CSB Bancorp, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following management’s discussion and analysis focuses on the consolidated financial condition of the Company on September 30, 2024 as compared to December 31, 2023, and the consolidated results of operations for the three and nine months ended September 30, 2024 compared to the same periods in 2023. The purpose of this discussion is to provide the reader with a more thorough understanding of the Consolidated Financial Statements. This discussion should be read in conjunction with the interim condensed Consolidated Financial Statements and related footnotes contained in Part I, Item 1 of this Quarterly Report.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report are not historical facts but rather are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates”, “plans”, “expects”, “believes”, and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company’s actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows, and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement.

The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by applicable law.

FINANCIAL CONDITION

Total assets increased $30 million to $1.21 billion at September 30, 2024 compared to $1.18 billion at December 31, 2023. During the nine months ended September 30, 2024, securities decreased $23 million, net loans increased $18 million, and cash and cash equivalents increased $32 million. Deposits and short-term borrowings increased $26 million.

Net loans increased $18 million, or 3%, as commercial and commercial real estate loans increased $1 million, or less than 1%, compared to December 31, 2023 and residential real estate loans increased $8 million, or 5%, from December 31, 2023. Construction loans increased $8 million, or 16%, from December 31, 2023. Consumer refinance activity slowed from previous periods on mortgage loans, while home purchase activity remained stable despite limited inventory, and home equity line balances increased by $2 million. Residential mortgage loan originations, including home equity lines, for the nine months ended September 30, 2024 totaled $39 million, a slight increase from $38 million in mortgage originations during the nine months ended September 30, 2023. Mortgage loan originations sold into the secondary market were $7 million and $3 million, respectively during the nine months ended September 30, 2024 and September 30, 2023. The Bank originates and sells primarily fixed rate thirty-year mortgages into the secondary market.

The allowance for credit losses for loans increased $617 thousand from December 31, 2023 to $7.2 million. A previously identified commercial lending relationship totaling $6.4 million experienced credit deterioration and was placed on nonaccrual during the second quarter 2024 while the company was being offered for sale. On July 23, 2024 the bank was notified that the borrower's company would cease operations. The credit was charged down in third quarter 2024 by $4.1 million as the liquidation of assets is in process.

Net charge-offs were $4.3 million, or an annualized 0.81% of average loans, in the current nine-month period compared to net recoveries of $125 thousand, or (0.03%) of average loans in the year-ago nine-month period. At September 30, 2024, the allowance for credit losses to total loans was 1%. We believe the allowance level is appropriate given the level of problem loans and composition of the overall loan portfolio in the current economic environment.

Nonperforming loans increased $3 million to $3.4 million, or 0.47%, of total loans from $396 thousand, or 0.06% of total loans, on December 31, 2023. For the nine months ended September 30, 2024, $7 million in loans were placed on nonaccrual status, $253 thousand in paydowns were received, and $4.1 million in loans were charged-off due to non-payment.

(Dollars in thousands)

The ratio of gross loans to deposits was 67% at September 30, 2024, compared to 68% at December 31, 2023.

The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations, or trust preferred securities. Management has considered industry analyst reports, sector credit reports, and the volatility within the bond market in concluding that the gross unrealized losses of $34 million within the available-for-sale and held-to-maturity portfolios as of September 30, 2024, was primarily the result of current market yields compared to the yields at the time the investments were purchased by the Company and not due to credit quality. As a result, all embedded security losses on September 30, 2024, are considered temporary and no allowance for credit loss is necessary.

The weighted average life of total debt securities was 5.23 years at September 30, 2024 as compared to 5.09 years at December 31, 2023. If interest rates declined 100 basis points, the weighted average life was estimated to fall to 4.98 years at September 30, 2024 and 4.98 years at December 31, 2023. If interest rates rose 100 basis points the weighted average life would be expected to increase to 5.42 years at September 30, 2024 and 5.16 years at December 31, 2023.

Deposits increased $43 million, or 4%, from December 31, 2023 with noninterest-bearing deposits decreasing approximately $15 million, or 5%, and interest-bearing deposit accounts increasing approximately $58 million, or 8%. Total deposits as of September 30, 2024 are $1.07 billion, or 5%, above September 30, 2023 deposit balances. On a year over year comparison, decreases were recognized in noninterest-bearing demand deposits of $13 million, interest bearing demand accounts of $19 million, and savings accounts of $7 million. Increases were recognized in money market accounts of $29 million, and time deposits of $63 million. Deposits have increased as customers move excess liquid funds into money market accounts and time certificates of deposit to take advantage of the increased interest rates. The estimated amount of uninsured deposits was $275 million, $254 million, and $267 million as of September 30, 2024, December 31, 2023, and September 30, 2023, respectively.

