CSB BANCORP, INC. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis focuses on the consolidated financial condition of the Company atSeptember 30, 2020 as compared toDecember 31, 2019 , and the consolidated results of operations for the three and nine months endedSeptember 30, 2020 compared to the same periods in 2019. The purpose of this discussion is to provide the reader with a more thorough understanding of the Consolidated Financial Statements. This discussion should be read in conjunction with the interim condensed Consolidated Financial Statements and related footnotes contained in Part I, Item 1 of this Quarterly Report. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report are not historical facts but rather are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates", "plans", "expects", "believes", and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. Other factors not currently anticipated may also materially and adversely affect the Company's results of operations, cash flows, and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by applicable law. FINANCIAL CONDITION Total assets were$988 million atSeptember 30, 2020 as compared to$819 million atDecember 31, 2019 . During the nine months endedSeptember 30, 2020 , net loans increased$76 million . Cash and cash equivalents, and securities increased$92 million . Deposits and short-term borrowings increased$160 million . Net loans increased$76 million , or 14%, as commercial real estate and construction loans increased$3 million , or 1%, and residential real estate loans increased$2 million , or 1%, fromDecember 31, 2019 . Commercial loans increased$75 million , or 54%, as loans originated under SBA Paycheck Protection Program exceeded$92 million during 2020. Consumers continued to refinance their mortgage loans for historically low long-term fixed rates while home purchase activity increased through the first nine-months of 2020. Residential mortgage loan originations for the nine months endedSeptember 30, 2020 totaled$54 million , an increase from$48 million in originations during the nine months endedSeptember 30, 2019 . Originations sold into the secondary market were$38 million and$11 million , respectively during the nine months endedSeptember 30, 2020 andSeptember 30, 2019 . The Bank originates and sells primarily fixed rate thirty-year mortgages into the secondary market. 28
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CSB BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The allowance for loan losses increased $1.6 million from the year ago quarter
to $8.4 million or 1.33% of total loans. The Company has not early adopted CECL
which has been delayed for smaller reporting companies. Outstanding loan
balances increased 11% to $628 million at September 30, 2020 . Net recoveries
increased to $66 thousand , or an annualized -0.01% of average loans, in the
current nine-month period compared to the $14 thousand recovery, or -0.003% of
average loans in the year-ago nine-month period. At September 30, 2020 , the
allowance for total loans minus the SBA guaranteed Payroll Protection loans was
1.56%. We believe the allowance level is appropriate given the low level of
problem loans and current composition of the overall loan portfolio.
Nonperforming loans decreased to $4.1 million , or 0.65% of total loans from $4.5
million , or 0.78%, a year ago. For the nine months ended September 30, 2020
loans totaling $257 thousand were placed on nonaccrual status, there were $26
thousand in charge-downs recognized, and pay downs of $473 thousand were
received.
September 30, December 31, September 30,
(Dollars in thousands) 2020 2019 2019
Non-performing loans $ 4,102 $ 4,539 $ 4,419
Other real estate - 99 99
Repossessed assets - 20 -
Allowance for loan losses 8,355 7,017 6,776
Total loans $ 628,084 $ 551,633 $ 566,213
Allowance for loan losses as a percentage of
total loans 1.33 % 1.27 % 1.20 %
Allowance for loan losses to total
nonperforming loans 2.0x 1.5x 1.5x
The ratio of gross loans to deposits was 74.7% at
