Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended: March 31, 2016

OR

 

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

Commission file number: 0-21714

 

 

CSB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio		34-1687530
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

91 North Clay, P.O. Box 232, Millersburg, Ohio 44654

(Address of principal executive offices)

(330) 674-9015

(Registrant’s telephone number)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

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

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

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

 

Common stock, $6.25 par value		Outstanding at May 1, 2016: 2,742,242 common shares

 

 

 

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CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED March 31, 2016

Table of Contents

 

Part I - Financial Information
						Page
ITEM 1		–		FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets							3
Consolidated Statements of Income							4
Consolidated Statements of Comprehensive Income							5
Condensed Consolidated Statements of Changes in Shareholders’ Equity							6
Condensed Consolidated Statements of Cash Flows							7
Notes to Consolidated Financial Statements							8
ITEM 2		–		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			27
ITEM 3		–		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			32
ITEM 4		–		CONTROLS AND PROCEDURES			33
Part II - Other Information
ITEM 1		–		Legal Proceedings.			34
ITEM 1A		–		Risk Factors			34
ITEM 2		–		Unregistered Sales of Equity Securities and Use of Proceeds			34
ITEM 3		–		Defaults upon Senior Securities			34
ITEM 4		–		Mine Safety Disclosures			34
ITEM 5		–		Other Information			34
ITEM 6		–		Exhibits			35
Signatures							36

 

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CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in thousands)		March 31, 2016				December 31, 2015
ASSETS
Cash and cash equivalents
Cash and due from banks		$	12,527			$	17,341
Interest-earning deposits in other banks			14,844				20,931
Total cash and cash equivalents			27,371				38,272
Securities
Available-for-sale, at fair value			122,242				127,969
Held-to-maturity (fair value 2016-$27,660; 2015-$34,011)			27,025				33,819
Restricted stock, at cost			4,614				4,614
Total securities			153,881				166,402
Loans held for sale			128				47
Loans			433,453				422,871
Less allowance for loan losses			5,005				4,662
Net loans			428,448				418,209
Premises and equipment, net			8,032				8,209
Core deposit intangible			474				504
Goodwill			4,728				4,728
Bank-owned life insurance			10,152				10,085
Accrued interest receivable and other assets			3,988				3,858
TOTAL ASSETS		$	637,202			$	650,314
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits
Noninterest-bearing		$	145,967			$	151,549
Interest-bearing			364,013				373,493
Total deposits			509,980				525,042
Short-term borrowings			48,787				48,598
Other borrowings			13,332				13,465
Accrued interest payable and other liabilities			2,307				1,943
Total liabilities			574,406				589,048
SHAREHOLDERS’ EQUITY
Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; outstanding (shares 2016 - 2,742,242; 2015 - 2,739,405)			18,629				18,629
Additional paid-in capital			9,815				9,846
Retained earnings			38,989				38,030
Treasury stock at cost (shares 2016 - 238,360; 2015 - 239,606)			(4,784	)			(4,822	)
Accumulated other comprehensive income (loss)			147				(417	)
Total shareholders’ equity			62,796				61,266
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	637,202			$	650,314

See notes to unaudited consolidated financial statements.

 

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CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended March 31,
(Dollars in thousands, except per share data)		2016				2015
INTEREST AND DIVIDEND INCOME
Loans, including fees		$	4,742			$	4,573
Taxable securities			737				688
Nontaxable securities			154				130
Other			28				16
Total interest and dividend income			5,661				5,407
INTEREST EXPENSE
Deposits			259				271
Short-term borrowings			17				17
Other borrowings			100				105
Total interest expense			376				393
NET INTEREST INCOME			5,285				5,014
PROVISION FOR LOAN LOSSES			164				194
Net interest income, after provision for loan losses			5,121				4,820
NONINTEREST INCOME
Service charges on deposit accounts			278				286
Trust services			226				202
Debit card interchange fees			262				227
Securities gains			—				35
Gain on sale of loans, net			32				70
Other income			194				234
Total noninterest income			992				1,054
NONINTEREST EXPENSES
Salaries and employee benefits			2,327				2,150
Occupancy expense			244				267
Equipment expense			174				166
Professional and director fees			174				290
Franchise tax expense			107				100
Marketing and public relations			85				76
Software expense			187				189
Debit card expense			104				99
Amortization of intangible assets			30				32
FDIC insurance expense			84				92
Other expenses			473				487
Total noninterest expenses			3,989				3,948
Income before federal income tax provision			2,124				1,926
FEDERAL INCOME TAX PROVISION			644				584
NET INCOME		$	1,480			$	1,342
Basic and diluted net earnings per share		$	0.54			$	0.49

See notes to unaudited consolidated financial statements.

 

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CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		Three Months Ended March 31,
(Dollars in thousands)		2016				2015
Net income		$	1,480			$	1,342
Other comprehensive income
Unrealized gains arising during the period			808				768
Amounts reclassified from accumulated other comprehensive income, held-to-maturity			46				54
Income tax effect			(290	)			(279	)
Reclassification adjustment for gains on available-for- sale securities included in net income			—				(35	)
Income tax effect			—				12
Other comprehensive income			564				520
Total comprehensive income		$	2,044			$	1,862

See notes to unaudited consolidated financial statements.

 

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CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

		Three Months Ended March 31,
(Dollars in thousands, except per share data)		2016				2015
Balance at beginning of period		$	61,266			$	57,450
Net income			1,480				1,342
Other comprehensive income			564				520
Stock options exercised 1,246 shares issued in 2016			7				—
Cash dividends declared			(521	)			(521	)
Balance at end of period		$	62,796			$	58,791
Cash dividends declared per share		$	0.19			$	0.19

See notes to unaudited consolidated financial statements.

