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CSB Bancorp, Inc. - Quarter Report: 2013 June (Form 10-Q)

FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended: June 30, 2013

OR

 

¨ 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

 

Common stock, $6.25 par value   Outstanding at August 1, 2013:
  2,736,634 common shares

 

 

 


Table of Contents

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED June 30, 2013

Table of Contents

Part I - Financial Information

 

      Page  

ITEM 1 – FINANCIAL STATEMENTS (Unaudited)

  

Consolidated Balance Sheets

     3   

Consolidated Statements of Income

     4   

Consolidated Statements of Comprehensive Income

     5   

Condensed Consolidated Statements of Changes in Shareholders’ Equity

     6   

Condensed Consolidated Statements of Cash Flows

     7   

Notes to Consolidated Financial Statements

     8   

ITEM 2 –

 

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

     26   

ITEM 3 –

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     32   

ITEM 4 –

 

CONTROLS AND PROCEDURES

     33   
Part II - Other Information   

ITEM 1 –

  Legal Proceedings.      34   

ITEM 1A –

  Risk Factors      34   

ITEM 2 –

  Unregistered Sales of Equity Securities and Use of Proceeds      34   

ITEM 3 –

  Defaults upon Senior Securities      34   

ITEM 4 –

  Mine Safety Disclosures      34   

ITEM 5 –

  Other Information      34   

ITEM 6 –

  Exhibits      35   

Signatures

     36   

 

2


Table of Contents

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in thousands)    June 30,
2013
    December 31,
2012
 

ASSETS

    

Cash and cash equivalents

    

Cash and due from banks

   $ 13,532      $ 21,485   

Interest-earning deposits in other banks

     23,534        45,393   
  

 

 

   

 

 

 

Total cash and cash equivalents

     37,066        66,878   
  

 

 

   

 

 

 

Securities

    

Available-for-sale, at fair value

     127,515        129,291   

Restricted stock, at cost

     5,463        5,463   
  

 

 

   

 

 

 

Total securities

     132,978        134,754   
  

 

 

   

 

 

 

Loans held for sale

     103        —     

Loans

     378,191        364,580   

Less allowance for loan losses

     4,945        4,580   
  

 

 

   

 

 

 

Net loans

     373,246        360,000   
  

 

 

   

 

 

 

Premises and equipment, net

     8,326        8,475   

Core deposit intangible

     826        894   

Goodwill

     4,728        4,728   

Bank-owned life insurance

     9,419        8,298   

Accrued interest receivable and other assets

     4,376        2,873   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 571,068      $ 586,900   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 101,644      $ 104,147   

Interest-bearing

     361,201        371,296   
  

 

 

   

 

 

 

Total deposits

     462,845        475,443   
  

 

 

   

 

 

 

Short-term borrowings

     41,851        43,992   

Other borrowings

     12,558        12,672   

Accrued interest payable and other liabilities

     2,423        2,340   
  

 

 

   

 

 

 

Total liabilities

     519,677        534,447   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; shares outstanding 2,736,634 in 2013 and 2,736,060 in 2012

     18,629        18,629   

Additional paid-in capital

     9,964        9,974   

Retained earnings

     28,586        26,962   

Treasury stock at cost - 243,968 in 2013 and 244,542 shares in 2012

     (4,958     (4,976

Accumulated other comprehensive (loss) income

     (830     1,864   
  

 

 

   

 

 

 

Total shareholders’ equity

     51,391        52,453   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 571,068      $ 586,900   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
(Dollars in thousands, except per share data)    2013      2012      2013      2012  

INTEREST AND DIVIDEND INCOME

           

Loans, including fees

   $ 4,441       $ 4,272       $ 9,008       $ 8,524   

Taxable securities

     585         707         1,167         1,436   

Nontaxable securities

     128         131         255         243   

Other

     19         41         43         80   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     5,173         5,151         10,473         10,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

           

Deposits

     448         590         923         1,230   

Short-term borrowings

     16         25         32         49   

Other borrowings

     117         139         234         294   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     581         754         1,189         1,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

     4,592         4,397         9,284         8,710   

PROVISION FOR LOAN LOSSES

     210         205         420         411   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income, after provision for loan losses

     4,382         4,192         8,864         8,299   
  

 

 

    

 

 

    

 

 

    

 

 

 

NONINTEREST INCOME

           

Service charges on deposit accounts

     333         318         648         626   

Trust services

     226         167         440         328   

Debit card interchange fees

     190         201         368         395   

Gain on sale of loans, net

     102         137         216         193   

Securities gain, net

     10         —           10         —     

Other

     205         211         422         440   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,066         1,034         2,104         1,982   
  

 

 

    

 

 

    

 

 

    

 

 

 

NONINTEREST EXPENSES

           

Salaries and employee benefits

     2,042         1,961         4,092         3,924   

Occupancy expense

     255         241         513         487   

Equipment expense

     177         139         342         294   

Professional and director fees

     174         242         291         449   

Franchise tax expense

     147         138         294         277   

FDIC insurance expense

     84         68         172         155   

Software expense

     118         88         232         181   

Marketing and public relations

     106         79         185         152   

Debit card expense

     50         84         112         148   

Amortization of intangible assets

     34         33         68         66   

Net cost of operation of other real estate

     —           6         9         8   

Other

     476         481         912         963   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     3,663         3,560         7,222         7,104   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,785         1,666         3,746         3,177   

FEDERAL INCOME TAX PROVISION

     538         525         1,137         981   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 1,247       $ 1,141       $ 2,609       $ 2,196   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted net earnings per share

   $ 0.45       $ 0.41       $ 0.95       $ 0.80   
  

 

 

    

 

 

    

 

 

    

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
(Dollars in thousands)    2013     2012     2013     2012  

Net income

   $ 1,247      $ 1,141      $ 2,609      $ 2,196   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

        

Unrealized (losses) gains arising during the period

     (3,326     924        (4,072     812   

Reclassification adjustment for gains included in income

     (10     —          (10     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized (losses) gains

     (3,336     924        (4,082     812   

Income tax effect

     1,134        (314     1,388        (276
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (2,202     610        (2,694     536   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

   $ (955   $ 1,751      $ (85   $ 2,732   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
(Dollars in thousands, except per share data)    2013     2012     2013     2012  

Balance at beginning of period

   $ 52,830      $ 49,918      $ 52,453      $ 49,429   

Net income

     1,247        1,141        2,609        2,196   

Other comprehensive (loss) income

     (2,202     610        (2,694     536   

Stock options exercised, 574 shares

     8        —          8        —     

Cash dividends declared

     (492     (493     (985     (985
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 51,391      $ 51,176      $ 51,391      $ 51,176   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.18      $ 0.18      $ 0.36      $ 0.36   

See notes to unaudited consolidated financial statements.

