CSB Bancorp, Inc. - Quarter Report: 2000 March (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: MARCH 31, 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 May 3, 2000:

2,618,177 common shares

FORM 10-Q

QUARTER ENDED MARCH 31, 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 - QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

Part II - Other Information

Other Information

Signatures

CONSOLIDATED BALANCE SHEETS

(Unaudited)

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN SHAREHOLDERS' EQUITY

(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(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 March 31, 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.

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 basis of assets and liabilities, using enacted tax rates.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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:

Statement of Financial Standards ("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 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. SFAS No. 133 does not allow hedging of a security which is classified as held to maturity. Upon adoption of SFAS No. 133, companies may reclassify any security from held to maturity to available for sale if they wish to be able to hedge the security in the future. SFAS No. 133, as amended by SFAS No. 137, 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 SFAS No. 133 to have a significant impact on the Corporation's financial statements.

NOTE 2 - SECURITIES

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

NOTE 2 - SECURITIES (Continued)

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

The amortized cost and fair values of debt securities at March 31, 2000, by contractual maturity, are shown below.

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consisted of the following:

During the first three months of 2000, the Company received $1.0 million in proceeds from mortgage loan sales. A gain of $14,438 was recognized on these sales. During the quarter, the Company reclassified $20.5 million in residential real estate loans held for sale into residential real estate.

Activity in the allowance for loan losses for the three months ended March 31, 2000 and 1999 is as follows:

NOTE 4 - FEDERAL HOME LOAN BANK BORROWINGS

The Company borrows from the Federal Home Loan Bank (FHLB) to fund certain fixed-rate residential real estate loans. These borrowings carry fixed interest rates ranging from 5.60% to 7.15% and maturities of 10, 15, and 20 years. Monthly principal and interest payments are due on the borrowings. In addition, a principal curtailment of 10% of the outstanding principal balance is due on the anniversary date of each borrowing. FHLB borrowings are collateralized by the Company's FHLB stock and a blanket pledge on $13.8 million of qualifying mortgage loans at March 31, 2000.

NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet customer financing needs. These financial instruments include commitments to make or purchase loans, undisbursed lines of credit, undisbursed credit card balances and letters of credit. The Company's exposure to credit loss in case of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Company follows the same credit policy to make such commitments as it uses for those loans recorded on the balance sheet.

Since many commitments to make loans expire without being used, the aforementioned amounts do not necessarily represent future cash commitments. Collateral obtained relating to these commitments is determined using management's credit evaluation of the borrower and may include real estate, vehicles, business assets, deposits and other items.

The Company sold $1.0 million in residential mortgage loans during the first three months of 2000. The Company has agreed to repurchase individual loans if they become delinquent by greater than ninety days. A recourse obligation has been established by management based on past loan loss experience and other factors. This liability is not material.

Occasionally, various contingent liabilities arise that are not recorded in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations.

NOTE 6 - OTHER COMPREHENSIVE INCOME

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 March 31, 2000, compared to December 31, 1999, and the consolidated results of operations for the quarterly period ending March 31, 2000 compared to the same period 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 $321.8 million at March 31, 2000, compared to $326.5 million at December 31, 1999, representing a decrease of $4.8 million or 1.5%. Total securities decreased approximately $3.9 million during the quarter. Since one of the primary functions of the securities portfolio is to provide a source of liquidity, it is structured such that security maturities and cash flows satisfy the Company's liquidity needs and asset-liability management requirements. At March 31, 2000, approximately 6.3% of the securities portfolio matures within one year.

Total loans increased $3.4 million, or 1.7%, to $198.2 million. This increase was primarily a result of a $4.0 million, or 11.3%, increase in commercial real estate loans. This more than offset a $1.4 million, or 19.0%, decrease in construction loans.

As a percentage of loans, the allowance for loan losses was 1.78% at March 31, 2000 and 1.72% at December 31, 1999. Loans past due more than 90 days and loans placed on nonaccrual status, were approximately $2.2 million, or 1.12% of total loans at March 31, 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 decreased $22,000, or 0.2%, during the first quarter of 2000 due to normal depreciation.