 

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CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended
		March 31,
(Dollars in thousands)		2016				2015
NET CASH FROM OPERATING ACTIVITIES		$	1,382			$	1,193
CASH FLOWS FROM INVESTING ACTIVITIES
Securities:
Proceeds from repayments, held-to-maturity			6,827				3,908
Proceeds from maturities and repayments, available-for-sale			11,625				4,480
Purchases, available-for-sale			(5,281	)			(10,358	)
Proceeds from sale of available-for-sale securities			—				88
Loan originations, net of repayments			(10,398	)			(10,049	)
Property, equipment, and software acquisitions			(50	)			(152	)
Net cash provided by (used in) investing activities			2,723				(12,083	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits			(15,062	)			(2,742	)
Net change in short-term borrowings			189				5,506
Repayment of other borrowings			(133	)			(165	)
Net cash provided by (used in) investing activities			(15,006	)			2,599
NET DECREASE IN CASH AND CASH EQUIVALENTS			(10,901	)			(8,291	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			38,272				43,923
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	27,371			$	35,632
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest		$	378			$	395
Income taxes			400				—
Noncash financing activities:
Dividends declared			521				521

See notes to unaudited consolidated financial statements.

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The condensed consolidated financial statements have been prepared without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the Company’s financial position at March 31, 2016, and the results of operations and changes in cash flows for the periods presented have been made.

Certain information and footnote disclosures typically included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been omitted. The Annual Report for CSB for the year ended December 31, 2015, contains Consolidated Financial Statements and related footnote disclosures, which should be read in conjunction with the accompanying Consolidated Financial Statements. The results of operations for the period ended March 31, 2016 are not necessarily indicative of the operating results for the full year or any future interim period.

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

 

amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which: (a) the lease term is 12 months or less, and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES

Securities consist of the following at March 31, 2016 and December 31, 2015:

 

(Dollars in thousands)		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value
March 31, 2016
Available-for-sale
U.S. Treasury security		$	1,002			$	—			$	—			$	1,002
U.S. Government agencies			13,000				9				6				13,003
Mortgage-backed securities of government agencies			60,532				929				141				61,320
Other mortgage-backed securities			95				—				—				95
Asset-backed securities of government agencies			1,424				—				85				1,339
State and political subdivisions			28,160				568				11				28,717
Corporate bonds			16,827				24				150				16,701
Equity securities			53				12				—				65
Total available-for-sale			121,093				1,542				393				122,242
Held-to-maturity securities
U.S. Government agencies			9,599				390				—				9,989
Mortgage-backed securities of government agencies			17,426				282				37				17,671
Total held-to-maturity			27,025				672				37				27,660
Restricted stock			4,614				—				—				4,614
Total securities		$	152,732			$	2,214			$	430			$	154,516
December 31, 2015
Available-for-sale
U.S. Treasury security		$	1,002			$	—			$	2			$	1,000
U.S. Government agencies			18,239				5				126				18,118
Mortgage-backed securities of government agencies			62,930				527				278				63,179
Other mortgage-backed securities			104				—				—				104
Asset-backed securities of government agencies			1,464				—				72				1,392
State and political subdivisions			24,924				418				41				25,301
Corporate bonds			18,912				7				108				18,811
Equity securities			53				11				—				64
Total available-for-sale			127,628				968				627				127,969
Held-to-maturity
U.S. Government agencies			15,586				312				46				15,852
Mortgage-backed securities of government agencies			18,233				81				155				18,159
Total held-to-maturity			33,819				393				201				34,011
Restricted stock			4,614				—				—				4,614
Total securities		$	166,061			$	1,361			$	828			$	166,594

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

The amortized cost and fair value of debt securities at March 31, 2016, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars in thousands)		Amortized cost				Fair value
Available-for-sale
Due in one year or less		$	10,156			$	10,174
Due after one through five years			21,491				21,696
Due after five through ten years			24,500				24,758
Due after ten years			64,893				65,549
Total debt securities available-for-sale		$	121,040			$	122,177
Held-to-maturity
Due in one year or less		$	—			$	—
Due after one through five years			—				—
Due after five through ten years			5,794				5,997
Due after ten years			21,231				21,663
Total debt securities held-to-maturity		$	27,025			$	27,660

Securities with a fair value of approximately $88.8 million and $94.3 million were pledged at March 31, 2016 and December 31, 2015, respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.

Restricted stock primarily consists of investments in Federal Home Loan Bank of Cincinnati (FHLB) and Federal Reserve Bank stock. The Bank’s investment in FHLB stock amounted to approximately $4.1 million at March 31, 2016 and December 31, 2015. Federal Reserve Bank stock was $471 thousand at March 31, 2016 and December 31, 2015.

The following table shows the proceeds from sales of available-for-sale securities and the gross realized gains and losses on the sales of those securities that have been included in earnings as a result of the sales.

 

		Three months ended March 31,
(Dollars in thousands)		2016				2015
Proceeds		$	—			$	88
Realized gains			—				35
Realized losses			—				—
Net securities gains		$	—			$	35

There were no income tax provisions from realized gains or no tax benefits recognized from realized losses for the three month period ended March 31, 2016. The income tax provision applicable to realized gains amounted to $12 thousand for the three month period ending March 31, 2015.

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 2 – SECURITIES (CONTINUED)

 

The following table presents gross unrealized losses and fair value of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2016 and December 31, 2015:

 

		Securities in a continuous unrealized loss position
		Less than 12 months								12 months or more								Total
(Dollars in thousands)		Gross unrealized losses				Fair value				Gross unrealized losses				Fair value				Gross unrealized losses				Fair value
March 31, 2016
Available-for-sale
U.S. Government agencies		$	3			$	2,998			$	3			$	2,996			$	6			$	5,994
Mortgage-backed securities of government agencies			141				15,271				—				—				141				15,271
Asset-backed securities of government agencies			85				1,339				—				—				85				1,339
State and political subdivisions			1				330				10				1,012				11				1,342
Corporate bonds			150				11,624				—				—				150				11,624
Held-to-maturity
Mortgage-backed securities of government agencies			25				6,370				12				1,066				37				7,436
Total temporarily impaired securities		$	405			$	37,932			$	25			$	5,074			$	430			$	43,006
December 31, 2015
Available-for-sale
U.S. Treasury security		$	2			$	1,000			$	—			$	—			$	2			$	1,000
U.S. Government agencies			67				9,172				59				4,941				126				14,113
Mortgage-backed securities of government agencies			278				20,231				—				—				278				20,231
Asset-backed securities of government agencies			72				1,392				—				—				72				1,392
State and political subdivisions			33				2,652				8				1,120				41				3,772
Corporate bonds			108				15,282				—				—				108				15,282
Held-to-maturity
U.S. Government agencies			46				5,954				—				—				46				5,954
Mortgage-backed securities of government agencies			155				12,994				—				—				155				12,994
Total temporarily impaired securities		$	761			$	68,677			$	67			$	6,061			$	828			$	74,738

