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

- Company: [CSB Bancorp, Inc.](/companies/csbb.md) (CIK 880417)
- Form: 10-Q
- Filed: 2010-11-12
- Accepted by EDGAR: Nov 12, 2010, 14:16 ET
- Period: 2010-09-30
- Accession: 0000950123-10-104838
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/880417/000095012310104838/l41144e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/880417/000095012310104838/

## Management's discussion and analysis

As filed, 22,522 characters.

The following discussion focuses on the consolidated financial condition of CSB Bancorp, Inc. and its subsidiaries (the “Company”) at September 30, 2010 as compared to December 31, 2009, and the consolidated results of operations for the three and nine month period ended September 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 $451.6 million at September 30, 2010, compared to $450.7 million at December 31, 2009, representing an increase of $900 thousand or 0.2%. Cash and cash equivalents increased $1.0 million, or 2.2%, during the nine-month period ending September 30, 2010, due to an $1.2 million increase in cash and due from banks. Securities decreased $2.7 million or 3.5% during the first nine months of 2010 primarily due to calls within the US Agency portfolio and principal repayments within the mortgage-backed securities portfolio. Net loans increased $3.1 million, or 1.0%, while deposits increased $11.8 million, or 3.6%, during the nine-month period. Short-term borrowings of securities sold under repurchase agreement increased $800 thousand and Federal Home Loan Bank advances decreased $13.4 million, during the period as advances matured and required amortized payments were made on outstanding advances at the Federal Home Loan Bank.

Net loans increased $3.1 million, or 1.0%, during the nine-month period ended September 30, 2010. Commercial loans increased $10.6 million, or 15.3%, and home equity lines increased $2.8 million, or 8.7%, over December 31, 2009. Decreases were recognized in real estate mortgage loans of $6.7 million, or 8.8%, commercial real estate loans of $5.3 million, or 4.9%, and consumer installment loans of $784 thousand, or 10.5%. Consumers continued to refinance their mortgage loans for lower long-term rates offered in the secondary market. The allowance for loan losses amounted to $4.4 million or 1.39% of total loans at September 30, 2010 compared to $4.1 million or 1.29% of total loans at December 31, 2009.

16.

The allowance for loan losses as a percentage of total loans increased at September 30, 2010 as compared to December 31, 2009 as the additional provision of $996 thousand exceeded net charge-offs of $648 thousand for the nine months ended September 30, 2010 and outstanding loan balances increased 1.1% to approximately $317 million at September 30, 2010. Non-performing loans have increased $1.1 million or 27% 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)*

|  | September 30, 2010 | December 31, 2009 | September 30, 2009 |
| --- | ---: | ---: | ---: |
| Non-performing loans | $5,246 | $4,141 | $4,504 |
| Other real estate | 163 | 162 | 40 |
| Allowance for loan losses | 4,407 | 4,059 | 3,697 |
| Total loans | 316,909 | 313,482 | 314,717 |
| Allowance: loans | 1.39% | 1.29% | 1.17% |
| Allowance: non-performing loans | 0.8 x | 1.0 x | 0.8 x |

The ratio of gross loans to deposits was 92.9% at September 30, 2010, compared to 95.1% at December 31, 2009. The decrease in this ratio is primarily the result of deposits increasing faster than loans during the nine months ended September 30, 2010.

The Company had net unrealized gains of $2.2 million within its securities portfolio at September 30, 2010, compared to net unrealized gains of $1.6 million at December 31, 2009. The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations or trust preferred securities. The Company holds 3 issues of nonagency collateralized mortgage obligations that have paid down to $1.4 million outstanding from an original face of $5.5 million. Most of the unrealized loss in the mortgage-backed securities relates to one private label mortgage-backed security. The Company has the ability and intent to hold the bond until the recovery of its cost and despite a credit downgrade below investment grade in 2010, there is no significant evidence to support an adverse change in the expected cash flows. Management has considered industry analyst reports, sector credit reports and the volatility within the bond market in concluding that the gross unrealized losses of $48 thousand within the portfolio as of September 30, 2010, 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 September 30, 2010, are considered temporary and no impairment loss relating to these securities has been recognized..