 

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Table of Contents

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended  
     June 30,  
(Dollars in thousands)    2013     2012  

NET CASH FROM OPERATING ACTIVITIES

   $ 3,137      $ 1,273   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Securities available-for-sale:

    

Proceeds from maturities and repayments

     23,384        31,456   

Purchases

     (26,442     (34,543

Proceeds from sale of securities

     500        —     

Loan originations, net of repayments

     (13,639     (19,940

Premises from sale of other real estate

     18        7   

Property, equipment, and software acquisitions

     (473     (256

Purchase of bank-owned life insurance

     (1,000     (5,000
  

 

 

   

 

 

 

Net cash used in investing activities

     (17,652     (28,276
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net change in deposits

     (12,558     11,238   

Net change in short-term borrowings

     (2,141     4,122   

Repayments of other borrowings

     (114     (2,291

Cash dividends

     (492     (492

Proceeds from stock options exercised

     8        —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (15,297     12,577   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (29,812     (14,426

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     66,878        82,258   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 37,066      $ 67,832   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

    

Cash paid during the year for:

    

Interest

   $ 1,241      $ 1,678   

Income taxes

     960        400   

Noncash investing activities:

    

Transfer of loans to other real estate owned

     —          5   

Noncash financing activities:

    

Dividends declared

     492        493   

See notes to unaudited consolidated financial statements.

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements include the accounts of CSB Bancorp, Inc. and its wholly-owned subsidiaries, The Commercial and Savings Bank (the “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, 2013, 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 (“U.S. GAAP”) have been omitted. The Annual Report for CSB for the year ended December 31, 2012, 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, 2013 are not necessarily indicative of the operating results for the full year or any future interim period.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (this “Update”). The amendments in this Update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company has provided the necessary disclosure in Note 6.

In July 2013, the FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.

NOTE 2 – SECURITIES

Securities consist of the following at June 30, 2013 and December 31, 2012:

 

(Dollars in thousands)   Amortized
cost
    Gross
unrealized
gains
    Gross
unrealized
losses
    Fair value  

June 30, 2013

       

Available-for-sale:

       

U.S. Treasury securities

  $ 1,106      $ —        $ 13      $ 1,093   

Obligations of U.S. government corporations and agencies

    33,995        12        1,148        32,859   

Mortgage-backed securities in government sponsored entities

    69,444        825        1,218        69,051   

Asset-backed securities in government sponsored entities

    2,796        24        —          2,820   

Obligations of states and political subdivisions

    16,922        370        183        17,109   

Corporate bonds

    4,404        80        15        4,469   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities

    128,667        1,311        2,577        127,401   

Equity securities in financial institutions

    106        9        1        114   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale

    128,773        1,320        2,578        127,515   

Restricted stock

    5,463        —          —          5,463   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

  $ 134,236      $ 1,320      $ 2,578      $ 132,978   
 

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2012

       

Available-for-sale:

       

U.S. Treasury securities

  $ 100      $ —        $ —        $ 100   

Obligations of U.S. government corporations and agencies

    35,996        27        43        35,980   

Mortgage-backed securities in government sponsored entities

    66,933        2,107        1        69,039   

Asset-backed securities in government sponsored entities

    2,862        —          39        2,823   

Obligations of states and political subdivisions

    16,194        701        12        16,883   

Corporate bonds

    4,313        112        28        4,397   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities

    126,398        2,947        123        129,222   

Equity securities in financial institutions

    69        9        9        69   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale

    126,467        2,956        132        129,291   

Restricted stock

    5,463        —          —          5,463   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

  $ 131,930      $ 2,956      $ 132      $ 134,754   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

The amortized cost and fair value of debt securities at June 30, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)    Amortized
cost
     Fair value  

Available-for-sale:

     

Due in one year or less

   $ 821       $ 821   

Due after one through five years

     14,207         14,484   

Due after five through ten years

     25,113         24,655   

Due after ten years

     88,526         87,441   
  

 

 

    

 

 

 

Total debt securities available-for-sale

   $ 128,667       $ 127,401   
  

 

 

    

 

 

 

Securities with a carrying value of approximately $87.3 million and $79.2 million were pledged at June 30, 2013 and December 31, 2012, respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.

Restricted stock primarily consists of investments in FHLB and Federal Reserve Bank stock. The Bank’s investment in FHLB stock amounted to approximately $5.0 million at June 30, 2013 and December 31, 2012. Federal Reserve Bank stock was $471 thousand at June 30, 2013 and December 31, 2012.

The following table shows the proceeds from sales of available-for-sale securities and the gross realized gains and losses on the sales of those securities that have been included in earnings as a result of the sales.

 

     Three months ended
June 30,
     Six months ended
June 30,
 
(Dollars in thousands)      2013          2012          2013          2012    

Proceeds

   $ 500       $ —         $ 500       $ —     

Realized gains

   $ 10       $ —         $ 10       $ —     

Realized losses

     —           —           —           —     

Impairment losses

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net securities gains

   $ 10       $ —         $ 10       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The income tax provision applicable to realized gains amounted to $3 thousand in 2013 and $0 in 2012. There were no tax benefits recognized from gross realized losses in 2013 or 2012.

 

10


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

The following table presents gross unrealized losses and fair value of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2013 and December 31, 2012:

 

     Securities in a continuous unrealized loss position  
     Less than 12 months      12 months or more      Total  
(Dollars in thousands)    Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
     Fair
value
 

June 30, 2013

                 

U.S. Treasury securities

   $ 13       $ 993       $ —         $ —         $ 13       $ 993   

Obligations of U.S. Government corporations and agencies

     1,148         26,849         —           —           1,148         26,849   

Mortgage-backed securities in government sponsored entities

     1,218         32,565         —           —           1,218         32,565   

Obligations of state and political subdivisions

     183         5,239         —           —           183         5,239   

Corporate bonds

     7         568         8         1,357         15         1,925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     2,569         66,214         8         1,357         2,577         67,571   

Equity securities in financial institutions

     —           —           1         53         1         53   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 2,569       $ 66,214       $ 9       $ 1,410       $ 2,578       $ 67,624   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                 

Obligations of U.S. Government corporations and agencies

   $ 43       $ 15,957       $ —         $ —         $ 43       $ 15,957   

Mortgage-backed securities in government sponsored entities

     1         344         —           —           1         344   

Asset-backed securities in government sponsored entities

     39         1,833         —           —           39         1,833   

Obligations of states and political subdivisions

     12         1,737         —           —           12         1,737   

Corporate bonds

     4         366         24         975         28         1,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     99         20,237         24         975         123         21,212   

Equity securities in financial institutions

     —           —           9         45         9         45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 99       $ 20,237       $ 33       $ 1,020       $ 132       $ 21,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were sixty (60) securities in an unrealized loss position at June 30, 2013, five (5) of which were in a continuous loss position for twelve months or more. At least quarterly, the Company conducts a comprehensive security-level impairment assessment. The assessments are based on the nature of the securities, the extent and duration of the securities in an unrealized loss position, the extent and duration of the loss and management’s intent to sell or if it is more likely than not that management will be required to sell a security before recovery of its amortized cost basis, which may be maturity. Management believes the Company will fully recover the cost of these securities. It does not intend to sell these securities and likely will not be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, management concluded that these securities were not other-than-temporarily impaired at June 30, 2013.

