CSBB 10-Q Quarter ended March 31, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: March 31, 2019

OR

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

Commission file number: 0-21714

CSB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

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

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

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

Emerging growth company  ☐

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

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock		CSBB		OTCPink

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 2019, 2,742,350 common shares

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED March  31, 2019

Table of Contents

		Page
Part I - Financial Information
ITEM 1 – FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets			3
Consolidated Statements of Income			4
Consolidated Statements of Comprehensive Income			5
Consolidated Statements of Changes in Shareholders’ Equity			6
Condensed Consolidated Statements of Cash Flows			7
Notes to Consolidated Financial Statements			8
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			27
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			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

2

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDAT ED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)		March 31, 2019				December 31, 2018
ASSETS
Cash and cash equivalents
Cash and due from banks		$	15,110			$	23,214
Interest-earning deposits in other banks			29,133				22,350
Total cash and cash equivalents			44,243				45,564
Securities
Available-for-sale, at fair value			86,378				85,528
Held-to-maturity (fair value 2019-$19,948; 2018-$20,118)			20,218				20,688
Equity Securities			89				83
Restricted stock, at cost			4,614				4,614
Total securities			111,299				110,913
Loans held for sale			140				108
Loans			548,220				548,974
Less allowance for loan losses			6,287				5,907
Net loans			541,933				543,067
Premises and equipment, net			10,800				9,961
Core deposit intangible			151				167
Goodwill			4,728				4,728
Bank-owned life insurance			16,638				13,554
Accrued interest receivable and other assets			4,913				3,660
TOTAL ASSETS		$	734,845			$	731,722
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits
Noninterest-bearing		$	177,404			$	185,871
Interest-bearing			429,938				420,627
Total deposits			607,342				606,498
Short-term borrowings			36,324				37,415
Other borrowings			8,373				8,525
Accrued interest payable and other liabilities			3,839				2,748
Total liabilities			655,878				655,186
SHAREHOLDERS’ EQUITY
Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; outstanding shares (2019 and 2018 - 2,742,242)			18,629				18,629
Additional paid-in capital			9,815				9,815
Retained earnings			56,115				54,288
Treasury stock at cost (shares 2019 and 2018 - 238,360)			(4,784	)			(4,784	)
Accumulated other comprehensive loss			(808	)			(1,412	)
Total shareholders’ equity			78,967				76,536
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	734,845			$	731,722

See notes to unaudited consolidated financial statements.

3

CSB BANCORP, INC.

CONSOLI DATED STATEMENTS OF INCOME

(Unaudited)

		Three Months Ended March 31,
(Dollars in thousands, except per share data)		2019				2018
INTEREST AND DIVIDEND INCOME
Loans, including fees		$	7,072			$	6,140
Taxable securities			587				603
Nontaxable securities			134				161
Other			175				45
Total interest and dividend income			7,968				6,949
INTEREST EXPENSE
Deposits			825				455
Short-term borrowings			93				53
Other borrowings			39				52
Total interest expense			957				560
NET INTEREST INCOME			7,011				6,389
PROVISION FOR LOAN LOSSES			285				324
Net interest income, after provision for loan losses			6,726				6,065
NONINTEREST INCOME
Service charges on deposit accounts			292				284
Trust services			224				219
Debit card interchange fees			347				313
Gain on sale of loans, net			79				77
Earnings on bank owned life insurance			83				81
Unrealized gain or loss on equity securities			6				4
Other income			193				167
Total noninterest income			1,224				1,145
NONINTEREST EXPENSES
Salaries and employee benefits			2,842				2,637
Occupancy expense			204				219
Equipment expense			137				156
Professional and director fees			339				311
Financial institutions and franchise tax expense			153				142
Marketing and public relations			117				120
Software expense			218				213
Debit card expense			127				116
Amortization of intangible assets			16				25
FDIC insurance expense			50				75
Other expenses			588				523
Total noninterest expenses			4,791				4,537
Income before income taxes			3,159				2,673
FEDERAL INCOME TAX PROVISION			619				509
NET INCOME		$	2,540			$	2,164
Basic and diluted net earnings per share		$	0.93			$	0.79

See notes to unaudited consolidated financial statements

4

CSB BANCORP, INC.

