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: September 30, 2012

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 November 13, 2012:
  2,734,799 common shares

 

 

 


Table of Contents

CSB BANCORP, INC

FORM 10-Q

QUARTER ENDED September 30, 2012

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 the Consolidated Financial Statements

     8   

ITEM 2

 

 

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

     24   

ITEM 3

 

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     30   

ITEM 4

 

 

CONTROLS AND PROCEDURES

     31   
    Part II – Other Information   

ITEM 1

 

 

Legal Proceedings.

     32   

ITEM 1A

 

 

Risk Factors

     32   

ITEM 2

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

     32   

ITEM 3

 

 

Defaults upon Senior Securities

     32   

ITEM 4

 

 

Mine Safety Disclosures

     32   

ITEM 5

 

 

Other Information

     32   

ITEM 6

 

 

Exhibits

     33   

Signatures

     34   

 

2


Table of Contents

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     September 30,
2012
    December 31,
2011
 

ASSETS

    

(Dollars in thousands)

    

Cash and cash equivalents

    

Cash and due from banks

   $ 12,913      $ 12,519   

Interest-earning deposits in other banks

     41,762        69,739   
  

 

 

   

 

 

 

Total cash and cash equivalents

     54,675        82,258   
  

 

 

   

 

 

 

Securities

    

Available-for-sale, at fair value

     134,889        123,026   

Restricted stock, at cost

     5,463        5,463   
  

 

 

   

 

 

 

Total securities

     140,352        128,489   
  

 

 

   

 

 

 

Loans held for sale

     540        0   

Loans

     352,748        324,182   

Less allowance for loan losses

     4,661        4,082   
  

 

 

   

 

 

 

Net loans

     348,087        320,100   
  

 

 

   

 

 

 

Premises and equipment, net

     8,425        8,513   

Core deposit intangible

     931        1,034   

Goodwill

     4,728        4,728   

Bank-owned life insurance

     8,237        3,068   

Accrued interest receivable and other assets

     2,808        3,043   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 568,783      $ 551,233   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 91,022      $ 85,890   

Interest-bearing

     363,277        357,663   
  

 

 

   

 

 

 

Total deposits

     454,299        443,553   
  

 

 

   

 

 

 

Short-term borrowings

     43,011        37,073   

Other borrowings

     16,738        19,161   

Accrued interest payable and other liabilities

     2,634        2,017   
  

 

 

   

 

 

 

Total liabilities

     516,682        501,804   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; outstanding 2,734,799 shares in 2012 and 2011

     18,629        18,629   

Additional paid-in capital

     9,994        9,994   

Retained earnings

     26,342        24,391   

Treasury stock at cost- 245,803 shares in 2012 and 2011

     (5,015     (5,015

Accumulated other comprehensive income

     2,151        1,430   
  

 

 

   

 

 

 

Total shareholders’ equity

     52,101        49,429   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 568,783      $ 551,233   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in thousands, except per share data)    2012      2011     2012      2011  

INTEREST AND DIVIDEND INCOME

          

Loans, including fees

   $ 4,357       $ 4,233      $ 12,881       $ 12,745   

Taxable securities

     638         601        2,074         1,809   

Nontaxable securities

     120         110        363         310   

Other

     32         14        112         42   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest and dividend income

     5,147         4,958        15,430         14,906   
  

 

 

    

 

 

   

 

 

    

 

 

 

INTEREST EXPENSE

          

Deposits

     559         663        1,789         2,154   

Short-term borrowings

     22         33        71         112   

Other borrowings

     140         165        434         513   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     721         861        2,294         2,779   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME

     4,426         4,097        13,136         12,127   

PROVISION FOR LOAN LOSSES

     206         240        617         710   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income, after provision for loan losses

     4,220         3,857        12,519         11,417   
  

 

 

    

 

 

   

 

 

    

 

 

 

NONINTEREST INCOME

          

Service charges on deposit accounts

     345         286        971         810   

Trust services

     175         154        503         504   

Debit card interchange fees

     195         154        590         444   

Gain on sale of loans, net

     169         54        362         153   

Securities gains, net

     0         237        0         237   

Other

     189         159        629         441   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     1,073         1,044        3,055         2,589   
  

 

 

    

 

 

   

 

 

    

 

 

 

NONINTEREST EXPENSES

          

Salaries and employee benefits

     1,985         1,856        5,909         5,412   

Occupancy expense

     280         208        767         631   

Equipment expense

     154         127        448         370   

Professional fees

     172         200        621         536   

Franchise tax expense

     138         135        415         405   

FDIC assessment expense

     83         36        238         254   

Software expense & amortization

     94         98        275         284   

Marketing and public relations

     83         83        235         215   

Debit card expense

     82         70        230         196   

Amortization of intangible assets

     37         15        103         46   

Net cost of operation of other real estate

     0         (51     8         (51

Other

     420         681        1,383         1,563   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest expenses

     3,528         3,458        10,632         9,861   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     1,765         1,443        4,942         4,145   

FEDERAL INCOME TAX PROVISION

     534         444        1,515         1,278   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME

   $ 1,231       $ 999      $ 3,427       $ 2,867   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic and diluted net income per share

   $ 0.45       $ 0.37      $ 1.25       $ 1.05   
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to unaudited consolidated financial statements.

