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CSB Bancorp, Inc. - Quarter Report: 2017 March (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: March 31, 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 May 1, 2017:
  2,742,242 common shares

 

 

 


Table of Contents

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED March 31, 2017

Table of Contents

 

         Page  
Part I - Financial Information   
ITEM 1 – FINANCIAL STATEMENTS (Unaudited)   
Consolidated Balance Sheets      3  
Consolidated Statements of Income      4  
Consolidated Statements of Comprehensive Income      5  
Condensed Consolidated Statements of Changes in Shareholders’ Equity      6  
Condensed Consolidated Statements of Cash Flows      7  
Notes to Consolidated Financial Statements      8  
ITEM 2 –  

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

     25  
ITEM 3 –  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     30  
ITEM 4 –  

CONTROLS AND PROCEDURES

     31  

Part II - Other Information

 

ITEM 1. –  

Legal Proceedings

     32  
ITEM 1A –  

Risk Factors

     32  
ITEM 2 –  

Unregistered Sales of Equity Securities and Use of Proceeds

     32  
ITEM 3 –  

Defaults upon Senior Securities

     32  
ITEM 4 –  

Mine Safety Disclosures

     32  
ITEM 5 –  

Other Information

     32  
ITEM 6 –  

Exhibits

     33  
Signatures      34  

 

2


Table of Contents

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,     December 31,  

(Dollars in thousands)

   2017     2016  

ASSETS

    

Cash and cash equivalents

    

Cash and due from banks

   $ 13,911     $ 13,590  

Interest-earning deposits in other banks

     24,476       23,248  
  

 

 

   

 

 

 

Total cash and cash equivalents

     38,387       36,838  
  

 

 

   

 

 

 

Securities

    

Available-for-sale, at fair value

     102,158       103,875  

Held-to-maturity (fair value 2017-$27,675; 2016-$23,444)

     27,892       23,883  

Restricted stock, at cost

     4,614       4,614  
  

 

 

   

 

 

 

Total securities

     134,664       132,372  
  

 

 

   

 

 

 

Loans held for sale

     264       —    

Loans

     480,709       475,449  

Less allowance for loan losses

     5,454       5,291  
  

 

 

   

 

 

 

Net loans

     475,255       470,158  
  

 

 

   

 

 

 

Premises and equipment, net

     8,656       8,749  

Core deposit intangible

     354       383  

Goodwill

     4,728       4,728  

Bank-owned life insurance

     12,959       10,361  

Accrued interest receivable and other assets

     4,170       6,389  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 679,437     $ 669,978  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 171,235     $ 167,824  

Interest-bearing

     370,945       372,961  
  

 

 

   

 

 

 

Total deposits

     542,180       540,785  
  

 

 

   

 

 

 

Short-term borrowings

     54,022       48,742  

Other borrowings

     12,304       12,385  

Accrued interest payable and other liabilities

     4,004       2,651  
  

 

 

   

 

 

 

Total liabilities

     612,510       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

     43,810       42,629  

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

     (4,784     (4,784

Accumulated other comprehensive loss

     (543     (874
  

 

 

   

 

 

 

Total shareholders’ equity

     66,927       65,415  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 679,437     $ 669,978  
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 

(Dollars in thousands, except per share data)

   2017     2016  

INTEREST AND DIVIDEND INCOME

    

Loans, including fees

   $ 5,449     $ 4,742  

Taxable securities

     598       737  

Nontaxable securities

     165       154  

Other

     34       28  
  

 

 

   

 

 

 

Total interest and dividend income

     6,246       5,661  
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

     267       259  

Short-term borrowings

     22       17  

Other borrowings

     95       100  
  

 

 

   

 

 

 

Total interest expense

     384       376  
  

 

 

   

 

 

 

NET INTEREST INCOME

     5,862       5,285  

(CREDIT) PROVISION FOR LOAN LOSSES

     (160     164  
  

 

 

   

 

 

 

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

     6,022       5,121  
  

 

 

   

 

 

 

NONINTEREST INCOME

    

Service charges on deposit accounts

     291       278  

Trust services

     207       226  

Debit card interchange fees

     288       262  

Gain on sale of loans, net

     42       32  

Other income

     278       194  
  

 

 

   

 

 

 

Total noninterest income

     1,106       992  
  

 

 

   

 

 

 

