Annual Statements Open main menu

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

CSB Bancorp, Inc. 10-Q
 
 
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, 2008
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
incorporation or organization)
  (I.R.S. Employer Identification Number)
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 o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
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 12, 2008:
 
  2,422,050 common shares
 
 

 


 

CSB BANCORP, INC.
FORM 10-Q
QUARTER ENDED June 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
    10  
 
       
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    15  
 
       
ITEM 4 — CONTROLS AND PROCEDURES
    16  
 
       
Part II — Other Information
       
 
       
ITEM 1 — Legal Proceedings
    17  
1A — Risk Factors
    17  
2 — Unregistered Sales of Equity Securities and Use of Proceeds
    17  
3 — Defaults upon Senior Securities
    17  
4 — Submission of Matters to a Vote of Security Holders.
    17  
5 — Other Information
    17  
6 — Exhibits
    18  
 
       
Signatures
    19  

 


 

CSB BANCORP, INC.
PART I — FINANCIAL INFORMATION
ITEM 1. — FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    June 30,     December 31,  
    2008     2007  
ASSETS
               
Cash and due from bank
  $ 11,350,478     $ 12,111,807  
Interest-earning deposits in other banks
    181,101       81,555  
Federal funds sold
    11,000,000        
 
           
Total cash and cash equivalents
    22,531,579       12,193,362  
 
           
 
               
Securities available-for-sale, at fair value
    65,562,619       71,419,830  
Restricted stock, at cost
    3,181,600       3,105,900  
 
           
Total securities
    68,744,219       74,525,730  
 
           
 
               
Loans
    249,542,605       256,659,059  
Less allowance for loan losses
    2,717,912       2,585,901  
 
           
Net loans
    246,824,693       254,073,158  
 
           
 
               
Premises and equipment, net
    7,076,699       7,273,238  
Accrued interest receivable and other assets
    1,926,733       2,204,257  
 
           
 
               
Total Assets
  $ 347,103,923     $ 350,269,745  
 
           
 
               
LIABILITIES
               
Deposits
               
Noninterest-bearing
  $ 40,794,649     $ 46,038,976  
Interest-bearing
    207,381,737       213,347,066  
 
           
Total deposits
    248,176,386       259,386,042  
Short-term borrowings
    27,111,134       27,305,157  
Other borrowings
    33,767,797       26,023,888  
Accrued interest payable and other liabilities
    1,471,300       1,276,610  
 
           
Total liabilities
    310,526,617       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
    6,459,819       6,452,319  
Retained earnings
    18,994,645       17,990,445  
Treasury stock at cost: 245,736 shares in 2008 and 220,162 shares in 2007
    (5,013,535 )     (4,599,282 )
Accumulated other comprehensive loss
    (537,290 )     (239,101 )
 
           
Total shareholders’ equity
    36,577,306       36,278,048  
 
           
 
               
Total Liabilities and Shareholders’ Equity
  $ 347,103,923     $ 350,269,745  
 
           
See notes to unaudited consolidated financial statements.

3.


 

CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
Interest income
                               
Loans, including fees
  $ 4,017,256     $ 4,485,314     $ 8,429,960     $ 8,799,834  
Taxable securities
    772,867       734,392       1,577,489       1,484,449  
Nontaxable securities
    55,544       66,617       99,422       135,129  
Other
    47,664       2,186       69,871       15,380  
 
                       
Total interest income
    4,893,331       5,288,509       10,176,742       10,434,792  
 
                       
 
                               
Interest expense
                               
Deposits
    1,166,153       1,600,736       2,593,911       3,154,099  
Other
    441,414       412,420       917,302       750,048  
 
                       
Total interest expense
    1,607,567       2,013,156       3,511,213       3,904,147  
 
                       
 
                               
Net interest income
    3,285,764       3,275,353       6,665,529       6,530,645  
Provision for loan losses
    47,677       124,271       154,709       202,276  
 
                       
 
                               
Net interest income after provision for loan losses
    3,238,087       3,151,082       6,510,820       6,328,369  
 
