UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019
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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 |
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34-1687530 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
91 North Clay Street, Millersburg, Ohio |
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44654 |
(Address of principal executive offices) |
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(Zip code) |
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Registrant’s telephone number, including area code: (330) 674-9015
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Shares, $6.25 par value |
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CSBB |
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OTCPink
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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 Section 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, a smaller reporting company, or 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.
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The aggregate market value of the voting common equity held by non-affiliates of the Registrant, based on a closing price of $40.45 per common share on June 30, 2019, was $102.7 million.
The number of shares of Registrant’s Common Stock outstanding as of March 16, 2020 was 2,742,350.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of CSB Bancorp Inc.’s 2019 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 2020 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.
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. Economic activity in the Company’s market area has been increasing at a steady pace for the past ten years. Reported unemployment levels at December 2019 in the four primary counties served by the Company ranged between 2.8% and 4.4%. These levels decreased slightly from December 2018. Labor markets continued hiring at a firmer pace during the year. Wages increased modestly during 2019 for most entry level jobs and to a lesser extent for middle-skills jobs in certain sectors such as banking and construction. The local housing market continues to improve with supply still relatively tight. Elevated costs of building materials have contributed to increased construction costs. Consumer confidence in the economy has been a primary driver for housing demand and higher consumer spending.
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 $300,000 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.
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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 100% 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, 2019, 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
At December 31, 2019, the Company had 187 employees, 158 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.
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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, federal deposit insurance funds, 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, as amended (the “BHC Act”). Pursuant to the Gramm-Leach-Bliley Act of 1999 (“GLBA”), a bank holding company may become a financial holding company if it meets certain capital requirements and is “well-managed” and each of its subsidiary banks is “well-capitalized” under regulatory “prompt corrective action” provisions, is “well-managed,” and has at least a “satisfactory” rating under the Community Reinvestment Act (“CRA”). CSB has been a financial holding company since 2005. No prior regulatory approval is required for a financial holding company to acquire certain companies, other than banks and savings associations, 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 actions or restrictions, which could include a requirement to divest 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 activities; merchant banking activities; and activities that the FRB has determined to be closely related to banking. As a financial holding company, CSB is subject to regulation, examination, and supervision by the FRB under the BHC Act. CSB is also subject to the disclosure and regulatory requirements of the Securities Exchange Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the 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 Deposit Insurance Fund of the FDIC (“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”) established by the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in July 2010 (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. These statutes and regulations are continually under review by the United States Congress and state legislatures, and state and federal regulatory agencies. A change in statutes, regulations, or regulatory policies applicable to CSB and its subsidiaries could have a material effect on their respective businesses.
Regulation of Bank Holding Companies
As a financial holding company under GLBA, CSB’s activities are subject to extensive regulation by the FRB. CSB is required to file reports with the FRB and provide such additional information as the FRB may require, and is subject to regular examination and inspection by the FRB.
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
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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.
The FRB also regulates and provides limitations on transactions between affiliates of a bank holding company, loans to directors and officers of bank affiliates, securities transactions, and liability for losses incurred by commonly controlled banks in certain circumstances.
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 Wall Street Reform and Consumer Protection Act of 2010, as amended (“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 the Company even before the enactment of the Regulatory Relief Act.
Current Expected Credit Loss Model
In December 2018, the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve Board, and the FDIC issued a final rule to address regulatory treatment of credit loss allowances under the current expected credit loss (“CECL”) model (accounting standard). 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.
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.
Basel III Capital Rules (“Basel III”) became effective on January 1, 2015, and contain a new capital conservation buffer and deductions from common equity capital that phased in from January 1, 2016, through January 1, 2019, and deductions from common equity tier 1 capital that have mostly phased in as of January 1, 2019.
The rules include (a) a new common equity tier 1 capital ratio of at least 4.5%, (b) a minimum tier 1 capital ratio of 6.0%, (c) a minimum capital to risk-weighted assets ratio of 8.0%, and (d) a minimum leverage ratio of 4%.
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).
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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.
Basel III places restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if 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. The capital conservation buffer phased in beginning January 1, 2016 at 0.625% and was fully implemented at 2.50% effective January 1, 2019. 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. At December 31, 2019, 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 Basel III 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, 2019, 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 2019 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 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 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 new 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 reaches 1.35%. The DRR reached 1.35% at September 30, 2018. The rules also provide assessment credits to banks with assets of less than $10 billion for the portion of their assessments that contribute to the increase of the DRR to 1.35%. Such credits will be applied when the reserve ratio is at least 1.38%. The 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.
In addition, all FDIC-insured institutions have been required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, which was established by the government to recapitalize a predecessor to the DIF. These assessments continued until the Financing Corporation bonds matured in September of 2019. The final assessment was collected on the March 29, 2019, FDIC invoice.
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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.
Fiscal and Monetary Policies
The business and earnings of the Company are affected significantly by the fiscal and monetary policies of the United States Government and its agencies. These policies are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. CSB is particularly affected by the policies of the FRB, which has regulatory authority over the supply of money and credit in the United States.
The monetary policies of the FRB have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy, the money markets, and the activities of monetary and fiscal authorities, the Company can make no definitive predictions as to future changes in interest rates, credit availability, or deposit levels.
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. Potential penalties under these laws include, but are not limited to, fines. 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:
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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. |
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• |
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.
7
In October 2017, the CFPB issued a final rule (the “Payday Rule”) to establish regulations for payday loans, vehicle title loans, and certain high-cost installment loans. The Payday Rule addressed two discrete topics. First, it contained a set of provisions with respect to the underwriting of certain covered loans and related reporting and recordkeeping requirements (the “Mandatory Underwriting Provisions”). Second, it contained a set of provisions establishing certain requirements and limitations with respect to attempts to withdraw payments from consumers’ checking or other accounts and related recordkeeping requirements (the “Payment Provisions”). The Payday Rule became effective on January 16, 2018. However, most provisions had a compliance date of August 19, 2019.
On February 6, 2019, the CFPB proposed delaying the August 19, 2019, compliance date for the Mandatory Underwriting Provisions to November 19, 2020. The CFPB proposed in a separate notice to rescind the Mandatory Underwriting Provisions.
On June 6, 2019, the CFPB issued a final rule delaying the compliance date for most Mandatory Underwriting Provisions until November 19, 2020. However, the final rule did not delay the compliance date for the Payment Provisions. The Company does not currently expect the Payday Rule to have a material effect on its financial condition or results of operations on a consolidated basis.
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 of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorist 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
8
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.
Executive and Incentive Compensation
In June 2010, the federal banking agencies issued joint interagency guidance on incentive compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
Pursuant to the Joint Guidance, the FRB will review as part of a regular, risk-focused examination process, the incentive compensation arrangements of financial institutions such as the Company. Such review will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination and deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against an institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and prompt and effective measures are not being taken to correct the deficiencies.
The Company’s board and management believe its policies and procedures related to Executive and Incentive Compensation are compliant with the Joint Guidance.
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 2019 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 2019 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 2019 Annual Report is incorporated by reference herein.
9
The following is a schedule of the fair value of securities at December 31:
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
||||
U.S. Treasury security |
|
$ |
999 |
|
|
$ |
996 |
|
|
$ |
998 |
|
U.S. Government agencies |
|
|
5,496 |
|
|
|
7,170 |
|
|
|
8,229 |
|
Mortgage-backed securities of government agencies |
|
|
75,857 |
|
|
|
44,901 |
|
|
|
49,701 |
|
Other mortgage-backed securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Asset-backed securities of government agencies |
|
|
917 |
|
|
|
1,024 |
|
|
|
1,169 |
|
State and political subdivisions |
|
|
21,511 |
|
|
|
23,125 |
|
|
|
27,141 |
|
Corporate bonds |
|
|
7,366 |
|
|
|
8,312 |
|
|
|
10,425 |
|
Total available-for-sale |
|
$ |
112,146 |
|
|
$ |
85,528 |
|
|
$ |
97,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
4,993 |
|
|
$ |
9,098 |
|
|
$ |
9,265 |
|
Mortgage-backed securities of government agencies |
|
|
8,957 |
|
|
|
11,020 |
|
|
|
11,531 |
|
State and political subdivisions |
|
|
— |
|
|
|
— |
|
|
|
4,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity |
|
$ |
13,950 |
|
|
$ |
20,118 |
|
|
$ |
25,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
92 |
|
|
$ |
83 |
|
|
$ |
89 |
|
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, 2019:
|
|
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 |
|
$ |
— |
|
|
|
— |
|
% |
$ |
998 |
|
|
|
1.60 |
|
% |
$ |
— |
|
|
|
— |
|
% |
$ |
— |
|
|
|
— |
|
% |
$ |
998 |
|
|
|
1.60 |
|
% |
U.S. Government agencies |
|
|
— |
|
|
|
— |
|
|
|
5,500 |
|
|
|
1.76 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,500 |
|
|
|
1.76 |
|
|
Mortgage-backed securities of government agencies |
|
|
2,001 |
|
|
|
1.94 |
|
|
|
472 |
|
|
|
2.26 |
|
|
|
3,191 |
|
|
|
2.60 |
|
|
|
70,012 |
|
|
|
2.32 |
|
|
|
75,676 |
|
|
|
2.32 |
|
|
Asset-backed securities of government agencies |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
934 |
|
|
|
2.49 |
|
|
|
934 |
|
|
|
2.49 |
|
|
State and political subdivisions |
|
|
1,147 |
|
|
|
2.14 |
|
|
|
7,222 |
|
|
|
2.45 |
|
|
|
12,792 |
|
|
|
2.25 |
|
|
|
— |
|
|
|
— |
|
|
|
21,161 |
|
|
|
2.31 |
|
|
Corporate bonds |
|
|
1,575 |
|
|
|
2.87 |
|
|
|
2,055 |
|
|
|
2.79 |
|
|
|
3,475 |
|
|
|
2.79 |
|
|
|
500 |
|
|
|
1.66 |
|
|
|
7,605 |
|
|
|
2.73 |
|
|
Total |
|
$ |
4,723 |
|
|
|
2.30 |
|
% |
$ |
16,247 |
|
|
|
2.20 |
|
% |
$ |
19,458 |
|
|
|
2.40 |
|
% |
$ |
71,446 |
|
|
|
2.32 |
|
% |
$ |
111,874 |
|
|
|
2.32 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies |
|
$ |
— |
|
|
|
— |
|
% |
$ |
3,000 |
|
|
|
2.00 |
|
% |
$ |
— |
|
|
|
— |
|
% |
$ |
1,999 |
|
|
|
2.02 |
|
% |
$ |
4,999 |
|
|
|
2.01 |
|
% |
Mortgage-backed securities of government agencies |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,870 |
|
|
|
1.99 |
|
|
|
8,870 |
|
|
|
1.99 |
|
|
Total |
|
$ |
— |
|
|
|
— |
|
% |
$ |
3,000 |
|
|
|
2.00 |
|
% |
$ |
— |
|
|
|
— |
|
% |
$ |
10,869 |
|
|
|
1.99 |
|
% |
$ |
13,869 |
|
|
|
2.00 |
|
% |
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 at December 31:
10
(Dollars in thousands) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||||
Commercial |
|
$ |
137,114 |
|
|
$ |
146,875 |
|
|
$ |
140,273 |
|
|
$ |
134,268 |
|
|
$ |
123,143 |
|
Commercial real estate |
|
|
196,748 |
|
|
|
183,605 |
|
|
|
179,663 |
|
|
|
159,475 |
|
|
|
148,775 |
|
Residential real estate |
|
|
174,259 |
|
|
|
167,296 |
|
|
|
157,172 |
|
|
|
144,489 |
|
|
|
125,775 |
|
Construction and land development |
|
|
23,960 |
|
|
|
31,227 |
|
|
|
22,886 |
|
|
|
23,428 |
|
|
|
15,452 |
|
Consumer |
|
|
19,052 |
|
|
|
19,402 |
|
|
|
16,306 |
|
|
|
13,308 |
|
|
|
9,268 |
|
Total loans |
|
$ |
551,133 |
|
|
$ |
548,405 |
|
|
$ |
516,300 |
|
|
$ |
474,968 |
|
|
$ |
422,413 |
|
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, 2019:
|
|
Maturing |
|
|||||||||||||
(Dollars in thousands) |
|
One Year or Less |
|
|
One Through Five Years |
|
|
After Five Years |
|
|
Total |
|
||||
Commercial |
|
$ |
73,784 |
|
|
$ |
37,980 |
|
|
$ |
25,350 |
|
|
$ |
137,114 |
|
Commercial real estate |
|
|
1,383 |
|
|
|
16,098 |
|
|
|
179,267 |
|
|
|
196,748 |
|
Construction and land development |
|
|
1,811 |
|
|
|
5,522 |
|
|
|
16,627 |
|
|
|
23,960 |
|
Total |
|
$ |
76,978 |
|
|
$ |
59,600 |
|
|
$ |
221,244 |
|
|
$ |
357,822 |
|
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, 2019.
(Dollars in thousands) |
|
Fixed Rate |
|
|
Variable Rate |
|
||
Total commercial, commercial real estate and construction and land development loans due after one year |
|
$ |
47,744 |
|
|
$ |
233,100 |
|
The following schedule summarizes nonaccrual, past due and restructured loans.
(Dollars in thousand) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||||
Loans accounted for on a nonaccrual basis |
|
$ |
4,298 |
|
|
$ |
3,155 |
|
|
$ |
6,081 |
|
|
$ |
1,449 |
|
|
$ |
1,576 |
|
Accruing loans that are contractually past due 90 days or more as to interest or principal payments |
|
|
241 |
|
|
|
174 |
|
|
|
441 |
|
|
|
235 |
|
|
|
105 |
|
Total |
|
$ |
4,539 |
|
|
$ |
3,329 |
|
|
$ |
6,522 |
|
|
$ |
1,684 |
|
|
$ |
1,681 |
|
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 at December 31 is as follows:
(Dollars in thousands) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
Total recorded investment of impaired loans |
|
$ |
6,071 |
|
|
$ |
3,860 |
|
|
$ |
7,882 |
|
Less portion for which no allowance for loan loss is allocated |
|
|
5,483 |
|
|
|
3,122 |
|
|
|
5,565 |
|
Portion of impaired loan balance for which an allowance for loan losses is allocated |
|
|
588 |
|
|
|
738 |
|
|
|
2,317 |
|
Portion of allowance for loan losses allocated to the impaired loan balance at December 31 |
|
|
34 |
|
|
|
101 |
|
|
|
244 |
|
11
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. For the year ended December 31, 2017, interest income recognized on impaired loans amounted to $123 thousand while $426 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.
At December 31, 2019, 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. At December 31, 2019, these amounts, including impaired and nonperforming loans, amounted to $21 million of substandard loans and $0 doubtful loans.
As of December 31, 2019, 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) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
|||||
LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding during period |
|
$ |
552,014 |
|
|
$ |
535,506 |
|
|
$ |
497,048 |
|
|
$ |
448,941 |
|
|
$ |
412,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLOWANCE FOR LOAN LOSSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
5,907 |
|
|
$ |
5,604 |
|
|
$ |
5,291 |
|
|
$ |
4,662 |
|
|
$ |
4,381 |
|
|
Loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
47 |
|
|
|
823 |
|
|
|
1,184 |
|
|
|
297 |
|
|
|
109 |
|
|
Commercial real estate |
|
|
— |
|
|
|
103 |
|
|
|
— |
|
|
|
50 |
|
|
|
61 |
|
|
Residential real estate |
|
|
— |
|
|
|
37 |
|
|
|
— |
|
|
|
12 |
|
|
|
132 |
|
|
Construction and land development |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Consumer |
|
|
211 |
|
|
|
119 |
|
|
|
20 |
|
|
|
59 |
|
|
|
46 |
|
|
Total loans charged-off |
|
|
258 |
|
|
|
1,082 |
|
|
|
1,204 |
|
|
|
418 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
175 |
|
|
|
61 |
|
|
|
361 |
|
|
|
214 |
|
|
|
199 |
|
|
Commercial real estate |
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
334 |
|
|
|
13 |
|
|
Residential real estate |
|
|
7 |
|
|
|
3 |
|
|
|
8 |
|
|
|
5 |
|
|
|
18 |
|
|
Construction and land development |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Consumer |
|
|
45 |
|
|
|
4 |
|
|
|
3 |
|
|
|
1 |
|
|
|
10 |
|
|
Total loans recoveries |
|
|
228 |
|
|
|
69 |
|
|
|
372 |
|
|
|
554 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans (recovered) charged-off |
|
|
30 |
|
|
|
1,013 |
|
|
|
832 |
|
|
|
(136 |
) |
|
|
108 |
|
|
Provision charged to operating expense |
|
|
1,140 |
|
|
|
1,316 |
|
|
|
1,145 |
|
|
|
493 |
|
|
|
389 |
|
|
Balance at end of period |
|
$ |
7,017 |
|
|
$ |
5,907 |
|
|
$ |
5,604 |
|
|
$ |
5,291 |
|
|
$ |
4,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average loans outstanding for period |
|
|
0.01 |
|
% |
|
0.19 |
|
% |
|
0.17 |
|
% |
|
(0.03 |
) |
% |
|
0.03 |
|
% |
12
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, 2019 |
|
|
December 31, 2018 |
|
|
December 31, 2017 |
|
|
December 31, 2016 |
|
|
December 31, 2015 |
|
|||||||||||||||||||||||||
Commercial |
|
$ |
2,408 |
|
|
|
24.88 |
|
% |
$ |
2,178 |
|
|
|
26.78 |
|
% |
$ |
1,813 |
|
|
|
27.17 |
|
% |
$ |
2,207 |
|
|
|
28.27 |
|
% |
$ |
1,664 |
|
|
|
29.15 |
|
Commercial real estate |
|
|
2,153 |
|
|
|
35.70 |
|
|
|
1,791 |
|
|
|
33.48 |
|
|
|
1,735 |
|
|
|
34.80 |
|
|
|
1,264 |
|
|
|
33.58 |
|
|
|
1,271 |
|
|
|
35.22 |
|
Residential real estate |
|
|
1,152 |
|
|
|
31.62 |
|
|
|
1,245 |
|
|
|
30.51 |
|
|
|
1,273 |
|
|
|
30.44 |
|
|
|
1,189 |
|
|
|
30.42 |
|
|
|
1,086 |
|
|
|
29.78 |
|
Construction & land development |
|
|
203 |
|
|
|
4.35 |
|
|
|
258 |
|
|
|
5.69 |
|
|
|
237 |
|
|
|
4.43 |
|
|
|
178 |
|
|
|
4.93 |
|
|
|
123 |
|
|
|
3.66 |
|
Consumer |
|
|
481 |
|
|
|
3.46 |
|
|
|
306 |
|
|
|
3.54 |
|
|
|
175 |
|
|
|
3.16 |
|
|
|
141 |
|
|
|
2.80 |
|
|
|
86 |
|
|
|
2.19 |
|
Unallocated |
|
|
620 |
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
371 |
|
|
|
|
|
|
|
312 |
|
|
|
|
|
|
|
432 |
|
|
|
|
|
Total |
|
$ |
7,017 |
|
|
|
100 |
|
% |
$ |
5,907 |
|
|
|
100 |
|
% |
$ |
5,604 |
|
|
|
100 |
|
% |
$ |
5,291 |
|
|
|
100 |
|
% |
$ |
4,662 |
|
|
|
100 |
|
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) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
||||||
Noninterest-bearing demand |
|
$ |
187,914 |
|
|
$ |
175,439 |
|
|
$ |
169,803 |
|
|
NA |
|
|
N/A |
|
|
N/A |
|
|||
Interest-bearing demand |
|
|
135,313 |
|
|
|
117,879 |
|
|
|
101,081 |
|
|
|
0.44 |
% |
|
|
0.30 |
% |
|
|
0.13 |
% |
Savings deposits |
|
|
189,520 |
|
|
|
180,718 |
|
|
|
170,694 |
|
|
|
0.48 |
|
|
|
0.37 |
|
|
|
0.18 |
|
Time deposits |
|
|
123,694 |
|
|
|
115,610 |
|
|
|
111,650 |
|
|
|
1.70 |
|
|
|
1.18 |
|
|
|
0.82 |
|
Total deposits |
|
$ |
636,441 |
|
|
$ |
589,646 |
|
|
$ |
553,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019:
(Dollars in thousands) |
|
|
|
|
Three months or less |
|
$ |
8,446 |
|
Over three through six months |
|
|
5,562 |
|
Over six through twelve months |
|
|
13,420 |
|
Over twelve months |
|
|
30,396 |
|
Total |
|
$ |
57,824 |
|
Return on Equity and Assets
|
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
Return on average assets |
|
|
1.36 |
% |
|
|
1.31 |
% |
|
|
1.02 |
% |
Return on average shareholders’ equity |
|
|
12.77 |
|
|
|
12.89 |
|
|
|
10.33 |
|
Dividend payout ratio |
|
|
28.42 |
|
|
|
28.57 |
|
|
|
32.45 |
|
Average shareholders‘ equity to average assets |
|
|
10.65 |
|
|
|
10.19 |
|
|
|
9.92 |
|
13
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) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|||
Securities sold under agreements to repurchase, federal funds purchased and short-term advances at year-end |
|
$ |
38,889 |
|
|
$ |
37,415 |
|
|
$ |
39,480 |
|
Average balance outstanding |
|
|
37,258 |
|
|
|
41,334 |
|
|
|
50,445 |
|
Maximum outstanding at any month end during the year |
|
|
38,889 |
|
|
|
44,155 |
|
|
|
56,932 |
|
Weighted-average interest rate at year-end |
|
|
0.51 |
% |
|
|
1.01 |
% |
|
|
0.39 |
% |
Weighted-average rate during the year |
|
|
0.85 |
|
|
|
0.81 |
|
|
|
0.29 |
|
14
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 and liability and costs to prevent further such 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
15
model, than the Company can offer. The OCC has recently 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 of 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 these 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.
