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: MARCH 31, 1999 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 Outstanding at May 10, 1999: 2,652,030 common shares CSB BANCORP, INC. FORM 10-Q QUARTER ENDED MARCH 31, 1999 Table of Contents Part I - Financial Information ITEM 1 - FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Income Condensed Consolidated Statements of Changes in Shareholders' Equity Condensed Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Part II - Other Information Other Information Signatures CSB BANCORP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, December 31, 1999 1998 ASSETS Cash and noninterest-bearing deposits with banks $ 8,064,444 $ 10,440,120 Interest-bearing deposits with banks 13,979 315,067 Federal funds sold 27,015,000 14,853,000 ------------ ------------ Total cash and cash equivalents 35,093,423 25,608,187 Securities available for sale, at fair value 29,060,975 27,115,456 Securities held to maturity (Fair values of $62,787,158 in 1999 and $63,981,883 in 1998) 61,402,837 62,252,682 Loans, net 179,969,328 193,823,995 Premises and equipment, net 6,320,529 5,372,876 Accrued interest receivable and other assets 3,652,883 3,328,722 ------------ ------------ Total assets $315,499,975 $317,501,918 ------------ ------------ ------------ ------------ LIABILITIES Deposits Noninterest-bearing $ 23,707,664 $ 27,359,102 Interest-bearing 242,439,772 238,387,456 ------------ ------------ Total deposits 266,147,436 265,746,558 Securities sold under repurchase agreements 7,133,244 9,770,519 Federal Home Loan Bank borrowings 9,538,273 10,111,119 Accrued interest payable and other liabilities 1,093,741 1,013,623 ------------ ------------ Total liabilities 283,912,694 286,641,819 SHAREHOLDERS' EQUITY Common stock, $6.25 par value: 9,000,000 shares authorized; 1999 2,658,430 shares issued; 1998 2,654,441 shares issued 16,615,186 16,590,255 Additional paid-in capital 6,133,448 5,963,191 Retained earnings 8,893,257 8,292,636 Treasury stock at cost: 6,400 shares (56,000) (56,000) Accumulated other comprehensive income 1,390 70,017 ------------ ------------ Total shareholders' equity 31,587,281 30,860,099 ------------ ------------ Total liabilities and shareholders' equity $315,499,975 $317,501,918 ------------ ------------ ------------ ------------ /TABLE CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, 1999 1998 Interest income Loans, including fees $4,439,609 $4,394,908 Taxable securities 682,516 746,704 Nontaxable securities 535,646 455,504 Other 161,562 104,206 --------- ---------- Total interest income 5,819,333 5,701,322 Interest expense Deposits 2,716,183 2,561,473 Other 217,972 244,219 --------- ---------- Total interest expense 2,934,155 2,805,692 --------- ---------- Net interest income 2,885,178 2,895,630 Provision for loan losses 647,955 97,650 --------- ---------- Net interest income after provision for loan losses 2,237,223 2,797,980 Other income Service charges on deposit accounts 182,032 181,379 Gain on sale of loans 302,652 --- Other income 187,333 136,500 --------- ---------- Total other income 672,017 317,879 Other expenses Salaries and employee benefits 862,321 804,375 Occupancy expense 88,039 75,299 Equipment expense 100,253 114,190 State franchise tax 93,960 95,200 Other expenses 597,066 495,960 --------- ---------- Total other expenses 1,741,639 1,585,024 --------- ---------- Income before income taxes 1,167,601 1,530,835 Provision for income taxes 249,064 415,086 --------- ---------- Net income $ 918,537 $1,115,749 --------- ---------- --------- ---------- Basic and diluted earnings per common share (See Note 1) $ 0.35 $ 0.42 --------- ---------- --------- ---------- CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) Three Months Ended March 31, 1999 1998 Balance at beginning of period $30,860,099 $27,274,480 Net income 918,537 1,115,749 Unrealized gains (losses) on available-for-sale securities arising during period, net of tax (68,627) 7,382 ------------ ----------- Comprehensive income 849,910 1,123,131 Common stock issued under the dividend reinvestment program and 401(k) plan 195,188 408,584 Cash dividends ($.12 per share in 1999; $.10 per share in 1998) (317,916) (263,478) ------------ ----------- Balance at end of period $31,587,281 $28,542,717 ------------ ----------- ------------ ----------- /TABLE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, 1999 1998 Net cash from operating activities $1,109,746 $1,553,223 Cash flows from investing activities Securities available for sale Proceeds from maturities 5,000,000 5,000,000 Purchases (6,991,982) (2,963,189) Securities held to maturity Proceeds from maturities, calls and repayments 6,100,000 3,879,734 Purchases (5,267,485) (203,268) Net change in loans 525,842 (5,024,155) Loan sale proceeds 12,972,366 --- Premises and equipment expenditures, net (1,031,280) (485,312) ----------- ------------ Net cash from investing activities 11,307,461 203,810 ----------- ------------ Cash flows from financing activities Net change in deposits 400,878 (2,788,498) Net change in securities sold under repurchase agreements (2,637,275) (1,014,997) Principal reductions on FHLB borrowings (572,846) (651,222) Shares issued for 401(k) plan 100,999 326,084 Cash dividends paid (223,727) (180,977) ----------- ------------ Net cash from financing activities (2,931,971) (4,309,610) ----------- ------------ Net change in cash and cash equivalents 9,485,236 (2,552,577) Beginning cash and cash equivalents 25,608,187 14,335,042 ----------- ------------ Ending cash and cash equivalents $35,093,423 $11,782,465 ----------- ------------ ----------- ------------ Supplemental disclosures Interest paid $ 2,906,289 $ 2,793,939 Income taxes paid 312,000 --- /TABLE 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" or "CSB"). 