CSB BANCORP INC /OH - FORM 10-Q

CSB BANCORP INC /OH - FORM 10-Q - November 9, 2017

Attached files

Attached files

CSB BANCORP INC /OH Reports

file	filename
EX-32.2 - EX-32.2 - CSB BANCORP INC /OH	d472238dex322.htm
EX-32.1 - EX-32.1 - CSB BANCORP INC /OH	d472238dex321.htm
EX-31.2 - EX-31.2 - CSB BANCORP INC /OH	d472238dex312.htm
EX-31.1 - EX-31.1 - CSB BANCORP INC /OH	d472238dex311.htm
EX-11 - EX-11 - CSB BANCORP INC /OH	d472238dex11.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-21714

CSB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Ohio

34-1687530

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

91 North Clay, P.O. Box 232, Millersburg, Ohio 44654

(Address of principal executive offices)

(330) 674-9015

(Registrant’s telephone number)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).


Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date.


Common stock, $6.25 par value		Outstanding at November 1, 2017:
		2,742,242 common shares

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED September 30, 2017

Table of Contents

Part I - Financial Information


	Page
ITEM 1 – FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Comprehensive Income		5
Condensed Consolidated Statements of Changes in Shareholders’ Equity		6
Condensed Consolidated Statements of Cash Flows		7
Notes to Consolidated Financial Statements		8

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		27
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		34
ITEM 4 – CONTROLS AND PROCEDURES		35

Part II - Other Information

ITEM 1 – Legal Proceedings		36
ITEM 1A – Risk Factors		36
ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds		36
ITEM 3 – Defaults upon Senior Securities		36
ITEM 4 – Mine Safety Disclosures		36
ITEM 5 – Other Information		36
ITEM 6 – Exhibits		37
Signatures		38

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30,			December 31,
(Dollars in thousands)	2017			2016
ASSETS
Cash and cash equivalents
Cash and due from banks	$	15,592		$	13,590
Interest-earning deposits in other banks		29,780			23,248

Total cash and cash equivalents		45,372			36,838

Securities
Available-for-sale, at fair value		98,048			103,875
Held-to-maturity (fair value 2017-$26,431; 2016-$23,444)		26,475			23,883
Restricted stock, at cost		4,614			4,614

Total securities		129,137			132,372

Loans held for sale		1,108			—

Loans		509,458			475,449
Less allowance for loan losses		5,436			5,291

Net loans		504,022			470,158

Premises and equipment, net		8,906			8,749
Core deposit intangible		296			383
Goodwill		4,728			4,728
Bank-owned life insurance		13,131			10,361
Accrued interest receivable and other assets		4,124			6,389

TOTAL ASSETS	$	710,824		$	669,978

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Deposits
Noninterest-bearing	$	167,563		$	167,824
Interest-bearing		404,063			372,961

Total deposits		571,626			540,785

Short-term borrowings		45,057			48,742
Other borrowings		21,596			12,385
Accrued interest payable and other liabilities		2,707			2,651

Total liabilities		640,986			604,563

SHAREHOLDERS’ EQUITY
Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; outstanding (shares 2017 and 2016 - 2,742,242)		18,629			18,629
Additional paid-in capital		9,815			9,815
Retained earnings		46,250			42,629
Treasury stock at cost (shares 2017 and 2016 - 238,360)		(4,784	)		(4,784	)
Accumulated other comprehensive loss		(72	)		(874	)

Total shareholders’ equity		69,838			65,415

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	710,824		$	669,978

See notes to unaudited consolidated financial statements.

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in thousands, except per share data)	2017		2016		2017		2016
INTEREST AND DIVIDEND INCOME
Loans, including fees	$	5,907	$	5,042	$	16,940	$	14,750
Taxable securities		599		634		1,796		2,032
Nontaxable securities		171		163		509		482
Other		89		24		180		73

Total interest and dividend income		6,766		5,863		19,425		17,337

INTEREST EXPENSE
Deposits		368		249		942		758
Short-term borrowings		49		19		106		55
Other borrowings		145		98		361		296

Total interest expense		562		366		1,409		1,109

NET INTEREST INCOME		6,204		5,497		18,016		16,228

PROVISION FOR LOAN LOSSES		280		164		965		493

Net interest income, after provision for loan losses		5,924		5,333		17,051		15,735

NONINTEREST INCOME
Service charges on deposit accounts		287		301		847		867
Trust services		122		213		481		657
Debit card interchange fees		298		270		882		803
Gain on sale of loans, net		94		71		197		221
Earnings on bank owned life insurance		86		70		270		207
Securities gains		—		1		—		1
Other income		167		169		543		428

Total noninterest income		1,054		1,095		3,220		3,184

NONINTEREST EXPENSES
Salaries and employee benefits		2,531		2,319		7,462		6,945
Occupancy expense		236		229		660		707
Equipment expense		143		170		485		513
Professional and director fees		257		221		660		584
Financial institutions and franchise tax expense		131		107		394		320
Marketing and public relations		91		94		259		322
Software expense		219		203		633		587
Debit card expense		139		120		410		338
Amortization of intangible assets		29		30		87		91
FDIC insurance expense		58		57		160		222
Other expenses		452		444		1,410		1,416

Total noninterest expenses		4,286		3,994		12,620		12,045

Income before income taxes		2,692		2,434		7,651		6,874
FEDERAL INCOME TAX PROVISION		826		740		2,329		2,089

NET INCOME	$	1,866	$	1,694	$	5,322	$	4,785

Basic and diluted net earnings per share	$	0.68	$	0.61	$	1.94	$	1.74

See notes to unaudited consolidated financial statements

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2017			2016			2017			2016
Net income	$	1,866		$	1,694		$	5,322		$	4,785

Other comprehensive income (loss)
Unrealized (losses) gains arising during the period		(255	)		128			1,132			1,455
Amounts reclassified from accumulated other comprehensive income, held-to-maturity		27			175			84			491
Income tax effect		78			(103	)		(414	)		(661	)

Reclassification adjustment for gains on available-for-sale securities included in net income		—			(1	)		—			(1	)
Income tax effect		—			—			—			—

Other comprehensive income (loss)		(150	)		199			802			1,284

Total comprehensive income	$	1,716		$	1,893		$	6,124		$	6,069

See notes to unaudited consolidated financial statements.

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except per share data)	2017			2016			2017			2016
Balance at beginning of period	$	68,726		$	64,407		$	65,415		$	61,266
Net income		1,866			1,694			5,322			4,785
Other comprehensive income (loss)		(150	)		199			802			1,284
Stock options exercised 1,246 shares issued in 2016		—			—			—			7
Cash dividends declared		(604	)		(549	)		(1,701	)		(1,591	)

Balance at end of period	$	69,838		$	65,751		$	69,838		$	65,751

Cash dividends declared per share	$	0.22		$	0.20		$	0.62		$	0.58

See notes to unaudited consolidated financial statements.