Short-term borrowings consisting of overnight repurchase agreements with retail customers decreased $17 million, or 46%, to $19 million at September 30, 2024 as compared to December 31, 2023 as customers moved money into higher interest rate money market and time deposit accounts. Other borrowings decreased $458 thousand as the Company repaid FHLB advances.

Total shareholders’ equity amounted to $115 million, or 9.5%, of total assets at September 30, 2024, an increase of $7 million, or 7%, from $108 million at December 31, 2023. The increase in shareholders’ equity during the nine months ended September 30, 2024 was due to net income of $7.7 million, other comprehensive income of $3 million, less cash dividends of $3 million, and treasury stock repurchase of $397 thousand. Total accumulated other comprehensive loss ("AOCL") decreased during the nine months ended September 30, 2024 due to decreases in interest rates and improvements in pricing in government agency and corporate bonds as AFS securities are marked to fair market value. This remaining unrealized loss in securities is temporary and is adjusted monthly for additional interest rate fluctuations, principal paydowns, calls, and maturities. The Company and the Bank met all regulatory capital requirements at September 30, 2024 as shown in the Capital Resources section of this report.

RESULTS OF OPERATIONS

Three months ended September 30, 2024 and 2023

For the quarters ended September 30, 2024 and 2023, the Company recorded net income of $3.1 million and $3.5 million and $1.18 and $1.30 per share, respectively. The $300 thousand decrease in net income for the period was primarily the result of the provision for credit losses and off-balance sheet commitments of $700 thousand compared to the provision for credit losses in the prior year period of $177 thousand. The increase of $377 thousand in net interest income and $104 thousand increase in noninteret income was offset by a $388 thousand increase in noninterest expenses. The federal income tax provision decreased $94 thousand. Pre-provision net revenue ("PPNR"), (a non-GAAP measure), totaled $4.6 million for the quarter ended September 30, 2024, an increase of $93 thousand, or 2%, from the prior year's third quarter.

Return on average assets and return on average equity were 1.05% and 11.14%, respectively, for the three-month period of 2024, compared to 1.19% and 13.63%, respectively for the same quarter in 2023.

Average Balance Sheets and Net Interest Margin Analysis

(Dollars in thousands)

30

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

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

3 Average loan balances include nonaccrual loans.

4 Taxable equivalent adjustments have been computed assuming a 21% tax rate in 2024 and 2023 (non-GAAP).

Interest income for the quarter ended September 30, 2024, was $13.2 million representing a $1.5 million, or 13% increase, compared to the same period in 2023. This increase was primarily due to increased interest rates and increased volumes on loans and interest-earning deposits in other banks. These increases were partially offset by the volume decreases in taxable securities to the comparable period. Average interest-earning deposit rates decreased 4 basis points while loan rates rose 41 basis points, and taxable securities' interest rates rose 7 basis points for the quarter ended September 30, 2024 as compared to the same period in 2023. Interest expense for the quarter ended September 30, 2024 was $4 million, an increase of $1.1 million, or 38%, from the same quarter in 2023. The increase in interest expense occurred primarily due to the increase in interest rates and volume increases of money market and time deposit accounts for the quarter ended September 30, 2024.

For the quarter ended September 30, 2024, the bank recognized net charge-offs of $4 million, compared to $119 thousand net recoveries for the same quarter in 2023. The provision for credit losses on loans in the current quarter of $645 thousand, compared to a provision of $13 thousand in the same quarter ended 2023. The company recorded a $55 thousand provision for credit loss on off-balance commitments in the third quarter 2024 compared to a $164 thousand provision in the third quarter of 2023. The quarter increase results primarily from a single commercial credit facility that ceased operations on July 23, 2024. The credit facility has been charged down by $4.1 million with the company's assets being liquidated through the court system which increased the historical loss component of the calculation.

Economic indicators reflect a leveling off in residential real estate prices and increases in unemployment rates. The provision for credit losses is determined based on management’s calculation of the adequacy of the allowance for credit losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.

Noninterest income increased $104 thousand, or 6%, compared to third quarter of 2023. The increase was primarily the result of a $59 thousand increase in gain on sale of mortgage loans to the secondary market, a $28 thousand increase in the unrealized gain on equity securities, a $24 thousand increase in earnings on bank owned life insurance, and a $15 thousand increase in trust and brokerage fees. Offsetting decreases were recognized in service charges related to deposit overdraft fees and credit card fees.

Noninterest expense increased $388 thousand, or 6%, from third quarter 2023. Salary and employee benefit costs increased $227 thousand, or 7%, compared to the prior year quarter with increases in base salary, insurance, and social security taxes. Marketing and public relation costs increased $38 thousand, or 31%, with increases in community related activities. Professional and directors’ fees increased $25 thousand, or 7%, state financial institutions tax increased $24 thousand, or 13%, due to the increase in capital. Debit card expenses increased $7 thousand, or 4%, primarily with increases in processing. Software expense increased $13 thousand, or 3%. Equipment expense increased $25 thousand, or 13%, with increasing costs of maintenance contracts and repairs. The Company’s third quarter efficiency ratio increased to 58.2% compared to 57.0% in the prior year.

Federal income tax expense decreased $94 thousand, or 11%, for the quarter ended September 30, 2024 as compared to the third quarter 2023. The provision for income taxes was $756 thousand (effective rate of 19.4%) for the quarter ended September 30, 2024, compared to $850 thousand (effective rate of 19.6%) for the same quarter ended 2023.

RESULTS OF OPERATIONS

Nine months ended September 30, 2024, and 2023

For the nine months ended September 30, 2024, and 2023, the Company recorded net income of $7.7 million and $11.1 million and $2.89 and $4.12 per share, respectively. The $3.4 million decrease in net income for the nine-month period was primarily the result of the provision for credit losses and off-balance sheet commitments of $4.7 million compared to the provision for credit losses in the prior year period of $286 thousand and an increase in noninterest expenses of $576 thousand. These decreases to net income were partially offset by an increase in noninterest income of $256 thousand and an increase in net interest income of $491 thousand. PPNR totaled $14.2 million for the nine months ended September 30, 2024, an increase of $171 thousand, or 1%, from the prior year's nine months.

The federal income tax provision was $918 thousand lower during the nine-month period in 2024 than in 2023. Return on average assets and return on average equity were 0.88% and 9.30%, respectively, for the nine months ended September 30, 2024, compared to 1.28% and 14.85%, respectively for the same period in 2023.

(Dollars in thousands)

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

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

3 Average loan balances include nonaccrual loans.

4 Taxable equivalent adjustments have been computed assuming a 21% tax rate in 2024 and 2023 (non-GAAP).

Interest income for the nine months ended September 30, 2024, was $38 million representing a $5 million increase, or 14%, compared to the same period in 2023. This increase was primarily due to volume and yield increases on loans along with rate increases on interest-earning deposits in other banks and taxable securities for the period ended September 30, 2024, as compared to the same period in 2023. Interest expense for the nine months ended September 30, 2024, was $11 million, an increase of $4 million, or 62%, from the same period in 2023. The increase in interest expense occurred primarily due to an increase in rates on most interest-bearing liabilities for the nine months ended September 30, 2024, as well as a shift in balances into higher rate time deposits.

For the nine months ended September 30, 2024, the provision for credit losses and off-balance sheet was $5 million, compared to $286 thousand for the same period in 2023. For more discussion see Results of Operations, three months. The provision for credit losses is determined based on management’s calculation of the adequacy of the allowance for credit losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.

Noninterest income for the nine months ended September 30, 2024, was $5.3 million, an increase of $256 thousand, or 5%, compared to the same period in 2023. Fees from trust and brokerage services increased $182 thousand for the period due to a one time fee collected in the first quarter. The gain on the sale of mortgage loans to the secondary market increased $109 thousand to $215 thousand for the nine months ended September 30, 2024, as improved pricing for smaller balance mortgage loans attracted buyers and some mortgage loan refinancing. Earnings on bank owned life insurance policies increased $65 thousand for the period. Service charges on deposit accounts decreased $52 thousand, or 6%, compared to the same period in 2023 primarily from decreases in overdraft fees. Credit card fee income decreased $51 thousand, or 10%.

Noninterest expenses for the nine months ended September 30, 2024, increased $576 thousand, or 3%, compared to the same period in 2023. Professional and director fees increased $87 thousand for the nine months ended September 30, 2024, as compared to the same period in 2023.Debit card expense increased $74 thousand, or 15%, primarily due to processing increases. Financial institutions tax increased $72 thousand, or 13%, based on increased capital. Occupancy and equipment expenses increased $70 thousand over the same period in 2023 with an increase in maintenance expense. Salaries and employee benefits increased $69 thousand, or less than 1%. Marketing and public relations expense increased $49 thousand, or 13%, with increases in community related activities. Software increased $35 thousand, or 3%.

Federal income tax expense decreased $918 thousand, or 34%, for the nine months ended September 30, 2024, as compared to the same period in 2023. The provision for income taxes was $1.8 million (effective rate of 18.9%) for the nine months ended September 30, 2024, compared to $2.7 million (effective rate of 19.7%) for the same period ended 2023.

CAPITAL RESOURCES

The Company maintained a strong capital position with tangible common equity to tangible assets of 9.2% at September 30, 2024 compared with 8.8% at December 31, 2023.

Consistent with the Board of Director’s commitment to public confidence and safe and sound banking operations, capital targets and minimum risk-based capital ratios for CSB were established to maintain excess capital to well-capitalized standards. To be considered well-capitalized, an institution must have a total risk-based capital ratio of at least 10%, a tier 1 capital ratio of at least 8%, a leverage capital ratio of at least 5%, a common equity tier 1 (“CET1”) ratio of at least 6.5% and must not be subject to any order or directive requiring the institution to improve its capital level. An adequately capitalized institution has a total risk-based capital ratio of at least 8%, a tier 1 capital ratio of at least 6%, a CET1 ratio of at least 4.5%, and a leverage ratio of at least 4%.

Failure to meet specified minimum capital requirements could result in regulatory actions by the Federal Reserve or Ohio Division of Financial Institutions that could have a material effect on the Company’s financial condition or results of operations. Management believes there were no material changes to capital resources as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. As of September 30, 2024, the Company and the Bank met all capital adequacy requirements to which they were subject.

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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 the Company’s Asset Liability Committee. Other sources of liquidity include, but are not limited to, purchases of federal funds, advances from the FHLB, adjustments of interest rates to attract deposits, brokered deposits, and borrowing at the Federal Reserve discount window. Additionally, the Company could sell all of its AFS securities and the loss would not cause a change in the capital adequacy classification. Management believes its sources of liquidity are adequate to meet cash flow obligations for the foreseeable future.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements (as such term is defined in applicable Securities and Exchange Commission (the “Commission”) rules) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

PER SHARE DATA

Earnings per share is computed based on the weighted average number of shares of common stock outstanding during each year. The company currently maintains a simple capital structure, thus, there are no dilutive effects on earnings per share.

The weighted average number of common shares outstanding for earnings per share computations was as follows:

(Dollars in thousands, except per share data)

35

CONTROLS AND PROCEDURES

Ohio's unemployment rate rose to 4.5% in September 2024 which was up from 3.7% in December 2023. Holmes County, where the bank is headquartered, is reporting an unemployment rate of 3.2% in September 2024. Of the counties within the bank's footprint, Stark County reported the highest unemployment rate at 4.4%, while Tuscarawas and Wayne Counties posted unemployment rates of 4.0% and 3.5% respectively in September 2024. The rate of inflation, as measured by the Consumer Price Index, decreased to 2.4% on a year over year basis at September 2024, following average inflation rates of 4.1% in 2023 and 8.0% in 2022. The rate continues to be above the Federal Reserve target rate of 2%. The Federal Reserve began to reduce the federal funds target rate by 0.50% in September 2024, and again by 0.25% in November 2024, to a range of 4.50% to 4.75%.

Management performs a quarterly analysis of the Company’s interest rate risk over a twenty-four-month horizon. The analysis includes two balance sheet models, one based on a static balance sheet and one on a dynamic balance sheet with projected growth in assets and liabilities. All balance sheet positions, and interest rate projections are currently within the Company’s board-approved policy for both the twelve- month and twenty-four-month periods.

The following table presents an analysis of the estimated sensitivity of the Company’s annual net interest income to sudden and sustained -400 through +400 basis point changes, in 100 basis point increments, in market interest rates at September 30, 2024 and December 31, 2023. The net interest income reflected is for the first twelve-month period of the modeled twenty-four-month horizon. The underlying balance sheet for illustrative purposes is dynamic with projected growth in assets and liabilities.

September 30, 2024

(Dollars in thousands)

36

CONTROLS AND PROCEDURES

With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that:

(a) information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure;

(b) information required to be disclosed by the Company in this Quarterly Report on Form 10-Q would be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms; and

(c) the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that material information relating to the Company and its consolidated subsidiary is made known to them, particularly during the period for which the Company’s periodic reports, including this Quarterly Report on Form 10-Q, are being prepared.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORM 10-Q

Quarter ended September 30, 2024