NONINTEREST EXPENSES

    

Salaries and employee benefits

     2,459       2,327  

Occupancy expense

     210       244  

Equipment expense

     170       174  

Professional and director fees

     169       174  

Franchise tax expense

     131       107  

Marketing and public relations

     78       85  

Software expense

     210       187  

Debit card expense

     130       104  

Amortization of intangible assets

     29       30  

FDIC insurance expense

     51       84  

Provision for unfunded loan commitments

     540       —    

Other expenses

     469       473  
  

 

 

   

 

 

 

Total noninterest expenses

     4,646       3,989  
  

 

 

   

 

 

 

Income before income taxes

     2,482       2,124  

FEDERAL INCOME TAX PROVISION

     752       644  
  

 

 

   

 

 

 

NET INCOME

   $ 1,730     $ 1,480  
  

 

 

   

 

 

 

Basic and diluted net earnings per share

   $ 0.63     $ 0.54  
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2017     2016  

Net income

   $ 1,730     $ 1,480  
  

 

 

   

 

 

 

Other comprehensive income

    

Unrealized gains arising during the period

     471       808  

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

     31       46  

Income tax effect

     (171     (290
  

 

 

   

 

 

 

Other comprehensive income

     331       564  
  

 

 

   

 

 

 

Total comprehensive income

   $ 2,061     $ 2,044  
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

     Three Months Ended
March 31,
 

(Dollars in thousands, except per share data)

   2017     2016  

Balance at beginning of period

   $ 65,415     $ 61,266  

Net income

     1,730       1,480  

Other comprehensive income

     331       564  

Stock options exercised 1,246 shares issued in 2016

     —         7  

Cash dividends declared

     (549     (521
  

 

 

   

 

 

 

Balance at end of period

   $ 66,927     $ 62,796  
  

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.20     $ 0.19  

See notes to unaudited consolidated financial statements.

 

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Table of Contents

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2017     2016  

NET CASH FROM OPERATING ACTIVITIES

   $ 4,407     $ 1,382  

CASH FLOWS FROM INVESTING ACTIVITIES

    

Securities:

    

Proceeds from repayments, available-for-sale

     4,430       11,625  

Proceeds from repayments, held-to-maturity

     709       6,827  

Purchases, available-for-sale

     (2,379     (5,281

Purchases, held-to-maturity

     (4,700     —    

Loan originations, net of repayments

     (4,899     (10,398

Property, equipment, and software acquisitions

     (113     (50

Purchase of bank-owned life insurance

     (2,500     —    
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (9,452     2,723  
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net change in deposits

     1,395       (15,062

Net change in short-term borrowings

     5,280       189  

Repayment of other borrowings

     (81     (133
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     6,594       (15,006
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

   $ 1,549     $ (10,901

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     36,838       38,272  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 38,387     $ 27,371  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

    

Cash paid during the year for:

    

Interest

   $ 389     $ 378  

Income taxes

     —         400  

Noncash financing activities:

    

Dividends declared

     549       521  
       —    

See notes to unaudited consolidated financial statements.

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements include the accounts of CSB Bancorp, Inc. and its wholly-owned subsidiaries, The Commercial and Savings Bank (the “Bank”) and CSB Investment Services, LLC (together referred to as the “Company” or “CSB”). All significant intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the Company’s financial position at March 31, 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 March 31, 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. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and the FASB issued a one-year deferral for implementation, which results in new guidance being effective for annual and interim reporting periods beginning after December 15, 2017. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. 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 2016-01 - 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 Update is not expected to have a significant impact 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. We expect the Update will result in an increase in total assets and liabilities. The amount of the increase will be impacted by the leases outstanding at the time of adoption and their remaining term at that time. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

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

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. The amendment is not expected to have a material impact on the Company’s Unaudited Consolidated 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 purchased at discount. The Update was adopted in the current reporting period and did not have a significant impact on the Company’s Unaudited Consolidated Financial Statements.