CSB BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 30,
(Dollars in thousands)	2017			2016
NET CASH FROM OPERATING ACTIVITIES	$	4,812		$	6,206

CASH FLOWS FROM INVESTING ACTIVITIES
Securities:
Proceeds from repayments, held-to-maturity		2,156			18,302
Proceeds from repayments, available-for-sale		15,818			38,139
Purchases, available-for-sale		(9,243	)		(22,217	)
Purchases, held-to-maturity		(4,700	)		(7,000	)
Proceeds from sale of available-for-sale securities		—			1
Loan originations, net of repayments		(34,774	)		(40,480	)
Property, equipment, and software acquisitions		(805	)		(1,055	)

Net cash used in investing activities		(31,548	)		(14,310	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		30,841			(2,802	)
Net change in short-term borrowings		(3,685	)		2,369
Proceeds from other borrowings		10,000			—
Repayment of other borrowings		(789	)		(989	)
Cash dividends paid		(1,097	)		(1,042	)

Net cash provided by (used in) financing activities		35,270			(2,464	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	8,534		$	(10,568	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		36,838			38,272

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	45,372		$	27,704

SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest	$	1,393		$	1,124
Income taxes		2,920			1,900
Noncash financing activities:
Dividends declared		604			549

See notes to unaudited consolidated financial statements.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements include the accounts of CSB Bancorp, Inc. and its wholly-owned subsidiaries, The Commercial and Savings Bank (the “Bank”) and CSB Investment Services, LLC (together referred to as the “Company” or “CSB”). All significant intercompany transactions and balances have been eliminated in consolidation.

The condensed consolidated financial statements have been prepared without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the Company’s financial position at September 30, 2017, and the results of operations and changes in cash flows for the periods presented have been made.

Certain information and footnote disclosures typically included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been omitted. The Annual Report for CSB for the year ended December 31, 2016, contains Consolidated Financial Statements and related footnote disclosures, which should be read in conjunction with the accompanying Consolidated Financial Statements. The results of operations for the period ended September 30, 2017 are not necessarily indicative of the operating results for the full year or any future interim period.

Certain items in the prior-year financial statements were reclassified to conform to the current-year presentation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

ASU 2014-09 - Revenue from Contracts with Customers. The amendments in ASU 2014-09 require an entity to recognize revenue upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. FASB issued a one-year deferral for implementation, for public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company’s financial instruments are not within the scope of Topic 606. However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities. This Update sets forth targeted improvements to GAAP including, but not limited to, requiring an entity to recognize the changes in fair value of equity investments in the income statement, requiring public business entities to use the exit price when measuring the fair value of financial instruments for financial statement disclosure purposes, eliminating certain disclosures required by existing GAAP, and providing for additional disclosures. The Update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

ASU 2016-02 – Leases. This Update sets forth a new lease accounting model for lessors and lessees. For lessees, virtually all leases will be required to be recognized on the balance sheet by recording a right-of-use asset. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The accounting provided by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Update is effective for fiscal years beginning after December 15, 2018, with early application permitted. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. This Update is not expected to have a significant impact on the Company’s financial statements.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)

ASU 2016-13 - Financial Instruments - Credit Losses. The Update requires that financial assets be presented at the net amount expected to be collected (i.e. net of expected credit losses), eliminating the probable recognition threshold for credit losses on financial assets measured at amortized cost. The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Update is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. We expect the Update will result in an increase in the allowance for credit losses for the estimated life of the financial asset, including an estimate for debt securities. The amount of the increase will be impacted by the portfolio composition and quality at the adoption date, as well as economic conditions and forecasts at that time. A cumulative-effect adjustment to retained earnings is required as of the beginning of the year of adoption. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

ASU 2016-15 - Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. Current guidance lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. FASB issued the ASU with the intent of reducing diversity in practice with respect to several types of cash flows. The amendments in this Update are effective using a retrospective transition approach for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

ASU 2017-04 - Simplifying the Test for Goodwill Impairment. The Update simplifies the goodwill impairment test. Under the new guidance, Step 2 of the goodwill impairment process that requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities is eliminated. Instead, the entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual and interim goodwill tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted. This Update is not expected to have a material impact on the Company’s financial statements.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES

Securities consist of the following at September 30, 2017 and December 31, 2016:


(Dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
September 30, 2017
Available-for-sale
U.S. Treasury security	$	999	$	—	$	1	$	998
U.S. Government agencies		8,350		—		50		8,300
Mortgage-backed securities of government agencies		50,452		340		286		50,506
Asset-backed securities of government agencies		1,198		—		4		1,194
State and political subdivisions		27,166		385		74		27,477
Corporate bonds		9,580		70		167		9,483
Equity securities		53		37		—		90

Total available-for-sale		97,798		832		582		98,048

Held-to-maturity
U.S. Government agencies		9,475		21		153		9,343
Mortgage-backed securities of government agencies		12,300		170		96		12,374
State and political subdivisions		4,700		14		—		4,714

Total held-to-maturity		26,475		205		249		26,431

Restricted stock		4,614		—		—		4,614

Total securities	$	128,887	$	1,037	$	831	$	129,093

December 31, 2016
Available-for-sale
U.S. Treasury security	$	1,001	$	—	$	—	$	1,001
U.S. Government agencies		6,500		—		98		6,402
Mortgage-backed securities of government agencies		56,187		239		589		55,837
Other mortgage-backed securities		65		—		—		65
Asset-backed securities of government agencies		1,312		—		46		1,266
State and political subdivisions		30,007		140		439		29,708
Corporate bonds		9,632		28		144		9,516
Equity securities		53		27		—		80

Total available-for-sale		104,757		434		1,316		103,875
Held-to-maturity
U.S. Government agencies		9,472		17		396		9,093
Mortgage-backed securities of government agencies		14,411		141		201		14,351

Total held-to-maturity		23,883		158		597		23,444
Restricted stock		4,614		—		—		4,614

Total securities	$	133,254	$	592	$	1,913	$	131,933

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (CONTINUED)

The amortized cost and fair value of debt securities at September 30, 2017, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(Dollars in thousands)	Amortized cost		Fair value
Available-for-sale
Due in one year or less	$	3,190	$	3,208
Due after one through five years		18,798		18,917
Due after five through ten years		26,083		26,271
Due after ten years		49,674		49,562

Total debt securities available-for-sale	$	97,745	$	97,958

Held-to-maturity
Due in one year or less	$	4,700	$	4,714
Due after one through five years		477		498
Due after five through ten years		3,000		2,914
Due after ten years		18,298		18,305

Total debt securities held-to-maturity	$	26,475	$	26,431

Securities with a fair value of approximately $101 million and $95 million were pledged at September 30, 2017 and December 31, 2016, respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law.

Restricted stock primarily consists of investments in Federal Home Loan Bank of Cincinnati (FHLB) and Federal Reserve Bank stock. The Bank’s investment in FHLB stock amounted to approximately $4.1 million at September 30, 2017 and December 31, 2016. Federal Reserve Bank stock was $471 thousand at September 30, 2017 and December 31, 2016.

