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2021 FINANCIAL REVIEW
INTRODUCTION
CSB Bancorp, Inc. (the "Company" or "CSB") was incorporated under the laws of theState of Ohio in 1991 and is a registered financial holding company. The Company's wholly owned subsidiaries areThe Commercial andSavings Bank (the "Bank") andCSB Investment Services, LLC . The Bank is chartered under the laws of theState of Ohio and was organized in 1879. The Bank is a member of theFederal Reserve System , with deposits insured by theFederal Deposit Insurance Corporation , and its primary regulators are theOhio Division of Financial Institutions and theFederal Reserve Board . The Company, through the Bank, provides retail and commercial banking services to its customers including checking and savings accounts, time deposits, cash management, safe deposit facilities, personal loans, commercial loans, real estate mortgage loans, installment loans, IRAs, night depository facilities, and trust and brokerage services. Its customers are located primarily inHolmes ,Stark ,Tuscarawas ,Wayne , and portions of surrounding counties inOhio . Economic activity in the Company's market area expanded moderately in the fourth quarter of 2021 after solid growth earlier in the year stemming from a continued recovery following the COVID-19 pandemic economic effects of 2020. Demand for goods and services has been strong; however, supply chain challenges have affected growth in many sectors of the economy. Consumer spending has increased modestly, although in some sectors, limited inventory and higher prices have deterred some buyers. Reported unemployment levels inDecember 2021 ranged from 2.0% to 3.5% in the four primary counties served by the Company. These levels decreased from theDecember 2020 range of 2.7% to 5.2% in the four counties served by the Company. Labor demand remained solid as competition for workers has put upward pressure on labor costs. The local housing market continues to be strong with supply still relatively tight. Construction costs remain high as continued supply chain disruptions have contributed to the increase. FORWARD-LOOKING STATEMENTS Certain statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations are not related to historical results but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties. Any forward-looking statements made by the Company herein and in future reports and statements are not guarantees of future performance. Actual results may differ materially from those in forward-looking statements because of various risk factors as discussed in this annual report. The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions to any forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date of such statements. 18
-------------------------------------------------------------------------------- FINANCIAL DATA The following table set forth certain selected consolidated financial information: (Dollars in thousands, except share data) 2021 2020 2019 2018 2017 Statements of income: Total interest income$ 29,529 $ 31,066 $ 32,461 $ 29,637 $ 26,440 Total interest expense 2,012 2,913 4,062 2,886 1,988 Net interest income 27,517 28,153 28,399 26,751 24,452 Provision (recovery) for loan losses (655 ) 1,650 1,140 1,316 1,145 Net interest income after provision (recovery) for loan losses 28,172 26,503 27,259 25,435 23,307 Noninterest income 7,325 6,935 5,428 4,758 4,340 Noninterest expense 22,093 20,342 19,769 18,518 17,316 Income before income taxes 13,404 13,096 12,918 11,675 10,331 Income tax provision 2,567 2,528 2,504 2,263 3,230 Net income$ 10,837 $ 10,568 $ 10,414 $ 9,412 $ 7,101 Per share of common stock: Basic earnings per share$ 3.97 $ 3.85 $ 3.80 $ 3.43 $ 2.59 Diluted earnings per share 3.97 3.85 3.80 3.43 2.59 Dividends 1.22 1.13 1.08 0.98 0.84 Book value 35.80 34.23 31.17 27.91 25.72 Average basic common shares outstanding 2,733,126 2,742,350 2,742,296 2,742,242 2,742,242 Average diluted common shares outstanding 2,733,126 2,742,350 2,742,296 2,742,242 2,742,242 Year-end balances: Loans, net$ 541,536 $ 600,885 $ 544,616 $ 543,067 $ 511,226 Securities 311,245 204,184 130,721 110,913 128,124 Total assets 1,144,239 1,031,632 818,683 731,722 707,063 Deposits 1,002,747 891,562 683,546 606,498 583,259 Borrowings 39,937 41,879 45,219 45,940 50,889 Shareholders' equity 97,315 93,859 85,476 76,536 70,532 Average balances: Loans, net$ 554,547 $ 601,419 $ 545,483 $ 529,522 $ 491,258 Securities 231,285 129,508 112,290 118,511 131,512 Total assets 1,111,808 931,330 765,722 716,243 692,859 