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CSB Bancorp, Inc. - Quarter Report: 2017 June (Form 10-Q)

Form 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: June 30, 2017

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    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  ☒

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 August 1, 2017:
   2,742,242 common shares

 

 

 


Table of Contents

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED June 30, 2017

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

     27  

ITEM  3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     34  

ITEM 4 – CONTROLS AND PROCEDURES

     35  

Part II – Other Information

  

ITEM 1 – Legal Proceedings

     36  

ITEM 1A – Risk Factors

     36  

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

     36  

ITEM 3 – Defaults upon Senior Securities

     36  

ITEM 4 – Mine Safety Disclosures

     36  

ITEM 5 – Other Information

     36  

ITEM 6 – Exhibits

     37  

Signatures

     38  

 

2


Table of Contents

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in thousands)

   June 30,
2017
    December 31,
2016
 

ASSETS

    

Cash and cash equivalents

    

Cash and due from banks

   $ 15,445     $ 13,590  

Interest-earning deposits in other banks

     23,351       23,248  
  

 

 

   

 

 

 

Total cash and cash equivalents

     38,796       36,838  
  

 

 

   

 

 

 

Securities

    

Available-for-sale, at fair value

     103,058       103,875  

Held-to-maturity (fair value 2017-$27,213; 2016-$23,444)

     27,169       23,883  

Restricted stock, at cost

     4,614       4,614  
  

 

 

   

 

 

 

Total securities

     134,841       132,372  
  

 

 

   

 

 

 

Loans held for sale

     432       —    

Loans

     498,625       475,449  

Less allowance for loan losses

     6,289       5,291  
  

 

 

   

 

 

 

Net loans

     492,336       470,158  
  

 

 

   

 

 

 

Premises and equipment, net

     8,633       8,749  

Core deposit intangible

     325       383  

Goodwill

     4,728       4,728  

Bank-owned life insurance

     13,045       10,361  

Accrued interest receivable and other assets

     3,755       6,389  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 696,891     $ 669,978  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 169,241     $ 167,824  

Interest-bearing

     377,863       372,961  
  

 

 

   

 

 

 

Total deposits

     547,104       540,785  
  

 

 

   

 

 

 

Short-term borrowings

     56,932       48,742  

Other borrowings

     21,781       12,385  

Accrued interest payable and other liabilities

     2,348       2,651  
  

 

 

   

 

 

 

Total liabilities

     628,165       604,563  
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $6.25 par value. Authorized

    

9,000,000 shares; issued 2,980,602 shares; outstanding (shares 2017 and 2016 - 2,742,242)

     18,629       18,629  

Additional paid-in capital

     9,815       9,815  

Retained earnings

     44,988       42,629  

Treasury stock at cost (shares 2017 and 2016 - 238,360)

     (4,784     (4,784

Accumulated other comprehensive income (loss)

     78       (874
  

 

 

   

 

 

 

Total shareholders’ equity

     68,726       65,415  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 696,891     $ 669,978  
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months
Ended June 30,
     Six Months Ended
June 30,
 

(Dollars in thousands, except per share data)

   2017     2016      2017      2016  

INTEREST AND DIVIDEND INCOME

          

Loans, including fees

   $ 5,584     $ 4,966      $ 11,033      $ 9,708  

Taxable securities

     598       662        1,196        1,398  

Nontaxable securities

     174       165        339        319  

Other

     57       20        91        49  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     6,413       5,813        12,659        11,474  
  

 

 

   

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

          

Deposits

     307       250        574        509  

Short-term borrowings

     35       19        57        36  

Other borrowings

     121       98        216        198  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest expense

     463       367        847        743  
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

     5,950       5,446        11,812        10,731  

PROVISION FOR LOAN LOSSES

     845       165        685        329  
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income, after provision for loan losses

     5,105       5,281        11,127        10,402  
  

 

 

   

 

 

    

 

 

    

 

 

 

NONINTEREST INCOME

          

Service charges on deposit accounts

     268       288        559        566  

Trust services

     152       218        359        444  

Debit card interchange fees

     296       271        584        533  

Gain on sale of loans, net

     61       118        103        150  

Other income

     283       202        561        396  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,060       1,097        2,166        2,089  
  

 

 

   

 

 

    

 

 

    

 

 

 

NONINTEREST EXPENSES

          

Salaries and employee benefits

     2,472       2,299        4,931        4,626  

Occupancy expense

     214       233        424        477  

Equipment expense

     171       169        341        343  

Professional and director fees

     234       189        403        363  

Financial institutions and franchise tax expense

     127       107        258        214  

Marketing and public relations

     89       143        167        228  

Software expense

     203       198        413        384  

Debit card expense

     141       114        271        218  

Amortization of intangible assets

     29       30        58        60  

FDIC insurance expense

     52       82        103        165  

Provision for unfunded loan commitments

     (540     —          —          —    

Other expenses

     496       498        965        973  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     3,688       4,062        8,334        8,051  
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,477       2,316        4,959        4,440  

FEDERAL INCOME TAX PROVISION

     751       705        1,503        1,349  
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 1,726     $ 1,611      $ 3,456      $ 3,091  
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic and diluted net earnings per share

   $ 0.63     $ 0.59      $ 1.26      $ 1.13  
  

 

 

   

 

 

    

 

 

    

 

 

 

See notes to unaudited consolidated financial statements

 

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Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months
Ended June 30,
    Six Months Ended
June 30,
 

(Dollars in thousands)

   2017     2016     2017     2016  

Net income

   $ 1,726     $ 1,611     $ 3,456     $ 3,091  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

        

Unrealized gains arising during the period

     916       519       1,386       1,327  

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

     26       271       58       317  

Income tax effect

     (321     (269     (492     (559
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     621       521       952       1,085  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 2,347     $ 2,132     $ 4,408     $ 4,176  
  

 

 

   

 

 

   

 

 

   

 

 

 

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
June 30,
    Six Months Ended
June 30,
 

(Dollars in thousands, except per share data)

   2017     2016     2017     2016  

Balance at beginning of period

   $ 66,927     $ 62,796     $ 65,415     $ 61,266  

Net income

     1,726       1,611       3,456       3,091  

Other comprehensive income

     621       521       952       1,085  

Stock options exercised

        

