UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

For the quarterly period ended:  March 31, 2020

OR

Commission file number:     0-21714

CSB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

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

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

 

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

Large accelerated filer (   ) Accelerated filer (X) Non-accelerated filer (   ) Smaller reporting company ( X ) Emerging growth company (   )

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

Indicate by check mark whether the registrant 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.

 

 

 

 

 

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CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED MARCH 31, 2020

Table of Contents

 

 

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CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

See notes to unaudited consolidated financial statements.

 

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CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

See notes to unaudited consolidated financial statements

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CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

See notes to unaudited consolidated financial statements.

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CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

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CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

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, 2020, 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, 2019, 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, 2020 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.

REVENUE RECOGNITION

Management has determined the primary sources of revenue emanating from interest and dividend income on loans and securities along with noninterest revenue resulting from investment security gains, loan servicing, gains on the sale of loans, commitment fees, fees from financial guarantees, certain credit cards fees, and income on bank-owned life insurance are not within the scope of ASC 606. These sources of revenue comprise 88% of the total revenue of the Company. Services within the scope of ASC 606 include income from fiduciary activities, brokerage fees, service charges on deposit accounts, other fee income, ATM fees, interchange fees, and gain on sale of OREO, net. For these accounts, fees are related to specific customer transactions, or attributable to specific performance obligations of the Bank where revenue is recognized at a defined point in time upon completion of the requested service/transaction.  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ASU 2016-13 - Financial Instruments - Credit Losses. The Update and all subsequent ASU’s 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 ASU’s.  

ASU 2017-04 - Simplifying the Test for Goodwill Impairment. The Update, and all subsequent ASU’s, simplifies the goodwill impairment test.  Under the new guidance, Step 2 of the goodwill impairment process that requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities is eliminated. Instead, the entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual and interim goodwill tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted. In November 2019, the FASB deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a material impact on the Company’s financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 Company’s financial statements. 

 

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

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

 

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 2 – SECURITIES

Securities consist of the following at March 31, 2020 and December 31, 2019:

 

 

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

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – SECURITIES (CONTINUED)

 

 

Securities with a fair value of approximately $87.6 million and $80.3 million were pledged at March 31, 2020 and December 31, 2019, respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.

Restricted stock primarily consists of investments in 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, 2020 and December 31, 2019. Federal Reserve Bank stock was $471 thousand at March 31, 2020 and December 31, 2019.

There were no proceeds from sales of securities for the three month periods ending March 31, 2020 and 2019. All gains and losses recognized on equity securities during the three month periods were unrealized.

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, 2020 and December 31, 2019:

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 – SECURITIES (CONTINUED)

 

There were twenty-four securities in an unrealized loss position at March 31, 2020, nine 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, 2020.

Note 3 – Loans

Loans consist of the following:

 

 

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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – LOANS (CONTINUED)

 

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

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

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

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

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

Loans serviced for others approximated $88.1 million and $95.7 million at March 31, 2020 and December 31, 2019, respectively.

Concentrations of Credit

Nearly all of the Company’s lending activity occurs within the state of Ohio, including the four counties of Holmes, Stark, Tuscarawas and Wayne, as well as other markets.  The majority of the Company’s loan portfolio consists of commercial and commercial real estate loans.  As of March 31, 2020 and December 31, 2019, 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, 2020 and 2019.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – LOANS (CONTINUED)

 

For the three-month period ended March 31, 2020 the increased allocation across all categories was primarily related to worsening economic conditions and the increasing unemployment rate at the end of March associated with the COVID-19 pandemic.

The decrease in the provision for loan losses for the three months ended March 31, 2019 related to commercial loans was primarily due to a recovery related to one loan relationship which contributed to declining historical losses of loans in this category. The decrease in the provision related to construction and land development loans was primarily due to the decrease in loan balances as construction projects were completed and transferred to permanent financing. The increase in the provision for consumer loans was related to increasing charge-offs as well as an increase in historical losses partially offset by lower delinquencies.

 

 

 

Summary of Allowance for Loan Losses

 

 

The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio class, based on the impairment method as of March 31, 2020 and December 31, 2019:

 

 

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – LOANS (CONTINUED)

 

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2020 and December 31, 2019:

 

 

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

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – LOANS (CONTINUED)

 

The following table presents the aging of past due loans and nonaccrual loans as of March 31, 2020 and December 31, 2019 by class of loans:

 

 

Troubled Debt Restructurings

All troubled debt restructurings (“TDR’s) are individually evaluated for impairment and a related allowance is recorded, as needed.  Loans whose terms have been modified as TDR’s totaled $2.4 million as of March 31, 2020, and $2.5 million as of December 31, 2019, with $18 thousand of specific reserves allocated to those loans at March 31, 2020 and December 31, 2019, respectively.  At March 31, 2020, $2.1 million of the loans classified as TDR’s were performing in accordance with their modified terms.  Of the remaining $252 thousand, all were in nonaccrual of interest status.    