Deposits 969,009 788,904 636,441 589,646 553,228 Borrowings 42,600 48,358 44,478 51,014 68,255 Shareholders' equity 96,145 90,247 81,548 73,002 68,738 Select ratios: Net interest margin, FTE basis 2.63 % 3.22 % 3.97 % 3.98 % 3.80 % Return on average total assets 0.97 1.13 1.36 1.31 1.02 Return on average shareholders' equity 11.27 11.71 12.77 12.89 10.33 Average shareholders' equity as a percent of average total assets 8.65 9.69 10.65 10.19 9.92 Net loan charge-offs (recoveries) as a percent of average loans 0.00 0.06 0.01 0.19 0.17 Allowance for loan losses as a percent of loans at year-end 1.39 1.36 1.27 1.08 1.08 Shareholders' equity as a percent of total year-end assets 8.50 9.10 10.44 10.46 9.98 Dividend payout ratio 30.73 29.35 28.42 28.57 32.45 19
-------------------------------------------------------------------------------- RESULTS OF OPERATIONSNet Income CSB's 2021 net income was$10.8 million compared to$10.6 million for 2020, an increase of 3%. Total revenue, net interest income plus noninterest income, decreased$246 thousand , or less than 1%, over the prior year to a total of$34.8 million . The provision for loan losses decreased to a$655 thousand recovery as compared to a provision for loan loss of$1.7 million for the prior year. Expense increases include noninterest expenses of$1.8 million and an increase in the provision for income tax of$39 thousand over the prior year due to an increase in taxable income. Basic and diluted earnings per share were$3.97 , up 3% from the prior year. The return on average assets was 0.97% in 2021 compared to 1.13% in 2020 and return on average equity was 11.27% in 2021 compared to 11.71% in 2020. CSB's 2020 net income was$10.6 million compared to$10.4 million for 2019, an increase of 1%. Total revenue, net interest income plus noninterest income, increased 4% over the prior year to a total of$35 million . The provision for loan losses increased$510 thousand over the prior year. Expense increases include noninterest expenses of$573 thousand and an increase in the provision for income tax of$24 thousand over the prior year due to an increase in taxable income. Basic and diluted earnings per share were$3.85 , up 1% from the prior year. The return on average assets was 1.13% in 2020 compared to 1.36% in 2019 and return on average equity was 11.71% in 2020 compared to 12.77% in 2019. Net Interest Income (Dollars in thousands) 2021 2020 2019 Net interest income$ 27,517 $ 28,153 $ 28,399 Taxable equivalent1 154 148 157 Net interest income, FTE$ 27,671 $ 28,301 $ 28,556 Net interest margin 2.61 % 3.20 % 3.95 % Taxable equivalent adjustment1 0.02 0.02 0.02 Net interest margin, FTE 2.63 % 3.22 % 3.97 %
¹Taxable equivalent adjustments have been computed assuming a 21% tax rate in
2021, 2020 and 2019 (non-GAAP).
Net interest income is the largest source of the Company's revenue and consists of the difference between interest income generated on earning assets and interest expense incurred on liabilities (deposits, short-term and long-term borrowings). Volumes, interest rates, composition of interest-earning assets, and interest-bearing liabilities affect net interest income. Net interest income decreased$636 thousand , or 2%, in 2021 compared to 2020 as excess borrower liquidity and Paycheck Protection Program ("PPP") loan forgiveness led to a decrease in average loan balances of$47 million . Taxable securities average yields dropped 47 basis points while nontaxable investment yields dropped 46 basis points. The decrease in interest income was partially offset by a decrease in interest expense of$901 thousand as the average rate paid on interest bearing liabilities decreased 20 basis points in 2021. The FTE net interest margin decreased to 2.63% from 3.22% in 2020. Net interest income decreased$246 thousand , or 1%, in 2020 compared to 2019 as managed and market rates fell in response to theFederal Reserve intervention to support markets and supply liquidity in response to the COVID-19 pandemic. The average rate earned on interest-earning deposits decreased 180 basis points as CSB's overnight liquidity increased an average of$86 million on a year over year basis. Taxable securities average yields dropped 78 basis points while nontaxable investment yields dropped 17 basis points. Loan yields decreased 52 basis points. The net interest margin FTE decreased to 3.22% from 3.97% in 2019. Interest income decreased$1.5 million , or 5%, in 2021 compared to 2020 primarily due to a decrease of$2.2 million in loan interest income as 2021 average loan balances were$47 million below the prior year. PPP loan average loan balances were$24 million lower than the prior year as customers applied for loan forgiveness from the SBA. Interest income on investments and interest-earning deposits increased$693 thousand due to an increase in average balances 20
