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CSB Bancorp, Inc. - Annual Report: 2020 (Form 10-K)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                     

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 No.)

91 North Clay Street

Millersburg, Ohio

44654

(Address of principal executive offices)

(Zip Code)

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(s)

 

Name of each exchange on which registered

Common Shares, $6.25 par value

 

CSBB

 

OTC Pink

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  No 

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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

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 by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock as of June 30, 2020 of $32.00 per share on the OTC Stock Market, was $81.1 million.

The number of shares of Registrant’s Common Stock outstanding as of March 15, 2021 was 2,742,350.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of CSB Bancorp Inc.’s 2020 Annual Report to Shareholders, which is filed as Exhibit 13 to this Form 10-K, are incorporated by reference in Parts I and II of this Form 10-K.

Portions of CSB Bancorp Inc.’s Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

 

 

 

 

 


 

 

PART I

ITEM 1. BUSINESS.

General

CSB Bancorp, Inc. (“CSB”), is a registered financial holding company under the Bank Holding Company Act of 1956, as amended, and was incorporated under the laws of the State of Ohio in 1991. The Commercial and Savings Bank of Millersburg, Ohio (the “Bank”), an Ohio banking corporation chartered in 1879, is a wholly owned subsidiary of CSB. The Bank is a member of the Federal Reserve System, and its deposits are insured up to the maximum amount provided by law by the Federal Deposit Insurance Corporation (“FDIC”). The primary regulators of the Bank are the Federal Reserve Board and the Ohio Division of Financial Institutions. CSB Investment Services, LLC, an Ohio limited liability company (“CSB Investment”), is a wholly owned subsidiary of CSB that is licensed to engage in the business of insurance in the State of Ohio. In this Annual Report on Form 10-K, CSB and its subsidiaries are sometimes collectively referred to as the “Company.”

Cautionary Statement Regarding Forward-Looking Information

Certain statements contained in this Annual Report on Form 10-K, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipate”, “estimates”, “may”, “feels”, “expects”, “believes”, “plans”, “will”, “would”, “should”, “could” and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements. Examples of forward-looking statements include: (i) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure, and other financial items; (ii) statements of plans and objectives of the Company and of its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company’s filings with the SEC, including without limitation the risk factors disclosed in Item 1A of this Annual Report on Form 10-K.

Other factors not currently anticipated may also materially and adversely affect the Company’s business, financial condition, results of operations, or cash flows. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this Annual Report on Form 10-K are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. The Company does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events, or otherwise, except as may be required by applicable law.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

Business Overview and Lending Activities

CSB operates primarily through the Bank and CSB Investment, providing a wide range of banking, trust, financial, and brokerage services to corporate, institutional, and individual customers throughout northeast Ohio. The Bank provides retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, night depository facilities, brokerage, and trust services.

The Bank provides residential real estate, commercial real estate, commercial, and consumer loans to customers located primarily in Holmes, Stark, Tuscarawas, Wayne, and portions of surrounding counties in Ohio. The Bank’s market area has historically exhibited relatively stable economic conditions. With the onset of the COVID-19 pandemic and the resulting economic shutdown of nonessential businesses in March of 2020, economic activity in the Company’s market area slowed during the second quarter of 2020. As the year continued, economic stimulus and the reopening of businesses led to an increase in economic activity in the second half of the year.   Reported unemployment levels in December 2020 ranged from 2.7% to 5.2% in the four primary counties served by the Bank. These levels increased slightly from December 2019 in three of the four counties served by the Bank apart from Holmes County where the unemployment rate decreased slightly compared to 2019. Labor demand increased modestly in some sectors not heavily affected by the pandemic and wage pressures have elevated somewhat. The local housing market continues to be strong with supply still relatively tight. Construction costs remain high as some supply chain disruptions have contributed to the increase.

Certain risks are involved in providing loans, including, but not limited to, the borrowers’ ability and willingness to repay the debt. Before the Bank extends a new loan or renews an existing loan to a customer, these risks are assessed through a review of the borrower’s past and current credit history, the collateral being used to secure the transaction if any, and other factors. For all commercial loan relationships greater than $500,000 the Bank’s internal credit department performs an annual risk rating review. In addition to this review, an independent, outside loan review firm is engaged to review a sample of watch list and adversely classified credits over $250,000 and a sample of commercial loan relationships greater than $250,000. The outside loan review will also assess management’s current credit grades and provide commentary with regard to assigned ratings and the need for a credit to be classified as a troubled debt restructuring, as well as assess management’s specific loan loss reserves for loans included in their sample that are considered to be impaired. In addition, any loan over $100,000 identified as a problem credit by management and/or the external loan review consultants is assigned to the Bank’s “loan watch list,” has a written action plan created specifically for the loan relationship, and is subject to ongoing review at least quarterly by the Bank’s credit department and the assigned loan officer to ensure appropriate action is taken if deterioration continues.

 


 

 

Commercial loan rates are variable and fixed and include operating lines of credit and term loans made to businesses, primarily based on their ability to repay the loan from the cash flow of the business. Business assets such as equipment, accounts receivable, and inventory typically secure such loans. When the borrower is not an individual, the Bank generally obtains the personal guarantee of the business owner. These loans typically involve larger loan balances, are generally dependent on the cash flow of the business, and thus may be subject to a greater extent to adverse conditions in the general economy or in a specific industry. Management reviews the borrower’s cash flows when deciding whether to grant the credit in order to evaluate whether estimated future cash flows will be adequate to service principal and interest of the new obligation in addition to existing obligations.

Commercial real estate loans are primarily secured by borrower-occupied business real estate and are dependent on the ability of the related business to generate adequate cash flow to service the debt. Commercial real estate loans are generally originated with a loan-to-value ratio of 80% or less. Commercial construction loans are secured by commercial real estate and in most cases the Bank also provides the permanent financing. The Bank monitors advances and the maximum loan to value ratio is typically limited to the lesser of 90% of cost or 80% of appraisal value. Management performs much of the same analysis when deciding whether to grant a commercial real estate loan as when deciding whether to grant a commercial loan.

Residential real estate loans carry both fixed and variable rates and are secured by the borrower’s residence. Such loans are made based on the borrower’s ability to make repayment from employment and other income. Management assesses the borrower’s ability and willingness to repay the debt through review of credit history and ratings, verification of employment and other income, review of debt-to-income ratios, and other measures of repayment ability. The Bank generally makes these loans in amounts of 80% or less of the value of the collateral or up to 95% of collateral value with private mortgage insurance. An appraisal from a qualified real estate appraiser or an evaluation based on comparable market values is obtained for substantially all loans secured by real estate. Residential construction loans are secured by residential real estate that generally will be occupied by the borrower upon completion. The Bank usually makes the permanent loan at the end of the construction phase. Generally, construction loans are made in amounts of 80% or less of the value of the as-completed collateral.

Home equity lines of credit are made to individuals and are secured by second or first mortgages on the borrower’s residence. Loans are based on similar credit and appraisal criteria used for residential real estate loans; however, loans up to 90% of the value of the property may be approved for borrowers with excellent credit histories. These loans typically bear interest at variable rates and require minimum monthly payments of the accrued interest.

Installment loans to individuals include unsecured loans and loans secured by recreational vehicles (“RV’s”), automobiles, and other consumer assets. Consumer loans for the purchase of new RV’s and new automobiles generally do not exceed 125% of Dealer Invoice on RV’s or 110% of the Manufacturer’s Suggested Retail Price (MSRP) of an automobile. Loans for used RV’s and automobiles do not exceed 120% of the “clean trade-in value” as reported in the current “NADA” used guides. Overdraft protection loans are unsecured personal lines of credit to individuals who have demonstrated good credit character with reasonably assured sources of income and satisfactory credit histories. Consumer loans generally involve more risk than residential mortgage loans because of the type and nature of collateral and, in certain types of consumer loans, absence of collateral. Since these loans are generally repaid from ordinary income of the individual or family unit, repayment may be adversely affected by job loss, divorce, ill health, or by a general decline in economic conditions. The Bank assesses the borrower’s ability and willingness to repay through a review of credit history, credit ratings, debt-to-income ratios, and other measures of repayment ability.

While CSB’s chief decision-makers monitor the revenue streams of the various financial products and services, operations are managed, and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment. For a discussion of the Company’s financial performance for the fiscal year ended December 31, 2020, see the Consolidated Financial Statements and Notes to the Consolidated Financial Statements found in Item 8 of this Annual Report on Form 10-K.

Employees

On December 31, 2020, the Company had 187 employees, 159 of which were employed on a full-time basis. CSB has no separate employees not also employed by the Bank. No employees are covered by collective bargaining agreements. Employees are provided benefit programs, some of which are contributory. Management considers its employee relations to be good.

Competition

The financial services industry is highly competitive. In its primary market area of Holmes, Stark, Tuscarawas, Wayne and surrounding Ohio counties, the Bank competes for new deposit dollars and loans with other commercial banks, including both large regional banks and smaller community banks, as well as savings and loan associations, credit unions, finance companies, insurance companies, brokerage firms, investment companies, private lenders, and technology-based providers of financial services (sometimes referred to as “fintech” companies).

Competition within the financial service industry continues to increase as a result of mergers between, and expansion of, financial service providers within and outside of the Company’s primary market areas. In addition, securities firms and insurance companies that have elected to become financial holding companies may acquire commercial banks and other financial institutions, which can create additional competitive pressure.

 


 

Management believes the primary factors in competing for loans and deposits are interest rates, availability of services, quality of customer service, convenience, and name recognition. Some of the Company’s competitors may have greater resources and as such, higher lending limits, or fewer regulatory constraints and lower cost structures, all of which may adversely affect the Company’s ability to compete.

Investor Relations

The Company’s website address is www.csb1.com. The Company makes available its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, free of charge on its website as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the “SEC”). The Company also makes available through its website, other reports filed with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including its proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as the Company’s Code of Ethics. References to our website in this Annual Report on Form 10-K are provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the information contained on, or available through, the website, and such information should not be considered part of this Annual Report on Form 10-K.

In addition, the Company’s filings are available on the SEC’s website at www.sec.gov free of charge as soon as reasonably practicable after the Company has filed the above referenced reports.

Supervision and Regulation of CSB and the Bank

CSB and the Bank are subject to extensive regulation by federal and state regulatory agencies. The regulation of financial holding companies and their subsidiaries by bank regulatory agencies is intended primarily for the protection of consumers, depositors, borrowers, the deposit insurance funds of the FDIC (the “DIF”), and the banking system as a whole and not for the protection of shareholders.

CSB is a bank holding company that has registered with the Federal Reserve Board (“FRB”) as a financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Pursuant to the Gramm-Leach-Bliley Act of 1999 (“GLBA”), a qualifying bank holding company may elect to become a financial holding company and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and not otherwise permissible for a bank holding company, if: (i) the holding company is "well managed" and "well capitalized" and (ii) each of its subsidiary banks (a) is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, (b) is well managed, and (c) has at least a "satisfactory" rating under the Community Reinvestment Act (the “CRA”).  CSB has been a financial holding company since 2005. No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB. The financial holding company and its subsidiaries must continue to meet the above described requirements in order to continue to engage in activities that are financial in nature without being subjected to regulatory action or restriction, which could include divestiture of the subsidiary or subsidiaries.

GLBA defines “financial in nature” to include securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking; and activities that the FRB has determined to be closely related to banking. CSB is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, the Exchange Act, and the regulations rules and regulations promulgated thereunder, as administered by the SEC.

The Bank, as an Ohio state-chartered bank and member of the Federal Reserve System, is subject to regulation, supervision, and examination by the Ohio Division of Financial Institutions and the FRB. Because the FDIC insures its deposits, the Bank is also subject to certain FDIC regulations. The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations, and safeguards the safety and soundness of the financial institution industry. The Bank’s deposits are insured up to applicable limits by the DIF, and the Bank is subject to deposit insurance assessments to maintain the DIF. In addition, the Bank is subject to regulations promulgated by the Consumer Financial Protection Bureau (the “CFPB”), which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended (the “Dodd-Frank Act”).

The earnings, dividends, and other aspects of the operations and activities of CSB and the Bank are affected by state and federal laws and regulations, and by policies of various regulatory authorities. These policies include, for example, statutory maximum lending rates, requirements on maintenance of reserves against deposits, domestic monetary policies of the FRB, United States fiscal and economic policies, international currency regulations, and monetary policies, certain restrictions on relationships with many phases of the securities business, and capital adequacy, and liquidity restraints.

The following information describes selected federal and state statutory and regulatory provisions that have, or could have, a material impact on the Company’s business. This discussion is qualified in its entirety by reference to the full text of the particular statutory or regulatory provisions contained or referenced herein.

Regulation of Bank Holding Companies

As a financial holding company, CSB’s activities are subject to regulation by the FRB. CSB is subject to regular examinations by the FRB and is required to file reports and such additional information as the FRB may require.

The FRB has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, issue cease and desist orders, and require that a bank holding company divest subsidiaries (including subsidiary banks). The FRB may initiate enforcement actions for violations of laws and regulations, and for unsafe and unsound practices. Under FRB policies, a bank holding company is expected

 


 

 

to act as a “source of strength” to its subsidiary banks and to commit resources to support those subsidiary banks. Under this policy, the FRB may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank.

The BHC Act requires the prior approval of the FRB in cases where a bank holding company proposes to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it, acquire all or substantially all of the assets of another bank or another financial or bank holding company, or merge or consolidate with any other financial or bank holding company.

Economic Growth, Regulatory Relief and Consumer Protection Act

On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was signed into law. The Regulatory Relief Act repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all but the largest banks (those with consolidated assets in excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including CSB, are no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion, including CSB, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied only to banks with assets in excess of $50 billion and so did not apply to CSB even before the enactment of the Regulatory Relief Act.

 

The Coronavirus Aid, Relief, and Economic Security Act of 2020

In response to the novel COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”), was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as CSB, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the FRB, and other federal banking agencies, including those with direct supervisory jurisdiction over CSB. Furthermore, as COVID-19 evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. For example, on December 27, 2020, the Consolidated Appropriations Act (the “CAA”) was signed into law, which, among other things, allowed certain banks to temporarily postpone implementation of the current expected credit loss (“CECL”) model (accounting standard), which is described below. CSB is continuing to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to COVID-19.

 

The CARES Act amended the loan program of the Small Business Administration (the “SBA”), in which CSB participates, to create a guaranteed, unsecured loan program, the Paycheck Protection Program (the “PPP”), to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of COVID-19, additional legislation was enacted authorizing the SBA to resume accepting PPP applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020. As a participating lender in the PPP, CSB continues to monitor legislative, regulatory, and supervisory developments related thereto. On September 29, 2020, the federal bank regulatory agencies issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19 liquidity facilities due to the fact there is no credit or market risk in association with exposures pledged to such facilities. As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19.

 

The CARES Act encouraged the FRB, in coordination with the Secretary of the Treasury, to establish or implement various programs to help mitigate the adverse effects of COVID-19 on midsize businesses, nonprofits, and municipalities. In April 2020, the FRB established the Main Street Lending Program (“MSLP”) to implement certain of these recommendations. The MSLP supported lending to small and medium-sized businesses that were in sound financial condition before the onset of COVID-19. On November 19, 2020, Treasury Secretary Steven Mnuchin indicated that he would not reauthorize extending the MSLP past December 31, 2020. However, the FRB extended the program to January 8, 2021, in order to process loans that were submitted on or before December 14, 2020. The program ended on January 8, 2021.

 

Current Expected Credit Loss Model

In December 2018, the federal banking agencies issued a final rule to address regulatory treatment of credit loss allowances under CECL.  The rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model. Concurrent with the enactment of the CARES Act, the federal banking agencies issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL prior to the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. On August 26, 2020, the federal banking agencies issued a final rule that made certain technical changes to the interim final rule, including expanding the pool of eligible institutions.

Regulatory Capital

The FRB adopted risk-based capital guidelines for bank holding companies and state member banks, designed to absorb losses. The guidelines provide a systematic analytical framework, which makes regulatory capital requirements sensitive to differences in risk profiles among banking

 


 

organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and incentivizes holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain Prompt Corrective Action regulatory provisions.

 

In July 2013, the United States banking regulators issued new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”).  Community banking organizations, including CSB, began transitioning to the new rules on January 1, 2015. The new minimum capital requirements became effective on January 1, 2015; while a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016 through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019.  

The Basel III Capital Rules include (i) a minimum common equity tier 1 capital ratio of 4.5%, (ii) a minimum tier 1 capital ratio of 6.0%, (iii) a minimum total capital ratio of 8.0%, and (iv) a minimum leverage ratio of 4.0%.

Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments, and investments in the capital of unconsolidated financial institutions (above certain levels).

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Basel III Capital Rules place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers in the event the Company does not hold a capital conservation buffer of greater than 2.5% composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. Pursuant to the FRB’s Small Bank Holding Company Policy statement (“SBHC Policy”), a bank holding company with assets of less than $1 billion and meeting certain other requirements is not required to comply with the consolidated capital requirements until such company exceeds $1 billion in assets or is otherwise determined by the FRB not to qualify as a small bank holding company. On December 31, 2020, CSB was deemed to be a small bank holding company under the SBHC Policy and was not required to comply with the FRB’s regulatory capital requirements. The Bank, however, must comply with the new capital requirements.

The implementation of the Basel III Capital Rules did not have a material impact on CSB’s or the Bank’s capital ratios.

Prompt Corrective Action

The federal banking agencies have established a system of “prompt corrective action” to resolve certain of the problems of undercapitalized institutions. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized”, and “critically undercapitalized.”

The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank’s capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes “critically undercapitalized” unless the bank’s primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank’s capital category. For example, a bank that is not “well capitalized” generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank’s capital plan for the plan to be acceptable.

In order to be “well-capitalized,” a bank must have a minimum common equity tier 1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10%, a tier 1 risk-based capital ratio of at least 8%, and a leverage ratio of at least 5%, and the bank must not be subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.

As of December 31, 2020, the Bank met the ratio requirements in effect at that date to be deemed “well-capitalized.” See Note 13 – Regulatory Matters of the Notes to Consolidated Financial Statements located on page 50 of CSB’s 2020 Annual Report, which is incorporated herein by

 


 

 

reference. Management of the Company believes the Bank also meets the capital requirements to be deemed “well-capitalized” under the new guidelines.

Deposit Insurance

Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF, and the Bank is assessed quarterly deposit insurance premiums to maintain the DIF. Insurance premiums for each insured institution are determined based upon the institution’s capital level and supervisory rating provided to the FDIC by the institution’s primary federal regulator and other information deemed by the FDIC to be relevant to the risk posed to the Deposit Insurance Fund by the institution. The assessment rate is then applied to the amount of the institution’s assessment base to determine the institution’s insurance premium. The deposit insurance assessment base is calculated on average assets less average tangible equity.

The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the insured institution and may also impose special assessments in emergency situations.  The premiums fund the DIF.  Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio ("DRR"), which is the amount in the DIF as a percentage of all DIF insured deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.  The Dodd-Frank Act requires the FDIC to offset the effect on insured institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%.  Although the FDIC's rules reduced assessment rates on all banks, they imposed a surcharge on banks with assets of $10 billion or more to be paid until the DRR reached 1.35%. The DRR reached 1.35% on September 30, 2018. As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits were determined by the FDIC for banks with assets of less than $10 billion for the portion of their assessments that contributed to the increase of the DRR to 1.35%. On June 30, 2019, the DRR reached 1.40%, and the FDIC applied credits for banks with assets of less than $10 billion ("small bank credits") beginning September 30, 2019. The FDIC will continue to apply small bank credits so long as the DRR is at least 1.35%. The FDIC rules further changed the method of determining risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk.

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally insured institutions. It also may prohibit any federally insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the Deposit Insurance Fund. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or written agreement entered into with the FDIC.

The management of the Bank does not know of any practice, condition, or violation that might lead to termination of deposit insurance.

Limits on Dividends and Other Payments

There are various legal limitations on the extent to which subsidiary banks may finance or otherwise supply funds to their parent holding companies. Under applicable federal and state laws, subsidiary banks may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, their bank holding companies. Subsidiary banks are also subject to collateral security requirements for any loan or extension of credit permitted by such exceptions.

