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Section 1: 10-K (10-K)

10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 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 No.)

 

                              91 North Clay Street, Millersburg, Ohio                                          44654
                                (Address of principal executive offices)                                      (Zip code)

Registrant’s telephone number, including area code 330.674.9015

Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act:

Common Shares, $6.25 par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (  ) Yes  (X) No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (  ) Yes  (X) No

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  (  )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer (  ) Accelerated filer (X) Non-accelerated filer (  ) Smaller reporting company (  ) 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 (X) 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 [  ]

At June 30, 2017, the aggregate market value of the voting common equity held by non-affiliates of the registrant, based on a price of $29.75 per common share (such price being the average of the bid and ask trade price on such date) was $75.4 million.

At March 16, 2018, there were outstanding 2,742,242 of the registrant’s common shares, $6.25 par value.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of CSB Bancorp Inc.’s 2017 Annual Report to  Shareholders are incorporated by reference in Parts I and II of this Form 10-K.

Portions of CSB Bancorp Inc.’s Proxy Statement for the 2018 Annual Meeting  of Shareholders are incorporated by reference in Part III of this Form 10-K.

PART I

ITEM 1. BUSINESS.

General

CSB Bancorp, Inc. (“CSB”), is a registered financial holding company under the Bank Holding Company Act of 1956, as amended, and was incorporated under the laws of the State of Ohio in 1991. The Commercial and Savings Bank of Millersburg, Ohio (the “Bank”), an Ohio banking corporation chartered in 1879, is a wholly-owned subsidiary of CSB. The Bank is a member of the Federal Reserve System, and its deposits are insured up to the maximum amount provided by law by the Federal Deposit Insurance Corporation (“FDIC”). The primary regulators of the Bank are the Federal Reserve Board and the Ohio Division of Financial Institutions. CSB Investment Services, LLC, an Ohio limited liability company (“CSB Investment”), is a wholly owned subsidiary of CSB that is licensed to engage in the business of insurance in the State of Ohio. In this Annual Report on Form 10-K, CSB and its subsidiaries are sometimes collectively referred to as the “Company.”

Cautionary Statement Regarding Forward-Looking Information

Certain statements contained in this Annual Report on Form 10-K, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipate”, “estimates”, “may”, “feels”, “expects”, “believes”, “plans”, “will”, “would”, “should”, “could” and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements. Examples of forward-looking statements include: (i) projections of income or expense, earnings per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of the Company and of its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company’s filings with the SEC, including without limitation the risk factors disclosed in Item 1A of this Annual Report on Form 10-K.

Other factors not currently anticipated may also materially and adversely affect the Company’s business, financial condition, results of operations, or cash flows. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this Annual Report on Form 10-K are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. The Company does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

Business Overview and Lending Activities

CSB operates primarily through the Bank and CSB Investment, providing a wide range of banking, trust, financial and brokerage services to corporate, institutional and individual customers throughout northeast Ohio. The Bank provides retail and commercial banking services to its customers, including checking and savings accounts, time deposits, IRAs, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, night depository facilities, brokerage, and trust services.

The Bank provides residential real estate, commercial real estate, commercial, and consumer loans to customers located primarily in Holmes, Tuscarawas, Wayne, Stark, and portions of surrounding counties in Ohio. The Bank’s market area has historically exhibited relatively stable economic conditions. Economic activity in the Company’s market area has been increasing at a steady pace for the past nine years. Reported unemployment levels at December 2017 in the four primary counties served by the Company ranged between 3.1% and 5%. These levels declined slightly from December 2016. Labor markets continued to tighten during the fiscal year ending December

 

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31, 2017. Wage pressure has increased for most entry level jobs and to a lesser extent middle-skills jobs in certain sectors such as banking and construction. The local housing market is relatively stable with moderate levels of sales and housing construction in 2017 and modest price appreciation. Higher costs of building materials and higher fuel costs have contributed to increased housing construction costs. Consumer confidence in the economy has been a primary driver for the strong housing demand and higher consumer spending.

Certain risks are involved in providing loans, including, but not limited to, the borrowers’ ability and willingness to repay the debt. Before the Bank extends a new loan or renews an existing loan to a customer, these risks are assessed through a review of the borrower’s past and current credit history, the collateral being used to secure the transaction if any, and other factors. For all commercial loan relationships greater than $300,000, the Bank’s internal credit department performs an annual risk rating review. In addition to this review, an independent outside loan review firm is engaged to review a sample of watch list and adversely classified credits over $250,000 and a sample of commercial loan relationships greater than $250,000. The outside loan review will also assess management’s current credit grades and provide commentary with regard to assigned ratings and the need for a credit to be classified as a troubled debt restructuring, as well as assess management’s specific loan loss reserves for loans included in their sample that are considered to be impaired. In addition, any loan over $100,000 identified as a problem credit by management and/or the external loan review consultants is assigned to the Bank’s “loan watch list,” and is subject to ongoing review by the Bank’s credit department and the assigned loan officer to ensure appropriate action is taken if deterioration continues.

Commercial loan rates are variable as well as fixed, and include operating lines of credit and term loans made to small businesses, primarily based on their ability to repay the loan from the cash flow of the business. Business assets such as equipment, accounts receivable, and inventory typically secure such loans. When the borrower is not an individual, the Bank generally obtains the personal guarantee of the business owner. These loans typically involve larger loan balances, are generally dependent on the cash flow of the business, and thus may be subject to a greater extent to adverse conditions in the general economy or in a specific industry. Management reviews the borrower’s cash flows when deciding whether to grant the credit in order to evaluate whether estimated future cash flows will be adequate to service principal and interest of the new obligation in addition to existing obligations.

Commercial real estate loans are primarily secured by borrower-occupied business real estate and are dependent on the ability of the related business to generate adequate cash flow to service the debt. Commercial real estate loans are generally originated with a loan-to-value ratio of 80% or less. Commercial construction loans are secured by commercial real estate and in most cases the Bank also provides the permanent financing. The Bank monitors advances and the maximum loan to value ratio is typically limited to the lesser of 90% of cost or 80% of appraisal value. Management performs much of the same analysis when deciding whether to grant a commercial real estate loan as when deciding whether to grant a commercial loan.

Residential real estate loans carry both fixed and variable rates and are secured by the borrower’s residence. Such loans are made based on the borrower’s ability to make repayment from employment and other income. Management assesses the borrower’s ability and willingness to repay the debt through review of credit history and ratings, verification of employment and other income, review of debt-to-income ratios, and other measures of repayment ability. The Bank generally makes these loans in amounts of 80% or less of the value of the collateral or up to 95% of collateral value with private mortgage insurance. An appraisal from a qualified real estate appraiser or an evaluation based on comparable market values is obtained for substantially all loans secured by real estate. Residential construction loans are secured by residential real estate that generally will be occupied by the borrower upon completion. The Bank usually makes the permanent loan at the end of the construction phase. Generally, construction loans are made in amounts of 80% or less of the value of the as-completed collateral.

Home equity lines of credit are made to individuals and are secured by second or first mortgages on the borrower’s residence. Loans are based on similar credit and appraisal criteria used for residential real estate loans; however, loans up to 100% of the value of the property may be approved for borrowers with excellent credit histories. These loans typically bear interest at variable rates and require minimum monthly payments of the accrued interest.

Installment loans to individuals include unsecured loans and loans secured by recreational vehicles (“RV’s”), automobiles, and other consumer assets. Consumer loans for the purchase of new RV’s and new automobiles generally do not exceed 110% of Manufacturer’s Suggested Retail Price (MSRP) on RV’s or 110% of the MSRP of an automobile. Loans for used RV’s and automobiles do not exceed 120% of the “clean trade-in value” as reported in the current “NADA” used guides. Overdraft protection loans are unsecured personal lines of credit to individuals who have demonstrated good credit character with reasonably assured sources of income and satisfactory credit histories. Consumer loans generally involve more risk than residential mortgage loans because of the type and nature of collateral and, in certain types of consumer loans, absence of collateral. Since these loans are generally repaid from ordinary income of the individual or family unit, repayment may be adversely affected by job loss, divorce, ill health, or by a general decline in economic conditions. The Bank assesses the borrower’s ability and willingness to

 

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repay through a review of credit history, credit ratings, debt-to-income ratios and other measures of repayment ability.

While CSB’s chief decision-makers monitor the revenue streams of the various financial products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment. For a discussion of the Company’s financial performance for the fiscal year ended December 31, 2017, see the Consolidated Financial Statements and Notes to the Consolidated Financial Statements found in Item 8 of this Annual Report on Form 10-K.

Employees

At December 31, 2017, the Company had 187 employees, 156 of which were employed on a full-time basis. CSB has no separate employees not also employed by the Bank. No employees are covered by collective bargaining agreements. Employees are provided benefit programs, some of which are contributory. Management considers its employee relations to be good.

Competition

The Bank operates in a highly competitive industry due, in part, to Ohio law permitting statewide branching by banks, savings and loan associations, and credit unions. Ohio and federal law also permit nationwide interstate banking. In its primary market area of Holmes, Tuscarawas, Wayne, Stark, and surrounding Ohio counties, the Bank competes for new deposit dollars and loans with other commercial banks, including both large regional banks and smaller community banks, as well as savings and loan associations, credit unions, finance companies, insurance companies, brokerage firms, investment companies, and technology-based providers of financial services (sometimes referred to as “fintech” companies).

Competition within the financial service industry continues to increase as a result of mergers between, and expansion of, financial service providers within and outside of the Bank’s primary market areas. In addition, securities firms and insurance companies that have elected to become financial holding companies may acquire commercial banks and other financial institutions, which can create additional competitive pressure.

Investor Relations

The Company’s website address is www.csb1.com. The Company makes available its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, free of charge on its website as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the “SEC”). The Company also makes available through its website, other reports filed with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including its proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as the Company’s Code of Ethics. The Company does not intend for information contained in its website to be incorporated by reference into this Annual Report on Form 10-K.

In addition, the Company’s filings with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street NE, Washington DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1.800.SEC.0330. These filings are also available on the SEC’s website at www.sec.gov free of charge as soon as reasonably practicable after the Company has filed the above referenced reports.

Supervision and Regulation of CSB and the Bank

CSB and the Bank are subject to extensive regulation by federal and state regulatory agencies. The regulation of financial holding companies and their subsidiaries by bank regulatory agencies is intended primarily for the protection of consumers, depositors, federal deposit insurance funds, and the banking system as a whole and not for the protection of shareholders.

CSB is a bank holding company that has registered with the Federal Reserve Board (“FRB”) as a financial holding company under the Bank Holding Company Act, as amended (the “BHC Act”). Pursuant to the Gramm-Leach-Bliley Act of 1999 (“GLBA”), a bank holding company may become a financial holding company if each of its subsidiary banks is “well-capitalized” under regulatory “prompt corrective action” provisions, is “well-managed,” and has at least a “satisfactory” rating under the Community Reinvestment Act (“CRA”) by filing a declaration with the FRB that the bank holding company wishes to become a financial holding company. CSB has been a financial holding company since 2005. No prior regulatory approval is required for a financial holding company to acquire certain companies, other than banks and savings associations, that are financial in nature as determined by the FRB.

GLBA defines “financial in nature” to include securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency activities; merchant banking activities; and activities that the FRB has determined to be closely related to banking. Bank subsidiaries of a financial holding company must continue to be well-capitalized and well-managed in order to continue to engage in activities that are

 

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financial in nature without regulatory actions or restrictions, which could include divestiture of the subsidiary or subsidiaries. In addition, a financial holding company or a bank subsidiary of a financial holding company may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or bank has a CRA rating of satisfactory or better.

As a financial holding company, CSB is subject to regulation, examination, and supervision by the FRB under the BHC Act. CSB is also subject to the disclosure and regulatory requirements of the Securities Exchange Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder, as administered by the SEC.

The Bank, as an Ohio state-chartered bank and member of the Federal Reserve System, is subject to regulation, supervision, and examination by the Ohio Division of Financial Institutions and the FRB. Because the FDIC insures its deposits, the Bank is also subject to certain FDIC regulations. The FDIC is an independent federal agency which insures the deposits, up to prescribed statutory limits, of federally-insured banks and savings associations, and safeguards the safety and soundness of the financial institution industry. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC and the Bank is subject to deposit insurance assessments to maintain the Deposit Insurance Fund. In addition, the Bank is subject to regulations promulgated by the Consumer Financial Protection Bureau (the “CFPB”) established by the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in July 2010 (the “Dodd-Frank Act”).

The earnings, dividends, and other aspects of the operations and activities of CSB and the Bank are affected by state and federal laws and regulations, and by policies of various regulatory authorities. These policies include, for example, statutory maximum lending rates, requirements on maintenance of reserves against deposits, domestic monetary policies of the FRB, United States fiscal and economic policies, international currency regulations, and monetary policies, certain restrictions on relationships with many phases of the securities business, and capital adequacy, and liquidity restraints.

The following information describes selected federal and state statutory and regulatory provisions that have, or could have, a material impact on the Company’s business. This discussion is qualified in its entirety by reference to the full text of the particular statutory or regulatory provisions. These statutes and regulations are continually under review by the United States Congress and state legislatures, and state and federal regulatory agencies. A change in statutes, regulations, or regulatory policies applicable to CSB and its subsidiaries could have a material effect on their respective businesses.

Regulation of Bank Holding Companies

As a financial holding company under GLBA, CSB’s activities are subject to extensive regulation by the FRB. CSB is required to file reports with the FRB and provide such additional information as the FRB may require, and is subject to regular examination and inspection by the FRB.

The FRB has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, issue cease and desist orders, and require that a bank holding company divest subsidiaries (including subsidiary banks). The FRB may initiate enforcement actions for violations of laws and regulations, and for unsafe and unsound practices. Under FRB policies, a bank holding company is expected to act as a “source of strength” to its subsidiary banks and to commit resources to support those subsidiary banks. Under this policy, the FRB may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank.

The BHC Act requires the prior approval of the FRB in cases where a bank holding company proposes to acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by it, acquire all or substantially all of the assets of another bank or another financial or bank holding company, or merge or consolidate with any other financial or bank holding company.

The FRB also regulates and provides limitations on transactions between affiliates of a bank holding company, loans to directors and officers of bank affiliates, securities transactions, and liability for losses incurred by commonly controlled banks in certain circumstances.

 

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Regulatory Capital

The FRB adopted risk-based capital guidelines for bank holding companies and state member banks, designed to absorb losses. The guidelines provide a systematic analytical framework, which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

New Basel III Capital Rules (“Basel III”) became effective on January 1, 2015, and contain a new capital conservation buffer and deductions from common equity capital that phase in from January 1, 2016, through January 1, 2019, and deductions from common equity tier 1 capital that will mostly phase in from January 1, 2015, through January 1, 2019.    

The new rules include (a) a new common equity tier 1 capital ratio of at least 4.5%, (b) a minimum tier 1 capital ratio of 6.0%, (c) a minimum capital to risk-weighted assets ratio of 8.0%, and (d) a minimum leverage ratio of 4%.

Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). The deductions phase in through 2019.

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The new rules placed restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the Company does not hold a capital conservation buffer of greater than 2.5% composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer was phased in beginning January 1, 2016 at 0.625% and will be fully phased in at 2.50% by January 1, 2019.The required capital conservation buffer for January 1, 2018 is 1.875%.

Pursuant to the FRB’s Small Bank Holding Company Policy statement (“SBHC Policy”), a bank holding company with assets of less than $1 billion and meeting certain other requirements is not required to comply with the consolidated capital requirements until such company exceeds $1 billion in assets or is otherwise determined by the FRB not to qualify as a small bank holding company. At December 31, 2017, CSB was deemed to be a small bank holding company under the SBHC Policy and was not required to comply with the FRB’s regulatory capital requirements. The Bank, however, must comply with the new capital requirements.

The implementation of Basel III did not have a material impact on CSB’s or the Bank’s capital ratios.

 

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Prompt Corrective Action

The federal banking agencies have established a system of “prompt corrective action” to resolve certain of the problems of undercapitalized institutions. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized”, and “critically undercapitalized.”

The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank’s capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes “critically undercapitalized” unless the bank’s primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank’s capital category. For example, a bank that is not “well capitalized” generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank’s capital plan for the plan to be acceptable.