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES

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

 

(Dollars in thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair value  

March 31, 2017

           

Available-for-sale

           

U.S. Treasury security

   $ 1,000      $ —        $ —        $ 1,000  

U.S. Government agencies

     8,500        —          79        8,421  

Mortgage-backed securities of government agencies

     53,306        296        438        53,164  

Other mortgage-backed securities

     55        —          —          55  

Asset-backed securities of government agencies

     1,272        —          26        1,246  

State and political subdivisions

     28,768        195        276        28,687  

Corporate bonds

     9,615        45        156        9,504  

Equity securities

     53        28        —          81  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     102,569        564        975        102,158  

Held-to-maturity

           

U.S. Government agencies

     9,473        21        303        9,191  

Mortgage-backed securities of government agencies

     13,719        169        137        13,751  

State and political subdivisions

     4,700        33        —          4,733  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     27,892        223        440        27,675  

Restricted stock

     4,614        —          —          4,614  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 135,075      $ 787      $ 1,415      $ 134,447  
  

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

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

   $ 3,269      $ 3,272  

Due after one through five years

     24,328        24,391  

Due after five through ten years

     22,266        22,174  

Due after ten years

     52,653        52,240  
  

 

 

    

 

 

 

Total debt securities available-for-sale

   $ 102,516      $ 102,077  
  

 

 

    

 

 

 

Held-to-maturity

     

Due in one year or less

   $ 4,700      $ 4,733  

Due after one through five years

     —          —    

Due after five through ten years

     3,475        3,359  

Due after ten years

     19,717        19,583  
  

 

 

    

 

 

 

Total debt securities held-to-maturity

   $ 27,892      $ 27,675  
  

 

 

    

 

 

 

Securities with a carrying value of approximately $92.2 million and $94.8 million were pledged at March 31, 2017 and December 31, 2016 to secure public deposits, as well as other deposits and borrowings as required or permitted by law.

Restricted stock primarily consists of investments in Federal Home Loan Bank of Cincinnati (FHLB) and Federal Reserve Bank stock. The Bank’s investment in FHLB stock amounted to approximately $4.1 million at March 31, 2017 and December 31, 2016. Federal Reserve Bank stock was $471 thousand at March 31, 2017 and December 31, 2016.

There were no proceeds from sales of available-for-sale securities for the three month periods ending March 31, 2017 and 2016.

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

The following table presents gross unrealized losses and fair value of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 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
 

March 31, 2017

                 

Available-for-sale

                 

U.S. Government agencies

   $ 79      $ 8,420      $ —        $ —        $ 79      $ 8,420  

Mortgage-backed securities of government agencies

     438        30,345        —          —          438        30,345  

Asset-backed securities of government agencies

        —          26        1,246        26        1,246  

State and political subdivisions

     276        10,713        —          —          276        10,713  

Corporate bonds

     1        941        155        2,345        156        3,286  

Held-to-maturity

                 

U.S. Government agencies

     303        8,695        —          —          303        8,695  

Mortgage-backed securities of government agencies

     12        1,938        125        3,517        137        5,455  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,109      $ 61,052      $ 306      $ 7,108      $ 1,415      $ 68,160  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 seventy-one securities in an unrealized loss position at March 31, 2017, six (6) of which were in a continuous loss position for twelve months or more. At least quarterly, the Company conducts a comprehensive security-level impairment assessment. The assessments are based on the nature of the securities, the extent and duration of the securities in an unrealized loss position, the extent and duration of the loss and management’s intent to sell or if it is more likely than not that management will be required to sell a security before recovery of its amortized cost basis, which may be maturity. Management believes the Company will fully recover the cost of these securities. It does not intend to sell these securities and likely will not be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, management concluded that these securities were not other-than-temporarily impaired at March 31, 2017.

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS

Loans consist of the following:

 

(Dollars in thousands)

   March 31, 2017      December 31, 2016  

Commercial

   $ 132,455      $ 134,268  

Commercial real estate

     167,203        159,475  

Residential real estate

     149,007        144,489  

Construction & land development

     16,996        23,428  

Consumer

     14,528        13,308  
  

 

 

    

 

 

 

Total loans before deferred costs

     480,189        474,968  

Deferred loan costs

     520        481  
  

 

 

    

 

 

 

Total Loans

   $ 480,709      $ 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 and the Board of Directors review and approve 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 past, 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, other business assets such as accounts receivable, or inventory and usually 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 are 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. At March 31, 2017 approximately 78% of the outstanding principal balances of the Company’s commercial real estate loans were secured by owner-occupied properties as compared to 77% at December 31, 2016.

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 appraisals, sensitivity analysis of absorption, 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.

