From 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2018

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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  ☒    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  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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 May 1, 2018:
     2,742,242 common shares

 

 

 


Table of Contents

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED MARCH  31, 2018

Table of Contents

 

Part I – Financial Information   
ITEM 1 – FINANCIAL STATEMENTS (Unaudited)    Page  

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 Consolidated Financial Statements

     8  

ITEM 2   –  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     26  

ITEM 3   –  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     31  

ITEM 4  –  CONTROLS AND PROCEDURES

     32  
Part II – Other Information   

ITEM 1   – Legal Proceedings

     33  

ITEM 1A – Risk Factors

     33  

ITEM 2   – Unregistered Sales of Equity Securities and Use of Proceeds

     33  

ITEM 3   – Defaults upon Senior Securities

     33  

ITEM 4   – Mine Safety Disclosures

     33  

ITEM 5   – Other Information

     33  

ITEM 6   – Exhibits

     34  

Signatures

     35  

 

2


Table of Contents

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,     December 31,  

(Dollars in thousands)

   2018     2017  

ASSETS

    

Cash and cash equivalents

    

Cash and due from banks

   $ 10,766     $ 17,255  

Interest-earning deposits in other banks

     10,823       19,165  
  

 

 

   

 

 

 

Total cash and cash equivalents

     21,589       36,420  
  

 

 

   

 

 

 

Securities

    

Available-for-sale, at fair value

     94,198       97,663  

Held-to-maturity (fair value 2018-$21,871; 2017-$25,491)

     22,488       25,758  

Equity Securities

     94       89  

Restricted stock, at cost

     4,614       4,614  
  

 

 

   

 

 

 

Total securities

     121,394       128,124  
  

 

 

   

 

 

 

Loans held for sale

     167       246  

Loans

     530,395       516,830  

Less allowance for loan losses

     5,633       5,604  
  

 

 

   

 

 

 

Net loans

     524,762       511,226  
  

 

 

   

 

 

 

Premises and equipment, net

     9,226       9,244  

Core deposit intangible

     242       268  

Goodwill

     4,728       4,728  

Bank-owned life insurance

     13,299       13,218  

Accrued interest receivable and other assets

     4,560       3,589  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 699,967     $ 707,063  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 166,512     $ 173,671  

Interest-bearing

     409,906       409,588  
  

 

 

   

 

 

 

Total deposits

     576,418       583,259  
  

 

 

   

 

 

 

Short-term borrowings

     38,350       39,480  

Other borrowings

     11,222       11,409  

Accrued interest payable and other liabilities

     2,958       2,383  
  

 

 

   

 

 

 

Total liabilities

     628,948       636,531  
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; outstanding (shares 2018 and 2017 – 2,742,242)

     18,629       18,629  

Additional paid-in capital

     9,815       9,815  

Retained earnings

     49,070       47,535  

Treasury stock at cost (shares 2018 and 2017 – 238,360)

     (4,784     (4,784

Accumulated other comprehensive loss

     (1,711     (663
  

 

 

   

 

 

 

Total shareholders’ equity

     71,019       70,532  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 699,967     $ 707,063  
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

    

Three Months Ended

March 31,

 

(Dollars in thousands, except per share data)

   2018      2017  

INTEREST AND DIVIDEND INCOME

     

Loans, including fees

   $ 6,140      $ 5,449  

Taxable securities

     603        598  

Nontaxable securities

     161        165  

Other

     45        34  
  

 

 

    

 

 

 

Total interest and dividend income

     6,949        6,246  
  

 

 

    

 

 

 

INTEREST EXPENSE

     

Deposits

     455        267  

Short-term borrowings

     53        22  

Other borrowings

     52        95  
  

 

 

    

 

 

 

Total interest expense

     560        384  
  

 

 

    

 

 

 

NET INTEREST INCOME

     6,389        5,862  

PROVISION (CREDIT) FOR LOAN LOSSES

     324        (160
  

 

 

    

 

 

 

Net interest income, after provision (credit) for loan losses

     6,065        6,022  
  

 

 

    

 

 

 

NONINTEREST INCOME

     

Service charges on deposit accounts

     284        291  

Trust services

     219        207  

Debit card interchange fees

     313        288  

Gain on sale of loans, net

     77        42  

Earnings on bank owned life insurance

     81        98  

Unrealized gain or loss on equity securities

     4        —    

Other income

     167        180  
  

 

 

    

 

 

 

Total noninterest income

     1,145        1,106  
  

 

 

    

 

 

 

NONINTEREST EXPENSES

     

Salaries and employee benefits

     2,637        2,459  

Occupancy expense

     219        210  

Equipment expense

     156        170  

Professional and director fees

     311        169  

Financial institutions and franchise tax expense

     142        131  

Marketing and public relations

     120        78  

Software expense

     213        210  

Debit card expense

     116        130  

Amortization of intangible assets

     25        29  

FDIC insurance expense

     75        51  

Provision for unfunded loan commitments

     —          540  

Other expenses

     523        469  
  

 

 

    

 

 

 

Total noninterest expenses

     4,537        4,646  
  

 

 

    

 

 

 

Income before income taxes

     2,673        2,482  

FEDERAL INCOME TAX PROVISION

     509      $ 752  
  

 

 

    

 

 

 

NET INCOME

   $ 2,164        1,730  
  

 

 

    

 

 

 

Basic and diluted net earnings per share

   $ 0.79      $ 0.63  
  

 

 

    

 

 

 

See notes to unaudited consolidated financial statements

 

4


Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2018     2017  

Net income

   $ 2,164     $ 1,730  
  

 

 

   

 

 

 

Other comprehensive (loss) income

    

Unrealized (losses) gains arising during the period

     (1,312     471  

Amounts reclassified from accumulated other comprehensive loss, held-to-maturity

     22       31  

Income tax effect

     271       (171
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (1,019     331  
  

 

 

   

 

 

 

Total comprehensive income

   $ 1,145     $ 2,061  
  

 

 

   

 

 

 

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  
     March 31,  

(Dollars in thousands, except per share data)

   2018     2017  

Balance at beginning of period

   $ 70,532     $ 65,415  

Net income

     2,164       1,730  

Other comprehensive (loss) income

     (1,019     331  

Cash dividends declared

     (658     (549
  

 

 

   

 

 

 

Balance at end of period

   $ 71,019     $ 66,927  
  

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.24     $ 0.20  

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended  
     March 31,  

(Dollars in thousands)