 

 

The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. There was one new TDR’s for the three month period ended March 31, 2020.

None of the loans restructured in 2019 defaulted in the first quarter of 2020. There was one loan in the amount of $200 thousand restructured in 2018 that subsequently defaulted in in the first quarter of 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – LOANS (CONTINUED)

 

Other real estate owned amounted to one property at $99 thousand at March 31, 2020 and December 31, 2019, respectively.  There were $44 thousand in consumer mortgage loans in the process of foreclosure at March 31, 2020 and $50 thousand at December 31, 2019.  There were no other repossessed assets at March 31, 2020 and December 31, 2019.

 

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 $500 thousand.  This analysis is performed on an annual basis.  The Company uses the following definitions for risk ratings:

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

Special Mention.  Assets assigned a Special Mention grade are not considered classified assets but are considered criticized.  These assets exhibit potential weaknesses that, deserve management’s close attention. If left uncorrected, those potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.  Loans in this rating warrant special attention but have not yet reached the point of concern for loss.  These assets have deteriorated sufficiently to the point they would have difficulty refinancing elsewhere.  Similarly, purchasers of the business would not be eligible for bank financing unless they represent a significantly stronger credit risk.

Substandard.  Loans classified as substandard are inadequately protected by the current sound 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 known 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 $500 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, 2020 and December 31, 2019:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – LOANS (CONTINUED)

 

 

 

The following table presents loans that are not rated by class of loans as of March 31, 2020 and December 31, 2019.  Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status.

 

 

NOTE 4 – SHORT-TERM BORROWINGS

The following table provides additional detail regarding repurchase agreements and the related collateral accounted for as secured borrowings.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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:

 

 

The following table presents the assets reported on the Consolidated Balance Sheets at their fair value on a recurring basis as of March 31, 2020 and December 31, 2019 by level within the fair value hierarchy. No liabilities are carried at fair value.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Equity securities with readily determinable values and U.S. Treasury Notes are valued at the closing price reported on the active market on which the individual securities are traded. Obligations of U.S. government agencies, mortgage-backed securities, asset-backed securities, obligations of states and political subdivisions and corporate bonds are valued at observable market data for similar assets.  Equity securities without readily determinable values are carried at amortized cost adjusted for impairment and observable price changes.

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 5 – 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 March 31, 2020 and December 31, 2019, by level within the fair value hierarchy. An impaired loan is written down to fair value through the establishment of specific reserves or a charge down is taken to reduce the loan to fair value of the collateral (less estimated selling costs) and the loan is included in the following table as a Level III measurement.  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.

 

 

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. As of March 31, 2020 there were no impaired loans carried at fair value under the methods described above.

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of recognized financial instruments as of March 31, 2020 and December 31, 2019 are as follows:

 

 

The Company also has unrecognized financial instruments at March 31, 2020 and December 31, 2019.  These financial instruments relate to commitments to extend credit and letters of credit.  The aggregated contract amount of such financial instruments was approximately $207.1 million at March 31, 2020 and $211.3 million at December 31, 2019.  Such amounts are also considered to be the fair values.

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

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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 period ended March 31, 2020 and 2019:

 

 

 

NOTE 8 – SUBSEQUENT EVENTS

 

Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic.  The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).  As a qualified SBA lender, we were automatically authorized to originate PPP loans.  An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10 million.  PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement.  The SBA will guarantee 100% of the PPP loans made to eligible borrowers.  The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.

As of May 5, 2020, we had disbursed approximately 667 loans for $91.6 million under the PPP. 

Loan Modifications

As of May 5, we had modified 213 loans aggregating $65.7 million in loan principal, primarily consisting of three to four months deferral of principal and interest payments, and extension of maturity date. The classifications of loans modified were:  151 commercial loans totaling $61.7 million, 31 residential real estate loans totaling $3.4 million and 31 consumer loans totaling $559 thousand. All of the loans provided modifications were performing in accordance with their terms.

 

 

 

 

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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, 2020 as compared to December 31, 2019, and the consolidated results of operations for the three month period ended March 31, 2020 compared to the same period in 2019. 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 $810 million at March 31, 2020 as compared to $819 million at December 31, 2019. During the three month period ended March 31, 2020, net loans increased $4 million. Cash and cash equivalents, and securities decreased $12 million. Deposits and short-term borrowings decreased $11 million.

