UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 30, 1998 OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-21714 CSB Bancorp, Inc. (Exact name of registrant as specified in its charter) Ohio 34-1687530 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 6 W. Jackson Street, P.O. Box 232, Millersburg, Ohio 44654 (Address of principal executive offices) (330) 674-9015 (Registrant's telephone number) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common stock, $6.25 par value 2,640,061 shares outstanding at August 3, 1998. CSB BANCORP, INC. FORM 10-Q QUARTER ENDED JUNE 30, 1998 Part I - Financial Information ITEM 1 - FINANCIAL STATEMENTS (Unaudited) Page Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Comprehensive Income 5 Condensed Consolidated Statements of Changes in Shareholders' Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to the Consolidated Financial Statements 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK 19 Part II - Other Information Other Information 20 Signatures 22 CSB BANCORP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, 1998 1997 ASSETS Cash and noninterest-bearing deposits with banks $ 8,444,444 $ 8,090,785 Interest-bearing deposits with banks 168,479 31,257 Federal funds sold 8,643,000 6,213,000 ---------- ---------- Total cash and cash equivalents 17,255,923 14,335,042 Time deposits with other institutions 3,000,000 3,000,000 Securities available for sale, at fair value 25,106,384 28,042,412 Securities held to maturity (Fair values of $55,302,669 in 1998 and $59,773,637 in 1997) 53,992,662 58,385,434 Loans Total loans 186,575,869 179,676,242 Allowance for loan losses 2,172,810 2,349,039 ----------- ----------- Net loans 184,403,059 177,327,203 Premises and equipment, net 4,094,487 3,601,254 Accrued interest receivable and other assets 3,669,305 3,750,570 ----------- ----------- Total assets $291,521,820 $288,441,915 =========== =========== LIABILITIES Deposits Noninterest-bearing $ 22,777,879 $ 24,678,146 Interest-bearing 220,074,255 216,525,123 ----------- ----------- Total deposits 242,852,134 241,203,269 Securities sold under repurchase agreements 7,576,622 7,290,759 Federal Home Loan Bank borrowings 10,626,129 11,686,863 Accrued interest payable and other liabilities 981,342 986,544 ----------- ----------- Total liabilities 262,036,227 261,167,435 SHAREHOLDERS' EQUITY Common stock, $6.25 par value: 9,000,000 shares authorized; 1998 2,646,461 shares issued; 1997 1,314,591 shares issued 16,540,386 8,216,191 Additional paid-in capital 5,609,653 5,135,899 Retained earnings 7,320,711 13,907,908 Treasury stock at cost: 6,400 shares (56,000) (56,000) Unrealized gain on securities available for sale 70,843 70,482 ---------- ----------- Total shareholders' equity 29,485,593 27,274,480 ---------- ----------- Total liabilities and shareholders' equity $291,521,820 $288,441,915 =========== ============ See accompanying notes to consolidated financial statements. CSB BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Interest income Loans, including fees $4,568,582 $4,066,951 $ 8,963,490 $ 8,101,361 Taxable securities 672,465 897,670 1,419,169 1,505,016 Nontaxable securities 467,097 344,309 922,601 621,999 Other 112,265 148,649 216,471 460,397 --------- -------- --------- ---------- Total interest income 5,820,409 5,457,579 11,521,731 10,688,773 Interest expense Deposits 2,606,214 2,426,912 5,167,687 4,704,140 Other 232,980 240,058 477,199 479,086 --------- --------- ---------- ---------- Total interest expense 2,839,194 2,666,970 5,644,886 5,183,226 --------- --------- ---------- ---------- Net interest income 2,981,215 2,790,609 5,876,845 5,505,547 Provision for loan losses 98,735 98,736 196,385 200,424 ------- ------- ------- -------- Net interest income after provision for loan losses 2,882,480 2,691,873 5,680,460 5,305,123 --------- --------- --------- --------- Other income Service charges on deposit accounts 178,610 164,118 359,989 335,782 Gain on sale of loans 3,529 3,529 220,176 Other income 161,799 128,495 298,299 214,424 --------- -------- --------- -------- Total other income 343,938 292,613 661,817 770,382 Other expense Salaries and employee benefits 870,415 777,962 1,674,790 1,514,804 Occupancy expense 90,091 73,607 165,390 157,349 Equipment expense 129,978 114,026 244,168 221,949 State franchise tax 97,041 86,752 192,241 169,111 Other expense 572,053 488,802 1,068,013 970,674 -------- ------- ---------- --------- Total other expense 1,759,578 1,541,149 3,344,602 3,033,887 --------- --------- ---------- --------- Income before income taxes 