1,246 shares issued in 2016

     —         —         —         7  

Cash dividends declared

     (548     (521     (1,097     (1,042
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 68,726     $ 64,407     $ 68,726     $ 64,407  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.20     $ 0.19     $ 0.40     $ 0.38  

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended
June 30,
 

(Dollars in thousands)

   2017     2016  

NET CASH FROM OPERATING ACTIVITIES

   $ 3,024     $ 3,185  

CASH FLOWS FROM INVESTING ACTIVITIES

    

Securities:

    

Proceeds from repayments, held-to-maturity

     1,447       14,263  

Proceeds from repayments, available-for-sale

     11,187       26,566  

Purchases, available-for-sale

     (9,243     (17,014

Purchases, held-to-maturity

     (4,700     (4,000

Loan originations, net of repayments

     (22,820     (27,785

Property, equipment, and software acquisitions

     (293     (930
  

 

 

   

 

 

 

Net cash used in investing activities

     (24,422     (8,900
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net change in deposits

     6,319       (8,545

Net change in short-term borrowings

     8,190       5,527  

Proceeds from other borrowings

     10,000       —    

Repayment of other borrowings

     (604     (891

Cash dividends paid

     (549     (521
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     23,356       (4,430
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   $ 1,958     $ (10,145

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     36,838       38,272  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 38,796     $ 28,127  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

    

Cash paid during the year for:

    

Interest

   $ 836     $ 751  

Income taxes

     2,160       1,400  

Noncash financing activities:

    

Dividends declared

     548       521  

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 June 30, 2017, 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, 2016, 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 June 30, 2017 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ASU 2014-09 – Revenue from Contracts with Customers. The amendments in ASU 2014-09 require an entity to recognize revenue upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. FASB issued a one-year deferral for implementation, for public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company’s financial instruments are not within the scope of Topic 606. However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

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. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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.

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

 

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 2016-15 – Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. Current guidance lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. FASB issued the ASU with the intent of reducing diversity in practice with respect to several types of cash flows. The amendments in this Update are effective using a retrospective transition approach for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

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.

ASU 2017-08 – Premium Amortization on Purchased Callable Debt Securities. The Update amends the guidance related to amortization for certain callable debt securities held at a premium. The new guidance requires the premium to be amortized to the earliest call date. The guidance does not require an accounting change for securities held at a discount. The Update was adopted in the current reporting period and did not have a significant impact on the Company’s financial statements.

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES

Securities consist of the following at June 30, 2017 and December 31, 2016:

 

(Dollars in thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair value  

June 30, 2017

           

Available-for-sale

           

U.S. Treasury security

   $ 998      $ —        $ 1      $ 997  

U.S. Government agencies

     10,350        1        35        10,316  

Mortgage-backed securities of government agencies

     53,106        438        210        53,334  

Asset-backed securities of government agencies

     1,232        —          19        1,213  

State and political subdivisions

     27,217        443        72        27,588  

Corporate bonds

     9,598        72        144        9,526  

Equity securities

     53        31        —          84  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     102,554        985        481        103,058  

Held-to-maturity securities

           

U.S. Government agencies

     9,475        23        129        9,369  

Mortgage-backed securities of government agencies

     12,994        207        81        13,120  

State and political subdivisions

     4,700        24        —          4,724  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     27,169        254        210        27,213  

Restricted stock

     4,614        —          —          4,614  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 134,337      $ 1,239      $ 691      $ 134,885  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

Available-for-sale

           

U.S. Treasury security

   $ 1,001      $ —        $ —        $ 1,001  

U.S. Government agencies

     6,500        —          98        6,402  

Mortgage-backed securities of government agencies

     56,187        239        589        55,837  

Other mortgage-backed securities

     65        —          —          65  

Asset-backed securities of government agencies

     1,312        —          46        1,266  

State and political subdivisions

     30,007        140        439        29,708  

Corporate bonds

     9,632        28        144        9,516  

Equity securities

     53        27        —          80  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     104,757        434        1,316        103,875  

Held-to-maturity

           

U.S. Government agencies

     9,472        17        396        9,093  

Mortgage-backed securities of government agencies

     14,411        141        201        14,351  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     23,883        158        597        23,444  

Restricted stock

     4,614        —          —          4,614  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 133,254      $ 592      $ 1,913      $ 131,933  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


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 June 30, 2017, 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

   $ 2,815      $ 2,836  

Due after one through five years

     21,224        21,370  

Due after five through ten years

     26,517        26,770  

Due after ten years

     51,945        51,998  
  

 

 

    

 

 

 

Total debt securities available-for-sale

   $ 102,501      $ 102,974  
  

 

 

    

 

 

 

Held-to-maturity

     

Due in one year or less

   $ 4,700      $ 4,724  

Due after one through five years

     476        499  

Due after five through ten years

     3,000        2,918  

Due after ten years

     18,993        19,072  
  

 

 

    

 

 

 

Total debt securities held-to-maturity

   $ 27,169      $ 27,213  
  

 

 

    

 

 

 

Securities with a fair value of approximately $107 million and $95 million were pledged at June 30, 2017 and December 31, 2016, 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 June 30, 2017 and December 31, 2016. Federal Reserve Bank stock was $471 thousand at June 30, 2017 and December 31, 2016.

There were no proceeds from sales of securities for the three or six month periods ending June 30, 2017 and 2016.

