# CSB Bancorp, Inc.: Form 10-Q for the period ended Jun 30, 2010

- Company: [CSB Bancorp, Inc.](/companies/csbb.md) (CIK 880417)
- Form: 10-Q
- Filed: 2010-08-13
- Accepted by EDGAR: Aug 13, 2010, 17:03 ET
- Period: 2010-06-30
- Accession: 0000950123-10-077407
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/880417/000095012310077407/l40516e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/880417/000095012310077407/

## Management's discussion and analysis

As filed, 18,827 characters.

The following discussion focuses on the consolidated financial condition of CSB Bancorp, Inc. and its subsidiaries (the “Company”) at June 30, 2010 as compared to December 31, 2009, and the consolidated results of operations for the three and six months and six month period ended June 30, 2010 compared to the same periods in 2009. 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 $441.2 million at June 30, 2010, compared to $450.7 million at December 31, 2009, representing a decrease of $9.4 million or 2.1%. Cash and cash equivalents decreased $2.8 million, or 6.5%, during the six-month period ending June 30, 2010, due to an $2.8 million decrease in deposits held at the Federal Reserve Bank and a $0.3 million decrease in cash and due from banks. Securities decreased $4.1 million or 5.1% during the first six months of 2010 primarily due to calls within the US Agency portfolio and principal repayments within the mortgage-backed securities portfolio. Net loans decreased $2.2 million, or 0.7%, while deposits increased $300 thousand, or 0.1%, during the six-month period. Short-term borrowings of securities sold under repurchase agreement increased $2.3 million and Federal Home Loan Bank advances decreased $13.1 million, during the period as advances matured and required amortized payments were made on outstanding advances at the Federal Home Loan Bank.

Net loans decreased $2.2 million, or 0.7%, during the six-month period ended June 30, 2010. Commercial loans increased $2.7 million or 1.4% and home equity lines increased $1.7 million or 5.3% over December 31, 2009. Decreases were recognized in real estate mortgage loans of $5.3 million or 6.3% and consumer installment loans of $752 thousand or 9.6%. Consumers continued to refinance their mortgage loans for lower long-term rates offered in the secondary market. The allowance for loan losses amounted to $4.6 million or 1.48% of total loans at June 30, 2010 compared to $4.1 million or 1.29% of total loans at December 31, 2009.

The allowance for loan losses as a percentage of total loans increased at June 30, 2010 as compared to December 31, 2009 as the additional provision of $758 thousand exceeded net charge-offs of $209 thousand for the six months ended June 30, 2010 and outstanding loan balances decreased 0.5% to approximately $312 million at June 30, 2010. Non-performing loans have increased $1.9 million or 47% from December 31, 2009, primarily the result of the bank’s internal analysis of cash flows of one $2.5 million commercial real estate loan and related line being moved to nonaccrual status.

*(dollars in thousands)*

|  | June 30, 2010 | December 31, 2009 | June 30, 2009 |
| --- | ---: | ---: | ---: |
| Non-performing loans | $6,088 | $4,141 | $4,071 |
| Other real estate | 247 | 162 | 52 |
| Allowance for loan losses | 4,608 | 4,059 | 3,398 |
| Total loans | 311,857 | 313,482 | 319,425 |
| Allowance: loans | 1.48% | 1.29% | 1.07% |
| Allowance: non-performing loans | 0.8x | 1.0x | 0.8x |

The ratio of gross loans to deposits was 94.6% at June 30, 2010, compared to 95.1% at December 31, 2009. The decrease in this ratio is primarily the result of deposits increasing while loans decreased slightly during the six months ended June 30, 2010.

The Company recognized $148 thousand (tax provision of $50 thousand) in realized gains from the sales of securities during the second quarter and first six months of 2010 as compared to recognizing gross gains on sales of available for sale securities of $151 thousand (tax provision of $51 thousand) which was partially offset by the recognition of a $35 thousand (tax benefit of $12 thousand) from other-than-temporary impairment of an equity investment during the first quarter ended March 31, 2009. The Company had net unrealized gains of $2 million within its securities portfolio at June 30, 2010, compared to net unrealized gains of $1.6 million at December 31, 2009. Management has considered industry analyst reports, sector credit reports and the volatility within the bond market in concluding that the gross unrealized losses of $56 thousand within the portfolio as of June 30, 2010, were primarily the result of customary and expected fluctuations in the bond market. As a result, all security impairments as of June 30, 2010, are considered temporary.

The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations or trust preferred securities. Nonagency collateralized mortgage obligations have paid down to $1.5 million outstanding from an original face of $5.5 million, with both principal and interest being received monthly on the three (3) outstanding bonds. Total gross unrealized security losses within the portfolio were an immaterial 0.07% of total available-for-sale securities at June 30, 2010.

