CSB Bancorp, Inc. - Quarter Report: 2000 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: SEPTEMBER 30, 2000

OR

_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-21714

CSB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Ohio 34-1687530

(State or other jurisdiction of (I.R.S. Employer Identification Number)

incorporation or organization)

6 W. Jackson Street, P.O. Box 232, Millersburg, Ohio 44654

(Address of principal executive offices)

(330) 674-9015

(Registrant's telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

___X___ Yes ______ No

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Common stock, $6.25 par value Outstanding at October 26, 2000:

2,623,141 common shares

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2000

Table of Contents

Part I - Financial Information

ITEM 1 - FINANCIAL STATEMENTS Page

Consolidated Balance Sheets

Consolidated Statements of Income

Condensed Consolidated Statements of Changes in Shareholders' Equity

Condensed Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURE

ABOUT MARKET RISK

Part II - Other Information

Other Information

Signatures

CSB BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to consolidated financial statements.

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS' EQUITY

(Unaudited)

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include accounts of CSB Bancorp, Inc. and its wholly-owned subsidiary, The Commercial and Savings Bank (together referred to as the "Company" or "CSB"). All significant intercompany transactions and balances have been eliminated.

These interim financial statements are prepared without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of CSB at September 30, 2000, and its results of operations and cash flows for the periods presented. The accompanying consolidated financial statements do not contain all financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances. The Annual Report for CSB for the year ended December 31, 1999, contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.

The Company is engaged in the business of commercial and retail banking and trust services, with operations conducted through its main office and eight branches located in Millersburg, Ohio, and nearby communities. These communities are the source of substantially all deposit, loan and trust activities. The majority of the Company's income is derived from commercial and retail lending activities and investments in securities.

While the Company's chief decision-makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment.

To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, realization of deferred tax assets, fair value of certain securities and determination and carrying value of impaired loans are particularly subject to change.

The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loan impairment is reported when full payment under the loan terms is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when the internal grading system indicates a doubtful classification.

Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first-mortgage loans secured by one- to four-family residences, residential construction loans and automobile, home equity and other consumer loans less than $100,000. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment.

The Company records income tax expense based on the amount of tax due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates.

Basic earnings per share ("EPS") is based on net income divided by the weighted average number of shares outstanding during the period. Diluted EPS shows the dilutive effect of additional common shares issuable under stock options. The weighted average number of shares outstanding for basic and diluted EPS computations were as follows:

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. The new standard does not allow hedging of a security which is classified as held to maturity. Upon adoption of the standard, companies are allowed to transfer securities from held to maturity to available for sale if they wish to be able to hedge the securities in the future. The standard is effective for fiscal years beginning after June 15, 2000, with early adoption encouraged for any fiscal quarter beginning July 1, 1998, or later, with no retroactive application. Management does not expect the adoption of this standard to have a significant impact on the Company's financial statements.

NOTE 2 - SECURITIES

The amortized cost and fair values of securities are as follows:

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - SECURITIES (Continued)

There were no sales of securities during the first nine months of 2000 or 1999.

The amortized cost and fair values of debt securities at September 30, 2000, by contractual maturity, are shown below.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following:

During the first nine months of 2000, the Company received $1.8 million in proceeds from the sale of mortgage loans held for sale. A gain of $24,000 was recognized on these sales. Also, during the first nine months of 2000, the Company reclassified $20.5 million in residential real estate loans from held for sale to the long-term portfolio.

Activity in the allowance for loan losses for the nine months ended September 30, 2000 and 1999 is as follows:

Impaired loans at September 30, 2000 and December 31, 1999 were as follows:

Impaired loans for the nine months ended September 30, 2000 and 1999 were as follows:

Nonperforming loans, including certain impaired and smaller-balance homogeneous loans such as residential mortgage and consumer loans that are collectively evaluated for impairment, were $1.7 million and $1.8 million at September 30, 2000 and December 31, 1999. Nonperforming loans include nonaccrual loans and loans greater than 90 days past due and still accruing interest.

NOTE 4 - SUBSEQUENT EVENTS

The Company expects to enter into a written agreement with the Federal Reserve Bank of Cleveland and the Ohio Division of Financial Institutions governing certain aspects of the Company's operations. The provisions of that agreement are currently being considered and discussed.

