# CSB Bancorp, Inc.: Form 10-Q for the period ended Sep 30, 2009

- Company: [CSB Bancorp, Inc.](/companies/csbb.md) (CIK 880417)
- Form: 10-Q
- Filed: 2009-11-13
- Accepted by EDGAR: Nov 13, 2009, 17:06 ET
- Period: 2009-09-30
- Accession: 0000950123-09-062402
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/880417/000095012309062402/l38084e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/880417/000095012309062402/

## Management's discussion and analysis

As filed, 19,723 characters.

The following discussion focuses on the consolidated financial condition of CSB Bancorp, Inc. and its subsidiaries (the “Company”) at September 30, 2009 as compared to December 31, 2008, and the consolidated results of operations for the three and nine-month periods ended September 30, 2009 compared to the same period in 2008. The purpose of this discussion is to provide the reader with a more thorough understanding of the consolidated financial statements. This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes.

### FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are not historical facts but rather are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates”, “plans”, “expects”, “believes”, and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. The Company’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.

The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

### FINANCIAL CONDITION

Total assets were $427.4 million at September 30, 2009, compared to $424.7 million at December 31, 2008, representing an increase of $2.7 million or 0.6%. Cash and cash equivalents increased $9.2 million, or 72.1%, during the nine-month period ending September 30, 2009, due to a $10.3 million increase in interest-earning deposits in other banks, offset partially by a $1.1 million decrease in Federal funds sold. Securities decreased $3.1 million or 4.7% during the first nine months of 2009 primarily due to calls within the U.S. Agency portfolio and principal repayments within the mortgage-backed securities portfolio. Net loans decreased $1.9 million, or 0.6%, while deposits decreased $2.6 million, or 0.8%, during the nine-month period. Short-term borrowings of Federal funds purchased, securities sold under repurchase agreement and Federal Home Loan Bank borrowings increased $4.2 million, while other borrowings decreased $1.1 million during the period.

Net loans decreased $1.9 million, or 0.6%, during the nine-month period ended September 30, 2009. Loan balance increases were recognized in commercial loans of $5.3 million, home equity lines of $5.7 million, and construction loans of $2.5 million during the nine-month period. Mortgage loans declined $14.1 million due to customers refinancing into lower rate mortgage loans which were primarily sold on the secondary market. Consumer installment credit continued to decline another $760,000 during the period. The allowance for loan losses amounted to $3,697,000, or 1.17% of total loans at September 30, 2009 compared to $3,394,000 or 1.07% of total loans at December 31, 2008.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The allowance for loan losses totaled $3.7 million at September 30, 2009, an increase of $300 thousand over June 30, 2009 and December 31, 2008. The Company provided $928 thousand to the allowance for loan losses for the nine-month period ending September 30, 2009 while net loan charge-offs totaled $625 thousand for the same period. At September 30, 2009 nonperforming loans, other real estate owned and delinquent loans reflect balance increases from June 30, 2009 of $1,046,000 and December 31, 2008 of $918,000.

|  | September 30, 2009 | June 30, 2009 | December 31, 2008 |
| --- | ---: | ---: | ---: |
| Non-performing loans | $4,504,000 | $4,071,028 | $2,642,728 |
| Other real estate | 40,000 | 52,000 | 79,000 |
| Allowance for loan losses | 3,696,698 | 3,397,920 | 3,393,685 |
| Total loans | 314,717,245 | 317,879,674 | 316,290,412 |
| Allowance: loans | 1.17% | 1.07% | 1.07% |
| 30-89 day loan delinquency | 2,207,000 | 1,581,869 | 3,111,000 |
| Allowance: non-performing loans | 0.8x | 0.8x | 1.3x |
| Non-performing assets: total assets | 1.06% | 1.00% | 0.64% |

The ratio of gross loans to deposits was 103.9% at September 30, 2009, compared to 103.5% at December 31, 2008. The increase in this ratio is the result of larger deposit decreases than loan balance decreases experienced during the nine months ended September 30, 2009.