Net loans increased $4 million, or 1%, as combined commercial real estate and construction loans decreased $2 million, or -1%, and residential real estate loans increased $3 million, or 2%, from December 31, 2019. Commercial loans increased $3 million, or 2%, as business lines of credits drew based on normal seasonality. Consumers continued to refinance their mortgage loans for historically low long-term fixed rates while home purchase activity increased through the first half of March. Residential mortgage loan originations for the three months ended March 31, 2020 totaled $13 million, an increase from $12.5 million in originations during the three month period ended March 31, 2019. Originations sold into the secondary market were $4.2 million and $2.6 million, respectively during the three month periods ended March 31, 2020 and March 31, 2019. The Bank originates and sells primarily fixed-rate thirty year mortgages into the secondary market.  

 

 

 

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CSB BANCORP, INC.

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

 

The allowance for loan losses increased $833 thousand from the year ago quarter to $7.1 million or 1.28% of total loans. The Company has not early adopted CECL which has been delayed for smaller reporting companies. Outstanding loan balances increased 1% to $555 million at March 31, 2020. Net charge-offs increased to $75 thousand, or an annualized 0.05% of average loans, in the current quarter compared to the $95 thousand recovery, or -0.07% in the year-ago quarter. We believe the allowance level is appropriate given the low level of problem loans and current composition of the overall loan portfolio.  

Nonperforming loans increased to $4.4 million, or 0.79% of total loans from $3.2 million, or 0.58%, a year ago. The increase is a result of one commercial real estate credit facility for $1.5 million being placed on nonaccrual status during second quarter 2019. For the three months ending March 31, 2020 loans totaling $174 thousand were placed on nonaccrual status, there were $26 thousand in charge-downs recognized, and pay downs of $79 thousand were received.

 

 

The ratio of gross loans to deposits was 82.7% at March 31, 2020, compared to 80.7% at December 31, 2019.

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 $627 thousand within the available-for-sale and held-to-maturity portfolios as of March 31, 2020, were primarily the result of customary and expected fluctuations in the bond market and not necessarily the expected cash flows of the individual securities. As a result, all embedded security impairments on March 31, 2020, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits decreased $12 million, or 2%, from December 31, 2019 with noninterest bearing deposits decreasing approximately $9 million and interest-bearing deposit accounts decreasing approximately $3 million. Total deposits as of March 31, 2020 are $64 million greater than March 31, 2019 deposit balances. On a year over year comparison, increases were recognized in noninterest-bearing demand deposits of $11 million, interest-bearing demand deposits of $38 million, money market accounts of $3 million, savings of $6 million, and time deposits of $6 million.

Short-term borrowings consisting of overnight repurchase agreements with retail customers increased $1 million to $41 million at March 31, 2020 as compared to December 31, 2019 and other borrowings decreased $124 thousand as the Company repaid FHLB advances.  

Total shareholders’ equity amounted to $88 million, or 10.8%, of total assets at March 31, 2020 up from December 31, 2019. The increase in shareholders’ equity during the three months ending March 31, 2020 was due to net income of $2.5 million and an increase in accumulated other comprehensive income of $438 thousand offset by dividends declared of $768 thousand. The Company and the Bank met all regulatory capital requirements at March 31, 2020.

RESULTS OF OPERATIONS

Three months ended March 31, 2020 and 2019

For the quarters ended March 31, 2020 and 2019, the Company recorded net income of $2.5 million and $2.5 million and $0.91 and $0.93 per share, respectively. The $57 thousand decrease in net income for the period was primarily the result of a $95 thousand decrease in net interest income and an increase of $216 thousand in other noninterest expenses. The decreases were partially offset by an increase of $119 thousand in other noninterest income, a decrease in the provision for loan losses of $107 thousand and a $28 thousand decrease in federal income tax provision.

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CSB BANCORP, INC.

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

 

Return on average assets and return on average equity were 1.23% and 11.47%, respectively, for the three month period of 2020, compared to 1.41% and 13.20%, respectively for the same quarter in 2019.

Average Balance Sheets and Net Interest Margin Analysis

 

 

¹ Average balances have been computed on an average daily basis.

² Average rates have been computed based on the amortized cost of the corresponding asset or liability.

³ Average loan balances include nonaccrual loans.

⁴ Interest income is shown on a fully tax-equivalent basis.

 

Interest income for the quarter ended March 31, 2020, was $7.8 million representing a $151 thousand decrease, or a 2% decline, compared to the same period in 2019. This decrease was primarily due to average loan rates decreasing 29 basis points partially offset by a volume increase of $10 million for the quarter ended March 31, 2020 as compared to the first quarter 2019. Interest expense for the quarter ended March 31, 2020 was $901 thousand, a decrease of $56 thousand, or 6%, from the same period in 2019. The decrease in interest expense occurred primarily due to a decrease in rates on all deposit liabilities except time deposits for the quarter ended March 31, 2020.

For the quarter ended March 31, 2020, the provision for loan losses was $178 thousand, compared to a provision of $285 thousand provision for the same quarter in 2019. At December 31, 2019 the allowance had an unallocated reserve portion that was allocated during first quarter 2020 including a qualitative factor for the developing Covid-19 pandemic.  For more discussion see Financial Condition. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-ffs and current economic trends.