16
The Company has significant exposure to risks associated with commercial and commercial real estate loans.
As of December 31, 2019, approximately 65% 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. 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, such as 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:
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• |
The time and costs associated with identifying and evaluating potential acquisitions or new products or services; |
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• |
The potential inaccuracy of estimates and judgments used to evaluate credit, operation management and market risk with respect to the target institutions; |
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• |
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; |
17
|
• |
The Company’s ability to finance an acquisition or other expansion and the possible dilution to the Company’s existing shareholders; |
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• |
The diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses; |
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• |
Entry into unfamiliar markets; |
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• |
The possible failure of the introduction of new products and services into the Company’s existing business; |
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• |
The incurrence and possible impartment of goodwill associated with an acquisition and possible adverse short-term effects on the Company’s results of operations; and |
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• |
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.
The trading volume and price of CSB’s common shares can be volatile.
CSB’s common shares are very thinly traded and therefore, susceptible to price swings. CSB’s common shares are traded on the OTC market under the symbol “CSBB;” however, the investment community does not actively follow CSB’s common shares. Given the lower trading volume of CSB’s common shares, significant sales of CSB’s common shares, or the expectation of significant sales, could cause CSB’s share price to fall.
The Company’s organizational documents may have the effect of discouraging a third party from acquiring the Company by means of a tender offer, proxy contest, or otherwise.
The Company’s articles of incorporation contain provisions that make it more difficult for a third party to gain control or acquire the Company without the consent of its board of directors. These provisions also could discourage proxy contests and may make it more difficult for dissident shareholders to elect representatives as directors and take other corporate actions. These provisions of the Company’s governing documents may have the effect of delaying, deferring, or preventing a transaction or a change in control that might be in the best interests of the Company’s shareholders.
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 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
18
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.
LIBOR is used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps, and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021. It is uncertain at this time whether LIBOR will change or cease to exist or the extent to which those entering into financial contracts will transition to any other particular benchmark. Other benchmarks may perform differently than LIBOR or alternative benchmarks have performed in the past 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 if LIBOR ceases to exist. As of December 31, 2019, the Company had two loans tied to LIBOR with balances of $3.8 million and commitments of $18.2 million and seven investment securities tied to LIBOR with a fair market value of $4.2 million. One investment of $576 thousand matures in 2020 and the remaining $3.6 million in investment securities receive principal repayment monthly. 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.
Adverse changes in the financial markets may adversely impact the Company’s results of operations.
The capital and credit markets have been experiencing unprecedented levels of volatility since 2008. While the Company generally invests in securities with limited credit risk, certain investment securities the Company holds possess higher credit risk since they represent beneficial interests in structured investments collateralized by residential mortgages. Regardless of the level of credit risk, all investment securities are subject to changes in market value due to changing interest rates and implied credit spreads. Structured investments have at times been subject to significant market volatility due to the uncertainty of credit ratings, deterioration in credit losses occurring within certain types of residential mortgages, changes in prepayments of the underlying collateral, and the lack of transparency related to the investment structures and the collateral underlying the structured investment vehicles.
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 businesses 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
19
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.
In June 2016, FASB issued a new accounting standard for recognizing current expected credit losses, commonly referred to as CECL. CECL will result in earlier recognition of credit losses and requires consideration of not only past and current events but also reasonable and supportable forecasts that affect collectability. 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. 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
20
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.
The Company may be a defendant from time to time in the future in a variety of litigation and other actions, which could have a material adverse effect on its business, financial condition, or results of operations.
The Company may be subject to claims or legal action from customers, employees, or others. Financial institutions are facing a growing number of significant class actions, including those based on the manner or calculation of interest on loans and the assessments of overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Like other financial institutions, the Company and the Bank are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. The Company’s insurance may not cover all claims that may be asserted against it, and any claims asserted against the Company, regardless of merit or eventual outcome, may harm its reputation. Should the ultimate judgments or settlements in any litigation exceed the Company’s insurance coverage, it could have a material adverse effect on the Company’s business, financial condition, or results of operations. In addition, the Company may not be able to obtain appropriate types or levels of insurance in the future, nor may the Company be able to obtain adequate replacement policies with acceptable terms, if at all.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
The Bank operates sixteen banking centers as noted below:
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Location |
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Address |
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Owned |
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Leased |
Walnut Creek |
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4980 Old Pump Street, Walnut Creek, Ohio 44687 |
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X |
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Winesburg |
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2225 U.S. 62, Winesburg, Ohio 44690 |
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X |
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Sugarcreek |
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127 South Broadway, Sugarcreek, Ohio 44681 |
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X |
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Charm |
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4440 C.R. 70, Charm, Ohio 44617 |
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X |
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Clinton Commons |
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2102 Glen Drive, Millersburg, Ohio 44654 |
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X |
Berlin |
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4587 S.R. 39 Suite B, Berlin, Ohio 44610 |
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X |
South Clay |
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91 South Clay Street, Millersburg, Ohio 44654 |
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X |
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Shreve |
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333 West South Street, Shreve, Ohio 44676 |
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X |
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Orrville |
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119 West High Street, Orrville, Ohio 44667 |
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X |
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Gnadenhutten |
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100 South Walnut Street, Gnadenhutten, Ohio 44629 |
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X |
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New Philadelphia |
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635 West High Avenue, New Philadelphia, Ohio 44663 |
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X |
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North Canton |
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1210 North Main Street, North Canton, Ohio 44720 |
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X |
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Bolivar |
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11113 Fairoaks Road NE, Bolivar, Ohio 44612 |
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X |
Wooster |
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350 East Liberty Street, Wooster, Ohio 44691 |
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X |
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Wooster |
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3562 Commerce Parkway, Wooster, Ohio 44691 |
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X |
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Operations Center |
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91 North Clay Street, Millersburg, Ohio 44654 |
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X |
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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.
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.
21
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 2019 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, 2019, 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, 2014 in CSB’s Common Shares and in each of the indicated indices and assumes reinvestment of dividends.
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2014 |
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2015 |
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2016 |
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2017 |
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2018 |
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2019 |
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CSBB |
|
$ |
100 |
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|
$ |
115 |
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|
$ |
150 |
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$ |
164 |
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$ |
196 |
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$ |
214 |
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S & P 500 |
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100 |
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101 |
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114 |
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138 |
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131 |
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174 |
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NASDAQ Bank |
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|
100 |
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110 |
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152 |
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156 |
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133 |
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164 |
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ISSUER PURCHASES OF EQUITY SECURITIES
On July 7, 2005, 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 10% of CSB’s Common Shares then outstanding. Repurchases may be made from time to time as market and business conditions warrant, in the open market, through block purchases and in negotiated private transactions. The Stock Repurchase Program has no scheduled expiration date. CSB did not repurchase any of its Common Shares during 2019.
ITEM 6. SELECTED FINANCIAL DATA.
Information contained in the section captioned “Selected Financial Data” on page 8 of CSB’s 2019 Annual Report is incorporated herein by reference.
22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Information contained in the section captioned “2019 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 2019 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, on pages 23 through 59 of CSB’s 2019 Annual Report is incorporated herein by reference.
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 and in the Report of Independent Registered Public Accounting Firm on pages 22 through 24 of CSB’s 2019 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, 2019, 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 2019 internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None
23
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 29, 2020 (the “2020 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 2020 Annual Meeting to be filed with the SEC (the “2020 Proxy Statement”) no later than 120 days after December 31, 2019. 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 2020 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 Profile/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 2020 Proxy Statement. These procedures have not materially changed from those described in the 2019 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 2020 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 2020 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 2020 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 2020 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 2020 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 2020 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 2020 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 2020 Proxy Statement.
24
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
The Consolidated Financial Statements (and report thereon) listed below are incorporated by reference from CSB Bancorp, Inc.’s 2019 Annual Report as noted:
(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.
None.
25
(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 |
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Description of Document |
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3.1 |
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3.1.1 |
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3.2 |
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Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form 10-SB). |
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3.2.1 |
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4* |
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10.1+ |
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10.2+ |
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10.3+ |
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10.4+ |
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10.5+ |
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13* |
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21* |
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23.1* |
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31.1* |
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31.2* |
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32.1** |
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32.2** |
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101 |
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The following materials from CSB’s 2019 Annual Report to Shareholders formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets (ii) Consolidated Statements of Income (iii) Consolidated Statements of Comprehensive Income (iv) Consolidated Statements of Changes in Shareholders’ Equity (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. |
* Filed herewith.
** Furnished herewith.
+ Indicates management contract or compensatory plan.
26
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.
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CSB BANCORP, INC. |
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/s/ Eddie L. Steiner |
Date: March 16, 2020 |
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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, 2020.
Signatures |
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Title |
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/s/ Eddie L. Steiner |
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President and Chief Executive Officer |
Eddie L. Steiner |
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/s/ Paula J. Meiler |
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Senior Vice President and Chief Financial Officer |
Paula J. Meiler |
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/s/ Pamela S. Basinger |
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Vice President and Principal Accounting Officer |
Pamela S. Basinger |
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/s/ Robert K. Baker |
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Director |
Robert K. Baker |
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/s/ Vikki G. Briggs |
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Director |
Vikki G. Briggs |
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/s/ Julian L. Coblentz |
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Director |
Julian L. Coblentz |
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/s/ Cheryl M. Kirkbride |
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Director |
Cheryl M. Kirkbride |
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/s/ J. Thomas Lang |
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Director |
J. Thomas Lang |
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/s/ Jeffery A. Robb, Sr. |
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Director |
Jeffery A. Robb, Sr. |
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27
EXHIBIT 4. DESCRIPTION OF CAPITAL STOCK
Description of CSB Bancorp, Inc.
CAPITAL STOCK
As of December 31, 2019, CSB Bancorp, Inc. (“CSB,” “the Company,” “we,” “our”) had common stock as the only class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The statements made below include summaries of certain provisions contained in our Amended Articles of Incorporation, as amended (“Articles”) and Code of Regulations, as amended (“Regulations”). This summary does not purport to be complete and is qualified in its entirety by reference to the Articles and the Regulations.
Authorized Capital Stock
Our authorized capital stock consists of 9,000,000 shares of common stock, $6.25 par value per share (“Common Shares”). Each Common Share has the same relative rights and is identical in all respects to every other Common Share.
Trading Symbol
Our Common Shares are listed for trading on the Over the Counter Pink market under the symbol “CSBB”.
Cumulative Voting
Our shareholders have the right to request cumulative voting for the election of directors. Subject to notice requirements, each shareholder has the right to cumulate the voting power the shareholder possesses and give one candidate as many votes as the number of directors to be elected multiplied by the number of the shareholder’s votes equals, or to distribute the shareholder’s votes on the same principle among two or more candidates, as the shareholder sees fit.
Preemptive Rights
Our shareholders do not have preemptive rights to subscribe to any additional securities that may be issued.
Dividends
Dividends may be paid on our Common Shares as and when declared by our Board of Directors out of funds legally available for the payment of dividends.
CSB’s ability to pay dividends to its shareholders is primarily dependent on its receipt of dividends from The Commercial and Savings Bank of Millersburg, Ohio (the “Bank”). The Federal Reserve Board (“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 our 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.
The FRB has adopted risk-based capital guidelines for bank holding companies and state member banks, designed to absorb losses. The rules place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if CSB does not hold a capital conservation buffer of greater than 2.5% 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. At December 31, 2019, 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.
Classified Board of Directors
Our Regulations provide that the Board of Directors shall be divided into three classes, with each class containing as nearly equal in number as the then total number of directors constituting the whole Board of Directors permits, with the term of office of one class expiring each year.
Transfer Agent
The transfer agent and registrar for our Common Shares is Computershare.
Certain “Anti-Takeover” Provisions of our Articles and Regulations
Our Articles contain a provision requiring that specified business combinations be approved by a “Supermajority Vote” of not less than 80% of the outstanding Common Shares unless, in the case of a transaction with an “Interested Shareholder,” the business combination is authorized and approved by the “Continuing Directors,” in which case the business combination must be approved by 66 2/3% of the outstanding Common Shares.
An “Interested Shareholder” means a person or entity and such person’s affiliates who, or which together, are: (i) the beneficial owner, directly or indirectly, of 10% or more of the outstanding Common Shares or were within the two-year period immediately prior to the date in question the beneficial owner, directly or indirectly, of 10% or more of the then outstanding Common Shares; or (ii) an assignee of or other person who has succeeded to any shares of the Common Shares which were at any time within the two-year period immediately prior to the date in question beneficially owned by an Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933.
A “Continuing Director” means: (i) any member of the Board of Directors who is unaffiliated with the Interested Shareholder (as defined below) that was a member of the Board of Directors prior to the time that such Interested Shareholder became an Interested shareholder; (ii) any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is approved to succeed a Continuing Director by the Continuing Directors; or (iii) any member of the Board of Directors who is unaffiliated with the Interested Shareholder and is approved by the Continuing Directors.
Ohio Anti-takeover Statutes
Certain state laws make a change in control of an Ohio corporation more difficult, even if desired by the holders of a majority of the corporation’s shares. Provided below is a summary of the Ohio anti-takeover statutes.
The Ohio Revised Code provides, in certain circumstances, that the approval of two-thirds of the voting power of a corporation is required to effect mergers and similar transactions, to adopt amendments to the articles of incorporation of a corporation and to take certain other significant actions. Although under Ohio law, the articles of incorporation of a corporation may permit such actions to be taken by a vote that is less than two-thirds (but not less than a majority), our Articles do not contain such a provision.
Ohio Revised Code Section 1701.831 is a “control share acquisition” statute. The control share acquisition statute provides, in essence, that any person acquiring shares of an “issuing public corporation” (which CSB meets by definition) in any of the following three ownership ranges must seek and obtain shareholder approval of the acquisition transaction that first puts such ownership within each such range: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; and (iii) a majority or more.
The control share acquisition statute applies not only to traditional offers but also to open market purchases, privately-negotiated transactions and original issuances by an Ohio corporation, whether friendly or unfriendly. The procedural requirements of the control share acquisition statute could render approval of any control share acquisition difficult because it must be authorized at a special meeting of shareholders, for which the statutorily prescribed form of notice has been given and at which the statutorily prescribed quorum is present, by the affirmative vote of the majority of the voting power of the corporation in the election of directors represented at the meeting and by a majority of the portion of such voting power, excluding the voting power of interested shares.
A corporation may elect not to be covered by the provisions of the control share acquisition statute by the adoption of an appropriate amendment to its articles of incorporation or its regulations. We have not adopted such an amendment.
Ohio Revised Code Chapter 1704 is a “merger moratorium” statute. The merger moratorium statute provides that, unless a corporation’s articles of incorporation otherwise provide, an “issuing public corporation” (which CSB meets by definition) may not engage in a “Chapter 1704 transaction” for three years following the date on which a person acquires more than 10% of the voting power in the election of directors of the issuing corporation, unless the Chapter 1704 transaction is approved by the corporation’s board of directors prior to such transaction. A person who acquires such voting power is an “interested shareholder,” and “Chapter 1704 transactions” involve a broad range of transactions, including mergers, consolidations, combinations, liquidations, recapitalizations and other transactions between an issuing public corporation and an interested shareholder if such transactions involve at least 5% of the aggregate fair market value of the assets or shares of the issuing public corporation or assets representing at least 10% of its earning power or income. After the initial three-year moratorium, Chapter 1704 prohibits such transactions absent approval by disinterested shareholders or the transaction meeting certain statutorily defined fair price provisions.
A corporation may elect not to be covered by the provisions of Ohio Revised Code Chapter 1704 by the adoption of an appropriate amendment to its articles of incorporation. We have not adopted such an amendment.
In addition, Section 1701.59 of the Ohio Revised Code provides that, in determining what a director reasonably believes to be in the best interests of the corporation, such director may consider, in addition to the interests of the corporation’s shareholders, any of the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the State of Ohio and the United States, community and societal considerations and the long-term as well as the short-term interests in the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.
The overall effect of the statutes described above may be to render more difficult or discourage the removal of incumbent management of an Ohio corporation or the assumption of effective control of an Ohio corporation by other persons.
Exhibit 13
2019 Report to Shareholders | CSB Bancorp, Inc. 3
CSBS VISION IS TO BE A COMPANY OF ENDURING GREATNESS
THIS REQUIRES AN ONGOING COMMITMENT TO OUR CORE VALUES
DEAR FELLOW SHAREHOLDER:
The excellent results of the past year reflect the diligent efforts of the entire CSB team as we strive to build a community bank of enduring greatness. Guided by our mission and core values, we are increasing shareholder value through profit earned by the work of valued employees providing excellent financial products and customer service. We are pleased to provide this report of the past years results.
Shareholders equity increased $9 million or 12% during 2019, with tangible book value per share increasing 13%. Dividends totaled $1.08 per share, an increase of 10%. Total shareholder return on the Companys stock amounted to 9.3% in 2019 including both market price appreciation and reinvestment of dividends.
At year-end 2019, total return on the Companys stock amounted to 44%, 123%, and 282%, over the past three-year, five-year and ten-year periods, respectively, assuming reinvestment of dividends.
The chart below indicates the growth in CSBs tangible book value per share and average annual market prices over the past 15 years, beginning prior to the Financial Crisis of 2007-08.
AVERAGE STOCK PRICE AND TANGIBLE BOOK VALUE
CORE PERFORMANCE
Average assets, loans, deposits and shareholders equity reached record highs in 2019, as did revenue and net income, which surpassed $10 million for the first time in the Banks history.
A solid efficiency ratio of 58.0% and continued low net charge-offs totaling just $30 thousand also contributed to this outstanding performance.
Total assets grew 12% from the prior year-end. Total loan growth was tempered as the year progressed by unusually high commercial loan payoffs and paydowns. Additionally, commercial loan demand was not as robust as the prior two years. The softer demand was partially attributable to slower manufacturing activity from the impact of trade policies and other uncertainties which affected business owners forward-looking outlook for much of the year. Fixed rate 30-year mortgage rates fell through much of 2019 and ended very near fifty-year lows, fueling one of our best years of mortgage originations in the past decade. All told, gross loan balances finished $3 million above year end 2018.
Deposit balances increased consistently throughout the year, partly due to business owners caution about capital spending. Ending deposit balances were 13% above the prior year end.