The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations, or trust preferred securities. Management has considered industry analyst reports, sector credit reports, and the volatility within the bond market in concluding that the gross unrealized losses of$548 thousand within the available-for-sale and held-to-maturity portfolios as ofSeptember 30, 2020 , was primarily the result of customary and expected fluctuations in the bond market and not necessarily the expected cash flows of the individual securities. As a result, all embedded security losses onSeptember 30, 2020 , are considered temporary and no impairment loss relating to these securities has been recognized. Deposits increased$157 million , or 23%, fromDecember 31, 2019 with noninterest-bearing deposits increasing approximately$55 million and interest-bearing deposit accounts increasing approximately$102 million . Total deposits as ofSeptember 30, 2020 are$183 million greater thanSeptember 30, 2019 deposit balances. On a year over year comparison, increases were recognized in noninterest-bearing demand deposits of$60 million , interest-bearing demand deposits of$78 million , money market accounts of$18 million , and savings of$27 million . During 2020, the Bank's customers increased deposits through cash conservation and stimulus payments as a result of the COVID-19 pandemic and ensuing unknown political climate. Short-term borrowings consisting of overnight repurchase agreements with retail customers increased$3 million to$42 million atSeptember 30, 2020 as compared toDecember 31, 2019 and other borrowings increased$3 million as the Company took out FHLB advances. Total shareholders' equity amounted to$92 million , or 9.3%, of total assets atSeptember 30, 2020 up from$85 million December 31, 2019 . The increase in shareholders' equity during the nine months endedSeptember 30, 2020 was due to net income of$7.9 million and an increase in accumulated other comprehensive income of$792 thousand offset by dividends declared of$2.3 million . The Company and the Bank met all regulatory capital requirements atSeptember 30, 2020 . RESULTS OF OPERATIONS
Three months ended
For the quarters endedSeptember 30, 2020 and 2019, the Company recorded net income of$2.8 million and$2.7 million and$1.02 and$0.98 per share, respectively. The$105 thousand increase in net income for the period was primarily the result of a$422 thousand increase in noninterest income and a decrease of$401 thousand in interest expenses. The increases were partially offset by a decrease of$548 thousand in interest 29 --------------------------------------------------------------------------------CSB BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
income, an increase in the provision for loan losses of
Return on average assets and return on average equity were 1.14% and 12.19%, respectively, for the three-month period of 2020, compared to 1.38% and 12.89%, respectively for the same quarter in 2019.
Average Balance Sheets and Net Interest Margin Analysis
For the Three Months Ended September 30,
2020 2019
Average Average Average Average
(Dollars in thousands) balance1 Interest rate2 balance1 Interest rate2
ASSETS
Federal funds sold $ - $ - - $ 393 $ 2 2.02 %
Interest-earning deposits 172,857 42 0.10 % 59,681 354 2.35
Taxable securities 97,723 372 1.51 87,091 534 2.43
Tax-exempt securities 4 20,673 139 2.68 23,494 168 2.84
Loans 3,4 635,124 7,197 4.51 554,957 7,244 5.18
Total interest-earning assets 926,377 7,750 3.33 % 725,616 8,302 4.54 %
Noninterest-earning assets 53,429 47,866
TOTAL ASSETS $ 979,806 $ 773,482
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing demand deposits$ 223,187 $ 85 0.15 %$ 141,260 $ 175 0.49 % Savings deposits 232,121 72 0.12 191,124 236 0.49 Time deposits 125,028 479 1.52 124,888 555 1.76 Borrowed funds 51,345 37 0.29 43,335 108 0.99 Total interest-bearing liabilities 631,681 673 0.42 % 500,607 1,074 0.85 % Noninterest-bearing demand deposits 252,952 186,710 Other liabilities 3,764 3,217 Shareholders' Equity 91,409 82,948
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY$ 979,806 $ 773,482 Taxable equivalent net interest income$ 7,077 $ 7,228 Tax equivalent adjustment (36 ) (40 ) Net interest income$ 7,041 $ 7,188 Net interest margin 3.02 % 3.93 % Tax equivalent adjustment 0.02 0.02 Net interest margin-taxable equivalent 3.04 % 3.95 % Taxable equivalent net interest spread 2.91 % 3.69 %
