CSB Bancorp, Inc.: Form 10-K for the period ended Dec 31, 2022

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.

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 Services, LLC, 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, Stark, Tuscarawas, Wayne, and portions of surrounding counties in Ohio. The Bank’s market area has historically exhibited relatively stable economic conditions. Economic activity slowed slightly in the fourth quarter of 2022 after growing modestly earlier in the year. Continued inflationary pressure led to households spending on necessities as opposed to discretionary items. Higher interest rates and increasing borrowing costs are also contributing to a slowing in loan demand. Reported unemployment levels in December 2022 ranged from 2.9% to 4.0% in the four primary counties served by the Bank. These levels increased from December 2021 in all four counties served by the Bank. Labor demand increased moderately in some sectors while wage pressures have eased somewhat over the past year. The local housing market continues to be strong with low inventory levels keeping home prices from declining. Construction costs remain high and higher interest rates have also contributed to slowing construction activity.

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 $500,000 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 $500,000 and a sample of commercial loan relationships greater than $1,000,000. 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,” has a written action plan created specifically for the loan relationship and is subject to ongoing review at least quarterly 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 and fixed and include operating lines of credit and term loans made to 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% of the lower of cost or appraised value. 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 80% of cost or appraised 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 90% 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 125% of Dealer Invoice on RV’s or 110% of the Manufacturer’s Suggested Retail Price (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 “J.D. Power” 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 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, 2022, 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

On December 31, 2022, the Company had 183 employees, 154 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 financial services industry is highly competitive. In its primary market area of Holmes, Stark, Tuscarawas, Wayne 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, private lenders, 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 Company’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.

Management believes the primary factors in competing for loans and deposits are interest rates, availability of services, quality of customer service, convenience, and name recognition. Some of the Company’s competitors may have greater resources and as such, higher lending limits, or fewer regulatory constraints and lower cost structures, all of which may adversely affect the Company’s ability to compete.

Investor Relations

The Company’s website address is www.csb1.com (http://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. References to our website in this Annual Report on Form 10-K are provided as a convenience and do not constitute, and should not be deemed, an incorporation by reference of the information contained on, or available through, the website, and such information should not be considered part of this Annual Report on Form 10-K.

In addition, the Company’s filings are available on the SEC’s website at www.sec.gov (http://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, borrowers, the deposit insurance funds of the FDIC (the “DIF”), 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 of 1956, as amended (the “BHC Act”). Pursuant to the Gramm-Leach-Bliley Act of 1999 (“GLBA”), a qualifying bank holding company may elect to become a financial holding company and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and not otherwise permissible for a bank holding company, if: (i) the holding company is "well managed" and "well capitalized" and (ii) each of its subsidiary banks (a) is well capitalized under the Federal Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, (b) is well managed, and (c) has at least a "satisfactory" rating under the Community Reinvestment Act (the “CRA”). CSB has been a financial holding company since 2005. No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB. The financial holding company and its subsidiaries must continue to meet the above-described requirements in order to continue to engage in activities that are financial in nature without being subjected to regulatory action or restriction, which could include divestiture of the subsidiary or subsidiaries.

GLBA defines “financial in nature” to include securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking; and activities that the FRB has determined to be closely related to banking. CSB is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, the Exchange Act, and the regulations rules and 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 DIF, and the Bank is subject to deposit insurance assessments to maintain the DIF. In addition, the Bank is subject to regulations promulgated by the Consumer Financial Protection Bureau (the “CFPB”), which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended (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 contained or referenced herein.

Regulation of Bank Holding Companies

As a financial holding company, CSB’s activities are subject to regulation by the FRB. CSB is subject to regular examinations by the FRB and is required to file reports and such additional information as the FRB may require.

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.

Economic Growth, Regulatory Relief and Consumer Protection Act

On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was signed into law. The Regulatory Relief Act repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all but the largest banks (those with consolidated assets in excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including CSB, are no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion, including CSB, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied only to banks with assets in excess of $50 billion and so did not apply to CSB even before the enactment of the Regulatory Relief Act.