Payments of dividends by the Bank are limited by applicable state and federal laws and regulations. The ability of CSB to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends that may be declared by the Bank. However, the FRB expects CSB to serve as a source of strength for the Bank and may require CSB to retain capital for further investment in the Bank, rather than pay dividends to CSB shareholders. Payment of dividends by the Bank may be restricted at any time at the discretion of its applicable regulatory authorities if they deem such dividends to constitute an unsafe or unsound banking practice. These provisions could have the effect of limiting CSB’s ability to pay dividends on its common shares.

FRB policy requires CSB to provide notice to the FRB in advance of the payment of a dividend to CSB’s shareholders under certain circumstances and states that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. The FRB may disapprove of a dividend payment if the FRB determines that the payment would be an unsafe or unsound practice.

Consumer Protection Laws and Regulations

Banks are subject to regular examination to ensure compliance with federal statutes and regulations applicable to their business, including consumer protection statutes and implementing regulations. The Dodd-Frank Act established the CFPB, which has extensive regulatory and enforcement powers over consumer financial products and services. The CFPB has adopted numerous rules with respect to consumer protection

 


 

laws, amending some existing regulations and adopting new ones, and has commenced enforcement actions. The following are just some of the consumer protection laws applicable to the Bank:

 

 

Community Reinvestment Act of 1977: imposes a continuing and affirmative obligation to fulfill the credit needs of its entire community, including low- and moderate-income neighborhoods.

 

Equal Credit Opportunity Act: prohibits discrimination in any credit transaction on the basis of any of various criteria.

 

Truth in Lending Act: requires that credit terms are disclosed in a manner that permits a consumer to understand and compare credit terms more readily and knowledgeably.

 

Fair Housing Act: makes it unlawful for a lender to discriminate in its housing-related lending activities against any person on the basis of any of certain criteria.

 

Home Mortgage Disclosure Act: requires financial institutions to collect data that enables regulatory agencies to determine whether the financial institutions are serving the housing credit needs of the communities in which they are located.

 

Real Estate Settlement Procedures Act: requires that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers’ costs.

 

Privacy provisions of the Gramm-Leach-Bliley Act: requires financial institutions to establish policies and procedures to restrict the sharing of non-public customer data with non-affiliated parties and to protect customer information from unauthorized access.

The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of specific banking or consumer finance law.

On July 22, 2020, the CFPB issued a final small dollar loan rule related to payday, vehicle title and certain high cost installment loans (the “Small Dollar Rule”) that modified a former rule that was issued in November 2013. Specifically, the Small Dollar Rule revokes provisions contained in the 2013 rule that: (i) provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (iii) exempt certain loans from mandatory underwriting requirements; and (iv) establish related definitions, reporting, and recordkeeping requirements.

Separately, in May 2018, the Office of the Comptroller of the Currency (the “OCC”) published guidance that encourages national banks and federal savings associations to offer responsible short-term, small-dollar installment loans with terms between two and twelve months and equal amortizing payments. Pursuant to the OCC’s guidance on this issue, banks are encouraged to offer these products in a manner that is consistent with sound risk management principles and clear, documented underwriting guidelines. Further, the federal bank regulatory agencies issued interagency guidance on May 20, 2020, to encourage banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes. The Small Dollar Rule did not have a material effect on CSB’s financial condition or results of operations on a consolidated basis in 2020.

Customer Privacy

Under the GLBA, federal banking agencies have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require distribution of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties.

USA Patriot Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the “Patriot Act”), and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity.  

The Bank has established policies and procedures to be compliant with the requirements of the Patriot Act.

 

Office of Foreign Assets Control Regulation

The United States Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. CSB is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

 

Cybersecurity

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient

 


 

 

business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of the financial institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack. If CSB fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

 

In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

 

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. CSB expects this trend of state-level activity in those areas to continue and is continually monitoring developments in the states in which our customers are located.

 

In the ordinary course of business, CSB relies on electronic communications and information systems to conduct its operations and to store sensitive data. CSB employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. CSB employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of CSB’s defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, CSB has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, CSB’s systems and those of its customers and third-party service providers are under constant threat and it is possible that CSB could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

 

Effect of Environmental Regulation

Compliance with federal, state, and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings, or competitive position of CSB or its subsidiaries. CSB believes the nature of the operations of its subsidiaries has little, if any, environmental impact. CSB, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future.

CSB believes its primary exposure to environmental risk is through the lending activities of the Bank. In cases where management believes environmental risk potentially exists, the Bank mitigates environmental risk exposure by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites.

Future Legislation

Various and significant legislation affecting financial institutions and the financial industry is from time to time adopted by the U.S. Congress and state legislatures, and regulatory agencies frequently adopt or amend regulations. Such legislation and regulation may continue to change banking laws and regulations and the operating environment of CSB and its subsidiaries in substantial and unpredictable ways, and could significantly increase or decrease costs of doing business, limit or expand permissible activities, or affect the competitive balance among financial institutions. The nature and extent of future legislative and regulatory changes affecting financial institutions remains very unpredictable.

Statistical Disclosures

The following schedules present, for the periods indicated, certain financial and statistical information of the Company as required under the SEC’s Industry Guide 3 “Statistical Disclosures by Bank Holding Companies,” or a specific reference as to the location of required disclosures in CSB’s 2020 Annual Report.

Distribution of Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differential

The information set forth under the heading, “Average Balance Sheets and Net Interest Margin Analysis” located on page 10 of CSB’s 2020 Annual Report is incorporated by reference herein.

The information set forth under the heading, “Rate/Volume Analysis of Changes in Income and Expense” located on page 11 of CSB’s 2020 Annual Report is incorporated by reference herein.

 


 

Investment Portfolio

The following is a schedule of the fair value of securities on December 31:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale, at fair value

 

2020

 

 

2019

 

 

2018

 

U.S. Treasury security

 

$

1,011

 

 

$

999

 

 

$

996

 

U.S. Government agencies

 

 

14,006

 

 

 

5,496

 

 

 

7,170

 

Mortgage-backed securities of government agencies

 

 

140,012

 

 

 

75,857

 

 

 

44,901

 

Asset-backed securities of government agencies

 

 

837

 

 

 

917

 

 

 

1,024

 

State and political subdivisions

 

 

23,966

 

 

 

21,511

 

 

 

23,125

 

Corporate bonds

 

 

10,606

 

 

 

7,366

 

 

 

8,312

 

Total available-for-sale

 

$

190,438

 

 

$

112,146

 

 

$

85,528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held-to-maturity, at fair value

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

 

 

$

4,993

 

 

$

9,098

 

Mortgage-backed securities of government agencies

 

 

5,800

 

 

 

8,957

 

 

 

11,020

 

State and political subdivisions

 

 

3,425

 

 

 

 

 

 

 

Total held-to-maturity

 

$

9,225

 

 

$

13,950

 

 

$

20,118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

87

 

 

$

92

 

 

$

83

 

 

The following is a schedule of maturities for each category of debt securities and the related weighted average yield of such securities as of December 31, 2020:

 

 

 

One Year or Less

 

 

After One Year

Through Five

Years

 

 

Maturing

After Five Years

Through Ten

Years

 

 

After Ten Years

 

 

Total

 

 

(Dollars in thousands)

 

Amortized

Cost

 

 

Yield

 

 

Amortized

Cost

 

 

Yield

 

 

Amortized

Cost

 

 

Yield

 

 

Amortized

Cost

 

 

Yield

 

 

Amortized

Cost

 

 

Yield

 

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

999

 

 

 

1.60

 

%

$

 

 

 

 

%

$

 

 

 

 

%

$

 

 

 

 

%

$

999

 

 

 

1.60

 

%

U.S. Government agencies

 

 

 

 

 

 

 

 

10,998

 

 

 

0.40

 

 

 

3,000

 

 

 

0.74

 

 

 

 

 

 

 

 

 

13,998

 

 

 

0.47

 

 

Mortgage-backed securities of

   government agencies

 

 

2

 

 

 

2.24

 

 

 

628

 

 

 

2.72

 

 

 

7,333

 

 

 

1.31

 

 

 

131,001

 

 

 

1.20

 

 

 

138,964

 

 

 

1.21

 

 

Asset-backed securities of government

   agencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

848

 

 

 

1.38

 

 

 

848

 

 

 

1.38

 

 

State and political subdivisions

 

 

436

 

 

 

2.52

 

 

 

7,860

 

 

 

2.96

 

 

 

15,126

 

 

 

2.34

 

 

 

 

 

 

 

 

 

23,422

 

 

 

2.55

 

 

Corporate bonds

 

 

2,501

 

 

 

3.01

 

 

 

3,818

 

 

 

1.30

 

 

 

4,522

 

 

 

2.75

 

 

 

 

 

 

 

 

 

10,841

 

 

 

2.30

 

 

Total

 

$

3,938

 

 

 

2.60

 

%

$

23,304

 

 

 

1.47

 

%

$

29,981

 

 

 

1.99

 

%

$

131,849

 

 

 

1.20

 

%

$

189,072

 

 

 

1.39

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities of

   government agencies

 

$

 

 

 

 

%

$

 

 

 

 

%

$

263

 

 

 

1.27

 

%

$

5,357

 

 

 

1.78

 

%

$

5,620

 

 

 

1.75

 

%

State and political subdivisions

 

 

3,425

 

 

 

2.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,425

 

 

 

2.63

 

 

Total

 

$

3,425

 

 

 

2.63

 

%

$

 

 

 

 

%

$

263

 

 

 

1.27

 

%

$

5,357

 

 

 

 

%

$

9,045

 

 

 

2.08

 

%

 

The weighted average yields are calculated using amortized cost of investments and are based on coupon rates for securities purchased at par value, and on effective interest rates considering amortization or accretion if securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations is presented on a tax-equivalent basis based on the Company’s marginal federal income tax rate of 21%.

 


 

 

Loan Portfolio

Total loans on the balance sheet are comprised of the following classifications on December 31:

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Commercial

 

$

191,540

 

 

$

137,114

 

 

$

146,875

 

 

$

140,273

 

 

$

134,268

 

Commercial real estate

 

 

187,221

 

 

 

196,748

 

 

 

183,605

 

 

 

179,663

 

 

 

159,475

 

Residential real estate

 

 

177,155

 

 

 

174,259

 

 

 

167,296

 

 

 

157,172

 

 

 

144,489

 

Construction and land development

 

 

36,038

 

 

 

23,960

 

 

 

31,227

 

 

 

22,886

 

 

 

23,428

 

Consumer

 

 

17,916

 

 

 

19,052

 

 

 

19,402

 

 

 

16,306

 

 

 

13,308

 

Total loans

 

$

609,870

 

 

$

551,133

 

 

$

548,405

 

 

$

516,300

 

 

$

474,968

 

 

The following is a schedule of maturities of loans based on contract terms and assuming no amortization or prepayments, excluding residential real estate mortgage and installment loans, as of December 31, 2020:

 

 

 

Maturing

 

(Dollars in thousands)

 

One Year

or Less

 

 

One

Through

Five Years

 

 

After Five

Years

 

 

Total

 

Commercial

 

$

51,903

 

 

$

112,038

 

 

$

27,599

 

 

$

191,540

 

Commercial real estate

 

 

2,385

 

 

 

19,241

 

 

 

165,595

 

 

 

187,221

 

Construction and land development

 

 

2,180

 

 

 

11,271

 

 

 

22,587

 

 

 

36,038

 

Total

 

$

56,468

 

 

$

142,550

 

 

$

215,781

 

 

$

414,799

 

 

The following is a schedule of fixed rate and variable rate commercial, commercial real estate and construction and land development loans due after one year from December 31, 2020.

 

(Dollars in thousands)

 

Fixed Rate

 

 

Variable Rate

 

Total commercial, commercial real estate and construction and

   land development loans due after one year

 

$

120,463

 

 

$

237,868

 

 

The following schedule summarizes nonaccrual, past due and restructured loans.

 

(Dollars in thousand)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Loans accounted for on a nonaccrual basis

 

$

4,448

 

 

$

4,298

 

 

$

3,155

 

 

$

6,081

 

 

$

1,449

 

Accruing loans that are contractually past due 90 days or

   more as to interest or principal payments

 

 

49

 

 

 

241

 

 

 

174

 

 

 

441

 

 

 

235

 

Total

 

$

4,497

 

 

$

4,539

 

 

$

3,329

 

 

$

6,522

 

 

$

1,684

 

 

The policy for placing loans on nonaccrual status is to cease accruing interest on loans when management believes that collection of interest is doubtful, when commercial loans are past due as to principal and interest 90 days or more or when mortgage loans are past due as to principal and interest 120 days or more, except that in certain circumstances interest accruals are continued on loans deemed by management to be well-secured and in process of collection. In such cases, loans are individually evaluated in order to determine whether to continue income recognition after 90 days beyond the due date. When loans are placed on nonaccrual, any accrued interest is charged against interest income.

Information regarding impaired loans on December 31 is as follows:

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

Total recorded investment of impaired loans

 

$

6,352

 

 

$

6,071

 

 

$

3,860

 

Less portion for which no allowance for loan loss is allocated

 

 

5,151

 

 

 

5,483

 

 

 

3,122

 

Portion of impaired loan balance for which an allowance for

   loan loss is allocated

 

 

1,201

 

 

 

588

 

 

 

738

 

Portion of allowance for loan losses allocated to the impaired

   loan balance on December 31

 

 

30

 

 

 

34

 

 

 

101

 

 

 


 

 

For the year ended December 31, 2020, interest income recognized on impaired loans amounted to $119 thousand, while $354 thousand would have been recognized had the loans been performing under their contractual terms. For the year ended December 31, 2019, interest income recognized on impaired loans amounted to $134 thousand, while $316 thousand would have been recognized had the loans been performing under their contractual terms. For the year ended December 31, 2018, interest income recognized on impaired loans amounted to $113 thousand, while $371 thousand would have been recognized had the loans been performing under their contractual terms.

Impaired loans are comprised of commercial, commercial real estate, and residential real estate loans, and are carried at the present value of expected cash flows discounted at the loan’s effective interest rate or at fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans.

Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first-mortgage loans secured by one to four-family residences, residential construction loans, automobile loans, home equity loans, and second-mortgage loans. These consumer loans are included in nonaccrual and past due disclosures above as well as impaired loans when they become nonperforming. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

On December 31, 2020, no loans were identified for which management had serious doubts about the borrowers’ ability to comply with present loan repayment terms that are not included in the tables set forth above. On a monthly basis, the Company internally classifies certain loans based on various factors. On December 31, 2020, these amounts, including impaired and nonperforming loans, amounted to $32 million of substandard loans and $317 thousand doubtful loans.

As of December 31, 2020, there were no concentrations of loans greater than 10% of total loans that were not otherwise disclosed as a category of loans in the loan portfolio table set forth above.

Summary of Loan Loss Experience

The following schedule presents an analysis of the allowance for loan losses, average loan data, and related ratios for the years ended December 31:

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

LOANS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans outstanding during period

 

$

609,207

 

 

$

552,014

 

 

$

535,506

 

 

$

497,048

 

 

$

448,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLOWANCE FOR LOAN LOSSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

7,017

 

 

$

5,907

 

 

$

5,604

 

 

$

5,291

 

 

$

4,662

 

 

Loans charged-off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

77

 

 

 

47

 

 

 

823

 

 

 

1,184

 

 

 

297

 

 

Commercial real estate

 

 

138

 

 

 

 

 

 

103

 

 

 

 

 

 

50

 

 

Residential real estate

 

 

15

 

 

 

 

 

 

37

 

 

 

 

 

 

12

 

 

Construction and land development

 

 

312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

100

 

 

 

211

 

 

 

119

 

 

 

20

 

 

 

59

 

 

Total loans charged-off

 

 

642

 

 

 

258

 

 

 

1,082

 

 

 

1,204

 

 

 

418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries of loans previously charged-off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

130

 

 

 

175

 

 

 

61

 

 

 

361

 

 

 

214

 

 

Commercial real estate

 

 

41

 

 

 

1

 

 

 

1

 

 

 

 

 

 

334

 

 

Residential real estate

 

 

3

 

 

 

7

 

 

 

3

 

 

 

8

 

 

 

5

 

 

Construction and land development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

75

 

 

 

45

 

 

 

4

 

 

 

3

 

 

 

1

 

 

Total loans recoveries

 

 

249

 

 

 

228

 

 

 

69

 

 

 

372

 

 

 

554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans charged-off (recovered)

 

 

393

 

 

 

30

 

 

 

1,013

 

 

 

832

 

 

 

(136

)

 

Provision charged to operating expense

 

 

1,650

 

 

 

1,140

 

 

 

1,316

 

 

 

1,145

 

 

 

493

 

 

Balance at end of period

 

$

8,274

 

 

$

7,017

 

 

$

5,907

 

 

$

5,604

 

 

$

5,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net charge-offs (recoveries) to average loans outstanding for period

 

 

0.06

 

%

 

0.01

 

%

 

0.19

 

%

 

0.17

 

%

 

(0.03

)

%

 

 


 

 

 

The allowance for loan losses balance and provision charged to expense are determined by management based on periodic reviews of the loan portfolio, past loan loss experience, economic conditions, and various other circumstances subject to change over time. In making this judgment, management reviews selected large loans, as well as impaired loans, other delinquent, nonaccrual and problem loans, and loans to industries experiencing economic difficulties. The collectability of these loans is evaluated after considering current operating results and financial position of the borrower, estimated market value of collateral, guarantees and the Company’s collateral position versus other creditors. Judgments, which are necessarily subjective, as to the probability of loss and amount of such loss are formed on these loans, as well as other loans taken together.

The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios. While management’s periodic analysis of the adequacy of the allowance for loan losses may allocate portions of the allowance for specific problem-loan situations, the entire allowance is available for any loan charge-offs that occur.

 

 

Allocation of the Allowance for Loan Losses

 

 

 

(Dollars in thousands)

 

 

 

 

Allowance

Amount

 

 

Percentage

of Loans

in Each

Category

to Total

Loans

 

 

Allowance

Amount

 

 

Percentage

of Loans

in Each

Category

to Total

Loans

 

 

Allowance

Amount

 

 

Percentage

of Loans

in Each

Category

to Total

Loans

 

 

Allowance

Amount

 

 

Percentage

of Loans

in Each

Category

to Total

Loans

 

 

Allowance

Amount

 

 

Percentage

of Loans

in Each

Category

to Total

Loans

 

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

December 31, 2018

 

 

December 31, 2017

 

 

December 31, 2016

 

 

Commercial

 

$

1,739

 

 

 

31.4

 

%

$

2,408

 

 

 

24.9

 

%

$

2,178

 

 

 

26.8

 

%

$

1,813

 

 

 

27.2

 

%

$

2,207

 

 

 

28.3

 

%

Commercial real estate

 

 

3,469

 

 

 

30.7

 

 

 

2,153

 

 

 

35.7

 

 

 

1,791

 

 

 

33.5

 

 

 

1,735

 

 

 

34.8

 

 

 

1,264

 

 

 

33.6

 

 

Residential real estate

 

 

1,156

 

 

 

29.1

 

 

 

1,152

 

 

 

31.6

 

 

 

1,245

 

 

 

30.5

 

 

 

1,273

 

 

 

30.4

 

 

 

1,189

 

 

 

30.4

 

 

Construction & land development

 

 

756

 

 

 

5.9

 

 

 

203

 

 

 

4.3

 

 

 

258

 

 

 

5.7

 

 

 

237

 

 

 

4.4

 

 

 

178

 

 

 

4.9

 

 

Consumer

 

 

352

 

 

 

2.9

 

 

 

481

 

 

 

3.5

 

 

 

306

 

 

 

3.5

 

 

 

175

 

 

 

3.2

 

 

 

141

 

 

 

2.8

 

 

Unallocated

 

 

802

 

 

 

 

 

 

 

620

 

 

 

 

 

 

 

129

 

 

 

 

 

 

 

371

 

 

 

 

 

 

 

312

 

 

 

 

 

 

Total

 

$

8,274

 

 

 

100.0

 

%

$

7,017

 

 

 

100.0

 

%

$

5,907

 

 

 

100.0

 

%

$

5,604

 

 

 

100.0

 

%

$

5,291

 

 

 

100.0

 

%

 

Deposits

The following is a schedule of average deposit amounts and average rates paid on each category for the periods indicated:

 

 

 

Average Amounts Outstanding

Year ended December 31,

 

 

Average Rate Paid

Year ended December 31,

 

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2018

 

 

Noninterest-bearing demand

 

$

236,348

 

 

$

187,914

 

 

$

175,439

 

 

N/A

 

 

N/A

 

 

N/A

 

 

Interest-bearing demand

 

 

203,010

 

 

 

135,313

 

 

 

117,879

 

 

 

0.19

 

%

 

0.44

 

%

 

0.30

 

%

Savings deposits

 

 

223,785

 

 

 

189,520

 

 

 

180,718

 

 

 

0.15

 

 

 

0.48

 

 

 

0.37

 

 

Time deposits

 

 

125,761

 

 

 

123,694

 

 

 

115,610

 

 

 

1.59

 

 

 

1.70

 

 

 

1.18

 

 

Total deposits

 

$

788,904

 

 

$

636,441

 

 

$

589,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Bank does not have any material deposits by foreign depositors.

