CSBB 10-Q Quarter ended June 30, 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: June 30, 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 incorporation or organization)		(I.R.S. Employer 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

Securities registered pursuant to Section 12(b) of the Act:

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

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.  ☐

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 August 1, 2019, 2,742,350 common shares

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED June  30, 2019

Table of Contents

Part I – Financial Information

				Page
ITEM 1 –		FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets					3
Consolidated Statements of Income					4
Consolidated Statements of Comprehensive Income					5
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			34
ITEM 4 –		CONTROLS AND PROCEDURES			35
Part II – Other Information
ITEM 1 –		Legal Proceedings			36
ITEM 1A –		Risk Factors			36
ITEM 2 –		Unregistered Sales of Equity Securities and Use of Proceeds			36
ITEM 3 –		Defaults upon Senior Securities			36
ITEM 4 –		Mine Safety Disclosures			36
ITEM 5 –		Other Information			36
ITEM 6 –		Exhibits			37
Signatures					38

2

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

		June 30,				December 31,
(Dollars in thousands)		2019				2018
ASSETS
Cash and cash equivalents
Cash and due from banks		$	15,214			$	23,214
Interest-earning deposits in other banks			42,063				22,350
Total cash and cash equivalents			57,277				45,564
Securities
Available-for-sale, at fair value			86,297				85,528
Held-to-maturity (fair value 2019-$19,696; 2018-$20,118)			19,657				20,688
Equity Securities			87				83
Restricted stock, at cost			4,614				4,614
Total securities			110,655				110,913
Loans held for sale			409				108
Loans			550,612				548,974
Less allowance for loan losses			6,537				5,907
Net loans			544,075				543,067
Premises and equipment, net			11,638				9,961
Core deposit intangible			135				167
Goodwill			4,728				4,728
Bank-owned life insurance			16,760				13,554
Accrued interest receivable and other assets			4,575				3,660
TOTAL ASSETS		$	750,252			$	731,722
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits
Noninterest-bearing		$	180,766			$	185,871
Interest-bearing			442,562				420,627
Total deposits			623,328				606,498
Short-term borrowings			35,474				37,415
Other borrowings			6,576				8,525
Accrued interest payable and other liabilities			3,416				2,748
Total liabilities			668,794				655,186
SHAREHOLDERS’ EQUITY
Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; outstanding 2,742,350 shares 2019 and 2,742,242 shares 2018			18,629				18,629
Additional paid-in capital			9,815				9,815
Retained earnings			57,988				54,288
Treasury stock at cost: 238,252 shares 2019, 238,360 shares 2018			(4,780	)			(4,784	)
Accumulated other comprehensive loss			(194	)			(1,412	)
Total shareholders’ equity			81,458				76,536
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	750,252			$	731,722

See notes to unaudited consolidated financial statements.

3

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands, except per share data)		2019				2018				2019				2018
INTEREST AND DIVIDEND INCOME
Loans, including fees		$	7,185			$	6,515			$	14,257			$	12,654
Taxable securities			584				594				1,171				1,197
Nontaxable securities			134				152				268				313
Other			218				83				393				129
Total interest and dividend income			8,121				7,344				16,089				14,293
INTEREST EXPENSE
Deposits			921				560				1,746				1,014
Short-term borrowings			93				84				186				138
Other borrowings			36				48				75				100
Total interest expense			1,050				692				2,007				1,252
NET INTEREST INCOME			7,071				6,652				14,082				13,041
PROVISION FOR LOAN LOSSES			285				324				570				648
Net interest income, after provision for loan losses			6,786				6,328				13,512				12,393
NONINTEREST INCOME
Service charges on deposit accounts			313				300				605				584
Trust services			212				217				436				436
Debit card interchange fees			369				323				716				636
Gain on sale of loans, net			76				60				155				137
Earnings on bank owned life insurance			122				85				205				166
Unrealized gain (loss) on equity securities			(2	)			—				4				4
Other income			223				183				416				350
Total noninterest income			1,313				1,168				2,537				2,313
NONINTEREST EXPENSES
Salaries and employee benefits			2,915				2,718				5,757				5,355
Occupancy expense			205				214				409				434
Equipment expense			143				160				280				316
Professional and director fees			308				239				647				551
Financial institutions and franchise tax expense			153				142				306				284
Marketing and public relations			139				119				256				239
Software expense			232				221				450				434
Debit card expense			132				126				259				242
Amortization of intangible assets			16				25				32				50
FDIC insurance expense			48				72				98				147
Other expenses			609				583				1,197				1,104
Total noninterest expenses			4,900				4,619				9,691				9,156
Income before income taxes			3,199				2,877				6,358				5,550
FEDERAL INCOME TAX PROVISION			613				553				1,232				1,062
NET INCOME		$	2,586			$	2,324			$	5,126			$	4,488
Basic and diluted net earnings per share		$	0.94			$	0.85			$	1.87			$	1.64

See notes to unaudited consolidated financial statements

4

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollars in thousands)		2019				2018				2019				2018
Net income		$	2,586			$	2,324			$	5,126			$	4,488
Other comprehensive income (loss)
Unrealized gains (losses) arising during the period			762				(156	)			1,511				(1,467	)
Amounts reclassified from accumulated other comprehensive income, held-to-maturity			15				20				30				41
Income tax effect			(163	)			29				(323	)			300
Other comprehensive income (loss)			614				(107	)			1,218				(1,126	)
Total comprehensive income		$	3,200			$	2,217			$	6,344			$	3,362

See notes to unaudited consolidated financial statements.