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, 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. The Company had net unrealized gains of $1.9 million within its securities portfolio at September 30, 2009, compared to net unrealized gains of $218,000 at December 31, 2008. Gross unrealized losses of $218,000 as of September 30, 2009 were primarily concentrated in two (2) private label CMO’s. These investments represent $1.7 million fair value, $4.5 million original par value and $159,000 gross unrealized loss. All bonds are investment grade at September 30, 2009, collateralized primarily by 1-4 family mortgage loans and borrowers in a wide geographical dispersion. Management believes the Company will fully recover the cost of these securities and 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 September 30, 2009 and has recognized the total amount of the impairment in other comprehensive income, net of tax. A $70,000 other-than-temporary impairment was recognized on an equity investment during the first nine months of 2009. As of September 30, 2009, this equity investment has been sold.

Short-term borrowings increased $4.2 million from December 31, 2008 as new customer relationships were opened as repurchase agreements. Other borrowings decreased $1.1 million due to maturities and payments of Federal Home Loan Bank advances.

Deposits decreased $2.6 million, or 0.8% from December 31, 2008 with non-interest bearing deposits declining $2.7 million and interest-bearing deposit accounts increasing $137 thousand. By deposit type, increases were recognized in money market savings accounts of $4.7 million, while time deposits of $100 thousand and greater decreased $2.9 million for the nine-month period ended September 30, 2009. Included in the decrease of time deposits of $100 thousand and greater, were $3.2 million of brokered deposits acquired through the merger with Indian Village that matured and were not renewed. Decreases were also reflected in interest-bearing demand deposits and traditional savings accounts.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Total shareholders’ equity amounted to $45.6 million, or 10.7%, of total assets, at September 30, 2009, compared to $43.5 million, or 10.2% of total assets, at December 31, 2009. The increase in shareholders’ equity during the nine months ended September 30, 2009 was due to net income of $2,460,000 and the increase in net unrealized gains, net of tax, on securities of $1,122,000. These increases were partially offset by dividends declared of $1,477,000. The Company and its subsidiary bank met all regulatory capital requirements at September 30, 2009.

### RESULTS OF OPERATIONS

### Three months ended September 30, 2009 and 2008

For the quarter ended September 30, 2009, the Company recorded net income of $858,000, or $0.31 per share, as compared to net income of $891,000, or $0.37 per share for the quarter ended September 30, 2008. The $33,000 decrease in net income for the quarter was principally due to a $186,000 increase in the provision for loan losses and a $526,000 increase in other expenses. The increase in expenses was offset by increases in net interest income of $425,000, and other income of $196,000 and a decline in federal income tax provision of $58,000.

Interest income for the quarter ended September 30, 2009, was $5,434,000, representing a $468,000 increase, or 9.4%, compared to the same period in 2008. This increase was primarily due to an increase in average loan volume of $62 million for the third quarter in 2009 compared to the quarter ended September 30, 2008. These interest income increases were partially offset by a rate decline of 1.77% on approximately $6.6 million in overnight fed funds sold and interest bearing deposit accounts.

Interest expense for the quarter ended September 30, 2009 was $1,570,000, an increase of $43,000, or 2.8%, from the same period in 2008. The increase in interest expense occurred due to volume increases in average interest-bearing deposit balances and Federal Home Loan Bank advances acquired in the Indian Village transactions, which were mostly offset by decreases in interest rates across the board for the quarter ended September 30, 2009. During the third quarter 2009, maturing time deposits renewed at interest rates that were lower than the previous period.

The provision for loan losses for the quarter ended September 30, 2009, was $293,000, compared to a $107,000 provision for the same quarter in 2008. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data including past charge-offs and current economic trends.

Non-interest income for the quarter ended September 30, 2009, was $870,000, an increase of $196,000, or 29.2%, compared to the same quarter in 2008. This increase occurred due to the gain on sale of mortgage loans into the secondary market of $172,000 for the quarter, as compared to the prior year quarter of $9,000, and was attributable to refinancings in the current low rate mortgage market environment. Additional increases were made in debit card interchange fees of $19,000 and trust and brokerage fees of $34,000 on a quarter over quarter basis. Service charges on deposit accounts declined by $13,000 or 3.9% as customer use of overdraft privilege products declined.