Short-term borrowings increased $800 thousand from December 31, 2009 and other borrowings decreased $13.4 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 $11.8 million, or 3.6% from December 31, 2009 with non-interest bearing deposits increasing $10.0 million and interest-bearing deposit accounts increasing $1.8 million. By deposit type, increases were recognized in all interest-bearing accounts except interest bearing demand accounts for the nine-month period ended September 30, 2010.

17.

Total shareholders’ equity amounted to $47.2 million, or 10.5%, of total assets, at September 30, 2010, compared to $45.8 million, or 10.2% of total assets, at December 31, 2009. The increase in shareholders’ equity during the nine months ended September 30, 2010 was due to net income of $2.5 million and gains in accumulated other comprehensive income of $325 thousand. The increase was partially offset by dividends declared of $1.5 million. The Company and its subsidiary bank met all regulatory capital requirements at September 30, 2010.

### RESULTS OF OPERATIONS

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

For the quarter ended September 30, 2010, the Company recorded net income of $882 thousand or $0.32 per share, as compared to net income of $858 thousand, or $0.31 per share for the quarter ended September 30, 2009. The $24 thousand increase in net income for the quarter was a result of net interest income increasing $93 thousand and a decrease in the provision for loan losses of $55 thousand. These gains were partially offset by a decline in noninterest income of $90 thousand and an increase in other expenses of $27 thousand.

### Average Balance Sheets and Net Interest Margin Analysis

*(Dollars in thousands)*

| Assets | For the Three Months Ended September 30, 2010 Average Balance | Average Rate | 2009 Average Balance | Average Rate |
| --- | ---: | ---: | ---: | ---: |
| Due from banks-interest bearing | $28,266 | 0.26% | $13,463 | 0.24% |
| Taxable securities | 68,216 | 3.87% | 65,761 | 4.68% |
| Tax-exempt securities | 11,503 | 4.77% | 8,941 | 5.67% |
| Federal funds sold | 251 | 0.13% | 315 | 0.05% |
| Loans | 315,355 | 5.53% | 316,149 | 5.74% |
| Total earning assets | 423,591 | 4.89% | 404,629 | 5.38% |
| Other assets | 22,508 |  | 20,810 |  |
| Total Assets | $446,099 |  | $425,439 |  |
| **Liabilities and Shareholders’ Equity** |  |  |  |  |
| Interest bearing demand deposits | $50,252 | 0.08% | $44,591 | 0.09% |
| Savings deposits | 74,377 | 0.32% | 57,240 | 0.38% |
| Time deposits | 151,199 | 2.15% | 153,595 | 2.56% |
| Other borrowed funds | 61,266 | 2.02% | 77,968 | 2.62% |
| Total interest bearing liabilities | 337,094 | 1.41% | 333,394 | 1.87% |
| Non-interest bearing demand deposits | 60,261 |  | 45,226 |  |
| Other liabilities | 1,531 |  | 1,370 |  |
| Shareholders’ Equity | 47,213 |  | 45,449 |  |
| Total Liabilities and Shareholders’ Equity | $446,099 |  | $425,439 |  |
| Taxable equivalent net interest spread |  | **3.76%** |  | **3.84%** |
| Taxable equivalent net interest margin |  | **3.48%** |  | **3.51%** |

18.

Interest income for the quarter ended September 30, 2010, was $5.2 million representing a $275 thousand decrease, or 5.1% decline, compared to the same period in 2009. This decrease was primarily due to a decline in the average loan yield of 0.21% to 5.53% for the quarter ended September 30, 2010 as compared to a loan yield of 5.74% for the third quarter ended September 30, 2009. Additionally, average loan volume declined by $800 thousand to approximately $315 million for the quarter ended September 30, 2010 as compared the third quarter 2009. Investment interest income decreased $104 thousand as both investment volume and yield decreased in 2010 over the third quarter in 2009. Interest expense for the quarter ended September 30, 2010 was $1.2 million a decrease of $368 thousand or 23.4%, 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 September 30, 2010.