 

11


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 June 30, 2017 and December 31, 2016:

 

     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
 

June 30, 2017

                 

Available-for-sale

                 

U.S. Treasury security

   $ 1      $ 997      $ —        $ —        $ 1      $ 997  

U.S. Government agencies

     35        6,464        —          —          35        6,464  

Mortgage-backed securities of government agencies

     210        20,136        —          —          210        20,136  

Asset-backed securities of government agencies

     —          —          19        1,213        19        1,213  

State and political subdivisions

     53        3,597        19        813        72        4,410  

Corporate bonds

     1        940        143        2,357        144        3,297  

Held-to-maturity

                 

U.S. Government agencies

     129        6,869        —          —          129        6,869  

Mortgage-backed securities of government agencies

     —          —          81        3,534        81        3,534  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 429      $ 39,003      $ 262      $ 7,917      $ 691      $ 46,920  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                 

Available-for-sale

                 

U.S. Government agencies

   $ 98      $ 6,402      $ —        $ —        $ 98      $ 6,402  

Mortgage-backed securities of government agencies

     589        27,243        —          —          589        27,243  

Asset-backed securities of government agencies

     —          —          46        1,266        46        1,266  

State and political subdivisions

     439        19,328        —          —          439        19,328  

Corporate bonds

     33        3,593        111        1,889        144        5,482  

Held-to-maturity

                 

U.S. Government agencies

     396        8,602        —          —          396        8,602  

Mortgage-backed securities of government agencies

     28        2,018        173        3,621        201        5,639  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,583      $ 67,186      $ 330      $ 6,776      $ 1,913      $ 73,962  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were forty-one securities in an unrealized loss position at June 30, 2017, eight (8) 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 June 30, 2017.

 

12


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS

Loans consist of the following:

 

(Dollars in thousands)

   June 30,
2017
     December 31,
2016
 

Commercial

   $ 141,285      $ 134,268  

Commercial real estate

     168,812        159,475  

Residential real estate

     151,126        144,489  

Construction & land development

     20,705        23,428  

Consumer

     16,173        13,308  
  

 

 

    

 

 

 

Total loans before deferred costs

     498,101        474,968  

Deferred loan costs

     524        481  
  

 

 

    

 

 

 

Total Loans

   $ 498,625      $ 475,449  
  

 

 

    

 

 

 

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.

 

13


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 $81.6 million and $85.9 million at June 30, 2017 and December 31, 2016, respectively.

Concentrations of Credit

Nearly all of the Company’s lending activity occurs within the state of Ohio, including the four (4) 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 June 30, 2017 and December 31, 2016, 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 and six months ended June 30, 2017 and 2016. 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 June 30, 2017 related to commercial and commercial real estate loans was primarily due to the increase in the specific allocation related to two commercial relationships. The decrease in the provision related to residential real estate is due to the improvement in the historical losses of loans in this category.

The increase in the provision for loan losses related to commercial real estate was due to the increase in the specific allocation for one commercial real estate relationship, the increase in nonaccrual loans in this category and the increase of special mention loan balances. The decrease in the provision for loan losses for the six months ended June 30, 2017 related to commercial loans was primarily due to the recovery of prior loan charge-offs from one relationship.

The increase in the provision for loan losses for the three and six months ended June 30, 2016 related to commercial loans were due to the increase in specific reserve amounts for two commercial relationships, the downgrade of one commercial relationship and the increase in loan volume. The decrease in the provision related to commercial real estate loans for the six month period in 2016 was primarily due to a recovery of a prior charge-off. The increase in the provision for commercial real estate loans for the three month period of 2016 was due to the downgrade of one commercial relationship.

 

14


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 June 30, 2017

               

Beginning balance

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

Provision for loan losses

     675       180       (47     38        18       (19     845  

Charge-offs

     (32     —         —         —          (2       (34

Recoveries

     15       —         8       —          1         24  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (17     —         8       —          (1       (10
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,362     $ 1,718     $ 1,264     $ 222      $ 182     $ 541     $ 6,289  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2017

               

Beginning balance

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

Provision for loan losses

     (156     454       67       44        47       229       685  

Charge-offs

     (40     —         —         —          (7     —         (47

Recoveries

     351       —         8       —          1       —         360  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     311       —         8       —          (6     —         313  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,362     $ 1,718     $ 1,264     $ 222      $ 182     $ 541     $ 6,289  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2016

               

Beginning balance

   $ 2,053     $ 1,225     $ 1,084     $ 106      $ 94     $ 443     $ 5,005  

Provision for loan losses

     326       48       11       21        16       (257     165  

Charge-offs

     (6     (12     —         —          —           (18

Recoveries

     3       1       —         —          —           4  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (3     (11     —         —          —           (14
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,376     $ 1,262     $ 1,095     $ 127      $ 110     $ 186     $ 5,156  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2016

               

Beginning balance

   $ 1,664     $ 1,271     $ 1,086     $ 123      $ 86     $ 432     $ 4,662  

Provision for loan losses

     720       (180     7       4        24       (246     329  

Charge-offs

     (15     (12     —         —          (1       (28

Recoveries

     7       183       2       —          1         193  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net charge-offs

     (8     171       2       —          —           165  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,376     $ 1,262     $ 1,095     $ 127      $ 110     $ 186     $ 5,156  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

 

The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio class and based on the impairment method as of June 30, 2017 and December 31, 2016:

 

(Dollars in thousands)

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

June 30, 2017

                    

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 573      $ 243      $ 25      $ —        $ —        $ —        $ 841  

Collectively evaluated for impairment

     1,789        1,475        1,239        222        182        541        5,448  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 2,362      $ 1,718      $ 1,264      $ 222      $ 182      $ 541      $ 6,289  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 3,169      $ 3,693      $ 1,465      $ —        $ —           $ 8,327  

Loans collectively evaluated for impairment

     138,116        165,119        149,661        20,705        16,173           489,774  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 141,285      $ 168,812      $ 151,126      $ 20,705      $ 16,173         $ 498,101  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

December 31, 2016

                    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 705      $ —        $ 24      $ —        $ —        $ —        $ 729  

Collectively evaluated for impairment

     1,502        1,264        1,165        178        141        312        4,562  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 5,028      $ 621      $ 1,507      $ —        $ —           $ 7,156  

Loans collectively evaluated for impairment

     129,240        158,854        142,982        23,428        13,308           467,812  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 134,268      $ 159,475      $ 144,489      $ 23,428      $ 13,308         $ 474,968  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

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 June 30, 2017 and December 31, 2016:

 

(Dollars in thousands)

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

June 30, 2017

              

Commercial

   $ 3,181      $ 1,012      $ 2,160      $ 3,172      $ 573  

Commercial real estate

     3,884        2,456        1,237        3,693        243  

Residential real estate

     1,643        1,059        409        1,468        25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 8,708      $ 4,527      $ 3,806      $ 8,333      $ 841  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