Short-term borrowings increased $2.3 million from December 31, 2009 and other borrowings decreased $13.1 million as the Company used cash flows from investments to repay required maturities and monthly payments on advances from the Federal Home Loan Bank (“FHLB”).

Deposits increased $331 thousand, or 0.5% from December 31, 2009 with non-interest bearing deposits increasing $3.2 million and interest-bearing deposit accounts decreasing $2.9 million. By deposit type, increases were recognized in all interest-bearing accounts except interest bearing demand accounts for the six-month period ended June 30, 2010.

Total shareholders’ equity amounted to $46.8 million, or 10.6%, of total assets, at June 30, 2010, compared to $45.8 million, or 10.2% of total assets, at December 31, 2009. The increase in shareholders’ equity during the six months ended June 30, 2010 was due to net income of $1.7 million and gains in accumulated other comprehensive income of $281 thousand. The increase was partially offset by dividends declared of $985 thousand. The Company and its subsidiary bank met all regulatory capital requirements at June 30, 2010.

### RESULTS OF OPERATIONS

### Three months ended June 30, 2010 and 2009

For the quarter ended June 30, 2010, the Company recorded net income of $921 thousand or $0.34 per share, as compared to net income of $706 thousand, or $0.26 per share for the quarter ended June 30, 2009. The $215 thousand increase in net income for the quarter was a result of revenues increasing $148 thousand from the gain on securities sold and the increase in interchange fees from the increased usage of debit cards as well as the decrease in the provision for loan loss of $155 thousand. On a core basis, net interest income increased $1 thousand, other income decreased $41 thousand (exclusive of the $148 thousand gain on sale of securities in 2010) and other expenses decreased $60 thousand.

Interest income for the quarter ended June 30, 2010, was $5.0 million representing a $437 thousand decrease, or 8.7% decline, compared to the same period in 2009. This decrease was primarily due to a decline in the average loan yield of 0.24% to 5.53% for the quarter ended June 30, 2010 as compared to a loan yield of 5.77% for the second quarter ended June 30, 2009. Additionally, average loan volume declined by $7.8 million to approximately $312 million for the quarter ended June 30, 2010 as compared the second quarter 2009. Investment interest income decreased $147 thousand as both investment volume and yield decreased in 2010 over the second quarter in 2009. Interest expense for the quarter ended June 30, 2010 was $1.2 million a decrease of $437 thousand or 26.7%, from the same period in 2009. The decrease in interest expense occurred due to decreases in interest rates across the board for the quarter ended June 30, 2010. During second quarter 2010, maturing time deposits continued to renew at interest rates that were lower.

The provision for loan losses for the quarter ended June 30, 2010, was $239 thousand, compared to a $394 thousand provision for the same quarter in 2009. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data including past charge-offs and current economic trends.

Non-interest income for the quarter ended June 30, 2010, was $889 thousand, an increase of $109 thousand, or 14.0%, compared to the same quarter in 2009. During the quarter ended 2010, the Company recognized a gross gain of $148 thousand on the sale of investments. Trust and brokerage fees increased $4 thousand on a year over year quarter as increases were recognized on the market value of assets under management. The gain on the sale of mortgage loans to the secondary market declined to $45 thousand from $117 thousand for the 3 month period ended June 30, 2010 as compared to the 3 month period ended June 30, 2009. Refinancing activity declined from 2009, and housing sales stalled after the curtailment of the home buyers tax credit.

Non-interest expenses for the quarter ended June 30, 2010, decreased $60 thousand, or 1.9%, compared to the second quarter of 2009. Salaries and employee benefits increased $48 thousand, or 2.8%, primarily due to merit salary increases and the salary expense of a branch office in 2010 that was not open the first half of 2009. Occupancy and equipment expenses decreased $53 thousand and other operating expenses increased $6 thousand. State franchise tax increased $9 thousand or 7% due to the increased capital of the franchise.

Federal income tax expense increased $110 thousand, or 36.4% for the quarter ended June 30, 2010 as compared to the second quarter of 2009. The provision for income taxes was $412 thousand (effective rate of 30.9%) for the quarter ended June 30, 2010, compared to $302 thousand (effective rate of 30.0%) for the quarter ended June 30, 2009. The increase in the effective tax rate resulted from a decreased percentage of tax-exempt interest income.

### Six months ended June 30, 2010 and 2009

Net income for the six months ending June 30, 2010, was $1.658 million or $0.61 per share, as compared to $1.602 million or $0.59 per share during the same period in 2009. Return on average assets and return on average equity were 0.76% and 7.18%, respectively, for the six-month period of 2010, compared to 0.76% and 7.24%, respectively for 2009.

Net interest income was $7.7 million for the six months ended June 30, 2010, a decrease of $12 thousand or 0.2% from the same period last year. Comparative net income increased due to lower noninterest expense primarily related to the lack of a special FDIC assessment in 2010 compared to 2009 and a decrease in incentive and profit sharing accruals from the first quarter in 2010.