-------------------------------------------------------------------------------- of$221 million over the prior year, as businesses and consumers increased their savings balances and decreased spending retaining the monies received through stimulus packages during 2020. Interest income decreased$1.4 million , or 4%, in 2020 compared to 2019 with a$763 thousand decrease in interest income from overnight funds sold primarily to theFederal Reserve due to a decline in average yield while balances grew as businesses and consumers increased their savings rates with decreased spending as well as retaining the monies received through stimulus packages during 2020. Interest income on taxable securities declined$365 thousand and interest income on nontaxable securities declined$68 thousand as theFederal Reserve substantially reduced rates and increased their purchases of securities to provide market liquidity. Loan yields decreased by 52 basis points as the prime rate was lowered 125 basis points in the first quarter of 2020 following decreases of 75 basis points during the third and fourth quarters of 2019. Interest expense decreased$901 thousand , or 31%, in 2021 as compared to 2020 primarily due to rate decreases of 21 basis points on deposits and 9 basis points on other borrowed funds. Average interest-bearing demand and savings deposit balances increased$114 million during the year as savings rates continued to accelerate with consumers and businesses reluctant to spend during the ongoing pandemic uncertainty along with supply chain disruptions affecting spending. Average time deposit balances decreased$2.1 million , and the average interest rate decreased 55 basis points. Interest expense decreased$1.1 million , or 28%, in 2020 as compared to 2019 due to rate decreases of 31 basis points on deposits and 63 basis points on other borrowed funds. Balances of all deposit types increased in the year as savings rates accelerated with consumers and businesses reacting to the COVID-19 pandemic insecurity. 21
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The following table provides detailed analysis of changes in average balances,
yield, and net interest income:
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
2021 2020 2019
Average Average Average Average Average Average
(Dollars in thousands) Balance 1 Interest Rate 2 Balance 1 Interest Rate 2 Balance 1 Interest Rate 2
Interest-earning assets
Federal funds sold $ - $ - - % $ - $ - - % $ 250 $ 5 2.00 %
Interest-earning deposits 259,789 337 0.13 140,438 366 0.26 54,573 1,124 2.06
Securities:
Taxable 206,077 2,613 1.27 107,826 1,880 1.74 89,104 2,247 2.52
Tax exempt 4 25,208 576 2.28 21,682 588 2.74 23,186 674 2.91
Loans 3, 4 562,592 26,156 4.65 609,207 28,379 4.66 552,014 28,568 5.18
Total interest-earning
assets 1,053,666 29,682 2.82 % 879,153 31,213 3.55 % 719,127 32,618 4.54 %
Noninterest-earning assets
Cash and due from banks 19,891 18,759 15,864
Bank premises and equipment,
net 13,372 12,493 11,297
Other assets 32,924 28,713 25,965
Allowance for loan losses (8,045 ) (7,788 ) (6,531 )
Total assets $ 1,111,808 $ 931,330 $ 765,722
Interest-bearing liabilities
Demand deposits $ 259,111 317 0.12 % $ 203,010 390 0.19 % $ 135,313 593 0.44 %
Savings deposits 281,888 281 0.10 223,785 339 0.15 189,520 915 0.48
Time deposits 123,659 1,285 1.04 125,761 1,994 1.59 123,694 2,101 1.70
Borrowed funds 42,600 128 0.30 48,358 189 0.39 44,478 453 1.02
Total interest-bearing
liabilities 707,258 2,011 0.28 % 600,914 2,912 0.48 % 493,005 4,062 0.82 %
Noninterest-bearing
liabilities and
shareholders' equity
Demand deposits 304,351 236,348 187,914
Other liabilities 4,054 3,821 3,255
Shareholders' equity 96,145 90,247 81,548
Total liabilities and equity $ 1,111,808 $ 931,330 $ 765,722
Net interest income 4 27,671 28,301 28,556
FTE adjustment (154 ) (148 ) (157 )
GAAP net interest income $ 27,517 $ 28,153 $ 28,399
Net interest margin FTE 2.63 % 3.22 % 3.97 %
Net interest spread 2.54 % 3.07 % 3.72 %
¹Average balances have been computed on an average daily basis.
²Average rates have been computed based on the amortized cost of the
corresponding asset or liability.
³Average loan balances include nonaccrual loans.
4Interest income is shown on a fully tax-equivalent basis (non-GAAP).