CONSOLIDATED STATE MENTS OF COMPREHENSIVE INCOME

(Unaudited)

		Three Months Ended March 31,
(Dollars in thousands)		2019				2018
Net income		$	2,540			$	2,164
Other comprehensive income (loss)
Unrealized gains (losses) arising during the period			749				(1,312	)
Amounts reclassified from accumulated other comprehensive income, held-to-maturity			15				22
Income tax effect			(160	)			271
Other comprehensive income (loss)			604				(1,019	)
Total comprehensive income		$	3,144			$	1,145

See notes to unaudited consolidated financial statements.

5

CSB BANCORP, INC.

CONSOLIDATED S TATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)		Common stock				Additional paid-in capital				Retained earnings				Treasury stock				Accumulated other comprehensive loss				Total
Three Months Ended March 31, 2018
Balance, beginning of period		$	18,629			$	9,815			$	47,535			$	(4,784	)		$	(663	)		$	70,532
Net income			—				—				2,164				—				—				2,164
Other comprehensive loss			—				—				—				—				(1,019	)			(1,019	)
Cumulative effect adjustment equity securities, related to ASU 2016-01			—				—				29				—				(29	)			—
Cash dividends declared, $0.24 per share			—				—				(658	)			—				—				(658	)
Balance, end of period		$	18,629			$	9,815			$	49,070			$	(4,784	)		$	(1,711	)		$	71,019
Three Months Ended March 31, 2019
Balance, beginning of period			18,629				9,815				54,288				(4,784	)			(1,412	)			76,536
Net income			—				—				2,540				—				—				2,540
Other comprehensive income			—				—				—								604				604
Cash dividends declared, $0.26 per share			—				—				(713	)			—				—				(713	)
Balance, end of period		$	18,629			$	9,815			$	56,115			$	(4,784	)		$	(808	)		$	78,967

See notes to unaudited consolidated financial statements.

6

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Three Months Ended March 31,
(Dollars in thousands)		2019				2018
NET CASH FROM OPERATING ACTIVITIES		$	1,894			$	2,308
CASH FLOWS FROM INVESTING ACTIVITIES
Securities:
Proceeds from repayments, available-for-sale			1,836				2,034
Proceeds from repayments, held-to-maturity			477				5,312
Purchases, available-for-sale			(2,023	)			—
Purchases, held-to-maturity			—				(2,029	)
Loan originations, net of repayments			870				(14,155	)
Property, equipment, and software acquisitions			(976	)			(143	)
Purchase of bank-owned life insurance			(3,000	)			—
Net cash used in investing activities			(2,816	)			(8,981	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits			844				(6,841	)
Net change in short-term borrowings			(1,091	)			(1,130	)
Repayment of other borrowings			(152	)			(187	)
Net cash used in financing activities			(399	)			(8,158	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(1,321	)			(14,831	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			45,564				36,420
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	44,243			$	21,589
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest		$	921			$	572
Income taxes			—				—
Noncash financing activities:
Dividends declared			713				658
Lease adoption:
Right of Use Lease Asset			464				—
Lease Liability			429				—

See notes to unaudited consolidated financial statements.

7

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, 2019, and the results of operations and changes in cash flows for the periods presented have been made.

Certain information and footnote disclosures typically included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been omitted. The Annual Report for CSB for the year ended December 31, 2018, contains Consolidated Financial Statements and related footnote disclosures, which should be read in conjunction with the accompanying Consolidated Financial Statements. The results of operations for the period ended March 31, 2019 are not necessarily indicative of the operating results for the full year or any future interim period.

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

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

ASU 2016-02 – Leases. This Update and all subsequent ASU’s that modified Topic 842 set forth a new lease accounting model for lessors and lessees. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The accounting provided by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Update and its related amendments were adopted as of January 1, 2019, which resulted in the recognition of operating right-of-use assets totaling $477 thousand and operating lease liabilities totaling $469 thousand. The Company elected to adopt the transition relief provisions from ASU 2018-11 and recorded the impact of adoption as of January 1, 2019, without restating any prior-year amounts or disclosures. The Company has presented the necessary disclosures in Note 8.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ASU 2016-13 - Financial Instruments - Credit Losses. The Update 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. The Update is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. We expect the Update will result in an increase in the allowance for credit losses for the estimated life of the financial asset, including an estimate for debt securities. The amount of any increase will be impacted by the portfolio composition and quality at the adoption date, as well as economic conditions and forecasts at that time. A cumulative-effect adjustment to retained earnings is required as of the beginning of the year of adoption. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

