CSB Bancorp, Inc. - Quarter Report: 2008 September (Form 10-Q)

CSB BANCORP, INC.
FORM 10-Q
QUARTER ENDED September 30, 2008

Table of Contents

		Page
Part I — Financial Information
ITEM 1 — FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Changes in Shareholders’ Equity			5
Condensed Consolidated Statements of Cash Flows			6
Notes to the Consolidated Financial Statements			7
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			11
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			16
ITEM 4 — CONTROLS AND PROCEDURES			17
Part II — Other Information
ITEM 1 — Legal Proceedings			18
1A — Risk Factors			18
2 — Unregistered Sales of Equity Securities and Use of Proceeds			19
3 — Defaults upon Senior Securities			19
4 — Submission of Matters to a Vote of Security Holders.			19
5 — Other Information			19
6 — Exhibits			20
Signatures			21
EX-11
EX-31.1
EX-31.2
EX-32.1
EX-32.2

CSB BANCORP, INC.

PART I — FINANCIAL INFORMATION

ITEM 1. — FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
(Unaudited)

		September 30,				December 31,
		2008				2007
ASSETS
Cash and due from bank		$	8,592,417			$	12,111,807
Interest-earning deposits in other banks			30,835				81,555
Federal funds sold			1,800,000				—
Total cash and cash equivalents			10,423,252				12,193,362
Securities available-for-sale, at fair value			67,417,273				71,419,830
Restricted stock, at cost			3,220,800				3,105,900
Total securities			70,638,073				74,525,730
Loans			256,343,002				256,659,059
Less allowance for loan losses			2,780,578				2,585,901
Net loans			253,562,424				254,073,158
Premises and equipment, net			7,073,444				7,273,238
Accrued interest receivable and other assets			2,045,872				2,204,257
Total Assets		$	343,743,065			$	350,269,745
LIABILITIES
Deposits
Noninterest-bearing		$	44,217,085			$	46,038,976
Interest-bearing			201,735,720				213,347,066
Total deposits			245,952,805				259,386,042
Short-term borrowings			24,756,834				27,305,157
Other borrowings			33,681,998				26,023,888
Accrued interest payable and other liabilities			1,839,484				1,276,610
Total liabilities			306,231,121				313,991,697
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			6,463,569				6,452,319
Retained earnings			19,449,252				17,990,445
Treasury stock at cost: 245,803 shares in 2008 and 220,162 shares in 2007			(5,014,541	)			(4,599,282	)
Accumulated other comprehensive loss			(60,003	)			(239,101	)
Total shareholders’ equity			37,511,944				36,278,048
Total Liabilities and Shareholders’ Equity		$	343,743,065			$	350,269,745

See notes to unaudited consolidated financial statements.

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Interest income
Loans, including fees		$	4,073,175			$	4,633,268			$	12,503,136			$	13,433,102
Taxable securities			800,062				720,952				2,377,551				2,205,401
Nontaxable securities			60,088				62,931				159,510				198,060
Other			32,992				944				102,863				16,324
Total interest income			4,966,317				5,418,095				15,143,060				15,852,887
Interest expense
Deposits			1,068,797				1,608,916				3,662,709				4,763,015
Other			457,693				419,497				1,374,994				1,169,545
Total interest expense			1,526,490				2,028,413				5,037,703				5,932,560
Net interest income			3,439,827				3,389,682				10,105,357				9,920,327
Provision for loan losses			107,031				151,264				261,740				353,540
Net interest income after provision for loan losses			3,332,796				3,238,418				9,843,617				9,566,787
Non-interest income
Service charges on deposit accounts			326,006				335,536				952,414				927,894
Trust and financial services			138,128				188,598				489,360				544,873
Debit card interchange fees			81,805				85,551				232,995				201,354
Credit card fee income			53,393				63,818				129,824				192,623
Gain on sale of loans			9,475				10,115				281,309				14,805
Other income			99,805				78,663				258,142				236,768
Insurance recovery			—				—				—				186,526
Securities gains (losses)			(35,000	)			—				(35,000	)			5,430
Total non-interest income			673,612				762,281				2,309,044				2,310,273
Non-interest expenses
Salaries and employee benefits			1,532,758				1,485,842				4,596,823				4,327,845
Occupancy expense			183,735				188,167				566,531				554,439
Equipment expense			122,541				131,192				367,312				372,324
State franchise tax			108,560				105,892				323,370				311,971
Professional and director fees			95,454				147,009				375,353				453,151
Telephone expense			47,064				54,850				151,609				174,821
Other expenses			571,732				609,157				1,626,578				1,793,941
Total non-interest expenses			2,661,844				2,722,109				8,007,575				7,988,492
Income before income taxes			1,344,564				1,278,590				4,145,086				3,888,568
Federal income tax provision			454,000				415,500				1,375,000				1,254,500
Net income		$	890,564			$	863,090			$	2,770,086			$	2,634,068
Basic and diluted earnings per share		$	0.37			$	0.35			$	1.14			$	1.07

See notes to unaudited consolidated financial statements.

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Balance at beginning of period		$	36,577,306			$	35,119,135			$	36,278,048			$	35,070,320
Comprehensive income:
Net income			890,564				863,090				2,770,086				2,634,068
Change in net unrealized loss, net of reclassification adjustments and related income taxes $245,875, $207,216, $92,262, and $107,570, respectively			477,287				402,244				179,098				208,812
Total comprehensive income			1,367,851				1,265,334				2,949,184				2,842,880
Issuance of 40 shares from treasury			—				—				—				641
Stock-based compensation expense			3,750				7,165				11,250				18,415
Purchase of treasury shares			(1,006	)			(131	)			(415,259	)			(654,114	)
Cash dividends declared ($0.18 and $0.54 per share in 2008 and 2007)			(435,957	)			(443,320	)			(1,311,279	)			(1,329,959	)
Balance at end of period		$	37,511,944			$	35,948,183			$	37,511,944			$	35,948,183

See notes to unaudited consolidated financial statements.

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Nine Months Ended
		September 30,
		2008				2007
Net cash from operating activities		$	3,384,940			$	3,067,230
Cash flows from investing activities
Securities available-for-sale:
Proceeds from maturities, calls and repayments			17,869,675				6,529,688
Purchases			(13,611,007	)			(2,156,064	)
Purchase of FHLB stock			(114,900	)			—
Proceeds from sale of other real estate			105,000				59,096
Loan originations, net of repayments			(1,983,166	)			(13,664,910	)
Proceeds from sale of credit cards			2,513,671				—
Premises and equipment expenditures, net			(320,292	)			(461,715	)
Net cash provided by (used for) investing activities			4,458,981				(9,693,905	)
Cash flows from financing activities
Net change in deposits			(13,433,237	)			(6,583,339	)
Net change in short-term borrowings			(2,548,323	)			3,761,849
Proceeds from other borrowings			8,000,000				5,000,000
Repayment of other borrowings			(341,890	)			(391,888	)
Purchase of treasury shares			(415,259	)			(654,113	)
Issuance of treasury shares			—				641
Cash dividends paid			(875,322	)			(886,639	)
Net cash used for financing activities			(9,614,031	)			246,511
Net change in cash and cash equivalents			(1,770,110	)			(6,380,164	)
Cash and cash equivalents at beginning of period			12,193,362				17,653,188
Cash and cash equivalents at end of period		$	10,423,252			$	11,273,024
Supplemental disclosures
Interest paid		$	5,120,995			$	5,816,914
Income taxes paid			1,326,000				1,560,000

See notes to unaudited consolidated financial statements.

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 September 30, 2008, 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, 2007, 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 September 30, 2008 are not necessarily indicative of the operating results for the full year or any future interim period.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under FAS No. 142, Goodwill and Other Intangible Assets. This standard is intended to improve the consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired after the effective date. In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset. This FSP clarifies the application of FAS Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP shall be effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application shall be accounted for as a change in accounting estimate (FAS Statement No. 154, Accounting Changes and Error Corrections. The disclosure provisions of Statement 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position.

CSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2 — SECURITIES

Securities consist of the following at September 30, 2008 and December 31, 2007:

September 30, 2008

						Gross				Gross
		Amortized				unrealized				unrealized				Fair
		Cost				gains				losses				Value
Available-for-sale:
U.S. Treasury security		$	99,971			$	1,396			$	—			$	101,367
Obligations of U.S. government corporations and agencies			12,406,349				39,783				11,880				12,434,252
Mortgage-backed securities			48,436,341				159,897				144,981				48,451,257
Obligations of states and political subdivisions			6,191,404				42,227				90,896				6,142,735
Total debt securities			67,134,065				243,303				247,757				67,129,611
Equity Securities			374,123				437				86,898				287,662
Total available-for-sale			67,508,188				243,740				334,655				67,417,273
Restricted stock			3,220,800				—				—				3,220,800
Total securities		$	70,728,988			$	243,740			$	334,655			$	70,638,073

December 31, 2007

						Gross				Gross
		Amortized				unrealized				unrealized				Fair
		Cost				gains				losses				Value
Available-for-sale:
U.S. Treasury security		$	99,944			$	1,704			$	—			$	101,648
Obligations of U.S. government corporations and agencies			25,498,979				18,190				7,904				25,509,265
Mortgage-backed securities			42,682,972				15,639				333,666				42,364,945
Obligations of states and political subdivisions			3,098,457				60,088				—				3,158,545
Total debt securities			71,380,352				95,621				341,570				71,134,403
Equity Securities			401,752				665				116,990				285,427
Total available-for-sale			71,782,104				96,286				458,560				71,419,830
Restricted stock			3,105,900				—				—				3,105,900
Total securities		$	74,888,004			$	96,286			$	458,560			$	74,525,730

CSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3 — FAIR VALUE MEASUREMENTS (FAS NO. 157)

Effective January 1, 2008, the Company adopted FAS No. 157, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. FAS No. 157 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by FAS No. 157 hierarchy are as follows:

Level I:		Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:		Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III:		Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of September 30, 2008 by level within the fair value hierarchy. No liabilities are carried at fair value. As required by FAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

		September 30, 2008
		Level I				Level II				Level III				Total
Assets:
Securities available for sale		$	287,662			$	67,129,611			$	—			$	67,417,273

NOTE 4 — ACQUISITION

Effective as of the close of business on October 31, 2008 CSB Bancorp, Inc. (“CSB”) completed the merger of Indian Village Bancorp, Inc. (“Indian Village”) with and into CSB pursuant to the terms of the Agreement and Plan of Merger dated as of May 14, 2008. Immediately following the merger, Indian Village Community Bank was merged with and into The Commercial and Savings Bank of Millersburg. Indian Village banking centers are located in Gnadenhutten, New Philadelphia and North Canton, Ohio. Under the terms of the agreement, the Company paid a combination of stock and cash as set forth in the definitive agreement and plan of merger for each outstanding common share of Indian Village, resulting in aggregate merger consideration of approximately $7.9 million. This transaction will be accounted for using the purchase method of accounting.

The following table summarizes the book values of the assets acquired and liabilities assumed at the date of acquisition of Indian Village. Fair market value adjustments will be made as additional information becomes available.

CSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4 — ACQUISITION-(continued)

		October 31, 2008
(dollars in thousands)		Unaudited
Assets
Cash and cash equivalents		$	9,029
Securities			9,383
Other investments			2,019
Loans, net of allowance of $458			56,119
Premises and equipment			1,672
Other assets			4,422
Total assets acquired		$	82,644
Liabilities
Deposits		$	58,021
Borrowings			16,941
Other liabilities			1,313
Total liabilities assumed			76,275
Net assets acquired		$	6,369

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 September 30, 2008 as compared to December 31, 2007, and the consolidated results of operations for the quarter and nine-month period ended September 30, 2008 compared to the same period in 2007. 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 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 $343.7 million at September 30, 2008, compared to $350.3 million at December 31, 2007, representing a decrease of $6.6 million or 1.9%. Cash and cash equivalents decreased $1.8 million, or 14.5%, during the nine-month period ending September 30, 2008, due to a $3.5 million decrease in cash and due from banks which was partially offset by a $1.8 million increase in Federal funds sold. Securities decreased $4.0 million or 7.8% during the first nine months of 2008 primarily due to calls within the US Agency portfolio and principal repayments within the mortgage-backed securities portfolio. Net loans decreased $511,000, or 0.2%, while deposits decreased $13.4 million, or 5.2%, during the nine-month period. Short-term borrowings of Federal funds purchased, securities sold under repurchase agreement and Federal Home Loan Bank borrowings decreased $2.5 million, while other borrowings increased $7.7 million during the period as a $10 million investment leverage strategy was executed during the first quarter 2008.

Net loans decreased $511,000, or 0.2%, during the nine-month period ended September 30, 2008. The credit card portfolio with outstanding balances of $2.2 million was sold during the quarter ended March 31, 2008. The company recognized a net gain on the sale of $261,000. These cards represented less than 1% of loans outstanding. Additional loan balance decreases occurred due to a payoff of several rate sensitive commercial loans as very low fixed rate commercial loan rates were being offered within the Company’s market area. Consumer home equity lines recognized a $1.6 million or 7.6% balance increase over December 31, 2007. The allowance for loan losses amounted to $2,781,000, or 1.08% of total loans at September 30, 2008 compared to $2,586,000 or 1.01% of total loans at December 31, 2007.

CSB BANCORP, INC.

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

The increase in the allowance for loan losses as a percentage of total loans is attributed to the additional provision of $262,000, net charge-offs of $67,000, and the decline of outstanding loan balances for the nine months ended September 30, 2008. The Company continues to reflect improved credit quality with the reduction of non-performing loans and other real estate owned at September 30, 2008 in comparison to December 31, 2007 and September 30, 2007.

(dollars in thousands)		September 30, 2008				December 31, 2007				September 30, 2007
Non-performing loans			577				571				1,092
Other real estate			0				101				0
Allowance for loan losses			2,781				2,586				2,555
Total loans			256,343				256,659				245,626
Allowance: loans			1.08	%			1.01	%			1.04	%
Allowance: non-performing loans			4.9	x			4.5	x			2.3	x

The ratio of gross loans to deposits was 104.2% at September 30, 2008, compared to 98.9% at December 31, 2007. The increase in this ratio is primarily the result of deposit shrinkage experienced during the nine months ended September 30, 2008.

The Company had net unrealized losses of $91,000 within its securities portfolio at September 30, 2008, compared to net unrealized losses of $362,000 at December 31, 2007. Management has considered industry analyst reports, sector credit reports and the volatility within the bond market in concluding that the gross unrealized losses of $335,000 within the portfolio as of September 30, 2008, were primarily the result of customary and expected fluctuations in the bond market. As a result, all security impairments as of September 30, 2008, are considered temporary.

Management continues to evaluate the three (3) private label CMOs held within the investment portfolio for any deterioration of investment quality. As of September 30, 2008, within this investment sector, the Company has $4.0 million current value investments, original face of $6.5 million, with gross unrealized losses of $78,000. All bonds are rated AAA on September 30, 2008, collateralized primarily by 1-4 family mortgage loans and borrowers in a wide geographical dispersion. All credit scores and loan to value ratios exceed sub prime status.

Short-term borrowings decreased $2.5 million from December 31, 2007 and other borrowings increased $7.7 million as the Company borrowed a $10 million in medium-term advances (1-4 years) from the Federal Home Loan Bank (“FHLB”) to fund $10 million in an investment leverage strategy.

Deposits decreased $13.4 million, or 5.2% from December 31, 2007 with non-interest bearing deposits declining $1.8 million and interest-bearing deposit accounts decreasing $11.6 million. By deposit type, increases were recognized only in money market savings accounts for the nine-month period ended September 30, 2008. On a year over year basis non-interest bearing accounts were up $1.9 million while interest-bearing accounts decreased $9.5 million.

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

Total shareholders’ equity amounted to $37.5 million, or 10.9%, of total assets, at September 30, 2008, compared to $36.3 million, or 10.4% of total assets, at December 31, 2007. The increase in shareholders’ equity during the nine months ended September 30, 2008 was due to net income of $2,770,000. The increase was partially offset by purchases of $415,000 of treasury shares and dividends declared of $1,311,000. The Company and its subsidiary bank met all regulatory capital requirements at September 30, 2008.