              

Commercial

   $ 5,476      $ 1,690      $ 3,354      $ 5,044      $ 705  

Commercial real estate

     796        600        21        621        —    

Residential real estate

     1,681        1,036        472        1,508        24  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 7,953      $ 3,326      $ 3,847      $ 7,173      $ 729  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months
ended June 30,
     Six months ended
June 30,
 

(Dollars in thousands)

   2017      2016      2017      2016  

Average recorded investment:

           

Commercial

   $ 2,794      $ 6,579      $ 3,505      $ 6,360  

Commercial real estate

     3,600        746        2,019        865  

Residential real estate

     1,540        1,497        1,514        1,518  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment in impaired loans

   $ 7,934      $ 8,822      $ 7,038      $ 8,743  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized:

           

Commercial

   $ 17      $ 56      $ 31      $ 122  

Commercial real estate

     2        2        2        6  

Residential real estate

     15        14        30        29  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on a cash basis on impaired loans

   $ 34      $ 72      $ 63      $ 157  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 June 30, 2017 and December 31, 2016 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
 

June 30, 2017

                    

Commercial

   $ 139,066      $ 147      $ —        $ —        $ 2,072      $ 2,219      $ 141,285  

Commercial real estate

     165,328        58        —          39        3,387        3,484        168,812  

Residential real estate

     150,426        174        18        30        478        700        151,126  

Construction & land development

     20,705        —          —          —          —          —          20,705  

Consumer

     16,047        87        9        —          30        126        16,173  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 491,572      $ 466      $ 27      $ 69      $ 5,967      $ 6,529      $ 498,101  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                    

Commercial

   $ 133,630      $ 151      $ 62      $ —        $ 425      $ 638      $ 134,268  

Commercial real estate

     158,504        435        —          39        497        971        159,475  

Residential real estate

     142,926        816        61        196        490        1,563        144,489  

Construction & land development

     23,428        —          —          —          —          —          23,428  

Consumer

     13,234        21        16        —          37        74        13,308  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 471,722      $ 1,423      $ 139      $ 235      $ 1,449      $ 3,246      $ 474,968  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

 

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 $4.9 million as of June 30, 2017, and $6.4 million as of December 31, 2016, with $456 thousand and $711 thousand of specific reserves allocated to those loans, respectively. At June 30, 2017, $2.5 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $2.4 million, all were in nonaccrual of interest status.

The Company held no foreclosed real estate as of June 30, 2017, or December 31, 2016. Consumer mortgage loans in the process of foreclosure were $225 thousand at June 30, 2017 and $448 thousand at December 31, 2016.

The following table presents loans restructured during the three and six month periods ended June 30, 2017 and 2016.

 

(Dollars in thousands)

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

For the three months ended June 30, 2017

        

Commercial Real Estate

     4      $ 288      $ 288  

Residential Real Estate

     1        14        14  
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     5      $ 302      $ 302  
  

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2017

        

Commercial Real Estate

     4      $ 288      $ 288  

Residential Real Estate

     1        14        14  
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     5      $ 302      $ 302  
  

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2016

        

Residential Real Estate

     3      $ 327      $ 327  
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     3      $ 327      $ 327  
  

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2016

        

Residential Real Estate

     3      $ 327      $ 327  
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     3      $ 327      $ 327  
  

 

 

    

 

 

    

 

 

 

The restructured loans were modified by changing the monthly payment to interest only. No principal reductions were made. There was one commercial loan in the amount of $3.3 million that was restructured in the fourth quarter of 2016 that has defaulted in 2017. None of the loans that were restructured in 2015 have subsequently defaulted in the six month period ended June 30, 2016.

 

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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 June 30, 2017 and December 31, 2016:

 

(Dollars in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Not Rated      Total  

June 30, 2017

                 

Commercial

   $ 114,648      $ 17,640      $ 8,180      $ —        $ 817      $ 141,285  

Commercial real estate

     152,806        10,480        5,008        —          518        168,812  

Residential real estate

     211        —          112        —          150,803        151,126  

Construction & land development

     15,282        1,423        648        —          3,352        20,705  

Consumer

     —          —          —          —          16,173        16,173  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 282,947      $ 29,543      $ 13,948      $ —        $ 171,663      $ 498,101  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                 

Commercial

   $ 116,739      $ 6,874      $ 9,704      $ —        $ 951      $ 134,268  

Commercial real estate

     149,630        4,168        4,766        —          911        159,475  

Residential real estate

     216        —          175        —          144,098        144,489  

Construction & land development

     17,183        981        504        —          4,760        23,428  

Consumer

     —          —          —          —          13,308        13,308  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 283,768      $ 12,023      $ 15,149      $ —        $ 164,028      $ 474,968  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


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 June 30, 2017 and December 31, 2016. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status.

 

(Dollars in thousands)

   Performing      Non-Performing      Total  

June 30, 2017

        

Commercial

   $ 817      $ —        $ 817  

Commercial real estate

     518        —          518  

Residential real estate

     150,295        508        150,803  

Construction & land development

     3,352        —          3,352  

Consumer

     16,143        30        16,173  
  

 

 

    

 

 

    

 

 

 

Total

   $ 171,125      $ 538      $ 171,663  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

        

Commercial

   $ 951      $ —        $ 951  

Commercial real estate

     911        —          911  

Residential real estate

     143,440        658        144,098  

Construction & land development

     4,760        —          4,760  

Consumer

     13,271        37        13,308  
  

 

 

    

 

 

    

 

 

 

Total

   $ 163,333      $ 695      $ 164,028  
  

 

 

    

 

 

    

 

 

 

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
 

(Dollars in thousands)

   June 30,
2017
     December 31,
2016
 

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

   $ 57,103      $ 48,866  

Repurchase agreements

     56,932        48,742  

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.