The following is a schedule of maturities of time certificates of deposit in amounts of $100,000 or more, as of December 31, 2020:

 

(Dollars in thousands)

 

 

 

 

Three months or less

 

$

11,997

 

Over three through six months

 

 

9,260

 

Over six through twelve months

 

 

15,220

 

Over twelve months

 

 

21,552

 

Total

 

$

58,029

 

 

 


 

 

Return on Equity and Assets

 

 

 

2020

 

 

2019

 

 

2018

 

 

Return on average assets

 

 

1.13

 

%

 

1.36

 

%

 

1.31

 

%

Return on average shareholders’ equity

 

 

11.71

 

 

 

12.77

 

 

 

12.89

 

 

Dividend payout ratio

 

 

29.35

 

 

 

28.42

 

 

 

28.57

 

 

Average shareholders' equity to average assets

 

 

9.69

 

 

 

10.65

 

 

 

10.19

 

 

 

Short-Term Borrowings

Short-term borrowings consist of securities sold under agreements to repurchase, short-term advances through the Federal Home Loan Bank, and federal funds purchased. Securities sold under agreements to repurchase mature one (1) business day from the transaction date. Federal funds purchased generally have overnight terms. Information concerning short-term borrowings is summarized as follows:

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

 

Securities sold under agreements to repurchase, federal funds purchased and

   short-term advances at year-end

 

$

37,215

 

 

$

38,889

 

 

$

37,415

 

 

Average balance outstanding

 

 

43,017

 

 

 

37,258

 

 

 

41,334

 

 

Maximum outstanding at any month end during the year

 

 

48,865

 

 

 

38,889

 

 

 

44,155

 

 

Weighted-average interest rate at year-end

 

 

0.14

 

%

 

0.51

 

%

 

1.01

 

%

Weighted-average rate during the year

 

 

0.21

 

 

 

0.85

 

 

 

0.81

 

 

 

 


 

 

 

ITEM 1A. RISK FACTORS.

Risks Related to the COVID-19 Pandemic

The COVID-19 pandemic is adversely affecting us and our customers, employees, and third-party service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant.

COVID-19 has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, increased unemployment levels, and decreased consumer confidence, generally. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. The pandemic could influence the recognition of credit losses in our loan portfolios and increase our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Furthermore, the pandemic could affect the stability of our deposit base as well as our capital and liquidity position, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, result in lost revenue and cause us to incur additional expenses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairments in future periods on the securities we hold as well as reductions in other comprehensive income.

The extent of the impact of the COVID-19 pandemic on our capital, liquidity, and other financial positions and on our business, results of operations, and prospects will depend on a number of evolving factors, including:

 

 

The duration, extent, and severity of the pandemic.  COVID-19 has not been contained and could affect significantly more households and businesses. The duration and severity of the pandemic continue to be impossible to predict.

 

The response of governmental and nongovernmental authorities.  Many of the actions taken by authorities have been directed at curtailing personal and business activity to contain COVID-19 while simultaneously deploying fiscal-and monetary-policy measures to assist in mitigating the adverse effects on individuals and businesses. These actions are not consistent across jurisdictions but, in general, have been rapidly expanding in scope and intensity.

 

The effect on our customers, counterparties, employees, and third-party service providers.  COVID-19 and its associated consequences and uncertainties may affect individuals, households, and businesses differently and unevenly. In the near-term if not longer, however, our credit, operational, and other risks are generally expected to increase.

 

The effect on economies and markets.  Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional, and local economies and markets could suffer lasting disruptions.

 

The success of hardship relief efforts to bridge the gap to reopening the economy.  The U.S. government has implemented programs to directly compensate individuals and grant or loan money to businesses in an effort to provide funding while the economy is shut down. Many banks, including the Bank, have implemented hardship relief programs that include payment deferral and short-term funding options. The success of these programs could mute the effect on the Company's credit losses, which may be difficult to determine.

The duration of these business interruptions and related impacts on our business and operations, which will depend on future developments, are uncertain and cannot be reasonably estimated at this time. The pandemic could cause us to experience higher credit losses in our lending portfolio, impairment of our goodwill and other financial assets, reduced demand for our products and services, and other negative impacts on our financial position, results of operations, and prospects. The cumulative effects of COVID-19 and the measures implemented by governments to combat the pandemic on mortgaged properties may cause borrowers to be unable to meet their payment obligations under mortgage loans that we hold and may result in significant losses.

Even after COVID-19 has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

Risks Related to the Company’s Business

A failure in or breach of the Company’s technology infrastructure, or those of third parties with whom the Company has relationships, could result in a material adverse effect on the Company’s operations, reputation, cash flows, financial condition, and results of operation.

The Company is very dependent upon the use of technology to operate its business. The Company processes a large number of transactions every day and maintains and transmits confidential client and employee information through its technology systems.

The Company’s dependence upon automated systems to record and process the Bank’s transactions poses the risk that technical system flaws, employee errors, tampering or manipulation of those systems, or attacks by third parties will result in losses and may be difficult to detect. The Company’s inability to use these information systems at critical points in time could unfavorably impact the timeliness and efficiency of its business operations. In recent years, some banks have experienced denial of service attacks in which individuals or organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. The Company could also be adversely affected if one of its employees causes a significant operational break-down or failure, either as a result of

 


 

human error or where an individual purposefully sabotages or fraudulently manipulates the Company’s operations or systems. The Company is further exposed to the risk that third-party service providers may be unable to fulfill their contractual obligations or will be affected by the same risks as the Bank has. These disruptions may interfere with service to the Bank’s customers, cause additional regulatory scrutiny, and result in a financial loss or liability. The Company is also at risk of the impact of natural disasters, terrorism, and international hostilities on its systems or for the effects of outages or other failures involving power or communications systems operated by others.

Employees could engage in fraudulent, improper or unauthorized activities on behalf of clients, or improper use of confidential information. The Company may not be able to prevent employee errors or misconduct, and the precautions taken to detect this type of activity might not be effective in all cases. Employee errors or misconduct could subject the Company to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on the Company’s business.

In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. The recent massive breach of the systems of a credit bureau presents additional threats as criminals now have more information about a larger portion of the country’s population than past breaches have involved, which could be used by criminals to pose as customers initiating transfers of money from customer accounts. Although the Company has policies and procedures in place to verify the authenticity of the Company’s customers, it cannot assure that such policies and procedures will prevent all fraudulent transfers. Such activity can result in financial liability and harm to the Company’s reputation.

Management cannot be certain that the security controls it has adopted will prevent unauthorized access to its computer systems or those of its third-party service providers, whom it requires to maintain similar controls. A security breach of the computer systems and loss of confidential information, such as customer account numbers or personal information could result in a loss of customers’ confidence and, thus, loss of business. In addition, unauthorized access to or use of sensitive data could subject the Company to litigation, liability, and costs to prevent future occurrences.

Further, the Company may be affected by data breaches at retailers and other third parties who participate in data interchanges with the Company and its customers that involve the theft of customer credit and debit card data, which may include the theft of debit card PIN numbers and commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in the Company incurring significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on the Company’s results of operations.

The Company’s assets at risk for cyber-attacks include financial assets and non-public information belonging to customers. The Company uses several third-party vendors who have access to the Company’s assets via electronic media. Certain cyber security risks arise due to this access, including cyber espionage, blackmail, ransom, and theft. As cyber and other data security threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify and enhance its protective measures or to investigate and remediate any security vulnerabilities.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to utilize alternative methods to complete financial transactions that historically have involved banks. Consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’s business, financial condition, or results of operations.

Strong competition within the market in which the Company operates could reduce its ability to attract and retain business.

Competition in the financial services industry is intense, as the Company competes with banks, credit unions, savings and loan associations, securities dealers, finance and insurance companies, mortgage brokers, and investment advisors. As a result of their size and ability to achieve economies of scale, certain of the Company’s competitors offer a broader range of products and services, or in some cases a lower cost operating model, than the Company can offer. The OCC has announced that it will accept applications for national bank charters from nondepository financial technology companies to engage in banking activities. In addition, the Company’s ability to achieve its financial objectives will depend on its ability to deliver or expand product delivery systems and technology required by customers.

Unauthorized disclosure of sensitive or confidential client or customer information whether through a breach of the Company’s computer systems or otherwise, could severely harm the Company’s business.

As part of the Company’s business, it collects, processes, and retains sensitive and confidential client and customer information on behalf of the Company’s subsidiaries and other third parties. Despite the security measures the Company has in place, its facilities and systems, and those of the Company’s third-party service providers, may be vulnerable to security breaches. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the

 


 

 

Company’s reputation, cause a loss of customer confidence, expose it to risks of litigation and liability, or disrupt the Company’s operations and may have a material adverse effect on the Company’s business.

 

The Company may not be able to adapt to technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers while reducing costs. The Company’s future success depends, in part, upon its ability to address customer needs by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in its operations. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect its growth, revenue, and profit.

The Company may not be able to attract and retain skilled people.

The Company’s success depends, in large part, on the ability to attract and retain key people. Succession planning includes the continuity of both the Board of Directors and the management team. Competition for the best people in most activities in which the Company engages can be intense, and it may not be able to attract, hire, or retain the people the Company wants or needs. In order to attract and retain qualified employees, the Company must compensate them at market levels. If the Company is unable to continue to attract and retain qualified employees or do so at rates necessary to maintain the Company’s competitive position, the Company’s performance could suffer, and, in turn, adversely affect the Company’s business, financial condition, or results of operation.

The Company’s exposure to credit risk could adversely affect its earnings and financial condition.

Credit risk is the risk of losing principal and interest income because borrowers fail to repay loans. The Company’s earnings may be negatively impacted if it fails to manage credit risk, as the origination of loans is an integral part of the Company’s business. Factors which may affect the ability of borrowers to repay loans include a slowing of the local economy in which the Company operates, a downturn in one or more business sectors in which the Company’s customers operate, or a rapid increase in interest rates. All the Company’s loan portfolios, particularly commercial and industrial loans may be affected by the impact of higher interest rates. There has been some price appreciation in the housing market across the Company’s footprint, reflecting improved sales and decreased inventories of houses to be sold. A return to further declines in home values and reduced levels of home sales in the Company’s market may have a negative effect on the Company’s business, financial condition, or results of operation.

The Company’s allowance for loan losses may be insufficient.

The Company maintains an allowance for loan losses to cover current, probable loan losses in the Company’s loan portfolio. Management makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans, and performance of customers relative to their financial obligations with the Company. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond the Company’s control and these losses may exceed current estimates. The Company cannot fully predict the amount, timing of losses, or whether the loss allowance will be adequate in the future. If the Company’s assumptions prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the Company’s loan portfolio, resulting in additions to the allowance. Excessive loan losses and significant additions to the Company’s allowance for loan losses could have a material adverse impact on the Company’s business, financial condition, and results of operations. Any such increase in the Company’s allowance for loan losses or loan charge-offs as required by regulatory authorities might have a material adverse effect on the Company’s business, financial condition, or results of operations.

The Financial Accounting Standards board (“FASB”) finalized its guidance eliminating the probable recognition threshold for credit losses on financial assets measured at amortized cost. The Update would require financial assets be presented at the net amount expected to be collected. Under this current expected credit loss model (“CECL”), an entity would record at the time of origination, as an allowance, its estimate of credit losses expected throughout the life of the loan as opposed to the current practice of recording losses when it is probable that a loss event has occurred. The Update for Financial Instruments-Credit Losses is required January 1, 2023. The guidance may require the Company to maintain a larger allowance for loan losses in the future than existing guidance currently requires.

The Company has significant exposure to risks associated with commercial and commercial real estate loans.

As of December 31, 2020, approximately 68% of the Company’s loan portfolio consisted of commercial, commercial real estate, and construction loans. These loans are generally viewed as having more inherent risk of default than residential mortgage or consumer loans. Included in the commercial loan category on December 31, 2020 were $70.1 million of PPP loans which are fully guaranteed by the SBA. The repayment of these loans often depends on the successful operation of a business. These loans are more likely to be adversely affected by weak conditions in the economy. Also, the commercial loan balance per borrower is typically larger than that of residential mortgage loans and consumer loans, indicating higher potential losses on an individual loan basis. The deterioration of one or a few of these loans could cause a significant increase in nonperforming loans and a reduction in interest income. An increase in nonperforming loans could result in an increase in the provision for loan losses and an increase in loan charge-offs, both of which could have a material adverse effect on the Company’s business, financial condition,

 


 

and results of operations. If the Bank forecloses on collateral property and owns the underlying real estate, the Bank may be subject to the increased costs associated with the ownership of real property, resulting in reduced revenue.

The Bank may have to foreclose on collateral property to protect its investment and may thereafter own and operate such property, in which case it will be exposed to the risks inherent in the ownership of real estate. The amount that the Bank, as a mortgagee, may realize after a default is dependent upon factors outside of the Bank’s control, including, but not limited to: (i) general or local economic conditions: (ii) neighborhood values; (iii) interest rates; (iv) real estate tax rates; (v) operating expenses of the mortgaged properties; (vi) supply of and demand for rental units or properties; (vii) ability to obtain and maintain adequate occupancy of the properties; (viii) zoning laws; (ix) governmental rules, regulations and fiscal policies; and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating a real property may exceed the rental income earned from such property, and the Bank may have to advance funds in order to protect its investment, or the Bank may be required to dispose of the real property at a loss. The Bank may also acquire properties with hazardous substances that must be removed or remediated, the costs of which could be substantial, and the Bank may not be able to recover such costs from the responsible parties. The foregoing expenditures and costs could adversely affect the Company’s ability to generate revenues, resulting in reduced levels of profitability.

The Company is subject to liquidity risk.

The Company requires liquidity to extend credit and repay liabilities on a timely basis at a reasonable cost. The Company’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry, or general economy. Factors that could reduce its access to liquidity sources include a downturn in the north central Ohio market, difficult credit markets, aggressive competitor actions due to liquidity needs, or adverse regulatory actions. The Company’s access to deposits may also be affected by the liquidity needs of its depositors. The Company’s primary source of liquidity is its supply of deposits from consumer and commercial customers which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company historically has been able to replace maturing deposits and advances as necessary, but it might not be able to readily replace such funds in the future, if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Company’s business, financial condition, or results of operations.

 

The Company is at risk of increased losses from fraud.

Criminals are committing fraud at an increasing rate and are using more sophisticated techniques.  In some cases, these individuals are part of larger criminal rings, which allow them to be more effective.  Such fraudulent activity has taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials.  Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud.  An emerging type of fraud even involves the creation of synthetic identification in which fraudsters "create" individuals for the purpose of perpetrating fraud.  Further, in addition to fraud committed directly against the Company, it may suffer losses as a result of fraudulent activity committed against third parties.  Increased deployment of technologies, such as chip card technology, defray and reduce certain aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, from unaffiliated healthcare providers and government entities, in order to impersonate the consumer and thereby commit fraud.

The Company may not be able to successfully implement planned growth as part of its business strategy and may incur expenses and risks related to such growth efforts.

The Company’s ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities. There can be no assurance when or if such growth opportunities will be available.

During the past decade, the Company’s growth has been accomplished through a combination of organic growth, de novo branching, and acquisitions. The Company may acquire other financial institutions or parts of institutions in the future, open new branches, and consider new lines of business and new products or services. Such expansions of its business may involve a number of expenses and risks, generally not attendant with organic growth efforts. Such expenses and risks include:

 

 

The time and costs associated with identifying and evaluating potential acquisitions or new products or services;

 

The potential inaccuracy of estimates and judgments used to evaluate credit, operation management and market risk with respect to the target institutions;

 

The time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the expansion;

 

The Company’s ability to finance an acquisition or other expansion and the possible dilution to the Company’s existing shareholders;

 

The diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses;

 

Entry into unfamiliar markets;

 

The possible failure of the introduction of new products and services into the Company’s existing business;

 

The incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on the Company’s results of operations; and

 


 

 

 

The risk of loss of key employees and customers.

Failure to manage the Company’s growth effectively could have a material adverse effect on its business, future prospects, financial condition, or results of operations and could adversely affect the Company’s ability to successfully implement its business strategy.

The Company may need to raise capital in the future, but capital may not be available when needed or at acceptable terms.

Federal and state banking regulators require CSB and the Bank to maintain adequate levels of capital to support its operations. The Company may need to raise additional capital in the future to support its business or to finance acquisitions, if any, or the Company may otherwise elect to raise additional capital in anticipation of future growth opportunities

The Company’s ability to raise additional capital for CSB’s or the Bank’s needs will depend on conditions at that time in the capital markets, overall economic conditions, CSB’s financial performance and condition, and other factors, many of which are outside the Company’s control. There is no assurance that, if needed, CSB will be able to raise additional capital on favorable terms or at all. An inability to raise additional capital may have a material adverse effect on the Company’s ability to expand operations, and on the Company’s financial condition, results of operations, and future prospects.

The Bank may be required to repurchase loans it has sold or indemnify loan purchasers under the terms of the sale agreements, which could adversely affect the Company’s liquidity, results of operations, and financial condition.

When the Bank sells a mortgage loan, it agrees to repurchase or substitute a mortgage loan if it is later found to have breached any representation or warranty the Bank made about the loan or if the borrower is later found to have committed fraud in connection with the origination of the loan. While the Bank has underwriting policies and procedures designed to avoid breaches of representations and warranties as well as borrower fraud, the Bank cannot be sure that no breach or fraud will ever occur. Required repurchases, substitutions, or indemnifications could have an adverse effect on the Company’s liquidity, results of operations, and financial condition.

Risks Relating to Economic and Market Conditions

Difficult market conditions and economic trends could adversely affect the financial services industry and the Company’s business.

Conditions such as inflation, recession, unemployment, changes in interest rates, money supply, pandemic conditions, and other factors beyond the Company’s control may adversely affect asset quality, deposit levels, and loan demand and therefore, the Company’s earnings. Because the Company has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and the Company’s ability to sell the collateral upon foreclosure. Adverse changes in the economy may also have a negative effect on the ability of borrowers to make timely repayments of their loans, which would have an adverse impact on the Company’s earnings. If during a period of reduced real estate values, the Company is required to liquidate the collateral securing loans to satisfy the debt, or to increase its allowance for loan losses, it could materially reduce the Company’s profitability and adversely affect its financial condition. The substantial majority of the Company’s loans are to individuals and businesses located in Holmes, Stark, Tuscarawas, Wayne and surrounding counties in Ohio. Consequently, significant declines in north central Ohio real estate values could have a material adverse effect on the Company’s business, financial condition, or results of operations.

Changes in interest rates could adversely affect income and financial condition.

The Company’s results of operation and financial condition are substantially dependent upon net interest income, which is the difference between interest earned from loans and investments and interest paid on interest bearing deposits and borrowings. Market interest rates are largely beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies, in particular the FRB, as well as competitive factors. Changes in interest rates will influence the origination of loans, the purchase of investments, the level of prepayments on the Company’s loans and investments, and the receipt of payments on mortgage-backed securities, resulting in fluctuations of income and cash flow. Changes in interest rates also can affect the value of loans, securities, mortgage servicing rights, and assets under management. Although fluctuations in market interest rates are neither completely predictable nor controllable, the Company’s Asset Liability Committee (ALCO) meets regularly to monitor the Company’s interest rate sensitivity position and oversee the Company’s financial risk management by establishing policies and operating limits. Rising interest rates may adversely affect the ability of borrowers to pay the principal or interest on loans and may lead to an increase in nonperforming assets and a reduction of interest income recognized. The Board reviews interest rate conditions monthly and management maintains continuous surveillance of interest rate risk exposures. Fixed rate investment securities will lose value during rising rates and certain investment securities, notably mortgage-backed securities will experience a decrease in in prepayments of principal and interest, which will extend their maturity. For more information, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk in this Annual Report on Form 10-K, which summarizes the Company’s exposure to interest rate risk.

