CSB Bancorp, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 2023 FINANCIAL REVIEW INTRODUCTION CSB Bancorp, Inc. (the “Company” or “CSB”) was incorporated under the laws of the State of Ohio in 1991 and is a registered financial holding company. The Company’s wholly owned subsidiaries are The Commercial and Savings Bank (the “Bank”) and CSB Investment Services, LLC. The Bank is chartered under the laws of the State of Ohio and was organized in 1879. The Bank is a member of the Federal Reserve System, with deposits insured by the Federal Deposit Insurance Corporation, and its primary regulators are the Ohio Division of Financial Institutions and the Federal 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, commercial loans, real estate mortgage loans, consumer loans, IRAs, night depository facilities, and trust and brokerage services. Its customers are located primarily in Holmes, Stark, Tuscarawas, Wayne, and portions of surrounding counties in Ohio. Economic activity in the Company’s market area increased slightly in the fourth quarter of 2023. Demand for goods and services improved as steady sales were recorded during the fourth quarter 2023 with households spending more during the holidays. Supply chain challenges improved during the year, creating less constrained inventories, and costs appear to be leveling off. Consumer spending has increased slightly . Reported unemployment levels in December 2023 ranged from 2.1% to 3.3% in the four primary counties served by the Company. These levels decreased from the December 2022 range of 2.9% to 4.0% in the four counties served by the Company. Labor demand remained solid as competition for workers with specialized skills has put upward pressure on labor costs. The local housing market continues to be strong with extremely low inventory levels. Residential construction has softened again year over year with higher interest rates as the main factor reducing demand while nonresidential construction activity has improved since the prior year. Core deposits remain flat, and customers continue to move funds into interest-bearing accounts. 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. NON-U.S. GAAP FINANCIAL MEASURES Management’s Discussion and Analysis of Financial Condition and Results of Operations contains non-U.S. GAAP financial measures where management believes it to be helpful in understanding CSB’s results of operations or financial position. Where non-U.S. GAAP financial measures are used, the comparable U.S. GAAP financial measure, as well as the reconciliation to the comparable U.S. GAAP financial measure, can be found herein. 18 FINANCIAL DATA The following table set forth certain selected consolidated financial information: (Dollars in thousands, except per share data) 2023 2022 2021 2020 2019 Statements of income: Total interest income $ 46,016 $ 34,819 $ 29,529 $ 31,066 $ 32,461 Total interest expense 9,875 2,496 2,012 2,913 4,062 Net interest income 36,141 32,323 27,517 28,153 28,399 Provision (recovery) for credit losses 442 (895 ) (655 ) 1,650 1,140 Net interest income after provision (recovery) for credit losses 35,699 33,218 28,172 26,503 27,259 Noninterest income 6,744 6,711 7,325 6,935 5,428 Noninterest expense 24,060 23,393 22,093 20,342 19,769 Income before income taxes 18,383 16,536 13,404 13,096 12,918 Income tax provision 3,627 3,223 2,567 2,528 2,504 Net income $ 14,756 $ 13,313 $ 10,837 $ 10,568 $ 10,414 Per share of common stock: Basic earnings per share $ 2,679,902.00 $ 4.91 $ 3.97 $ 3.85 $ 3.80 Diluted earnings per share 2,679,902.00 4.91 3.97 3.85 3.80 Dividends 1.50 1.30 1.22 1.13 1.08 Book value 40.43 35.43 35.80 34.23 31.17 Average basic common shares outstanding 2,679,902 2,714,045 2,733,126 2,742,350 2,742,296 Average diluted common shares outstanding 2,679,902 2,714,045 2,733,126 2,742,350 2,742,296 Year-end balances: Loans, net $ 694,797 $ 620,333 $ 541,536 $ 600,885 $ 544,616 Securities 368,153 401,144 311,245 204,184 130,721 Total assets 1,178,689 1,159,108 1,144,239 1,031,632 818,683 Deposits 1,027,427 1,023,417 1,002,747 891,562 683,546 Borrowings 37,597 35,011 39,937 41,879 45,219 Shareholders’ equity 107,939 95,920 97,315 93,859 85,476 Average balances: Loans, net $ 660,265 $ 580,454 $ 554,547 $ 601,419 $ 545,483 Securities 385,666 388,827 231,285 129,508 112,290 Total assets 1,158,286 1,151,925 1,111,808 931,330 765,722 Deposits 1,017,983 1,012,629 969,009 788,904 636,441 Borrowings 34,526 40,218 42,600 48,358 44,478 Shareholders’ equity 100,452 94,850 96,145 90,247 81,548 Select ratios: Net interest margin, FTE basis 1 3.32 % 2.98 % 2.63 % 3.22 % 3.97 % Return on average total assets 1.27 1.16 0.97 1.13 1.36 Return on average shareholders’ equity 14.69 14.04 11.27 11.71 12.77 Average shareholders’ equity as a percent of average total assets 8.67 8.23 8.65 9.69 10.65 Net loan charge-offs (recoveries) as a percent of average loans (0.02 ) (0.02 ) 0.00 0.06 0.01 Allowance for credit losses on loans as a percent of loans at year-end 0.94 1.09 1.39 1.36 1.27 Shareholders’ equity as a percent of total year-end assets 9.16 8.28 8.50 9.10 10.44 Dividend payout ratio 2 27.20 26.48 30.73 29.35 28.42 1 Net interest margin is shown on a fully taxable equivalent, ("FTE") basis. 