EXHIBIT 13
| CSB Bancorp, Inc. Celebrating 125 Years of Serving Your Community |
| 2004 Annual Report to shareholders |
| | |FOR THE YEAR ENDED DECEMBER 31 2004 2003 % Change (Dollars in thousands, except per share data) |
| | | CONSOLIDATED RESULTS Net interest income $11,200$10,7834% Net interest income- fully taxable-equivalent (“FTE”) basis11,93911,765 1% Noninterest income2,6802,155 24% Provision (credit) for loan losses 423 (51) NA Noninterest expense10,27810,799 -5% Net income2,5262,060 23% AT YEAR-END Loans $215,510$210,7962% Assets317,340306,180 4% Deposits247,951248,958 <-1% Shareholders’ equity36,20834,718 4% Cash dividends declared 0.52 0.48 8% Book value13.6913.13 4% Market price20.0017.00 18% Basic earnings per share 0.96 0.78 23% Diluted earnings per share 0.95 0.78 22% FINANCIAL PERFORMANCE Return on average assets 0.81% 0.68% Return on average equity 7.15% 6.00% Net interest margin 3.83% 3.81% Efficiency ratio 70.00% 83.00% CAPITAL RATIOS Risk-based capital: |
| Tier 117.19%16.90% Total18.43%18.10% Leverage 11.45% 11.20% |
As you can see from the opposite page listing our Financial Highlights, CSB made good progress in 2004. We had net income of $2,526,000 versus $2,060,000 in 2003, a 22.6% increase! Our basic earnings per share improved from $0.78 in 2003 to $0.96 in 2004, representing a 23.1% year over year increase! On a diluted share basis the earnings per share increased 21.8% from $0.78 to $0.95. Earnings enjoyed a wonderfully high percentage increase in comparison with prior years.
You may notice there is a $.01 difference between basic and diluted earnings per share. Diluted earnings per share includes shares outstanding as well as those shares that could be issued under currently outstanding stock options. |
| This report highlights the Company’s 125 years of service to Holmes and surrounding counties. I am confident that the founders never envisioned the growth and changes of both the market and the Bank. We are honored to be the current stewards of this legacy, and vow to sustain the positive contributions of those who came before us. |
| 2004 Financial Performance |
| 2004 can be summarized by saying we made solid, steady progress toward achieving industry targets. The historical graphs on this and the following pages reflect these trends. We had a long way to come, and have elected to not try to get there overnight. We believe the 2004 earnings improvements are sustainable, as evidenced by five consecutive quarterly increases in our Net Interest Income — the core of our business! |
| Our loan portfolio had modest growth, due in large part to our decision to resell “out of market loans” that had previously been purchased. Additionally, there was a slowdown in home mortgage refinancing. Deposits were down for the year, a rare occurrence for a bank. Early in the year we decided not to actively renew a large block of high rate, maturing Certificates of Deposit. These deposits were primarily from customers with whom we were not their primary bank, but had opened these accounts at a time when the Bank was seeking time deposits. We will aggressively seek to grow deposits, but prefer to build on existing relationships or acquire new ones. |
| We remain visible, competitive and active in our marketplace, and have been fortunate to acquire several significant new customers. Of equal importance, however, is the business that existing customers brought back to us or allowed us to expand with them. |
| As a result of all these efforts, your cash dividend increased in 2004 and the price per share also rose during the period, an accomplishment we hope to replicate for years to come. |
| The balance of my letter will discuss our results relative to industry targets; talk about long-term strategies; describe a customer service initiative we are kicking off; provide a brief forecast of our marketplace in 2005; and ask your support for an increase in the existing stock option plan share provision to enable CSB to continue to attract and retain quality staff and management. |
| Progress to Industry Benchmarks |
| In our 2003 Annual Report to Shareholders, we emphasized moving the Company to reaching, and subsequently exceeding, accepted industry performance standards. We specifically highlighted five of those standards or ratios: Return on Assets, Return on Equity, Leverage Ratio, Efficiency Ratio and Allowance for Loan Losses to Nonperforming Loans. Here is an update on how our 2004 results contributed to meeting these targets: |
| ·Return on Average Assets (ROA):We made good progress |
| toward our goal of exceeding a 1% ROA. Rising interest rates will assist us in achieving this goal as we have more assets that immediately reprice than liabilities. I believe we did, in a rate environment that was flat most of the year, a very good job in managing our balance sheet. |
| ·Return on Average Equity (ROE):We made steady improvement |
| toward our target of double digit ROE. While we are blessed with abundant capital, it does negatively impact this ratio. You’ll see, in the strategy section, our thoughts for this capital. |
| ·Leverage Ratio:This measure of bank soundness continues to |
| improve. The regulatory minimum to be deemed “well capitalized” is at 5%. Our ratio currently stands at 11.5%. |
| ·Efficiency Ratio (NIE/REV):Our strategies to control costs and |
| improve this ratio are having the positive impact we wanted. The lower, the better for this ratio. This critical measurement improved by almost 10% in 2004, falling to 70.4%. We remain focused on continuing this improvement in the coming year. |
| ·Allowance for Loan Losses to Nonperforming Loans:This measure |
| ment of the Bank’s ability to provide for problem loans remains |
| strong. The percentage of our allowance to total nonperforming |
| loans declined slightly as a result of two older loans, which are in |
| the process of foreclosure, being placed on nonperforming status. |
| As I mentioned earlier, we are blessed with an abundance of capital. This is a good thing! Finding appropriate uses for this capital that significantly increase your return on investment is our strategy. |
| As you know by now, we have opened a Trust and Loan Production office in Wooster, Ohio. This office will support the growth in our Wayne County trust business as well as provide us a local platform to meet with business and consumer prospects. CSB has not opened a new, full-service banking center since 1999. We intend to open at least one new office this year, and more if the locations we seek and the right personnel to staff the offices are available. |
| We will seek opportunities to further invest our capital with any final decision driven by the goal of increasing the net return to you, the shareholder, consistent with safe and sound banking practices. |
| In late January 2005, we held an all-employee meeting to kick-off a renewed focus on providing outstanding customer service. While we strive to make every interaction with us a positive one, there are processes that can be enhanced, eliminated, or supplemented that will significantly improve overall customer satisfaction levels. |
| Designed to mirror the strategies outlined in the bookRaving Fans,our Company goal is quite simple — provide every customer with a service experience that is incredibly positive, so much so that our customers become “raving fans!” |
| We have created internal Service Improvement Teams staffed by associates from all areas of the Company. They are charged with correcting the barriers to providing extraordinary customer service while simultaneously looking, and listening for, new ideas from both our employees and our customers. |
| While these efforts will be in progress as you read this letter, your input to us is vital to our service improvement as well. If you experience a service issue with us that is less than what you think is outstanding, please take a moment to let us know. Tell the banking center manager, or loan officer, or drop me a note. Also, we have enclosed a card to record your feedback. We’ll take your comments, review them, and if the Service Improvement Team feels there is an improvement opportunity, we’ll put it into place. |
| This initiative is not about cutting expenses, reducing staff or eliminating services or products. It is exclusively about raising the level of service you experience with our Bank, from the most routine of transactions to the most complicated. We look forward to your assistance and feedback! |
| Marketplace Outlook for 2005 |
| There is risk involved when attempting to predict the future. I reviewed my comments from last year, and, buoyed by the lack of glaring errors, venture forward again. |
| Holmes County continues to have the lowest unemployment rate in the State of Ohio. This is driven by the success enjoyed by our three largest industries— tourism, lumber and agriculture. We believe these industries will have continued success this calendar year. We applaud the efforts of our local elected officials in their efforts to reduce the economic impact of enacted Streamlined Sales Tax initiatives, and will join with them to find ways to lessen the impact on local businesses and governmental treasuries. The contiguous counties to Holmes continue to experience less satisfactory trends. Nevertheless, we expect their performances to improve and will explore opportunities to share in this growth. |
| We expect interest rates to continue their recent increases. We believe that depositors can expect higher returns on their deposits, and that borrowers will see increases in their variable rate loans. We believe these increases will not be harmful to our customers or markets. |
| Stock Option Plan Changes |
| As detailed in the proxy statement you have received, we are asking for your approval to increase the number of shares eligible for awards under the CSB Share Incentive Plan from 75,000 to 200,000 shares. |
| There are several reasons for this proposal. First, as we grow and expand, attracting and retaining experienced and qualified associates to staff our Company is a most difficult task. At the current level, we have limited stock options available to share with both existing and new associates. These awards provide long-term motivation for talented people to join and stay with the CSB team. |
| Second, our compensation strategy for all associates has three components — salary or hourly wages, which pay individuals for performing their required tasks; cash bonuses for achieving performance goals; and stock awards to provide long-term rewards for continued outstanding performance. There are only 35,000 unissued shares remaining from the original program. Increasing the number of shares will enable us to match compensation programs comparable to similar sized institutions. |
| It is important to note that all awards are reviewed by the Board’s Compensation Committee and then submitted to the full Board for approval. As a result of this process, no individual award occurs without passing the review of all Directors. |
| Allowance for Loan Losses to Nonperforming Loans |
| During 2004, Robert Oswald retired after 45 plus years of service. On behalf of his fellow employees, I want to thank Bob for his contributions and wish him good health and a happy retirement. |
| I believe we are making significant progress at CSB, while simultaneously maintaining a quality balance sheet and community focus. These accomplishments are the result of 130 employees working together to attain a common goal. I am honored to work beside them and look forward to expanding our achievements and returning those results to you, the shareholder. |
JOHN J. LIMBERT
President & Chief Executive Officer |
| THE COMMERCIAL & SAVINGS BANK |
| Robert Long was born July 21,1809 in Lancaster County, PA. He settled in Nashville, Ohio in 1854 and opened a private bank in 1867 under the firm name of Long, Brown & Company. |
| 1872 The First National Bank succeeded the Bank. Long was President. 1874 John Koch and Robert Long formed the Bank of Millersburg. |
| 1879 The name was changed to The Commercial Bank of Millersburg. It is under this charter that the Bank operates today. |
| 1888 Koch became President of the Bank and at that time the Bank was described as “one of the solid financial institutions in this part of the state.” |
| 1907 While Koch was President, the Bank moved into its present site. The Bank occupied the left-hand corner of the building, half of the width it is now. |
| 1911 B.C. Sill became President. |
| 1913 The building was revamped and the Masonic Temple was constructed. |
| The Koch name was added to the building. |
| 1914 Mr. Sill was President and Walter Koch, son of John, was Vice President. |
| E. A. Uhl was Cashier. Assets totaled $514,000. |
| 1919 E.A. Uhl was promoted to President. |
| 1933 The famous Bank Holiday occurred. President Franklin D. Roosevelt closed |
| all banks for different lengths of time, in order to reorganize; the Bank was |
| 1934 The Bank purchased its first branch office at Walnut Creek from a small |
| private bank. This branch then closed in 1940. |
| Early 1940s The Bank purchased the building for $50,000 and remodeled the space occupied by the former Hudson Shoe Store. This space was added to the lobby, doubling the size. |
| 1944 Assets totaled $2.7 million. |
| 1958 H.R. Maxwell was appointed Chairman of the |
| the Bank. The exterior of the building was |
| 1965 The citizens of Walnut Creek petitioned for |
| the Bank to re-open in their town. The State Department of Banking |
| 1967 Walnut Creek residents again petitioned with $5,000,000 in business pledges and 375 persons vowing to support the local bank. Walnut Creek branch was reopened. |
| 1972 Alvin Ruess retired from his position of Executive Vice President. |
| 1974 The Bank recognized the need for drive-thru service and decided to build an auto bank in Millersburg. South Clay opened in 1975. |
| 1979 Winesburg Banking Center opened and the Bank celebrated its 100th anniversary. 1981 The Bank installed its first in-house computer system. |
| December, 1987 Charm Banking Center opened. One month later, January, 1988, Sugarcreek Banking Center opened. |
| 1989 The Bank established an Operations Center in Millersburg. |
| Assets totaled $139,777,256. |
| 1990 Renovation of the Main Office began. The brick exterior and green |
| awnings brought new pride to the Bank and community. |
| 1991 Clinton Commons Banking Center opened. |
| 1992 Berlin Banking Center opened. CSB Bancorp, Inc. was formed and |
| became the parent company of the Bank. Assets of the bank were $166 million. |
| 1993 Vivian McClelland became the first woman elected to the Board of Directors. |
| 1995 Arlie Rodhe retired from his position as Chairman of the Board of Directors. |
| 1995 The Trust & Financial Service Division opened. |
| 1998 Shreve Banking Center opened. |
| 1999 Operations Center in Millersburg was built. |
| 2003 John Limbert accepted the position of President |
| and Chief Executive Officer. |
| 2004 CSB Celebrates 125th Anniversary. |
| Senior Vice President, Chief Lending Officer |
President,
Chief Executive Officer |
| Senior Vice President, Chief Financial Officer |
| Senior Vice President, Chief Operations/ Information Officer |
Physician
East Holmes Family Care, Inc. |
| Co-Owner and Controller Bakerwell, Inc. |
| Logee, Hostetler, Stutzman & Lehman |
| Veterinarian, Dairy Farmer Spring Hill Farms, Inc. |
| Critchfield, Critchfield & Johnston |
JOHNJ. LIMBERT
President & Chief Executive Officer The Commercial & Savings Bank |
| Vice President of Production Smith Dairy Products Company |
President
Robb Companies, Inc. |
SAMUEL M. STEIMEL
Attorney Steimel Law Office |
2004 Financial Review
INTRODUCTION
CSB Bancorp, Inc. (the “Company”) was incorporated under the laws of the State of Ohio in 1991 as a registered bank holding company for its wholly owned subsidiary, The Commercial and Savings Bank (the “Bank”). The Bank is chartered under the laws of the State of Ohio and was organized in 1879. The Bank is a member of the Federal Reserve System, insured by the Federal Deposit Insurance Corporation, and its primary Regulators are Ohio Division of Financial Institutions and the Federal Reserve Bank.
The Company, through the Bank, provides retail and commercial banking services to its customers including checking and savings accounts, time deposits, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, IRAs, night depository facilities, trust, and brokerage services. Its customers are located primarily in Holmes County and portions of surrounding counties in Ohio. The general economic conditions in the Company’s market area have been sound. Unemployment statistics have generally been among the lowest in the State of Ohio and the area has experienced stable to rising real estate values.
The following discussion is presented to aid in understanding the Company’s consolidated financial condition and results of operations, and should be read in conjunction with the audited consolidated financial statements and related notes.
FORWARD-LOOKING STATEMENTS
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 factors. The Company does not undertake, and specifically disclaims any obligation to publicly release the result of any revisions to any forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date of such statements.