There were thirty-one (31) securities in an unrealized loss position at March 31, 2016, seven (7) of which were in a continuous loss position for twelve months or more. At least quarterly, the Company conducts a comprehensive security-level impairment assessment. The assessments are based on the nature of the securities, the extent and duration of the securities in an unrealized loss position, the extent and duration of the loss and management’s intent to sell or if it is more likely than not that management will be required to sell a security before recovery of its amortized cost basis, which may be maturity. Management believes the Company will fully recover the cost of these securities. It does not intend to sell these securities and likely will not be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, management concluded that these securities were not other-than-temporarily impaired at March 31, 2016.

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 3 – LOANS

Loans consist of the following:

 

(Dollars in thousands)		March 31, 2016				December 31, 2015
Commercial		$	128,924			$	123,143
Commercial real estate			153,008				148,775
Residential real estate			127,099				125,775
Construction & land development			13,571				15,452
Consumer			10,383				9,268
Total loans before deferred costs			432,985				422,413
Deferred loan costs			468				458
Total Loans		$	433,453			$	422,871

Loan Origination/Risk Management

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

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

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At March 31, 2016 and December 31, 2015, approximately 76% of the outstanding principal balances of the Company’s commercial real estate loans were secured by owner-occupied properties.

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

 

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NOTE 3 – LOANS (CONTINUED)

 

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

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

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

Loans serviced for others approximated $80.2 million and $76.3 million at March 31, 2016 and December 31, 2015, respectively.

Concentrations of Credit

Nearly all of the Company’s lending activity occurs within the state of Ohio, including the four (4) counties of Holmes, Stark, Tuscarawas and Wayne, as well as other markets. The majority of the Company’s loan portfolio consists of commercial and industrial and commercial real estate loans. As of March 31, 2016 and December 31, 2015, there were no concentrations of loans related to any single industry.

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

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

The increase in the provision for loan losses for the three months ended March 31, 2015 related to commercial and industrial loans was primarily due to the increase in loan balances. The increase in the provision related to commercial real estate loans was affected by an increase in loan balances and charge-offs that occurred during the quarter. The increase in the provision related to consumer loans was due to charge-offs of loans in that category.

 

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NOTE 3 – LOANS (CONTINUED)

 

(Dollars in thousands)		Commercial				Commercial Real Estate				Residential Real Estate				Construction & Land Development				Consumer				Unallocated				Total
Three months ended March 31, 2016
Beginning balance		$	1,664			$	1,271			$	1,086			$	123			$	86			$	432			$	4,662
Provision for possible loan losses			394				(228	)			(4	)			(17	)			8				11				164
Charge-offs			(9	)			—				—				—				(1	)							(10	)
Recoveries			4				182				2				—				1								189
Net (charge-offs) recoveries			(5	)			182				2				—				—								179
Ending balance		$	2,053			$	1,225			$	1,084			$	106			$	94			$	443			$	5,005
Three months ended March 31, 2015
Beginning balance		$	1,289			$	1,524			$	1,039			$	142			$	60			$	327			$	4,381
Provision for possible loan losses			101				64				8				(9	)			36				(6	)			194
Charge-offs			(2	)			(24	)			(53	)			—				(30	)							(109	)
Recoveries			6				10				9				—				3								28
Net (charge-offs) recoveries			4				(14	)			(44	)			—				(27	)							(81	)
Ending balance		$	1,394			$	1,574			$	1,003			$	133			$	69			$	321			$	4,494

 

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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 based on the impairment method as of March 31, 2016 and December 31, 2015:

 

(Dollars in thousands)		Commercial				Commercial Real Estate				Residential Real Estate				Construction				Consumer				Unallocated				Total
March 31, 2016
Allowance for loan losses:
Individually evaluated for impairment		$	583			$	—			$	26			$	—			$	—			$	—			$	609
Collectively evaluated for impairment			1,470				1,225				1,058				106				94				443				4,396
Total ending allowance balance		$	2,053			$	1,225			$	1,084			$	106			$	94			$	443			$	5,005
Loans:
Loans individually evaluated for impairment		$	6,017			$	744			$	1,509			$	—			$	—							$	8,270
Loans collectively evaluated for impairment			122,907				152,264				125,590				13,571				10,383								424,715
Total ending loans balance		$	128,924			$	153,008			$	127,099			$	13,571			$	10,383							$	432,985
December 31, 2015
Allowance for loan losses:
Individually evaluated for impairment		$	299			$	64			$	26			$	—			$	—			$	—			$	389
Collectively evaluated for impairment			1,365				1,207				1,060				123				86				432				4,273
Total ending allowance balance		$	1,664			$	1,271			$	1,086			$	123			$	86			$	432			$	4,662
Loans:
Loans individually evaluated for impairment		$	6,127			$	1,064			$	1,533			$	—			$	—							$	8,724
Loans collectively evaluated for impairment			117,016				147,711				124,242				15,452				9,268								413,689
Total ending loans balance		$	123,143			$	148,775			$	125,775			$	15,452			$	9,268							$	422,413

 

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NOTE 3 – LOANS (CONTINUED)

 

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2016 and December 31, 2015:

 

(Dollars in thousands)		Unpaid Principal Balance				Recorded Investment with no Allowance				Recorded Investment with Allowance				Total Recorded Investment				Related Allowance
March 31, 2016
Commercial		$	6,435			$	5,142			$	894			$	6,036			$	583
Commercial real estate			952				719				25				744				—
Residential real estate			1,671				849				661				1,510				26
Total impaired loans		$	9,058			$	6,710			$	1,580			$	8,290			$	609
December 31, 2015
Commercial		$	6,541			$	5,832			$	301			$	6,133			$	299
Commercial real estate			1,265				670				393				1,063				64
Residential real estate			1,689				967				568				1,535				26
Total impaired loans		$	9,495			$	7,469			$	1,262			$	8,731			$	389