In order to be “well-capitalized,” a bank must have a minimum common equity tier 1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10%, a tier 1 risk-based capital ratio of at least 8% and a leverage ratio of at least 5%, and the bank must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.

As of December 31, 2017, the Bank met the ratio requirements in effect at that date to be deemed “well-capitalized.” See Note 12 of the Notes to Consolidated Financial Statements located on page 51 of CSB’s 2017 Annual Report, which is incorporated herein by reference. Management of the Company believes the Bank also meets the capital requirements to be deemed “well-capitalized” under the new guidelines.

Deposit Insurance

Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund of the FDIC, and the Bank is assessed quarterly deposit insurance premiums to maintain the Deposit Insurance Fund. Insurance premiums for each insured institution are determined based upon the institution’s capital level and supervisory rating provided to the FDIC by the institution’s primary federal regulator and other information deemed by the FDIC to be relevant to the risk posed to the Deposit Insurance Fund by the institution. The assessment rate is then applied to the amount of the institution’s assessment base to determine the institution’s insurance premium. The deposit insurance assessment base is calculated on average assets less average tangible equity.

Effective July 1, 2016 the FDIC revised the deposit insurance premium assessment method for banks with less than $10 billion in assets that have been insured by the FDIC for at least five years. The change revised the financial ratios method so that it would be based on a statistical model estimating the probability of failure of a bank over three years; updated the financial measures used in the financial ratios method consistent with the statistical model; and eliminated risk categories for established small banks by using the financial ratios method to determine assessment rates for all such banks (subject to minimum or maximum initial assessment rates based upon a bank’s composite examination rating).

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally-insured institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the Deposit Insurance Fund. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or written agreement entered into with the FDIC.

The management of the Bank does not know of any practice, condition, or violation that might lead to termination of deposit insurance.

Fiscal and Monetary Policies

The business and earnings of the Company are affected significantly by the fiscal and monetary policies of the United States Government and its agencies. These policies are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. CSB is particularly affected by the policies of the FRB, which has regulatory authority over the supply of money and credit in the United States.

The monetary policies of the FRB have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy, the money markets and the activities of monetary and fiscal authorities, the Company can make no definitive predictions as to future changes in interest rates, credit availability or deposit levels.

 

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Limits on Dividends and Other Payments

There are various legal limitations on the extent to which subsidiary banks may finance or otherwise supply funds to their parent holding companies. Under applicable federal and state laws, subsidiary banks may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, their bank holding companies. Subsidiary banks are also subject to collateral security requirements for any loan or extension of credit permitted by such exceptions.

Payments of dividends by the Bank are limited by applicable state and federal laws and regulations. The ability of CSB to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends that may be declared by the Bank. However, the FRB expects CSB to serve as a source of strength for the Bank and may require CSB to retain capital for further investment in the Bank, rather than pay dividends to CSB shareholders. Payment of dividends by the Bank may be restricted at any time at the discretion of its applicable regulatory authorities, if they deem such dividends to constitute an unsafe or unsound banking practice. These provisions could have the effect of limiting CSB’s ability to pay dividends on its common shares.

The FRB issued a policy statement that provides that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. At December 31, 2017, approximately $9.3 million of the total shareholders’ equity of the Bank was available for payment to CSB without the prior approval of the applicable regulatory authorities. See Note 12 of the “Notes to Consolidated Financial Statements located on page 52 of CSB’s 2017 Annual Report.

Customer Privacy

Under the GLBA, federal banking agencies have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require distribution of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties.

USA Patriot Act

In response to the events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) was signed into law in October, 2001. The Patriot Act provides for financial institutions to establish programs and procedures to combat money laundering and terrorist financing. In addition, federal banking agencies are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering policies, procedures, and controls of the applicants.

The Bank has established policies and procedures to be compliant with the requirements of the Patriot Act.

 

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Corporate Governance

The Sarbanes-Oxley Act of 2002 (“SOX”) effected broad reforms to areas of financial disclosure and corporate governance. The Board of Directors reviews the Company’s corporate governance practices on a continuing basis. In accordance with section 302(a) of SOX, written certifications by CSB’s Chief Executive Officer and Chief Financial Officer are required to certify that CSB’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact or fail to state a material fact. CSB has also implemented a program designed to comply with Section 404 of SOX, which includes identification of significant processes and accounts, documentation of the design of control effectiveness over process and entity-level controls, and testing of the operating effectiveness of key controls. As of June 30, 2017, CSB exceeded the Section 404(b) market cap requirement under SOX to provide an auditor’s attestation and report on management’s assessment of internal control over financial reporting for fiscal year 2017. Management’s assessment of internal controls over financial reporting and the Independent Registered Public Accounting Firm opinion on internal control over financial reporting are located on pages 22 and 23 of CSB’s 2017 Annual Report.

Effect of Environmental Regulation

Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of CSB or its subsidiaries. CSB believes the nature of the operations of its subsidiaries has little, if any, environmental impact. CSB, therefore, anticipates no material capital expenditures for environmental control facilities for its current fiscal year or for the foreseeable future.

CSB believes its primary exposure to environmental risk is through the lending activities of the Bank. In cases where management believes environmental risk potentially exists, the Bank mitigates environmental risk exposure by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites.

Executive and Incentive Compensation

In June 2010, the federal banking agencies issued joint interagency guidance on incentive compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

Pursuant to the Joint Guidance, the FRB will review as part of a regular, risk-focused examination process, the incentive compensation arrangements of financial institutions such as the Company. Such review will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination and deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against an institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and prompt and effective measures are not being taken to correct the deficiencies.

The Company’s board and management believe its policies and procedures related to Executive and Incentive Compensation are compliant with the Joint Guidance.

Future Legislation

Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced by the U.S. Congress and state legislatures, as well as by regulatory agencies. Such legislation may continue to change banking statutes and the operating environment of CSB and its subsidiaries in substantial and unpredictable ways, and could significantly increase or decrease costs of doing business, limit or expand permissible activities or affect the competitive balance among financial institutions. The nature and extent of future legislative and regulatory changes affecting financial institutions remains very unpredictable.

 

9


Statistical Disclosures

The following schedules present, for the periods indicated, certain financial and statistical information of the Company as required under the SEC’s Industry Guide 3 “Statistical Disclosures by Bank Holding Companies,” or a specific reference as to the location of required disclosures in the Company’s 2017 Annual Report.

Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential

The information set forth under the heading, “Average Balance Sheets and Net Interest Margin Analysis” located on page 10 of the Company’s 2017 Annual Report is incorporated by reference herein.

The information set forth under the heading, “Rate/Volume Analysis of Changes in Income and Expense” located on page 11 of the Company’s 2017 Annual Report is incorporated by reference herein.

Investment Portfolio

The following is a schedule of the fair value of securities at December 31:

 

(Dollars in thousands)                     
Securites available-for-sale, at fair value    2017      2016      2015  

U.S. Treasury security

   $ 998      $ 1,001      $ 1,000  

U.S. Government agencies

     8,229        6,402        18,118  

Mortgage-backed securities of government agencies

     49,701        55,837        63,179  

Other mortgage-backed securities

     -        65        104  

Asset-backed securities of government agencies

     1,169        1,266        1,392  

State and political subdivisions

     27,141        29,708        25,301  

Corporate bonds

     10,425        9,516        18,811  

Equity securities

     89        80        64  
  

 

 

    

 

 

    

 

 

 

Total available-for-sale

   $ 97,752      $ 103,875      $ 127,969  
  

 

 

    

 

 

    

 

 

 

Securities held-to-maturity, at fair value

        

U.S. Government agencies

   $ 9,265      $ 9,093      $ 15,852  

Mortgage-backed securities of government agencies

     11,531        14,351        18,159  

State and political subdivisions

     4,695        -        -  
  

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 25,491      $ 23,444      $ 34,011  
  

 

 

    

 

 

    

 

 

 

 

10


The following is a schedule of maturities for each category of debt securities and the related weighted average yield of such securities as of December 31, 2017:

 

            One Year or Less            After One Year
Through Five Years
          

Maturing

After Five Years
Through Ten Years

           After Ten Years            Total  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 
(Dollars in thousands)           Amortized
Cost
     Yield            Amortized
Cost
     Yield            Amortized
Cost
     Yield            Amortized
Cost
     Yield            Amortized
Cost
     Yield  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Available-for-sale:

                                        
U.S. Treasury    $        999        1.11   $        -        -       $        -        -       $        -        -       $        999        1.11
U.S. Government agencies         1,000        1.19          3,000        1.78          4,350        2.32          -        -              8,350        1.99  
Mortgage-backed securities of government agencies         57        1.77          1,998        1.99          6,313        2.56          41,769        2.38          50,137        2.39  
Asset-backed securities of government agencies         -        -          -        -          -        -          1,168        2.03          1,168        2.03  
State and political subdivisions         1,221        4.16          7,523        3.61          15,408        3.45          2,868        3.08          27,020        3.49  
Corporate bonds         1,844        2.14          4,718        2.63          3,469        3.64          500        4.00          10,531        2.95  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

   $        5,121        2.23   $        17,239        2.84   $        29,540        3.11   $        46,305        2.43   $        98,205        2.70
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Held-to-maturity:

                                        
U.S. Government agencies    $        -        -       $        478        2.19   $        3,000        2.00   $        5,998        2.01   $        9,476        2.01
Mortgage-backed securities of government agencies         -        -          -        -          -        -          11,582        1.78          11,582        1.78  
State and political subdivisions         4,700        2.35          -        -          -        -          -        -          4,700        2.35  
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

   $        4,700        2.35   $        478        2.19   $        3,000        2.04   $        17,580        1.85   $        25,758        1.97
     

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

The weighted average yields are calculated using amortized cost of investments and are based on coupon rates for securities purchased at par value, and on effective interest rates considering amortization or accretion if securities were purchased at a premium or discount. The weighted average yield on tax-exempt obligations is presented on a tax-equivalent basis based on the Company’s marginal federal income tax rate of 34%.

 

11


Loan Portfolio

Total loans on the balance sheet are comprised of the following classifications at December 31:

 

(Dollars in thousands)    2017      2016      2015      2014      2013  

Commercial

   $   140,273        $   134,268        $   123,143        $   123,813        $   117,478    

Commercial real estate

     179,663          159,475          148,775          139,695          129,828    

Residential real estate

     157,172          144,489          125,775          121,684          111,445    

Construction and land development

     22,886          23,428          15,452          17,446          13,444    

Consumer

     16,306          13,308          9,268          7,913          6,687    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 516,300        $ 474,968        $ 422,413        $ 410,551        $ 378,882    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a schedule of maturities of loans based on contract terms and assuming no amortization or prepayments, excluding residential real estate mortgage and installment loans, as of December 31, 2017:

 

     Maturing  
(Dollars in thousands)    One Year
or Less
     One
Through
Five Years
     After Five
Years
     Total  

Commercial

   $   66,584        $   48,803        $ 24,886        $ 140,273    

Commercial real estate

     1,960          25,019          152,684          179,663    

Construction and land development

     4,167          6,551          12,168          22,886    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 72,711        $ 80,373        $   189,738        $   342,822    
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a schedule of fixed rate and variable rate commercial, commercial real estate and construction and land development loans due after one year from December 31, 2017.

 

(Dollars in thousands)    Fixed Rate      Variable Rate  

Total commercial, commercial real estate and construction and land

development loans due after one year

   $   47,945        $   222,166    

The following schedule summarizes nonaccrual, past due and restructured loans.

 

(Dollars in thousand)    2017      2016      2015      2014      2013  

Loans accounted for on a nonaccural basis

   $ 6,081        $ 1,449        $ 1,576        $ 3,668        $ 2,234    

Accruing loans that are contractually past due 90 days or more as to interest or principal payments

     441          235          105          281          1,036    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   6,522        $   1,684        $   1,681        $   3,949        $   3,270    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The policy for placing loans on nonaccrual status is to cease accruing interest on loans when management believes that collection of interest is doubtful, when commercial loans are past due as to principal and interest 90 days or more or when mortgage loans are past due as to principal and interest 120 days or more, except that in certain circumstances interest accruals are continued on loans deemed by management to be well-secured and in process of collection. In such cases, loans are individually evaluated in order to determine whether to continue income recognition after 90 days beyond the due date. When loans are placed on nonaccrual, any accrued interest is charged against interest income.

 

12


Information regarding impaired loans at December 31 is as follows:

 

(Dollars in thousands)   

2017

     2016      2015  

Total recorded investment of impaired loans

   $     7,882        $       7,173        $       8,731    

Less portion for which no allowance for loan loss is allocated

       5,565            3,326            7,469    

Portion of impaired loan balance for which an allowance for loan losses is allocated

       2,317            3,847            1,262    

Portion of allowance for loan losses allocated to the impaired loan balance at December 31

       244            729            389    

For the year ended December 31, 2017, interest income recognized on impaired loans amounted to $123 thousand, while $426 thousand would have been recognized had the loans been performing under their contractual terms. For the year ended December 31, 2016, interest income recognized on impaired loans amounted to $312 thousand, while $426 thousand would have been recognized had the loans been performing under their contractual terms. For the year ended December 31, 2015, interest income recognized on impaired loans amounted to $309 thousand while $442 thousand would have been recognized had the loans been performing under their contractual terms.

Impaired loans are comprised of commercial, commercial real estate and residential real estate loans, and are carried at the present value of expected cash flows discounted at the loan’s effective interest rate or at fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans.

Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first-mortgage loans secured by one to four-family residences, residential construction loans, automobile loans, home equity loans and second-mortgage loans. These consumer loans are included in nonaccrual and past due disclosures above as well as impaired loans when they become nonperforming. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

At December 31, 2017, no loans were identified that management had serious doubts about the borrowers’ ability to comply with present loan repayment terms that are not included in the tables set forth above. On a monthly basis, the Company internally classifies certain loans based on various factors. At December 31, 2017, these amounts, including impaired and nonperforming loans, amounted to $17.9 million of substandard loans and $0 doubtful loans.

As of December 31, 2017, there were no concentrations of loans greater than 10% of total loans that were not otherwise disclosed as a category of loans in the loan portfolio table set forth above.

 

13


Summary of Loan Loss Experience

The following schedule presents an analysis of the allowance for loan losses, average loan data and related ratios for the years ended December 31:

 

(Dollars in thousands)

     2017         2016         2015         2014         2013    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOANS

          

Average loans outstanding during period

   $ 497,048       $ 448,941       $ 412,147       $ 405,973       $ 374,821    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLOWANCE FOR LOAN LOSSES

          

Balance at beginning of period

   $ 5,291       $ 4,662       $ 4,381       $ 5,085       $ 4,580    

Loans charged-off:

          

Commercial

     1,184         297         109         1,005         190    

Commercial real estate

     -         50         61         379         108    

Residential real estate

     -         12         132         27         82    

Construction and land development

     -         -         -         -         -    

Consumer

     20         59         46         11         48    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans charged-off

     1,204         418         348         1,422         428    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries of loans previously charged-off:

          

Commercial

     361         214         199         28         25    

Commercial real estate

     -         334         13         8         -    

Residential real estate

     8         5         18         25         18    

Construction and land development

     -         -         -         -         -    

Consumer

     3         1         10         14         50    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans recoveries

     372         554         240         75         93    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans (recovered) charged-off

     832         (136)         108         1,347         335    

Provision charged to operating expense

     1,145         493         389         643         840    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 5,604       $ 5,291       $ 4,662       $ 4,381       $ 5,085    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Ratio of net charge-offs to average loans outstanding for period      0.17       (0.03)       0.03       0.33       0.09  

The allowance for loan losses balance and provision charged to expense are determined by management based on periodic reviews of the loan portfolio, past loan loss experience, economic conditions, and various other circumstances subject to change over time. In making this judgment, management reviews selected large loans, as well as impaired loans, other delinquent, nonaccrual and problem loans and loans to industries experiencing economic difficulties. The collectability of these loans is evaluated after considering current operating results and financial position of the borrower, estimated market value of collateral, guarantees and the Company’s collateral position versus other creditors. Judgments, which are necessarily subjective, as to the probability of loss and amount of such loss are formed on these loans, as well as other loans taken together.