The provision for loan losses for the quarter ended September 30, 2010, was $238 thousand, compared to a $293 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 September 30, 2010, was $780 thousand, a decrease of $90 thousand, or 10.3%, compared to the same quarter in 2009. During the third quarter ended 2010, service charges on deposit accounts decreased $17 thousand or 5.4%, as consumers decreased their usage of overdraft products and maintained higher average deposit balances. The gain on the sale of mortgage loans to the secondary market declined to $62 thousand for the three month period ended September 30 2010, from $172 thousand in the 3 month period ended September 30, 2010. Refinancing activity declined from 2009, and housing sales stalled after the curtailment of the home buyers tax credit.

The Company recognized $0 and $148 thousand (tax provision of $50 thousand) in realized gains from the sales of securities during the third quarter and first nine months of 2010 as compared to recognizing gross gains on sales of available for sale securities of $1 and $153 thousand (tax provision of $52 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 and $70 thousand (tax benefit of $24 thousand) during the third quarter and first nine months of 2009.

Non-interest expenses for the quarter ended September 30, 2010, increased $27 thousand, or 0.8%, compared to the third quarter of 2009. Salaries and employee benefits increased $4 thousand, or 0.2%.

Occupancy and equipment expenses decreased $76 thousand in 2010 over the third quarter of 2009 due to an impairment write-down of the Main Office of $50 thousand in 2009 and a decrease in depreciation expense of $25 thousand relating to furniture and equipment located at the corporate offices in Millersburg which were totally depreciated following the tenth anniversary of the building in 2009. Other operating expenses increased $120 thousand primarily due to the increase in loan collection expense resulting from the recognition of delinquent real estate taxes and assessments on one commercial property which has been sold at sheriff’s sale in the third quarter but has not transferred.

Federal income tax expense increased $7 thousand, or 1.8% for the quarter ended September 30, 2010 as compared to the third quarter of 2009. The provision for income taxes was $402 thousand (effective rate of 31.3%) for the quarter ended September 30, 2010, compared to $395 thousand (effective rate of 31.5%)

19.

for the quarter ended September 30, 2009. The decrease in the effective tax rate resulted from an increased percentage of tax-exempt interest income.

### Nine months ended September 30, 2010 and 2009

Net income for the nine months ending September 30, 2010, was $2.54 million or $0.93 per share, as compared to $2.46 million or $0.90 per share during the same period in 2009. Return on average assets and return on average equity were 0.77% and 7.25%, respectively, for the nine-month period of 2010, compared to 0.78% and 7.33%, respectively for 2009.

Net interest income was $11.7 million for the nine months ended September 30, 2010, an increase of $81 thousand or 0.7% from the same period last year.

Comparative net income increased due to a decrease in 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.

*(unaudited, dollars in thousands)*

| Assets | 2010 Average Balance | Average Rate | 2009 Average Balance | Average Rate |
| --- | ---: | ---: | ---: | ---: |
| Due from banks-interest bearing | $28,290 | 0.24% | $9,630 | 0.23% |
| Taxable securities | 68,577 | 4.02% | 66,513 | 4.95% |
| Tax-exempt securities | 10,026 | 5.19% | 8,164 | 5.76% |
| Federal funds sold | 240 | 0.13% | 200 | 0.13% |
| Loans | 312,943 | 5.56% | 317,957 | 5.80% |
| Total earning assets | 420,076 | 4.94% | 402,464 | 5.53% |
| Other assets | 22,514 |  | 21,137 |  |
| Total Assets | $442,590 |  | $423,601 |  |
| **Liabilities and Shareholders Equity** |  |  |  |  |
| Interest bearing demand deposits | $51,819 | 0.08% | $44,848 | 0.11% |
| Savings deposits | 73,061 | 0.36% | 57,582 | 0.43% |
| Time deposits | 149,504 | 2.16% | 155,031 | 2.70% |
| Other borrowed funds | 64,206 | 2.15% | 74,688 | 2.75% |
| Total interest bearing liabilities | 338,590 | 1.45% | 332,149 | 1.97% |
| Non-interest bearing demand deposits | 55,677 |  | 44,722 |  |
| Other liabilities | 1,486 |  | 1,868 |  |
| Shareholders’ Equity | 46,837 |  | 44,862 |  |
| Total Liabilities and Shareholders’ Equity | $442,590 |  | $423,601 |  |
| Taxable equivalent net interest spread |  | **3.77%** |  | **3.90%** |
| Taxable equivalent net interest margin |  | **3.49%** |  | **3.56%** |

20.