8

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

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

9

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES

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

(Dollars in thousands)		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value
March 31, 2019
Available-for-sale
U.S. Treasury security		$	999			$	—			$	1			$	998
U.S. Government agencies			7,350				—				102				7,248
Mortgage-backed securities of government agencies			45,997				59				532				45,524
Asset-backed securities of government agencies			1,012				—				16				996
State and political subdivisions			23,166				185				32				23,319
Corporate bonds			8,636				2				345				8,293
Total available-for-sale			87,160				246				1,028				86,378
Held-to-maturity
U.S. Government agencies			9,483				11				206				9,288
Mortgage-backed securities of government agencies			10,735				71				146				10,660
Total held-to-maturity			20,218				82				352				19,948
Equity securities			53				36				—				89
Restricted stock			4,614				—				—				4,614
Total securities		$	112,045			$	364			$	1,380			$	111,029
December 31, 2018
Available-for-sale
U.S. Treasury security		$	997			$	—			$	1			$	996
U.S. Government agencies			7,350				—				180				7,170
Mortgage-backed securities of government agencies			45,744				41				884				44,901
Asset-backed securities of government agencies			1,040				—				16				1,024
State and political subdivisions			23,282				49				206				23,125
Corporate bonds			8,646				—				334				8,312
Total available-for-sale			87,059				90				1,621				85,528
Held-to-maturity
U.S. Government agencies			9,482				6				390				9,098
Mortgage-backed securities of government agencies			11,206				28				214				11,020
Total held-to-maturity			20,688				34				604				20,118
Equity securities			53				30				—				83
Restricted stock			4,614				—				—				4,614
Total securities		$	112,414			$	154			$	2,225			$	110,343

10

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, 2019, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)		Amortized cost				Fair value
Available-for-sale
Due in one year or less		$	3,477			$	3,480
Due after one through five years			20,264				20,224
Due after five through ten years			22,565				22,374
Due after ten years			40,854				40,300
Total debt securities available-for-sale		$	87,160			$	86,378
Held-to-maturity
Due after one through five years		$	484			$	495
Due after five through ten years			3,000				2,917
Due after ten years			16,734				16,536
Total debt securities held-to-maturity		$	20,218			$	19,948

Securities with a fair value of approximately $82.4 million and $83.4 million were pledged at March 31, 2019 and December 31, 2018, respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.

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

There were no proceeds from sales of securities for the three month periods ending March 31, 2019 and 2018.

11

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, 2019 and December 31, 2018:

		Securities in a continuous unrealized loss position
		Less than 12 months								12 months or more								Total
(Dollars in thousands)		Gross unrealized losses				Fair value				Gross unrealized losses				Fair value				Gross unrealized losses				Fair value
March 31, 2019
Available-for-sale
U.S. Treasury security		$	1			$	998			$	—			$	—			$	1			$	998
U.S. Government agencies			—				—				102				7,248				102				7,248
Mortgage-backed securities of government agencies			1				1,948				531				32,804				532				34,752
Asset-backed securities of government agencies			—				—				16				996				16				996
State and political subdivisions			—				—				32				3,302				32				3,302
Corporate bonds			1				574				344				6,717				345				7,291
Held-to-maturity
U.S. Government agencies			—				—				206				8,793				206				8,793
Mortgage-backed securities of government agencies			32				473				114				4,094				146				4,567
Total temporarily impaired securities		$	35			$	3,993			$	1,345			$	63,954			$	1,380			$	67,947
December 31, 2018
Available-for-sale
U.S. Treasury security		$	1			$	996			$	—			$	—			$	1			$	996
U.S. Government agencies			—				—				180				7,170				180				7,170
Mortgage-backed securities of government agencies			33				4,206				851				35,188				884				39,394
Asset-backed securities of government agencies			16				1,024				—				—				16				1,024
State and political subdivisions			9				3,326				197				8,626				206				11,952
Corporate bonds			131				5,014				203				3,298				334				8,312
Held-to-maturity
U.S. Government agencies			—				—				390				8,609				390				8,609
Mortgage-backed securities of government agencies			72				3,404				142				3,360				214				6,764
Total temporarily impaired securities		$	262			$	17,970			$	1,963			$	66,251			$	2,225			$	84,221

There were 67 securities in an unrealized loss position at March 31, 2019, 62 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, 2019.

12

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS

Loans consist of the following:

(Dollars in thousands)		March 31, 2019				December 31, 2018
Commercial		$	144,793			$	146,875
Commercial real estate			192,663				183,605
Residential real estate			170,303				167,296
Construction & land development			20,792				31,227
Consumer			19,083				19,402
Total loans before deferred costs			547,634				548,405
Deferred loan costs			586				569
Total Loans		$	548,220			$	548,974

Loan Origination/Risk Management

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

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

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

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

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

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

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

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

Loans serviced for others approximated $94.5 million and $92.3 million at March 31, 2019 and December 31, 2018, respectively.