 

14


The following schedule is a breakdown of the allowance for loan losses allocated by type of loan and related ratios. While management’s periodic analysis of the adequacy of the allowance for loan losses may allocate portions of the allowance for specific problem-loan situations, the entire allowance is available for any loan charge-offs that occur.

 

     Allocation of the Allowance for Loan Losses      
     (Dollars in thousands)      
     Allowance
Amount
     Percentage
of Loans
in Each
Category
to Total
Loans
         Allowance
Amount
     Percentage
of Loans
in Each
Category
to Total
Loans
         Allowance
Amount
     Percentage
of Loans
in Each
Category
to Total
Loans
         Allowance
Amount
     Percentage
of Loans
in Each
Category
to Total
Loans
         Allowance
Amount
     Percentage
of Loans
in Each
Category
to Total
Loans
     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   
         December 31, 2017        December 31, 2016        December 31, 2015        December 31, 2014    December 31, 2013      
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Commercial

     $ 1,813        27.17    

%

     $ 2,207        28.27    

%

     $ 1,664        29.15    

%

     $ 1,289        30.16    

%

     $ 1,219        31.00    

%

Commercial real estate

     1,735        34.80          1,264        33.58          1,271        35.22          1,524        34.02          1,872        34.27    

Residential real estate

     1,273        30.44          1,189        30.42          1,086        29.78          1,039        29.64          1,205        29.41    

Construction & land development

     237        4.43          178        4.93          123        3.66          142        4.25          178        3.55    

Consumer

     175        3.16          141        2.80          86        2.19          60        1.93          91        1.77    

Unallocated

     371             312             432             327             520       
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

Total

     $ 5,604        100.00      

%

     $ 5,291        100.00      

%

     $ 4,662        100.00      

%

     $ 4,381        100.00      

%

     $ 5,085        100.00      

%

  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

   

 

15


Deposits

The following is a schedule of average deposit amounts and average rates paid on each category for the periods indicated:

 

    Average Amounts Outstanding      Average Rate Paid      
   

Year ended December 31,

    

Year ended December 31,

     

(Dollars in thousands)

  2017      2016        2015      2017        2016          2015    
 

 

  

 

 

    

 

 

    

 

    

 

 

      

 

 

   

Noninterest-bearing demand

 

$169,803  

   $ 156,287        $ 144,513        N/A        N/A          N/A    

Interest-bearing demand

 

101,081  

     83,956          77,689                    0.13     %            0.04       %            0.03       %

Savings deposits

 

170,694  

     163,271          158,531                    0.18                0.08                  0.07      

Time deposits

 

111,650  

     116,427          125,180                0.82                0.73                  0.75      
 

 

  

 

 

    

 

 

                

Total deposits

  $553,228      $ 519,941        $ 505,913                   
 

 

  

 

 

    

 

 

                

The Bank does not have any material deposits by foreign depositors.

The following is a schedule of maturities of time certificates of deposit in amounts of $100,000 or more, as of December 31, 2017:

 

(Dollars in thousands)

  

Three months or less

   $ 7,387  

Over three through six months

     6,107  

Over six through twelve months

     8,283  

Over twelve months

     17,851  
  

 

 

 

Total

   $ 39,628  
  

 

 

 

Return on Equity and Assets

 

     2017     2016     2015  

Return on average assets

     1.02       1.03       0.95  

Return on average shareholders’ equity

     10.33         10.44         10.07    

Dividend payout ratio

     32.45         31.71         34.55    

Average shareholders’ equity to average assets

     9.92         9.91         9.44    

Short-Term Borrowings

Short-term borrowings consist of securities sold under agreements to repurchase, short-term advances through the Federal Home Loan Bank, and federal funds purchased. Securities sold under agreements to repurchase mature one (1) business day from the transaction date. Federal funds purchased generally have overnight terms. Information concerning short-term borrowings is summarized as follows:

 

(Dollars in thousands)

     2017    

 

2016

 

    2015  
  

 

 

   

 

 

   

 

 

 

Securities sold under agreements to repurchase, federal

funds purchased and short-term advances at year-end

   $ 39,480       $ 48,742       $ 48,598    

Average balance outstanding

     50,445         51,801         51,571    

Maximum outstanding at any month end during the year

     56,932         55,642         54,462    

Weighted-average interest rate at year-end

     0.39       0.16       0.14  

Weighted-average rate during the year

     0.29         0.14         0.14    

 

16


ITEM 1A. RISK FACTORS.

Risks Related to the Company’s Business

Unauthorized disclosure of sensitive or confidential client or customer information whether through a breach of the Company’s computer systems or otherwise, could severely harm the Company’s business.

As part of the Company’s business, it collects, processes, and retains sensitive and confidential client and customer information on behalf of the Company’s subsidiaries and other third parties. Despite the security measures the Company has in place, its facilities and systems, and those of the Company’s third-party service providers, may be vulnerable to security breaches. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company’s reputation, cause a loss of customer confidence, expose it to risks of litigation and liability or disrupt the Company’s operations and may have a material adverse effect on the Company’s business.

A failure in or breach of the Company’s technology infrastructure, or those of third parties with whom the Company has relationships, could result in a material adverse effect on the Company’s operations, reputation, cash flows, financial condition, and results of operation.

The Company is very dependent upon the use of technology to operate its business. The Company processes a large number of transactions every day and maintains and transmits confidential client and employee information through its technology systems. Although the Company has instituted security systems and monitors, modifies, and updates those systems periodically, those systems may fail to operate properly. Technology changes at a rapid pace, as do the threats to the continued operation and security of the Company’s technology systems.

Most of the software applications the Company uses are licensed from, and supported, upgraded, and maintained by, third parties. A suspension or termination of certain of the licenses or the related support, upgrades, and maintenance could disrupt the Company’s business.

Strong competition within the market in which the Company operates could reduce its ability to attract and retain business.

Competition in the financial services industry is intense, as the Company competes with banks, credit unions, securities dealers, finance and insurance companies, mortgage brokers, and investment advisors. As a result of their size and ability to achieve economies of scale, certain of the Company’s competitors offer a broader range of products and services, or in some cases a lower cost operating model, than the Company can offer. The Company’s ability to achieve its financial objectives will depend on its ability to deliver or expand product delivery systems and technology required by customers.

The Company may not be able to attract and retain skilled people.

The Company’s success depends, in large part, on the ability to attract and retain key people. Succession planning includes the continuity of both the Board of Directors and the management team. Competition for the best people in most activities in which we engage can be intense, and we may not be able to attract, hire, or retain the people we want or need. In order to attract and retain qualified employees, we must compensate them at market levels. If we are unable to continue to attract and retain qualified employees, or do so at rates necessary to maintain our competitive position, our performance, could suffer, and, in turn, adversely affect our business, financial condition, or results of operation.

The Company’s exposure to credit risk could adversely affect its earnings and financial condition.

Credit risk is the risk of losing principal and interest income because borrowers fail to repay loans. The Company’s earnings may be negatively impacted if it fails to manage credit risk, as the origination of loans is an integral part of the Company’s business. Factors which may affect the ability of borrowers to repay loans include a slowing of the local economy in which the Company operates, a downturn in one or more business sectors in which the Company’s customers operate or a rapid increase in interest rates. All of the Company’s loan portfolios, particularly commercial and industrial loans may be affected by the impact of higher interest rates. There has been some price appreciation in the housing market across the Company’s footprint, reflecting improved sales and decreased inventories of houses to be sold. A return to further declines in home values and reduced levels of home sales in the Company’s market may have a negative effect on the Company’s business, financial condition or results of operation.

 

17


The Company’s allowance for loan losses may be insufficient.

The Company maintains an allowance for loan losses to cover current, probable loan losses in our loan portfolio. Management makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans, and performance of customers relative to their financial obligations with the Company. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond the Company’s control and these losses may exceed current estimates. The Company cannot fully predict the amount, timing of losses, or whether the loss allowance will be adequate in the future. If the Company’s assumptions prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the Company’s loan portfolio, resulting in additions to the allowance. Excessive loan losses and significant additions to the Company’s allowance for loan losses could have a material adverse impact on the Company’s business, financial condition, and results of operations. Any such increase in the Company’s allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on the Company’s business, financial condition or results of operations.

The Financial Accounting Standards board (“FASB”) finalized its guidance eliminating the probable recognition threshold for credit losses on financial assets measured at amortized cost. The Update would require financial assets be presented at the net amount expected to be collected. Under this current expected credit loss model (“CECL”), an entity would record at the time of origination, as an allowance, its estimate of credit losses expected throughout the life of the loan as opposed to the current practice of recording losses when it is probable that a loss event has occurred. The Update for Financial Instruments-Credit Losses is required January 1, 2020. The guidance may require the Company to maintain a larger allowance for loan losses in the future than existing guidance currently requires.

The Company has significant exposure to risks associated with commercial and commercial real estate loans.

As of December 31, 2017, approximately 62% of the Company’s loan portfolio consisted of commercial and commercial real estate loans. These loans are generally viewed as having more inherent risk of default than residential mortgage or consumer loans. The repayment of these loans often depends on the successful operation of a business. These loans are more likely to be adversely affected by weak conditions in the economy. Also, the commercial loan balance per borrower is typically larger than that of residential mortgage loans and consumer loans, indicating higher potential losses on an individual loan basis. The deterioration of one or a few of these loans could cause a significant increase in nonperforming loans and a reduction in interest income. An increase in nonperforming loans could result in an increase in the provision for loan losses and an increase in loan charge-offs, both of which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company is subject to liquidity risk.

The Company requires liquidity to extend credit and repay liabilities on a timely basis at a reasonable cost. The Company’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or economy generally. Factors that could reduce its access to liquidity sources include a downturn in the north central Ohio market, difficult credit markets, aggressive competitor actions due to liquidity needs, or adverse regulatory actions. The Company’s access to deposits may also be affected by the liquidity needs of its depositors. Our primary source of liquidity is our supply of deposits from consumer and commercial customers which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company historically has been able to replace maturing deposits and advances as necessary, but it might not be able to readily replace such funds in the future, if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Company’s business, financial condition or results of operations.

 

18


The Company may not be able to successfully implement planned growth as part of its business strategy and may incur expenses and risks related to such growth efforts.

The Company’s ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities. There can be no assurance when or if such growth opportunities will be available.

During the past decade, the Company’s growth has been accomplished through a combination of organic growth, de novo branching and acquisitions. The Company may acquire other financial institutions or parts of institutions in the future, open new branches, and consider new lines of business and new products or services. Such expansions of its business may involve a number of expenses and risks, generally not attendant with organic growth efforts.

Failure to manage the Company’s growth effectively could have a material adverse effect on its business, future prospects, financial condition or results of operations and could adversely affect the Company’s ability to successfully implement its business strategy.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to utilize alternative methods to complete financial transactions that historically have involved banks. Consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’s business, financial condition, or results of operations.

The Company may need to raise capital in the future, but capital may not be available when needed or at acceptable terms.

Federal and state banking regulators require CSB and the Bank to maintain adequate levels of capital to support its operations. The Company may need to raise additional capital in the future to support its business or to finance acquisitions, if any, or the Company may otherwise elect to raise additional capital in anticipation of future growth opportunities

The Company’s ability to raise additional capital for CSB’s or the Bank’s needs will depend on conditions at that time in the capital markets, overall economic conditions, CSB’s financial performance and condition, and other factors, many of which are outside the Company’s control. There is no assurance that, if needed, CSB will be able to raise additional capital on favorable terms or at all. An inability to raise additional capital may have a material adverse effect on the Company’s ability to expand operations, and on the Company’s financial condition, results of operations and future prospects.

The Bank’s ability to pay dividends is subject to regulatory limitations which, to the extent the Company requires such dividends in the future, may affect its ability to pay dividends or repurchase its stock.

As a financial holding company, CSB is a separate legal entity from the Bank and does not have significant operations of its own. Dividends from the Bank provide a significant source of capital for CSB. The availability of dividends from the Bank is limited by various statutes and regulations. The FRB or Ohio Division of Financial Institutions, as the Bank’s primary regulators, could assert that the payment of dividends or other payments by the Bank are an unsafe or unsound practice. In the event the Bank is unable to pay dividends to CSB, CSB may not be able to pay its obligations as they become due, repurchase its stock, or pay dividends on its common stock. Consequently, the potential inability to receive dividends from the Bank could adversely affect CSB’s business, financial condition, results of operations or prospects.

The trading volume and price of CSB’s common shares can be volatile.

CSB’s common shares are very thinly traded and, therefore, susceptible to price swings. CSB’s common shares are traded on the OTC market under the symbol “CSBB;” however, the investment community does not actively follow CSB’s common shares. Given the lower trading volume of CSB’s common shares, significant sales of CSB’s common shares, or the expectation of significant sales, could cause CSB’s share price to fall.

 

19


Risks Relating to Economic and Market Conditions

Changes in interest rates could adversely affect income and financial condition.

The Company’s results of operation and financial condition are substantially dependent upon net interest income, which is the difference between interest earned from loans and investments and interest paid on interest bearing deposits and borrowings. Market interest rates are largely beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies, in particular the FRB, as well as competitive factors. Changes in interest rates will influence the origination of loans, the purchase of investments, the level of prepayments on the Company’s loans and investments, and the receipt of payments on mortgage-backed securities, resulting in fluctuations of income and cash flow. Changes in interest rates also can affect the value of loans, securities, mortgage servicing rights, and assets under management. Although fluctuations in market interest rates are neither completely predictable nor controllable, the Company’s Asset Liability Committee (ALCO) meets periodically to monitor the Company’s interest rate sensitivity position and oversee the Company’s financial risk management by establishing policies and operating limits Rising interest rates may adversely affect the ability of borrowers to pay the principal or interest on loans and may lead to an increase in nonperforming assets and a reduction of interest income recognized. Fixed rate investment securities will lose value during rising rates and certain investment securities, notably mortgage backed securities will experience a decrease in in prepayments of principal and interest which will extend their maturity. For more information, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk in this Annual Report on Form 10-K, which summarizes the Company’s exposure to interest rate risk.

Difficult market conditions and economic trends could adversely affect the financial services industry and the Company’s business.

The Company’s success depends, to a certain extent, upon local and national economic and political conditions as well as governmental monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, money supply, and other factors beyond the Company’s control may adversely affect asset quality, deposit levels, and loan demand and, therefore, the Company’s earnings. Because the Company has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and the Company’s ability to sell the collateral upon foreclosure. Adverse changes in the economy may also have a negative effect on the ability of borrowers to make timely repayments of their loans, which would have an adverse impact on the Company’s earnings. If during a period of reduced real estate values, the Company is required to liquidate the collateral securing loans to satisfy the debt or to increase its allowance for loan losses, it could materially reduce the Company’s profitability and adversely affect its financial condition. The substantial majority of the Company’s loans are to individuals and businesses located in Holmes, Tuscarawas, Wayne, and Stark Counties in Ohio. Consequently, significant declines in north central Ohio real estate values could have a material adverse effect on the Company’s business, financial condition, or results of operations.

 

20


Risks Related to Regulatory Environment and Legal Events

Legislative or regulatory changes or actions, or significant litigation, could adversely impact the Company or the businesses in which it is engaged.

The Company and its subsidiaries are subject to broad state and federal regulation, supervision, and legislation that govern almost all aspects of its operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the Deposit Insurance Fund, and not to benefit the Company’s shareholders. Changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by an institution, and the adequacy of an institution’s allowance for loan losses. Additionally, actions by regulatory agencies or significant litigation against the Company could cause it to devote significant time and resources to defending the Company’s business and may lead to penalties that materially affect the Company and its shareholders.

As discussed earlier, comprehensive revisions to the regulatory capital framework were included in the final rule adopted by the FRB in July 2014 based upon the Basel III capital standards. The final rule specifically revises what qualifies as regulatory capital, raises minimum requirements and introduces the concept of additional capital buffers. The need to maintain more and higher quality capital as well as greater liquidity going forward could limit the Company’s business activities, including lending, and the Company’s ability to expand, either organically or through acquisitions. In addition, the new liquidity standards could require the Company to increase the Company’s holdings of highly liquid short-term investments, thereby reducing the Company’s ability to invest in longer-term assets even if longer-term assets are more desirable from a balance sheet management perspective.