Current Expected Credit Loss Model

In December 2019, the federal banking agencies issued a final rule to address regulatory treatment of credit loss allowances under the current expected loss (‘CECL”) models. The rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model. Concurrent with the enactment of the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended, federal banking agencies issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL prior to the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. On August 26, 2020, the federal banking agencies issued a final rule that made certain technical changes to the interim final rule, including expanding the pool of eligible institutions. The bank is required to adopt the CECL model after January 1, 2023, since it is a smaller reporting company.

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 incentivizes 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.

In July 2013, the United States banking regulators issued new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). Community banking organizations, including CSB, began transitioning to the new rules on January 1, 2015. The new minimum capital requirements became effective on January 1, 2015; while a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016 through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019.

The Basel III Capital Rules include (i) a minimum common equity tier 1 capital ratio of 4.5%, (ii) a minimum tier 1 capital ratio of 6.0%, (iii) a minimum total capital ratio of 8.0%, and (iv) a minimum leverage ratio of 4.0%.

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).

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 Basel III Capital Rules place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers in the event 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. Pursuant to the FRB’s Small Bank Holding Company Policy statement (“SBHC Policy”), as amended in September 2018, a bank holding company with assets of less than $3 billion and meeting certain other requirements is not required to comply with the consolidated capital requirements until such company exceeds $3 billion in assets or is otherwise determined by the FRB not to qualify as a small bank holding company. On December 31, 2022, 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 the Basel III Capital Rules did not have a material impact on CSB’s or the Bank’s capital ratios.

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 10.0%, a tier 1 risk-based capital ratio of at least 8.0%, and a leverage ratio of at least 5.0%, 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, 2022, the Bank met the ratio requirements in effect at that date to be deemed “well-capitalized.” See Note 12 – Regulatory Matters of the Notes to Consolidated Financial Statements, located in Item 8 Financial Statements and Supplementary Data of this 10-K. 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 DIF, and the Bank is assessed quarterly deposit insurance premiums to maintain the DIF. 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.

The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the insured institution and may also impose special assessments in emergency situations. The premiums fund the DIF. Pursuant to the Dodd-Frank Act, the FDIC has established reserve ratios. On June 30, 2019, the reserve ratios were met and the FDIC applied credits for banks with assets of less than $10 billion ("small bank credits") beginning September 30, 2019 through the June 2020 premium payment. The FDIC rules further changed the method of determining risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk.

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.

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 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.

FRB policy requires CSB to provide notice to the FRB in advance of the payment of a dividend to CSB’s shareholders under certain circumstances and states that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Additionally, The Ohio Revised Code, restricts the amount a Bank can dividend if the total amount of all dividends, including the proposed dividend, declared by the Bank in any calendar year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the Ohio Division of Financial Institutions.

Consumer Protection Laws and Regulations

Banks are subject to regular examination to ensure compliance with federal statutes and regulations applicable to their business, including consumer protection statutes and implementing regulations. The Dodd-Frank Act established the CFPB, which has extensive regulatory and enforcement powers over consumer financial products and services. The CFPB has adopted numerous rules with respect to consumer protection laws, amending some existing regulations and adopting new ones, and has commenced enforcement actions. The following are just some of the consumer protection laws applicable to the Bank:

• Community Reinvestment Act of 1977: imposes a continuing and affirmative obligation to fulfill the credit needs of its entire community, including low- and moderate-income neighborhoods.
• Equal Credit Opportunity Act: prohibits discrimination in any credit transaction on the basis of any of various criteria.
• Truth in Lending Act: requires that credit terms are disclosed in a manner that permits a consumer to understand and compare credit terms more readily and knowledgeably.
• Fair Housing Act: makes it unlawful for a lender to discriminate in its housing-related lending activities against any person on the basis of any of certain criteria.
• Home Mortgage Disclosure Act: requires financial institutions to collect data that enables regulatory agencies to determine whether the financial institutions are serving the housing credit needs of the communities in which they are located.
• Real Estate Settlement Procedures Act: requires that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers’ costs.
• Privacy provisions of the Gramm-Leach-Bliley Act: requires financial institutions to establish policies and procedures to restrict the sharing of non-public customer data with non-affiliated parties and to protect customer information from unauthorized access.

The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of specific banking or consumer finance law.

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

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the “Patriot Act”), and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity.