                               
Non-interest income
                               
Service charges on deposit accounts
    339,256       316,887       626,408       592,359  
Trust and financial services
    162,568       186,638       351,232       356,275  
Debit card interchange fees
    80,370       61,911       151,190       115,803  
Credit card fee income
    12,379       65,358       76,431       128,805  
Gain on sale of loans
    7,176       1,946       271,835       4,690  
Other income
    78,197       77,196       158,336       158,105  
Insurance recovery
          186,526             186,526  
Securities gains
          5,430             5,430  
 
                       
Total non-interest income
    679,946       901,892       1,635,432       1,547,993  
 
                               
Non-interest expenses
                               
Salaries and employee benefits
    1,527,162       1,434,823       3,064,065       2,842,003  
Occupancy expense
    184,915       181,720       382,796       366,273  
Equipment expense
    119,320       125,214       244,770       241,132  
State franchise tax
    107,380       104,741       214,810       206,079  
Professional and director fees
    140,343       164,760       279,899       306,142  
Telephone expense
    46,877       55,305       104,544       119,970  
Other expenses
    491,274       579,944       1,054,846       1,184,784  
 
                       
Total non-interest expenses
    2,617,271       2,646,507       5,345,730       5,266,383  
 
                       
 
                               
Income before income taxes
    1,300,762       1,406,467       2,800,522       2,609,979  
Federal income tax provision
    423,000       450,000       921,000       839,000  
 
                       
 
                               
Net income
  $ 877,762     $ 956,467     $ 1,879,522     $ 1,770,979  
 
                       
 
                               
Basic and diluted earnings per share
  $ 0.36     $ 0.39     $ 0.77     $ 0.72  
 
                       
See notes to unaudited consolidated financial statements.

4.


 

CSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
Balance at beginning of period
  $ 37,147,621     $ 34,915,226     $ 36,278,048     $ 35,070,320  
 
                               
Comprehensive income :
                               
Net income
    877,762       956,467       1,879,522       1,770,979  
Change in net unrealized loss, net of reclassification adjustments and related income taxes $(368,492), $(158,912), $(153,612), and $(99,646), respectively
    (715,308 )     (308,477 )     (298,189 )     (193,432 )
 
                       
Total comprehensive income
    162,454       649,990       1,581,333       1,577,547  
 
                               
Issuance of 40 shares from treasury
                          641  
 
                               
Stock-based compensation expense
    4,000             7,500       11,250  
 
                               
Purchase of treasury shares
    (300,800 )     (761 )     (414,253 )     (653,983 )
 
                               
Cash dividends declared ($0.18 and $0.36 per share in 2008 and 2007)
    (435,969 )     (443,320 )     (875,322 )     (886,640 )
 
                       
 
                               
Balance at end of period
  $ 36,577,306     $ 35,119,135     $ 36,577,306     $ 35,119,135  
 
                       
See notes to unaudited consolidated financial statements.

5.


 

CSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Six Months Ended  
    June 30,  
    2008     2007  
Net cash from operating activities
  $ 2,229,326     $ 1,564,951  
 
               
Cash flows from investing activities
               
Securities available-for-sale:
               
Proceeds from maturities, calls and repayments
    27,083,212       3,232,451  
Purchases
    (21,730,677 )     (167,061 )
Purchase of FHLB stock
    (75,700 )      
Proceeds from sale of other real estate
    105,000       10,000  
Loan originations, net of repayments
    4,858,189       (10,496,202 )
Proceeds from sale of credit cards
    2,513,671        
Premises and equipment expenditures, net
    (131,428 )     (436,157 )
 
           
Net cash provided by (used for) investing activities
    12,622,267       (7,856,969 )
 
           
 
               
Cash flows from financing activities
               
Net change in deposits
    (11,209,656 )     (9,813,169 )
Net change in short-term borrowings
    (194,023 )     5,234,970  
Proceeds from other borrowings
    8,000,000       5,000,000  
Repayment of other borrowings
    (256,091 )     (296,480 )
Purchase of treasury shares
    (414,253 )     (653,983 )
Issuance of treasury shares
          641  
Cash dividends paid
    (439,353 )     (443,320 )
 