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

 

		Three months
		ended March 31,
(Dollars in thousands)		2016				2015
Average recorded investment:
Commercial		$	6,016			$	5,857
Commercial real estate			984				1,704
Residential real estate			1,530				1,618
Average recorded investment in impaired loans		$	8,530			$	9,179
Interest income recognized:
Commercial		$	65			$	51
Commercial real estate			4				5
Residential real estate			15				16
Interest income recognized on a cash basis on impaired loans		$	84			$	72

 

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NOTE 3 – LOANS (CONTINUED)

 

The following table presents the aging of past due loans and nonaccrual loans as of March 31, 2016 and December 31, 2015 by class of loans:

 

(Dollars in thousands)		Current				30 - 59 Days Past Due				60 - 89 Days Past Due				90 Days + Past Due				Non- Accrual				Total Past Due and Non- Accrual				Total Loans
March 31, 2016
Commercial		$	128,225			$	86			$	169			$	—			$	444			$	699			$	128,924
Commercial real estate			152,192				—				108				39				669				816				153,008
Residential real estate			126,063				180				93				189				574				1,036				127,099
Construction & land development			13,558				13				—				—				—				13				13,571
Consumer			10,284				62				37				—				—				99				10,383
Total Loans		$	430,322			$	341			$	407			$	228			$	1,687			$	2,663			$	432,985
December 31, 2015
Commercial		$	122,760			$	34			$	172			$	—			$	177			$	383			$	123,143
Commercial real estate			147,920				—				59				—				796				855				148,775
Residential real estate			124,408				486				173				105				603				1,367				125,775
Construction & land development			15,452				—				—				—				—				—				15,452
Consumer			9,105				163				—				—				—				163				9,268
Total Loans		$	419,645			$	683			$	404			$	105			$	1,576			$	2,768			$	422,413

 

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NOTE 3 – LOANS (CONTINUED)

 

Troubled Debt Restructurings

All troubled debt restructurings (“TDR’s) are individually evaluated for impairment and a related allowance is recorded, as needed. Loans whose terms have been modified as TDR’s totaled $6.7 million as of March 31, 2016, and $7.6 million as of December 31, 2015, with $26 thousand of specific reserves allocated to those loans for both periods. At March 31, 2016, $6.3 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $409 thousand, all were in nonaccrual of interest status.

The Company held no foreclosed real estate as of March 31, 2016 or December 31, 2015. Consumer mortgage loans in the process of foreclosure were $360 thousand at March 31, 2016 and $89 thousand at December 31, 2015.

The following table presents loans restructured during the three month period ended March 31, 2015.

 

(Dollars in thousands)		Number of loans restructured				Pre- Modification Recorded Investment				Post- Modification Recorded Investment
For the Three Months Ended March 31, 2015
Residential Real Estate			1			$	29			$	29
Total Restructured Loans			1			$	29			$	29

The restructured loan was modified by changing the monthly payment to interest only. No principal reduction was made. None of the loans that were restructured in 2014 or 2015 have subsequently defaulted in the three month periods ended March 31, 2016 and 2015. There were no new TDR’s during the three month period ended March 31, 2016.

 

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NOTE 3 – LOANS (CONTINUED)

 

Credit Quality Indicators

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

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $300 thousand or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class is as follows as of March 31, 2016 and December 31, 2015:

 

(Dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Not Rated				Total
March 31, 2016
Commercial		$	118,269			$	2,776			$	6,990			$	—			$	889			$	128,924
Commercial real estate			146,445				2,664				2,976				—				923				153,008
Residential real estate			223				—				202				—				126,674				127,099
Construction & land development			11,678				724				—				—				1,169				13,571
Consumer			—								—				—				10,383				10,383
Total		$	276,615			$	6,164			$	10,168			$	—			$	140,038			$	432,985
December 31, 2015
Commercial		$	112,229			$	3,100			$	7,044			$	—			$	770			$	123,143
Commercial real estate			141,621				2,742				3,150				—				1,262				148,775
Residential real estate			190				—				213				—				125,372				125,775
Construction & land development			11,015				944				—				—				3,493				15,452
Consumer			—				—				—				—				9,268				9,268
Total		$	265,055			$	6,786			$	10,407			$	—			$	140,165			$	422,413

 

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(Unaudited)

 

NOTE 3 – LOANS (CONTINUED)

 

The following table presents loans that are not rated by class of loans as of March 31, 2016 and December 31, 2015. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status.

 

(Dollars in thousands)		Performing				Non-Performing				Total
March 31, 2016
Commercial		$	889			$	—			$	889
Commercial real estate			923				—				923
Residential real estate			125,941				733				126,674
Construction & land development			1,169				—				1,169
Consumer			10,383				—				10,383
Total		$	139,305			$	733			$	140,038
December 31, 2015
Commercial		$	770			$	—			$	770
Commercial real estate			1,262				—				1,262
Residential real estate			124,700				672				125,372
Construction & land development			3,493				—				3,493
Consumer			9,268				—				9,268
Total		$	139,493			$	672			$	140,165

NOTE 4 – SHORT-TERM BORROWINGS

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

 

		Remaining Contractual Maturity Overnight and Continuous
(Dollars in thousands)		March 31, 2016				December 31, 2015
Securities of U.S. Government Agencies and mortgage-backed securities of government agencies pledged, fair value		$	48,924			$	48,791
Repurchase agreements			48,787				48,598

NOTE 5 – FAIR VALUE MEASUREMENTS

The Company provides disclosures about assets and liabilities carried at fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. The three broad levels of the fair value hierarchy are described below:

 

Level I:		Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level II:		Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by corroborated or other means. If the asset or liability has a specified (contractual) term, the Level II input must be observable for substantially the full term of the asset or liability.
Level III:		Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

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NOTE 5- FAIR VALUE MEASUREMENTS (CONTINUED)

 

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value as of March 31, 2016 and December 31, 2015 by level within the fair value hierarchy. No liabilities are carried at fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Equity securities and U.S. Treasury Notes are valued at the closing price reported on the active market on which the individual securities are traded. Obligations of U.S. government agencies, mortgage-backed securities, asset-backed securities, obligations of states and political subdivisions and corporate bonds are valued at observable market data for similar assets.