2 Dividend payout ratio is calculated as dividends declared as a percentage of net income. 19 RESULTS OF OPERATIONS Net Income CSB’s 2023 net income was $14.8 million compared to $13.3 million for 2022, an increase of 11%. Total revenue, net interest income plus noninterest income, increased $3.9 million, or 10%, over the prior year to a total of $43 million. The provision for credit losses increased to a $442 thousand expense as compared to a $895 thousand recovery for the prior year. Noninterest expense increased $667 thousand, or 3% and the provision for income tax increased $404 thousand over the prior year due to an increase in taxable income. Basic and diluted earnings per share were $5.51, up 12% from the prior year. The return on average assets was 1.27% in 2023 compared to 1.16% in 2022 and return on average equity was 14.69% in 2023 compared to 14.04% in 2022. Net Interest Income (Dollars in thousands) 2023 2022 Net interest income $ 36,141 $ 32,323 Taxable equivalent 133 145 Net interest income, FTE 1 $ 36,274 $ 32,468 Net interest margin 3.31 % 2.97 % Taxable equivalent adjustment 0.01 0.01 Net interest margin, FTE 1 3.32 % 2.98 % 1 Taxable equivalent adjustments have been computed assuming a 21% tax rate in 2023, and 2022 (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). Changes in volume, interest rates, composition of interest-earning assets, and interest-bearing liabilities affect net interest income. Net interest income increased $3.8 million, or 12%, in 2023 compared to 2022. The increase was a result of a $11.2 million increase in interest income, partially offset by an increase of $7.4 million in interest expense. The FTE net interest margin increased to 3.32% from 2.98% in 2022. Interest income increased $11.2 million, or 32%, in 2023 compared to 2022 primarily due to an increase of $9.7 million, or 37%, in interest and fees on loans due to an increase in average balances of $79 million and an increase in yield of 93 basis points ("bps"). Interest income on taxable securities increased $1.1 million due to a increase of 31 bps. Interest income on interest-earning deposits mainly held at the Federal Reserve increased $404 thousand in 2023 compared to 2022 primarily due to a 365 bps yield increase. Interest expense increased $7.4 million, or 296%, in 2023 as compared to 2022 primarily due to rate increases of 75 bps on deposits and 69 bps on other borrowed funds. Average interest-bearing demand and savings deposit balances decreased $8 million during the year as the level of savings continued to decrease, but at a lesser pace than the prior year as the increase in the money supply created by the government to offset pandemic economic decreases phased out to consumers and businesses. Average time deposit balances increased $36 million, and the average interest rate increased 210 bps. 20 The following table provides detailed analysis of changes in average balances, yield, and net interest income: AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS 2023 2022 (Dollars in thousands) Average Balance 1 Interest Average Rate 2 Average Balance 1 Interest Average Rate 2 Interest-earning assets Interest-earning deposits in other banks $ 40,723 $ 2,107 5.17 % $ 111,775 $ 1,703 1.52 % Securities: Taxable 363,988 7,803 2.14 364,478 6,665 1.83 Tax exempt 4 21,678 506 2.33 24,349 553 2.27 Loans 3, 4 666,793 35,733 5.36 587,765 26,043 4.43 Total interest- earning assets 1,093,182 46,149 4.22 % 1,088,367 34,964 3.21 % Noninterest- earning assets Cash and due from banks 19,313 20,435 Bank premises and equipment, net 13,189 13,601 Other assets 39,129 36,833 Allowance for credit losses on loans (6,527 ) (7,311 ) Total assets $ 1,158,286 $ 1,151,925 Interest-bearing liabilities Demand deposits $ 251,626 2,564 1.02 % $ 240,904 648 0.27 % Savings deposits 296,896 2,362 0.80 315,881 670 0.21 Time deposits 154,505 4,573 2.96 118,085 1,017 0.86 Borrowed funds 34,525 376 1.09 40,218 161 0.40 Total interest- bearing liabilities 737,552 9,875 1.34 % 715,088 2,496 0.35 % Noninterest-bearing liabilities and shareholders’ equity Demand deposits 314,956 337,759 Other liabilities 5,326 4,228 Shareholders’ equity 100,452 94,850 Total liabilities and equity $ 1,158,286 $ 1,151,925 Net interest income 4 36,274 32,468 FTE adjustment (133 ) (145 ) GAAP net interest income $ 36,141 $ 32,323 Net interest margin FTE 3.32 % 2.98 % Net interest spread 2.88 % 2.86 % 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 (non-GAAP), reconciled to the GAAP amount at the bottom of the table. 