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

Office of Foreign Assets Control Regulation

The United States Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. CSB is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

Cybersecurity

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of the financial institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack. If CSB fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

In November 2021, federal banking agencies issued a final rule that became effective in May 2022 requiring banking organizations that experience a cybersecurity incident to notify certain entities. A cybersecurity incident occurs when actual or potential harm to the confidentiality, integrity, or availability of information or an information system occurs, or there is a violation or imminent threat of a violation to banking security policies and procedures. The affected bank must notify its respective federal regulator of the cybersecurity incident as soon as possible and no later than 36 hours after the bank determines a cybersecurity incident that rises to the level of a notification incident has occurred. These notifications are intended to promote early awareness of threats to banking organizations and will help banks react to those threats before they manifest into larger incidents. This rule also requires bank service providers to notify their bank organization customers of a cybersecurity incident that has caused, or is reasonably likely to cause, a material service disruption or degradation for four or more hours.

Furthermore, once final rules are adopted, the Cyber Incident Reporting for Critical Infrastructure Act, enacted in March 2022, will require certain covered entities to report a covered cyber incident to the U.S. Department of Homeland Security’s Cybersecurity & Infrastructure Security Agency (“CISA”) within 72 hours after it reasonably believes an incident has occurred. Separate reporting to CISA will also be required within 24 hours, if a ransom payment is made as a result of a ransomware attack.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. CSB expects this trend of state-level activity in those areas to continue and is continually monitoring developments in the states in which our customers are located.

In the ordinary course of business, CSB relies on electronic communications and information systems to conduct its operations and to store sensitive data. CSB employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. CSB employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of CSB’s defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, CSB has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, CSB’s systems and those of its customers and third-party service providers are under constant threat and it is possible that CSB could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking and other technology-based products and services by us and our customers.

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

Public companies will be required, once stock exchanges adopt additional listing requirements under the Dodd-Frank Act and rules adopted by the SEC in October 2022, to adopt and implement “clawback” procedures policies for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating an accounting restatement due to material noncompliance with financial reporting requirements. This clawback policy is intended to apply to compensation paid within the three completed fiscal years immediately preceding the date the issuer is required to prepare a restatement a three-year look-back window of the restatement and would cover all executives (including former executives) who received incentive awards.

Future Legislation

Various and significant legislation affecting financial institutions and the financial industry is from time to time adopted by the U.S. Congress and state legislatures, and regulatory agencies frequently adopt or amend regulations. Such legislation and regulation may continue to change banking laws and regulations 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.

Statistical Disclosures

The following schedules present, for the periods indicated, certain financial and statistical information of the Company as required under the SEC’s “Subpart 1400 of regulation S-K”, as amended on September 11, 2020, or a specific reference as to the location of required disclosures in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) or Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

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 in Item 7 MD&A is incorporated by reference herein.

The information set forth under the heading, “Rate/Volume Analysis of Changes in Income and Expense” located in Item 7 MD&A is incorporated by reference herein.

Investment Portfolio

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, 2022:

(Dollars in thousands)

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 21%.

Loan Portfolio

The following is a schedule of maturities of loans based on contract terms and assuming no amortization or prepayments, as of December 31, 2022:

(Dollars in thousands)

The following is a schedule of fixed rate and variable rate loans due after one year from December 31, 2022.

(Dollars in thousands)

For the year ended December 31, 2022, interest income recognized on impaired loans amounted to $50 thousand, while $73 thousand would have been recognized had the loans been performing under their contractual terms. For the year ended December 31, 2021, interest income recognized on impaired loans amounted to $147 thousand, while $265 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.

On December 31, 2022, no loans were identified for which 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. On December 31, 2022, these amounts, including impaired and nonperforming loans, amounted to $16 million of substandard loans and no doubtful loans.

As of December 31, 2022, there was one concentration of loans greater than 10% of total loans that is not otherwise disclosed as a category of loans in the loan portfolio table set forth above. Loans to lessors of non-residential buildings totaled $73 million, or 12% of total loans as of December 31, 2022.

Summary of Loan Loss Experience

The following schedule presents an analysis of net charge-offs (recoveries) to average loans, and related ratios for the years ended December 31:

(Dollars in thousands)

10

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.

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.

(Dollars in thousands)

Deposits

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

(Dollars in thousands)

The Bank does not have any material deposits by foreign depositors. The total uninsured portion of all deposit accounts greater than $250 thousand was $267 million as of December 31, 2022, and $265 million as of December 31, 2021. The following is a schedule of maturities of time certificates of deposit in amounts greater than $250 thousand as of December 31, 2022:

(Dollars in thousands)

The Bank operates sixteen banking centers as noted below:

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.

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.

2022 FINANCIAL REVIEW

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, commercial loans, real estate mortgage loans, consumer loans, IRAs, night depository facilities, and trust and brokerage services. Its customers are located primarily in Holmes, Stark, Tuscarawas, Wayne, and portions of surrounding counties in Ohio.

Economic activity in the Company’s market area declined moderately in the fourth quarter of 2022 after solid growth earlier in the year stemming from a continued recovery following the COVID-19 pandemic economic effects of 2020. Demand for goods and services slowed during the fourth quarter 2022 with households spending more on necessities and less on discretionary items. Supply chain challenges improved during the year. Consumer spending has softened due to inflation pressures and increased interest rates. Reported unemployment levels in December 2022 ranged from 2.9% to 4.0% in the four primary counties served by the Company. These levels increased from the December 2021 range of 2.0% to 3.5% in the four counties served by the Company. Labor demand remained solid as competition for workers has put upward pressure on labor costs. The local housing market continues to be strong with extremely low inventory levels. Residential construction has declined year over year with higher interest rates as the main factor reducing demand.

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. 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.

FINANCIAL DATA

The following table set forth certain selected consolidated financial information:

(Dollars in thousands, except per share data)

¹Net interest margin is shown on a fully taxable equivalent basis.

2Dividend payout ratio is calculated as dividends declared as a percentage of net income.

RESULTS OF OPERATIONS

Net Income

CSB’s 2022 net income was $13.3 million compared to $10.8 million for 2021, an increase of 23%. Total revenue, net interest income plus noninterest income, increased $4.2 million, or 12%, over the prior year to a total of $39.0 million. The provision for loan losses decreased to a $895 thousand recovery as compared to a $655 thousand recovery for the prior year. Noninterest expense increased $1.3 million, or 6% and the provision for income tax increased $656 thousand over the prior year due to an increase in taxable income. Basic and diluted earnings per share were $4.91, up 24% from the prior year. The return on average assets was 1.16% in 2022 compared to 0.97% in 2021 and return on average equity was 14.04% in 2022 compared to 11.27% in 2021.

Net Interest Income

(Dollars in thousands)

¹Taxable equivalent adjustments have been computed assuming a 21% tax rate in 2022, and 2021 (non-GAAP).

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 $4.8 million, or 17%, in 2022 compared to 2021. The increase was a result of a $5.3 million increase in interest income, partially offset by an increase of $484 thousand in interest expense. The FTE net interest margin increased to 2.98% from 2.63% in 2021.

Interest income increased $5.3 million, or 18%, in 2022 compared to 2021 primarily due to an increase of $4.1 million, or 155%, in taxable securities interest income due to an increase in average balances of $158 million and an increase in yield of 56 basis points ("bps"). Interest income on interest-earning deposits mainly held at the Federal Reserve increased $1.4 million in 2022 compared to 2021 primarily due to a 139 basis points yield increase. Interest income on loans decreased $109 thousand primarily due to a decrease of 22 basis points in yield which was partially offset by an increase in loan volume of $25 million. The decrease in yield occurred as Payckeck Prtection Program ("PPP") loans were forgiven by the Small Business Administration ("SBA"), the bank recognized origination fees of $176 thousand in interest income in 2022 as compared to $2.8 million in 2021 on the forgiven PPP loans.

Interest expense increased $484 thousand, or 24%, in 2022 as compared to 2021 primarily due to rate increases of 7 bps on deposits and 10 basis points on other borrowed funds. Average interest-bearing demand and savings deposit balances increased $16 million during the year as savings rates continued but at a lesser pace than the prior year as the increase in the money supply created by the government to offset pandemic economic decreases was being phased out to consumers and businesses. Average time deposit balances decreased $5.6 million, and the average interest rate decreased 18 bps.

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

AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS

(Dollars in thousands)

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.

4Interest income is shown on a fully tax-equivalent basis (non-GAAP), reconciled to the GAAP amount at the bottom of the table.

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

(Dollars in thousands)

¹ Changes 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.

2 Interest income is shown on a fully tax-equivalent basis (non-GAAP).

Provision (Recovery) For Loan Losses

The provision (recovery) 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 incurred net charge-offs inherent in the loan portfolio as of period end. During 2022 a recovery of credit losses of $895 thousand was recognized compared to a 2021 recovery of credit losses of $655 thousand. The recapture of provision for loan losses for the year primarily reflects the improvement in credit quality including the reduction of impaired and adversely classified loans, as well as the improvement in economic indicators including unemployment, residential real estate prices and consumer confidence. Nonperforming loans decreased $832 thousand from 2021 to 2022. See Financial Condition – Allowance for Loan Losses for additional discussion and information relative to the provision for loan losses.

Noninterest Income

(Dollars in thousands)

Noninterest income decreased $614 thousand, or 8%, in 2022 compared to the same period in 2021. Gain on sales of mortgage loans including mortgage servicing rights (“MSRs”) decreased $1.1 million due to fewer sales of real estate mortgage loans into the secondary market as many consumers took advantage of the large mortgage interest rate declines in 2021. The Bank sold $10 million in mortgage loans, including gains, in 2022 as compared to the sale of $47 million of loans in 2021. Trust service revenue decreased $105 thousand with market declines. Service charges on deposits, which are primarily customer overdraft fees, increased $235 thousand in 2022. Debit card interchange fees increased $55 thousand in 2022 compared to 2021 due to volume increases. Credit card interchange income increased $195 thousand as business credit card usage continued to increase. Earnings on bank owned life insurance increased $55 thousand.

Noninterest Expenses

(Dollars in thousands)

Noninterest expense increased $1.3 million, or 6%, in 2022 compared to 2021. Salaries and employee benefits increased $847 thousand from increases in base and incentive compensation of $575 thousand. The capitalization of employee costs of loan originations increased the amount recognized in salary expense by $250 thousand in 2022, a result of decreased origination of commercial and mortgage loans. Professional and director fees increased $367 thousand primarily due to an increase in third party assistance with contracting the bank's core vendor, increase of $64 thousand in legal expenses related to loan collections, $50 thousand increase in audit and accounting fees, and $33 thousand increase in director's fees. Marketing and public relations expense increased $90 thousand, or 20%, with increasing market coverage. Software expense increased $87 thousand, or 6%, due to full-year implementation of a new mobile banking platform along with core software provider increases. Equipment expense increased $67 thousand in 2022, as compared to 2021, with increased depreciation expense and equipment maintenance contracts. Occupancy expense increased $52 thousand primarily from depreciation from branch renovations, property taxes and insurance. An increase of $28 thousand in the Ohio financial institutions tax was recognized as capital increased. Debit card expense increased $24 thousand in 2022 due to increased volume. The FDIC insurance assessment decreased $133 thousand, or 28%, with improved credit quality and increased earnings. Other expenses decreased $85 thousand, or 3%.

Income Taxes

The provision for income taxes amounted to $3.2 million in 2022 as compared to $2.6 million in 2021. The slight increase in 2022 resulted from an increase in income. The corporate statutory tax rate was 21% for 2022 and 2021. The effective tax rate in 2022 and 2021 approximates 19%.

FINANCIAL CONDITION

Total assets of the Company were $1.2 billion on December 31, 2022 compared to $1.1 billion on December 31, 2021, representing an increase of $15 million, or 1%. Net loans increased $79 million, or 15%, while investment securities increased $90 million, or 29%, and total cash and cash equivalents decreased $157 million, or 65%. Deposits increased $21 million and short-term borrowings decreased $4 million, while other borrowings from the Federal Home Loan Bank (“FHLB”) decreased by $946 thousand, or 28%.

Securities

Total investment securities increased $90 million, or 29%, to $401 million at year-end 2022. CSB’s portfolio is primarily comprised of agency mortgage-backed securities, obligations of state and political subdivisions, U.S. Treasury notes, 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 tax-exempt general obligation and revenue bonds. As of December 31, 2022, 73% of such bonds held an S&P or Moody’s investment grade rating, and 27% were non-rated local issues. The municipal portfolio includes a broad spectrum of counties, towns, universities, and school districts with 83% of the portfolio originating in Ohio, and 17% in Pennsylvania. Gross unrealized security losses within the portfolio were 13% of total securities on December 31, 2022, reflecting interest rate increases, not credit downgrades.

During December 2021, investments with an amortized cost of approximately $79 million and a fair value of $77 million were transferred from available-for-sale to held-to-maturity as rising interest rates and a slowing of monthly cash payments were occurring. The transfer included $76 million of U.S. Government agency mortgage-backed securities and $3 million of U.S. Treasury notes. These bonds will still provide liquidity through pledging and for use as collateral against borrowings. No additional transfers to held to maturity were made in 2022, as bonds were assigned their held to maturity classification on their purchase date in 2022.

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 provide a portion of the Company’s liquidity needs and asset/liability management requirements.

Loans

Total loans increased $78 million, or 14%, during 2022 with increases in all loan categories. Volume increases were recognized as follows: commercial loans including PPP loans increased $5 million, or 4%, during 2022, with PPP loan forgiveness of $4 million offsetting the increase. Remaining PPP loan balances were $359 thousand as of December 31, 2022. Construction and land development loans increased $9 million, or 20% as several commercial projects were under construction and consumer demand slowed for 1-4 family residential construction at year end. Residential real estate loans increased $26 million, or 15%. Commercial real estate loans increased $37 million, or 19%. Commercial real estate and construction loan demand remained strong, however there was a slowing of commercial loan growth with increased competition from private lenders and excess business liquidity remaining from government stimulus programs.

The Company originated $69 million and $67 million of residential mortgage loans held in the portfolio, including residential construction, conventional 1-4 family, and equity line loans, which were predominately variable rate, in 2022 and 2021, respectively. The increase in interest rates slowed consumer demand for 1-4 family fixed-rate thirty-year residential mortgages which are sold into the secondary market as the Company sold $10 million of mortgages into the secondary market in 2022 as compared to $46 million in 2021. Demand for home equity loans strengthened in 2022, with balances increasing $7 million, as consumers opted to not refinance their lower fixed-rate mortgages. Installment loans increased $300 thousand.

Management anticipates modest economic growth in the Company’s local service areas will continue to improve. Commercial and commercial real estate loans, in aggregate, comprise approximately 58% of the total loan portfolio at year-end 2022 and 2021. Residential real estate loans remained at 31% of the portfolio in 2022 and 2021. Construction and land development loans increased to 9% of the portfolio as loan demand for commercial construction projects increased by $7 million and residential construction loans increased by $2 million, year over year. 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, Stark, Tuscarawas and Wayne counties in Ohio. The majority of the Company’s loan portfolio consists of commercial and industrial and commercial real estate loans. See concentration of credit discussion included in Note 3 in the Notes to Consolidated Financial Statements.

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 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.

(Dollars in thousands)

Allowance for Loan Losses

The allowance for loan losses is maintained at a level considered by management to be adequate to cover loan losses 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 (recoveries) for classified loans, and a provision (recovery) for the remainder of the portfolio based on historical data, including past charge-offs.

During 2022, $689 thousand in nonaccrual loans were collected, $226 thousand were charged-off, $93 thousand were returned to accrual, while $181 thousand new loans entered nonaccrual status.

(Dollars in thousands)

The allowance for loan losses totaled $6.8 million, or 1.09%, of total loans at year-end 2022 as compared to $7.6 million, or 1.39%, of total loans at year-end 2021. The Bank had net loan recoveries of $115 thousand in 2022 compared to net loan charge-offs of $1 thousand for 2021.

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 $256 thousand, or 0.04%, of loans at year-end 2022 compared to $1.1 million, or 0.20%, of loans at year-end 2021. Impaired loans were $1 million at year-end 2022 as compared to $2 million at year-end 2021. 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 decreased $452 thousand to $13.4 million at year-end 2022 with depreciation expense exceeding purchases. Total bank-owned life insurance increased from $24 million at year-end 2021 to $24.7 million at year-end 2022 with increasing cash surrender values. There was no other real estate owned on December 31, 2022 or 2021. The Company recognized a net deferred tax asset of $3 million on December 31, 2022 compared to a net deferred tax asset of $325 thousand on December 31, 2021. The increase in the net deferred tax asset is a result of the increase in the gross unrealized losses on available-for-sale securities which is a result of rising interest rates during 2022.

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 2022, at a lesser growth trajectory following the trillions of government stimulus relief pumped into the economy during the COVID-19 pandemic. Market rates on deposits and cash management products increased throughout the year as liquidity decreased in the industry.

(Dollars in thousands)

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 $4 million. Other borrowings, consisting of FHLB advances, decreased $946 thousand as the result of principal repayments. All FHLB borrowings on December 31, 2022, have long term maturities with monthly amortizing payments.

CAPITAL RESOURCES

Total shareholders’ equity was $95.9 million at December 31, 2022 compared to $97.3 million on December 31, 2021. This decrease was primarily due to a $10.8 million accumulated other comprehensive loss recognized on the available-for-sale securities portfolio resulting from increasing interest rates. Dividends were paid of $3.5 million and $388 thousand treasury stock was repurchased in 2022, which was partially offset by net income of $13.3 million. The Board of Directors approved a Stock Repurchase Program on February 26, 2021, allowing the repurchase of up to 5% of the Company’s then-outstanding common shares. Repurchased shares are to be held as treasury stock and are available for general corporate purposes. On December 31, 2022, approximately 102 thousand shares could still be repurchased under the current authorized program. Shares repurchased during 2022 totaled 10,448 shares for $388 thousand and shares purchased in 2021 totaled 24,326 shares for $939 thousand.

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 rules include: (a) a common equity tier 1 capital ratio of at least 4.5%, (b) a tier 1 capital ratio of at least 6.0%, (c) a minimum total capital ratio of at least 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 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. 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 (2) 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.

LIQUIDITY

(Dollars in thousands)

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 on December 31, 2022, and 2021. 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 2022 included net loan originations of $78 million and securities purchases of $144 million, offset by maturities and repayment of securities totaling $38 million. The Company’s financing activities included a $21 million increase in deposits, $4 million in cash dividends paid, and a $4 million decrease in short-term borrowings.

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 change 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 (2) 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 2022 and 2021. Interest rate risk policy limits are tested by measuring the anticipated change in net interest income over a two-year period. The tests assume quarterly ramped increases and decreases in market interest rates over twenty-four month hoizons, as compared to a stable rate environment or base model. The following table reflects the change to net interest income using a dynamic balance sheet for the first twelve-month periods of the twenty-four month horizon.

Net Interest Income at Risk

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, 2022 and 2021 for the first twelve-month periods of the twenty-four month horizon.

Economic Value of Equity at Risk

December 31, 2022

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. As of December 31, 2022, the percentage change of the market value of equity was outside of the board policy limit in the -400 basis point scenario and as of December 31, 2021, the percentage change was outside the board policy limits in the +200 through +400 basis point rate scenarios as well as the -100 basis point change. In the rising rate scenarios, the exceptions are positive as the market value of equity increases as interest rates increase. The technical fails have a favorable impact to equity in the rising rate scenarios. In the declining rate scenarios in 2022 and 2021, the duration of liabilities remains high and loan prepayment speeds increase causing decreases in the market value of equity of (39.4)% in the -400 basis point rate scenario as of December 31, 2022 and (18.4)% in the -100 basis point rate scenario as of December 31, 2021.

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, 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 on December 31, 2022, and 2021 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, 2022:

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 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.

The following table summarizes the Company’s other contractual obligations, exclusive of interest, as of December 31, 2022:

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 affecting 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 Note 1- Summary of Significant Accounting Policies. These policies, along with the other disclosures presented in the Notes to Consolidated Financial Statements and the 2022 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 requiring 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 a permanent decline 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), and loans past due 30 to 89 days, any significant changes in lending or loan review staff, an evaluation of current and future 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 are amortized using accelerated methods over their estimated weighted-average useful lives, approximating ten years.

The Company groups financial assets and financial liabilities measured at fair value in three (3) 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 traded 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.

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 2022 and 2021. 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

As of December 31, 2022, the Company had 1,082 shareholders of record and 2,707,576 outstanding shares of common stock.

Information contained in the section captioned, “Quantitative and Qualitative Disclosures about Market Risk” located in Item 7 MD&A is incorporated by reference herein.

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 contained in the Report On Management’s Assessment of Internal Control Over Financial Reporting in Item 8 of this Annual Report on Form 10-K is incorporated herein by reference

Changes in Internal Control over Financial Reporting

There have been no changes during the quarter ended December 31, 2022, 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, CSB’s 2022 internal control over financial reporting.