 

4


Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in thousands)    2012     2011     2012     2011  

Net income

   $ 1,231      $ 999      $ 3,427      $ 2,867   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax:

        

Unrealized gains arising during the period

     282        458        1,093        1,216   

Income tax effect

     (96     (156     (372     (413

Reclassification adjustment for gains on available for sale securities included in net income

     0        (237     0        (237

Income tax effect

     0        81        0        81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive gain

     186        146        721        646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 1,417      $ 1,145      $ 4,148      $ 3,513   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

5


Table of Contents

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in thousands, except per share data)    2012     2011     2012     2011  

Balance at beginning of period

   $ 51,176      $ 48,538      $ 49,429      $ 47,154   

Comprehensive income:

        

Net income

     1,231        999        3,427        2,867   

Other comprehensive income

     186        146        721        646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     1,417        1,145        4,148        3,513   

Common cash dividends declared

     (492     (492     (1,476     (1,476
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 52,101      $ 49,191      $ 52,101      $ 49,191   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common cash dividends declared per share

   $ 0.18      $ 0.18      $ 0.54      $ 0.54   

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended
September 30,
 
(Dollars in thousands)    2012     2011  

NET CASH FROM OPERATING ACTIVITIES

   $ 4,388      $ 3,857   

CASH FLOWS FROM INVESTING ACTIVITES

    

Securities available-for-sale:

    

Proceeds from maturities and repayments

     54,051        27,928   

Purchases

     (65,222     (40,159

Proceeds from sale of securities

     0        3,244   

Loan originations, net of repayments

     (28,702     248   

Proceeds from sale of other real estate owned

     26        347   

Property, equipment, and software acquisitions

     (503     (311

Purchase of bank-owned life insurance

     (5,000     0   
  

 

 

   

 

 

 

Net cash used in investing activities

     (45,350     (8,703
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net change in deposits

     10,849        1,396   

Net change in short-term borrowings

     5,938        509   

Repayments of other borrowings

     (2,423     (3,576

Cash dividends paid

     (985     (985
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     13,379        (2,656
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (27,583     (7,502

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     82,258        48,360   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 54,675      $ 40,858   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

    

Cash paid during the year for:

    

Interest

   $ 2,426      $ 2,868   

Income taxes

     1,170        1,100   

Noncash investing activities:

    

Transfer of loans to other real estate owned

     56        764   

Noncash financing activities:

    

Dividends declared

     492        492   

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 September 30, 2012, 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, 2011, 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 September 30, 2012 are not necessarily indicative of the operating results for the full year or any future interim period.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company has provided the necessary disclosure in Note 4 and Note 5.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted. The Company has provided the necessary disclosure in the Statement of Comprehensive Income.

 

8


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. This ASU is not expected to have a significant impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The Company has provided the necessary disclosure in the Statement of Comprehensive Income.

 

9


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES

Securities consist of the following at September 30, 2012 and December 31, 2011:

 

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

September 30, 2012

           

Available-for-sale:

           

U.S. Treasury security

   $ 100       $ 0       $ 0       $ 100   

Obligations of U.S. Government corporations and agencies

     34,874         52         52         34,874   

Mortgage-backed securities in government sponsored entities

     76,875         2,491         38         79,328   

Obligations of states and political subdivisions

     15,402         740         4         16,138   

Corporate bonds

     4,310         109         36         4,383   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     131,561         3,392         130         134,823   

Equity securities in financial institutions

     69         6         9         66   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     131,630         3,398         139         134,889   

Restricted stock

     5,463         0         0         5,463   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 137,093       $ 3,398       $ 139       $ 140,352   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Available-for-sale:

           

U.S. Treasury security

   $ 100       $ 0       $ 0       $ 100   

Obligations of U.S. Government corporations and agencies

     28,263         83         23         28,323   

Mortgage-backed securities in government sponsored entities

     74,834         1,562         64         76,332   

Obligations of states and political subdivisions

     14,148         732         0         14,880   

Corporate bonds

     3,445         6         121         3,330   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     120,790         2,383         208         122,965   

Equity securities in financial institutions

     69         3         11         61   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     120,859         2,386         219         123,026   

Restricted stock

     5,463         0         0         5,463   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 126,322       $ 2,386       $ 219       $ 128,489   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of debt securities at September 30, 2012, 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.

 

10


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

 

(Dollars in thousands)    Amortized
cost
     Fair value  

Available-for-sale:

     

Due in one year or less

   $ 280       $ 280   

Due after one through five years

     13,172         13,551   

Due after five through ten years

     20,428         20,899   

Due after ten years

     97,681         100,093   
  

 

 

    

 

 

 

Total debt securities available-for-sale

   $ 131,561       $ 134,823   
  

 

 

    

 

 

 

Realized Gains and Losses

There were no sales of available-for-sale securities for the three month or nine month periods ending September 30, 2012. Proceeds of $3.2 million from sales of available-for-sale securities and gross realized gains of $237 thousand were included in earnings for both the three month and nine month periods ending September 30, 2011. Gains or losses on the sales of available-for-sale securities are recognized upon sale and are determined by the specific identification method.

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 September 30, 2012 and December 31, 2011:

 

     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
 

September 30, 2012

                 

Obligations of U.S. Corporations and agencies

   $ 52       $ 13,945       $ 0       $ 0       $ 52       $ 13,945   

Mortgage-backed securities in government sponsored entities

     38       $ 2,249         0         0         38         2,249   

Obligations of state and political subdivisions

     4         610         0         0         4         610   

Corporate bonds

     5         367         31         969         36         1,336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     99         17,171         31         969         130         18,140   

Equity securities in financial institutions

     0         0         9         45         9         45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 99       $ 17,171       $ 40       $ 1,014       $ 139       $ 18,185   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Obligations of U.S. Corporations and agencies

   $ 23       $ 6,974       $ 0       $ 0       $ 23       $ 6,974   

Mortgage-backed securities in government sponsored entities

     63         16,794         1         192         64         16,986   

Corporate bonds

     49         2,397         72         428         121         2,825   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     135         26,165         73         620         208         26,785   

Equity securities in financial institutions

     0         0         11         43         11         43   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 135       $ 26,165       $ 84       $ 663       $ 219       $ 26,828   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

There were sixteen (16) securities in an unrealized loss position at September 30, 2012, four (4) of which were in a continuous loss position for twelve months or more. There were seventeen (17) securities in an unrealized loss position at December 31, 2011, two (2) 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 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, 2012 and has recognized the total amount of the impairment in other comprehensive income, net of tax.