 

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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 a credit department that reviews and validates the credit risk program on a periodic basis. The Company engages an outside firm on an annual basis to provide a third party review of the commercial loan portfolio. Results of these reviews are presented to management. The loan review processes complement and reinforce the risk identification, assessment decisions made by lenders, and credit personnel, as well as the Company’s policies and procedures.

Loans serviced for others approximated $86.0 million and $85.9 million at March 31, 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, industrial, and commercial real estate loans. As of March 31, 2017, there were four business segment concentrations of credit. Loan balances as a percentage of capital included: $42 million, or 69%, to lessors of non-residential buildings, $25 million, or 41%, to logging and sawmill operations, $22 million, or 36%, to borrowers in the hotel, motel and lodging business, and $19 million, or 32%, to lessors of residential buildings at March 31, 2017.

Allowance for Loan Losses

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

The changes in the provision for loan losses for the three months ended March 31, 2016 related to commercial and industrial loans were primarily due to the increase in a specific reserve amount for one commercial relationship as well as the increase in loan volume. The decrease in the provision related to commercial real estate loans was primarily due to a recovery of a prior charge-off as well as a decrease in a specific reserve amount related to one loan relationship.

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

(Dollars in thousands)

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

Three months ended March 31, 2017

               

Beginning balance

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

(Credit) provision for loan losses

     (831     274       114       6       29       248        (160

Charge-offs

     (8     —         —         —         (5        (13

Recoveries

     336       —         —         —         —            336  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net recoveries (charge-offs)

     328       —         —         —         (5        323  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Three months ended March 31, 2016

               

Beginning balance

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

(Credit) provision for loan losses

     394       (228     (4     (17     8       11        164  

Charge-offs

     (9     —         —         —         (1        (10

Recoveries

     4       182       2       —         1          189  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net recoveries (charge-offs)

     (5     182       2       —         —            179  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

 

(Dollars in thousands)

   Commercial      Commercial
Real Estate
     Residential
Real Estate
     Construction      Consumer      Unallocated      Total  

March 31, 2017

                    

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 51      $ —        $ 25      $ —        $ —        $ —        $ 76  

Collectively evaluated for impairment

     1,653        1,538        1,278        184        165        560        5,378  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 2,000      $ 3,543      $ 1,520      $ —        $ —           $ 7,063  

Loans collectively evaluated for impairment

     130,455        163,660        147,487        16,996        14,528           473,126  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 132,455      $ 167,203      $ 149,007      $ 16,996      $ 14,528         $ 480,189  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 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
 

March 31, 2017

              

Commercial

   $ 2,084      $ 1,882      $ 121      $ 2,003      $ 51  

Commercial real estate

     3,435        3,522        20        3,542        —    

Residential real estate

     1,727        1,056        465        1,521        25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 7,246      $ 6,460      $ 606      $ 7,066      $ 76  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 March 31,

 
(Dollars in thousands)    2017      2016  

Average recorded investment:

     

Commercial

   $ 4,216      $ 6,016  

Commercial real estate

     438        984  

Residential real estate

     1,488        1,530  
  

 

 

    

 

 

 

Average recorded investment in impaired loans

   $ 6,142      $ 8,530  
  

 

 

    

 

 

 

Interest income recognized:

     

Commercial

   $ 14      $ 65  

Commercial real estate

     —          4  

Residential real estate

     15        15  
  

 

 

    

 

 

 

Interest income recognized on a cash basis on impaired loans

   $ 29      $ 84  
  

 

 

    

 

 

 

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

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

March 31, 2017

                    

Commercial

   $ 131,447      $ 148      $ —        $ —        $ 860      $ 1,008      $ 132,455  

Commercial real estate

     163,273        272        95        40        3,523        3,930        167,203  

Residential real estate

     148,011        347        197        30        422        996        149,007  

Construction & land development

     16,996        —          —          —          —          —          16,996  

Consumer

     14,455        38        1        —          34        73        14,528  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 474,182      $ 805      $ 293      $ 70      $ 4,839      $ 6,007      $ 480,189  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $2.8 million as of March 31, 2017, and $6.4 million as of December 31, 2016, with $25 thousand and $711 thousand of specific reserves allocated to those loans, respectively. At March 31, 2017, $2.5 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $348 thousand, all were in nonaccrual of interest status.