 

11


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS

Loans consist of the following:

 

(Dollars in thousands)    June 30, 2013      December 31, 2012  

Commercial

   $ 116,898       $ 104,899   

Commercial real estate

     129,013         119,192   

Residential real estate

     111,186         110,412   

Construction & land development

     14,056         23,358   

Consumer

     6,790         6,480   
  

 

 

    

 

 

 

Total loans before deferred costs

     377,943         364,341   

Deferred loan costs

     248         239   
  

 

 

    

 

 

 

Total Loans

   $ 378,191       $ 364,580   
  

 

 

    

 

 

 

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s management examines current and occasionally projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At June 30, 2013 and December 31, 2012, approximately 79% and 81%, respectively of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction and land development loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate.

 

12


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Construction and land development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

The Company originates consumer loans utilizing a judgmental underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Loans serviced for others approximated $64.1 million and $60.2 million at June 30, 2013 and December 31, 2012, respectively.

Concentrations of Credit

Nearly all of the Company’s lending activity occurs within the state of Ohio, including the four (4) counties of Holmes, Stark, Tuscarawas and Wayne, as well as other markets. The majority of the Company’s loan portfolio consists of commercial and industrial and commercial real estate loans. As of June 30, 2013 and December 31, 2012, there were no concentrations of loans related to any single industry.

Allowance for Loan Losses

The following table details activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2013 and 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. The increase in the provision for possible loan losses related to commercial loans was affected by a qualitative adjustment for loans rated special mention, as well as changes in volume and credit quality of loans in this category. The provision for possible loan losses related to residential real estate decreased during second quarter 2013 as a result of a decrease in loan impairment.

 

13


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

(Dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential
Real Estate
    Construction
& Land
Development
    Consumer     Unallocated     Total  

Three months ended June 30, 2013

              

Beginning balance, March 31, 2013

   $ 1,176      $ 1,824      $ 1,282      $ 134      $ 68      $ 320      $ 4,804   

Provision for possible loan losses

     171        42        (110     28        65        14        210   

Charge-offs

     (32     (51     —          —          (12     —          (95

Recoveries

     1        —          2        —          23        —          26   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (31     (51     2        —          11          (69
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,316      $ 1,815      $ 1,174      $ 162      $ 144      $ 334      $ 4,945   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential
Real Estate
    Construction
& Land
Development
    Consumer     Unallocated     Total  

Six months ended June 30, 2013

              

Beginning balance, December 31, 2012

   $ 933      $ 1,902      $ 1,096      $ 253      $ 76      $ 320      $ 4,580   

Provision for possible loan losses

     413        (36     67        (91     53        14        420   

Charge-offs

     (38     (51     —          —          (22     —          (111

Recoveries

     8        —          11        —          37        —          56   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (30     (51     11        —          15        —          (55
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,316      $ 1,815      $ 1,174      $ 162      $ 144      $ 334      $ 4,945   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential
Real Estate
    Construction
& Land
Development
    Consumer     Unallocated     Total  

Three months ended June 30, 2012

              

Beginning balance, March 31, 2012

   $ 976      $ 1,649      $ 939      $ 184      $ 74      $ 424      $ 4,246   

Provision for possible loan losses

     (78     278        87        33        (7     (108     205   

Charge-offs

     (11     —          (59     —          (15     —          (85

Recoveries

     9        —          84        —          12        —          105   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (2     —          25        —          (3     —          20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 896      $ 1,927      $ 1,051      $ 217      $ 64      $ 316      $ 4,471   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential
Real Estate
    Construction
& Land
Development
    Consumer     Unallocated     Total  

Six months ended June 30, 2012

              

Beginning balance, December 31, 2011

   $ 1,024      $ 1,673      $ 894      $ 180      $ 78      $ 233      $ 4,082   

Provision for possible loan losses

     (127     268        172        37        (22     83        411   

Charge-offs

     (15     (14     (104     —          (31     —          (164

Recoveries

     14        —          89        —          39        —          142   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1     (14     (15     —          8        —          (22
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 896      $ 1,927      $ 1,051      $ 217      $ 64      $ 316      $ 4,471   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio segment and based on the impairment method as of June 30, 2013 and December 31, 2012:

 

(Dollars in thousands)

   Commercial      Commercial
Real Estate
     Residential
Real Estate
     Construction
& Land
Development
     Consumer      Unallocated      Total  

June 30, 2013

                    

Allowance for loan losses:

                    

Ending allowance balances attributable to loans:

                    

Individually evaluated for impairment

   $ 194       $ 463       $ 264       $ —         $ —         $ —         $ 921   

Collectively evaluated for impairment

     1,122         1,352         910         162         144         334         4,024   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,316       $ 1,815       $ 1,174       $ 162       $ 144       $ 334       $ 4,945   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 3,504       $ 3,502       $ 1,690       $ —         $ —            $ 8,696   

Loans collectively evaluated for impairment

     113,394         125,511         109,496         14,056         6,790            369,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 116,898       $ 129,013       $ 111,186       $ 14,056       $ 6,790          $ 377,943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

December 31, 2012

                    

Allowance for loan losses:

                    

Ending allowance balances attributable to loans:

                    

Individually evaluated for impairment

   $ 85       $ 522       $ 172       $ —         $ —         $ —         $ 779   

Collectively evaluated for impairment

     848         1,380         924         253         76         320         3,801   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 933       $ 1,902       $ 1,096       $ 253       $ 76       $ 320       $ 4,580   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 4,315       $ 4,573       $ 1,137       $ 166       $ —            $ 10,191   

Loans collectively evaluated for impairment

     100,584         114,619         109,275         23,192         6,480            354,150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 104,899       $ 119,192       $ 110,412       $ 23,358       $ 6,480          $ 364,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

15


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2013 and December 31, 2012:

 

(Dollars in thousands)

   Unpaid
Principal
Balance
     Recorded
Investment
with no
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

June 30, 2013

                    

Commercial

   $ 3,506       $ 76       $ 3,436       $ 3,512       $ 194       $ 3,988       $ 84   

Commercial real estate

     3,839         698         2,805         3,503         463         3,838         85   

Residential real estate

     1,792         548         1,146         1,694         264         1,233         19   

Construction & land development

     —           —           —           —           —           42         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 9,137       $ 1,322       $ 7,387       $ 8,709       $ 921       $ 9,101       $ 190   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                    

Commercial

   $ 4,315       $ —         $ 4,329       $ 4,329       $ 85       $ 4,123       $ 167   

Commercial real estate

     4,906         1,723         2,849         4,572         522         4,396         152   

Residential real estate

     1,223         86         1,057         1,143         172         770         18   

Construction & land development

     173         166         —           166         —           167         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 10,617       $ 1,975       $ 8,235       $ 10,210       $ 779       $ 9,456       $ 337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of past due loans and nonaccrual loans as of June 30, 2013 and December 31, 2012 by class of loans:

 

(Dollars in thousands)

   Current      30 - 59
Days Past
Due
     60 - 89
Days Past
Due
     90 Days +
Past Due
     Non-
Accrual
     Total Past
Due and
Non-
Accrual
     Total Loans  