The Company may be a defendant from time to time in the future in a variety of litigation and other actions, which could have a material adverse effect on its business, financial condition, or results of operations.

The Company may be involved from time to time in the future in a variety of litigation arising out of its business. The Company’s insurance may not cover all claims that may be asserted against it, and any claims asserted against the Company, regardless of merit or eventual outcome, may harm its reputation. Should the ultimate judgments or settlements in any litigation exceed the Company’s insurance coverage, it could have a material adverse effect on the Company’s business, financial condition, or results of operations. In addition, the Company may not be able to obtain appropriate types or levels of insurance in the future, nor may the Company be able to obtain adequate replacement policies with acceptable terms, if at all.

 

21


ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

The Bank operates fifteen banking centers as noted below:

 

       

Location

  Address    Owned      Leased  

Walnut Creek

  4980 Old Pump Street, Walnut Creek, Ohio 44687    X         

Winesburg

  2225 U.S. 62, Winesburg, Ohio 44690    X         

Sugarcreek

  127 South Broadway, Sugarcreek, Ohio 44681    X         

Charm

  4440 C.R. 70, Charm, Ohio 44617    X         

Clinton Commons

  2102 Glen Drive, Millersburg, Ohio 44654           X  

Berlin

  4587 S.R. 39 Suite B, Berlin, Ohio 44610           X  

South Clay

  91 South Clay Street, Millersburg, Ohio 44654    X         

Shreve

  333 West South Street, Shreve, Ohio 44676    X         

Orrville

  119 West High Street, Orrville, Ohio 44667    X         

Gnadenhutten

  100 South Walnut Street, Gnadenhutten, Ohio 44629    X         

New Philadelphia

  635 West High Avenue, New Philadelphia, Ohio 44663    X         

North Canton

  1210 North Main Street, North Canton, Ohio 44720    X         

Wooster

  405 East Liberty Street, Wooster, Ohio 44691           X  

Wooster

  3562 Commerce Parkway, Wooster, Ohio 44691    X         

Operations Center

  91 North Clay Street, Millersburg, Ohio 44654    X         

The Bank considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. All properties owned by the Bank are unencumbered by any mortgage or security interest and in management’s opinion, are adequately insured.

ITEM 3. LEGAL PROCEEDINGS.

In the normal course of business, CSB is subject to pending and threatened legal actions, including claims for which material relief or damages are sought. Although CSB is not able to predict the outcome of such actions, after reviewing pending and threatened actions, management believes that the outcome of any or all such actions will not have a material adverse effect on the results of operations, the financial position or shareholders’ equity of CSB. Further, there are no material legal proceedings in which any director, executive officer, principal shareholder or affiliate of CSB is a party or has a material interest that is adverse to CSB or the Bank.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Information contained in the section captioned “Common Stock and Shareholder Information” on page 21 of the Annual Report is incorporated herein by reference.

 

22


ISSUER PURCHASES OF EQUITY SECURITIES

On July 7, 2005, CSB filed a Current Report on Form 8-K with the SEC announcing that its Board of Directors approved a Stock Repurchase Program authorizing the repurchase of up to 10% of CSB’s Common Shares then outstanding. Repurchases may be made from time to time as market and business conditions warrant, in the open market, through block purchases and in negotiated private transactions. The Stock Repurchase Program has no scheduled expiration date. CSB did not repurchase any of its Common Shares during 2017.    

PERFORMANCE GRAPH

The following graph compares the yearly stock change and the cumulative total shareholder return on CSB’s Common Shares during the five-year period ended December 31, 2017, with the cumulative total return on the Standard and Poor’s 500 Stock Index and the NASDAQ Community Bank Stock Index. The comparison assumes $100 was invested on December 31, 2012 in CSB’s Common Shares and in each of the indicated indices and assumes reinvestment of dividends.

 

     2012      2013      2014      2015      2016      2017  

CSBB

     $100      $ 116      $ 139      $ 160      $ 209      $ 229  

S & P 500

     100        132        151        153        171        208  

NASDAQ Bank

     100        142        148        162        225        231  

 

 

LOGO

ITEM 6. SELECTED FINANCIAL DATA.

Information contained in the section captioned “Selected Financial Data” on page 8 of the Annual Report is incorporated herein by reference.

 

23


ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Information contained in the section captioned “2017 Financial Review” on pages 7 through 21 of the Annual Report is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information contained in the section captioned “Quantitative and Qualitative Disclosures About Market Risk” on pages 17 through 19 of the Annual Report is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Information contained in the Consolidated Financial Statements and related notes and the Report of Independent Registered Public Accounting Firm thereon, on pages 23 through 59 of the Annual Report is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Disclosure Controls And Procedures

With the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) was performed, as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective.

Internal Control over Financial Reporting

Information required by this item is set forth in the Report On Management’s Assessment of Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm.

Changes In Internal Control Over Financial Reporting

There have been no changes during the quarter ended December 31, 2017, in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

None

 

24


PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by Item 401 of Regulation S-K concerning the directors of the Company and the nominees for election as directors of the Company at the Annual Meeting of Shareholders to be held on April 25, 2018 (the “2018 Annual Meeting”) is incorporated herein by reference from the information to be included under the captions “Proposal 1 – Election of Directors,” “Nominees for Election of Directors,” and “Directors Continuing in Office” in the Company’s definitive proxy statement relating to the 2018 Annual Meeting to be filed with the SEC (“2018 Proxy Statement”) on or about March 16, 2018. The information required by Item 401 of Regulation S-K concerning the executive officers of the Company is incorporated herein by reference from the information to be included under the caption “Executive Officers” in the 2018 Proxy Statement.

Compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended

The information required by Item 405 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the caption, “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2018 Proxy Statement.

Code of Ethics

The Company has adopted a Code of Ethics that applies to its senior financial officers, including the Chief Executive Officer and Chief Financial Officer. The Company has posted its Code of Ethics on its website at www.csb1.com; select Investor Relations/Corporate Profile/Governance Documents. The Company plans to satisfy SEC disclosure requirements regarding any amendments to, or waiver of, the Code of Ethics relating to its Chief Executive Officer or Chief Financial Officer, and persons performing similar functions, by posting such information on the Company’s website or by making any necessary filings with the SEC. Any person may receive a copy of our Code of Ethics free of charge upon request by calling the Company during business hours or by sending a written request.

Procedures for Recommending Director Nominees

Information concerning the procedures by which shareholders may recommend nominees to the Company’s Board of Directors can be found under the caption “Shareholder Recommendations” in the 2018 Proxy Statement. These procedures have not materially changed from those described in the 2018 Proxy Statement.

Audit Committee

The information required by Items 407(d)(4) and (d)(5) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the sections “Membership and Meetings of the Board and its Committees” and the subsection “Committees of the Board of Directors – Audit Committee” in the 2018 Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 402 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the sections “Discussion of Executive Compensation Programs” and “Executive Compensation and Other Information” and the subsection “Directors’ Compensation” under the section captioned “Membership and Meetings of the Board and its Committees” in the 2018 Proxy Statement.

The information required by Item 407(e)(4) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “Compensation Committee Interlocks and Insider Participation” in the 2018 Proxy Statement.

The information required by Item 407(e)(5) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “The Compensation Committee Report” in the 2018 Proxy Statement.

 

25


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Equity Compensation Plan Information

None.

Security Ownership of Certain Beneficial Owners and Management

The information required by Item 403 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “Beneficial Ownership of Management and Certain Beneficial Owners” in the 2018 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by Item 404 of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “Certain Relationships and Related Transactions” in the 2018 Proxy Statement.

The information required by Item 407(a) of Regulation S-K is incorporated herein by reference from the disclosure to be included under the section “Membership and Meetings of the Board and its Committees” in the 2018 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this Item 14 is incorporated herein by reference from the disclosure to be included under the section “Independent Registered Public Accounting Firm Fees” and subsection “Audit Committee Procedures for Pre-Approval of Services by the Independent Public Accounting Firm” in the 2018 Proxy Statement.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1) Financial Statements

The Consolidated Financial Statements (and report thereon) listed below are incorporated by reference from CSB Bancorp, Inc.’s 2017 Annual Report as noted:

Report of Independent Registered Public Accounting Firm (S.R. Snodgrass) –pgs. 23-24.

Consolidated Balance Sheets at December 31, 2017 and 2016–pg. 25.

Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015–pg. 26.

Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015–pg. 27.

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2017, 2016 and 2015–pg. 27.

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015–pgs. 28-29.

Notes to Consolidated Financial Statements–pgs. 30-59.

(a)(2) Financial Statement Schedules

All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have been omitted.

 

26


(a)(3) Exhibits

The documents listed below are filed with this Annual Report on Form 10-K as exhibits or incorporated into this Annual Report on Form 10-K by reference as noted:

 

Exhibit
Number

  

Description of Document

3.1   

Amended Articles of Incorporation of CSB Bancorp, Inc., (incorporated by reference to registrant’s Quarterly Report on Form 10-Q filed August 6, 2004, Exhibit 3.1, film number 04958544).

3.1.1   

Amended form of Article Fourth of Amended Articles of Incorporation, as effective April 9, 1998 (incorporated by reference to registrant’s Annual Report on Form 10-K filed on March 30, 1999, Exhibit 3.1.1, film number 99579149).

3.2   

Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form 10-SB).

3.2.1   

Amendment to Article VIII to the Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to registrant’s Form DEF 14A filed on March 25, 2009, Appendix A, film number 09703970).

4   

Form of Certificate of Common Shares of CSB Bancorp, Inc. (incorporated by reference to Registrant’s Form 10-SB). (P)

10.1   

CSB Bancorp, Inc. Share Incentive Plan (incorporated by reference to registrant’s Form DEF 14A filing, filed on March 18, 2005, Appendix A, film number 03615627).

10.2   

Employment Agreement between Paula Meiler and the Commercial and Savings Bank of Millersburg, Ohio (incorporated by reference to registrant’s Annual Report on Form 10-K filed on March 25, 2013, Exhibit 10.2, film number 13714485).

10.3   

Amendment to Employment Agreement between Paula Meiler and The Commercial & Savings Bank of Millersburg, Ohio (incorporated by reference to registrant’s Annual Report on Form 10-K filed on March 25, 2013, Exhibit 10.3, film number 13714485).

10.4   

CSB Bancorp, Inc. Annual Incentive Plan (incorporated by reference to registrant’s Annual Report on Form 10-K filed on March 23, 2017, Exhibit 10.4, film number 17709193).

13   

CSB Bancorp, Inc. 2017 Annual Report to Shareholders

21   

Subsidiaries of CSB Bancorp, Inc.

23.1   

Consent of S.R. Snodgrass, P.C.

31.1   

Section 302 Certification of Chief Executive Officer

31.2   

Section 302 Certification of Chief Financial Officer

32.1   

Section 906 Certification of Chief Executive Officer

32.2   

Section 906 Certification of Chief Financial Officer

101   

The following materials from CSB’s 2017 Annual Report to Shareholders formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets (ii) Consolidated Statements of Income (iii) Consolidated Statements of Comprehensive Income (iv) Consolidated Statements of Changes in Shareholders’ Equity (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

 

27


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  CSB BANCORP, INC.

 

  /s/ Eddie L. Steiner

 

  Date: March 16, 2018

 

  Eddie L. Steiner, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 16, 2018.

 

Signatures   Title  

  /s/ Eddie L. Steiner

 

 

President and Chief Executive Officer

 

 

  Eddie L. Steiner

   

  /s/ Paula J. Meiler

 

 

Senior Vice President and Chief Financial Officer

 

 

  Paula J. Meiler

   

  /s/ Pamela S. Basinger

 

 

Vice President and Principal Accounting Officer

 

 

  Pamela S. Basinger

   

  /s/ Robert K. Baker

 

 

Director

 

 

  Robert K. Baker

   

  /s/ Vikki G. Briggs

 

 

Director

 

 

  Vikki G. Briggs

   

  /s/ Julian L. Coblentz

 

 

Director

 

 

  Julian L. Coblentz

   

  /s/ Ronald E. Holtman

 

 

Director

 

 

  Ronald E. Holtman

   

  /s/ Cheryl M. Kirkbride

 

 

Director

 

 

  Cheryl M. Kirkbride

   

  /s/ J. Thomas Lang

 

 

Director

 

 

  J. Thomas Lang

   

  /s/ Jeffery A. Robb, Sr.

 

 

Director

 

 

  Jeffery A. Robb, Sr.

   

  /s/ John R. Waltman

 

 

Director

 

 

  John R. Waltman

   

 

28

(Back To Top)

Section 2: EX-13 (EX-13)

EX-13

Exhibit 13

 

LOGO

CSB BANCORP, INC. BUILDING OUR WAY TO EXCELLENCE 2017 REPORT TO SHAREHOLDERS


LOGO

 

TABLE OF

CONTENTS

 

2017 Financial Highlights

     3  

2017 Letter to Shareholders

     4  

2017 Financial Review

     7  
Report on Management’s Assessment of Internal Control over Financial Reporting      22  
Report of Independent Registered Public Accounting Firm      23  

Consolidated Balance Sheets

     25  

Consolidated Statements of Income

     26  
Consolidated Statements of Comprehensive Income      27  
Consolidated Statements of Changes in Shareholders’ Equity      27  

Consolidated Statements of Cash Flows

     28  

Notes to Consolidated Financial Statements

     30  
Officers of The Commercial and Savings Bank      60  

Shareholders and General Inquiries

     61  

Board of Directors

     62  

2017 Milestones

     63  

Banking Center Information

     64  
 

 

 

2

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


LOGO  

LOGO

 

2017 FINANCIAL

HIGHLIGHTS

For the Year Ended December 31    2017         2016         % CHANGE  

 

 
(Dollars in thousands, except per share data)                   

CONSOLIDATED RESULTS

      

Net interest income

   $ 24,452     $ 22,159       10%        

Net interest income – fully taxable-equivalent (FTE) basis

     24,833       22,531       10           

Noninterest income

     4,340       4,296       1           

Provision for loan losses

     1,145       493       132           

Noninterest expense

     17,316       16,255       7           

Net income

     7,101       6,738       5           

 

 

AT YEAR-END

      

Loans, net

   $   511,226     $   470,158       9%        

Assets

     707,063       669,978       6           

Deposits

     583,259       540,785       8           

Shareholders’ equity

     70,532       65,415       8           

Cash dividends declared

     0.84       0.78       8           

Book value

     25.72       23.85       8           

Tangible book value

     23.90       21.99       9           

Market price

     33.11       31.00       7           

Basic and diluted earnings per share

     2.59       2.46       5           

 

 

FINANCIAL PERFORMANCE

      

Return on average assets

     1.02     1.03  

Return on average equity

     10.33       10.44    

Net interest margin, FTE

     3.80       3.67    

Efficiency ratio

     58.96       60.14    

 

 

CAPITAL RATIOS

      

Risk-based capital:

      

Common equity tier 1

     12.70     12.58  

Tier 1

     12.70       12.58    

Total

     13.78       13.67    

Leverage

     9.31       9.30    

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

3

 


LOGO

 

 

LETTER TO SHAREHOLDERS

 

 

DEAR FELLOW SHAREHOLDER:

CSB’s forward momentum continued in 2017 as the Company again achieved new milestones in size, earnings, and influence in our markets. Average loan balances during the year increased 11%, and average deposit balances were up 6%. This growth was a key factor in delivering record earnings of $7.1 million. Total shareholders’ equity grew by 7.8% to $71 million, and the Board of Directors approved a dividend increase for the fourth year in a row.

 

 

FINANCIAL PERFORMANCE TRENDS AT A GLANCE:

11th  Consecutive Year of Record Average Assets

10th  Consecutive Year of Record Average Equity

9th    Consecutive Year of Record Average Deposits

7th    Consecutive Year of Record Revenue

   [Net Interest Income (fte) + Other Income]

6th    Consecutive Year of Record Net Income

6th    Consecutive Year of Efficiency Ratio Below 65%

4th    Consecutive Year of Greater Than 10% Return on Equity

2nd   Consecutive Year of Greater Than 1% Return on Assets

1st    Year of Efficiency Ratio Below 60%

 

 

STOCK PERFORMANCE

We continue to generate value for shareholders. The Company’s stock price has been trending upward for the past several years. The market price increased 55% from the beginning of 2015 to the end of 2017; and total return, with dividend reinvestment, amounted to 70% for the three year period. With price-to-book and price-to-earnings multiples that tend to be lower than the overall stock market, we believe CSB stock remains a good value.