There were no new TDR’s during the three month periods ended March 31, 2017 and 2016. None of the loans that were restructured in 2015 or 2016 have subsequently defaulted in the three month periods ended March 31, 2017 and 2016.

The Company held no foreclosed real estate as of March 31, 2017 or December 31, 2016. Consumer mortgage loans in the process of foreclosure were $487 thousand at March 31, 2017 and $448 thousand at December 31, 2016.

 

17


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis includes commercial loans with an outstanding balance greater than $300 thousand. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings:

Pass. Loans classified as pass (Acceptable, Low Acceptable or Pass Watch) may exhibit a wide array of characteristics but at a minimum represent an acceptable risk to the Bank. Borrowers in this rating may have leveraged but acceptable balance sheet positions, satisfactory asset quality, stable to favorable sales and earnings trends, acceptable liquidity, and adequate cash flow. Loans are considered fully collectible and require an average amount of administration. While generally adhering to credit policy, these loans may exhibit occasional exceptions that do not result in undue risk to the Bank. Borrowers are generally capable of absorbing setbacks, financial and otherwise, without the threat of failure.

Special Mention. Loans classified as special mention have material weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, values, highly questionable, and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $300 thousand or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class is as follows as of March 31, 2017 and December 31, 2016:

 

(Dollars in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Not Rated      Total  

March 31, 2017

                 

Commercial

   $ 115,363      $ 9,316      $ 6,767      $ —        $ 1,009      $ 132,455  

Commercial real estate

     150,517        9,845        5,829        —          1,012        167,203  

Residential real estate

     213        —          55        —          148,739        149,007  

Construction & land development

     12,491        1,169        —          —          3,336        16,996  

Consumer

     —          —          —          —          14,528        14,528  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 278,584      $ 20,330      $ 12,651      $ —        $ 168,624      $ 480,189  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents loans that are not rated by class of loans as of March 31, 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  

March 31, 2017

        

Commercial

   $ 857      $ 152      $ 1,009  

Commercial real estate

     1,012        —          1,012  

Residential real estate

     148,404        335        148,739  

Construction & land development

     3,336        —          3,336  

Consumer

     14,494        34        14,528  
  

 

 

    

 

 

    

 

 

 

Total

   $ 168,103      $ 521      $ 168,624  
  

 

 

    

 

 

    

 

 

 

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)

   March 31,
2017
     December 31,
2016
 

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

   $ 54,226      $ 48,866  

Repurchase agreements

     54,022        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.

 

19


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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 Sheet at their fair value as of March 31, 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  

March 31, 2017

           

Assets:

           

Securities available-for-sale

           

U.S. Treasury security

   $ 1,000      $ —        $ —        $ 1,000  

U.S. Government agencies

     —          8,421        —          8,421  

Mortgage-backed securities of government agencies

     —          53,164        —          53,164  

Other mortgage-backed securities

     —          55        —          55  

Asset-backed securities of government agencies

     —          1,246        —          1,246  

State and political subdivisions

     —          28,687        —          28,687  

Corporate bonds

     —          9,504        —          9,504  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     1,000        101,077        —          102,077  

Equity securities

     81        —          —          81  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 1,081      $ 101,077      $ —        $ 102,158  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 March 31, 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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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5- FAIR VALUE MEASUREMENTS (CONTINUED)

 

(Dollars in thousands)

   Level I      Level II      Level III      Total  

March 31, 2017

           

Assets measured on a nonrecurring basis:

           

Impaired loans

   $ —        $ —        $ 6,987      $ 6,987  

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:

 

(Dollars in thousands)                      

March 31, 2017

           

Impaired loans

   $ 5,678      Discounted cash flow   

Remaining term

Discount rate

   2 mos to 30 yrs (154 months) 3.1% to 9.8% (4.7%)
     1,309     

Appraisal of

collateral (1)

  

Appraisal adjustments (2)

Liquidation expense (2)

  

0% to -50% (-23%)

-10%

December 31, 2016

           

Impaired loans

   $ 5,331     

Discounted

cash flow

  

Remaining term

Discount rate

   6 mos to 29.9 yrs / (61.1 mos) 3.1% to 12.0% / (4.9%)
     1,096      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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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of recognized financial instruments as of March 31, 2017 and December 31, 2016 are as follows:

 

(Dollars in thousands)

   Carrying
Value
     Level I      Level II      Level III      Fair Value  

March 31, 2017

              

Financial assets

              

Cash and cash equivalents

   $ 38,387      $ 38,387      $ —        $ —        $ 38,387  

Securities available-for-sale

     102,158        1,081        101,077        —          102,158  

Securities held-to-maturity

     27,892        —          27,675        —          27,675  

Restricted stock

     4,614        4,614           —          4,614  

Loans held for sale

     264        264        —          —          264  

Net loans

     475,255        —          —          478,673        478,673  

Bank-owned life insurance

     12,959        12,959        —          —          12,959  

Accrued interest receivable

     1,604        1,604        —          —          1,604  

Mortgage servicing rights

     260        —          —          260        260  

Financial liabilities

              

Deposits

   $ 542,180      $ 430,366      $ —        $ 112,062      $ 542,428  

Short-term borrowings

     54,022        54,022        —             54,022  

Other borrowings

     12,304        —          —          12,434        12,434  

Accrued interest payable

     71        71        —          —          71  

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  

Loans held for sale

     —          —          —          —          —    

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.

 

22


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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. As a result, these rights are measured at fair value on a recurring basis and are classified within Level III of the fair value hierarchy.

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 March 31, 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 $164.4 million at March 31, 2017 and $163.7 million at December 31, 2016. Such amounts are also considered to be the estimated fair values.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

 

23


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 month periods ended March 31, 2017 and 2016:

 

(Dollars in thousands)

   Pretax      Tax Effect      After-tax  

Three months ended March 31, 2017

        

Balance as of December 31, 2016

   $ (1,323    $ 449      $ (874

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

     471        (161      310  

Amortization of held-to-maturity discount resulting from transfer

     31        (10      21  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income

     502        (171      331  
  

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2017

   $ (821    $ 278      $ (543
  

 

 

    

 

 

    

 

 

 

Three months ended March 31, 2016

        

Balance as of December 31, 2015

   $ (631    $ 214      $ (417

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

     808        (275      533  

Amortization of held-to-maturity discount resulting from transfer

     46        (15      31  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income

     854        (290      564  
  

 

 

    

 

 

    

 

 

 

Balance as of March 31, 2016

   $ 223      $ (76    $ 147  
  

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

CSB BANCORP, INC.

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

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

The following management’s discussion and analysis focuses on the consolidated financial condition of the Company at March 31, 2017 as compared to December 31, 2016, and the consolidated results of operations for the three month period ended March 31, 2017 compared to the same period 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 $679 million at March 31, 2017 as compared to $670 million at December 31, 2016. During the three month period ended March 31, 2017, net loans increased $5 million. Cash, cash equivalents, and investments increased $4 million. On the liability side, deposits and repurchase agreements increased by $7 million.

Net loans increased $5 million, or 1%, during the three months ended March 31, 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 $6 million, or 2%, while construction and land development loans decreased $6 million, or 27%, as loans transferred to permanent financing. Residential real estate loans increased $4 million, or 3%, and consumer loans increased $1 million, or 9% 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 three months ended March 31, 2017 and 2016 were $12 million and $7 million, respectively. Originations sold into the secondary market were $1.5 million during the three month period ended March 31, 2017 as compared to $1 million during the three months ended March 31, 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 1.13% at March 31, 2017 as compared to 1.11% at December 31, 2016. Outstanding loan balances increased 1% to $5 million at March 31, 2017. A provision credit of $160 thousand and net recoveries of $323 thousand, increased the allowance for loan losses to $5.5 million at March 31, 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 three months of 2017. For the three months ending March 31, 2017 loans totaling $3.9 million were placed on nonaccrual status, there were no charge-offs recognized, and pay downs of $552 thousand 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, these loans were classified as nonaccrual loans as of the end of the first quarter. It is anticipated that collection efforts on several of the non-performing loans should result in repayment of their full carrying value.

 

(Dollars in thousands)

   March 31,
2017
    December 31,
2016
    March 31,
2016
 

Non-performing loans

   $ 4,909     $ 1,684     $ 1,915  

Other real estate

     —         —         —    

Allowance for loan losses

     5,454       5,291       5,005  

Total loans

     480,709       475,449       433,453  

Allowance: Loans

     1.13     1.11     1.15

Allowance: Non-performing loans

     1.1x       3.1x       2.6x  

The ratio of gross loans to deposits was 88.7% at March 31, 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 $1.4 million within the available-for-sale and held-to-maturity portfolios as of March 31, 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 March 31, 2017, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits increased $1 million, or less than 1%, from December 31, 2016 with noninterest bearing deposits increasing $3 million and interest-bearing deposit accounts decreasing $2 million. Total deposits as of March 31, 2017 are $32 million greater than March 31, 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 $5 million to $54 million at March 31, 2017 as compared to December 31, 2016 and other borrowings decreased $81 thousand as the Company repaid FHLB advances with required monthly amortization.