 

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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 as of June 30, 2017 and December 31, 2016 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  

June 30, 2017

           

Assets:

  

Securities available-for-sale

           

U.S. Treasury security

   $ 997      $ —        $ —        $ 997  

U.S. Government agencies

     —          10,316        —          10,316  

Mortgage-backed securities of government agencies

     —          53,334        —          53,334  

Asset-backed securities of government agencies

     —          1,213        —          1,213  

State and political subdivisions

     —          27,588        —          27,588  

Corporate bonds

     —          9,526        —          9,526  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     997        101,977        —          102,974  

Equity securities

     84        —          —          84  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 1,081      $ 101,977      $ —        $ 103,058  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

Assets:

           

Securities available-for-sale

           

U.S. Treasury security

   $ 1,001      $ —        $ —        $ 1,001  

U.S. Government agencies

     —          6,402        —          6,402  

Mortgage-backed securities of government agencies

     —          55,837        —          55,837  

Other mortgage-backed securities

     —          65        —          65  

Asset-backed securities of government agencies

     —          1,266        —          1,266  

State and political subdivisions

     —          29,708        —          29,708  

Corporate bonds

     —          9,516        —          9,516  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,001        102,794        —          103,795  

Equity securities

     80        —          —          80  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 1,081      $ 102,794      $ —        $ 103,875  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of June 30, 2017 and December 31, 2016, 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.

 

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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  

June 30, 2017

           

Assets measured on a nonrecurring basis:

  

Impaired loans

   $ —        $ —        $ 5,577      $ 5,577  

December 31, 2016

           

Assets measured on a nonrecurring basis:

  

Impaired loans

   $ —        $ —        $ 6,427      $ 6,427  

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
Estimate
    

Valuation
Techniques

  

Unobservable

Input

  

Range (Weighted Average)

(Dollars in thousands)                      

June 30, 2017

           

Impaired loans

   $ 5,128      Discounted cash flow   

Remaining term

Discount rate

  

1 mo to 29.8 yrs (102 months)

3.5% to 9.8% (5.2%)

     449      Appraisal of collateral (1)   

Appraisal adjustments (2)

Liquidation expense (2)

  

0% to -50% (-17%)

-10%

December 31, 2016

           

Impaired loans

   $ 5,330      Discounted cash flow   

Remaining term

Discount rate

  

6 mos to 29.9 yrs / (61.1 mos)

3.1% to 12.0% / (4.9%)

     1,097      Appraisal of collateral (1)   

Appraisal adjustments (2)

Liquidation expense (2)

  

0% to -50% (-21.7%)

-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.

 

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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 June 30, 2017 and December 31, 2016 are as follows:

 

(Dollars in thousands)

   Carrying
Value
     Level I      Level II      Level III      Fair Value  

June 30, 2017

              

Financial assets

              

Cash and cash equivalents

   $ 38,796      $ 38,796      $ —        $ —        $ 38,796  

Securities available-for-sale

     103,058        1,081        101,977        —          103,058  

Securities held-to-maturity

     27,169        —          27,213        —          27,213  

Restricted stock

     4,614        4,614        —          —          4,614  

Loans held for sale

     432        432        —          —          432  

Net loans

     492,336        —          —          496,611        496,611  

Bank-owned life insurance

     13,045        13,045        —          —          13,045  

Accrued interest receivable

     1,440        1,440        —          —          1,440  

Mortgage servicing rights

     260        —          —          260        260  

Financial liabilities

              

Deposits

   $ 547,104      $ 436,592      $ —        $ 110,825      $ 547,417  

Short-term borrowings

     56,932        56,932        —          —          56,932  

Other borrowings

     21,781        —          —          20,955        20,955  

Accrued interest payable

     87        87        —          —          87  

December 31, 2016

              

Financial assets

              

Cash and cash equivalents

   $ 36,838      $ 36,838      $ —        $ —        $ 36,838  

Securities available-for-sale

     103,875        1,081        102,794        —          103,875  

Securities held-to-maturity

     23,883        —          23,444        —          23,444  

Restricted stock

     4,614        4,614        —          —          4,614  

Net loans

     470,158        —          —          471,815        471,815  

Bank-owned life insurance

     10,361        10,361        —          —          10,361  

Accrued interest receivable

     1,409        1,409        —          —          1,409  

Mortgage servicing rights

     261        —          —          261        261  

Financial liabilities

              

Deposits

   $ 540,785      $ 428,676      $ —        $ 112,642      $ 541,318  

Short-term borrowings

     48,742        48,742        —          —          48,742  

Other borrowings

     12,385        —          —          12,511        12,511  

Accrued interest payable

     76        76        —          —          76  

For purposes of the above disclosures of estimated fair value, the following assumptions are used:

Cash and cash equivalents; Loans held for sale; Accrued interest receivable; Short-term borrowings and Accrued interest payable

The fair value of the above instruments is considered to be carrying value, classified as Level I in the fair value hierarchy.

 

24


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.

Net loans

The fair value for loans is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Fair value of non-accrual loans is based on carrying value, classified as Level III.

Bank-owned life insurance

The carrying amount of bank-owned life insurance is based on the cash surrender value of the policies and is a reasonable estimate of fair value, classified as Level I.

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. Fair value is based on carrying value, classified as Level I.

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.

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.

The Company also has unrecognized financial instruments at June 30, 2017 and December 31, 2016. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $178.5 million at June 30, 2017 and $163.7 million at December 31, 2016. 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. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

 

25


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 and six month periods ended June 30, 2017 and 2016:

 

(Dollars in thousands)

   Pretax     Tax
Effect
    After-tax  

Three months ended June 30, 2017

      

Balance as of March 31, 2017

   $ (821   $ 278     $ (543

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

     916       (312     604  

Amortization of held-to-maturity discount resulting from transfer

     26       (9     17  
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     942       (321     621  
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2017

   $ 121     $ (43   $ 78  
  

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2017

      

Balance as of December 31, 2016

   $ (1,323   $ 449     $ (874

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

     1,386       (471     915  

Amortization of held-to-maturity discount resulting from transfer

     58       (21     37  
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     1,444       (492     952  
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2017

   $ 121     $ (43   $ 78  
  

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2016

      

Balance as of March 31, 2016

   $ 223     $ (76   $ 147  

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

     519       (176     343  

Amortization of held-to-maturity discount resulting from transfer

     271       (93     178  
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     790       (269     521  
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2016

   $ 1,013     $ (345   $ 668  
  

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2016

      

Balance as of December 31, 2015

   $ (631   $ 214     $ (417

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

     1,327       (451     876  

Amortization of held-to-maturity discount resulting from transfer

     317       (108     209  
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     1,644       (559     1,085  
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2016

   $ 1,013     $ (345   $ 668  
  

 

 

   

 

 

   

 

 

 

 

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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 June 30, 2017 as compared to December 31, 2016, and the consolidated results of operations for the three and six month periods ended June 30, 2017 compared to the same periods in 2016. 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 $697 million at June 30, 2017 as compared to $670 million at December 31, 2016. During the six month period ended June 30, 2017, net loans increased $22 million. Cash, cash equivalents, and securities increased $4 million. On the liability side, deposits and repurchase agreements increased by $15 million.