 

 

OUR OPERATING MODEL

We run the bank with a customer centric focus, deployed through a talented, highly committed workforce visible in the community. We gather deposits and lend locally. In fact, well over 80% of our deposits and loans are sourced right in the four primary counties we serve. Household deposits amount to roughly one half of our FDIC-insured deposits, with businesses, organizations, and municipalities comprising the other half. Our loan portfolio contains about 2/3 business loans and 1/3 household consumer loans. These ratios have been largely unchanged for over a decade and have served us well through changing economic conditions.

 

To be good stewards of the capital and trust provided by our stakeholders, we intentionally focus on being efficient throughout the organization. We have been targeting an Efficiency Ratio of 60% or below for several years, and in 2017 we hit that marker for the first time. Our Efficiency Ratio of 59% remains better than average. Each year has its own distinct set of challenges and opportunities, and some years require changes that are not as efficient in the short term, but can yield better results in the long run. As such, we may not always achieve an Efficiency Ratio at or below 60%, but we will always endeavor to maintain an operating model that is both effective and sensibly efficient.

 

Part of being an efficient and strong bank involves effective use of technology, both in operations and in providing easy-to-use and reliable digital service channels. Convenience and “on demand” services rank high on customer priority lists. We strive to provide products and services customers desire, when and where they want them, with platforms that provide safe and secure transactions. As such, we are continually evolving our digital channels to further enhance the user experience. Customer response has been very positive. Additionally, we have increased the size of our very talented team supporting the rapidly increasing volumes of cash management transactions.

 

 

KEY ACTIVITIES AND EVENTS OF 2017

In 2017, we rolled out a reengineered website and interface for online banking, and launched CSB’s social media presence. Both platforms have been successful in expanding customer engagement. We increased traditional and digital marketing in geographic areas targeted for growing CSB’s brand recognition. We have also been focusing on bolstering our trust and brokerage areas, and are happy to report improved momentum across our wealth management activities. Trust operations ended the year with more than $100 million in fiduciary, safekeeping, and custody account balances.

 

             4

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


LETTER TO SHAREHOLDERS
 

Our facilities continue to be an important presence in the markets we serve. During 2017, we consolidated two facilities that we have been leasing in the greater Orrville area into a newly constructed banking center on property that we own in downtown Orrville. We were also able to purchase the Charm banking center which we had leased for many years.

At the end of the year, Congress enacted the Tax Cuts and Jobs Act, which among other things, reduced the statutory corporate federal income tax rate from 35% to 21% of taxable income beginning in 2018. The reduction is welcome, as commercial banks have for many years carried a significant federal income tax burden. CSB’s effective tax rate has ranged between 30% and 33% for the past ten years, amounting to $22 million of federal income tax expense during that period. The new tax structure will reduce the Company’s effective tax rate to approximately 20%. Going forward, the change in effective tax rate will generate approximately $1 million of expense savings annually on a current proforma basis. This in turn will allow us to further invest in talent, technology, and the markets we serve, while at the same time augmenting after tax earnings in such a way that our share price and dividend paths should be supported.

THE BANKING ENVIRONMENT

Overall credit quality remains acceptable, but a mixed picture. The financial health of businesses and households as a whole continues to improve, both nationally and locally. Consumer debt is increasing, and average credit card balances are near historical highs. Within our loan portfolio, early stage delinquencies declined during 2017, while nonaccrual loan dollars (loan balances with signs of significant distress) increased. The nonaccrual loans in our portfolio at year end are limited to several relationships and appear manageable within our normal course of business. There is no general pattern of concern within the loan portfolio, but we are vigilantly watching loan categories, business sectors, and large customers for any signs of stress. The current economic expansion is one of the longest on record and may be getting into the later stage of its cycle; it would not be a surprise if the next economic slowdown also shifts the credit cycle into a bit more challenging environment.

Competition is fairly keen in our markets, with about 25 different banks and 220 bank branches in the four counties we call home. Total bank deposits grew by 5.5% in those counties over the FDIC’s past two year measurement period, while CSB’s deposits grew by 10%. There is a lot of room for CSB to increase deposit share within our markets, but we are pleased to have improved from the 7th largest deposit share in our four county area to the 6th position, with one out of every twenty FDIC-insured dollars in the market now on deposit at CSB. 2017 was the 9th consecutive year that CSB’s total deposit market share was the highest of any community bank with operations in the four county area. Coupled with loan balances that grew more than 20% in the past two years, the numbers indicate that our focus on providing noticeably different service is being met with favorable market response.

Interest rates have clearly shifted into a rising trajectory. The Federal Reserve expects to continue gradually raising the Federal Funds rate for some period of time, and financial markets have responded by driving yields on short and medium term securities higher. As a result, interest rates on loans and deposits began to rise during 2017 and we would not be surprised to see the pattern of higher cost loans and better yielding deposit rates continue for the next year or more.

Various federal regulatory agencies are evaluating a number of initiatives aimed at finding the “right balance” of prudential oversight. We do not expect a significant relaxation of consumer protections or safety and soundness expectations, nor do we think a broad relaxation would be appropriate given some of the publicized problems within the industry over the past several years. But more importantly, compliance is aligned with CSB’s core values of integrity and honesty in all we do, and doing the right things are engrained within our business strategy. It’s who we are and who we strive to be.

 

LOGO

 

 

 


LOGO

    
  

LETTER TO SHAREHOLDERS

  

 

Cyber risk (the risk of financial loss, disruption, or damage to an individual or organization from some sort of failure of information technology) is pervasive and continues to proliferate. We are committed to protecting the nonpublic, personally identifiable information and financial assets entrusted to us. Toward that end, we continue to strengthen internal controls, vendor controls, and monitoring systems and protocols. We are happy to speak with any stakeholder about the efforts each of us can make to reduce the risk of loss from a fraudulent transaction, scam, or breach of security.

Industry consolidation has also been a steady presence in banking for quite some time. Roughly 4% of banks have been merging out of existence in recent years; 4.3% disappeared in 2017, while 30% of banks have dropped out in the past eight years. M&A activity in Ohio has also been fairly steady, but at a bit slower pace. Deal pricing increased in 2017, with average deal multiples about 20% higher on a price-to-book basis than in the prior year. We continuously watch for potentially attractive merger and acquisition opportunities, always evaluating such scenarios through the lens of our commitment to add value for our shareholders as an independent community bank.

  

 

BUILDING OUR WAY TO EXCELLENCE

This Company’s path to enduring greatness rests upon its ability to perpetually develop capable, committed, and courageous leaders throughout the organization. We are proud to report that we continue to see outstanding leadership development among CSB team members. The Company was also honored as a recipient of the NorthCoast 99 award in 2017, recognizing CSB as one of the best workplaces for top talent in northeast Ohio.

Continuous improvement is incumbent upon organizations that seek to thrive not only in the present, but going forward in the future. By definition, continuous improvement is not a short term initiative; however, in our view it is worthy of our sustained best efforts at building an ever-better banking experience for CSB stakeholders. We are therefore committed to work smart and maintain organizational agility by making prudent and timely systems improvements, investing wisely in market growth, and developing and supporting outstanding talent.

  

 

WORDS OF GRATITUDE

CSB’s board of directors provides diligent governance oversight of the company, and we thank them for their continuous work. Two new directors, Ms. Vikki Briggs and Ms. Cheryl Kirkbride, were recently elected to the board; and Mr. Ron Holtman will conclude a 17 year tenure of outstanding board service as of this year’s annual shareholder meeting. Please note the inset honoring Director Holtman on page 62.

Finally, thank you for being a shareholder of CSB. You help provide the capital required for CSB to carry out its purpose-driven work. We believe community-based banks are significant contributors to the health and well-being of local markets, and we are proud to give our best efforts in helping sustain the areas we serve while generating increasing shareholder value.

  

 

LOGO

 

EDDIE STEINER

President and

Chief Executive Officer

 

 

 

    

LOGO                                                            

ROBERT “ROC” BAKER

Chairman of the

Board of Directors

    

 

             6

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


 

 

2017 FINANCIAL REVIEW

 

 

   LOGO

INTRODUCTION

CSB Bancorp, Inc. (the “Company” or “CSB”) was incorporated under the laws of the State of Ohio in 1991 and is a registered financial holding company. The Company’s wholly-owned subsidiaries are The Commercial and Savings Bank (the “Bank”) and CSB Investment Services, LLC. The Bank is chartered under the laws of the State of Ohio and was organized in 1879. The Bank is a member of the Federal Reserve System, with deposits insured by the Federal Deposit Insurance Corporation, and its primary regulators are the Ohio Division of Financial Institutions and the Federal Reserve Board.

The Company, through the Bank, provides retail and commercial banking services to its customers including checking and savings accounts, time deposits, cash management, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, IRAs, night depository facilities, and trust and brokerage services. Its customers are located primarily in Holmes, Tuscarawas, Wayne, Stark, and portions of surrounding counties in Ohio.

 

Economic activity in the Company’s market area has continued to strengthen at a steady pace for the past nine years. The expansion has been most prevalent in small to mid-sized manufacturing and across various professional and non-professional service sectors. Reported unemployment levels at December 2017 ranged from 3.1% to 5% in the four primary counties served by the Company. These levels declined slightly from December 2016. Labor markets continued to tighten during the year. Wage pressure has increased for most entry-level jobs and to a lesser extent middle-skills jobs in certain sectors such as banking and construction. The local housing market continues to improve. Higher costs of building materials and higher fuel costs have contributed to increased housing construction costs. Consumer confidence in the economy has been a primary driver for the strong housing demand and higher consumer spending.

 

 

FORWARD-LOOKING STATEMENTS

Certain statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations are not related to historical results, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties. Any forward-looking statements made by the Company herein and in future reports and statements are not guarantees of future performance. Actual results may differ materially from those in forward-looking statements because of various risk factors as discussed in this annual report and the Company’s Annual Report on Form 10-K. The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions to any forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date of such statements.

 

    

    

 

    

 

    

    

 
 
 
 
 
 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

7             

 


2017 FINANCIAL REVIEW

 

SELECTED FINANCIAL DATA

The following table sets forth certain selected consolidated financial information:

 

(Dollars in thousands, except share data)   2017      2016      2015      2014      2013   

 

 

Statements of income:

         

Total interest income

  $ 26,440     $ 23,632     $ 21,997     $ 21,656     $ 21,138  

Total interest expense

    1,988       1,473       1,567       1,729       2,255  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    24,452       22,159       20,430       19,927       18,883  

Provision for loan losses

    1,145       493       389       643       840  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

    23,307       21,666       20,041       19,284       18,043  

Noninterest income

    4,340       4,296       4,424       4,250       4,318  

Noninterest expense

    17,316       16,255       15,796       15,082       14,848  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    10,331       9,707       8,669       8,452       7,513  

Income tax provision

    3,230       2,969       2,647       2,568       2,273  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 7,101     $ 6,738     $ 6,022     $ 5,884     $ 5,240  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share of common stock:

         

Basic income per share

  $ 2.59     $ 2.46     $ 2.20     $ 2.15     $ 1.91  

Diluted income per share

    2.59       2.46       2.20       2.15       1.91  

Dividends

    0.84       0.78       0.76       0.74       0.72  

Book value

    25.72       23.85       22.35       20.97       19.15  

Average basic common shares outstanding

     2,742,242        2,742,028        2,739,470        2,737,636        2,736,473  

Average diluted common shares outstanding

    2,742,242       2,742,028       2,742,108       2,739,078       2,728,477  

Year-end balances:

         

Loans, net

  $ 511,226     $ 470,158     $ 418,209     $ 406,522     $ 374,040  

Securities

    128,124       132,372       166,402       143,038       151,535  

Total assets

    707,063       669,978       650,314       620,981       596,465  

Deposits

    583,259       540,785       525,042       500,075       480,933  

Borrowings

    50,889       61,127       62,063       61,580       61,130  

Shareholders’ equity

    70,532       65,415       61,266       57,450       52,411  

Average balances:

         

Loans, net

  $ 491,258     $ 443,862     $ 407,517     $ 400,876     $ 369,889  

Securities

    131,512       147,649       151,181       145,065       138,976  

Total assets

    692,859       651,318       633,298       604,605       581,150  

Deposits

    553,228       519,941       505,913       479,330       468,395  

Borrowings

    68,255       64,528       65,515       67,657       57,882  

Shareholders’ equity

    68,738       64,524       59,799       55,529       52,787  

Select ratios:

         

Net interest margin, tax equivalent basis

    3.80     3.67     3.48     3.56     3.51

Return on average total assets

    1.02       1.03       0.95       0.97       0.90  

Return on average shareholders’ equity

    10.33       10.44       10.07       10.60       9.93  

Average shareholders’ equity as a percent of average total assets

    9.92       9.91       9.44       9.18       9.08  

Net loan charge-offs as a percent of average loans

    0.17       (0.03     0.03       0.33       0.09  

Allowance for loan losses as a percent of loans at year-end

    1.08       1.11       1.10       1.07       1.34  

Shareholders’ equity as a percent of total year-end assets

    9.98       9.76       9.42       9.25       8.79  

Dividend payout ratio

    32.45       31.71       34.55       34.42       37.60  

 

 

8

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


2017 FINANCIAL REVIEW

 

RESULTS OF OPERATIONS

Net Income

CSB’s 2017 net income was $7.1 million compared to $6.7 million for 2016, an increase of 5%. Total revenue, net interest income plus noninterest income, increased 9% over the prior year. Expense increases included the provision for loan losses of $652 thousand, noninterest expenses of $1.1 million and the provision for income tax of $261 thousand. Basic and diluted earnings per share were $2.59, up 5% from the prior year. The return on average assets was 1.02% in 2017 compared to 1.03% in 2016 and return on average equity was 10.33% in 2017 compared to 10.44% in 2016.

Net income for 2016 was $6.7 million while basic and diluted earnings per share were $2.46 as compared to $6.0 million, or $2.20 per share, for the year ended December 31, 2015. Net income increased 12% during 2016 as compared to 2015 due primarily to a $1.7 million increase in total net interest income partially offset by increases of $104 thousand in the provision for loan losses, $459 thousand in noninterest expenses, and $322 thousand in federal income taxes. Return on average assets was 1.03% in 2016 compared to 0.95% in 2015 and return on average shareholders’ equity was 10.44% in 2016 as compared to 10.07% in 2015.

Net Interest Income

 

(Dollars in thousands)      2017            2016            2015      

 

 

Net interest income

     $       24,452        $       22,159        $       20,430  

Taxable equivalent1

       381          372          328  
    

 

 

      

 

 

      

 

 

 

Net interest income, fully taxable equivalent

     $ 24,833        $ 22,531        $ 20,758  
    

 

 

      

 

 

      

 

 

 

Net interest margin

       3.74        3.61        3.42

Taxable equivalent adjustment1

       0.06          0.06          0.06  
    

 

 

      

 

 

      

 

 

 

Net interest margin-taxable equivalent

       3.80        3.67        3.48
    

 

 

      

 

 

      

 

 

 

1Taxable equivalent adjustments have been computed assuming a 34% tax rate.

Net interest income is the largest source of the Company’s revenue and consists of the difference between interest income generated on earning assets and interest expense incurred on liabilities (deposits, short-term and long-term borrowings). Volumes, interest rates, composition of interest-earning assets, and interest-bearing liabilities affect net interest income.

Net interest income increased $2.3 million, or 10%, in 2017 compared to 2016 primarily due to an 11% increase in average loan balances and an increase of 13 basis points in the average rate earned on loans. The net interest margin increased to 3.80% from 3.67% in 2016.

Net interest income increased $1.8 million, or 9%, in 2016 compared to 2015 partially due to a 9% increase in average loan balances and a decrease of 3 basis points in the average rate paid on interest-bearing liabilities. The net interest margin increased to 3.67% from 3.48% in 2015.

Interest income increased $2.8 million, or 12%, in 2017 compared to 2016 due to a $39 million increase in average interest-earning asset balances. The increase in average loan volume throughout the year helped mitigate the low interest rate environment.