   2018     2017  

NET CASH FROM OPERATING ACTIVITIES

   $ 2,308     $ 4,407  
CASH FLOWS FROM INVESTING ACTIVITIES             

Securities:

    

Proceeds from repayments, available-for-sale

     2,034       4,430  

Proceeds from repayments, held-to-maturity

     5,312       709  

Purchases, available-for-sale

     —         (2,379

Purchases, held-to-maturity

     (2,029     (4,700

Loan originations, net of repayments

     (14,155     (4,899

Property, equipment, and software acquisitions

     (143     (113

Purchase of bank owned life insurance

     —         (2,500
  

 

 

   

 

 

 

Net cash used in investing activities

     (8,981     (9,452
  

 

 

   

 

 

 
CASH FLOWS FROM FINANCING ACTIVITIES             

Net change in deposits

     (6,841     1,395  

Net change in short-term borrowings

     (1,130     5,280  

Repayment of other borrowings

     (187     (81
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (8,158     6,594  
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   $ (14,831   $ 1,549  

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     36,420       36,838  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 21,589     $ 38,387  
  

 

 

   

 

 

 
SUPPLEMENTAL DISCLOSURES             

Cash paid during the year for:

    

Interest

   $ 572     $ 389  

Noncash financing activities:

    

Dividends declared

     658       549  

See notes to unaudited consolidated financial statements.

 

7


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 March 31, 2018, 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, 2017, 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 March 31, 2018 are not necessarily indicative of the operating results for the full year or any future interim period.

Certain items in the prior-year financial statements were reclassified to conform to the current-year presentation.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

ASU 2014-09 Effective January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers – Topic 606 and all subsequent ASUs that modified ASC 606. The Company has elected to apply the standard utilizing the modified retrospective approach with a cumulative effect of adoption for the impact from uncompleted contracts at the date of adoption. The adoption of this guidance did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustments were recorded..

Management determined that the primary sources of revenue emanating from interest and dividend income on loans and securities along with noninterest revenue resulting from investment security gains, loan servicing, gains on the sale of loans, commitment fees, fees from financial guarantees, certain credit cards fees, and income on bank-owned life insurance are not within the scope of ASC 606. As a result, no changes were made during the period related to these sources of revenue, which cumulatively comprise 87 percent of the total revenue of the Company. Services within the scope of ASC 606 include income from fiduciary activities, service charges on deposit accounts, other service income, ATM fees, interchange fees, and gain on sale of OREO, net.

Service charges on deposit accounts – the Bank has contracts with its deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either the Bank or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Bank has an unconditional right to the fee consideration. The Bank also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Bank where the revenue is recognized at a defined point in time, completion of the requested service/transaction.

Fiduciary/trust fees – Typical contracts for trust services are based on a fixed percentage of the assets earned ratably over a defined period and billed on a monthly or quarterly basis. Fees charged to customers’ accounts are recognized as revenue over the period during which the Bank fulfills its performance obligation under the contract (i.e., holding client asset in a managed fiduciary trust account). For these accounts, the performance obligation of the Bank is typically satisfied by holding and managing the customer’s assets over time.

 

8


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Other fees related to specific customer requests are attributable to specific performance obligations of the Bank where the revenue is recognized at a defined point in time, completion of the requested service/transaction.

Interchange fees – The Bank is a member of Visa U.S.A. Inc. and receives interchange fees as a result of customer usage of Bank issued debit cards. The bank’s performance obligation is to provide debit cards for customers to use as a method of payment. Fees received are allocated by Visa and are a percentage of the transaction amount and also vary by the merchant where the card was used. Fees are recognized daily the day after the transaction is processed.

Brokerage commissions – Brokerage commissions are based on a percentage of the initial investment. Commissions on transactions are recognized monthly on a trade-date basis as the performance obligation is satisfied at the point in time in which the trade is processed.

ASU 2016-01 – Recognition and Measurement of Financial Assets and Financial Liabilities. This Update sets forth targeted improvements to GAAP including, but not limited to, requiring an entity to recognize the changes in fair value of equity investments in the income statement, requiring public business entities to use the exit price when measuring the fair value of financial instruments for financial statement disclosure purposes, eliminating certain disclosures required by existing GAAP, and providing for additional disclosures. The Update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption on January 1, 2018, the Company made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $29 thousand. The net effect was an increase to retained earnings. Additional income of $4 thousand was recorded in the first quarter of 2018, as a result of changes to the accounting for equity investments. We have included the related new disclosure requirements in Note 6.

ASU 2018-02 – Income Statement – Reporting Comprehensive Income. This guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act. On December 31, 2017, the Company adopted this standard which resulted in a reclassification of $109 thousand between accumulated other comprehensive loss and retained earnings on the consolidated balance sheet.

 

9


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ASU 2016-02 – Leases. This Update sets forth a new lease accounting model for lessors and lessees. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The accounting provided by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Update is effective for fiscal years beginning after December 15, 2018, with early application permitted. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. This Update is not expected to have a significant impact on the Company’s financial statements.

ASU 2016-13 – Financial Instruments – Credit Losses. The Update requires that financial assets be presented at the net amount expected to be collected (i.e. net of expected credit losses), eliminating the probable recognition threshold for credit losses on financial assets measured at amortized cost. The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Update is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. We expect the Update will result in an increase in the allowance for credit losses for the estimated life of the financial asset, including an estimate for debt securities. The amount of the increase will be impacted by the portfolio composition and quality at the adoption date, as well as economic conditions and forecasts at that time. A cumulative-effect adjustment to retained earnings is required as of the beginning of the year of adoption. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

ASU 2017-04 – Simplifying the Test for Goodwill Impairment. The Update simplifies the goodwill impairment test. Under the new guidance, Step 2 of the goodwill impairment process that requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities is eliminated. Instead, the entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual and interim goodwill tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted. This Update is not expected to have a material impact on the Company’s financial statements.

