CSB Bancorp, Inc. - Quarter Report: 2005 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended: March 31, 2005

OR

Commission file number:          0-21714

CSB Bancorp, Inc.

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

(330) 674-9015

Indicate by check mark whether the registrant (1) has 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.

Yes (X) No ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ( ) No (X)

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

CSB BANCORP, INC.
FORM 10-Q
QUARTER ENDED March 31, 2005

Table of Contents

CSB BANCORP, INC.
PART I — FINANCIAL INFORMATION

See notes to consolidated financial statements.

3.

CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See notes to consolidated financial statements.

4.

CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

See notes to consolidated financial statements.

5.

CSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See notes to consolidated financial statements.

6.

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 March 31, 2005, 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, 2004, 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 March 31, 2005 are not necessarily indicative of the operating results for the full year or any future interim period.

NOTE 2 — SECURITIES
Securities consist of the following at March 31, 2005 and December 31, 2004:

March 31, 2005

December 31, 2004

7.

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. and its subsidiary (the “Company”) at March 31, 2005 as compared to December 31, 2004, and the consolidated results of operations for the quarterly period ending March 31, 2005 compared to the same period in 2004. 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 but rather 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 $312.7 million at March 31, 2005, compared to $317.3 million at December 31, 2004, representing a decrease of $4.6 million or 1.4%. Cash and cash equivalents decreased $5.1 million, or 32.7%, during the three-month period ending March 31, 2005, due to a $2.0 million decrease in cash and due from banks and a $3.0 million decrease in Federal funds sold. Securities decreased $6.6 million or 8.6% during the quarter principally due to the sale or maturity of securities with an amortized cost of $5.6 million and a $1.1 million change in unrealized gain (loss) on available-for-sale securities. Net loans increased $6.2 million, or 2.9%. The increase is a result of seasonal credit draws, growth in home equity line lending and a slowing of prepayments within the mortgage loan portfolio. Total liabilities decreased $4.2 million or 1.5% during the quarter which matched the decrease in deposits during the quarter.

8.

CSB BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net loans increased $6.2 million, or 2.9% during the three-month period ended March 31, 2005. This increase was due to a combination of increased loan demand and production within the Company’s market area. The allowance for loan losses amounted to $2,410,000, or 1.08% of gross loans at March 31, 2005, compared to $2,575,000, or 1.18 % of total loans at December 31, 2004. The components of the change in the allowance for loan losses during the three-month period ended March 31, 2005, included a provision of $106,000 and net loan charge-offs of $271,000. Loans past due more than 90 days and still accruing interest and loans placed on nonaccrual status, aggregated $1,432,000, or 0.64% of total loans at March 31, 2005 compared to $1,671,000, or 0.77% of total loans at December 31, 2004.

At March 31, 2005, the ratio of net loans to deposits was 91.0%, compared to 86.9% at December 31, 2004. The increase in this ratio is due to loan growth coupled with deposit shrinkage experienced during the three months ended March 31, 2005.

The Company had unrealized losses of $524,000 within its investment portfolio at March 31, 2005 as compared against unrealized gains of $589,000 at December 31, 2004. Management has considered industry analyst reports, sector credit reports and volatility in the bond market in concluding that the unrealized losses as of March 31, 2005 were primarily the result of customary and expected fluctuations in the bond market. As a result, all security impairments as of March 31, 2005 are considered temporary.

The decrease in Federal Home Loan Bank borrowings resulted from scheduled pay downs of existing advances. Other external financing sources remained relatively stable, with a $2.4 million decrease in securities sold under repurchase agreements, and a $2.3 million increase in federal funds purchased during the three-month period.

Total shareholders’ equity amounted to $35.8 million, or 11.4% of total assets, at March 31, 2005, compared to $36.2 million, or 11.4% of total assets, at December 31, 2004. The decrease in shareholders’ equity during the three months ended March 31, 2005 was principally due to dividends declared of $370,000, and a decrease in unrealized gain (loss) on securities, net of tax, of $735,000, offset by net income of $667,000. The Company and its subsidiary met all regulatory capital requirements at March 31, 2005.