A transition away from LIBOR as a reference rate for financial contracts could negatively affect the Company’s income and expenses and the value of various financial contracts.

The London Interbank Offered Rate (“LIBOR”) is used extensively in the United States and globally as a reference rate for various commercial and financial contracts, including adjustable-rate mortgages, corporate debt, interest rate swaps, and other derivatives. In November 2020, the Federal Reserve Board issued a statement supporting the release of a proposal and supervisory statements designed to provide a clear end date for U.S. Dollar LIBOR (“USD LIBOR”), and the federal banking agencies issued a release encouraging banks to stop entering into USD LIBOR contracts by the end of 2021, noting that most legacy contracts will mature prior to the date LIBOR ceases to be issued. It is uncertain at this time the extent to which those entering into financial contracts will transition to any other particular benchmark. Other benchmarks may perform

 


 

differently than LIBOR or other alternative benchmarks or have other consequences that cannot currently be anticipated.  It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding when LIBOR ceases to exist.

 

The Federal Reserve Board, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large financial institutions, is considering replacing USD LIBOR with a new index calculated by short-term repurchase agreements, backed by United States Treasury securities, otherwise known as the Secured Overnight Financing Rate (“SOFR”). SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. The extent to which SOFR attains traction as a LIBOR replacement tool is not known, although transactions using SOFR have been completed, including by Fannie Mae. Both Fannie Mae and Freddie Mac ceased accepting adjustable-rate mortgages tied to LIBOR and began accepting mortgages based on SOFR in 2020, and many issuers are now utilizing SOFR.

 

As of December 31, 2020, the Company had three loans tied to LIBOR with balances of $13.1 million and total commitments of $23.6 million and seven investment securities tied to LIBOR with a fair market value of $3.7 million. One investment of $501 thousand matures in 2021 and the remaining $3.2 million in investment securities either receive principal repayment monthly or mature within 5 years. The potential transition away from LIBOR is not expected to have a significant direct impact on the Company’s financial statements. However, the extent of indirect impacts from financial market adjustments to the absence of LIBOR are unknown at this time.

A default by another larger financial institution could adversely affect financial markets generally.

Many financial institutions and their related operations are closely intertwined, and the soundness of such financial institutions may, to some degree, be interdependent. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses, or defaults by other institutions.  This “systemic risk” may adversely affect the Company’s business.

Risks Related to Legal, Regulatory, and Accounting Changes

Legislative, regulatory, or accounting changes or actions could adversely impact the Company or the businesses in which it is engaged.

The Company and its subsidiaries are subject to broad state and federal regulation, supervision, and legislation that govern almost all aspects of its operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, and the Deposit Insurance Fund, and not to benefit the Company’s shareholders. Changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by an institution, and the adequacy of an institution’s allowance for loan losses. Additionally, actions by regulatory agencies could cause the Company to devote significant time and resources to defending the Company’s business and may lead to penalties that materially affect the Company and its shareholders.

As discussed earlier, comprehensive revisions to the regulatory capital framework were included in the final rule adopted by the FRB in July 2014 based upon the Basel III capital standards. The final rule specifically revises what qualifies as regulatory capital, raises minimum requirements, and introduces the concept of additional capital buffers. The need to maintain more and higher quality capital as well as greater liquidity going forward could limit the Company’s business activities, including lending, and the Company’s ability to expand, either organically or through acquisitions. In addition, the new liquidity standards could require the Company to increase the Company’s holdings of highly liquid short-term investments, thereby reducing the Company’s ability to invest in longer-term assets even if longer-term assets are more desirable from a balance sheet management perspective.

In addition to laws, regulations, and actions directed at the operations of banks in general, the CFPB has adopted regulations directed at consumer lending in particular. As discussed above, in October 2017, the CFPB issued the Payday Rule with respect to certain consumer loans. The Company does not expect this new rule to have a material effect on the Bank’s lending business, or on the Company’s financial condition, and results of operations. The costs of complying with this regulation or a determination to discontinue certain types of consumer lending in light of the expense of compliance could have an adverse effect on the financial conditions and results of operations of the Company. The Company believes its current consumer lending practices are exempt from the Payday Rule.

Changes in tax laws could adversely affect the Company’s financial condition and results of operations.

The Company is subject to extensive federal, state, and local taxes, including income, excise, sales/use, payroll, franchise, withholding, and ad valorem taxes. Changes to the Company’s taxes could have a material adverse effect on our results of operations. In addition, the Company’s customers are subject to a wide variety of federal, state, and local taxes. Changes in taxes paid by the Company’s customers, including changes in the deductibility of mortgage loan related expenses, may adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for the Company’s loans and deposit products. In addition, such negative effects on the Company’s customers could result in defaults on the loans the Bank has made and decrease the value of mortgage-backed securities in which the Company has invested.

Increases in FDIC insurance premiums may have a material adverse effect on the Company’s earnings.

Increased bank failures for several years commencing in 2008 greatly increased resolution costs of the FDIC and depleted the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC took a number of actions, including increasing assessment rates of insured institutions, requiring riskier institutions to pay a larger share of premiums by factoring in rate

 


 

 

adjustments based on secured liabilities and unsecured debt levels, changing the assessment base and requiring a prepayment of assessments for over three years.

The Company is generally unable to control the amount of premiums that the Bank is required to pay for FDIC insurance. If there are additional financial institution failures, the Bank may be required to pay even higher FDIC premiums. Increases in FDIC insurance premiums may materially adversely affect the Company’s results of operations and its ability to continue to pay dividends on our common shares at the current rate or at all. The FDIC has recently adopted rules revising its assessments in a manner benefitting banks with assets totaling less than $10 billion. There can be no assurance though, that assessments will not be changed in the future.

Changes in accounting standards, policies, estimates, or procedures could impact the Company’s reported financial condition or results of operations.

Entities that set generally applicable accounting standards, such as the FASB, the Securities and Exchange Commission, and other regulatory boards periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes can be difficult to predict and can materially affect how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, which would result in the restatement of the Company’s financial statements for prior periods.

FASB has changed its requirements for establishing the allowance for credit losses.  The new accounting guidance requires banks to record, at the time of origination, credit losses expected throughout the life of the asset on loans, leases and held-to-maturity debt securities, as opposed to the current practice of recording losses when it is probable that a loss event has occurred. In November 2019, the FASB deferred the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these Accounting Standard Updates. Upon adoption of CECL, credit loss allowances may increase, which would decrease retained earnings and regulatory capital. The federal banking regulators have adopted a regulation that will allow banks to phase in the day-one impact of CECL on regulatory capital over three years. CECL implementation poses operational risk, including the failure to properly transition internal processes or systems, which could lead to call report errors, financial misstatements, or operational losses.

Management’s accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations. The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods in order to ensure that they comply with U.S. generally accepted accounting principles and reflect management’s judgment as to the most appropriate manner in which to record and report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in reporting materially different amounts than would have been reported under a different alternative.

Management has identified several accounting policies that are considered significant to the presentation of our financial condition and results of operations because they require management to make particularly subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. Because of the inherent uncertainty of estimates about these matters, no assurance can be given that the application of alternative policies or methods might not result in the Company reporting materially different amounts.

The Bank’s ability to pay dividends is subject to regulatory limitations which, to the extent the Company requires such dividends in the future, may affect its ability to pay dividends or repurchase its stock.

As a financial holding company, CSB is a separate legal entity from the Bank and does not have significant operations of its own. Dividends from the Bank provide a significant source of capital for CSB. The availability of dividends from the Bank is limited by various statutes and regulations. The FRB or Ohio Division of Financial Institutions, as the Bank’s primary regulators, could assert that the payment of dividends or other payments by the Bank are an unsafe or unsound practice. In the event the Bank is unable to pay dividends to CSB, CSB may not be able to pay its obligations as they become due, repurchase its stock, or pay dividends on its common stock. Consequently, the potential inability to receive dividends from the Bank could adversely affect CSB’s business, financial condition, results of operations, or prospects.

Periodic regulatory reviews may affect the Company’s operations and financial condition.

The Company is subject to periodic reviews from state and federal regulators, which may impact our operations and our financial condition. As part of the regulatory review, the loan portfolio and the allowance for loan losses are evaluated. As a result, the incurred loss identified on loans or the assigned loan rating could change and may require us to increase our provision for loan losses or loan charge-offs. In addition, any downgrade in loan ratings could impact our level of impaired loans or classified assets. Any increase in our provision for loan losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our financial condition and results of operations. Findings of deficiencies in compliance with regulations could result in restrictions on our activities or even a loss in our financial holding company status.

 


 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

The Bank operates sixteen banking centers as noted below:

 

 

 

 

 

 

 

 

 

 

 

 

Location

  

Address

  

        Owned        

  

        Leased        

Walnut Creek

  

4980 Old Pump Street, Walnut Creek, Ohio 44687

  

X

  

 

Winesburg

  

2225 U.S. 62, Winesburg, Ohio 44690

  

X

  

 

Sugarcreek

  

127 South Broadway, Sugarcreek, Ohio 44681

  

X

  

 

Charm

  

4440 C.R. 70, Charm, Ohio 44617

  

X

  

 

Clinton Commons

  

2102 Glen Drive, Millersburg, Ohio 44654

  

 

  

X

Berlin

  

4587 S.R. 39 Suite B, Berlin, Ohio 44610

  

 

  

X

South Clay

  

91 South Clay Street, Millersburg, Ohio 44654

  

X

  

 

Shreve

  

333 West South Street, Shreve, Ohio 44676

  

X

  

 

Orrville

  

119 West High Street, Orrville, Ohio 44667

  

X

  

 

Gnadenhutten

  

100 South Walnut Street, Gnadenhutten, Ohio 44629

  

X

  

 

New Philadelphia

  

635 West High Avenue, New Philadelphia, Ohio 44663

  

X

  

 

North Canton

  

1210 North Main Street, North Canton, Ohio 44720

  

 

  

X

North Canton1

 

600 South Main Street, North Canton, Ohio 44720

 

X

 

 

Bolivar

 

11113 Fairoaks Road NE, Bolivar, Ohio 44612

 

 

 

X

Wooster

  

350 East Liberty Street, Wooster, Ohio 44691

 

X

  

 

Wooster

  

3562 Commerce Parkway, Wooster, Ohio 44691

  

X

  

 

Operations Center

  

91 North Clay Street, Millersburg, Ohio 44654

  

X

  

 

 

1 Purchased 600 South Main Street, North Canton, Ohio, will close 1210 North Main Street office, and relocate mid-2021.

 

The Bank considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. All properties owned by the Bank are unencumbered by any mortgage or security interest and in management’s opinion, are adequately insured.

ITEM 3. LEGAL PROCEEDINGS.

In the normal course of business, CSB is subject to pending and threatened legal actions, including claims for which material relief or damages are sought. Although CSB is not able to predict the outcome of such actions, after reviewing pending and threatened actions, management believes that the outcome of any or all such actions will not have a material adverse effect on the results of operations, the financial position, or shareholders’ equity of CSB. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder, or affiliate of CSB is a party or has a material interest that is adverse to CSB or the Bank.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

 


 

 

PART II

ITEM 5. MARKET FOR REGISTRANT’ S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Information contained in the section captioned “Common Stock and Shareholder Information” on page 21 of CSB’s 2020 Annual Report is incorporated herein by reference.

PERFORMANCE GRAPH

The following graph compares the yearly stock change and the cumulative total shareholder return on CSB’s Common Shares during the five-year period ended December 31, 2020, with the cumulative total return on the Standard and Poor’s 500 Stock Index and the NASDAQ Community Bank Stock Index. The comparison assumes $100 was invested on December 31, 2015 in CSB’s Common Shares and in each of the indicated indices and assumes reinvestment of dividends.

 

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

CSBB

 

$

100

 

 

$

130

 

 

$

143

 

 

$

171

 

 

$

186

 

 

$

165

 

S & P 500

 

 

100

 

 

 

112

 

 

 

136

 

 

 

129

 

 

 

171

 

 

 

203

 

NASDAQ Bank

 

 

100

 

 

 

139

 

 

 

142

 

 

 

121

 

 

 

149

 

 

 

132

 

 

 

ISSUER PURCHASES OF EQUITY SECURITIES

On March 2, 2021, CSB filed a Current Report on Form 8-K with the SEC announcing that its Board of Directors approved a Stock Repurchase Program authorizing the repurchase of up to 5% of CSB’s common shares. Repurchases may be made periodically as market and business conditions warrant, in the open market, through block purchases and in negotiated private transactions. The Stock Repurchase Program has no scheduled expiration date. CSB did not repurchase any of its Common Shares during 2020. The prior share repurchase program adopted by the Company in June 2005 is terminated.

ITEM 6. SELECTED FINANCIAL DATA.

Information contained in the section captioned “Selected Financial Data” on page 8 of CSB’s 2020 Annual Report is incorporated herein by reference.

 


 

ITEM  7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Information contained in the section captioned “2020 Financial Review” on pages 7 through 21 of the Annual Report is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information contained in the section captioned “Quantitative and Qualitative Disclosures About Market Risk” on pages 17 through 19 of CSB’s 2020 Annual Report is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Information contained in the Consolidated Financial Statements and related notes and the Report of Independent Registered Public Accounting Firm thereon, which is filed as Part IV Item 15(a)(1) Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

With the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) was performed, as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective.

Internal Control over Financial Reporting

Information contained in the Report On Management’s Assessment of Internal Control Over Financial Reporting on page 22 of CSB’s 2020 Annual Report is incorporated herein by reference.

Changes in Internal Control over Financial Reporting

There have been no changes during the quarter ended December 31, 2020, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, CSB’s 2020 internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None

 


 

 

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

The information required by Item 401 of Regulation S-K concerning the directors of the Company and the nominees for election as directors of the Company at the Annual Meeting of Shareholders to be held on April 28, 2021 (the “2021 Annual Meeting”), is incorporated herein by reference from the information to be included under the captions “Proposal One – Election of Directors,” “Nominees for Election of Directors,” and “Directors Continuing in Office” in the Company’s definitive proxy statement relating to the 2021 Annual Meeting to be filed with the SEC (the “2021 Proxy Statement”) no later than 120 days after December 31, 2020. The information required by Item 401 of Regulation S-K concerning the executive officers of the Company is incorporated herein by reference from the information to be included under the caption “Executive Officers” in the 2021 Proxy Statement.

Code of Ethics

The Company has adopted a Code of Ethics that applies to its senior financial officers, including the Chief Executive Officer and Chief Financial Officer. The Company has posted its Code of Ethics on its website at www.csb1.com; select Investor Relations/Corporate Governance/Governance Documents. The Company plans to satisfy SEC disclosure requirements regarding any amendments to, or waiver of, the Code of Ethics relating to its Chief Executive Officer or Chief Financial Officer, and persons performing similar functions, by posting such information on the Company’s website or by making any necessary filings with the SEC. Any person may receive a copy of our Code of Ethics free of charge upon request by calling the Company during business hours or by sending a written request.

Procedures for Recommending Director Nominees

Information concerning the procedures by which shareholders may recommend nominees to the Company’s Board of Directors can be found under the caption “Shareholder Recommendations” in the 2021 Proxy Statement. These procedures have not materially changed from those described in the 2020 Proxy Statement.

Audit Committee

The information required by Items 407(d)(4) and (d)(5) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the sections “Membership and Meetings of the Board and its Committees” and the subsection “Committees of the Board of Directors – Audit Committee” in the 2021 Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 402 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the sections “Discussion of Executive Compensation Programs” and “Executive Compensation and Other Information” and the subsection “Directors’ Compensation” under the section captioned “Membership and Meetings of the Board and its Committees” in the 2021 Proxy Statement.

The information required by Item 407(e)(4) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “Compensation Committee Interlocks and Insider Participation” in the 2021 Proxy Statement.

The information required by Item 407(e)(5) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “The Compensation Committee Report” in the 2021 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Equity Compensation Plan Information

None.

Security Ownership of Certain Beneficial Owners and Management

The information required by Item 403 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “Beneficial Ownership of Management and Certain Beneficial Owners” in the 2021 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by Item 404 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “Certain Relationships and Related Transactions” in the 2021 Proxy Statement.

The information required by Item 407(a) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “Membership and Meetings of the Board and its Committees” in the 2021 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this Item 14 is incorporated herein by reference from the disclosure to be included under the section “Independent Registered Public Accounting Firm Fees” and subsection “Audit Committee Procedures for Pre-Approval of Services by the Independent Public Accounting Firm” in the 2021 Proxy Statement.

 


 

PART IV

ITEM  15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

(a)(1)Financial Statements

 

 

 

Report of Independent Registered Public Accounting Firm (S.R. Snodgrass)

 

 

Consolidated Balance Sheets on December 31, 2020 and 2019

 

 

Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018

 

 

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018

 

 

Notes to Consolidated Financial Statements

 

 

 

(a)(2) Financial Statement Schedules

All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have been omitted.

 

(a)(3) Exhibits

The documents listed in the Index to Exhibits that immediately precedes the "Signatures" pages of this Annual Report on Form 10-K are filed or furnished with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference.

 

(b)Exhibits Required by Item 601 of Regulation S-K.

 

 

(c)Financial Statement Schedules

Certain schedules have been omitted because the required information is included in the consolidated financial statements and notes thereto or because they are not applicable or not required.

 

ITEM 16. FORM 10-K SUMMARY.

None.

 

 

 


 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Shareholders and the Board of Directors of CSB Bancorp, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of CSB Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and 2019; the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses (ALL) – Qualitative Factors

Description of the Matter

The Company’s loan portfolio totaled $610 million as of December 31, 2020, and the associated ALL was $8.3 million. As discussed in Notes 1 and 3 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.

 

 


 

 

Critical Audit Matters (continued)

Allowance for Loan Losses (ALL) – Qualitative Factors (Continued)

Furthermore, concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause borrowers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained loan repayment shortfalls, significant loan delinquencies, foreclosures, declines in collateral values, and credit losses could result in, and significantly impact, the overall adequacy of the ALL. The extent of COVID-19’s effects on business, operations, or the global economy as a whole is highly uncertain and cannot be predicted, including the scope and duration of the pandemic, which increases the degree of subjectivity involved in estimating the related qualitative factors within the ALL.

We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity and are highly difficult to estimate based on the uncertainty of the pandemic. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.

How We Addressed the Matter in Our Audit

We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL as well as the reliability of the data utilized to support management’s assessment.To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL and the need to consider qualitative adjustments, including the potential effect of COVID-19 on the adjustments.

 

Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data to the Company’s historical loan performance data, third-party macroeconomic data, and other internal and external data point and considered the existence of new or contrary information. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external economic factors, the Company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers affected by the COVID-19 pandemic and the supporting documentation for substantiating revisions to qualitative factors

 

We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.

 

 

 

We have served as the Company’s auditor since 2005.