21 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 EXPENSE 1 2023 v. 2022 Net Increase (Dollars in thousands) (Decrease) Volume Rate Increase (decrease) in interest income: Interest-earning deposits in other banks $ 404 $ (3,676 ) $ 4,080 Securities: Taxable 1,138 (11 ) 1,149 Tax exempt 2 (47 ) (61 ) 14 Loans 2 9,690 4,235 5,455 Total interest income change 2 11,185 487 10,698 Increase (decrease) in interest expense: Demand deposits 1,916 109 1,807 Savings deposits 1,692 (151 ) 1,843 Time deposits 3,556 1,078 2,478 Borrowed funds 215 (62 ) 277 Total interest expense change 7,379 974 6,405 Net interest income change 2 $ 3,806 $ (487 ) $ 4,293 1 Changes 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. 2 Interest income is shown on a fully tax-equivalent basis (non-GAAP). Provision (Recovery) for Credit Losses on Loans The provision (recovery) for credit losses on loans is determined by management as the amount required to bring the allowance for credit losses to a level considered appropriate to absorb an estimation of credit loss during the expected weighted average life of the loan. During 2023, a provision for credit loss expense for loans of $198 thousand was recognized compared to a 2022 recovery of credit losses for loans of $895 thousand. The recapture of provision for credit losses for the prior 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 . A credit loss provision for off-balance sheet commitments of $244 thousand was recognized in 2023 as compared to a recovery of credit loss provision for off-balance sheet commitments of $128 thousand in 2022, which was included in other noninterest expenses. This provision is primarily the result of the adoption of ASU 2016-13, which is the Current Expected Credit Loss Model ("CECL"), to reserve against construction loan commitments, which will most likely be drawn as compared to 2022 when provisions for off-balance sheet items were provided primarily on impaired lines of credit. Nonperforming loans increased $140 thousand from 2022 to 2023. See Financial Condition – Allowance for Credit Losses for additional discussion and information relative to the provision for credit losses. Noninterest Income YEAR ENDED DECEMBER 31 Change from 2022 (Dollars in thousands) 2023 Amount % 2022 Service charges on deposit accounts $ 1,209 $ 35 3 % $ 1,174 Trust services 1,013 59 6 954 Debit card interchange fees 2,107 2 0 2,105 Credit card fees 701 24 4 677 Gain on sale of loans, including MSRs 161 (170 ) (51 ) 331 Earnings on bank-owned life insurance 702 28 4 674 Unrealized (loss) gain on equity securities 15 18 (600 ) (3 ) Other 836 37 5 799 Total noninterest income $ 6,744 $ 33 0.5 % $ 6,711 Noninterest income increased $33 thousand, or 0.5%, in 2023 compared to the same period in 2022. Trust service revenue increased $59 thousand with fair market value increases. Service charges on deposits, increased $35 thousand in 2023 primarily from fees on business accounts. Earnings on bank owned life insurance increased $28 thousand. Credit card interchange income increased $24 thousand as business credit card usage continued to increase. Gain on sales of mortgage loans including mortgage servicing rights (“MSRs”) decreased $170 thousand due to fewer 22 sales of real estate mortgage loans into the secondary market. The Bank sold $5 million in mortgage loans, including gains, in 2023 as compared to the sale of $10 million of loans in 2022. Noninterest Expenses YEAR ENDED DECEMBER 31 Change from 2022 (Dollars in thousands) 2023 Amount % 2022 Salaries and employee benefits $ 13,673 $ 227 2 % $ 13,446 Occupancy expense 1,138 53 5 1,085 Equipment expense 792 11 1 781 Professional and director fees 1,471 (80 ) (5 ) 1,551 Financial institutions tax 767 (12 ) (2 ) 779 Marketing and public relations 549 (2 ) (0 ) 551 Software expense 1,651 222 16 1,429 Debit card expense 682 (52 ) (7 ) 734 FDIC insurance 514 169 49 345 Other 2,823 131 5 2,692 Total noninterest expenses $ 24,060 $ 667 3 % $ 23,393 Noninterest expense increased $667 thousand, or 3%, in 2023 compared to 2022. Salaries and employee benefits increased $227 thousand from increases in base salaries, medical, and other benefits. Software expense increased $222 thousand, or 16%, due to full-year implementation of a new analytical software and cyber security software. FDIC insurance increased $169 thousand due to increased rates. Professional and director fees decreased $80 thousand primarily due to a decrease in third party assistance with contracting the bank's core vendor that did not recur in 2023, partially offset by audit and accounting fees for the implementation of CECL. Other expenses increased $131 thousand, or 5%. Income Taxes The provision for income taxes amounted to $3.6 million in 2023 as compared to $3.2 million in 2022. The increase in 2023 resulted from an increase in taxable income. The corporate statutory tax rate was 21% for 2023 and 2022. The effective tax rate in 2023 and 2022 was 19.7% and 19.5%, respectively. FINANCIAL CONDITION Total assets of the Company were $1.2 billion on December 31, 2023 and 2022, representing an increase of $20 million, or 2%. Net loans increased $74 million, or 12%, while investment securities decreased $33 million, or 8%, and total cash and cash equivalents decreased $22 million, or 26%. Deposits increased $4 million and short-term borrowings increased $3 million, while other borrowings from the Federal Home Loan Bank (“FHLB”) decreased by $707 thousand, or 29%. Securities Total investment securities decreased $33 million, or 8%, to $368 million at year-end 2023, primarily related to principal repayments on mortgage-backed securities. 