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| 8 | |  |
2004 Financial Review
SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial information.
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| | | (Dollars in thousands, except per share data) | |
| Statements of income: | | | | | | | | | | | | | | | | | | | | |
| Total interest income | | $ | 15,074 | | | $ | 15,414 | | | $ | 16,700 | | | $ | 21,656 | | | $ | 25,497 | |
| Total interest expense | | | 3,874 | | | | 4,631 | | | | 6,467 | | | | 11,471 | | | | 12,782 | |
| | | | | | | | | | | | | | | | |
| Net interest income | | | 11,200 | | | | 10,783 | | | | 10,233 | | | | 10,185 | | | | 12,715 | |
| Provision (credit) for loan losses | | | 423 | | | | (51 | ) | | | (587 | ) | | | 35 | | | | 6,142 | |
| | | | | | | | | | | | | | | | |
| Net interest income after provision (credit) for loan losses | | | 10,777 | | | | 10,834 | | | | 10,820 | | | | 10,150 | | | | 6,573 | |
| Noninterest income | | | 2,680 | | | | 2,155 | | | | 2,037 | | | | 1,976 | | | | 2,019 | |
| Noninterest expenses | | | 10,278 | | | | 10,799 | | | | 10,999 | | | | 11,604 | | | | 9,191 | |
| | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 3,179 | | | | 2,190 | | | | 1,858 | | | | 522 | | | | (599 | ) |
| Income tax provision (credit) | | | 653 | | | | 130 | | | | (65 | ) | | | (537 | ) | | | (920 | ) |
| | | | | | | | | | | | | | | | |
| Net income | | $ | 2,526 | | | $ | 2,060 | | | $ | 1,923 | | | $ | 1,059 | | | $ | 321 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Per share of common stock: | | | | | | | | | | | | | | | | | | | | |
| Basic income per share | | $ | 0.96 | | | $ | 0.78 | | | $ | 0.73 | | | $ | 0.40 | | | $ | 0.12 | |
| Diluted income per share | | | 0.95 | | | | 0.78 | | | | 0.73 | | | | 0.40 | | | | 0.12 | |
| Dividends | | | 0.52 | | | | 0.48 | | | | 0.30 | | | | 0.10 | | | | 0.45 | |
| Book value | | | 13.69 | | | | 13.13 | | | | 12.83 | | | | 12.46 | | | | 12.02 | |
| Average basic common shares outstanding | | | 2,644,582 | | | | 2,638,360 | | | | 2,630,931 | | | | 2,625,241 | | | | 2,628,998 | |
| Average diluted common shares outstanding | | | 2,650,948 | | | | 2,641,887 | | | | 2,634,558 | | | | 2,626,014 | | | | 2,629,733 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year-end balances: | | | | | | | | | | | | | | | | | | | | |
| Loans, net (includes held for sale) | | $ | 215,510 | | | $ | 210,796 | | | $ | 197,109 | | | $ | 164,916 | | | $ | 198,358 | |
| Securities | | | 76,228 | | | | 67,773 | | | | 73,088 | | | | 92,607 | | | | 96,550 | |
| Total assets | | | 317,340 | | | | 306,180 | | | | 304,713 | | | | 306,345 | | | | 325,212 | |
| Deposits | | | 247,951 | | | | 248,958 | | | | 239,976 | | | | 251,430 | | | | 268,583 | |
| FHLB borrowings | | | 18,745 | | | | 21,372 | | | | 29,828 | | | | 21,317 | | | | 24,048 | |
| Shareholders’ equity | | | 36,208 | | | | 34,718 | | | | 33,742 | | | | 32,721 | | | | 31,540 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average balances: | | | | | | | | | | | | | | | | | | | | |
| Loans, net | | $ | 214,330 | | | $ | 206,685 | | | $ | 177,592 | | | $ | 180,157 | | | $ | 203,790 | |
| Securities | | | 73,342 | | | | 70,027 | | | | 80,176 | | | | 90,538 | | | | 100,216 | |
| Total assets | | | 312,534 | | | | 302,601 | | | | 295,399 | | | | 314,153 | | | | 325,880 | |
| Deposits | | | 241,674 | | | | 236,525 | | | | 235,080 | | | | 260,677 | | | | 264,795 | |
| Borrowings | | | 34,540 | | | | 30,981 | | | | 25,971 | | | | 20,532 | | | | 28,108 | |
| Shareholders’ equity | | | 35,332 | | | | 34,360 | | | | 33,382 | | | | 31,921 | | | | 32,083 | |
| | | | | | | | | | | | | | | | | | | | | |
| Selected ratios: | | | | | | | | | | | | | | | | | | | | |
| Net interest margin | | | 3.83 | % | | | 3.81 | % | | | 3.73 | % | | | 3.45 | % | | | 4.11 | % |
| Return on average total assets | | | 0.81 | | | | 0.68 | | | | 0.65 | | | | 0.34 | | | | 0.10 | |
| Return on average shareholders’ equity | | | 7.15 | | | | 6.00 | | | | 5.76 | | | | 3.32 | | | | 1.00 | |
| Average shareholders’ equity as a percent of average total assets | | | 11.31 | | | | 11.35 | | | | 11.30 | | | | 10.16 | | | | 9.85 | |
| Net loan charge-offs as a percent of average loans | | | 0.14 | | | | 0.09 | | | | 0.40 | | | | 1.86 | | | | 1.01 | |
| Allowance for loan losses as a percent of loans at year-end | | | 1.18 | | | | 1.15 | | | | 1.35 | | | | 2.38 | | | | 3.62 | |
| Shareholders’ equity as a percent of total year-end assets | | | 11.41 | | | | 11.34 | | | | 11.07 | | | | 10.68 | | | | 9.70 | |
2004 Financial Review
RESULTS OF OPERATIONS
Net Income
Net income for 2004 was $2,526,000, an increase of $466,000, or 22.6%, from 2003. Basic net income per share was $0.96 and $0.78 for the years ended December 31, 2004 and 2003, respectively. Diluted net income per share was $0.95 and $0.78 for the years ended December 31, 2004 and 2003, respectively. Return on average assets was 0.81% in 2004, as compared to 0.68% in 2003, and return on average shareholders’ equity was 7.15% in 2004 compared to 6.00% in 2003.
Net income for 2003 was $2,060,000 or $0.78 per basic and diluted share, as compared to $1,923,000 or $0.73 per basic and diluted share for 2002. This equated to a return on average assets of 0.68% in 2003 and 0.65% in 2002, while the return on average shareholders’ equity for the same periods was 6.00% and 5.76%.
Net Interest Income
Net interest income is the largest component of the Company’s net income and consists of the difference between income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Volumes, interest rates and composition of interest-earning assets and interest-bearing liabilities affect net interest income.
Interest income for 2004 was $15.1 million, decreasing $0.3 million from $15.4 million in 2003. Interest and fees on loans was $12.1 million, a decrease of $331,000, or 2.7%, from 2003, attributable to the decreased yield on loans of 36 basis points in 2004 from 2003. Interest income on securities decreased $15,000, or 0.5%, due primarily to the $10.0 million decrease in the average balance of tax-exempt securities in 2004 as compared to 2003 and a 4 basis point decrease in average yield on non-taxable securities from 2003 to 2004. Other interest income increased $4,000 to $40,000 in 2004 compared to $36,000 in 2003, primarily as a result of an increase in the average federal funds yield from 0.99% in 2003 to 1.77% in 2004.
Interest income for 2003 was $15.4 million, decreasing $1.3 million from $16.7 million in 2002. Interest and fees on loans was $12.5 million, a decrease of $186,000, or 1.5%, from 2002, mostly attributable to the decreased yield on loans of 103 basis points in 2003. Interest income on securities decreased $924,000, or 24.3%, to $2.9 million as compared to 2002 of $3.8 million, due primarily to the $10.1 million decrease in the average balance of securities in 2003 as compared to 2002. Other interest income decreased $176,000 to $36,000 in 2003 compared to $212,000 in 2002, primarily as a result of a decrease in the average federal funds sold balance, from $13.1 million in 2002 to $3.6 million in 2003 and a decrease in the average yield from 1.61% in 2002 to 0.99% in 2003.
Interest expense for 2004 was $3.9 million, a decrease of $757,000, or 16.3%, from 2003. The Company’s interest expense on deposits decreased $608,000 in 2004, due primarily to the continuing decline in deposit interest rates during 2004, as cost of interest-bearing deposits decreased to 1.56% in 2004, compared to 1.87% in 2003 and the average balance of time deposits decreased $4.9 million, or 4.0%. Interest expense on other borrowings decreased $146,000 due to the 68 basis point decrease in average rate paid in 2004 as compared to 2003.
Interest expense for 2003 was $4.6 million, a decrease of $1.8 million, or 28.4%, from 2002. The Company’s interest expense on deposits decreased $1.9 million in 2003, due primarily to the decrease in deposit interest rates during 2003, as cost of interest-bearing deposits decreased to 1.87% in 2003, compared to 2.78% in 2002 and the average balance of time deposits decreased $5.7 million, or 4.5%. Interest expense on other borrowings increased $79,000 due to the $5.0 million increase in average other borrowings, in 2003 as compared to 2002.
Net interest income for 2004 increased by $417,000 to $11.2 million. The $9.6 million increase in average interest-earning assets was enhanced by a 2 basis point increase in the net interest yield as rates declined faster on interest-bearing liabilities than interest-bearing assets. Net interest income for 2003 was $10.8 million.
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.
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2004 Financial Review
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | AVERAGE BALANCES, RATES AND YIELDS | |
| | | (Dollars in thousands) | |
| | | 2004 | | | | 2003 | | | | 2002 | |
| | | Average | | | | | | | | | | | | Average | | | | | | | | | | | | Average | | | | | | | |
| | | Balance (1) | | | interest | | | Rate (2) | | | | Balance (1) | | | Interest | | | Rate (2) | | | | Balance (1) | | | interest | | | Rate (2) | |
| | | | | | | | | |
| Interest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold | | $ | 2,263 | | | $ | 40 | | | | 1.77 | % | | | $ | 3,591 | | | $ | 35 | | | | 0.99 | % | | | $ | 13,131 | | | $ | 211 | | | | 1.61 | % |
| Interest-earning deposits | | | 43 | | | | 0 | | | | 0.47 | | | | | 29 | | | | 1 | | | | 0.52 | | | | | 36 | | | | 1 | | | | 1.41 | |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | 44,072 | | | | 1,502 | | | | 3.41 | | | | | 30,806 | | | | 1,020 | | | | 3.31 | | | | | 34,722 | | | | 1,659 | | | | 4.78 | |
| Tax exempt | | | 29,270 | | | | 1,409 | | | | 4.81 | | | | | 39,221 | | | | 1,905 | | | | 4.85 | | | | | 45,454 | | | | 2,190 | | | | 4.82 | |
| Loans(3) | | | 216,864 | | | | 12,123 | | | | 5.59 | | | | | 209,231 | | | | 12,453 | | | | 5.95 | | | | | 181,147 | | | | 12,639 | | | | 6.98 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-earning assets | | | 292,512 | | | | 15,074 | | | | 5.15 | | | | | 282,878 | | | | 15,414 | | | | 5.45 | | | | | 274,490 | | | | 16,700 | | | | 6.08 | |
| Noninterest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and due from banks | | | 11,734 | | | | | | | | | | | | | 11,090 | | | | | | | | | | | | | 10,591 | | | | | | | | | |
| Bank premises and equipment, net | | | 8,413 | | | | | | | | | | | | | 8,847 | | | | | | | | | | | | | 8,910 | | | | | | | | | |
| Other assets | | | 2,409 | | | | | | | | | | | | | 2,332 | | | | | | | | | | | | | 4,963 | | | | | | | | | |
| Allowance for loan losses | | | (2,534 | ) | | | | | | | | | | | | (2,546 | ) | | | | | | | | | | | | (3,555 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 312,534 | | | | | | | | | | | | $ | 302,601 | | | | | | | | | | | | $ | 295,399 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | $ | 48,042 | | | $ | 105 | | | | 0.22 | % | | | $ | 46,687 | | | $ | 191 | | | | 0.41 | % | | | $ | 44,456 | | | $ | 409 | | | | 0.92 | % |
| Savings deposits | | | 42,904 | | | | 189 | | | | 0.44 | | | | | 37,989 | | | | 199 | | | | 0.53 | | | | | 35,759 | | | | 355 | | | | 0.99 | |
| Time deposits | | | 116,418 | | | | 2,944 | | | | 2.53 | | | | | 121,298 | | | | 3,459 | | | | 2.85 | | | | | 126,981 | | | | 5,000 | | | | 3.94 | |
| Other borrowed funds | | | 34,540 | | | | 636 | | | | 1.84 | | | | | 30,981 | | | | 782 | | | | 2.52 | | | | | 25,971 | | | | 703 | | | | 2.71 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest-bearing liabilities | | | 241,904 | | | | 3,874 | | | | 1.60 | | | | | 236,955 | | | | 4,631 | | | | 1.95 | | | | | 233,167 | | | | 6,467 | | | | 2.77 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 34,310 | | | | | | | | | | | | | 30,551 | | | | | | | | | | | | | 27,884 | | | | | | | | | |
| Other liabilities | | | 988 | | | | | | | | | | | | | 735 | | | | | | | | | | | | | 966 | | | | | | | | | |
| Shareholders’ equity | | | 35,332 | | | | | | | | | | | | | 34,360 | | | | | | | | | | | | | 33,382 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and equity | | $ | 312,534 | | | | | | | | | | | | $ | 302,601 | | | | | | | | | | | | $ | 295,399 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | | | | $ | 11,200 | | | | | | | | | | | | $ | 10,783 | | | | | | | | | | | | $ | 10,233 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest margin | | | | | | | | | | | 3.83 | % | | | | | | | | | | | | 3.81 | % | | | | | | | | | | | | 3.73 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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. |
2004 Financial Review
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | RATE/VOLUME ANALYSIS OF CHANGES IN INCOME AND EXPENSE (1) | |
| | | (Dollars in thousand) | |
| | | 2004 v. 2003 | | | | 2003 v. 2002 | |
| | | Change in | | | | | | | | | | | | Change in | | | | | | | |
| | | Income/ | | | Volume | | | Rate | | | | Income/ | | | Volume | | | Rate | |
| | | Expense | | | Effect | | | Effect | | | | Expense | | | Effect | | | Effect | |
| | | | | | |
| Interest Income | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold | | $ | 5 | | | $ | (23 | ) | | $ | 28 | | | | $ | (176 | ) | | $ | (114 | ) | | $ | (62 | ) |
| Interest-earning deposits | | | (1 | ) | | | — | | | | (1 | ) | | | | — | | | | — | | | | — | |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | 482 | | | | 452 | | | | 30 | | | | | (639 | ) | | | (172 | ) | | | (467 | ) |
| Tax exempt | | | (496 | ) | | | (479 | ) | | | (17 | ) | | | | (285 | ) | | | (303 | ) | | | 18 | |
| Loans | | | (330 | ) | | | 427 | | | | (757 | ) | | | | (186 | ) | | | 1,672 | | | | (1,858 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Total interest income | | | (340 | ) | | | 377 | | | | (717 | ) | | | | (1,286 | ) | | | 1,083 | | | | (2,369 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Expense | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | (86 | ) | | | 3 | | | | (89 | ) | | | | (218 | ) | | | 9 | | | | (227 | ) |
| Savings deposits | | | (10 | ) | | | 22 | | | | (32 | ) | | | | (156 | ) | | | 12 | | | | (168 | ) |
| Time deposits | | | (515 | ) | | | (123 | ) | | | (392 | ) | | | | (1,541 | ) | | | (215 | ) | | | (1,326 | ) |
| Other borrowed funds | | | (146 | ) | | | 66 | | | | (212 | ) | | | | 79 | | | | 126 | | | | (47 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Total interest expense | | | (757 | ) | | | (32 | ) | | | (725 | ) | | | | (1,836 | ) | | | (68 | ) | | | (1,768 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Net interest income | | $ | 417 | | | $ | 409 | | | $ | 8 | | | | $ | 550 | | | $ | 1,151 | | | $ | (601 | ) |
| | | | | | | | | | | | | | | | | | | | |
| (1) | | Changes attributable to both volume and rate, which cannot be segregated, have been allocated based on the absolute value of the change due to volume and the change due to rate. |
The following table reconciles net interest income as shown in the financial statements to taxable equivalent net interest income:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| Net interest income | | $ | 11,199,632 | | | $ | 10,783,073 | | | $ | 10,232,966 | |
| Taxable equivalent adjustment (1) | | | 739,703 | | | | 981,555 | | | | 1,128,235 | |
| | | | | | | | | | |
| Net interest income—fully taxable equivalent | | $ | 11,939,335 | | | $ | 11,764,628 | | | $ | 11,361,201 | |
| | | | | | | | | | |
| Net interest yield | | | 3.83 | % | | | 3.81 | % | | | 3.73 | % |
| Taxable equivalent adjustment (1) | | | .25 | | | | .35 | | | | .41 | |
| | | | | | | | | | |
| Net interest yield — taxable equivalent | | | 4.08 | % | | | 4.16 | % | | | 4.14 | % |
| | | | | | | | | | |
| (1) | | Taxable equivalent adjustments have been computed assuming a 34% tax rate. |
Provision (Credit) for Loan Losses
During 2004, the Company reported a provision for loan losses of $423,000 compared to a credit for loan losses of $51,000 for 2003 and a credit for loan losses of $587,000 for 2002. The provision in 2004 represents management’s calculation on an increasing loan portfolio and specific reserves held on two larger commercial real estate loans in foreclosure at December 31, 2004. The credits to the provision in 2003 and 2002 resulted from the resolution and payoff of certain large classified credits, as well as more aggressive collection procedures and stronger underwriting standards. These factors contributed to an improved charge-off experience rate which is a component of management’s calculation of the allowance for loan losses. The decrease in classified assets during 2003 and 2002, includes a $1.4 million decrease in impaired loans and a $551,000 decrease in loans on nonaccrual of interest. As part of management’s aggressive collection efforts, the Bank incurred approximately $85,000 and $135,000 of external collection costs in 2003 and 2002, respectively, mostly representing legal and other professional fees. These costs are reported as non-interest expenses in the consolidated statement of income. See “Financial Condition — Allowance for Loan Losses” for additional discussion and information relative to the provision (credit) for loan losses.