Net loans increased $22 million, or 5%, during the six months ended June 30, 2017. 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 $16 million, or 6%, while construction and land development loans decreased $3 million, or 12%, as loans transferred to permanent financing. Residential real estate loans increased $7 million, or 5%, and consumer loans increased $3 million, or 22% from December 31, 2016. 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 six months ended June 30, 2017 and 2016 were $29 million and $28 million, respectively. Originations sold into the secondary market were $4 million during the six month periods ended June 30, 2017 and June 30, 2016. 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 1.26% at June 30, 2017 as compared to 1.11% at December 31, 2016. Outstanding loan balances increased 5% to $499 million at June 30, 2017. A provision of $685 thousand and net recoveries of $313 thousand, increased the allowance for loan losses to $6 million at June 30, 2017.

 

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CSB BANCORP, INC.

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

 

Nonaccrual loans increased during the first six months of 2017. For the six months ending June 30, 2017 loans totaling $6 million were placed on nonaccrual status, there were no charge-offs recognized, and pay downs of $1.5 million were received. The increase in nonaccrual loans was primarily due to two lending relationships comprised of several loans. Although payments on these loans were current June 30, 2017, these loans were classified as nonaccrual loans as of the end of the first quarter.

 

(Dollars in thousands)

   June 30,
2017
    December 31,
2016
    June 30,
2016
 

Non-performing loans

   $ 6,036     $ 1,684     $ 2,734  

Other real estate

     —         —         72  

Allowance for loan losses

     6,289       5,291       5,156  

Total loans

     498,625       475,449       450,789  

Allowance: Loans

     1.26     1.11     1.14

Allowance: Non-performing loans

     1.0x       3.1x       1.9 x  

The ratio of gross loans to deposits was 91.1% at June 30, 2017, compared to 87.9% at December 31, 2016.

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 $691 thousand within the available-for-sale and held-to-maturity portfolios as of June 30, 2017, 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 June 30, 2017, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits increased $6 million, or 1%, from December 31, 2016 with noninterest bearing deposits increasing $1 million and interest-bearing deposit accounts increasing $5 million. Total deposits as of June 30, 2017 are $31 million greater than June 30, 2016 deposit balances. On a year over year comparison, increases were recognized in noninterest-bearing demand deposits, interest-bearing demand, savings, and money market savings accounts.

Short-term borrowings consisting of overnight repurchase agreements with retail customers increased $8 million to $57 million at June 30, 2017 as compared to December 31, 2016 and other borrowings increased $9 million as the Company obtained a $10 million long-term advance and repaid FHLB advances with required monthly amortization.

Total shareholders’ equity amounted to $69 million, or 9.9%, of total assets, at June 30, 2017, compared to $65 million, or 9.8%, of total assets, at December 31, 2016. The increase in shareholders’ equity during the six months ending June 30, 2017 was due to net income of $3.5 million and other comprehensive income of $952 thousand, partially offset by dividends declared of $1.1 million. The Company and the Bank met all regulatory capital requirements at June 30, 2017.

RESULTS OF OPERATIONS

Three months ended June 30, 2017 and 2016

For the quarters ended June 30, 2017 and 2016, the Company recorded net income of $1.7 million and $1.6 million and $0.63 and $0.59 per share, respectively. The $115 thousand increase in net income for the quarter was primarily the result of a $504 thousand increase in net interest income combined with a decrease in other noninterest expenses of $374 thousand. The increase was partially offset by an increase in the provision for loans losses of $680 thousand. Return on average assets and return on average equity were 1.01% and 10.15%, respectively, for the three month period of 2017, compared to 1.00% and 10.14%, respectively for the same quarter in 2016.

 

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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 June 30,  
     2017     2016  

(Dollars in thousands)

   Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Interest-earning deposits in other banks

   $ 22,859        1.00   $ 11,978        0.66

Federal funds sold

     410        0.98       446        0.45  

Taxable securities

     101,158        2.37       122,484        2.17  

Tax-exempt securities

     32,073        3.26       28,221        3.56  

Loans

     490,359        4.57       447,009        4.48  
  

 

 

      

 

 

    

Total earning assets

     646,859        4.04     610,138        3.88

Other assets

     39,544          36,504     
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 686,403        $ 646,642     
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest-bearing demand deposits

   $ 90,002        0.06   $ 83,011        0.03

Savings deposits

     170,438        0.17       162,697        0.07  

Time deposits

     111,637        0.79       117,296        0.73  

Other borrowed funds

     73,276        0.85       65,369        0.72  
  

 

 

      

 

 

    

Total interest bearing liabilities

     445,353        0.42     428,373        0.34

Non-interest bearing demand deposits

     170,231          152,507     

Other liabilities

     2,635          1,885     

Shareholders’ Equity

     68,184          63,877     
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 686,403        $ 646,642     
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.62        3.54

Taxable equivalent net interest margin

        3.75        3.65

Interest income for the quarter ended June 30, 2017, was $6.4 million representing a $600 thousand increase, or a 10% improvement, compared to the same period in 2016. This increase was primarily due to average loan volume increasing $43 million for the quarter ended June 30, 2017 as compared to the second quarter 2016. The volume of taxable securities declined $21 million on a year over year comparison, resulting in a decrease in interest income of $64 thousand from the volume reduction. Interest expense for the quarter ended June 30, 2017 was $463 thousand, an increase of $96 thousand, or 26%, from the same period in 2016. The increase in interest expense occurred primarily due to an increase in rate on all deposit categories for the quarter ended June 30, 2017.