 

Cranberry Township, Pennsylvania

March 1, 2021

 

 

 

 

 


 

 

 

CONSOLIDATED BALANCE SHEETS

At December 31, 2020 and 2019

 

(Dollars in thousands, except share data)

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

19,281

 

 

$

17,648

 

Interest-earning deposits in other banks

 

 

162,371

 

 

 

84,369

 

Total cash and cash equivalents

 

 

181,652

 

 

 

102,017

 

 

 

 

 

 

 

 

 

 

Securities

 

 

 

 

 

 

 

 

Available-for-sale, at fair value

 

 

190,438

 

 

 

112,146

 

Held-to-maturity; fair value of $9,225 in 2020 and $13,950 in 2019

 

 

9,045

 

 

 

13,869

 

Equity securities

 

 

87

 

 

 

92

 

Restricted stock, at cost

 

 

4,614

 

 

 

4,614

 

Total securities

 

 

204,184

 

 

 

130,721

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

 

1,378

 

 

 

622

 

 

 

 

 

 

 

 

 

 

Loans

 

 

609,159

 

 

 

551,633

 

Less allowance for loan losses

 

 

8,274

 

 

 

7,017

 

Net loans

 

 

600,885

 

 

 

544,616

 

 

 

 

 

 

 

 

 

 

Premises and equipment, net

 

 

12,633

 

 

 

12,040

 

Core deposit intangible

 

 

44

 

 

 

104

 

Goodwill

 

 

4,728

 

 

 

4,728

 

Bank-owned life insurance

 

 

21,416

 

 

 

18,894

 

Accrued interest receivable and other assets

 

 

4,712

 

 

 

4,941

 

TOTAL ASSETS

 

$

1,031,632

 

 

$

818,683

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

272,051

 

 

$

197,780

 

Interest-bearing

 

 

619,511

 

 

 

485,766

 

Total deposits

 

 

891,562

 

 

 

683,546

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

 

37,215

 

 

 

38,889

 

Other borrowings

 

 

4,664

 

 

 

6,330

 

Accrued interest payable and other liabilities

 

 

4,332

 

 

 

4,442

 

Total liabilities

 

 

937,773

 

 

 

733,207

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock, $6.25 par value. Authorized 9,000,000 shares; issued

   2,980,602 shares; and outstanding 2,742,350 shares in 2020 and 2019

 

 

18,629

 

 

 

18,629

 

Additional paid-in capital

 

 

9,815

 

 

 

9,815

 

Retained earnings

 

 

69,209

 

 

 

61,740

 

Treasury stock at cost: 238,252 shares in 2020 and 2019

 

 

(4,780

)

 

 

(4,780

)

Accumulated other comprehensive income

 

 

986

 

 

 

72

 

Total shareholders’ equity

 

 

93,859

 

 

 

85,476

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,031,632

 

 

 

818,683

 

 

These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.

 


 

 

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2020, 2019, and 2018

 

(Dollars in thousands, except per share data)

 

2020

 

 

2019

 

 

2018

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

28,354

 

 

$

28,553

 

 

$

26,237

 

Taxable securities

 

 

1,882

 

 

 

2,247

 

 

 

2,371

 

Nontaxable securities

 

 

464

 

 

 

532

 

 

 

608

 

Other

 

 

366

 

 

 

1,129

 

 

 

421

 

Total interest and dividend income

 

 

31,066

 

 

 

32,461

 

 

 

29,637

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,723

 

 

 

3,609

 

 

 

2,372

 

Short-term borrowings

 

 

89

 

 

 

317

 

 

 

333

 

Other borrowings

 

 

101

 

 

 

136

 

 

 

181

 

Total interest expense

 

 

2,913

 

 

 

4,062

 

 

 

2,886

 

NET INTEREST INCOME

 

 

28,153

 

 

 

28,399

 

 

 

26,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

 

1,650

 

 

 

1,140

 

 

 

1,316

 

Net interest income, after provision for loan losses

 

 

26,503

 

 

 

27,259

 

 

 

25,435

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

1,003

 

 

 

1,252

 

 

 

1,182

 

Trust services

 

 

896

 

 

 

899

 

 

 

863

 

Debit card interchange fees

 

 

1,661

 

 

 

1,481

 

 

 

1,316

 

Gain on sale of loans, net

 

 

1,951

 

 

 

462

 

 

 

307

 

Earnings on bank owned life insurance

 

 

522

 

 

 

446

 

 

 

336

 

Unrealized gain (loss) on equity securities

 

 

(4

)

 

 

9

 

 

 

(6

)

Other income

 

 

906

 

 

 

879

 

 

 

760

 

Total noninterest income

 

 

6,935

 

 

 

5,428

 

 

 

4,758

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

11,707

 

 

 

11,663

 

 

 

10,895

 

Occupancy expense

 

 

953

 

 

 

832

 

 

 

833

 

Equipment expense

 

 

657

 

 

 

571

 

 

 

597

 

Professional and director fees

 

 

1,284

 

 

 

1,332

 

 

 

1,029

 

Financial institutions and franchise tax

 

 

684

 

 

 

612

 

 

 

564

 

Marketing and public relations

 

 

398

 

 

 

535

 

 

 

508

 

Software expense

 

 

1,101

 

 

 

938

 

 

 

893

 

Debit card expense

 

 

621

 

 

 

554

 

 

 

537

 

Amortization of intangible assets

 

 

60

 

 

 

63

 

 

 

101

 

FDIC insurance expense

 

 

203

 

 

 

98

 

 

 

276

 

Other expenses

 

 

2,674

 

 

 

2,571

 

 

 

2,285

 

Total noninterest expenses

 

 

20,342

 

 

 

19,769

 

 

 

18,518

 

INCOME BEFORE INCOME TAXES

 

 

13,096

 

 

 

12,918

 

 

 

11,675

 

FEDERAL INCOME TAX PROVISION

 

 

2,528

 

 

 

2,504

 

 

 

2,263

 

NET INCOME

 

$

10,568

 

 

$

10,414

 

 

$

9,412

 

EARNING PER SHARE

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

3.85

 

 

$

3.80

 

 

$

3.43

 

 

These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.

 

 


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2020, 2019, and 2018

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

Net income

 

$

10,568

 

 

$

10,414

 

 

$

9,412

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

 

1,094

 

 

 

1,803

 

 

 

(989

)

Amounts reclassified from accumulated other comprehensive

   income, held-to-maturity

 

 

63

 

 

 

75

 

 

 

78

 

Income tax effect at 21%

 

 

(243

)

 

 

(394

)

 

 

191

 

Other comprehensive income (loss)

 

 

914

 

 

 

1,484

 

 

 

(720

)

Total comprehensive income

 

$

11,482

 

 

$

11,898

 

 

$

8,692

 

 

These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.

 

 


 

 

CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS’ EQUITY

Years Ended December 31, 2020, 2019, and 2018

 

(Dollars in thousands)

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

BALANCE AT DECEMBER 31, 2017

 

$

18,629

 

 

$

9,815

 

 

$

47,535

 

 

$

(4,784

)

 

$

(663

)

 

$

70,532

 

Net income

 

 

 

 

 

 

 

 

9,412

 

 

 

 

 

 

 

 

 

9,412

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(720

)

 

 

(720

)

Cumulative effect adjustment equity securities,

   related to ASU 2016-01

 

 

 

 

 

 

 

 

29

 

 

 

 

 

 

(29

)

 

 

 

Cash dividends declared, $0.98 per share

 

 

 

 

 

 

 

 

(2,688

)

 

 

 

 

 

 

 

 

(2,688

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2018

 

$

18,629

 

 

$

9,815

 

 

$

54,288

 

 

$

(4,784

)

 

$

(1,412

)

 

$

76,536

 

Net income

 

 

 

 

 

 

 

 

10,414

 

 

 

 

 

 

 

 

 

10,414

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,484

 

 

 

1,484

 

Issuance of 108 treasury shares

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

4

 

Cash dividends declared, $1.08 per share

 

 

 

 

 

 

 

 

(2,962

)

 

 

 

 

 

 

 

 

(2,962

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2019

 

$

18,629

 

 

$

9,815

 

 

$

61,740

 

 

$

(4,780

)

 

$

72

 

 

$

85,476

 

Net income

 

 

 

 

 

 

 

 

10,568

 

 

 

 

 

 

 

 

 

10,568

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

914

 

 

 

914

 

Cash dividends declared, $1.13 per share

 

 

 

 

 

 

 

 

(3,099

)

 

 

 

 

 

 

 

 

(3,099

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2020

 

$

18,629

 

 

$

9,815

 

 

$

69,209

 

 

$

(4,780

)

 

$

986

 

 

$

93,859

 

 

These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.

 


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2020, 2019, and 2018

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,568

 

 

$

10,414

 

 

$

9,412

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization of premises, equipment

   and software

 

 

853

 

 

 

745

 

 

 

799

 

Deferred income taxes

 

 

(36

)

 

 

66

 

 

 

93

 

Provision for loan losses

 

 

1,650

 

 

 

1,140

 

 

 

1,316

 

Gain on sale of loans, net

 

 

(1,951

)

 

 

(462

)

 

 

(307

)

Loss on sale of other real estate

 

 

4

 

 

 

 

 

 

(10

)

Gain on sale of assets

 

 

(22

)

 

 

 

 

 

 

Security amortization, net of accretion

 

 

926

 

 

 

478

 

 

 

480

 

Secondary market loan sale proceeds

 

 

60,765

 

 

 

19,671

 

 

 

10,749

 

Originations of secondary market loans held-for-sale

 

 

(59,410

)

 

 

(19,820

)

 

 

(10,356

)

Earnings on bank-owned life insurance

 

 

(522

)

 

 

(446

)

 

 

(336

)

Effects of changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Net deferred loan fees (costs)

 

 

1,169

 

 

 

46

 

 

 

(22

)

Accrued interest receivable

 

 

(518

)

 

 

(60

)

 

 

(36

)

Accrued interest payable

 

 

(36

)

 

 

39

 

 

 

(2

)

Other assets and liabilities

 

 

732

 

 

 

87

 

 

 

508

 

Net cash provided by operating activities

 

$

14,172

 

 

$

11,898

 

 

$

12,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from repayments, available-for-sale

 

$

54,315

 

 

$

20,597

 

 

$

15,713

 

Proceeds from repayments, held-to-maturity

 

 

8,280

 

 

 

6,861

 

 

 

7,137

 

Purchases, available-for-sale

 

 

(132,406

)

 

 

(45,858

)

 

 

(5,007

)

Purchases, held-to-maturity

 

 

(3,425

)

 

 

 

 

 

(2,029

)

Purchase of bank-owned life insurance

 

 

(2,000

)

 

 

(4,894

)

 

 

 

Loan originations, net of repayments

 

 

(59,547

)

 

 

(2,734

)

 

 

(33,253

)

Proceeds from sale of other real estate

 

 

95

 

 

 

 

 

 

30

 

Proceeds from sale of assets

 

 

716

 

 

 

 

 

 

 

Purchases of premises and equipment

 

 

(1,990

)

 

 

(2,655

)

 

 

(1,315

)

Purchases of software

 

 

(152

)

 

 

(131

)

 

 

(22

)

Net cash used in investing activities

 

$

(136,114

)

 

$

(28,814

)

 

$

(18,746

)

 

These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.

 


 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2020, 2019, and 2018

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

Net change in deposits

 

$

208,016

 

 

$

77,048

 

 

$

23,239

 

Net change in short-term borrowings

 

 

(1,674

)

 

 

1,474

 

 

 

(2,065

)

Proceeds from other borrowings

 

 

5,000

 

 

 

 

 

 

 

Repayment of other borrowings

 

 

(6,666

)

 

 

(2,195

)

 

 

(2,884

)

Cash dividends paid

 

 

(3,099

)

 

 

(2,962

)

 

 

(2,688

)

Issuance of treasury stock

 

 

 

 

 

4

 

 

 

 

Net cash provided by financing activities

 

$

201,577

 

 

$

73,369

 

 

$

15,602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

79,635

 

 

 

56,453

 

 

 

9,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

 

 

102,017

 

 

 

45,564

 

 

 

36,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

 

$

181,652

 

 

$

102,017

 

 

$

45,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

2,950

 

 

$

4,023

 

 

$

2,888

 

Income taxes

 

 

2,300

 

 

 

4,725

 

 

 

2,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncash investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Transfer of loans to other real estate owned

 

 

 

 

 

 

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease adoption:

 

 

 

 

 

 

 

 

 

 

 

 

Right of use lease asset

 

 

 

 

477

 

 

 

 

Lease liability

 

 

 

 

469

 

 

 

 

 

These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.

 

 

 

 


 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CSB Bancorp, Inc. (the “Company” or “CSB”) was incorporated in 1991 in the State of Ohio, and is a registered bank holding company. The Company’s wholly-owned subsidiaries are The Commercial and Savings Bank of Millersburg, Ohio (the “Bank”) and CSB Investment Services, LLC. The Company, through its subsidiaries, operates in one industry segment, the commercial banking industry.

The Bank, an Ohio-chartered bank organized in 1879, provides financial services through its sixteen Banking Centers located in Holmes, Stark, Tuscarawas and Wayne counties. These communities are the source of a substantial majority of the Bank’s deposit, loan, and trust activities. The majority of the Bank’s income is derived from commercial and retail lending activities, and investments in securities. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential real estate, commercial real estate, commercial, and installment loans. Substantially, all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid with cash flow from business operations. Real estate loans are secured by both residential and commercial real estate.

Significant accounting policies followed by the Company are presented below:

USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

In preparing the Consolidated Financial Statements, in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions affecting the reported amounts of assets and liabilities as of the date of the Consolidated Balance Sheets and reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. The most significant estimates susceptible to change in the near term relate to management’s determination of the allowance for loan losses and the fair value of financial instruments.

PRINCIPLES OF CONSOLIDATION

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

The Bank has a trust department and the assets held by the Bank in fiduciary or agency capacities for its customers are not included in the Consolidated Balance Sheets as such items are not assets of the Bank.

CASH AND CASH EQUIVALENTS

For purposes of the Consolidated Statements of Cash Flows, cash, and cash equivalents include cash on hand and amounts due from banks which mature overnight or within ninety days.

CASH RESERVE REQUIREMENTS

The Bank generally is required by the Federal Reserve to maintain reserves consisting of cash on hand and noninterest-earning balances on deposit with the Federal Reserve Bank. There was no required reserve balance as of December 31, 2020 and $919 thousand as of December 31, 2019, respectively.

DEBT SECURITIES

At the time of purchase all debt securities are evaluated and designated as available-for-sale or held-to-maturity. Securities designated as available-for-sale are carried at fair value with unrealized gains and losses on such securities, net of applicable income taxes, recognized as other comprehensive income or loss. Held-to-maturity securities are carried at their fair value on the date of transfer or at amortized cost if security purchases are designated as held-to-maturity. On December 31, 2020, 4% of the total investment portfolio was classified as held-to-maturity. The amortized cost of debt securities is adjusted for the accretion of discounts to maturity and the amortization of premiums to the earlier of a bond’s call date or maturity based on the interest method. Such amortization and accretion is included in interest and dividends on securities.

Gains and losses on sales of securities are accounted for on a trade date basis, using the specific identification method, and are included in noninterest income. Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to: the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the receipt of principal and interest according to the contractual terms, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its market value and management’s intent, and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors considered in determining management’s intent and ability to hold the security, is a review of the Company’s capital adequacy, interest rate risk position, and liquidity. The assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations, and management’s intent and ability to hold the security requires considerable judgment. A decline in value considered to be other-than-temporary, is recorded as a loss within noninterest income in the Consolidated Statements of Income.

 


 

 

EQUITY SECURITIES

Equity securities are held at fair value. Holding gains and losses are recorded in income. Dividends on equity securities are recognized as income when earned.

RESTRICTED STOCK

Investments in FHLB and Federal Reserve Bank stock are classified as restricted stock, carried at cost, and evaluated for impairment. The Bank is required to maintain an investment in common stock of the FHLB and Federal Reserve Bank because the Bank is a member of the FHLB and the Federal Reserve System.

LOANS

Loans that management has the intent and ability to hold for the foreseeable future, until maturity, or pay-off, generally are stated at their outstanding principal amount, adjusted for charge-offs, the allowance for loan losses, and any deferred loan fees or costs on originated loans. Interest is accrued based upon the daily outstanding principal balance. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield over the life of the related loan.

Interest income is not reported when full repayment is in doubt, typically when the loan is impaired, or payments are past due over 90 days. All interest accrued, but not collected for loans placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

At origination, a determination is made whether a loan will be held in the Bank’s portfolio or is intended for sale in the secondary market. Mortgage loans held for sale are recorded at the lower of the aggregate cost or fair value. Generally, these loans are held for sale for less than three (3) days. The Bank recognizes gains and losses on sales of the loans held for sale when the sale is completed.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans experiencing insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate, construction loans, and troubled debt restructurings by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential real estate or consumer loans for impairment disclosures.

OTHER REAL ESTATE OWNED

Other real estate acquired through or in lieu of foreclosure is initially recorded at fair value, less estimated costs to sell, and any loan balance in excess of fair value is charged to the allowance for loan losses. Subsequent valuations are periodically performed and write-downs are included in noninterest expenses, as well as expenses related to maintenance of the properties. Gains or losses upon sale are recorded through noninterest income. Other real estate owned amounted to $0 and $99 thousand on December 31, 2020 and 2019, respectively.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization are determined based on the estimated useful lives of the individual assets (typically 20 to 40 years for buildings and 3 to 10 years for equipment) and is computed using the straight-line method. Leasehold improvements are amortized over the useful life of the asset, or lease term, whichever is shorter. Expenses for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.

 


 

GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS

Goodwill is not amortized, but is tested for impairment at least annually in the fourth quarter or more frequently if indicators of impairment are present. The evaluation for impairment involves comparing the current fair value of the reporting unit to the carrying value, including goodwill. If the current fair value of a reporting unit exceeds the carrying value, no additional testing is required, and an impairment loss is not recorded. The Company uses market capitalization and multiples of tangible book value methods to determine the estimated current fair value of its reporting unit. Based on this analysis no impairment was recorded in 2020, 2019 or 2018.

The core deposit intangible assets are assigned useful lives, which are amortized on an accelerated basis over their weighted average lives. The Company periodically reviews the intangible asset for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

MORTGAGE SERVICING RIGHTS

Mortgage servicing rights (“MSRs”) represent the right to service loans for third party investors. MSRs are recognized as a separate asset upon the sale of mortgage loans to a third-party investor with the servicing rights retained by the Company. Originated MSRs are recorded at allocated fair value at the time of the sale of the loans to the third-party investor. MSRs are amortized in proportion to and over the estimated period of net servicing income. MSRs are carried at amortized cost, less a valuation allowance for impairment, if any. MSRs are evaluated on a discounted earnings basis to determine the present value of future earnings of the underlying serviced mortgages. All assumptions are reviewed annually, or more frequently if necessary, adjusted to reflect current, and anticipated market conditions.

BANK-OWNED LIFE INSURANCE

The cash surrender value of bank-owned life insurance policies is included as an asset on the Consolidated Balance Sheets and any increases in the cash surrender value are recorded as noninterest income on the Consolidated Statements of Income. In the event of the death of an individual insured under these policies, the Company would receive a death benefit, which would be recorded as noninterest income.

REPURCHASE AGREEMENTS

Substantially all securities sold under repurchase agreements represent amounts advanced by various customers. Securities owned by the Bank are pledged to secure those obligations. Repurchase agreements are not deposits and are not covered by federal deposit insurance.

ADVERTISING COSTS

All advertising costs are expensed as incurred. Advertising expenses amounted to $165 thousand, $223 thousand, and $215 thousand for the years ended 2020, 2019, and 2018, respectively.

FEDERAL INCOME TAXES

The Company and its subsidiaries file a consolidated tax return. Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their respective tax bases. Deferred tax assets are recognized for temporary differences deductible in future years’ tax returns and for operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences taxable in future years’ tax returns.

The Bank, domiciled in Ohio, is not currently subject to state and local income taxes.

COMPREHENSIVE INCOME

The Company includes recognized revenue, expenses, gains, and losses in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the Consolidated Balance Sheets, net of tax, these items along with net income are components of comprehensive income.

TRANSFERS OF FINANCIAL ASSETS

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions constraining it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

PER SHARE DATA

Earnings per share is computed based on the weighted average number of shares of common stock outstanding during each year. The company currently maintains a simple capital structure, thus, there are no dilutive effects on earnings per share.

 


 

The weighted average number of common shares outstanding for earnings per share computations was as follows:

 

 

 

2020

 

 

2019

 

 

2018

 

Weighted average common shares

 

 

2,980,602

 

 

 

2,980,602

 

 

 

2,980,602

 

Average treasury shares

 

 

(238,252

)

 

 

(238,306

)

 

 

(238,360

)

Total weighted average common shares outstanding basic and diluted

 

 

2,742,350

 

 

 

2,742,296

 

 

 

2,742,242

 

 

Dividends per share are based on the number of shares outstanding at the declaration date.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ASU 2016-13 - Financial Instruments - Credit Losses. The Update and all subsequent ASU’s that modified Topic 326, requires 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. 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. In November 2019, the FASB deferred the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASU’s.

ASU 2017-04 - Simplifying the Test for Goodwill Impairment. The Update, and all subsequent ASU’s, 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. In November 2019, the FASB deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a material 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 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. In November 2019, the FASB deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

 

ASU 2019-12 - Income Taxes. This update simplifies the accounting for income taxes, changes the accounting for certain tax transactions, and makes minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized as a separate transaction. The Update also changes current guidance for making an intra-period allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. This update is not expected to have a significant impact on the Company’s financial statements.