Full year net interest margin declined from 3.98% to 3.97% in 2019. However, those numbers belie an increasing margin during the first half of the year on the heels of the rising rate environment in 2017-2018, followed by declining margins in the last half of the year as the Fed cut interest rates three times. While we enter 2020 with lower net interest margins, we believe we are properly positioned to remain competitive for growing loans and deposits while maintaining adequate margins.
All of the above operating dynamics resulted in higher pre-tax return on average assets (pre-tax ROA). Our pre-tax ROA has climbed from 1.49% in both 2016 and 2017, to 1.63% in 2018, and 1.69% for 2019.
4 2019 Report to Shareholders | CSB Bancorp, Inc.
LETTER TO SHAREHOLDERS
As we noted in last years letter, tax reform enacted at the end of 2017 significantly decreased the Companys income tax expense. As a result, our effective income tax rate declined from approximately 31% in 2017 to a little over 19% in 2018 and 2019, increasing the Companys net income by approximately $1.3 million and $1.5 million, respectively. The current tax rate provisions are set to extend through tax years ending in 2025. ROAA (return on average assets after taxes), which we commonly use to measure our overall effectiveness in deploying the Companys assets, amounted to 1.36% in 2019, up from 1.31% in the prior year. These operating results delivered solid value for our shareholders, as depicted below: |
The banking industry has been changing rather significantly during these past ten years. First, the sheer change in numbers tells a story. There were 8,012 FDIC-insured banks in January 2010 but more than one-third of those banks are now gone. Almost 5% disappeared in 2019 alone, and the pace of consolidation has been increasing. On the brighter side, the current banking industry appears relatively strong. Bank equity levels average 11%, only 1% of banks are classified as problem institutions, corporate income tax rates are one-third lower than they were for most of the decade, and the regulatory and political environments are less burdensome than they were ten years ago. As the number of banks diminishes, the average asset size of banks has been increasing. It takes more than just ambition to be a strong bank these days. As more and more banks realize the road ahead will be challenging for them, we will continue to seek out potential institutions to become part of our banks quest and commitment to enduring greatness. Secondly, sources of bank competition are also growing. Non-bank lenders such as private equity (PE) funds and other private credit sources are a significant and growing factor in the changing landscape of finance. These entities are largely unencumbered by traditional bank regulation, and their growth has been fueled by high levels of liquidity available at low costs. There are approximately 3,000 U.S. |
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12.8%
Return on Average Equity .
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13.6%
Return on Average Tangible Equity
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+11.7%
Book Value per share growth
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+12.6%
Tangible BV per share growth
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Financial metrics only partially indicate the Companys condition, effectiveness in serving customers, and ability to successfully execute within its markets and industry. In the coming paragraphs we highlight important aspects of our business, major influences on banking, and our strategies and initiatives. |
THE MARKET AND BANKING DYNAMICS We start by recognizing the importance of the geographic area we serve. One key factor in the well-being of a community bank is the economic health of its region and we are blessed to serve an area with a relatively stable economy. Our sixteen locations are located within Holmes, Wayne, Tuscarawas, and Stark counties in northeast Ohio. Over 80% of our deposit and loan accounts originate within this geography, and the remainder are generally located in adjacent counties or tied to customers based inside this |
PE funds that own all or a majority of about 7,500 companies, and minority stakes in perhaps another 7,000 companies. By comparison, only about 4,300 publicly-traded companies remain in the United States. PE firms have approximately $1.5 trillion in liquidity at their disposal to invest in additional companies. As long as liquidity continues to be readily available at low cost, PE firms and private lenders will compete to buy out and/or lend to companies and borrowers where funding has traditionally been provided by banks. Other significant sources of competition include mortgage companies that originate loans to sell to the secondary market, and direct |
area. The market area has a stable population of about 600,000 people, low to moderate unemployment, diverse manufacturing and service sectors, and a reliable employment base. Good school systems, institutions of higher learning, and reliable hospital systems provide strong resources in the communities. The overall local economy has been steadily expanding over the past ten years at a modest to moderate pace. We will continue to actively participate in supporting those organizations and initiatives that are vital to maintaining the social and economic well-being of the local communities we serve. In a broader context, the U.S. economy emerged from the severe recession of 2007-2009 and began what has become the longest and slowest-paced economic expansion in the nations history. For the past ten years, inflation has remained remarkably tame, unemployment has dropped to a fifty-year low, and most household balance sheets have been repaired from the damage done in the late 2000s. The entire period has been marked by very low interest rates something that has proven both blessing and curse depending on whether one is borrowing or saving. Other notable economic developments of the past decade that arent so grand include a widening wealth gap and a diminishing middle class with fewer skilled jobs. |
internet lenders reaching small businesses and individuals, often at higher costs or more stringent overall requirements than banks. Community banks can compete effectively against these new and growing forms of competition. Doing so requires talented and aligned team members who are dedicated to building customer loyalty through direct relationships, strong technology platforms, and excellence in both products and services. The CSB team is dedicated to all of the above. Digital technology has been a third major dynamic ushering in sweeping changes in banking over the past ten years. In 2010, the iPhone was little more than two years old. In 2019, 96% of U.S. adults owned a cellular phone, 81% owned smartphones, and mobile banking was one of the three most-used apps by U.S. adults (behind social media and weather apps). In fact, more than 70% of banking customers now use some form of online banking, with more than 40% using mobile banking. Completing a financial transaction via a mobile app has proven compelling for its quickness and convenience, whether using mobile deposit, transferring money, paying by mobile wallet, or simply checking the balance in ones account. In many respects, the bank is becoming something people carry with them. |
2019 Report to Shareholders | CSB Bancorp, Inc. 5
LETTER TO SHAREHOLDERS
Fundamentally, banking is becoming more and more a technology pursuit. Consumers, businesses, and organizations alike are all seeking frictionless, reliable and secure financial services available where and when the customer wants them. Over time, financial services will become more and more embedded in a wide manner of digital devices, and most banking activities will not be done at a bank or ATM.
To support banking transactions, whether in-person or by digital means, data must be rapidly gathered, analyzed and protected, while moving high volumes of currency safely and accurately. This requires significant investment and competencies in data management, which we are wholly committed to.
During 2019, we completed a major two-year restructuring of our Information Technology (I.T.) infrastructure. We now have multiple off-site backups for our data systems, with the ability to fully restore I.T. operations within minutes in the event of system failure. The new infrastructure provides built-in scalability and is a key tactical accomplishment for both security and future growth of the Company. Similarly, we have added to our I.T. staff, and will continue to do so, as we move at the pace of business and digital change and innovation while protecting our customers financial assets. Finally, our Digital Transformation team is actively at work not only assuring that we have digital products, services and competencies required to assure high performance today, but also helping to create the bigger and better CSB of tomorrow.
FACILITIES AND MARKET EXPANSION
All of the above notwithstanding, banking centers are not going away anytime in the foreseeable future. Physical facilities provide brand recognition, presence in local areas, and most importantly, human resources to meet the banking needs of business and consumer customers alike. We continue to invest in upgrading our facilities and to add banking centers where business opportunities warrant.
In June 2019, we opened our newly constructed banking center in downtown Wooster. We have had a brick and mortar presence in Wooster since 2005 and two banking centers there for the past eight years. The positive response to our committed investment in the new location in downtown Wooster has been remarkable from customers and the community at large.
Likewise, in November 2019, we signed a lease to open a banking center in Bolivar, in northern Tuscarawas County adjacent to I-77. Our newest location is in a building that has been a bank branch for over 30 years, but was vacated by the prior tenant.
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EDDIE STEINER President and Chief Executive Officer |
We refurbished the interior, much to the delight of local residents, and opened in January 2020. The Bolivar/Zoar community has one other bank branch and a combined population of 5,000 residents. We expect the Bolivar location to deepen our penetration and allow us to better serve the communities in northern Tuscarawas and southern Stark counties.
We expect to continue to grow our market share organically through the continued delivery of excellence in banking. At the same time, we are well-positioned to consider appropriate expansion opportunities through merger and acquisition activity within or adjacent to our four-county primary market area. No matter how we grow, our commitment is to endure as a great independent community bank, serving and rewarding local shareholders, customers, communities and employees.
EMPLOYEES
CSBs outstanding team of 190 dedicated employees deserves recognition for the significant accomplishments of not just the past year, but throughout this past decade of significant change. CSB has been recognized as one of the 99 best places for top talent to work in northeast Ohio in each of the past three years, and we continue to invite top talent to join this strong and dedicated team. We firmly believe the commitment and dedication of this highly capable team will continue to take us to new heights in this fast-changing industry.
Great Workplace
for Top Talent
A SPECIAL WORD OF APPRECIATION
Director Tom Lang will be retiring as of this years annual meeting, concluding 27 years of distinguished service on the board of directors. Please note the inset honoring Director Lang on page 62 of this report.
Finally, we are continually grateful for each shareholder invested in CSB. Shareholder capital literally provides the foundation needed for us to be a great bank. We realize we earn your trust by investing capital wisely and returning good value in the form of dividends and long-term share appreciation. We thank you for your continued investment in CSB Bancorp, Inc. and The Commercial and Savings Bank.
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ROBERT ROC BAKER Chairman of the Board of Directors |
6 2019 Report to Shareholders | CSB Bancorp, Inc.
INTRODUCTION
CSB Bancorp, Inc. (the Company or CSB) was incorporated under the laws of the State of Ohio in 1991 and is a registered financial holding company. The Companys wholly owned subsidiaries are The Commercial and Savings Bank (the Bank) and CSB Investment Services, LLC. The Bank is chartered under the laws of the State of Ohio and was organized in 1879. The Bank is a member of the Federal Reserve System, with deposits insured by the Federal Deposit Insurance Corporation, and its primary regulators are the Ohio Division of Financial Institutions and the Federal Reserve Board.
The Company, through the Bank, provides retail and commercial banking services to its customers including checking and savings accounts, time deposits, cash management, personal loans, commercial loans, real estate mortgage loans, installment loans, IRAs, night depository facilities, and trust and brokerage services. Its customers are located primarily in Holmes, Stark, Tuscarawas, Wayne, and portions of surrounding counties in Ohio.
Economic activity in the Companys market area continues to expand at a modest pace after strengthening in a few sectors and somewhat waning in sectors affected by the trade tariffs with China. The expansion has been most prevalent across various professional and non-professional service sectors while stabilizing in small and mid-sized manufacturing. Reported unemployment levels at December 2019 ranged from 2.8% to 4.4% in the four primary counties served by the Company. These levels decreased slightly from December 2018. Labor markets continued hiring at a firmer pace during the year. Wages increased moderately during 2019 for most entry level jobs and to a lesser extent for middle-skills jobs in certain sectors. The local housing market continues to improve with supply still relatively tight. Elevated costs of building materials have contributed to increased construction costs. Consumer confidence in the economy has been a primary driver for housing demand and higher consumer spending.
FORWARD-LOOKING STATEMENTS
Certain statements contained in Managements Discussion and Analysis of Financial Condition and Results of Operations are not related to historical results, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties. Any forward-looking statements made by the Company herein and in future reports and statements are not guarantees of future performance. Actual results may differ materially from those in forward-looking statements because of various risk factors as discussed in this annual report and the Companys Annual Report on Form 10-K. The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions to any forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date of such statements.
2019 FINANCIAL REVIEW
SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial information:
(Dollars in thousands, except share data) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||
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Statements of income: |
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Total interest income |
$ | 32,461 | $ | 29,637 | $ | 26,440 | $ | 23,632 | $ | 21,997 | ||||||||||||||||||||
Total interest expense |
4,062 | 2,886 | 1,988 | 1,473 | 1,567 | |||||||||||||||||||||||||
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Net interest income |
28,399 | 26,751 | 24,452 | 22,159 | 20,430 | |||||||||||||||||||||||||
Provision for loan losses |
1,140 | 1,316 | 1,145 | 493 | 389 | |||||||||||||||||||||||||
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Net interest income after provision for loan losses |
27,259 | 25,435 | 23,307 | 21,666 | 20,041 | |||||||||||||||||||||||||
Noninterest income |
5,428 | 4,758 | 4,340 | 4,296 | 4,424 | |||||||||||||||||||||||||
Noninterest expense |
19,769 | 18,518 | 17,316 | 16,255 | 15,796 | |||||||||||||||||||||||||
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Income before income taxes |
12,918 | 11,675 | 10,331 | 9,707 | 8,669 | |||||||||||||||||||||||||
Income tax provision |
2,504 | 2,263 | 3,230 | 2,969 | 2,647 | |||||||||||||||||||||||||
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Net income |
$ | 10,414 | $ | 9,412 | $ | 7,101 | $ | 6,738 | $ | 6,022 | ||||||||||||||||||||
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Per share of common stock: |
||||||||||||||||||||||||||||||
Basic earnings per share |
$ | 3.80 | $ | 3.43 | $ | 2.59 | $ | 2.46 | $ | 2.20 | ||||||||||||||||||||
Diluted earnings per share |
3.80 | 3.43 | 2.59 | 2.46 | 2.20 | |||||||||||||||||||||||||
Dividends |
1.08 | 0.98 | 0.84 | 0.78 | 0.76 | |||||||||||||||||||||||||
Book value |
31.17 | 27.91 | 25.72 | 23.85 | 22.35 | |||||||||||||||||||||||||
Average basic common shares outstanding |
2,742,296 | 2,742,242 | 2,742,242 | 2,742,028 | 2,739,470 | |||||||||||||||||||||||||
Average diluted common shares outstanding |
2,742,296 | 2,742,242 | 2,742,242 | 2,742,028 | 2,742,108 | |||||||||||||||||||||||||
Year-end balances: |
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Loans, net |
$ | 544,616 | $ | 543,067 | $ | 511,226 | $ | 470,158 | $ | 418,209 | ||||||||||||||||||||
Securities |
130,721 | 110,913 | 128,124 | 132,372 | 166,402 | |||||||||||||||||||||||||
Total assets |
818,683 | 731,722 | 707,063 | 669,978 | 650,314 | |||||||||||||||||||||||||
Deposits |
683,546 | 606,498 | 583,259 | 540,785 | 525,042 | |||||||||||||||||||||||||
Borrowings |
45,219 | 45,940 | 50,889 | 61,127 | 62,063 | |||||||||||||||||||||||||
Shareholders equity |
85,476 | 76,536 | 70,532 | 65,415 | 61,266 | |||||||||||||||||||||||||
Average balances: |
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Loans, net |
$ | 545,483 | $ | 529,522 | $ | 491,258 | $ | 443,862 | $ | 407,517 | ||||||||||||||||||||
Securities |
112,290 | 118,511 | 131,512 | 147,649 | 151,181 | |||||||||||||||||||||||||
Total assets |
765,722 | 716,243 | 692,859 | 651,318 | 633,298 | |||||||||||||||||||||||||
Deposits |
636,441 | 589,646 | 553,228 | 519,941 | 505,913 | |||||||||||||||||||||||||
Borrowings |
44,478 | 51,014 | 68,255 | 64,528 | 65,515 | |||||||||||||||||||||||||
Shareholders equity |
81,548 | 73,002 | 68,738 | 64,524 | 59,799 | |||||||||||||||||||||||||
Select ratios: |
||||||||||||||||||||||||||||||
Net interest margin, tax equivalent basis |
3.97 | % | 3.98 | % | 3.80 | % | 3.67 | % | 3.48 | % | ||||||||||||||||||||
Return on average total assets |
1.36 | 1.31 | 1.02 | 1.03 | 0.95 | |||||||||||||||||||||||||
Return on average shareholders equity |
12.77 | 12.89 | 10.33 | 10.44 | 10.07 | |||||||||||||||||||||||||
Average shareholders equity as a percent of average total assets |
10.65 | 10.19 | 9.92 | 9.91 | 9.44 | |||||||||||||||||||||||||
Net loan charge-offs as a percent of average loans |
0.01 | 0.19 | 0.17 | (0.03 | ) | 0.03 | ||||||||||||||||||||||||
Allowance for loan losses as a percent of loans at year-end |
1.27 | 1.08 | 1.08 | 1.11 | 1.10 | |||||||||||||||||||||||||
Shareholders equity as a percent of total year-end assets |
10.44 | 10.46 | 9.98 | 9.76 | 9.42 | |||||||||||||||||||||||||
Dividend payout ratio |
28.42 | 28.57 | 32.45 | 31.71 | 34.55 |
8 2019 Report to Shareholders | CSB Bancorp, Inc.
2019 FINANCIAL REVIEW
RESULTS OF OPERATIONS
Net Income
CSBs 2019 net income was $10.4 million compared to $9.4 million for 2018, an increase of 11%. Total revenue, net interest income plus noninterest income, increased 7% over the prior year to a total of $33.8 million. The provision for loan losses declined $176 thousand over the prior year. Expense increases include noninterest expenses of $1.3 million and an increase in the provision for income tax of $241 thousand over the prior year due to an increase in taxable income. Basic and diluted earnings per share were $3.80, up 11% from the prior year. The return on average assets was 1.36% in 2019 compared to 1.31% in 2018 and return on average equity was 12.77% in 2019 compared to 12.89% in 2018.
Net income for 2018 was $9.4 million while basic and diluted earnings per share were $3.43 as compared to $7.1 million, or $2.59 per share, for the year ended December 31, 2017. Net income increased 33% during 2018 as compared to 2017 due primarily to a $2.3 million increase in total net interest income which was partially offset by increases of $171 thousand in the provision for loan losses, and $1.2 million in noninterest expenses. Federal income taxes decreased $967 thousand in 2018 due to a decrease in the statutory rate. Return on average assets was 1.31% in 2018 compared to 1.02% in 2017, and return on average shareholders equity was 12.89% in 2018 as compared to 10.33% in 2017.
Net Interest Income
(Dollars in thousands) |
2019 |
2018 | 2017 | |||||||||||||||
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Net interest income |
$ | 28,399 | $ | 26,751 | $ | 24,452 | ||||||||||||
Taxable equivalent1 |
157 | 162 | 381 | |||||||||||||||
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Net interest income, fully taxable equivalent |
$ | 28,556 | $ | 26,913 | $ | 24,833 | ||||||||||||
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Net interest margin |
3.95 | % | 3.96 | % | 3.74 | % | ||||||||||||
Taxable equivalent adjustment1 |
0.02 | 0.02 | 0.06 | |||||||||||||||
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Net interest margin-taxable equivalent |
3.97 | % | 3.98 | % | 3.80 | % | ||||||||||||
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1Taxable equivalent adjustments have been computed assuming a 21% tax rate in 2019 and 2018 and a 34% tax rate in 2017.
Net interest income is the largest source of the Companys revenue and consists of the difference between interest income generated on earning assets and interest expense incurred on liabilities (deposits, short-term and long-term borrowings). Volumes, interest rates, composition of interest-earning assets, and interest-bearing liabilities affect net interest income.
Net interest income increased $1.6 million, or 6%, in 2019 compared to 2018 primarily due to an increase of 28 basis points in the average rate earned on loans as well as a 3% increase in average loan balances. The net interest margin decreased to 3.97% from 3.98% in 2018.
Net interest income increased $2.3 million, or 9%, in 2018 compared to 2017 primarily due to a 8% increase in average loan balances and an increase of 25 basis points in the average rate earned on loans. The net interest margin increased to 3.98% from 3.80% in 2017.
Interest income increased $2.8 million, or 10%, in 2019 compared to 2018 with a $2.3 million increase in loan interest income resulting primarily from an increase in loan interest yield. Following a period of rising interest rates in 2018, the prime rate remained stable until August 2019 and then was lowered three times by 25 basis points during the third and fourth quarters of 2019.
Interest income increased $3.2 million, or 12%, in 2018 compared to 2017 due to a $38 million increase in average loan balances augmented with an increase in loan interest rates. Following a period of low interest rates, the prime rate increased four times by 25 basis points during 2018.
Interest expense increased $1.2 million, or 41%, in 2019 as compared to 2018 due to rate increases of 23 basis points on deposits and 1 basis point on other borrowed funds. Balances of all deposit types increased in the year as competitive market interest rates rose.
Interest expense increased $898 thousand, or 45%, in 2018 as compared to 2017. After a period of low interest rates, many banks were loaned up with depositors demanding more yield as rates began to rise after December 2017.