 

(Dollars in thousands)		Level I				Level II				Level III				Total
March 31, 2016
Assets:
Securities available-for-sale
U.S. Treasury security		$	1,002			$	—			$	—			$	1,002
U.S. Government agencies			—				13,003				—				13,003
Mortgage-backed securities of government agencies			—				61,320				—				61,320
Other mortgage-backed securities			—				95				—				95
Asset-backed securities of government agencies			—				1,339				—				1,339
State and political subdivisions			—				28,717				—				28,717
Corporate bonds			—				16,701				—				16,701
Total debt securities			1,002				121,175				—				122,177
Equity securities			65				—				—				65
Total available-for-sale securities		$	1,067			$	121,175			$	—			$	122,242
December 31, 2015
Assets:
Securities available-for-sale
U.S. Treasury security		$	1,000			$	—			$	—			$	1,000
U.S. Government agencies			—				18,118				—				18,118
Mortgage-backed securities of government agencies			—				63,179				—				63,179
Other mortgage-backed securities			—				104				—				104
Asset-backed securities of government agencies			—				1,392				—				1,392
State and political subdivisions			—				25,301				—				25,301
Corporate bonds			—				18,811				—				18,811
Total debt securities			1,000				126,905				—				127,905
Equity securities			64				—				—				64
Total available-for-sale securities		$	1,064			$	126,905			$	—			$	127,969

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of March 31, 2016 and December 31, 2015, by level within the fair value hierarchy. Impaired loans are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as Level I inputs; and observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

 

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NOTE 5- FAIR VALUE MEASUREMENTS (CONTINUED)

 

(Dollars in thousands)		Level I				Level II				Level III				Total
March 31, 2016
Assets measured on a nonrecurring basis:
Impaired loans		$	—			$	—			$	7,661			$	7,661
December 31, 2015
Assets measured on a nonrecurring basis:
Impaired loans		$	—			$	—			$	8,335			$	8,335

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

 

		Quantitative Information about Level III Fair Value Measurements
		Fair Value		Valuation		Unobservable
(Dollars in thousands)		Estimate		Techniques		Input		Range (Weighted Average)
March 31, 2016
Impaired loans		$6,425		Discounted cash flow		Remaining term Discount rate		1 mo to 29.25 yrs (54 months) 3.1% to 9.8% (4.3%)
		1,236		Appraisal of collateral (1)		Appraisal adjustments (2) Liquidation expense (2)		0% to -50% (-34%) -10%
December 31, 2015
Impaired loans		$7,256		Discounted cash flow		Remaining term Discount rate		2 mos to 29.5 yrs / (55 mos) 3.1% to 8.3% / (4.3%)
		1,079		Appraisal of collateral (1)		Appraisal adjustments (2) Liquidation expense (2)		0% to -50% (-26%) -10%

 

(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various inputs which are not identifiable.

(2)	Appraisals may be adjusted by management for qualitative factors. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

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NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of recognized financial instruments as of March 31, 2016 and December 31, 2015 are as follows:

 

(Dollars in thousands)		Carrying Value				Level I				Level II				Level III				Total Fair Value
March 31, 2016
Financial assets
Cash and cash equivalents		$	27,371			$	27,371			$	—			$	—			$	27,371
Securities available-for-sale			122,242				1,067				121,175				—				122,242
Securities held-to-maturity			27,025				—				27,660				—				27,660
Restricted stock			4,614				4,614								—				4,614
Loans held for sale			128				128				—				—				128
Net loans			428,448				—				—				432,379				432,379
Bank-owned life insurance			10,152				10,152				—				—				10,152
Accrued interest receivable			1,696				1,696				—				—				1,696
Mortgage servicing rights			244				—				—				244				244
Financial liabilities
Deposits		$	509,980			$	392,304			$	—			$	118,248			$	510,552
Short-term borrowings			48,787				48,787				—								48,787
Other borrowings			13,332				—				—				13,672				13,672
Accrued interest payable			78				78				—				—				78
December 31, 2015
Financial assets
Cash and cash equivalents		$	38,272			$	38,272			$	—			$	—			$	38,272
Securities available-for-sale			127,969				1,064				126,905				—				127,969
Securities held-to-maturity			33,819				—				34,011				—				34,011
Restricted stock			4,614				4,614				—				—				4,614
Loans held for sale			47				47				—				—				47
Net loans			418,209				—				—				420,181				420,181
Bank-owned life insurance			10,085				10,085				—				—				10,085
Accrued interest receivable			1,513				1,513				—				—				1,513
Mortgage servicing rights			246				—				—				246				246
Financial liabilities
Deposits		$	525,042			$	405,776			$	—			$	119,867			$	525,643
Short-term borrowings			48,598				48,598				—				—				48,598
Other borrowings			13,465				—				—				13,667				13,667
Accrued interest payable			80				80				—				—				80

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.

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

 

Securities

The fair value of securities available-for-sale and securities held-to-maturity which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other similar securities, classified as Level I or Level II in the fair value hierarchy.

Net loans

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

Bank-owned life insurance

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

Restricted stock

Restricted stock includes Federal Home Loan Bank Stock and Federal Reserve Bank Stock. It is not practicable to determine the fair value of regulatory equity securities due to restrictions placed on their transferability. Fair value is based on carrying value, classified as Level I.

Mortgage servicing rights

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates discounted cash flow and repayment assumptions based on management’s best judgment. As a result, these rights are measured at fair value on a recurring basis and are classified within Level III of the fair value hierarchy.

Deposits

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using market rates currently offered for similar instruments with similar remaining maturities, resulting in a Level III classification. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of quarter end, resulting in a Level I classification.

Other borrowings

The fair value of Federal Home Loan Bank advances are estimated using a discounted cash flow analysis based on the current borrowing rates for similar types of borrowings, resulting in a Level III classification.

The Company also has unrecognized financial instruments at March 31, 2016 and December 31, 2015. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $140 million at March 31, 2016 and $138 million at December 31, 2015. Such amounts are also considered to be the estimated fair values.

