Quarterly Report (10-q)

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, 2019

☐	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)

Registrant’s address: 91 North Clay, P.O. Box 232, Millersburg, Ohio 44654

Registrant’s telephone number, including area code: (330) 674-9015

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 (X) No ( )

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes (X) No ( )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ( ) Accelerated filer (X) Non-accelerated filer ( ) Smaller reporting company ( X ) 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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ( ) No (X)

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock		CSBB		OTCPink

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, 2019, 2,742,350 common shares

CSB BANCORP, INC.

FORM 10-Q

QUARTER ENDED September 30, 2019

Table of Contents

Part I - Financial Information

		Page
ITEM 1 –	FINANCIAL STATEMENTS (Unaudited)	3
Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Comprehensive Income		5
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	26
ITEM 3 –	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
ITEM 4 –	CONTROLS AND PROCEDURES	34

Part II - Other Information

ITEM1 –	Legal Proceedings	35
ITEM1A –	Risk Factors	35
ITEM2 –	Unregistered Sales of Equity Securities and Use of Proceeds	35
ITEM3 –	Defaults upon Senior Securities	35
ITEM4 –	Mine Safety Disclosures	35
ITEM5 –	Other Information	35
ITEM6 –	Exhibits	36
Signatures		37

CSB BANCORP, INC.

PART I – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
(Dollars in thousands)	2019			2018
ASSETS
Cash and cash equivalents
Cash and due from banks	$	20,696		$	23,214
Interest-earning deposits in other banks		58,873			22,350
Total cash and cash equivalents		79,569			45,564
Securities
Available-for-sale, at fair value		89,572			85,528
Held-to-maturity (fair value 2019-$15,192; 2018-$20,118)		15,097			20,688
Equity securities		91			83
Restricted stock, at cost		4,614			4,614
Total securities		109,374			110,913
Loans held for sale		399			108
Loans		566,213			548,974
Less allowance for loan losses		6,776			5,907
Net loans		559,437			543,067
Premises and equipment, net		11,595			9,961
Core deposit intangible		119			167
Goodwill		4,728			4,728
Bank-owned life insurance		16,880			13,554
Accrued interest receivable and other assets		4,691			3,660
TOTAL ASSETS	$	786,792		$	731,722
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing	$	192,620		$	185,871
Interest-bearing		465,499			420,627
Total deposits		658,119			606,498
Short-term borrowings		35,070			37,415
Other borrowings		6,453			8,525
Accrued interest payable and other liabilities		3,536			2,748
Total liabilities		703,178			655,186
SHAREHOLDERS' EQUITY
Common stock, $6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; outstanding 2,742,350 shares 2019 and 2,742,242 shares 2018		18,629			18,629
Additional paid-in capital		9,815			9,815
Retained earnings		59,915			54,288
Treasury stock at cost: 238,252 shares 2019, 238,360 shares 2018		(4,780	)		(4,784	)
Accumulated other comprehensive income (loss)		35			(1,412	)
Total shareholders' equity		83,614			76,536
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	786,792		$	731,722

See notes to unaudited consolidated financial statements.

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2019		2018			2019		2018
INTEREST AND DIVIDEND INCOME
Loans, including fees	$	7,239	$	6,707		$	21,496	$	19,361
Taxable securities		534		586			1,705		1,784
Nontaxable securities		133		152			401		464
Other		356		127			749		256
Total interest and dividend income		8,262		7,572			24,351		21,865
INTEREST EXPENSE
Deposits		966		633			2,711		1,647
Short-term borrowings		78		97			264		235
Other borrowings		30		41			106		141
Total interest expense		1,074		771			3,081		2,023
NET INTEREST INCOME		7,188		6,801			21,270		19,842
PROVISION FOR LOAN LOSSES		285		324			855		972
Net interest income, after provision for loan losses		6,903		6,477			20,415		18,870
NON INTEREST INCOME
Service charges on deposit accounts		333		301			938		885
Trust services		234		204			670		641
Debit card interchange fees		377		330			1,093		966
Gain on sale of loans, net		132		63			287		200
Earnings on bank owned life insurance		120		86			326		252
Unrealized gain or (loss) on equity securities, net		5		(6	)		8		(2	)
Other income		239		197			655		546
Total noninterest income		1,440		1,175			3,977		3,488
NON INTEREST EXPENSES
Salaries and employee benefits		2,993		2,805			8,750		8,160
Occupancy expense		209		194			618		628
Equipment expense		128		145			408		461
Professional and director fees		316		199			963		749
Financial institutions and franchise tax expense		153		139			459		425
Marketing and public relations		149		124			405		363
Software expense		225		221			674		655
Debit card expense		142		144			401		386
Amortization of intangible assets		16		25			47		76
FDIC insurance expense		—		66			98		213
Other expenses		668		576			1,867		1,678
Total noninterest expenses		4,999		4,638			14,690		13,794
Income before income taxes		3,344		3,014			9,702		8,564
FEDERAL INCOME TAX PROVISION		649		582			1,881		1,644
NET INCOME	$	2,695	$	2,432		$	7,821	$	6,920
Basic and diluted net earnings per share	$	0.98	$	0.88		$	2.85	$	2.52

See notes to unaudited consolidated financial statements

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2019			2018			2019			2018
Net income	$	2,695		$	2,432		$	7,821		$	6,920
Other comprehensive income (loss)
Unrealized gains (losses) arising during the period		275			(620	)		1,786			(2,088	)
Amounts reclassified from accumulated other comprehensive income, held-to-maturity		15			20			45			62
Income tax effect		(61	)		125			(384	)		425
Other comprehensive income (loss)		229			(475	)		1,447			(1,601	)
Total comprehensive income	$	2,924		$	1,957		$	9,268		$	5,319

See notes to unaudited consolidated financial statements.

CSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)	Common stock		Additional paid-in capital		Retained earnings			Treasury stock			Accumulated other comprehensive income (loss)			Total
Three Months Ended September 30, 2019
Balance, beginning of period	$	18,629	$	9,815	$	57,988		$	(4,780	)	$	(194	)	$	81,458
Net income		—		—		2,695			—			—			2,695
Other comprehensive income		—		—		—			—			229			229
Cash dividends declared, $0.28 per share		—		—		(768	)		—			—			(768	)
Balance, end of period	$	18,629	$	9,815	$	59,915		$	(4,780	)	$	35		$	83,614
Nine Months Ended September 30, 2019
Balance, beginning of period	$	18,629	$	9,815	$	54,288		$	(4,784	)	$	(1,412	)	$	76,536
Net income		—		—		7,821			—			—			7,821
Other comprehensive income		—		—		—			—			1,447			1,447
Issuance of 108 treasury shares		—		—		—			4			—			4
Cash dividends declared, $0.80 per share		—		—		(2,194	)		—			—			(2,194	)
Balance, end of period	$	18,629	$	9,815	$	59,915		$	(4,780	)	$	35		$	83,614
Three Months Ended September 30, 2018
Balance, beginning of period	$	18,629	$	9,815	$	50,736		$	(4,784	)	$	(1,818	)	$	72,578
Net income		—		—		2,432			—			—			2,432
Other comprehensive loss		—		—		—			—			(475	)		(475	)
Cash dividends declared, $0.24 per share		—		—		(658	)		—			—			(658	)
Balance, end of period	$	18,629	$	9,815	$	52,510		$	(4,784	)	$	(2,293	)	$	73,877
Nine Months Ended September 30, 2018
Balance, beginning of period	$	18,629	$	9,815	$	47,535		$	(4,784	)	$	(663	)	$	70,532
Net income		—		—		6,920			—			—			6,920
Other comprehensive loss		—		—		—			—			(1,601	)		(1,601	)
Cumulative effect adjustment equity securities, related to ASU 2016-01		—		—		29			—			(29	)		-
Cash dividends declared, $0.72 per share		—		—		(1,974	)		—			—			(1,974	)
Balance, end of period	$	18,629	$	9,815	$	52,510		$	(4,784	)	$	(2,293	)	$	73,877

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)	2019			2018
NET CASH FROM OPERATING ACTIVITIES	$	7,565		$	8,110
CASH FLOWS FROM INVESTING ACTIVITIES
Securities:
Proceeds from repayments, available-for-sale		13,431			8,726
Proceeds from repayments, held-to-maturity		5,613			6,558
Purchases, available-for-sale		(15,984	)		(2,998	)
Purchases, held-to-maturity		—			(2,030	)
Loan originations, net of repayments		(17,252	)		(18,953	)
Property, equipment, and software acquisitions		(2,150	)		(822	)
Purchase of bank-owned life insurance		(3,000	)		—
Proceeds from sale of other real estate		—			30
Net cash used in investing activities		(19,342	)		(9,489	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		51,621			4,272
Net change in short-term borrowings		(2,345	)		(2,015	)
Repayment of other borrowings		(2,072	)		(2,733	)
Cash dividends paid		(1,426	)		(1,316	)
Issuance of treasury stock		4			—
Net cash provided by (used in) financing activities		45,782			(1,792	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		34,005			(3,171	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		45,564			36,420
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	79,569		$	33,249
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest	$	3,046		$	2,037
Income taxes		2,125			1,660
Noncash financing activities:
Dividends declared		768			658
Lease adoption:
Right of use lease asset		477			—
Lease liability		469			—

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, 2019, 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, 2018, 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, 2019 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.

ADOPTION of New Accounting Pronouncements

ASU 2016-02 – Leases. This Update and all subsequent ASU’s that modified Topic 842 set 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 and lease liability. 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 and its related amendments were adopted as of January 1, 2019, which resulted in the recognition of operating right-of-use assets totaling $477 thousand and operating lease liabilities totaling $469 thousand. The Company elected to adopt the transition relief provisions from ASU 2018-11 and recorded the impact of adoption as of January 1, 2019, without restating any prior-year amounts or disclosures. The Company has presented the necessary disclosures in Note 8.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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 any 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. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November 2019.

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. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November, 2019. This Update is not expected to have a material impact on the Company’s financial statements.

ASU 2018-13 - Fair Value Measurement - Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.

ASU 2018-15 - Intangibles – Goodwill and Other – Internal-Use Software. This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.

ASU 2019-01 - Leases (Topic 842): Codification Improvements. This Update addresses issues lessors sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies, and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. 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)

NOTE 2 – SECURITIES

Securities consist of the following at September 30, 2019 and December 31, 2018:

(Dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value
September 30, 2019
Available-for-sale
U.S. Treasury security	$	996	$	1	$	—	$	997
U.S. Government agencies		3,500		—		14		3,486
Mortgage-backed securities of government agencies		53,150		307		127		53,330
Asset-backed securities of government agencies		960		—		9		951
State and political subdivisions		23,096		345		3		23,438
Corporate bonds		7,615		22		267		7,370
Total available-for-sale		89,317		675		420		89,572
Held-to-maturity
U.S. Government agencies		5,485		14		12		5,487
Mortgage-backed securities of government agencies		9,612		154		61		9,705
Total held-to-maturity		15,097		168		73		15,192
Equity securities		53		38		—		91
Restricted stock		4,614		—		—		4,614
Total securities	$	109,081	$	881	$	493		109,469
December 31, 2018
Available-for-sale
U.S. Treasury security	$	997	$	—	$	1	$	996
U.S. Government agencies		7,350		—		180		7,170
Mortgage-backed securities of government agencies		45,744		41		884		44,901
Asset-backed securities of government agencies		1,040		—		16		1,024
State and political subdivisions		23,282		49		206		23,125
Corporate bonds		8,646		—		334		8,312
Total available-for-sale		87,059		90		1,621		85,528
Held-to-maturity
U.S. Government agencies		9,482		6		390		9,098
Mortgage-backed securities of government agencies		11,206		28		214		11,020
Total held-to-maturity		20,688		34		604		20,118
Equity securities		53		30		—		83
Restricted stock		4,614		—		—		4,614
Total securities	$	112,414	$	154	$	2,225	$	110,343

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, 2019, 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	$	4,014	$	4,022
Due after one through five years		14,535		14,588
Due after five through ten years		22,148		22,276
Due after ten years		48,620		48,686
Total debt securities available-for-sale	$	89,317	$	89,572
Held-to-maturity
Due after one through five years	$	3,486	$	3,492
Due after ten years		11,611		11,700
Total debt securities held-to-maturity	$	15,097	$	15,192

Securities with a fair value of approximately $80.1 million and $83.4 million were pledged at September 30, 2019 and December 31, 2018, 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, 2019 and December 31, 2018. Federal Reserve Bank stock was $471 thousand at September 30, 2019 and December 31, 2018.