Concentrations of Credit

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

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

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.

The increase in the provision for loan losses for the three months ended March 31, 2018 related to commercial loans was primarily due to the increase in substandard loans and the increase in loan volume of loans in this category. The decrease in the provision related to residential real estate loans is due to the decrease of loan delinquencies in this category.

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

Summary of Allowance for Loan Losses

(Dollars in thousands)		Commercial				Commercial Real Estate				Residential Real Estate				Construction & Land Development				Consumer				Unallocated				Total
Three months ended March 31, 2019
Beginning balance		$	2,178			$	1,791			$	1,245			$	258			$	306			$	129			$	5,907
Provision for loan losses			(339	)			17				(24	)			(88	)			83				636				285
Charge-offs			(5	)			—				—				—				(65	)							(70	)
Recoveries			163				—				1				—				1								165
Net charge-offs			158				—				1				—				(64	)							95
Ending balance		$	1,997			$	1,808			$	1,222			$	170			$	325			$	765			$	6,287
Three months ended March 31, 2018
Beginning balance		$	1,813			$	1,735			$	1,273			$	237			$	175			$	371			$	5,604
Provision for loan losses			257				26				(40	)			7				23				51				324
Charge-offs			(194	)			(62	)			(37	)			—				(10	)							(303	)
Recoveries			8				—				—				—				—								8
Net charge-offs			(186	)			(62	)			(37	)			—				(10	)							(295	)
Ending balance		$	1,884			$	1,699			$	1,196			$	244			$	188			$	422			$	5,633

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

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

(Dollars in thousands)		Commercial				Commercial Real Estate				Residential Real Estate				Construction				Consumer				Unallocated				Total
March 31, 2019
Allowance for loan losses:
Individually evaluated for impairment		$	35			$	16			$	1			$	—			$	—			$	—			$	52
Collectively evaluated for impairment			1,962				1,792				1,221				170				325				765				6,235
Total ending allowance balance		$	1,997			$	1,808			$	1,222			$	170			$	325			$	765			$	6,287
Loans:
Loans individually evaluated for impairment		$	1,139			$	2,186			$	975			$	—			$	17							$	4,317
Loans collectively evaluated for impairment			143,654				190,477				169,328				20,792				19,066								543,317
Total ending loans balance		$	144,793			$	192,663			$	170,303			$	20,792			$	19,083							$	547,634
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment		$	36			$	64			$	1			$	—			$	—			$	—			$	101
Collectively evaluated for impairment			2,142				1,727				1,244				258				306				129				5,806
Total ending allowance balance		$	2,178			$	1,791			$	1,245			$	258			$	306			$	129			$	5,907
Loans:
Loans individually evaluated for impairment		$	419			$	2,403			$	1,030			$	—			$	—							$	3,852
Loans collectively evaluated for impairment			146,456				181,202				166,266				31,227				19,402								544,553
Total ending loans balance		$	146,875			$	183,605			$	167,296			$	31,227			$	19,402							$	548,405

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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, 2019 and December 31, 2018:

(Dollars in thousands)		Unpaid Principal Balance				Recorded Investment with no Allowance				Recorded Investment with Allowance				Total Recorded Investment				Related Allowance
March 31, 2019
Commercial		$	1,536			$	1,107			$	35			$	1,142			$	35
Commercial real estate			2,412				1,985				211				2,196				16
Residential real estate			1,136				710				266				976				1
Consumer			17				17				—				17				—
Total impaired loans		$	5,101			$	3,819			$	512			$	4,331			$	52
December 31, 2018
Commercial		$	815			$	383			$	36			$	419			$	36
Commercial real estate			2,616				1,976				433				2,409				64
Residential real estate			1,190				763				269				1,032				1
Total impaired loans		$	4,621			$	3,122			$	738			$	3,860			$	101

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)		2019				2018
Average recorded investment:
Commercial		$	861			$	1,792
Commercial real estate			2,289				4,490
Residential real estate			1,018				1,443
Consumer			3				—
Average recorded investment in impaired loans		$	4,171			$	7,725
Interest income recognized:
Commercial		$	13			$	11
Commercial real estate			3				4
Residential real estate			12				14
Consumer			—				—
Interest income recognized on a cash basis on impaired loans		$	28			$	29

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