CSB BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion focuses on the consolidated financial condition of CSB Bancorp, Inc. (the Company) at September 30, 2000, compared to December 31, 1999, and the consolidated results of operations for the quarterly and year-to-date periods ending September 30, 2000, compared to the same periods in 1999. The purpose of this discussion is to provide the reader with a more thorough understanding of the consolidated financial statements. This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates", "plans", "expects", "believes", and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. The Company's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.

The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

FINANCIAL CONDITION

Total assets were $332.6 million at September 30, 2000, compared to $326.5 million at December 31, 1999, representing an increase of $6.1 million or 1.9%. Total securities decreased approximately $7.6 million, or 7.2%, during the nine months. Proceeds from securitites maturities were used to fund loan growth. Net loans increased $13.7 million, or 7.0%, to $208.5 million. This increase was primarily a result of an $8.1 million, or 9.5%, increase in commercial loans, a $2.9 million, or 8.2% increase in commercial real estate loans, and a $3.4 million, or 6.5% increase in residential real estate loans. These increases were a result of loan demand in the local market area.

As a percentage of total loans, the allowance for loan losses was 2.45% at September 30, 2000, and 1.72% at December 31, 1999. As described in Note 1 to the financial statements, the allowance for loan losses is an estimate that encompasses known losses in the portfolio and management's judgment about the performance of individual credits. Changes in these factors impact the provision for loan losses. Additions to the allowance through the provision for loan losses for 2000 were $3.5 million for the nine months ended September 30, 2000 as compared to $949,000 for the same period in 1999, and charge-offs were $1.8 million and $510,000 for the same periods (see also Results of Operations). These accounted for the net increase in the allowance for loan losses. Loans past due more than 90 days and loans placed on nonaccrual status were approximately $1.8 million, or 0.83% of total loans at September 30, 2000, compared to $1.5 million, or 0.77% of loans at December 31, 1999. These credits are considered in management's analysis of the allowance for loan losses.

Premises and equipment increased $155,000, or 1.7%, during the first nine months of 2000. Other assets increased $1.1 million, or 26.7%, due primarily to the increase in the deferred tax asset resulting from the additional loan loss reserve.

At September 30, 2000, the ratio of net loans to deposits was 78.5%, compared to 72.2% at the end of 1999. The Company's local market area has experienced strong loan demand during 2000. Because of the competitive nature of the pricing for retail deposits, management has funded this loan growth through securities maturities and through the use of short-term funding in the form of federal funds purchased.

Total shareholders' equity decreased $1.2 million, or 3.5%, due primarily to the adoption of a stock buyback program during the first quarter and $1.2 million of cash dividends declared. The stock buyback program resulted in the purchases of $1.5 million of stock. The above decreases were partially offset by year-to-date net income of $1.1 million. The stock buyback program has been terminated.

The Company and its subsidiary met all regulatory capital requirements at September 30, 2000. The Company's ratio of total capital to risk-weighted assets was 15.66% at September 30, 2000, while Tier 1 risk-based capital ratio was 14.4%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least one-half of which must be Tier 1 capital. The Company's leverage ratio was 9.78% at September 30, 2000, which exceeds the regulatory minimum of 3% to 5%.

RESULTS OF OPERATIONS

Net income for the nine months ended September 30, 2000, was $1.1 million, or $0.41 per share, compared to $3.2 million, or $1.19 per share earned during the same period last year, a decrease of $2.1 million or 65.7%. The primary factor contributing to the decrease was an increase in the provision for loan loss and in other expenses, which were partially offset by an increase in net interest income. For the three months ended September 30, 2000, the Company's net income was $716,000, or $0.27 per share, compared to $1.1 million, or $0.42 per share in the same period of 1999.