22
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The following table compares the impact of changes in average rates and changes
in average volumes on net interest income:
RATE/VOLUME ANALYSIS OF CHANGES IN INCOME AND EXPENSE¹
2021 v. 2020 2020 v. 2019
Net Increase Net Increase
(Dollars in thousands) (Decrease) Volume Rate (Decrease) Volume Rate
Increase (decrease) in
interest income:
Federal funds $ - $ - $ - $ (5 ) $ - $ (5 )
Interest-earning deposits (29 ) 155 (184 ) (758 ) 224 (982 )
Securities:
Taxable 733 1,244 (511 ) (367 ) 327 (694 )
Tax exempt (12 ) 81 (93 ) (86 ) (41 ) (45 )
Loans (2,223 ) (2,167 ) (56 ) (189 ) 2,672 (2,861 )
Total interest income change (1,531 ) (687 ) (844 ) (1,405 ) 3,182 (4,587 )
Increase (decrease) in
interest expense:
Demand deposits (73 ) 69 (142 ) (203 ) 130 (333 )
Savings deposits (58 ) 58 (116 ) (576 ) 52 (628 )
Time deposits (709 ) (22 ) (687 ) (107 ) 33 (140 )
Other borrowed funds (61 ) (17 ) (44 ) (264 ) 15 (279 )
Total interest expense change (901 ) 88 (989 ) (1,150 ) 230 (1,380 )
Net interest income change $ (630 ) $ (775 ) $ 145 $ (255 ) $ 2,952 $ (3,207 )
¹Changes attributable to both volume and rate, which cannot be segregated, have
been allocated based on the absolute value of the change due to volume and the
change due to rate.
Provision For Loan Losses
The provision for loan losses is determined by management as the amount required
to bring the allowance for loan losses to a level considered appropriate to
absorb probable incurred net charge-offs inherent in the loan portfolio as of
period end. During 2021 a recovery of credit losses of $655 thousand was
recognized compared to a provision for loan losses of $1.7 million in 2020 and
$1.1 million provision in 2019. The recapture of provision for loan losses for
the year primarily reflects the improvement in credit quality including the
reduction of impaired and adversely classified loans, as well as the improvement
in economic indicators including unemployment, residential real estate prices
and consumer confidence. Nonperforming loans decreased $3.4 million from 2020 to
2021. See "Financial Condition - Allowance for Loan Losses" for additional
discussion and information relative to the provision for loan losses.
Noninterest Income
YEAR ENDED DECEMBER 31
Change from 2020 Change from 2019
(Dollars in thousands) 2021 Amount % 2020 Amount % 2019
Service charges on deposit
accounts $ 939 $ (64 ) (6 ) % $ 1,003 $ (249 ) (20 ) % $ 1,252
Trust services 1,059 163 18 896 (3 ) (0 ) 899
Debit card interchange fees 2,050 389 23 1,661 180 12 1,481
Gain on sale of loans, including
MSRs 1,449 (502 ) (26 ) 1,951 1,489 322 462
Earnings on bank-owned life
insurance 619 97 19 522 76 17 446
Unrealized gain (loss) on equity
securities 28 32 800 (4 ) (13 ) (144 ) 9
Other 1,181 275 30 906 27 3 879
Total noninterest income $ 7,325 $ 390 6 % $ 6,935 $ 1,507 28 % $ 5,428
Noninterest income increased $390 thousand , or 6%, in 2021 compared to the same
period in 2020. Debit card interchange fees increased $389 thousand in 2021
compared to 2020 due to volume increases. Credit card interchange income, which
is included in other income above, increased $149 thousand as business credit
card usage continued to increase. Earnings on bank owned life insurance
increased $97 thousand with the purchase of $2 million in policy
23
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values in 2021. Trust and brokerage service revenue increased $163 thousand .
Gains on sales of mortgage loans including mortgage servicing rights ("MSRs")
decreased $502 thousand due to fewer sales of real estate mortgage loans into
the secondary market as many consumers took advantage of the large interest rate
declines in 2020. The Bank sold $47 million in mortgage loans, including gains,
in 2021 as compared to the sale of $61 million of loans in 2020. Service charges
on deposits, which are primarily customer overdraft fees, decreased $64 thousand
in 2021.
Noninterest income increased $1.5 million , or 28%, in 2020 compared to the same
period in 2019. Gains on sales of mortgage loans including mortgage servicing
rights increased 322% due to increasing sales of real estate mortgage loans with
low fixed rate thirty-year maturities into the secondary market. The Bank sold
$61 million in mortgage loans, including gains, in 2020 as compared to the sale
of $20 million of loans in 2019. Service charges on deposits, decreased 20% in
2020. Debit card interchange fees increased 12% in 2020 compared to 2019 due to
volume increases. Earnings on bank owned life insurance increased $76 thousand
with the addition of $2 million in policy values in 2020. Trust and brokerage
service revenue decreased less than 1%.