           
Net cash used for financing activities
    (4,513,376 )     (971,341 )
 
           
 
               
Net change in cash and cash equivalents
    10,338,217       (7,263,359 )
 
               
Cash and cash equivalents at beginning of period
    12,193,362       17,653,188  
 
           
 
               
Cash and cash equivalents at end of period
  $ 22,531,579     $ 10,389,829  
 
           
 
               
Supplemental disclosures
               
Interest paid
  $ 3,543,249     $ 3,880,531  
Income taxes paid
    926,000       1,010,000  
Non-cash investing activity-transfer of loans to OREO
          59,096  
See notes to unaudited consolidated financial statements.

6.


 

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, 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 June 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.

7.


 

CSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 — SECURITIES
Securities consist of the following at June 30, 2008 and December 31, 2007:
June 30, 2008
                                 
            Gross     Gross        
    Amortized     unrealized     unrealized     Fair  
    Cost     gains     losses     Value  
Available-for-sale:
                               
U.S. Treasury security
  $ 99,968     $ 1,579     $     $ 101,547  
Obligations of U.S. government corporations and agencies
    11,417,400       24,690       55,984       11,386,106  
Mortgage-backed securities
    48,257,199       25,766       698,354       47,584,611  
Obligations of states and political subdivisions
    6,193,006       58,417       58,136       6,193,287  
 
                       
Total debt securities
    65,967,573       110,452       812,474       65,265,551  
Equity Securities
    409,122       779       112,833       297,068  
 
                       
Total available-for-sale
    66,376,695       111,231       925,307       65,562,619  
Restricted stock
    3,181,600                   3,181,600  
 
                       
Total securities
  $ 69,558,295     $ 111,231     $ 925,307     $ 68,744,219  
 
                       
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  
 
                       

8.


 

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 June 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.
                                 
    June 30, 2008
    Level I   Level II   Level III   Total
Assets:
                               
Securities available for sale
  $ 297,068     $ 65,265,551     $       $ 65,562,619  
NOTE 4 — PENDING ACQUISITION
On May 14, 2008, CSB Bancorp, Inc. entered into a definitive agreement and plan of merger whereby CSB Bancorp, Inc. will acquire Indian Village Bancorp, Inc. (“Indian Village”), and its wholly-owned subsidiary, Indian Village Community Bank. Subject to approval by Indian Village shareholders, receipt of regulatory approvals and satisfaction of other customary closing conditions, Indian Village will be merged with and into CSB Bancorp, Inc., followed immediately by the merger of Indian Village Community Bank with and into The Commercial and Savings Bank. Indian Village Community Bank has banking centers located in each of Gnadenhutten, New Philadelphia and North Canton, Ohio, and offers a wide range of bank products and services. Under the terms of the agreement, the Company will pay 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. The transaction is expected to close late in the third quarter or early in the fourth quarter of 2008. This transaction will be accounted for using the purchase method of accounting.

9.


 

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, 2008 as compared to December 31, 2007, and the consolidated results of operations for the quarter and six-month period ended June 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 $347.1 million at June 30, 2008, compared to $350.3 million at December 31, 2007, representing a decrease of $3.2 million or 0.9%. Cash and cash equivalents increased $10.3 million, or 84.8%, during the six-month period ending June 30, 2008, due to a $11.0 million increase in Federal funds sold and a $762 thousand decrease in cash and due from banks. Securities decreased $5.8 million or 7.8% during the first six months of 2008 primarily due to calls within the US Agency portfolio and principal repayments within the mortgage-backed securities portfolio. Net loans decreased $7.2 million, or 2.9%, while deposits decreased $11.2 million, or 4.3%, during the six-month period. Short-term borrowings of Federal funds purchased, securities sold under repurchase agreement and Federal Home Loan Bank borrowings decreased $194,000, 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 $7.2 million, or 2.9%, during the six-month period ended June 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 $2,718,000, or 1.09% of total loans at June 30, 2008 compared to $2,586,000 or 1.01% of total loans at December 31, 2007.

10.


