Annual Statements Open main menu

CSB Bancorp, Inc. - Quarter Report: 2006 June (Form 10-Q)

CSB BANCORP 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2006
OR
     
o   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)    
91 North Clay, 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) 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 þ       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o       Accelerated filer o       Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o       No þ
Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date.
     
Common stock, $6.25 par value
  Outstanding at August 11, 2006:
 
  2,514,561 common shares
 
 

 


Table of Contents

CSB BANCORP, INC.
FORM 10-Q
QUARTER ENDED June 30, 2006
Table of Contents
         
    Page  
       
     
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    10  
 
       
    15  
 
       
    16  
 
       
       
 
       
    17  
    17  
    17  
    17  
    17  
    18  
    19  
 
       
    20  
 EX-11
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

 


Table of Contents

CSB BANCORP, INC.
PART I — FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    June 30,     December 31,  
    2006     2005  
ASSETS
               
Cash and due from banks
  $ 11,990,923     $ 14,785,250  
Interest-earning deposits in other banks
    9,964       124,726  
Federal funds sold
    350,000       1,740,000  
 
           
Total cash and cash equivalents
    12,350,887       16,649,976  
 
           
 
               
Securities available-for-sale, at fair value
    69,256,199       78,273,248  
Restricted stock, at cost
    3,023,800       2,947,000  
 
           
Total securities
    72,279,999       81,220,248  
 
           
Loans held for sale
           
Loans
    228,110,564       215,019,673  
Less allowance for loan loans
    2,467,284       2,445,494  
 
           
Net loans
    225,643,280       212,574,179  
 
           
 
               
Premises and equipment, net
    7,486,661       7,671,822  
Accrued interest receivable and other assets
    3,137,890       2,873,007  
 
           
 
               
Total Assets
  $ 320,898,717     $ 320,989,232  
 
           
LIABILITIES
               
Deposits
               
Noninterest-bearing
  $ 38,119,508     $ 41,807,069  
Interest-bearing
    204,703,822       213,595,648  
 
           
Total deposits
    242,823,330       255,402,717  
Short-term borrowings
    39,889,842       21,417,616  
Other borrowings
    2,704,998       8,067,840  
Accrued interest payable and other liabilities
    1,681,549       930,800  
 
           
Total liabilities
    287,099,719       285,818,973  
 
           
 
               
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
    6,418,965       6,413,915  
Retained earnings
    15,388,867       14,752,250  
Treasury stock at cost: 148,053 shares in 2006 and 89,287 shares in 2005
    (3,275,850 )     (2,086,686 )
Accumulated other comprehensive loss
    (1,406,651 )     (582,887 )
 
           
Total shareholders’ equity
    33,798,998       35,170,259  
 
           
 
               
Total Liabilities and Shareholders’ Equity
  $ 320,898,717     $ 320,989,232  
 
           
See notes to unaudited consolidated financial statements.

3


Table of Contents

CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Interest income
                               
Loans, including fees
  $ 4,146,971     $ 3,542,196     $ 7,969,475     $ 6,827,588  
Taxable securities
    759,166       517,862       1,536,966       1,037,191  
Nontaxable securities
    99,693       157,810       201,516       326,598  
Other
    247       897       6,839       1,567  
 
                       
Total interest income
    5,006,077       4,218,765       9,714,796       8,192,944  
 
                               
Interest expense
                               
Deposits
    1,272,915       993,894       2,439,835       1,862,891  
Other
    460,229       196,444       707,755       372,922  
 
                       
Total interest expense
    1,733,144       1,190,338       3,147,590       2,235,813  
 
                       
 
                               
Net interest income
    3,272,933       3,028,427       6,567,206       5,957,131  
Provision for loan losses
    114,667       105,999       146,667       211,998  
 
                       
 
                               
Net interest income after provision for loan losses
    3,158,266       2,922,428       6,420,539       5,745,133  
 
                               
Non-interest income
                               
Service charges on deposit accounts
    337,640       234,186       652,726       446,741  
Gain on sale of securities
                      247,047  
Trust and financial services
    164,348       120,885       256,590       238,036  
Other income
    230,218       198,790       393,333       402,294  
 
                       
Total non-interest income
    732,206       553,861       1,302,649       1,334,118  
 
                               
Non-interest expenses
                               
Salaries and employee benefits
    1,435,548       1,347,708       2,926,553       2,750,172  
Occupancy expense
    167,530       186,869       338,743       345,647  
Equipment expense
    121,377       125,611       257,513       249,099  
State franchise tax
    112,192       107,655       221,392       212,578  
Professional and director fees
    174,431       151,523       348,452       307,998  
Other expenses
    897,041       714,179       1,523,276       1,445,200  
 
                       
Total non-interest expenses
    2,908,119       2,633,545       5,615,929       5,310,694  
 
                       
 
                               
Income before income taxes
    982,353       842,744       2,107,259       1,768,557  
Federal income tax provision
    305,700       229,000       656,700       488,000  
 
                       
 
                               
Net income
  $ 676,653     $ 613,744     $ 1,450,559     $ 1,280,557  
 
                       
 
                               
Basic and diluted earnings per share
  $ 0.27     $ 0.23     $ 0.57     $ 0.48  
 
                       
See notes to unaudited consolidated financial statements.

4


Table of Contents

CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Balance at beginning of period
  $ 34,991,684     $ 35,769,494     $ 35,170,259     $ 36,207,507  
 
                               
Comprehensive income (loss):
                               
Net income
    676,653       613,744       1,450,559       1,280,557  
Change in net unrealized gain (loss), net of reclassification adjustments and related income taxes $(265,441), $235,088, $(424,363), and $(143,369), respectively
    (515,267 )     456,348       (823,764 )     (278,304 )
 
                       
Total comprehensive income
    161,386       1,070,092       626,795       1,002,253  
 
                               
Issuance of 6 shares from treasury
                            121  
 
                               
Stock-based compensation expense
    2,525               5,050          
 
                               
Purchase of treasury shares
    (953,440 )     (40 )     (1,189,164 )     (40 )
 
                               
Cash dividends declared ($0.16 and $0.32 per share in 2006, and $0.14 and $0.28 per share in 2005)
    (403,157 )     (370,296 )     (813,942 )     (740,591 )
 
                       
 
                               
Balance at end of period
  $ 33,798,998     $ 36,469,250     $ 33,798,998     $ 36,469,250  
 
                       
See notes to unaudited consolidated financial statements.

5


Table of Contents

CSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Six Months Ended  
    June 30,  
    2006     2005  
Net cash from operating activities
  $ 2,048,216     $ 1,604,788  
 
               
Cash flows from investing activities
               
Securities available-for-sale:
               
Proceeds from maturities, calls and repayments
    7,740,727       2,914,280  
Proceeds from sales
          5,098,433  
Purchases
    (1,589 )     (1,128,596 )
Purchase of FHLB stock
    (76,800 )     (86,400 )
Proceeds from sale of other real estate
    412,500        
Net change in loans
    (13,247,253 )     (6,350,727 )
Premises and equipment expenditures, net
    (104,938 )     (489,617 )
 
           
Net cash provided by (from) investing activities
    (5,277,353 )     (42,627 )
 
           
 
               
Cash flows from financing activities
               
Net change in deposits
    (12,579,387 )     (2,556,364 )
Net change in short-term borrowings
    18,472,226       1,350,302  
Repayment of other borrowings
    (5,362,842 )     (5,426,614 )
Purchase of treasury shares
    (1,189,164 )     (40 )
Cash dividends paid
    (410,785 )     (714,141 )
 
           
Net cash from financing activities
    (1,069,952 )     (7,346,857 )
 
           
 
               
Net change in cash and cash equivalents
    (4,299,089 )     (5,784,696 )
 
               
Cash and cash equivalents at beginning of period
    16,649,976       15,644,292  
 
           
 
               
Cash and cash equivalents at end of period
  $ 12,350,887     $ 9,859,596  
 
           
 
               
Supplemental disclosures
               
Interest paid
  $ 3,084,518     $ 2,205,326  
Income taxes paid
    411,198       240,000  
Non-cash investing activity-transfer of loans to OREO
    -0-       625,000  
See notes to unaudited consolidated financial statements.

6


Table of Contents

CSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements include the accounts of CSB Bancorp, Inc. and its wholly-owned subsidiaries, The Commercial and Savings Bank and CSB Investment Services, LLC (together referred to as the “Company” or “CSB”). All significant intercompany transactions and balances have been eliminated in consolidation.
The condensed 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, 2006, 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 U.S. generally accepted accounting principles have been omitted. The Annual Report for CSB for the year ended December 31, 2005, 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, 2006 are not necessarily indicative of the operating results for the full year or any future interim period.
STOCK-BASED COMPENSATION
The Company sponsors a stock-based compensation plan, administered by a committee, under which incentive stock options may be granted periodically to certain employees. Effective January 1, 2006, CSB adopted FASB Statement No. 123 (revised 2004), Share-Based Payment (FASB No. 123r), using the modified prospective application method. The modified prospective application method applies to new awards, to any outstanding liability awards, and to awards modified, repurchased, or cancelled after January 1, 2006. For all awards granted prior to January 1, 2006, unrecognized compensation cost, on the date of adoption, will be recognized as an expense in future periods. The results for prior periods have not been restated.
The adoption of FASB No. 123r reduced net income by approximately $2,525 for the three months ended June 30, 2006 and $5,050 for the six months ended June 30, 2006. The following table illustrates the effect on net income and earnings per share if CSB had applied the fair value recognition provisions to stock-based employee compensation during the prior period presented. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option-pricing model and amortized to expense over the options’ vesting period.
                 
    Quarter ended     Six months ended  
    June 30, 2005  
Net income, as reported
  $ 613,744     $ 1,280,557  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    2,800       5,600  
 
           
Pro forma net income
  $ 610,944     $ 1,274,957  
 
           
Earnings per share
               
Basic – as reported
  $ .23     $ .48  
Basic – pro forma
  $ .23     $ .48  
Diluted – as reported
  $ .23     $ .48  
Diluted – pro forma
  $ .23     $ .48  

7


Table of Contents

CSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date.
                 
    2004   2003
Risk-free interest rate
    3.34 %     2.75 %
Dividend yield
    2.60 %     2.50 %
Volatility
    37 %     37 %
Expected option life
  3.5 yrs.   6.4 yrs.
As of June 30, 2006, there was approximately $15,275 of unrecognized compensation cost related to unvested share-based compensation awards granted. That cost is expected to be recognized over the next two years.
Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The 2002 Plan authorizes the issuance of 75,000 shares. The Plan was amended April 27, 2005 to authorize the issuance of 200,000 shares. The time period during which any option is exercisable under the Plan is determined by the committee but shall not continue beyond the expiration of ten years after the date the option is awarded. As of June 30, 2006, there were options for 11,970 Company shares outstanding under this Plan.
The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. CSB estimated the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature. There were no options granted in the quarter or the six-month periods ended June 30, 2006 or 2005.
The following summarizes stock options activity for the six months ended June 30, 2006:
                                 
                    Weighted    
                    Average    
            Weighted   Remaining    
    Number   Average   Contractual   Aggregate
    of Options   Exercise Price   Term (in yrs.)   Intrinsic Value
Outstanding at January 1, 2006
    21,970     $ 17.09       4.28          
Granted
                           
Exercised
                           
Forfeited
                           
 
                               
Outstanding at June 30, 2006
    21,970       17.09       3.76          
 
                               
Exercisable at June 30, 2006
    18,361     $ 17.29       3.28     $ 57,103  
 
                               

8


Table of Contents

CSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SECURITIES
Securities consist of the following at June 30, 2006 and December 31, 2005:
June 30, 2006
                                 
            Gross     Gross        
    Amortized     unrealized     unrealized     Fair  
    Cost     gains     losses     Value  
Available-for-sale:
                               
U.S. Treasury security
  $ 99,966     $     $ 1,279     $ 98,687  
Obligations of U.S. government corporations and agencies
    38,492,329             1,358,262       37,134,067  
Mortgage-backed securities
    24,656,172       523       905,865       23,750,830  
Obligations of states and political subdivisions
    7,832,621       142,646       7,317       7,967,950  
 
                       
Total debt securities
    71,081,088       143,169       2,272,723       68,951,534  
Equity Securities
    305,965       7,900       9,200       304,665  
 
                       
Total available-for-sale
    71,387,053       151,069       2,281,923       69,256,199  
Restricted stock
    3.023,800                   3,023,800  
 
                       
Total securities
  $ 74,410,853     $ 151,069     $ 2,281,923     $ 72,279,999  
 
                       
December 31, 2005
                                 
            Gross     Gross        
    Amortized     unrealized     unrealized     Fair  
    Cost     gains     losses     Value  
Available-for-sale:
                               
U.S. Treasury security
  $ 99,938     $     $ 1,313     $ 98,625  
Obligations of U.S. government corporations and agencies
    42,991,204       4,376       765,254       42,230,326  
Mortgage-backed securities
    27,368,053       14,166       376,262       27,005,957  
Obligations of states and political subdivisions
    8,392,840       242,499       1,943       8,633,396  
 
                       
Total debt securities
    78,852,035       261,041       1,144,772       77,968,304  
Equity Securities
    304,376       6,080       5,512       304,944  
 
                       
Total available-for-sale
    79,156,411       267,121       1,150,284       78,273,248  
Restricted stock
    2,947,000                   2,947,000  
 
                       
Total securities
  $ 82,103,411     $ 267,121     $ 1,150,284     $ 81,220,248  
 
                       

9


Table of Contents

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 subsidiaries (the “Company”) at June 30, 2006 as compared to December 31, 2005, and the consolidated results of operations for the quarterly period ending June 30, 2006 compared to the same period in 2005. 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 $320.9 million at June 30, 2006, compared to $321.0 million at December 31, 2005, representing a decrease of $90 thousand or .03%. Cash and cash equivalents decreased $4.3 million, or 25.8%, during the six-month period ending June 30, 2006, due to a $2.8 million decrease in cash and due from banks and a $1.4 million decrease in Federal funds sold. Securities decreased $8.9 million or 11.0% during the first six months of 2006 primarily due to maturities and principal repayments during the first quarter of 2006. Net loans increased $13.1 million, or 6.1%, while deposits decreased $12.6 million, or 4.9%, during the six-month period. Short-term borrowings of Federal funds purchased, securities sold under repurchase agreement and Federal Home Loan Bank borrowings increased $18.5 million during the period as a liquidity source to cover loan demand as well as repayments of Federal Home Loan Bank borrowings.
Net loans increased $13.1 million, or 6.1%, during the six-month period ended June 30, 2006. This increase was due to a combination of increased loan demand and production within the Company’s market area. The increase in balances were concentrated in commercial loans of $8.5 million, mortgage loans of $3.5 million and home equity lines of credit of $1.5 million while small declines in consumer credit balances were realized. The allowance for loan losses amounted to $2,467,000, or 1.08% of total loans at June 30, 2006, compared to $2,445,000 or 1.14% of total loans at December 31, 2005. The decrease in the allowance for loan losses as a percentage of total loans is largely due to the $13.1 million

10


Table of Contents

CSB BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increase in the loan portfolio during the period. The components of the change in the allowance for loan losses during the six-month period ended June 30, 2006, included a provision of $147,000 and net loan charge-offs of $125,000. Loans past due more than 90 days and still accruing interest, and loans placed on nonaccrual status, aggregated $846,000, or .37% of total loans at June 30, 2006, compared to $1,241,000 or 0.58% of total loans at December 31, 2005.
The ratio of net loans to deposits was 92.9%, compared to 83.2% at December 31, 2005. The increase in this ratio is due to loan growth coupled with deposit shrinkage experienced during the six months ended June 30, 2006.
The Company had net unrealized losses of $2,131,000 within its securities portfolio at June 30, 2006, compared to net unrealized losses of $883,000 at December 31, 2005. Management has considered industry analyst reports, sector credit reports and the volatility within the bond market in concluding that the gross unrealized losses of $2,282,000 within the portfolio as of June 30, 2006, were primarily the result of customary and expected fluctuations in the bond market. As a result, all security impairments as of June 30, 2006, are considered temporary.
The decrease in other borrowings resulted from the repayment of a $5 million maturing advance from the Federal Home Loan Bank (“FHLB”). Other liquidity sources, including securities sold under repurchase agreements increased $1.9 million as the Company expanded its cash management products to customers.
Total shareholders’ equity amounted to $33.8 million, or 10.5%, of total assets, at June 30, 2006, compared to $35.2 million, or 11.0% of total assets, at December 31, 2005. The decrease in shareholders’ equity during the six months ended June 30, 2006 was due purchases of $1.2 million of treasury shares, an increase in unrealized losses on available-for-sale securities, net of tax, of $824 thousand, and dividends declared of $814,000 partially offset by net income of $1,451,000. The Company and its subsidiary bank met all regulatory capital requirements at June 30, 2006.
RESULTS OF OPERATIONS
Three months ended June 30, 2006 and 2005
For the quarter ended June 30, 2006, the Company recorded net income of $677,000, or $0.27 per share, as compared to net income of $614,000, or $0.23 per share for the quarter ended June 30, 2005. The increase in net income for the quarter of $63,000 was principally due to a $245,000 increase in net interest income and a $178,000 increase in other income. These gains were partially offset by a $275,000 increase in non-interest expenses and a $77,000 increase in the federal income tax provision.
Interest income for the quarter ended June 30, 2006, was $5,006,000, representing a $787,000 increase, or 18.7%, compared to the same period in 2005. This increase was primarily due to an increase in loan volume and interest rates. Interest expense for the quarter ended June 30, 2006 was $1,733,000, an increase of $543,000, or 45.6%, from the same period in 2005. The increase in interest expense occurred due to an increase in average rates paid on all interest-bearing liabilities as the Federal Reserve Board continued to increase interest rates during 2006 with two increases occurring during the second quarter 2006. Additionally, customers shifted funds from lower yielding deposits to higher yielding time deposits and repurchase agreements.
The provision for loan losses for the quarter ended June 30, 2006, was $115,000, compared to a $106,000 provision for the same quarter in 2005. The provision for loan losses is determined based on

11


Table of Contents

CSB BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
management’s calculation of the adequacy 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 June 30, 2006, was $732,000, an increase of $178,000, or 32.2%, compared to the same quarter in 2005. This increase was primarily due to increases in the Company’s core deposit service charge income of $103,000 and fee increases of $43,000 resulting from increasing assets under management in the Trust and brokerage divisions over the same period in 2005.
Non-interest expenses for the quarter ended June 30, 2006, increased $275,000, or 10.4%, compared to the second quarter of 2005. This increase was due primarily to the increase of $237,000 in all other expenses as a result of a cash irregularity discovered in June 2006. Management believes that no customer accounts were affected by this isolated irregularity. As required by accounting rules, the Company has recognized the loss during second quarter 2006. The Company carries insurance against this type of loss, with a $50,000 deductible, and is in the process of filing an insurance claim. Excluding the nonrecurring charge of $237,000, non-interest expense for second quarter 2006 increased 1.4% over second quarter 2005.
Six months ended June 30, 2006 and 2005
Net income for the six months ending June 30, 2006, was $1,451,000, or $0.57 per share, as compared to $1,281,000 or $0.48 per share during the same period in 2005. Return on average assets and return on average equity were .92% and 8.37%, respectively, for the six-month period of 2006, compared to .82% and 7.11%, respectively for 2005.
Net interest income was $6,567,000 for the six months ended June 30, 2006, an increase of $610,000 or 10.2% from the same period last year. Comparative net income increased because of a reduction of $65,000 in the provision for loan losses as compared to the same period in 2005. The improvements in net income were partially offset by increases to other expenses of $305,000, or 5.8%, for the six month period ended June 30, 2006, as compared to the same period of 2005, while non-interest income decreased $31,000, or 2.4%, for the six month period ended June 30, 2006 as compared to the same period in 2005.
Interest income for the six months ended June 30, 2006, was $9,715,000 an increase of $1,522,000 or 18.6% from the same period in 2005. Interest income on loans increased $1,142,000, or 16.7%, for the six months ended June 30, 2006, as compared to the same period in 2005. This increase was primarily due to an increase of 109 basis points on average loan rates that was partially offset by a decline in average gross loan balances of $1.8 million. Interest income on securities increased $375,000, or 27.5%, as average investment balances increased $7.0 million.
Interest expense increased $912,000 to $3,148,000 for the six months ended June 30, 2006, compared to the six months ended June 30, 2005. Interest expense on deposits increased $577,000, or 31.0%, from the same period as last year, while interest expense on other borrowings increased $335,000 or 89.8%. The increase in interest expense was caused by higher rates on all interest bearing deposit accounts and short-term borrowings, as the Federal Reserve Board has actively increased rates seventeen times since mid 2004, with four increases occurring during the first six months of 2006. The net interest margin improved by 29 basis points for the six-month period ended June 30, 2006, to 4.49%, from 4.20% for the same period in 2005.

12


Table of Contents

CSB BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The provision for loan losses was $147,000 during the first six months of 2006, compared to $212,000 in the same six-month period of 2005. The provision or credit for loan losses is determined based on management’s calculation of the adequacy 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 decreased $31,000, or 2.4%, during the six months ended June 30, 2006, as compared to the same period in 2005. The decrease in non-interest income was primarily due to a decrease of $247,000 on sale of securities in 2005, partially offset by an increase of $206,000 in service charges on deposit accounts. The increases in deposit fees were a result of the consumer and small business customer use of fee-based products, primarily an overdraft privilege program that was implemented during the fourth quarter of 2005.
Non-interest expenses increased $305,000, or 5.8%, for the six months ended June 30, 2006, compared to the same period in 2005. Salaries and employee benefits increased $176,000, or 6.4%, as a result of increased staffing, as well as employee benefit cost increases. Professional and director fees increased $40,000 or 13.1%, primarily a result of the third party costs of the overdraft privilege program and the use of a third-party consultant to review executive compensation and benefit programs. Other expense increased $78,000 during the first six months of 2006 partially as a result of the cash irregularity discussed above which was offset by lower security costs in 2006.
The provision for income taxes was $657,000 (effective rate of 31.2%) for the six months ended June 30, 2006, compared to $488,000 (effective rate of 27.6%) for the six months ended June 30, 2005. The increase in the effective tax rate resulted from a decrease in tax-exempt interest income as a portion of total income before income taxes.
CAPITAL RESOURCES
The Federal Reserve Board (FRB) has established risk-based capital guidelines that must be observed by financial holding companies and banks. Failure to meet specified minimum capital requirements could result in regulatory actions by the Federal Reserve or Ohio Division of Financial Institutions that could have a material effect on the Company’s financial condition or results of operations. Management believes there were no material changes to Capital Resources as presented in CSB Bancorp’s annual report on Form 10-K for the year ended December 31, 2005 and as of June 30, 2006 the holding company and its bank meet all capital adequacy requirements to which they are subject.
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 $12.4 million at June 30, 2006 a decrease of $4.3 million from $16.7 million at December 31, 2005. Net income, securities available-for-sale, and loan repayments also serve as sources of liquidity. Cash and cash equivalents and estimated principal payment and securities maturing within one year represent 7.3% of total assets as of June 30, 2006 compared to 7.7% of total assets at year-end 2005. 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 both short and long-term liquidity needs of the Company.

13


Table of Contents

CSB BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as such term is defined in applicable Securities and Exchange Commission rules) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
CONTRACTUAL OBLIGATIONS
During the first six months of 2006, the Company’s contractual obligations have not changed materially from those discussed in the Company’s Annual Report of Form 10-K for the year ended December 31, 2005.
RECENLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting (“FAS”) No. 155, Accounting for Certain Hybrid Instruments, as an amendment of FASB Statements No. 133 and 140. FAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of Financial Assets. This Statement, which is an amendment to FAS No. 140, will simplify the accounting for servicing assets and liabilities, such as those common with mortgage securitization activities. Specifically, FAS No. 156 addresses the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify efforts to obtain hedge-like (offset) accounting. FAS No. 156 also clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or a servicing liability, requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable, and permits an entity with a separately recognized servicing asset or servicing liability to choose either of the amortization or fair value methods for subsequent measurement. The provisions of FAS No. 156 are effective as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN No. 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

14


Table of Contents

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 June 30, 2006, from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Management performs a quarterly analysis of the Company’s interest rate risk. All positions are currently within the Company’s board-approved policy.
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 June 30, 2006 and December 31, 2005:
June 30, 2006
                         
  Changes in            
Interest Rates   Net Interest   Dollar   Percentage
 (basis points)   Income   Change   Change
(Dollars in Thousands)
+200
  $ 14,263     $ 735       5.4 %
+100
    13,791       263       1.9  
0
    13,528       0       0.0  
-100
    13,305       (223 )     (1.6 )
-200
    12,922       (606 )     (4.5 )
December 31, 2005
                         
  Changes in            
Interest Rates   Net Interest   Dollar   Percentage
 (basis points)   Income   Change   Change
(Dollars in Thousands)
+200
  $ 15,042     $ 1,198       8.7 %
+100
    14,387       544       3.9  
0
    13,844       0       0.0  
-100
    13,383       (461 )     (3.3 )
-200
    12,741       (1,103 )     (8.0 )

15


Table of Contents

CSB BANCORP, INC.
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 be 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 SEC’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.

16


Table of Contents

CSB BANCORP, INC.
FORM 10-Q
Quarter ended June 30, 2006
PART II — OTHER INFORMATION
ITEM 1 —       LEGAL PROCEEDINGS
There are no matters required to be reported under this item.
ITEM 1A —    RISK FACTORS
There were no material changes to the Risk Factors described in Item 1A in the Company’s Annual Report on Form 10-K for the period ended December 31, 2005.
ITEM 2 —       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There are no matters required to be reported under this item.
Issuer Purchase of Equity Securities
                                 
                            Maximum
                    Total Number of   Number of Shares
    Total Number   Average   Shares Purchased   that May Yet be
    of Shares   Price Paid   as Part of Publicly   Purchased Under
Period
  Purchased   Per Share   Announced Plans   the Plan
April 1, 2006 to April 30, 2006
    34,040     $ 20.00       34,040       153,107  
May 1, 2006 to May 31, 2006
    13,632     $ 20.00       13,632       139,475  
June 1, 2006 to June 30, 2006
  None   None   None     139,475  
On July 7, 2005 CSB Bancorp, Inc. filed Form 8-k with the Securities and Exchange Commission announcing that its Board of Directors approved a Stock Repurchase Program authorizing the repurchase of up to 10% of the Company’s common shares outstanding. Repurchases will be made from time to time as market and business conditions warrant, in the open market, through block purchases and in negotiated private transactions.
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:

17


Table of Contents

CSB BANCORP, INC.
The 2006 Annual Meeting of Shareholders of the Company was held on April 26, 2006. Matters submitted to a vote of the security holders at the meeting was the election of three members to the Board of Directors, each to continue in office until the 2009 Annual Shareholders’ Meeting.
                 
Nominee   For   Withheld
Ronald E. Holtman
    1,624,481       157,765  
Daniel J. Miller
    1,589,458       192,788  
Eddie L. Steiner
    1,622,320       159,926  
The following individuals continued as directors of CSB following the 2006 Annual Meeting of Shareholders:
Robert K. Baker
Ronald E. Holtman
J. Thomas Lang
Jeffery A. Robb Sr.
Samuel M. Steimel
John R. Waltman
Item 5 —          Other Information:
There are no matters required to be reported under this item.

18


Table of Contents

CSB BANCORP, INC.
FORM 10-Q
Quarter ended June 30, 2006
PART II — OTHER INFORMATION
Item 6—          Exhibits:
     
Exhibit    
Number   Description of Document
 
   
11
  Statement Regarding Computation of Per Share Earnings (reference is hereby made to Consolidated Statements of Income on page 4 hereof.)
 
   
31.1
  Rule 13a-14(a)/15d-14(a) CEO’s Certification
 
   
31.2
  Rule 13a-14(a)/15d-14(a) CFO’s Certification
 
   
32.1
  Section 1350 CEO’s Certification
 
   
32.2
  Section 1350 CFO’s Certification

19


Table of Contents

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: August 11, 2006
  /s/ Eddie L. Steiner
 
   
 
  Eddie L. Steiner
 
  President
 
  Chief Executive Officer
 
   
Date: August 11, 2006
  /s/ Paula J. Meiler
 
   
 
  Paula J. Meiler
 
  Senior Vice President
 
  Chief Financial Officer

20


Table of Contents

CSB BANCORP, INC.
Index to Exhibits
         
Exhibit       Sequential
Number   Description of Document   Page
 
       
11
  Statement Regarding Computation of Per Share Earnings (reference is hereby made to Consolidated Statements of Income on page 4 hereof.)    
 
       
31.1
  Rule 13a-14(a)/15d-14(a) CEO’s Certification    
 
       
31.2
  Rule 13a-14(a)/15d-14(a) CFO’s Certification    
 
       
32.1
  Section 1350 CEO’s Certification    
 
       
32.2
  Section 1350 CFO’s Certification    

21