There were no proceeds from sales of securities for the three or nine month periods ending September 30, 2019 and 2018.

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, 2019 and December 31, 2018:

	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, 2019
Available-for-sale
U.S. Government agencies	$	—	$	—	$	14	$	3,486	$	14	$	3,486
Mortgage-backed securities of government agencies		51		7,977		76		10,247		127		18,224
Asset-backed securities of government agencies		—		—		9		951		9		951
State and political subdivisions		1		636		2		654		3		1,290
Corporate bonds		1		574		266		3,708		267		4,282
Held-to-maturity
U.S. Government agencies		—		—		12		4,987		12		4,987
Mortgage-backed securities of government agencies		—		—		61		3,266		61		3,266
Total temporarily impaired securities	$	53	$	9,187	$	440	$	27,299	$	493	$	36,486
December 31, 2018
Available-for-sale
U.S. Treasury security	$	1	$	996	$	—	$	—	$	1	$	996
U.S. Government agencies		—		—		180		7,170		180		7,170
Mortgage-backed securities of government agencies		33		4,206		851		35,188		884		39,394
Asset-backed securities of government agencies		16		1,024		—		—		16		1,024
State and political subdivisions		9		3,326		197		8,626		206		11,952
Corporate bonds		131		5,014		203		3,298		334		8,312
Held-to-maturity
U.S. Government agencies		—		—		390		8,609		390		8,609
Mortgage-backed securities of government agencies		72		3,404		142		3,360		214		6,764
Total temporarily impaired securities	$	262	$	17,970	$	1,963	$	66,251	$	2,225	$	84,221

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – SECURITIES (CONTINUED)

There were 37 securities in an unrealized loss position at September 30, 2019, 28 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, 2019.

Note 3 – Loans

Loans consist of the following:

(Dollars in thousands)	September 30, 2019		December 31, 2018
Commercial	$	140,835	$	146,875
Commercial real estate		212,677		183,605
Residential real estate		176,984		167,296
Construction & land development		14,946		31,227
Consumer		20,250		19,402
Total loans before deferred costs		565,692		548,405
Deferred loan costs		521		569
Total Loans	$	566,213	$	548,974

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.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Loans (CONTINUED)

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.

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, mitigates 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 $97.5 million and $92.3 million at September 30, 2019 and December 31, 2018, respectively.

Concentrations of Credit

Nearly all of the Company’s lending activity occurs within the state of Ohio, including the four 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, 2019 and December 31, 2018, 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, 2019 and 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Loans (CONTINUED)

The increase in the provision for loan losses for the three and nine months ended September 30, 2019 related to commercial and commercial real estate loans was primarily due to the increase in special mention rated loans along with loan volume increases of commercial real estate loans. The decrease in the provision related to residential real estate loans was primarily due to declining historical losses. The decrease in the provision related to construction loans was related to volume changes as loans transferred to permanent financing. The increase in the provision for consumer loans was primarily due to increasing charge-offs partially offset by lower delinquencies.

The increase in the provision for loan losses for the three months ended September 30, 2018 related to commercial loans was primarily due to the increase in specific reserves for one loan relationship. The increase in the provision related to commercial real estate loans was primarily due to the increase in substandard loans in this category.

The increase in the provision for loan losses for the nine months ended September 30, 2018 related to commercial loans was primarily due to the increase in specific reserves for impaired loans, an increase in substandard loans and charge-offs of loans in this category. The increase in the provision related to consumer loans is primarily due to the increased loan volume and charge-offs of loans in this category.

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, 2019
Beginning balance	$	2,267		$	1,946		$	1,229		$	104		$	341		$	650	$	6,537
Provision for loan losses		91			91			(74	)		12			26			139		285
Charge-offs		(20	)		—			—			—			(55	)				(75	)
Recoveries		5			1			2			—			21					29
Net charge-offs		(15	)		1			2			—			(34	)				(46	)
Ending balance	$	2,343		$	2,038		$	1,157		$	116		$	333		$	789	$	6,776
Nine months ended September 30, 2019
Beginning balance	$	2,178		$	1,791		$	1,245		$	258		$	306		$	129	$	5,907
Provision for loan losses		29			246			(93	)		(142	)		155			660		855
Charge-offs		(36	)		—			—			—			(163	)				(199	)
Recoveries		172			1			5			—			35					213
Net recoveries		136			1			5			—			(128	)				14
Ending balance	$	2,343		$	2,038		$	1,157		$	116		$	333		$	789	$	6,776
Three months ended September 30, 2018
Beginning balance	$	1,849		$	1,612		$	1,236		$	279		$	259		$	683	$	5,918
Provision for loan losses		138			74			39			8			(13	)		78		324
Charge-offs		(12	)		(22	)		—			—			(9	)				(43	)
Recoveries		5			—			—			—			—					5
Net charge-offs		(7	)		(22	)		—			—			(9	)				(38	)
Ending balance	$	1,980		$	1,664		$	1,275		$	287		$	237		$	761	$	6,204
Nine months ended September 30, 2018
Beginning balance	$	1,813		$	1,735		$	1,273		$	237		$	175		$	371	$	5,604
Provision for loan losses		364			13			38			50			117			390		972
Charge-offs		(215	)		(84	)		(37	)		—			(55	)				(391	)
Recoveries		18			—			1			—			—					19
Net charge-offs		(197	)		(84	)		(36	)		—			(55	)				(372	)
Ending balance	$	1,980		$	1,664		$	1,275		$	287		$	237		$	761	$	6,204

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, based on the impairment method as of September 30, 2019 and December 31, 2018:

(Dollars in thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Construction		Consumer		Unallocated		Total
September 30, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	18	$	17	$	1	$	—	$	—	$	—	$	36
Collectively evaluated for impairment		2,325		2,021		1,156		116		333		789		6,740
Total ending allowance balance	$	2,343	$	2,038	$	1,157	$	116	$	333	$	789	$	6,776
Loans:
Loans individually evaluated for impairment	$	2,441	$	2,694	$	865	$	—	$	14			$	6,014
Loans collectively evaluated for impairment		138,394		209,983		176,119		14,946		20,236				559,678
Total ending loans balance	$	140,835	$	212,677	$	176,984	$	14,946	$	20,250			$	565,692
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	36	$	64	$	1	$	—	$	—	$	—	$	101
Collectively evaluated for impairment		2,142		1,727		1,244		258		306		129		5,806
Total ending allowance balance	$	2,178	$	1,791	$	1,245	$	258	$	306	$	129	$	5,907
Loans:
Loans individually evaluated for impairment	$	419	$	2,403	$	1,030	$	—	$	—			$	3,852
Loans collectively evaluated for impairment		146,456		181,202		166,266		31,227		19,402				544,553
Total ending loans balance	$	146,875	$	183,605	$	167,296	$	31,227	$	19,402			$	548,405