 

10


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 2 – SECURITIES

Securities consist of the following at March 31, 2018 and December 31, 2017:

 

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

March 31, 2018

           

Available-for-sale

           

U.S. Treasury security

   $ 999      $ —        $ 1      $ 998  

U.S. Government agencies

     8,350        —          222        8,128  

Mortgage-backed securities of government agencies

     48,080        34        1,103        47,011  

Asset-backed securities of government agencies

     1,139        —          4        1,135  

State and political subdivisions

     26,969        54        359        26,664  

Corporate bonds

     10,515        3        256        10,262  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     96,052        91        1,945        94,198  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity

           

U.S. Government agencies

     9,478        8        385        9,101  

Mortgage-backed securities of government agencies

     13,010        21        261        12,770  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     22,488        29        646        21,871  

Equity securities

     53        41        —          94  

Restricted stock

     4,614        —          —          4,614  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 123,207      $ 161      $ 2,591      $ 120,777  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2017

           

Available-for-sale

           

U.S. Treasury security

   $ 999      $ —        $ 1      $ 998  

U.S. Government agencies

     8,350        —          121        8,229  

Mortgage-backed securities of government agencies

     50,136        146        581        49,701  

Asset-backed securities of government agencies

     1,168        1        —          1,169  

State and political subdivisions

     27,020        224        103        27,141  

Corporate bonds

     10,532        35        142        10,425  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     98,205        406        948        97,663  

Held-to-maturity

           

U.S. Government agencies

     9,477        16        228        9,265  

Mortgage-backed securities of government agencies

     11,581        95        145        11,531  

State and political subdivisions

     4,700        —          5        4,695  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     25,758        111        378        25,491  

Equity securities

     53        36        —          89  

Restricted stock

     4,614        —          —          4,614  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 128,630      $ 553      $ 1,326      $ 127,857  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

The amortized cost and fair value of debt securities at March 31, 2018, 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.

 

(Dollars in thousands)

   Amortized
cost
     Fair value  

Available-for-sale

     

Due in one year or less

   $ 5,067      $ 5,060  

Due after one through five years

     17,212        17,040  

Due after five through ten years

     29,162        28,586  

Due after ten years

     44,611        43,512  
  

 

 

    

 

 

 

Total debt securities available-for-sale

   $ 96,052      $ 94,198  
  

 

 

    

 

 

 

Held-to-maturity

     

Due in one year or less

   $ —        $ —    

Due after one through five years

     480        488  

Due after five through ten years

     3,000        2,831  

Due after ten years

     19,008        18,552  
  

 

 

    

 

 

 

Total debt securities held-to-maturity

   $ 22,488      $ 21,871  
  

 

 

    

 

 

 

Securities with a fair value of approximately $94 million were pledged at March 31, 2018 and December 31, 2017, respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.

Restricted stock primarily consists of investments in Federal Home Loan Bank of Cincinnati (FHLB) and Federal Reserve Bank stock. The Bank’s investment in FHLB stock amounted to approximately $4.1 million at March 31, 2018 and December 31, 2017. Federal Reserve Bank stock was $471 thousand at March 31, 2018 and December 31, 2017.

There were no proceeds from sales of securities for the three month periods ending March 31, 2018 and 2017.

 

12


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

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 March 31, 2018 and December 31, 2017:

 

     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
 

March 31, 2018

                 

Available-for-sale

                 

U.S. Treasury security

   $ —        $ —        $ 1      $ 998      $ 1      $ 998  

U.S. Government agencies

     104        3,746        118        4,382        222        8,128  

Mortgage-backed securities of government agencies

     421        27,764        682        16,723        1,103        44,487  

Asset-backed securities of government agencies

     4        1,135        —          —          4        1,135  

State and political subdivisions

     182        14,099        177        3,645        359        17,744  

Corporate bonds

     54        6,986        202        2,298        256        9,284  

Held-to-maturity

                 

U.S. Government agencies

     38        1,962        347        6,651        385        8,613  

Mortgage-backed securities of government agencies

     82        6,940        179        2,942        261        9,882  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 885      $ 62,632      $ 1,706      $ 37,639      $ 2,591      $ 100,271  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2017

                 

Available-for-sale

                 

U.S. Treasury security

   $ 1      $ 998      $ —        $ —        $ 1      $ 998  

U.S. Government agencies

     46        3,804        75        4,425        121        8,229  

Mortgage-backed securities of government agencies

     145        16,872        436        17,259        581        34,131  

State and political subdivisions

     26        4,400        77        3,752        103        8,152  

Corporate bonds

     2        2,912        140        2,360        142        5,272  

Held-to-maturity

                 

U.S. Government agencies

     15        1,985        213        6,785        228        8,770  

Mortgage-backed securities of government agencies

     18        1,818        127        3,116        145        4,934  

State and political subdivisions

     5        4,695        —          —          5        4,695  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 258      $ 37,484      $ 1,068      $ 37,697      $ 1,326      $ 75,181  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were 120 securities in an unrealized loss position at March 31, 2018, thirty-five (35) 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. 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 March 31, 2018.

 

13


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 3 – LOANS

Loans consist of the following:

 

(Dollars in thousands)

   March 31, 2018      December 31, 2017  

Commercial

   $ 143,690      $ 140,273  

Commercial real estate

     184,892        179,663  

Residential real estate

     158,625        157,172  

Construction & land development

     26,303        22,886  

Consumer

     16,356        16,306  
  

 

 

    

 

 

 

Total loans before deferred costs

     529,866        516,300  

Deferred loan costs

     529        530  
  

 

 

    

 

 

 

Total Loans

   $ 530,395      $ 516,830  
  

 

 

    

 

 

 

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 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 as agreed. Commercial 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 loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; 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.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial 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 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 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. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single 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.

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 record of success. 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.

 

14


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Construction and land development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from 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 risk 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 line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. 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.

Loans serviced for others approximated $84.8 million and $82.7 million at March 31, 2018 and December 31, 2017, respectively.

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 commercial and commercial real estate loans. As of March 31, 2018 and December 31, 2017, there were no concentrations of loans related to any single industry.

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018 and 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

The increase in the provision for loan losses for the three months ended March 31, 2018 related to commercial loans was primarily due to the increase in substandard loans and the increase in loan volume of loans in this category. The decrease in the provision related to residential real estate loans is due to the decrease of loan delinquencies in this category.

The change in the provision for loan losses for the three months ended March 31, 2017 related to commercial loans was primarily due to the decrease in the specific allocation related to one commercial relationship, as well as the recovery of prior loan charge-offs. The increase in the provision for loan losses related to commercial real estate loans was due to the increase of nonaccrual loans in this category, as well as the increase in volume of loans.