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

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 7- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax for the three month period ended March 31, 2016 and 2015:

 

(Dollars in thousands)		Pretax				Tax Effect				After-tax				Affected Line Item in the Consolidated Statements of Income
Three months ended March 31, 2016
Balance as of December 31, 2015		$	(631	)		$	214			$	(417	)
Unrealized holding gain on available-for-sale securities arising during the period			808				(275	)			533
Amortization of held-to-maturity discount resulting from transfer			46				(15	)			31			(a)
Total other comprehensive income			854				(290	)			564
Balance as of March 31, 2016		$	223			$	(76	)		$	147
Three months ended March 31, 2015
Balance as of December 31, 2014		$	(427	)		$	145			$	(282	)
Unrealized holding gain on available-for-sale securities arising during the period			768				(261	)			507
Reclassify gain included in income			(35	)			12				(23	)		(b, c)
Amortization of held-to-maturity discount resulting from transfer			54				(18	)			36			(a)
Total other comprehensive income			787				(267	)			520
Balance as of March 31, 2015		$	360			$	(122	)		$	238

 

(a)	There was no income statement effect from the transfer of securities to held-to-maturity.

(b)	Securities gains

(c)	Federal Income Tax Provision

 

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CSB BANCORP, INC.

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

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

The following management’s discussion and analysis focuses on the consolidated financial condition of the Company at March 31, 2016 as compared to December 31, 2015, and the consolidated results of operations for the three month period ended March 31, 2016 compared to the same period in 2015. The purpose of this discussion is to provide the reader with a more thorough understanding of the Consolidated Financial Statements. This discussion should be read in conjunction with the interim Consolidated Financial Statements and related footnotes contained in Part I, Item 1 of this Quarterly Report.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report are not historical facts but rather are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates”, “plans”, “expects”, “believes”, and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement.

The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by applicable law.

FINANCIAL CONDITION

Total assets were $637 million at March 31, 2016, compared to $650 million at December 31, 2015, representing a decrease of $13 million, or 2%. This reduction was funded by an $11 million decrease in cash and cash equivalents and a decrease of $13 million in total securities during the three month period ended March 31, 2016.

Net loans increased $10 million, or 3%, during the three months ended March 31, 2016. Commercial loans including commercial real estate loans increased $10 million, or 4%, while construction and land development loans decreased $2 million, or 12%. Residential real estate loans increased $1 million, or 1%, and consumer loans increased 12% from December 31, 2015. Home purchase activity has increased and consumers continued to refinance their mortgage loans for lower long-term fixed rates. Residential mortgage loan originations for the three months ended March 31, 2016 and 2015 were $7 and $8 million, respectively. Originations sold into the secondary market were $1 million during the three month period ended March 31, 2016 as compared to $2 million during the three months ended March 31, 2015. The Bank originates and sells primarily fixed-rate thirty year mortgages into the secondary market.

The allowance for loan losses as a percentage of total loans was 1.15% at March 31, 2016 as compared to 1.10% at December 31, 2015. Outstanding loan balances increased 3% to $433 million at March 31, 2016. A provision of $164 thousand, as well as net recoveries of $179 thousand, increased the allowance for loan losses for the three months ended March 31, 2016.

Nonaccrual loans increased during first quarter 2016. For the three months ending March 31, 2016 loans totaling $370 thousand were placed on nonaccrual status, $4 thousand in charge-offs were recognized and pay downs of $188 thousand were received.

 

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CSB BANCORP, INC.

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

 

		March 31,				December 31,				March 31,
(Dollars in thousands)		2016				2015				2015
Non-performing loans		$	1,915			$	1,681			$	3,685
Other real estate			—				—				—
Allowance for loan losses			5,005				4,662				4,494
Total loans			433,453				422,871				420,861
Allowance: Loans			1.15	%			1.10	%			1.07	%
Allowance: Non-performing loans			2.6	x			2.8	x			1.2	x

The ratio of gross loans to deposits was 85% at March 31, 2016, compared to 81% at December 31, 2015.

The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations or trust preferred securities. Management has considered industry analyst reports, sector credit reports and the volatility within the bond market in concluding that the gross unrealized losses of $430 thousand within the available-for-sale and held-to-maturity portfolios as of March 31, 2016, were primarily the result of customary and expected fluctuations in the bond market and not necessarily the expected cash flows of the individual securities. As a result, all security impairments on March 31, 2016, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits decreased $15 million, or 3%, from December 31, 2015 with noninterest bearing deposits decreasing $6 million and interest-bearing deposit accounts decreasing $9 million. Total deposits as of March 31, 2016 are $13 million greater than March 31, 2015 deposit balances. On a year over year comparison, increases were recognized in demand and savings deposits while decreases are reflected in money market savings accounts and time deposits.

Short-term borrowings consisting of overnight repurchase agreements with retail customers were stable at $49 million at March 31, 2016 as compared to from December 31, 2015 and other borrowings decreased $133 thousand as the Company repaid FHLB advances with required monthly amortization.

Total shareholders’ equity amounted to $62.8 million, or 9.9% of total assets, at March 31, 2016, compared to $61.3 million, or 9.4% of total assets, at December 31, 2015. The increase in shareholders’ equity during the three months ending March 31, 2016 was due to net income of $1.5 million and other comprehensive gains of $564 thousand, partially offset by dividends declared of $521 thousand. The Company and the Bank met all regulatory capital requirements at March 31, 2016.

RESULTS OF OPERATIONS

Three months ended March 31, 2016 and 2015

For the quarters ended March 31, 2016 and 2015, the Company recorded net income of $1.5 and $1.3 million and $0.54 and $0.49 per share, respectively. The $138 thousand increase in net income for the quarter was primarily the result of a $271 thousand increase in net interest income and a $30 thousand decrease in the provision for loan losses. These increases were partially offset by a decline in noninterest income of $62 thousand. Return on average assets and return on average equity were 0.93% and 9.48%, respectively, for the three month period of 2016, compared to 0.87% and 9.33%, respectively for the same quarter in 2015.

 

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CSB BANCORP, INC.