1,466,840 1,443,337 2,997,675 3,041,618 Provision for income taxes 380,800 460,001 795,886 883,701 --------- --------- ---------- --------- Net income $1,086,040 $ 983,336 $ 2,201,789 $ 2,157,917 ========= ========= ========== ========= Basic and diluted earnings per common share $ .41 $ .38 $ .84 $ .83 ========= ========= ========== ========= See accompanying notes to the consolidated financial statements. CSB BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Net income $ 1,086,040 $ 983,336 $2,201,789 $2,157,917 Other comprehensive income, Net of tax: Unrealized gains (losses) arising during period (7,021) 84,333 361 (60) --------- --------- --------- --------- Comprehensive income $1,079,019 $1,067,669 $2,202,150 $2,157,857 ========= ========= ========= ========= CSB BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Balance at beginning of period $28,542,717 $24,518,736 $27,274,480 $23,426,480 Net income 1,086,040 983,336 2,201,789 2,157,917 Common stock issued under the dividend reinvestment program and 401(k) plan 127,681 79,794 536,264 302,766 Cash dividends ($.10 and $.20 per share in 1998; $.085 and $.17 per share in 1997) (263,824) (221,227) (527,301) (442,131) Change in unrealized gain/loss on securities available for sale (7,021) 84,333 361 (60) ---------- ---------- ---------- ---------- Balance at end of period $29,485,593 $25,444,972 $29,485,593 $25,444,972 ========== ========== ========== =========== See accompanying notes to the consolidated financial statements. CSB BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1998 1997 Net cash from operating activities $ 2,617,544 $ 1,359,203 Cash flows from investing activities Securities available for sale Proceeds from maturities 7,000,000 3,000,000 Purchases (4,003,044) (18,957,238) Securities held to maturity Proceeds from maturities, calls and repayments 6,179,734 4,906,150 Purchases (1,805,037) (20,118,784) Net change in loans (7,745,245) (12,313,578) Loan sale proceeds 489,529 10,766,167 Purchase of premises and equipment, net (695,557) (437,076) ----------- ----------- Net cash from investing activities (579,620) (33,154,359) ----------- ------------ Cash from financing activities Net change in deposits 1,648,865 13,086,173 Net change in repurchase agreements 285,863 321,871 Principle reductions on FHLB borrowings (1,060,734) (773,066) Advance on FHLB borrowings 1,289,309 Shares issued for 401(k) Plan 454,181 180,434 Cash dividends paid, net of dividend reinvestment (445,218) (319,799) ----------- ----------- Net cash from financing activities 882,957 13,784,922 ----------- ----------- Net change in cash and cash equivalents 2,920,881 (18,010,234) Beginning cash and cash equivalents 14,335,042 30,317,756 ---------- ----------- Ending cash and cash equivalents $17,255,923 $ 12,307,522 ========== =========== Supplemental disclosures Interest paid $ 5,666,920 $ 5,192,682 Income taxes paid 775,000 983,866 See accompanying notes to the consolidated financial statements. CSB BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include accounts of CSB Bancorp, Inc. and its wholly-owned subsidiary, The Commercial and Savings Bank (together referred to as the "Company"). All significant intercompany transactions and balances have been eliminated. These interim financial statements are prepared without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of CSB at June 30, 1998, and results of operations and cash flows for the periods presented. The accompanying consolidated financial statements do not contain all necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances. The Annual Report for CSB for the year ended December 31, 1997, contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements. The Company is engaged in the business of commercial and retail banking and trust services, with operations conducted through its main office and eight branches located in Millersburg, Ohio, and nearby communities. These communities are the source of substantially all deposit, loan and trust activities. The majority of the Company's income is derived from commercial and retail lending activities and investments in securities. To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, realization of deferred tax assets, fair value of certain securities and determination and carrying value of impaired loans are particularly subject to change. The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loans that, in management's judgement, should be charged-off. Loan impairment is reported when full payment under the loan terms is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when the internal grading system indicates a doubtful classification. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one- to four-family residences, residential construction loans and automobile, home equity and second mortgage loans less than $100,000. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. The Company records income tax expense based on the amount of tax due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," was adopted by the Company in 1997. SFAS 125 revises the accounting for transfers of financial assets such as loans and securities, and for distinguishing between sales and secured borrowings. The adoption of the portions of SFAS No. 125 relating to securities lending, repurchase agreements and other similar transactions are not required to be adopted until 1998. SFAS 125 did not have a material impact on the Company's financial statements. On April 30, 1998, a two-for-one stock split in the form of a 100% stock dividend was distributed to shareholders of record as of March 31, 1998. All share and per share data was restated to reflect the stock split. SFAS No. 128, "Earnings Per Share," became effective for the company in 1997. SFAS 128 requires dual presentation of basic and diluted earnings per share ("EPS") for entities with complex capital structures. All prior EPS data has been restated to conform to the new method. Basic EPS is based on net income divided by the weighted average number of shares outstanding during the period. Diluted EPS shows the dilutive effect of additional common shares issuable under stock options. The weighted average number of shares outstanding for basic EPS was 2,637,702 and 2,631,830 for the three and six month periods ended June 30, 1998 and 2,602,846 and 2,597,778 for the three and six month periods ended June 30, 1997. The weighted average number of shares outstanding for diluted EPS, which includes the effect of stock options granted using the treasury stock method, was 2,638,658 and 2,632,753 for the three and six month periods ended June 30, 1998 and 2,603,538 and 2,598,470 for the three and six month periods ended June 30, 1997. There was no per share dilution as a result of the stock options in 1997 or 1998. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) SFAS No. 129, "Disclosures of Information about Capital Structure," consolidated existing accounting guidance relating to disclosure about a company's capital structure. Public companies generally have always been required to make disclosures now required by SFAS 129 and, therefore, SFAS 129 did not impact the Company's disclosures. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 is effective for the Company in 1998. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The information required by SFAS 130 is included in these financial statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," changes the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises report selected information about reportable segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 becomes effective for the Company in 1998. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving off-setting changes in fair value or cash flows. SFAS 133 does not allow hedging of a security which is classified as held to maturity, accordingly, upon adoption of SFAS 133, companies may reclassify any security from held to maturity to available for sale if they wish to be able to hedge the security in the future. SFAS 133 is effective for fiscal years beginning after June 15, 1999 with early adoption encouraged for any fiscal quarter beginning July 1, 1998 or later, with no retroactive application. Management does not expect the adoption SFAS 133 to have a significant impact on the Corporation's financial statements. NOTE 2 - SECURITIES The amortized cost and fair values of securities are as follows: June 30, 1998 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale Debt securities U.S. Treasury securities $10,023,324 $ 69,957 $ 0 $10,093,281 U.S. Government agencies 12,980,123 42,151 (4,771) 13,017,503 ----------- --------- -------- ---------- Total debt securities 23,003,447 112,108 (4,771) 23,110,784 Other securities 1,995,600 0 0 1,995,600 Total securities available for sale $24,999,047 $ 112,108 $ (4,771) $25,106,384 ========== ========== ========= =========== Held to maturity U.S. Treasury securities $12,125,645 $ 119,197 $ 0 $12,244,842 U.S. Government agencies 4,989,779 18,346 (2,500) 5,005,625 Obligations of state and political subdivisions 36,877,238 1,188,195 (13,231) 