NOTE 3 – LOANS

Loans consist of the following:

 

(Dollars in thousands)    September 30,
2012
     December 31,
2011
 

Commercial

   $ 97,983       $ 89,828   

Commercial real estate

     118,287         106,332   

Residential real estate

     108,450         103,518   

Construction & Land Development

     21,462         18,061   

Consumer

     6,298         6,216   
  

 

 

    

 

 

 

Total loans before deferred costs

     352,480         323,955   

Deferred loan costs

     268         227   
  

 

 

    

 

 

 

Total Loans

   $ 352,748       $ 324,182   
  

 

 

    

 

 

 

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 and industrial 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. Commercial and industrial 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 and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and usually incorporate the personal guarantees of business owners; 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.

 

12


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial 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 generally 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 more 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 which helps reduce the Company’s exposure to adverse economic events that affect any single market or 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 September 30, 2012 approximately 82% of the outstanding principal balances 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 financial record. 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. Construction and land development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources or repayment for these types of loans may be pre-committed permanent loans from the Company or other 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 risks 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 lenders and loan support personnel. This activity, coupled with relatively small loan amounts spread across many individual borrowers, minimizes risk.

The Company utilizes an independent loan review vendor that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Audit Committee of the Board of Directors. 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.

Concentrations of Credit

Nearly all of the Company’s lending activity occurs within the State of Ohio, including the four counties of Holmes, Stark, Tuscarawas and Wayne, as well as other markets. The majority of the Company’s loan portfolio consists of owner occupied commercial real estate and commercial loans. As of September 30, 2012 and December 31, 2011 there were no concentrations of loans related to any single industry.

 

13


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine month periods ended September 30, 2012 and 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

(Dollars in thousands)

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

Three months ended September 30, 2012

              

Beginning balance, July 1, 2012

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

Provision for possible loan losses

     94        108        (45     85        46        (82     206   

Charge-offs

     0        0        0        0        (39       (39

Recoveries

     2        0        10        0        11          23   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     2        0        10        0        (28       (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 992      $ 2,035      $ 1,016      $ 302      $ 82      $ 234      $ 4,661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

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

Nine months ended
September 30, 2012

              

Beginning balance, January 1, 2012

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

Provision for possible loan losses

     (33     376        127        122        24        1        617   

Charge-offs

     (15     (14     (104     0        (70       (203

Recoveries

     16        0        99        0        50          165   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     1        (14     (5     0        (20       (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 992      $ 2,035      $ 1,016      $ 302      $ 82      $ 234      $ 4,661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

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

Three months ended September 30, 2011

              

Beginning balance, July 1, 2011

   $ 1,012      $ 1,558      $ 776      $ 272      $ 81      $ 355      $ 4,054   

Provision for possible loan losses

     (9     (59     304        4        2        (2     240   

Charge-offs

     (36     (25     (72     (41     (18       (192

Recoveries

     1        0        0        0        13          14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (35     (25     (72     (41     (5       (178
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 968      $ 1,474      $ 1,008      $ 235      $ 78      $ 353      $ 4,116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Dollars in thousands)

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

Nine months ended
September 30, 2011

              

Beginning balance, January 1, 2011

   $ 1,179      $ 1,183      $ 1,057      $ 213      $ 80      $ 319      $ 4,031   

Provision for possible loan losses

     120        359        98        63        36        34        710   

Charge-offs

     (343     (68     (156     (41     (78       (686

Recoveries

     12        0        9        0        40          61   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (331     (68     (147     (41     (38       (625
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 968      $ 1,474      $ 1,008      $ 235      $ 78      $ 353      $ 4,116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 September 30, 2012 and December 31,2011:

 

(Dollars in thousands)

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

September 30, 2012

                    

Allowance for loan losses:

                    

Ending allowance balances attributable to loans:

                    

Individually evaluated for impairment

   $ 86       $ 688       $ 57       $ 61       $ 0       $ 0       $ 892   

Collectively evaluated for impairment

     906         1,347         959         241         82         234         3,769   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 992       $ 2,035       $ 1,016       $ 302       $ 82       $ 234       $ 4,661   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 3,915       $ 4,911       $ 1,151       $ 166       $ 0          $ 10,143   

Loans collectively evaluated for impairment

     94,068         113,376         107,299         21,296         6,298            342,337   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 97,983       $ 118,287       $ 108,450       $ 21,462       $ 6,298          $ 352,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

December 31, 2011

                    

Allowance for loan losses:

                    

Ending allowance balances attributable to loans:

                    

Individually evaluated for impairment

   $ 165       $ 304       $ 53       $ 0       $ 0       $ 0       $ 522   

Collectively evaluated for impairment

     859         1,369         841         180         78         233         3,560   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 4,605       $ 2,476       $ 182       $ 0       $ 0          $ 7,263   

Loans collectively evaluated for impairment

     85,223         103,856         103,336         18,061         6,216            316,692   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 89,828       $ 106,332       $ 103,518       $ 18,061       $ 6,216          $ 323,955   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

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 September 30, 2012 and December 31, 2011:

 

(Dollars in thousands)

   Unpaid
Principal
Balance
     Recorded
Investment
with no
Allowance
     Recorded
Investment
with
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

September 30, 2012

                 