 

15


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Summary of Allowance for Loan Losses

 

(Dollars in thousands)

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

Three months ended March 31, 2018

                

Beginning balance

   $ 1,813     $ 1,735     $ 1,273     $ 237      $ 175     $ 371      $ 5,604  

Provision (credit) for loan losses

     257       26       (40     7        23       51        324  

Charge-offs

     (194     (62     (37     —          (10        (303

Recoveries

     8       —         —         —          —            8  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Net charge-offs

     (186     (62     (37     0        (10        (295
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 1,884     $ 1,699     $ 1,196     $ 244      $ 188     $ 422      $ 5,633  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Three months ended March 31, 2017

                

Beginning balance

   $ 2,207     $ 1,264     $ 1,189     $ 178      $ 141     $ 312      $ 5,291  

(Credit) provision for loan losses

     (831     274       114       6        29       248        (160

Charge-offs

     (8     —         —         —          (5        (13

Recoveries

     336       —         —         —          —            336  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Net recoveries (charge-offs)

     328       —         —         —          (5        323  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 1,704     $ 1,538     $ 1,303     $ 184      $ 165     $ 560      $ 5,454  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio class and based on the impairment method as of March 31, 2018 and December 31, 2017:

 

(Dollars in thousands)

   Commercial      Commercial
Real Estate
     Residential
Real
Estate
     Construction      Consumer      Unallocated      Total  

March 31, 2018

                    

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 8      $ 46      $ 3      $ —        $ —        $ —        $ 57  

Collectively evaluated for impairment

     1,876        1,653        1,193        244        188        422        5,576  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,884      $ 1,699      $ 1,196      $ 244      $ 188      $ 422      $ 5,633  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 1,418      $ 3,411      $ 1,394      $ —        $ —           $ 6,223  

Loans collectively evaluated for impairment

     142,272        181,481        157,231        26,303        16,356           523,643  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 143,690      $ 184,892      $ 158,625      $ 26,303      $ 16,356         $ 529,866  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

December 31, 2017

                    

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 74      $ 151      $ 19      $ —        $ —        $ —        $ 244  

Collectively evaluated for impairment

     1,739        1,584        1,254        237        175        371        5,360  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,813      $ 1,735      $ 1,273      $ 237      $ 175      $ 371      $ 5,604  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 1,726      $ 4,686      $ 1,470      $ —        $ —           $ 7,882  

Loans collectively evaluated for impairment

     138,547        174,977        155,702        22,886        16,306           508,418  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 140,273      $ 179,663      $ 157,172      $ 22,886      $ 16,306         $ 516,300  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

16


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 March 31, 2018 and December 31, 2017:

 

(Dollars in thousands)

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

March 31, 2018

              

Commercial

   $ 2,460      $ 1,413      $ 8      $ 1,421      $ 8  

Commercial real estate

     3,580        3,087        330        3,417        46  

Residential real estate

     1,543        1,113        283        1,396        3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 7,583      $ 5,613      $ 621      $ 6,234      $ 57  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2017

              

Commercial

   $ 3,352      $ 1,329      $ 399      $ 1,728      $ 74  

Commercial real estate

     4,826        3,117        1,566        4,683        151  

Residential real estate

     1,654        1,119        352        1,471        19  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 9,832      $ 5,565      $ 2,317      $ 7,882      $ 244  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated.

 

     Three months
ended March 31,
 
(Dollars in thousands)    2018      2017  

Average recorded investment:

     

Commercial

   $ 1,792      $ 4,216  

Commercial real estate

     4,490        438  

Residential real estate

     1,443        1,488  
  

 

 

    

 

 

 

Average recorded investment in impaired loans

   $ 7,725      $ 6,142  
  

 

 

    

 

 

 

Interest income recognized:

     

Commercial

   $ 11      $ 14  

Commercial real estate

     4        —    

Residential real estate

     14        15  
  

 

 

    

 

 

 

Interest income recognized on a cash basis on impaired loans

   $ 29      $ 29  
  

 

 

    

 

 

 

 

17


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents the aging of past due loans and nonaccrual loans as of March 31, 2018 and December 31, 2017 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
 

March 31, 2018

                    

Commercial

   $ 142,882      $ 84      $ —        $ —        $ 724      $ 808      $ 143,690  

Commercial real estate

     181,659        92        —          —          3,141        3,233        184,892  

Residential real estate

     157,499        292        140        164        530        1,126        158,625  

Construction & land development

     26,303        —          —          —          —          —          26,303  

Consumer

     15,926        338        49        —          43        430        16,356  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 524,269      $ 806      $ 189      $ 164      $ 4,438      $ 5,597      $ 529,866  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2017

                    

Commercial

   $ 138,908      $ 148      $ 65      $ —        $ 1,152      $ 1,365      $ 140,273  

Commercial real estate

     175,062        177        —          40        4,384        4,601        179,663  

Residential real estate

     155,488        757        38        401        488        1,684        157,172  

Construction & land development

     22,886        —          —          —          —          —          22,886  

Consumer

     16,048        193        8        —          57        258        16,306  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 508,392      $ 1,275      $ 111      $ 441      $ 6,081      $ 7,908      $ 516,300  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

All troubled debt restructurings (“TDR’s) are individually evaluated for impairment and a related allowance is recorded, as needed. Loans whose terms have been modified as TDR’s totaled $3.0 million as of March 31, 2018, and $2.9 million as of December 31, 2017, with $25 thousand and $38 thousand of specific reserves allocated to those loans, respectively. At March 31, 2018, $2.1 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $841 thousand, all were in nonaccrual of interest status.

The Company held $20 thousand in other real estate as of March 31, 2018, and no other real estate as of December 31, 2017. Consumer mortgage loans in the process of foreclosure were $57 thousand at March 31, 2018 and $114 thousand at December 31, 2017.

There were no new TDR’s during the three month periods ended March 31, 2018 and 2017.