During the third quarter of 2000, the Company's provision for loan losses totaled $616,000, an increase from $151,000 in the third quarter of 1999. The loan loss provision totaled $3.5 million for the nine months ended September 30, 2000, up from $949,000 for the corresponding period in the previous year. This was a result of several factors, one of which is continued growth in the Company's commercial lending, which represents a higher risk of loss than traditional one-to-four family mortgage lending. In addition, the rising interest rate environment has impacted the ability of some businesses to meet their scheduled loan payments in accordance with original loan terms. Lastly, information obtained in the second and third quarters of 2000 about specific borrower situations led to charge-offs and additional reserve requirements. Net charge-offs totaled $1.7 million for the first nine months of 2000, compared to $480,000 for the same period in 1999. The unallocated portion of the allowance at September 30, 2000 was $868,000, compared to $352,000 at December 31, 1999. This increase is due to factors noted above, including deteriorating financial condition of borrowers and economic conditions. Management believes the allowance for loan losses reflects the losses in the portfolio for September 30, 2000.

Net interest income was $9.5 million for the first nine months of 2000, a $624,000, or 7.0% increase over the same period last year. Interest and fees on loans increased $1.8 million, or 13.7%, primarily as a result of a $17.6 million increase in average loans as compared to the same period last year and the increase in yields on loans due to higher market rates. Interest income from securities increased $89,000 or 2.3%. These increases more than offset the $715,000, or 8.2%, increase in interest expense from the first three quarters of 2000, as compared to the same period in 1999. This increase was due to a $5.6 million increase in the average total of deposits and other borrowings and an increase in the cost of funds. Other interest income decreased $540,000, or 96.5%, as overnight funds were invested in loans.

Net interest income for the quarter ended September 30, 2000, was $3.2 million, an increase of $157,000, or 5.1%, over the same period last year. Interest and fees on loans increased $855,000, or 19.4%, while other interest income decreased $150,000 for reasons noted above. Interest expense increased $437,000, or 15.0%, for the three months ended September 30, 2000, compared to the three months ended September 30, 1999, for reasons noted above.

Other income for the first nine months of 2000 decreased approximately $126,000 as compared to the prior year, primarily as a result of a $280,000 decrease in gain on the sale of loans from the 1999 period. In the first quarter of 1999, $13.0 million of fixed rate mortgage loans were sold, resulting in a gain of $303,000. These loans had previously been identified as held for sale. Trust and financial services income increased $92,000, or 43.7%, due to increased activity in the department. Other income for the three months ended September 30, 2000, was $480,000, an increase of $19,000 or 4.1% over the same period in 1999. This increase was primarily due to the increase in Trust and Financial Services revenues.

Other expenses increased $1.2 million, or 21.2%, for the nine months ended September 30, 1999, compared to the same period in 1999. Salaries and employee benefits increased by $571,000 or 20.1%, due to additional staffing in the lending area and normal merit increases. Occupancy expense increased by $121,000, or 41.7%, due to the new Operations Center, which opened in the third quarter of 1999. Other expense for the three months ended September 30, 2000, amounted to $2.2 million, an increase of 15.6% for the same reasons as noted above.

The provision for income taxes was $111,000 for the three months ended September 30, 2000. For the first nine months of 2000, the net benefit from income taxes was $314,000 as compared to a provision of $871,000 for the same period in 1999. The differences between 2000 and 1999 were the result of lower net income before income taxes, combined with increased levels of non-taxable interest income.

ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risks as of September 30, 2000 from that presented in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Management performs a quarterly analysis of the Company's interest rate risk. All positions are currently within the Board-approved policy limits.

CSB BANCORP, INC.

FORM 10-Q

Quarter ended September 30, 2000

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings:

There are no matters required to be reported under this item.

Item 2 - Changes in Securities:

There are no matters required to be reported under this item.

Item 3 - Defaults Upon Senior Securities:

There are no matters required to be reported under this item.

Item 4 - Submission of Matters to a Vote of Security Holders:

There are no matters required to be reported under this item.

Item 5 - Other Information:

There are no matters required to be reported under this item.

Item 6 - Exhibits and Reports on Form 8-K:

(a) Exhibits:

CSB BANCORP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CSB BANCORP, INC.

(Registrant)

Date: November 14, 2000 /s/_________________________

Douglas D. Akins

President

Chief Executive Officer

Date: November 14, 2000 /s/_________________________

A. Lee Miller

Senior Vice President

Chief Financial Officer

CSB BANCORP, INC.

EXHIBIT 11

STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS