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CSB Bancorp, Inc. - Quarter Report: 2019 June (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended: June 30, 2019

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)

Registrant’s address: 91 North Clay, P.O. Box 232, Millersburg, Ohio 44654

Registrant’s telephone number, including area code: (330) 674-9015    

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol

 

Name of each exchange

on which registered

Common Stock   CSBB   OTCPink

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 every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  

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

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

Emerging growth company  ☐

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

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date.

 

Common stock, $6.25 par value    Outstanding at August 1, 2019, 2,742,350 common shares

 

 

 


Table of Contents

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED June  30, 2019

Table of Contents

Part I – Financial Information

 

         Page  
ITEM 1 –   FINANCIAL STATEMENTS (Unaudited)   
Consolidated Balance Sheets      3  
Consolidated Statements of Income      4  
Consolidated Statements of Comprehensive Income      5  
Consolidated Statements of Changes in Shareholders’ Equity      6  
Condensed Consolidated Statements of Cash Flows      7  
Notes to Consolidated Financial Statements      8  
ITEM 2 –   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      27  
ITEM 3 –   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      34  
ITEM 4 –   CONTROLS AND PROCEDURES      35  
Part II – Other Information   
ITEM 1 –   Legal Proceedings      36  
ITEM 1A –   Risk Factors      36  
ITEM 2 –   Unregistered Sales of Equity Securities and Use of Proceeds      36  
ITEM 3 –   Defaults upon Senior Securities      36  
ITEM 4 –   Mine Safety Disclosures      36  
ITEM 5 –   Other Information      36  
ITEM 6 –   Exhibits      37  
Signatures      38  

 

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Table of Contents

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     June 30,     December 31,  

(Dollars in thousands)

   2019     2018  

ASSETS

    

Cash and cash equivalents

    

Cash and due from banks

   $ 15,214     $ 23,214  

Interest-earning deposits in other banks

     42,063       22,350  
  

 

 

   

 

 

 

Total cash and cash equivalents

     57,277       45,564  
  

 

 

   

 

 

 

Securities

    

Available-for-sale, at fair value

     86,297       85,528  

Held-to-maturity (fair value 2019-$19,696; 2018-$20,118)

     19,657       20,688  

Equity Securities

     87       83  

Restricted stock, at cost

     4,614       4,614  
  

 

 

   

 

 

 

Total securities

     110,655       110,913  
  

 

 

   

 

 

 

Loans held for sale

     409       108  

Loans

     550,612       548,974  

Less allowance for loan losses

     6,537       5,907  
  

 

 

   

 

 

 

Net loans

     544,075       543,067  
  

 

 

   

 

 

 

Premises and equipment, net

     11,638       9,961  

Core deposit intangible

     135       167  

Goodwill

     4,728       4,728  

Bank-owned life insurance

     16,760       13,554  

Accrued interest receivable and other assets

     4,575       3,660  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 750,252     $ 731,722  
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 180,766     $ 185,871  

Interest-bearing

     442,562       420,627  
  

 

 

   

 

 

 

Total deposits

     623,328       606,498  
  

 

 

   

 

 

 

Short-term borrowings

     35,474       37,415  

Other borrowings

     6,576       8,525  

Accrued interest payable and other liabilities

     3,416       2,748  
  

 

 

   

 

 

 

Total liabilities

     668,794       655,186  
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; outstanding 2,742,350 shares 2019 and 2,742,242 shares 2018

     18,629       18,629  

Additional paid-in capital

     9,815       9,815  

Retained earnings

     57,988       54,288  

Treasury stock at cost: 238,252 shares 2019, 238,360 shares 2018

     (4,780     (4,784

Accumulated other comprehensive loss

     (194     (1,412
  

 

 

   

 

 

 

Total shareholders’ equity

     81,458       76,536  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 750,252     $ 731,722  
  

 

 

   

 

 

 

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      Six Months Ended  
     June 30,      June 30,  

(Dollars in thousands, except per share data)

   2019     2018      2019      2018  

INTEREST AND DIVIDEND INCOME

          

Loans, including fees

   $ 7,185     $ 6,515      $ 14,257      $ 12,654  

Taxable securities

     584       594        1,171        1,197  

Nontaxable securities

     134       152        268        313  

Other

     218       83        393        129  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     8,121       7,344        16,089        14,293  
  

 

 

   

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

          

Deposits

     921       560        1,746        1,014  

Short-term borrowings

     93       84        186        138  

Other borrowings

     36       48        75        100  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest expense

     1,050       692        2,007        1,252  
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

     7,071       6,652        14,082        13,041  

PROVISION FOR LOAN LOSSES

     285       324        570        648  
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income, after provision for loan losses

     6,786       6,328        13,512        12,393  
  

 

 

   

 

 

    

 

 

    

 

 

 

NONINTEREST INCOME

          

Service charges on deposit accounts

     313       300        605        584  

Trust services

     212       217        436        436  

Debit card interchange fees

     369       323        716        636  

Gain on sale of loans, net

     76       60        155        137  

Earnings on bank owned life insurance

     122       85        205        166  

Unrealized gain (loss) on equity securities

     (2     —          4        4  

Other income

     223       183        416        350  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,313       1,168        2,537        2,313  
  

 

 

   

 

 

    

 

 

    

 

 

 

NONINTEREST EXPENSES

          

Salaries and employee benefits

     2,915       2,718        5,757        5,355  

Occupancy expense

     205       214        409        434  

Equipment expense

     143       160        280        316  

Professional and director fees

     308       239        647        551  

Financial institutions and franchise tax expense

     153       142        306        284  

Marketing and public relations

     139       119        256        239  

Software expense

     232       221        450        434  

Debit card expense

     132       126        259        242  

Amortization of intangible assets

     16       25        32        50  

FDIC insurance expense

     48       72        98        147  

Other expenses

     609       583        1,197        1,104  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     4,900       4,619        9,691        9,156  
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes

     3,199       2,877        6,358        5,550  

FEDERAL INCOME TAX PROVISION

     613       553        1,232        1,062  
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 2,586     $ 2,324      $ 5,126      $ 4,488  
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic and diluted net earnings per share

   $ 0.94     $ 0.85      $ 1.87      $ 1.64  
  

 

 

   

 

 

    

 

 

    

 

 

 

See notes to unaudited consolidated financial statements

 

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CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

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

(Dollars in thousands)

   2019     2018     2019     2018  

Net income

   $ 2,586     $ 2,324     $ 5,126     $ 4,488  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Unrealized gains (losses) arising during the period

     762       (156     1,511       (1,467

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

     15       20       30       41  

Income tax effect

     (163     29       (323     300  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     614       (107     1,218       (1,126
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 3,200     $ 2,217     $ 6,344     $ 3,362  
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands)

   Common
stock
     Additional
paid-in
capital
     Retained
earnings
    Treasury
stock
    Accumulated
other
comprehensive
loss
    Total  

Three Months Ended June 30, 2019

              

Balance, beginning of period

   $ 18,629      $ 9,815      $ 56,115     $ (4,784   $ (808   $ 78,967  

Net income

     —          —          2,586       —         —         2,586  

Other comprehensive income

     —          —          —         —         614       614  

Issuance of 108 treasury shares

     —          —          —         4       —         4  

Cash dividends declared, $0.26 per share

     —          —          (713     —         —         (713
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 18,629      $ 9,815      $ 57,988     $ (4,780   $ (194   $ 81,458  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2019

              

Balance, beginning of period

   $ 18,629      $ 9,815      $ 54,288     $ (4,784   $ (1,412   $ 76,536  

Net income

     —          —          5,126       —         —         5,126  

Other comprehensive income

     —          —          —         —         1,218       1,218  

Issuance of 108 treasury shares

     —          —          —         4       —         4  

Cash dividends declared, $0.52 per share

     —          —          (1,426     —         —         (1,426
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 18,629      $ 9,815      $ 57,988     $ (4,780   $ (194   $ 81,458  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2018

              

Balance, beginning of period

   $ 18,629      $ 9,815      $ 49,070     $ (4,784   $ (1,711   $ 71,019  

Net income

     —          —          2,324       —         —         2,324  

Other comprehensive loss

     —          —          —         —         (107     (107

Cash dividends declared, $0.24 per share

     —          —          (658     —         —         (658
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 18,629      $ 9,815      $ 50,736     $ (4,784   $ (1,818   $ 72,578  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2018

              

Balance, beginning of period

   $ 18,629      $ 9,815      $ 47,535     $ (4,784   $ (663   $ 70,532  

Net income

     —          —          4,488       —         —         4,488  

Other comprehensive loss

     —          —          —         —         (1,126     (1,126

Cumulative effect adjustment equity securities, related to ASU 2016-01

     —          —          29       —         (29     —    

Cash dividends declared, $0.48 per share

     —          —          (1,316     —         —         (1,316
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 18,629      $ 9,815      $ 50,736     $ (4,784   $ (1,818   $ 72,578  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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Table of Contents

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended  
     June 30,  

(Dollars in thousands)

   2019     2018  

NET CASH FROM OPERATING ACTIVITIES

   $ 4,500     $ 4,023  

CASH FLOWS FROM INVESTING ACTIVITIES

    

Securities:

    

Proceeds from repayments, available-for-sale

     6,268       6,151  

Proceeds from repayments, held-to-maturity

     1,045       5,956  

Purchases, available-for-sale

     (5,705     (992

Purchases, held-to-maturity

     —         (2,029

Loan originations, net of repayments

     (1,587     (18,938

Property, equipment, and software acquisitions

     (2,039     (639

Purchase of bank-owned life insurance

     (3,000     —    

Proceeds from sale of other real estate

     —         30  
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,018     (10,461
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net change in deposits

     16,830       11,814  

Net change in short-term borrowings

     (1,941     4,675  

Repayment of other borrowings

     (1,949     (2,582

Cash dividends paid

     (713     (658

Issuance of treasury stock

     4       —    
  

 

 

   

 

 

 

Net cash provided by financing activities

     12,231       13,249  
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     11,713       6,811  

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     45,564       36,420  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 57,277     $ 43,231  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

    

Cash paid during the year for:

    

Interest

   $ 1,969     $ 1,276  

Income taxes

     1,475       1,110  

Noncash financing activities:

    

Dividends declared

     713       658  

Lease adoption:

    

Right of use lease asset

     477       —    

Lease liability

     469       —    

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 June 30, 2019, 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, 2018, contains Consolidated Financial Statements and related footnote disclosures, which should be read in conjunction with the accompanying Consolidated Financial Statements. The results of operations for the period ended June 30, 2019 are not necessarily indicative of the operating results for the full year or any future interim period.

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

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

ASU 2016-02 – Leases. This Update and all subsequent ASU’s that modified Topic 842 set 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 and lease liability. 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 and its related amendments were adopted as of January 1, 2019, which resulted in the recognition of operating right-of-use assets totaling $477 thousand and operating lease liabilities totaling $469 thousand. The Company elected to adopt the transition relief provisions from ASU 2018-11 and recorded the impact of adoption as of January 1, 2019, without restating any prior-year amounts or disclosures. The Company has presented the necessary disclosures in Note 8.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ASU 2016-13—Financial Instruments—Credit Losses. This Update and all subsequent ASU’s that modify Topic 326, require 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 any increase will be impacted by the portfolio composition and quality at the adoption date, as well as economic conditions and forecasts at that time. A cumulative-effect adjustment to retained earnings is required as of the beginning of the year of adoption. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. During July 2019, the Financial Accounting Standards Board (FASB)

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

unanimously voted for a proposal to delay this Update to January, 2023 for smaller reporting companies. While there is a thirty day comment period starting in August, the proposed delay is widely expected to be adopted.

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

ASU 2018-13—Fair Value Measurement—Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.

ASU 2018-15—Intangibles – Goodwill and Other – Internal-Use Software. This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

ASU 2019-01—Leases (Topic 842): Codification Improvements. This Update addresses issues lessors sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies, and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES

Securities consist of the following at June 30, 2019 and December 31, 2018:

 

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

June 30, 2019

           

Available-for-sale

           

U.S. Treasury security

   $ 990      $ —        $ 2      $ 988  

U.S. Government agencies

     7,350        —          32        7,318  

Mortgage-backed securities of government agencies

     46,233        181        191        46,223  

Asset-backed securities of government agencies

     987        —          12        975  

State and political subdivisions

     23,131        303        5        23,429  

Corporate bonds

     7,626        19        281        7,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     86,317        503        523        86,297  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity

           

U.S. Government agencies

     9,484        14        41        9,457  

Mortgage-backed securities of government agencies

     10,173        142        76        10,239  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     19,657        156        117        19,696  

Equity securities

     53        34        —          87  

Restricted stock

     4,614        —          —          4,614  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $  110,641      $  693      $  640      $  110,694  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

           

Available-for-sale

           

U.S. Treasury security

   $ 997      $ —        $ 1      $ 996  

U.S. Government agencies

     7,350        —          180        7,170  

Mortgage-backed securities of government agencies

     45,744        41        884        44,901  

Asset-backed securities of government agencies

     1,040        —          16        1,024  

State and political subdivisions

     23,282        49        206        23,125  

Corporate bonds

     8,646        —          334        8,312  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     87,059        90        1,621        85,528  

Held-to-maturity

           

U.S. Government agencies

     9,482        6        390        9,098  

Mortgage-backed securities of government agencies

     11,206        28        214        11,020  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity

     20,688        34        604        20,118  

Equity securities

     53        30        —          83  

Restricted stock

     4,614        —          —          4,614  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 112,414      $ 154      $  2,225      $ 110,343  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

10


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

The amortized cost and fair value of debt securities at June 30, 2019, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)

   Amortized
cost
     Fair value  

Available-for-sale

     

Due in one year or less

   $ 2,994      $ 2,995  

Due after one through five years

     17,214        17,254  

Due after five through ten years

     24,676        24,753  

Due after ten years

     41,433        41,295  
  

 

 

    

 

 

 

Total debt securities available-for-sale

   $  86,317      $  86,297  
  

 

 

    

 

 

 

Held-to-maturity

     

Due after one through five years

   $ 3,485      $ 3,473  

Due after ten years

     16,172        16,223  
  

 

 

    

 

 

 

Total debt securities held-to-maturity

   $ 19,657      $ 19,696  
  

 

 

    

 

 

 

Securities with a fair value of approximately $77.3 million and $83.4 million were pledged at June 30, 2019 and December 31, 2018, respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.

Restricted stock primarily consists of investments in Federal Home Loan Bank of Cincinnati (FHLB) and Federal Reserve Bank stock. The Bank’s investment in FHLB stock amounted to approximately $4.1 million at June 30, 2019 and December 31, 2018. Federal Reserve Bank stock was $471 thousand at June 30, 2019 and December 31, 2018.

There were no proceeds from sales of securities for the three or six month periods ending June 30, 2019 and 2018.

 

11


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

The following table presents gross unrealized losses and fair value of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2019 and December 31, 2018:

 

     Securities in a continuous unrealized loss position  
     Less than 12 months      12 months or more      Total  

(Dollars in thousands)

   Gross
unrealized
losses
     Fair value      Gross
unrealized
losses
     Fair value      Gross
unrealized
losses
     Fair value  

June 30, 2019

                 

Available-for-sale

                 

U.S. Treasury security

   $ 2      $ 988      $ —        $ —        $ 2      $ 988  

U.S. Government agencies

     —          —          32        7,318        32        7,318  

Mortgage-backed securities of government agencies

     38        4,370        153        15,488        191        19,858  

Asset-backed securities of government agencies

     —          —          12        975        12        975  

State and political subdivisions

     —          —          5        1,292        5        1,292  

Corporate bonds

     —          —          281        3,693        281        3,693  

Held-to-maturity

                 

U.S. Government agencies

     —          —          41        6,958        41        6,958  

Mortgage-backed securities of government agencies

     17        446        59        3,034        76        3,480  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 57      $ 5,804      $ 583      $  38,758      $ 640      $  44,562  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

                 

Available-for-sale

                 

U.S. Treasury security

   $ 1      $ 996      $ —        $ —        $ 1      $ 996  

U.S. Government agencies

     —          —          180        7,170        180        7,170  

Mortgage-backed securities of government agencies

     33        4,206        851        35,188        884        39,394  

Asset-backed securities of government agencies

     16        1,024        —          —          16        1,024  

State and political subdivisions

     9        3,326        197        8,626        206        11,952  

Corporate bonds

     131        5,014        203        3,298        334        8,312  

Held-to-maturity

                 

U.S. Government agencies

     —          —          390        8,609        390        8,609  

Mortgage-backed securities of government agencies

     72        3,404        142        3,360        214        6,764  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $  262      $  17,970      $  1,963      $ 66,251      $  2,225      $ 84,221  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were 42 securities in an unrealized loss position at June 30, 2019, 36 of which were in a continuous loss position for twelve months or more. At least quarterly, the Company conducts a comprehensive security-level impairment assessment. The assessments are based on the nature of the securities, the extent and duration of the securities in an unrealized loss position, the extent and duration of the loss and management’s intent to sell or if it is more likely than not that management will be required to sell a security before recovery of its amortized cost basis, which may be maturity. Management believes the Company will fully recover the cost of these securities. It does not intend to sell these securities and likely will not be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, management concluded that these securities were not other-than-temporarily impaired at June 30, 2019.

 

12


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS

Loans consist of the following:

 

(Dollars in thousands)

   June 30, 2019      December 31, 2018  

Commercial

   $ 140,411      $  146,875  

Commercial real estate

     202,661        183,605  

Residential real estate

     174,635        167,296  

Construction & land development

     12,460        31,227  

Consumer

     19,899        19,402  
  

 

 

    

 

 

 

Total loans before deferred costs

     550,066        548,405  

Deferred loan costs

     546        569  
  

 

 

    

 

 

 

Total Loans

   $ 550,612      $ 548,974  
  

 

 

    

 

 

 

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s management examines current and occasionally projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers; however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

With respect to loans to developers and builders that are secured by non-owner occupied properties, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction and land development loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate.

 

13


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Construction and land development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.

The Company originates consumer loans utilizing a judgmental underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk.

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Loans serviced for others approximated $94.9 million and $92.3 million at June 30, 2019 and December 31, 2018, respectively.

Concentrations of Credit

Nearly all of the Company’s lending activity occurs within the state of Ohio, including the four counties of Holmes, Stark, Tuscarawas and Wayne, as well as other markets. The majority of the Company’s loan portfolio consists of commercial and commercial real estate loans. As of June 30, 2019 and December 31, 2018, there were no concentrations of loans related to any single industry.

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

For 2019, the provision for loan losses related to commercial loans reflected an additional allocation for loans within the hardwood industry that are affected by trade tariffs, which was offset by a first quarter recovery related to one loan relationship. The provision for commercial real estate was increased to recognize loan volume increases as loans transferred from construction to permanent financing. The increase in the provision for consumer loans, was primarily due to increasing charge-offs partially offset by lower delinquencies.

The increase in the provision for loan losses for the six months ended June 30, 2018 related to commercial loans was primarily due to the increase in substandard loans in this category. The decrease in the provision related to commercial real estate loans is due to the decrease of loan delinquencies in this category. The increase in the provision related to consumer loans is primarily due to the increase loan volume and charge-offs of loans in this category.

 

14


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Summary of Allowance for Loan Losses

 

(Dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential
Real Estate
    Construction &
Land

Development
    Consumer     Unallocated     Total  

Three months ended June 30, 2019

              

Beginning balance

   $ 1,997     $ 1,808     $ 1,222     $ 170     $ 325     $ 765     $ 6,287  

Provision for loan losses

     277       138       5       (66     46       (115     285  

Charge-offs

     (11     —         —         —         (43       (54

Recoveries

     4       —         2       —         13         19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Net charge-offs

     (7     —         2       —         (30       (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,267     $ 1,946     $ 1,229     $ 104     $ 341     $ 650     $ 6,537  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2019

              

Beginning balance

   $ 2,178     $ 1,791     $ 1,245     $ 258     $ 306     $ 129     $ 5,907  

Provision for loan losses

     (62     155       (19     (154     129       521       570  

Charge-offs

     (16     0       0       0       (108       (124

Recoveries

     167       0       3       0       14         184  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Net recoveries

     151       0       3       0       (94       60  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,267     $ 1,946     $ 1,229     $ 104     $ 341     $ 650     $ 6,537  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2018

              

Beginning balance

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

Provision for loan losses

     (31     (87     39       35       107       261       324  

Charge-offs

     (9     —         —         —         (36       (45

Recoveries

     5       —         1       —         —           6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Net charge-offs

     (4     0       1       —         (36       (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,849     $ 1,612     $ 1,236     $ 279     $ 259     $ 683     $ 5,918  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2018

              

Beginning balance

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

Provision for loan losses

     226       (61     (1     42       130       312       648  

Charge-offs

     (203     (62     (37     —         (46       (348

Recoveries

     13       —         1       —         —           14  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Net charge-offs

     (190     (62     (36     —         (46       (334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,849     $ 1,612     $ 1,236     $ 279     $ 259     $ 683     $ 5,918  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio class, based on the impairment method as of June 30, 2019 and December 31, 2018:

 

(Dollars in thousands)

   Commercial      Commercial
Real Estate
     Residential
Real Estate
     Construction      Consumer      Unallocated      Total  

June 30, 2019

                    

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 16      $ 16      $ 1      $ —        $ —        $  —        $ 33  

Collectively evaluated for impairment

     2,251        1,930        1,228        104        341        650        6,504  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 2,267      $ 1,946      $ 1,229      $ 104      $ 341      $ 650      $ 6,537  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 2,547      $ 2,597      $ 880      $ —        $ 15         $ 6,039  

Loans collectively evaluated for impairment

     137,864        200,064        173,755        12,460        19,884           544,027  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $  140,411      $  202,661      $  174,635      $  12,460      $  19,899         $  550,066  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

December 31, 2018

                    

Allowance for loan losses:

                    

Individually evaluated for impairment

   $ 36      $ 64      $ 1      $ —        $ —        $ —        $ 101  

Collectively evaluated for impairment

     2,142        1,727        1,244        258        306        129        5,806  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 2,178      $ 1,791      $ 1,245      $ 258      $ 306      $ 129      $ 5,907  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 419      $ 2,403      $ 1,030      $ —        $ —           $ 3,852  

Loans collectively evaluated for impairment

     146,456        181,202        166,266        31,227        19,402           544,553  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total ending loans balance

   $ 146,875      $ 183,605      $ 167,296      $ 31,227      $ 19,402         $ 548,405  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

16


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2019 and December 31, 2018:

 

(Dollars in thousands)

   Unpaid
Principal
Balance
     Recorded
Investment
with no
Allowance
     Recorded
Investment
with
Allowance
     Total
recorded
investment1
     Related
Allowance
 

June 30, 2019

              

Commercial

   $  2,944      $  2,533      $ 16      $  2,549      $ 16  

Commercial real estate

     2,850        2,463        143        2,606        16  

Residential real estate

     1,045        618        264        882        1  

Consumer

     15        15        —          15        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 6,854      $ 5,629      $  423      $ 6,052      $ 33  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

              

Commercial

   $ 815      $ 383      $ 36      $ 419      $ 36  

Commercial real estate

     2,616        1,976        433        2,409        64  

Residential real estate

     1,190        763        269        1,032        1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 4,621      $ 3,122      $ 738      $ 3,860      $ 101  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

1   includes principal, accrued interest, unearned fees, and origination costs

    

           

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

 

     Three months      Six months  
     ended June 30,      ended June 30,  
(Dollars in thousands)    2019      2018      2019      2018  

Average recorded investment:

           

Commercial

   $  1,582      $  1,190      $  1,228      $  1,491  

Commercial real estate

     2,152        2,700        2,233        3,595  

Residential real estate

     943        1,131        986        1,287  

Consumer

     15        —          9        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Average recorded investment in impaired loans

   $ 4,692      $ 5,021      $ 4,447      $ 6,373  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized:

           

Commercial

   $ 28      $ 10      $ 37      $ 21  

Commercial real estate

     3        4        6        8  

Residential real estate

     12        12        23        26  

Consumer

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on a cash basis on impaired loans

   $ 43      $ 26      $ 66      $ 55  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents the aging of past due loans and nonaccrual loans as of June 30, 2019 and December 31, 2018 by class of loans:

 

(Dollars in thousands)

   Current      30 - 59
Days Past
Due
     60 - 89
Days Past
Due
     90 Days +
Past Due
     Non-Accrual      Total Past
Due and
Non-Accrual
     Total
Loans
 

June 30, 2019

                    

Commercial

   $  138,892      $ 26      $  56      $ 71      $  1,366      $  1,519      $  140,411  

Commercial real estate

     200,149        169        —          —          2,343        2,512        202,661  

Residential real estate

     173,262        703        —          113        557        1,373        174,635  

Construction & land development

     12,460        —          —          —          —          —          12,460  

Consumer

     19,601        226        25        7        40        298        19,899  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 544,364      $  1,124      $ 81      $  191      $ 4,306      $ 5,702      $ 550,066  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

                    

Commercial

   $ 146,431      $ 253      $ 34      $ —        $ 157      $ 444      $ 146,875  

Commercial real estate

     181,388        86        —          —          2,131        2,217        183,605  

Residential real estate

     165,837        265        213        174        807        1,459        167,296  

Construction & land development

     31,169        58        —          —          —          58        31,227  

Consumer

     18,965        291        86        —          60        437        19,402  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 543,790      $ 953      $  333      $ 174      $ 3,155      $ 4,615      $ 548,405  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Troubled Debt Restructurings

All troubled debt restructurings (“TDR’s) are individually evaluated for impairment and a related allowance is recorded, as needed. Loans whose terms have been modified as TDR’s totaled $2.4 million as of June 30, 2019, and $1.5 million as of December 31, 2018, with $17 thousand of specific reserves allocated to those loans at June 30, 2019 and December 31, 2018, respectively. At June 30, 2019, $2.2 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $266 thousand, all were in nonaccrual of interest status.

Other real estate owned amounted to one property at $99 thousand at June 30, 2019 and December 31, 2018, respectively. There were no consumer mortgage loans in the process of foreclosure at June 30, 2019 and $57 thousand at December 31, 2018. There were no other repossessed assets at June 30, 2019 and December 31, 2018.

 

(Dollars in thousands)

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

For the six months ended June 30, 2019

        

Commercial

     1      $ 17      $ 17  
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     1      $ 17      $ 17  
  

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2018

        

Commercial

     1      $ 200      $ 200  
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     1      $ 200      $ 200  
  

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2018

        

Commercial Real Estate

     1      $ 200      $ 200  
  

 

 

    

 

 

    

 

 

 

Total Restructured Loans

     1      $ 200      $ 200  
  

 

 

    

 

 

    

 

 

 

The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. There were no new TDR’s for the three month period ended June 30, 2019.

There was one loan in the amount of $200 thousand restructured in 2018 that has subsequently defaulted in the first quarter of 2019. None of the loans restructured in 2017 defaulted in 2018.

 

19


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

Credit Quality Indicators

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

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $300 thousand or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class is as follows as of June 30, 2019 and December 31, 2018:

 

(Dollars in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Not Rated      Total  

June 30, 2019

                 

Commercial

   $ 115,162      $ 10,323      $ 14,000      $ —        $ 926      $ 140,411  

Commercial real estate

     183,259        7,234        11,682        —          486        202,661  

Residential real estate

     188        —          68        —          174,379        174,635  

Construction & land development

     9,843        —          115        —          2,502        12,460  

Consumer

     —          —          50        —          19,849        19,899  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 308,452      $ 17,557      $ 25,915      $  —        $ 198,142      $ 550,066  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

                 

Commercial

   $ 125,840      $ 5,383      $ 14,775      $ —        $ 877      $ 146,875  

Commercial real estate

     163,261        5,582        13,578        —          1,184        183,605  

Residential real estate

     194        —          637        —          166,465        167,296  

Construction & land development

     27,540        —          —          —          3,687        31,227  

Consumer

     —          —          60        —          19,342        19,402  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 316,835      $ 10,965      $ 29,050      $ —        $ 191,555      $ 548,405  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents loans that are not rated by class of loans as of June 30, 2019 and December 31, 2019. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status.

 

(Dollars in thousands)

   Performing      Non-Performing      Total  

June 30, 2019

        

Commercial

   $ 926      $ —        $ 926  

Commercial real estate

     486        —          486  

Residential real estate

     173,772        607        174,379  

Construction & land development

     2,502        —          2,502  

Consumer

     19,849        —          19,849  
  

 

 

    

 

 

    

 

 

 

Total

   $ 197,535      $ 607      $ 198,142  
  

 

 

    

 

 

    

 

 

 

December 31, 2018

        

Commercial

   $ 877      $  —        $ 877  

Commercial real estate

     1,184        —          1,184  

Residential real estate

     166,122        343        166,465  

Construction & land development

     3,687        —          3,687  

Consumer

     19,342        —          19,342  
  

 

 

    

 

 

    

 

 

 

Total

   $ 191,212      $ 343      $ 191,555  
  

 

 

    

 

 

    

 

 

 

NOTE 4 – SHORT-TERM BORROWINGS

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

 

     Remaining Contractual Maturity
Overnight and Continuous
 

(Dollars in thousands)

   June 30,
2019
     December 31,
2018
 

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

   $ 35,652      $ 37,574  

Repurchase agreements

     35,474        37,415  

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.

 

21


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5- FAIR VALUE MEASUREMENTS (CONTINUED)

 

The following table presents the assets reported on the Consolidated Balance Sheets at their fair value on a recurring basis as of June 30, 2019 and December 31, 2018 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 with readily determinable values 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. Equity securities without readily determinable values are carried at amortized cost adjusted for impairment and observable price changes.

 

(Dollars in thousands)

   Level I      Level II      Level III      Total  

June 30, 2019

           

Assets:

  

Securities available-for-sale

           

U.S. Treasury security

   $ 988      $ —        $ —        $ 988  

U.S. Government agencies

     —          7,318        —          7,318  

Mortgage-backed securities of government agencies

     —          46,223        —          46,223  

Asset-backed securities of government agencies

     —          975        —          975  

State and political subdivisions

     —          23,429        —          23,429  

Corporate bonds

     —          7,364        —          7,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 988      $ 85,309      $ —        $ 86,297  

Equity securities

   $ 41      $ —        $ 46      $ 87  

December 31, 2018

           

Assets:

           

Securities available-for-sale

           

U.S. Treasury security

   $ 996      $ —        $ —        $ 996  

U.S. Government agencies

     —          7,170        —          7,170  

Mortgage-backed securities of government agencies

     —          44,901        —          44,901  

Asset-backed securities of government agencies

     —          1,024        —          1,024  

State and political subdivisions

     —          23,125        —          23,125  

Corporate bonds

     —          8,312        —          8,312  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 996      $ 84,532      $  —        $ 85,528  

Equity securities

   $ 37      $ —        $ 46      $ 83  

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of June 30, 2019 and December 31, 2018, 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.

 

22


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5- FAIR VALUE MEASUREMENTS (CONTINUED)

 

 

(Dollars in thousands)

   Level I      Level II      Level III      Total  

June 30, 2019

           

Assets measured on a nonrecurring basis:

  

Impaired loans

   $  —        $  —        $ 389      $ 389  

Other real estate owned

     —          —          99        99  

December 31, 2018

           

Assets measured on a nonrecurring basis:

           

Impaired loans

   $ —        $ —        $ 636      $ 636  

Other real estate owned

     —          —          99        99  

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level III inputs to determine fair value:

 

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

Techniques

  

Input

  

(Weighted Average)

June 30, 2019

           

Impaired loans

   $ 389      Discounted cash flow    Remaining term Discount rate   

8.5 mos to 26 yrs / ( 15 yrs)

5.1% to 7.5% / (5.7%)

Other real estate owned

     99      Appraisal of collateral (1)   

Appraisal adjustments (2)

Liquidation expense (2)

   -33% -10%

December 31, 2018

           

Impaired loans

   $ 636      Discounted cash flow    Remaining term Discount rate    1.2 yrs to 26.5 yrs / (10.9 yrs) 5.1% to 7.5% / (5.88%)

Other real estate owned

     99      Appraisal of collateral (1)   

Appraisal adjustments (2)

Liquidation expense (2)

   -33% -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.

 

23


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of recognized financial instruments as of June 30, 2019 and December 31, 2018 are as follows:

 

(Dollars in thousands)

   Carrying
Value
     Level I      Level II      Level III      Fair Value  

June 30, 2019

              

Financial assets

              

Cash and cash equivalents

   $ 57,277      $ 57,277      $ —        $ —        $ 57,277  

Securities available-for-sale

     86,297        988        85,309        —          86,297  

Securities held-to-maturity

     19,657        —          19,696        —          19,696  

Equity securities

     87        41        —          46        87  

Restricted stock

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

Loans held for sale

     409        409        —          —          409  

Net loans

     544,075        —          —          554,080        554,080  

Bank-owned life insurance

     16,760        16,760        —          —          16,760  

Accrued interest receivable

     1,671        1,671        —          —          1,671  

Mortgage servicing rights

     296        —          —          296        296  

Financial liabilities

              

Deposits

   $ 623,328      $ 498,967      $ —        $ 124,093      $ 623,060  

Short-term borrowings

     35,474        35,474        —          —          35,474  

Other borrowings

     6,576        —          —          6,508        6,508  

Accrued interest payable

     125        125        —             125  

December 31, 2018

              

Financial assets

              

Cash and cash equivalents

   $ 45,564      $ 45,564      $ —        $ —        $ 45,564  

Securities available-for-sale

     85,528        996        84,532        —          85,528  

Securities held-to-maturity

     20,688        —          20,118        —          20,118  

Equity securities

     83        37        —          46        83  

Restricted stock

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

Loans held for sale

     108        108        —          —          108  

Net loans

     543,067        —          —          543,076        543,076  

Bank-owned life insurance

     13,554        13,554        —          —          13,554  

Accrued interest receivable

     1,581        1,581        —          —          1,581  

Mortgage servicing rights

     281        —          —          281        281  

Financial liabilities

              

Deposits

   $ 606,498      $ 490,007      $ —        $ 114,434      $ 604,441  

Short-term borrowings

     37,415        37,415        —          —          37,415  

Other borrowings

     8,525        —          —          8,251        8,251  

Accrued interest payable

     88        88        —          —          88  

 

 

24


Table of Contents

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

 

The Company also has unrecognized financial instruments at June 30, 2019 and December 31, 2018. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $190 million at June 30, 2019 and $173.3 million at December 31, 2018. Such amounts are also considered to be the fair values.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

NOTE 7- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax for the three and six month period ended June 30, 2019 and 2018:

 

(Dollars in thousands)

   Pretax      Tax Effect      After-tax  

Three months ended June 30, 2019

        

Balance as of March 31, 2019

   $ (1,022    $ 214      $ (808

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

     762        (160      602  

Amortization of held-to-maturity discount resulting from transfer

     15        (3      12  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income

     777        (163      614  
  

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2019

   $ (245    $ 51      $ (194
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2019

        

Balance as of December 31, 2018

   $ (1,786    $ 374      $ (1,412

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

     1,511        (317      1,194  

Amortization of held-to-maturity discount resulting from transfer

     30        (6      24  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income

     1,541        (323      1,218  
  

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2019

   $ (245    $ 51      $ (194
  

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2018

        

Balance as of March 31, 2018

   $ (2,165    $ 454      $ (1,711

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

     (156      33        (123

Amortization of held-to-maturity discount resulting from transfer

     20        (4      16  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive loss

     (136      29        (107
  

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2018

   $ (2,301    $ 483      $ (1,818
  

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2018

        

Balance as of December 31, 2017

   $ (839    $ 176      $ (663

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

     (1,467      309        (1,158

Reclassify equity AOCI gain to retained earnings

     (36      7        (29

Amortization of held-to-maturity discount resulting from transfer

     41        (9      32  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive loss

     (1,462      307        (1,155
  

 

 

    

 

 

    

 

 

 

Balance as of June 30, 2018

   $ (2,301    $ 483      $ (1,818
  

 

 

    

 

 

    

 

 

 

 

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 8 – LEASES

Operating leases in which the Company is the lessee are recorded as operating lease Right of Use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the consolidated balance sheets. The Company does not currently have any finance leases. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. The Company elected to adopt the transition method, which uses a modified retrospective transition approach. ROU assets and operating lease liabilities are recognized as of the date of adoption based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the date of initial application.

Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy and equipment expense in the consolidated statements of income and other comprehensive income. The leases relate to bank branches with remaining lease terms of generally 7 to 8 years. Certain lease arrangements contain extension options which are typically 5 years at the then fair market rental rates. As these extension options are generally considered reasonably certain of exercise, they are included in the lease term.

As of June 30, 2019, operating lease ROU assets were $450 thousand and liabilities were $424 thousand. At June 30, 2019, CSB recognized $36 thousand in operating lease cost.

The following table summarizes other information related to our operating leases:

 

June 30, 2019

  

Weighted-average remaining lease term - operating leases in years

     7.2  

Weighted-average discount rate - operating leases

     3.77

The following table presents aggregate lease maturities and obligations as of June 30, 2019:

 

(Dollars in thousands)       

June 30, 2019

  

2019

   $ 18  

2020

     63  

2021

     71  

2022

     71  

2023

     71  

2024 and thereafter

     195  
  

 

 

 

Total lease payments

     489  
  

 

 

 

Less: interest

     65  
  

 

 

 

Present value of lease liabilities

   $ 424  
  

 

 

 

 

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CSB BANCORP, INC.

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

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

The following management’s discussion and analysis focuses on the consolidated financial condition of the Company at June 30, 2019 as compared to December 31, 2018, and the consolidated results of operations for the three and six month periods ended June 30, 2019 compared to the same periods in 2018. 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 $750 million at June 30, 2019 as compared to $732 million at December 31, 2018. During the six month period ended June 30, 2019, net loans increased $1 million. Cash and cash equivalents, and securities increased $11 million. On the liability side, deposits and repurchase agreements increased by $15 million.

Net loans increased $1 million, or less than 1%, during the six months ended June, 30, 2019 as business lines of credits decreased on the improved cash flow of businesses within the bank’s markets. Commercial loans decreased $6 million, or 4%, while construction and land development loans decreased $19 million, contributing to the increase in commercial real estate loans by $19 million as construction loans moved to permanent financing. Residential real estate loans increased $7 million, or 4%, and consumer loans increased $497 thousand, or 3%, from December 31, 2018. Consumers continued to refinance their mortgage loans for historically low long-term fixed rates while home purchase activity has increased. Residential mortgage loan originations for the six months ended June 30, 2019 totaled $28 million, a decrease from $31 million in originations during the six month period ended June 30, 2018. Originations sold into the secondary market were $5.9 million and $4.3 million, respectively during the six month periods ended June 30, 2019 and June 30, 2018. 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 1.19% at June 30, 2019 as compared to 1.08% at December 31, 2018. Outstanding loan balances increased 1% to $551 million at June 30, 2019. The allowance for loan losses increased to $6.5 million at June 30, 2019 following a provision of $570 thousand and net loan recoveries of $60 thousand for the current six months ended June 30, 2019.

 

 

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CSB BANCORP, INC.

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

 

Nonaccrual loans increased during the first six months of 2019. For the six months ending June 30, 2019 loans totaling $1.9 million were placed on nonaccrual status, there were $32 thousand in charge-downs recognized, and pay downs of $673 thousand were received.

 

(Dollars in thousands)

   June 30,
2019
    December 31,
2018
    June 30,
2018
 

Non-performing loans

   $ 4,497     $ 3,329     $ 4,399  

Other real estate

     99       99       —    

Repossessed assets

     —         —         —    

Allowance for loan losses

     6,537       5,907       5,918  

Total loans

     550,612       548,974       535,427  

Allowance: Loans

     1.19     1.08     1.11

Allowance: Non-performing loans

     1.5     1.8     1.3

The ratio of gross loans to deposits was 88.3% at June 30, 2019, compared to 90.5% at December 31, 2018.

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 gains of $53 thousand within the available-for-sale and held-to-maturity portfolios as of June 30, 2019, 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 embedded security impairments on June 30, 2019, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits increased $17 million, or 3%, from December 31, 2018 with noninterest bearing deposits decreasing approximately $5 million and interest-bearing deposit accounts increasing approximately $22 million. Total deposits as of June 30, 2019 are $28 million greater than June 30, 2018 deposit balances. On a year over year comparison, increases were recognized in noninterest-bearing demand deposits of $2 million, interest-bearing demand deposits of $13 million, money market accounts of $2 million, savings of $3 million, and time deposits of $8 million.

Short-term borrowings consisting of overnight repurchase agreements with retail customers decreased $2 million to $35 million at June 30, 2019 as compared to December 31, 2018 and other borrowings decreased $1.9 million as the Company repaid FHLB advances.

Total shareholders’ equity amounted to $81 million, or 10.9%, of total assets at June 30, 2019 up slightly from December 31, 2018. The increase in shareholders’ equity during the six months ending June 30, 2019 was due to net income of $5.1 million and an increase in accumulated other comprehensive income of $1.2 million offset by dividends declared of $1.4 million. The Company and the Bank met all regulatory capital requirements at June 30, 2019.

RESULTS OF OPERATIONS

Three months ended June 30, 2019 and 2018

For the quarters ended June 30, 2019 and 2018, the Company recorded net income of $2.6 million and $2.3 million and $.94 and $.85 per share, respectively. The $262 thousand increase in net income for the quarter was primarily the result of a $419 thousand increase in net interest income, an increase of $145 thousand in other noninterest income, and a decrease in the provision for loan losses of $39 thousand. The increases were partially offset by an increase of $281 thousand in other noninterest expenses and a $60 thousand increase in federal income tax provision.

Return on average assets and return on average equity were 1.39% and 12.91%, respectively, for the three month period of 2019, compared to 1.30% and 12.94%, respectively for the same quarter in 2018.

 

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CSB BANCORP, INC.

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

 

Average Balance Sheets and Net Interest Margin Analysis

 

     For the three months ended June 30,  
     2019     2018  

(Dollars in thousands)

   Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Fedeeral funds sold

   $ 212        2.08   $ 621        1.74

Interest-earning deposits with other banks

     39,772        2.19       19,960        1.61  

Taxable securities

     87,942        2.66       93,170        2.57  

Tax-exempt securities

     23,322        2.92       26,096        2.92  

Loans

     547,981        5.26       534,852        4.89  
  

 

 

      

 

 

    

Total earning assets

     699,229        4.68     674,699        4.39

Other assets

     46,429          41,203     
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 745,658        $ 715,902     
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest-bearing demand deposits

   $ 127,211        0.46   $ 118,506        0.30

Savings deposits

     186,179        0.54       181,097        0.33  

Time deposits

     124,001        1.69       116,824        1.11  

Other borrowed funds

     44,803        1.15       52,592        1.01  
  

 

 

      

 

 

    

Total interest bearing liabilities

     482,194        0.87     469,019        0.59

Non-interest bearing demand deposits

     180,167          172,784     

Other liabilities

     2,959          2,060     

Shareholders’ Equity

     80,338          72,039     
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 745,658        $ 715,902     
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.81        3.80

Taxable equivalent net interest margin

        4.08        3.98

Interest income for the quarter ended June 30, 2019, was $8.1 million representing a $777 thousand increase, or an 11% improvement, compared to the same period in 2018. This increase was primarily due to average loan rates increasing 37 basis points as well as a volume increase of $13 million for the quarter ended June 30, 2019 as compared to the second quarter 2018. Interest expense for the quarter ended June 30, 2019 was $1.1 million, an increase of $358 thousand, or 52%, from the same period in 2018. The increase in interest expense occurred primarily due to an increase in rate on all interest-bearing liabilities for the quarter ended June 30, 2019.

For the quarter ended June 30, 2019, the provision for loan losses was $285 thousand, compared to a provision of $324 thousand provision for the same quarter in 2018. For more discussion see Financial Condition. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.

Noninterest income for the quarter ended June 30, 2019, was $1.3 million, an increase of $145 thousand, or 12%, compared to the same quarter in 2018. Service charges on deposit accounts increased $13 thousand, or 4%, compared to the same quarter in 2018 primarily from a volume increase in overdraft fees. The gain on the sale of mortgage loans to the secondary market increased to $76 thousand for the quarter ended June 30, 2019 as additional loan volume was sold into the secondary market. Debit card interchange income increased $46 thousand, or 14%, with greater fees generated from usage in the second quarter of 2019. Fees from trust and brokerage services decreased $5 thousand to $212 thousand for the second quarter 2019 as compared to the same quarter in 2018. Earnings on bank owned life insurance increased $37 thousand for the second quarter 2019, see discussion in Results of Operations for the six months periods.

Noninterest expenses for the quarter ended June 30, 2019 increased $281 thousand, or 6%, compared to the second quarter of 2018. Salaries and employee benefits increased $197 thousand, or 7%, a result of increases in employees, base salary, and other benefits. Marketing and public relations expense increased

 

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CSB BANCORP, INC.

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

 

$20 thousand, or 17%, primarily due to brand recognition initiatives and the opening of a new banking center. Debit card expenses increased $6 thousand, or 5%, compared to the second quarter 2018 with increased volume. Software expense rose $11 thousand quarter over quarter with additional investment. Occupancy expense decreased $9 thousand in 2019 over the second quarter of 2018. Professional and director fees increased $69 thousand for the quarter ended June 30, 2019 as compared to the second quarter 2018. The increase was primarily a result of increased service costs related to network improvements.

Federal income tax expense increased $60 thousand, or 11%, for the quarter ended June 30, 2019 as compared to the second quarter of 2018. The provision for income taxes was $613 thousand (effective rate of 19%) for the quarter ended June 30, 2019, compared to $553 thousand (effective rate of 19%) for the same quarter ended 2018.

RESULTS OF OPERATIONS

Six months ended June 30, 2019 and 2018

For the six months ended June 30, 2019 and 2018, the Company recorded net income of $5.1 million and $4.5 million and $1.87 and $1.64 per share, respectively. The $638 thousand increase in net income for the quarter was primarily the result of a $1 million increase in net interest income, an increase of $224 thousand in other noninterest income, and a decrease in the provision for loan losses of $78 thousand. The increases were partially offset by an increase of $535 thousand in other noninterest expenses and an increase in the federal income tax provision of $170 thousand.

Return on average assets and return on average equity were 1.40% and 13.05%, respectively, for the six month period of 2019, compared to 1.28% and 12.64%, respectively for the same quarter in 2018.

 

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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 six months ended June 30,  
     2019     2018  

(Dollars in thousands)

   Average
balance
     Average
rate
    Average
balance
     Average
rate
 

ASSETS

          

Federal funds sold

   $ 305        2.38   $ 508        1.98

Interest-earning deposits in other banks

     33,144        2.37       14,294        1.75  

Taxable securities

     87,502        2.70       94,449        2.56  

Tax-exempt securities

     23,228        2.95       27,419        2.90  

Loans

     549,225        5.24       531,107        4.81  
  

 

 

      

 

 

    

Total earning assets

     693,404        4.70     667,777        4.34

Other assets

     44,598          40,421     
  

 

 

      

 

 

    

TOTAL ASSETS

   $ 738,002        $ 708,198     
  

 

 

      

 

 

    

LIABILITIES AND SHAREHOLDERS’ EQUITY

          

Interest-bearing demand deposits

   $ 123,050        0.42   $ 117,475        0.26

Savings deposits

     187,211        0.55       180,413        0.30  

Time deposits

     121,495        1.62       114,617        1.05  

Other borrowed funds

     45,101        1.17       52,708        0.91  
  

 

 

      

 

 

    

Total interest bearing liabilities

     476,857        0.85     465,213        0.54

Non-interest bearing demand deposits

     178,980          169,071     

Other liabilities

     2,971          2,306     

Shareholders’ Equity

     79,194          71,608     
  

 

 

      

 

 

    

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 738,002        $ 708,198     
  

 

 

      

 

 

    

Taxable equivalent net interest spread

        3.85        3.80

Taxable equivalent net interest margin

        4.12        3.97

Interest income for the six months ended June 30, 2019, was $16 million representing a $1.8 million increase, or a 13% improvement, compared to the same period in 2018. This increase was primarily due to the increase in average loan rates, as well as loan volume increasing $18 million for the period ended June 30, 2019 as compared to the same period in 2018. Interest expense for the six months ended June 30, 2019 was $2.0 million, an increase of $755 thousand, or 60%, from the same period in 2018. The increase in interest expense occurred primarily due to an increase in rate on all interest-bearing liabilities for the six month period ended June 30, 2019.

For the six month period ended June 30, 2019, the provision for loan losses was $570 thousand, compared to a provision of $648 thousand provision for the same period in 2018. For more discussion see Financial Condition. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.

Noninterest income for the six month period ended June 30, 2019, was $2.5 million, an increase of $224 thousand, or 10%, compared to the same period in 2018. Service charges on deposit accounts increased $21 thousand, or 4%, compared to the same period in 2018 primarily from increases in overdraft fees. Debit card interchange income increased $80 thousand, or 13%, with increased card usage in the first six months of 2019. The cash surrender value of bank owned life insurance policies increased $39 thousand for the period with the additional purchase of $3 million in policies in 2019.The gain on the sale of mortgage loans to the secondary market increased $18 thousand to $155 thousand for the six month period ended June 30, 2019. Fees from trust and brokerage services were flat for the period.

 

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CSB BANCORP, INC.

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

 

Noninterest expenses for the six month period ended June 30, 2019 increased $535 thousand, or 6%, compared to the same period in 2018. Salaries and employee benefits increased $402 thousand, or 8%, a result of increases in employees, base salary, and other benefits. Marketing and public relations expense increased $17 thousand, or 7%, with increases in market, brand recognition initiatives, and community support in the company’s market. Debit card expenses increased $17 thousand, or 7%, compared to the prior period in 2018. Occupancy expense declined $25 thousand over the same period in 2018 with a decrease in depreciation and rental expense. Professional and director fees increased $96 thousand for the six month period ended June 30, 2019 as compared to the same period in 2018 with increases in service fees to improve the network.

Federal income tax expense increased $170 thousand, or 16%, for the six months ended June 30, 2019 as compared to the same period in 2018. The provision for income taxes was $1.2 million (effective rate of 19%) for the six month period ended June 30, 2019, compared to $1.1 million (effective rate of 19%) for the same period ended 2018.

CAPITAL RESOURCES

The Company maintained a strong capital position with tangible common equity to tangible assets of 10.3% at June 30, 2019 compared with 9.9% at December 31, 2018.

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. Effective with the March 31, 2015 Call Report the Bank selected the opt-out election for accumulated other comprehensive income (“AOCI”). This election neutralizes 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, 2018. As of June 30, 2019 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

 

     Capital Ratios  
     June 30, 2019     December 31, 2018  

Common Equity Tier 1 Capital To Risk Weighted Assets

    

Consolidated

     14.0     13.4

Bank

     13.8     13.2

Tier 1 Capital To Risk Weighted Assets Ratio

    

Consolidated

     14.0     13.4

Bank

     13.8     13.2

Total Capital To Risk Weighted Assets Ratio

    

Consolidated

     15.2     14.5

Bank

     15.0     14.3

Tier 1 Leverage Ratio

    

Consolidated

     10.4     10.1

Bank

     10.2     9.9

LIQUIDITY

 

(Dollars in millions)

   June 30, 2019     December 31, 2018     Change  

Cash and cash equivalents

   $ 57     $ 46     $ 11  

Unused lines of credit

     97       89       8  

Unpledged AFS securities at fair market value

     41       39       2  
  

 

 

   

 

 

   

 

 

 
   $ 195     $ 174     $ 21  
  

 

 

   

 

 

   

 

 

 

Net deposits and short-term liabilities

   $ 614     $ 599     $ 15  
  

 

 

   

 

 

   

 

 

 

Liquidity ratio

     31.8     29.1     2.7  

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 31.8% and 29.1% at June 30, 2019 and December 31, 2018.

OFF-BALANCE SHEET ARRANGEMENTS

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

 

 

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CSB BANCORP, INC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3 –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risks as of June 30, 2019, from the disclosures presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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. All 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 -200 through +400 basis point changes, in 100 basis point increments, in market interest rates at June 30, 2019 and -200 through +400 basis point changes at December 31, 2018. The net interest income reflected is for the first twelve month period of the modeled twenty-four month horizon. The underlying balance sheet for illustrative purposes is dynamic with projected growth in assets and liabilities.    

 

June 30, 2019

 
(Dollars in thousands)                      

Change in

Interest Rates

(basis points)

   Net
Interest
Income
     Dollar
Change
     Percentage
Change
    Board
Policy
Limits
 

+400

   $  29,780      $ 893        3.1     +/-25

+300

     29,597        710        2.5       +/-15  

+200

     29,388        501        1.7       +/-10  

+100

     29,118        231        0.8       +/-5  

      0

     28,887        —          —         —    

-100

     28,557        (330      (1.1     +/-5  

-200

     27,950        (937      (3.3     +/-10  

December 31, 2018

 

+400

   $ 30,114      $ 931        3.2     +/-25

+300

     29,922        739        2.5       +/-15  

+200

     29,701        518        1.8       +/-10  

+100

     29,436        253        0.9       +/-5  

      0

     29,183        —          —         —    

-100

     28,831        (352      (1.2     +/-5  

-200

     27,880        (1,303      (4.5     +/-10  

 

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CSB BANCORP, INC.

CONTROLS AND PROCEDURES

ITEM 4—CONTROLS AND PROCEDURES

With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that:

 

  (a)

information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure;

 

  (b)

information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms; and

 

  (c)

the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to the Company and its consolidated subsidiary is made known to them, particularly during the period for which the Company’s periodic reports, including this Quarterly Report on Form 10-Q, are being prepared.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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CSB BANCORP, INC.

FORM 10-Q

Quarter ended June  30, 2019

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, 2018.
ITEM 2-    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
   On July 7, 2005 CSB Bancorp, Inc. filed Form 8-K with the Commission announcing that its Board of Directors approved a Stock Repurchase Program authorizing the repurchase of up to 10% of the Company’s common shares then outstanding. Repurchases may be made from time to time as market and business conditions warrant, in the open market, through block purchases, and in negotiated private transactions. No repurchases were made during the quarterly period ended June 30, 2019.
ITEM 3-    DEFAULTS UPON SENIOR SECURITIES.
   Not applicable.
ITEM 4-    MINE SAFETY DISCLOSURES.
   Not applicable.
ITEM 5-    OTHER INFORMATION.
   Not applicable.

 

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CSB BANCORP, INC.

FORM 10-Q

Quarter ended June 30, 2019

PART II – OTHER INFORMATION

 

ITEM 6-    Exhibits.

Exhibit
Number

  

Description of Document

3.1    Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed August 6, 2004, Exhibit 3.1, film number 04958544).
3.2    Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to the Registrant’s Form 10-SB).
3.2.1    Amended Article VIII of the Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form DEF 14a filed on March 25, 2009, Appendix A, film number 09703970).
4.0    Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB). (P).
11    Statement Regarding Computation of Per Share Earnings.
31.1    Rule 13a-14(a)/15d-14(a) Chief Executive Officer’s Certification.
31.2    Rule 13a-14(a)/15d-14(a) Chief Financial Officer’s Certification.
32.1    Section 1350 Chief Executive Officer’s Certification.
32.2    Section 1350 Chief Financial Officer’s Certification.
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 formatted in XBRL (extensible Business Reporting Language): (i) Consolidated Balance Sheets: (ii) Consolidated Statements of Income: (iii) Consolidated Statements of Comprehensive Income: (iv) Consolidated Statements of Changes in Shareholders’ Equity: (v) Condensed Consolidated Statements of Cash Flows: and (vi) Notes to Consolidated Financial Statements.

 

 

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CSB BANCORP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

     CSB BANCORP, INC.
     (Registrant)
Date: August 8, 2019     

/s/ Eddie L. Steiner

     Eddie L. Steiner
     President
     Chief Executive Officer
Date: August 8, 2019     

/s/ Paula J. Meiler

     Paula J. Meiler
     Senior Vice President
     Chief Financial Officer

 

 

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