2019 Report to Shareholders | CSB Bancorp, Inc. 9
2019 FINANCIAL REVIEW
The following table provides detailed analysis of changes in average balances, yield, and net interest income:
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Average
Balance1 |
Interest |
Average
Rate2 |
Average
Balance1 |
Interest |
Average
|
Average
|
Interest |
Average Rate2 |
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Interest-earning assets |
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Federal funds sold |
$ | 250 | $ | 5 | 2.00 | % | $ | 530 | $ | 10 | 1.89 | % | $ | 575 | $ | 6 | 0.96 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning deposits |
54,573 | 1,124 | 2.06 | 20,927 | 411 | 1.96 | 23,780 | 283 | 1.19 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities: |
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Taxable |
89,104 | 2,247 | 2.52 | 92,056 | 2,371 | 2.58 | 99,981 | 2,374 | 2.37 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax exempt4 |
23,186 | 674 | 2.91 | 26,455 | 771 | 2.91 | 31,531 | 1,030 | 3.27 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans3, 4 |
552,014 | 28,568 | 5.18 | 535,506 | 26,236 | 4.90 | 497,048 | 23,128 | 4.65 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total interest-earning assets |
719,127 | 32,618 | 4.54 | % | 675,474 | 29,799 | 4.41 | % | 652,915 | 26,821 | 4.11 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-earning assets |
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Cash and due from banks |
15,864 | 14,485 | 14,677 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bank premises and equipment, net |
11,297 | 9,537 | 8,817 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets |
25,965 | 22,731 | 22,240 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses |
(6,531 | ) | (5,984 | ) | (5,790 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total assets |
$ | 765,722 | $ | 716,243 | $ | 692,859 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Interest-bearing liabilities |
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Demand deposits |
$ | 135,313 | 593 | 0.44 | % | $ | 117,879 | 351 | 0.30 | % | $ | 101,081 | 129 | 0.13 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Savings deposits |
189,520 | 915 | 0.48 | 180,718 | 661 | 0.37 | 170,694 | 302 | 0.18 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Time deposits |
123,694 | 2,101 | 1.70 | 115,610 | 1,360 | 1.18 | 111,650 | 913 | 0.82 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Borrowed funds |
44,478 | 453 | 1.02 | 51,014 | 514 | 1.01 | 68,255 | 644 | 0.94 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total interest-bearing liabilities |
493,005 | 4,062 | 0.82 | % | 465,221 | 2,886 | 0.62 | % | 451,680 | 1,988 | 0.44 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Noninterest-bearing liabilities and shareholders equity |
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Demand deposits |
187,914 | 175,439 | 169,803 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities |
3,255 | 2,581 | 2,638 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shareholders equity |
81,548 | 73,002 | 68,738 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total liabilities and equity |
$ | 765,722 | $ | 716,243 | $ | 692,859 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net interest income4 |
$ | 28,556 | $ | 26,913 | $ | 24,833 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net interest margin |
3.97 | % | 3.98 | % | 3.80 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest spread |
3.72 | % | 3.79 | % | 3.67 | % |
1Average balances have been computed on an average daily basis.
2Average rates have been computed based on the amortized cost of the corresponding asset or liability.
3Average loan balances include nonaccrual loans.
4Interest income is shown on a fully tax-equivalent basis.
10 2019 Report to Shareholders | CSB Bancorp, Inc.
2019 FINANCIAL REVIEW
The following table compares the impact of changes in average rates and changes in average volumes on net interest income:
RATE/VOLUME ANALYSIS OF CHANGES IN INCOME AND EXPENSE1
2019 v. 2018 | 2018 v. 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Net Increase
|
Volume |
Rate |
Net Increase
|
Volume |
Rate |
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Increase (decrease) in interest income: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds |
$ | (5 | ) | $ | (6 | ) | $ | 1 | $ | 4 | $ | (1 | ) | $ | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning deposits |
713 | 693 | 20 | 128 | (56 | ) | 184 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Taxable |
(124 | ) | (74 | ) | (50 | ) | (3 | ) | (204 | ) | 201 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax exempt |
(97 | ) | (95 | ) | (2 | ) | (259 | ) | (148 | ) | (111 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans |
2,332 | 854 | 1,478 | 3,108 | 1,883 | 1,225 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total interest income change |
2,819 | 1,372 | 1,447 | 2,978 | 1,474 | 1,504 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Increase (decrease) in interest expense: |
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Demand deposits |
242 | 76 | 166 | 222 | 50 | 172 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Savings deposits |
254 | 42 | 212 | 359 | 37 | 322 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Time deposits |
741 | 137 | 604 | 447 | 47 | 400 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowed funds |
(61 | ) | (67 | ) | 6 | (130 | ) | (174 | ) | 44 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total interest expense change |
1,176 | 188 | 988 | 898 | (40 | ) | 938 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net interest income change |
$ | 1,643 | $ | 1,184 | $ | 459 | $ | 2,080 | $ | 1,514 | $ | 566 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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1Changes attributable to both volume and rate, which cannot be segregated, have been allocated based on the absolute value of the change due to volume and the change due to rate.
Provision For Loan Losses
The provision for loan losses is determined by management as the amount required to bring the allowance for loan losses to a level considered appropriate to absorb probable future net charge-offs inherent in the loan portfolio as of period end. The provision for loan losses was $1.1 million in 2019, $1.3 million in 2018, and $1.1 million in 2017. A lower provision expense in 2019 resulted from a year of lower loan losses following 2018 and 2017 which reflected increased loan volumes in the loan portfolio and higher loan losses. Nonperforming loans increased from 2018 to 2019. See Financial Condition Allowance for Loan Losses for additional discussion and information relative to the provision for loan losses.
Noninterest Income
YEAR ENDED DECEMBER 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Change from 2018 |
Change from 2017 |
|||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | Amount | % |
2018 |
Amount |
% | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Service charges on deposit accounts |
$ | 1,252 | $ | 70 | 5.9 | % | $ | 1,182 | $ | 49 | 4.3 | % | $ | 1,133 | ||||||||||||||||||||||||||||||||||||
Trust services |
899 | 36 | 4.2 | 863 | 176 | 25.6 | 687 | |||||||||||||||||||||||||||||||||||||||||||
Debit card interchange fees |
1,481 | 165 | 12.5 | 1,316 | 123 | 10.3 | 1,193 | |||||||||||||||||||||||||||||||||||||||||||
Gain on sale of loans, including MSRs |
462 | 155 | 50.5 | 307 | 11 | 3.7 | 296 | |||||||||||||||||||||||||||||||||||||||||||
Earnings on bank-owned life insurance |
446 | 110 | 32.7 | 336 | (21 | ) | (5.9 | ) | 357 | |||||||||||||||||||||||||||||||||||||||||
Unrealized gain (loss) on equity securities |
9 | 15 | N.M. | (6 | ) | (6 | ) | | | |||||||||||||||||||||||||||||||||||||||||
Other |
879 | 119 | 15.7 | 760 | 86 | 11.9 | 674 | |||||||||||||||||||||||||||||||||||||||||||
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Total noninterest income |
$ | 5,428 | $ | 670 | 14.1 | % | $ | 4,758 | $ | 418 | 9.6 | % | $ | 4,340 | ||||||||||||||||||||||||||||||||||||
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2019 Report to Shareholders | CSB Bancorp, Inc. 11
2019 FINANCIAL REVIEW
Noninterest income increased $670 thousand, or 14%, in 2019 compared to the same period in 2018. Gains on sales of mortgage loans including mortgage servicing rights (MSRs) increased 51% due to increasing sales of real estate mortgage loans with low fixed rate thirty-year maturities into the secondary market. The Bank sold $20 million in mortgage loans in 2019 as compared to the sale of $11 million of loans in 2018. Service charges on deposits, which are primarily customer overdraft fees, increased 6% in 2019. Debit card interchange fees increased 13% in 2019 compared to 2018 due to volume increases. Earnings on bank owned life insurance increased $110 thousand with the addition of $5 million in policy values in 2019. Trust and brokerage service revenue increased 4%.
Noninterest income increased $418 thousand, or 10%, in 2018 compared to the same period in 2017. Trust and brokerage service fees increased 26% reflecting a normalization of the departments. Debit card interchange fees increased 10% in 2018 compared to 2017 due to increased volume. Service charges on deposits, which are primarily customer overdraft fees, increased 4% in 2018. Gains on sales of mortgage loans including MSRs increased 4% as customers opted into thirty year fixed rate mortgages that continue to have low historical rates. The Bank originated and sold $11 million in mortgage loans in 2018 and 2017.
Noninterest Expenses
YEAR ENDED DECEMBER 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Change from 2018 | Change from 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | Amount | % | 2018 | Amount | % | 2017 | |||||||||||||||||||||||||||||||||||||||||||
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Salaries and employee benefits |
$ | 11,663 | $ | 768 | 7.0 | % | $ | 10,895 | $ | 886 | 8.9 | % | $ | 10,009 | ||||||||||||||||||||||||||||||||||||
Occupancy expense |
832 | (1 | ) | (0.1 | ) | 833 | (36 | ) | (4.1 | ) | 869 | |||||||||||||||||||||||||||||||||||||||
Equipment expense |
571 | (26 | ) | (4.4 | ) | 597 | (68 | ) | (10.2 | ) | 665 | |||||||||||||||||||||||||||||||||||||||
Professional and director fees |
1,332 | 303 | 29.4 | 1,029 | 66 | 6.9 | 963 | |||||||||||||||||||||||||||||||||||||||||||
Financial institutions tax |
612 | 48 | 8.5 | 564 | 41 | 7.8 | 523 | |||||||||||||||||||||||||||||||||||||||||||
Marketing and public relations |
535 | 27 | 5.3 | 508 | 107 | 26.7 | 401 | |||||||||||||||||||||||||||||||||||||||||||
Software expense |
938 | 45 | 5.0 | 893 | 14 | 1.6 | 879 | |||||||||||||||||||||||||||||||||||||||||||
Debit card expense |
554 | 17 | 3.2 | 537 | 2 | 0.4 | 535 | |||||||||||||||||||||||||||||||||||||||||||
Telecommunications expense |
384 | 123 | 47.1 | 261 | 13 | 3.7 | 248 | |||||||||||||||||||||||||||||||||||||||||||
FDIC insurance |
98 | (178 | ) | (64.5 | ) | 276 | 51 | 22.7 | 225 | |||||||||||||||||||||||||||||||||||||||||
Amortization of intangible assets |
63 | (38 | ) | (37.6 | ) | 101 | (15 | ) | (12.9 | ) | 116 | |||||||||||||||||||||||||||||||||||||||
Other |
$ | 2,187 | 163 | 8.1 | 2,024 | 141 | 7.5 | 1,883 | ||||||||||||||||||||||||||||||||||||||||||
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Total noninterest expenses |
19,769 | $ | 1,251 | 6.8 | % | $ | 18,518 | $ | 1,202 | 6.9 | % | $ | 17,316 | |||||||||||||||||||||||||||||||||||||
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Noninterest expense increased $1.3 million, or 7%, in 2019 compared to 2018. Salaries and employee benefits increased $768 thousand due to base compensation increasing $495 thousand as a result of additional full-time employees and annual adjustments. Increases in 2019 include retirement benefits and incentive compensation of $230 thousand, medical and dental expense rising $30 thousand, and employment taxes rising $37 thousand. The capitalization of employee costs of loan originations contributed to a decrease in salary expense of $33 thousand. Professional and director fees increased $303 thousand primarily due to an increase of $166 thousand in fees to improve the network infrastructure and increased legal and collection fees of $81 thousand. Telecommunications expense increased $123 thousand in 2019 over 2018 with additional back-up redundancy added to the core systems. Debit card expense increased $17 thousand in 2019. An increase in the Ohio financial institutions tax was recognized as capital increased. Equipment expense decreased $26 thousand in 2019, as compared to 2018, due to a decline in depreciation expense of $28 thousand. The FDIC insurance assessment decreased $178 thousand, or 65%, as small bank credits will be applied by the FDIC for four quarters starting in September 2019 so long as the FDICs Reserve Ratio is above 1.35%. Occupancy expense was stable. Other expenses increased $163 thousand including an increase of $68 thousand in check fraud losses, and $22 thousand in paper and printing costs.
Noninterest expense increased $1.2 million, or 7%, in 2018 compared to 2017. Salaries and employee benefits increased $886 thousand due to base compensation increasing $579 thousand in 2018 as a result of additional full time employees and annual adjustments. The capitalization of employee costs of loan originations contributed to an increase in salary expense of $75 thousand. Following the Tax Cuts and Jobs Act (TCJA), the 401k plan match was increased with 2018 expense rising $202 thousand. Marketing and public relations expense increased $107 thousand, or 27%, primarily due to increased expenses related to brand recognition and community support in the Companys footprint in 2018. An increase in the Ohio financial institutions tax was recognized as capital increased. Equipment expense decreased $68 thousand in 2018, as compared to 2017. The FDIC insurance assessment increased $51 thousand, or 23%, due to increased assets. Occupancy expense decreased primarily with a reduction of branch facility costs, which included the construction of a branch office that had combined two leased branches in the same city.
12 2019 Report to Shareholders | CSB Bancorp, Inc.
2019 FINANCIAL REVIEW
Income Taxes
The provision for income taxes amounted to $2.5 million in 2019, $2.3 million in 2018, and $3.2 million in 2017. The increase in 2019 resulted from an increase in income. The decrease in 2018 resulted from the TCJA reducing the corporate statutory tax rate from 34% to 21%. The effective tax rate in 2019 and 2018 approximates 19%. The provision increase in 2017 included the TCJA income tax increase adjustment of $101 thousand resulting from the write down of a deferred tax asset of $109 thousand related to unrealized losses on securities, as the valuation rate on this future tax deduction was reduced from 34% to 21% in accordance with the TCJA.
FINANCIAL CONDITION
Total assets of the Company were $819 million at December 31, 2019, compared to $732 million at December 31, 2018, representing an increase of $87 million, or 12%. Net loans increased $2 million, or less than 1%, while investment securities increased $20 million, or 18%, and total cash and cash equivalents increased $56 million. Deposits increased $77 million and short-term borrowings increased $1 million, while other borrowings from the Federal Home Loan Bank (FHLB) decreased by $2 million, or 26%.
Securities
Total investment securities increased $20 million, or 18%, to $131 million at year-end 2019. CSBs portfolio is primarily comprised of agency mortgage-backed securities, obligations of state and political subdivisions, other government agencies debt, and corporate bonds. Restricted securities consist primarily of FHLB stock.
The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations, or trust preferred securities. The Companys municipal bond portfolio consists of tax-exempt general obligation and revenue bonds. As of December 31, 2019, 96% of such bonds held an S&P or Moodys investment grade rating and 4%, were non-rated. The municipal portfolio includes a broad spectrum of counties, towns, universities, and school districts with 82% of the portfolio originating in Ohio, and 18% in Pennsylvania. Gross unrealized security losses within the portfolio were less than 1% of total securities at December 31, 2019, reflecting interest rate fluctuations, not credit downgrades.
One of the primary functions of the securities portfolio is to provide a source of liquidity and it is structured such that maturities and cash flows provide a portion of the Companys liquidity needs and asset/liability management requirements.
Loans
Total loans increased $3 million, or less than 1%, during 2019 with increases in commercial real estate and 1-4 family residential real estate. Volume increases were recognized as follows: commercial real estate loan increased $13 million, or 7%, and residential real estate loans increased $7 million, or 4%. Interest rates decreased during the third and fourth quarters of 2019, however, there was a slowing of commercial loan growth as business loan prepayments accelerated with increased competition from private lenders and several loan participations were repurchased by the originating banks.
The Company originated $47 million and $29 million of portfolio mortgage loans, which were predominately variable rate, in 2019 and 2018, respectively. Attractive interest rates in the secondary market also continued to drive consumer demand for longer-term 1-4 family fixed rate residential mortgages as the Company sold $20 million of originated mortgages into the secondary market in 2019 as compared to $11 million in 2018. Demand for home equity loans improved in 2019, with balances increasing $2 million. Installment lending declined slightly with consumer loans decreasing from a slowdown in the origination of RV finance loans.
Management anticipates the Companys local service areas will continue to exhibit modest economic growth in line with the past three years. Commercial and commercial real estate loans, in aggregate, comprise approximately 61% and 60% of the total loan portfolio at year-end 2019 and 2018, respectively. Residential real estate loans increased to 32% in 2019 from 30% of the total loan portfolio. Construction and land development loans decreased to 4% of the portfolio as loans transferred to the commercial real estate portfolio for permanent financing. The Company is well within the respective regulatory guidelines for investment in construction, development, and investment property loans that are not owner occupied.
Most of the Companys lending activity is with customers primarily located within Holmes, Stark, Tuscarawas, and Wayne counties in Ohio. 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, 2019, included $48 million, or 9%, of total loans to lessors of non-residential buildings or dwellings; $32 million, or 6%, of total loans to borrowers in the hotel, motel, and lodging business; $30 million, or 5%, of total loans to logging, sawmills, and timber tract operations; and $29 million, or 5%, of total loans to assisted living facilities for the elderly. 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.
2019 Report to Shareholders | CSB Bancorp, Inc. 13
2019 FINANCIAL REVIEW
Nonperforming Assets, Impaired Loans, and Loans Past Due 90 Days or More
Nonperforming assets consist of nonaccrual loans, loans past due 90 days and still accruing, and other real estate acquired through or in lieu of foreclosure. Other impaired loans include certain loans that are internally classified as substandard or doubtful. Loans are placed on nonaccrual status when they become past due 90 days or more, or when mortgage loans are past due as to principal and interest 120 days or more, unless they are both well secured and in the process of collection.
The increase in nonperforming loans year-over-year is primarily due to a single $1.7 million commercial facility. Approximately $1.1 million of the nonperforming loan total is guaranteed by either the USDA or the SBA.
NONPERFORMING ASSETS | DECEMBER 31 | |||||||||||||
(Dollars in thousands) | 2019 | 2018 | ||||||||||||
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Nonaccrual loans |
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Commercial |
$ | 1,325 | $ | 157 | ||||||||||
Commercial real estate |
2,405 | 2,131 | ||||||||||||
Residential real estate |
521 | 807 | ||||||||||||
Consumer |
47 | 60 | ||||||||||||
Loans past due 90 days or more and still accruing |
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Commercial |
67 | | ||||||||||||
Residential real estate |
174 | 174 | ||||||||||||
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Total nonperforming loans |
4,539 | 3,329 | ||||||||||||
Other real estate owned |
99 | 99 | ||||||||||||
Other repossessed assets |
20 | | ||||||||||||
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Total nonperforming assets |
$ | 4,658 | $ | 3,428 | ||||||||||
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Nonperforming assets as a percentage of loans plus other real estate and repossessed assets |
0.84 | % | 0.61 | % |
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered by management to be adequate to cover loan losses that are currently anticipated based on past loss experience, general economic conditions, changes in mix and size of the loan portfolio, information about specific borrower situations, and other factors and estimates which are subject to change over time. Management periodically reviews selected large loans, delinquent and other problem loans, and selected other loans. Collectability of these loans is evaluated by considering the current financial position and performance of the borrower, estimated market value of the collateral, the Companys collateral position in relationship to other creditors, guarantees, and other potential sources of repayment. Management forms judgments, which are in part subjective, as to the probability of loss and the amount of loss on these loans as well as other loans taken together. The Companys Allowance for Loan Losses Policy includes, among other items, provisions for classified loans, and a provision for the remainder of the portfolio based on historical data, including past charge-offs.
14 2019 Report to Shareholders | CSB Bancorp, Inc.