Noninterest Income
Total noninterest income increased $525,000, or 24.4%, to $2.7 million in 2004. Increases included the gains on sale of securities of $588,000, and increases in service charges on deposit accounts of $56,000, which represent increases in overdraft fees and business checking fees. Gain on sale of other real estate owned decreased $115,000 and merchant servicing fees declined $45,000 as the servicing of the merchant credit card portfolio was sold to a third party servicer during December 2004. The sale of the portfolio will have minimal net income effect in 2005 as merchant income was offset by merchant expense in noninterest expense.
Total noninterest income increased $118,000, or 5.8%, to $2.2 million in 2003. Increases of $42,000 in trust and financial services, $118,000 gain on the sale of other real estate and a $62,000 gain on the sale of loans were partially offset by decreases in securities gains of $114,000, decreases in service charges on deposit accounts of $16,000 and a decrease in merchant servicing of $4,000.
| | | |
| 12 | | |
2004 Financial Review
Noninterest Expenses
Total noninterest expenses decreased $521,000, or 4.8%, during 2004. The largest component of non-interest expenses is salaries and employee benefits, which decreased $266,000, or 4.8% in 2004. The decrease relates to a severance package of $237,000 of salary benefits and $100,000 consulting costs classified as professional fees to a former officer in 2003. Professional fees were also reduced in 2004 by $42,000 in director fees and $27,000 in management search fees. Equipment expense rose $25,000 with the installation of a new core processor and automated teller system in 2004.
Total noninterest expenses decreased $199,000 or 1.8% during 2003. The largest component of noninterest expenses is salaries and employee benefits, which decreased $38,000 or 0.7% in 2003. The slight decrease relates to cost reduction efforts in officer salaries and a slight headcount reduction which offset the normal salary adjustments and rising costs of employee benefits. Other expenses reduced $200,000 including reductions in employee education and travel of $45,000, decreases in advertising of $31,000 and postage of $31,000.
Income Taxes
The provision for income taxes amounted to $653,000 in 2004, compared to $130,000 in 2003 and a credit of $65,000 in 2002. The provision in 2004 is partially attributable to rising taxable income from the gain on the sale of tax free bonds. The provision in 2003, as compared to a credit in 2002 was the direct result of a $332,000 increase in income before income taxes and a $285,000 decrease in tax-exempt securities interest income. The credit in 2002 resulted from a net loss before income taxes after consideration of nontaxable interest income.
FINANCIAL CONDITION
Total assets of the Company were $317.3 million at December 31, 2004, compared to $306.2 million at December 31, 2003, representing an increase of $11.1 million, or 3.6%. Net loans increased $4.7 million with the loan growth funded primarily by a $1.5 million increase in securities sold under repurchase agreement and a $1.7 million decrease in federal funds sold.
Securities
Total securities increased $8.4 million, or 12.4% from $67.8 million at year-end 2003 to $76.2 million at year-end 2004. During 2004 the Company liquidated its out of state tax free portfolio previously classified as held-to-maturity. As a result of a change in executive management and the implementation of a strategic initiative to grow both lending and public fund relationships, the Company made a one-time reclassification of all held-to-maturity securities to available-for-sale with the intent to classify all future security purchases as available-for-sale. The action allows management the ability to enhance the diversity and usage of the securities portfolio. The securities portfolio at year-end 2004 consisted of U.S. Treasury, U.S. government corporations and agencies, and obligations of state and political subdivisions. Restricted securities consist primarily of FHLB stock.
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 amounted to $218.1 million at year-end 2004, compared to $213.3 million at year-end 2003, representing an increase of $4.8 million or 2.3%. The loan portfolio at December 31, 2004 was comprised of approximately 56% commercial and commercial real estate loans down from the 58% composition at December 31, 2003. The Company recorded an increase of $3.6 million or 4.9% increase in commercial loans; a decrease of $5.5 million in commercial real estate loans, a $6.0 million or 8.2% increase in residential real estate, a $2.0 million or 16.3% decrease in consumer credit and an increase of $2.5 million or 45.5% in construction loans.
The decrease in commercial real estate loans was partially due to the Bank’s exiting several participation loan agreements with local and regional financial institutions that had been entered into during the year ended December 31, 2003.
Agriculture production loans totaled approximately $1.1 million at year-end 2004, and are included in the commercial, commercial real estate and residential real estate categories. Credit card loans, which are primarily unsecured, totaled $2.5 million, or 1.1%, of loans at year-end 2004. Demand for commercial business loans, as well as both commercial and residential real estate loans, was stable in 2004 and 2003. There was increased consumer demand for home equity loans in 2004. Management believes the Company’s local service areas will experience continued economic strength and a continued need for these types of lending products in 2005.
Most of the Bank’s lending activity is with customers primarily located within Holmes County, Wayne County, and the western portion of Tuscarawas County. Credit concentrations, as determined using Standard Industrial Classification (SIC) codes, that exceeded 5% of total loans at December 31, 2004 included $16,552,000 or 7.6% of total loans to logging, sawmills and rough cut lumber industries; $14,365,000 or 6.6% of total loans to borrowers in the hotel, motel and lodging business; and $11,914,000 or 5.5% of total loans to owners of non-residential real estate. 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 three 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.
2004 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, and other factors and estimates which are subject to change over time. Management periodically reviews selected large loans, delinquent and other problem loans, and selected other loans. Collectibility of these loans is evaluated by considering current financial position and performance of the borrower, estimated market value of the collateral, the Company’s collateral position in relationship to other creditors, guarantees and other potential sources of repayment. Management forms judgments, which are subjective, as to the probability of loss and the amount of loss on these loans as well as other loans taken together. The Bank’s Allowance for Loan and Lease Losses Policy includes, among other items, provisions for classified loans and a provision for the remainder of the portfolio and historical data, including past charge-offs.
The allowance for loan losses totaled $2.6 million or 1.18% of total loans at year-end 2004, compared with $2.5 million or 1.15% of total loans at year-end 2003.
Net charge-offs for 2004 totaled $307,000, compared to $191,000 in 2003 and $732,000 in 2002. Charge-offs of $147,000, $140,000 and $43,000 occurred in commercial loans, mortgage loans and credit cards, respectively during 2004. A net recovery of approximately $24,000 occurred in consumer loans in 2004. During the third and fourth quarters of 2002, the Company sold $1.3 million of commercial and commercial real estate loans that resulted in $494,000 of the charge-offs in 2002. For many of the other loans that have been charged-off, Management is continuing collection efforts, and future recoveries may occur.
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.
Nonperforming loans, which consist of loans past due 90 days or more and nonaccrual loans aggregated $1.7 million or 0.8 % of loans at year end 2004, as compared to $1.3 million or 0.6% of loans at year-end 2003. Impaired loans were $1.2 million at year end 2004, as compared to $897,000 in 2003 and $916,000 in 2002. The increase from 2003 to 2004 was due primarily to the classification of one commercial real estate credit that is currently in the process of foreclosure. 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 $319,000 to $8.2 million at year-end 2004 from $8.6 million at year-end 2003. The decrease in 2004 was due to depreciation exceeding the relatively low volume of equipment purchases. Other assets, including accrued interest receivable, decreased $132,000 at year-end 2004 to $1.7 million largely due to a $210,000 decrease in net tax assets and a $119,000 increase in accrued interest receivable.
Deposits
The Company’s deposits are obtained 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 decreased $1.0 million to $248.0 million at year-end 2004 as compared to $249.0 million at year-end 2003. Noninterest-bearing deposits increased $8.2 million, or 24.5%, to $41.7 million compared to $33.5 million at year-end 2003. Interest-bearing deposits decreased $9.2 million or 4.3% at year-end 2004 compared to year-end 2003. Interest-bearing demand deposits decreased slightly to $50.2 million while the establishment of a money market savings account increased overall savings balances by $5.6 million. Time deposits in excess of $100,000 decreased $7.0 million while other certificates of deposit decreased $5.9 million as consumers invested their monies in savings accounts, awaiting increasing interest rates on their deposits.
Other Funding Sources
The Company obtains additional funds through securities sold under repurchase agreements and advances from the FHLB. These borrowings totaled $32.1 million at year-end 2004, as compared to $21.4 million at year-end 2003. These funding sources provided a net increase in cash of $10.7 million from year-end 2003 to 2004. A $10 million advance from the FHLB was used to purchase US Agency securities during the first quarter 2004. The repurchase agreements are uninsured, so the Company pledges securities against these customer funds.
| | | |
| 14 | | |
2004 Financial Review
CAPITAL RESOURCES
Total shareholders’ equity increased from $34.7 million at December 31, 2003 to $36.2 million at December 31, 2004. This increase was primarily due to net income of $2.5 million, offset by dividends declared of $1.4 million. Shareholders’ equity increased $ 11,375 in 2004, $261,000 in 2003 and $120,000 in 2002 as a portion of dividends declared were reinvested by shareholders in common stock under the Company’s dividend reinvestment program and shares were issued from the Company’s treasury shares.
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’s and Bank’s actual and required capital amounts are disclosed in Note 10 to the consolidated financial statements.
Dividends paid by the Company’s bank subsidiary are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Company is subject to restrictions by regulatory authorities, which generally limit dividends to current and prior two years retained earnings, as defined by regulation. In addition, dividend payments 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 sources of liquidity are cash and cash equivalents, which totaled $15.6 million at December 31, 2004 a decrease of $1.6 million from $17.2 million at December 31, 2003. 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 7.9% of total assets at year-end 2004, as compared to 8.5% of total assets at year-end 2003. 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 the needs of the Company.
As summarized in the consolidated statements of cash flows, the most significant investing activities for the Company in 2004 included the maturities and calls of securities totaling $25.9 million and sales of securities of $11.9 million offset by $48.9 million in securities purchases, and net loan originations of $5.0 million. The Company’s financing activities included a $1.0 million decrease in deposits, a $1.5 million increase in repurchase agreements, and $10.0 million in proceeds from FHLB advances offset by $767,000 in repayments.
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 consists of investments in interest-earning assets (primarily loans and securities), which are funded by interest-bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in the market rates of interest, resulting in market risk. None of the Company’s financial instruments are held for trading purposes.
The Company manages interest rate risk regularly through its Asset Liability Committee. 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 a sensitivity analysis, whereby it measures potential changes in its future earnings and the fair values of its financial instruments that may result from one or more hypothetical changes in interest rates. This analysis is performed by estimating the expected cash flows of the Company’s financial instruments using interest rates in effect at year-end 2004 and 2003. For the fair value estimates, the cash flows are then discounted to year-end to arrive at an estimated present value of the Company’s financial instruments. Hypothetical changes in interest rates are then applied to the financial instruments, and the cash flows and fair values are again estimated using these hypothetical rates. For the net interest income estimates, the hypothetical rates are applied to the financial instruments based on the assumed cash flows. The Company applies these interest rate “shocks” to its financial instruments up and down 200 basis points in 100 basis point increments.