38,052,202 ---------- ---------- -------- ----------- Total debt securities held to maturity $53,992,662 $1,325,738 $(15,731) $55,302,669 ========== ========= ========= =========== NOTE 2 - SECURITIES (Continued) December 31, 1997 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale Debt securities U.S. Treasury securities $16,021,859 $ 72,864 $ (349) $16,094,374 Obligations of U.S. government corporations and agencies 9,978,862 40,872 (6,596) 10,013,138 ---------- -------- ------- ---------- Total debt securities available for sale 26,000,721 113,736 (6,945) 26,107,512 Other securities 1,934,900 1,934,900 ---------- -------- ------- ---------- Total securities available for sale $27,935,621 $ 113,736 $ (6,945) $28,042,412 ========== ======== ======== ========== Held to maturity U.S. Treasury securities $15,121,855 $ 130,739 $ (1,095) $15,251,499 Obligations of U.S. government corporations and agencies 7,540,006 11,870 (6,343) 7,545,533 Obligations of states and political subdivisions 35,723,573 1,262,675 (9,643) 36,976,605 ---------- ---------- -------- ---------- Total securities held to maturity $58,385,434 $1,405,284 $(17,081) $59,773,637 ========== ========= ====== ========== No securities were sold during the first six months of 1998 or 1997. The amortized cost and fair values of debt securities at June 30, 1998, by contractual maturity, are shown below. Available-for-sale securities Held-to-maturity securities Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less $ 9,984,459 $10,007,805 $ 8,936,581 $ 8,979,204 Due from one to five years 13,018,988 13,102,979 13,521,694 13,753,233 Due from five to ten years 0 0 15,795,000 16,389,695 Due after ten years 0 0 15,739,387 16,180,537 Mortgage-backed 0 0 0 0 --------- ---------- ---------- ---------- $23,003,447 $23,110,784 $53,992,662 $55,302,669 ========== ========== ========== =========== /TABLE NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following: June 30, 1998 December 31, 1997 Commercial $ 82,652,945 $ 80,260,550 Commercial real estate 30,787,270 30,407,670 Residential real estate 52,582,193 49,049,948 Installment and credit card 16,553,312 16,450,211 Construction 4,000,149 3,507,863 ---------- ------------ Total loans $186,575,869 $179,676,242 =========== ============ During the first six months of 1998, the Company received $490,000 in proceeds from mortgage loan sales. A gain of $3,529 was recognized on this sale. During the first six months of 1997, the Company received $10.8 million in proceeds from mortgage loan sales. A gain of $220,176 was recognized on this sale. Activity in the allowance for loan losses for the six months ended June 30, 1998 and 1997 is as follows: 1998 1997 Beginning balance $2,349,039 $2,120,845 Provision for loan losses 196,385 200,424 Loans charged off (389,005) (124,835) Recoveries 16,391 27,490 --------- --------- Ending balance $2,172,810 $2,223,924 ========= ========= Impaired loans at June 30, 1998 and December 31, 1997 is as follows: June 30, December 31, 1998 1997 Loans with no allowance for loan losses allocated $ 72,944 $ 0 Loans with allowance for loan losses allocated 1,325,004 1,384,000 Amount of allowance allocated 175,407 437,000 NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Impaired loans for the six months ended June 30, 1998 and 1997, is as follows: 1998 1997 Average of impaired loans $1,391,000 $1,174,000 Interest income recognized during impairment 35,301 35,849 Cash basis interest income recognized 34,212 30,851 NOTE 4 - FEDERAL HOME LOAN BANK BORROWINGS The Company borrows from the Federal Home Loan Bank (FHLB) to fund certain fixed-rate residential real estate loans. At June 30, 1998, the Company had 189 outstanding borrowings from the FHLB. These borrowings carry fixed interest rates ranging from 5.60% to 7.15% and maturities of 10, 15, and 20 years. The Company matches each borrowing against a fixed-rate mortgage loan with a similar maturity. Monthly principal and interest payments are due on the borrowings. In addition, a principal curtailment of 10% of the outstanding principal balance is due on the anniversary date of each borrowing. FHLB borrowings are collateralized by FHLB stock and a blanket pledge on $15.9 million of qualifying mortgage loans at June 30, 1998. NOTE 5 COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet customer financing needs. These financial instruments include commitments to make or purchase loans, undisbursed lines of credit, undisbursed credit card balances and letters of credit. The Company's exposure to credit loss in case of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Company follows the same credit policy to make such commitments as it uses for those loans recorded on the balance sheet. At June 30, 1998 and December 31, 1997, commitments to make loans, primarily in the form of undisbursed portions of approved lines of credit, amounted to approximately $30.4 million and $29.0 million, substantially all of which carried adjustable rates of interest. Commitments under outstanding standby letters of credit amounted to $747,000 at June 30, 1998 and $820,000 at December 31, 1997. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained relating to these commitments is determined using management's credit evaluation of the borrower and may include real estate, vehicles, business assets, deposits and other items. NOTE 5 COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES (Continued) The Company sold $490,000 in residential mortgage loans during 1998 and $10.8 million during 1997. The Company has agreed to repurchase individual loans if they become delinquent by greater than ninety days. A recourse obligation has been established by management based on past loan loss experience, and other factors. This liability is not material. Occasionally, various contingent liabilities arise that are not recorded in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, ultimate disposition of these matters is not expected to have a material affect on financial condition or results of operations. CSB BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion focuses on the consolidated financial condition of CSB Bancorp, Inc. (the Company) at June 30, 1998, compared to December 31, 1997, and the consolidated results of operations for the quarterly period ending June 30, 1998 compared to the same period in 1997. The purpose of this discussion is to provide the reader with a more thorough understanding of the consolidated financial statements. This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes. Forward-looking statements contained in this discussion involve risks and uncertainties and are subject to change based on various important factors. Actual results could differ from those expressed or implied. The Company is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on the liquidity, capital resources or operations except as discussed herein. Also, the Company is not aware of any current recommendations by regulatory authorities that would have such effect if implemented. FINANCIAL CONDITION Total securities decreased approximately $7.3 million during the first half of 1998 as maturing investment securities were used to fund loan activity. Since one of the primary functions of the securities portfolio is to provide a source of liquidity, it is structured such that security maturities and cash flows satisfy the Company's liquidity needs and asset-liability management requirements. At June 30, 1998, approximately 24% of the securities portfolio matures within one year. Total loans increased $6.9 million, or 3.8%, during the first six months of 1998. Residential real estate loans increased $3.5 million, or 7.2% and commercial loans increased $2.4 million, or 3.0%. These increases were primarily a result of increased loan demand in the Company's service area as the local economy remains strong. The commercial loans are generally variable-rate and based on the Prime rate and may be unsecured or collateralized by business or farm equipment. These loans are generally of higher risk than residential mortgage loans. As a percentage of loans, the allowance for loan losses was 1.16% at June 30, 1998 and 1.31% at December 31, 1997. Impaired loans were approximately $1.4 million, or 0.75% of total loans, at June 30, 1998, compared to 0.77% of loans at December 31, 1997. These credits are considered in management's analysis of the allowance for loan losses. Premises and equipment increased $493,000, or 13.7%, during the first six months of 1998. This was primarily due to the completion of the Shreve office, which opened in March 1998. Additional investment was made in the design and plan of the new operations center, which should be completed in 1999. At June 30, 1998, the ratio of net loans to deposits was 75.9%, compared to 73.5% at the end of 1997 due to the increase in loans discussed earlier. Total deposits increased $1.6 million, or 0.7% during the first six months of 1998. Historically, the Company has experienced a decline in overall deposit balances during the first half of the year. Total shareholders' equity was increased in part by year-to-date net