5

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS 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 June 30, 2019
Balance, beginning of period		$	18,629			$	9,815			$	56,115			$	(4,784	)		$	(808	)		$	78,967
Net income			—				—				2,586				—				—				2,586
Other comprehensive income			—				—				—				—				614				614
Issuance of 108 treasury shares			—				—				—				4				—				4
Cash dividends declared, $0.26 per share			—				—				(713	)			—				—				(713	)
Balance, end of period		$	18,629			$	9,815			$	57,988			$	(4,780	)		$	(194	)		$	81,458
Six Months Ended June 30, 2019
Balance, beginning of period		$	18,629			$	9,815			$	54,288			$	(4,784	)		$	(1,412	)		$	76,536
Net income			—				—				5,126				—				—				5,126
Other comprehensive income			—				—				—				—				1,218				1,218
Issuance of 108 treasury shares			—				—				—				4				—				4
Cash dividends declared, $0.52 per share			—				—				(1,426	)			—				—				(1,426	)
Balance, end of period		$	18,629			$	9,815			$	57,988			$	(4,780	)		$	(194	)		$	81,458
Three Months Ended June 30, 2018
Balance, beginning of period		$	18,629			$	9,815			$	49,070			$	(4,784	)		$	(1,711	)		$	71,019
Net income			—				—				2,324				—				—				2,324
Other comprehensive loss			—				—				—				—				(107	)			(107	)
Cash dividends declared, $0.24 per share			—				—				(658	)			—				—				(658	)
Balance, end of period		$	18,629			$	9,815			$	50,736			$	(4,784	)		$	(1,818	)		$	72,578
Six Months Ended June 30, 2018
Balance, beginning of period		$	18,629			$	9,815			$	47,535			$	(4,784	)		$	(663	)		$	70,532
Net income			—				—				4,488				—				—				4,488
Other comprehensive loss			—				—				—				—				(1,126	)			(1,126	)
Cumulative effect adjustment equity securities, related to ASU 2016-01			—				—				29				—				(29	)			—
Cash dividends declared, $0.48 per share			—				—				(1,316	)			—				—				(1,316	)
Balance, end of period		$	18,629			$	9,815			$	50,736			$	(4,784	)		$	(1,818	)		$	72,578

See notes to unaudited consolidated financial statements.

6

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Six Months Ended
		June 30,
(Dollars in thousands)		2019				2018
NET CASH FROM OPERATING ACTIVITIES		$	4,500			$	4,023
CASH FLOWS FROM INVESTING ACTIVITIES
Securities:
Proceeds from repayments, available-for-sale			6,268				6,151
Proceeds from repayments, held-to-maturity			1,045				5,956
Purchases, available-for-sale			(5,705	)			(992	)
Purchases, held-to-maturity			—				(2,029	)
Loan originations, net of repayments			(1,587	)			(18,938	)
Property, equipment, and software acquisitions			(2,039	)			(639	)
Purchase of bank-owned life insurance			(3,000	)			—
Proceeds from sale of other real estate			—				30
Net cash used in investing activities			(5,018	)			(10,461	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits			16,830				11,814
Net change in short-term borrowings			(1,941	)			4,675
Repayment of other borrowings			(1,949	)			(2,582	)
Cash dividends paid			(713	)			(658	)
Issuance of treasury stock			4				—
Net cash provided by financing activities			12,231				13,249
NET INCREASE IN CASH AND CASH EQUIVALENTS			11,713				6,811
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			45,564				36,420
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	57,277			$	43,231
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest		$	1,969			$	1,276
Income taxes			1,475				1,110
Noncash financing activities:
Dividends declared			713				658
Lease adoption:
Right of use lease asset			477				—
Lease liability			469				—

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 June 30, 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 June 30, 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. This Update and all subsequent ASU’s that modify Topic 326, require 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. During July 2019, the Financial Accounting Standards Board (FASB)

8

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

unanimously voted for a proposal to delay this Update to January, 2023 for smaller reporting companies. While there is a thirty day comment period starting in August, the proposed delay is widely expected to be adopted.