Commercial

   $ 3,915       $ 0       $ 3,928       $ 3,928       $ 86       $ 4,243   

Commercial real estate

     4,950         1,263         3,641         4,904         689         4,160   

Residential real estate

     1,229         88         1,066         1,154         57         646   

Construction & land development

     173         0         166         166         61         166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 10,267       $ 1,351       $ 8,801       $ 10,152       $ 893       $ 9,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Commercial

   $ 4,605       $ 0       $ 4,605       $ 4,605       $ 165       $ 2,890   

Commercial real estate

     2,621         0         2,476         2,476         304         2,924   

Residential real estate

     182         0         182         182         53         103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 7,408       $ 0       $ 7,263       $ 7,263       $ 522       $ 5,917   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of past due and nonaccrual loans as of September 30, 2012 and December 31, 2011 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
 

September 30, 2012

                    

Commercial

   $ 97,782       $ 123       $ 21       $ 0       $ 57       $ 201       $ 97,983   

Commercial real estate

     115,390         257         0         11         2,629         2,897         118,287   

Residential

     106,318         1,097         243         141         651         2,132         108,450   

Construction

     20,621         668         0         0         173         841         21,462   

Consumer

     6,124         111         63         0         0         174         6,298   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 346,235       $ 2,256       $ 327       $ 152       $ 3,510       $ 6,245       $ 352,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                    

Commercial

   $ 89,365       $ 272       $ 28       $ 150       $ 13       $ 463       $ 89,828   

Commercial real estate

     103,828         587         250         141         1,526         2,504         106,332   

Residential

     100,297         1,443         303         282         1,193         3,221         103,518   

Construction

     17,885         0         0         0         176         176         18,061   

Consumer

     5,985         194         29         8         0         231         6,216   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 317,360       $ 2,496       $ 610       $ 581       $ 2,908       $ 6,595       $ 323,955   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Troubled Debt Restructurings

The Company has troubled debt restructurings of $8.3 million as of September 30, 2012, and $8.5 million as of December 31, 2011, with $600 thousand and $516 thousand of specific reserves allocated as of September 30, 2012 and December 31, 2011 respectively to customers whose loan terms have been modified in troubled debt restructurings. At September 30, 2012, $7.6 million of the loans classified as troubled debt restructurings were performing to modified terms. The remaining $631 thousand were in nonaccrual status.

Loan modifications that are considered troubled debt restructurings completed during the three and nine month periods ended September 30, 2012 and 2011 were as follows:

 

     For the Three Months Ended September 30, 2012  

(Dollars in thousands)

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

Commercial real estate

             0       $ 0       $ 0   

Residential real estate

     1         206         206   
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     1       $ 206       $ 206   
  

 

 

    

 

 

    

 

 

 

Subsequently Defaulted

     0       $ 0      
  

 

 

    

 

 

    

 

     For the Nine Months Ended September 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

     8         694         694   
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     9       $ 834       $ 834   
  

 

 

    

 

 

    

 

 

 

Subsequently Defaulted

     1       $ 60      
  

 

 

    

 

 

    

 

     For the Three Months Ended September 30, 2011  

(Dollars in thousands)

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

Commercial real estate

             1       $ 298       $ 298   

Residential real estate

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     1       $ 298       $ 298   
  

 

 

    

 

 

    

 

 

 

Subsequently Defaulted

     0       $ 0      
  

 

 

    

 

 

    

 

     For the Nine Months Ended September 30, 2011  

(Dollars in thousands)

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

Commercial

             3       $ 4,465       $ 4,465   

Commercial real estate

     2         518         518   

Residential real estate

     5         285         285   
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     10       $ 5,268       $ 5,268   
  

 

 

    

 

 

    

 

 

 

Subsequently Defaulted

     1       $ 90      
  

 

 

    

 

 

    

 

17


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The loans restructured during the three and nine month periods ending September 30, 2012 and 2011 were modified by changing the monthly payment to interest only. No principal reductions were made. The loan that subsequently defaulted in 2012 was a residential real estate loan.

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.

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 September 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 3 – Loans (CONTINUED)

 

 

(Dollars in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Not Rated      Total  

September 30, 2012

                 

Commercial

   $ 86,829       $ 4,905       $ 6,075       $ 0       $ 174       $ 97,983   

Commercial real estate

     100,725         5,369         9,081         0         3,112         118,287   

Residential real estate

     204         0         55         0         108,191         108,450   

Construction & land development

     15,505         3,369         1,214         0         1,374         21,462   

Consumer

     0         0         0         0         6,298         6,298   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 203,263       $ 13,643       $ 16,425       $ 0       $ 119,149       $ 352,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Commercial

   $ 76,216       $ 5,147       $ 7,710       $ 0       $ 755       $ 89,828   

Commercial real estate

     84,846         10,385         8,686         0         2,415         106,332   

Residential real estate

     1,151         0         61         0         102,306         103,518   

Construction & land development

     12,695         4,340         168         0         858         18,061   

Consumer

     0         0         0         0         6,216         6,216   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 174,908       $ 19,872       $ 16,625       $ 0       $ 112,550       $ 323,955   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2012 and December 31, 2011. Non-performing loans include loans past due 90 days and greater and loans on nonaccrual of interest.

 

(Dollars in thousands)

   Performing      Non-Performing      Total  

September 30, 2012

        

Commercial

   $ 174       $ 0       $ 174   

Commercial real estate

     3,112         0         3,112   

Residential real estate

     107,454         737         108,191   

Construction & land development

     1,367         7         1,374   

Consumer

     6,298         0         6,298   
  

 

 

    

 

 

    

 

 

 

Total

   $ 118,405       $ 744       $ 119,149   
  

 

 

    

 

 

    

 

 

 

December 31, 2011

        

Commercial

   $ 755       $ 0       $ 755   

Commercial real estate

     2,415         0         2,415   

Residential real estate

     100,892         1,414         102,306   

Construction & land development

     850         8         858   

Consumer

     6,208         8         6,216   
  

 

 

    

 

 

    

 

 

 

Total

   $ 111,120       $ 1,430       $ 112,550   
  

 

 

    

 

 

    

 

 

 

Loans serviced for others approximated $56 million and $50 million at September 30, 2012 and December 31, 2011, respectively.