Non-interest expenses for the quarter ended September 30, 2009, increased $526,000, or 19.8%, compared to the third quarter of 2008 primarily the result of increased operating costs of a larger company. FDIC assessments increased $85,000 due to increased rates, while a previous credit balance was exhausted. Increases in all other expenses occurred primarily as a result of the Indian Village acquisition; salaries and employee benefits increased $215,000, occupancy and equipment expenses increased $91,000, professional and director fees increased $62,000, and other expenses increased $31,000.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Federal income tax expense decreased $58,000, or 12.8% for the quarter ended September 30, 2009 as compared to the third quarter of 2008. The provision for income taxes was $396,000 (effective rate of 31.6%) for the quarter ended September 30, 2009, compared to $454,000 (effective rate of 33.8%) for the quarter ended September 30, 2008. The decrease in the effective tax rate resulted from an increase in tax-exempt interest income and decreased income generated by the company.

### Nine months ended September 30, 2009 and 2008

Net income for the nine months ending September 30, 2009, was $2,460,000, or $0.90 per share, as compared to $2,770,000 or $1.14 per share during the same period in 2008. Return on average assets and return on average equity were 0.78% and 7.33%, respectively, for the nine-month period of 2009, compared to 1.08% and 9.91%, respectively for 2008.

Net interest income was $11,590,000 for the nine months ended September 30, 2009, an increase of $1,485,000 or 14.7% from the same period last year. Comparative net income decreased primarily due to the increase in the provision for loan losses of $666,000 and the increase in FDIC premiums and assessments of $462,000 compared to the same period in 2008, and additional costs resulting from operating a larger organization after the Indian Village acquisition.

Interest income on loans increased $1,266,000, or 10.1%, for the nine months ended September 30, 2009, as compared to the same period in 2008. This increase was primarily due to an average volume increase of $65 million partially offset by an interest rate decrease of 82 basis points for the comparable nine-month periods. Interest income on securities increased $157,000, or 6.2%, as average investment balances increased by $6.0 million, partially offset by yield decreases. Interest income on fed funds sold and interest bearing deposits decreased $86,000 for the nine months ended September 30, 2009 as the average fed funds sold rate decreased 192 basis points to 0.13%, compared to the same period in 2008.

Interest expense decreased $148,000 to $4,889,000 for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. Interest expense on deposits decreased $310,000, or 8.5%, from the same period as last year, while interest expense on other borrowings increased $161,000 or 11.7%. The decrease in interest expense has been caused by lower interest rates being paid across the board on interest-bearing deposit accounts and borrowings. Time deposits continue to renew at lower interest rates, and some depositors have moved monies to saving instruments anticipating higher rate time deposits. Competition for deposits appears to be decreasing from a year ago with larger money center banks reducing the premium paid for term deposits. The net interest margin declined by 25 basis points for the nine-month period ended September 30, 2009, to 3.90%, from 4.15% for the same period in 2008.

The provision for loan losses was $928,000 during the first nine months of 2009, compared to $262,000 in the same nine-month period of 2008. The provision or credit for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data including past charge-offs and current economic trends.

Non-interest income increased $137,000, or 5.9%, during the nine months ended September 30, 2009, as compared to the same period in 2008. The increase in non-interest income was primarily due to gains on the sale of mortgage loans into the secondary market of $357,000 in 2009, as compared to $14,000 in 2008. The increase from the sale of mortgage loans was partially offset as the gain on the sale of the credit card portfolio of $267,000 that occurred in 2008 was non recurring in 2009. Net gains on the sale of securities were $117,000 greater in 2009 as compared to the same period in 2008. Trust fees declined $98,000 due to declines in market values of assets under management, while brokerage fees increased by

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

$16,000 over the same period in 2008. Additional increases of $50,000 were made in debit card interchange fees, due to increased customer usage. Service charges on deposits decreased $22,000 from the same period in 2008 as deposit customers curtailed their use of overdraft privilege products in 2009.

Non-interest expenses increased $1,519,000, or 19.0%, for the nine months ended September 30, 2009, compared to the same period in 2008. The bank’s FDIC deposit premium rose $462,000 from $35,000 for the nine months ended 2008 reflecting the rising assessment rate, the exhaustion of the bank’s credit in 2009 and the effect of the special assessment paid on September 30, 2009. Salaries and employee benefits increased $555,000, or 12.1%, primarily the result of increased number of employees following the merger of Indian Village as well as increased cost of benefit programs. Professional and directors fees increased as a result of rising legal and legal collection fees due to an increased number of nonperforming loans. Occupancy expense has increased during the first nine-months of 2009 as compared with 2008 due to increased rents, maintenance and utilities on three additional offices. Other expenses increased $87,000 or 5.0% primarily the result of increased operating costs of a larger company.

