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CSBB > SEC Filings for CSBB > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for CSB BANCORP INC /OH

Form 10-Q for CSB BANCORP INC /OH


13-Aug-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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

The following management's discussion and analysis focuses on the consolidated financial condition of the Company at June 30, 2013 as compared to December 31, 2012, and the consolidated results of operations for the three and six month periods ending June 30, 2013 compared to the same periods in 2012. The purpose of this discussion is to provide the reader with a more thorough understanding of the Consolidated Financial Statements. This discussion should be read in conjunction with the interim Consolidated Financial Statements and related footnotes.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report are not historical facts but rather are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates", "plans", "expects", "believes", and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. Other factors not currently anticipated may also materially and adversely affect the Company's results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement.

The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by applicable law.

FINANCIAL CONDITION

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

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


Table of Contents

CSB BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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

                                      June 30,           December 31,          June 30,
    (Dollars in thousands)              2013                 2012                2012
    Non-performing loans              $   2,393         $        3,337         $   4,005
    Other real estate                        -                      25                 5
    Allowance for loan losses             4,945                  4,580             4,471
    Total loans                         378,191                364,580           344,116
    Allowance: loans                       1.31     %             1.26     %        1.30     %
    Allowance: non-performing loans         2.1     x              1.4     x         1.1     x

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

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

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

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

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


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CSB BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

RESULTS OF OPERATIONS

Three months ended June 30, 2013 and 2012

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

Average Balance Sheets and Net Interest Margin Analysis



                                                         For the three months ended June 30,
                                                         2013                            2012
                                                Average         Average         Average        Average
(Dollars in thousands)                          balance          rate           balance         rate
ASSETS
Interest-earning deposits in other banks      $    27,429           0.28 %     $  57,108           0.29 %
Federal funds sold                                    217           0.08             145           0.00
Taxable securities                                117,583           2.00         118,045           2.41
Tax-exempt securities                              16,489           4.72          13,690           5.85
Loans                                             375,447           4.76         339,829           5.07

Total earning assets                              537,165           3.92 %       528,817           3.98 %
Other assets                                       34,404                         33,474

TOTAL ASSETS                                  $   571,569                      $ 562,291

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits              $    71,125           0.06 %     $  62,751           0.08 %
Savings deposits                                  138,136           0.10         133,442           0.18
Time deposits                                     152,349           1.06         165,693           1.25
Other borrowed funds                               54,510           0.98          57,672           1.14

Total interest bearing liabilities                416,120           0.56 %       419,558           0.72 %
Non-interest bearing demand deposits               99,878                         89,760
Other liabilities                                   1,894                          1,848
Shareholders' Equity                               53,677                         51,125

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $   571,569                      $ 562,291

Taxable equivalent net interest spread                              3.36 %                         3.26 %
Taxable equivalent net interest margin                              3.49 %                         3.40 %

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

The provision for loan losses for the quarter ended June 30, 2013 was $210 thousand, compared to a $205 thousand provision for the same quarter in 2012. The provision for loan losses is determined based on management's calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.


Table of Contents

CSB BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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

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

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

RESULTS OF OPERATIONS

Six months ended June 30, 2013 and 2012

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

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

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


Table of Contents

CSB BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Average Balance Sheet and Net Interest Margin Analysis



                                                         For the six months ended June 30,
                                                        2013                           2012
                                               Average        Average         Average        Average
(Dollars in thousands)                         balance         rate           balance         rate
ASSETS
Due from banks-interest bearing               $  30,740           0.28 %     $  61,926           0.26 %
Federal funds sold                                  162           0.17             104           0.10
Taxable securities                              118,141           1.99         115,649           2.50
Tax-exempt securities                            16,434           4.74          13,615           5.44
Loans                                           374,263           4.86         333,516           5.15

Total earning assets                            539,740           3.97 %       524,810           4.00 %
Other assets                                     33,972                         32,524

TOTAL ASSETS                                  $ 573,712                      $ 557,334

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing demand deposits              $  70,715           0.06 %     $  61,442           0.09 %
Savings deposits                                139,172           0.11         131,143           0.18
Time deposits                                   154,431           1.08         167,609           1.30
Other borrowed funds                             56,085           0.96          57,578           1.20

Total interest bearing liabilities              420,403           0.57 %       417,772           0.76 %
Non-interest bearing demand deposits             97,928                         87,114
Other liabilities                                 2,061                          1,864
Shareholders' Equity                             53,320                         50,584

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $ 573,712                      $ 557,334

Taxable equivalent net interest spread                            3.40 %                         3.24 %
Taxable equivalent net interest margin                            3.53 %                         3.39 %

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

The provision for loan losses was $420 thousand during the six months of 2013, compared to $411 thousand in the same six month period of 2012. The provision for loan losses is determined based on management's calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data including past charge-offs and current economic trends.

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


Table of Contents

CSB BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

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

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

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

CAPITAL RESOURCES

The Board of Governors of the Federal Reserve System (the "Federal Reserve") has established risk-based capital guidelines that must be observed by financial holding companies and banks. Failure to meet specified minimum capital requirements could result in regulatory actions by the Federal Reserve or Ohio Division of Financial Institutions that could have a material effect on the Company's financial condition or results of operations. Management believes there were no material changes to capital resources as presented in the Company's annual report on Form 10-K for the year ended December 31, 2012. As of June 30, 2013 the Company and the Bank meet all capital adequacy requirements to which they are subject.

LIQUIDITY



(Dollars in millions)                     June 30, 2013            December 31, 2012            Change
Cash and cash equivalents                $            37          $                67          $    (30 )
Unused lines of credit                                46                           41                 5
Unpledged securities at fair
market value                                          47                           59               (12 )

                                         $           130          $               167          $    (37 )

Net deposits and short-term
liabilities                              $           419          $               444          $    (25 )

Liquidity ratio                                     31.0 %                       37.6 %
Minimum board approved liquidity
ratio                                               20.0 %                       20.0 %

Liquidity refers to the Company's ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, pay operating expenses and meet other obligations. Liquidity is monitored by CSB's Asset Liability Committee. Other sources of liquidity include, but are not limited to, purchase of federal funds, advances from the FHLB, adjustments of interest rates to attract deposits and borrowing at the Federal Reserve discount window. Management believes that its sources of liquidity are adequate to meet cash flow obligations for the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS

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


Table of Contents

CSB BANCORP, INC.

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