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:

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 – FAIR VALUE MEASUREMENTS (CONTINUED)

 

LevelI:

   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 Balance Sheets at their fair value on a recurring basis as of September 30, 2012 and December 31, 2011, by level within the fair value hierarchy. No liabilities are carried at fair value. As required by the applicable 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, corporate bonds and obligations of states and political subdivisions are valued at observable market data for similar assets.

 

(Dollars in thousands)    Level I      Level II      Level III      Total  
     September 30, 2012  

Assets:

  

Securities available-for-sale

           

U.S. Treasury security

   $ 100       $ 0       $ 0       $ 100   

Obligations of U.S. government corporations and agencies

     0         34,874         0         34,874   

Mortgage-backed securities in government sponsored entities

     0         79,328         0         79,328   

Obligations of states and political subdivisions

     0         16,138         0         16,138   

Corporate bonds

     0         4,383         0         4,383   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     100         134,723         0         134,823   

Equity securities in financial institutions

     66         0         0         66   

Loans held for sale

     540         0         0         540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 706       $ 134,723       $ 0       $ 135,429   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  

Assets:

  

Securities available-for-sale

           

U.S. Treasury security

   $ 100       $ 0       $ 0       $ 100   

Obligations of U.S. government corporations and agencies

     0         28,323         0         28,323   

Mortgage-backed securities in government sponsored entities

     0         76,332         0         76,332   

Obligations of states and political subdivisions

     0         14,880         0         14,880   

Corporate bonds

     0         3,330         0         3,330   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     100         122,865         0         122,965   

Equity securities in financial institutions

     61         0         0         61   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 161       $ 122,865       $         0       $ 123,026   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 4 – FAIR VALUE MEASUREMENTS (CONTINUED)

 

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of September 30, 2012, and December 31, 2011, by level within the fair value hierarchy. The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. 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. Impaired loans measured using a discounted cash flow model, calculate the present value of future loan payments. The valuation models incorporate assumptions based on management’s best judgment that are significant inputs to the discounting calculations. Techniques used to value the collateral that secure the impaired loans and other real estate owned include: quoted market prices for identical assets classified as Level I inputs, and 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.

 

(Dollars in thousands)    Level I      Level II      Level III      Total  
     September 30, 2012  

Assets measured on a nonrecurring basis:

  

Impaired loans

   $ 0       $ 0       $ 9,250       $ 9,250   

Other real estate owned

     0         0         51         51   

Mortgage servicing rights

     0         0         192         192   
     December 31, 2011  

Impaired loans

   $ 0       $ 0       $ 6,741       $ 6,741   

Other real estate owned

     0         0         10         10   

Mortgage servicing rights

     0         0         167         167   

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 3 inputs to determine fair value:

 

    

Fair value

estimate

  

Valuation

techniques

  

Unobservable

input

  

Range

(Dollars in thousands)    September 30, 2012
      Discounted    Remaining term    17 mos to 30 yrs
      cash flow    Discount rate    3.75% to 8%
      Appraisal of    Appraisal adjustments (2)    0% to -50%

Impaired loans

   $9,250    collateral (1), (3 )    Liquidation expense (2)    0% to -10%
      Appraisal of    Management discount   

Other real estate owned

   51    collateral (1), (3 )    for property type    0% to -32%
      Discounted    Remaining term    8 mos to 30 yrs

Mortgage servicing rights

   192    cash flow    Discount rate    2.1%

 

(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 appraisals adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.

 

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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 September 30, 2012 and December 31, 2011 are as follows:

 

     September 30, 2012  
(Dollars in thousands)    Carrying
Value
     Level 1      Level II      Level III      Total Fair
Value
 

Financial assets:

              

Cash and cash equivalents

   $ 54,675       $ 54,675       $ 0       $ 0       $ 54,675   

Securities

     134,889         166         134,723         0         134,889   

Loans held for sale

     540         540         0         0         540   

Net loans

     348,087         0         0         353,559         353,559   

Bank-owned life insurance

     8,237         8,237         0         0         8,237   

Regulatory stock

     5,463         0         5,463         0         5,463   

Accrued interest receivable

     1,463         1,463         0         0         1,463   

Financial liabilities:

              

Deposits

   $ 454,299       $ 293,229       $ 0       $ 162,577       $ 455,806   

Short-term borrowings

     43,011         43,011         0         0         43,011   

Federal Home Loan Bank advances

     16,738         0         0         17,969         17,969   

Accrued interest payable

     153         153         0         0         153   

 

     December 31, 2011  
(Dollars in thousands)    Carrying
value
     Fair value  

Financial assets:

     

Cash and cash equivalents

   $ 82,258       $ 82,258   

Securities available for sale

     123,026         123,026   

Net loans

     320,100         327,138   

Bank-owned life insurance

     3,068         3,068   

Regulatory stock

     5,463         5,463   

Accrued interest receivable

     1,349         1,349   

Financial liabilities:

     

Deposits

   $ 443,553       $ 445,587   

Short-term borrowings

     37,073         37,073   

Federal Home Loan Bank advances

     19,161         20,087   

Accrued interest payable

     182         182   

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

 

22


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.