9.

CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS
Three months ended March 31, 2005 and 2004

For the quarter ended March 31, 2005, the Company recorded net income of $667,000, or $.25 per share, as compared to net income of $521,000, or $.20 per share for the quarter ended March 31, 2004. The increase in net income for the quarter of $146,000 was principally due to a $233,000 increase in net interest income, an increase in gain on the sale of securities of $221,000 and a $60,000 increase in core fee and service charge income, offset by a $143,000 increase in salaries and employee benefits, a $12,000 increase in the provision for loan losses and a $194,000 increase in the federal income tax provision.

Interest income for the quarter ended March 31, 2005 of $3.97 million represents an increase of $306,000, or 8.3%, compared to the same period in 2004. This increase was primarily due to an increase of 40 basis points on average loan rates coupled with a $6.9 million increase in average gross loan balances. Interest expense for the quarter ended March 31, 2005 was $1,045,000, an increase of $73,000, or 7.5%, from the same period in 2004. The increase in interest expense occurred due to both increases in rate and average volume of interest-bearing liabilities. The average balance of interest-bearing liabilities rose $1.7 million with an average rate increase of 12 basis points to 1.76% for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004.

The provision for loan losses for the quarter ended March 31, 2005 was $106,000, compared to a $94,000 provision for the same quarter in 2004. The provision or credit for loan losses is determined based on management’s calculation of the allowance for loan losses, which includes provisions for classified loans, as well as for the remainder of the portfolio based on historical data, including past charge-offs, and current economic trends.

Non-interest income for the quarter ended March 31, 2005 of $780,000 represents an increase of $281,000, or 56.3%, compared to the same quarter in 2004. This increase was primarily due to an increase in the gain on the sale of securities of $221,000, increases of $31,000 in fees on deposits, and increases of $23,000 in trust and brokerage income. The increase in trust and brokerage income can largely be attributed to the opening in March 2005 of a trust office in Wooster. Assets under management by the trust department amounted to $53.7 million at March 31, 2005 as compared to $42.9 million at December 31, 2004. Such assets are not reflected in the Company’s consolidated balance sheet. The increases in other non-interest income were offset by decreases in merchant credit card income of $40,000 as the merchant card program was sold to a third-party servicer in late 2004.

Non-interest expenses for the quarter ended March 31, 2005 increased $163,000, or 6.5%, compared to the first quarter of 2004. This increase was due primarily to the increase in salaries and employee benefit expense of $143,000 with an overall increase in head count and benefits. Other expense also increased during the first quarter of 2005 as a result of two robberies at a branch office and the resulting increase in security costs following those robberies. Merchant credit card program expense declined by $42,000 during the first quarter 2005 as compared against 2004 a result of the sale of the merchant credit card program to a third party servicer in late 2004.

10.

CSB BANCORP, INC.

ITEM 3 — QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risks as of March 31, 2005 from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Management performs a quarterly analysis of the Company’s interest rate risk. All positions are currently within the Board-approved policy.

ITEM 4 — CONTROLS AND PROCEDURES

With the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that:

(a) information required to disclosed by the Company in this Quarterly Report on Form 10-Q would be accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure;

(b) information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and

(c) the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to the Company and its consolidated subsidiary is made known to them, particularly during the period for which our periodic reports, including this Quarterly Report on Form 10-Q, are being prepared.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes during the period covered by this Quarterly Report on Form 10-Q in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

11.

CSB BANCORP, INC.

FORM 10-Q
Quarter ended March 31, 2005
PART II — OTHER INFORMATION

12.

CSB BANCORP, INC.

FORM 10-Q
Quarter ended March 31, 2005
PART II — OTHER INFORMATION

13.

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.

14.

CSB BANCORP, INC.

Index to Exhibits

15.