June 30, 2013

                    

Commercial

   $ 116,588       $ 105       $ 152       $ —         $ 53       $ 310       $ 116,898   

Commercial real estate

     127,247         583         —           —           1,183         1,766         129,013   

Residential real estate

     109,396         616         25         133         1,016         1,790         111,186   

Construction & land development

     14,050         —           —           —           6         6         14,056   

Consumer

     6,576         151         61         2         —           214         6,790   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 373,857       $ 1,455       $ 238       $ 135       $ 2,258       $ 4,086       $ 377,943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                    

Commercial

   $ 104,348       $ 60       $ 8       $ —         $ 483       $ 551       $ 104,899   

Commercial real estate

     117,372         41         34         —           1,745         1,820         119,192   

Residential real estate

     108,574         472         430         131         805         1,838         110,412   

Construction & land development

     23,180         —           5         —           173         178         23,358   

Consumer

     6,325         132         23         —           —           155         6,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 359,799       $ 705       $ 500       $ 131       $ 3,206       $ 4,542       $ 364,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Troubled Debt Restructurings

All troubled debt restructurings (“TDR’s) are individually evaluated for impairment and a related allowance is recorded, as needed. Loans whose terms have been modified as TDR’s totaled $7.7 million as of June 30, 2013, and $8.7 million as of December 31, 2012, with $781 thousand and $718 thousand of specific reserves allocated to those loans, respectively. At June 30, 2013, $7.0 million of the loans classified as TDR’s were performing to modified terms. Of the remaining $679 thousand, all were in nonaccrual of interest status.

None of the loans that were restructured in 2011 or 2012 have subsequently defaulted in the three or six month periods ending June 30, 2013 and 2012. Loan modifications that are considered TDR’s completed during the three and six month periods ending June 30, 2013 and 2012 were as follows:

 

     For the Three Months Ended June 30, 2013  

(Dollars in thousands)

   Number of
loans
restructured
     Pre-
Modification
Recorded

Investment
     Post-
Modification
Recorded
Investment
 

Commercial

     2       $ 76       $ 76   
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     2       $ 76       $ 76   
  

 

 

    

 

 

    

 

 

 
     For the Six Months Ended June 30, 2013  

(Dollars in thousands)

   Number of
loans
restructured
     Pre-
Modification
Recorded

Investment
     Post-
Modification
Recorded
Investment
 

Commercial

     2       $ 76       $ 76   
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     2       $ 76       $ 76   
  

 

 

    

 

 

    

 

 

 
     For the Three Months Ended June 30, 2012  

(Dollars in thousands)

   Number of
loans
restructured
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
 

Commercial real estate

     1       $ 140       $ 140   

Residential real estate

     5         333         333   
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     6       $ 473       $ 473   
  

 

 

    

 

 

    

 

 

 
     For the Six Months Ended June 30, 2012  

(Dollars in thousands)

   Number of
loans
restructured
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
 

Commercial real estate

     1       $ 140       $ 140   

Residential real estate

     7         488         488   
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     8       $ 628       $ 628   
  

 

 

    

 

 

    

 

 

 

The loans restructured during the three and six months ending June 30, 2013 and 2012 were modified by changing the monthly payment to interest only. No principal reductions were made.

 

17


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis includes commercial loans with an outstanding balance greater than $275 thousand and is performed on an annual basis.

The Company uses the following definitions for risk ratings:

Pass. Loans classified as pass (Acceptable, Low Acceptable or Pass Watch) may exhibit a wide array of characteristics but at minimum represent an acceptable risk to the Bank. Borrowers in this rating may have leveraged but acceptable balance sheet positions, satisfactory asset quality, and stable to favorable sales and earnings trends, acceptable liquidity and adequate cash flow. Loans are considered fully collectible and require an average amount of administration. While generally adhering to credit policy, these loans may exhibit occasional exceptions that do not result in undue risk to the Bank. Borrowers are generally capable of absorbing setbacks, financial and otherwise, without the threat of failure.

Special Mention. Loans classified as special mention have material weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

18


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Loans that do not meet the criteria for special mention, substandard or doubtful classification, when analyzed individually as part of the above described process are considered to be pass rated loans. As of June 30, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

(Dollars in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Not Rated      Total  

June 30, 2013

                 

Commercial

   $ 99,512       $ 7,220       $ 9,158       $ —         $ 1,008       $ 116,898   

Commercial real estate

     113,780         7,206         6,639         —           1,388         129,013   

Residential real estate

     190         —           50         —           110,946         111,186   

Construction & land development

     10,602         1,451         991         —           1,012         14,056   

Consumer

     —           —           —           —           6,790         6,790   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 224,084       $ 15,877       $ 16,838       $ —         $ 121,144       $ 377,943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                 

Commercial

   $ 92,123       $ 5,854       $ 6,637       $ —         $ 285       $ 104,899   

Commercial real estate

     102,602         5,671         8,459         —           2,460         119,192   

Residential real estate

     200         —           53         —           110,159         110,412   

Construction & land development

     18,063         2,750         1,244         —           1,301         23,358   

Consumer

     —           —           —           —           6,480         6,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 212,988       $ 14,275       $ 16,393       $ —         $ 120,685       $ 364,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans listed as not rated are either less than $275 thousand or are included in groups of homogeneous loans. The following table presents loans that are not rated by class of loans as of June 30, 2013 and December 31, 2012. Non-performing loans include loans past due 90 days and greater and loans on nonaccrual of interest.

 

(Dollars in thousands)

   Performing      Non-Performing      Total  

June 30, 2013

        

Commercial

   $ 1,002       $ 6       $ 1,008   

Commercial real estate

     1,388         —           1,388   

Residential real estate

     109,841         1,105         110,946   

Construction & land development

     1,012         —           1,012   

Consumer

     6,788         2         6,790   
  

 

 

    

 

 

    

 

 

 

Total

   $ 120,031       $ 1,113       $ 121,144   
  

 

 

    

 

 

    

 

 

 

December 31, 2012

        

Commercial

   $ 285       $ —         $ 285   

Commercial real estate

     2,460         —           2,460   

Residential real estate

     109,276         883         110,159   

Construction & land development

     1,294         7         1,301   

Consumer

     6,480         —           6,480   
  

 

 

    

 

 

    

 

 

 

Total

   $ 119,795       $ 890       $ 120,685   
  

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 – FAIR VALUE MEASUREMENTS

The Company provides disclosures about assets and liabilities carried at fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. The three broad levels of the fair value hierarchy are described below:

 

Level I:   Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level II:   Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data by corroborated or other means. If the asset or liability has a specified (contractual) term, the Level II input must be observable for substantially the full term of the asset or liability.
Level III:   Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table presents the assets reported on the consolidated statements of financial condition at their fair value as of June 30, 2013 and December 31, 2012, by level within the fair value hierarchy. No liabilities are carried at fair value. As required by the accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Equity securities and U.S. Treasury Notes are valued at the closing price reported on the active market on which the individual securities are traded. Obligations of U.S. government corporations and agencies, mortgage-backed securities, asset-backed securities, obligations of states and political subdivisions and corporate bonds are valued at observable market data for similar assets.