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 of December 31, 2023, 97% of such bonds held an S&P or Moody’s investment grade rating, and 3% were non-rated local issues. The municipal portfolio includes a broad spectrum of counties, cities, universities, and school districts with 82% of the portfolio originating in Ohio, and 18% in Pennsylvania. Gross unrealized security losses within the portfolio were 11% of total securities on December 31, 2023, reflecting interest rate increases, not credit downgrades. 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 increased $74 million, or 12%, during 2023. Volume increases were recognized as follows: commercial loans increased $23 million, or 18%, during 2023. Construction and land development loans decreased $6 million, or 11% as several commercial projects were under 23 construction and consumer demand slowed for 1-4 family residential construction at year end. Residential real estate loans increased $16 million, or 8%. Commercial real estate loans increased $42 million, or 18%. Commercial real estate and construction loan demand remains strong, within the company's market footprint. At year-end 2023, commercial real estate is comprised mostly of owner occupied buildings, $191 million and $83 million of buildings held for investment and leased to others. Owner occupied buildings are mostly assisted living, light industrial, and warehouse buildings. Investment properties include commercial strip centers, medical and office buildings. The Company originated $52 million and $69 million of residential mortgage loans held in the portfolio, including residential construction, conventional 1-4 family, and equity line loans, which were predominately variable rate, in 2023 and 2022, respectively. The increase in interest rates slowed consumer demand for 1-4 family fixed-rate thirty-year residential mortgages which are sold into the secondary market as the Company sold $5 million of mortgages into the secondary market in 2023 as compared to $10 million of mortgages into the secondary market in 2022. Demand for home equity loans declined in 2023, with balances decreasing $1 million, as rates rose. Installment loans increased $206 thousand. 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 61% and 58% of the total loan portfolio at year-end 2023 and 2022, respectively. Residential real estate loans approximated 30-31% of the portfolio in 2023 and 2022. Construction and land development loans decreased from 9% to 7% of the portfolio; however a number of construction loans will fund in 2024. The Company is well within the respective regulatory guidelines for investment in construction, development, and investment property loans that are not owner occupied. The Company has very little exposure to commercial office space leased properties. See Note 3 - Loans for further discussion of Concentrations of Credit. Most of the Company’s lending activity is with customers primarily located within Holmes, Stark, Tuscarawas and Wayne counties in Ohio. The majority of the Company’s loan portfolio consists of commercial and industrial and commercial real estate loans. Nonperforming Assets, Individually Evaluated 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. 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) 2023 2022 Nonaccrual loans Commercial and industrial $ 59 $ — Commercial real estate 62 92 Commercial lessors of buildings 15 — Construction — — Consumer mortgage 172 99 Home equity line of credit — — Consumer installment 49 9 Consumer indirect 39 56 Loans past due 90 days or more and still accruing — — Total nonperforming loans 396 256 Other real estate owned — — Other repossessed assets — — Total nonperforming assets $ 396 $ 256 Nonaccrual loans to total loans 0.06 % 0.04 % Allowance for Credit Losses The allowance for credit losses ("ACL") is maintained at a level considered by management to be adequate to cover credit losses currently expected over the weighted average life of the loan pools. The ACL decreased by $159 thousand, or 3%, to $6.6 million on December 31, 2023 from $6.8 million on December 31, 2022. The decrease was primarily the result of the adoption of the CECL model under the Weighted Average Remaining Maturity historical loss method, ("WARM") that is based on the weighted average life loan pools. This method is similar to the incurred loss method utilized prior to the implementation of CECL. The weighted average life of the loan pools are calculated on an instrument level and incorporate prepayment speeds from a 12 month trailing period. Additionally, a two year economic forecast is made based on the Bloomberg Financial consensus. During 2023 decreases