income of $2.2 million, less $527,000 of cash dividends declared. The cash dividend represents 24% of net income for the first half of 1998. Also contributing to capital was the dividend reinvestment program (DRIP) and the purchase of stock by the Company's 401(k) retirement plan which increased equity approximately $536,000 during the first half of 1998. The Company and its subsidiary meet all regulatory capital requirements and are considered to be "well capitalized" at June 30, 1998. The Company's ratio of total capital to risk-weighted assets was 17.23% at June 30, 1998, while Tier 1 risk-based capital ratio was 16.05%. Regulatory minimums call for a total risk-based capital ratio of 8%, at least one-half of which must be Tier 1 capital. The Company's leverage ratio was 10.24% at June 30, 1998, which exceeds the regulatory minimum of 3% to 5%. RESULTS OF OPERATIONS Net income for the six months ended June 30, 1998 was $2.2 million, or $0.84 per share, remaining comparable to $2.2 million or $0.83 per share earned during the same period last year, an increase of $44,000, or 2.0%. Second quarter net income was $1.1 million, or $0.41 per share, in 1998, compared to $983,000, or $0.385 per share for the second quarter of 1997. The primary factor contributing to this increase was the increase in net interest income. Net interest income was $5.9 million for the first six months of 1998, a 6.7% increase from 1997. Interest and fees on loans increased $862,000, or 10.6%, which resulted primarily from a higher average balance of loans. Also, as deposit funds were invested in securities from federal funds sold, interest on securities increased $215,000 and other interest income decreased $244,000 for the first half of 1998, compared to the first half of 1997. Net interest income for the second quarter of 1998 totaled $3.0 million, up 6.8% from $2.8 million in the second quarter of 1997. Most of this increase resulted from the increase in total loans. Income from taxable investments decreased $225,000 or 25.1% from the second quarter of 1997 to 1998, while income from nontaxable securities increased $123,000 or 35.7% for the same period. Interest expense increased $462,000, or 8.9% for the six months ended June 30, 1998, compared to the six months ended June 30, 1997. This increase was the result of increased volumes on interest-bearing accounts and slightly higher rates. For the second quarter of 1998 compared to the same period in 1997, interest expense increased $172,000 or 6.5%. The changes were primarily volume related. The provision for loan losses was $99,000 for the second quarter of 1998 and $196,000 during the first half of 1998, remaining virtually unchanged from the provisions for comparable periods in 1997. These provisions were made in recognition of continued loan origination volume, primarily in the commercial loan portfolio which typically carries a higher risk of loan loss. Other income for the first half of 1998 decreased approximately $109,000, primarily as a result of the $220,000 gain on the sale of loans in 1997 discussed above. The decrease was partially offset by an $84,000, or 39.1% increase in other income, primarily as a result of an increase in trust and financial services income. Noninterest income for the second quarter of 1998 increased $51,000, or 17.5%. Other expenses increased $218,000 or 14.2% for the three months ended June 30, 1998 and $311,000, or 10.2%, for the six months ended June 30, 1998, compared to the same periods in 1997. Management continues to monitor the Company's efficiency ratio by maintaining increases in other operating costs at low levels. Salaries and employee benefits increased by 11.9% in the second quarter and 10.6% for the six month period, and state franchise taxes increased as a result of 1997 earnings retention. The increase in salaries and employee benefits is in part due to normal merit increases and the staffing of the new branch office in Shreve, Ohio. Ohio's state franchise tax for financial institutions is based on the level of capital at the previous year-end. The provisions for income taxes of $381,000 for the second quarter and $796,000 during the first half of 1998 reflected an effective rate of 26.0% and 26.6%, compared to effective rates of 31.9% and 29.1% for the same time periods in 1997. The decrease in effective rates resulted from increased nontaxable interest income. YEAR 2000 ISSUE Many computer programs use only two digits to identify a year in the date field and were apparently designed and developed without considering the impact of