Noninterest Expenses
YEAR ENDED DECEMBER 31
Change from 2020 Change from 2019
(Dollars in thousands) 2021 Amount % 2020 Amount % 2019
Salaries and employee
benefits $ 12,599 $ 892 8 % $ 11,707 $ 44 0 % $ 11,663
Occupancy expense 1,033 80 8 953 121 15 832
Equipment expense 714 57 9 657 86 15 571
Professional and director
fees 1,184 (100 ) (8 ) 1,284 (48 ) (4 ) 1,332
Financial institutions tax 751 67 10 684 72 12 612
Marketing and public
relations 461 63 16 398 (137 ) (26 ) 535
Software expense 1,342 241 22 1,101 163 17 938
Debit card expense 710 89 14 621 67 12 554
Telecommunications expense 377 (42 ) (10 ) 419 35 9 384
FDIC insurance 478 275 135 203 105 107 98
Amortization of intangible
assets 44 (16 ) (27 ) 60 (3 ) (5 ) 63
Provision for unfunded loan
commitments 103 86 506 17 17 n/a -
Other 2,297 59 3 2,238 51 2 2,187
Total noninterest expenses $ 22,093 $ 1,751 9 % $ 20,342 $ 573 3 % $ 19,769
Noninterest expense increased $1.8 million , or 9%, in 2021 compared to 2020.
Salaries and employee benefits increased $892 thousand from increases in base
compensation of $554 thousand and incentive compensation of $183 thousand . The
capitalization of employee costs of loan originations increased the amount
recognized in salary expense by $82 thousand in 2021, a result of decreased
origination of commercial and mortgage loans. The FDIC insurance assessment
increased $275 thousand , or 135%, a result of the increase in asset size and the
expiration of small bank assessment credits. Software expense increased $241
thousand , or 22%, due to implementation of a new mobile banking platform along
with core software provider increases. Debit card expense increased $89 thousand
in 2021 due to increased volume. An increase of $67 thousand in the Ohio
financial institutions tax was recognized as capital increased. Occupancy
expense increased $80 thousand primarily from branch renovations. Equipment
expense increased $57 thousand in 2021, as compared to 2020, with increased
depreciation expense and equipment maintenance contracts. The provision for
unfunded loan commitments increased $86 thousand due to unfunded construction
loans to assisted living / retirement facilities that have been negatively
affected by COVID-19. Other expenses increased $59 thousand , or 3%. Professional
and director fees decreased $100 thousand primarily due to a decrease in legal
expenses related to loan collections. Telecommunications expense decreased $42
thousand in 2021 over 2020 as data lines were replaced with more effective and
cost-efficient means.
Noninterest expense increased $573 thousand , or 3%, in 2020 compared to 2019.
Salaries and employee benefits increased $44 thousand due to base compensation
increasing $449 thousand due to additional full-time employees and annual
adjustments. The capitalization of employee costs of loan originations decreased
the amount of recognized salary expense by $660 thousand and $217 thousand , in
2020 and 2019 respectively. Other increases in 2020 include retirement benefits
and incentive compensation of $16 thousand and medical and dental expense rising
$32 thousand .
24
-------------------------------------------------------------------------------- Employment taxes decreased$16 thousand with refunds withinOhio workmen's compensation. Professional and director fees decreased$48 thousand primarily due to a decrease in outside audit and accounting fees. Telecommunications expense increased$35 thousand in 2020 over 2019 with additional back-up redundancy added to the core systems. Debit card expense increased$67 thousand in 2020 due to increased volume. An increase in theOhio financial institutions tax was recognized as capital increased. Equipment expense increased$86 thousand in 2020, as compared to 2019, with increased depreciation expense with the replacement of ATMs, PC's and laptops, and branch market expansion. TheFDIC insurance assessment increased$105 thousand , or 107%, as small bank "credits" expired. Occupancy expense increased$121 thousand , or 15% with the expansion of the branch footprint. Other expenses increased$51 thousand , or 2%. Income Taxes The provision for income taxes amounted to$2.6 million in 2021,$2.5 million in 2020, and$2.5 million in 2019. The slight increase in 2021 and 2020 resulted from an increase in income. The corporate statutory tax rate was 21% for 2021, 2020, and 2019. The effective tax rate in 2021, 2020, and 2019 approximates 19%. FINANCIAL CONDITION Total assets of the Company were$1.1 billion onDecember 31, 2021 , compared to$1 billion atDecember 31, 2020 , representing an increase of$113 million , or 11%. Net loans decreased$59 million , or 10%, while investment securities increased$107 million , or 52%, and total cash and cash equivalents increased$62 million . Deposits increased$111 million and short-term borrowings decreased$685 thousand , while other borrowings from theFederal Home Loan Bank ("FHLB") decreased by$1.3 million , or 27%.
