
Adjustments to reconcile net income to cash provided by operations: | ||||||||||||
Security accretion | — | — | (508 | ) | ||||||||
Securities gain | (810 | ) | — | (5,430 | ) | |||||||
Other-than-temporary impairment of investments | 70,000 | 35,000 | — | |||||||||
Software amortization | — | 1,667 | 6,667 | |||||||||
Equity earnings in subsidiary, net of dividends | (1,600,718 | ) | (332,711 | ) | (1,297,272 | ) | ||||||
Stock compensation expense | 7,313 | 15,000 | 24,554 | |||||||||
Change in other assets, liabilities | 133,353 | (187,022 | ) | (21,451 | ) | |||||||
Net cash provided by operating activities | 2,000,421 | 3,069,004 | 2,220,474 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchase of investment securities | — | (7,370 | ) | (95,787 | ) | |||||||
Proceeds from sale of investment securities | 13,457 | — | — | |||||||||
Maturities, calls of investment securities | — | — | 504,985 | |||||||||
Acquisition of Indian Village | — | (1,989,555 | ) | — | ||||||||
Net cash provided by (used in) investing activities | 13,457 | (1,996,925 | ) | 409,198 | ||||||||
Cash flows from financing activities: | ||||||||||||
Purchase of treasury shares | — | (415,259 | ) | (904,410 | ) | |||||||
Issuance of treasury shares | — | — | 644 | |||||||||
Cash dividends paid | (1,969,056 | ) | (1,803,543 | ) | (1,771,491 | ) | ||||||
Net cash used in financing activities | (1,969,056 | ) | (2,218,802 | ) | (2,675,257 | ) | ||||||
Net change in cash | 44,822 | (1,146,723 | ) | (45,585 | ) | |||||||
Cash at beginning of year | 601,525 | 1,748,248 | 1,793,833 | |||||||||
Cash at end of year | $ | 646,347 | $ | 601,525 | $ | 1,748,248 | ||||||
NOTE 14 — OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects are as follows for the years ended December 31, 2009, 2008 and 2007:
2009 | 2008 | 2007 | ||||||||||
Unrealized holding gains on available-for-sale securities | $ | 1,481,966 | $ | 545,115 | $ | 538,825 | ||||||
Less reclassification adjustment for securities losses (gains) recognized in income | (81,890 | ) | 35,000 | (16,830 | ) | |||||||
Net unrealized holding gains | 1,400,076 | 580,115 | 521,995 | |||||||||
Federal income tax provision | 476,026 | 197,239 | 177,478 | |||||||||
Other comprehensive income | $ | 924,050 | $ | 382,876 | $ | 344,517 | ||||||
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 — FAIR VALUE MEASUREMENTS
The Company provides disclosures about assets and liabilities carried at fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. The three broad levels of the fair value hierarchy are described below:
Level I: | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. | ||
Level II: | Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data or other means (including certified appraisals). If the asset or liability has a specified (contractual) term, the Level II input must be observable for substantially the full term of the asset or liability. | ||
Level III: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of December 31, 2009 and December 31, 2008, by level within the fair value hierarchy. No liabilities are carried at fair value. As required by the accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Equity securities and U.S. Treasury Notes are valued at the closing price reported on the active market on which the individual securities are traded. Obligations of U.S. government corporations and agencies, mortgage-backed securities and obligations of states and political subdivisions are valued at observable market data for similar assets.