 

20


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 – FAIR VALUE MEASUREMENTS (CONTINUED)

 

(Dollars in thousands)    Level I      Level II      Level III      Total  

June 30, 2013

           

Assets:

           

Securities available-for-sale

           

U.S. Treasury securities

   $ 1,093       $ —         $ —         $ 1,093   

Obligations of U.S. government corporations and agencies

     —           32,859         —           32,859   

Mortgage-backed securities in government sponsored entities

     —           69,051         —           69,051   

Asset-backed securities in government sponsored entities

     —           2,820         —           2,820   

Obligations of states and political subdivisions

     —           17,109         —           17,109   

Corporate bonds

     —           4,469         —           4,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,093         126,308         —           127,401   

Equity securities in financial institutions

     114         —           —           114   

Loans held for sale

     103         —           —           103   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 1,310       $ 126,308       $ —         $ 127,618   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

Assets:

           

Securities available-for-sale

           

U.S. Treasury securities

   $ 100       $ —         $ —         $ 100   

Obligations of U.S. government corporations and agencies

     —           35,980         —           35,980   

Mortgage-backed securities in government sponsored entities

     —           69,039         —           69,039   

Asset-backed securities in government sponsored entities

     —           2,823         —           2,823   

Obligations of states and political subdivisions

     —           16,883         —           16,883   

Corporate bonds

     —           4,397         —           4,397   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     100         129,122         —           129,222   

Equity securities in financial institutions

     69         —           —           69   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 169       $ 129,122       $ —         $ 129,291   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of June 30, 2013 and December 31, 2012, by level within the fair value hierarchy. Impaired loans and other real estate are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates discounted cash flow and repayment assumptions based on management’s best judgment. As a result, these rights are measured at fair value on a nonrecurring basis and are classified within Level III of the fair value hierarchy.

 

21


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4- FAIR VALUE MEASUREMENTS (CONTINUED)

 

(Dollars in thousands)

   Level I      Level II      Level III      Total  

June 30, 2013

           

Assets measured on a nonrecurring basis:

           

Impaired loans

   $ —         $ —         $ 7,775       $ 7,775   

Mortgage servicing rights

     —           —           226         226   

December 31, 2012

           

Impaired loans

   $ —         $ —         $ 9,412       $ 9,412   

Other real estate owned

     —           —           25         25   

Mortgage servicing rights

     —           —           214         214   

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level III inputs to determine fair value:

 

     Quantitative Information about Level III Fair Value Measurements
     Fair Value      Valuation    Unobservable     
     Estimate     

Techniques

  

Input

  

Range

(Dollars in thousands)                      

June 30, 2013

           

Impaired loans

   $ 6,652      

Discounted

cash flow

  

Remaining term

Discount rate

  

9 mos to 29 yrs

4.63% to 12%

     1,123      

Appraisal of

collateral (1),(3)

  

Appraisal adjustments (2)

Liquidation expense (2)

  

-20% to -25%

-10%

Mortgage servicing rights

     226      

Discounted

cash flow

  

Remaining term

Discount rate

  

18 mos to 30 yrs

1.5%

December 31, 2012

           

Impaired loans

   $ 7,260      

Discounted

cash flow

  

Remaining term

Discount rate

  

4 mos to 29 yrs

7.5% to 12%

     2,152      

Appraisal of

collateral (1),(3)

   Appraisal adjustments (2) Liquidation expense (2)   

-20% to -35%

-10%

Other real estate owned

     25      

Appraisal of

collateral (1), (3)

  

Management discount

for property type (3)

   0% to -67%

Mortgage servicing rights

     214      

Discounted

cash flow

  

Remaining term

Discount rate

  

24 mos to 30 yrs

1.5%

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.

 

22


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of recognized financial instruments as of June 30, 2013 and December 31, 2012 are as follows:

 

(Dollars in thousands)    Carrying
Value
     Level 1      Level II      Level III      Total Fair
Value
 

June 30, 2013

              

Financial assets:

              

Cash and cash equivalents

   $ 37,066       $ 37,066       $ —         $ —         $ 37,066   

Securities

     127,515         1,207         126,308         —           127,515   

Loans held for sale

     103         103         —           —           103   

Net loans

     373,246         —           —           377,473         377,473   

Bank-owned life insurance

     9,419         9,419         —           —           9,419   

Restricted stock

     5,463         —           5,463         —           5,463   

Accrued interest receivable

     1,343         1,343         —           —           1,343   

Financial liabilities:

              

Deposits

   $ 462,845       $ 312,312       $ —         $ 151,610       $ 463,922   

Short-term borrowings

     41,851         41,851         —           —           41,851   

Other borrowings

     12,558         —           —           13,185         13,185   

Accrued interest payable

     124         124         —           —           124   
(Dollars in thousands)    Carrying
Value
     Level 1      Level II      Level III      Total Fair
Value
 

December 31, 2012

              

Financial assets:

              

Cash and cash equivalents

   $ 66,878       $ 66,878       $ —         $ —         $ 66,878   

Securities

     129,291         169         129,122         —           129,291   

Net loans

     360,000         —           —           367,028         367,028   

Bank-owned life insurance

     8,298         8,298         —           —           8,298   

Restricted stock

     5,463         —           5,463         —           5,463   

Accrued interest receivable

     1,317         1,317         —           —           1,317   

Financial liabilities:

              

Deposits

   $ 475,443       $ 317,369       $ —         $ 159,573       $ 476,942   

Short-term borrowings

     43,992         43,992         —           —           43,992   

Other borrowings

     12,672         —           —           13,772         13,772   

Accrued interest payable

     135         135         —           —           135   

For purposes of the above disclosures of estimated fair value, the following assumptions are used:

Cash and cash equivalents; Loans held for sale; Accrued interest receivable; Short-term borrowings, and Accrued interest payable

The fair value of the above instruments is considered to be carrying value. Classified as Level I in the fair value hierarchy.

Securities

The fair value of securities available-for-sale which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other similar securities. Classified as Level I or Level II in the fair value hierarchy.

 

23


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

 

Net loans

The fair value for loans is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Fair value of non-accrual loans is based on carrying value, classified as Level III.

Bank-owned life insurance

The carrying amount of bank-owned life insurance is based on the cash surrender value of the policies and is a reasonable estimate of fair value, classified as Level I.

Regulatory stock

Regulatory stock includes Federal Home Loan Bank Stock and Federal Reserve Bank Stock. It is not practicable to determine the fair value of regulatory equity securities due to restrictions placed on their transferability. Fair value is based on carrying value, classified as Level II.

Deposits

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using market rates currently offered for similar instruments with similar remaining maturities, resulting in a Level III classification. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of quarter end, resulting in a Level I classification.

Other borrowings

The fair value of Federal Home Loan Bank advances are estimated using a discounted cash flow analysis based on the current borrowing rates for similar types of borrowings, resulting in a Level III classification.