in the allowance were recognized in the WARM method (due to continuing recoveries) 24 and the Bloomberg financial forecast (due to the decrease in the prediction of a recession). The bank continues to maintain qualitative factors tied to changes in: the lending policy, economic conditions, lending credit management, delinquent and classified loans, and the value of collateral. During 2023, $113 thousand in nonaccrual loans were collected, $40 thousand were charged-off, and $293 thousand new loans entered nonaccrual status. ALLOWANCE FOR CREDIT LOSSES FOR THE YEAR ENDED (Dollars in thousands) 2023 2022 Net charge-offs (recoveries) as a percentage of average total loans (0.02 ) % (0.02 ) % Allowance for credit losses as a percentage of total loans 0.94 1.09 Allowance for credit losses to total nonacrrual loans 16.67 x 26.71 x Components of the allowance for credit losses: General reserves $ 6,546 $ 6,834 Specific reserve allocations 61 4 Total allowance for credit losses $ 6,607 $ 6,838 The allowance for credit losses on loans totaled $6.6 million, or 0.94% of total loans at year-end 2023 as compared to $6.8 million, or 1.09%, of total loans at year-end 2022. The Bank had net loan recoveries of $130 thousand in 2023, compared to $115 thousand in recoveries in 2022. 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 $396 thousand, or 0.06%, of loans at year-end 2023 compared to $256 thousand, or 0.04%, of loans at year-end 2022. Other Assets Net premises and equipment decreased $412 thousand to $13 million at year-end 2023 with depreciation expense exceeding purchases. Total bank-owned life insurance increased from $24 million at year-end 2022 to $25 million at year-end 2023 with increasing cash surrender values. There was no other real estate owned on December 31, 2023 or 2022. The Company recognized a net deferred tax asset of $2.6 million on December 31, 2023 compared to a net deferred tax asset of $3.0 million on December 31, 2022. The decrease is primarily due to an improvement in the net unrealized loss on securities. 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. Time deposits increased for the year ended 2023. Market rates on deposits and cash management products increased throughout the year as liquidity decreased in the industry. December 31 Change from 2022 (Dollars in thousands) 2023 2022 Amount % Noninterest-bearing demand $ 301,697 $ 350,283 $ (48,586 ) (14 ) % Interest-bearing demand 256,621 241,227 15,394 6 Traditional savings 165,265 194,918 (29,653 ) (15 ) Money market savings 112,264 118,908 (6,644 ) (6 ) Time deposits in excess of $250,000 58,597 28,089 30,508 109 Other time deposits 132,983 89,992 42,991 48 Total deposits $ 1,027,427 $ 1,023,417 $ 4,010 0.4 % 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, increased $3 million. Other borrowings, consisting of FHLB advances, decreased $707 thousand as the result of principal repayments. The majority of FHLB borrowings on December 31, 2023, have long term maturities with monthly amortizing payments. CAPITAL RESOURCES Total shareholders’ equity was $107.9 million at December 31, 2023 compared to $95.9 million on December 31, 2022. This increase was primarily due to net income of $14.8 million and a $2.6 million accumulated other comprehensive gain recognized on the available-for-sale 25 securities portfolio resulting from decreasing interest rates. Dividends were paid of $4 million and $1.4 million treasury stock was repurchased in 2023. 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, 2023, approximately 102 thousand shares could still be repurchased under the current authorized program. Shares repurchased during 2023 totaled 37,638 shares for $1.4 million and shares purchased in 2022 totaled 10,448 shares for $388 thousand. 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 12 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. LIQUIDITY December 31 (Dollars in thousands) 2023 2022 Change from 2022 Cash and cash equivalents $ 64,077 $ 86,420 $ (22,343 ) Unused lines of credit 128,198 122,062 6,136 Unpledged AFS securities at fair market value 127,387 134,401 (7,014 ) $ 319,662 $ 342,883 $ (23,221 ) Net deposits and short-term liabilities $ 1,051,156 $ 1,041,016 $ 10,140 Liquidity ratio 30.4 % 32.9 % Minimum board approved liquidity ratio 20.0 % 20.0 % Liquidity refers to the Company’s ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, pay operating expenses, and meet other obligations. Liquidity is monitored by CSB’s Asset Liability Committee. The Company was within all Board-approved limits on December 31, 2023, and 2022. 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 2023 included net loan originations of $74 million and securities purchases of $4 million, offset by maturities and repayment of securities totaling $38 million. The Company’s financing activities included a $4 million increase in deposits, $3 million increase in short-term borrowings, and $4 million in cash dividends paid. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The most significant market risk the Company is exposed to is interest rate risk. The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans and securities), which are funded by interest-bearing liabilities (deposits and borrowings). These financial instruments have varying levels of sensitivity to changes in the market rates of interest, resulting in market risk. None of the Company’s financial instruments are held for trading purposes. The Board of Directors establishes policies and operating limits with respect to interest rate risk. The Company manages interest rate risk regularly through its Asset Liability Committee. The Committee meets periodically to review various asset and liability management information including, but not limited to, the Company’s liquidity position, projected sources and uses of funds, interest rate risk position, and economic conditions. 26 Interest rate risk is monitored primarily through the use of an earnings simulation model. The model is highly dependent on various assumptions, which change regularly as the balance sheet and market interest rates change. The earnings simulation model projects change in net interest income resulting from the effect of changes in interest rates. The analysis is performed quarterly over a twenty-four-month horizon. The analysis includes two (2) balance sheet models, one based on a static balance sheet and one on a dynamic balance sheet with projected growth in assets and liabilities. This analysis is performed by estimating the expected cash flows of the Company’s financial instruments using interest rates in effect at year-end 2023 and 2022. Interest rate risk policy limits are tested by measuring the anticipated change in net interest income over a two-year period. The tests assume quarterly ramped increases and decreases in market interest rates over twenty-four month horizons, as compared to a stable rate environment or base model. The following table reflects the change to net interest income using a dynamic balance sheet for the first twelve-month periods of the twenty-four month horizon. Net Interest Income at Risk December 31, 2023 Change In Interest Rates (Basis Points) Net Interest Income Dollar Change Percentage Change Board Policy Limits (Dollars in thousands) + 400 $ 39,184 $ (266 ) (0.7 ) % ± 25 % + 300 39,264 (186 ) (0.5 ) ± 15 + 200 39,340 (110 ) (0.3 ) ± 10 + 100 39,394 (56 ) (0.1 ) ± 5 0 39,450 — — – 100 39,201 (249 ) (0.6 ) ± 5 – 200 38,951 (499 ) (1.3 ) ± 10 – 300 38,718 (732 ) (1.9 ) ± 15 – 400 38,494 (956 ) (2.4 ) ± 25 December 31, 2022 + 400 $ 38,810 $ 1,090 2.9 % ± 25 % + 300 38,581 861 2.3 ± 15 + 200 38,302 582 1.5 ± 10 + 100 38,003 283 0.8 ± 5 0 37,720 — — – 100 37,368 (352 ) (0.9 ) ± 5 – 200 36,869 (851 ) (2.3 ) ± 10 – 300 35,973 (1,747 ) (4.6 ) ± 15 – 400 35,519 (2,201 ) (5.8 ) ± 25 Management reviews Net Interest Income at Risk with the Board on a periodic basis. The Company was within all Board-approved limits at December 31, 2023 and 2022 for the first twelve-month periods of the twenty-four month horizon. 27 Economic Value of Equity at Risk December 31, 2023 Change In Interest Rates (Basis Points) Percentage Change Board Policy Limits + 400 15.9 % ± 35 % + 300 12.8 ± 30 + 200 9.2 ± 20 + 100 4.9 ± 15 – 100 (6.2 ) ± 15 – 200 (13.2 ) ± 20 – 300 (22.5 ) ± 30 – 400 (36.5 ) ± 35 December 31, 2022 + 400 13.2 % ± 35 % + 300 11.2 ± 30 + 200 8.5 ± 20 + 100 4.8 ± 15 – 100 (6.3 ) ± 15 – 200 (14.5 ) ± 20 – 300 (25.4 ) ± 30 – 400 (39.4 ) ± 35 The economic value of equity is calculated by subjecting the period-end balance sheet to changes in interest rates and measuring the impact of the changes on the values of the assets and liabilities. Hypothetical changes in interest rates are then applied to the financial instruments. The cash flows and fair values are again estimated using these hypothetical rates. For the net interest income estimates, the hypothetical rates are applied to the financial instruments based on the assumed cash flows. Management periodically measures and reviews the economic value of equity at risk with the Board. As of December 31, 2023 and December 31, 2022 the percentage change of the market value of equity was outside of the board policy limit in the -400 basis point scenario. The technical fails in the declining rate scenarios in 2023 and 2022, are caused by the duration of liabilities remaining high and loan and investment securities prepayment speeds increasing. The simulation calculates decreases in the market value of equity of (36.5)% as of December 31, 2023 and (39.4)% in the -400 basis point rate scenario as of December 31, 2022. SIGNIFICANT ASSUMPTIONS AND OTHER CONSIDERATIONS The above analysis is based on numerous assumptions, including relative levels of market interest rates, loan prepayments, and reactions of depositors to changes in interest rates and this should not be relied upon as being indicative of actual results. Further, the analysis does not contemplate all actions the Company may undertake in response to changes in interest rates. U.S. Treasury