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

 

Average Balance Sheets and Net Interest Margin Analysis

 

		For the three months ended March 31,
		2016								2015
(Dollars in thousands)		Average balance				Average rate				Average balance				Average rate
ASSETS
Interest-earning deposits in other banks		$	15,833				0.71	%		$	24,113				0.25	%
Federal funds sold			538				0.45				1,116				0.24
Taxable securities			134,580				2.20				127,649				2.19
Tax-exempt securities			26,044				3.60				18,825				4.26
Loans			427,916				4.46				414,761				4.48
Total earning assets			604,911				3.81	%			586,464				3.79	%
Other assets			35,759								36,164
TOTAL ASSETS		$	640,670							$	622,628
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits		$	82,203				0.03	%		$	74,715				0.03	%
Savings deposits			167,181				0.07				159,441				0.07
Time deposits			118,591				0.75				127,077				0.76
Other borrowed funds			63,738				0.74				64,478				0.77
Total interest bearing liabilities			431,713				0.35	%			425,711				0.37	%
Non-interest bearing demand deposits			144,217								136,413
Other liabilities			2,115								2,153
Shareholders’ Equity			62,625								58,351
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	640,670							$	622,628
Taxable equivalent net interest spread							3.46	%							3.42	%
Taxable equivalent net interest margin							3.57	%							3.52	%

Interest income for the quarter ended March 31, 2016, was $5.7 million representing a $254 thousand increase, or a 5% improvement, compared to the same period in 2015. This increase was primarily due to average investment volume and loan volume increasing $14 and $13 million, respectively for the quarter ended March 31, 2016 as compared to the first quarter 2015. Interest expense for the quarter ended March 31, 2016 was $376 thousand, a decrease of $17 thousand, or 4%, from the same period in 2015. The decrease in interest expense occurred primarily due to a rate decrease of 0.03% on all other borrowings which declined from 0.77% in 2015 to 0.74% for the quarter ended March 31, 2016.

The provision for loan losses for the quarter ended March 31, 2016 was $164, compared to a $194 thousand provision for the same quarter in 2015. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.

Noninterest income for the quarter ended March 31, 2016, was $992 thousand, a decrease of $62 thousand, or 6%, compared to the same quarter in 2015. The gain on the sale of mortgage loans to the secondary market decreased to $32 thousand for the quarter ending March 31, 2016, from $70 thousand in the same quarter in 2015. The gain in 2015 was greater due to an additional volume of loans sold during the first quarter of 2015 as compared to the first quarter 2016. A loss on asset retirement of $39 thousand was recognized during the first quarter of 2016. Service charges on deposit accounts decreased $8 thousand, or 3%, compared to the same quarter in 2015 primarily from decreases in overdraft fees. Debit card interchange income increased $35 thousand, or 15%, with greater fee income. Fees from trust and brokerage services increased $24 thousand to $226 thousand for the first quarter 2016 as compared to the same quarter in 2015.

 

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CSB BANCORP, INC.

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

 

Noninterest expenses for the quarter ended March 31, 2016 increased $41 thousand, or 1%, compared to the first quarter of 2015. Salaries and employee benefits increased $177 thousand, or 8%, a result of increases in base salary, medical and other benefits. Professional and director fees declined $116 thousand for the quarter ended March 31, 2016 as compared to the first quarter 2015. The decline relates to a $110 thousand professional fee incurred in 2015 to contract a professional firm to assist the company with the assessment of market opportunities and long-term strategic goals that did not recur in 2016. Occupancy and equipment expenses decreased $15 thousand in 2016 over the first quarter of 2015. Software expenses decreased $2 thousand, or 1%, compared to the first quarter 2015.

Federal income tax expense increased $60 thousand, or 10%, for the quarter ended March 31, 2016 as compared to the first quarter of 2015. The provision for income taxes was $644 thousand (effective rate of 30%) for the quarter ended March 31, 2016, compared to $584 thousand (effective rate of 30%) for the same quarter ended 2015.

CAPITAL RESOURCES

CSB maintained a strong capital position with tangible common equity to tangible assets of 9.11% at March 31, 2016 compared with 8.63% at March 31, 2015.

Effective January 1, 2015 the Federal Reserve adopted final rules implementing Basel III and regulatory capital changes required by the Dodd-Frank Act. The rules apply to both the Company and the Bank. The rules established minimum risk-based and leverage capital requirements for all banking organizations. The quality of capital will be provided by the new measurement of Tier 1 capital called common equity tier 1 or (“CET1”). Effective with the March 31, 2015 Call Report the Bank selected the opt-out election for accumulated other comprehensive income (“AOCI”). This election will neutralize the effects of unrealized gains and losses from available-for-sale securities and other elements of the AOCI account for regulatory capital purposes.

Consistent with the Board of Director’s commitment to public confidence and safe and sound banking operations, capital targets and minimum risk-based capital ratios for CSB were established to maintain excess capital to well-capitalized standards. To be considered well-capitalized, an institution must have a total risk-based capital ratio of at least 10%, a tier 1 capital ratio of at least 8%, a leverage capital ratio of at least 5%, a CET1 ratio of at least 6.5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An adequately capitalized institution has a total risk-based capital ratio of at least 8%, a tier 1 capital ratio of at least 6%, a CET1 ratio of at least 4.5% and a leverage ratio of at least 4%.

Failure to meet specified minimum capital requirements could result in regulatory actions by the Federal Reserve or Ohio Division of Financial Institutions that could have a material effect on the Company’s financial condition or results of operations. Management believes there were no material changes to capital resources as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. As of March 31, 2016 the Company and the Bank met all capital adequacy requirements to which they were subject.

 

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CSB BANCORP, INC.

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

 

		Capital Ratios
		March 31, 2016				December 31, 2015
Common Equity Tier 1 Capital
Consolidated			12.6	%			12.5	%
Bank			12.4	%			12.3	%
Tier 1 Capital Ratio
Consolidated			12.6	%			12.5	%
Bank			12.4	%			12.3	%
Total Capital Ratio
Consolidated			13.7	%			13.5	%
Bank			13.5	%			13.3	%
Tier 1 Leverage Ratio
Consolidated			9.1	%			8.7	%
Bank			8.9	%			8.6	%

LIQUIDITY

 

(Dollars in millions)		March 31, 2016				December 31, 2015				Change
Cash and cash equivalents		$	27			$	38			$	(11	)
Unused lines of credit			54				52				2
Unpledged AFS securities at fair market value			59				70				(11	)
		$	140			$	160			$	(20	)
Net deposits and short-term liabilities		$	496			$	516			$	(20	)
Liquidity ratio			28.2	%			31.1	%			(2.9	)
Minimum board approved liquidity ratio			20.0	%			20.0	%

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

The liquidity ratio was 28.2% and 31.1% at March 31, 2016 and December 31, 2015.