2019 FINANCIAL REVIEW
ALLOWANCE FOR LOAN LOSSES | FOR THE YEAR ENDED | |||||||||||||||
(Dollars in thousands) | 2019 | 2018 | ||||||||||||||
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Beginning balance of allowance for loan losses |
$ | 5,907 | $ | 5,604 | ||||||||||||
Provision for loan losses |
1,140 | 1,316 | ||||||||||||||
Charge-offs: |
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Commercial |
47 | 823 | ||||||||||||||
Commercial real estate |
| 103 | ||||||||||||||
Residential real estate & home equity |
| 37 | ||||||||||||||
Consumer |
211 | 119 | ||||||||||||||
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Total charge-offs |
258 | 1,082 | ||||||||||||||
Recoveries: |
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Commercial |
175 | 61 | ||||||||||||||
Commercial real estate |
1 | 1 | ||||||||||||||
Residential real estate & home equity |
7 | 3 | ||||||||||||||
Consumer |
45 | 4 | ||||||||||||||
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Total recoveries |
228 | 69 | ||||||||||||||
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Net charge-offs |
30 | 1,013 | ||||||||||||||
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Ending balance of allowance for loan losses |
$ | 7,017 | $ | 5,907 | ||||||||||||
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Net charge-offs as a percentage of average total loans |
0.01 | % | 0.19 | % | ||||||||||||
Allowance for loan losses as a percentage of total loans |
1.27 | 1.08 | ||||||||||||||
Allowance for loan losses to total nonperforming loans |
1.55x | 1.77 | x | |||||||||||||
Components of the allowance for loan losses: |
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General reserves |
$ | 6,983 | $ | 5,806 | ||||||||||||
Specific reserve allocations |
34 | 101 | ||||||||||||||
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Total allowance for loan losses |
$ | 7,017 | $ | 5,907 | ||||||||||||
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The allowance for loan losses totaled $7.0 million, or 1.27%, of total loans at year-end 2019 as compared to $5.9 million, or 1.08%, of total loans at year-end 2018. The Bank had net charge-offs of $30 thousand for 2019 as compared to net charge-offs of $1 million in 2018.
The Company maintains an internal watch list on which it places loans where managements analysis of the borrowers operating results and financial condition indicates the borrowers cash flows are inadequate to meet its debt service requirements and loans where there exists an increased risk that such a shortfall may occur. Nonperforming loans, which consist of loans past due 90 days or more and nonaccrual loans, aggregated $4.5 million, or 0.82%, of loans at year-end 2019 as compared to $3.3 million, or 0.61% of loans at year-end 2018. Impaired loans were $6.1 million at year-end 2019 as compared to $3.9 million at year-end 2018. Management has assigned loss allocations to absorb the estimated losses on impaired loans. These allocations are included in the total allowance for loan losses balance.
Other Assets
Net premises and equipment increased $2 million to $12 million at year-end 2019 with the construction completion of an owned branch facility in 2019 replacing a leased facility. Total bank-owned life insurance increased from $14 million at year-end 2018 to $19 million at year-end 2019 as additional policies were purchased totaling $5 million along with $446 thousand of increases in the cash surrender value. Other real estate owned at December 31, 2019 and 2018 was $99 thousand. The Company recognized a net deferred tax asset of $126 thousand in December 31, 2019 as compared to $446 thousand at December 31, 2018.
2019 Report to Shareholders | CSB Bancorp, Inc. 15
2019 FINANCIAL REVIEW
Deposits
The Companys deposits are obtained primarily from individuals and businesses located in its market area. For deposits, the Company must compete with products offered by other financial institutions, as well as alternative investment options. Demand and savings deposits increased for the year ended 2019, due to focused retail and business banking strategies to obtain more account relationships as well as customers reflecting their preference for shorter maturities. Customers with larger deposit balances of greater than $250 thousand are seeking additional rate on their balances with the increase in market rates during the year.
December 31 | Change from 2018 | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2019 | 2018 | Amount | % | ||||||||||||||||||||||||||||||
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Noninterest-bearing demand |
$ | 197,780 | $ | 185,871 | $ | 11,909 | 6.4 | % | ||||||||||||||||||||||||||
Interest-bearing demand |
161,838 | 120,424 | 41,414 | 34.4 | ||||||||||||||||||||||||||||||
Traditional savings |
120,035 | 113,814 | 6,221 | 5.5 | ||||||||||||||||||||||||||||||
Money market savings |
76,332 | 69,898 | 6,434 | 9.2 | ||||||||||||||||||||||||||||||
Time deposits in excess of $250,000 |
23,034 | 17,951 | 5,083 | 28.3 | ||||||||||||||||||||||||||||||
Other time deposits |
104,527 | 98,540 | 5,987 | 6.1 | ||||||||||||||||||||||||||||||
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Total deposits |
$ | 683,546 | $ | 606,498 | $ | 77,048 | 12.7 | % | ||||||||||||||||||||||||||
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Other Funding Sources
The Company obtains additional funds through securities sold under repurchase agreements, overnight borrowings from the FHLB or other financial institutions, and advances from the FHLB. Short-term borrowings, consisting of securities sold under repurchase agreements, increased $1 million. Other borrowings, consisting of FHLB advances, decreased $2 million as the result of maturities and principal repayments. All FHLB borrowings at December 31, 2019 have long term maturities with monthly amortizing payments.
CAPITAL RESOURCES
Total shareholders equity increased to $85.5 million in December 31, 2019, as compared to $76.5 million at December 31, 2018. This increase was primarily due to $10.4 million of net income which was partially offset by the payment of $3.0 million of cash dividends in 2019. The Board of Directors approved a Stock Repurchase Program on July 7, 2005 that allowed the repurchase of up to 10% of the Companys then-outstanding common shares. Repurchased shares are to be held as treasury stock and are available for general corporate purposes. At December 31, 2019, approximately 41 thousand shares could still be repurchased under the current authorized program. No shares were repurchased in 2019 or 2018.
Effective January 1, 2015, the Federal Reserve adopted final rules implementing Basel III and regulatory capital changes required by the Dodd-Frank Act. The rules apply to both the Company and the Bank. The rules established minimum risk-based and leverage capital requirements for all banking organizations. The rules include: (a) a common equity tier 1 capital ratio of at least 4.5%, (b) a tier 1 capital ratio of at least 6.0%, (c) a minimum total capital ratio of at least 8.0%, and (d) a minimum leverage ratio of 4%. 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 classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if 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. The regulatory capital conservation buffer on January 1, 2020, is 2.5%. The Company and Banks actual and required capital amounts are disclosed in Note 13 to the consolidated financial statements.
Dividends paid by the Bank to CSB are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Company is subject to restrictions by regulatory authorities, which generally limit dividends to current year net income and the prior two years net retained earnings, as defined by regulation. In addition, dividend payments generally cannot reduce regulatory capital levels below the minimum regulatory guidelines discussed above.
16 2019 Report to Shareholders | CSB Bancorp, Inc.
2019 FINANCIAL REVIEW
LIQUIDITY
December 31
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Change from 2018 |
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(Dollars in millions) | 2019 | 2018 | ||||||||||||||||||||||||
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Cash and cash equivalents |
$ | 102 | $ | 46 | $ | 56 | ||||||||||||||||||||
Unused lines of credit |
97 | 89 | 8 | |||||||||||||||||||||||
Unpledged securities at fair market value |
61 | 39 | 22 | |||||||||||||||||||||||
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$ | 260 | $ | 174 | $ | 86 | |||||||||||||||||||||
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Net deposits and short-term liabilities |
$ | 673 | $ | 599 | $ | 74 | ||||||||||||||||||||
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Liquidity ratio |
38.6 | % | 29.1 | % | ||||||||||||||||||||||
Minimum board approved liquidity ratio |
20.0 | % | 20.0 | % |
Liquidity refers to the Companys ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, pay operating expenses, and meet other obligations. Liquidity is monitored by CSBs Asset Liability Committee. The Company was within all Board-approved limits at December 31, 2019 and 2018. Additional sources of liquidity include net income, loan repayments, the availability of borrowings, and adjustments of interest rates to attract deposit accounts.
As summarized in the Consolidated Statements of Cash Flows, the most significant investing activities for the Company in 2019 included net loan originations of $3 million and securities purchases of $46 million, offset by maturities and repayment of securities totaling $27 million. The Companys financing activities included a $77 million increase in deposits, $3 million in cash dividends paid, and a $2 million net decrease in FHLB advances.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The most significant market risk the Company is exposed to is interest rate risk. The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans and securities), which are funded by interest-bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in the market rates of interest, resulting in market risk. None of the Companys financial instruments are held for trading purposes.
The Board of Directors establishes policies and operating limits with respect to interest rate risk. The Company manages interest rate risk regularly through its Asset Liability Committee. The Committee meets periodically to review various asset and liability management information including, but not limited to, the Companys liquidity position, projected sources and uses of funds, interest rate risk position, and economic conditions.
Interest rate risk is monitored primarily through the use of an earnings simulation model. The model is highly dependent on various assumptions, which change regularly as the balance sheet and market interest rates change. The earnings simulation model projects changes in net interest income resulting from the effect of changes in interest rates. The analysis is performed quarterly over a twenty-four month horizon. The analysis includes two balance sheet models, one based on a static balance sheet and one on a dynamic balance sheet with projected growth in assets and liabilities. This analysis is performed by estimating the expected cash flows of the Companys financial instruments using interest rates in effect at year-end 2019 and 2018. Interest rate risk policy limits are tested by measuring the anticipated change in net interest income over a two year period. The tests assume a quarterly ramped 100, 200, 300, and 400 basis point increase and a 100 and 200 basis point decreases in 2019 and 2018 in market interest rates as compared to a stable rate environment or base model. The following table reflects the change to interest income for the first twelve-month period of the twenty-four month horizon.
2019 Report to Shareholders | CSB Bancorp, Inc. 17
2019 FINANCIAL REVIEW
Net Interest Income at Risk
December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Change In
Interest Rates (Basis Points) |
Net
Interest Income |
Dollar Change |
Percentage
Change |
Board
Policy Limits |
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(Dollars in thousands) |
+ 400 | $ | 30,266 | $ | 1,481 | 5.1 | % | ± | 25 | % | ||||||||||||||||||||||||||||||||||||||||
+ 300 | 29,958 | 1,173 | 4.1 | ± | 15 | |||||||||||||||||||||||||||||||||||||||||||||
+ 200 | 29,599 | 814 | 2.8 | ± | 10 | |||||||||||||||||||||||||||||||||||||||||||||
+ 100 | 29,208 | 423 | 1.5 | ± | 5 | |||||||||||||||||||||||||||||||||||||||||||||
0 | 28,785 | | | |||||||||||||||||||||||||||||||||||||||||||||||
100 | 27,955 | (830 | ) | (2.9 | ) | ± | 5 | |||||||||||||||||||||||||||||||||||||||||||
200 | 26,767 | (2,018 | ) | (7.0 | ) | ± | 10 | |||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||
+ 400 | $ | 30,114 | $ | 931 | 3.2 | % | ± | 25 | % | |||||||||||||||||||||||||||||||||||||||||
+ 300 | 29,922 | 739 | 2.5 | ± | 15 | |||||||||||||||||||||||||||||||||||||||||||||
+ 200 | 29,701 | 518 | 1.8 | ± | 10 | |||||||||||||||||||||||||||||||||||||||||||||
+ 100 | 29,436 | 253 | 0.9 | ± | 5 | |||||||||||||||||||||||||||||||||||||||||||||
0 | 29,183 | | | |||||||||||||||||||||||||||||||||||||||||||||||
100 | 28,831 | (352 | ) | (1.2 | ) | ± | 5 | |||||||||||||||||||||||||||||||||||||||||||
200 | 27,880 | (1,303 | ) | (4.5 | ) | ± | 10 |
Management reviews Net Interest Income at Risk with the Board on a periodic basis. The Company was within all Board-approved limits at December 31, 2019 and 2018.
Economic Value of Equity at Risk
December 31, 2019 | ||||||||
Change In Interest Rates (Basis Points) |
Percentage Change |
Board Policy Limits |
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+ 400 |
30.9 | % | ± 35% | |||||
+ 300 |
25.5 | ± 30 | ||||||
+ 200 |
18.8 | ± 20 | ||||||
+ 100 |
10.5 | ± 15 | ||||||
100 |
(14.2 | ) | ± 15 | |||||
200 |
(32.8 | ) | ± 20 | |||||
December 31, 2018 | ||||||||
+ 400 |
22.8 | % | ± 35% | |||||
+ 300 |
18.6 | ± 30 | ||||||
+ 200 |
13.7 | ± 20 | ||||||
+ 100 |
7.4 | ± 15 | ||||||
100 |
(9.7 | ) | ± 15 | |||||
200 |
(20.9 | ) | ± 20 |
18 2019 Report to Shareholders | CSB Bancorp, Inc.
2019 FINANCIAL REVIEW
The economic value of equity is calculated by subjecting the period-end balance sheet to changes in interest rates and measuring the impact of the changes on the values of the assets and liabilities. Hypothetical changes in interest rates are then applied to the financial instruments. Then the cash flows and fair values are again estimated using these hypothetical rates. For the net interest income estimates, the hypothetical rates are applied to the financial instruments based on the assumed cash flows.
Management periodically measures and reviews the economic value of equity at risk with the Board. At December 31, 2019, the market value of equity as a percent of the base in a 400 basis point rising rate environment indicates increases of 30.9% and 22.8% as of December 31, 2019 and 2018, respectively. Due to the amount of overnight cash held at December 31, 2019 and 2018, the Company was outside of the Board-approved 20% limit for a 200 basis point decrease in interest rates.
SIGNIFICANT ASSUMPTIONS AND OTHER CONSIDERATIONS
The above analysis is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, and reactions of depositors to changes in interest rates and this should not be relied upon as being indicative of actual results. Further, the analysis does not contemplate all actions the Company may undertake in response to changes in interest rates.
U.S. Treasury securities, obligations of U.S. Government corporations and agencies, obligations of states and political subdivisions will generally repay at their stated maturity or if callable prior to their final maturity date. Mortgage-backed security payments increase when interest rates are low and decrease when interest rates rise. Most of the Companys loans permit the borrower to prepay the principal balance prior to maturity without penalty. The likelihood of prepayment depends on a number of factors: current interest rate and interest rate index (if any) on the loan, the financial ability of the borrower to refinance, the economic benefit to be obtained from refinancing, availability of refinancing at attractive terms, as well as economic conditions in specific geographic areas, which affect the sales and price levels of residential and commercial property. In a changing interest rate environment, prepayments may increase or decrease on fixed and adjustable rate loans depending on the current relative levels and expectations of future short-term and long-term interest rates. Prepayments on adjustable rate loans generally increase when long-term interest rates fall or are at historically low levels relative to short-term interest rates, thus making fixed rate loans more desirable. While savings and checking deposits generally may be withdrawn upon the customers request without prior notice, a continuing relationship with customers resulting in future deposits and withdrawals is generally predictable, leading to a dependable and uninterrupted source of funds. Time deposits generally have early withdrawal penalties, which discourage customer withdrawal prior to maturity. Short-term borrowings have fixed maturities. Certain advances from the FHLB carry prepayment penalties and are expected to be repaid in accordance with their contractual terms.
FAIR VALUE MEASUREMENTS
The Company discloses the estimated fair value of its financial instruments at December 31, 2019 and 2018 in Note 16 to the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS
The following table summarizes the Companys loan commitments, including letters of credit, as of December 31, 2019:
Amount of Commitment to Expire Per Period
|
||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) Type of Commitment |
Total
Amount |
Less than
1 year |
1 to 3
Years |
3 to 5
Years |
Over 5
Years |
|||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||
Commercial lines of credit |
$ | 113,478 | $ | 104,178 | $ | 9,253 | $ | 47 | $ | | ||||||||||||||||||||||||||||||||||||
Real estate lines of credit |
60,621 | 2,628 | 6,382 | 6,958 | 44,653 | |||||||||||||||||||||||||||||||||||||||||
Construction |
23,761 | 7,701 | 16,060 | | | |||||||||||||||||||||||||||||||||||||||||
Consumer lines of credit |
384 | 384 | | | | |||||||||||||||||||||||||||||||||||||||||
Credit cards lines of credit |
5,274 | 5,274 | | | | |||||||||||||||||||||||||||||||||||||||||
Overdraft privilege |
7,061 | 7,061 | | | | |||||||||||||||||||||||||||||||||||||||||
Commercial real estate loan commitments |
| | | | | |||||||||||||||||||||||||||||||||||||||||
Letters of credit |
741 | 640 | 71 | 30 | | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
Total commitments |
$ | 211,320 | $ | 127,866 | $ | 31,766 | $ | 7,035 | $ | 44,653 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
All lines of credit represent either fee-paid or legally binding loan commitments for the loan categories noted. Letters of credit are also included in the amounts noted in the table since the Company requires that each letter of credit be supported by a loan agreement. The commercial and consumer lines represent both unsecured and secured obligations. The real estate lines are secured by mortgages on residential property. It is anticipated that a significant portion of these lines will expire without being drawn upon.
2019 Report to Shareholders | CSB Bancorp, Inc. 19
2019 FINANCIAL REVIEW
The following table summarizes the Companys other contractual obligations, exclusive of interest, as of December 31, 2019:
Payment Due by Period | ||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) Contractual Obligations |
Total
|
Less than
|
1 to 3
Years |
3 to 5
Years |
Over 5
Years |
|||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||
Total time deposits |
$ | 127,561 | $ | 63,354 | $ | 57,292 | $ | 6,915 | $ | | ||||||||||||||||||||||||||||||||||||||
Short-term borrowings |
38,889 | 38,889 | | | | |||||||||||||||||||||||||||||||||||||||||||
Other borrowings |
6,330 | 1,665 | 2,204 | 1,195 | 1,266 | |||||||||||||||||||||||||||||||||||||||||||
Operating leases |
574 | 75 | 183 | 195 | 121 | |||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
Total obligations |
$ | 173,354 | $ | 103,983 | $ | 59,679 | $ | 8,305 | $ | 1,387 | ||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
The other borrowings noted in the preceding table represent borrowings from the FHLB. The notes require payment of interest on a monthly basis with principal due in monthly installments. The obligations bear stated fixed interest rates and stipulate a prepayment penalty if the notes interest rate exceeds the current market rate for similar borrowings at the time of repayment. As the notes mature, the Company evaluates the liquidity and interest rate circumstances, at that time, to determine whether to pay off or renew the note. The evaluation process typically includes: the strength of current and projected customer loan demand, the Companys federal funds sold or purchased position, projected cash flows from maturing investment securities, the current and projected market interest rate environment, local and national economic conditions, and customer demand for the Companys deposit product offerings.
CRITICAL ACCOUNTING POLICIES
The Companys consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the commercial banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements. These estimates, assumptions, and judgments are based upon the information available as of the date of the financial statements.
The most significant accounting policies followed by the Company are presented in the Summary of Significant Accounting Policies. These policies, along with the other disclosures presented in the Notes to Consolidated Financial Statements and the 2018 Financial Review, provide information about how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the other-than-temporary impairment of securities, allowance for loan losses, goodwill, and the fair value of financial instruments as the accounting areas that require the most subjective and complex estimates, assumptions and judgments and, as such, could be the most subject to revision as new information becomes available.
Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term other-than-temporary is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
As previously noted in the section entitled Allowance for Loan Losses, management performs an analysis to assess the adequacy of its allowance for loan losses. This analysis encompasses a variety of factors including: the potential loss exposure for individually reviewed loans, the historical loss experience, the volume of nonperforming loans (i.e., loans in nonaccrual status or past due 90 days or more), the volume of loans past due, any significant changes in lending or loan review staff, an evaluation of current and future local and national economic conditions, any significant changes in the volume or mix of loans within each category, a review of the significant concentrations of credit, and any legal, competitive, or regulatory concerns.
The Company accounts for business combinations using the acquisition method of accounting. Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives, consisting of core deposit intangibles, are amortized using accelerated methods over their estimated weighted-average useful lives, approximating ten years. Additional information is presented in Note 6, Core Deposit Intangible Assets.
The Company groups financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level I valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level II valuations are for instruments that trade in less active dealer or broker markets and incorporate values obtained for identical or comparable instruments. Level III valuations are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level III valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument.
20 2019 Report to Shareholders | CSB Bancorp, Inc.
2019 FINANCIAL REVIEW
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, requiring measurement of financial position, and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Most assets and liabilities of the Company are monetary in nature. Therefore, interest rates have a more significant impact on the Companys performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as prices of goods and services. The liquidity, maturity structure, and quality of the Companys assets and liabilities are critical to maintenance of acceptable performance levels.