15
2004 Financial Review
The following table presents an analysis of the estimated sensitivity of the Company’s annual net interest income to sudden and sustained 100 basis point changes in market interest rates at December 31, 2004 and 2003:
2004
| | | | | | | | | | | | | | | | | |
| | | Change in | | | | | | | | | | |
| | | Interest Rates | | | Net Interest | Dollar | Percentage |
| | | (basis points) | | | Income | Change | Change |
| |
| | | (Dollars in Thousands) | |
| +200 | | | | | | $ | 13,598 | | | $ | 1,455 | | | | 12.0 | % |
| +100 | | | | | | | 12,812 | | | | 669 | | | | 5.5 | |
| 0 | | | | | | | 12,143 | | | | 0 | | | | 0.0 | |
| -100 | | | | | | | 11,526 | | | | (617 | ) | | | (5.1 | ) |
| -200 | | | | | | | 10,762 | | | | (1,381 | ) | | | (11.4 | ) |
2003
| | | | | | | | | | | | | | | | | |
| | | Change in | | | | | | | | | | |
| | | Interest Rates | | | Net Interest | Dollar | Percentage |
| | | (basis points) | | | Income | Change | Change |
| |
| | | | | | | | | | | (Dollars in Thousands) | | | | | |
| +200 | | | | | | $ | 12,094 | | | $ | 1,152 | | | | 10.5 | % |
| +100 | | | | | | | 11,479 | | | | 537 | | | | 4.9 | |
| 0 | | | | | | | 10,942 | | | | 0 | | | | 0.0 | |
| -100 | | | | | | | 10,534 | | | | (408 | ) | | | (3.7 | ) |
| -200 | | | | | | | 9,965 | | | | (977 | ) | | | (8.9 | ) |
Management reviews its “rate shock” position with the Board on a periodic basis. The Company was within all Board-approved limits at December 31, 2004 and 2003.
SIGNIFICANT ASSUMPTIONS AND OTHER CONSIDERATIONS
The above analysis is based on numerous assumptions, including relative levels of market interest rates, loan prepayments and reactions of depositors to changes in interest rates, and should not be relied upon as being indicative of actual results. Further, the analysis does not necessarily contemplate all actions the Company may undertake in response to changes in interest rates.
Securities owned by the Company will generally repay at their stated maturity. Many of the Company’s loans permit the borrower to prepay the principal balance prior to maturity without penalty. The likelihood of prepayment depends on a number of factors, including current interest rate and interest rate index (if any) on the loan, the financial ability of the borrower to refinance, the economic benefit to be obtained from refinancing, availability of refinancing at attractive terms, as well as economic and other factors in specific geographic areas which affect the sales and price levels of residential property. In a changing interest rate environment, prepayments may increase or decrease on fixed and adjustable rate loans depending on the current relative levels and expectations of future short and long-term interest rates. Prepayments on adjustable rate residential mortgage loans generally increase when long-term interest rates fall or are at historically low levels relative to short-term interest rates, thus making fixed rate loans more desirable. While savings and checking deposits generally may be withdrawn upon the customer’s request without prior notice, a continuing relationship with customers resulting in future deposits and withdrawals is generally predictable, resulting in a dependable and uninterrupted source of funds. No change in the rates on such deposits is assumed when market rates increase or decrease 100 basis points. When market rates increase or decrease 200 basis points, the analysis assumes a corresponding 50 basis point change in the rates paid on such deposits. Short-term borrowings have fixed maturities. Time deposits generally have early withdrawal penalties, which discourage customer withdrawal prior to maturity. Certain advances from the FHLB carry prepayment penalties and are expected to be repaid in accordance with their contractual terms.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses the estimated fair value of its financial instruments at December 31, 2004 and 2003 in Note 13 to the consolidated financial statements. Fair value of the Company’s financial instruments experienced modest changes in 2004. Estimated fair value of loans amounted to 100.4% of the carrying value in 2004, decreasing from 100.8% in 2003. The fair value of securities decreased to 100.0% of carrying value in 2004, from 103.4% in 2003, as all securities were reclassified as available-for-sale. Estimated fair value of deposits decreased slightly to 100.2% of carrying value in 2004 from 100.5% in 2003.
16
2004 Financial Review
OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS
The following table summarizes the Company’s loan commitments, including letters of credit, as of December 31, 2004:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Amount of Commitment to Expire Per Period | | | | |
| | | Total | Less than 1 | 1-3 | 3-5 | Over 5 |
| Type of Commitment | | Amount | year | Years | Years | Years |
| |
| | | (dollars in thousands) | |
| Commercial lines-of-credit | | $ | 23,611 | | | $ | 23,611 | | | | | | | | | | | | | |
| Real estate lines-of-credit | | | 12,101 | | | | 60 | | | $ | 79 | | | $ | 247 | | | $ | 11,715 | |
| Consumer lines-of-credit | | | 675 | | | | 675 | | | | | | | | | | | | | |
| Credit card lines-of-credit | | | 9,098 | | | | 9,098 | | | | | | | | | | | | | |
| Letters of credit | | | 555 | | | | 555 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| |
| Total Commitments | | $ | 46,040 | | | $ | 33,999 | | | $ | 79 | | | $ | 247 | | | $ | 11,715 | |
| | | | | | | | | | | | | | | | |
As indicated in the preceding table, the Bank had $46.0 million in total loan commitments at the end of 2004, with $34.0 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 in residential and nonresidential property. The credit card lines were all made on an unsecured basis. It is anticipated that a significant portion of these lines will expire without being drawn upon, particularly the credit card lines, which represent the maximum amount available to all cardholders.
The following table summarizes the Company’s other contractual obligations as of December 31, 2004:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Payment Due by Period | | | | |
| | | Total | | | Less than | | | 1-3 | | | 3-5 | | | Over 5 | |
| Contractual Obligations | | Amount | | | 1 year | | | Years | | | Years | | | Years | |
| |
| | | (dollars in thousands) | |
| Long-term debt | | $ | 18,745 | | | $ | 10,677 | | | $ | 6,044 | | | $ | 787 | | | $ | 1,237 | |
| Capital leases | | | | | | | | | | | | | | | | | | | | |
| Operating leases | | | 156 | | | | 71 | | | | 69 | | | | 16 | | | | | |
| Unconditional purchase obligations | | | | | | | | | | | | | | | | | | | | |
| Other | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Total Obligations | | $ | 18,901 | | | $ | 10,748 | | | $ | 6,113 | | | $ | 803 | | | $ | 1,237 | |
| | | | | | | | | | | | | | | | |
The long-term debt noted in the preceding table represents 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 point in time to determine whether to payoff 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.
As also indicated in the table, the Company had no capital leases or unconditional purchase obligations as of December 31, 2004.
17
2004 Financial Review
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-1). EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. At December 31, 2004, the Company had gross unrealized losses of $355,000 relating to available-for-sale securities. As disclosed in Note 1 to the consolidated financial statements, management has considered various factors in concluding that the unrealized losses are the result of customary and expected fluctuations in the bond market. Furthermore, it is management’s opinion the Bank has both the ability and intent to hold such securities until maturity or until such time as the fair value of the security equals or exceeds amortized cost.
On March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (SAB 105). This bulletin was issued to inform registrants of the SEC’s view that the fair value of the recorded loan commitments that are required to follow derivative accounting under FAS 133, Accounting for Derivative Instruments and Hedging Activities, should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of this Staff Accounting Bulletin did not have an impact on the Company’s consolidated financial statements since the Bank has not entered into loan commitments that are required to follow derivative accounting under FAS 133.
In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued AICPA Statement of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3), to address accounting for differences between the contractual cash flows of certain loans and debt securities and the cash flows expected to be collected when loans or debt securities are acquired in a transfer and those cash flow differences are attributable, at least in part, to credit quality. As such, SOP 03-3 applies to such loans and debt securities purchased or acquired in purchase business combinations and does not apply to originated loans. SOP 03-3 is effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004, with early application encouraged. At the present time, the implementation of SOP 03-3 is not expected to have a significant, if any, impact on the Company’s consolidated financial statements.
The Company applies Accounting Principles Board Opinion No. 25 in accounting for stock options and discloses the fair value of options granted as permitted by SFAS No. 123. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the common stock at date of grant. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Revised), “Share-Based Payments” (FAS 123R), which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. FAS 123R also establishes fair value as the measurement objective in accounting for share-based payment arrangements, including share options. The Statement will require the Company to measure compensation expense based on the grant-date fair value of options awarded over the period during which the recipient is required to provide services in exchange for the award.
The Company will be required to adopt the provisions of FAS 123R as of the interim reporting period that begins July 1, 2005. FAS 123R applies to all options awarded after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying FAS 123R, if any, will be recognized as of July 1, 2005. The Company has not yet determined the impact the adoption of FAS 123R will have on its consolidated financial statements.
SIGNIFICANT ACCOUNTING POLICIES
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America 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 2004 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 allowance for loan losses as the accounting area that requires the most subjective and complex estimates, assumptions, and judgments and, as such, could be the most subject to revision as new information becomes available.
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 non-performing 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.
18
2004 Financial Review
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, requiring measurement of financial position and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, most assets and liabilities of the Company are monetary in nature. Therefore, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as prices of goods and services. The liquidity, maturity structure and quality of the Company’s assets and liabilities are critical to maintenance of acceptable performance levels.
COMMON STOCK AND SHAREHOLDER INFORMATION
Common shares of the Company are not traded on an established market. Shares are traded through broker/dealers under the symbol “CSBB.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 inter-dealer prices, without mark-up, mark-down or commission and may not represent actual transactions. The chart specifies cash dividends declared by the Company to its shareholders during 2004 and 2003. No assurances can be given that dividends will be declared, or if declared, what the amount of any such dividends will be. Additional information concerning restrictions over the payment of dividends is included in Note 10 of the consolidated financial statements.
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Quarter Ended | | High | | | Low | | | Dividends Declared | |
| |
| March 31, 2004 | | $ | 18.00 | | | $ | 17.00 | | | $ | 343,765 | |
| June 30, 2004 | | | 18.50 | | | | 17.07 | | | | 343,765 | |
| September 30, 2004 | | | 20.25 | | | | 17.80 | | | | 343,845 | |
| December 31, 2004 | | | 21.00 | | | | 19.65 | | | | 343,846 | |
| | | | | | | | | | | | | |
| March 31, 2003 | | $ | 18.50 | | | $ | 16.50 | | | $ | 315,937 | |
| June 30, 2003 | | | 18.00 | | | | 17.00 | | | | 316,398 | |
| September 30, 2003 | | | 17.50 | | | | 15.50 | | | | 316,871 | |
| December 31, 2003 | | | 17.55 | | | | 17.00 | | | | 317,322 | |
As of December 31, 2004, the Company had approximately 1,190 shareholders and 2,644,962 outstanding shares of common stock.
TRANSFER AGENT
Registrar and Transfer Company
Attn: Investor Relations
10 Commerce Drive
Cranford, NJ 07016
800-368-5948
ANNUAL AND OTHER REPORTS; SHAREHOLDER AND GENERAL INQUIRIES
CSB Bancorp, Inc. is required to file an annual report on Form 10-K annually with the Securities and Exchange Commission. Copies of the Form 10-K annual report and the Company’s quarterly reports may be obtained without charge by contacting:
Paula J. Meiler, Chief Financial Officer
CSB Bancorp, Inc.
6 West Jackson Street
Millersburg, Ohio 44654
Phone 330-674-9015 or 800-654-9015
The annual meeting of shareholders is currently scheduled to be held on Wednesday, April 27, 2005 at 7:00 pm, at the Carlisle Inn in Walnut Creek, Ohio.
19
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
CSB Bancorp, Inc.