Interest income increased $1.6 million, or 7%, in 2016 compared to 2015 due to a $37 million increase in average loan balances. The increase in average loan volume throughout the year helped mitigate the low interest rate environment. In 2016, interest rates paid on deposits hit their lowest point with the first increases to deposit rates starting in December 2016.

Interest expense increased $515 thousand, or 35%, in 2017 as compared to 2016 due to rate increases of 7 basis points on deposits and 22 basis points on other borrowed funds. Long term advances of $10 million were borrowed during second quarter 2017 in advance of a December 2017 advance maturity providing a future rate decrease of 148 basis points. Total average time deposits continued to decline as customers anticipate rising interest rates.

Interest expense decreased $94 thousand, or 6%, in 2016 as compared to 2015 due to decreases in time deposits and other borrowed funds and a continued shift in the liability mix towards less expensive, noninterest bearing demand deposits. Total average time deposits continued to decline as customers anticipate rising interest rates.

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

9

 


2017 FINANCIAL REVIEW

 

The following table provides detailed analysis of changes in average balances, yield, and net interest income:

AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS

 

    2017            2016            2015  

(Dollars in thousands)

 

 

Average
Balance1

 

   

Interest

 

   

Average
Rate2

 

          

Average
Balance1

 

   

Interest

 

   

Average
Rate2

 

          

Average
Balance1

 

   

Interest

 

   

Average
Rate2

 

 
   

Interest-earning assets

                         

Federal funds sold

  $ 575     $ 6       0.96%         $ 732     $ 3       0.44%         $ 982     $ 2       0.23%    

Interest-earning deposits

    23,780       283       1.19              16,946       107       0.63              32,395       94       0.29       

Securities:

                         

Taxable

    99,981       2,374       2.37              119,701       2,598       2.17              129,700       2,790       2.15       

Tax exempt

    31,531       1,030       3.27              27,948       985       3.52              21,481       854       3.97       

Loans3

    497,048       23,128       4.65              448,941       20,311       4.52              412,147       18,585       4.51       
 

 

 

   

 

 

         

 

 

   

 

 

         

 

 

   

 

 

   

Total interest-earning assets

    652,915       26,821       4.11%           614,268       24,004       3.91%           596,705       22,325       3.74%    

Noninterest-earning assets

                         

Cash and due from banks

    14,677               13,914               13,661      

Bank premises and equipment, net

    8,817               8,531               8,290      

Other assets

    22,240               19,684               19,272      

Allowance for loan losses

    (5,790             (5,079             (4,630    
 

 

 

           

 

 

           

 

 

     

Total assets

  $ 692,859             $ 651,318             $ 633,298      
 

 

 

           

 

 

           

 

 

     
   

Interest-bearing liabilities

                         

Demand deposits

  $ 101,081       129       0.13%         $ 83,956       33       0.04%         $ 77,689       27       0.03%    

Savings deposits

    170,694       302       0.18              163,271       123       0.08              158,531       113       0.07       

Time deposits

    111,650       913       0.82              116,427       850       0.73              125,180       941       0.75       

Borrowed funds

    68,255       644       0.94              64,528       467       0.72              65,515       486       0.74       
 

 

 

   

 

 

         

 

 

   

 

 

         

 

 

   

 

 

   

Total interest-bearing liabilities

    451,680       1,988       0.44%           428,182       1,473       0.34%           426,915       1,567       0.37%    
 

 

 

   

 

 

         

 

 

   

 

 

         

 

 

   

 

 

   

Noninterest-bearing liabilities and shareholders’ equity

                         

Demand deposits

    169,803               156,287               144,513      

Other liabilities

    2,638               2,325               2,071      

Shareholders’ equity

    68,738               64,524               59,799      
 

 

 

           

 

 

           

 

 

     

Total liabilities and equity

  $ 692,859             $   651,318             $   633,298      
 

 

 

           

 

 

           

 

 

     

Net interest income4

    $ 24,833             $ 22,531             $  20,758    
   

 

 

           

 

 

           

 

 

   

Net interest margin

        3.80%               3.67%               3.48%    

Net interest spread

        3.67%               3.57%               3.37%    

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

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

 3Average loan balances include nonaccrual loans.

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

 

 

10

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


2017 FINANCIAL REVIEW

 

The following table compares the impact of changes in average rates and changes in average volumes on net interest income:

RATE/VOLUME ANALYSIS OF CHANGES IN INCOME AND EXPENSE1

 

   

2017 v. 2016

      

2016 v. 2015

(Dollars in thousands)  

 

Net Increase
(Decrease)

 

 

Volume

 

 

Rate

 

       

 

Net Increase
(Decrease)

 

 

Volume

 

  Rate
 

Increase (decrease) in interest income:

                              

Federal funds

    $ 3     $ (2 )     $ 5            $ 1     $ (1 )     $ 2

Interest-earning deposits

      176       82       94              13       (98 )       111

Securities:

                              

Taxable

      (224 )       (469 )       245              (192 )       (217 )       25

Tax exempt

      45       117       (72 )              131       228       (97 )

Loans

      2,817       2,245       572              1,726       1,665       61
   

 

 

     

 

 

     

 

 

            

 

 

     

 

 

     

 

 

 

Total interest income change

      2,817       1,973       844              1,679       1,577       102
   

 

 

     

 

 

     

 

 

            

 

 

     

 

 

     

 

 

 

Increase (decrease) in interest expense:

                              

Demand deposits

      96       22       74              6       2       4

Savings deposits

      179       13       166              10       4       6

Time deposits

      63       (39 )       102              (91 )       (64 )       (27 )

Other borrowed funds

      177       35       142              (19 )       (7 )       (12 )
   

 

 

     

 

 

     

 

 

            

 

 

     

 

 

     

 

 

 

Total interest expense change

      515       31       484              (94 )       (65 )       (29)  
   

 

 

     

 

 

     

 

 

            

 

 

     

 

 

     

 

 

 

Net interest income change

    $   2,302     $   1,942     $     360            $     1,773     $     1,642     $ 131
   

 

 

     

 

 

     

 

 

            

 

 

     

 

 

     

 

 

 

1Changes attributable to both volume and rate, which cannot be segregated, have been allocated based on the absolute value of the change due to volume and the change due to rate.

Provision For Loan Losses

The provision for loan losses is determined by management as the amount required to bring the allowance for loan losses to a level considered appropriate to absorb probable future net charge-offs inherent in the loan portfolio as of period end. The provision for loan losses was $1.1 million in 2017, $493 thousand in 2016, and $389 thousand in 2015. Higher provision expense in 2017 and 2016 reflects an increasing volume in the loan portfolio, higher loan losses, and an increase in nonperforming loans. See “Financial Condition – Allowance for Loan Losses” for additional discussion and information relative to the provision for loan losses.

Noninterest Income

 

     YEAR ENDED DECEMBER 31
          Change from 2016   Change from 2015
(Dollars in thousands)    2017   

  Amount

 

 

%

 

 

2016

 

  

Amount

 

 

%

 

 

2015

 

Service charges on deposit accounts

     $ 1,133      $ (33 )       (2.8 )%     $ 1,166        $    (37       (3.1 )%     $ 1,203

Trust services

       687        (174 )       (20.2 )       861        1       0.0       860

Debit card interchange fees

       1,193        106       9.8       1,087        99       10.0       988

Gain on sale of loans, including MSRs

       296        (13 )       (4.2 )       309        (54 )       (14.9 )       363

Earnings on bank-owned life insurance

       357        81       29.3       276        6       2.2       270

Securities gains

              (1 )       (100.0 )       1        (55 )       (98.2 )       56

Other

       674        78       13.1       596        (88 )       (12.9 )       684
    

 

 

      

 

 

         

 

 

      

 

 

         

 

 

 

Total noninterest income

     $   4,340      $ 44       1.0 %     $   4,296        $  (128       (2.9 )%     $   4,424
    

 

 

      

 

 

         

 

 

      

 

 

         

 

 

 

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

11

 


2017 FINANCIAL REVIEW

 

Noninterest income increased $44 thousand, or 1%, in 2017 compared to the same period in 2016. Gains on sales of mortgage loans including mortgage servicing rights (“MSRs”) decreased 4% due to decreasing sales of real estate mortgage loans into the secondary market and customers opting into variable rate mortgages that have been retained by the Bank. The Bank originated and sold $11 million in mortgage loans in 2017 as compared to the sale of $11 million of loans in 2016. Service charges on deposits, which are primarily customer overdraft fees, decreased 3% in 2017, with a 3% decrease in overdraft fees due to improving consumer deposit balances. Debit card interchange fees increased 10% in 2017 compared to 2016 due to volume increases. Earnings on bank owned life insurance increased $81 thousand with the addition of $2.5 million in policy values in 2017. Trust and brokerage services decreased 20% as a reorganization of the departments was completed with fees declining through third quarter 2017 and then stabilizing in fourth quarter 2017 over fourth quarter 2016.

Noninterest income decreased $128 thousand, or 3%, in 2016 compared to the same period in 2015. Gains on sales of mortgage loans including MSRs decreased 15% due to decreasing sales of real estate mortgage loans into the secondary market and customers opting into variable rate mortgages that have been retained by the Bank. The Bank originated and sold $11 million in mortgage loans in 2016 as compared to the sale of $12 million of loans in 2015. Service charges on deposits, which are primarily customer overdraft fees, decreased 3% in 2016, with a 6% decrease in overdraft fees due to increasing health of consumer deposit balances. Debit card interchange fees increase 10% in 2016 compared to 2015 due to increased volume.

Noninterest Expenses

 

    

 

YEAR ENDED DECEMBER 31

         

  Change from 2016

 

      

Change from 2015

 

   
(Dollars in thousands)   

2017

 

  

Amount

 

 

%

 

 

2016

 

  

Amount

 

 

%

 

 

2015

 

Salaries and employee benefits

     $ 10,009      $ 655       7.0 %     $ 9,354      $ 535       6.1 %     $ 8,819

Occupancy expense

       869        (104 )       (10.7 )       973        (54 )       (5.3 )       1,027

Equipment expense

       665        (14 )       (2.1 )       679        16       2.4       663

Professional and director fees

       963        131       15.7       832        2       0.2       830

Financial institutions tax

       523        96       22.5       427        27       6.8       400

Marketing and public relations

       401        (14 )       (3.4 )       415        (4 )       (1.0 )       419

Software expense

       879        80       10.0       799        (2 )       (0.2 )       801

Debit card expense

       535        90       20.2       445        32       7.7       413

FDIC insurance

       225        (57 )       (20.2 )       282        (75 )       (21.0 )       357

Amortization of intangible assets

       116        (5 )       (4.1 )       121        (4 )       (3.2 )       125

Other

       2,131        203       10.5       1,928        (14 )       (0.7 )       1,942
    

 

 

      

 

 

         

 

 

      

 

 

         

 

 

 

Total noninterest expenses

     $   17,316      $   1,061       6.5 %     $   16,255      $   459       2.9 %     $   15,796
    

 

 

      

 

 

         

 

 

      

 

 

         

 

 

 

Noninterest expense increased $1.1 million, or 7%, in 2017 compared to 2016. Salaries and employee benefits increased $655 thousand due to base compensation increasing $432 thousand as a result of additional full-time employees and annual adjustments. Increases in 2017 include retirement benefits and incentive compensation of $112 thousand, medical and dental expense rising $41 thousand, and employment taxes rising $11 thousand. The capitalization of employee costs of loan originations contributed to an increase in salary expense of $54 thousand. Professional and director fees increased $131 thousand primarily due to increased accounting and audit fees of $145 thousand, due to the outsourcing of internal audit and first year expenses for the internal control audit, required under Section 404(b) of the Sarbanes-Oxley Act. Debit card expense increased $90 thousand in 2017. At the end of 2017, all customers had been issued debit cards with embedded chips that protect cardholder data. An increase in the Ohio financial institutions tax was recognized as capital increased. Equipment expense decreased $14 thousand in 2017, as compared to 2016, due to a decline in depreciation expense of $66 thousand partially offset by increases in maintenance, repair, and small equipment replacement. The FDIC insurance assessment decreased $57 thousand, or 20%, due to a rate reduction that started July 1, 2016. Occupancy expense continued to decrease primarily with a reduction of branch facility costs, which included a full year savings on a branch relocation. Other expenses increased $203 thousand including an increase of $64 thousand start-up costs for an employee wellness program, $37 thousand in fraud check losses, and $22 thousand in paper and printing costs.

Noninterest expense increased $459 thousand, or 3%, in 2016 compared to 2015. Salaries and employee benefits increased $535 thousand due to base compensation increasing $436 thousand as a result of additional full-time employees and annual adjustments. Other increases in 2016 included medical and dental expense of $45 thousand and employment taxes of $38 thousand. The capitalization of employee costs of loan originations contributed to a decrease in salary expense of $109 thousand. Debit card expense increased $32 thousand in 2016, with increased costs due to the migration to EMV chip cards. Debit cards are being issued with embedded chips that protect cardholder data. An increase in the Ohio financial institutions tax was recognized as capital increased. Equipment expense

 

 

12

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


2017 FINANCIAL REVIEW

 

increased $16 thousand in 2016, as compared to 2015, with small equipment replacement. The FDIC insurance assessment decreased $75 thousand, or 21%, due to a rate reduction starting July 1, 2016. Occupancy expense decreased primarily with a reduction of branch facility costs, which included a branch relocation and the purchase of a branch office that had been previously leased.

Income Taxes

The provision for income taxes amounted to $3.2 million in 2017, $3.0 million in 2016, and $2.6 million in 2015. The increase in 2017 included the Tax Cuts and Jobs Act (“TCJA”) income tax increase adjustment of $101 thousand resulting from the write down of a deferred tax asset of $109 thousand related to unrealized losses on securities, as the valuation rate on this future tax deduction was reduced from 34% to 21% in accordance with the TCJA. The effective tax rate, without the TCJA adjustment, decreased slightly with an increase in tax exempt income.

FINANCIAL CONDITION

Total assets of the Company were $707 million at December 31, 2017, compared to $670 million at December 31, 2016, representing an increase of $37 million, or 6%. Net loans increased $41 million, or 9%, while investment securities decreased $4 million, or 3%, and interest-earning deposits with other banks decreased $4 million, which was offset by a $4 million increase in cash and due from banks. Deposits increased $42 million and short-term borrowings decreased $9 million, while other borrowings from the Federal Home Loan Bank (“FHLB”) decreased by $1 million, or 8%.

Securities

Total investment securities decreased $4 million, or 3%, to $128 million at year-end 2017. CSB’s portfolio is primarily comprised of agency mortgage-backed securities, obligations of state and political subdivisions, other government agencies’ debt, and corporate bonds. Restricted securities consist primarily of FHLB stock.

The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations, or trust preferred securities. The Company’s municipal bond portfolio consists of both taxable and tax-exempt general obligation and revenue bonds. As of December 31, 2017, $26 million, or 82%, held an S&P or Moody’s investment grade rating and $6 million, or 18%, were non-rated. The municipal portfolio includes a broad spectrum of counties, towns, universities, and school districts with 88% of the portfolio originating in Ohio, and 12% in Pennsylvania. Gross unrealized security losses within the portfolio were 1% of total securities at December 31, 2017, reflecting interest rate fluctuations, not credit downgrades.

One of the primary functions of the securities portfolio is to provide a source of liquidity and it is structured such that maturities and cash flows track the Company’s liquidity needs and asset/liability management requirements.

Loans

Total loans increased $41 million, or 9%, during 2017 with increases in all loan categories, except for a small decrease in construction and land development. Volume increases were recognized as follows: residential real estate loans increased $13 million, or 9%, commercial loans increased $6 million, or 4%, and commercial real estate loans increased $20 million, or 13%. Aided by low interest rates, business expansion and consumer borrowing continued to increase throughout 2017.

Attractive interest rates in the secondary market continued to drive consumer demand for longer-term 1-4 family fixed rate residential mortgages during 2017. The Company sold $11 million of originated mortgages into the secondary market, as compared to $11 million in 2016. The Company originated $29 million of portfolio mortgage loans, which were predominately variable rate in 2017 as compared to 2016 origination of $36 million for the Company’s portfolio. Demand for home equity loans improved in 2017, with balances increasing $351 thousand. Installment lending continued to improve with consumer loans increasing 23% on a year-over-year basis to $16 million at December 31, 2017. This growth is primarily from RV finance loans, originated in northeast Ohio.

