CSB Bancorp, Inc. - Quarter Report: 2001 June (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: JUNE 30, 2001

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)

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 preceding 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.

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED June 30, 2001

Table of Contents

Part I - Financial Information

Consolidated Balance Sheets

Consolidated Statements of Income

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

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.

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

See notes to the consolidated financial statements.

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to the consolidated financial statements.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include the 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 in consolidation.

The consolidated financial statements have been prepared without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the Company's financial position at June 30, 2001, and the results of operations and changes in cash flows for the periods presented have been made.

Certain information and footnote disclosures typically included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The Annual Report for CSB for the year ended December 31, 2000, contains consolidated financial statements and related footnote disclosures which should be read in conjunction with the accompanying consolidated financial statements. The results of operations for the period ended June 30, 2001, are not necessarily indicative of the operating results for the full year or any future interim period.

NOTE 2 - ACCOUNTING STANDARD IMPLEMENTED

Statement of Financial Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133) establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts and requires that an entity recognize all derivative assets or liabilities in the balance sheet and measure them at fair value. Statement 133 also provides an entity the opportunity at the date of initial adoption to transfer any held-to-maturity security into the available for sale category.

There was no impact on the consolidated financial statements of CSB as a result of adopting Statement 133 during the first quarter of 2001, as CSB does not hold any derivative instruments or conduct hedging activities.

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 June 30, 2001, compared to December 31, 2000, and the consolidated results of operations for the six month and quarterly periods ending June 30, 2001 compared to the same periods in 2000. 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 $311.1 million at June 30, 2001, compared to $325.2 million at December 31, 2000, representing a decrease of $14.1 million or 4.3%. Federal funds sold increased $13.0 million to $15.7 million at June 30, 2001. Total securities decreased approximately $7.7 million during the six month period ended June 30, 2001, including an $8.9 million decrease in the held-to-maturity category and a $1.2 million increase in the available for sale category. The Company manages its securities portfolio and federal funds sold position to meet liquidity needs and asset liability management requirements.

CSB BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net loans decreased $19.2 million, or 9.7% from December 31, 2000, to $179.1 million at June 30, 2001. Commercial loans decreased $4.4 million, or 5.1%, from December 31, 2000, partially due to $737,000 being sold during the six month period. Commercial real estate loans decreased $3.5 million, or 8.8%, as a result of $5.2 million of performing and non-performing commercial real estate loans being sold during the first six months of 2001. This sale more than offset commercial real estate construction loans which became permanent loans. Total construction loans decreased $6.4 million, or 84.7%. Installment loans decreased $3.0 million, or 16.5%. Overall, the decrease in loans is attributed to the sale of commercial real estate loans, the $2.7 million loan loss provision, and stricter underwriting standards.

The allowance for loan losses amounted to $8.0 million, or 4.26% of total loans, at June 30, 2001, compared to $7.5 million, or 3.61% of total loans at December 31, 2000. The components of the change in the allowance for loan losses during the six months ended June 30, 2001, included a provision of $2.7 million and net loan charge-offs of $2.2 million. Such charge-offs included $1.6 million relating to commercial real estate loans sold during the period.

Loans past due more than 90 days and loans placed on nonaccrual status, were approximately $4.4 million, or 2.4% of total loans at June 30, 2001, compared to $1.3 million, or 0.65% of total loans at December 31, 2000. These credits are considered in management's analysis of the allowance for loan losses.

Net premises and equipment increased $189,000, or 2.0%, during the first six months of 2001, due primarily to the acquisition of technology equipment in the normal course of business, which more than offset depreciation.

At June 30, 2001, the ratio of total loans to deposits was 72.0%, compared to 76.6% at the end of 2000.

Total shareholders' equity at June 30, 2001 decreased $865,000, or 2.7%, compared to December 31, 2000, primarily due to the six month net loss of $1.0 million.

The Company and its subsidiary exceeded all minimum regulatory capital requirements at June 30, 2001.

RESULTS OF OPERATIONS

The net loss for the six months ending June 30, 2001, was $1.0 million, or $0.40 per share, as compared to net income of $365,000, or $0.15 per share during the same period last year, a decrease of $1.4 million. The primary factors contributing to the net loss were (1) a provision for loan losses of $2.7 million, (2) a decrease in net interest income of $822,000 due to the Federal Reserve actions in the first six months of 2001 and reductions in the level of loans,

CSB BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

especially commercial loans, and (3) $1.5 million increase in operating expenses, primarily as a result of additional staffing and professional fees relating to the Written Agreement previously entered into with the Company's regulators. For the quarter ended June 30, 2001, the Company incurred a net loss of $1.4 million, or $0.52 per share, for the reasons previously noted.

Interest income for the six months ended June 30, 2001 was $11.6 million, a decrease of $774,000, or 6.2%, over the same period last year, including interest and fees on loans decreasing $532,000, or 5.5%. Interest on securities decreased $421,000, or 15.4%, as short term interest rates fell and certain callable securities were called. Other interest income increased $179,000 as the average federal fund sold position was higher during the current period. Interest income for the quarter ended June 30, 2001 was $5.6 million, a decrease of $747,000, or 11.8%, compared to the same period in 2000. This decrease was due to the reasons previously noted.

Interest expense increased $48,000 to $6.2 million for the six months ended June 30, 2001, compared to the six months ended June 30, 2000. Interest expense on deposits increased $278,000, or 5.1%, from the same period as last year, while interest expense on other borrowings decreased by $230,000, or 33.8%. The increase in deposit interest expense was caused by the higher rates on certificates of deposit originated in the latter part of 2000, which reflect the 175 basis points increase in short term rates by the Federal Reserve during 2000. Interest expense for the quarter ended June 30, 2001 was $3.0 million, a decrease of $120,000, or 3.8%, from the same period in 2000.

The provision for loan losses was $2.7 million during the first six months of 2001, a decrease of $210,000 over the same period of 2000. This provision is determined based on management's calculation of the allowance for loan losses, which includes provisions for classified loans, and a provision for the remainder of the portfolio and historical data, including past charge-offs. The provision for loan losses for the three months ended June 30, 2001 was $2.4 million, compared to $2.7 million for the same quarter last year.

Other income increased $17,000, or 1.7%, during the six months ended June 30, 2001 as compared to the same period in 2000. Other expenses increased $1.5 million, or 33.5%, for the six months ended June 30, 2001, compared to the same period in 2000. Salaries and employee benefits increased $411,000, or 18.6%; occupancy expense increased $50,000, or 18.2%; professional fees increased $634,000 due to additional expenses relating to the Written Agreement; and other expenses increased $387,000 or 27.9%. The credit for income taxes was $1.1 million during the first six months of 2001, as compared to a credit of $425,000 for the first six months of 2000.

Other income for the quarter ended June 30, 2001 was $524,000, an increase of $7,000 compared to the same quarter in 2000. Other expenses for the three month period increased $747,000, or 32.7%, compared to last year's period. This increase was due to reasons previously noted.

CSB BANCORP, INC.

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

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 June 30, 2001 from that presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 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 June 30, 2001

PART II - OTHER INFORMATION

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.

Index to Exhibits