Millersburg, Ohio
We have audited the accompanying consolidated balance sheets of CSB Bancorp, Inc. and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. 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 subsidiary as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
Toledo, Ohio
January 27, 2005
20
Consolidated Balance Sheets
December 31, 2004 and 2003
| | | | | | | | | |
| | | 2004 | | | 2003 | |
ASSETS | | | | | | | | |
CASH AND CASH EQUIVALENTS | | | | | | | | |
| Cash and due from banks | | $ | 12,501,954 | | | $ | 12,327,227 | |
| Interest-earning deposits in other banks | | | 142,338 | | | | 147,154 | |
| Federal funds sold | | | 3,000,000 | | | | 4,727,000 | |
| | | | | | | |
| Total cash and cash equivalents | | | 15,644,292 | | | | 17,201,381 | |
| | | | | | | |
SECURITIES | | | | | | | | |
| Available-for-sale, at fair value | | | 73,438,070 | | | | 28,990,615 | |
| Held-to-maturity, at amortized cost (fair value of $38,395,177 in 2003) | | | | | | | 36,092,027 | |
| Restricted stock, at cost | | | 2,790,400 | | | | 2,690,600 | |
| | | | | | | |
| Total securities | | | 76,228,470 | | | | 67,773,242 | |
| | | | | | | |
LOANS | | | 218,084,479 | | | | 213,254,462 | |
| Less allowance for loan losses | | | 2,574,945 | | | | 2,458,864 | |
| | | | | | | |
| Net loans | | | 215,509,534 | | | | 210,795,598 | |
| | | | | | | |
| | | | | | | | | |
PREMISES AND EQUIPMENT, NET | | | 8,243,997 | | | | 8,563,276 | |
| | | | | | | | | |
ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS | | | 1,714,050 | | | | 1,846,292 | |
| | | | | | | |
| | | | | | | | | |
TOTAL ASSETS | | $ | 317,340,343 | | | $ | 306,179,789 | |
| | | | | | | |
| | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
LIABILITIES | | | | | | | | |
| Deposits: | | | | | | | | |
| Noninterest-bearing | | $ | 41,733,596 | | | $ | 33,539,061 | |
| Interest-bearing | | | 206,217,123 | | | | 215,418,686 | |
| | | | | | | |
| Total deposits | | | 247,950,719 | | | | 248,957,747 | |
| Securities sold under repurchase agreements | | | 13,316,473 | | | | 11,859,052 | |
| Federal Home Loan Bank borrowings | | | 18,745,236 | | | | 9,512,481 | |
| Accrued interest payable and other liabilities | | | 1,120,408 | | | | 1,132,971 | |
| | | | | | | |
| Total liabilities | | | 281,132,836 | | | | 271,462,251 | |
| | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | | |
| Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,667,786 shares | | | 16,673,667 | | | | 16,673,667 | |
| Additional paid-in capital | | | 6,413,915 | | | | 6,413,915 | |
| Retained earnings | | | 13,358,321 | | | | 12,214,751 | |
| Treasury stock at cost - 22,824 shares in 2004 and 23,436 shares in 2003 | | | (627,119 | ) | | | (645,938 | ) |
| Accumulated other comprehensive income | | | 388,723 | ) | | | 61,143 | |
| | | | | | | |
| Total shareholders’ equity | | | 36,207,507 | | | | 34,717,538 | |
| | | | | | | |
| | | | | | | | | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 317,340,343 | | | $ | 306,179,789 | |
| | | | | | | |
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
21
| | | |
Consolidated Statements of Income | | |
| |
| Years Ended December 31, 2004, 2003 and 2002 | | |
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
INTEREST AND DIVIDEND INCOME | | | | | | | | | | | | |
| Loans, including fees | | $ | 12,122,379 | | | $ | 12,452,881 | | | $ | 12,639,261 | |
| Taxable securities | | | 1,501,812 | | | | 1,020,512 | | | | 1,658,996 | |
| Nontaxable securities | | | 1,409,263 | | | | 1,905,372 | | | | 2,190,103 | |
| Other | | | 40,094 | | | | 35,666 | | | | 211,435 | |
| | | | | | | | | | |
| Total interest and dividend income | | | 15,073,548 | | | | 15,414,431 | | | | 16,699,795 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
INTEREST EXPENSE | | | | | | | | | | | | |
| Deposits | | | 3,237,803 | | | | 3,849,339 | | | | 5,764,027 | |
| Other | | | 636,113 | | | | 782,019 | | | | 702,802 | |
| | | | | | | | | | |
| Total interest expense | | | 3,873,916 | | | | 4,631,358 | | | | 6,466,829 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
NET INTEREST INCOME | | | 11,199,632 | | | | 10,783,073 | | | | 10,232,966 | |
| | | | | | | | | | | | | |
PROVISION (CREDIT) FOR LOAN LOSSES | | | 422,621 | | | | (51,000 | ) | | | (586,521 | ) |
| | | | | | | | | | |
| Net interest income, after provision (credit) for loan losses | | | 10,777,011 | | | | 10,834,073 | | | | 10,819,487 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
NONINTEREST INCOME | | | | | | | | | | | | |
| Service charges on deposit accounts | | | 846,935 | | | | 790,587 | | | | 807,206 | |
| Merchant fees | | | 163,086 | | | | 207,811 | | | | 212,109 | |
| Trust services | | | 386,469 | | | | 375,929 | | | | 334,089 | |
| Securities gains | | | 587,916 | | | | 1,068 | | | | 114,822 | |
| Gain on sale of loans | | | 13,481 | | | | 68,267 | | | | 5,843 | |
| Gain (loss) on sale of other real estate owned | | | | | | | 114,836 | | | | (3,350 | ) |
| Other | | | 682,423 | | | | 596,855 | | | | 566,342 | |
| | | | | | | | | | |
| Total noninterest income | | | 2,680,310 | | | | 2,155,353 | | | | 2,037,061 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
NONINTEREST EXPENSES | | | | | | | | | | | | |
| Salaries and employee benefits | | | 5,250,732 | | | | 5,516,584 | | | | 5,554,344 | |
| Occupancy expense | | | 642,048 | | | | 647,157 | | | | 622,037 | |
| Equipment expense | | | 515,267 | | | | 490,483 | | | | 534,296 | |
| Franchise tax expense | | | 419,527 | | | | 408,544 | | | | 377,274 | |
| Professional and director fees | | | 680,043 | | | | 894,314 | | | | 868,257 | |
| Other expenses | | | 2,770,469 | | | | 2,842,235 | | | | 3,042,202 | |
| | | | | | | | | | |
| Total noninterest expenses | | | 10,278,086 | | | | 10,799,317 | | | | 10,998,410 | |
| | | | | | | | | | |
| Income before income taxes | | | 3,179,235 | | | | 2,190,109 | | | | 1,858,138 | |
| | | | | | | | | | | | | |
FEDERAL INCOME TAX PROVISION (CREDIT) | | | 653,000 | | | | 130,000 | | | | (65,000 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
NET INCOME | | $ | 2,526,235 | | | $ | 2,060,109 | | | $ | 1,923,138 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
NET INCOME PER SHARE | | | | | | | | | | | | |
| Basic | | $ | .96 | | | $ | .78 | | | $ | .73 | |
| | | | | | | | | | |
| Diluted | | $ | .95 | | | $ | .78 | | | $ | .73 | |
| | | | | | | | | | |
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
22
| | | |
Consolidated Statements of Shareholders’ Equity | | |
| |
| Years Ended December 31, 2004, 2003 and 2002 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | | | | | | | Accumulated other | | | | |
| | | Common | | | paid-in | | | Retained | | | Treasury | | | comprehensive | | | | |
| | | stock | | | capital | | | earnings | | | stock | | | income (loss) | | | Total | |
| | | |
BALANCE AT DECEMBER 31, 2001 | | $ | 16,673,667 | | | $ | 6,413,915 | | | $ | 10,571,152 | | | $ | (1,204,018 | ) | | $ | 266,421 | | | $ | 32,721,137 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 1,923,138 | | | | | | | | | | | | 1,923,138 | |
| Change in net unrealized gain (loss), net of reclassification adjustments and related income taxes | | | | | | | | | | | | | | | | | | | (144,699 | ) | | | (144,699 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 1,778,439 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of 6,562 shares from treasury under dividend reinvestment program | | | | | | | | | | | (83,829 | ) | | | 203,434 | | | | | | | | 119,605 | |
| Purchase of 5,013 treasury shares | | | | | | | | | | | | | | | (87,728 | ) | | | | | | | (87,728 | ) |
| Cash dividends declared, $.30 per share | | | | | | | | | | | (789,169 | ) | | | | | | | | | | | (789,169 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31 , 2002 | | | 16,673,667 | | | | 6,413,915 | | | | 11,621,292 | | | | (1,088,312 | ) | | | 121,722 | | | | 33,742,284 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 2,060,109 | | | | | | | | | | | | 2,060,109 | |
| Change in net unrealized gain (loss), net of reclassification adjustments and related income taxes | | | | | | | | | | | | | | | | | | | (60,579 | ) | | | (60,579 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 1,995,530 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of 15,135 shares from treasury under dividend reinvestment program | | | | | | | | | | | (200,122 | ) | | | 461,119 | | | | | | | | 260,997 | |
| Purchase of 1,043 treasury shares | | | | | | | | | | | | | | | (18,745 | ) | | | | | | | (18,745 | ) |
| Cash dividends declared, $.48 per share | | | | | | | | | | | (1,266,528 | ) | | | | | | | | | | | (1,266,528 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2003 | | | 16,673,667 | | | | 6,413,915 | | | | 12,214,751 | | | | (645,938 | ) | | | 61,143 | | | | 34,717,538 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | 2,526,235 | | | | | | | | | | | | 2,526,235 | |
| Change in net unrealized gain (loss), net of reclassification adjustments and related income taxes | | | | | | | | | | | | | | | | | | | 327,580 | | | | 327,580 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 2,853,815 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of 612 shares from treasury under dividend reinvestment program | | | | | | | | | | | (7,444 | ) | | | 18,819 | | | | | | | | 11,375 | |
| Cash dividends declared, $.52 per share | | | | | | | | | | | (1,375,221 | ) | | | | | | | | | | | (1,375,221 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE AT DECEMBER 31, 2004 | | $ | 16,673,667 | | | $ | 6,413,915 | | | $ | 13,358,321 | | | $ | (627,119 | ) | | $ | 388,723 | | | $ | 36,207,507 | |
| | | | | | | | | | | | | | | | | | | |
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
23
| | | |
Consolidated Statements of Cash Flows | | |
| |
| Years Ended December 31, 2004, 2003 and 2002 | | |
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net income | | $ | 2,526,235 | | | $ | 2,060,109 | | | $ | 1,923,138 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization of premises and equipment | | | 760,009 | | | | 723,841 | | | | 720,316 | |
| Deferred income taxes | | | 115,246 | | | | (113,793 | ) | | | 1,426,542 | |
| Provision (credit) for loan losses | | | 422,621 | | | | (51,000 | ) | | | (586,521 | ) |
| Gain on sale of loans | | | (13,481 | ) | | | (68,267 | ) | | | (5,843 | ) |
| Securities gains | | | (587,916 | ) | | | (1,068 | ) | | | (114,822 | ) |
| Gain on sale of premises and equipment | | | | | | | | | | | (1,762 | ) |
| Loss (gain) on sale of other real estate owned | | | | | | | (114,836 | ) | | | 3,350 | |
| Security amortization, net of accretion | | | 31,448 | | | | 14,764 | | | | 88,983 | |
| Federal Home Loan Bank stock dividends | | | (99,800 | ) | | | (97,100 | ) | | | (109,700 | ) |
| Secondary market loan sale proceeds | | | 1,281,531 | | | | 7,933,025 | | | | 3,871,289 | |
| Originations of secondary market loans held-for-sale | | | (1,268,050 | ) | | | (7,864,758 | ) | | | (3,865,446 | ) |
| Effects of changes in operating assets and liabilities: | | | | | | | | | | | | |
| Net deferred loan fees | | | (104,489 | ) | | | (21,088 | ) | | | (166,716 | ) |
| Accrued interest receivable | | | (118,785 | ) | | | 320,468 | | | | 406,812 | |
| Accrued interest payable | | | (10,309 | ) | | | (41,701 | ) | | | (184,174 | ) |
| Other assets and liabilities | | | (61,750 | ) | | | 758,858 | | | | 557,806 | |
| | | | | | | | | | |
| |
| Net cash provided by operating activities | | | 2,872,510 | | | | 3,437,454 | | | | 3,963,252 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | | |
| Proceeds from maturities and repayments | | | 25,896,718 | | | | 38,128,846 | | | | 31,129,822 | |
| Proceeds from sale | | | 11,928,699 | | | | | | | | | |
| Purchases | | | (48,940,043 | ) | | | (44,537,368 | ) | | | (20,497,528 | ) |
| Securities held-to-maturity: | | | | | | | | | | | | |
| Proceeds from maturities and repayments | | | 3,812,000 | | | | 11,714,947 | | | | 8,803,000 | |
| Proceeds from sale of loans | | | | | | | | | | | 780,732 | |
| Loan originations, net of repayments | | | (5,032,068 | ) | | | (13,614,238 | ) | | | (32,605,933 | ) |
| Proceeds from sale of other real estate | | | | | | | 169,000 | | | | 327,486 | |
| Proceeds from sale of premises and equipment | | | | | | | | | | | 11,450 | |
| Property and equipment expenditures | | | (440,730 | ) | | | (216,879 | ) | | | (459,672 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | | (12,775,424 | ) | | | (8,355,692 | ) | | | (12,510,643 | ) |
| | | | | | | | | | |
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
24
| | | |
Consolidated Statements of Cash Flows | | |
| |
| Years Ended December 31, 2004, 2003 and 2002 | | |
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | |
| Net change in deposits | | $ | (1,007,028 | ) | | $ | 8,981,814 | | | $ | (11,453,797 | ) |
| Net change in securities sold under repurchase agreements | | | 1,457,421 | | | | (2,589,332 | ) | | | (508,641 | ) |
| Federal Home Loan Bank borrowings: | | | | | | | | | | | | |
| Proceeds | | | 10,000,000 | | | | 5,000,000 | | | | 10,000,000 | |
| Repayments | | | (767,245 | ) | | | (10,867,579 | ) | | | (979,728 | ) |
| Purchase of treasury shares | | | | | | | (18,745 | ) | | | (87,728 | ) |
| Cash dividends paid | | | (1,337,323 | ) | | | (951,235 | ) | | | (406,538 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net cash provided by (used in) financing activities | | | 8,345,825 | | | | (445,077 | ) | | | (3,436,432 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | | | (1,557,089 | ) | | | (5,363,315 | ) | | | (11,983,823 | ) |
| | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR | | | 17,201,381 | | | | 22,564,696 | | | | 34,548,519 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 15,644,292 | | | $ | 17,201,381 | | | $ | 22,564,696 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURES | | | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | | | |
| Interest | | $ | 3,884,225 | | | $ | 4,673,059 | | | $ | 6,651,003 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Income taxes | | $ | 550,000 | | | $ | 20,000 | | | $ | | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Noncash investing activities: | | | | | | | | | | | | |
| Transfer of loans to other real estate owned | | $ | | | | $ | | | | $ | 385,000 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Transfer of securities from held-to-maturity to available-for-sale | | $ | 31,681,132 | | | $ | | | | $ | | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Noncash financing activity — payments of dividends through issuance of treasury shares, under dividend reinvestment program | | $ | 11,375 | | | $ | 260,997 | | | $ | 119,605 | |
| | | | | | | | | | |
These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements.
25
| | | |
Summary of Significant Accounting Policies | | |
| |
CSB Bancorp, Inc. (the “Company”) was incorporated in 1991 in the State of Ohio and is a registered bank holding company for its wholly-owned subsidiary, The Commercial and Savings Bank (the “Bank”). The Company, through its subsidiary, operates in one industry segment, the commercial banking industry.
The Bank, an Ohio-chartered bank organized in 1879, provides financial services through its Main Office and eight Banking Centers located in Millersburg, Ohio, 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 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 estimate susceptible to change in the near term relates to management’s determination of the allowance for loan losses.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company 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, 2004 and 2003 was $2,434,000 and $1,879,000, respectively.
SECURITIES
During 2004, the Bank transferred its held-to-maturity securities portfolio to the available-for-sale classification, as more fully described in Note 1. Prior to the transfer, securities designated as held-to-maturity were carried at amortized cost. Securities designated as available-for-sale are carried at fair value with unrealized gains and losses, net of applicable income taxes, on such securities recognized as other comprehensive income (loss).
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. 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 completed transaction basis, using the specific identification method, and are included in noninterest income. Securities are written down to fair value when a decline in fair value is not temporary.
26
Summary of Significant Accounting Policies
LOANS
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off 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 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 the lower of cost or 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. There was no other real estate owned at December 31, 2004 and 2003.
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.
SERVICING
Mortgage servicing rights are recognized as an asset when acquired through sale of loans. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Any impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount.
27
Summary of Significant Accounting Policies
REPURCHASE AGREEMENTS
Substantially all securities sold under repurchase agreements represent amounts advanced by various customers. Securities 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
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 is not currently subject to state and local income taxes.
STOCK-BASED COMPENSATION
Employee compensation expense under stock option plans is reported if options are granted below market price at the grant date. Pro forma disclosures of compensation cost of stock-based awards have been determined using the fair value method that considers the time value of the option considering the volatility of the Company’s stock and the risk-free interest rate over the expected life of the option using a Black-Scholes valuation model. Had compensation cost for stock options been measured using FASB Statement No. 123, net income and earnings per share would have been the pro forma amounts indicated below. The pro forma effect may increase in the future if more options are granted.