Securities
Total investment securities increased$107 million , or 52%, to$311 million at year-end 2021. CSB's portfolio is primarily comprised of agency mortgage-backed securities, obligations of state and political subdivisions,U.S. Treasury notes, other government agencies' debt, and corporate bonds. Restricted securities consist primarily of FHLB stock. The Company has no exposure to government-sponsored enterprise preferred stocks, collateralized debt obligations, or trust preferred securities. The Company's municipal bond portfolio consists of tax-exempt general obligation and revenue bonds. As ofDecember 31, 2021 , 73% of such bonds held an S&P or Moody's investment grade rating, and 27% were non-rated local issues. The municipal portfolio includes a broad spectrum of counties, towns, universities, and school districts with 82% of the portfolio originating inOhio , and 18% inPennsylvania . Gross unrealized security losses within the portfolio were less than 1% of total securities onDecember 31, 2021 , reflecting interest rate fluctuations, not credit downgrades. DuringDecember 2021 , investments with an amortized cost of approximately$79 million and a fair value of$77 million were transferred from available-for-sale to held-to-maturity as rising interest rates and a slowing of monthly cash payments were occurring. The transfer included$76 million ofU.S. Government agency mortgage-backed securities and$3 million ofU.S. Treasury notes. These bonds will still provide liquidity through pledging and for use as collateral against borrowings. One of the primary functions of the securities portfolio is to provide a source of liquidity and it is structured such that maturities and cash flows provide a portion of the Company's liquidity needs and asset/liability management requirements.
Loans
Total loans decreased$60 million , or 10%, during 2021 with decreases in commercial loans, residential real estate and consumer loans. Volume decreases were recognized as follows: commercial loans including PPP loans decreased$68 million , or 35%, during 2021, with PPP loan forgiveness comprising$66 million of the decrease. Remaining PPP loan balances were$4.6 million as ofDecember 31, 2021 . Construction and land development loans increased$10 million , or 28% as several commercial projects were under construction and consumer demand increased for 1-4 family residential construction at year end. Residential real estate loans decreased$9 million , or 5%. Commercial real estate loans increased$8 million , or 4%. Commercial real estate and construction loan demand resumed, however there was a slowing of commercial loan growth with increased competition from private lenders and excess business liquidity remaining from government stimulus programs. 25
-------------------------------------------------------------------------------- The Company originated$53 million and$76 million of portfolio mortgage loans, which were predominately variable rate, in 2021 and 2020, respectively. Attractive interest rates in the secondary market also continued to drive consumer demand for longer-term 1-4 family fixed rate residential mortgages as the Company sold$46 million of originated mortgages into the secondary market in 2021 as compared to$59 million in 2020. Demand for home equity loans declined in 2021, with balances decreasing$5 million , as outstanding loan balances were paid down, or balances were refinanced into new first mortgages at lower fixed rates. Installment loans declined$2 million with consumer loans decreasing from a slowdown in the Company's origination of Recreational Vehicle finance loans. Management anticipates modest economic growth in the Company's local service areas will continue to improve. Commercial and commercial real estate loans, in aggregate, comprise approximately 58% and 62% of the total loan portfolio at year-end 2021 and 2020, respectively. Residential real estate loans increased to 31% in 2021 from 29% of the total loan portfolio in 2020. Construction and land development loans increased to 8% of the portfolio as loan demand for commercial construction projects increased by$10 million and residential construction loans increased by$483 thousand , year over year. The Company is well within the respective regulatory guidelines for investment in construction, development, and investment property loans that are not owner occupied. Most of the Company's lending activity is with customers primarily located withinHolmes ,Stark ,Tuscarawas andWayne counties inOhio . The majority of the Company's loan portfolio consists of commercial and industrial and commercial real estate loans. See concentration of credit discussion included in Note 3 in the Notes to Consolidated Financial Statements. 26 -------------------------------------------------------------------------------- Nonperforming Assets, Impaired Loans, and Loans Past Due 90 Days or More Nonperforming assets consist of nonaccrual loans, loans past due 90 days and still accruing, and other real estate acquired through or in lieu of foreclosure. Other impaired loans include certain loans internally classified as substandard or doubtful. Loans are placed on nonaccrual status when they become past due 90 days or more, or when mortgage loans are past due as to principal and interest 120 days or more, unless they are both well secured and in the process of collection. NONPERFORMING ASSETS DECEMBER 31 (Dollars in thousands) 2021 2020 Nonaccrual loans Commercial$ 208 $ 1,225 Commercial real estate 139 2,205 Residential real estate 367 688 Construction & land development 329