COMMON STOCK AND SHAREHOLDER INFORMATION
Common shares of the Company are not traded on an established market. Shares are traded on the OTC market through broker/ dealers under the symbol CSBB and through private transactions. The table below represents the range of high and low prices paid for transactions known to the Company. Management does not have knowledge of prices paid on all transactions. Because of the lack of an established market, these prices may not reflect the prices at which stock would trade in an active market. These quotations reflect interdealer prices, without mark-up, mark-down, or commission and may not represent actual transactions. The table specifies cash dividends declared by the Company to its shareholders during 2019 and 2018. No assurances can be given that future dividends will be declared, or if declared, what the amount of any such dividends will be. Additional information concerning restrictions over the payment of dividends is included in Note 13 of the consolidated financial statements.
Quarterly Common Stock Price and Dividend Data
Quarter Ended | High | Low |
Dividends
Declared Per Share |
Dividends
Declared |
||||||||||||||||||||||
|
||||||||||||||||||||||||||
March 31, 2019 |
$ | 39.70 | $ | 37.50 | $ 0.26 | $ | 713,011 | |||||||||||||||||||
June 30, 2019 |
42.14 | 38.75 | 0.26 | 713,011 | ||||||||||||||||||||||
September 30, 2019 |
41.67 | 38.67 | 0.28 | 767,858 | ||||||||||||||||||||||
December 31, 2019 |
41.25 | 38.67 | 0.28 | 767,858 | ||||||||||||||||||||||
March 31, 2018 |
$ | 36.50 | $ | 32.55 | $ 0.24 | $ | 658,138 | |||||||||||||||||||
June 30, 2018 |
44.00 | 35.90 | 0.24 | 658,138 | ||||||||||||||||||||||
September 30, 2018 |
44.99 | 38.98 | 0.24 | 658,138 | ||||||||||||||||||||||
December 31, 2018 |
41.50 | 38.50 | 0.26 | 712,983 |
As of December 31, 2019, the Company had 1,153 shareholders of record and 2,742,350 outstanding shares of common stock.
2019 Report to Shareholders | CSB Bancorp, Inc. 21
REPORT ON MANAGEMENTS ASSESSMENT OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of CSB Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Companys internal control over financial reporting is designed to provide reasonable assurance that our published financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted the required assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2019. Managements assessment did not identify any material weaknesses in the Companys internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework. Based upon this assessment, management believes that the Companys internal control over financial reporting is effective as of December 31, 2019.
The Companys internal control over financial reporting as of December 31, 2019 has been audited by S.R. Snodgrass, P.C. an independent registered public accounting firm, as stated in their report appearing on the next page.
Eddie L. Steiner President, Chief Executive Officer |
Paula J. Meiler Senior Vice President, Chief Financial Officer |
|||
22 2019 Report to Shareholders | CSB Bancorp, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
of CSB Bancorp, Inc.
Opinion on Internal Control over Financial Reporting
We have audited CSB Bancorp, Inc. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018; 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, 2019, of the Company; and our report dated March 3, 2020, expressed an unqualified opinion.
Basis for Opinion
The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report on Managements Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements, for external purposes, in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Cranberry Township, Pennsylvania
March 3, 2020
2019 Report to Shareholders | CSB Bancorp, Inc. 23
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, 2019 and 2018; 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, 2019; 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Companys internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 3, 2020, expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys 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. 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.
We have served as the Companys auditor since 2005.
Cranberry Township, Pennsylvania
March 3, 2020
24 2019 Report to Shareholders | CSB Bancorp, Inc.
December 31, 2019 and 2018
These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.
2019 Report to Shareholders | CSB Bancorp, Inc. 25
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2019, 2018, and 2017
(Dollars in thousands, except per share data) | 2019 | 2018 | 2017 | |||||||||||||||||||||||
|
||||||||||||||||||||||||||
INTEREST AND DIVIDEND INCOME |
||||||||||||||||||||||||||
Loans, including fees |
$ | 28,553 | $ | 26,237 | $ | 23,097 | ||||||||||||||||||||
Taxable securities |
2,247 | 2,371 | 2,374 | |||||||||||||||||||||||
Nontaxable securities |
532 | 608 | 680 | |||||||||||||||||||||||
Other |
1,129 | 421 | 289 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total interest and dividend income |
32,461 | 29,637 | 26,440 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
INTEREST EXPENSE |
||||||||||||||||||||||||||
Deposits |
3,609 | 2,372 | 1,344 | |||||||||||||||||||||||
Short-term borrowings |
317 | 333 | 149 | |||||||||||||||||||||||
Other borrowings |
136 | 181 | 495 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total interest expense |
4,062 | 2,886 | 1,988 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
NET INTEREST INCOME |
28,399 | 26,751 | 24,452 | |||||||||||||||||||||||
PROVISION FOR LOAN LOSSES |
1,140 | 1,316 | 1,145 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Net interest income, after provision for loan losses |
27,259 | 25,435 | 23,307 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
NONINTEREST INCOME |
||||||||||||||||||||||||||
Service charges on deposit accounts |
1,252 | 1,182 | 1,133 | |||||||||||||||||||||||
Trust services |
899 | 863 | 687 | |||||||||||||||||||||||
Debit card interchange fees |
1,481 | 1,316 | 1,193 | |||||||||||||||||||||||
Gain on sale of loans, net |
462 | 307 | 296 | |||||||||||||||||||||||
Earnings on bank owned life insurance |
446 | 336 | 357 | |||||||||||||||||||||||
Unrealized gain (loss) on equity securities |
9 | (6 | ) | | ||||||||||||||||||||||
Other income |
879 | 760 | 674 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total noninterest income |
5,428 | 4,758 | 4,340 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
NONINTEREST EXPENSES |
||||||||||||||||||||||||||
Salaries and employee benefits |
11,663 | 10,895 | 10,009 | |||||||||||||||||||||||
Occupancy expense |
832 | 833 | 869 | |||||||||||||||||||||||
Equipment expense |
571 | 597 | 665 | |||||||||||||||||||||||
Professional and director fees |
1,332 | 1,029 | 963 | |||||||||||||||||||||||
Financial institutions and franchise tax |
612 | 564 | 523 | |||||||||||||||||||||||
Marketing and public relations |
535 | 508 | 401 | |||||||||||||||||||||||
Software expense |
938 | 893 | 879 | |||||||||||||||||||||||
Debit card expense |
554 | 537 | 535 | |||||||||||||||||||||||
Amortization of intangible assets |
63 | 101 | 116 | |||||||||||||||||||||||
FDIC insurance expense |
98 | 276 | 225 | |||||||||||||||||||||||
Other expenses |
2,571 | 2,285 | 2,131 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total noninterest expenses |
19,769 | 18,518 | 17,316 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
INCOME BEFORE INCOME TAXES |
12,918 | 11,675 | 10,331 | |||||||||||||||||||||||
FEDERAL INCOME TAX PROVISION |
2,504 | 2,263 | 3,230 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
NET INCOME |
$ | 10,414 | $ | 9,412 | $ | 7,101 | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
EARNING PER SHARE |
||||||||||||||||||||||||||
Basic and diluted |
$ | 3.80 | $ | 3.43 | $ | 2.59 | ||||||||||||||||||||
|
|
|
|
|
|
These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.
26 2019 Report to Shareholders | CSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2019, 2018, and 2017
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||||||||||||||||
|
||||||||||||||||||||||||||
Net income |
$ | 10,414 | $ | 9,412 | $ | 7,101 | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Other comprehensive income (loss) |
||||||||||||||||||||||||||
Unrealized gains (losses) arising during the period |
1,803 | (989 | ) | 376 | ||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income, held-to-maturity |
75 | 78 | 108 | |||||||||||||||||||||||
Income tax effect at 21% in 2019 and 2018, 34% in 2017 |
(394 | ) | 191 | (164 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Other comprehensive income (loss) |
1,484 | (720 | ) | 320 | ||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total comprehensive income |
$ | 11,898 | $ | 8,692 | $ | 7,421 | ||||||||||||||||||||
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
Years Ended December 31, 2019, 2018, and 2017
(Dollars in thousands) |
Common
Stock |
Additional
Paid-In Capital |
Retained
Earnings |
Treasury
Stock |
Accumulated
Other Comprehensive Loss |
Total | ||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2016 |
$ | 18,629 | $ | 9,815 | $ | 42,629 | $ | (4,784 | ) | $ | (874 | ) | $ | 65,415 | ||||||||||||||||||||||||||||||||||
Net income |
| | 7,101 | | | 7,101 | ||||||||||||||||||||||||||||||||||||||||||
Reclassification of tax effect from AOCI to retained earnings |
| | 109 | | (109 | ) | | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
| | | | 320 | 320 | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared, $0.84 per share |
| | (2,304 | ) | | | (2,304 | ) | ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2017 |
$ | 18,629 | $ | 9,815 | $ | 47,535 | $ | (4,784 | ) | $ | (663 | ) | $ | 70,532 | ||||||||||||||||||||||||||||||||||
Net income |
| | 9,412 | | | 9,412 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
| | | | (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 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.
2019 Report to Shareholders | CSB Bancorp, Inc. 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2019, 2018, and 2017
These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.
28 2019 Report to Shareholders | CSB Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2019, 2018, and 2017
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||||||||||||||||
|
||||||||||||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||||||||||||||||||
Net change in deposits |
$ | 77,048 | $ | 23,239 | $ | 42,474 | ||||||||||||||||||||
Net change in short-term borrowings |
1,474 | (2,065 | ) | (9,262 | ) | |||||||||||||||||||||
Proceeds from other borrowings |
| | 10,000 | |||||||||||||||||||||||
Repayment of other borrowings |
(2,195 | ) | (2,884 | ) | (10,976 | ) | ||||||||||||||||||||
Cash dividends paid |
(2,962 | ) | (2,688 | ) | (2,304 | ) | ||||||||||||||||||||
Issuance of treasury stock |
4 | | | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Net cash provided by financing activities |
$ | 73,369 | $ | 15,602 | $ | 29,932 | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
56,453 | 9,144 | (418 | ) | ||||||||||||||||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
45,564 | 36,420 | 36,838 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 102,017 | $ | 45,564 | $ | 36,420 | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
SUPPLEMENTAL DISCLOSURES |
||||||||||||||||||||||||||
Cash paid during the year for: |
||||||||||||||||||||||||||
Interest |
$ | 4,023 | $ | 2,888 | $ | 1,973 | ||||||||||||||||||||
Income taxes |
4,725 | 2,375 | 3,320 | |||||||||||||||||||||||
Noncash investing activities: |
||||||||||||||||||||||||||
Transfer of loans to other real estate owned |
| 119 | | |||||||||||||||||||||||
Purchase of bank-owned life insurance |
| | 2,500 | |||||||||||||||||||||||
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.
2019 Report to Shareholders | CSB Bancorp, Inc. 29
NOTES TO 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 Companys 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 Banks deposit, loan, and trust activities. The majority of the Banks 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 that affect 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 managements 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. The required reserve balances were $919 thousand and $846 thousand as of December 31, 2019 and 2018, respectively.
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. At December 31, 2019, 11% of the total investment portfolio was classified as held-to-maturity. 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.
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 bonds 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 securitys ability to recover any decline in its market value and managements intent, and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors that are considered in determining managements intent and ability to hold the security is a review of the Companys capital adequacy, interest rate risk position, and liquidity. The assessment of a securitys ability to recover any decline in market value, the ability of the issuer to meet contractual obligations, and managements intent and ability to hold the security requires considerable judgment. A decline in value that is considered to be other-than-temporary is recorded as a loss within noninterest income in the Consolidated Statements of Income.
30 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 that are 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 Banks 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 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 managements 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 that experience 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 of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers 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 loans effective interest rate, the loans 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 $99 thousand at December 31, 2019 and 2018, respectively.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation, and amortization. Land is carried at cost. Depreciation and amortization is 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.
2019 Report to Shareholders | CSB Bancorp, Inc. 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 its carrying value, including goodwill. If the current fair value of a reporting unit exceeds its 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 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 $223 thousand, $215 thousand, and $168 thousand for the years ended 2019, 2018, and 2017, 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 that will be 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 that will be 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, 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 that constrain 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.
32 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
2019 | 2018 | 2017 | ||||||||||||||||||
|
||||||||||||||||||||
Weighted average common shares |
2,980,602 | 2,980,602 | 2,980,602 | |||||||||||||||||
Average treasury shares |
(238,306 | ) | (238,360 | ) | (238,360 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total weighted average common shares outstanding basic and diluted |
2,742,296 | 2,742,242 | 2,742,242 |
Dividends per share are based on the number of shares outstanding at the declaration date.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
ASU 2016-02 Leases. This Update and all subsequent ASUs that modified Topic 842 set forth a new lease accounting model for lessors and lessees. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The accounting provided by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Update and its related amendments were adopted as of January 1, 2019, which resulted in the recognition of operating right-of-use assets totaling $477 thousand and operating lease liabilities totaling $469 thousand. The Company elected to adopt the transition relief provisions from ASU 2018-11 and recorded the impact of adoption as of January 1, 2019, without restating any prior-year amounts or disclosures. The Company has presented the necessary disclosures in Note 5.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ASU 2016-13 Financial Instruments Credit Losses. The Update and all subsequent ASUs that modified Topic 326, requires that financial assets be presented at the net amount expected to be collected (i.e. net of expected credit losses), eliminating the probable recognition threshold for credit losses on financial assets measured at amortized cost. The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. 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 ASUs.
ASU 2017-04 - Simplifying the Test for Goodwill Impairment. The Update, and all subsequent ASUs, 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 units 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 Companys financial statements.
ASU 2018-13 - Fair Value Measurement - Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Companys financial statements.
2019 Report to Shareholders | CSB Bancorp, Inc. 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASU 2018-15 - Intangibles Goodwill and Other Internal-Use Software. This Update addresses customers accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. 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 Companys financial statements.
ASU 2019-01 - Leases: Codification Improvements. This Update addresses issues lessors sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies, and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Companys 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 Companys 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.
34 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SECURITIES
Securities consisted of the following at December 31:
(Dollars in thousands) |
Amortized
|
Gross
|
Gross
|
Fair
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury security |
$ | 997 | $ | | $ | 1 | $ | 996 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government agencies |
7,350 | | 180 | 7,170 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities of government agencies |
45,744 | 41 | 884 | 44,901 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities of government agencies |
1,040 | | 16 | 1,024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
State and political subdivisions |
23,282 | 49 | 206 | 23,125 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds |
8,646 | | 334 | 8,312 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total available-for-sale |
87,059 | 90 | 1,621 | 85,528 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government agencies |
9,482 | 6 | 390 | 9,098 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities of government agencies |
11,206 | 28 | 214 | 11,020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total held-to-maturity |
20,688 | 34 | 604 | 20,118 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities |
53 | 30 | | 83 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted stock |
4,614 | | | 4,614 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities |
$ | 112,414 | $ | 154 | $ | 2,225 | $ | 110,343 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
2019 Report to Shareholders | CSB Bancorp, Inc. 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SECURITIES (CONTINUED)
The amortized cost and fair value of debt securities at December 31, 2019, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(Dollars in thousands) |
Amortized
|
Fair
|
||||||||||||||
|
||||||||||||||||
Available-for-sale |
||||||||||||||||
Due in one year or less |
$ | 4,723 | $ | 4,723 | ||||||||||||
Due after one through five years |
16,247 | 16,385 | ||||||||||||||
Due after five through ten years |
19,458 | 19,537 | ||||||||||||||
Due after ten years |
71,446 | 71,501 | ||||||||||||||
|
|
|
|
|||||||||||||
Total debt securities available-for-sale |
$ | 111,874 | $ | 112,146 | ||||||||||||
|
|
|
|
|||||||||||||
Held-to-maturity |
||||||||||||||||
Due after one through five years |
$ | 3,000 | $ | 2,997 | ||||||||||||
Due after ten years |
10,869 | 10,953 | ||||||||||||||
|
|
|
|
|||||||||||||
Total debt securities held-to-maturity |
$ | 13,869 | $ | 13,950 | ||||||||||||
|
|
|
|
Securities with a carrying value of approximately $80.3 million and $83.4 million were pledged at December 31, 2019 and 2018 respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.
Restricted stock primarily consists of investments in FHLB and Federal Reserve Bank stock. The Banks investment in FHLB stock amounted to $4.1 million at December 31, 2019 and 2018, respectively. Federal Reserve Bank stock was $471 thousand at December 31, 2019 and 2018.
There were no sales of securities in 2019, 2018, or 2017.
36 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SECURITIES (CONTINUED)
The following table presents gross unrealized losses, fair value of securities, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31:
Less Than 12 Months |
12 Months Or More |
Total |
||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) |
Gross
|
Fair
|
Gross
|
Fair
|
Gross
|
Fair
|
||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
2018 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury security |
$ | 1 | $ | 996 | $ | | $ | | $ | 1 | $ | 996 | ||||||||||||||||||||||||||||||||||||||||||||
U.S. Government agencies |
| | 180 | 7,170 | 180 | 7,170 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities of government agencies |
33 | 4,206 | 851 | 35,188 | 884 | 39,394 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities of government agencies |
16 | 1,024 | | | 16 | 1,024 | ||||||||||||||||||||||||||||||||||||||||||||||||||
State and political subdivisions |
9 | 3,326 | 197 | 8,626 | 206 | 11,952 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds |
131 | 5,014 | 203 | 3,298 | 334 | 8,312 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government agencies |
| | 390 | 8,609 | 390 | 8,609 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities of government agencies |
72 | 3,404 | 142 | 3,360 | 214 | 6,764 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Total temporarily impaired securities |
$ | 262 | $ | 17,970 | $ | 1,963 | $ | 66,251 | $ | 2,225 | $ | 84,221 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
There were 41 securities in an unrealized loss position at December 31, 2019, twenty-seven (27) of which were in a continuous loss position for twelve 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 managements 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 at December 31, 2019.
2019 Report to Shareholders | CSB Bancorp, Inc. 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS
Loans consisted of the following at December 31:
(Dollars in thousands) | 2019 | 2018 | ||||||||||||||
|
||||||||||||||||
Commercial |
$ | 137,114 | $ | 146,875 | ||||||||||||
Commercial real estate |
196,748 | 183,605 | ||||||||||||||
Residential real estate |
174,259 | 167,296 | ||||||||||||||
Construction & land development |
23,960 | 31,227 | ||||||||||||||
Consumer |
19,052 | 19,402 | ||||||||||||||
|
|
|
|
|||||||||||||
Total loans before deferred costs |
551,133 | 548,405 | ||||||||||||||
Deferred loan costs |
500 | 569 | ||||||||||||||
|
|
|
|
|||||||||||||
Total loans |
$ | 551,633 | $ | 548,974 | ||||||||||||
|
|
|
|
Loan Origination/Risk Management
The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and 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 borrowers ability to operate profitably and prudently expand their business. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Companys 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 Companys commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Companys 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 that are secured by non-owner occupied properties, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption, 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 that are 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 Companys policies and procedures.
38 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS (CONTINUED)
Concentrations of Credit
Nearly all of the Companys 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 Companys loan portfolio consists of commercial and industrial and commercial real estate loans. See concentration of credit discussion included in the 2019 Financial Review.
Allowance for Loan Losses
The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2019, 2018, and 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
During 2019, the increase in the provision for loan losses related to commercial loans was primarily related to loans in the sawmill industry that have been 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 an increase in 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 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.
During 2017, the increase in the provision for loan losses related to commercial loans was primarily due to the net charge-offs of loans in this category. The increase related to commercial real estate loans was due to the increase of nonperforming loans in this category, as well as the increase in the specific allocation to one commercial real estate loan. The increase in the provision amounts allocated to the remaining loan categories, primarily relate to loan growth.