For the quarter ended June 30, 2017, the provision for loan losses was $845 thousand, compared to a provision of $165 thousand for the same quarter in 2016. For more discussion see Results of Operations for the six months ended June 30. 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 June 30, 2017, was $1.1 million, a decrease of $37 thousand, or 3%, compared to the same quarter in 2016. Service charges on deposit accounts decreased $20 thousand, or 7%, compared to the same quarter in 2016 primarily from decreases in overdraft fees. The gain on the sale of mortgage loans to the secondary market decreased to $61 thousand for the quarter ending June, 2017, from $118 thousand in the same quarter in 2016. Debit card interchange income increased $25 thousand, or 9%, with greater fee income in the second quarter of 2017. A loss on asset retirement of $25 thousand included in other noninterest income was recognized during the second quarter of 2016 that did not recur in 2017. Fees from trust and brokerage services decreased $66 thousand to $152 thousand for

 

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CSB BANCORP, INC.

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

 

the second quarter 2017 as compared to the same quarter in 2016 due to decreased assets under management.

Noninterest expenses for the quarter ended June 30, 2017 decreased $374 thousand, or 9%, compared to the second quarter of 2016. The provision for unfunded loan commitments decreased $540 thousand during second quarter 2017 related to an impaired commercial credit facility line which was drawn on June 30, 2017. Salaries and employee benefits increased $173 thousand, or 8%, a result of increases in employees, base salary, medical, and other benefits. Debit card expenses increased $27 thousand, or 24%, compared to the second quarter 2016 due to the replacement of all outstanding debit cards with EMV chip cards. Software expense rose $5 thousand quarter over quarter with additional investment. Occupancy expense decreased $19 thousand in 2017 over the second quarter of 2016 due to expense reductions that resulted from the reduction of office lease expense. FDIC assessment declined $30 thousand due to the new rate structure beginning third quarter 2016. Professional and director fees increased $45 thousand for the quarter ended June 30, 2017 as compared to the second quarter 2016. The increase resulted from an increase in internal audit fees and director fees, partially offset by a decrease in other outside service fees.

Federal income tax expense increased $46 thousand, or 7%, for the quarter ended June 30, 2017 as compared to the second quarter of 2016. The provision for income taxes was $751 thousand (effective rate of 30.3%) for the quarter ended June 30, 2017, compared to $705 thousand (effective rate of 30.4%) for the same quarter ended 2016.

RESULTS OF OPERATIONS

Six months ended June 30, 2017 and 2016

Net income for the six months ended June 30, 2017, was $3.5 million or $1.26 per share, as compared to $3.1 million or $1.13 per share during the same period in 2016. Return on average assets and return on average equity were 1.03% and 10.34%, respectively, for the six month period of 2017, compared to 0.97% and 9.83%, respectively for 2016.

Comparative net income increased as total interest and dividend income increased $1.2 million or 10% for the six month period in 2017 as compared to 2016. The provision for loan losses increased $356 thousand or 108% during the same comparative period. Noninterest income increased $77 thousand to $2.2 million or 4% for the six month period ending in 2017 as compared to 2016. Noninterest expense increased to $8.3 million for the six months ended June 30, 2017, an increase of $283 thousand or 4% from the same period last year.

 

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CSB BANCORP, INC.

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

 

Average Balance Sheet and Net Interest Margin Analysis

 

     For the six months ended June 30,  
     2017     2016  
(Dollars in thousands)    Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Due from banks-interest bearing

   $ 17,705        1.01   $ 13,906        0.69

Federal funds sold

     698        0.78       492        0.49  

Taxable securities

     101,932        2.37       128,532        2.19  

Tax-exempt securities

     31,373        3.30       27,132        3.58  

Loans

     485,534        4.59       437,462        4.47  
  

 

 

      

 

 

    

Total earning assets

     637,242        4.07     607,524        3.85

Other assets

     39,413          36,132     
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 676,655        $ 643,656     
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest bearing demand deposits

   $ 86,169        0.06   $ 82,607        0.03

Savings deposits

     164,924        0.15       164,939        0.07  

Time deposits

     111,560        0.77       117,943        0.74  

Other borrowed funds

     65,781        0.84       64,554        0.73  
  

 

 

      

 

 

    

Total interest bearing liabilities

     428,434        0.40     430,043        0.35

Non-interest bearing demand deposits

     168,727          148,362     

Other liabilities

     12,117          2,000     

Shareholders’ Equity

     67,377          63,251     
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 676,655        $ 643,656     
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.67        3.50

Taxable equivalent net interest margin

        3.80        3.61

Interest income on loans increased $1.3 million, or 14%, for the six months ended June 30, 2017, as compared to the same period in 2016. This increase was primarily due to an average loan volume increase of $48 million for the comparable six month periods. Interest income on securities decreased $182 thousand, or 11%, as the average volume of securities decreased $22 million, for the comparable six month periods. Interest income on fed funds sold and interest bearing deposits increased $42 thousand for the six months ended June 30, 2017 as the yield on fed funds sold and due from banks interest bearing balances increased 0.32%, compared to the same period in 2016.

Interest expense increased $104 thousand to $847 thousand for the six months ended June 30, 2017, compared to the same period in 2016. Interest expense on deposits increased $65 thousand, or 13%, from the same period as last year. Interest expense on short-term and other borrowings increased $39 thousand, or 17%. The increase in interest expense has been caused by higher interest rates being paid on all deposits and borrowings. Additionally, during the comparable six month periods, the Company grew non-interest bearing deposits by $20 million in 2017. Time deposits continue to renew at higher interest rates, and some depositors have moved monies to savings instruments anticipating higher interest rates. Competition for deposits appears to be increasing from a year ago with larger money center banks and community banks increasing rates offered for money market savings accounts. The net interest margin increased by 19 basis points for the six month period ended June 30, 2017, to 3.80%, from 3.61% for the same period in 2016. This margin increase is primarily the result of increased loan volume.

 

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CSB BANCORP, INC.