There were no proceeds from sales of securities for the three or nine month periods ending September 30, 2017. There were proceeds received and gains recognized of $1 thousand on the conversion of restricted stock in the nine month period ending September 30, 2016.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (CONTINUED)

The following table presents gross unrealized losses and fair value of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2017 and December 31, 2016:


	Securities in a continuous unrealized loss position
	Less than 12 months				12 months or more				Total
(Dollars in thousands)	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value
September 30, 2017
Available-for-sale
U.S. Treasury security	$	1	$	998	$	—	$	—	$	1	$	998
U.S. Government agencies		10		3,840		40		4,460		50		8,300
Mortgage-backed securities of government agencies		245		20,128		41		2,316		286		22,444
Asset-backed securities of government agencies		—		—		4		1,194		4		1,194
State and political subdivisions		9		1,693		65		2,961		74		4,654
Corporate bonds		—		—		167		2,333		167		2,333
Held-to-maturity
U.S. Government agencies		32		3,966		121		4,879		153		8,845
Mortgage-backed securities of government agencies		3		2,011		93		3,274		96		5,285

Total temporarily impaired securities	$	300	$	32,636	$	531	$	21,417	$	831	$	54,053

December 31, 2016
Available-for-sale
U.S. Government agencies	$	98	$	6,402	$	—	$	—	$	98	$	6,402
Mortgage-backed securities of government agencies		589		27,243		—		—		589		27,243
Asset-backed securities of government agencies		—		—		46		1,266		46		1,266
State and political subdivisions		439		19,328		—		—		439		19,328
Corporate bonds		33		3,593		111		1,889		144		5,482
Held-to-maturity
U.S. Government agencies		396		8,602		—		—		396		8,602
Mortgage-backed securities of government agencies		28		2,018		173		3,621		201		5,639

Total temporarily impaired securities	$	1,583	$	67,186	$	330	$	6,776	$	1,913	$	73,962

There were forty-six securities in an unrealized loss position at September 30, 2017, twenty (20) of which were in a continuous loss position for twelve months or more. At least quarterly, the Company conducts a comprehensive security-level impairment assessment. The assessments are based on the nature of the securities, the extent and duration of the securities in an unrealized loss position, the extent and duration of the loss and management’s intent to sell or if it is more likely than not that management will be required to sell a security before recovery of its amortized cost basis, which may be maturity. Management believes the Company will fully recover the cost of these securities. It does not intend to sell these securities and likely will not be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, management concluded that these securities were not other-than-temporarily impaired at September 30, 2017.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS

Loans consist of the following:


(Dollars in thousands)	September 30, 2017		December 31, 2016
Commercial	$	137,459	$	134,268
Commercial real estate		177,588		159,475
Residential real estate		153,281		144,489
Construction & land development		23,915		23,428
Consumer		16,686		13,308

Total loans before deferred costs		508,929		474,968
Deferred loan costs		529		481

Total Loans	$	509,458	$	475,449

Loan Origination/Risk Management

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s management examines current and occasionally projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers; however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

With respect to loans to developers and builders that are secured by non-owner occupied properties, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction and land development loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

Construction and land development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.

The Company originates consumer loans utilizing a judgmental underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Loans serviced for others approximated $79.8 million and $85.9 million at September 30, 2017 and December 31, 2016, respectively.

Concentrations of Credit

Nearly all of the Company’s lending activity occurs within the state of Ohio, including the four (4) counties of Holmes, Stark, Tuscarawas and Wayne, as well as other markets. The majority of the Company’s loan portfolio consists of commercial and commercial real estate loans. As of September 30, 2017 and December 31, 2016, there were no concentrations of loans related to any single industry.

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

The increase in the provision for loan losses for the three months ended September 30, 2017 related to commercial loans was primarily due to the increase in historical losses of loans in this category. The decrease in the provision related to commercial real estate loans was due to the decrease in the specific impairment amount related to one loan relationship. The decrease in the provision related to residential real estate loans is due to the decrease of loan delinquencies in this category.

The increase in the provision for loan losses related to commercial loans for the nine months ended September 30, 2017 was due to the increase in the historical loss rate and the increase of special mention loans in this category. The increase in the provision related to commercial real estate loans was due to the increase in nonaccrual loans in this category and the increase of adversely classified loan balances.

The changes in the provision for loan losses for the three and nine months ended September 30, 2016 related to commercial loans were primarily due to charge-offs of loans in this category as well as an increase in the specific reserve for one commercial relationship. The decrease in the provision related to commercial real estate loans for the nine month period in 2016 was primarily due to a recovery of a prior charge-off. The increase in the provision for consumer loans during the three and nine month periods of 2016 relates to charge-offs of loans in this category as well as the increase in loan volume.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

Summary of Allowance for Loan Losses


(Dollars in thousands)	Commercial			Commercial Real Estate			Residential Real Estate			Construction & Land Development		Consumer			Unallocated			Total
Three months ended September 30, 2017
Beginning balance	$	2,362		$	1,718		$	1,264		$	222	$	182		$	541		$	6,289
Provision for loan losses		881			(88	)		(53	)		21		(5	)		(476	)		280
Charge-offs		(1,138	)		—			—			—		—						(1,138	)
Recoveries		4			—			—			—		1						5

Net charge-offs		(1,134	)		—			—			—		1						(1,133	)

Ending balance	$	2,109		$	1,630		$	1,211		$	243	$	178		$	65		$	5,436

Nine months ended September 30, 2017
Beginning balance	$	2,207		$	1,264		$	1,189		$	178	$	141		$	312		$	5,291
Provision for loan losses		725			366			14			65		42			(247	)		965
Charge-offs		(1,178	)		—			—			—		(7	)					(1,185	)
Recoveries		355			—			8			—		2						365

Net charge-offs		(823	)		—			8			—		(5	)					(820	)

Ending balance	$	2,109		$	1,630		$	1,211		$	243	$	178		$	65		$	5,436

Three months ended September 30, 2016
Beginning balance	$	2,376		$	1,262		$	1,095		$	127	$	110		$	186		$	5,156
Provision for loan losses		77			63			50			24		74			(124	)		164
Charge-offs		(261	)		(38	)		—			—		(47	)					(346	)
Recoveries		27			—			1			—		—						28

Net charge-offs		(234	)		(38	)		1			—		(47	)					(318	)

Ending balance	$	2,219		$	1,287		$	1,146		$	151	$	137		$	62		$	5,002

Nine months ended September 30, 2016
Beginning balance	$	1,664		$	1,271		$	1,086		$	123	$	86		$	432		$	4,662
Provision for loan losses		797			(117	)		57			28		98			(370	)		493
Charge-offs		(276	)		(50	)		—			—		(48	)					(374	)
Recoveries		34			183			3			—		1						221

Net charge-offs		(242	)		133			3			—		(47	)					(153	)

Ending balance	$	2,219		$	1,287		$	1,146		$	151	$	137		$	62		$	5,002

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio class and based on the impairment method as of September 30, 2017 and December 31, 2016:


(Dollars in thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Construction & Land Development		Consumer		Unallocated		Total
September 30, 2017
Allowance for loan losses:
Individually evaluated for impairment	$	5	$	20	$	24	$	—	$	—	$	—	$	49
Collectively evaluated for impairment		2,104		1,610		1,187		243		178		65		5,387