The Company also has unrecognized financial instruments at June 30, 2013 and December 31, 2012. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $107.0 million at June 30, 2013 and $107.4 million at December 31, 2012. Such amounts are also considered to be the estimated fair values.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

 

24


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6- ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the changes in accumulated other comprehensive income by component net of tax for the three and six months ended June 30, 2013:

 

(Dollars in thousands)

   Unrealized gains
on available for
sale securities (a)
   

Affected Line Item in the
Consolidated Statements

of Income

Balance as of March 31, 2013

   $ 1,372     

Other comprehensive loss before reclassification

     (2,195  

Amount reclassified from accumulated other comprehensive income

     (7   Securities gain, net of tax
  

 

 

   

Total other comprehensive loss

     (2,202  
  

 

 

   

Balance as of June 30, 2013

   $ (830  
  

 

 

   

Balance as of December 31, 2012

   $ 1,864     

Other comprehensive loss before reclassification

     (2,687  

Amount reclassified from accumulated other comprehensive income

     (7   Securities gain, net of tax
  

 

 

   

Total other comprehensive loss

     (2,694  
  

 

 

   

Balance as of June 30, 2013

   $ (830  
  

 

 

   

 

(a) All amounts are net of tax. Amounts in parentheses indicate debits.

 

25


Table of Contents

CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis focuses on the consolidated financial condition of the Company at June 30, 2013 as compared to December 31, 2012, and the consolidated results of operations for the three and six month periods ending June 30, 2013 compared to the same periods in 2012. 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 Quarterly 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 forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement.

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, except as may be required by applicable law.

FINANCIAL CONDITION

Total assets were $571.1 million at June 30, 2013, compared to $586.9 million at December 31, 2012, representing a decrease of $15.8 million, or 3%. This decrease was a result of a decline in deposits of $12.6 million, or 3%, during the six month period ended June 30, 2013 to $462.8 million. Cash and cash equivalents decreased $29.8 million, or 45%, during the six months ending June 30, 2013, primarily as a result of funding increases in loans. Securities decreased $1.8 million, or 1%, during the first six months of 2013 as bonds were called within the US government agency portfolio.

Net loans increased $13.2 million, or 4%, during the six months ending June 30, 2013. Commercial loans including commercial real estate loans increased $21.8 million, or 10%, home equity lines decreased $650 thousand, or 2%, real estate mortgage loans increased $1.0 million, or 2%, construction and land development loans decreased $9.3 million, or 40%, and consumer loans increased slightly over December 31, 2012. Consumers continued to refinance their mortgage loans for lower long-term rates. During 2012 and the first six months of 2013 the Bank originated and retained some fifteen year fixed rate mortgage loans for its portfolio. Residential mortgage originations for the six months ended June 30, 2013 were $13.8 million as compared to $17.9 million for the prior year six-month period. The Bank originates and sells fixed rate thirty year mortgages into the secondary market.

 

26


Table of Contents

CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

 

The allowance for loan losses as a percentage of total loans was 1.31% at June 30, 2013, an increase from 1.26% at December 31, 2012. Outstanding loan balances increased 4% to $378.2 million at June 30, 2013. A provision of $420 thousand, partially offset by net charge-offs of $55 thousand, increased the allowance for loan losses for the six months ending June 30, 2013.

 

     June 30,          December 31,          June 30,      
(Dollars in thousands)    2013          2012          2012      

Non-performing loans

   $ 2,393        $ 3,337        $ 4,005    

Other real estate

     —             25          5    

Allowance for loan losses

     4,945          4,580          4,471    

Total loans

     378,191          364,580          344,116    

Allowance: loans

     1.31      %      1.26      %      1.30      %

Allowance: non-performing loans

     2.1      x      1.4      x      1.1      x

The ratio of gross loans to deposits was 82% at June 30, 2013, compared to 77% at December 31, 2012. The increase in this ratio is the result of loan volume increases and decreases in deposits during the six months ending June 30, 2013.

The Company had net unrealized losses of $1.3 million within its securities portfolio at June 30, 2013, compared to net unrealized gains of $2.8 million at December 31, 2012. The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations or trust preferred securities. Management has considered industry analyst reports, sector credit reports and the volatility within the bond market in concluding that the gross unrealized losses of $2.6 million within the total portfolio as of June 30, 2013, were primarily the result of customary and expected fluctuations in the bond market and not necessarily the expected cash flows of the individual securities. As a result, all security impairments detailed above on June 30, 2013, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits decreased $12.6 million, or 3% from December 31, 2012 with non-interest bearing deposits decreasing $2.5 million and interest-bearing deposit accounts decreasing $10.0 million. Total deposits as of June 30, 2013 are $8.1 million above June 30, 2012 deposit balances. On a year over year comparison, increases were recognized in non-interest bearing demand deposits, interest bearing demand deposits and statement and passbook savings accounts for the period ended June 30, 2013.

Short-term borrowings consisting of overnight repurchase agreements with retail customers decreased $2.1 million from December 31, 2012 and other borrowings decreased $114 thousand as the Company used cash from interest-earning deposits in other banks to repay required maturities and monthly payments on advances from the FHLB.

Total shareholders’ equity amounted to $51.4 million, or 9% of total assets, at June 30, 2013, compared to $52.5 million, or 9% of total assets, at December 31, 2012. The decrease in shareholders’ equity during the six months ending June 30, 2013 was due to other comprehensive income decreasing $2.7 million and dividends declared of $1.0 million, which were partially offset by net income of $2.6 million. The Company and the Bank met all regulatory capital requirements at June 30, 2013.

 

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CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

 

RESULTS OF OPERATIONS

Three months ended June 30, 2013 and 2012

For the quarter ended June 30, 2013, the Company recorded net income of $1.2 million or $0.45 per share, as compared to net income of $1.1 million, or $0.41 per share for the quarter ended June 30, 2012. The $106 thousand increase in net income for the quarter was a result of net interest income increasing $195 thousand and other noninterest income increasing $32 thousand. These gains were partially offset by an increase in noninterest expense of $103 thousand and an increase in the federal income tax provision of $13 thousand. Return on average assets and return on average equity were 0.88% and 9.32%, respectively, for the three month period of 2013, compared to 0.82% and 8.98%, respectively for the same quarter in 2012.

