# CSB Bancorp, Inc.: Form 10-Q for the period ended Mar 31, 2017

- Company: [CSB Bancorp, Inc.](/companies/csbb.md) (CIK 880417)
- Form: 10-Q
- Filed: 2017-05-12
- Accepted by EDGAR: May 12, 2017, 11:46 ET
- Period: 2017-03-31
- Accession: 0001193125-17-168230
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/880417/000119312517168230/d310318d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/880417/000119312517168230/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2017-01-01 to 2017-03-31 | $384.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-01-01 to 2017-03-31 | $752.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | $1.7m | us-gaap:NetIncomeLoss |
| Operating cash flow | 3 months, 2017-01-01 to 2017-03-31 | $4.4m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2017-01-01 to 2017-03-31 | $113.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Total assets | at 2017-03-31 | $679.4m | us-gaap:Assets |
| Total liabilities | at 2017-03-31 | $612.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-03-31 | $66.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 18,052 characters.

The following management’s discussion and analysis focuses on the consolidated financial condition of the Company at March 31, 2017 as compared to December 31, 2016, and the consolidated results of operations for the three month period ended March 31, 2017 compared to the same period in 2016. 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 Consolidated Financial Statements and related footnotes contained in Part I, Item 1 of this Quarterly Report.

### FORWARD-LOOKING STATEMENTS

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

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

### FINANCIAL CONDITION

Total assets were $679 million at March 31, 2017 as compared to $670 million at December 31, 2016. During the three month period ended March 31, 2017, net loans increased $5 million. Cash, cash equivalents, and investments increased $4 million. On the liability side, deposits and repurchase agreements increased by $7 million.

Net loans increased $5 million, or 1%, during the three months ended March 31, 2017. The increase occurred as demand for both business and consumer loans within the bank’s markets continued. The bank has added lending and operations staff to accommodate the increase in demand. Commercial loans including commercial real estate loans increased $6 million, or 2%, while construction and land development loans decreased $6 million, or 27%, as loans transferred to permanent financing. Residential real estate loans increased $4 million, or 3%, and consumer loans increased $1 million, or 9% from December 31, 2016. Home purchase activity has increased and consumers continued to refinance their mortgage loans for lower long-term fixed rates. Residential mortgage loan originations for the three months ended March 31, 2017 and 2016 were $12 million and $7 million, respectively. Originations sold into the secondary market were $1.5 million during the three month period ended March 31, 2017 as compared to $1 million during the three months ended March 31, 2016. The Bank originates and sells primarily fixed-rate thirty year mortgages into the secondary market.

The allowance for loan losses as a percentage of total loans was 1.13% at March 31, 2017 as compared to 1.11% at December 31, 2016. Outstanding loan balances increased 1% to $5 million at March 31, 2017. A provision credit of $160 thousand and net recoveries of $323 thousand, increased the allowance for loan losses to $5.5 million at March 31, 2017.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nonaccrual loans increased during the first three months of 2017. For the three months ending March 31, 2017 loans totaling $3.9 million were placed on nonaccrual status, there were no charge-offs recognized, and pay downs of $552 thousand were received. The increase in nonaccrual loans was primarily due to two lending relationships comprised of several loans. Although payments on these loans were current, these loans were classified as nonaccrual loans as of the end of the first quarter. It is anticipated that collection efforts on several of the non-performing loans should result in repayment of their full carrying value.

*(Dollars in thousands)*

|  | March 31, 2017 | December 31, 2016 | March 31, 2016 |
| --- | ---: | ---: | ---: |
| Non-performing loans | $4,909 | $1,684 | $1,915 |
| Other real estate | — | — | — |
| Allowance for loan losses | 5,454 | 5,291 | 5,005 |
| Total loans | 480,709 | 475,449 | 433,453 |
| Allowance: Loans | 1.13% | 1.11% | 1.15% |
| Allowance: Non-performing loans | 1.1x | 3.1x | 2.6x |

The ratio of gross loans to deposits was 88.7% at March 31, 2017, compared to 87.9% at December 31, 2016.