52
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 — FAIR VALUE MEASUREMENTS (CONTINUED)
Level I | Level II | Level III | Total | |||||||||||||
December 31, 2009 | ||||||||||||||||
Assets: | ||||||||||||||||
Securities available-for-sale | ||||||||||||||||
U.S. Treasury security | $ | 100,184 | $ | — | $ | — | $ | 100,184 | ||||||||
Obligations of U.S. government corporations and agencies | — | 14,033,105 | — | 14,033,105 | ||||||||||||
Mortgage-backed securities | — | 51,357,447 | — | 51,357,447 | ||||||||||||
Obligations of states and political subdivisions | — | 9,613,810 | — | 9,613,810 | ||||||||||||
Total debt securities | 100,184 | 75,004,362 | — | 75,104,546 | ||||||||||||
Equity securities | 52,905 | — | — | 52,905 | ||||||||||||
Total available-for-sale securities | $ | 153,089 | $ | 75,004,362 | $ | — | $ | 75,157,451 | ||||||||
December 31, 2008 | ||||||||||||||||
Securities available-for-sale | ||||||||||||||||
U.S. Treasury security | $ | 100,461 | $ | — | $ | — | $ | 100,461 | ||||||||
Obligations of U.S. government corporations and agencies | — | 12,540,356 | — | 12,540,356 | ||||||||||||
Mortgage-backed securities | — | 56,898,945 | — | 56,898,945 | ||||||||||||
Obligations of states and political subdivisions | — | 7,040,296 | — | 7,040,296 | ||||||||||||
Total debt securities | 100,461 | 76,479,597 | — | 76,580,058 | ||||||||||||
Equity securities | 75,758 | — | — | 75,758 | ||||||||||||
Total available-for-sale securities | $ | 176,219 | $ | 76,479,597 | $ | — | $ | 76,655,816 | ||||||||
The following table presents the assets measured on a nonrecurring basis on the consolidated balance sheets at their fair value as of December 31, 2009, and December 31, 2008, by level within the fair value hierarchy. Impaired loans and other real estate that are collateral dependent are written down to fair value through the establishment of specific reserves. Premises include a building currently used for storage that has been written down to appraised value. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.
The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates discounted cashflow and prepayment assumptions based on management’s best judgment. As a result, these rights are measured at fair value on a nonrecurring basis and are classified within level III of the fair value hierarchy.
Level I | Level II | Level III | Total | |||||||||||||
December 31, 2009 | ||||||||||||||||
Assets Measured on a Nonrecurring Basis: | ||||||||||||||||
Impaired loans | $ | — | $ | 1,735,577 | $ | — | $ | 1,735,577 | ||||||||
Other real estate owned | — | 162,200 | — | 162,200 | ||||||||||||
Premises | — | 180,538 | — | 180,538 | ||||||||||||
Mortgage servicing rights | — | — | 138,036 | 138,036 | ||||||||||||
December 31, 2008 | ||||||||||||||||
Impaired loans | $ | — | $ | 2,049,171 | $ | — | $ | 2,049,171 | ||||||||
Other real estate owned | — | 79,000 | — | 79,000 | ||||||||||||
Premises | — | 327,112 | — | 327,112 | ||||||||||||
Mortgage servicing rights | — | — | 63,014 | 63,014 |
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 — FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of recognized financial instruments as of December 31, 2009 and 2008 are as follows:
2009 | 2008 | |||||||||||||||
CARRYING | FAIR | CARRYING | FAIR | |||||||||||||
(Dollars in thousands) | VALUE | VALUE | VALUE | VALUE | ||||||||||||
Financial assets: | ||||||||||||||||
Cash and cash equivalents | $ | 42,661 | $ | 42,661 | $ | 12,746 | $ | 12,746 | ||||||||
Securities | 80,621 | 80,621 | 81,888 | 81,888 | ||||||||||||
Loans, net | 309,423 | 313,993 | 312,897 | 318,529 | ||||||||||||
Accrued Interest Receivable | 1,315 | 1,315 | 1,386 | 1,386 | ||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | $ | 329,486 | $ | 331,511 | $ | 305,453 | $ | 308,213 | ||||||||
Short-term borrowings | 28,764 | 28,764 | 22,892 | 22,892 | ||||||||||||
Other borrowings | 45,010 | 46,535 | 50,998 | 53,073 | ||||||||||||
Accrued Interest Payable | 322 | 322 | 417 | 417 |
For purposes of the above disclosures of estimated fair value, the following assumptions are used:
Cash and cash equivalents; Accrued interest receivable; Short-term borrowings, Accrued interest payable
The fair value of the above instruments is considered to be carrying value.
Securities
The fair value of securities available-for-sale which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other similar securities.
Loans
The fair value for loans is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Fair value of nonaccrual loans is based on carrying value.
Deposits and Other Borrowed Funds
The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end.
The Company also has unrecognized financial instruments at December 31, 2009 and 2008. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $63,824,000 at December 31, 2009 and $61,791,000 at December 31, 2008. Such amounts are also considered to be the estimated fair values.