317
Consumer 40
13
Loans past due 90 days or more and still accruing Commercial 5 - Residential real estate - 49 Total nonperforming loans 1,088 4,497 Other real estate owned - - Other repossessed assets - - Total nonperforming assets$ 1,088 $ 4,497 Nonperforming assets as a percentage of loans plus other real estate and repossessed assets 0.20 % 0.74 %
During 2021,
returned to accrual, while
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered by management
to be adequate to cover loan losses currently anticipated based on past loss
experience, general economic conditions, changes in mix and size of the loan
portfolio, information about specific borrower situations, and other factors and
estimates which are subject to change over time. Management periodically reviews
selected large loans, delinquent and other problem loans, and selected other
loans. Collectability of these loans is evaluated by considering the current
financial position and performance of the borrower, estimated market value of
the collateral, the Company's collateral position in relationship creditors,
guarantees, and other potential sources of repayment. Management forms
judgments, which are in part subjective, as to the probability of loss and the
amount of loss on these loans as well as other loans taken together. The
Company's
27
-------------------------------------------------------------------------------- Allowance for Loan Losses Policy includes, among other items, provisions for classified loans, and a provision for the remainder of the portfolio based on historical data, including past charge offs. ALLOWANCE FOR LOAN LOSSES FOR THE YEAR ENDED (Dollars in thousands) 2021 2020 Beginning balance of allowance for loan losses$ 8,274 $ 7,017 Provision for loan losses (655 ) 1,650 Charge-offs: Commercial 35 77 Commercial real estate - 138 Residential real estate & home equity -
15
Construction & land development - 312 Consumer 95 100 Total charge-offs 130 642 Recoveries: Commercial 31 130 Commercial real estate 8 41 Residential real estate & home equity 25 3 Consumer 65 75 Total recoveries 129 249 Net charge-offs 1 393 Ending balance of allowance for loan losses$ 7,618 $
8,274
Net charge-offs as a percentage of average total loans - % 0.06 % Allowance for loan losses as a percentage of total loans 1.39
1.36
Allowance for loan losses to total nonperforming loans 7.00 x
1.84 x
Components of the allowance for loan losses: General reserves$ 7,396 $
8,244
Specific reserve allocations 222
30
Total allowance for loan losses$ 7,618 $
8,274
The allowance for loan losses totaled$7.6 million , or 1.39%, of total loans at year-end 2021 as compared to$8.3 million , or 1.36%, of total loans at year-end 2020. The allowance for loan losses as a percentage of total loans excluding the$4.6 million PPP loans, which are fully guaranteed by the SBA is 1.40% (non-GAAP) as ofDecember 31, 2021 . The Bank had net charge-offs of$1 thousand for 2021 as compared to net charge-offs of$393 thousand for 2020. The Company maintains an internal watch list on which it places loans where management's analysis of the borrower's operating results and financial condition indicates the borrower's cash flows are inadequate to meet its debt service requirements and loans where there exists an increased risk that such a shortfall may occur. Nonperforming loans, which consist of loans past due 90 days or more and nonaccrual loans, aggregated$1.1 million , or 0.20%, of loans at year-end 2021 as compared to$4.5 million , or 0.74%, of loans at year-end 2020. Impaired loans were$2 million at year-end 2021 as compared to$6.3 million at year-end 2020. Management has assigned loss allocations to absorb the estimated losses on impaired loans. These allocations are included in the total allowance for loan losses balance. Other Assets Net premises and equipment increased$1.2 million to$13.9 million at year-end 2021 with renovations to several banking locations and the replacement of laptops and personal computers. Total bank-owned life insurance increased from$21 million at year-end 2020 to$24 million at year-end 2021 as additional policies were purchased totaling$2 million along with$619 thousand of increases in the cash surrender value. There was no other real estate owned onDecember 31, 2021 , or 2020. The Company recognized a net deferred tax asset of$325 thousand onDecember 31, 2021 , as compared to a deferred tax liability of$153 thousand onDecember 31, 2020 . 28
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Deposits
The Company's deposits are obtained primarily from individuals and businesses
located in its market area. For deposits, the Company must compete with products
offered by other financial institutions, as well as alternative investment
options. Demand and savings deposits increased for the year ended 2021, due to
continued government stimulus relief along with reduced spending during the
COVID-19 pandemic. Market rates on deposits and cash management products
decreased throughout the year as liquidity increased.