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| Net income as reported | | $ | 2,526,235 | | | $ | 2,060,109 | | | $ | 1,923,138 | |
| Pro forma net income | | | 2,469,434 | | | | 2,031,391 | | | | 1,904,729 | |
| Basic earnings per share as reported | | | .96 | | | | .78 | | | | .73 | |
| Pro forma basic earnings per share | | | .93 | | | | .77 | | | | .72 | |
| Diluted earnings per share as reported | | | .95 | | | | .78 | | | | .73 | |
| Pro forma diluted earnings per share | | | .93 | | | | .77 | | | | .72 | |
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
| | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 |
| Risk-free interest rate | | | 3.34 | % | | | 2.75 | % | | | 3.00 | % |
| Expected option life (years) | | | 3.5 | | | | 6.4 | | | | 9.5 | |
| Dividend yield | | | 2.6 | % | | | 2.5 | % | | | 2.5 | % |
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (Revised), “Share-Based Payments” (FAS 123R), which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. FAS 123R also establishes fair value as the measurement objective in accounting for share-based payment arrangements, including share options. The Statement will require the Company to measure compensation expense based on the grant-date fair value of options awarded over the period during which the recipient is required to provide services in exchange for the award.
The Company will be required to adopt the provisions of FAS 123R as of the interim reporting period that begins July 1, 2005. FAS 123R applies to all options awarded after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying FAS 123R, if any, will be recognized as of July 1, 2005. The Company has not yet determined the impact the adoption of FAS 123R will have on its consolidated financial statements.
28
Summary of Significant Accounting Policies
COMPREHENSIVE INCOME
Accounting principles generally 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, after restatement for stock dividends. 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;
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| Weighted average common shares outstanding (basic) | | | 2,644,582 | | | | 2,638,360 | | | | 2,630,931 | |
| Dilutive effect of assumed exercise of stock options | | | 6,366 | | | | 3,527 | | | | 3,627 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Weighted average common shares outstanding (diluted) | | | 2,650,948 | | | | 2,641,887 | | | | 2,634,558 | |
| | | | | | | | | | |
Dividends per share are based on the number of shares outstanding at the declaration date.
29
Notes to Consolidated Financial Statements
NOTE 1 — SECURITIES
Securities consist of the following at December 31, 2004 and 2003:
| | | | | | | | | | | | | | | | | |
| | | | | | | Gross | | | Gross | | | | |
| | | Amortized | | | unrealized | | | unrealized | | | Fair | |
| | | cost | | | gains | | | losses | | | value | |
December 31, 2004 | | | | | | | | | | | | | | | | |
| Available-for-sale: | | | | | | | | | | | | | | | | |
| U.S. Treasury security | | $ | 101,551 | | | $ | 32,277 | | | | | | | $ | 133,828 | |
| Obligations of U.S. government corporations and agencies | | | 39,458,087 | | | | 38,527 | | | $ | 282,074 | | | | 39,214,540 | |
| Mortgage-backed securities | | | 16,291,492 | | | | 9,347 | | | | 72,876 | | | | 16,227,963 | |
| Obligations of states and political subdivisions | | | 16,997,965 | | | | 863,774 | | | | | | | | 17,861,739 | |
| | | | | | | | | | | | | |
| Total available-for-sale | | | 72,849,095 | | | | 943,925 | | | | 354,950 | | | | 73,438,070 | |
| Restricted stock | | | 2,790,400 | | | | | | | | | | | | 2,790,400 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total securities | | $ | 75,639,495 | | | $ | 943,925 | | | $ | 354,950 | | | $ | 76,228,470 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2003 | | | | | | | | | | | | | | | | |
| Available-for-sale: | | | | | | | | | | | | | | | | |
| Obligations of U.S. government corporations and agencies | | $ | 24,018,719 | | | $ | 73,383 | | | $ | 7,872 | | | $ | 24,084,230 | |
| Mortgage-backed securities | | | 4,263,078 | | | | 4,782 | | | | 7,600 | | | | 4,260,260 | |
| Corporate security | | | 616,177 | | | | 29,948 | | | | | | | | 646,125 | |
| | | | | | | | | | | | | |
| Total available-for-sale | | | 28,897,974 | | | | 108,113 | | | | 15,472 | | | | 28,990,615 | |
| | | | | | | | | | | | | |
| Held-to-maturity: | | | | | | | | | | | | | | | | |
| U.S. Treasury security | | | 101,599 | | | | 32,557 | | | | | | | | 134,156 | |
| Obligations of U.S. government corporations and agencies | | | 1,000,000 | | | | 11,875 | | | | | | | | 1,011,875 | |
| Obligations of states and political subdivisions | | | 34,990,428 | | | | 2,258,718 | | | | | | | | 37,249,146 | |
| | | | | | | | | | | | | |
| Total held-to-maturity | | | 36,092,027 | | | | 2,303,150 | | | | | | | | 38,395,177 | |
| | | | | | | | | | | | | |
| Restricted stock | | | 2,690,600 | | | | | | | | | | | | 2,690,600 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total securities | | $ | 67,680,601 | | | $ | 2,411,263 | | | $ | 15,472 | | | $ | 70,076,392 | |
| | | | | | | | | | | | | |
30
Notes to Consolidated Financial Statements
NOTE 1 — SECURITIES (continued)
The amortized cost and fair value of securities at December 31, 2004, 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 | | $ | 9,496,833 | | | $ | 9,520,215 | |
| Due after one through five years | | | 29,243,748 | | | | 29,832,991 | |
| Due after five years through ten years | | | 21,154,937 | | | | 21,157,167 | |
| Due after ten years | | | 12,953,577 | | | | 12,927,697 | |
| | | | | | | |
| | | | | | | | | |
Total available-for-sale | | $ | 72,849,095 | | | $ | 73,438,070 | |
| | | | | | | |
Securities with a carrying value of approximately $51,710,000 and $47,526,000 were pledged at December 31, 2004 and 2003, 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 $2,520,400 and $2,420,600 at December 31, 2004 and 2003, respectively.
During the third quarter of 2004, the Company transferred its entire held-to-maturity securities portfolio, with an amortized cost of $31,681,132, to the available-for-sale category resulting in unrealized gains of $1,639,462. The portfolio was almost entirely comprised of state and political subdivision issues (i.e., municipal securities). The transfer was prompted by the Bank’s difficulty securing public fund deposits with out-of-state municipal securities, as well as changes in executive management over the past two years, and will enable management to enhance the diversity and usage of the securities portfolio going forward. Subsequent to the transfer, the Bank sold all out-of-state municipal securities from the portfolio, with an amortized cost of $10,701,432, resulting in a gain on sale of $559,157.
Gross gains realized from sales or recovery of previous impairment write-offs of securities available-for-sale amounted to $587,916 in 2004, $1,068 in 2003, and $114,822 in 2002, with the income tax provision applicable to such gains amounting to $199,891 in 2004, $363 in 2003, and $39,039 in 2002. There were no gross realized losses in 2004, 2003 and 2002.
31
Notes to Consolidated Financial Statements
NOTE 1 — SECURITIES (continued)
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, 2004 and 2003:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Securities in a Continuous Unrealized Loss Position | |
| | | Less Than 12 Months | | | 12 Months or More | | | Total | |
| | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | |
| | | loss | | | value | | | loss | | | value | | | loss | | | value | |
2004 | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations of U.S. Government corporations and agencies | | $ | 253,805 | | | $ | 29,240,789 | | | $ | 28,269 | | | $ | 3,979,056 | | | $ | 282,074 | | | $ | 33,219,845 | |
| Mortgage-backed securities | | | 65,250 | | | | 8,847,373 | | | | 7,626 | | | | 1,954,414 | | | | 72,876 | | | | 10,801,787 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | | $ | 319,055 | | | $ | 38,088,162 | | | $ | 35,895 | | | $ | 5,933,470 | | | $ | 354,950 | | | $ | 44,021,632 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
2003 | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations of U.S. Government corporations and agencies | | $ | 7,872 | | | $ | 5,487,658 | | | $ | | | | $ | | | | $ | 7,872 | | | $ | 5,487,658 | |
| Mortgage-backed securities | | | 7,600 | | | | 3,582,507 | | | | | | | | | | | | 7,600 | | | | 3,582,507 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | | $ | 15,472 | | | $ | 9,070,165 | | | $ | | | | $ | | | | $ | 15,472 | | | $ | 9,070,165 | |
| | | | | | | | | | | | | | | | | | | |
There were twenty-three securities in an unrealized loss position at December 31, 2004, four of which were in a continuous unrealized loss position for twelve months or more. Management has considered industry analyst reports, sector credit reports and volatility in the bond market in concluding that the unrealized losses as of December 31, 2004 were primarily the result of customary and expected fluctuations in the bond market. As a result, all security impairments as of December 31, 2004 are considered temporary.
NOTE 2 — LOANS
Loans consist of the following at December 31, 2004 and 2003:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| Commercial | | $ | 77,231,142 | | | $ | 73,558,796 | |
| Commercial real estate | | | 43,743,785 | | | | 49,160,157 | |
| Residential real estate | | | 78,861,767 | | | | 72,944,329 | |
| Installment and credit card | | | 10,273,257 | | | | 12,250,616 | |
| Construction | | | 8,033,519 | | | | 5,503,312 | |
| Deferred loan fees, net | | | (58,991 | ) | | | (162,748 | ) |
| | | | | | | |
| | | | | | | | | |
Loans | | $ | 218,084,479 | | | $ | 213,254,462 | |
| | | | | | | |
The following represents a summary of the activity in the allowance for loan losses for the years ended December 31, 2004, 2003 and 2002:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| Beginning balance | | $ | 2,458,864 | | | $ | 2,700,643 | | | $ | 4,019,302 | |
| Provision (credit) for loan losses | | | 422,621 | | | | (51,000 | ) | | | (586,521 | ) |
| Loans charged-off | | | (434,055 | ) | | | (337,533 | ) | | | (1,165,247 | ) |
| Recoveries | | | 127,515 | | | | 146,754 | | | | 433,109 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Ending balance | | $ | 2,574,945 | | | $ | 2,458,864 | | | $ | 2,700,643 | |
| | | | | | | | | | |
32
Notes to Consolidated Financial Statements
NOTE 2 — LOANS (continued)
During 2002, the Bank sold certain commercial and commercial real estate loans with an outstanding principal balance aggregating approximately $1,275,000 and received total proceeds of $780,732, with a charge to the allowance for loan losses of approximately $494,000. There was no gain or loss recorded on the sales.
As a result of an increase in non-operating loans during 2000 and a regulatory examination performed in the second quarter of 2000, management analyzed certain of its credits, resulting in increased loan charge-offs and specific and general allocation of its allowance for loan losses, which caused an increase in the provision for loan losses during the year. Certain of these credits were favorably resolved during 2002 and 2001, resulting in actual loan charge-offs being less than the specific allocations provided. As a result of these favorable outcomes, the Bank recognized a credit for loan losses of $51,000 in 2003 and $586,521 in 2002.
Impaired loans were as follows for December 31, 2004 and 2003:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| Year-end loans with no allowance for loan losses allocated | | | | | | | | |
| Year-end loans with allowance for loan losses allocated | | $ | 1,198,408 | | | $ | 897,370 | |
| Amount of the allowance allocated | | | 388,415 | | | | 250,781 | |
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| Average of impaired loans during the year | | $ | 823,793 | | | $ | 1,135,417 | | | $ | 2,496,740 | |
| Interest income recognized during impairment | | | 24,105 | | | | 51,740 | | | | 105,169 | |
| Cash-basis interest income recognized | | | 23,415 | | | | 51,039 | | | | 105,169 | |
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, 2004 and 2003:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| Loans past due over 90 days still accruing interest | | $ | 119,000 | | | $ | 175,000 | |
| Nonaccrual loans | | | 1,552,368 | | | | 1,170,000 | |
Loans serviced for others approximated $22,789,000 and $25,598,000 at December 31, 2004 and 2003, respectively.
NOTE 3 — PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31, 2004 and 2003:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| Land and improvements | | $ | 1,007,927 | | | $ | 1,007,927 | |
| Buildings and improvements | | | 8,388,882 | | | | 8,406,896 | |
| Furniture and equipment | | | 6,000,967 | | | | 5,565,389 | |
| Leasehold improvements | | | 79,979 | | | | 79,979 | |
| | | | | | | |
| | | | 15,477,775 | | | | 15,060,191 | |
| Accumulated depreciation | | | 7,233,758 | | | | 6,496,915 | |
| | | | | | | |
| | | | | | | | | |
Premises and equipment, net | | $ | 8,243,997 | | | $ | 8,563,276 | |
| | | | | | | |
The Bank leases certain office locations. Total rental expense under these leases approximated $71,400, $72,000, and $77,000 in 2004, 2003, and 2002, respectively. Future minimum lease payments at December 31, 2004 aggregate $156,200 and are due as follows: 2005, $71,400; 2006, $49,200; 2007, $20,000; and 2008, $15,600.
33
Notes to Consolidated Financial Statements
NOTE 4 — INTEREST-BEARING DEPOSITS
Interest-bearing deposits at December 31, 2004 and 2003 are as follows:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| Demand | | $ | 50,215,416 | | | $ | 50,873,110 | |
| Savings | | | 43,285,120 | | | | 38,924,341 | |
| Time deposits: | | | | | | | | |
| In excess of $100,000 | | | 30,616,776 | | | | 37,579,321 | |
| Other | | | 82,099,811 | | | | 88,041,914 | |
| | | | | | | |
| | | | | | | | | |
Total interest-bearing deposits | | $ | 206,217,123 | | | $ | 215,418,686 | |
| | | | | | | |
| | | | | | | | | |
| At December 31, 2004, stated maturities of time deposits were as follows: | | | | | | | | |
| | | | | | | | | |
| 2005 | | $ | 45,954,974 | | | | | |
| 2006 | | | 35,262,835 | | | | | |
| 2007 | | | 21,272,020 | | | | | |
| 2008 | | | 6,837,516 | | | | | |
| 2009 and beyond | | | 3,389,242 | | | | | |
| | | | | | | | |
| | | | | | | | | |
Total | | $ | 112,716,587 | | | | | |
| | | | | | | | |
NOTE 5 — BORROWINGS
During 2004, the Bank borrowed $10,000,000 from the Federal Home Loan Bank under two secured notes, with $5,000,000 maturing March 2005 and $5,000,000 maturing March 2006, with interest at 1.58% and 2.15%, respectively. During 2003, the Bank borrowed $5,000,000 from the Federal Home Loan Bank under a secured note, with interest at 2.08%, which matures in April 2005. The Bank also borrowed from the Federal Home Loan Bank to fund certain fixed-rate residential real estate loans during the mid-1990’s. Such borrowings carry fixed interest rates ranging from 5.60% to 7.15% at December 31, 2004, with 10, 15 or 20 year maturities. Monthly principal and interest payments are due on the borrowings. In addition, a principal curtailment of 10% of outstanding principal balance is due on the anniversary date of each borrowing.