Federal Home Loan Bank advances

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 September 30, 2012 and December 31, 2011. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $105 million at September 30, 2012 and $92 million at December 31, 2011. 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.

 

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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 September 30, 2012 as compared to December 31, 2011, and the consolidated results of operations for the three and nine month periods ended September 30, 2012 compared to the same periods in 2011. 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 $569 million at September 30, 2012, compared to $551 million at December 31, 2011, representing an increase of $18 million, or 3%. Cash and cash equivalents decreased $28 million, or 33%, during the nine month period ended September 30, 2012, primarily as a result of funding increases in loans and securities and repayment of advances from the FHLB. Securities increased $12 million, or 9%, during the first nine months of 2012 as bonds were purchased within the US government agency portfolio.

Net loans increased $28 million, or 9%, during the nine month period ended September 30, 2012. Commercial loans including commercial real estate loans increased $20 million, or 10%, home equity lines increased $1 million, or 3%, real estate mortgage loans increased $4 million, or 6%, construction and land development loans increased $3 million, or 19%, and consumer loans remained stable over December 31, 2011. Consumers continued to refinance their mortgage loans for lower long-term rates. During the fourth quarter 2011 and first nine months of 2012 the bank originated and retained fifteen year fixed rate mortgage loans for its portfolio. The bank originates and sells fixed rate thirty year mortgages into the secondary market.

 

24


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 1.32% at September 30, 2012, an increase from 1.26% at December 31, 2011. Outstanding loan balances increased 9% to $353 million at September 30, 2012 while net charge-offs of $38 thousand were offset by a provision of $617 thousand to the allowance for loan losses for the nine months ended September 30, 2012. Non-performing loans increased $173 thousand or 5% from December 31, 2011.

 

(Dollars in thousands)    September 30,
2012
    December 31,
2011
    September 30,
2011
 

Non-performing loans

   $ 3,662      $ 3,489      $ 3,495   

Other real estate

     51        10        505   

Allowance for loan losses

     4,661        4,082        4,116   

Total loans

     352,748        324,182        313,980   

Allowance: loans

     1.32     1.26     1.31

Allowance: non-performing loans

     1.3     1.2     1.2

The ratio of gross loans to deposits was 78% at September 30, 2012, compared to 73% at December 31, 2011. The increase in this ratio is the result of loan volume increases outpacing increases in deposits during the nine months ended September 30, 2012.

The Company had net unrealized gains of $3 million within its securities portfolio at September 30, 2012, compared to net unrealized gains of $2 million at December 31, 2011. 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 $139 thousand within the total portfolio as of September 30, 2012, 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, 2012, are considered temporary and no impairment loss relating to these securities has been recognized.

Bank–owned life insurance of $5 million was purchased on the lives of senior management during first quarter of 2012.

Deposits increased $11 million, or 2% from December 31, 2011 with non-interest bearing deposits increasing $5 million and interest-bearing deposit accounts increasing $6 million. By deposit type, increases were recognized in statement and passbook savings accounts and money market savings accounts for the period ended September 30, 2012.

Short-term borrowings consisting of overnight repurchase agreements with retail customers increased $6 million from December 31, 2011 and other borrowings decreased $2 million 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 $52 million, or 9% of total assets, at September 30, 2012, compared to $49 million, or 9% of total assets, at December 31, 2011. The increase in shareholders’ equity during the nine months ended September 30, 2012 was due to net income of $3.4 million, an increase of $721 thousand in other comprehensive income and dividends declared of $1.5 million which partially offset the above increases. The Company and its subsidiary bank met all regulatory capital requirements at September 30, 2012.

 

25


Table of Contents

CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

Three months ended September 30, 2012 and 2011

For the quarter ended September 30, 2012, the Company recorded net income of $1.2 million or $0.45 per share, as compared to net income of $999 thousand, or $0.37 per share for the quarter ended September 30, 2011. The $232 thousand increase in net income for the quarter was a result of net interest income increasing $329 thousand and other noninterest income increasing $29 thousand. These gains were partially offset by an increase in noninterest expense of $70 thousand and an increase in the federal income tax provision of $90 thousand. Return on average assets and return on average equity were 0.86% and 9.41%, respectively, for the three month period of 2012, compared to 0.87% and 8.04%, respectively for 2011.

Average Balance Sheets and Net Interest Margin Analysis

 

     For the three months ended September 30,  
     2012     2011  
(Dollars in thousands)    Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Interest-earning deposits in other banks

   $ 49,930         0.25   $ 28,194         0.21

Federal funds sold

     241         0.00        101         0.03   

Taxable securities

     123,565         2.05        74,486         3.20   

Tax-exempt securities

     14,675         4.93        12,740         5.15   

Loans

     347,682         5.00        315,750         5.33   
  

 

 

      

 

 

    

Total earning assets

     536,093         3.87     431,271         4.62

Other assets

     33,049           23,414      
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 569,142         $ 454,685      
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest-bearing demand deposits

   $ 63,263         0.07   $ 52,662         0.08

Savings deposits

     138,415         0.16        84,903         0.24   

Time deposits

     161,998         1.21        144,326         1.65   

Other borrowed funds

     59,198         1.08        53,088         1.47   

Total interest bearing liabilities

     422,874         0.68     334,979         1.02

Non-interest bearing demand deposits

     91,815           68,686      

Other liabilities

     2,390           1,755      

Shareholders’ Equity

     52,063           49,265      
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 569,142         $ 454,685      
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.19        3.60

Taxable equivalent net interest margin

        3.34        3.83

Interest income for the quarter ended September 30, 2012, was $5.1 million representing a $189 thousand increase, or a 3.8% improvement, compared to the same period in 2011. This increase was primarily due to average loan volume increasing $32 million for the quarter ended September 30, 2012 as compared to the third quarter 2011. Interest expense for the quarter ended September 30, 2012 was $721 thousand, a decrease of $140 thousand or 16.3%, from the same period in 2011. The decrease in interest expense occurred primarily due to a decrease of 0.32% in interest rates paid on interest-bearing deposits which decreased from 0.93% in 2011 to 0.61% in 2012 and a rate decrease of 0.39% on all other borrowings which declined from 1.47% in 2011 to 1.08% for the quarter ended September 30, 2012.