ASU 2020-4 – Reference Rate Reform (Topic 848).  This update provides temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients allowing them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.

 


 

RECLASSIFICATION OF COMPARATIVE AMOUNTS

Certain comparative amounts from the prior years have been reclassified to conform to current year classifications. Such classifications had no effect on net income or shareholders’ equity.

NOTE 2 – SECURITIES

Securities consisted of the following on December 31:

 

(Dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury security

 

$

999

 

 

$

12

 

 

$

 

 

$

1,011

 

U.S. Government agencies

 

 

13,998

 

 

 

8

 

 

 

 

 

 

14,006

 

Mortgage-backed securities of government agencies

 

 

138,964

 

 

 

1,184

 

 

 

(136

)

 

 

140,012

 

Asset-backed securities of government agencies

 

 

848

 

 

 

 

 

 

(11

)

 

 

837

 

State and political subdivisions

 

 

23,422

 

 

 

544

 

 

 

 

 

 

23,966

 

Corporate bonds

 

 

10,841

 

 

 

42

 

 

 

(277

)

 

 

10,606

 

Total available-for-sale

 

 

189,072

 

 

 

1,790

 

 

 

(424

)

 

 

190,438

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities of government agencies

 

 

5,620

 

 

 

192

 

 

 

(12

)

 

 

5,800

 

State and political subdivisions

 

 

3,425

 

 

 

 

 

 

 

 

 

3,425

 

Total held-to-maturity

 

 

9,045

 

 

 

192

 

 

 

(12

)

 

 

9,225

 

Equity securities

 

 

53

 

 

 

34

 

 

 

 

 

 

87

 

Restricted stock

 

 

4,614

 

 

 

 

 

 

 

 

 

4,614

 

Total securities

 

$

202,784

 

 

$

2,016

 

 

$

(436

)

 

$

204,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury security

 

$

998

 

 

$

1

 

 

$

 

 

$

999

 

U.S. Government agencies

 

 

5,500

 

 

 

 

 

 

(4

)

 

 

5,496

 

Mortgage-backed securities of government agencies

 

 

75,676

 

 

 

326

 

 

 

(145

)

 

 

75,857

 

Asset-backed securities of government agencies

 

 

934

 

 

 

 

 

 

(17

)

 

 

917

 

State and political subdivisions

 

 

21,161

 

 

 

351

 

 

 

(1

)

 

 

21,511

 

Corporate bonds

 

 

7,605

 

 

 

23

 

 

 

(262

)

 

 

7,366

 

Total available-for-sale

 

 

111,874

 

 

 

701

 

 

 

(429

)

 

 

112,146

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

4,999

 

 

 

 

 

 

(6

)

 

 

4,993

 

Mortgage-backed securities of government agencies

 

 

8,870

 

 

 

143

 

 

 

(56

)

 

 

8,957

 

Total held-to-maturity

 

 

13,869

 

 

 

143

 

 

 

(62

)

 

 

13,950

 

Equity securities

 

 

53

 

 

 

39

 

 

 

 

 

 

92

 

Restricted stock

 

 

4,614

 

 

 

 

 

 

 

 

 

4,614

 

Total securities

 

$

130,410

 

 

$

883

 

 

$

(491

)

 

$

130,802

 

 

 


 

 

The amortized cost and fair value of debt securities on December 31, 2020, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)

 

Amortized

Cost

 

 

Fair

Value

 

Available-for-sale

 

 

 

 

 

 

 

 

Due in one year or less

 

$

3,938

 

 

$

3,977

 

Due after one through five years

 

 

23,304

 

 

 

23,546

 

Due after five through ten years

 

 

29,981

 

 

 

30,141

 

Due after ten years

 

 

131,849

 

 

 

132,774

 

Total debt securities available-for-sale

 

$

189,072

 

 

$

190,438

 

 

 

 

 

 

 

 

 

 

Held-to-maturity

 

 

 

 

 

 

 

 

Due in one year or less

 

$

3,425

 

 

$

3,425

 

Due after five through ten years

 

 

263

 

 

 

263

 

Due after ten years

 

 

5,357

 

 

 

5,537

 

Total debt securities held-to-maturity

 

$

9,045

 

 

$

9,225

 

 

Securities with a carrying value of approximately $91.0 million and $80.3 million were pledged on December 31, 2020 and 2019 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 FHLB and Federal Reserve Bank stock. The Bank’s investment in FHLB stock amounted to $4.1 million on December 31, 2020 and 2019, respectively. Federal Reserve Bank stock was $471 thousand on December 31, 2020 and 2019.

There were no proceeds from sales of debt securities for the years ended December 31, 2020, 2019, and 2018. Gains and losses recognized on equity securities on the statement of income of $(4) thousand, $9 thousand, and $(6) thousand for the years ended December 31, 2020, 2019, and 2018 were unrealized.

 

 


 

 

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

 

 

 

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

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities of government

   agencies

 

$

(70

)

 

$

10,808

 

 

$

(66

)

 

$

8,974

 

 

$

(136

)

 

$

19,782

 

Asset-backed securities of government

   agencies

 

 

 

 

 

 

 

 

(11

)

 

 

837

 

 

 

(11

)

 

 

837

 

Corporate bonds

 

 

(32

)

 

 

1,968

 

 

 

(245

)

 

 

3,733

 

 

 

(277

)

 

 

5,701

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities of government

   agencies

 

 

(12

)

 

 

1,734

 

 

 

-

 

 

 

-

 

 

 

(12

)

 

 

1,734

 

Total temporarily impaired securities

 

$

(114

)

 

$

14,510

 

 

$

(322

)

 

$

13,544

 

 

$

(436

)

 

$

28,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

 

 

$

 

 

$

(4

)

 

$

3,496

 

 

$

(4

)

 

$

3,496

 

Mortgage-backed securities of government

   agencies

 

 

(74

)

 

 

22,702

 

 

 

(71

)

 

 

8,924

 

 

 

(145

)

 

 

31,626

 

Asset-backed securities of government

   agencies

 

 

 

 

 

 

 

 

(17

)

 

 

917

 

 

 

(17

)

 

 

917

 

State and political subdivisions

 

 

 

 

 

 

 

 

(1

)

 

 

653

 

 

 

(1

)

 

 

653

 

Corporate bonds

 

 

 

 

 

 

 

 

(262

)

 

 

3,712

 

 

 

(262

)

 

 

3,712

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

 

 

 

 

 

 

(6

)

 

 

4,993

 

 

 

(6

)

 

 

4,993

 

Mortgage-backed securities of government

   agencies

 

 

 

 

 

 

 

 

(56

)

 

 

3,009

 

 

 

(56

)

 

 

3,009

 

Total temporarily impaired securities

 

 

(74

)

 

$

22,702

 

 

$

(417

)

 

$

25,704

 

 

$

(491

)

 

$

48,406

 

 

There were 26 securities in an unrealized loss position on December 31, 2020, sixteen (16) of which were in a continuous loss position for twelve (12) or more months. 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, 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 and 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 on December 31, 2020.

 

NOTE 3 – LOANS

Loans consisted of the following on December 31:

 

(Dollars in thousands)

 

2020

 

 

2019

 

Commercial

 

$

191,540

 

 

$

137,114

 

Commercial real estate

 

 

187,221

 

 

 

196,748

 

Residential real estate

 

 

177,155

 

 

 

174,259

 

Construction & land development

 

 

36,038

 

 

 

23,960

 

Consumer

 

 

17,916

 

 

 

19,052

 

Total loans before deferred loan (fees) and costs

 

 

609,870

 

 

 

551,133

 

Deferred loan (fees) and costs

 

 

(711

)

 

 

500

 

Total loans

 

$

609,159

 

 

$

551,633

 

 

 


 

 

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. Management reviews and the Board of Directors 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 their 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. However, the cash flows of borrowers 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 generally 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.

With respect to loans to developers and builders 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, lease rates, and financial analysis of 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. Construction and land development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the 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 permanent financing from the Company. 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. Policies and procedures are developed and modified, as needed, by management to monitor and manage consumer loan risk. This activity, coupled with relatively small loan amounts spread across many individual borrowers, minimizes risk.

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

 

Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020 and provided over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. The PPP provides loans to small businesses who have been affected by economic conditions as a result of COVID-19 to provide cash flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. During 2020, the Company originated 793 PPP loans with principal balances of $92.1 million. The PPP loans are 100% guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made if certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. As of December 31, 2020, the Company has received $22 million in loan forgiveness from the SBA.  The remaining $70.1 million of PPP loans are included in the Commercial loan category with no allowance for loan losses allocated.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $3.2 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and are being amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2. During 2020, $1.9 million of these fees were recognized in income.

 


 

Concentrations of Credit

Nearly all 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 industrial and commercial real estate loans. Credit concentrations, including commitments, as determined using North American Industry Classification Codes (NAICS), to the four largest industries compared to total loans at December 31, 2020, included $46 million, or 8%, of total loans to lessors of non-residential buildings or dwellings; $34 million, or 6%, of total loans to assisted living facilities for the elderly; $30 million, or 5%, of total loans to logging, sawmills, and timber tract operations; and $25 million, or 4%, of total loans to borrowers in the hotel, motel, and lodging business. These loans are generally secured by real property and equipment, with repayment expected from operational cash flow. Credit evaluation is based on a review of cash flow coverage of principal, interest payments, and the adequacy of the collateral received.

Allowance for Loan Losses

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2020, 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.

During 2020, the increase in the provision for loan losses for commercial real estate loans was primarily related to businesses affected by the COVID economic shutdown.  The provision for losses in the construction and land development category also increased due to effects of the COVID shutdown as well as the increase in volume of loans. The provision related to commercial loans decreased primarily as a result of the decrease in loans graded special mention along with the decrease in historical losses of loans in this category.

During 2019, the increase in the provision for loan losses related to commercial loans was primarily related to loans in the sawmill industry affected by tariffs on trade with China along with an increase in loans in the special mention category.  The increase in the provision for commercial real estate loans was primarily related to the $13 million increase in loan volume. The increase in the provision related to consumer loans was due to historical losses of loans in this category. The decrease in the provision related to residential real estate loans was primarily related to the decrease in specific allocation amounts related to three (3) mortgage loans.

During 2018, the increase in the provision for loan losses related to commercial loans was predominantly due to the $5.9 million increase of loans classified as substandard, as well as charge-offs, and loan volume increases. The increase in the provision related to consumer loans was due to an increase in charge-offs and delinquencies. The increase related to commercial real estate loans was primarily related to the $5 million increase of loans classified as substandard.

Summary of Allowance for Loan Losses

 

(Dollars in thousands)

 

Commercial

 

 

Commercial

Real Estate

 

 

Residential

Real Estate

 

 

Construction

& Land

Development

 

 

Consumer

 

 

Unallocated

 

 

Total

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,408

 

 

$

2,153

 

 

$

1,152

 

 

$

203

 

 

$

481

 

 

$

620

 

 

$

7,017

 

Provision for loan losses

 

 

(722

)

 

 

1,413

 

 

 

16

 

 

 

865

 

 

 

(104

)

 

 

182

 

 

 

1,650

 

Charge-offs

 

 

(77

)

 

 

(138

)

 

 

(15

)

 

 

(312

)

 

 

(100

)

 

 

 

 

 

 

(642

)

Recoveries

 

 

130

 

 

 

41

 

 

 

3

 

 

 

 

 

 

75

 

 

 

 

 

 

 

249

 

Net (charge-offs) recoveries

 

 

53

 

 

 

(97

)

 

 

(12

)

 

 

(312

)

 

 

(25

)

 

 

 

 

 

(393

)

Ending balance

 

$

1,739

 

 

$

3,469

 

 

$

1,156

 

 

$

756

 

 

$

352

 

 

$

802

 

 

$

8,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,178

 

 

$

1,791

 

 

$

1,245

 

 

$

258

 

 

$

306

 

 

$

129

 

 

$

5,907

 

Provision for loan losses

 

 

102

 

 

 

361

 

 

 

(100

)

 

 

(55

)

 

 

341

 

 

 

491

 

 

 

1,140

 

Charge-offs

 

 

(47

)

 

 

 

 

 

 

 

 

 

 

 

(211

)

 

 

 

 

 

 

(258

)

Recoveries

 

 

175

 

 

 

1

 

 

 

7

 

 

 

 

 

 

45

 

 

 

 

 

 

 

228

 

Net (charge-offs) recoveries

 

 

128

 

 

 

1

 

 

 

7

 

 

 

 

 

 

(166

)

 

 

 

 

 

(30

)

Ending balance

 

$

2,408

 

 

$

2,153

 

 

$

1,152

 

 

$

203

 

 

$

481

 

 

$

620

 

 

$

7,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,813

 

 

$

1,735

 

 

$

1,273

 

 

$

237

 

 

$

175

 

 

$

371

 

 

$

5,604

 

Provision for loan losses

 

 

1,127

 

 

 

158

 

 

 

6

 

 

 

21

 

 

 

246

 

 

 

(242

)

 

 

1,316

 

Charge-offs

 

 

(823

)

 

 

(103

)

 

 

(37

)

 

 

 

 

 

(119

)

 

 

 

 

 

 

(1,082

)

Recoveries

 

 

61

 

 

 

1

 

 

 

3

 

 

 

 

 

 

4

 

 

 

 

 

 

 

69

 

Net (charge-offs) recoveries

 

 

(762

)

 

 

(102

)

 

 

(34

)

 

 

 

 

 

(115

)

 

 

 

 

 

(1,013

)

Ending balance

 

$

2,178

 

 

$

1,791

 

 

$

1,245

 

 

$

258

 

 

$

306

 

 

$

129

 

 

$

5,907

 

 

 


 

 

 

The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio segment and impairment method as of December 31:

 

(Dollars in thousands)

 

Commercial

 

 

Commercial

Real Estate

 

 

Residential

Real Estate

 

 

Construction

& Land

Development

 

 

Consumer

 

 

Unallocated

 

 

Total

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balances attributable to

   loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

4

 

 

$

20

 

 

$

1

 

 

$

 

 

 

5

 

 

$

 

 

$

30

 

Collectively evaluated for impairment

 

 

1,735

 

 

 

3,449

 

 

 

1,155

 

 

 

756

 

 

 

347

 

 

 

802

 

 

 

8,244

 

Total ending allowance balance

 

$

1,739

 

 

$

3,469

 

 

$

1,156

 

 

$

756

 

 

$

352

 

 

$

802

 

 

$

8,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for

   impairment

 

$

2,560

 

 

$

2,875

 

 

$

756

 

 

$

 

 

$

141

 

 

 

 

 

 

$

6,332

 

Loans collectively evaluated for

   impairment

 

 

188,980

 

 

 

184,346

 

 

 

176,399

 

 

 

36,038

 

 

 

17,775

 

 

 

 

 

 

 

603,538

 

Total ending loans balance

 

$

191,540

 

 

$

187,221

 

 

$

177,155

 

 

$

36,038

 

 

$

17,916

 

 

 

 

 

 

$

609,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balances attributable to

   loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

16

 

 

$

17

 

 

$

1

 

 

$

 

 

$

 

 

$

 

 

$

34

 

Collectively evaluated for impairment

 

 

2,392

 

 

 

2,136

 

 

 

1,151

 

 

 

203

 

 

 

481

 

 

 

620

 

 

 

6,983

 

Total ending allowance balance

 

$

2,408

 

 

$

2,153

 

 

$

1,152

 

 

$

203

 

 

$

481

 

 

$

620

 

 

$

7,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for

   impairment

 

$

2,555

 

 

$

2,637

 

 

$

853

 

 

$

 

 

$

14

 

 

 

 

 

 

$

6,059

 

Loans collectively evaluated for

   impairment

 

 

134,559

 

 

 

194,111

 

 

 

173,406

 

 

 

23,960

 

 

 

19,038

 

 

 

 

 

 

 

545,074

 

Total ending loans balance

 

$

137,114

 

 

$

196,748

 

 

$

174,259

 

 

$

23,960

 

 

$

19,052

 

 

 

 

 

 

$

551,133

 

 

 


 

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31:

 

(Dollars in thousands)

 

Unpaid

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Total

Recorded

Investment 1

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,604

 

 

$

1,965

 

 

$

597

 

 

$

2,562

 

 

$

4

 

 

$

2,305

 

 

$

66

 

Commercial real estate

 

 

3,755

 

 

 

2,673

 

 

 

211

 

 

 

2,884

 

 

 

20

 

 

 

2,569

 

 

 

13

 

Residential real estate

 

 

923

 

 

 

513

 

 

 

247

 

 

 

760

 

 

 

1

 

 

 

782

 

 

 

33

 

Consumer

 

 

143

 

 

 

 

 

 

146

 

 

 

146

 

 

 

5

 

 

 

114

 

 

 

7

 

Total impaired loans

 

$

7,425

 

 

$

5,151

 

 

$

1,201

 

 

$

6,352

 

 

$

30

 

 

$

5,770

 

 

$

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

2,982

 

 

$

2,541

 

 

$

16

 

 

$

2,557

 

 

$

16

 

 

$

2,054

 

 

$

68

 

Commercial real estate

 

 

2,952

 

 

 

2,471

 

 

 

176

 

 

 

2,647

 

 

 

17

 

 

 

2,517

 

 

 

11

 

Residential real estate

 

 

1,024

 

 

 

457

 

 

 

396

 

 

 

853

 

 

 

1

 

 

 

1,093

 

 

 

54

 

Consumer

 

$

14

 

 

 

14

 

 

 

 

 

 

14

 

 

 

 

 

 

12

 

 

 

1

 

Total impaired loans

 

 

6,972

 

 

$

5,483

 

 

 

588

 

 

$

6,071

 

 

$

34

 

 

$

5,676

 

 

$

134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

815

 

 

$

383

 

 

 

36

 

 

$

419

 

 

$

36

 

 

$

1,511

 

 

$

37

 

Commercial real estate

 

 

2,616

 

 

 

1,976

 

 

 

433

 

 

 

2,409

 

 

 

64

 

 

 

3,531

 

 

 

19

 

Residential real estate

 

 

1,190

 

 

 

763

 

 

 

269

 

 

 

1,032

 

 

 

1

 

 

 

1,327

 

 

 

57

 

Total impaired loans

 

$

4,621

 

 

$

3,122

 

 

 

738

 

 

$

3,860

 

 

$

101

 

 

$

6,369

 

 

$

113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Includes principal, accrued interest, unearned fees, and origination costs.

 

The following table presents the aging of accruing past due and nonaccrual loans by class of loans as of December 31:

 

 

 

 

 

 

 

Accruing Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Current

 

 

30-59

Days

Past Due

 

 

60-89

Days

Past Due

 

 

90 Days +

Past Due

 

 

Nonaccrual

 

 

Total Past

Due and

Nonaccrual

 

 

Total

Loans

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

190,264

 

 

$

51

 

 

$

 

 

$

 

 

$

1,225

 

 

$

1,276

 

 

$

191,540

 

Commercial real estate

 

 

185,005

 

 

 

11

 

 

 

 

 

 

 

 

 

2,205

 

 

 

2,216

 

 

 

187,221

 

Residential real estate

 

 

175,812

 

 

 

606

 

 

 

 

 

 

49

 

 

 

688

 

 

 

1,343

 

 

 

177,155

 

Construction & land development

 

 

35,721

 

 

 

 

 

 

 

 

 

 

 

 

317

 

 

 

317

 

 

 

36,038

 

Consumer

 

 

17,713

 

 

 

168

 

 

 

22

 

 

 

 

 

 

13

 

 

 

203

 

 

 

17,916

 

Total loans

 

$

604,515

 

 

$

836

 

 

$

22

 

 

$

49

 

 

$

4,448

 

 

$

5,355

 

 

$

609,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

135,707

 

 

$

15

 

 

$

 

 

$

67

 

 

$

1,325

 

 

$

1,407

 

 

$

137,114

 

Commercial real estate

 

 

194,157

 

 

 

186

 

 

 

 

 

 

 

 

 

2,405

 

 

 

2,591

 

 

 

196,748

 

Residential real estate

 

 

173,023

 

 

 

264

 

 

 

277

 

 

 

174

 

 

 

521

 

 

 

1,236

 

 

 

174,259

 

Construction & land development

 

 

23,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,960

 

Consumer

 

 

18,640

 

 

 

365

 

 

 

 

 

 

 

 

 

47

 

 

 

412

 

 

 

19,052

 

Total loans

 

$

545,487

 

 

$

830

 

 

$

277

 

 

$

241

 

 

$

4,298

 

 

$

5,646

 

 

$

551,133

 

 

CARES Act Loan Modifications   

The table below summarizes the Company’s deferral activity on December 31, 2020 under the COVID-19 related loan modification program to customers.  Loan modifications consist of three (3) to four (4) months deferral of principal and interest payments, and extension of maturity date.  As of December 31, 2020, there was one modified loan in nonaccrual status. All remaining loans provided modifications were

 


 

performing in accordance with their terms as of December 31, 2020.  In accordance with the CARES Act, these loans are not required to be evaluated as TDR’s. As of December 31, 2020, there were two (2) loans totaling $123 thousand that have been granted a second deferral.