Summary of Allowance for Loan Losses
(Dollars in thousands) |
Commercial |
Commercial Real Estate |
Residential
|
Construction & Land Development |
Consumer |
Unallocated |
Total |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 2,207 | $ | 1,264 | $ | 1,189 | $ | 178 | $ | 141 | $ | 312 | $ | 5,291 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision for loan losses |
429 | 471 | 76 | 59 | 51 | 59 | 1,145 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Charge-offs |
(1,184 | ) | | | | (20 | ) | (1,204 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Recoveries |
361 | | 8 | | 3 | 372 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Net (charge-offs) recoveries |
(823 | ) | | 8 | | (17 | ) | (832 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance |
$ | 1,813 | $ | 1,735 | $ | 1,273 | $ | 237 | $ | 175 | $ | 371 | $ | 5,604 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Report to Shareholders | CSB Bancorp, Inc. 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS (CONTINUED)
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
|
Construction & Land Development |
Consumer |
Unallocated |
Total |
|||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
2018 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending allowance balances attributable to loans: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 36 | $ | 64 | $ | 1 | $ | | $ | | $ | | $ | 101 | ||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment |
2,142 | 1,727 | 1,244 | 258 | 306 | 129 | 5,806 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||
Total ending allowance balance |
$ | 2,178 | $ | 1,791 | $ | 1,245 | $ | 258 | $ | 306 | $ | 129 | $ | 5,907 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment |
$ | 419 | $ | 2,403 | $ | 1,030 | $ | | $ | | $ | 3,852 | ||||||||||||||||||||||||||||||||||||||||||||
Loans collectively evaluated for impairment |
146,456 | 181,202 | 166,266 | 31,227 | 19,402 | 544,553 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
Total ending loans balance |
$ | 146,875 | $ | 183,605 | $ | 167,296 | $ | 31,227 | $ | 19,402 | $ | 548,405 | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
40 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS (CONTINUED)
The following table presents loans individually evaluated for impairment by class of loans as of December 31:
(Dollars in thousands) |
Unpaid
|
Recorded
|
Recorded
|
Total
Investment1 |
Related
|
Average
|
Interest
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||
2017 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 3,352 | $ | 1,329 | $ | 399 | $ | 1,728 | $ | 74 | $ | 2,884 | $ | 52 | ||||||||||||||||||||||||||||||||||||||||||
Commercial real estate |
4,826 | 3,117 | 1,566 | 4,683 | 151 | 3,213 | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate |
1,654 | 1,119 | 352 | 1,471 | 19 | 1,476 | 57 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||
Total impaired loans |
$ | 9,832 | $ | 5,565 | $ | 2,317 | $ | 7,882 | $ | 244 | $ | 7,573 | $ | 123 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Includes principal, accrued interest, unearned fees, and origination costs.
2019 Report to Shareholders | CSB Bancorp, Inc. 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS (CONTINUED)
The following table presents the aging of past due and nonaccrual loans by class of loans as of December 31:
(Dollars in thousands) |
Current |
30-59 Days
|
60-89 Days
|
90 Days + Past Due |
Nonaccrual |
Total Past Due and Nonaccrual |
Total Loans |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 146,431 | $ | 253 | $ | 34 | $ | | $ | 157 | $ | 444 | $ | 146,875 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate |
181,388 | 86 | | | 2,131 | 2,217 | 183,605 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate |
165,837 | 265 | 213 | 174 | 807 | 1,459 | 167,296 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction & land development |
31,169 | 58 | | | | 58 | 31,227 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer |
18,965 | 291 | 86 | | 60 | 437 | 19,402 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total loans |
$ | 543,790 | $ | 953 | $ | 333 | $ | 174 | $ | 3,155 | $ | 4,615 | $ | 548,405 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
The Company had troubled debt restructurings (TDRs) of $2.5 million as of December 31, 2019, with $18 thousand of specific reserves allocated to customers whose loan terms have been modified in TDRs. The increase in 2019 TDRs resulted primarily from an active line of credit that was designated as a TDR in a prior year. As of December 31, 2018, the Company had TDRs of $1.5 million, with $17 thousand of specific reserves allocated. At December 31, 2019, $2.2 million of the loans classified as TDRs were performing in accordance with their modified terms. The remaining $254 thousand were classified as nonaccrual.
Loan modifications that are considered TDRs completed during the year ended December 31 were as follows:
(Dollars in thousands) |
Number Of
|
Pre-Modification
|
Post-Modification
|
|||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
2017 |
||||||||||||||||||||||||||||||||||||
Commercial |
2 | $ | 150 | $ | 150 | |||||||||||||||||||||||||||||||
Commercial real estate |
4 | 288 | 288 | |||||||||||||||||||||||||||||||||
Residential real estate |
2 | 52 | 52 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total restructured loans |
8 | $ | 490 | $ | 490 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
42 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS (CONTINUED)
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. None of the loans restructured in 2017 subsequently defaulted in 2018.
Real Estate Loans in Foreclosure
Other real estate owned amounted to one property at $99 thousand as of December 31, 2019 and 2018. Mortgage loans in the process of foreclosure were $50 thousand at December 31, 2019, and $57 thousand at December 31, 2018.
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 $300 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 that deserves managements close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan or of the Banks 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 that jeopardize 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 $300 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 at December 31:
(Dollars in thousands) |
Pass |
Special
Mention |
Substandard |
Doubtful |
Not
Rated |
Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
2018 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 125,840 | $ | 5,383 | $ | 14,775 | $ | | $ | 877 | $ | 146,875 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate |
163,261 | 5,582 | 13,578 | | 1,184 | 183,605 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate |
194 | | 637 | | 166,465 | 167,296 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction & land development |
27,540 | | | | 3,687 | 31,227 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer |
| | 60 | | 19,342 | 19,402 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||
Total |
$ | 316,835 | $ | 10,965 | $ | 29,050 | $ | | $ | 191,555 | $ | 548,405 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Report to Shareholders | CSB Bancorp, Inc. 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS (CONTINUED)
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 |
|||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||
2018 |
||||||||||||||||||||||||||||||||||
Commercial |
$ | 877 | $ | | $ | 877 | ||||||||||||||||||||||||||||
Commercial real estate |
1,184 | | 1,184 | |||||||||||||||||||||||||||||||
Residential real estate |
166,122 | 343 | 166,465 | |||||||||||||||||||||||||||||||
Construction & land development |
3,687 | | 3,687 | |||||||||||||||||||||||||||||||
Consumer |
19,342 | | 19,342 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total |
$ | 191,212 | $ | 343 | $ | 191,555 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
Mortgage Servicing Rights
For the years ended December 31, 2019 and 2018, the Company had outstanding MSRs of $328 thousand and $281 thousand, respectively. No valuation allowance was recorded at December 31, 2019 or 2018, as the fair value of the MSRs exceeded their carrying value. On December 31, 2019, the Company had $75.9 million residential mortgage loans with servicing retained as compared to $66.8 million with servicing retained at December 31, 2018.
Total loans serviced for others approximated $97.7 million and $92.3 million at December 31, 2019 and 2018, respectively.
44 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
(Dollars in thousands) | 2019 |
2018 |
||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||
Land and improvements |
$ | 2,384 | $ | 2,384 | ||||||||||||||||||||||||
Buildings and improvements |
12,869 | 11,058 | ||||||||||||||||||||||||||
Furniture and equipment |
6,448 | 6,265 | ||||||||||||||||||||||||||
Leasehold improvements |
296 | 309 | ||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
21,997 | 20,016 | |||||||||||||||||||||||||||
Accumulated depreciation |
9,957 | 10,055 | ||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Premises and equipment, net |
$ | 12,040 | $ | 9,961 | ||||||||||||||||||||||||
|
|
|
|
Depreciation expense amounted to $562 thousand, $598 thousand, and $652 thousand for the years ended December 31, 2019, 2018, and 2017, 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 Companys incremental borrowing rate at the date of initial application.
Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy and equipment expense in the consolidated statements of income and other comprehensive income. The leases relate to bank branches with remaining lease terms of generally 7 to 8 years. Certain lease arrangements contain extension options which are typically 5 years at the then fair market rental rates. As these extension options are generally considered reasonably certain of exercise, they are included in the lease term.
As of December 31, 2019, operating lease ROU assets were $583 thousand, and liabilities were $574 thousand. At December 31, 2019, CSB recognized $71 thousand in operating lease cost.
The following table summarizes other information related to our operating leases:
December 31, 2019 | ||||
|
||||
Weighted-average remaining lease term operating leases in years |
6.1 | |||
Weighted-average discount rate operating leases |
3.15% |
The following table presents aggregate lease maturities and obligations as of December 31, 2019:
(Dollars in thousands) | ||||||||||
|
||||||||||
December 31, 2019 |
||||||||||
2020 |
$ |
93 | ||||||||
2021 |
105 | |||||||||
2022 |
105 | |||||||||
2023 |
105 | |||||||||
2024 |
105 | |||||||||
2025 and thereafter |
126 | |||||||||
|
|
|||||||||
Total lease payments |
639 | |||||||||
Less: interest |
65 | |||||||||
|
|
|||||||||
Present value of lease liabilities |
$ |
574 | ||||||||
|
|
2019 Report to Shareholders | CSB Bancorp, Inc. 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 CORE DEPOSIT INTANGIBLE ASSETS
Core Deposit Intangible
No additional core deposit intangible was recorded in 2019, 2018, or 2017. 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 $63 thousand, $101 thousand, and $116 thousand in 2019, 2018, and 2017, respectively. The following table shows the core deposit intangible and the related accumulated amortization as of December 31:
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||
Gross carrying amount |
$ | 1,251 | $ | 1,251 | $ | 1,251 | ||||||||||||||||||||||||
Accumulated amortization |
(1,147 | ) | (1,084 | ) | (983 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||
Net carrying amount |
$ | 104 | $ | 167 | $ | 268 | ||||||||||||||||||||||||
|
|
|
|
|
|
The estimated aggregate future amortization expense for the core deposit assets remaining as of December 31, 2019 was as follows:
(Dollars in thousands) |
Core Deposit Amortization |
|||||||||||||
|
||||||||||||||
2020 |
$ | 60 | ||||||||||||
2021 |
44 | |||||||||||||
|
|
|
||||||||||||
$ | 104 | |||||||||||||
|
|
|
NOTE 7 INTEREST-BEARING DEPOSITS
Interest-bearing deposits at December 31 were as follows:
(Dollars in thousands) | 2019 | 2018 | ||||||||||||||
|
||||||||||||||||
Demand |
$ | 161,838 | $ | 120,424 | ||||||||||||
Savings |
196,367 | 183,712 | ||||||||||||||
Time deposits: |
||||||||||||||||
In excess of $ 250,000 |
23,034 | 17,951 | ||||||||||||||
Other |
104,527 | 98,540 | ||||||||||||||
|
|
|
|
|||||||||||||
Total interest-bearing deposits |
$ | 485,766 | $ | 420,627 | ||||||||||||
|
|
|
|
At December 31, 2019, stated maturities of time deposits were as follows:
(Dollars in thousands) | ||||||||||
|
||||||||||
2020 |
$ | 63,354 | ||||||||
2021 |
40,334 | |||||||||
2022 |
16,958 | |||||||||
2023 |
5,983 | |||||||||
2024 |
932 | |||||||||
|
|
|||||||||
Total |
$ | 127,561 | ||||||||
|
|
46 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) | 2019 | 2018 | ||||||||||
|
||||||||||||
Balance at year-end |
$ | 38,889 | $ | 37,415 | ||||||||
Average balance outstanding |
37,258 | 41,334 | ||||||||||
Maximum month-end balance |
38,889 | 44,155 | ||||||||||
Weighted-average rate at year-end |
0.51 | % | 1.01 | % | ||||||||
Weighted-average rate during the year |
0.85 | 0.81 |
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,
2019 |
December 31,
2018 |
||||||||||
|
||||||||||||
Securities of U.S. Government agencies and mortgage-backed securities of government agencies pledged, fair value |
$ 39,058 | $ 37,574 | ||||||||||
Repurchase agreements |
38,889 | 37,415 |
Other borrowings
The following table sets forth information concerning other borrowings:
Maturities of other borrowings at December 31, 2019, are summarized as follows for the years ended December 31:
(Dollars in thousands) |
Amount |
Weighted
Average Rate |
||||||||||||
|
||||||||||||||
2020 |
$ | 1,665 | 1.84% | |||||||||||
2021 |
1,258 | 1.85 | ||||||||||||
2022 |
946 | 1.86 | ||||||||||||
2023 |
707 | 1.87 | ||||||||||||
2024 and beyond |
1,754 | 1.94 | ||||||||||||
|
|
|||||||||||||
$ | 6,330 | 1.88% | ||||||||||||
|
|
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. At December 31, 2019 the Company had the capacity to borrow an additional $96.6 million from the FHLB.
2019 Report to Shareholders | CSB Bancorp, Inc. 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 INCOME TAXES
The provision for income taxes consisted of the following for the years ended December 31:
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||||||||||||||||
|
||||||||||||||||||||||||||
Current |
$ | 2,438 | $ | 2,170 | $ | 3,296 | ||||||||||||||||||||
Deferred |
66 | 93 | (167 | ) | ||||||||||||||||||||||
Change in corporate tax rate |
| | 101 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total income tax provision |
$ | 2,504 | $ | 2,263 | $ | 3,230 | ||||||||||||||||||||
|
|
|
|
|
|
The Tax Cuts and Jobs Act, enacted on December 22, 2017, lowered the federal income tax rate from 34% to 21% effective January 1, 2018. As a result, the carrying value of net deferred tax assets was reduced, which increased income tax expense by $101 thousand in 2017.
The income tax provision attributable to income from operations differed from the amounts computed by applying the statutory federal income tax rate of 21% in 2019 and 2018 and 34% for 2017 to income before income taxes as follows:
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||||||||||||||||
|
||||||||||||||||||||||||||
Expected provision using statutory federal income tax rate |
$ | 2,713 | $ | 2,452 | $ | 3,513 | ||||||||||||||||||||
Effect of bond and loan tax-exempt income |
(124 | ) | (128 | ) | (251 | ) | ||||||||||||||||||||
Interest expense associated with carrying certain tax exempt bonds and loans |
5 | 5 | 6 | |||||||||||||||||||||||
Bank-owned life insurance income |
(94 | ) | (71 | ) | (121 | ) | ||||||||||||||||||||
Other |
4 | 5 | 83 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total income tax provision |
$ | 2,504 | $ | 2,263 | $ | 3,230 | ||||||||||||||||||||
|
|
|
|
|
|
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31 were as follows:
(Dollars in thousands) | 2019 | 2018 | ||||||||||||||||||
|
||||||||||||||||||||
Allowance for loan losses |
$ | 1,571 | $ | 1,338 | ||||||||||||||||
Unrealized loss on securities |
| 367 | ||||||||||||||||||
Other |
10 | 30 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||
Deferred tax assets |
1,581 | 1,735 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||
Premises and equipment |
(370 | ) | (311 | ) | ||||||||||||||||
Federal Home Loan Bank stock dividends |
(376 | ) | (376 | ) | ||||||||||||||||
Deferred loan fees |
(241 | ) | (240 | ) | ||||||||||||||||
Prepaid expenses |
(111 | ) | (76 | ) | ||||||||||||||||
Unrealized gain on securities |
(19 | ) | | |||||||||||||||||
Other |
(338 | ) | (286 | ) | ||||||||||||||||
|
|
|
|
|||||||||||||||||
Deferred tax liabilities |
(1,455 | ) | (1,289 | ) | ||||||||||||||||
|
|
|
|
|||||||||||||||||
Net deferred tax asset |
$ | 126 | $ | 446 | ||||||||||||||||
|
|
|
|
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 2016.
48 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Companys 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 2019, 2018, and 2017 of each eligible participants 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. For 2017, the Plan provided for a 50% Company match of participant contributions up to a maximum of 2% of each participants annual compensation. Expense under the Plan amounted to approximately $679 thousand, $565 thousand, and $363 thousand for 2019, 2018, and 2017, 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 Banks 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 at December 31:
(Dollars in thousands) | 2019 | 2018 | ||||||
|
||||||||
Commitments to extend credit |
$ | 210,579 | $ | 172,257 | ||||
Letters of credit |
741 | 1,045 |
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 customers 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 managements 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.
2019 Report to Shareholders | CSB Bancorp, Inc. 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 RELATED-PARTY TRANSACTIONS
In the ordinary course of business, loans are made by the Bank to executive officers, directors, and their related business interests consistent with Federal Reserve Regulation O.
The following is an analysis of activity of related-party loans for the years ended December 31:
(Dollars in thousands) | 2019 | 2018 | ||||||||||||||
|
||||||||||||||||
Balance at beginning of year |
$ | 1,130 | $ | 505 | ||||||||||||
New loans and advances |
102 | 114 | ||||||||||||||
Repayments, including loans sold |
217 | 203 | ||||||||||||||
Changes in related parties1 |
(142 | ) | 714 | |||||||||||||
|
|
|
|
|||||||||||||
Balance at end of year |
$ | 873 | $ | 1,130 | ||||||||||||
|
|
|
|
1The adjustment made in 2019 relates to the retirement of a director and 2018 relates to the retirement of a director and the addition of two new directors.
Deposits from executive officers, directors, and their related business interests at December 31, 2019 and 2018 were approximately $2.2 million and $2.3 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 Companys and Banks financial performance. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve 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, 2019 and 2018, the Company and Bank met or exceeded all capital adequacy requirements to which they are subject.
As of December 31, 2019, 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 Banks category.
50 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 REGULATORY MATTERS (CONTINUED)
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 | ||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
2018 |
||||||||||||||||||||||||||||||
Total capital to risk-weighted assets |
||||||||||||||||||||||||||||||
Consolidated |
$ | 78,968 | 14.5 | % | $ | 43,500 | 8.0 | % | $ | 54,375 | 10.0 | % | ||||||||||||||||||
Bank |
77,854 | 14.3 | 43,488 | 8.0 | 54,361 | 10.0 | ||||||||||||||||||||||||
Tier 1 capital to risk-weighted assets |
||||||||||||||||||||||||||||||
Consolidated |
73,053 | 13.4 | 32,625 | 6.0 | 43,500 | 8.0 | ||||||||||||||||||||||||
Bank |
71,939 | 13.2 | 32,616 | 6.0 | 43,488 | 8.0 | ||||||||||||||||||||||||
Common equity tier 1 capital to risk-weighted assets |
||||||||||||||||||||||||||||||
Consolidated |
73,053 | 13.4 | 24,469 | 4.5 | 35,344 | 6.5 | ||||||||||||||||||||||||
Bank |
71,939 | 13.2 | 24,462 | 4.5 | 35,334 | 6.5 | ||||||||||||||||||||||||
Tier 1 capital to average assets |
||||||||||||||||||||||||||||||
Consolidated |
73,053 | 10.1 | 29,031 | 4.0 | 36,288 | 5.0 | ||||||||||||||||||||||||
Bank |
71,939 | 9.9 | 29,025 | 4.0 | 36,281 | 5.0 |
The Companys 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, at January 1, 2020, the Bank could dividend $14.3 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 Banks common stock and capital surplus.