Average Balance Sheets and Net Interest Margin Analysis

 

     For the three months ended June 30,  
     2013     2012  
(Dollars in thousands)    Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Interest-earning deposits in other banks

   $ 27,429         0.28   $ 57,108         0.29

Federal funds sold

     217         0.08        145         0.00   

Taxable securities

     117,583         2.00        118,045         2.41   

Tax-exempt securities

     16,489         4.72        13,690         5.85   

Loans

     375,447         4.76        339,829         5.07   
  

 

 

      

 

 

    

Total earning assets

     537,165         3.92     528,817         3.98

Other assets

     34,404           33,474      
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 571,569         $ 562,291      
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest-bearing demand deposits

   $ 71,125         0.06   $ 62,751         0.08

Savings deposits

     138,136         0.10        133,442         0.18   

Time deposits

     152,349         1.06        165,693         1.25   

Other borrowed funds

     54,510         0.98        57,672         1.14   
  

 

 

      

 

 

    

Total interest bearing liabilities

     416,120         0.56     419,558         0.72

Non-interest bearing demand deposits

     99,878           89,760      

Other liabilities

     1,894           1,848      

Shareholders’ Equity

     53,677           51,125      
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 571,569         $ 562,291      
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.36        3.26

Taxable equivalent net interest margin

        3.49        3.40

Interest income for the quarter ended June 30, 2013, was $5.2 million representing a $22 thousand increase, or a 0.4% improvement, compared to the same period in 2012. This increase was primarily due to average loan volume increasing $36 million for the quarter ended June 30, 2013 as compared to the second quarter 2012. Interest expense for the quarter ended June 30, 2013 was $581 thousand, a decrease of $173 thousand or 23%, from the same period in 2012. The decrease in interest expense occurred primarily due to a decrease of 0.1% in interest rates paid on interest-bearing deposits which decreased from 0.6% in 2012 to 0.5% in 2013 and a rate decrease of .16% on all other borrowings which declined from 1.1% in 2012 to 1.0% for the quarter ended June 30, 2013.

The provision for loan losses for the quarter ended June 30, 2013 was $210 thousand, compared to a $205 thousand provision for the same quarter in 2012. 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.

 

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CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

 

Noninterest income for the quarter ended June 30, 2013, was $1.1 million, an increase of $32 thousand, or 3%, compared to the same quarter in 2012. Service charges on deposit accounts increased $15 thousand, or 5%, compared to the same quarter in 2012. Debit card interchange income declined $11 thousand, or 5%, as competitive pricing and alternative clearing channels were provided by debit card processors. Fees from trust and brokerage services increased $59 thousand to $226 thousand for the second quarter 2013 as compared to the same quarter in 2012. The gain on the sale of mortgage loans to the secondary market decreased to $102 thousand for the quarter ending June 30, 2013, from $137 thousand in the quarter ended June 30, 2012. Mortgage origination decreased during the quarter as secondary market mortgage refinancings have declined with higher mortgage interest rates.

Noninterest expenses for the quarter ended June 30, 2013 increased $103 thousand, or 3%, compared to the second quarter of 2012. Salaries and employee benefits increased $81 thousand, or 4%. Occupancy and equipment expenses increased $52 thousand in 2013 over the second quarter of 2012. Other expenses decreased $5 thousand, or 1%, compared to the second quarter 2012.

Federal income tax expense increased $13 thousand, or 2%, for the quarter ended June 30, 2013 as compared to the second quarter of 2012. The provision for income taxes was $538 thousand (effective rate of 30%) for the quarter ended June 30, 2013, compared to $525 thousand (effective rate of 32%) for the quarter ended June 30, 2012. The increase in the expense resulted from improved income.

RESULTS OF OPERATIONS

Six months ended June 30, 2013 and 2012

Net income for the six months ending June 30, 2013, was $2.6 million or $0.95 per share, as compared to $2.2 million or $0.80 per share during the same period in 2012. Return on average assets and return on average equity were 0.92% and 9.87%, respectively, for the six month period of 2013, compared to 0.79% and 8.73%, respectively for 2012.

Comparative net income increased as net interest income improved to $9.3 million for the six months ended June 30, 2013, an increase of $574 thousand or 7% from the same period last year. Total noninterest income rose $122 thousand or 6% to $2.1 million. The provision for loan losses increased $9 thousand or 2% during the same comparative period. These improvements were partially offset by higher noninterest expenses for the six month period ending in 2013 as compared to 2012.

Interest income on loans increased $484 thousand, or 6%, for the six months ended June 30, 2013, as compared to the same period in 2012. This increase was primarily due to an average volume increase of $40.7 million for the comparable six month periods. Interest income on securities decreased $257 thousand, or 15%, as the average volume of securities increased $5.3 million for the comparable six month periods. Interest income on fed funds sold and interest bearing deposits decreased $37 thousand for the six months ended June 30, 2013 as the average fed funds sold and due from banks interest bearing balances decreased $31.1 million, compared to the same period in 2012.

 

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CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

 

Average Balance Sheet and Net Interest Margin Analysis

 

     For the six months ended June 30,  
     2013     2012  
(Dollars in thousands)    Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Due from banks-interest bearing

   $ 30,740         0.28   $ 61,926         0.26

Federal funds sold

     162         0.17        104         0.10   

Taxable securities

     118,141         1.99        115,649         2.50   

Tax-exempt securities

     16,434         4.74        13,615         5.44   

Loans

     374,263         4.86        333,516         5.15   
  

 

 

      

 

 

    

Total earning assets

     539,740         3.97     524,810         4.00

Other assets

     33,972           32,524      
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 573,712         $ 557,334      
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest bearing demand deposits

   $ 70,715         0.06   $ 61,442         0.09

Savings deposits

     139,172         0.11        131,143         0.18   

Time deposits

     154,431         1.08        167,609         1.30   

Other borrowed funds

     56,085         0.96        57,578         1.20   
  

 

 

      

 

 

    

Total interest bearing liabilities

     420,403         0.57     417,772         0.76

Non-interest bearing demand deposits

     97,928           87,114      

Other liabilities

     2,061           1,864      

Shareholders’ Equity

     53,320           50,584      
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 573,712         $ 557,334      
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.40        3.24

Taxable equivalent net interest margin

        3.53        3.39

Interest expense decreased $384 thousand to $1.2 million for the six months ended June 30, 2013, compared to the six months ended June 30, 2012. Interest expense on deposits decreased $307 thousand, or 25%, from the same period as last year, while interest expense on short-term and other borrowings decreased $77 thousand or 22%. The decrease in interest expense has been caused by lower interest rates being paid across the board on interest-bearing deposit accounts and borrowings. Additionally, during the comparable six month periods, the Company grew non-interest bearing deposits in 2013. Time deposits continue to renew at lower interest rates, and some depositors have moved monies to savings instruments anticipating higher rates than time deposits. Competition for deposits appears to be decreasing from a year ago with larger money center banks reducing the premium paid for term deposits. The net interest margin increased by 14 basis points for the six month period ended June 30, 2013, to 3.53%, from 3.39% for the same period in 2012. This margin increase is primarily the result of decreased interest expense and the change in the asset mix from overnight funds to loans.

The provision for loan losses was $420 thousand during the six months of 2013, compared to $411 thousand in the same six month period of 2012. 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 increased $122 thousand, or 6%, during the six months ended June 30, 2013, as compared to the same period in 2012. Debit card interchange income decreased $27 thousand or 7% as a result of decreased servicer revenue. Service charges on deposits increased $22 thousand from the same period in 2012 reflecting the increase in fees based on transaction activity.

 

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CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

 

Increases were recognized in gains on mortgage loans sold in the secondary market during the first quarter of 2013 which gradually tapered off in the second quarter of 2013 as refinancing activity decreased with rising mortgage rates.