Total ending allowance balance	$	2,109	$	1,630	$	1,211	$	243	$	178	$	65	$	5,436

Loans:
Loans individually evaluated for impairment	$	1,241	$	3,703	$	1,486	$	—	$	—			$	6,430
Loans collectively evaluated for impairment		136,218		173,885		151,795		23,915		16,686				502,499

Total ending loans balance	$	137,459	$	177,588	$	153,281	$	23,915	$	16,686			$	508,929

December 31, 2016
Allowance for loan losses:
Individually evaluated for impairment	$	705	$	—	$	24	$	—	$	—	$	—	$	729
Collectively evaluated for impairment		1,502		1,264		1,165		178		141		312		4,562

Total ending allowance balance	$	2,207	$	1,264	$	1,189	$	178	$	141	$	312	$	5,291

Loans:
Loans individually evaluated for impairment	$	5,028	$	621	$	1,507	$	—	$	—			$	7,156
Loans collectively evaluated for impairment		129,240		158,854		142,982		23,428		13,308				467,812

Total ending loans balance	$	134,268	$	159,475	$	144,489	$	23,428	$	13,308			$	474,968

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2017 and December 31, 2016:


(Dollars in thousands)	Unpaid Principal Balance		Recorded Investment with no Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance
September 30, 2017
Commercial	$	2,868	$	1,238	$	5	$	1,243	$	5
Commercial real estate		3,901		3,653		51		3,704		20
Residential real estate		1,667		1,095		392		1,487		24

Total impaired loans	$	8,436	$	5,986	$	448	$	6,434	$	49

December 31, 2016
Commercial	$	5,476	$	1,690	$	3,354	$	5,044	$	705
Commercial real estate		796		600		21		621		—
Residential real estate		1,681		1,036		472		1,508		24

Total impaired loans	$	7,953	$	3,326	$	3,847	$	7,173	$	729

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated.


	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2017		2016		2017		2016
Average recorded investment:
Commercial	$	3,084	$	6,389	$	3,376	$	6,393
Commercial real estate		4,712		660		2,934		799
Residential real estate		1,370		1,460		1,471		1,504

Average recorded investment in impaired loans	$	9,166	$	8,509	$	7,781	$	8,696

Interest income recognized:
Commercial	$	10	$	54	$	41	$	176
Commercial real estate		7		3		9		9
Residential real estate		13		15		43		44

Interest income recognized on a cash basis on impaired loans	$	30	$	72	$	93	$	229

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

The following table presents the aging of past due loans and nonaccrual loans as of September 30, 2017 and December 31, 2016 by class of loans:


(Dollars in thousands)	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days + Past Due		Non- Accrual		Total Past Due and Non- Accrual		Total Loans
September 30, 2017
Commercial	$	136,544	$	28	$	—	$	144	$	743	$	915	$	137,459
Commercial real estate		173,989		160		—		40		3,399		3,599		177,588
Residential real estate		151,684		914		108		68		507		1,597		153,281
Construction & land development		23,915		—		—		—		—		—		23,915
Consumer		16,561		87		9		1		28		125		16,686

Total Loans	$	502,693	$	1,189	$	117	$	253	$	4,677	$	6,236	$	508,929

December 31, 2016
Commercial	$	133,630	$	151	$	62	$	—	$	425	$	638	$	134,268
Commercial real estate		158,504		435		—		39		497		971		159,475
Residential real estate		142,926		816		61		196		490		1,563		144,489
Construction & land development		23,428		—		—		—		—		—		23,428
Consumer		13,234		21		16		—		37		74		13,308

Total Loans	$	471,722	$	1,423	$	139	$	235	$	1,449	$	3,246	$	474,968

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

Troubled Debt Restructurings

All troubled debt restructurings (“TDR’s) are individually evaluated for impairment and a related allowance is recorded, as needed. Loans whose terms have been modified as TDR’s totaled $3.1 million as of September 30, 2017, and $6.4 million as of December 31, 2016, with $24 thousand and $711 thousand of specific reserves allocated to those loans, respectively. At September 30, 2017, $2.0 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $1.1 million, all were in nonaccrual of interest status.

The Company held no foreclosed real estate as of September 30, 2017, or December 31, 2016. Consumer mortgage loans in the process of foreclosure were $154 thousand at September 30, 2017 and $448 thousand at December 31, 2016.

The following table presents loans restructured during the three and nine month periods ended September 30, 2017 and 2016.


(Dollars in thousands)	Number of loans restructured		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
For the three months ended September 30, 2017
Residential Real Estate		1	$	38	$	38

Total Restructured Loans		1	$	38	$	38

For the nine months ended September 30, 2017
Commercial Real Estate		4	$	288	$	288
Residential Real Estate		2		52		52

Total Restructured Loans		6	$	340	$	340

For the three months ended September 30, 2016
Residential Real Estate		—	$	—	$	—

Total Restructured Loans		—	$	—	$	—

For the nine months ended September 30, 2016
Residential Real Estate		3	$	327	$	327

Total Restructured Loans		3	$	327	$	327

The restructured loans were modified by changing the monthly payment to interest only. No principal reductions were made. There was one commercial loan in the amount of $3.3 million that was restructured in the fourth quarter of 2016 that has defaulted in 2017. None of the loans that were restructured in 2015 have subsequently defaulted in the nine month period ended September 30, 2016.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis includes commercial loans with an outstanding balance greater than $300 thousand. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings:

Pass. Loans classified as pass (Acceptable, Low Acceptable or Pass Watch) may exhibit a wide array of characteristics but at a minimum represent an acceptable risk to the Bank. Borrowers in this rating may have leveraged but acceptable balance sheet positions, satisfactory asset quality, stable to favorable sales and earnings trends, acceptable liquidity and adequate cash flow. Loans are considered fully collectible and require an average amount of administration. While generally adhering to credit policy, these loans may exhibit occasional exceptions that do not result in undue risk to the Bank. Borrowers are generally capable of absorbing setbacks, financial and otherwise, without the threat of failure.

Special Mention. Loans classified as special mention have material weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $300 thousand or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class is as follows as of September 30, 2017 and December 31, 2016:


(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
September 30, 2017
Commercial	$	115,301	$	16,167	$	5,130	$	—	$	861	$	137,459
Commercial real estate		160,677		9,933		6,744		—		234		177,588
Residential real estate		208		—		183		—		152,890		153,281
Construction & land development		18,171		1,410		—		—		4,334		23,915
Consumer		—		—		—		—		16,686		16,686

Total	$	294,357	$	27,510	$	12,057	$	—	$	175,005	$	508,929

December 31, 2016
Commercial	$	116,739	$	6,874	$	9,704	$	—	$	951	$	134,268
Commercial real estate		149,630		4,168		4,766		—		911		159,475
Residential real estate		216		—		175		—		144,098		144,489
Construction & land development		17,183		981		504		—		4,760		23,428
Consumer		—		—		—		—		13,308		13,308

Total	$	283,768	$	12,023	$	15,149	$	—	$	164,028	$	474,968

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS (CONTINUED)

The following table presents loans that are not rated by class of loans as of September 30, 2017 and December 31, 2016. Nonperforming loans include loans past due 90 days or more and loans on nonaccrual of interest status.


(Dollars in thousands)	Performing		Non-Performing		Total
September 30, 2017
Commercial	$	861	$	—	$	861
Commercial real estate		234		—		234
Residential real estate		152,315		575		152,890
Construction & land development		4,334		—		4,334
Consumer		16,657		29		16,686

Total	$	174,401	$	604	$	175,005

December 31, 2016
Commercial	$	951	$	—	$	951
Commercial real estate		911		—		911
Residential real estate		143,440		658		144,098
Construction & land development		4,760		—		4,760
Consumer		13,271		37		13,308

Total	$	163,333	$	695	$	164,028

NOTE 4 – SHORT-TERM BORROWINGS

The following table provides additional detail regarding repurchase agreements accounted for as secured borrowings.


	Remaining Contractual Maturity Overnight and Continuous
(Dollars in thousands)	September 30, 2017		December 31, 2016
Securities of U.S. Government Agencies and mortgage-backed securities of government agencies pledged, fair value	$	45,234	$	48,866
Repurchase agreements		45,057		48,742

NOTE 5 – FAIR VALUE MEASUREMENTS

The Company provides disclosures about assets and liabilities carried at fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. The three broad levels of the fair value hierarchy are described below:


Level I:		Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level II:		Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by corroborated or other means. If the asset or liability has a specified (contractual) term, the Level II input must be observable for substantially the full term of the asset or liability.

Level III:		Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5- FAIR VALUE MEASUREMENTS (CONTINUED)

The following table presents the assets reported on the Consolidated Balance Sheets at their fair value as of September 30, 2017 and December 31, 2016 by level within the fair value hierarchy. No liabilities are carried at fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Equity securities and U.S. Treasury Notes are valued at the closing price reported on the active market on which the individual securities are traded. Obligations of U.S. government agencies, mortgage-backed securities, asset-backed securities, obligations of states and political subdivisions and corporate bonds are valued at observable market data for similar assets.


(Dollars in thousands)	Level I		Level II		Level III		Total
September 30, 2017
Assets:
Securities available-for-sale
U.S. Treasury security	$	998	$	—	$	—	$	998
U.S. Government agencies		—		8,300		—		8,300
Mortgage-backed securities of government agencies		—		50,506		—		50,506
Asset-backed securities of government agencies		—		1,194		—		1,194
State and political subdivisions		—		27,477		—		27,477
Corporate bonds		—		9,483		—		9,483

Total debt securities		998		96,960		—		97,958
Equity securities		90		—		—		90

Total available-for-sale securities	$	1,088	$	96,960	$	—	$	98,048


December 31, 2016
Assets:
Securities available-for-sale
U.S. Treasury security	$	1,001	$	—	$	—	$	1,001
U.S. Government agencies		—		6,402		—		6,402
Mortgage-backed securities of government agencies		—		55,837		—		55,837
Other mortgage-backed securities		—		65		—		65
Asset-backed securities of government agencies		—		1,266		—		1,266
State and political subdivisions		—		29,708		—		29,708
Corporate bonds		—		9,516		—		9,516

Total debt securities		1,001		102,794		—		103,795
Equity securities		80		—		—		80

Total available-for-sale securities	$	1,081	$	102,794	$	—	$	103,875

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of September 30, 2017 and December 31, 2016, by level within the fair value hierarchy. Impaired loans are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as Level I inputs; and observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5- FAIR VALUE MEASUREMENTS (CONTINUED)


(Dollars in thousands)	Level I		Level II		Level III		Total
September 30, 2017
Assets measured on a nonrecurring basis:
Impaired loans	$	—	$	—	$	6,381	$	6,381

December 31, 2016
Assets measured on a nonrecurring basis:
Impaired loans	$	—	$	—	$	6,427	$	6,427

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level III inputs to determine fair value:


	Quantitative Information about Level III Fair Value Measurements
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
(Dollars in thousands)
September 30, 2017
Impaired loans	$	2,120	Discounted cash flow	Remaining term Discount rate	7 mo to 29.8 yrs (182 months) 3.5% to 9.8% (4.9%)

		4,261	Appraisal of collateral ⁽¹⁾	Appraisal adjustments ⁽²⁾ Liquidation expense ⁽²⁾	0% to -25% (-20%) -10%

December 31, 2016
Impaired loans	$	5,330	Discounted cash flow	Remaining term Discount rate	6 mos to 29.9 yrs / (61.1 mos) 3.1% to 12.0% / (4.9%)

		1,097	Appraisal of collateral ⁽¹⁾	Appraisal adjustments ⁽²⁾ Liquidation expense ⁽²⁾	0% to -50% (-21.7%) -10%

(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various inputs which are not identifiable.

(2)	Appraisals may be adjusted by management for qualitative factors. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of recognized financial instruments as of September 30, 2017 and December 31, 2016 are as follows:


(Dollars in thousands)	Carrying Value		Level I		Level II		Level III		Fair Value
September 30, 2017
Financial assets
Cash and cash equivalents	$	45,372	$	45,372	$	—	$	—	$	45,372
Securities available-for-sale		98,048		1,088		96,960		—		98,048
Securities held-to-maturity		26,475		—		26,431		—		26,431
Restricted stock		4,614		4,614		—		—		4,614
Loans held for sale		1,108		1,108		—		—		1,108
Net loans		504,022		—		—		507,303		507,303
Bank-owned life insurance		13,131		13,131		—		—		13,131
Accrued interest receivable		1,701		1,701		—		—		1,701
Mortgage servicing rights		266		—		—		266		266
Financial liabilities
Deposits	$	571,626	$	459,054	$	—	$	112,960	$	572,014
Short-term borrowings		45,057		45,057		—		—		45,057
Other borrowings		21,596		—		—		20,734		20,734
Accrued interest payable		92		92		—		—		92

December 31, 2016
Financial assets
Cash and cash equivalents	$	36,838	$	36,838	$	—	$	—	$	36,838
Securities available-for-sale		103,875		1,081		102,794		—		103,875
Securities held-to-maturity		23,883		—		23,444		—		23,444
Restricted stock		4,614		4,614		—		—		4,614
Net loans		470,158		—		—		471,815		471,815
Bank-owned life insurance		10,361		10,361		—		—		10,361
Accrued interest receivable		1,409		1,409		—		—		1,409
Mortgage servicing rights		261		—		—		261		261
Financial liabilities
Deposits	$	540,785	$	428,676	$	—	$	112,642	$	541,318
Short-term borrowings		48,742		48,742		—		—		48,742
Other borrowings		12,385		—		—		12,511		12,511
Accrued interest payable		76		76		—		—		76

For purposes of the above disclosures of estimated fair value, the following assumptions are used:

Cash and cash equivalents; Loans held for sale; Accrued interest receivable; Short-term borrowings and Accrued interest payable

The fair value of the above instruments is considered to be carrying value, classified as Level I in the fair value hierarchy.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

Securities

The fair value of securities available-for-sale and securities held-to-maturity which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on securities’ relationship to other similar securities, classified as Level I or Level II in the fair value hierarchy.

Net loans

The fair value for loans is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value. Fair value of non-accrual loans is based on carrying value, classified as Level III.

Bank-owned life insurance

The carrying amount of bank-owned life insurance is based on the cash surrender value of the policies and is a reasonable estimate of fair value, classified as Level I.

Restricted stock

Restricted stock includes Federal Home Loan Bank Stock and Federal Reserve Bank Stock. It is not practicable to determine the fair value of regulatory equity securities due to restrictions placed on their transferability. Fair value is based on carrying value, classified as Level I.

Mortgage servicing rights

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates discounted cash flow and repayment assumptions based on management’s best judgment, classified as Level III.

Deposits

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using market rates currently offered for similar instruments with similar remaining maturities, resulting in a Level III classification. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of quarter end, resulting in a Level I classification.

Other borrowings

The fair value of Federal Home Loan Bank advances are estimated using a discounted cash flow analysis based on the current borrowing rates for similar types of borrowings, resulting in a Level III classification.

The Company also has unrecognized financial instruments at September 30, 2017 and December 31, 2016. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $177.8 million at September 30, 2017 and $163.7 million at December 31, 2016. Such amounts are also considered to be the fair values.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument over the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Since no ready market exists for a significant portion of the financial instruments, fair value estimates are largely based on judgments after considering such factors as future expected credit losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax for the three and nine month periods ended September 30, 2017 and 2016:


(Dollars in thousands)	Pretax			Tax Effect			After-tax
Three months ended September 30, 2017
Balance as of June 30, 2017	$	121		$	(43	)	$	78
Unrealized holding gain on available-for-sale securities arising during the period		(255	)		87			(168	)
Reclassify gain included in income		—			—			—
Amortization of held-to-maturity discount resulting from transfer		27			(9	)		18

Total other comprehensive income (loss)		(228	)		78			(150	)

Balance as of September 30, 2017	$	(107	)	$	35		$	(72	)


Nine months ended September 30, 2017
Balance as of December 31, 2016	$	(1,323	)	$	449		$	(874	)
Unrealized holding gain on available-for-sale securities arising during the period		1,132			(385	)		747
Reclassify gain included in income		—			—			—
Amortization of held-to-maturity discount resulting from transfer		84			(29	)		55

Total other comprehensive income (loss)		1,216			(414	)		802

Balance as of September 30, 2017	$	(107	)	$	35		$	(72	)


Three months ended September 30, 2016
Balance as of June 30, 2016	$	1,012		$	(344	)	$	668
Unrealized holding gain on available-for-sale securities arising during the period		128			(43	)		85
Reclassify gain included in income		(1	)		—			(1	)
Amortization of held-to-maturity discount resulting from transfer		175			(60	)		115

Total other comprehensive income (loss)		302			(103	)		199

Balance as of September 30, 2016	$	1,314		$	(447	)	$	867


Nine months ended September 30, 2016
Balance as of December 31, 2015	$	(631	)	$	214		$	(417	)
Unrealized holding gain on available-for-sale securities arising during the period		1,455			(494	)		961
Reclassify gain included in income		(1	)		—			(1	)
Amortization of held-to-maturity discount resulting from transfer		491			(167	)		324

Total other comprehensive income (loss)		1,945			(661	)		1,284

Balance as of September 30, 2016	$	1,314		$	(447	)	$	867

CSB BANCORP, INC.

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

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis focuses on the consolidated financial condition of the Company at September 30, 2017 as compared to December 31, 2016, and the consolidated results of operations for the three and nine month periods ended September 30, 2017 compared to the same periods 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 $711 million at September 30, 2017 as compared to $670 million at December 31, 2016. During the nine month period ended September 30, 2017, net loans increased $34 million. Cash, cash equivalents, and securities increased $5 million. On the liability side, deposits and repurchase agreements increased by $27 million.

Net loans increased $34 million, or 7%, during the nine months ended September 30, 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 $21 million, or 7%, while construction and land development loans increased $487 thousand, or 2%. Residential real estate loans increased $9 million, or 6%, and consumer loans increased $3 million, or 25% 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 nine months ended September 30, 2017 and 2016 were $44 million and $48 million, respectively. Originations sold into the secondary market were $7 million and $6 million, respectively during the nine month periods ended September 30, 2017 and September 30, 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 1.07% at September 30, 2017 as compared to 1.11% at December 31, 2016. Outstanding loan balances increased 7% to $509 million at September 30, 2017. A provision of $965 thousand and net charge-offs of $820 thousand, increased the allowance for loan losses to $5.4 million at September 30, 2017.

CSB BANCORP, INC.

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

Nonaccrual loans increased during the first nine months of 2017. For the nine months ending September 30, 2017 loans totaling $6.1 million were placed on nonaccrual status, there were $1.0 million charge-downs recognized, and pay downs of $1.8 million were received. The increase in nonaccrual loans was primarily due to two lending relationships comprised of several loans. Management continues to work through the resolution of the two credit facilities.


	September 30,			December 31,			September 30,
(Dollars in thousands)	2017			2016			2016
Non-performing loans	$	4,930		$	1,684		$	2,816
Other real estate		—			—			33
Allowance for loan losses		5,436			5,291			5,002
Total loans		509,458			475,449			463,211
Allowance: Loans		1.07	%		1.11	%		1.08	%
Allowance: Non-performing loans		1.1x			3.1x			1.8 x

The ratio of gross loans to deposits was 89.1% at September 30, 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 million within the available-for-sale and held-to-maturity portfolios as of September 30, 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 September 30, 2017, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits increased $31 million, or 6%, from December 31, 2016 with noninterest bearing deposits decreasing $261 thousand and interest-bearing deposit accounts increasing $31 million. Total deposits as of September 30, 2017 are $49 million greater than September 30, 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 decreased $4 million to $45 million at September 30, 2017 as compared to December 31, 2016 and other borrowings increased $9 million as the Company obtained a $10 million long-term advance and repaid FHLB advances with required monthly amortization.

Total shareholders’ equity amounted to $70 million, or 9.8%, of total assets, at September 30, 2017, compared to $65 million, or 9.8%, of total assets, at December 31, 2016. The increase in shareholders’ equity during the nine months ending September 30, 2017 was due to net income of $5 million and other comprehensive income of $802 thousand, partially offset by dividends declared of $2 million. The Company and the Bank met all regulatory capital requirements at September 30, 2017.

RESULTS OF OPERATIONS

Three months ended September 30, 2017 and 2016

For the quarters ended September 30, 2017 and 2016, the Company recorded net income of $1.9 million and $1.7 million and $.68 and $.61 per share, respectively. The $172 thousand increase in net income for the quarter was primarily the result of a $707 thousand increase in net interest income. The increase was partially offset by an increase in other noninterest expenses of $292 thousand, an increase in the provision for loans losses of $116 thousand, and an increase in the tax provision of $86 thousand. Return on average assets and return on average equity were 1.05% and 10.62%, respectively, for the three month period of 2017, compared to 1.03% and 10.29%, respectively for the same quarter in 2016.

CSB BANCORP, INC.

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

Average Balance Sheets and Net Interest Margin Analysis


	For the three months ended September 30,
	2017					2016
(Dollars in thousands)	Average balance		Average rate			Average balance		Average rate
ASSETS
Interest-earning deposits in other banks	$	25,144		1.37	%	$	13,847		0.66	%
Federal funds sold		493		1.29			690		0.52
Taxable securities		100,111		2.37			116,220		2.17
Tax-exempt securities		31,741		3.24			28,933		3.51
Loans		504,943		4.65			456,865		4.40

Total earning assets		662,432		4.11	%		616,555		3.84	%
Other assets		39,608					37,080

TOTAL ASSETS	$	702,040				$	653,635

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits	$	107,459		0.16	%	$	83,699		0.04	%
Savings deposits		171,559		0.20			162,561		0.07
Time deposits		111,741		0.85			115,925		0.72
Other borrowed funds		70,761		1.09			65,933		0.71

Total interest bearing liabilities		461,520		0.48	%		428,118		0.34	%
Non-interest bearing demand deposits		168,436					157,643
Other liabilities		2,347					2,403
Shareholders’ Equity		69,737					65,471

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	702,040				$	653,635

Taxable equivalent net interest spread				3.63	%				3.50	%
Taxable equivalent net interest margin				3.77	%				3.61	%

Interest income for the quarter ended September 30, 2017, was $6.8 million representing a $903 thousand increase, or a 15% improvement, compared to the same period in 2016. This increase was primarily due to average loan volume increasing $48 million for the quarter ended September 30, 2017 as compared to the third quarter 2016. The volume of taxable securities declined $16 million on a year over year comparison, resulting in a decrease in interest income of $95 thousand from the volume reduction. Interest expense for the quarter ended September 30, 2017 was $562 thousand, an increase of $196 thousand, or 54%, from the same period in 2016. The increase in interest expense occurred primarily due to an increase in rate on all interest-bearing liabilities for the quarter ended September 30, 2017.

For the quarter ended September 30, 2017, the provision for loan losses was $280 thousand, compared to a provision of $164 thousand for the same quarter in 2016. For more discussion see Results of Operations for the nine months ended September 30. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.

Noninterest income for the quarter ended September 30, 2017, was $1.1 million, a decrease of $41 thousand, or 4%, compared to the same quarter in 2016. Service charges on deposit accounts decreased $14 thousand, or 5%, compared to the same quarter in 2016 primarily from decreases in overdraft fees. The gain on the sale of mortgage loans to the secondary market increased to $94 thousand for the quarter ending September 30, 2017, from $71 thousand in the same quarter in 2016. Debit card interchange income increased $28 thousand, or 10%, with greater fee income in the third quarter of 2017 Fees from trust and brokerage services decreased $91 thousand to $122 thousand for the third quarter 2017 as compared to the same quarter in 2016 due to the realignment of both divisions, the use of representative on demand in the brokerage division in 2017 with decreased commissions, as well as a decrease of assets under management.

CSB BANCORP, INC.

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

Noninterest expenses for the quarter ended September 30, 2017 increased $292 thousand, or 7%, compared to the third quarter of 2016. Salaries and employee benefits increased $212 thousand, or 9%, a result of increases in employees, base salary, medical, and other benefits. Debit card expenses increased $19 thousand, or 16%, compared to the third quarter 2016 due to the replacement of all outstanding debit cards with EMV chip cards. Software expense rose $16 thousand quarter over quarter with additional investment. Occupancy expense increased $7 thousand in 2017 over the third quarter of 2016. Professional and director fees increased $36 thousand for the quarter ended September 30, 2017 as compared to the third quarter 2016. The increase resulted from an increase in internal audit fees and legal fees for loan collections, partially offset by a decrease in other outside service fees.

Federal income tax expense increased $86 thousand, or 12%, for the quarter ended September 30, 2017 as compared to the third quarter of 2016. The provision for income taxes was $826 thousand (effective rate of 30.7%) for the quarter ended September 30, 2017, compared to $740 thousand (effective rate of 30.4%) for the same quarter ended 2016.

RESULTS OF OPERATIONS

Nine months ended September 30, 2017 and 2016

Net income for the nine months ended September 30, 2017, was $5.3 million or $1.94 per share, as compared to $4.8 million or $1.74 per share during the same period in 2016. Return on average assets and return on average equity were 1.04% and 10.44%, respectively, for the nine month period of 2017, compared to 0.99% and 9.99%, respectively for 2016.

Comparative net income increased as total interest and dividend income increased $2 million or 12% for the nine month period in 2017 as compared to 2016. The provision for loan losses increased $472 thousand or 96% during the same comparative period. Noninterest income increased $36 thousand to $3.2 million, or 1%, for the nine month period ending in 2017 as compared to 2016. Noninterest expense increased to $12.6 million for the nine months ended September 30, 2017, an increase of $575 thousand or 5% from the same period last year.

CSB BANCORP, INC.

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

Average Balance Sheet and Net Interest Margin Analysis


	For the nine months ended September 30,
	2017					2016
(Dollars in thousands)	Average balance		Average rate			Average balance		Average rate
ASSETS
Due from banks-interest bearing	$	20,212		1.16	%	$	13,886		0.68	%
Federal funds sold		629		0.85			558		0.48
Taxable securities		101,319		2.37			124,398		2.18
Tax-exempt securities		31,497		3.27			27,737		3.55
Loans		492,075		4.61			443,977		4.45

Total earning assets		645,732		4.08	%		610,556		3.85	%
Other assets		39,478					36,451

TOTAL ASSETS	$	685,210				$	647,007

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing demand deposits	$	94,621		0.10	%	$	82,973		0.04	%
Savings deposits		168,998		0.17			164,140		0.07
Time deposits		111,647		0.79			117,266		0.73
Other borrowed funds		69,957		0.89			65,017		0.72

Total interest bearing liabilities		445,223		0.42	%		429,396		0.34	%
Non-interest bearing demand deposits		169,131					151,479
Other liabilities		2,684					2,136
Shareholders’ Equity		68,172					63,996

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	685,210				$	647,007

Taxable equivalent net interest spread				3.66	%				3.51	%
Taxable equivalent net interest margin				3.79	%				3.61	%

Interest income on loans increased $2 million, or 15%, for the nine months ended September 30, 2017, as compared to the same period in 2016. This increase was primarily due to an average loan volume increase of $48 million for the comparable nine month periods. Interest income on securities decreased $209 thousand, or 8%, as the average volume of securities decreased $19 million, for the comparable nine month periods. Interest income on fed funds sold and interest bearing deposits increased $107 thousand for the nine months ended September 30, 2017 as the yield on fed funds sold and due from banks interest bearing balances increased 0.48%, compared to the same period in 2016.

Interest expense increased $300 thousand to $1.4 million for the nine months ended September 30, 2017, compared to the same period in 2016. Interest expense on deposits increased $184 thousand, or 24%, from the same period as last year. Interest expense on short-term and other borrowings increased $116 thousand, or 33%. The increase in interest expense has been caused by higher interest rates being paid on all deposits and borrowings. Additionally, during the comparable nine month periods, the Company grew non-interest bearing deposits by $7 million in 2017. Time deposits continue to renew at higher interest rates, and some depositors have moved monies to savings instruments anticipating higher interest rates. Competition for deposits appears to be increasing from a year ago with larger money center banks and community banks increasing rates offered for money market savings accounts. The net interest margin increased by 18 basis points for the nine month period ended September 30, 2017, to 3.79%, from 3.61% for the same period in 2016. This margin increase is primarily the result of increased loan volume.

CSB BANCORP, INC.

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

The provision for loan losses was $965 thousand during the nine months of 2017, compared to $493 thousand in the same nine month period of 2016. The increase in the provision for loan losses from a year ago reflects an increase in nonperforming loans. Early stage loan delinquency has decreased and net loan losses were reflected in both nine month periods. 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.

Non-interest income increased $36 thousand during the nine months ended September 30, 2017, as compared to the same period in 2016. Debit card interchange income increased $79 thousand, or 10%, as a result of increased servicer revenue during the nine months of 2017. Trust services declined $176 thousand during the nine months ended September 30, 2017 compared to the same period in 2016. Brokerage fees within the line declined by $106 thousand during this time as the Company reorganized both brokerage and trust and used the brokerage platform’s representative on demand during the first half of 2017 which provided reduced commissions. The Company has returned to an in-house brokerage representative during the third quarter of 2017. A loss on asset retirement of $64 thousand was recognized in other income during the nine month period in 2016. Service charges on deposits decreased $20 thousand from the same period in 2016 reflecting a decrease in overdraft fees based on volume. A decrease was recognized in gains on mortgage loans sold in the secondary market on a year over year basis as more loans were originated and retained for portfolio.

Non-interest expenses increased $575 thousand, or 5%, for the nine months ended September 30, 2017, compared to the same period in 2016. Salaries and employee benefits increased $517 thousand, or 7%, primarily the result of salary and medical benefit increases. Professional fees increased $76 thousand, or 13%, as audit expense grew by $120 thousand on a year over year basis from the outsourcing of internal audit in 2017. The financial institutions tax expense increased $74 thousand on a year over year basis as capital increased. Debit card expenses increased $72 thousand, or 21%, primarily due to the new issuance of cards with EMV chips. Software expense increased $46 thousand for the nine month period in 2017 as compared to the same period in 2016. Occupancy and equipment expense decreased $75 thousand, or 6%, reflecting a decrease in building lease expense and an increase in building rental income when compared to 2016. Marketing and public relations expense decreased $63 thousand, or 20%, primarily due to expenses related to redesign of the company’s website in 2016. FDIC assessment decreased $62 thousand as the fee calculation changed third quarter 2016. Loan legal and collection fees decreased $13 thousand for the nine month period ended September 30, 2017 with the collection of prior period legal expenses.

The provision for income taxes of $2.3 million increased in 2017 from 2016 with a slight increase to the effective rate of 30.4% for the nine months ended September 30, 2017 as compared to 2016.

CAPITAL RESOURCES

The Company maintained a strong capital position with tangible common equity to tangible assets of 9.2% at September 30, 2017 compared with 9.1% at December 30, 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

CSB BANCORP, INC.

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

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 September 30, 2017 the Company and the Bank met all capital adequacy requirements to which they were subject.


	September 30, 2017			December 31, 2016
Common Equity Tier 1 Capital To Risk Weighted Assets
Consolidated		12.6	%		12.6	%
Bank		12.4	%		12.4	%

Tier 1 Capital To Risk Weighted Assets Ratio
Consolidated		12.6	%		12.6	%
Bank		12.4	%		12.4	%

Total Capital To Risk Weighted Assets Ratio
Consolidated		13.7	%		13.7	%
Bank		13.4	%		13.5	%

Tier 1 Leverage Ratio
Consolidated		9.3	%		9.3	%
Bank		9.2	%		9.1	%

LIQUIDITY


(Dollars in millions)	September 30, 2017			December 31, 2016			Change
Cash and cash equivalents	$	45		$	37		$	8
Unused lines of credit		76			66			10
Unpledged AFS securities at fair market value		30			37			(7	)

	$	151		$	140		$	11

Net deposits and short-term liabilities	$	560		$	533		$	27

Liquidity ratio		27.0	%		26.1	%		0.9
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 27.0% and 26.1% at September 30, 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.

CSB BANCORP, INC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3 –QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risks as of September 30, 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 September 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 September 30, 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.


September 30, 2017
(Dollars in thousands)
Change in Interest Rates (basis points)		Net Interest Income		Dollar Change			Percentage Change			Board Policy Limits
	+400	$	27,727	$	2,003			7.8	%		+/-25	%
	+300		27,266		1,542			6.0			+/-15
	+200		26,768		1,044			4.1			+/-10
	+100		26,259		535			2.1			+/-5
	0		25,724		—			—			—
	-100		25,038		(686	)		(2.7	)		+/-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

CSB BANCORP, INC.

CONTROLS AND PROCEDURES

ITEM 4 - 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.

CSB BANCORP, INC.

FORM 10-Q

Quarter ended September 30, 2017

PART II – OTHER INFORMATION


ITEM 1-		LEGAL PROCEEDINGS.

		In the opinion of management there are no outstanding legal proceedings that are reasonably likely to have a material adverse effect on the company’s financial condition or results of operations.

ITEM 1A-		RISK FACTORS.

		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.

ITEM 2-		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

		On July 7, 2005 CSB Bancorp, Inc. filed Form 8-K with the Commission announcing that its Board of Directors approved a Stock Repurchase Program authorizing the repurchase of up to 10% of the Company’s common shares then outstanding. Repurchases may be made from time to time as market and business conditions warrant, in the open market, through block purchases, and in negotiated private transactions. No repurchases were made during the quarterly period ended September 30, 2017.

ITEM 3-		DEFAULTS UPON SENIOR SECURITIES.

		Not applicable.

ITEM 4-		MINE SAFETY DISCLOSURES.

		Not applicable.

ITEM 5-		OTHER INFORMATION.

		Not applicable.

CSB BANCORP, INC.

FORM 10-Q

Quarter ended September 30, 2017

PART II – OTHER INFORMATION

ITEM 6-

Exhibits.


Exhibit Number		Description of Document

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

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

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

4.0		Specimen stock certificate (incorporated by reference to Registrant’s Form 10-SB). (P)

11		Statement Regarding Computation of Per Share Earnings.

31.1		Rule 13a-14(a)/15d-14(a) Chief Executive Officer’s Certification.

31.2		Rule 13a-14(a)/15d-14(a) Chief Financial Officer’s Certification.

32.1		Section 1350 Chief Executive Officer’s Certification.

32.2		Section 1350 Chief Financial Officer’s Certification.

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in XBRL (extensible Business Reporting Language): (i) Consolidated Balance Sheets: (ii) Consolidated Statements of Income: (iii) Consolidated Statements of Comprehensive Income: (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity: (v) Condensed Consolidated Statements of Cash Flows: and (vi) Notes to Consolidated Financial Statements.

(P)	Paper Exhibits

CSB BANCORP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


						CSB BANCORP, INC.
						(Registrant)

Date: November 9, 2017						/s/ Eddie L. Steiner
						Eddie L. Steiner
						President
						Chief Executive Officer

Date: November 9, 2017						/s/ Paula J. Meiler
						Paula J. Meiler
						Senior Vice President
						Chief Financial Officer

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Smaller reporting company