 

 

 

During the Year Ended December 31, 2020

 

At December 31, 2020

 

(Dollars in thousands)

 

Total Loan Balances

 

 

Deferred # of Loans

 

 

Total COVID Loan Deferrals

 

Percent of Portfolio Modified

 

 

 

Remaining Balance in Deferment

 

 

Remaining # of Loans in Deferment

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

191,540

 

 

61

 

 

$

9,260

 

 

5

 

%

 

$

 

 

 

 

Commercial real estate

 

 

187,221

 

 

72

 

 

 

51,335

 

 

27

 

 

 

 

11,921

 

 

2

 

Construction

 

 

36,038

 

 

2

 

 

 

303

 

 

1

 

 

 

 

 

 

 

 

Total Commercial

 

$

414,799

 

 

 

135

 

 

$

60,898

 

 

15

 

%

 

$

11,921

 

 

 

2

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

$

177,155

 

 

32

 

 

$

3,521

 

 

2

 

%

 

$

475

 

 

5

 

RV

 

 

8,873

 

 

13

 

 

 

281

 

 

3

 

 

 

 

 

 

 

 

Other consumer

 

 

9,043

 

 

17

 

 

 

218

 

 

2

 

 

 

 

 

 

 

 

Total Consumer

 

 

195,071

 

 

 

62

 

 

 

4,020

 

 

2

 

 

 

 

475

 

 

 

5

 

Total Loans

 

$

609,870

 

 

 

197

 

 

$

64,918

 

 

11

 

%

 

$

12,396

 

 

 

7

 

 

Troubled Debt Restructurings

The Company had troubled debt restructurings (“TDRs”) of $2.8 million as of December 31, 2020, with $30 thousand of specific reserves allocated to customers whose loan terms have been modified in TDRs. As of December 31, 2019, the Company had TDRs of $2.5 million, with $18 thousand of specific reserves allocated.  On December 31, 2020, $2.5 million of the loans classified as TDRs were performing in accordance with their modified terms. The remaining $315 thousand were classified as nonaccrual.

Loan modifications considered TDRs completed during the year ended December 31 were as follows:

 

(Dollars in thousands)

 

Number Of

Loans Restructured

 

 

Pre-Modification

Recorded Investment

 

 

Post-Modification

Recorded Investment

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

6

 

 

$

648

 

 

$

648

 

Commercial Real Estate

 

 

2

 

 

 

177

 

 

 

177

 

Residential

 

 

2

 

 

 

189

 

 

 

189

 

Consumer

 

 

6

 

 

 

146

 

 

 

146

 

Total restructured loans

 

 

16

 

 

$

1,160

 

 

$

1,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

1

 

 

$

17

 

 

$

17

 

Total restructured loans

 

 

1

 

 

$

17

 

 

$

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1

 

 

$

200

 

 

$

200

 

Residential real estate

 

 

2

 

 

 

27

 

 

 

27

 

Total restructured loans

 

 

3

 

 

$

227

 

 

$

227

 

 

The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. No principal reductions were made.  There was one loan in the amount of $200 thousand restructured in 2018 that has subsequently defaulted in 2019.

Real Estate Loans in Foreclosure

There was no other real estate owned on December 31, 2020. Other real estate owned amounted to one property at $99 thousand as of December 31, 2019. Mortgage loans in the process of foreclosure were $21 thousand on December 31, 2020, and $50 thousand on December 31, 2019.

Credit Quality Indicators

The Company categorizes commercial and commercial real estate 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 and commercial real estate loans individually by classifying the loans as to credit risk. This analysis includes commercial loans with an outstanding balance greater than $500 thousand. This analysis is performed on an annual basis.

 


 

The Company uses the following definitions for risk ratings:

Pass. Loans classified as pass (Cash Secured, Exceptional, Acceptable, Monitor 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 a material weakness deserving of management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position 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 jeopardizing the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

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

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed as not rated are either less than $500 thousand or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class was as follows on December 31:

 

(Dollars in thousands)

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

 

 

Not

Rated

 

 

Total

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

177,620

 

 

$

2,352

 

 

$

9,644

 

 

$

 

 

$

1,924

 

 

$

191,540

 

Commercial real estate

 

 

161,091

 

 

 

2,545

 

 

 

21,812

 

 

 

 

 

 

1,773

 

 

 

187,221

 

Residential real estate

 

 

174

 

 

 

 

 

 

114

 

 

 

 

 

 

176,867

 

 

 

177,155

 

Construction & land development

 

 

29,182

 

 

 

 

 

 

 

 

 

317

 

 

 

6,539

 

 

 

36,038

 

Consumer

 

 

 

 

 

 

 

 

105

 

 

 

 

 

 

17,811

 

 

 

17,916

 

Total

 

$

368,067

 

 

$

4,897

 

 

$

31,675

 

 

$

317

 

 

$

204,914

 

 

$

609,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

110,731

 

 

$

15,040

 

 

$

10,295

 

 

$

 

 

$

1,048

 

 

$

137,114

 

Commercial real estate

 

 

174,045

 

 

 

11,546

 

 

 

9,994

 

 

 

 

 

 

1,163

 

 

 

196,748

 

Residential real estate

 

 

183

 

 

 

 

 

 

237

 

 

 

 

 

 

173,839

 

 

 

174,259

 

Construction & land development

 

 

19,423

 

 

 

104

 

 

 

 

 

 

 

 

 

4,433

 

 

 

23,960

 

Consumer

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

18,979

 

 

 

19,052

 

Total

 

$

304,382

 

 

$

26,690

 

 

$

20,599

 

 

$

 

 

$

199,462

 

 

$

551,133

 

 

Nonperforming loans include loans past due 90 days and greater and loans on nonaccrual of interest status that have not been risk rated. The following table presents loans that are not rated, by class of loans as of December 31:

 

(Dollars in thousands)

 

Performing

 

 

Nonperforming

 

 

Total

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,924

 

 

$

 

 

$

1,924

 

Commercial real estate

 

 

1,773

 

 

 

 

 

 

1,773

 

Residential real estate

 

 

176,278

 

 

 

589

 

 

 

176,867

 

Construction & land development

 

 

6,539

 

 

 

 

 

 

6,539

 

Consumer

 

 

17,798

 

 

 

13

 

 

 

17,811

 

Total

 

$

204,312

 

 

$

602

 

 

$

204,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,048

 

 

$

 

 

$

1,048

 

Commercial real estate

 

 

1,163

 

 

 

 

 

 

1,163

 

Residential real estate

 

 

173,407

 

 

 

432

 

 

 

173,839

 

Construction & land development

 

 

4,433

 

 

 

 

 

 

4,433

 

Consumer

 

 

18,979

 

 

 

 

 

 

18,979

 

Total

 

$

199,030

 

 

$

432

 

 

$

199,462

 

 


 

 

 

Mortgage Servicing Rights

For the years ended December 31, 2020 and 2019, the Company had outstanding MSRs of $488 thousand and $328 thousand, respectively. No valuation allowance was recorded on December 31, 2020 or 2019, as the fair value of the MSRs exceeded their carrying value. On December 31, 2020, the Company had $107.1 million residential mortgage loans with servicing retained as compared to $75.9 million with servicing retained on December 31, 2019.

Total loans serviced for others approximated $117.5 million and $95.7 million on December 31, 2020 and 2019, respectively.

NOTE 4 – PREMISES AND EQUIPMENT

Premises and equipment consisted of the following on December 31:

 

(Dollars in thousands)

 

2020

 

 

2019

 

Land and improvements

 

$

2,550

 

 

$

2,384

 

Buildings and improvements

 

 

12,664

 

 

 

12,869

 

Furniture and equipment

 

 

6,499

 

 

 

6,448

 

Leasehold improvements

 

 

329

 

 

 

296

 

 

 

 

22,042

 

 

 

21,997

 

Accumulated depreciation

 

 

9,409

 

 

 

9,957

 

Premises and equipment, net

 

$

12,633

 

 

$

12,040

 

 

Depreciation expense amounted to $704 thousand, $562 thousand, and $598 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.

 

NOTE 5 – 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 4 to 7 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 December 31, 2020, operating lease ROU assets were $498 thousand, and liabilities were $490 thousand. For the years ended December 31, 2020, 2019, and 2018, CSB recognized $105 thousand, $71 thousand, and $104 thousand in operating lease cost.

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

 

December 31, 2020

 

 

 

 

 

Weighted-average remaining lease term - operating leases in years

 

 

5.2

 

 

Weighted-average discount rate - operating leases

 

 

3.15

 

%

 

The following table presents aggregate lease maturities and obligations as of December 31, 2020:

 

(Dollars in thousands)

 

 

 

 

December 31, 2020

 

 

 

 

2021

 

 

96

 

2022

 

 

105

 

2023

 

 

105

 

2024

 

 

105

 

2025

 

 

74

 

2026 and thereafter

 

 

52

 

Total lease payments

 

 

537

 

Less: interest

 

 

47

 

Present value of lease liabilities

 

$

490

 

 


 

 

 

NOTE 6 – CORE DEPOSIT INTANGIBLE ASSETS

Core Deposit Intangible

No additional core deposit intangible was recorded in 2020, 2019, or 2018. The core deposit intangible asset will be amortized over an estimated life of ten years. Amortization expense related to the core deposit intangible asset totaled $60 thousand, $63 thousand, and $101 thousand in 2020, 2019, and 2018, respectively. The following table shows the core deposit intangible and the related accumulated amortization as of December 31:

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

Gross carrying amount

 

$

1,251

 

 

$

1,251

 

 

$

1,251

 

Accumulated amortization

 

 

(1,207

)

 

 

(1,147

)

 

 

(1,084

)

Net carrying amount

 

$

44

 

 

$

104

 

 

$

167

 

 

The estimated aggregate future amortization expense for the core deposit assets remaining as of December 31, 2020 was as follows:

 

(Dollars in thousands)

 

Core Deposit

Amortization

 

2021

 

$

44

 

 

 

$

44

 

 

NOTE 7 – INTEREST-BEARING DEPOSITS

Interest-bearing deposits on December 31 were as follows:

 

(Dollars in thousands)

 

2020

 

 

2019

 

Demand

 

$

243,467

 

 

$

161,838

 

Savings

 

 

252,712

 

 

 

196,367

 

Time deposits:

 

 

 

 

 

 

 

 

In excess of $250,000

 

 

23,378

 

 

 

23,034

 

Other

 

 

99,954

 

 

 

104,527

 

Total interest-bearing deposits

 

$

619,511

 

 

$

485,766

 

 

On December 31, 2020, stated maturities of time deposits were as follows:

 

(Dollars in thousands)

 

 

 

 

2021

 

 

77,397

 

2022

 

 

33,980

 

2023

 

 

9,650

 

2024

 

 

954

 

2025

 

 

1,351

 

Total

 

$

123,332

 

 

NOTE 8 – BORROWINGS

Short-term borrowings

Short-term borrowings include overnight repurchase agreements, federal funds purchased, and short-term advances through the FHLB. The outstanding balances and related information for short-term borrowings are summarized as follows:

 

(Dollars in thousands)

 

2020

 

 

 

2019

 

 

Balance at year-end

 

$

37,215

 

 

 

$

38,889

 

 

Average balance outstanding

 

 

43,017

 

 

 

 

37,258

 

 

Maximum month-end balance

 

 

48,865

 

 

 

 

38,889

 

 

Weighted-average rate at year-end

 

 

0.14

 

%

 

 

0.51

 

%

Weighted-average rate during the year

 

 

0.21

 

 

 

 

0.85

 

 

 

 


 

 

Average balances outstanding during the year represent daily average balances; average interest rates represent interest expenses divided by the related average balances.

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

 

 

 

Remaining Contractual Maturity

Overnight and Continuous

 

(Dollars in thousands)

 

December 31,

2020

 

 

December 31,

2019

 

Securities of U.S. Government agencies and mortgage-backed securities of

   government agencies pledged, fair value

 

$

37,393

 

 

$

39,058

 

Repurchase agreements

 

 

37,215

 

 

 

38,889

 

 

Other borrowings

The following table sets forth information concerning other borrowings:

 

 

 

Maturity Range

 

Weighted

Average

Interest

 

 

Stated Interest

Rate Range

 

 

At December 31,

 

(Dollars in thousands)

 

From

 

To

 

Rate

 

 

From

 

 

To

 

 

2020

 

 

2019

 

Fixed-rate amortizing

 

4/1/24

 

6/1/37

 

 

1.90

%

 

 

1.16

%

 

 

2.01

%

 

$

4,664

 

 

$

6,330

 

 

Maturities of other borrowings on December 31, 2020, are summarized as follows for the years ended December 31:

 

(Dollars in thousands)

 

Amount

 

 

Weighted

Average

Rate

 

 

2021

 

$

1,258

 

 

 

1.85

 

%

2022

 

 

946

 

 

 

1.86

 

 

2023

 

 

707

 

 

 

1.87

 

 

2024

 

 

488

 

 

 

1.94

 

 

2025

 

 

349

 

 

 

1.98

 

 

2026 and beyond

 

 

916

 

 

 

1.98

 

 

 

 

$

4,664

 

 

 

1.90

 

%

 

Monthly principal and interest payments, as well as 10% – 20% principal curtailments on the borrowings’ anniversary dates are due on the fixed-rate amortizing borrowings. FHLB borrowings are secured by a blanket collateral agreement. On December 31, 2020, the Company had the capacity to borrow an additional $101.6 million from the FHLB.

NOTE 9 – INCOME TAXES

Income tax expense (benefit) was as follows:

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

Current

 

$

2,564

 

 

$

2,438

 

 

$

2,170

 

Deferred

 

 

(36

)

 

 

66

 

 

 

93

 

Total income tax provision

 

$

2,528

 

 

$

2,504

 

 

$

2,263

 

 

Effective tax rates differ from the federal statutory rate of 21% for 2020, 2019, and 2018 applied to income before taxes due to the following:

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

Expected provision using statutory federal income tax rate

 

$

2,750

 

 

$

2,713

 

 

$

2,452

 

Effect of bond and loan tax-exempt income

 

 

(117

)

 

 

(124

)

 

 

(128

)

Interest expense associated with carrying certain tax

   exempt bonds and loans

 

 

3

 

 

 

5

 

 

 

5

 

Bank owned life insurance income

 

 

(110

)

 

 

(94

)

 

 

(71

)

Other

 

 

2

 

 

 

4

 

 

 

5

 

Total income tax provision

 

$

2,528

 

 

$

2,504

 

 

$

2,263

 

 


 

 

 

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities on December 31 were as follows:

 

(Dollars in thousands)

 

2020

 

 

2019

 

Allowance for loan losses

 

$

1,835

 

 

$

1,571

 

Other

 

 

22

 

 

 

10

 

Deferred tax assets

 

 

1,857

 

 

 

1,581

 

Premises and equipment

 

 

(564

)

 

 

(370

)

Federal Home Loan Bank stock dividends

 

 

(376

)

 

 

(376

)

Deferred loan fees

 

 

(282

)

 

 

(241

)

Prepaid expenses

 

 

(114

)

 

 

(111

)

Unrealized gain on securities

 

 

(262

)

 

 

(19

)

Other

 

 

(412

)

 

 

(338

)

Deferred tax liabilities

 

 

(2,010

)

 

 

(1,455

)

Net deferred tax asset (liability)

 

$

(153

)

 

$

126

 

 

There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statements of Income. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years prior to 2017.

NOTE 10 – EMPLOYEE BENEFITS

The Company sponsors a contributory 401(k) profit-sharing plan (the “Plan”) covering substantially all employees who meet certain age and service requirements. The Plan permits investment in the Company’s common stock subject to various limitations and provides for discretionary profit sharing and matching contributions. The discretionary profit-sharing contribution is determined annually by the Board of Directors and amounted to 3% in 2020, 2019, and 2018 of each eligible participant’s compensation. Beginning in 2018, the Plan provided for a 100% Company match up to a maximum of 4% of eligible compensation. The Company auto enrolls all eligible new hires into the Plan. Expense under the Plan amounted to approximately $655 thousand, $679 thousand, and $565 thousand for 2020, 2019, and 2018, respectively.

 

 


 

 

NOTE 11 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily loan commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract amount of these instruments reflects the extent of involvement the Bank has in these financial instruments. The Bank’s exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments. The Bank uses the same credit policies in making loan commitments as it does for on-balance sheet loans.

The following financial instruments whose contract amount represents credit risk were outstanding on December 31:

 

(Dollars in thousands)

 

2020

 

 

2019

 

Commitments to extend credit

 

$

227,532

 

 

$

210,579

 

Letters of credit

 

 

700

 

 

 

741

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Consumer commitments generally have fixed expiration dates and commercial commitments are generally due on demand and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, obtained if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include residential real estate, accounts receivable, recognized inventory, property, plant and equipment, and income-producing commercial properties.

Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party and are reviewed for renewal at expiration. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company requires collateral supporting these commitments when deemed appropriate.

The Company had a reserve for unfunded loan commitments of $25 thousand as of December 31, 2020 and $8 thousand as of December 31, 2019.

NOTE 12 – RELATED-PARTY TRANSACTIONS

In the ordinary course of business, loans are made by the Bank to executive officers, directors, their immediate family members, and their related business interests consistent with Federal Reserve Regulation O and GAAP definition of related parties.

The following is an analysis of activity of related-party loans for the years ended December 31:

 

(Dollars in thousands)

 

2020

 

 

2019

 

Balance at beginning of year

 

$

873

 

 

$

1,130

 

New loans and advances

 

 

31

 

 

 

102

 

Repayments, including loans sold

 

 

769

 

 

 

217

 

Changes in related parties 1

 

 

(51

)

 

 

(142

)

Balance at end of year

 

$

84

 

 

$

873

 

 

1 The adjustments made in 2020 and 2019 relate to the retirement of directors.

Deposits from executive officers, directors, their immediate family members, and their related business interests on December 31, 2020 and 2019 were approximately $7.5 million and $4.2 million.

NOTE 13 – REGULATORY MATTERS

The Company (on a consolidated basis) and Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial performance. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines involving quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of Total capital, Tier 1 capital and Common equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes as of December 31, 2020 and 2019, the Company and Bank met or exceeded all capital adequacy requirements to which they are subject.

 


 

As of December 31, 2020, the most recent notification from federal and state banking agencies categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” an institution must maintain minimum Total risk-based, Tier 1 risk-based, Common equity Tier 1, and Tier 1 leverage ratios as set forth in the following tables. There are no known conditions or events since that notification that Management believes have changed the Bank’s category.