securities, obligations of U.S. Government corporations and agencies, obligations of states and political subdivisions will generally repay at their stated maturity or if callable, prior to their final maturity date. Mortgage-backed security payments increase when interest rates are low and decrease when interest rates rise. Most of the Company’s loans permit the borrower to prepay the principal balance prior to maturity without penalty. The likelihood of prepayment depends on a number of factors: current interest rate and interest rate index (if any) on the loan, the financial ability of the borrower to refinance, the economic benefit to be obtained from refinancing, availability of refinancing at attractive terms, as well as economic conditions in specific geographic areas, which affect the sales and price levels of residential and commercial property. In a changing interest rate environment, prepayments may increase or decrease on fixed and adjustable-rate loans depending on the current relative levels and expectations of future short-term and long-term interest rates. Prepayments on adjustable-rate loans generally increase when long-term interest rates fall or are at historically low levels relative to short-term interest rates, thus making fixed rate loans more desirable. While savings and checking deposits generally may be withdrawn upon the customer’s request without prior notice, a continuing relationship with customers resulting in future deposits and withdrawals is generally predictable, leading to a dependable and uninterrupted source of funds. Time deposits generally have early withdrawal penalties, which discourage customer withdrawal prior to maturity. Short-term borrowings have fixed maturities. Certain advances from the FHLB carry prepayment penalties and are expected to be repaid in accordance with their contractual terms. FAIR VALUE MEASUREMENTS 28 The Company discloses the estimated fair value of its financial instruments on December 31, 2023, and 2022 in Note 15 to the Consolidated Financial Statements. OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS The following table summarizes the Company’s loan commitments, including letters of credit, as of December 31, 2023: Amount of Commitment to Expire Per Period (Dollars in thousands) Type of Commitment Total Amount Less than 1 year 1 to 3 Years 3 to 5 Years Over 5 Years Commercial lines of credit $ 147,304 $ 117,964 $ 24,441 $ 4,721 $ 178 Commercial real estate 9,438 7,470 1,856 112 — Home equity line of credit 81,903 2,869 13,727 14,129 51,178 Construction 22,782 13,202 9,580 — — Consumer lines of credit 646 646 — — — Credit card lines 8,158 8,158 — — — Overdraft privilege 7,266 7,266 — — — Letters of credit 4,379 3,983 385 11 — Total commitments $ 281,876 $ 161,558 $ 49,989 $ 18,973 $ 51,356 All lines of credit represent either fee-paid or legally binding loan commitments for the loan categories noted. Letters of credit are also included in the amounts noted in the table since the Company requires each letter of credit be supported by a loan agreement. The commercial and consumer lines represent both unsecured and secured obligations. The home equity lines are secured by mortgages on residential property. It is anticipated that a significant portion of these lines will expire without being drawn upon. The following table summarizes the Company’s other contractual obligations, exclusive of interest, as of December 31, 2023: Payment Due by Period (Dollars in thousands) Contractual Obligations Total Amount Less than 1 year 1 to 3 Years 3 to 5 Years Over 5 Years Total time deposits $ 191,580 $ 155,697 $ 34,142 $ 1,741 $ — Short-term borrowings 35,843 35,843 — — — Other borrowings 1,754 488 611 339 316 Operating leases 317 101 162 54 — Total obligations $ 229,494 $ 192,129 $ 34,915 $ 2,134 $ 316 The other borrowings noted in the preceding table represent borrowings from the FHLB. The notes require payment of interest on a monthly basis with principal due in monthly installments. The obligations bear stated fixed interest rates and stipulate a prepayment penalty if the note’s interest rate exceeds the current market rate for similar borrowings at the time of repayment. As the notes mature, the Company evaluates the liquidity and interest rate circumstances at that time to determine whether to pay off or renew the note. The evaluation process typically includes: the strength of current and projected customer loan demand, the Company’s federal funds sold or purchased position, projected cash flows from maturing investment securities, the current and projected market interest rate environment, local and national economic conditions, and customer demand for the Company’s deposit product offerings. CRITICAL ACCOUNTING POLICIES The Company’s Consolidated Financial Statements are prepared in accordance with U.S. Generally Accepted Accounting Principles and follow general practices within the commercial banking industry. Application of these principles requires management to make