Interest income on loans decreased $798 thousand, or 5.8%, for the nine months ended September 30, 2010, as compared to the same period in 2009. This decrease was primarily due to an average loan volume decrease of $5 million compounded by an interest rate decrease of 24 basis points for the comparable nine-month period. Interest income on securities decreased $372 thousand, or 13.8%, as the yield on taxable securities decreased 86 basis points due to both calls in the Agency portfolio and accelerated payments within the mortgage-backed securities portfolio, while average investment balances increased by $3.9 million. Interest income on fed funds sold and interest bearing deposits increased $35 thousand for the nine months ended September 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 $1.2 million to $3.7 million for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. Interest expense on deposits decreased $712 thousand, or 21.2%, from the same period as last year, while interest expense on other borrowings decreased $504 thousand or 32.8%. 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 in the future. 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 13 basis points for the nine-month period ended September 30, 2010, to 3.77%, from 3.90% for the same period in 2009.

The provision for loan losses was $996 thousand during the first nine months of 2010, compared to $928 thousand in the same nine-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 decreased $46 thousand, or 1.9%, during the nine months ended September 30, 2010, as compared to the same period in 2009. The decrease in non-interest income was primarily due to the reduction in gain on sale of mortgage loans into the secondary market and reductions in service charges on deposits as deposit customers curtailed their use of overdraft privilege products in 2010 and have maintained higher average deposit balances to offset monthly fees. Increases in fee revenue occurred on debit card interchange fees as customers increased their card usage and increases were recognized on securities gains as the securities losses recognized in 2009 did not reoccur in 2010. Other income increased $96 thousand, or 25.0%, primarily due to an increase in servicing fees from loans sold of $40 thousand and an increase in check printing fee income of $27 thousand.

Decreases were recognized in gains on mortgage loans sold in the secondary market for the first nine months 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 $121 thousand, or 1.3%, for the nine months ended September 30, 2010, compared to the same period in 2009. The bank’s FDIC deposit premium decreased $79 thousand from $496 thousand for the nine 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 $52 thousand, or 1.0%, primarily the result of the decrease of incentive and profit sharing accruals in first quarter 2010. Professional and directors fees decreased $28 thousand or 5.8%.

21.

Occupancy and equipment expense has decreased during the first nine-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. Other expenses increased $165 thousand, or 9.0%, primarily due to an increase of $152 thousand in loan collection expenses.

The provision for income taxes was $1.1 million (effective rate of 30.8%) for the nine months ended September 30, 2010, compared to $1.1 million (effective rate of 31.3%) for the nine months ended September 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 September 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 September 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 September 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.

22.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## Market risk

As filed, 1,282 characters.

There have been no material changes in the quantitative and qualitative disclosures about market risks as of September 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 September 30, 2010 and December 31, 2009:

### September 30, 2010

*(Dollars in Thousands)*

| Changes in Interest Rates (basis points) | Net Interest Income | Dollar Change | Percentage Change |
| ---: | ---: | ---: | ---: |
| +200 | $16,391 | $1,248 | 8.2% |
| +100 | 15,558 | 415 | 2.7 |
| 0 | 15,143 | 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 |

23.

## Controls and procedures

As filed, 1,798 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.

24.

FORM 10-Q

Quarter ended September 30, 2010

Filed Nov 12, 2010.
Source: SEC EDGAR, the filing index for accession 0000950123-10-104838. Last ingested by Listed: Nov 2, 2026, 09:27 ET. No prices; not investment advice.