2019 Report to Shareholders | CSB Bancorp, Inc. 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of December 31, 2019 and 2018, and for each of the three years in the period ended December 31, 2019 follows:
(Dollars in thousands) | 2019 | 2018 | ||||||||||||||||||||||||
|
||||||||||||||||||||||||||
CONDENSED BALANCE SHEETS |
||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||
Cash deposited with subsidiary bank |
$ | 871 | $ | 969 | ||||||||||||||||||||||
Investment in subsidiary bank |
84,422 | 75,422 | ||||||||||||||||||||||||
Securities available-for-sale |
92 | 83 | ||||||||||||||||||||||||
Other assets |
142 | 144 | ||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
TOTAL ASSETS |
$ | 85,527 | $ | 76,618 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||||||||
Total liabilities |
$ | 51 | $ | 82 | ||||||||||||||||||||||
Total shareholders equity |
85,476 | 76,536 | ||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 85,527 | $ | 76,618 | ||||||||||||||||||||||
|
|
|
|
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||||||||||||||||
|
||||||||||||||||||||||||||
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME |
||||||||||||||||||||||||||
Interest on securities |
$ | 3 | $ | 2 | $ | 2 | ||||||||||||||||||||
Dividends from subsidiary |
3,170 | 2,865 | 2,600 | |||||||||||||||||||||||
Unrealized gain (loss) on equity securities |
9 | (6 | ) | | ||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Total income |
3,182 | 2,861 | 2,602 | |||||||||||||||||||||||
Operating expenses |
357 | 357 | 348 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Income before taxes and undistributed equity income of subsidiary |
2,825 | 2,504 | 2,254 | |||||||||||||||||||||||
Income tax benefit |
(73 | ) | (76 | ) | (123 | ) | ||||||||||||||||||||
Equity earnings in subsidiary, net of dividends |
7,516 | 6,832 | 4,724 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
NET INCOME |
$ | 10,414 | $ | 9,412 | $ | 7,101 | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
COMPREHENSIVE INCOME |
$ | 11,898 | $ | 8,692 | $ | 7,421 | ||||||||||||||||||||
|
|
|
|
|
|
52 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
(Dollars in thousands) | 2019 | 2018 | 2017 | |||||||||||||||||||||||
|
||||||||||||||||||||||||||
CONDENSED STATEMENTS OF CASH FLOWS |
||||||||||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||||
Net income |
$ | 10,414 | $ | 9,412 | $ | 7,101 | ||||||||||||||||||||
Adjustments to reconcile net income to cash provided by operations: |
||||||||||||||||||||||||||
Equity earnings in subsidiary, net of dividends |
(7,516 | ) | (6,832 | ) | (4,724 | ) | ||||||||||||||||||||
Change in other assets, liabilities |
(38 | ) | 70 | 13 | ||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Net cash provided by operating activities |
2,860 | 2,650 | 2,390 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||||
Cash dividends paid |
(2,962 | ) | (2,688 | ) | (2,304 | ) | ||||||||||||||||||||
Cash received from issuance of treasury shares |
4 | | | |||||||||||||||||||||||
Net cash used in financing activities |
(2,958 | ) | (2,688 | ) | (2,304 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Increase (decrease) in cash |
(98 | ) | (38 | ) | 86 | |||||||||||||||||||||
Cash at beginning of year |
969 | 1,007 | 921 | |||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||
Cash at end of year |
$ | 871 | $ | 969 | $ | 1,007 | ||||||||||||||||||||
|
|
|
|
|
|
NOTE 15 FAIR VALUE MEASUREMENTS
The Company provides disclosures about assets and liabilities carried at fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. The three broad levels of the fair value hierarchy are described below:
Level I: |
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. |
|
Level II: |
Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs that are 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. |
2019 Report to Shareholders | CSB Bancorp, Inc. 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 FAIR VALUE MEASUREMENTS (CONTINUED)
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, 2019 and December 31, 2018, 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 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 corporations and agencies, mortgage-backed securities, asset-backed securities, obligations of states, and political subdivisions are valued at observable market data for similar assets.
(Dollars in thousands) | Level I | Level II | Level III | Total | ||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
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 | $ | 92 | ||||||||||||||||||||||||||||
Assets: |
December 31, 2018 |
|
||||||||||||||||||||||||||||||||||
Securities available-for-sale |
||||||||||||||||||||||||||||||||||||
U.S. Treasury security |
$ | 996 | $ | | $ | | $ | 996 | ||||||||||||||||||||||||||||
U.S. Government agencies |
| 7,170 | | 7,170 | ||||||||||||||||||||||||||||||||
Mortgage-backed securities of government agencies |
| 44,901 | | 44,901 | ||||||||||||||||||||||||||||||||
Asset-backed securities of government agencies |
| 1,024 | | 1,024 | ||||||||||||||||||||||||||||||||
State and political subdivisions |
| 23,125 | | 23,125 | ||||||||||||||||||||||||||||||||
Corporate bonds |
| 8,312 | | 8,312 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total available-for-sale securities |
$ | 996 | $ | 84,532 | $ | | $ | 85,528 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Equity securities |
$ | 37 | $ | | $ | 46 | $ | 83 |
54 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 FAIR VALUE MEASUREMENTS (CONTINUED)
The following table presents the assets measured on a nonrecurring basis on the consolidated balance sheets at their fair value as of December 31, 2019 and December 31, 2018, 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 inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.
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
|
||||||||||||||
(Dollars in thousands) |
Fair Value Estimate |
Valuation
Techniques |
Unobservable Input |
Range (Weighted Average) |
||||||||||
|
||||||||||||||
December 31, 2019 |
||||||||||||||
Impaired loans |
$ 553 |
|
Discounted
cash flow |
|
Remaining term Discount rate |
3.9 yrs to 26.9 yrs / (16 yrs) 3.5% to 6.0% / (5.3%) |
||||||||
Other real estate owned |
99 |
|
Appraisal of
collateral |
1 |
Appraisal adjustments2 Liquidation expense2 |
33% 10% |
||||||||
December 31, 2018 |
||||||||||||||
Impaired loans |
$ 636 |
|
Discounted
cash flow |
|
Remaining term Discount rate |
1.2 yrs to 26.5 yrs / (10.9 yrs) 5.1% to 7.5% / (5.9%) |
||||||||
Other real estate owned |
99 |
|
Appraisal of
collateral |
1 |
Appraisal adjustments2 Liquidation expense2 |
33% 10% |
1 |
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various inputs which are not identifiable. |
2 |
Appraisals may be adjusted by management for qualitative factors such as estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. |
2019 Report to Shareholders | CSB Bancorp, Inc. 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of recognized financial instruments as of December 31 were as follows:
2019 | |||||||||||||||||||||||||
(Dollars in thousands) |
Carrying
Value |
Level I | Level II | Level III |
Total Fair
Value |
||||||||||||||||||||
Financial assets |
|||||||||||||||||||||||||
Cash and cash equivalents |
$ | 102,017 | $ | 102,017 | $ | | $ | | $ | 102,017 | |||||||||||||||
Securities available-for-sale |
112,146 | 999 | 111,147 | | 112,146 | ||||||||||||||||||||
Securities held-to-maturity |
13,869 | | 13,950 | | 13,950 | ||||||||||||||||||||
Equity securities |
92 | 46 | | 46 | 92 | ||||||||||||||||||||
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 |
2018 | |||||||||||||||||||||||||
(Dollars in thousands) |
Carrying
Value |
Level I | Level II | Level III |
Total Fair
Value |
||||||||||||||||||||
Financial assets |
|||||||||||||||||||||||||
Cash and cash equivalents |
$ | 45,564 | $ | 45,564 | $ | | $ | | $ | 45,564 | |||||||||||||||
Securities available-for-sale |
85,528 | 996 | 84,532 | | 85,528 | ||||||||||||||||||||
Securities held-to-maturity |
20,688 | | 20,118 | | 20,118 | ||||||||||||||||||||
Equity securities |
83 | 37 | | 46 | 83 | ||||||||||||||||||||
Restricted stock |
4,614 | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Loans held for sale |
108 | 108 | | | 108 | ||||||||||||||||||||
Net loans |
543,067 | | | 543,076 | 543,076 | ||||||||||||||||||||
Bank-owned life insurance |
13,554 | 13,554 | | | 13,554 | ||||||||||||||||||||
Accrued interest receivable |
1,581 | 1,581 | | | 1,581 | ||||||||||||||||||||
Mortgage servicing rights |
281 | | | 281 | 281 | ||||||||||||||||||||
Financial liabilities |
|||||||||||||||||||||||||
Deposits |
$ | 606,498 | $ | 490,007 | $ | | $ | 114,434 | $ | 604,441 | |||||||||||||||
Short-term borrowings |
37,415 | 37,415 | | | 37,415 | ||||||||||||||||||||
Other borrowings |
8,525 | | | 8,251 | 8,251 | ||||||||||||||||||||
Accrued interest payable |
88 | 88 | | | 88 |
For purposes of the above disclosures of estimated fair value, the following assumptions are used:
Cash and cash equivalents; Loans held for sale; Accrued interest receivable; Short-term borrowings, and Accrued interest payable
The fair value of the above instruments is considered to be carrying value, classified as Level I in the fair value hierarchy.
56 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Securities
The fair value of securities available-for-sale and securities held-to-maturity, which are measured on a recurring basis, are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities relationship to other similar securities. Classified as Level I or Level II in the fair value hierarchy.
Equity securities with a readily determinable value are classified as Level I and equity securities without a readily determinable value are classified as Level III. The following table presents the carry amount of equity securities without readily determinable fair values, the cumulative amount of impairment, and the cumulative amount of observable price changes for orderly transactions for the identical or a similar investment of the same issuer. There have been no known transactions for the equity securities in 2019.
(Dollars in thousands) |
December 31, 2019
Life-to-Date |
December 31, 2018
Life-to-Date |
||||||||||||||||||||||||||
Amortized cost |
$ | 44 | $ | 44 | ||||||||||||||||||||||||
Impairment |
| | ||||||||||||||||||||||||||
Observable price changes |
2 | 2 | ||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Carrying value |
$ | 46 | $ | 46 | ||||||||||||||||||||||||
|
|
|
|
Net loans
Effective first quarter 2018 the fair value of loans were determined using an exit price methodology as prescribed by ASU 2016-01. The exit price estimation of fair value is based on the future value of expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a current market rate based on the relative credit risk of the loan. In addition, an incremental liquidity discount is applied.
Bank-owned life insurance
The carrying amount of bank-owned life insurance is based on the cash surrender value of the policies and is a reasonable estimate of fair value, classified as Level I.
Restricted stock
Restricted stock includes FHLB Stock and Federal Reserve Bank Stock. It is not practicable to determine the fair value of regulatory equity securities due to restrictions placed on their transferability.
Mortgage servicing rights
The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates discounted cash flow and repayment assumptions based on managements best judgment, classified as Level III.
Deposits
The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using market rates currently offered for similar instruments with similar remaining maturities, resulting in a Level III classification. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of quarter end, resulting in a Level I classification.
Other borrowings
The fair value of FHLB advances are estimated using a discounted cash flow analysis based on the current borrowing rates for similar types of borrowings, resulting in a Level III classification.
The Company also had unrecognized financial instruments at December 31, 2019 and 2018. These financial instruments relate to commitments to extend credit and letters of credit. The aggregate contract amount of such financial instruments was approximately $211.3 million at December 31, 2019 and $173.3 million at December 31, 2018. Such amounts are also considered to be the estimated fair values.
2019 Report to Shareholders | CSB Bancorp, Inc. 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
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, 2019, 2018, and 2017:
(Dollars in thousands) |
Pretax |
Tax Effect |
After-Tax |
Affected Line
Item In The Consolidated Statements Of Income |
||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||
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 | ) | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2018 |
$ | (1,786 | ) | $ | 374 | $ | (1,412 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Balance as of December 31, 2016 |
$ | (1,323 | ) | $ | 449 | $ | (874 | ) | ||||||||||||||||||||||||||
Unrealized holding gain on available-for-sale securities arising during the period |
376 | (128 | ) | 248 | ||||||||||||||||||||||||||||||
Amortization of held-to-maturity discount resulting from transfer |
108 | (36 | ) | 72 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total other comprehensive income (loss) |
484 | (164 | ) | 320 | ||||||||||||||||||||||||||||||
Deferred tax reclassification from retained earnings |
| (109 | ) | (109 | ) | (a) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total other comprehensive income (loss) after reclassification |
484 | (273 | ) | 211 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2017 |
$ | (839 | ) | $ | 176 | $ | (663 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
(a) Federal income tax provision.
58 2019 Report to Shareholders | CSB Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 |
|||||||||||||||||
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 | |||||||||||||||||
2017 |
||||||||||||||||||||||
First quarter |
$ | 6,247 | $ | 5,862 | $ | 1,730 | $ | 0.63 | $ 0.63 | |||||||||||||
Second quarter |
6,413 | 5,950 | 1,726 | 0.63 | 0.63 | |||||||||||||||||
Third quarter |
6,766 | 6,204 | 1,866 | 0.68 | 0.68 | |||||||||||||||||
Fourth quarter |
7,014 | 6,436 | 1,779 | 0.65 | 0.65 |
2019 Report to Shareholders | CSB Bancorp, Inc. 59
OFFICERS OF THE COMMERCIAL AND SAVINGS BANK
JEFF M. AGNES
Officer,
Systems Administrator
PAMELA S. BASINGER
Vice President,
Financial Officer
DEBORAH S. BERNER
Vice President,
Retail Services Manager
LES A. BERTSCHY
Assistant Vice President,
Banking Center Manager
SARAH BIRCHFIELD
Vice President,
Business Relationship Manager
PAMELA L. BROMUND
Assistant Vice President,
Loan Operations Supervisor
WENDY D. BROWN
Assistant Vice President,
Project Manager
STACY BUCKLEW
Officer,
Banking Center Manager
C. DAWN BUTLER
Vice President,
Regional Bank Manager
BEVERLY A. CARR
Officer,
Bank Operations Manager
COLBY M. CHAMBERLIN
Vice President,
Commercial Lender
PEGGY L. CONN
Corporate Secretary
JENNIFER L. DEAM
Officer,
Electronic Services Manager
CHRISTOPHER J. DELATORE
Vice President,
Commercial Lender
DAVID J. DOLAN
Vice President,
Retail Lending Manager
LORI S. FRANTZ
Assistant Vice President,
Banking Center Manager
BRETT A. GALLION
Senior Vice President,
Chief Operations Officer,
Chief Information Officer
CARRIE A. GERBER
Credit Officer
ERIC S. GERBER
Vice President,
Commercial Lender
RYAN A. GROSSCHMIDT
Officer,
Banking Center Manager
AMI K. HAMMOND
Assistant Vice President,
Banking Center Manager
MARC R. HARVEY
Vice President,
Organizational Development
JACKIE S. HAZEL
Vice President,
Trust Operations
BENJAMIN J. HERSHBERGER
Assistant Vice President,
Banking Center Manager
MARIE HULL-GREEN
Vice President,
Trust Officer
RANDALL S. JANSON
Assistant Vice President,
Banking Center Manager
JULIE A. JONES
Vice President,
Director Of Human Resources
STEPHEN G. KARAPASHA
Compliance Officer
STEPHEN K. KILPATRICK
First Vice President,
Senior Credit Officer
GINA K. MARSHALL
Officer,
Customer Service Center Manager
BROC A. MARTIN
Officer,
BSA & AML, Compliance Analyst
KEVIN J. MCALLISTER
Vice President,
Director of Wealth Management
ROBYN E. MCCLINTOCK
Vice President,
Regional Bank Manager
MICHAEL V. MCKELVEY
Assistant Vice President,
Banking Center Manager
PAULA J. MEILER
Senior Vice President,
Chief Financial Officer
ANDREA R. MILEY
Senior Vice President,
Senior Risk Officer
EDWARD J. MILLER
Vice President,
Operation Services Manager,
Security
KERRY J. MILLER
Banking Center Manager,
Market Development Officer
MOLLY M. MOHR
Assistant Vice President,
Banking Center Manager
DANIEL L. MUSE
Operations Officer
JASON O. MYERS
Vice President,
Trust Officer
TODD R. NICOLAS
Vice President,
Commercial Lender
SHAWN E. OSWALD
Vice President,
Information Security Officer,
OFAC Officer
AMY R. PATTERSON
Assistant Vice President,
Manager of Mortgage &
Consumer Loan Services
MELANIE S. RABER
Officer,
Commercial Loan Documentation Supervisor
KATHY M. RINGWALT
Officer,
Mortgage Underwriter
A. CLAY SINNETT
Assistant Vice President,
Commercial Lender
HARLAND L. STEBBINS III
Senior Vice President,
Senior Loan Officer
CHERYL J. STEINER
Assistant Vice President,
Investment Representative
EDDIE L. STEINER
Chairman,
President,
Chief Executive Officer
STEVEN J. STIFFLER
Vice President,
Commercial Lender
ERIC D. STROUSE
Vice President,
Commercial Lender
ELAINE A. TEDROW
Assistant Vice President,
Banking Center Manager
WILLIAM R. TINLIN
Vice President,
Recovery, Right To Financial
Privacy Officer
JEANETTE M. TROYER
Assistant Vice President,
Banking Center Manager
ASHLEY E. VAUGHN
Vice President,
Marketing,
Cash Management,
CRA Officer
ALICIA R. WALLACE
Vice President,
Commercial Lender
BARRY WATTS
Vice President,
Information Systems Director
MICHAEL D. WORKMAN
Vice President,
Mortgage Loan Officer,
Small Business Lender
CRYSTAL R. YODER
Operations Officer
60 2019 Report to Shareholders | CSB Bancorp, Inc.
SHAREHOLDERS AND GENERAL INQUIRIES
CORPORATE OFFICE |
||
91 North Clay Street, P.O. Box 232, Millersburg, Ohio |
330.674.9015 or 800.654.9015 |
If you have questions regarding your CSB Bancorp, Inc. stock, please contact:
COMPUTERSHARE
Shareholder Services
462 South Fourth Street, Suite 1600
Louisville, Kentucky 40202
800.368.5948
www.computershare.com/investor
PEGGY L. CONN
Corporate Secretary
CSB Bancorp, Inc.
91 North Clay Street
P.O. Box 232
Millersburg, Ohio 44654
330.674.9015
800.654.9015
If you are interested in purchasing shares of CSB Bancorp, Inc., you may contact your local broker or one of the following:
CHERYL J. STEINER
Assistant Vice President,
Investment Representative
330.674.2397
Direct 330.763.2853
cheryl.steiner@ceterais.com
BOENNING & SCATTERGOOD, INC.
80 East Rich Street, Suite 220
Columbus, Ohio 43215
800.334.7481
CSB Bancorp, Inc. is required to file an annual report on Form 10-K annually with the Securities and Exchange Commission. A copy of our Annual Report on Form 10-K is available on our website after it is filed with the SEC. Copies of the Form 10-K Annual Report and the Companys quarterly reports will be furnished, free of charge, to shareholders by written request to:
PAULA J. MEILER
Chief Financial Officer
CSB Bancorp, Inc.
91 North Clay Street
P.O. Box 232
Millersburg, Ohio 44654
330.674.9015
800.654.9015
LEGAL COUNSEL
Vorys, Sater, Seymour and Pease LLP
52 East Gay Street
P.O. Box 1008
Columbus, Ohio 43216
2019 Report to Shareholders | CSB Bancorp, Inc. 61
EXHIBIT 21
SUBSIDIARIES OF CSB BANCORP, INC.
The Commercial and Savings Bank of Millersburg, Ohio, an Ohio-chartered commercial bank (100% owned).
CSB Investment Services, LLC, an Ohio limited liability company (100% owned).
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement File No. 333-130082, on Form S-8 of CSB Bancorp, Inc., and in the Registration Statement on Form S-8 of The Commercial & Savings Bank 401(k) Retirement Plan of our report dated March 3, 2020, relating to our audit of the consolidated financial statements and internal control over financial reporting, which is incorporated in the Annual Report on Form 10-K of CSB Bancorp, Inc., for the year ended December 31, 2019.
/s/ S.R. Snodgrass P.C.
Cranberry Township, Pennsylvania
March 16, 2020
EXHIBIT 31.1
SECTION 302 CERTIFICATION
Chief Executive Officer
I, Eddie L. Steiner, certify that:
|
1. |
I have reviewed this annual report on Form 10-K of CSB Bancorp, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined by Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 16, 2020
/s/ Eddie L. Steiner |
|
Eddie L. Steiner |
President and Chief Executive Officer |
EXHIBIT 31.2
SECTION 302 CERTIFICATION
Senior Vice President and Chief Financial Officer
I, Paula J. Meiler, certify that:
|
1. |
I have reviewed this annual report on Form 10-K of CSB Bancorp, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined by Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 16, 2020
/s/ Paula J. Meiler |
|
Paula J. Meiler |
Senior Vice President and Chief Financial Officer |
EXHIBIT 32.1
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of CSB Bancorp, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eddie L. Steiner, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
/s/ Eddie L. Steiner |
|
Eddie L. Steiner |
President and |
Chief Executive Officer |
March 16, 2020
EXHIBIT 32.2
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of CSB Bancorp, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paula J. Meiler, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
/s/ Paula J. Meiler |
|
Paula J. Meiler |
Senior Vice President and |
Chief Financial Officer |
March 16, 2020