The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 — CONTINGENT LIABILITIES
In the normal course of business, the Company and its subsidiary may be involved in various legal actions, but in the opinion of management and its legal counsel, the ultimate disposition of such matters is not expected to have a material adverse effect on the consolidated financial statements.
The Company has entered into employment agreements with various officers. Upon the occurrence of certain types of termination of employment, the Company may be required to make specified severance payments if termination occurs within a specified period of time, generally two years from the date of the agreement, or pursuant to certain change in control transactions.
NOTE 18 — QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data (unaudited) for the years ended December 31, 2009 and 2008:
BASIC | DILUTED | |||||||||||||||||||
NET | EARNINGS | EARNINGS | ||||||||||||||||||
INTEREST | INTEREST | NET | PER | PER | ||||||||||||||||
INCOME | INCOME | INCOME | SHARE | SHARE | ||||||||||||||||
2009 | ||||||||||||||||||||
First quarter | $ | 5,579,344 | $ | 3,893,560 | $ | 895,943 | $ | .33 | $ | .33 | ||||||||||
Second quarter | 5,465,886 | 3,832,067 | 706,051 | .26 | .26 | |||||||||||||||
Third quarter | 5,434,331 | 3,864,577 | 858,322 | .31 | .31 | |||||||||||||||
Fourth quarter | 5,625,326 | 4,174,467 | 930,967 | .34 | .34 | |||||||||||||||
2008 | ||||||||||||||||||||
First quarter | $ | 5,283,411 | $ | 3,379,765 | $ | 1,001,760 | $ | .41 | $ | .41 | ||||||||||
Second quarter | 4,893,331 | 3,285,764 | 877,762 | .36 | .36 | |||||||||||||||
Third quarter | 4,966,317 | 3,439,827 | 890,564 | .37 | .37 | |||||||||||||||
Fourth quarter | 5,477,667 | 3,772,553 | 766,984 | .29 | .29 |
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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OFFICERS OF THE COMMERCIAL & SAVINGS BANK
Linda C. Amos
Assistant Vice President/Mortgage Underwriter
Assistant Vice President/Mortgage Underwriter
Rebecca A. Baker
Assistant Vice President/Banking Center Manager
Assistant Vice President/Banking Center Manager
Pamela S. Basinger
Vice President/Financial Officer
Vice President/Financial Officer
Deborah S. Berner
Vice President/Marketing & Public Relations
Vice President/Marketing & Public Relations
Pamela L. Bromund
Assistant Vice President/Loan Operations Supervisor
Assistant Vice President/Loan Operations Supervisor
Wendy D. Brown
Assistant Vice President/Cash Management Services
Assistant Vice President/Cash Management Services
C. Dawn Butler
Vice President/Banking Center Manager
Vice President/Banking Center Manager
Beverly A. Carr
Operations Officer/Deposit Processing
Operations Officer/Deposit Processing
Colby M. Chamberlin
Vice President/Business Development Officer/ Commercial Lender
Vice President/Business Development Officer/ Commercial Lender
Dale J. Clinton
Vice President/Internal Auditor
Vice President/Internal Auditor
G. Gail Cochran
Assistant Vice President/Executive Loan Secretary
Assistant Vice President/Executive Loan Secretary
Peggy L. Conn
Corporate Secretary
Corporate Secretary
Marianne Davis
Assistant Cashier/Banking Center Manager
Assistant Cashier/Banking Center Manager
Paula S. Foy
Vice President/Compliance Officer/BSA Officer
Vice President/Compliance Officer/BSA Officer
Lori S. Frantz
Assistant Vice President/Banking Center Manager
Assistant Vice President/Banking Center Manager
Carrie A. Gerber
Credit Officer
Credit Officer
Eric R. Giauque
Assistant Vice President/Banking Center Manager
Assistant Vice President/Banking Center Manager
Rick L. Ginther
President/Chief Executive Officer The Commercial & Savings Bank