Non-interest expenses increased $118 thousand, or 2%, for the six months ended June 30, 2013, compared to the same period in 2012. The Bank’s FDIC deposit premium increased $17 thousand to $172 thousand for the six months ended 2012 reflecting an increase in assets for the six months ended June 30, 2013 as compared to 2012. Salaries and employee benefits increased $168 thousand, or 4%, primarily the result of benefit increases. Professional fees decreased $158 thousand, or 35%, as certain employment search fees for Chief Operating Officer and commercial lending positions, as well as fees spent to review the Company’s computer operating system in 2012 did not recur in 2013. During the first quarter 2013 legal fees of $43 thousand were recovered on 2 commercial relationships and 1 real estate mortgage relationship. Occupancy and equipment expense increased $74 thousand, or 9% reflecting the increase in depreciation and maintenance as compared to 2012.

The provision for income taxes was $1.1 million (effective rate of 30%) for the six months ended June 30, 2013, compared to $981 thousand (effective rate of 31%) for the six months ended June 30, 2012.

CAPITAL RESOURCES

The Board of Governors of the Federal Reserve System (the “Federal Reserve”) 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 the Company’s annual report on Form 10-K for the year ended December 31, 2012. As of June 30, 2013 the Company and the Bank meet all capital adequacy requirements to which they are subject.

LIQUIDITY

 

(Dollars in millions)

   June 30, 2013     December 31, 2012     Change  

Cash and cash equivalents

   $ 37      $ 67      $ (30

Unused lines of credit

     46        41        5   

Unpledged securities at fair market value

     47        59        (12
  

 

 

   

 

 

   

 

 

 
   $ 130      $ 167      $ (37
  

 

 

   

 

 

   

 

 

 

Net deposits and short-term liabilities

   $ 419      $ 444      $ (25
  

 

 

   

 

 

   

 

 

 

Liquidity ratio

     31.0     37.6  

Minimum board approved liquidity ratio

     20.0     20.0  

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. Liquidity is monitored by CSB’s Asset Liability Committee. 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

The Company does not have any off-balance sheet arrangements (as such term is defined in applicable Securities and Exchange Commission (the “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.

 

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CSB BANCORP, INC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3 –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risks as of June 30, 2013, from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Management performs a quarterly analysis of the Company’s interest rate risk over a twenty-four month horizon. The analysis includes two balance sheet models, one based on a static balance sheet and one on a dynamic balance sheet with projected growth in assets and liabilities. All positions are currently within the Company’s board-approved policy. Board set limits under a static balance sheet assumption were minimally exceeded on December 31, 2012 due to the volume of liquidity held by the Bank.

The following table presents an analysis of the estimated sensitivity of the Company’s annual net interest income to sudden and sustained 100 through 400 basis point changes, in 100 basis point changes, in market interest rates at June 30, 2013 and December 31, 2012. The net interest income reflected is for the first twelve months of the modeled twenty-four month period.

 

(Dollars in thousands)  

June 30, 2013

 
    

Change in

interest rates

(basis points)

   Net
interest
income
     Dollar
change
    Percentage
change
    Board
Policy
Limits
 

+

 

400

   $ 19,593       $ 1,263        6.9     +/- 25   

+

 

300

     19,253         923        5.0        +/-15   

+

 

200

     18,920         590        3.2        +/-10   

+

 

100

     18,594         264        1.4        +/-5   
 

0

     18,330         0        0.0     

-

 

100

     18,082         (248     (1.4     +/-5   

-

 

200

     N/A         N/A        N/A     

December 31, 2012

 
    

Change in

interest rates

(basis points)

   Net
interest
income
     Dollar
change
    Percentage
change
    Board
Policy
Limits
 

+

 

400

   $ 19,420       $ 1,762        10.0     +/- 25   

+

 

300

     18,982         1,324        7.5        +/-15   

+

 

200

     18,507         849        4.8        +/-10   

+

 

100

     18,053         395        2.2        +/-5   
 

0

     17,658         —          —       

-

 

100

     17,483         (175     (1.0     +/-5   

-

 

200

     N/A         N/A        N/A     

 

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CSB BANCORP, INC.

CONTROLS AND PROCEDURES

ITEM 4 - CONTROLS AND PROCEDURES

With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its 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, the Company’s 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 Commission’s rules and forms; and

 

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

 

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Table of Contents

CSB BANCORP, INC.

FORM 10-Q

Quarter ended June 30, 2013

PART II – OTHER INFORMATION

 

ITEM 1- LEGAL PROCEEDINGS.

In the opinion of management there are no outstanding legal actions that will have a material adverse effect on the company’s financial condition or results of operations.

 

ITEM 1A- RISK FACTORS.

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

ITEM 2- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On July 7, 2005 CSB Bancorp, Inc. filed Form 8-K with the 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.

Not applicable.

 

ITEM 4- MINE SAFETY DISCLOSURES.

Not applicable.

 

ITEM 5- OTHER INFORMATION.

Not applicable.

 

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Table of Contents

CSB BANCORP, INC.

FORM 10-Q

Quarter ended June 30, 2013

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 Quarterly Report on Form 10-Q filed August 6, 2004, Exhibit 3.1, film number 04958544).
    3.2    Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to the Registrant’s Form 10-SB).
    3.2.1    Amended Article VIII Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form DEF 14a filed on March 25, 2009, Appendix A, film number 09703970).
    4.0    Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB).
  11    Statement Regarding Computation of Per Share Earnings.
  31.1    Rule 13a-14(a)/15d-14(a) Chief Executive Officer’s Certification.
  31.2    Rule 13a-14(a)/15d-14(a) Chief Financial Officer’s Certification.
  32.1    Section 1350 Chief Executive Officer’s Certification.
  32.2    Section 1350 Chief Financial Officer’s Certification.
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets: (ii) Consolidated Statements of Income: (iii) Consolidated Statements of Comprehensive Income: (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity: (v) Condensed Consolidated Statements of Cash Flows: and (vi) Notes to Consolidated Financial Statements.

 

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Table of Contents

CSB BANCORP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      CSB BANCORP, INC.
      (Registrant)
Date: August 13, 2013      

/s/ Eddie L. Steiner

      Eddie L. Steiner
      President
      Chief Executive Officer
Date: August 13, 2013      

/s/ Paula J. Meiler

      Paula J. Meiler
      Senior Vice President
      Chief Financial Officer

 

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Table of Contents

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 Quarterly Report on Form 10-Q filed August 6, 2004, Exhibit 3.1, film number 04958544).
    3.2    Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to the Registrant’s Form 10-SB).
    3.2.1    Amended Article VIII Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form DEF 14a filed on March 25, 2009, Appendix A, film number 09703970).
    4.0    Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB).
  11    Statement Regarding Computation of Per Share Earnings.
  31.1    Rule 13a-14(a)/15d-14(a) Chief Executive Officer’s Certification.
  31.2    Rule 13a-14(a)/15d-14(a) Chief Financial Officer’s Certification.
  32.1    Section 1350 Chief Executive Officer’s Certification.
  32.2    Section 1350 Chief Financial Officer’s Certification.
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets: (ii) Consolidated Statements of Income: (iii) Consolidated Statements of Comprehensive Income: (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity: (v) Condensed Consolidated Statements of Cash Flows: and (vi) Notes to Consolidated Financial Statements.

 

37