 

18


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

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 $300 thousand. This analysis 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 a minimum represent an acceptable risk to the Bank. Borrowers in this rating may have leveraged but acceptable balance sheet positions, satisfactory asset quality, 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 not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $300 thousand or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class is as follows as of March 31, 2018 and December 31, 2017:

 

(Dollars in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Not Rated      Total  

March 31, 2018

                 

Commercial

   $ 121,917      $ 5,205      $ 15,707      $ —        $ 861      $ 143,690  

Commercial real estate

     166,895        9,244        7,407        —          1,346        184,892  

Residential real estate

     203        —          286        —          158,136        158,625  

Construction & land development

     23,274        —          16        —          3,013        26,303  

Consumer

     —          —          43        —          16,313        16,356  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 312,289      $ 14,449      $ 23,459      $ —        $ 179,669      $ 529,866  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2017                                          

Commercial

   $ 116,833      $ 13,685      $ 8,841      $ —        $ 914      $ 140,273  

Commercial real estate

     162,012        8,220        8,620        —          811        179,663  

Residential real estate

     205        —          470        —          156,497        157,172  

Construction & land development

     18,493        880        —          —          3,513        22,886  

Consumer

     —          —          57        —          16,249        16,306  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 297,543      $ 22,785      $ 17,988      $      $ 177,984      $ 516,300  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents loans that are not rated by class of loans as of March 31, 2018 and December 31, 2017. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status.    

 

(Dollars in thousands)

   Performing      Non-Performing      Total  

March 31, 2018

        

Commercial

   $ 861      $ —        $ 861  

Commercial real estate

     1,346        —          1,346  

Residential real estate

     157,442        694        158,136  

Construction & land development

     3,013        —          3,013  

Consumer

     16,313        —          16,313  
  

 

 

    

 

 

    

 

 

 

Total

   $ 178,975      $ 694      $ 179,669  
  

 

 

    

 

 

    

 

 

 

December 31, 2017

        

Commercial

   $ 914      $ —        $ 914  

Commercial real estate

     811        —          811  

Residential real estate

     155,608        889        156,497  

Construction & land development

     3,513        —          3,513  

Consumer

     16,249        —          16,249  
  

 

 

    

 

 

    

 

 

 

Total

   $ 177,095      $ 889      $ 177,984  
  

 

 

    

 

 

    

 

 

 

NOTE 4 – SHORT-TERM BORROWINGS

The following table provides additional detail regarding repurchase agreements accounted for as secured borrowings.

 

     Remaining Contractual Maturity  
     Overnight and Continuous  
     March 31,      December 31,  

(Dollars in thousands)

   2018      2017  

Securities of U.S. Government Agencies and mortgage-backed securities of government agencies pledged, fair value

   $ 38,545      $ 39,637  

Repurchase agreements

     38,350        39,480  

NOTE 5 – 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:

 

Level I:    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; and 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.

 

20


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5- FAIR VALUE MEASUREMENTS (CONTINUED)

 

The following table presents the assets reported on the Consolidated Balance Sheets at their fair value on a recurring basis as of March 31, 2018 and December 31, 2017 by level within the fair value hierarchy. No liabilities are carried at fair value. 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 agencies, mortgage-backed securities, asset-backed securities, obligations of states and political subdivisions and corporate bonds are valued at observable market data for similar assets.

 

(Dollars in thousands)

   Level I      Level II      Level III      Total  

March 31, 2018

           

Assets:

  

Securities available-for-sale

           

U.S. Treasury security

   $ 998      $ —        $ —        $ 998  

U.S. Government agencies

     —          8,128        —          8,128  

Mortgage-backed securities of government agencies

     —          47,011        —          47,011  

Asset-backed securities of government agencies

     —          1,135        —          1,135  

State and political subdivisions

     —          26,664        —          26,664  

Corporate bonds

     —          10,262        —          10,262  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 998      $ 93,200      $ —        $ 94,198  

Equity securities

   $ 48      $ —        $ 46      $ 94  

December 31, 2017

           

Assets:

           

Securities available-for-sale

           

U.S. Treasury security

   $ 998      $ —        $ —        $ 998  

U.S. Government agencies

     —          8,229        —          8,229  

Mortgage-backed securities of government agencies

     —          49,701        —          49,701  

Asset-backed securities of government agencies

     —          1,169        —          1,169  

State and political subdivisions

     —          27,141        —          27,141  

Corporate bonds

     —          10,425        —          10,425  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 998      $ 96,665      $ —        $ 97,663  

Equity securities

   $ 89      $ —        $ —        $ 89  

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of March 31, 2018 and December 31, 2017, by level within the fair value hierarchy. Impaired loans are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans 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.

 

21


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5- FAIR VALUE MEASUREMENTS (CONTINUED)

 

 

(Dollars in thousands)

   Level I      Level II      Level III      Total  

March 31, 2018

           

Assets measured on a nonrecurring basis:

  

Impaired loans

   $ —        $ —        $ 564      $ 564  

December 31, 2017

           

Assets measured on a nonrecurring basis:

           

Impaired loans

   $      $      $ 2,073      $ 2,073  

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 III inputs to determine fair value:

 

     Quantitative Information about Level III Fair Value Measurements
     Fair Value      Valuation    Unobservable    Range
(Dollars in thousands)    Estimate     

Techniques

  

Input

  

(Weighted Average)

March 31, 2018

           

Impaired loans

   $ 531      Discounted cash flow    Remaining term Discount rate   

1 mo to 24.2 yrs / (19.5 mos)

4.4% to 7.5% / (5.3%)

     33      Appraisal of collateral (1)   

Appraisal adjustments (2)

Liquidation expense (2)

  

0% to -25% (-14.9%)

-10%

December 31, 2017

           

Impaired loans

   $ 551      Discounted cash flow    Remaining term Discount rate   

4 mos to 24.5 yrs / (20.3 mos)

4.4% to 7.5% / (5.3%)

     1,522      Appraisal of collateral (1)   

Appraisal adjustments (2)

Liquidation expense (2)

  

0% to -25% (-6.8%)

-10%

 

(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. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

22


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of recognized financial instruments as of March 31, 2018 and December 31, 2017 are as follows:

 

(Dollars in thousands)

   Carrying
Value
     Level I      Level II      Level III      Fair Value  

March 31, 2018

              

Financial assets

              

Cash and cash equivalents

   $ 21,589      $ 21,589      $ —        $ —        $ 21,589  

Securities available-for-sale

     94,198        998        93,200        —          94,198  

Securities held-to-maturity

     22,488        —          21,871        —          21,871  

Equity securities

     94        48        —          46        94  

Restricted stock

     4,614        N/A        N/A        N/A        N/A  

Loans held for sale

     167        167        —          —          167  

Net loans

     524,762        —          —          523,155        523,155  

Bank-owned life insurance

     13,299        13,299        —          —          13,299  

Accrued interest receivable

     1,784        1,784        —          —          1,784  

Mortgage servicing rights

     270        —          —          270        270  

Financial liabilities

              