Management anticipates the Company’s local service areas will continue to exhibit modest economic growth in line with the past three years. Commercial and commercial real estate loans comprise approximately 62% of the total loan portfolio at year-end 2017 and 2016, respectively. Residential real estate loans remained stable at approximately 31% of the total loan portfolio. Construction and land development loans declined to 4% of the total portfolio at December 31, 2017. The Company is well within the respective regulatory guidelines for investment in construction, development, and investment property loans that are not owner occupied.

Most of the Company’s lending activity is with customers primarily located within Holmes, Tuscarawas, Wayne, and Stark counties in Ohio. Credit concentrations, including commitments, as determined using North American Industry Classification Codes (NAICS), to the four largest industries compared to total loans at December 31, 2017, included $41 million, or 8%, of total loans to lessors of non-residential buildings or dwellings; $30 million, or 6%, of total loans to borrowers in the hotel, motel, and lodging business; $26 million, or 5%, of total loans to logging, sawmills, and timber tract operations; and $21 million, or 4%, of total loans to lessors of residential real estate. These loans are generally secured by real property and equipment, with repayment expected from operational cash flow. Credit evaluation is based on a review of cash flow coverage of principal, interest payments, and the adequacy of the collateral received.

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

13

 


2017 FINANCIAL REVIEW

 

Nonperforming Assets, Impaired Loans, and Loans Past Due 90 Days or More

Nonperforming assets consist of nonaccrual loans, loans past due 90 days and still accruing, and other real estate acquired through or in lieu of foreclosure. Other impaired loans include certain loans that are internally classified as substandard or doubtful. Loans are placed on nonaccrual status when they become past due 90 days or more, or when mortgage loans are past due as to principal and interest 120 days or more, unless they are both well secured and in the process of collection.

The increase in nonperforming loans year-over-year is primarily due to three lending relationships comprised of several loans. Approximately $2.9 million of the nonperforming loan total is guaranteed by either the USDA or the SBA.

 

NONPERFORMING ASSETS    DECEMBER 31  

(Dollars in thousands)

 

  

2017

 

    

2016

 

 

 

 

Nonaccrual loans

     

 

Commercial

 

   $ 1,152      $ 425  

Commercial real estate

 

     4,384        497  

Residential real estate

 

     487        490  

Construction & land development

 

             

Consumer

 

     58        37  

Loans past due 90 days or more and still accruing

 

     

Commercial

 

             

Commercial real estate

 

     40        39  

Residential real estate

 

     401        196  

Construction & land development

             
  

 

 

    

 

 

 

Total nonperforming loans

 

     6,522        1,684  

Other real estate owned

             
  

 

 

    

 

 

 

Total nonperforming assets

   $   6,522      $   1,684  
  

 

 

    

 

 

 

Nonperforming assets as a percentage of loans plus other real estate

     1.26      0.35

Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered by management to be adequate to cover loan losses that are currently anticipated based on past loss experience, general economic conditions, changes in mix and size of the loan portfolio, information about specific borrower situations, and other factors and estimates which are subject to change over time. Management periodically reviews selected large loans, delinquent and other problem loans, and selected other loans. Collectability of these loans is evaluated by considering the current financial position and performance of the borrower, estimated market value of the collateral, the Company’s collateral position in relationship to other creditors, guarantees, and other potential sources of repayment. Management forms judgments, which are in part subjective, as to the probability of loss and the amount of loss on these loans as well as other loans taken together. The Company’s Allowance for Loan Losses Policy includes, among other items, provisions for classified loans, and a provision for the remainder of the portfolio based on historical data, including past charge-offs.

 

 

14

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


2017 FINANCIAL REVIEW

 

 
ALLOWANCE FOR LOAN LOSSES          FOR THE YEAR ENDED  

(Dollars in thousands)

 

       2017            2016  

 

 

Beginning balance of allowance for loan losses

 

   $ 5,291        $ 4,662  

Provision for loan losses

 

     1,145          493  

Charge-offs:

 

       

Commercial

 

     1,184          297  

Commercial real estate

 

              50  

Residential real estate & home equity

 

              12  

Construction & land development

 

               

Consumer

 

     20          59  

Credit cards

               
  

 

 

      

 

 

 

Total charge-offs

 

     1,204          418  

Recoveries:

 

       

Commercial

 

     361          214  

Commercial real estate

 

              334  

Residential real estate & home equity

 

     8          5  

Construction & land development

 

               

Consumer

 

     3          1  

Credit cards

               
  

 

 

      

 

 

 

Total recoveries

     372          554  
  

 

 

      

 

 

 

Net (recoveries) charge-offs

     832          (136
  

 

 

      

 

 

 

Ending balance of allowance for loan losses

   $ 5,604        $ 5,291  
  

 

 

      

 

 

 

Net charge-offs as a percentage of average total loans

 

     0.17        (0.03 )% 

Allowance for loan losses as a percentage of total loans

 

     1.08          1.11  

Allowance for loan losses to total nonperforming loans

 

     0.86        3.14

Components of the allowance for loan losses:

 

       

General reserves

 

   $   5,360        $   4,562  

Specific reserve allocations

     244          729  
  

 

 

      

 

 

 

Total allowance for loan losses

   $ 5,604        $ 5,291  
  

 

 

      

 

 

 

The allowance for loan losses totaled $5.6 million, or 1.08%, of total loans at year-end 2017 as compared to $5.3 million, or 1.11%, of total loans at year-end 2016. The Bank had net charge-offs of $832 thousand for 2017 as compared to net recoveries of $136 thousand in 2016.

The Company maintains an internal watch list on which it places loans where management’s analysis of the borrower’s operating results and financial condition indicates the borrower’s cash flows are inadequate to meet its debt service requirements and loans where there exists an increased risk that such a shortfall may occur. Nonperforming loans, which consist of loans past due 90 days or more and nonaccrual loans, aggregated $6.5 million, or 1.26%, of loans at year-end 2017 as compared to $1.7 million, or 0.35% of loans at year-end 2016. Impaired loans were $7.9 million at year-end 2017 as compared to $7.2 million at year-end 2016. Management has assigned loss allocations to absorb the estimated losses on impaired loans. These allocations are included in the total allowance for loan losses balance.

Other Assets

Net premises and equipment increased $495 thousand to $9.2 million at year-end 2017 primarily because of the construction of a branch facility that consolidated two previously leased facilities in 2016. There was no other real estate owned at December 31, 2017 or 2016. At December 31, 2017, the Company recognized a net deferred tax asset of $162 thousand as compared to a net deferred tax asset of $603 thousand at December 31, 2016.

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

15

 


2017 FINANCIAL REVIEW

 

 

Deposits

The Company’s deposits are obtained primarily from individuals and businesses located in its market area. For deposits, the Company must compete with products offered by other financial institutions, as well as alternative investment options. Demand and savings deposits increased for the year ended 2017, due to focused retail and business banking strategies to obtain more account relationships as well as customers reflecting their preference for shorter maturities.

 

    December 31        Change from 2016    

(Dollars in thousands)

 

 

2017

 

      

2016

 

      

Amount 

 

   

%  

 

 

 

 

 

Noninterest-bearing demand

 

  $ 173,671        $ 167,824        $ 5,847       3.5

Interest-bearing demand

 

    119,579          97,683          21,896       22.4  

Traditional savings

 

    108,468          95,275          13,193                 13.8  

Money market savings

 

    71,749          67,894          3,855       5.7  

Time deposits in excess of $250,000

 

    12,026          13,102          (1,076     (8.2

Other time deposits

 

    97,766          99,007          (1,241     (1.3
 

 

 

      

 

 

      

 

 

   

Total deposits

  $   583,259        $   540,785        $   42,474       7.9
 

 

 

      

 

 

      

 

 

   

Other Funding Sources

The Company obtains additional funds through securities sold under repurchase agreements, overnight borrowings from the FHLB or other financial institutions, and advances from the FHLB. Short-term borrowings, consisting of securities sold under repurchase agreements, decreased $9 million. During 2017, a new corporate overnight cash management product was established within interest-bearing checking and at December 31, 2017 the new product had balances of $21.8 million. Other borrowings, consisting of FHLB advances, decreased $1 million as the result of maturities and principal repayments. All FHLB borrowings at December 31, 2017 have long term maturities with monthly amortizing payments.

CAPITAL RESOURCES

Total shareholders’ equity increased to $70.5 million at December 31, 2017, as compared to $65.4 million at December 31, 2016. This increase was primarily due to $7.1 million of net income, which was partially offset by the payment of $2.3 million of cash dividends in 2017. The Board of Directors approved a Stock Repurchase Program on July 7, 2005 that allowed the repurchase of up to 10% of the Company’s then-outstanding common shares. Repurchased shares are to be held as treasury stock and are available for general corporate purposes. At December 31, 2017, approximately 41 thousand shares could still be repurchased under the current authorized program. No shares were repurchased in 2017 or 2016.

Effective January 1, 2015, the Federal Reserve adopted final rules implementing Basel III and regulatory capital changes required by the Dodd-Frank Act. The rules apply to both the Company and the Bank. The rules established minimum risk-based and leverage capital requirements for all banking organizations.

The new rules include (a) a new common equity tier 1 capital ratio of at least 4.5%, (b) a tier 1 capital ratio of at least 6.0%, rather than the former 4.0%, (c) a minimum total capital ratio that remains at 8.0%, and (d) a minimum leverage ratio of 4%.

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets primarily based on the relative credit risk of the counterparty. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The new rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer on January 1, 2018, is 1.875%. The Company and Bank’s actual and required capital amounts are disclosed in Note 12 to the consolidated financial statements.

Dividends paid by the Bank to CSB are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Company is subject to restrictions by regulatory authorities, which generally limit dividends to current year net income and the prior two years net retained earnings, as defined by regulation. In addition, dividend payments generally cannot reduce regulatory capital levels below the minimum regulatory guidelines discussed above.

 

 

16

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


2017 FINANCIAL REVIEW

 

 

LIQUIDITY

 

    

        December 31        

        Change     

(Dollars in millions)

 

  

2017

 

       

2016

 

        from 2016   

 

 

Cash and cash equivalents

 

   $ 36       $ 37         $ (1

Unused lines of credit

 

     82         66           16  

Unpledged securities at fair market value

     31         37           (6
  

 

 

     

 

 

          

 

 

 
   $ 149       $ 140         $ 9  
  

 

 

     

 

 

       

 

 

 

Net deposits and short-term liabilities

   $ 557       $ 533         $ 24  
  

 

 

     

 

 

       

 

 

 

Liquidity ratio

 

       26.8         26.1      

Minimum board approved liquidity ratio

     20.0       20.0      

Liquidity refers to the Company’s ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, pay operating expenses, and meet other obligations. Liquidity is monitored by CSB’s Asset Liability Committee. The Company was within all Board-approved limits at December 31, 2017 and 2016. Additional sources of liquidity include net income, loan repayments, the availability of borrowings, and adjustments of interest rates to attract deposit accounts.

As summarized in the Consolidated Statements of Cash Flows, the most significant investing activities for the Company in 2017 included net loan originations of $42 million, securities purchases of $18 million, offset by maturities and repayment of securities totaling $22 million. The Company’s financing activities included a $42 million increase in deposits, $2 million in cash dividends paid, and a $1 million net decrease in FHLB advances.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The most significant market risk the Company is exposed to is interest rate risk. The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans and securities), which are funded by interest-bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in the market rates of interest, resulting in market risk. None of the Company’s financial instruments are held for trading purposes.

The Board of Directors establishes policies and operating limits with respect to interest rate risk. The Company manages interest rate risk regularly through its Asset Liability Committee. The Committee meets periodically to review various asset and liability management information including, but not limited to, the Company’s liquidity position, projected sources and uses of funds, interest rate risk position, and economic conditions.

Interest rate risk is monitored primarily through the use of an earnings simulation model. The model is highly dependent on various assumptions, which change regularly as the balance sheet and market interest rates change. The earnings simulation model projects changes in net interest income resulting from the effect of changes in interest rates. The analysis is performed quarterly over a twenty-four month horizon. The analysis includes two balance sheet models, one based on a static balance sheet and one on a dynamic balance sheet with projected growth in assets and liabilities. This analysis is performed by estimating the expected cash flows of the Company’s financial instruments using interest rates in effect at year-end 2017 and 2016. Interest rate risk policy limits are tested by measuring the anticipated change in net interest income over a two year period. The tests assume a quarterly ramped 100, 200, 300, and 400 basis point increase and a 100 basis point decrease in 2017 in market interest rates as compared to a stable rate environment or base model. The following table reflects the change to interest income for the first twelve month period of the twenty-four month horizon.

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

17

 


2017 FINANCIAL REVIEW

 

Net Interest Income at Risk

 

     December 31, 2017         
   

 Change In

 Interest Rates

 (Basis Points)

 

  

 Net

 Interest

 Income

 

    

       Dollar

       Change

 

   

Percentage

Change

 

 

        Board  

        Policy  

        Limits  

 

        
 

 

    
(Dollars in thousands)   + 400    $   28,329              $   1,666        6.2%      ± 25%       
  + 300      27,944        1,281     4.8     ± 15          
  + 200      27,552        889     3.3     ± 10          
  + 100      27,123        460     1.7     ±   5          
          0       26,663                –      
  – 100      25,996        (667   (2.5)     ±  5          
     December 31, 2016         
 

 

    
  + 400    $   25,519              $   1,889        8.0%      ± 25%       
  + 300      25,063        1,433     6.1     ± 15          
  + 200      24,577        947     4.0     ± 10          
  + 100      24,092        462     2.0     ±   5          
          0       23,630                –      
  – 100      22,841        (789   (3.3)     ±  5          

 

Management reviews Net Interest Income at Risk with the Board on a periodic basis. The Company was within all Board-approved limits at December 31, 2017 and 2016.

 

Economic Value of Equity at Risk

 

 

 

           December 31, 2017               
   

 Change In

 Interest Rates

 (Basis Points)

 

         

          Percentage             

             Change             

 

 

        Board  

        Policy  

        Limits  

 

        
 

 

    
  + 400         20.0        ± 35%       
  + 300         16.2         ± 30          
  + 200         11.9         ± 20          
  + 100         6.6         ± 15          
  – 100         (8.1       ± 15          
        

   December 31, 2016  

 

            
 

 

    
  + 400         18.1        ± 35%       
  + 300         14.9         ± 30          
  + 200         11.0         ± 20          
  + 100         6.1         ± 15          
  – 100         (7.6       ± 15          

 

 

18

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


2017 FINANCIAL REVIEW

 

The economic value of equity is calculated by subjecting the period-end balance sheet to changes in interest rates and measuring the impact of the changes on the values of the assets and liabilities. Hypothetical changes in interest rates are then applied to the financial instruments. Then the cash flows and fair values are again estimated using these hypothetical rates. For the net interest income estimates, the hypothetical rates are applied to the financial instruments based on the assumed cash flows.

Management periodically measures and reviews the Economic Value of Equity at Risk with the Board. At December 31, 2017, the market value of equity as a percent of base in a 400 basis point rising rate environment indicates an increase of 20.0% and 18.1% as of December 31, 2017 and 2016, respectively. The Company was within all Board-approved limits at December 31, 2017 and 2016.

SIGNIFICANT ASSUMPTIONS AND OTHER CONSIDERATIONS

The above analysis is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, and reactions of depositors to changes in interest rates and this should not be relied upon as being indicative of actual results. Further, the analysis does not contemplate all actions the Company may undertake in response to changes in interest rates.