Future estimated principal payments on Federal Home Loan Bank borrowings, including curtailments, are as follows:
| | | | | |
| 2005 | | $ | 10,677,396 | |
| 2006 | | | 5,568,442 | |
| 2007 | | | 475,512 | |
| 2008 | | | 417,127 | |
| 2009 | | | 369,517 | |
| Thereafter | | | 1,237,242 | |
| | | | |
| | | | | |
Total | | $ | 18,745,236 | |
| | | | |
Federal Home Loan Bank borrowings are collateralized by the Bank’s Federal Home Loan Bank stock and certain qualifying mortgage loans.
Securities sold under agreements to repurchase generally mature within three months from the transaction date. Physical control is maintained for all securities sold under repurchase agreements. Information concerning securities sold under agreements to repurchase for 2004 and 2003 is as follows:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| Average balance during the year | | $ | 12,986,890 | | | $ | 14,107,116 | |
| Average interest rate during the year | | | .49 | % | | | .61 | % |
| Maximum month-end balance during the year | | $ | 13,693,003 | | | $ | 13,737,563 | |
| | | |
| 34 | | |
Notes to Consolidated Financial Statements
NOTE 6 — INCOME TAXES
The provision (credit) for income taxes consists of the following for the years ended December 31, 2004, 2003 and 2002:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| Current | | $ | 537,754 | | | $ | 243,793 | | | $ | (1,491,542 | ) |
| Deferred | | | 115,246 | | | | (113,793 | ) | | | 1,426,542 | |
| | | | | | | | | | |
Total income tax provision (credit) | | $ | 653,000 | | | $ | 130,000 | | | $ | (65,000 | ) |
| | | | | | | | | | |
The significant components of the provision (credit) for deferred income taxes for the years ended December 31, 2004, 2003, and 2002, were as follows:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| Tax effect of temporary differences, exclusive of item listed below | | $ | 115,246 | | | $ | (113,793 | ) | | $ | 439,542 | |
| Impact of change in tax law — Job Creation and Worker Assistance Act of 2002 | | | | | | | | | | | 987,000 | |
| | | | | | | | | | |
Total deferred income tax provision (credit) | | $ | 115,246 | | | $ | (113,793 | ) | | $ | 1,426,542 | |
| | | | | | | | | | |
The enactment on March 9, 2002 of the Job Creation and Worker Assistance Act of 2002 enabled the Company to carryback net operating losses for a period of five years, as opposed to the normal two-year carryback period. Consequently, refundable income taxes at December 31, 2001 were increased and deferred tax assets decreased approximately $987,000 as a result of this tax law change.
The income tax provision (credit) 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:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| Expected provision using statutory federal income tax rate | | $ | 1,080,900 | | | $ | 744,600 | | | $ | 631,800 | |
| Tax-exempt income on state and municipal securities and political subdivision loans | | | (474,500 | ) | | | (662,900 | ) | | | (756,400 | ) |
| Interest expense associated with carrying certain state and municipal securities and political subdivision loans | | | 24,700 | | | | 41,400 | | | | 68,800 | |
| Other | | | 21,900 | | | | 6,900 | | | | (9,200 | ) |
| | | | | | | | | | |
Total income tax provision (credit) | | $ | 653,000 | | | $ | 130,000 | | | $ | (65,000 | ) |
| | | | | | | | | | |
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003, are as follows:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| Allowance for loan losses | | $ | 550,900 | | | $ | 381,400 | |
| Alternative minimum tax credit carryforwards | | | 660,200 | | | | 772,000 | |
| Net operating loss carryforward | | | | | | | 31,600 | |
| Other | | | 30,500 | | | | 30,100 | |
| | | | | | | |
| Deferred tax assets | | | 1,241,600 | | | | 1,215,100 | |
| | | | | | | |
| Unrealized gain on securities available-for-sale | | | (200,252 | ) | | | (31,498 | ) |
| Depreciation of premises and equipment | | | (452,800 | ) | | | (406,100 | ) |
| Federal Home Loan Bank stock dividends | | | (361,500 | ) | | | (326,700 | ) |
| Deferred loan fees | | | (85,600 | ) | | | (20,800 | ) |
| Other | | | (23,448 | ) | | | (28,002 | ) |
| | | | | | | |
| Deferred tax liabilities | | | (1,123,600 | ) | | | (813,100 | ) |
| | | | | | | |
Net deferred tax assets | | $ | 118,000 | | | $ | 402,000 | |
| | | | | | | |
The Company had available at December 31, 2004, alternative minimum tax credit carryforwards of approximately $660,200 which may be utilized in the future to the extent computed regular tax exceeds the alternative minimum tax.
The Company believes it is more likely than not that the benefit of deferred tax assets will be realized. Consequently, no valuation allowance for deferred tax assets is deemed necessary at December 31, 2004 and 2003.
The Company’s 2001 and 2002 consolidated federal income tax returns are currently under examination by the Internal Revenue Service. Management of the Company and the exam agent have had correspondence regarding certain matters identified during the exam. Management does not believe final resolution of these matters will have a significant adverse impact on the Company’s consolidated financial statements.
Notes to Consolidated Financial Statements
NOTE 7 — 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 1% of each eligible participant’s compensation for 2004, and 3% of each eligible participant’s compensation for 2003 and 2002. The Plan also provides for a 100% Bank match of participant contributions up to a maximum of 2% of each participant’s annual compensation. Expense under the Plan amounted to $111,000, $164,000 and $197,000 for 2004, 2003 and 2002, respectively.
During 2003, the Board of Directors granted options to various executive officers of the Company, including options to purchase 10,000 shares of the Company’s common shares at an exercised price of $17.75 per share through May 19, 2008 to one executive officer, and options to purchase 1,000 shares each to two other officers at an exercise price of $17.50 per share through July 31, 2008. During 2004, the Board of Directors granted options to another executive officer to purchase 1,000 shares at an exercise price of $19.00 per share through August 9, 2009.
Effective December 31, 2002, the Board of Directors granted to various officers and employees of the Bank, options to purchase a total of 14,660 shares of common stock under the Company’s Share Incentive Plan. The options are exercisable on the anniversary of the grant date in annual 20% increments. The exercise price for the options is the December 31, 2002 market price of $16.05 per share and the options expire 10 years from the grant date. None of the options were exercised in 2004.
The following summarizes stock options activity for the years ended December 31, 2004, 2003 and 2002:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | | | | | Weighted | | | | | | | Weighted | | | | | | | Weighted | |
| | | | | | | Average | | | | | | | Average | | | | | | | Average | |
| | | | | | | Exercise | | | | | | | Exercise | | | | | | | Exercise | |
| | | Shares | | | Price | | | Shares | | | Price | | | Shares | | | Price | |
| | | |
| Outstanding at beginning of year | | | 42,485 | | | $ | 16.02 | | | | 34,660 | | | $ | 15.44 | | | | 20,000 | | | $ | 15.00 | |
| Granted | | | 1,000 | | | | 19.00 | | | | 12,000 | | | | 17.71 | | | | 14,660 | | | | 16.05 | |
| Exercised | | | | | | | | | | | | | | | | | | | | | | | | |
| Forfeited | | | (665 | ) | | | (16.05 | ) | | | (4,175 | ) | | | (16.05 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Outstanding at end of year | | | 42,820 | | | $ | 16.09 | | | | 42,485 | | | $ | 16.02 | | | | 34,660 | | | $ | 15.44 | |
| | | | | | | | | | | | | | | | | | | |
| Options exercisable at year end | | | 36,964 | | | $ | 16.10 | | | | 34,097 | | | $ | 15.93 | | | | 20,000 | | | $ | 15.00 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted-average fair value of options granted during year | | | | | | $ | 2.94 | | | | | | | $ | 1.51 | | | | | | | $ | 2.33 | |
| | | | | | | | | | | | | | | | | | | | | | |
Options outstanding at December 31, 2004 were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | OUTSTANDING | | | EXERCISABLE | |
| | | | | | | | | | | Weighted | | | | | | | |
| | | | | | | | | | | Average | | | | | | Weighted | |
| | | Range of | | | | | | | Remaining | | | | | | Average | |
| | | Exercisable | | | | | | | Contractual Life | | | | | | Exercise | |
| | | Prices | | | Number | | | (Years) | | Number | | | Price | |
| | | |
| | | $ | 15.00 | | | | 20,000 | | | | 1.17 | | | | 20,000 | | | $ | 15.00 | |
| | | | 16.05 | | | | 9,820 | | | | 8.00 | | | | 3,964 | | | | 16.05 | |
| | | | 17.50 | | | | 2,000 | | | | 3.58 | | | | 2,000 | | | | 17.50 | |
| | | | 17.75 | | | | 10,000 | | | | 3.42 | | | | 10,000 | | | | 17.75 | |
| | | | 19.00 | | | | 1,000 | | | | 4.58 | | | | 1,000 | | | | 19.50 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Outstanding at year end | | | | | | | 42,820 | | | | | | | | 36,964 | | | $ | 16.10 | |
| | | | | | | | | | | | | | | | | | |
| | | |
| 36 | | |
Notes to Consolidated Financial Statements
NOTE 8 — 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.
The following financial instruments whose contract amount represents credit risk were outstanding at December 31, 2004 and 2003:
| | | | | | | | | |
| | | Contract amount | |
| | | 2004 | | | 2003 | |
| Commitments to extend credit | | $ | 45,485,000 | | | $ | 46,714,000 | |
| | | | | | | |
| Letters of credit | | $ | 555,000 | | | $ | 368,000 | |
| | | | | | | |
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; 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, 2004, are due on demand or expire in 2005. 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 9 — 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 years ending December 31, 2004 and 2003:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| Balance at beginning of year | | $ | 6,516,219 | | | $ | 6,299,088 | |
| New loans and advances | | | 1,416,546 | | | | 5,056,942 | |
| Repayments, including loans sold | | | (1,615,646 | ) | | | (4,839,811 | ) |
| | | | | | | |
Balance at end of year | | $ | 6,317,119 | | | $ | 6,516,219 | |
| | | | | | | |
Deposits from executive officers, directors and their related business interests at December 31, 2004 and 2003 were approximately $3,001,000 and $4,217,000, respectively.
Notes to Consolidated Financial Statements
NOTE 10 — 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. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) 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, 2004 and 2003, that the Company and Bank met or exceeded all capital adequacy requirements to which they are subject.
As of December 31, 2004, 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 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, 2004 and 2003, are also presented in the following table (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Minimum required | | | | Minimum required to be well | |
| | | | | | | | | | | | for capital | | | | capitalized under prompt | |
| | | Actual | | | | adequacy purposes | | | | corrective action regulations | |
| | | Amount | | | Ratio | | | | Amount | | | Ratio | | | | Amount | | | Ratio | |
| | | | | | | | | |
As of December 31, 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 38,410 | | | | 18.4 | % | | | $ | 16,673 | | | | 8.0 | % | | | $ | N/A | | | | N/A | |
| Bank | | | 36,505 | | | | 17.5 | | | | | 16,656 | | | | 8.0 | | | | | 20,820 | | | | 10.0 | % |
| Tier I capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 35,835 | | | | 17.2 | | | | | 8,336 | | | | 4.0 | | | | | N/A | | | | N/A | |
| Bank | | | 33,930 | | | | 16.3 | | | | | 8,328 | | | | 4.0 | | | | | 12,492 | | | | 6.0 | |
| Tier I capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 35,835 | | | | 11.5 | | | | | 12,522 | | | | 4.0 | | | | | N/A | | | | N/A | |
| Bank | | | 33,930 | | | | 10.9 | | | | | 12,497 | | | | 4.0 | | | | | 15,121 | | | | 5.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2003 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 37,112 | | | | 18.1 | % | | | $ | 16,381 | | | | 8.0 | % | | | $ | N/A | | | | N/A | |
| Bank | | | 35,159 | | | | 17.4 | | | | | 16,210 | | | | 8.0 | | | | | 20,262 | | | | 10.0 | % |
| Tier I capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 34,653 | | | | 16.9 | | | | | 8,190 | | | | 4.0 | | | | | N/A | | | | N/A | |
| Bank | | | 32,700 | | | | 16.1 | | | | | 8,105 | | | | 4.0 | | | | | 12,157 | | | | 6.0 | |
| Tier I capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated | | | 34,653 | | | | 11.2 | | | | | 12,335 | | | | 4.0 | | | | | N/A | | | | N/A | |
| Bank | | | 32,700 | | | | 10.7 | | | | | 12,249 | | | | 4.0 | | | | | 15,311 | | | | 5.0 | |
The Company’s primary source of funds with which to pay dividends is dividends received from the Bank. The payment of dividends by the Bank to the Company is subject to restrictions by its regulatory agencies. These restrictions generally limit dividends to current and prior two-years retained earnings. Also, dividends may not reduce capital levels below the minimum regulatory requirements disclosed above. Under these provisions, approximately $2,016,000 was available for dividends on January 1, 2005, without the need to obtain the approval of the State of Ohio Division of Financial Institutions.