Deposits

   $ 576,418      $ 459,760      $ —        $ 114,103      $ 573,863  

Short-term borrowings

     38,350        38,350        —          —          38,350  

Other borrowings

     11,222        —          —          10,030        10,030  

Accrued interest payable

     78        78        —          —          78  

December 31, 2017

              

Financial assets

              

Cash and cash equivalents

   $ 36,420      $ 36,420      $ —        $ —        $ 36,420  

Securities available-for-sale

     97,663        998        96,665        —          97,663  

Securities held-to-maturity

     25,758        —          25,491        —          25,491  

Equity securities

     89        89        —          —          89  

Restricted stock

     4,614        N/A        N/A        N/A        N/A  

Loans held for sale

     246        246        —          —          246  

Net loans

     511,226        —          —          513,106        513,106  

Bank-owned life insurance

     13,218        13,218        —          —          13,218  

Accrued interest receivable

     1,545        1,545        —          —          1,545  

Mortgage servicing rights

     270        —          —          270        270  

Financial liabilities

              

Deposits

   $ 583,259      $ 473,467      $ —        $ 110,224      $ 583,691  

Short-term borrowings

     39,480        39,480        —          —          39,480  

Other borrowings

     11,409        —          —          10,365        10,365  

Accrued interest payable

     90        90        —          —          90  

For purposes of the above disclosures of 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.

 

23


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

 

Securities

The fair value of securities available-for-sale and securities held-to-maturity 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.

Equity investments with a readily determinable value are classified as Level I and equity investments without a readily determinable value are classified as Level III. The following table presents the carrying amount of equity investments without readily determinable fair values, the annual and cumulative amount of impairment, and the annual and cumulative amount of observable price changes for orderly transactions for the identical or a similar investment of the same issuer:

 

     March 31, 2018  
(Dollars in thousands)    Year-to-Date      Life-to-Date  

Amortized cost

   $ 44      $ 44  

Impairment

     —          —    

Observable price changes

     2        2  
  

 

 

    

 

 

 

Carrying value

   $ 46      $ 46  
  

 

 

    

 

 

 

Net loans

Effective first quarter 2018 the fair value of loans were determined using an exit price methodology as prescribed by ASU 2016-01.The exit price estimation of fair value is based on the future value of expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a current market rate based on the relative credit risk of the loan. In addition, an incremental liquidity discount is applied. In comparison, loan fair values as of December 31, 2017 were estimated based on an entrance price methodology. As a result the fair value adjustments as of March 31, 2018 and December 31, 2017 are not comparable, 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.

Restricted stock

Restricted 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.

Mortgage servicing rights

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates discounted cash flow and repayment assumptions based on management’s best judgment, classified as Level III.

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.

Other borrowings

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.

 

24


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

 

The Company also has unrecognized financial instruments at March 31, 2018 and December 31, 2017. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $171.9 million at March 31, 2018 and $178.2 million at December 31, 2017. Such amounts are also considered to be the fair values.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. 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.

NOTE 7 –  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax for the three month periods ended March 31, 2018 and 2017:

 

(Dollars in thousands)

   Pretax      Tax Effect      After-tax  

Three months ended March 31, 2018

        

Balance as of December 31, 2017

   $ (839    $ 176      $ (663

Unrealized holding loss on available-for-sale securities arising during the period

     (1,385      291        (1,094

Reclassify equity AOCI gain to retained earnings

     37        (8      29  

Amortization of held-to-maturity discount resulting from transfer

     22        (5      17  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss)

     (1,326      278        (1,048
  

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2018

   $ (2,165    $ 454      $ (1,711
  

 

 

    

 

 

    

 

 

 

Three months ended March 31, 2017

        

Balance as of December 31, 2016

   $ (1,323    $ 449      $ (874

Unrealized holding gain on available-for-sale securities arising during the period

     471        (161      310  

Amortization of held-to-maturity discount resulting from transfer

     31        (10      21  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income

     502        (171      331  
  

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2017

   $ (821    $ 278      $ (543
  

 

 

    

 

 

    

 

 

 

 

25


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 March 31, 2018 as compared to December 31, 2017, and the consolidated results of operations for the three month period ended March 31, 2018 compared to the same period in 2017. 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 contained in Part I, Item 1 of this Quarterly Report.

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 $700 million at March 31, 2018 as compared to $707 million at December 31, 2017. During the three month period ended March 31, 2018, net loans increased $14 million. Cash, cash equivalents, and securities decreased $22 million. On the liability side, deposits and repurchase agreements decreased by $8 million.

Net loans increased $14 million, or 3%, during the three months ended March 31, 2018. The increase occurred as demand for both business and consumer loans within the bank’s markets continued. The bank has added lending and operations staff to accommodate the increase in demand. Commercial loans including commercial real estate loans increased $9 million, or 3%, while construction and land development loans increased $3 million, or 15%. Residential real estate loans increased $1 million, or 1%, and consumer loans increased $50 thousand from December 31, 2017. Home purchase activity has increased and consumers continued to refinance their mortgage loans for lower long-term fixed rates. Residential mortgage loan originations for the three months ended March 31, 2018 and 2017 were $12 million for each period. Originations sold into the secondary market were $2.2 million and $1.5 million, respectively during the three month periods ended March 31, 2018 and March 31, 2017. The Bank originates and sells primarily fixed-rate thirty year mortgages into the secondary market.

The allowance for loan losses as a percentage of total loans was 1.06% at March 31, 2018 as compared to 1.08% at December 31, 2017. Outstanding loan balances increased 3% to $530 million at March 31, 2018. The allowance for loan losses remained constant at $5.6 million at March 31, 2018 following a provision of $324 thousand and net charge-offs of $295 thousand for the current quarter.

 

26


Table of Contents

CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

 

Nonaccrual loans decreased during the first three months of 2018. For the three months ending March 31, 2018 loans totaling $183 thousand were placed on nonaccrual status, there were $292 thousand in charge-downs recognized, and pay downs of $1.1 million were received. The decrease in nonaccrual loans was primarily due to the resolution of a $1.7 million credit facility.