Total shareholders’ equity amounted to $67 million, or 9.9%, of total assets, at March 31, 2017, compared to $65 million, or 9.8%, of total assets, at December 31, 2016. The increase in shareholders’ equity during the three months ending March 31, 2017 was due to net income of $1.7 million and other comprehensive income of $331 thousand, partially offset by dividends declared of $549 thousand. The Company and the Bank met all regulatory capital requirements at March 31, 2017.

RESULTS OF OPERATIONS

Three months ended March 31, 2017 and 2016

For the quarters ended March 31, 2017 and 2016, the Company recorded net income of $1.7 million and $1.5 million and $0.63 and $0.54 per share, respectively. The $250 thousand increase in net income for the quarter was primarily the result of a $577 thousand increase in net interest income combined with a credit in the provision for loan losses of $160 thousand. The increase was partially offset by an increase in noninterest expenses of $657 thousand. Return on average assets and return on average equity were 1.05% and 10.54%, respectively, for the three month period of 2017, compared to 0.93% and 9.48%, 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 March 31,  
     2017     2016  

(Dollars in thousands)

   Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Interest-earning deposits in other banks

   $ 12,493        1.04   $ 15,833        0.71

Federal funds sold

     990        0.70       538        0.45  

Taxable securities

     102,717        2.36       134,580        2.20  

Tax-exempt securities

     30,664        3.33       26,044        3.60  

Loans

     480,656        4.60       427,916        4.46  
  

 

 

      

 

 

    

Total earning assets

     627,520        4.10     604,911        3.81

Other assets

     39,130          35,759     
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 666,650        $ 640,670     
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest-bearing demand deposits

   $ 86,169        0.06   $ 82,203        0.03

Savings deposits

     164,924        0.13       167,181        0.07  

Time deposits

     111,560        0.74       118,591        0.75  

Other borrowed funds

     65,781        0.73       63,738        0.74  
  

 

 

      

 

 

    

Total interest bearing liabilities

     428,434        0.36     431,713        0.35

Non-interest bearing demand deposits

     168,727          144,217     

Other liabilities

     2,929          2,115     

Shareholders’ Equity

     66,560          62,625     
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 666,650        $ 640,670     
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.74        3.46

Taxable equivalent net interest margin

        3.85        3.57

Interest income for the quarter ended March 31, 2017, was $6.2 million representing a $585 thousand increase, or a 10% improvement, compared to the same period in 2016. This increase was primarily due to average loan volume increasing $53 million for the quarter ended March 31, 2017 as compared to the first quarter 2016. The volume of taxable securities declined $32 million on a year over year comparison, resulting in a decrease in interest income of $186 thousand from the volume reduction. Interest expense for the quarter ended March 31, 2017 was $384 thousand, an increase of $8 thousand, or 2%, from the same period in 2016. The increase in interest expense occurred primarily due to an increase in rate on interest-bearing demand and savings deposits for the quarter ended March 31, 2017.

For the quarter ended March 31, 2017, the provision for loan losses reflected a $160 thousand credit, compared to a provision of $164 thousand for the same quarter in 2016. 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. Favorable settlements of prior charged-off loans and impaired loans can result in a reduction in the required allowance for loan losses and a negative provision, or credit, being reflected in current operations.

Noninterest income for the quarter ended March 31, 2017, was $1.1 million, an increase of $114 thousand, or 11%, compared to the same quarter in 2016. Service charges on deposit accounts increased $13 thousand, or 5%, compared to the same quarter in 2016 primarily from increases in overdraft fees. The gain on the sale of mortgage loans to the secondary market increased to $42 thousand for the quarter ending March 31, 2017, from $32 thousand in the same quarter in 2016. Debit card interchange income increased $26 thousand, or 10%, with greater fee income in the first quarter of 2017. A loss on asset retirement of $39 thousand was recognized during the first quarter of 2016 that did not recur in 2017.