| | | |
| 38 | | |
Notes to Consolidated Financial Statements
NOTE 11 — CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 are as follows:
| | | | | | | | | |
| CONDENSED BALANCE SHEETS | | 2004 | | | 2003 | |
Assets | | | | | | | | |
| Cash deposited with subsidiary bank | | $ | 1,609,532 | | | $ | 1,667,505 | |
| Investment in subsidiary bank | | | 34,303,146 | | | | 32,765,194 | |
| Security | | | 528,399 | | | | 498,930 | |
| Other assets | | | 110,275 | | | | 103,231 | |
| | | | | | | |
| | | | | | | | | |
Total assets | | $ | 36,551,352 | | | $ | 35,034,860 | |
| | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | |
| Liability — dividends payable | | $ | 343,845 | | | $ | 317,322 | |
| Shareholders’ equity: | | | | | | | | |
| Common stock | | | 16,673,667 | | | | 16,673,667 | |
| Additional paid-in capital | | | 6,413,915 | | | | 6,413,915 | |
| Retained earnings | | | 13,358,321 | | | | 12,214,751 | |
| Treasury stock | | | (627,119 | ) | | | (645,938 | ) |
| Accumulated other comprehensive income | | | 388,723 | | | | 61,143 | |
| | | | | | | |
| Total shareholders’ equity | | | 36,207,507 | | | | 34,717,538 | |
| | | | | | | |
| | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 36,551,352 | | | $ | 35,034,860 | |
| | | | | | | |
| | | | | | | | | | | | | |
| CONDENSED STATEMENTS OF INCOME | | 2004 | | | 2003 | | | 2002 | |
| Interest on security | | $ | 24,837 | | | $ | 24,837 | | | $ | 24,837 | |
| Dividends from subsidiary | | | 1,375,221 | | | | 1,266,528 | | | | 789,169 | |
| | | | | | | | | | |
| Total income | | | 1,400,058 | | | | 1,291,365 | | | | 814,006 | |
| Operating expenses | | | 157,521 | | | | 104,471 | | | | 107,670 | |
| | | | | | | | | | |
| Income before taxes and undistributed equity income of subsidiary | | | 1,242,537 | | | | 1,186,894 | | | | 706,336 | |
| Income tax benefit | | | 54,000 | | | | 37,000 | | | | 36,608 | |
| Equity income in subsidiary, net of dividends | | | 1,229,698 | | | | 836,215 | | | | 1,180,194 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net income | | $ | 2,526,235 | | | $ | 2,060,109 | | | $ | 1,923,138 | |
| | | | | | | | | | |
39
Notes to Consolidated Financial Statements
NOTE 11 — CONDENSED PARENT COMPANY FINANCIAL INFORMATION (continued)
| | | | | | | | | | | | | |
| CONDENSED STATEMENTS OF CASH FLOWS | | 2004 | | | 2003 | | | 2002 | |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 2,526,235 | | | $ | 2,060,109 | | | $ | 1,923,138 | |
| Adjustments to reconcile net income to cash provided by operations: | | | | | | | | | | | | |
| Security accretion | | | (187 | ) | | | (187 | ) | | | (188 | ) |
| Equity income subsidiary, net of dividends | | | (1,229,698 | ) | | | (836,215 | ) | | | (1,180,194 | ) |
| Change in other assets | | | (17,000 | ) | | | 7,578 | | | | (241 | ) |
| | | | | | | | | | |
| Net cash from operating activities | | | 1,279,350 | | | | 1,231,285 | | | | 742,515 | |
| | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Purchase of treasury shares | | | | | | | (18,745 | ) | | | (87,728 | ) |
| Cash dividends paid | | | (1,337,323 | ) | | | (951,235 | ) | | | (406,538 | ) |
| | | | | | | | | | |
| Net cash from financing activities | | | (1,337,323 | ) | | | (969,980 | ) | | | (494,266 | ) |
| | | | | | | | | | |
| Net change in cash | | | (57,973 | ) | | | 261,305 | | | | 248,249 | |
| Cash at beginning of year | | | 1,667,505 | | | | 1,406,200 | | | | 1,157,951 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Cash at end of year | | $ | 1,609,532 | | | $ | 1,667,505 | | | $ | 1,406,200 | |
| | | | | | | | | | |
NOTE 12 — OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects are as follows for the years ended December 31, 2004, 2003 and 2002:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| Unrealized holding losses on available-for-sale securities | | $ | (555,212 | ) | | $ | (90,719 | ) | | $ | (104,419 | ) |
| Unrealized holding gains on held-to-maturity securities transferred to the available-for-sale category | | | 1,639,462 | | | | | | | | | |
| Less reclassification adjustment for securities gains recognized in income | | | (587,916 | ) | | | (1,068 | ) | | | (114,822 | ) |
| | | | | | | | | | |
| Net unrealized holding gains (losses) | | | 496,334 | | | | (91,787 | ) | | | (219,241 | ) |
| Tax effect | | | 168,754 | | | | (31,208 | ) | | | (74,542 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss) | | $ | 327,580 | | | $ | (60,579 | ) | | $ | (144,699 | ) |
| | | | | | | | | | |
40
Notes to Consolidated Financial Statements
NOTE 13 — FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of recognized financial instruments as of December 31, 2004 and 2003, are as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | Carrying | | | Fair | | | Carrying | | | Fair | |
| | | amounts | | | value | | | amounts | | | value | |
| Financial assets: | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 15,644 | | | $ | 15,644 | | | $ | 17,201 | | | $ | 17,201 | |
| Securities | | | 76,228 | | | | 76,228 | | | | 67,773 | | | | 70,076 | |
| Loans, net Total | | | 215,510 | | | | 216,374 | | | | 210,796 | | | | 212,543 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 307,382 | | | $ | 308,246 | | | $ | 295,770 | | | $ | 299,820 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | |
| Deposits | | $ | 247,951 | | | $ | 248,526 | | | $ | 248,958 | | | $ | 250,223 | |
| Securities sold under agreements to repurchase | | | 13,316 | | | | 13,316 | | | | 11,859 | | | | 11,859 | |
| Federal Home Loan Bank borrowings | | | 18,745 | | | | 18,862 | | | | 9,512 | | | | 9,808 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total | | $ | 280,012 | | | $ | 280,704 | | | $ | 270,329 | | | $ | 271,890 | |
| | | | | | | | | | | | | |
The preceding summary does not include accrued interest receivable, accrued interest payable, and other liabilities which are also considered financial instruments. The estimated fair value of such items is considered to be their carrying amount.
The Company also has unrecognized financial instruments at December 31, 2004 and 2003. These financial instruments relate to commitments to extend credit and letters of credit. The aggregate contract amount of such financial instruments was approximately to $46,040,000 at December 31, 2004 and $47,082,000 at December 31, 2003. Such amounts are also considered to be the estimated fair values.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments shown above:
Cash and cash equivalents
Fair value is determined to be the carrying amount for these items (which include cash on hand, due from banks, and federal funds sold) because they represent cash or mature in 90 days or less and do not represent unanticipated credit concerns.
Securities
The fair value of securities (both available-for-sale and held-to-maturity) is determined based on quoted market prices of the individual securities or, if not available, estimated fair value was obtained by comparison to other known securities with similar risk and maturity characteristics. Such value does not consider possible tax ramifications or estimated transaction costs.
Loans
Fair value for loans was estimated for portfolios of loans with similar financial characteristics. For adjustable rate loans, which reprice at least annually and generally possess low risk characteristics, the carrying amount is believed to be a reasonable estimate of fair value. For fixed rate loans, the fair value is estimated based on secondary market quotes from various dealers, considering weighted average rates and terms of the portfolio, adjusted for credit and interest rate risk inherent in the loans. Fair value for nonperforming loans is based on recent appraisals or estimated discounted cash flows. The estimated value of credit card loans is based on existing loans and does not include the value that relates to estimated cash flows from new loans generated from existing cardholders over the remaining life of the portfolio.
Deposit liabilities
The fair value of core deposits, including demand deposits, savings accounts, and certain money market deposits, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates offered at year end for deposits of similar remaining maturities. The estimated fair value does not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the marketplace.
41
Notes to Consolidated Financial Statements
NOTE 13 — FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
Other financial instruments
The fair value of commitments to extend credit and letters of credit is determined to be the contract amount since these financial instruments generally represent commitments at existing rates. The fair value of securities sold under agreements to repurchase is determined to be the carrying amount since these financial instruments represent obligations, which are due on demand. The fair value of Federal Home Loan Bank borrowings is determined based on a discounted cash flow analysis.
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.
NOTE 14 — 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 15 — QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data (unaudited) for the years ended December 31, 2004 and 2003:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Basic | | | Diluted | |
| | | | | | | Net | | | | | | | earnings | | | earnings | |
| | | Interest | | | interest | | | Net | | | per | | | per | |
| | | income | | | income | | | income | | | share | | | share | |
2004 | | | | | | | | | | | | | | | | | | | | |
| First quarter | | $ | 3,668,033 | | | $ | 2,695,785 | | | $ | 521,451 | | | $ | 0.20 | | | $ | 0.20 | |
| Second quarter | | | 3,743,434 | | | | 2,776,332 | | | | 606,490 | | | | 0.23 | | | | 0.23 | |
| Third quarter | | | 3,772,162 | | | | 2,811,714 | | | | 746,828 | | | | 0.28 | | | | 0.28 | |
| Fourth quarter | | | 3,889,919 | | | | 2,915,801 | | | | 651,466 | | | | 0.25 | | | | 0.24 | |
| | | | | | | | | | | | | | | | | | | | | |
2003 | | | | | | | | | | | | | | | | | | | | |
| First quarter | | $ | 3,959,148 | | | $ | 2,732,834 | | | $ | 597,832 | | | $ | 0.23 | | | $ | 0.23 | |
| Second quarter | | | 3,937,783 | | | | 2,749,329 | | | | 571,614 | | | | 0.21 | | | | 0.21 | |
| Third quarter | | | 3,814,367 | | | | 2,673,319 | | | | 338,685 | | | | 0.13 | | | | 0.13 | |
| Fourth quarter | | | 3,703,133 | | | | 2,627,591 | | | | 551,978 | | | | 0.21 | | | | 0.21 | |
42
| Officers of The Commercial&Savings Bank — |
| Assistant Vice President/Mortgage LINDA C.AMOS Loan Officer —— — |
| WILLIAM D. ARNOLD Vice President/Banking Center Manager |
| REBECCA A. BAKER Assistant Vice President/Banking Center Manager |
| Assistant Vice President/Financial PAMELAS. BASINGER Officer —— — |
| Vice President/Retail DEBORAH S. BERNER Services —— — |
| Assistant Vice President/Loan Operations PAMELA L. BROMUND Supervisor —— — |
| C. DAWN BUTLER Assistant Vice President/Banking Center Manager |
| COLBY M. CHAMBERLIN . . . Vice President/Retail/Sma ll Business Lending Supervisor |
| Vice President/Internal DALE J. CLINTON Auditor —— — |
| Corporate PEGGY L. CONN Secretary —— — |
| PAULAS. FOY Vice President/Banking Center Manager |
| REBECCA J. FRYBARGER Assistant Vice President/Banking Center Manager |
| RICKL. GINTHER Senior Vice President/Chief Lending Officer |
| LORETTAGRAY Assistant Cashier/Assistant Banking Center Manager |
| PAUL D. GREIG . . . Senior Vice President/Chief Operation/Informatio n Officer |
| Assistant Vice President/Trust MARCELLA K. HAWKINS Officer —— — |
| Vice President/Director of Human JULIE A. JONES Resources —— — |
| First Vice President/ Credit and Loan STEPHEN K. KILPATRICK Administration —— — |
| President/Chief Executive JOHN J. LIMBERT Officer —— — |
| Assistant Vice President/Brokerage JASON R. MCCULLOCH Manager —— — |
| Sr. Vice President/Chief Financial PAULA J. MEILER Officer —— — |
| Vice President/Cash Management & Special A. LEE MILLER Projects —— — |
| DANIEL L. MUSE Operations Officer |
| SHAWN E. OSWALD Vice President/Informatio n System Director |
| Vice President/Trust THOMAS S. RUMBAUGH Officer —— — |
| Assistant Vice President/Loan REBECCA J. SHULTZ Officer —— — |
| Operations SCOTT A. STALLMAN Officer —— — |
| Vice President/Commercial HARLAND L. STEBBINS Lender —— — |
| Vice President/Commercial ERIC D. STROUSE Lender —— — |
| Banking RONALD L. STUTZMAN Center Manager —— — |
| DOUGLAS W. THIESSEN Vice President/Compliance Officer |
| WILLIAM R. TINLIN Vice President/Recovery/Security |
| BRIAN D. TROYER Assistant Vice President/Trust Operations |
| A. MIEKE TUERPITZ Assistant Cashier/Banking Center Manager |
| Assistant Vice President/Loan I. MILTON WAYLAND Officer —— — |
| Assistant Vice President/IRA KERRIE L. WEAVER Administrator —— — |
| Assistant Cashier/Assistant Banking Center JANE C. WHITMER Manager —— — |
| Vice President/Business Development ERVIN C. YODER Officer —— — |
| The Commercial & Savings Bank |
| Information & Customer Service330-674-9015 or 1-800-654-901524 Hour Xpress Phone Banking330-674-2720 or 1-888-438-2720Loan Services Holmes & Tuscarawas County6 W. Jackson, Millersburg ..Consumer Loans330-763-2823 |
| Commercial Loans330-763-2822 |
| Loan Services Wayne County146 E. Liberty, Suite 230, Wooster ................... 330-264-0334Trust & Investment Services Holmes & Tuscarawas County91 N. Clay, Millersburg .. 330-674-2397Trust & Investment Services Wayne County146 E. Liberty, Suite 230, Wooster ..... 330-264-033424 Hour Xpress Net Banking & BillPay ............................................ WWW.csbl.com |
| Millersburg Banking Centers |
| Main Office 6 W. Jackson ................................................ 330-763-2820 |
| Clinton Commons 2102 Glen Dr. (Drive-Up ATM) ............................ 330-674-2265 |
| South Clay 91 S. Clay (Drive-Up ATM) .................................... 330-674-0687 |
| Berlin Banking Center 4587 S.R. 39,Berlin (Drive-Up ATM) ............... 330-893-3565 |
| Charm Banking Center 4440 C.R.70, Charm (Walk-UpATM) ................... 330-893-3323 |
| Shreve Banking Center333 W. South St., Shreve (Drive-Up ATM) ........... 330-567-2226 |
| Sugarcreek Banking Center127 S. Broadway, Sugarcreek (Drive-Up ATM) .... 330-852-4444 |
| Walnut Creek Banking Center4980 Olde Pump, Walnut Creek (Walk-Up ATM) .. 330-893-2961 |
| Winesburg Banking Center2225 U.S. 62, Winesburg (Drive-Up ATM) ......... 330-359-5543 |
| Shareholder and General Inquiries Stock Listing Common Symbol: CSBB.OB |
| If you have questions regarding your If you are interested in purchasing shares of CSB Bancorp, Inc., CSB Bancorp, Inc. stock, please contact: you may contact your local broker or one of the following:Registrar and Transfer Company Jay McCulloch Linda Reall Attn: Investor Relations Investment Executive Capital Securities of America, Inc. 10 Commerce Drive PrimeVest Financial Services, Inc. 150 Grand Trunk Avenue Cranford, New Jersey 07016 Located at The Commercial & Savings Bank Hartville, Ohio 44632 (800)368-5948 91 North Clay Street (800)494-9497 www.rtco.com P.O. Box 50 Millersburg, Ohio 44654 (330) 674-2397 (800) 654-9015General Counsel George Geissbuhler Thompson Mine LLP Sweney Cartwright & Co. One Columbus 17 South High Street, Suite 300 10 West Broad Street Columbus, Ohio 43215 Columbus, Ohio 43215-3435 (800) 334-7481 |
| mootVisit CSB on the web: www.csbl.com FDK |