 

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 $155,000, minimal net charge-offs of $23,000, and the decline of outstanding loan balances for the six months ended June 30, 2008. The Company continues to reflect improved credit quality with the reduction of non-performing loans and other real estate owned at June 30, 2008 in comparison to December 31, 2007 and June 30, 2007.
                         
    June 30, 2008   December 31, 2007   June 30, 2007
Non-performing loans
    615,000       571,000       1,586,000  
Other real estate
          101,700       49,000  
Allowance for loan losses
    2,718,000       2,585,900       2,426,000  
Total loans
    249,543,000       256,659,100       242,485,000  
Allowance: loans
    1.09 %     1.01 %     1.00 %
Allowance: non-performing loans
    4.4x       4.5x       1.5x  
The ratio of gross loans to deposits was 100.1% at June 30, 2008, compared to 98.93% at December 31, 2007. The increase in this ratio is primarily the result of deposit shrinkage experienced during the six months ended June 30, 2008.
The Company had net unrealized losses of $814,000 within its securities portfolio at June 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 $925,000 within the portfolio as of June 30, 2008, were primarily the result of customary and expected fluctuations in the bond market. As a result, all security impairments as of June 30, 2008, are considered temporary.
Management continues to evaluate the three (3) private label CMO’s held within the investment portfolio for any deterioration of investment quality. As of June 30, 2008, within this investment sector, the Company has $4.3 million current value investments, original face of $6.5 million, with gross unrealized losses of $107 thousand. All bonds are rated AAA on June 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 $194,000 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 $11.2 million, or 4.3% from December 31, 2007 with non-interest bearing deposits declining $5.2 million and interest-bearing deposit accounts decreasing $6.0 million. By deposit type, increases were recognized only in money market savings accounts for the six-month period ended June 30, 2008. The bank is subject to seasonality within its deposit accounts due to its commercial customer base reliance on logging, sawmills, and lumber as well as the tourism and lodging business. On a year over year basis non-interest bearing accounts were up $146,000 while interest-bearing accounts decreased $2.3 million.

11.


 

CSB BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total shareholders’ equity amounted to $36.6 million, or 10.5%, of total assets, at June 30, 2008, compared to $36.3 million, or 10.4% of total assets, at December 31, 2007. The increase in shareholders’ equity during the six months ended June 30, 2008 was due to net income of $1,880,000. These increases were partially offset by purchases of $414,000 of treasury shares and dividends declared of $875,000. The Company and its subsidiary bank met all regulatory capital requirements at June 30, 2008.
RESULTS OF OPERATIONS
Three months ended June 30, 2008 and 2007
For the quarter ended June 30, 2008, the Company recorded net income of $878,000, or $0.36 per share, as compared to net income of $956,000, or $0.39 per share for the quarter ended June 30, 2007. The $79,000 decrease in net income for the quarter was principally due to a $187,000 non-recurring insurance recovery for the quarter ended June 30, 2007 which was partially offset by a $77,000 reduction in the provision for loan losses.
Interest income for the quarter ended June 30, 2008, was $4,893,000, representing a $395,000 decrease, or 7.5%, compared to the same period in 2007. This decrease was primarily due to a decrease in loan interest rate to 6.48% for the second quarter in 2008 from 7.50% for the quarter ended June 30, 2007. This decrease was partially offset by an increase in the yield on securities and the volume of fed funds sold. Interest expense for the quarter ended June 30, 2008 was $1,608,000, a decrease of $406,000, or 20.1%, from the same period in 2007. The decrease in interest expense occurred due to decreases in interest rates across the board for the quarter ended June 30, 2008. During second quarter 2008, maturing time deposits renewed at interest rates that were lower.
The provision for loan losses for the quarter ended June 30, 2008, was $48,000, compared to a $124,000 provision for the same quarter in 2007. The provision 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 for the quarter ended June 30, 2008, was $680,000, a decrease of $222,000, or 24.6%, compared to the same quarter in 2007. This decrease was primarily recording of a due to the recording of a $187,000 non-recurring insurance recovery for the quarter ended June 30, 2007 and the reduction of credit card fee income of $53,000 resulting from the sale of the cards in March 2008. Trust and brokerage fees slid $24,000 on a quarter over quarter basis as the market value of assets under management declined. Partially offsetting the losses in non-interest income were increases to both service charges on deposits as per item overdraft fees were increased and debit card interchange income due to increased commission due to rate.
Non-interest expenses for the quarter ended June 30, 2008, decreased $29,000, or 1.1%, compared to the second quarter of 2007. Salaries and employee benefits increased $92,000, or 6.4%, primarily the result of increased salary levels due to merit increases, increased medical and retirement benefits and increased bonus accruals based on projections of incentive goals. Other expenses declined with reductions in postage, advertising, debit card fees, and telephone expense.