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CSB BANCORP, INC.

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

 

Noninterest income for the quarter ended March 31, 2020, was $1.3 million, an increase of $119 thousand, or 10%, compared to the same quarter in 2019. Earnings on bank owned life insurance increased $46 thousand for the first quarter 2020 a result of adding policies in 2019. The gain on the sale of mortgage loans to the secondary market increased by $35 thousand for the quarter ended March 31, 2020 as additional loan volume was sold into the secondary market. Debit card interchange income increased $28 thousand, or 8%, with greater fees generated from usage in the first quarter of 2020. Fees from trust and brokerage services increased $6 thousand to $230 thousand for the first quarter 2020 as compared to the same quarter in 2019. Service charges on deposit accounts decreased $1 thousand, or less than 1%, compared to the same quarter in 2019 primarily from a volume decrease in overdraft fees.

Noninterest expenses for the quarter ended March 31, 2020 increased $216 thousand, or 5%, compared to the first quarter of 2019. Salaries and employee benefits increased $126 thousand, or 4%, a result of increases in employees, base salary, and other benefits. The Ohio financial institutions tax increased $18 thousand in the first quarter due to the Company’s increased capital base. Marketing and public relations expense increased $10 thousand, or 9%, primarily due to brand recognition initiatives and the opening of a new banking center. Debit card expenses increased $13 thousand, or 10%, compared to the first quarter 2019 with increased volume. Software expense rose $9 thousand quarter over quarter with additional investment. Occupancy expense increased $16 thousand in 2020 over the first quarter of 2019. Professional and director fees decreased $9 thousand for the quarter ended March 31, 2020 as compared to the first quarter 2019.

Federal income tax expense decreased $28 thousand, or 5%, for the quarter ended March 31, 2020 as compared to the first quarter of 2019. The provision for income taxes was $591 thousand (effective rate of 19%) for the quarter ended March 31, 2020, compared to $619 thousand (effective rate of 19%) for the same quarter ended 2019.

CAPITAL RESOURCES

The Company maintained a strong capital position with tangible common equity to tangible assets of 10.3% at March 31, 2020 compared with 9.9% at December 31, 2019.

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, 2019. As of March 31, 2020 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

 

During October 2019, the federal banking agencies adopted an optional community bank leverage ratio (“CBLR”).  Depository institutions and depository institution holding companies, that have less than $10 billion in total consolidated assets and have a tier 1 leverage ratio of greater than 9 percent, are considered qualifying community banking organizations and are eligible to opt into the community bank leverage ratio framework.  Additionally, such insured depository institutions are considered to have satisfied the risk-based and leverage capital requirements and will be considered well-capitalized under the rule, effective January 1, 2020.  The Company met the well-capitalized ratios under the new standard at both March 31, 2020 and December 31, 2019, but has not elected to opt-in to the CBLR framework as of March 31, 2020.

 

 

LIQUIDITY

 

 

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 37.2% and 38.6% at March 31, 2020 and December 31, 2019.

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

 

COVID-19 added market risk disclosure which should be read with the disclosures presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. While 2020 began with increased loan demand and strong employment, the economic picture reversed sharply as coronavirus wreaked havoc and became the lead story by mid-March. A series of emergency health orders for public safety curtailed nonessential activity and had the effect of shutting down vast swaths of Ohio’s economy, resulting in more than 8% of Ohio’s active workforce filing for unemployment during the last two weeks of March alone. We anticipate that second quarter will be very difficult for many small businesses, organizations and households, and are focused on working to address the financial needs within our primary market areas during this extraordinarily challenging health crisis. This pandemic may affect the Company’s employee base which has been dispersed amongst different buildings and home to ensure no one department could be disrupted by illness. The lack of economic activity, layoffs, and illness among businesses may have a material adverse effect on the Company’s business.

Management performs a quarterly analysis of the Company’s interest rate risk over a twenty-four month horizon. The analysis includes two balance sheet models, one based on a static balance sheet and one on a dynamic balance sheet with projected growth in assets and liabilities. All balance sheet positions and interest rate projections are currently within the Company’s board-approved policy.

The following table presents an analysis of the estimated sensitivity of the Company’s annual net interest income to sudden and sustained -200 through +400 basis point changes, in 100 basis point increments, in market interest rates at March 31, 2020 and December 31, 2019. 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.    

 

 

 

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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:

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, 2020

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, 2019, other than the COVID-19 developments previously discussed under Item 3 - Quantitative and Qualitative Disclosures About Market Risk in Part I of this report.

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, 2020.

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, 2020

PART II – OTHER INFORMATION

 

ITEM 6 - Exhibits.

 

 

 

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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.

 

 

 

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