 

(Dollars in thousands)

   March 31,
2018
    December 31,
2017
    March 31,
2017
 

Non-performing loans

   $ 4,602     $ 6,522     $ 4,909  

Other real estate

     20       —         —    

Allowance for loan losses

     5,633       5,604       5,454  

Total loans

     530,395       516,830       480,709  

Allowance: Loans

     1.06     1.08     1.13

Allowance: Non-performing loans

     1.2     0.9     1.1

The ratio of gross loans to deposits was 92.0% at March 31, 2018, compared to 88.6% at December 31, 2017.

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 available-for-sale and held-to-maturity portfolios as of March 31, 2018, 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 on March 31, 2018, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits decreased $7 million, or 1%, from December 31, 2017 with noninterest bearing deposits decreasing $7 million and interest-bearing deposit accounts increasing $318 thousand, or less than 1%. Total deposits as of March 31, 2018 are $34 million greater than March 31, 2017 deposit balances. On a year over year comparison, a decrease was recognized in noninterest-bearing demand deposits of $5 million and money market savings accounts of $2 million, while increases were recognized in interest-bearing demand deposits of $25 million, savings of $11 million, and time deposits of $5 million.

Short-term borrowings consisting of overnight repurchase agreements with retail customers decreased $1 million to $38 million at March 31, 2018 as compared to December 31, 2017 and other borrowings decreased $187 thousand as the Company repaid FHLB advances with required monthly amortization.

Total shareholders’ equity amounted to $71 million, or 10.1% of total assets at March 31, 2018 up slightly from December 31, 2017. The increase in shareholders’ equity during the three months ending March 31, 2018 was due to net income of $2.2 million offset by an increase in accumulated other comprehensive loss of $1 million and dividends declared of $658 thousand. The Company and the Bank met all regulatory capital requirements at March 31, 2018.

RESULTS OF OPERATIONS

Three months ended March 31, 2018 and 2017

For the quarters ended March 31, 2018 and 2017, the Company recorded net income of $2.2 million and $1.7 million and $.79 and $.63 per share, respectively. The $434 thousand increase in net income for the quarter was primarily the result of a $527 thousand increase in net interest income an increase of $39 thousand in other noninterest income, a decrease of $109 thousand in other noninterest expenses, and a $243 thousand reduction in federal income tax provision. The increases were partially offset by an increase in the provision for loans losses of $484 thousand.

Return on average assets and return on average equity were 1.25% and 12.23%, respectively, for the three month period of 2018, compared to 1.05% and 10.54%, respectively for the same quarter in 2017.

 

27


Table of Contents

CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

 

Average Balance Sheets and Net Interest Margin Analysis

 

     For the three months ended March 31,  
     2018     2017  

(Dollars in thousands)

   Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Interest-earning deposits in other banks

   $ 8,564        2.06   $ 12,493        1.04

Federal funds sold

     395        1.64       990        0.70  

Taxable securities

     95,741        2.55       102,717        2.36  

Tax-exempt securities

     28,757        2.88       30,664        3.33  

Loans

     527,315        4.72       480,656        4.60  
  

 

 

      

 

 

    

Total earning assets

     660,772        4.29     627,520        4.10

Other assets

     39,622          39,130     
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 700,394        $ 666,650     
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest-bearing demand deposits

   $ 116,432        0.22   $ 86,169        0.06

Savings deposits

     179,720        0.27       164,924        0.13  

Time deposits

     112,386        0.99       111,560        0.74  

Other borrowed funds

     52,826        0.81       65,781        0.73  
  

 

 

      

 

 

    

Total interest bearing liabilities

     461,364        0.49     428,434        0.36

Non-interest bearing demand deposits

     165,317          168,727     

Other liabilities

     2,540          2,929     

Shareholders’ Equity

     71,173          66,560     
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 700,394        $ 666,650     
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.80        3.74

Taxable equivalent net interest margin

        3.95        3.85

Interest income for the quarter ended March 31, 2018, was $6.9 million representing a $703 thousand increase, or a 11% improvement, compared to the same period in 2017. This increase was primarily due to average loan volume increasing $47 million for the quarter ended March 31, 2018 as compared to the first quarter 2017. Interest expense for the quarter ended March 31, 2018 was $560 thousand, an increase of $176 thousand, or 46%, from the same period in 2017. The increase in interest expense occurred primarily due to an increase in rate on all interest-bearing liabilities for the quarter ended March 31, 2018.

For the quarter ended March 31, 2018, the provision for loan losses was $324 thousand, compared to a provision of $160 thousand credit for the same quarter in 2017. For more discussion see Financial Condition. 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 March 31, 2018, was $1.1 million, a decrease of $39 thousand, or 4%, compared to the same quarter in 2017. Service charges on deposit accounts decreased $7 thousand, or 2%, compared to the same quarter in 2017 primarily from decreases in overdraft fees. The gain on the sale of mortgage loans to the secondary market increased to $77 thousand for the quarter ending March 31, 2018, from $42 thousand in the same quarter in 2017. Debit card interchange income increased $25 thousand, or 9%, with greater fee income in the first quarter of 2018. Fees from trust and brokerage services increased $12 thousand to $219 thousand for the first quarter 2018 as compared to the same quarter in 2017 following a realignment of both divisions in 2017.

 

28


Table of Contents

CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

 

Noninterest expenses for the quarter ended March 31, 2018 decreased $109 thousand, or 2%, compared to the first quarter of 2017. Salaries and employee benefits increased $178 thousand, or 7%, a result of increases in employees, base salary, and other benefits. Debit card expenses decreased $14 thousand, or 11%, compared to the first quarter 2017 due to the replacement of all outstanding debit cards with EMV chip cards. Software expense rose $3 thousand quarter over quarter with additional investment. Occupancy expense increased $9 thousand in 2018 over the first quarter of 2017. Professional and director fees increased $142 thousand for the quarter ended March 31, 2018 as compared to the first quarter 2017. The increase was primarily a result of increased legal fees for loan collections.

Federal income tax expense decreased $243 thousand, or 32%, for the quarter ended March 31, 2018 as compared to the first quarter of 2017. The provision for income taxes was $509 thousand (effective rate of 19%) for the quarter ended March 31, 2018, compared to $752 thousand (effective rate of 30%) for the same quarter ended 2017. The effective rate decreased as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017.

CAPITAL RESOURCES

The Company maintained a strong capital position with tangible common equity to tangible assets of 9.5% at March 31, 2018 compared with 9.3% at December 31, 2017.