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

9

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES

Securities consist of the following at June 30, 2019 and December 31, 2018:

(Dollars in thousands)		Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value
June 30, 2019
Available-for-sale
U.S. Treasury security		$	990			$	—			$	2			$	988
U.S. Government agencies			7,350				—				32				7,318
Mortgage-backed securities of government agencies			46,233				181				191				46,223
Asset-backed securities of government agencies			987				—				12				975
State and political subdivisions			23,131				303				5				23,429
Corporate bonds			7,626				19				281				7,364
Total available-for-sale			86,317				503				523				86,297
Held-to-maturity
U.S. Government agencies			9,484				14				41				9,457
Mortgage-backed securities of government agencies			10,173				142				76				10,239
Total held-to-maturity			19,657				156				117				19,696
Equity securities			53				34				—				87
Restricted stock			4,614				—				—				4,614
Total securities		$	110,641			$	693			$	640			$	110,694
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 June 30, 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		$	2,994			$	2,995
Due after one through five years			17,214				17,254
Due after five through ten years			24,676				24,753
Due after ten years			41,433				41,295
Total debt securities available-for-sale		$	86,317			$	86,297
Held-to-maturity
Due after one through five years		$	3,485			$	3,473
Due after ten years			16,172				16,223
Total debt securities held-to-maturity		$	19,657			$	19,696

Securities with a fair value of approximately $77.3 million and $83.4 million were pledged at June 30, 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 June 30, 2019 and December 31, 2018. Federal Reserve Bank stock was $471 thousand at June 30, 2019 and December 31, 2018.

There were no proceeds from sales of securities for the three or six month periods ending June 30, 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 June 30, 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
June 30, 2019
Available-for-sale
U.S. Treasury security		$	2			$	988			$	—			$	—			$	2			$	988
U.S. Government agencies			—				—				32				7,318				32				7,318
Mortgage-backed securities of government agencies			38				4,370				153				15,488				191				19,858
Asset-backed securities of government agencies			—				—				12				975				12				975
State and political subdivisions			—				—				5				1,292				5				1,292
Corporate bonds			—				—				281				3,693				281				3,693
Held-to-maturity
U.S. Government agencies			—				—				41				6,958				41				6,958
Mortgage-backed securities of government agencies			17				446				59				3,034				76				3,480
Total temporarily impaired securities		$	57			$	5,804			$	583			$	38,758			$	640			$	44,562
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 42 securities in an unrealized loss position at June 30, 2019, 36 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 June 30, 2019.

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CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS

Loans consist of the following:

(Dollars in thousands)		June 30, 2019				December 31, 2018
Commercial		$	140,411			$	146,875
Commercial real estate			202,661				183,605
Residential real estate			174,635				167,296
Construction & land development			12,460				31,227
Consumer			19,899				19,402
Total loans before deferred costs			550,066				548,405
Deferred loan costs			546				569
Total Loans		$	550,612			$	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 $94.9 million and $92.3 million at June 30, 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 June 30, 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 and six months ended June 30, 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.

For 2019, the provision for loan losses related to commercial loans reflected an additional allocation for loans within the hardwood industry that are affected by trade tariffs, which was offset by a first quarter recovery related to one loan relationship. The provision for commercial real estate was increased to recognize loan volume increases as loans transferred from construction to permanent financing. The increase in the provision for consumer loans, was primarily due to increasing charge-offs partially offset by lower delinquencies.

The increase in the provision for loan losses for the six months ended June 30, 2018 related to commercial loans was primarily due to the increase in substandard loans in this category. The decrease in the provision related to commercial real estate loans is due to the decrease of loan delinquencies in this category. The increase in the provision related to consumer loans is primarily due to the increase loan volume and charge-offs of loans 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 June 30, 2019
Beginning balance		$	1,997			$	1,808			$	1,222			$	170			$	325			$	765			$	6,287
Provision for loan losses			277				138				5				(66	)			46				(115	)			285
Charge-offs			(11	)			—				—				—				(43	)							(54	)
Recoveries			4				—				2				—				13								19
Net charge-offs			(7	)			—				2				—				(30	)							(35	)
Ending balance		$	2,267			$	1,946			$	1,229			$	104			$	341			$	650			$	6,537
Six months ended June 30, 2019
Beginning balance		$	2,178			$	1,791			$	1,245			$	258			$	306			$	129			$	5,907
Provision for loan losses			(62	)			155				(19	)			(154	)			129				521				570
Charge-offs			(16	)			0				0				0				(108	)							(124	)
Recoveries			167				0				3				0				14								184
Net recoveries			151				0				3				0				(94	)							60
Ending balance		$	2,267			$	1,946			$	1,229			$	104			$	341			$	650			$	6,537
Three months ended June 30, 2018
Beginning balance		$	1,884			$	1,699			$	1,196			$	244			$	188			$	422			$	5,633
Provision for loan losses			(31	)			(87	)			39				35				107				261				324
Charge-offs			(9	)			—				—				—				(36	)							(45	)
Recoveries			5				—				1				—				—								6
Net charge-offs			(4	)			0				1				—				(36	)							(39	)
Ending balance		$	1,849			$	1,612			$	1,236			$	279			$	259			$	683			$	5,918
Six months ended June 30, 2018
Beginning balance		$	1,813			$	1,735			$	1,273			$	237			$	175			$	371			$	5,604
Provision for loan losses			226				(61	)			(1	)			42				130				312				648
Charge-offs			(203	)			(62	)			(37	)			—				(46	)							(348	)
Recoveries			13				—				1				—				—								14
Net charge-offs			(190	)			(62	)			(36	)			—				(46	)							(334	)
Ending balance		$	1,849			$	1,612			$	1,236			$	279			$	259			$	683			$	5,918

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