estimates, assumptions, and judgments affecting the amounts reported in the financial statements. These estimates, assumptions, and judgments are based upon the information available as of the date of the financial statements. The most significant accounting policies followed by the Company are presented in Note 1- Summary of Significant Accounting Policies. These policies, along with the other disclosures presented in the Notes to Consolidated Financial Statements and the 2023 Financial Review, provide information about how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the allowance for credit losses and goodwill as the accounting areas requiring the most subjective and complex estimates, assumptions, and judgments and, as such, could be the most subject to revision as new information becomes available. 29 As previously noted in the section entitled Allowance for Credit Losses, management performs an analysis to assess the adequacy of its allowance for credit losses. This analysis encompasses a variety of factors including: the potential loss exposure for individually reviewed loans, the historical loss experience, changes in delinquent and classified loans, any significant changes in lending or loan review staff, an evaluation of current and future economic conditions, any significant changes in the volume or mix of loans within each category, a review of the significant concentrations of credit, and any legal, competitive, or regulatory concerns. Potential future earnings volatility is driven by CECL's life of loan loss and economic forecasts of unemployment, recession and future loan loss within the portfolio. Under stress testing performed by the Bank in 2023, the unemployment forecast models as the largest driver of credit loss provision volatility. When sustained unemployment is significantly increased to 10% over a two-year period, an additional provision of approximately $1.1 million would be required under current model assumptions. While the weighted average life of the loan portfolio has extended to just under five years, at December 31, 2023, stressing the CRE and residential mortgage portfolio's weighted average lives by less than one year, resulted in a minimal increase of less than $100 thousand to the allowance for credit losses. The Company accounts for business combinations using the acquisition method of accounting. Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized using accelerated methods over their estimated weighted-average useful lives, approximating ten years. IMPACT OF INFLATION AND CHANGING PRICES The Consolidated Financial Statements and related data presented herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles, requiring measurement of financial position, and results of operations primarily in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Most assets and liabilities of the Company are monetary in nature. Therefore, interest rates have a more significant impact on the Company’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as prices of goods and services. The liquidity, maturity structure, and quality of the Company’s assets and liabilities are critical to maintenance of acceptable performance levels. COMMON STOCK AND SHAREHOLDER INFORMATION Common shares of the Company are not traded on an established market. Shares are traded on the OTC market through broker/ dealers under the symbol “CSBB” and through private transactions. The table below represents the range of high and low prices paid for transactions known to the Company. Management does not have knowledge of prices paid on all transactions. Because of the lack of an established market, these prices may not reflect the prices at which stock would trade in an active market. These quotations reflect interdealer prices, without mark-up, mark-down, or commission and may not represent actual transactions. The table specifies cash dividends declared by the Company to its shareholders during 2023 and 2022. No assurances can be given that future dividends will be declared, or if declared, what the amount of any such dividends will be. Additional information concerning restrictions over the payment of dividends is included in Note 12 of the Consolidated Financial Statements. Quarterly Common Stock Price and Dividend Data Quarter Ended High Low Dividends Declared Per Share Dividends Declared March 31, 2023 $ 42.80 $ 36.00 $ 0.36 $ 965,025 June 30, 2023 40.75 35.32 0.38 1,018,524 September 30, 2023 39.13 35.05 0.38 1,015,099 December 31, 2023 40.85 36.18 0.38 1,014,577 March 31, 2022 $ 39.60 $ 37.50 $ 0.00 $ — June 30, 2022 43.45 36.50 0.62 1,685,175 September 30, 2022 40.50 37.00 0.33 893,500 December 31, 2022 43.00 35.02 0.35 947,652 As of December 31, 2023, the Company had 1,055 shareholders of record and 2,669,938 outstanding shares of common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information contained in the section captioned, “Quantitative and Qualitative Disclosures about Market Risk” located in the MD&A is incorporated by reference herein. 30