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

 

The provision for loan losses was $685 thousand during the six months of 2017, compared to $329 thousand in the same six month period of 2016. The increase in the provision for loan losses from a year ago reflects an increase in nonperforming loans. Early stage loan delinquency has decreased and net loan recoveries were reflected in both six month periods. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data including past charge-offs and current economic trends.

Non-interest income increased $77 thousand during the six months ended June 30, 2017, as compared to the same period in 2016. A loss on asset retirement of $64 thousand was recognized in other income during the six month period in 2016. Service charges on deposits decreased $7 thousand from the same period in 2016 reflecting a decrease in overdraft fees based on volume. Decreases were recognized in gains on mortgage loans sold in the secondary market on a year over year basis as more loans were originated and retained for portfolio. Debit card interchange income increased $51 thousand, or 10%, as a result of increased servicer revenue during the six months of 2017.

Non-interest expenses increased $283 thousand, or 4%, for the six months ended June 30, 2017, compared to the same period in 2016. Salaries and employee benefits increased $305 thousand, or 7%, primarily the result of salary and medical benefit increases. Marketing and public relations expense decreased $61 thousand, or 27%, primarily due to expenses related to redesign of the company’s website in 2016. Professional fees increased $40 thousand, or 11%, as audit expense grew by $73 thousand on a year over year basis from the outsourcing of internal audit in 2017. Loan legal and collection fees were decreased $36 thousand for the six month period ended June 30, 2017 with the collection of prior period legal expenses. Software expense increased $29 thousand for the six month period in 2017 as compared to the same period in 2016. The Bank’s telephone and data line expense decreased $3 thousand to $120 thousand for the six months ended 2017 reflecting an expense reduction initiative. Occupancy and equipment expense decreased $55 thousand, or 7%, reflecting a decrease in building lease expense and an increase in building rental income when compared to 2016.

The provision for income taxes of $1.5 million increased in 2017 from 2016 with a slight reduction to the effective rate of 30.3% for the six months ended June 30, 2017 as compared to 2016.

CAPITAL RESOURCES

The Company maintained a strong capital position with tangible common equity to tangible assets of 9.2% at June 30, 2017 compared with 9.1% at December 30, 2016.

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%.

 

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CSB BANCORP, INC.

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

 

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, 2016. As of June 30, 2017 the Company and the Bank met all capital adequacy requirements to which they were subject.

 

     June 30,
2017
    December 31,
2016
 

Common Equity Tier 1 Capital To Risk Weighted Assets

    

Consolidated

     12.5     12.6

Bank

     12.2     12.4

Tier 1 Capital To Risk Weighted Assets Ratio

    

Consolidated

     12.5     12.6

Bank

     12.2     12.4

Total Capital To Risk Weighted Assets Ratio

    

Consolidated

     13.7     13.7

Bank

     13.5     13.5

Tier 1 Leverage Ratio

    

Consolidated

     9.3     9.3

Bank

     9.2     9.1

LIQUIDITY

 

(Dollars in millions)

   June 30,
2017
    December 31,
2016
    Change  

Cash and cash equivalents

   $ 39     $ 37     $ 2  

Unused lines of credit

     76       66       10  

Unpledged AFS securities at fair market value

     26       37       (11
  

 

 

   

 

 

   

 

 

 
   $ 141     $ 140     $ 1  
  

 

 

   

 

 

   

 

 

 

Net deposits and short-term liabilities

   $ 539     $ 533     $ 6  
  

 

 

   

 

 

   

 

 

 

Liquidity ratio

     26.2     26.1     0.1  

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 26.2% and 26.1% at June 30, 2017 and December 31, 2016.

OFF-BALANCE SHEET ARRANGEMENTS

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

 

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CSB BANCORP, INC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risks as of June 30, 2017, from the disclosures presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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 June 2017 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 June 30, 2017 and December 31, 2016. 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.

 

     June 30, 2017  
     (Dollars in thousands)  
    

Change in
Interest Rates
(basis points)

     Net
Interest
Income
     Dollar
Change
     Percentage
Change
    Board
Policy
Limits
 
     +400      $ 26,972      $ 1,645        6.5     +/-25
     +300        26,595        1,268        5.0       +/-15  
     +200        26,183        856        3.4       +/-10  
     +100        25,765        438        1.7       +/-5  
     0        25,327        —          —         —    
     -100        24,389        (938      (3.7     +/-5  
     December 31, 2016  
     +400      $ 25,519      $ 1,889       
8.0
 
    +/-25
     +300        25,063        1,433        6.1       +/-15  
     +200        24,577        947        4.0       +/-10  
     +100        24,092        462        2.0       +/-5  
     0        23,630        —          —         —    
     -100        22,841        (789      (3.3     +/-5  

 

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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.

 

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CSB BANCORP, INC.

FORM 10-Q

Quarter ended June 30, 2017

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, 2016.

 

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 June 30, 2017.

 

ITEM 3- DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

 

ITEM 4- MINE SAFETY DISCLOSURES.

Not applicable.

 

ITEM 5- OTHER INFORMATION.

Not applicable.

 

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CSB BANCORP, INC.

FORM 10-Q

Quarter ended June 30, 2017

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).
  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 June 30, 2017 formatted in XBRL (extensible Business Reporting Language): (i) Consolidated Balance Sheets: (ii) Consolidated Statements of Income: (iii) Consolidated Statements of Comprehensive Income: (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity: (v) Condensed Consolidated Statements of Cash Flows: and (vi) Notes to Consolidated Financial Statements.

 

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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: August 11, 2017     /s/ Eddie L. Steiner
    Eddie L. Steiner
    President
    Chief Executive Officer
Date: August 11, 2017     /s/ Paula J. Meiler
    Paula J. Meiler
    Senior Vice President
    Chief Financial Officer

 

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Table of Contents

CSB BANCORP, INC.

INDEX TO EXHIBITS

 

Exhibit
Number

  

Description of Document

    3.1    Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to the 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).
  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 June 30, 2017, formatted in XBRL (extensible Business Reporting Language): (i) Consolidated Balance Sheets: (ii) Consolidated Statements of Income: (iii) Consolidated Statements of Comprehensive Income: (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity: (v) Condensed Consolidated Statements of Cash Flows: and (vi) Notes to Consolidated Financial Statements.

 

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