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2019 and December 31, 2018:

(Dollars in thousands)	Unpaid Principal Balance		Investment with no Allowance		Investment with Allowance		Total recorded investment¹		Related Allowance
September 30, 2019
Commercial	$	2,856	$	2,424	$	18	$	2,442	$	18
Commercial real estate		2,981		2,519		184		2,703		17
Residential real estate		1,033		474		391		865		1
Consumer		14		14		—		14		—
Total impaired loans	$	6,884	$	5,431	$	593	$	6,024	$	36
December 31, 2018
Commercial	$	815	$	383	$	36	$	419	$	36
Commercial real estate		2,616		1,976		433		2,409		64
Residential real estate		1,190		763		269		1,032		1
Total impaired loans	$	4,621	$	3,122	$	738	$	3,860	$	101

¹	includes principal, accrued interest, unearned fees, and origination costs

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Loans (CONTINUED)

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)	2019		2018		2019		2018
Average recorded investment:
Commercial	$	3,035	$	1,648	$	1,837	$	1,544
Commercial real estate		2,767		3,236		2,413		3,474
Residential real estate		1,538		1,451		1,172		1,425
Consumer		15		—		11		—
Average recorded investment in impaired loans	$	7,355	$	6,335	$	5,433	$	6,443
Interest income recognized:
Commercial	$	12	$	10	$	49	$	31
Commercial real estate		3		4		9		12
Residential real estate		20		14		43		43
Consumer		1		—		1		—
Interest income recognized on a cash basis on impaired loans	$	36	$	28	$	102	$	86

The following table presents the aging of past due loans and nonaccrual loans as of September 30, 2019 and December 31, 2018 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, 2019
Commercial	$	139,361	$	52	$	10	$	69	$	1,343	$	1,474	$	140,835
Commercial real estate		210,171		52		—		—		2,454		2,506		212,677
Residential real estate		175,768		456		223		—		537		1,216		176,984
Construction & land development		14,946		—		—		—		—		—		14,946
Consumer		20,031		193		10		—		16		219		20,250
Total Loans	$	560,277	$	753	$	243	$	69	$	4,350	$	5,415	$	565,692
December 31, 2018
Commercial	$	146,431	$	253	$	34	$	—	$	157	$	444	$	146,875
Commercial real estate		181,388		86		—		—		2,131		2,217		183,605
Residential real estate		165,837		265		213		174		807		1,459		167,296
Construction & land development		31,169		58		—		—		—		58		31,227
Consumer		18,965		291		86		—		60		437		19,402
Total Loans	$	543,790	$	953	$	333	$	174	$	3,155	$	4,615	$	548,405

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 $2.4 million as of September 30, 2019, and $1.5 million as of December 31, 2018, with $18 thousand, and $17 thousand of specific reserves allocated to those loans at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, $2.1 million of the loans classified as TDR’s were performing in accordance with their modified terms. Of the remaining $259 thousand, all were in nonaccrual of interest status.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Loans (CONTINUED)

Other real estate owned amounted to one property at $99 thousand at September 30, 2019 and December 31, 2018, respectively. There were no consumer mortgage loans in the process of foreclosure at September 30, 2019 and $57 thousand at December 31, 2018. There were no other repossessed assets at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Number of loans restructured		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
For the Nine months ended September 30, 2019
Commercial		1	$	17	$	17
Total Restructured Loans		1	$	17	$	17
For the three months ended September 30, 2018
Commercial		2	$	27	$	27
Total Restructured Loans		2	$	27	$	27
For the Nine months ended September 30, 2018
Commercial Real Estate		1	$	200	$	200
Residential real estate		2		27		27
Total Restructured Loans		3	$	227	$	227

The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. There were no new TDR’s for the three month period ended September 30, 2019.

There was one loan in the amount of $200 thousand restructured in 2018 that has subsequently defaulted in the first quarter of 2019. None of the loans restructured in 2017 defaulted in 2018.

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.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 – Loans (CONTINUED)

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, 2019 and December 31, 2018:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Not Rated		Total
September 30, 2019
Commercial	$	109,455	$	17,264	$	13,158	$	—	$	958	$	140,835
Commercial real estate		188,712		11,581		11,338		—		1,046		212,677
Residential real estate		185		—		69		—		176,730		176,984
Construction & land development		11,304		—		110		—		3,532		14,946
Consumer		—		—		59		—		20,191		20,250
Total	$	309,656	$	28,845	$	24,734	$	—	$	202,457	$	565,692
December 31, 2018
Commercial	$	125,840	$	5,383	$	14,775	$	—	$	877	$	146,875
Commercial real estate		163,261		5,582		13,578		—		1,184		183,605
Residential real estate		194		—		637		—		166,465		167,296
Construction & land development		27,540		—		—		—		3,687		31,227
Consumer		—		—		60		—		19,342		19,402
Total	$	316,835	$	10,965	$	29,050	$	—	$	191,555	$	548,405

The following table presents loans that are not rated by class of loans as of September 30, 2019 and December 31, 2019. 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, 2019
Commercial	$	958	$	—	$	958
Commercial real estate		1,046		—		1,046
Residential real estate		176,193		537		176,730
Construction & land development		3,532		—		3,532
Consumer		20,191		—		20,191
Total	$	201,920	$	537	$	202,457
December 31, 2018
Commercial	$	877	$	—	$	877
Commercial real estate		1,184		—		1,184
Residential real estate		166,122		343		166,465
Construction & land development		3,687		—		3,687
Consumer		19,342		—		19,342
Total	$	191,212	$	343	$	191,555

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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
	September 30,		December 31,
(Dollars in thousands)	2019		2018
Securities of U.S. Government Agencies and mortgage-backed securities of government agencies pledged, fair value	$	35,250	$	37,574
Repurchase agreements		35,070		37,415

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 on a recurring basis as of September 30, 2019 and December 31, 2018 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 with readily determinable values 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. Equity securities without readily determinable values are carried at amortized cost adjusted for impairment and observable price changes.

(Dollars in thousands)	Level I		Level II		Level III		Total
September 30, 2019
Assets:
Securities available-for-sale
U.S. Treasury security	$	997	$	—	$	—	$	997
U.S. Government agencies		—		3,486		—		3,486
Mortgage-backed securities of government agencies		—		53,330		—		53,330
Asset-backed securities of government agencies		—		951		—		951
State and political subdivisions		—		23,438		—		23,438
Corporate bonds		—		7,370		—		7,370
Total available-for-sale securities	$	997	$	88,575	$	—	$	89,572
Equity securities	$	45	$	—	$	46	$	91

December 31, 2018
Assets:
Securities available-for-sale
U.S. Treasury security	$	996	$	—	$	—	$	996
U.S. Government agencies		—		7,170		—		7,170
Mortgage-backed securities of government agencies		—		44,901		—		44,901
Asset-backed securities of government agencies		—		1,024		—		1,024
State and political subdivisions		—		23,125		—		23,125
Corporate bonds		—		8,312		—		8,312
Total available-for-sale securities	$	996	$	84,532	$	—	$	85,528
Equity securities	$	37	$	—	$	46	$	83

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of September 30, 2019 and December 31, 2018, 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.

(Dollars in thousands)	Level I		Level II		Level III		Total
September 30, 2019
Assets measured on a nonrecurring basis:
Impaired loans	$	—	$	—	$	556	$	556
Other real estate owned		—		—		99		99

December 31, 2018
Assets measured on a nonrecurring basis:
Impaired loans	$	—	$	—	$	636	$	636
Other real estate owned		—		—		99		99

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FAIR VALUE MEASUREMENTS (CONTINUED)

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

(Dollars in thousands)

Fair Value

Estimate

Valuation

Techniques

Unobservable

Input

Range

(Weighted Average)

September 30, 2019

Impaired loans

556

Discounted cash flow

Remaining term

4.2 yrs to 25.7 yrs / ( 14.7 yrs)

Discount rate

5.0% to 6.0% / (5.6%)

Other real estate

owned

Appraisal of collateral ₍₁₎

Appraisal adjustments ₍₂₎

-33%

Liquidation expense ₍₂₎

-10%

December 31, 2018

Impaired loans

636

Discounted cash flow

Remaining term

1.2 yrs to 26.5 yrs / (10.9 yrs)

Discount rate

5.1% to 7.5% / (5.88%)

Other real estate

owned

Appraisal of collateral ₍₁₎

Appraisal adjustments ₍₂₎

-33%

Liquidation expense ₍₂₎

-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 fair values of recognized financial instruments as of September 30, 2019 and December 31, 2018 are as follows:

(Dollars in thousands)	Carrying Value		Level I		Level II		Level III		Fair Value
September 30, 2019
Financial assets
Cash and cash equivalents	$	79,569	$	79,569	$	—	$	—	$	79,569
Securities available-for-sale		89,572		997		88,575		—		89,572
Securities held-to-maturity		15,097		—		15,192		—		15,192
Equity securities		91		45		—		46		91
Restricted stock		4,614	N/A		N/A		N/A		N/A
Loans held for sale		399		399		—		—		399
Net loans		559,437		—		—		563,354		563,354
Bank-owned life insurance		16,880		16,880		—		—		16,880
Accrued interest receivable		1,820		1,820		—		—		1,820
Mortgage servicing rights		311		—		—		311		311
Financial liabilities
Deposits	$	658,119	$	531,660	$	—	$	126,532	$	658,192
Short-term borrowings		35,070		35,070		—		—		35,070
Other borrowings		6,453		—		—		6,427		6,427
Accrued interest payable		123		123		—		—		123

December 31, 2018
Financial assets
Cash and cash equivalents	$	45,564	$	45,564	$	—	$	—	$	45,564
Securities available-for-sale		85,528		996		84,532		—		85,528
Securities held-to-maturity		20,688		—		20,118		—		20,118
Equity securities		83		37		—		46		83
Restricted stock		4,614	N/A		N/A		N/A		N/A
Loans held for sale		108		108		—		—		108
Net loans		543,067		—		—		543,076		543,076
Bank-owned life insurance		13,554		13,554		—		—		13,554
Accrued interest receivable		1,581		1,581		—		—		1,581
Mortgage servicing rights		281		—		—		281		281
Financial liabilities
Deposits	$	606,498	$	490,007	$	—	$	114,434	$	604,441
Short-term borrowings		37,415		37,415		—		—		37,415
Other borrowings		8,525		—		—		8,251		8,251
Accrued interest payable		88		88		—		—		88

The Company also has unrecognized financial instruments at September 30, 2019 and December 31, 2018. These financial instruments relate to commitments to extend credit and letters of credit. The aggregated contract amount of such financial instruments was approximately $190 million at September 30, 2019 and $173.3 million at December 31, 2018. 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. 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 period ended September 30, 2019 and 2018:

(Dollars in thousands)	Pretax			Tax Effect			After-tax
Three months ended September 30, 2019
Balance as of June 30, 2019	$	(245	)	$	51		$	(194	)
Unrealized holding gain on available-for-sale securities arising during the period		275			(58	)		217
Amortization of held-to-maturity discount resulting from transfer		15			(3	)		12
Total other comprehensive income		290			(61	)		229
Balance as of September 30, 2019	$	45		$	(10	)	$	35
Nine months ended September 30, 2019
Balance as of December 31, 2018		(1,786	)		374		$	(1,412	)
Unrealized holding gain on available-for-sale securities arising during the period		1,786			(374	)		1,412
Amortization of held-to-maturity discount resulting from transfer		45			(10	)		35
Total other comprehensive income		1,831			(384	)		1,447
Balance as of September 30, 2019	$	45		$	(10	)	$	35
Three months ended September 30, 2018
Balance as of June 30, 2018	$	(2,301	)	$	483		$	(1,818	)
Unrealized holding loss on available-for-sale securities arising during the period		(620	)		129			(491	)
Amortization of held-to-maturity discount resulting from transfer		20			(4	)		16
Total other comprehensive loss		(600	)		125			(475	)
Balance as of September 30, 2018	$	(2,901	)	$	608		$	(2,293	)
Nine months ended September 30, 2018
Balance as of December 31, 2017	$	(839	)	$	176		$	(663	)
Unrealized holding loss on available-for-sale securities arising during the period		(2,088	)		439			(1,649	)
Amortization of held-to-maturity discount resulting from transfer		62			(14	)		48
Total other comprehensive loss		(2,026	)		425			(1,601	)
Reclassify equity AOCI gain to retained earnings		(36	)	7				(29	)
Balance as of September 30, 2018	$	(2,901	)	$	608		$	(2,293	)

Note 8 – LEASES

Operating leases in which the Company is the lessee are recorded as operating lease Right of Use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the consolidated balance sheets. The Company does not currently have any finance leases. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. The Company elected to adopt the transition method, which uses a modified retrospective transition approach. ROU assets and operating lease liabilities are recognized as of the date of adoption based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the date of initial application.

Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy and equipment expense in the consolidated statements of income and other comprehensive income. The leases relate to bank branches with remaining lease terms of generally 7 to 8 years. Certain lease arrangements contain extension options which are typically 5 years at the then fair market rental rates. As these extension options are generally considered reasonably certain of exercise, they are included in the lease term.

CSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 – LEASES (CONTINUED)

As of September 30, 2019, operating lease ROU assets were $437 thousand and liabilities were $419 thousand. At September 30, 2019, CSB recognized $54 thousand in operating lease cost.

The following table summarizes other information related to our operating leases:

September 30, 2019
Weighted-average remaining lease term - operating leases in years	6.9
Weighted-average discount rate - operating leases	3.77	%

The following table presents aggregate lease maturities and obligations as of September 30, 2019:

(Dollars in thousands)
September 30, 2019
2019	$	9
2020		63
2021		71
2022		71
2023		71
2024 and thereafter		195
Total lease payments		480
Less: interest		61
Present value of lease liabilities	$	419

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, 2019 as compared to December 31, 2018, and the consolidated results of operations for the three and nine month periods ended September 30, 2019 compared to the same periods in 2018. 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 $787 million at September 30, 2019 as compared to $732 million at December 31, 2018. During the nine month period ended September 30, 2019, net loans increased $16 million. Cash and cash equivalents, and securities increased $34 million. On the liability side, deposits and repurchase agreements increased by $49 million.

Net loans increased $16 million, or 3%, as combined commercial real estate and construction loans increased $13 million, or 6%, and residential real estate loans increased $9 million, or 6% from December 31, 2018. Commercial loans decreased $6 million, or 4%, as business lines of credits decreased on the improved cash flow of businesses within the bank’s markets. Consumers continued to refinance their mortgage loans for historically low long-term fixed rates while home purchase activity has increased. Residential mortgage loan originations for the nine months ended September 30, 2019 totaled $48 million, an increase from $44 million in originations during the nine month period ended September 30, 2018. Originations sold into the secondary market were $11.3 million and $5.8 million, respectively during the nine month periods ended September 30, 2019 and September 30, 2018. The Bank originates and sells primarily fixed-rate thirty year mortgages into the secondary market.

CSB BANCORP, INC.

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

The allowance for loan losses as a percentage of total loans was 1.20% at September 30, 2019 as compared to 1.08% at December 31, 2018. Outstanding loan balances increased 3% to $566 million at September 30, 2019. The allowance for loan losses increased to $6.8 million at September 30, 2019 following a provision of $855 thousand and net loan recoveries of $14 thousand for the current nine months ended September 30, 2019.

Nonaccrual loans increased during the first nine months of 2019. For the nine months ending September 30, 2019 loans totaling $2.0 million were placed on nonaccrual status, there were $55 thousand in charge-downs recognized, and pay downs of $793 thousand were received.

	September 30,			December 31,			September 30,
(Dollars in thousands)	2019			2018			2018
Non-performing loans	$	4,419		$	3,329		$	5,341
Other real estate		99			99			—
Repossessed assets		—			—			—
Allowance for loan losses		6,776			5,907			6,204
Total loans		566,213			548,974			535,424
Allowance: Loans		1.20	%		1.08	%		1.16	%
Allowance: Non-performing loans	1.5x			1.8x			1.2x

The ratio of gross loans to deposits was 86.0% at September 30, 2019, compared to 90.5% at December 31, 2018.

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 $493 thousand within the available-for-sale and held-to-maturity portfolios as of September 30, 2019, 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 embedded security impairments on September 30, 2019, are considered temporary and no impairment loss relating to these securities has been recognized.

Deposits increased $52 million, or 9%, from December 31, 2018 with noninterest bearing deposits increasing approximately $7 million and interest-bearing deposit accounts increasing approximately $45 million. Total deposits as of September 30, 2019 are $71 million greater than September 30, 2018 deposit balances. On a year over year comparison, increases were recognized in noninterest-bearing demand deposits of $15 million, interest-bearing demand deposits of $34 million, money market accounts of $8 million, savings of $4 million, and time deposits of $10 million.

Short-term borrowings consisting of overnight repurchase agreements with retail customers decreased $2 million to $35 million at September 30, 2019 as compared to December 31, 2018 and other borrowings decreased $2.1 million as the Company repaid FHLB advances.

Total shareholders’ equity amounted to $84 million, or 10.6%, of total assets at September 30, 2019 up slightly from December 31, 2018. The increase in shareholders’ equity during the nine months ending September 30, 2019 was due to net income of $7.8 million and an increase in accumulated other comprehensive income of $1.4 million offset by dividends declared of $2.2 million. The Company and the Bank met all regulatory capital requirements at September 30, 2019.

RESULTS OF OPERATIONS

Three months ended September 30, 2019 and 2018

For the quarters ended September 30, 2019 and 2018, the Company recorded net income of $2.7 million and $2.4 million and $0.98 and $0.88 per share, respectively. The $263 thousand increase in net income for the period was primarily the result of a $387 thousand increase in net interest income, an increase of $265 thousand in other noninterest income, and a decrease in the provision for loan losses of $39 thousand. The increases were partially offset by an increase of $361 thousand in other noninterest expenses and a $67 thousand increase in federal income tax provision.

Return on average assets and return on average equity were 1.38% and 12.89%, respectively, for the three month period of 2019, compared to 1.34% and 13.07%, respectively for the same quarter in 2018.

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,
	2019					2018
(Dollars in thousands)	Average balance		Average rate			Average balance		Average rate
ASSETS
Federal funds sold	$	393		2.02	%	$	485		1.64	%
Interest-earning deposits with other banks		59,681		2.35			23,357		2.12
Taxable securities		87,091		2.43			91,149		2.55
Tax-exempt securities		23,494		2.84			26,108		2.93
Loans		554,957		5.18			538,182		4.95
Total earning assets		725,616		4.54	%		679,281		4.45	%
Other assets		47,866					41,091
TOTAL ASSETS	$	773,482				$	720,372

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits	$	141,260		0.49	%	$	116,321		0.29	%
Savings deposits		191,124		0.49			181,172		0.40
Time deposits		124,888		1.76			116,906		1.23
Other borrowed funds		43,335		0.99			51,264		1.07
Total interest bearing liabilities		500,607		0.85	%		465,663		0.66	%
Non-interest bearing demand deposits		186,710					178,339
Other liabilities		3,217					2,526
Shareholders' Equity		82,948					73,844
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	773,482				$	720,372

Taxable equivalent net interest spread				3.69	%				3.79	%
Taxable equivalent net interest margin				3.95	%				4.00	%

Interest income for the quarter ended September 30, 2019, was $8.3 million representing a $690 thousand increase, or a 9% improvement, compared to the same period in 2018. This increase was primarily due to average loan rates increasing 23 basis points as well as a volume increase of $17 million for the quarter ended September 30, 2019 as compared to the third quarter 2018. Interest expense for the quarter ended September 30, 2019 was $1.1 million, an increase of $302 thousand, or 39%, from the same period in 2018. The increase in interest expense occurred primarily due to an increase in rates on all deposit liabilities for the quarter ended September 30, 2019.

For the quarter ended September 30, 2019, the provision for loan losses was $285 thousand, compared to a provision of $324 thousand provision for the same quarter in 2018. For more discussion see Financial Condition. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.

Noninterest income for the quarter ended September 30, 2019, was $1.4 million, an increase of $265 thousand, or 23%, compared to the same quarter in 2018. Service charges on deposit accounts increased $32 thousand, or 11%, compared to the same quarter in 2018 primarily from a volume increase in overdraft fees. The gain on the sale of mortgage loans to the secondary market increased to $132 thousand for the quarter ended September 30, 2019 as additional loan volume was sold into the secondary market. Debit card interchange income increased $47 thousand, or 14%, with greater fees generated from usage in the third quarter of 2019. Fees from trust and brokerage services increased $30 thousand to $234 thousand for the third quarter 2019 as compared to the same quarter in 2018. Earnings on bank owned life insurance increased $34 thousand for the third quarter 2019, see discussion in Results of Operations for the nine months periods.

CSB BANCORP, INC.

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

Noninterest expenses for the quarter ended September 30, 2019 increased $361 thousand, or 8%, compared to the third quarter of 2018. Salaries and employee benefits increased $188 thousand, or 7%, a result of increases in employees, base salary, and other benefits. Marketing and public relations expense increased $25 thousand, or 20%, primarily due to brand recognition initiatives and the opening of a new banking center. Debit card expenses decreased $2 thousand, or 1%, compared to the third quarter 2018 with increased volume. Software expense rose $4 thousand quarter over quarter with additional investment. Occupancy expense increased $15 thousand in 2019 over the third quarter of 2018. Professional and director fees increased $117 thousand for the quarter ended September 30, 2019 as compared to the third quarter 2018. The increase was primarily a result of increased professional service costs related to network improvements.

Federal income tax expense increased $67 thousand, or 12%, for the quarter ended September 30, 2019 as compared to the third quarter of 2018. The provision for income taxes was $649 thousand (effective rate of 19%) for the quarter ended September 30, 2019, compared to $582 thousand (effective rate of 19%) for the same quarter ended 2018.

RESULTS OF OPERATIONS

Nine months ended September 30, 2019 and 2018

For the nine months ended September 30, 2019 and 2018, the Company recorded net income of $7.8 million and $6.9 million and $2.85 and $2.52 per share, respectively. The $901 thousand increase in net income for the quarter was primarily the result of a $1.4 million increase in net interest income, an increase of $489 thousand in other noninterest income, and a decrease in the provision for loan losses of $117 thousand. The increases were partially offset by an increase of $896 thousand in other noninterest expenses and an increase in the federal income tax provision of $237 thousand.

Return on average assets and return on average equity were 1.39% and 13.00%, respectively, for the nine month period of 2019, compared to 1.30% and 12.79%, respectively for the same quarter in 2018.

CSB BANCORP, INC.

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

Average Balance Sheets and Net Interest Margin Analysis

	For the nine months ended September 30,
	2019					2018
(Dollars in thousands)	Average balance		Average rate			Average balance		Average rate
ASSETS
Federal funds sold	$	335		2.23	%	$	501		2.03	%
Interest-earning deposits in other banks		42,087		2.36			17,348		1.91
Taxable securities		87,364		2.61			93,336		2.56
Tax-exempt securities		23,317		2.92			26,977		2.91
Loans		551,157		5.22			533,492		4.86
Total earning assets		704,260		4.65	%		671,654		4.38	%
Other assets		45,699					40,634
TOTAL ASSETS	$	749,959				$	712,288

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits	$	129,187		0.45	%	$	117,086		0.27	%
Savings deposits		188,530		0.53			180,669		0.33
Time deposits		122,638		1.67			115,388		1.11
Other borrowed funds		44,506		1.11			52,222		0.96
Total interest bearing liabilities		484,861		0.85	%		465,365		0.58	%
Non-interest bearing demand deposits		181,585					172,194
Other liabilities		3,054					2,367
Shareholders' Equity		80,459					72,362
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	749,959				$	712,288

Taxable equivalent net interest spread				3.80	%				3.80	%
Taxable equivalent net interest margin				4.06	%				3.98	%

Interest income for the nine months ended September 30, 2019, was $24 million representing a $2.5 million increase, or a 11% improvement, compared to the same period in 2018. This increase was primarily due to the increase in average loan rates, as well as loan volume increasing $18 million for the period ended September 30, 2019 as compared to the same period in 2018. Interest expense for the nine months ended September 30, 2019 was $3.1 million, an increase of $1.1 million, or 52%, from the same period in 2018. The increase in interest expense occurred primarily due to an increase in rate on all interest-bearing liabilities for the nine month period ended September 30, 2019.

For the nine month period ended September 30, 2019, the provision for loan losses was $855 thousand, compared to a provision of $972 thousand provision for the same period in 2018. For more discussion see Financial Condition. The provision for loan losses is determined based on management’s calculation of the adequacy of the allowance for loan losses, which includes provisions for classified loans as well as for the remainder of the portfolio based on historical data, including past charge-offs and current economic trends.

Noninterest income for the nine month period ended September 30, 2019, was $4 million, an increase of $489 thousand, or 14%, compared to the same period in 2018. Service charges on deposit accounts increased $53 thousand, or 6%, compared to the same period in 2018 primarily from increases in overdraft fees. Debit card interchange income increased $127 thousand, or 13%, with increased card usage in the first nine months of 2019. The cash surrender value of bank owned life insurance policies increased $74 thousand for the period with the additional purchase of $3 million in policies in 2019. The gain on the sale of mortgage loans to the secondary market increased $87 thousand to $287 thousand for the nine month period ended September 30, 2019. Fees from trust and brokerage services increased $29 thousand for the period.

CSB BANCORP, INC.

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

Noninterest expenses for the nine month period ended September 30, 2019 increased $896 thousand, or 6.5%, compared to the same period in 2018. Salaries and employee benefits increased $590 thousand, or 7%, a result of increases in employees, base salary, and other benefits. Marketing and public relations expense increased $42 thousand, or 12%, with increases in market, brand recognition initiatives, and community support in the company’s market. Debit card expenses increased $15 thousand, or 4%, compared to the prior period in 2018. Occupancy expense declined $10 thousand over the same period in 2018 with a decrease in depreciation and rental expense. Professional and director fees increased $214 thousand for the nine month period ended September 30, 2019 as compared to the same period in 2018 with increases in professional service fees to improve the network.

Federal income tax expense increased $237 thousand, or 14%, for the nine months ended September 30, 2019 as compared to the same period in 2018. The provision for income taxes was $1.9 million (effective rate of 19%) for the nine month period ended September 30, 2019, compared to $1.6 million (effective rate of 19%) for the same period ended 2018.

CAPITAL RESOURCES

The Company maintained a strong capital position with tangible common equity to tangible assets of 10.1% at September 30, 2019 compared with 9.9% at December 31, 2018.

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

Failure to meet specified minimum capital requirements could result in regulatory actions by the Federal Reserve or Ohio Division of Financial Institutions that could have a material effect on the Company’s financial condition or results of operations. Management believes there were no material changes to capital resources as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. As of September 30, 2019 the Company and the Bank met all capital adequacy requirements to which they were subject.

During October 2019, the federal banking agencies adopted an optional community bank leverage ratio. Depository institutions and depository institution holding companies, that have less than $10 billion in total consolidated assets and have a tier I leverage ratio of greater than 9 percent, are considered qualifying community banking organizations and are eligible to opt into the community bank leverage ratio framework. Additionally, such insured depository institutions are considered to have satisfied the risk-based and leverage capital requirements and will be considered well-capitalized under the rule, effective January 1, 2020. The Company met the well-capitalized ration under the new standard at both September 30, 2019 and December 31, 2018.

CSB BANCORP, INC.

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

	Capital Ratios
	September 30, 2019			December 31, 2018
Common Equity Tier 1 Capital To Risk Weighted Assets
Consolidated		13.9	%		13.4	%
Bank		13.7	%		13.2	%

Tier 1 Capital To Risk Weighted Assets Ratio
Consolidated		13.9	%		13.4	%
Bank		13.7	%		13.2	%

Total Capital To Risk Weighted Assets Ratio
Consolidated		15.1	%		14.5	%
Bank		14.9	%		14.3	%

Tier 1 Leverage Ratio
Consolidated		10.2	%		10.1	%
Bank		10.1	%		9.9	%

LIQUIDITY

(Dollars in millions)	September 30, 2019			December 31, 2018			Change
Cash and cash equivalents	$	80		$	46		$	34
Unused lines of credit		96			89			7
Unpledged AFS securities at fair market value		40			39			1
	$	216		$	174		$	42
Net deposits and short-term liabilities	$	644		$	599		$	45
Liquidity ratio		33.5	%		29.1	%		—
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 33.5% and 29.1% at September 30, 2019 and December 31, 2018.

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, 2019, from the disclosures presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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

The following table presents an analysis of the estimated sensitivity of the Company’s annual net interest income to sudden and sustained -200 through +400 basis point changes, in 100 basis point increments, in market interest rates at September 30, 2019 and -200 through +400 basis point changes at December 31, 2018. 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, 2019
(Dollars in thousands)
Change in Interest Rates (basis points)	Net Interest Income		Dollar Change			Percentage Change			Board Policy Limits
+400	$	29,887	$	1,102			3.8	%	+/- 25%
+300		29,666		881			3.1		+/-15
+200		29,372		587			2.0		+/-10
+100		29,086		301			1.1		+/-5
0		28,785		—			—			—
-100		28,466		(319	)		(1.1	)	+/-5
-200		27,743		(1,042	)		(3.6	)	+/-10

December 31, 2018
+400	$	30,114	$	931			3.2	%	+/- 25%
+300		29,922		739			2.5		+/-15
+200		29,701		518			1.8		+/-10
+100		29,436		253			0.9		+/-5
0		29,183		—			—			—
-100		28,831		(352	)		(1.2	)	+/-5
-200		27,880		(1,303	)		(4.5	)	+/-10

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, 2019

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, 2018.

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, 2019.

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, 2019

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, 2019 formatted in XBRL (extensible Business Reporting Language): (i) Consolidated Balance Sheets: (ii) Consolidated Statements of Income: (iii) Consolidated Statements of Comprehensive Income: (iv) Consolidated Statements of Changes in Shareholders’ Equity: (v) Condensed Consolidated Statements of Cash Flows: and (vi) Notes to Consolidated Financial Statements.

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 8, 2019	/s/ Eddie L. Steiner
		Eddie L. Steiner
		President
		Chief Executive Officer


Date:	November 8, 2019	/s/ Paula J. Meiler
		Paula J. Meiler
		Senior Vice President
		Chief Financial Officer

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