The provision for income taxes was $1,121,000 (effective rate of 31.3%) for the nine months ended September 30, 2009, compared to $1,375,000 (effective rate of 33.2%) for the nine months ended September 30, 2008. The decrease in the effective tax rate resulted from an increase in tax-exempt interest income as a portion of total income before income taxes, and decreased income generated by the company.

### CAPITAL RESOURCES

The Federal Reserve Board (FRB) has established risk-based capital guidelines that must be observed by financial holding companies and banks. Failure to meet specified minimum capital requirements could result in regulatory actions by the Federal Reserve or Ohio Division of Financial Institutions that could have a material effect on the Company’s financial condition or results of operations. Management believes there were no material changes to Capital Resources as presented in CSB Bancorp’s annual report on Form 10-K for the year ended December 31, 2008, and as of September 30, 2009 the holding company and its bank meet all capital adequacy requirements to which they are subject.

### LIQUIDITY

Liquidity refers to the Company’s ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, pay operating expenses and meet other obligations. The Company’s primary sources of liquidity are cash and cash equivalents, which totaled $21.9 million at September 30, 2009, an increase of $9.2 million from $12.7 million at December 31, 2008. Net income, securities available-for-sale, and loan repayments also serve as sources of liquidity. Cash and cash equivalents and estimated principal cash flow and maturities on investments maturing within one year represent 11.9% of total assets as of September 30, 2009 compared to 6.6% of total assets at year-end 2008. Other sources of liquidity include, but are not limited to, purchase of federal funds, advances from the FHLB, adjustments of interest rates to attract deposits, and borrowing at the Federal Reserve discount window. Management believes that its sources of liquidity are adequate to meet cash flow obligations for the foreseeable future.

### OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements (as such term is defined in applicable Securities and Exchange Commission rules) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

## Market risk

As filed, 1,281 characters.

There have been no material changes in the quantitative and qualitative disclosures about market risks as of September 30, 2009, from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Management performs a quarterly analysis of the Company’s interest rate risk. All positions are currently within the Company’s board-approved policy.

The following table presents an analysis of the estimated sensitivity of the Company’s annual net interest income to sudden and sustained 100 and 200 basis point changes in market interest rates at September 30, 2009 and December 31, 2008:

### September 30, 2009

*(Dollars in Thousands)*

| Changes in Interest Rates (basis points) | Net Interest Income | Dollar Change | Percentage Change |
| ---: | ---: | ---: | ---: |
| +200 | $16,321 | $841 | 5.4% |
| +100 | 15,858 | 378 | 2.4% |
| 0 | 15,480 | 0 | 0 |
| -100 | N/A | N/A | N/A |
| -200 | N/A | N/A | N/A |

### December 31, 2008

*(Dollars in Thousands)*

| Changes in Interest Rates (basis points) | Net Interest Income | Dollar Change | Percentage Change |
| ---: | ---: | ---: | ---: |
| +200 | $16,084 | $651 | 4.2% |
| +100 | 15,786 | 353 | 2.3 |
| 0 | 15,433 | 0 | 0.0 |
| -100 | 15,532 | 99 | 0.6 |
| -200 | N/A | N/A | N/A |

21.

## Controls and procedures

As filed, 1,793 characters.

With the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that:

(a) information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure;

(b) information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and

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

### CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes during the period covered by this Quarterly Report on Form 10-Q in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORM 10-Q

Quarter ended September 30, 2009

## Risk factors

As filed, 155 characters.

There were no material changes to the Risk Factors described in Item 1A in the Company’s Annual Report on Form 10-K for the period ended December 31, 2008.

Filed Nov 13, 2009.
Source: SEC EDGAR, the filing index for accession 0000950123-09-062402. Last ingested by Listed: Nov 2, 2026, 09:27 ET. No prices; not investment advice.