12.


 

CSB BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Federal income tax expense decreased $27,000, or 6.0% for the quarter ended June 30, 2008 as compared to the second quarter of 2007. The provision for income taxes was $423,000 (effective rate of 32.5%) for the quarter ended June 30, 2008, compared to $450,000 (effective rate of 32.0%) for the quarter ended June 30, 2007. The increase in the effective tax rate resulted from a decrease in tax-exempt interest income and increased income generated by the company.
Six months ended June 30, 2008 and 2007
Net income for the six months ending June 30, 2008, was $1,880,000, or $0.77 per share, as compared to $1,771,000 or $0.72 per share during the same period in 2007. Return on average assets and return on average equity were 1.11% and 10.14%, respectively, for the six-month period of 2008, compared to 1.10% and 10.11%, respectively for 2007.
Net interest income was $6,666,000 for the six months ended June 30, 2008, an increase of $135,000 or 2.1% from the same period last year. Comparative net income increased primarily due to an increase in non-interest income of $87,000 and a decrease to the provision for loans losses of $48,000 compared to the same period in 2007. The improvements in net income were partially offset by an increase in non-interest expenses of $79,000. Interest income for the six months ended June 30, 2008, was $10,177,000 a decrease of $258,000 or 2.5% from the same period in 2007.
Interest income on loans decreased $370,000, or 4.2%, for the six months ended June 30, 2008, as compared to the same period in 2007. This decrease was primarily due to an interest rate decrease of 77 basis points for the comparable six-month periods. Interest income on securities increased $57,000, or 3.5%, as the yield on taxable securities increased 27 basis points, which was partially offset by average investment balances decreasing by $800,000. Interest income on fed funds sold increased $54,000 for the six months ended June 30, 2008 as average fed funds sold balances increased $6.2 million, compared to the same period in 2007.
Interest expense decreased $393,000 to $3,511,000 for the six months ended June 30, 2008, compared to the six months ended June 30, 2007. Interest expense on deposits decreased $560,000, or 17.8%, from the same period as last year, while interest expense on other borrowings increased $167,000 or 22.3%. The decrease in interest expense has been caused by lower interest rates being paid across the board on interest-bearing deposit accounts and borrowings. Time deposits continue to renew at lower interest rates, and some depositors have moved monies to saving instruments anticipating higher rate time deposits. Competition for deposits continues to increase with larger money center banks paying higher interest rates on term deposits above market interest rates. The net interest margin declined by 21 basis points for the six-month period ended June 30, 2008, to 4.14%, from 4.35% for the same period in 2007.
The provision for loan losses was $155,000 during the first six months of 2008, compared to $202,000 in the same six-month period of 2007. 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 increased $87,000, or 5.6%, during the six months ended June 30, 2008, as compared to the same period in 2007. The increase in non-interest income was due to the sale of credit cards resulting in a gain of $261,000 during first quarter 2008 and the increase in debit card interchange fees. Service charges on deposits increased $34,000 from the same period in 2007 due to increases in

13.


