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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

CSB Bancorp, Inc.

Ohio		34-1687530
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

(Address of principal executive offices)

(330) 674-9015

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes 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.

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.

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.

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.

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.

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

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.

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.

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.

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.