President/Chief Executive Officer The Commercial & Savings Bank
Loretta Gray
Assistant Cashier/Assistant Banking Center Manager
Assistant Cashier/Assistant Banking Center Manager
Paul D. Greig
Senior Vice President/Chief Operation/Information Officer
Senior Vice President/Chief Operation/Information Officer
Jason B. Hummel
Assistant Vice President/Commercial Lender
Assistant Vice President/Commercial Lender
Julie A. Jones
Vice President/Director of Human Resources
Vice President/Director of Human Resources
Stephen K. Kilpatrick
First Vice President/ Senior Credit Officer
First Vice President/ Senior Credit Officer
Larry S. Kutcher
Assistant Vice President/Small Business Development
Assistant Vice President/Small Business Development
Betty C. Lyon
Assistant Vice President/Banking Center Manager
Assistant Vice President/Banking Center Manager
Kevin J. McAllister
Assistant Vice President/Trust Officer
Assistant Vice President/Trust Officer
Jason R. McCulloch
Vice President/Brokerage Manager
Vice President/Brokerage Manager
Sherry A. McRobie
Assistant Cashier/Banking Center Manager
Assistant Cashier/Banking Center Manager
Paula J. Meiler
Senior Vice President/Chief Financial Officer
Senior Vice President/Chief Financial Officer
A. Lee Miller
Vice President/Cash Management & Special Projects/ CRA Officer
Vice President/Cash Management & Special Projects/ CRA Officer
Edward J. Miller
Vice President/Banking Center Services
Vice President/Banking Center Services
Daniel L. Muse
Operations Officer
Operations Officer
Lisa M. Nelson
Assistant Vice President/Banking Center Manager
Assistant Vice President/Banking Center Manager
Shawn E. Oswald
Vice President/Information System Director/OFAC Officer
Vice President/Information System Director/OFAC Officer
Amy R. Patterson
Assistant Vice President/Loan Officer
Assistant Vice President/Loan Officer
Christopher S. Rickly
Vice President/Commercial Lender
Vice President/Commercial Lender
Thomas S. Rumbaugh
Vice President/Trust Officer
Vice President/Trust Officer
Rebecca J. Shultz
Assistant Vice President/Loan Officer
Assistant Vice President/Loan Officer
Melissa F. Sprang
Assistant Cashier/Banking Center Manager
Assistant Cashier/Banking Center Manager
Scott A. Stallman
Operations Officer
Operations Officer
Harland L. Stebbins
First Vice President/Senior Loan Officer
First Vice President/Senior Loan Officer
Eddie L. Steiner
President/Chief Executive Officer CSB Bancorp, Inc.
President/Chief Executive Officer CSB Bancorp, Inc.
Steven J. Stiffler
Vice President/Commercial Lender
Vice President/Commercial Lender
Eric D. Strouse
Vice President/Commercial Lender
Vice President/Commercial Lender
Elaine A. Tedrow
Assistant Vice President/Banking Center Manager
Assistant Vice President/Banking Center Manager
Jennifer M. Thorpe
Assistant Vice President/Senior Credit Analyst
Assistant Vice President/Senior Credit Analyst
William R. Tinlin
Vice President/Recovery/Security
Vice President/Recovery/Security
Brian D. Troyer
Assistant Vice President/Trust Operations
Assistant Vice President/Trust Operations
Jane C. Whitmer
Assistant Cashier/Assistant Banking Center Manager
Assistant Cashier/Assistant Banking Center Manager
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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BANKING CENTER INFORMATION
THE COMMERCIAL & SAVINGS BANK | ||||
INFORMATION & CUSTOMER SERVICE | 330-674-9015 or 1-800-654-9015 | |||
24 HOUR XPRESS PHONE BANKING | 330-674-2720 or 1-888-438-2720 | |||
24 HOUR XPRESS NET BANKING & BILLPAY | www.csb1.com | |||
LOAN SERVICES91 N. Clay St., Millersburg | Personal Loans | 330-763-2823 | ||
Business Loans | 330-763-2822 | |||