 

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Table of Contents

CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The provision for loan losses for the quarter ended September 30, 2012 was $206 thousand, compared to a $240 thousand provision for the same quarter in 2011. 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.

Noninterest income for the quarter ended September 30, 2012, was $1.1 million, an increase of $29 thousand, or 3%, compared to the same quarter in 2011. Service charges on deposit accounts increased $59 thousand or 21% compared to the same quarter in 2011 reflecting the increase in fees generated from deposits acquired during October 2011 from the branch acquisition. Debit card interchange income rose $41 thousand, or 27%, due to volume increases from new accounts as consumers increased their usage of the product. Fees from trust and brokerage services increased $21 thousand to $175 thousand for third quarter 2012 as compared to the same quarter in 2011. The gain on the sale of mortgage loans to the secondary market increased to $169 thousand for the three month period ended September 30, 2012, from $54 thousand in the three month period ended September 30, 2011. Mortgage origination increased during the quarter as secondary market mortgage interest rates reached new lows for the year. Gains on securities sold decreased during the third quarter 2012 as securities gains of $237 thousand recognized in the third quarter of 2011 did not reoccur during the third quarter of 2012.

Noninterest expenses for the quarter ended September 30, 2012 increased $70 thousand, or 2%, compared to the third quarter of 2011. Salaries and employee benefits increased $129 thousand, or 7%. Occupancy and equipment expenses increased $99 thousand in 2012 over the third quarter of 2011. Other expenses decreased $261 thousand, or 38%, compared to the third quarter 2011. Increases in non-interest expense in salaries and employee benefits, occupancy and equipment and some other expenses are the direct result of acquiring two branches in Wooster, Ohio during fourth quarter 2011. The FDIC deposit premium expense increase for the quarter of $47 thousand reflected an accrual adjustment based on a change in the assessment calculation.

Federal income tax expense increased $90 thousand, or 20%, for the quarter ended September 30, 2012 as compared to the third quarter of 2011. The provision for income taxes was $534 thousand (effective rate of 30%) for the quarter ended September 30, 2012, compared to $444 thousand (effective rate of 31%) for the quarter ended September 30, 2011. The increase in the expense resulted from improved income.

RESULTS OF OPERATIONS

Nine months ended September 30, 2012 and 2011

Net income for the nine months ending September 30, 2012, was $3.4 million or $1.25 per share, as compared to $2.9 million or $1.05 per share during the same period in 2011. Return on average assets and return on average equity were 0.82% and 8.95%, respectively, for the nine month period of 2012, compared to 0.85% and 7.92%, respectively for 2011.

Comparative net income increased as net interest income improved to $13.1 million for the nine months ended September 30, 2012, an increase of $1 million or 8% from the same period last year. Total noninterest income rose $466 thousand or 18% to $3.1 million. The provision for loan losses decreased $93 thousand or 13% during the same comparative period. These improvements were partially offset by higher noninterest expenses for the nine month period ending in 2012 as compared to 2011.

Interest income on loans increased $136 thousand, or 1%, for the nine months ended September 30, 2012, as compared to the same period in 2011. This increase was primarily due to an average volume increase of $20 million for the comparable nine month periods. Interest income on securities increased $318 thousand, or 15%, as the average volume of securities increased $46 million for the comparable nine month periods. Interest income on fed funds sold and interest bearing deposits increased $70 thousand for the nine months ended September 30, 2012 as the average fed funds sold and due from banks interest bearing balances increased $34 million, compared to the same period in 2011.

 

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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 nine months ended September 30,  
     2012     2011  
(Dollars in thousands)    Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Due from banks -interest bearing

   $ 57,898         0.26   $ 23,531         0.24

Federal funds sold

     150         0.00        93         0.06   

Taxable securities

     118,200         2.34        74,050         3.26   

Tax-exempt securities

     14,078         5.22        12,209         5.14   

Loans

     338,272         5.10        318,420         5.36   
  

 

 

      

 

 

    

Total earning assets

     528,598         3.95     428,303         4.71

Other assets

     32,712           23,220      
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 561,310         $ 451,523      
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest bearing demand deposits

   $ 62,054         0.08   $ 52,541         0.08

Savings deposits

     133,585         0.18        84,014         0.25   

Time deposits

     165,725         1.27        146,661         1.79   

Other borrowed funds

     58,122         1.16        52,020         1.61   
  

 

 

      

 

 

    

Total interest bearing liabilities

     419,486         0.73     335,236         1.11

Non-interest bearing demand deposits

     88,693           66,374      

Other liabilities

     2,007           1,542      

Shareholders’ Equity

     51,124           48,371      
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 561,310         $ 451,523      
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.22        3.60

Taxable equivalent net interest margin

        3.37        3.85

Interest expense decreased $485 thousand to $2.3 million for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. Interest expense on deposits decreased $365 thousand, or 17%, from the same period as last year, while interest expense on short-term and other borrowings decreased $120 thousand or 19%. 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 nine month periods, the Company grew non-interest bearing deposits in 2012. 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 decreased by 48 basis points for the nine month period ended September 30, 2012, to 3.37%, from 3.85% for the same period in 2011. This margin decrease is primarily the result of $74 million in deposit growth acquired with two branches in Wooster, Ohio combined with deposit growth in the core bank which has been temporarily invested in lower earning assets.