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 March 31, 1999, and its results of operations and cash flows for the periods presented. The accompanying consolidated financial statements do not contain all 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, 1998, 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. While the Company's chief decision-makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company- wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment. 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 loan that, in management's judgment, should be charged-off. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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 other consumer 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. Basic earnings per share ("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 and diluted EPS computations were as follows: Three Months Ended March 31, 1999 1998 Weighted average common shares outstanding (basic) 2,648,611 2,625,892 Dilutive effect of assumed exercise of stock options 971 831 Weighted average common shares outstanding (diluted) 2,649,582 2,626,723 SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" 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 offsetting changes in fair value or cash flows. The new standard does not allow hedging of a security which is classified as held to maturity. Upon adoption of the standard, companies are allowed to transfer securities from held to maturity to available for sale if they wish to be able to hedge the securities in the future. The standard 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 of this standard to have a significant impact on the Company's financial statements. NOTE 2 - SECURITIES The amortized cost and fair values of securities are as follows: March 31, 1999 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale Debt securities U.S. Treasury securities $ 6,016,900 $ 61,616 $ --- $ 6,078,516 Obligations of U.S. government corporations and agencies 20,951,668 53,506 (113,015) 20,892,159 ----------- ---------- ---------- ----------- Total debt securities available for sale 26,968,568 115,122 (113,015) 26,970,675 Other securities 2,090,300 --- --- 2,090,300 ----------- ---------- ---------- ----------- Total securities available for sale $29,058,868 $ 115,122 $(113,015) $29,060,975 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- Held to maturity U.S. Treasury securities $ 6,120,527 $ 85,465 $ --- $ 6,205,992 Obligations of U.S. government corporations and agencies 10,505,986 12,538 (87,901) 10,430,623 Obligations of states and political subdivisions 44,776,324 1,432,865 (58,646) 46,150,543 ----------- ---------- ---------- ----------- Total debt securities held to maturity $61,402,837 $1,530,868 $(146,547) $62,787,158 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- NOTE 2 - SECURITIES (Continued) December 31, 1999 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale Debt securities U.S. Treasury securities $10,018,642 $ 96,670 $ --- $10,115,312 Obligations of U.S. government corporations and agencies 14,931,926 56,205 (46,787) 14,941,344 ----------- ---------- ---------- ----------- Total debt securities 24,950,568 152,875 (46,787) 25,056,656 Other securities 2,058,800 --- --- 2,058,800 ----------- ---------- ---------- ----------- Total securities available for sale $27,009,368 $ 152,875 $(46,787) $27,115,456 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- Held to maturity U.S. Treasury securities $10,124,422 $ 121,297 $ --- $10,245,719 Obligations of U.S. government corporations and agencies 9,501,449 21,675 (35,929) 9,487,195 Obligations of states and political subdivisions 42,626,811 1,667,490 (45,332) 44,248,969 ----------- ---------- ---------- ----------- Total securities held to maturity $62,252,682 $1,810,462 $(81,261) $63,981,883 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- There were no sales of investment securities during the first three months of 1999 or 1998. The amortized cost and fair values of debt securities at March 31, 1999, 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 $ 4,005,982 $ 4,035,313 $ 6,054,790 $ 6,122,553 Due from one to five years 22,962,586 22,935,362 19,509,828 19,724,096 Due from five to ten years --- --- 21,776,642 22,446,929 Due after ten years --- --- 14,061,577 14,493,580 $26,968,568 $26,970,675 $61,402,837 $62,787,158 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- /TABLE NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following: March 31, 1999 December 31, 1998 Commercial $ 85,431,465 $ 86,971,202 Commercial real estate 32,607,830 33,136,841 Residential real estate 31,526,905 33,684,743 Residential real estate loans held for sale 14,630,971 23,636,259 Installment and credit card 16,312,111 16,992,208 Construction 3,660,226 3,154,733 ------------ ------------ Subtotal 184,169,508 197,575,986 Allowance for loan losses (3,496,627) (2,887,721) Net deferred loan fees (703,553) (864,270) ------------ ------------ $179,969,328 $193,823,995 ------------ ------------ ------------ ------------ During the first three months of 1999, the Company received $13.0 million in proceeds from mortgage loan sales. A gain of $303,000 was recognized on these sales. Activity in the allowance for loan losses for the three months ended March 31, 1999 and 1998 is as follows: 1999 1998 Beginning balance $2,887,721 $2,349,039 Provision for loan losses 647,955 97,650 Charge-offs 45,295 (23,267) Recoveries 6,246 6,661 ---------- ---------- Balance - March 31 $3,496,627 $2,430,083 ---------- ---------- ---------- ---------- Impaired loans at March 31, 1999 and December 31, 1998 is as follows: March 31, December 31, 1999 1998 Loans with no allowance for loan losses allocated $ 677,658 $ 141,509 Loans with allowance for loan losses allocated 2,544,126 1,453,837 Amount of allowance allocated 890,553 412,284 /TABLE NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Impaired loans for the three months ended March 31, 1999 and 1998, is as follows: 1999 1998 Average of impaired loans $2,408,565 $1,592,000 Interest income recognized during impairment 36,000 18,000 Cash basis interest income recognized 35,000 18,000 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 March 31, 1999, 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. 