December 31 Change from 2020
(Dollars in thousands) 2021 2020 Amount %
Noninterest-bearing demand $ 334,346 $ 272,051 $ 62,295 23 %
Interest-bearing demand 242,387 243,467 (1,080 ) -
Traditional savings 191,836 154,899 36,937 24
Money market savings 112,803 97,813 14,990 15
Time deposits in excess of $250,000 26,213 23,378 2,835 12
Other time deposits 95,162 99,954 (4,792 ) (5 )
Total deposits $ 1,002,747 $ 891,562 $ 111,185 12 %
Other Funding Sources
The Company obtains additional funds through securities sold under repurchase
agreements, overnight borrowings from the FHLB or other financial institutions,
and advances from the FHLB. Short-term borrowings, consisting of securities sold
under repurchase agreements, decreased $685 thousand . Other borrowings,
consisting of FHLB advances, decreased $1.3 million as the result of principal
repayments. All FHLB borrowings on December 31, 2021 , have long term maturities
with monthly amortizing payments.
CAPITAL RESOURCES
Total shareholders' equity increased to $97.3 million on December 31, 2021 , as
compared to $93.9 million on December 31, 2020 . This increase was primarily due
to $10.8 million of net income which was partially offset by the payment of $3.3
million of cash dividends in 2021. The Board of Directors approved a Stock
Repurchase Program on February 26, 2021 , allowing the repurchase of up to 5% of
the Company's then-outstanding common shares. Repurchased shares are to be held
as treasury stock and are available for general corporate purposes. On December
31, 2021 , approximately 113 thousand shares could still be repurchased under the
current authorized program. Shares repurchased during 2021 totaled 24,326 in the
amount of $939 thousand and no shares were repurchased in 2020.
Effective January 1, 2015 , the Federal Reserve adopted final rules implementing
Basel III and regulatory capital changes required by the Dodd-Frank Act. The
rules apply to both the Company and the Bank. The rules established minimum
risk-based and leverage capital requirements for all banking organizations. The
rules include: (a) a common equity tier 1 capital ratio of at least 4.5%, (b) a
tier 1 capital ratio of at least 6.0%, (c) a minimum total capital ratio of at
least 8.0%, and (d) a minimum leverage ratio of 4%. Under the guidelines,
capital is compared to the relative risk related to the balance sheet. To derive
the risk included in the balance sheet, one of several risk weights is applied
to different balance sheet and off-balance sheet assets primarily based on the
relative credit risk of the counterparty. The capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. The rules also place
restrictions on the payment of capital distributions, including dividends, and
certain discretionary bonus payments to executive officers if the company does
not hold a capital conservation buffer of greater than 2.5% composed of common
equity tier 1 capital above its minimum risk-based capital requirements. The
Company and Bank's actual and required capital amounts are disclosed in Note 13
to the consolidated financial statements.
Dividends paid by the Bank to CSB are the primary source of funds available to
the Company for payment of dividends to shareholders and for other working
capital needs. The payment of dividends by the Bank to the Company is subject to
restrictions by regulatory authorities, which generally limit dividends to
current year net income and the prior two (2) years net retained earnings, as
defined by regulation. In addition, dividend payments generally cannot reduce
regulatory capital levels below the minimum regulatory guidelines discussed
above.
29
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LIQUIDITY
December 31
Change
(Dollars in thousands) 2021 2020 from 2020
Cash and cash equivalents $ 243,657 $ 181,652 $ 62,005
Unused lines of credit 107,054 101,616 5,438
Unpledged AFS securities at fair market value 108,158 130,702
(22,544 )
$ 458,869 $ 413,970 $ 44,899
Net deposits and short-term liabilities $ 1,016,821 $ 870,498 $ 146,323
Liquidity ratio 45.1 % 47.6 % -2.5 %
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 CSB's Asset Liability Committee. The Company was within all Board-approved limits onDecember 31, 2021 , and 2020. Additional sources of liquidity include net income, loan repayments, the availability of borrowings, and adjustments of interest rates to attract deposit accounts. As summarized in the Consolidated Statements of Cash Flows, the most significant investing activities for the Company in 2021 included net loan repayments of$58 million and securities purchases of$169 million , offset by maturities and repayment of securities totaling$57 million . The Company's financing activities included a$111 million increase in deposits,$3 million in cash dividends paid, and a$1 million decrease in repayment of other borrowings.
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