The actual capital amounts and ratios of the Company and Bank as of December 31 are presented in the following tables:

 

 

 

Actual

 

 

 

Minimum

Required For

Capital Adequacy

Purposes

 

 

 

Minimum Required

To Be Well Capitalized

Under Prompt

Corrective Action

 

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

 

Amount

 

 

Ratio

 

 

 

Amount

 

 

Ratio

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

95,149

 

 

 

16.9

 

%

 

$

44,969

 

 

 

8.0

 

%

 

$

56,211

 

 

 

10.0

 

%

Bank

 

 

93,333

 

 

 

16.6

 

 

 

 

44,954

 

 

 

8.0

 

 

 

 

56,193

 

 

 

10.0

 

 

Tier 1 capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

88,101

 

 

 

15.7

 

 

 

 

33,727

 

 

 

6.0

 

 

 

 

44,969

 

 

 

8.0

 

 

Bank

 

 

86,285

 

 

 

15.4

 

 

 

 

33,716

 

 

 

6.0

 

 

 

 

44,954

 

 

 

8.0

 

 

Common equity tier 1 capital to

   risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

88,101

 

 

 

15.7

 

 

 

 

25,295

 

 

 

4.5

 

 

 

 

36,537

 

 

 

6.5

 

 

Bank

 

 

86,285

 

 

 

15.4

 

 

 

 

25,287

 

 

 

4.5

 

 

 

 

36,526

 

 

 

6.5

 

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

88,101

 

 

 

8.7

 

 

 

 

40,518

 

 

 

4.0

 

 

 

 

50,647

 

 

 

5.0

 

 

Bank

 

 

86,285

 

 

 

8.5

 

 

 

 

40,511

 

 

 

4.0

 

 

 

 

50,638

 

 

 

5.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

87,598

 

 

 

15.5

 

%

 

$

45,226

 

 

 

8.0

 

%

 

$

56,532

 

 

 

10.0

 

%

Bank

 

 

86,544

 

 

 

15.3

 

 

 

 

45,209

 

 

 

8.0

 

 

 

 

56,511

 

 

 

10.0

 

 

Tier 1 capital to risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

80,573

 

 

 

14.3

 

 

 

 

33,919

 

 

 

6.0

 

 

 

 

45,226

 

 

 

8.0

 

 

Bank

 

 

79,519

 

 

 

14.1

 

 

 

 

33,907

 

 

 

6.0

 

 

 

 

45,209

 

 

 

8.0

 

 

Common equity tier 1 capital to

   risk-weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

80,573

 

 

 

14.3

 

 

 

 

25,439

 

 

 

4.5

 

 

 

 

36,746

 

 

 

6.5

 

 

Bank

 

 

79,519

 

 

 

14.1

 

 

 

 

25,430

 

 

 

4.5

 

 

 

 

36,732

 

 

 

6.5

 

 

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

80,573

 

 

 

10.0

 

 

 

 

32,296

 

 

 

4.0

 

 

 

 

40,370

 

 

 

5.0

 

 

Bank

 

 

79,519

 

 

 

9.9

 

 

 

 

32,288

 

 

 

4.0

 

 

 

 

40,359

 

 

 

5.0

 

 

 

The Company’s primary source of funds with which to pay dividends, are dividends received from the Bank. The payment of dividends by the Bank to the Company is subject to restrictions by its regulatory agencies. These restrictions generally limit dividends to current year net income and prior two-years’ net retained earnings. Also, dividends may not reduce capital levels below the minimum regulatory requirements disclosed in the prior table. Under these provisions, on January 1, 2021, the Bank could dividend $14.2 million to the Company. The Company does not anticipate the financial need to obtain regulatory approval to pay dividends. Federal law prevents the Company from borrowing from the Bank unless loans are secured by specific obligations. Further, such secured loans are limited to an amount not exceeding ten percent of the Bank’s common stock and capital surplus.

 


 

NOTE 14 – CONDENSED PARENT COMPANY FINANCIAL INFORMATION

A summary of condensed financial information of the parent company as of December 31, 2020 and 2019, and for each of the three years in the period ended December 31, 2020 follows:

 

(Dollars in thousands)

 

2020

 

 

2019

 

CONDENSED BALANCE SHEETS

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash deposited with subsidiary bank

 

$

1,631

 

 

$

871

 

Investment in subsidiary bank

 

 

92,043

 

 

 

84,422

 

Securities available-for-sale

 

 

87

 

 

 

92

 

Other assets

 

 

146

 

 

 

142

 

TOTAL ASSETS

 

$

93,907

 

 

$

85,527

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Total liabilities

 

$

48

 

 

$

51

 

Total shareholders’ equity

 

 

93,859

 

 

 

85,476

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

93,907

 

 

$

85,527

 

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on securities

 

$

3

 

 

$

3

 

 

$

2

 

Dividends from subsidiary

 

 

4,140

 

 

 

3,170

 

 

 

2,865

 

Unrealized gain (loss) on equity securities

 

 

(4

)

 

 

9

 

 

 

(6

)

Other income

 

 

4

 

 

 

 

 

 

 

Total income

 

 

4,143

 

 

 

3,182

 

 

 

2,861

 

Operating expenses

 

 

357

 

 

 

357

 

 

 

357

 

Income before taxes and undistributed equity

   income of subsidiary

 

 

3,786

 

 

 

2,825

 

 

 

2,504

 

Income tax benefit

 

 

(76

)

 

 

(73

)

 

 

(76

)

Equity earnings in subsidiary, net of dividends

 

 

6,706

 

 

 

7,516

 

 

 

6,832

 

NET INCOME

 

$

10,568

 

 

$

10,414

 

 

$

9,412

 

COMPREHENSIVE INCOME

 

$

11,482

 

 

 

11,898

 

 

$

8,692

 

 

(Dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,568

 

 

$

10,414

 

 

$

9,412

 

Adjustments to reconcile net income to cash provided by

   operations:

 

 

 

 

 

 

 

 

 

 

 

 

Equity earnings in subsidiary, net of dividends

 

 

(6,706

)

 

 

(7,516

)

 

 

(6,832

)

Change in other assets, liabilities

 

 

(3

)

 

 

(38

)

 

 

70

 

Net cash provided by operating activities

 

 

3,859

 

 

 

2,860

 

 

 

2,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid

 

 

(3,099

)

 

 

(2,962

)

 

 

(2,688

)

Cash received from issuance of treasury shares

 

 

 

 

 

4

 

 

 

 

Net cash used in financing activities

 

 

(3,099

)

 

 

(2,958

)

 

 

(2,688

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash

 

 

760

 

 

 

(98

)

 

 

(38

)

Cash at beginning of year

 

 

871

 

 

 

969

 

 

 

1,007

 

Cash at end of year

 

$

1,631

 

 

$

871

 

 

$

969

 

 

 


 

 

NOTE 15 – FAIR VALUE MEASUREMENTS

The Company provides disclosures about assets and liabilities carried at fair value. The framework provides a fair value hierarchy prioritizing 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 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 observable for the asset or liability; inputs derived principally from or corroborated by observable market data by or other means including certified appraisals. 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.

 

The following table presents the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of December 31, 2020 and December 31, 2019, by level within the fair value hierarchy. No liabilities were carried at fair value. As required by the accounting standards, 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

 

Assets:

 

 

 

 

 

December 31,

2020

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury security

 

$

1,011

 

 

$

 

 

$

 

 

$

1,011

 

U.S. Government agencies

 

 

 

 

 

14,006

 

 

 

 

 

 

14,006

 

Mortgage-backed securities of government

   agencies

 

 

 

 

 

140,012

 

 

 

 

 

 

140,012

 

Asset-backed securities of government agencies

 

 

 

 

 

837

 

 

 

 

 

 

837

 

State and political subdivisions

 

 

 

 

 

23,966

 

 

 

 

 

 

23,966

 

Corporate bonds

 

 

 

 

 

10,606

 

 

 

 

 

 

10,606

 

Total available-for-sale securities

 

$

1,011

 

 

$

189,427

 

 

$

 

 

$

190,438

 

Equity securities

 

$

41

 

 

$

 

 

$

 

 

$

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

December 31,

2019

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury security

 

$

999

 

 

$

 

 

$

 

 

$

999

 

U.S. Government agencies

 

 

 

 

 

5,496

 

 

 

 

 

 

5,496

 

Mortgage-backed securities of government

   agencies

 

 

 

 

 

75,857

 

 

 

 

 

 

75,857

 

Asset-backed securities of government agencies

 

 

 

 

 

917

 

 

 

 

 

 

917

 

State and political subdivisions

 

 

 

 

 

21,511

 

 

 

 

 

 

21,511

 

Corporate bonds

 

 

 

 

 

7,366

 

 

 

 

 

 

7,366

 

Total available-for-sale securities

 

$

999

 

 

$

111,147

 

 

$

 

 

$

112,146

 

Equity securities

 

$

46

 

 

$

 

 

$

 

 

$

46

 

 

 


 

 

The following table presents the assets measured on a nonrecurring basis on the consolidated balance sheets at their fair value as of December 31, 2020 and December 31, 2019, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral securing the impaired loans include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included unobservable inputs 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.

 

(Dollars in thousands)

 

 

Level I

 

 

 

Level II

 

 

 

Level III

 

 

 

Total

 

Assets measured on a nonrecurring basis

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

Impaired loans

 

$

 

 

 

$

 

 

 

$

 

10

 

 

$

 

10

 

Assets measured on a nonrecurring basis

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

Impaired loans

 

$

 

 

 

$

 

 

 

$

 

553

 

 

$

 

553

 

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)

 

 

 

December 31,

2020

 

 

 

 

 

 

 

Appraisal of

 

Appraisal adjustments 2

 

-20%

 

Impaired loans

 

$

10

 

 

collateral 1

 

Liquidation expense 2

 

-10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

2019

 

 

 

 

 

 

 

Discounted

 

Remaining term

 

3.9 yrs to 26.9 yrs / (16 yrs)

 

Impaired loans

 

$

553

 

 

cash flow

 

Discount rate

 

3.5% to 6.0% / (5.3%)

 

 

 

 

 

 

 

Appraisal of

 

Appraisal adjustments 2

 

-33%

 

Other real estate owned

 

 

99

 

 

collateral 1

 

Liquidation expense 2

 

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

 


 

NOTE 16 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of recognized financial instruments carried at amortized cost as of December 31 were as follows:

 

 

 

2020

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(Dollars in thousands)

 

 

Value

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

181,652

 

 

$

181,652

 

 

$

 

 

$

 

 

$

181,652

 

Securities held-to-maturity

 

 

 

9,045

 

 

 

 

 

 

9,225

 

 

 

 

 

 

9,225

 

Restricted stock

 

 

 

4,614

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Loans held for sale

 

 

 

1,378

 

 

 

1,378

 

 

 

 

 

 

 

 

 

1,378

 

Net loans

 

 

 

600,885

 

 

 

 

 

 

 

 

 

598,583

 

 

 

598,583

 

Bank-owned life insurance

 

 

 

21,416

 

 

 

21,416

 

 

 

 

 

 

 

 

 

21,416

 

Accrued interest receivable

 

 

 

2,159

 

 

 

2,159

 

 

 

 

 

 

 

 

 

2,159

 

Mortgage servicing rights

 

 

 

488

 

 

 

 

 

 

 

 

 

488

 

 

 

488

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

 

891,562

 

 

$

768,230

 

 

$

 

 

$

124,127

 

 

$

892,357

 

Short-term borrowings

 

 

 

37,215

 

 

 

37,215

 

 

 

 

 

 

 

 

 

37,215

 

Other borrowings

 

 

 

4,664

 

 

 

 

 

 

 

 

 

4,775

 

 

 

4,775

 

Accrued interest payable

 

 

 

90

 

 

 

90

 

 

 

 

 

 

 

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(Dollars in thousands)

 

 

Value

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

102,017

 

 

$

102,017

 

 

$

 

 

$

 

 

$

102,017

 

Securities held-to-maturity

 

 

 

13,869

 

 

 

 

 

 

13,950

 

 

 

 

 

 

13,950

 

Restricted stock

 

 

 

4,614

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Loans held for sale

 

 

 

622

 

 

 

622

 

 

 

 

 

 

 

 

 

622

 

Net loans

 

 

 

544,616

 

 

 

 

 

 

 

 

 

542,981

 

 

 

542,981

 

Bank-owned life insurance

 

 

 

18,894

 

 

 

18,894

 

 

 

 

 

 

 

 

 

18,894

 

Accrued interest receivable

 

 

 

1,641

 

 

 

1,641

 

 

 

 

 

 

 

 

 

1,641

 

Mortgage servicing rights

 

 

 

328

 

 

 

 

 

 

 

 

 

328

 

 

 

328

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

 

683,546

 

 

$

555,985

 

 

$

 

 

$

127,440

 

 

$

683,425

 

Short-term borrowings

 

 

 

38,889

 

 

 

38,889

 

 

 

 

 

 

 

 

 

38,889

 

Other borrowings

 

 

 

6,330

 

 

 

 

 

 

 

 

 

6,273

 

 

 

6,273

 

Accrued interest payable

 

 

 

127

 

 

 

127

 

 

 

 

 

 

 

 

 

127

 

 

 

 


 

 

NOTE 17 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax for the years ended December 31, 2020, 2019, and 2018:

 

(Dollars in thousands)

 

Pretax

 

 

Tax Effect

 

 

After-Tax

 

 

Affected Line

Item in The

Consolidated

Statements

Of Income

BALANCE AS OF DECEMBER 31, 2017

 

$

(839

)

 

$

176

 

 

$

(663

)

 

 

Unrealized holding loss on available-for-sale

   securities arising during the period

 

 

(989

)

 

 

208

 

 

 

(781

)

 

 

Amortization of held-to-maturity discount resulting

   from transfer

 

 

78

 

 

 

(17

)

 

 

61

 

 

 

Total other comprehensive income (loss)

 

 

(911

)

 

 

191

 

 

 

(720

)

 

 

Reclassify equity AOCI gain to retained earnings

 

 

(36

)

 

 

7

 

 

 

(29

)

 

(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AS OF DECEMBER 31, 2018

 

$

(1,786

)

 

$

374

 

 

 

(1,412

)

 

 

Unrealized holding gain on available-for-sale

   securities arising during the period

 

 

1,803

 

 

 

(378

)

 

 

1,425

 

 

 

Amortization of held-to-maturity discount resulting

   from transfer

 

 

75

 

 

 

(16

)

 

 

59

 

 

 

Total other comprehensive income (loss)

 

 

1,878

 

 

 

(394

)

 

 

1,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AS OF DECEMBER 31, 2019

 

$

92

 

 

$

(20

)

 

$

72

 

 

 

Unrealized holding gain on available-for-sale

   securities arising during the period

 

 

1,094

 

 

 

(230

)

 

 

864

 

 

 

Amortization of held-to-maturity discount resulting

   from transfer

 

 

63

 

 

 

(13

)

 

 

50

 

 

 

Total other comprehensive income (loss)

 

 

1,157

 

 

 

(243

)

 

 

914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AS OF DECEMBER 31, 2020

 

$

1,249

 

 

$

(263

)

 

$

986

 

 

 

 

(a) Federal income tax provision.

NOTE 18 – CONTINGENT LIABILITIES

In the normal course of business, the Company is subject to pending and threatened legal actions. Although, the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions, management believes that the outcome of any or all such actions will not have a material adverse effect on the results of operations or shareholders’ equity of the Company.

The Company has an employment agreement with an officer. Upon the occurrence of certain types of termination of employment, the Company may be required to make specified severance payments if termination occurs within a specified period of time, generally two years from the date of the agreement, or pursuant to certain change in control transactions.  

 


 

NOTE 19– QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of selected quarterly financial data (unaudited) for the years ended December 31:

 

(Dollars in thousands, except per share data)

 

Interest

Income

 

 

Net

Interest

Income

 

 

Net

Income

 

 

Basic

Earnings

Per Share

 

 

Diluted

Earnings

Per Share

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

7,817

 

 

$

6,916

 

 

$

2,483

 

 

$

0.91

 

 

$

0.91

 

Second quarter

 

 

7,731

 

 

 

7,012

 

 

 

2,606

 

 

 

0.95

 

 

 

0.95

 

Third quarter

 

 

7,714

 

 

 

7,041

 

 

 

2,800

 

 

 

1.02

 

 

 

1.02

 

Fourth quarter

 

 

7,804

 

 

 

7,184

 

 

 

2,679

 

 

 

0.97

 

 

 

0.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

7,968

 

 

$

7,011

 

 

$

2,540

 

 

$

0.93

 

 

$

0.93

 

Second quarter

 

 

8,121

 

 

 

7,071

 

 

 

2,586

 

 

 

0.94

 

 

 

0.94

 

Third quarter

 

 

8,262

 

 

 

7,188

 

 

 

2,695

 

 

 

0.98

 

 

 

0.98

 

Fourth quarter

 

 

8,110

 

 

 

7,129

 

 

 

2,593

 

 

 

0.95

 

 

 

0.95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

6,949

 

 

$

6,389

 

 

$

2,164

 

 

$

0.79

 

 

$

0.79

 

Second quarter

 

 

7,344

 

 

 

6,652

 

 

 

2,324

 

 

 

0.85

 

 

 

0.85

 

Third quarter

 

 

7,572

 

 

 

6,801

 

 

 

2,432

 

 

 

0.88

 

 

 

0.88

 

Fourth quarter

 

 

7,772

 

 

 

6,909

 

 

 

2,492

 

 

 

0.91

 

 

 

0.91

 

 

 

 

 

 

 


 

(a)(3) Exhibits

The documents listed below are filed with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference as noted:

 

Exhibit

Number

 

Description of Document

 

 

 

3.1

 

Amended Articles of Incorporation of CSB Bancorp, Inc., (incorporated by reference to registrant’s Quarterly Report on Form 10-Q filed August 6, 2004, Exhibit 3.1, file number 000-21714).

 

 

3.1.1

 

Amended form of Article Fourth of Amended Articles of Incorporation, as effective April 9, 1998 (incorporated by reference to registrant’s Annual Report on Form 10-K filed on March 30, 1999, Exhibit 3.1.1, file number 000-21714).

 

 

3.2

 

Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form 10-SB).

 

 

3.2.1

 

Amendment to Article VIII to the Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to registrant’s Form DEF 14A filed on March 25, 2009, Appendix A, file number 000-21714).

 

 

4

 

Description of Capital Stock (incorporated by reference to registrant’s Annual Report on Form 10-K filed on March 16, 2020, Exhibit 4, file number 000-21714).

 

 

10.1+

 

CSB Bancorp, Inc. Share Incentive Plan (incorporated by reference to registrant’s Form DEF 14A, filed on March 18, 2005, Appendix A, file number 000-21714).

 

 

10.2+

 

Employment Agreement between Paula Meiler and the Commercial and Savings Bank of Millersburg, Ohio (incorporated by reference to registrant’s Annual Report on Form 10-K filed on March 25, 2013, Exhibit 10.2, file number 000-21714).

 

 

10.3+

 

Amendment to Employment Agreement between Paula Meiler and The Commercial & Savings Bank of Millersburg, Ohio (incorporated by reference to registrant’s Annual Report on Form 10-K filed on March 25, 2013, Exhibit 10.3, file number 000-21714).

 

 

10.4+

 

CSB Bancorp, Inc. Annual Incentive Plan (incorporated by reference to registrant’s Annual Report on Form 10-K filed on March 23, 2017, Exhibit 10.4, file number 000-21714).

 

 

 

10.5+

 

The Commercial & Savings Bank Deferred Compensation Plan (incorporated by reference to Registrant’s Current Report on Form 8-K filed on December 26, 2019, Exhibit 10.1 file number 000-21714).

 

 

13*

 

CSB Bancorp, Inc. 2020 Annual Report to Shareholders

 

 

21*

 

Subsidiaries of CSB Bancorp, Inc.

 

 

23.1*

 

Consent of S.R. Snodgrass, P.C.

 

 

31.1*

 

Section 302 Certification of Chief Executive Officer

 

 

31.2*

 

Section 302 Certification of Chief Financial Officer

 

 

32.1**

 

Section 906 Certification of Chief Executive Officer

 

 

32.2**

 

Section 906 Certification of Chief Financial Officer

 

 

101.INS

 

 Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

The cover page for the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, has been formatted in Inline XBRL and contained in Exhibit 101 

*   Filed herewith.

** Furnished herewith.

+   Indicates management contract or compensatory plan.

 


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 

 

 

/s/ Eddie L. Steiner

Date:  March 16, 2021

 

Eddie L. Steiner, President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 16, 2021.

 

Signatures

 

Title

 

 

/s/ Eddie L. Steiner

 

President and Chief Executive Officer

Eddie L. Steiner

 

 

 

 

/s/ Paula J. Meiler

 

Senior Vice President and Chief Financial Officer

Paula J. Meiler

 

 

 

 

/s/ Pamela S. Basinger

 

Vice President and Principal Accounting Officer

Pamela S. Basinger

 

 

 

 

/s/ Robert K. Baker

 

Director

Robert K. Baker

 

 

 

 

/s/ Vikki G. Briggs

 

Director

Vikki G. Briggs

 

 

 

 

/s/ Julian L. Coblentz

 

Director

Julian L. Coblentz

 

 

 

 

/s/ Cheryl M. Kirkbride

 

Director

Cheryl M. Kirkbride

 

 

 

 

/s/ Jeffery A. Robb, Sr.

 

Director

Jeffery A. Robb, Sr.