U.S. Treasury securities, obligations of U.S. Government corporations and agencies, and obligations of states and political subdivisions will generally repay at their stated maturity or if callable prior to their final maturity date. Mortgage-backed security payments increase when interest rates are low and decrease when interest rates rise. Most of the Company’s loans permit the borrower to prepay the principal balance prior to maturity without penalty. The likelihood of prepayment depends on a number of factors: current interest rate and interest rate index (if any) on the loan, the financial ability of the borrower to refinance, the economic benefit to be obtained from refinancing, availability of refinancing at attractive terms, as well as economic conditions in specific geographic areas, which affect the sales and price levels of residential, and commercial property. In a changing interest rate environment, prepayments may increase or decrease on fixed and adjustable rate loans depending on the current relative levels and expectations of future short-term and long-term interest rates. Prepayments on adjustable rate loans generally increase when long-term interest rates fall or are at historically low levels relative to short-term interest rates, thus making fixed rate loans more desirable. While savings and checking deposits generally may be withdrawn upon the customer’s request without prior notice, a continuing relationship with customers resulting in future deposits and withdrawals is generally predictable, leading to a dependable and uninterrupted source of funds. Time deposits generally have early withdrawal penalties, which discourage customer withdrawal prior to maturity. Short-term borrowings have fixed maturities. Certain advances from the FHLB carry prepayment penalties and are expected to be repaid in accordance with their contractual terms.

FAIR VALUE MEASUREMENTS

The Company discloses the estimated fair value of its financial instruments at December 31, 2017 and 2016 in Note 15 to the consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS

The following table summarizes the Company’s loan commitments, including letters of credit, as of December 31, 2017:

 

    

Amount of Commitment to Expire Per Period

 

 
  

 

 

 

(Dollars in thousands)

 

Type of Commitment

 

  

Total

Amount

 

    

Less than

1 year

 

    

1 to 3

Years

 

    

3 to 5

Years

 

    

Over 5

Years

 

 

 

 

Commercial lines of credit

 

   $   110,804      $   99,585      $ 381      $ 76      $   10,762  

Real estate lines of credit

 

     54,374        1,582          5,118          7,219        40,455  

Consumer lines of credit

 

     740        740                       

Credit cards lines of credit

 

     4,475        4,475                       

Overdraft privilege

 

     6,961        6,961                       

Commercial real estate loan commitments

 

                                  

Letters of credit

     849        671        20        143        15  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commitments

   $ 178,203      $ 114,014      $ 5,519      $ 7,438      $ 51,232  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All lines of credit represent either fee-paid or legally binding loan commitments for the loan categories noted. Letters of credit are also included in the amounts noted in the table since the Company requires that each letter of credit be supported by a loan agreement. The commercial and consumer lines represent both unsecured and secured obligations. The real estate lines are secured by mortgages on residential property. It is anticipated that a significant portion of these lines will expire without being drawn upon.

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

19

 


2017 FINANCIAL REVIEW

 

The following table summarizes the Company’s other contractual obligations, exclusive of interest, as of December 31, 2017:

 

     Payment Due by Period  
  

 

 

 

(Dollars in thousands)

 

Contractual Obligations

 

  

Total
Amount

 

      

Less than
1 year

 

      

1 to 3
Years

 

      

3 to 5
Years

 

      

Over 5
Years

 

 

 

 

 

Total time deposits

 

   $ 109,792        $ 61,124        $ 32,239        $ 16,429        $  

Short-term borrowings

 

     39,480          39,480                             

Other borrowings

 

     11,409          2,884          3,860          2,203          2,462  

Operating leases

 

     321          108          142          71           
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total obligations

   $   161,002        $   103,596        $   36,241        $   18,703        $   2,462  
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

The other borrowings noted in the preceding table represent borrowings from the FHLB. The notes require payment of interest on a monthly basis with principal due in monthly installments. The obligations bear stated fixed interest rates and stipulate a prepayment penalty if the note’s interest rate exceeds the current market rate for similar borrowings at the time of repayment. As the notes mature, the Company evaluates the liquidity and interest rate circumstances, at that time, to determine whether to pay off or renew the note. The evaluation process typically includes: the strength of current and projected customer loan demand, the Company’s federal funds sold or purchased position, projected cash flows from maturing investment securities, the current and projected market interest rate environment, local and national economic conditions, and customer demand for the Company’s deposit product offerings.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the commercial banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements. These estimates, assumptions, and judgments are based upon the information available as of the date of the financial statements.

The most significant accounting policies followed by the Company are presented in the Summary of Significant Accounting Policies. These policies, along with the other disclosures presented in the Notes to Consolidated Financial Statements and the 2017 Financial Review, provide information about how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the other-than-temporary impairment of securities, allowance for loan losses, goodwill, and the fair value of financial instruments as the accounting areas that require the most subjective and complex estimates, assumptions and judgments and, as such, could be the most subject to revision as new information becomes available.

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

As previously noted in the section entitled Allowance for Loan Losses, management performs an analysis to assess the adequacy of its allowance for loan losses. This analysis encompasses a variety of factors including: the potential loss exposure for individually reviewed loans, the historical loss experience, the volume of nonperforming loans (i.e., loans in nonaccrual status or past due 90 days or more), the volume of loans past due, any significant changes in lending or loan review staff, an evaluation of current and future local and national economic conditions, any significant changes in the volume or mix of loans within each category, a review of the significant concentrations of credit, and any legal, competitive, or regulatory concerns.

The Company accounts for business combinations using the acquisition method of accounting. Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives, consisting of core deposit intangibles, are amortized using accelerated methods over their estimated weighted-average useful lives, approximating ten years. Additional information is presented in Note 5, Core Deposit Intangible Assets.

The Company groups financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level I valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level II valuations are for instruments that trade in less active dealer or broker markets and incorporate values obtained for identical or comparable instruments. Level III valuations are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level III valuations incorporate certain assumptions and projections in determining the fair value assigned to each instrument.

 

 

20

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


2017 FINANCIAL REVIEW

 

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, requiring measurement of financial position, and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Most assets and liabilities of the Company are monetary in nature. Therefore, interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as prices of goods and services. The liquidity, maturity structure, and quality of the Company’s assets and liabilities are critical to maintenance of acceptable performance levels.

COMMON STOCK AND SHAREHOLDER INFORMATION

Common shares of the Company are not traded on an established market. Shares are traded on the OTC market through broker/ dealers under the symbol “CSBB” and through private transactions. The table below represents the range of high and low prices paid for transactions known to the Company. Management does not have knowledge of prices paid on all transactions. Because of the lack of an established market, these prices may not reflect the prices at which stock would trade in an active market. These quotations reflect interdealer prices, without mark-up, mark-down, or commission, and may not represent actual transactions. The table specifies cash dividends declared by the Company to its shareholders during 2017 and 2016. No assurances can be given that future dividends will be declared, or if declared, what the amount of any such dividends will be. Additional information concerning restrictions over the payment of dividends is included in Note 12 of the consolidated financial statements.

Quarterly Common Stock Price and Dividend Data

 

Quarter Ended

 

  

    High

 

    

   Low

 

    

Dividends
Declared
Per Share

 

    

  Dividends
  Declared

 

 

March 31, 2017

     $   32.70        $   26.00        $   0.20        $   548,449

 

June 30, 2017

       34.50          29.55          0.20          548,449

 

September 30, 2017

       30.60          28.04          0.22          603,293

 

December 31, 2017

       34.66          30.00          0.22          603,293

March 31, 2016

     $ 24.50        $ 22.10        $ 0.19        $ 521,026

 

June 30, 2016

       26.00          23.27          0.19          521,026

 

September 30, 2016

       26.00          23.80          0.20          548,449

 

December 31, 2016

       33.50          25.17          0.20          548,449

As of December 31, 2017, the Company had 1,199 shareholders of record and 2,742,242 outstanding shares of common stock.

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

21

 


REPORT ON MANAGEMENT’S ASSESSMENT OF

INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of CSB Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance that our published financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted the required assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework. Based upon this assessment, management believes that the Company’s internal control over financial reporting is effective as of December 31, 2017.

The Company’s internal control over financial reporting as of December 31, 2017 has been audited by S.R. Snodgrass, P.C. an independent registered public accounting firm, as stated in their report appearing on the next page.

 

LOGO  

LOGO

Eddie L. Steiner   Paula J. Meiler
President,  

Senior Vice President,

Chief Executive Officer  

Chief Financial Officer

 

 

22

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

LOGO

To the Shareholders and the Board of Directors

of CSB Bancorp, Inc.

Opinion on Internal Control over Financial Reporting

We have audited CSB Bancorp, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, of the Company and our report dated March 1, 2018, expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report on Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

LOGO

Cranberry Township, Pennsylvania

March 1, 2018

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

23

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

LOGO

To the Shareholders and the Board of Directors

of CSB Bancorp, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of CSB Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016; the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017; and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 1, 2018, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2005.

 

LOGO

Cranberry Township, Pennsylvania

March 1, 2018

 

 

24

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


CONSOLIDATED BALANCE SHEETS

December 31, 2017 and 2016

 

(Dollars in thousands, except share data)

 

  

2017

 

      

2016

 

 

 

 

 

ASSETS

       

 

Cash and cash equivalents

       

 

Cash and due from banks

   $   17,255        $   13,590  

 

Interest-earning deposits in other banks

     19,165          23,248  
  

 

 

      

 

 

 

 

Total cash and cash equivalents

     36,420          36,838  
  

 

 

      

 

 

 

Securities

       

 

Available-for-sale, at fair value

     97,752          103,875  

 

Held-to-maturity; fair value of $25,491 in 2017 and $23,444 in 2016

     25,758          23,883  

 

Restricted stock, at cost

     4,614          4,614  
  

 

 

      

 

 

 

 

Total securities

     128,124          132,372  
  

 

 

      

 

 

 

Loans held for sale

     246           

Loans

     516,830          475,449  

 

Less allowance for loan losses

     5,604          5,291  
  

 

 

      

 

 

 

 

Net loans

     511,226          470,158  
  

 

 

      

 

 

 

Premises and equipment, net

     9,244          8,749  

 

Core deposit intangible

     268          383  

 

Goodwill

     4,728          4,728  

 

Bank-owned life insurance

     13,218          10,361  

 

Accrued interest receivable and other assets

     3,589          6,389  
  

 

 

      

 

 

 

 

TOTAL ASSETS

   $   707,063        $   669,978  
  

 

 

      

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

       

LIABILITIES

       

 

Deposits

       

 

Noninterest-bearing

   $   173,671        $   167,824  

 

Interest-bearing

     409,588          372,961  
  

 

 

      

 

 

 

Total deposits

     583,259          540,785  
  

 

 

      

 

 

 

Short-term borrowings

     39,480          48,742  

 

Other borrowings

     11,409          12,385  

 

Accrued interest payable and other liabilities

     2,383          2,651  
  

 

 

      

 

 

 

 

Total liabilities

     636,531          604,563  
  

 

 

      

 

 

 

SHAREHOLDERS’ EQUITY

       

Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares in 2017 and 2016

     18,629          18,629  

 

Additional paid-in capital

     9,815          9,815  

 

Retained earnings

     47,535          42,629  

 

Treasury stock at cost – 238,360 shares in 2017 and 2016

     (4,784        (4,784

 

Accumulated other comprehensive loss

     (663        (874
  

 

 

      

 

 

 

 

Total shareholders’ equity

     70,532          65,415  
  

 

 

      

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $   707,063        $   669,978  
  

 

 

      

 

 

 

These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.

 

 

2017 Report to Shareholders  |  CSB Bancorp, Inc.

25

 


CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2017, 2016, and 2015

 

(Dollars in thousands, except per share data)

 

  

2017

 

    

2016

 

    

2015

 

 

 

 

 

INTEREST AND DIVIDEND INCOME

 

        

Loans, including fees

 

   $   23,097      $   20,278      $   18,548  

Taxable securities

 

     2,374        2,598        2,790  

Nontaxable securities

 

     680        646        563  

Other

     289        110        96  
  

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     26,440        23,632        21,997  
  

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

        

Deposits

 

     1,344        1,006        1,081  

Short-term borrowings

 

     149        73        71  

Other borrowings

     495        394        415  
  

 

 

    

 

 

    

 

 

 

Total interest expense

     1,988        1,473        1,567  
  

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

 

     24,452        22,159        20,430  

PROVISION FOR LOAN LOSSES

     1,145        493        389  
  

 

 

    

 

 

    

 

 

 

Net interest income, after provision for loan losses

     23,307        21,666        20,041  
  

 

 

    

 

 

    

 

 

 

NONINTEREST INCOME

 

        

Service charges on deposit accounts

 

     1,133        1,166        1,203  

Trust services

 

     687        861        860  

Debit card interchange fees

 

     1,193        1,087        988  

Securities gains

 

            1        56  

Gain on sale of loans, net

 

     296        309        363  

Earnings on bank-owned life insurance

 

     357        276        270  

Other income

     674        596        684  
  

 

 

    

 

 

    

 

 

 

Total noninterest income

     4,340        4,296        4,424  
  

 

 

    

 

 

    

 

 

 

NONINTEREST EXPENSES

 

        

Salaries and employee benefits

 

     10,009        9,354        8,819  

Occupancy expense

 

     869        973        1,027  

Equipment expense

 

     665        679        663  

Professional and director fees

 

     963        832        830  

Financial institutions and franchise tax

 

     523        427        400  

Marketing and public relations

 

     401        415        419  

Software expense

 

     879        799        801  

Debit card expense

 

     535        445        413  

Amortization of intangible assets

 

     116        121        125  

FDIC insurance expense

 

     225        282        357  

Other expenses

     2,131        1,928        1,942  
  

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     17,316        16,255        15,796  
  

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

 

     10,331        9,707        8,669  

FEDERAL INCOME TAX PROVISION

     3,230        2,969        2,647  
  

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 7,101      $ 6,738      $ 6,022  
  

 

 

    

 

 

    

 

 

 

NET INCOME PER SHARE

 

        

Basic

   $ 2.59      $ 2.46      $ 2.20  
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 2.59      $ 2.46      $ 2.20  
  

 

 

    

 

 

    

 

 

 

These consolidated financial statements should be read in connection with the accompanying summary of significant accounting policies and notes to the consolidated financial statements.

 

 

26

2017 Report to Shareholders  |  CSB Bancorp, Inc.

 


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2017, 2016, and 2015

 

(Dollars in thousands)

 

  

2017

 

      

2016

 

      

2015

 

 

Net income

   $   7,101        $ 6,738        $   6,022  
  

 

 

      

 

 

      

 

 

 

Other comprehensive income (loss)

            

Unrealized gains (losses) arising during the period

     376          (1,221        (551

Amounts reclassified from accumulated other comprehensive income, held-to-maturity

     108          530          403  

Income tax effect at 34%

     (164        235          50  

Reclassification adjustment for gains on available-for-sale securities included in net income

              (1        (56

Income tax effect

                       19  
  

 

 

      

 

 

      

 

 

 

Other comprehensive income (loss)

     320          (457        (135
  

 

 

      

 

 

      

 

 

 

Total comprehensive income

   $   7,421        $ 6,281        $   5,887  
  

 

 

      

 

 

      

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years Ended December 31, 2017, 2016, and 2015

 

(Dollars in thousands)

 

 

Common
Stock

 

    

Additional
Paid-In
Capital

 

  

Retained
Earnings

 

  

Treasury

Stock

 

  

Accumulated
Other
Comprehensive
Loss

 

  

Total

 

BALANCE AT DECEMBER 31, 2014

      $18,629          $ 9,884        $34,090        $(4,871)        $   (282 )      $ 57,450

Net income

                      6,022                      6,022

Other comprehensive loss

                                    (135 )        (135 )

Stock options issued, 1,591 shares

               (38 )               49               11

Cash dividends declared, $0.76 per share

                      (2,082 )                      (2,082 )
   

 

 

        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

BALANCE AT DECEMBER 31, 2015

    $ 18,629        $ 9,846      $ 38,030      $ (4,822 )      $   (417 )      $ 61,266

Net income

                      6,738                      6,738

Other comprehensive loss

                                    (457 )        (457 )

Stock options issued, 1,246 shares

               (31 )               38               7

Cash dividends declared, $0.78 per share

                      (2,139 )                      (2,139 )
   

 

 

        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

BALANCE AT DECEMBER 31, 2016

    $ 18,629        $ 9,815      $ 42,629      $ (4,784 )      $   (874 )      $ 65,415

Net income

                      7,101                      7,101

Reclassification of tax effect from AOCI to retained earnings

                      109               (109 )       

Other comprehensive income

                                    320        320

Cash dividends declared, $0.84 per share

                      (2,304 )                      (2,304 )
   

 

 

        

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

BALANCE AT DECEMBER 31, 2017

    $   18,629        $   9,815      $   47,535      $   (4,784)        $   (663 )