Interest income on loans decreased $616 thousand, or 6.7%, for the six months ended June 30, 2010, as compared to the same period in 2009. This decrease was primarily due to an average volume decrease of $7 million compounded by an interest rate decrease of 26 basis points for the comparable six-month periods. Interest income on securities decreased $269 thousand, or 14.7%, as the yield on taxable securities decreased 96 basis points due to both calls in the Agency portfolio and accelerated payments within the mortgage-backed securities portfolio. Average investment balances increased by $3.4 million. Interest income on fed funds sold and interest bearing deposits increased $25 thousand for the six months ended June 30, 2010 as the average fed funds sold rate increased 1 basis points to 0.24%, compared to the same period in 2009.

Interest expense decreased $848 thousand to $2.5 million for the six months ended June 30, 2010, compared to the six months ended June 30, 2009. Interest expense on deposits decreased $564 thousand, or 23.7%, from the same period as last year, while interest expense on other borrowings decreased $303 thousand or 29.6%. 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 savings 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 16 basis points for the six-month period ended June 30, 2010, to 3.77%, from 3.93% for the same period in 2009. The provision for loan losses was $758 thousand during the first six months of 2010, compared to $635 thousand in the same six-month period of 2009. 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 $44 thousand, or 2.8%, during the six months ended June 30, 2010, as compared to the same period in 2009. The increase in non-interest income was primarily due to increases in Trust fees due to increases in market values of the custodial assets, net gains on securities sold and increases in debit card interchange resulting from increased card usage in 2010. Service charges on deposits decreased $62 thousand from the same period in 2009 as deposit customers curtailed their use of overdraft privilege products in 2010 and have maintained higher average deposit balances offsetting monthly service fees.

Decreases were recognized in gains on mortgage loans sold in the secondary market for the first half of 2010 as the wave of refinancing activity stalled and new housing sales were virtually nonexistent following the government’s curtailment of the home buyers credit in 2010.

Non-interest expenses decreased $148 thousand, or 2.3%, for the six months ended June 30, 2010, compared to the same period in 2009. The bank’s FDIC deposit premium decreased $83 thousand from $391 thousand for the six months ended 2009 reflecting the lack of a special assessment fully expensed and payable on September 30, 2009 which has not been reinstated in 2010. Salaries and employee benefits decreased $56 thousand, or 1.6%, primarily the result of the decrease of incentive and profit sharing accruals in first quarter 2010. Professional and directors fees remained relatively stable with a slight decrease of $5 thousand or 1.4%. Occupancy and equipment expense has decreased during the first six-months of 2010 as compared with 2009 as depreciation on the furniture and equipment located at the corporate offices in Millersburg ceased following the tenth anniversary of the building in 2009. Increases were recognized in franchise taxes and other expenses primarily the result of increased operating costs of a larger company.

The provision for income taxes was $727 thousand (effective rate of 30.5%) for the six months ended June 30, 2010, compared to $726 thousand (effective rate of 31.2%) for the six months ended June 30, 2009. 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.

### 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, 2009, and as of June 30, 2010 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 $39.9 million at June 30, 2010, a decrease of $2.8 million from $42.7 million at December 31, 2009. 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 14.9% of total assets as of June 30, 2010 compared to 15.0% of total assets at year-end 2009. 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## Market risk

As filed, 1,263 characters.

There have been no material changes in the quantitative and qualitative disclosures about market risks as of June 30, 2010, from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. 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 June 30, 2010 and December 31, 2009:

### June 30, 2010

*(Dollars in Thousands)*

| Changes in Interest Rates (basis points) | Net Interest Income | Dollar Change | Percentage Change |
| ---: | ---: | ---: | ---: |
| +200 | 16,134 | $636 | 4.1% |
| +100 | 15,660 | 162 | 1.0 |
| 0 | 15,498 | 0 | 0.0 |
| -100 | N/A | N/A | N/A |
| -200 | N/A | N/A | N/A |

### December 31, 2009

*(Dollars in Thousands)*

| Changes in Interest Rates (basis points) | Net Interest Income | Dollar Change | Percentage Change |
| ---: | ---: | ---: | ---: |
| +200 | $17,287 | $849 | 5.2% |
| +100 | 16,739 | 301 | 1.8 |
| 0 | 16,438 | 0 | 0.0 |
| -100 | N/A | N/A | N/A |
| -200 | N/A | N/A | N/A |

22

## Controls and procedures

As filed, 1,788 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 June 30, 2010

## 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, 2009.

Filed Aug 13, 2010.
Source: SEC EDGAR, the filing index for accession 0000950123-10-077407. Last ingested by Listed: Nov 2, 2026, 09:27 ET. No prices; not investment advice.