OPERATIONS CENTER91 N. Clay St., Millersburg | 330-674-9015 | |||
TRUST & INVESTMENT SERVICES91 N. Clay St., Millersburg | Holmes, Stark & Tuscarawas County | 330-674-2397 | ||
TRUST & INVESTMENT SERVICES146 E. Liberty St., Suite 230, Wooster | Wayne County | 330-264-0334 | ||
CSB BANKING CENTERS | ||||
Millersburg Locations | ||||
CLINTON COMMONS BANKING CENTER2102 Glen Dr., Millersburg (Drive-Up ATM) | 330-674-2265 | |||
SOUTH CLAY BANKING CENTER91 S. Clay St., Millersburg (Drive-Up ATM) | 330-674-0687 | |||
Holmes, Tuscarawas, Wayne & Stark County Locations | ||||
BERLIN BANKING CENTER4587 S.R. 39, Berlin (Drive-Up ATM) | 330-893-3565 | |||
CHARM BANKING CENTER4440 C.R. 70, Charm (Walk-Up ATM) | 330-893-3323 | |||
GNADENHUTTEN BANKING CENTER100 S. Walnut St., Gnadenhutten | 740-254-4313 | |||
NEW PHILADELPHIA BANKING CENTER635 W. High Ave., New Philadelphia (Drive-Up ATM) | 330-308-4867 | |||
NORTH CANTON BANKING CENTER1210 North Main St., North Canton (Drive-Up ATM) | 330-497-0839 | |||
ORRVILLE AREA BANKING CENTER461 Wadsworth Rd., Orrville (Drive-Up ATM) | 330-682-8000 | |||
ORRVILLE HIGH STREET BANKING CENTER330 W. High St., Orrville (Drive-Up ATM) | 330-682-8001 | |||
SHREVE BANKING CENTER 333 W. South St., Shreve (Drive-Up ATM) | 330-567-2226 | |||
SUGARCREEK BANKING CENTER 127 S. Broadway, Sugarcreek (Drive-Up ATM) | 330-852-4444 | |||
WALNUT CREEK BANKING CENTER4980 Olde Pump St., Walnut Creek (Walk-Up ATM) | 330-893-2961 | |||
WINESBURG BANKING CENTER2225 U.S. 62, Winesburg (Drive-Up ATM) | 330-359-5543 | |||
OTHER CSB ATMS TO SERVE YOU | ||||
POMERENE HOSPITAL981 Wooster Rd., Millersburg | ||||
SKIP’S CONVENIENCE STORE213 Main St., Gnadenhutten | ||||
TONY’S UNION 763054 E. Main St., Port Washington | ||||
UNION HOSPITAL659 Boulevard, Dover | ![]() ![]() |
2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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SHAREHOLDER & GENERAL INQUIRIES
Stock Listing Common Symbol:CSBB.OB
CORPORATE OFFICE91 N. Clay St., Millersburg | 330-674-9015 |
If you have questions regarding your CSB Bancorp, Inc. stock, please contact: Registrar and Transfer Company Attn: Investor Relations 10 Commerce Drive Cranford, New Jersey 07016 800-368-5948 www.rtco.com Peggy L. Conn Corporate Secretary CSB Bancorp, Inc. 91 North Clay Street Millersburg, Ohio 44654 330-674-9015• 800-654-9015 Legal Counsel Bricker & Eckler LLP 100 South Third Street Columbus, Ohio 43215 | If you are interested in purchasing shares of CSB Bancorp, Inc., you may contact your local broker or one of the following: Jay McCulloch Investment Executive CSB Investment Services Located at The Commercial & Savings Bank 91 North Clay Street P.O. Box 50 Millersburg, Ohio 44654 330-674-2397• 800-654-9015 George Geissbuhler Sweney Cartwright & Co. 17 South High Street, Suite 300 Columbus, Ohio 43215 800-334-7481 Nicolas “Nick” P. Bicking Boenning & Scattergood 9916 Brewster Lane Powell, Ohio 43065 866-326-8113 | 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: Paula J. Meiler Chief Financial Officer CSB Bancorp, Inc. 91 North Clay Street Millersburg, Ohio 44654 330-674-9015• 800-654-9015 | ||
The annual meeting of shareholders is currently scheduled to be held on Wednesday, April 21, 2010 at 7:00 pm, at the Carlisle Inn in Walnut Creek, Ohio. |
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2009 ANNUAL REPORT TO SHAREHOLDERS | CSB BANCORP, INC.
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A PARTNERSHIP 130 YEARS STRONG CSB BANCORP, INC.Awarding scholarships for 20 years Helping to strengthen established community resourcesSponsoring community eventsHiland graduate receives $1,000Orrville Area Boys & Girls Club Christmas in Tuscora Park |