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 $1.4 million within the available-for-sale and held-to-maturity portfolios as of March 31, 2017, were primarily the result of customary and expected fluctuations in the bond market and not necessarily the expected cash flows of the individual securities. As a result, all security impairments on March 31, 2017, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits increased $1 million, or less than 1%, from December 31, 2016 with noninterest bearing deposits increasing $3 million and interest-bearing deposit accounts decreasing $2 million. Total deposits as of March 31, 2017 are $32 million greater than March 31, 2016 deposit balances. On a year over year comparison, increases were recognized in noninterest-bearing demand deposits, interest-bearing demand, savings, and money market savings accounts.

Short-term borrowings consisting of overnight repurchase agreements with retail customers increased $5 million to $54 million at March 31, 2017 as compared to December 31, 2016 and other borrowings decreased $81 thousand as the Company repaid FHLB advances with required monthly amortization.

Total shareholders’ equity amounted to $67 million, or 9.9%, of total assets, at March 31, 2017, compared to $65 million, or 9.8%, of total assets, at December 31, 2016. The increase in shareholders’ equity during the three months ending March 31, 2017 was due to net income of $1.7 million and other comprehensive income of $331 thousand, partially offset by dividends declared of $549 thousand. The Company and the Bank met all regulatory capital requirements at March 31, 2017.

### RESULTS OF OPERATIONS

### Three months ended March 31, 2017 and 2016

For the quarters ended March 31, 2017 and 2016, the Company recorded net income of $1.7 million and $1.5 million and $0.63 and $0.54 per share, respectively. The $250 thousand increase in net income for the quarter was primarily the result of a $577 thousand increase in net interest income combined with a credit in the provision for loan losses of $160 thousand. The increase was partially offset by an increase in noninterest expenses of $657 thousand. Return on average assets and return on average equity were 1.05% and 10.54%, respectively, for the three month period of 2017, compared to 0.93% and 9.48%, respectively for the same quarter in 2016.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

### Average Balance Sheets and Net Interest Margin Analysis

*(Dollars in thousands)*

| ASSETS | For the three months ended March 31, 2017 Average balance | Average rate | 2016 Average balance | Average rate |
| --- | ---: | ---: | ---: | ---: |
| Interest-earning deposits in other banks | $12,493 | 1.04% | $15,833 | 0.71% |
| Federal funds sold | 990 | 0.70 | 538 | 0.45 |
| Taxable securities | 102,717 | 2.36 | 134,580 | 2.20 |
| Tax-exempt securities | 30,664 | 3.33 | 26,044 | 3.60 |
| Loans | 480,656 | 4.60 | 427,916 | 4.46 |
| Total earning assets | 627,520 | 4.10% | 604,911 | 3.81% |
| Other assets | 39,130 |  | 35,759 |  |
| **TOTAL ASSETS** | $666,650 |  | $640,670 |  |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY** |  |  |  |  |
| Interest-bearing demand deposits | $86,169 | 0.06% | $82,203 | 0.03% |
| Savings deposits | 164,924 | 0.13 | 167,181 | 0.07 |
| Time deposits | 111,560 | 0.74 | 118,591 | 0.75 |
| Other borrowed funds | 65,781 | 0.73 | 63,738 | 0.74 |
| Total interest bearing liabilities | 428,434 | 0.36% | 431,713 | 0.35% |
| Non-interest bearing demand deposits | 168,727 |  | 144,217 |  |
| Other liabilities | 2,929 |  | 2,115 |  |
| Shareholders’ Equity | 66,560 |  | 62,625 |  |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY** | $666,650 |  | $640,670 |  |
| Taxable equivalent net interest spread |  | 3.74% |  | 3.46% |
| Taxable equivalent net interest margin |  | 3.85% |  | 3.57% |

Interest income for the quarter ended March 31, 2017, was $6.2 million representing a $585 thousand increase, or a 10% improvement, compared to the same period in 2016. This increase was primarily due to average loan volume increasing $53 million for the quarter ended March 31, 2017 as compared to the first quarter 2016. The volume of taxable securities declined $32 million on a year over year comparison, resulting in a decrease in interest income of $186 thousand from the volume reduction. Interest expense for the quarter ended March 31, 2017 was $384 thousand, an increase of $8 thousand, or 2%, from the same period in 2016. The increase in interest expense occurred primarily due to an increase in rate on interest-bearing demand and savings deposits for the quarter ended March 31, 2017.

For the quarter ended March 31, 2017, the provision for loan losses reflected a $160 thousand credit, compared to a provision of $164 thousand for the same quarter in 2016. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends. Favorable settlements of prior charged-off loans and impaired loans can result in a reduction in the required allowance for loan losses and a negative provision, or credit, being reflected in current operations.

Noninterest income for the quarter ended March 31, 2017, was $1.1 million, an increase of $114 thousand, or 11%, compared to the same quarter in 2016. Service charges on deposit accounts increased $13 thousand, or 5%, compared to the same quarter in 2016 primarily from increases in overdraft fees. The gain on the sale of mortgage loans to the secondary market increased to $42 thousand for the quarter ending March 31, 2017, from $32 thousand in the same quarter in 2016. Debit card interchange income increased $26 thousand, or 10%, with greater fee income in the first quarter of 2017. A loss on asset retirement of $39 thousand was recognized during the first quarter of 2016 that did not recur in 2017.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fees from trust and brokerage services decreased $19 thousand to $207 thousand for the first quarter 2017 as compared to the same quarter in 2016 due to decreased assets under management.

Noninterest expenses for the quarter ended March 31, 2017 increased $657 thousand, or 16%, compared to the first quarter of 2016. The provision for unfunded loan commitments increased $540 thousand during first quarter 2017 related to an impaired commercial credit facility line on March 31, 2017. The allowance for unfunded loan commitments is included in other liabilities. Salaries and employee benefits increased $132 thousand, or 6%, a result of increases in base salary, medical, and other benefits. Debit card expenses increased $26 thousand, or 25%, compared to the first quarter 2016 due to the replacement of all outstanding debit cards with EMV chip cards. Software expense rose $23 thousand quarter over quarter with additional investment. Occupancy and equipment expenses decreased $38 thousand in 2017 over the first quarter of 2016 due to expense reductions that resulted from the reduction of office lease expense. FDIC assessment declined $33 thousand due to the new rate structure beginning third quarter 2016. Professional and director fees decreased $5 thousand for the quarter ended March 31, 2017 as compared to the first quarter 2016. The decrease resulted from a reduction of general legal and collection fees offset by an increase in internal audit fees

Federal income tax expense increased $108 thousand, or 17%, for the quarter ended March 31, 2017 as compared to the first quarter of 2016. The provision for income taxes was $752 thousand (effective rate of 30.3%) for the quarter ended March 31, 2017, compared to $644 thousand (effective rate of 30.3%) for the same quarter ended 2016.

### CAPITAL RESOURCES

CSB maintained a strong capital position with tangible common equity to tangible assets of 9.2% at March 31, 2017 compared with 9.1% at December 31, 2016.

Effective January 1, 2015 the Federal Reserve adopted final rules implementing Basel III and regulatory capital changes required by the Dodd-Frank Act. The rules apply to both the Company and the Bank. The rules established minimum risk-based and leverage capital requirements for all banking organizations. The quality of capital will be provided by the new measurement of Tier 1 capital called common equity tier 1 or (“CET1”). Effective with the March 31, 2015 Call Report the Bank selected the opt-out election for accumulated other comprehensive income (“AOCI”). This election will neutralize the effects of unrealized gains and losses from available-for-sale securities and other elements of the AOCI account for regulatory capital purposes.

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 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, 2016. As of March 31, 2017 the Company and the Bank met all capital adequacy requirements to which they were subject.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

| Common Equity Tier 1 Capital To Risk Weighted Assets | March 31, 2017 | December 31, 2016 |
| --- | ---: | ---: |
| Consolidated | 12.7% | 12.6% |
| Bank | 12.5% | 12.4% |
| Tier 1 Capital To Risk Weighted Assets Ratio |  |  |
| Consolidated | 12.7% | 12.6% |
| Bank | 12.5% | 12.4% |
| Total Capital To Risk Weighted Assets Ratio |  |  |
| Consolidated | 14.0% | 13.7% |
| Bank | 13.7% | 13.5% |
| Tier 1 Leverage Ratio |  |  |
| Consolidated | 9.4% | 9.3% |
| Bank | 9.3% | 9.1% |

### LIQUIDITY

*(Dollars in millions)*

|  | March 31, 2017 | December 31, 2016 | Change |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $38 | $37 | $1 |
| Unused lines of credit | 81 | 66 | 15 |
| Unpledged AFS securities at fair market value | 30 | 37 | (7) |
|  | $149 | $140 | $9 |
| Net deposits and short-term liabilities | $535 | $533 | $2 |
| Liquidity ratio | 27.9% | 26.1% | 1.8 |
| Minimum board approved liquidity ratio | 20.0% | 20.0% | — |

Liquidity refers to the Company’s ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, pay operating expenses, and meet other obligations. Liquidity is monitored by the Company’s Asset Liability Committee. Other sources of liquidity include, but are not limited to, purchases of federal funds, advances from the FHLB, adjustments of interest rates to attract deposits, brokered deposits, and borrowing at the Federal Reserve discount window. Management believes that its sources of liquidity are adequate to meet cash flow obligations for the foreseeable future.

The liquidity ratio was 27.9% and 26.1% at March 31, 2017 and December 31, 2016.

### 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## Market risk

As filed, 2,060 characters.

There have been no material changes in the quantitative and qualitative disclosures about market risks as of March 31, 2017, from the disclosures presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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. Minor variances with net interest income exceeding the board approved policy are being projected in the March 2017 dynamic balance sheet simulation coupled with immediate rate shocks. All other balance sheet positions and interest rate projections are currently within the Company’s board-approved policy.

The following table presents an analysis of the estimated sensitivity of the Company’s annual net interest income to sudden and sustained -100 through +400 basis point changes, in 100 basis point increments, in market interest rates at March 31, 2017 and December 31, 2016. 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.

*March 31, 2017*

*(Dollars in thousands)*

| Change in Interest Rates (basis points) | Net Interest Income | Dollar Change | Percentage Change | Board Policy Limits |
| --- | ---: | ---: | ---: | --- |
| +400 | $25,949 | $1,668 | 6.9% | +/- 25% |
| +300 | 25,558 | 1,277 | 5.3 | +/-15 |
| +200 | 25,133 | 852 | 3.5 | +/-10 |
| +100 | 24,706 | 425 | 1.8 | +/-5 |
| 0 | 24,281 | — | — | — |
| -100 | 23,421 | (860) | (3.5) | +/-5 |
| **December 31, 2016** |  |  |  |  |
| +400 | $25,519 | $1,889 | 8.0% | +/- 25% |
| +300 | 25,063 | 1,433 | 6.1 | +/-15 |
| +200 | 24,577 | 947 | 4.0 | +/-10 |
| +100 | 24,092 | 462 | 2.0 | +/-5 |
| 0 | 23,630 | — | — | — |
| -100 | 22,841 | (789) | (3.3) | +/-5 |

30

CONTROLS AND PROCEDURES

## Controls and procedures

As filed, 1,843 characters.

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 March 31, 2017

## Risk factors

As filed, 175 characters.

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Filed May 12, 2017.
Source: SEC EDGAR, the filing index for accession 0001193125-17-168230. Last ingested by Listed: Nov 2, 2026, 09:27 ET. No prices; not investment advice.