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 the Company's FHLB stock and a blanket pledge on $14.3 million of qualifying mortgage loans at March 31, 1999. 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. March 31, December 31, 1999 1998 Fixed Variable Fixed Variable Rate Rate Rate Rate Commitments to make loans (at market rates) $ 799,852 $ 1,530,000 $1,230,165 $ 1,326,760 Unused lines of credit and Letters of credit 2,642,067 32,583,596 3,105,699 28,532,674 Since many commitments to make loans expire without being used, the aforementioned amounts do 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. The Company sold $13.0 million in residential mortgage loans during the first three months of 1999. 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. 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 March 31, 1999, compared to December 31, 1998, and the consolidated results of operations for the quarterly period ending March 31, 1999 compared to the same period in 1998. 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 Certain statements contained in this report that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates", "plans", "expects", "believes", and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. The Company's actual results, performance or achievements may materially differ from those expressed or implied in the forward- looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. FINANCIAL CONDITION Total assets were $315.5 million at March 31, 1999, compared to $317.5 million at December 31, 1998, representing a decrease of $2.0 million or 0.6%. Total securities increased approximately $1.1 million during the quarter. 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 March 31, 1999, approximately 11.4% of the securities portfolio matures within one year. Total loans decreased $13.4 million, or 6.8%, to $184.2 million. This decrease was a result of the $13.0 million sale of residential real estate loans previously identified as held for sale. Commercial loans decreased $1.5 million, or 1.8%, primarily as a result of reduced demand for such loans in the local market area. Residential real estate loans, exclusive of the loan sale, increased $1.2 million, or 2.1%. As a percentage of loans, the allowance for loan losses was 1.90% at March 31, 1999 and 1.47% at December 31, 1998. Loans past due more than 90 days and loans placed on nonaccrual status, were approximately $2.2 million, or 1.2% of total loans at March 31, 1999, compared to $1.5 million, or 0.86% of loans at December 31, 1998. These credits are considered in management's analysis of the allowance for loan losses. Premises and equipment increased $948,000, or 17.6%, during the first quarter of 1999. This was primarily due to the construction of the new operations center, which should be completed in the third quarter of 1999. At March 31, 1999, the ratio of net loans to deposits was 67.6%, compared to 72.9% at the end of 1998. This decrease is due primarily to the $13.0 million loan sale. Total shareholders' equity was increased in part by year-to-date net income of $919,000, less $318,000 of cash dividends declared. The cash dividend represents 34.6% of net income for the first quarter of 1999. Also contributing to capital was the dividend reinvestment program and the purchase of stock by the Company's 401(k) retirement plan. As a result of these programs, equity increased approximately $195,000 during the first quarter of 1999. The Company and its subsidiary met all regulatory capital requirements at March 31, 1999. The Company's ratio of total capital to risk-weighted assets was 17.22% at March 31, 1999, while Tier 1 risk-based capital ratio was 15.96%. 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 10.02% at March 31, 1999, which exceeds the regulatory minimum of 3% to 5%. RESULTS OF OPERATIONS Net income for the quarter ending March 31, 1999, was $919,000, or $0.35 per share, as compared to $1.1 million, or $0.42 per share earned during the same period last year, a decrease of $197,000, or 17.7%. The primary factors contributing to this decrease was an increase in the provision for loan loss and in other expenses, which were partially offset by an increase in other income. Net interest income for the quarter ended March 31, 1999 was $2.9 million, substantially the same as the first quarter of 1998. Interest and fees on loans increased $45,000, or 1.0%. Also, as deposit funds were invested in securities, interest on securities increased $16,000, and other interest income increased by $57,000, primarily due to a higher balance in federal funds sold. Interest expense increased $129,000 to $2.9 million for the quarter ended March 31, 1999, compared to $2.8 million for the quarter ended March 31, 1998. This increase was the result of increased volumes on interest-bearing accounts and slightly higher rates. The provision for loan losses was $648,000 during the first quarter of 1999, an increase of $550,000 over the first quarter of 1998. This additional provision was made in recognition