OFF-BALANCE SHEET ARRANGEMENTS

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

 

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CSB BANCORP, INC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

ITEM 3 –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risks as of March 31, 2016, from the disclosures presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Management performs a quarterly analysis of the Company’s interest rate risk over a twenty-four month horizon. The analysis includes two balance sheet models, one based on a static balance sheet and one on a dynamic balance sheet with projected growth in assets and liabilities. Minor variances with net interest income exceeding the board approved policy are being projected in the March 2016 dynamic balance sheet simulation coupled with immediate rate shocks. All other balance sheet positions and interest rate projections are currently within the Company’s board-approved policy.

The following table presents an analysis of the estimated sensitivity of the Company’s annual net interest income to sudden and sustained -100 through +400 basis point changes, in 100 basis point increments, in market interest rates at March 31, 2016 and December 31, 2015. The net interest income reflected is for the first twelve month period of the modeled twenty-four month horizon. The underlying balance sheet for illustrative purposes is dynamic with projected growth in assets and liabilities.

 

March 31, 2016
(Dollars in thousands)
Change in Interest Rates (basis points)		Net Interest Income				Dollar Change				Percentage Change				Board Policy Limits
+400		$	23,364			$	1,720				8.0	%			+/-25	%
+300			22,920				1,276				5.9				+/-15
+200			22,457				813				3.8				+/-10
+100			22,001				357				1.7				+/-5
0			21,644				—				—
-100			21,147				(497	)			(2.3	)			+/-5
December 31, 2015
+400		$	23,360			$	1,624				7.5	%			+/-25	%
+300			22,957				1,221				5.6				+/-15
+200			22,500				764				3.5				+/-10
+100			22,071				335				1.5				+/-5
0			21,736				—				—
-100			21,172				(564	)			(2.6	)			+/-5

 

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CSB BANCORP, INC.

CONTROLS AND PROCEDURES

ITEM 4 - CONTROLS AND PROCEDURES

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

 

(a)

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

 

(b)

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

 

(c)

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

 

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CSB BANCORP, INC.

FORM 10-Q

Quarter ended March 31, 2016

PART II – OTHER INFORMATION

 

ITEM 1-

LEGAL PROCEEDINGS.

In the opinion of management there are no outstanding legal proceedings that are reasonably likely to have a material adverse effect on the company’s financial condition or results of operations.

 

ITEM 1A-

RISK FACTORS.

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

ITEM 2-

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On July 7, 2005 CSB Bancorp, Inc. filed Form 8-K with the Commission announcing that its Board of Directors approved a Stock Repurchase Program authorizing the repurchase of up to 10% of the Company’s common shares then outstanding. Repurchases may be made from time to time as market and business conditions warrant, in the open market, through block purchases and in negotiated private transactions. No repurchases were made during the quarterly period ended March 31, 2016.

 

ITEM 3-

DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

 

ITEM 4-

MINE SAFETY DISCLOSURES.

Not applicable.

 

ITEM 5-

OTHER INFORMATION.

Not applicable.

 

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CSB BANCORP, INC.

FORM 10-Q

Quarter ended March 31, 2016

PART II – OTHER INFORMATION

 

ITEM 6-

Exhibits.

 

Exhibit Number		Description of Document
3.1		Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed August 6, 2004, Exhibit 3.1, film number 04958544).
3.2		Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to the Registrant’s Form 10-SB).
3.2.1		Amended Article VIII of the Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form DEF 14a filed on March 25, 2009, Appendix A, film number 09703970).
4.0		Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB).
11		Statement Regarding Computation of Per Share Earnings.
31.1		Rule 13a-14(a)/15d-14(a) Chief Executive Officer’s Certification.
31.2		Rule 13a-14(a)/15d-14(a) Chief Financial Officer’s Certification.
32.1		Section 1350 Chief Executive Officer’s Certification.
32.2		Section 1350 Chief Financial Officer’s Certification.
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 formatted in XBRL (extensible Business Reporting Language): (i) Consolidated Balance Sheets: (ii) Consolidated Statements of Income: (iii) Consolidated Statements of Comprehensive Income: (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity: (v) Condensed Consolidated Statements of Cash Flows: and (vi) Notes to Consolidated Financial Statements.

 

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CSB BANCORP, INC.

SIGNATURES

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

 

						CSB BANCORP, INC.
						(Registrant)
Date: May 13, 2016						/s/ Eddie L. Steiner
						Eddie L. Steiner
						President
						Chief Executive Officer
Date: May 13, 2016						/s/ Paula J. Meiler
						Paula J. Meiler
						Senior Vice President
						Chief Financial Officer

 

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CSB BANCORP, INC.

INDEX TO EXHIBITS

 

Exhibit Number		Description of Document
3.1		Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed August 6, 2004, Exhibit 3.1, film number 04958544).
3.2		Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to the Registrant’s Form 10-SB).
3.2.1		Amended Article VIII of the Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form DEF 14a filed on March 25, 2009, Appendix A, film number 09703970).
4.0		Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB).
11		Statement Regarding Computation of Per Share Earnings.
31.1		Rule 13a-14(a)/15d-14(a) Chief Executive Officer’s Certification.
31.2		Rule 13a-14(a)/15d-14(a) Chief Financial Officer’s Certification.
32.1		Section 1350 Chief Executive Officer’s Certification.
32.2		Section 1350 Chief Financial Officer’s Certification.
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (extensible Business Reporting Language): (i) Consolidated Balance Sheets: (ii) Consolidated Statements of Income: (iii) Consolidated Statements of Comprehensive Income: (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity: (v) Condensed Consolidated Statements of Cash Flows: and (vi) Notes to Consolidated Financial Statements.

 

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