1 Average balances have been computed on an average daily basis.
2 Average rates have been computed based on the amortized cost of the corresponding asset or liability.
3 Average loan balances include nonaccrual loans.
4 Interest income is shown on a fully tax-equivalent basis.
Interest income for the quarter endedSeptember 30, 2020 , was$7.7 million representing a$548 thousand decrease, or a 6.6% decline, compared to the same period in 2019. This decrease was primarily due to average loan rates decreasing 67 basis points partially offset by an average volume increase of$80 million for the quarter endedSeptember 30, 2020 as compared to the same period in 2019. Interest expense for the quarter endedSeptember 30, 2020 was$673 thousand , a decrease of$401 thousand , or 37%, from the same quarter in 2019. The decrease in interest expense occurred primarily due to a decrease in rates on all liabilities for the quarter endedSeptember 30, 2020 , partially offset by increases in the average balances. 30 --------------------------------------------------------------------------------CSB BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the quarter ended September 30, 2020 , the provision for loan losses was $377
thousand , compared to a provision of $285 thousand provision for the same
quarter in 2019. For more discussion see Financial Condition. The provision for
loan losses is determined based on management's calculation of the adequacy of
the allowance for loan losses, which includes provisions for classified loans as
well as for the remainder of the portfolio based on historical data, including
past charge-offs and current economic trends.
Noninterest income for the quarter ended
The
gain on the sale of mortgage loans to the secondary market increased by$435 thousand for the quarter endedSeptember 30, 2020 as additional loan volume was sold into the secondary market. Debit card interchange income increased$56 thousand , or 15%, with greater fees generated from usage in the third quarter 2020. Earnings on bank owned life insurance increased$11 thousand for the third quarter 2020 a result of adding policies in 2019. Fees from trust and brokerage services increased$2 thousand to$236 thousand for the third quarter 2020 as compared to the same quarter in 2019. Service charges on deposit accounts decreased$81 thousand , or 24%, compared to the same quarter in 2019 primarily from a volume decrease in overdraft fees. Noninterest expenses for the quarter endedSeptember 30, 2020 increased$51 thousand , or 1%, compared to the third quarter 2019. Salaries and employee benefits decreased$34 thousand , or 1%, a result of an increase in capitalization of approximately$54 thousand in salary and benefits expense to deferred loan origination costs related to new commercial and mortgage loan originations. The loan capitalization reductions in salary were partially offset by increases in base wage, social security benefits and incentive accruals. TheOhio financial institutions tax increased$18 thousand in the third quarter due to the Company's increased capital base. Marketing and public relations expense decreased$53 thousand , or 36%, primarily due to events being cancelled due to COVID-19. Debit card expenses increased$23 thousand , or 16%, compared to the third quarter 2019 with increased volume. Software expense rose$44 thousand quarter over quarter with additional investment. Occupancy expense increased$37 thousand in 2020 over the third quarter 2019. Professional and director fees decreased$84 thousand for the quarter endedSeptember 30, 2020 as compared to the third quarter 2019. This decrease resulted from a decrease in audit expense as the Company is no longer subject to an internal controls audit opinion from an outside accountant and directors fees with the decrease of one director. Federal income tax expense increased$27 thousand , or 4%, for the quarter endedSeptember 30, 2020 as compared to the third quarter 2019. The provision for income taxes was$676 thousand (effective rate of 19%) for the quarter endedSeptember 30, 2020 , compared to$649 thousand (effective rate of 19%) for the same quarter ended 2019. RESULTS OF OPERATIONS
Nine months ended
For the nine months endedSeptember 30, 2020 and 2019, the Company recorded net income of$7.9 million and$7.8 million and$2.88 and$2.85 per share, respectively. The$68 thousand increase in net income for the quarter was primarily the result of an increase of$869 thousand in other noninterest income and an increase in the federal income tax provision of$7 thousand . The increases were partially offset by a$301 thousand decrease in net interest income, an increase of$76 thousand in noninterest expense, and an increase in the provision for loan losses of$417 thousand . Return on average assets and return on average equity were 1.17% and 11.80%, respectively, for the nine months endedSeptember 30, 2020 , compared to 1.39% and 13.00%, respectively for the same period in 2019. 31 --------------------------------------------------------------------------------CSB BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Average Balance Sheets and Net Interest Margin Analysis
For the Nine Months Ended September 30,
2020 2019
Average Average Average Average
(Dollars in thousands) balance1 Interest rate2 balance1 Interest rate2
ASSETS
Federal funds sold $ - $ - - $ 335 $ 6 2.23 %
Interest-earning deposits in
other banks 122,382 312 0.34 % 42,087 743 2.36
Taxable securities 101,107 1,462 1.93 87,364 1,705 2.61
Tax-exempt securities4 20,637 435 2.82 23,317 508 2.92
Loans3,4 605,767 21,162 4.67 551,157 21,507 5.22
Total earning assets 849,893 23,371 3.66 % 704,260 24,469 4.65 %
Other assets 52,101 45,699
TOTAL ASSETS $ 901,994 $ 749,959
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing demand deposits $ 190,490 $ 308 0.22 % $ 129,187 $ 432 0.45 %
Savings deposits 216,463 270 0.17 188,530 746 0.53
Time deposits 126,229 1,561 1.65 122,638 1,533 1.67
Other borrowed funds 48,901 154 0.42 44,506 370 1.11
Total interest bearing
liabilities 582,083 2,293 0.52 % 484,861 3,081 0.85 %
Non-interest bearing demand
deposits 226,874 181,585
Other liabilities 3,729 3,054
Shareholders' Equity 89,308 80,459
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 901,994 $ 749,959
Taxable equivalent net interest
income $ 21,078 $ 21,388
Tax equivalent adjustment (109 ) (118 )
Net interest income $ 20,969 $ 21,270
Net interest margin 3.29 % 4.04 %
Tax equivalent adjustment 0.02 0.02
Net interest margin-taxable
equivalent 3.31 % 4.06 %
Taxable equivalent net interest
spread 3.14 % 3.80 %
1 Average balances have been computed on an average daily basis.
2 Average rates have been computed based on the amortized cost of the corresponding asset or liability.
3 Average loan balances include nonaccrual loans.
4 Interest income is shown on a fully tax-equivalent basis.
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CSB BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Interest income for the nine months ended September 30, 2020 , was $23.3 million
representing a $1.1 million decrease, or a 4% decline, compared to the same
period in 2019. This decrease was primarily due to yield decreases as follows:
202 basis points in interest-earning deposits in other banks, 55 basis points in
average loan rates, and 68 basis points in average taxable security yields for
the period ended September 30, 2020 as compared to the same period in 2019.
Interest expense for the nine months ended September 30, 2020 was $2.3 million ,
a decrease of $788 thousand , or 26%, from the same period in 2019. The decrease
in interest expense occurred primarily due to a decrease in rates on all
interest-bearing liabilities for the nine months ended September 30, 2020 ,
partially offset by increases in the average balances.
For the nine months ended September 30, 2020 , the provision for loan losses was
$1.3 million , compared to a provision of $855 thousand provision for the same
period in 2019. For more discussion see Financial Condition. The provision for
loan losses is determined based on management's calculation of the adequacy of
the allowance for loan losses, which includes provisions for classified loans as
well as for the remainder of the portfolio based on historical data, including
past charge-offs and current economic trends.
Noninterest income for the nine months ended September 30, 2020 , was $4.8
million , an increase of $869 thousand , or 22%, compared to the same period in
2019. The gain on the sale of mortgage loans to the secondary market increased
$902 thousand to $1.2 million for the nine months ended September 30, 2020 .
Debit card interchange income increased $116 thousand , or 11%, with increased
card usage in the first nine months of 2020. Earnings on bank owned life
insurance policies increased $64 thousand for the period with the additional
purchase of $3 million in policies in 2019. Service charges on deposit accounts
decreased $185 thousand , or 20%, compared to the same period in 2019 primarily
from decreases in overdraft fees. Fees from trust and brokerage services
decreased $8 thousand for the period.
Noninterest expenses for the nine months ended September 30, 2020 increased $76
thousand , or less than 1%, compared to the same period in 2019. Salaries and
employee benefits decreased $147 thousand , or 2%, a result of the capitalization
of deferred loan origination costs related to PPP loan originations. Marketing
and public relations expense decreased $116 thousand , or 29%, with decreases in
market, brand recognition initiatives, and community support in the company's
market due to COVID-19. Debit card expenses increased $50 thousand , or 12%,
compared to the prior period in 2019. Occupancy expense increased $93 thousand
over the same period in 2019 with an increase in depreciation, maintenance, and
supplies expense. Professional and director fees decreased $120 thousand for the
nine months ended September 30, 2020 as compared to the same period in 2019.
Federal income tax expense increased $7 thousand , or less than 1%, for the nine
months ended September 30, 2020 as compared to the same period in 2019. The
provision for income taxes was $1.89 million (effective rate of 19%) for the
nine months ended September 30, 2020 , compared to $1.88 million (effective rate
of 19%) for the same period ended 2019.
CAPITAL RESOURCES
The Company maintained a strong capital position with tangible common equity to tangible assets of 8.9% atSeptember 30, 2020 compared with 9.9% atDecember 31, 2019 . Consistent with theBoard of Director's commitment to public confidence and safe and sound banking operations, capital targets and minimum risk-based capital ratios for CSB were established to maintain excess capital to well-capitalized standards. To be considered well-capitalized, an institution must have a total risk-based capital ratio of at least 10%, a tier 1 capital ratio of at least 8%, a leverage capital ratio of at least 5%, a CET1 ratio of at least 6.5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An adequately capitalized institution has a total risk-based capital ratio of at least 8%, a tier 1 capital ratio of at least 6%, a CET1 ratio of at least 4.5%, and a leverage ratio of at least 4%. Failure to meet specified minimum capital requirements could result in regulatory actions by theFederal Reserve orOhio Division of Financial Institutions that could have a material effect on the Company's financial condition or results of operations. Management believes there were no material changes to capital resources as presented in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . As ofSeptember 30, 2020 , the Company and the Bank met all capital adequacy requirements to which they were subject. 33 --------------------------------------------------------------------------------CSB BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
During October 2019 , the federal banking agencies adopted an optional community
bank leverage ratio ("CBLR"). Depository institutions and depository institution
holding companies, that have less than $10 billion in total consolidated assets
and have a tier 1 leverage ratio of greater than 9 percent, are considered
qualifying community banking organizations and are eligible to opt into the
community bank leverage ratio framework. Additionally, such insured depository
institutions are considered to have satisfied the risk-based and leverage
capital requirements and will be considered well-capitalized under the rule,
effective January 1, 2020 . The Company met the well-capitalized ratios under the
new standard at both September 30, 2020 and December 31, 2019 but has not
elected to opt-in to the CBLR framework as of September 30, 2020 .
Capital Ratios
September 30, December 31,
2020 2019
Common Equity Tier 1 Capital To Risk Weighted Assets
Consolidated 15.8 % 14.3 %
Bank 15.3 % 14.1 %
Tier 1 Capital To Risk Weighted Assets Ratio
Consolidated 15.8 % 14.3 %
Bank 15.3 % 14.1 %
Total Capital To Risk Weighted Assets Ratio
Consolidated 17.0 % 15.5 %
Bank 16.5 % 15.3 %
Tier 1 Leverage Ratio
Consolidated 8.9 % 10.0 %
Bank 8.6 % 9.9 %
LIQUIDITY
September 30, December 31,
(Dollars in millions) 2020 2019 Change
Cash and cash equivalents $ 198 $ 102 $ 96
Available from FHLB 97 97 0
Unpledged AFS securities at fair market value 46 61 (15 )
$ 341 $ 260 $ 81
Net deposits and short-term liabilities $ 822 $ 673 $ 149
Liquidity ratio 41.5 % 38.6 %
Minimum board approved liquidity ratio 20.0 20.0
Liquidity refers to the Company's ability to generate sufficient cash to fund
current loan demand, meet deposit withdrawals, pay operating expenses, and meet
other obligations. Liquidity is monitored by the Company's Asset Liability
Committee. Other sources of liquidity include, but are not limited to, purchases
of federal funds, advances from the FHLB, adjustments of interest rates to
attract deposits, brokered deposits, and borrowing at the Federal Reserve
discount window. Management believes that its sources of liquidity are adequate
to meet cash flow obligations for the foreseeable future.
The liquidity and on-hand liquidity ratios were 41.5% and 23.7% at
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements (as such term is defined in applicableSecurities and Exchange Commission (the "Commission") rules) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. 34
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