 

CSB BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NSF fees in 2008. These gains were partially offset by a $52,000 reduction in credit card fee income as the Company’s cards were sold during March 2008 and the non-recurring insurance recovery of $187,000 recorded in June 2007.
Non-interest expenses increased $79,000, or 1.5%, for the six months ended June 30, 2008, compared to the same period in 2007. Salaries and employee benefits increased $222,000, or 7.8%, primarily the result of increased benefit programs. Professional and directors fees decreased due to a lower number of outside directors as well as reduced fees payable to a third party vendor in connection with the overdraft privilege program. Occupancy expense has increased during the first six-months of 2008 as compared with 2007 due to increased rents, maintenance and utilities. Other expenses decreased $130,000 primarily the result of a $70,000 decrease in credit card expenses as the credit card portfolio was sold during the first quarter 2008. Additional expense reductions were realized in trust third party vendor expenses, advertising due to the opening promotional costs of the Orrville office being expensed in 2007, telephone, ATM third party vendor expenses, decreased loan collection expenses due to the lower dollar volume of nonperforming loans in 2008, and postage expense.
The provision for income taxes was $921,000 (effective rate of 32.9%) for the six months ended June 30, 2007, compared to $839,000 (effective rate of 32.1%) for the six months ended June 30, 2007. 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, 2007, and as of June 30, 2008 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 $22.5 million at June 30, 2008, an increase of $10.3 million from $12.2 million at December 31, 2007. Net income, securities available-for-sale, and loan repayments also serve as sources of liquidity. Cash and cash equivalents and estimated principal cash flow and maturities on investments maturing within one year represent 15.0% of total assets as of June 30, 2008 compared to 4.5% of total assets at year-end 2007. 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 cash flow obligations for the foreseeable future.
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.

14.


 

CSB BANCORP, INC.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2008, from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. 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, 2008 and December 31, 2007:
June 30 2008
                         
Changes in            
Interest Rates   Net Interest   Dollar   Percentage
(basis points)   Income   Change   Change
(Dollars in Thousands)
+200
  $ 13,929     $ 864       6.6 %
+100
    13,493       428       3.3  
  0
    13,065       0       0.0  
-100
    12,708       (357 )     (2.7 )
-200
    12,243       (822 )     (6.3 )
December 31, 2007
                         
Changes in            
Interest Rates   Net Interest   Dollar   Percentage
(basis points)   Income   Change   Change
(Dollars in Thousands)
+200
  $ 14,682     $ 506       3.6 %
+100
    14,457       281       2.0  
  0
    14,176       0       0.0  
-100
    13,988       (188 )     (1.3 )
-200
    13,646       (530 )     (3.7 )

15.


 

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.


 

CSB BANCORP, INC.
FORM 10-Q
Quarter ended June 30, 2008
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, 2007.
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, 2008 to April 30, 2008
                      60,337  
 
                               
May 1, 2008 to May 31, 2008
    18,800     $ 16.00       18,800       41,537  
 
                               
June 1, 2008 to June 30, 2008
                      41,537  
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 then 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:
There are no matters required to be reported under this item
Item 5 — Other Information:
There are no matters required to be reported under this item

17.


 

CSB BANCORP, INC.
FORM 10-Q
Quarter ended June 30, 2008
PART II — OTHER INFORMATION
Item 6 — Exhibits:
     
Exhibit    
Number   Description of Document
 
   
3.1
  Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form 10-KSB for the Fiscal Year ended December 31, 1994)
 
   
3.1.1
  Amended form of Article Fourth of Amended Articles of Incorporation, as effective April 9, 1998 (incorporated by reference to Registrant’s Form 10-K for the Fiscal Year ended December 31, 1998)
 
   
3.2
  Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form 10-SB)
 
   
4
  Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB.
 
   
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

18.


 

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 12, 2008  /s/ Eddie L. Steiner    
  Eddie L. Steiner   
  President
Chief Executive Officer 
 
 
     
Date: August 12, 2008  /s/ Paula J. Meiler    
  Paula J. Meiler   
  Senior Vice President
Chief Financial Officer 
 
 

19.


 

CSB BANCORP, INC.
Index to Exhibits
     
Exhibit    
Number   Description of Document
3.1
  Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form 10-KSB for the Fiscal Year ended December 31, 1994)
 
   
3.1.1
  Amended form of Article Fourth of Amended Articles of Incorporation, as effective April 9, 1998 (incorporated by reference to Registrant’s Form 10-k for the Fiscal Year ended December 31, 1998)
 
   
3.2
  Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form 10-SB)
 
   
4
  Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB)
 
   
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

20.