Effective January 1, 2015 the Federal Reserve adopted final rules implementing Basel III and regulatory capital changes required by the Dodd-Frank Act. The rules apply to both the Company and the Bank. The rules established minimum risk-based and leverage capital requirements for all banking organizations. The quality of capital will be provided by the new measurement of Tier 1 capital called common equity tier 1 or (“CET1”). Effective with the March 31, 2015 Call Report the Bank selected the opt-out election for accumulated other comprehensive income (“AOCI”). This election will neutralize the effects of unrealized gains and losses from available-for-sale securities and other elements of the AOCI account for regulatory capital purposes.

Consistent with the Board of Director’s commitment to public confidence and safe and sound banking operations, capital targets and minimum risk-based capital ratios for CSB were established to maintain excess capital to well-capitalized standards. To be considered well-capitalized, an institution must have a total risk-based capital ratio of at least 10%, a tier 1 capital ratio of at least 8%, a leverage capital ratio of at least 5%, a CET1 ratio of at least 6.5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An adequately capitalized institution has a total risk-based capital ratio of at least 8%, a tier 1 capital ratio of at least 6%, a CET1 ratio of at least 4.5%, and a leverage ratio of at least 4%.

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, 2017. As of March 31, 2018 the Company and the Bank met all capital adequacy requirements to which they were subject.

 

29


Table of Contents

CSB BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

 

     Capital Ratios  
     March 31, 2018     December 31, 2017  

Common Equity Tier 1 Capital To Risk Weighted Assets

    

Consolidated

     12.6     12.7

Bank

     12.4     12.5

Tier 1 Capital To Risk Weighted Assets Ratio

    

Consolidated

     12.6     12.7

Bank

     12.4     12.5

Total Capital To Risk Weighted Assets Ratio

    

Consolidated

     13.7     13.8

Bank

     13.5     13.6

Tier 1 Leverage Ratio

    

Consolidated

     9.7     9.3

Bank

     9.6     9.2

LIQUIDITY

 

(Dollars in millions)

   March 31, 2018     December 31, 2017     Change  

Cash and cash equivalents

   $ 22     $ 36     $ (14

Unused lines of credit

     82       82       —    

Unpledged AFS securities at fair market value

     23       31       (8
  

 

 

   

 

 

   

 

 

 
   $ 127     $ 149     $ (22
  

 

 

   

 

 

   

 

 

 

Net deposits and short-term liabilities

   $ 546     $ 557     $ (11
  

 

 

   

 

 

   

 

 

 

Liquidity ratio

     23.0     26.8     (3.8

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 the Company’s Asset Liability Committee. Other sources of liquidity include, but are not limited to, purchases of federal funds, advances from the FHLB, adjustments of interest rates to attract deposits, brokered 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.

The liquidity ratio was 23.0% and 26.8% at March 31, 2018 and December 31, 2017.

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.

 

30


Table of Contents

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 March 31, 2018, from the disclosures presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Management performs a quarterly analysis of the Company’s interest rate risk over a twenty-four month horizon. 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. Minor variances with net interest income exceeding the board approved policy are being projected in the March 2018 dynamic balance sheet simulation coupled with immediate rate shocks. All other balance sheet positions and interest rate projections are currently within the Company’s board-approved policy.

The following table presents an analysis of the estimated sensitivity of the Company’s annual net interest income to sudden and sustained -100 through +400 basis point changes, in 100 basis point increments, in market interest rates at March 31, 2018 and December 31, 2017. The net interest income reflected is for the first twelve month period of the modeled twenty-four month horizon. The underlying balance sheet for illustrative purposes is dynamic with projected growth in assets and liabilities.    

 

March 31, 2018  
(Dollars in thousands)                      

Change in

Interest Rates

(basis points)

   Net
Interest
Income
     Dollar
Change
     Percentage
Change
    Board
Policy
Limits
 

+400

   $ 28,763      $ 1,177        4.3     +/-25

+300

     28,505        919        3.3       +/-15  

+200

     28,241        655        2.4       +/-10  

+100

     27,927        341        1.2       +/-5  

      0

     27,586        —          —         —    

-100

     27,222        (364      (1.3     +/-5  

December 31, 2017

 

+400

   $ 28,329      $ 1,889        6.2     +/-25

+300

     27,944        1,433        4.8       +/-15  

+200

     27,552        947        3.3       +/-10  

+100

     27,123        462        1.7       +/-5  

      0

     26,663        —          —         —    

-100

     25,996        (667      (2.5     +/-5  

 

 

31


Table of Contents

CSB BANCORP, INC.

CONTROLS AND PROCEDURES

ITEM 4 – 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 Commission’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.

 

32


Table of Contents

CSB BANCORP, INC.

FORM 10-Q

Quarter ended March  31, 2018

PART II – OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS.

In the opinion of management there are no outstanding legal proceedings that are reasonably likely to 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, 2017.

 

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

On July 7, 2005 CSB Bancorp, Inc. filed Form 8-K with the 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 may be made from time to time as market and business conditions warrant, in the open market, through block purchases, and in negotiated private transactions. No repurchases were made during the quarterly period ended March 31, 2018.

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

 

ITEM 4 – MINE SAFETY DISCLOSURES.

Not applicable.

 

ITEM 5 – OTHER INFORMATION.

Not applicable.

 

33


Table of Contents

CSB BANCORP, INC.

FORM 10-Q

Quarter ended March 31, 2018

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 Registrant’s Quarterly Report on Form 10-Q filed August 6, 2004, Exhibit 3.1, film number 04958544).
  3.2    Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to the Registrant’s Form 10-SB).
  3.2.1    Amended Article VIII of the Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form DEF 14a filed on March 25, 2009, Appendix A, film number 09703970).
  4.0    Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB). (P)
11    Statement Regarding Computation of Per Share Earnings.
31.1    Rule 13a-14(a)/15d-14(a) Chief Executive Officer’s Certification.
31.2    Rule 13a-14(a)/15d-14(a) Chief Financial Officer’s Certification.
32.1    Section 1350 Chief Executive Officer’s Certification.
32.2    Section 1350 Chief Financial Officer’s Certification.
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 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.

 

34


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: May 10, 2018    

/s/ Eddie L. Steiner

    Eddie L. Steiner
    President
   

Chief Executive Officer

 

Date: May 10, 2018    

/s/ Paula J. Meiler

    Paula J. Meiler
    Senior Vice President
    Chief Financial Officer

 

 

35