 

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CSB BANCORP, INC.

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

 

Fees from trust and brokerage services decreased $19 thousand to $207 thousand for the first quarter 2017 as compared to the same quarter in 2016 due to decreased assets under management.

Noninterest expenses for the quarter ended March 31, 2017 increased $657 thousand, or 16%, compared to the first quarter of 2016. The provision for unfunded loan commitments increased $540 thousand during first quarter 2017 related to an impaired commercial credit facility line on March 31, 2017. The allowance for unfunded loan commitments is included in other liabilities. Salaries and employee benefits increased $132 thousand, or 6%, a result of increases in base salary, medical, and other benefits. Debit card expenses increased $26 thousand, or 25%, compared to the first quarter 2016 due to the replacement of all outstanding debit cards with EMV chip cards. Software expense rose $23 thousand quarter over quarter with additional investment.    Occupancy and equipment expenses decreased $38 thousand in 2017 over the first quarter of 2016 due to expense reductions that resulted from the reduction of office lease expense. FDIC assessment declined $33 thousand due to the new rate structure beginning third quarter 2016. Professional and director fees decreased $5 thousand for the quarter ended March 31, 2017 as compared to the first quarter 2016. The decrease resulted from a reduction of general legal and collection fees offset by an increase in internal audit fees

Federal income tax expense increased $108 thousand, or 17%, for the quarter ended March 31, 2017 as compared to the first quarter of 2016. The provision for income taxes was $752 thousand (effective rate of 30.3%) for the quarter ended March 31, 2017, compared to $644 thousand (effective rate of 30.3%) for the same quarter ended 2016.

CAPITAL RESOURCES

CSB maintained a strong capital position with tangible common equity to tangible assets of 9.2% at March 31, 2017 compared with 9.1% at December 31, 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%.

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

 

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CSB BANCORP, INC.

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

 

     March 31, 2017     December 31, 2016  

Common Equity Tier 1 Capital To Risk Weighted Assets

    

Consolidated

     12.7     12.6

Bank

     12.5     12.4

Tier 1 Capital To Risk Weighted Assets Ratio

    

Consolidated

     12.7     12.6

Bank

     12.5     12.4

Total Capital To Risk Weighted Assets Ratio

    

Consolidated

     14.0     13.7

Bank

     13.7     13.5

Tier 1 Leverage Ratio

    

Consolidated

     9.4     9.3

Bank

     9.3     9.1

LIQUIDITY

 

(Dollars in millions)

   March 31, 2017     December 31, 2016     Change  

Cash and cash equivalents

   $ 38     $ 37     $ 1  

Unused lines of credit

     81       66       15  

Unpledged AFS securities at fair market value

     30       37       (7
  

 

 

   

 

 

   

 

 

 
   $ 149     $ 140     $ 9  
  

 

 

   

 

 

   

 

 

 

Net deposits and short-term liabilities

   $ 535     $ 533     $ 2  
  

 

 

   

 

 

   

 

 

 

Liquidity ratio

     27.9     26.1     1.8  

Minimum board approved liquidity ratio

     20.0     20.0     —    

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

The liquidity ratio was 27.9% and 26.1% at March 31, 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 March 31, 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 March 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 March 31, 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.    

 

March 31, 2017  
(Dollars in thousands)                             

Change in
Interest Rates

(basis points)

     Net
Interest
Income
     Dollar
Change
     Percentage
Change
    Board
Policy
Limits
 
  +400      $ 25,949      $ 1,668        6.9     +/- 25
  +300        25,558        1,277        5.3       +/-15  
  +200        25,133        852        3.5       +/-10  
  +100        24,706        425        1.8       +/-5  
  0        24,281        —          —         —    
  -100        23,421        (860      (3.5     +/-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 March 31, 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 March 31, 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 March 31, 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 March 31, 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: May 12, 2017    

/s/ Eddie L. Steiner

    Eddie L. Steiner
    President
    Chief Executive Officer
Date: May 12, 2017    

/s/ Paula J. Meiler

    Paula J. Meiler
    Senior Vice President
    Chief Financial Officer

 

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CSB BANCORP, INC.

INDEX TO EXHIBITS

 

Exhibit
Number

  

Description of Document

    3.1    Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to the 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 March 31, 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.

 

35