of an increase in impaired and nonperforming loans and loans adversely classified in the Company's loan review system. Other income increased approximately $354,000 primarily as a result of the gain on the sale of loans during the 1999 period. In the first quarter of 1999, $13.0 million of fixed rate mortgage loans were sold, resulting in a gain of $303,000. These loans had previously been identified as held for sale. Other expenses increased $157,000, or 9.9%, for the three months ended March 31, 1999, compared to the same period in 1998. Management continues to monitor the Company's efficiency ratio by controlling increases in other operating costs. Salaries and employee benefits increased by $58,000 or 7.2%, and other expenses increased $101,000 or 20.4%. This increase was primarily due to increases in the merchant credit card program, and trust and financial services, which also increased other income. The provision for income taxes of $249,000 during the first quarter of 1999 reflected an effective rate of 21.3%, as compared to 27.1%, for the first quarter of 1998. YEAR 2000 ISSUE Certain statements contained in this section of Management's Discussion and Analysis of Financial Condition and Results of Operations that are not related to historical results are forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involved 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 and actual results may differ materially from those in forward-looking statements because of various factors. These factors include the ability of the Company and its key service providers, vendors, suppliers, customers and governmental entities to replace, modify or upgrade computer systems in ways that adequately address the Year 2000 issue discussed below. Special factors that might cause actual results to vary materially from the results anticipated include the ability to identify and correct all relevant computer codes and embedded chips, unanticipated difficulties or delays in the implementation of the Company's plans and the ability of third parties to adequately address their own Year 2000 issues. 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 financial institutions, such as the Company. In 1997, the Company formed a Year 2000 Committee to assess the extent to which its information and technology, noninformation technology and its outside vendors may be adversely affected by the Year 2000 problems. Management has identified systems as mission critical or nonmission critical. Vendors of all mission- critical systems have been contacted regarding the status of the renovation and validation of the systems. The Company completed all testing on mission-critical applications as of March 31, 1999. In addition to reviewing its own systems, the Company also recognizes it could incur losses if loan payments are delayed due to Year 2000 problems affecting any of the Company's significant borrowers or impairing the payroll systems of large employers in the Company's primary market area. Because the Company's loan portfolio is diversified with regard to individual borrowers and types of businesses, and the Company's primary market area is not significantly dependent on one employer or industry, the Company does not expect any significant or prolonged Year 2000-related difficulties. In addition, the Company is providing information to its customers about the Year 2000 issue. Management established a budget of $250,000 for costs associated with completing the comprehensive Year 2000 plan. This includes hardware and software upgrades, testing, training and other out- of-pocket expenses. The budget does not include in-house personnel costs. Through March 31, 1999, the Company had incurred $20,000 of operating expenses and $39,000 of capital expenditures for Year 2000 readiness. In addition to these costs, the Company has estimated it has incurred $79,000 of internal personnel costs through December 31, 1998. Management is in the process of developing contingency plans for mission-critical systems, where applicable. These contingency plans include both remediation and business resumption plans. These contingency plans will be based on the results of the above- mentioned testing. The Company plans to complete the design of contingency plans by June 30, 1999. 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 March 31, 1999 from that presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. CSB BANCORP, INC. FORM 10-Q Quarter ended March 31, 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: There are no matters required to be reported under this item. 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: Exhibit Number Description of Document 11 Statement Regarding Computation of Per Share Earnings (reference is hereby made to Consolidated Statements of Income on page 4 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. 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: May 12, 1999 /s/ Douglas D. Akins --------------------- Douglas D. Akins President Chief Executive Officer Date: May 12, 1999 /s/ A. Lee Miller --------------------- A. Lee Miller Senior Vice President Chief Financial Officer Index to Exhibits Exhibit Sequential Number Description of Document Page 11 Statement Regarding Computation of Per Share Earnings (reference is hereby made to Consolidated Statements of Income on page 4 hereof.) 27 Financial Data Schedule CSB BANCORP, INC. EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Three Months Ended March 31, 1999 1998 Net income $ 918,537 $1,115,749 Average basic shares outstanding 2,648,611 2,625,892 Add: Effect of stock options 971 831 Average diluted shares outstanding 2,649,582 2,626,723 Basic and diluted earnings per common share $ 0.35 $ 0.42