The provision for loan losses was $617 thousand during the nine months of 2012, compared to $710 thousand in the same nine month period of 2011. 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.

 

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CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Non-interest income increased $466 thousand, or 18%, during the nine months ended September 30, 2012, as compared to the same period in 2011. Debit card interchange income increased $146 thousand or 33% as a result of increased customers and card usage in 2012. Service charges on deposits increased $161 thousand from the same period in 2011 reflecting the increase in accounts following the fourth quarter 2011 branch acquisition.

Increases were recognized in gains on mortgage loans sold in the secondary market for the first nine months of 2012 as refinancing activity increased during a period of historically low mortgage rates.

Non-interest expenses increased $771 thousand, or 8%, for the nine months ended September 30, 2012, compared to the same period in 2011. The bank’s FDIC deposit premium decreased $16 thousand to $238 thousand for the nine months ended 2011 reflecting a decrease in rate and accrual for the nine months ended September 30, 2012 as compared to 2011. Salaries and employee benefits increased $497 thousand, or 9%, primarily the result of additional branch personnel, benefit increases and increased personnel to run a larger institution. Professional fees increased $85 thousand, or 16%, reflecting employment search fees for the Chief Operating Officer and commercial lending positions as well as fees spent to review the Company’s computer operating system. Occupancy and equipment expense increased $214 thousand, or 21% reflecting the increase in the number of branches as compared to 2011. Decreases were recognized in other expenses, primarily the result of 2011 branch conversion expenses that did not recur in 2012.

The provision for income taxes was $1.5 million (effective rate of 31%) for the nine months ended September 30, 2012, compared to $1.3 million (effective rate of 31%) for the nine months ended September 30, 2011.

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, 2011, and as of September 30, 2012 the Company and the 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 $55 million at September 30, 2012, a decrease of $27 million from $82 million at December 31, 2011. 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 16% of total assets as of September 30, 2012 compared to 13% of total assets at year-end 2011. 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 September 30, 2012, from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Management performs a quarterly analysis over a twenty-four month horizon of the Company’s interest rate risk. 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 under a dynamic balance sheet. Board set limits are minimally exceeded under a static balance sheet due to the volume of liquidity held by the bank on September 30, 2012.

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 September 30, 2012 and December 31, 2011. The net interest income reflected is for the first twelve months of the modeled twenty-four month period. Due to the current low interest rate environment, particularly for short-term rates, the decreasing change is not calculated.

 

(Dollars in thousands)                            
            September 30, 2012  
     Change in interest rates
(basis points)
     Net interest income      Dollar change      Percentage change  

+

     400       $ 17,672       $ 866         5.2

+

     300         17,474         668         4.0   

+

     200         17,286         480         2.9   

+

     100         17,098         292         1.7   
     0         16,806         0         0.0   

     100         N/A         N/A         N/A   

     200         N/A         N/A         N/A   
            December 31, 2011  
     Change in interest rates (basis
points)
     Net interest income      Dollar change      Percentage change  

+

     400       $ 17,500       $ 818         4.9

+

     300         17,241         559         3.4   

+

     200         17,028         346         2.1   

+

     100         16,857         17         1.0   
     0         16,682         0         0.0   

     100         N/A         N/A         N/A   

     200         N/A         N/A         N/A   

 

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CSB BANCORP, INC.

CONTROLS AND PROCEDURES

ITEM 4T – 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 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 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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CSB BANCORP, INC.

FORM 10-Q

Quarter ended September 30, 2012

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, 2011.

 

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

On July 7, 2005 CSB Bancorp, Inc. filed Form 8-k with the Securities and Exchange 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 September 30, 2012

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 the Company’s Form 10-KSB for the fiscal year ended December 31, 1994).
3.1.1    Amended form of Article Fourth of Amended Articles of Incorporation, as effective April 9, 1998 (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 1998).
  3.2    Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to the Company’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 for the fiscal year ended December 31, 2008).
  4.0    Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB).
11    Statement Regarding Computation of Per Share Earnings (reference is hereby made to Consolidated Statements of Income on page 4 hereof).
31.1    Rule 13a-14(a)/15d-14(a) CEO’s Certification (filed herewith).
31.2    Rule 13a-14(a)/15d-14(a) CFO’s Certification (filed herewith).
32.1    Section 1350 CEO’s Certification (filed herewith).
32.2    Section 1350 CFO’s Certification (filed herewith).
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 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: November 13, 2012

   

/s/ Eddie L. Steiner        

    Eddie L. Steiner
    President
Chief Executive Officer

Date: November 13, 2012

   

/s/ Paula J. Meiler        

    Paula J. Meiler
    Senior Vice President
Chief Financial Officer

 

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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 the Company’s Form 10-KSB for the fiscal year ended December 31, 1994).
    3.1.1    Amended form of Article Fourth of Amended Articles of Incorporation, as effective April 9, 1998 (incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 1998).
    3.2    Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to the Company’s Form 10-SB).
    3.2.1    Amended Article VIII Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to the Company’s Form DEF 14a for the fiscal year ended December 31, 2008).
    4.0    Specimen stock certificate (incorporated by reference to the Company’s Form 10-SB).
  11    Statement Regarding Computation of Per Share Earnings (reference is hereby made to Consolidated Statements of Income on page 4 hereof).
  31.1    Rule 13a-14(a)/15d-14(a) CEO’s Certification (filed herewith).
  31.2    Rule 13a-14(a)/15d-14(a) CFO’s Certification (filed herewith).
  32.1    Section 1350 CEO’s Certification (filed herewith).
  32.2    Section 1350 CFO’s Certification (filed herewith).
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 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.

 

35