the upcoming change in the century. Such programs could erroneously read entries for the Year 2000 as the Year 1900. This could result in major systems failures and miscalculations. Rapid and accurate data processing is essential to the operations of the financial institutions, such as the Company. The Company has formed a Year 2000 committee to assess the extent to which its information technology, non information technology and its outside vendors may be adversely affected by the Year 2000 problems. Management is in the process of determining which programs are or will be capable of identifying the turn of the century. The issue is closely monitored by management and full compliance is expected by the end of 1998. While the Company does not anticipate that any Year 2000 computer problems or expenses required to correct such problems will materially affect its financial condition or results of operations, no assurance can be given in this regard. The Company is in the process of designing a contingency plan for each mission-critical application. The completion of this plan is scheduled for September 30, 1998. ITEM 3 - QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK There have been no material changes in the quantitative and qualitative disclosures about market risks as of June 30, 1998 from that presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. CSB BANCORP, INC. FORM 10-Q Quarter ended June 30, 1998 PART II - OTHER INFORMATION Item 1 - Legal Proceedings: There are no matters required to be reported under this item. Item 2 - Changes in Securities: There are no matters required to be reported under this item. Item 3 - Defaults Upon Senior Securities: There are no matters required to be reported under this item. Item 4 - Submission of Matters to a Vote of Security Holders: On April 8, 1998, the Company held the Annual Meeting of Shareholders at which the following issues were voted on: Shareholders voted upon the election of three (3) directors for Class I Nominees for three-year terms expiring in 2000. The results of the voting on these matters were as follows: Nominee Votes for Withheld David W. Kaufman 1,149,226 7,789 H. Richard Maxwell 1,060,350 105,623 Samuel M. Steimel 1,149,844 7,170 One (1) director was elected for a one-year term expiring in 1999: Douglas D. Akins 1,150,699 6,316 The following are directors who were not up for election at the meeting and whose terms of office as directors continued after the meeting: J. Thomas Lang Vivian A. McClelland Daniel J. Miller Samuel P. Riggle, Jr. David C. Sprang Shareholders voted on an increase in the authorized shares from 3,000,000 to 9,000,000. The results of the voting were as follows: Votes for Votes against Withheld 1,025,349 131,013 612 Item 5 - Other Information: There are no matters required to be reported under this item. Item 6 - Exhibits and Reports on Form 8-K: (a) Exhibits 3.1 Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to Registrant's 1994 Form 10-KSB). 3.2 Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB). 4 Form of Certificate of Common Shares of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB). 10 Leases for the Clinton Commons, Berlin and Charm Branch Offices of The Commercial and Savings Bank (incorporated by reference to Registrant's Form 10-SB). 11 Statement Regarding Computation of Per Share Earnings (reference is hereby made to Consolidated Statements of Income on page 5 hereof.) 27 Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter for which this report is filed. CSB BANCORP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CSB BANCORP, INC. (Registrant) Date: August 13, 1998 /s/ Douglas D. Akins (Signature) Douglas D. Akins President Chief Executive Officer Date: August 13, 1998 /s/ A. Lee Miller (Signature) A. Lee Miller Senior Vice President Chief Financial Officer CSB BANCORP, INC. Index to Exhibits Exhibit Sequential Number Description of Document Page 3.1 Amended Articles of Incorporation of CSB Bancorp, Inc. (incorporated by reference to Registrant's 1994 Form 10-KSB). 3.2 Code of Regulations of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB). 4 Form of Certificate of Common Shares of CSB Bancorp, Inc. (incorporated by reference to Registrant's Form 10-SB). 10 Leases for the Clinton Commons, Berlin and Charm Branch Offices of The Commercial and Savings Bank (incorporated by reference to Registrant's Form 10-SB). 11 Statement Regarding Computation of Per Share Earnings (reference is hereby made to Consolidated Statements of Income on page 5 hereof.) 27 Financial Data Schedule