At March 31, 2000, the ratio of net loans to deposits was 75.2%, compared to 72.2% at the end of 1999. This increase is due primarily to the normal deposit activity in the first quarter of the year.

Total shareholders' equity decreased $274,000, or 0.8%, due to the adopting of a stock buyback program during the quarter. This resulted in the purchases of $882,000 of treasury stock. This amount was partially offset by year-to-date net income of $974,000, less $399,000 of cash dividends declared. The cash dividend represents 40.9% of net income for the first quarter of 2000. Also contributing to capital was the dividend reinvestment program and the purchase of stock by the Company's 401(k) retirement plan. As a result of these programs, equity increased approximately $122,000 during the first quarter of 2000 from the reissuance of treasury shares.

The Company and its subsidiary met all regulatory capital requirements at March 31, 2000. The Company's ratio of total capital to risk-weighted assets was 15.54% at March 31, 2000, while Tier 1 risk-based capital ratio was 16.80%. Regulatory minimums call for a total risk-based capital ratio of 8%, at least one-half of which must be Tier 1 capital. The Company's leverage ratio was 10.30% at March 31, 2000, which exceeds the regulatory minimum of 3% to 5%.

RESULTS OF OPERATIONS

Net income for the quarter ending March 31, 2000, was $974,000, or $0.37 per share, as compared to $919,000, or $0.35 per share earned during the same period last year, an increase of $56,000, or 6.0%. The primary factors contributing to this increase was a decrease in the provision for loan loss, which was partially offset by a decrease in other income and an increase in other expenses.

Net interest income for the quarter ended March 31, 2000 was $3.1 million, an increase of $180,000, or 6.2%, over the same period last year. Interest and fees on loans increased $213,000, or 4.8%. Also, as overnight funds were invested in securities, interest on securities increased $175,000, and other interest income decreased by $150,000.

Interest expense increased $59,000 to $3.0 million for the quarter ended March 31, 2000, compared to $2.9 million for the quarter ended March 31, 1999. This increase was the result of increased average balances on interest-bearing accounts and higher interest rates.

The provision for loan losses was $231,000 during the first quarter of 2000, a decrease of $417,000 over the first quarter of 1999.

Other income decreased approximately $209,000 primarily as a result of the gain on the sale of loans during 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.

Other expenses increased $380,000, or 21.8%, for the three months ended March 31, 2000, compared to the same period in 1999. Management continues to monitor the Company's efficiency ratio by maintaining increases in other operating costs at low levels. Salaries and employee benefits increased by $205,000 or 23.8%, occupancy expense increased $50,000, or 56.6%, and other expenses increased $114,000 or 19.1%. The provision for income taxes of $202,000 during the first quarter of 2000 reflected an effective rate of 17.2%, as compared to 21.3%, for the first quarter of 1999.

YEAR 2000 ISSUE

The Company experienced no disruption to its operations because of the Year 2000. Management will continue to monitor activity over the course of the year for possible effects on its operations and customers. Certain critical dates, as identified by the Company and regulators, fall in 2000. While these dates have been tested, the Company will review operations during these periods. Some of these dates fell in the first quarter and no disruption of operations or systems occurred.

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 March 31, 2000 from that presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

FORM 10-Q

Quarter ended March 31, 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:

Exhibit

Number Description of Document

11 Statement Regarding Computation of Per Share Earnings

27 Financial Data Schedule

(b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter for which this report is filed.

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: May 3, 2000 /s/ DOUGLAS D. AKINS

Douglas D. Akins

President

Chief Executive Officer

Date: May 3, 2000 /a/ A. LEE MILLER

A. Lee Miller

Senior Vice President

Chief Financial Officer

Index to Exhibits

CSB BANCORP, INC.

EXHIBIT 11

STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS