CSB BANCORP, INC. 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 atJune 30, 2021 as compared toDecember 31, 2020 , and the consolidated results of operations for the three and six months endedJune 30, 2021 compared to the same periods in 2020. The purpose of this discussion is to provide the reader with a more thorough understanding of the Consolidated Financial Statements. This discussion should be read in conjunction with the interim condensed Consolidated Financial Statements and related footnotes contained in Part I, Item 1 of this Quarterly Report.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report are not historical facts but rather are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates", "plans", "expects", "believes", and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. Other factors not currently anticipated may also materially and adversely affect the Company's results of operations, cash flows, and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as may be required by applicable law. FINANCIAL CONDITION Total assets were$1.1 billion atJune 30, 2021 as compared to$1.0 billion atDecember 31, 2020 . During the six months endedJune 30, 2021 , net loans decreased$57 million . Cash and cash equivalents, and securities increased$150 million . Deposits and short-term borrowings increased$96 million . Net loans decreased$57 million , or 9%, as commercial real estate and construction loans decreased$4 million , or 2%, and residential real estate loans decreased$6 million , or 3%, fromDecember 31, 2020 . Commercial loans decreased$47 million , or 24%. Loans originated under SBA Paycheck Protection Program totaled$37 million during the first six months of 2021 and$92 million during 2020. Consumers continued to refinance their mortgage loans for historically low long-term fixed rates while home purchase activity remained robust despite limited inventory through the first half of 2021. Residential mortgage loan originations for the six months endedJune 30, 2021 totaled$58.7 million , an increase from$55.9 million in originations during the six months endedJune 30, 2020 . Originations sold into the secondary market were$27 million and$22 million , respectively during the six months endedJune 30, 2021 andJune 30, 2020 . The Bank originates and sells primarily fixed rate thirty-year mortgages into the secondary market. The allowance for loan losses increased$40 thousand from the year ago quarter to$7.9 million . The Company has not early adopted CECL which has been delayed for smaller reporting companies. Year over year outstanding loan balances decreased 13% to$552 million atJune 30, 2021 . Net recoveries were$46 thousand , or an annualized -0.02% of average loans, in the current six-month period compared to the$77 thousand net charge-off, or 0.03% of average loans in the year-ago six-month period. AtJune 30, 2021 , the allowance for total loans minus the SBA guaranteed Payroll Protection loans was 1.53%. We believe the allowance level is appropriate given the low level of problem loans and current composition of the overall loan portfolio in the current economic environment. 27
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CSB BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Nonperforming loans decreased $1.6 million to $2.8 million , or 0.50%, of total
loans from $4.4 million , or 0.69%, a year ago. For the six months ended June 30,
2021 , $321 thousand loans were placed on nonaccrual status, $348 thousand in
paydowns, and the bank returned $1.6 million back to accrual status due to
ongoing payment performance.
June 30, December 31, June 30,
(Dollars in thousands) 2021 2020 2020
Non-performing loans $ 2,786 $ 4,497 $ 4,382
Other real estate - - 98
Repossessed assets - - -
Allowance for loan losses 7,875 8,274 7,835
Total loans $ 552,030 $ 609,159 $ 636,799
Allowance for loan losses as a percentage of
total loans 1.43 % 1.36 % 1.23 %
Allowance for loan losses to total
nonperforming loans 2.8x 1.8x 1.7x
The ratio of gross loans to deposits was 55.9% at
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$2.0 million within the available-for-sale and held-to-maturity portfolios as ofJune 30, 2021 , was primarily the result of current market yields compared to the yields at the time the investments were purchased by the Company and not due to credit quality. As a result, all embedded security losses onJune 30, 2021 , are considered temporary and no impairment loss relating to these securities has been recognized. Deposits increased$95 million , or 11%, fromDecember 31, 2020 with noninterest-bearing deposits increasing approximately$31 million and interest-bearing deposit accounts increasing approximately$64 million . Total deposits as ofJune 30, 2021 are$987 million , or 21%, greater thanJune 30, 2020 deposit balances. On a year over year comparison, increases were recognized in noninterest-bearing demand deposits of$48 million , interest-bearing demand deposits of$68 million , money market accounts of$13 million , savings of$42 million , and time deposits remained stable. During 2020 and continuing into 2021, the Bank's customers increased deposits through stimulus payments and cash conservation as a result of the COVID-19 pandemic. Short-term borrowings consisting of overnight repurchase agreements with retail customers increased$1.3 million to$38 million atJune 30, 2021 as compared toDecember 31, 2020 and other borrowings decreased$1 million as the Company repaid FHLB advances. Total shareholders' equity amounted to$96 million , or 8.5%, of total assets atJune 30, 2021 an increase from$93.9 million December 31, 2020 . The increase in shareholders' equity during the six months endedJune 30, 2021 was due to net income of$5.6 million partially offset by cash dividends of$1.6 million , other comprehensive loss of$1.5 million and the repurchase of treasury shares for$313 thousand . The Company and the Bank met all regulatory capital requirements atJune 30, 2021 . RESULTS OF OPERATIONS
Three months ended
For the quarters endedJune 30, 2021 and 2020, the Company recorded net income of$2.7 million and$2.6 million and$1.00 and$0.95 per share, respectively. The$139 thousand increase in net income for the period was primarily the result of a reversal of provision for loan losses of$475 thousand and a$202 thousand increase in noninterest income. The increases were partially offset by an increase in noninterest expenses of$681 thousand , a$541 thousand decrease in net interest income and a$33 thousand increase in the federal income tax provision. Return on average assets and return on average equity were 0.97% and 11.62%, respectively, for the three-month period of 2021, compared to 1.15% and 11.72%, respectively for the same quarter in 2020. 28 --------------------------------------------------------------------------------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 June 30,
2021 2020
Average Average Average Average
(Dollars in thousands) balance1 Interest rate2 balance1 Interest rate2
ASSETS
Interest-earning deposits $ 291,587 $ 68 0.09 % $ 117,916 $ 31 0.11 %
Taxable securities 193,252 604 1.25 99,353 481 1.95
Tax-exempt securities 4 24,029 141 2.35 21,858 145 2.65
Loans 3,4 564,997 6,239 4.43 621,710 7,110 4.60
Total interest-earning assets 1,073,865 7,052 2.63 % 860,837 7,767 3.63 %
Noninterest-earning assets 57,386 52,038
TOTAL ASSETS $ 1,131,251 $ 912,875
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing demand deposits$ 281,376 $ 94 0.13 %$ 186,993 79 0.17 % Savings deposits 276,746 70 0.10 215,644 70 0.13 Time deposits 124,436 345 1.11 126,475 523 1.66 Borrowed funds 44,956 34 0.30 51,748 47 0.37 Total interest-bearing liabilities 727,514 543 0.30 % 580,860 719 0.50 % Noninterest-bearing demand deposits 305,459 238,876 Other liabilities 3,492 3,735 Shareholders' Equity 94,786 89,404
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY$ 1,131,251 $ 912,875 Taxable equivalent net interest income, (Non-GAAP)$ 6,509 $ 7,048 Tax equivalent adjustment 4 (38 ) (36 ) Net interest income, (GAAP)$ 6,471 $ 7,012 Net interest margin, (GAAP) 2.42 % 3.27 % Tax equivalent adjustment 4 0.01 0.02 Net interest margin-taxable equivalent, (Non-GAAP) 2.43 % 3.29 % Taxable equivalent net interest spread 2.33 % 3.13 %
1 Average balances have been computed on an average daily basis.
2 Average rates have been computed based on the amortized cost of the corresponding asset or liability.
3 Average loan balances include nonaccrual loans.
4 Interest income is shown on a fully tax-equivalent basis, which is a Non-GAAP measure and is reconciled to the GAAP measure at the bottom of the table.
Interest income for the quarter endedJune 30, 2021 , was$7 million representing a$717 thousand decrease, or a 9% decline, compared to the same period in 2020. This decrease was primarily due to average loan volume decreasing$57 million as well as average loan rates decreasing 17 basis points for the quarter endedJune 30, 2021 as compared to the same period in 2020. Interest expense for the quarter endedJune 30, 2021 was$543 thousand , a decrease of$176 thousand , or 24%, from the same quarter in 2020. The decrease in interest expense occurred primarily due to a decrease in rates on all liabilities for the quarter endedJune 30, 2021 , partially offset by increases in the average deposit balances. 29
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CSB BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the quarter ended June 30, 2021 , with stimulus programs, improving credit
quality, and a decrease of outstanding loan balances, the bank recognized a
negative (credit) provision of $475 thousand to the provision for loan losses,
compared to a loss provision of $717 thousand for the same quarter in 2020. The
Company's provision for loan losses for the three months ended June 30, 2020 ,
reflected the unknown COVID-19 pandemic and an elevated qualitative factor
adjustment ("Q-factor") under managements estimate of loss at that time. The
recapture of provision for loan losses for the current quarter primarily
reflects the decrease in loan balances, as well as the improvement in economic
indicators including unemployment, residential real estate prices and consumer
confidence over 2020. 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 June 30, 2021 , was $1.8 million , an
increase of $202 thousand , or 12%, compared to the same quarter in 2020. The
gain on the sale of mortgage loans to the secondary market decreased by $90
thousand for the quarter ended June 30, 2021 as fewer loans were sold into the
secondary market due to decreasing inventories of homes available for sale and
decreasing demand for mortgage rewrites. Debit card interchange income increased
$126 thousand , or 32%, with greater fees generated from usage in the second
quarter 2021. Earnings on bank owned life insurance increased $13 thousand for
the second quarter 2021 a result of adding policies in 2020. Fees from trust and
brokerage services amounted to $264 thousand for the second quarter 2021, an
increase of $68 thousand , or 35%, as compared to the same quarter in 2020.
Service charges on deposit accounts increased $8 thousand , or 4%, compared to
the same quarter in 2020 primarily from a slight volume increase in overdraft
fees.
Noninterest expenses for the quarter ended June 30, 2021 increased $681
thousand , or 14%, compared to the second quarter 2020. Salaries and employee
benefits increased $368 thousand , or 14%, a result of a decrease in
capitalization of approximately $262 thousand in salary and benefits expense to
deferred loan origination costs related to new commercial and mortgage loan
originations. Increases were recognized in base wage, social security benefits
and incentive accruals. FDIC assessment amounted to $120 thousand as compared to
$12 thousand in the second quarter 2020 due to small bank assessment credits
being utilized in 2020. The Ohio financial institutions tax increased $16
thousand in the second quarter due to the Company's increased capital base.
Marketing and public relations expense increased $33 thousand , or 51%, primarily
due to more events taking place after being cancelled due to COVID-19. Debit
card expenses increased $26 thousand , or 18%, compared to the second quarter
2020 with increased volume. Software expense rose $77 thousand quarter over
quarter with additional investment. Occupancy expense increased $3 thousand in
2021 over the second quarter 2020. Professional and director fees increased $74
thousand for the quarter ended June 30, 2021 as compared to the second quarter
2020. This increase resulted from an increase in collection legal fees, an
increase in audit expense and an increase in director's compensation.
Federal income tax expense increased $33 thousand , or 5%, for the quarter ended
June 30, 2021 as compared to the second quarter 2020. The provision for income
taxes was $654 thousand (effective rate of 19%) for the quarter ended June 30,
2021 , compared to $621 thousand (effective rate of 19%) for the same quarter
ended 2020.
RESULTS OF OPERATIONS
Six months ended
For the six months endedJune 30, 2021 and 2020, the Company recorded net income of$5.6 million and$5.1 million and$2.05 and$1.86 per share, respectively. The$541 thousand increase in net income for the six-month period was primarily the result of a negative loan loss provision of$445 thousand for the period as compared to a loss provision of$895 thousand for the same period in 2020. Other income increased$737 thousand . The increases were partially offset by an increase of$955 thousand in noninterest expense, a$449 thousand decrease in net interest income, and an$132 thousand increase in the federal income tax provision. Return on average assets and return on average equity were 1.04% and 11.97%, respectively, for the six months endedJune 30, 2021 , compared to 1.19% and 11.60%, respectively for the same period in 2020. 30 --------------------------------------------------------------------------------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 Six
Months Ended
2021 2020
Average Average Average Average
(Dollars in thousands) balance1 Interest rate2 balance1 Interest rate2
ASSETS
Interest-earning deposits in other
banks 247,638 114 0.09 % 96,867 270 0.56 %
Taxable securities 187,476 1,163 1.25 101,915 1,090 2.14
Tax-exempt securities4 23,700 281 2.39 21,521 296 2.76
Loans3,4 580,572 13,113 4.55 590,926 13,965 4.74
Total earning assets 1,039,386 14,671 2.85 % 811,229 15,621 3.86 %
Other assets 56,692 51,410
TOTAL ASSETS $ 1,096,078 $ 862,639 © Edgar Online, source
