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, 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 August 4, 1999: 2,654,382 common shares FORM 10-Q QUARTER ENDED JUNE 30, 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 - QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Part II - Other Information Other Information Signatures CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, 1999 1998 ASSETS Cash and noninterest-bearing deposits with banks $ 11,654,964 $ 10,440,120 Interest-bearing deposits with banks 149,208 315,067 Federal funds sold 12,683,000 14,853,000 ------------ ------------ Total cash and cash equivalents 24,487,172 25,608,187 Securities available for sale, at fair value 30,702,494 27,115,456 Securities held to maturity (Fair values of $71,697,213 in 1999 and $63,981,883 in 1998) 72,004,469 62,252,682 Loans, net 185,157,300 193,823,995 Premises and equipment, net 7,579,640 5,372,876 Accrued interest receivable and other assets 3,749,320 3,328,722 ------------ ------------ Total assets $323,680,395 $317,501,918 LIABILITIES Deposits Noninterest-bearing $ 24,141,921 $ 27,359,102 Interest-bearing 245,729,222 238,387,456 ------------ ------------ Total deposits 269,871,143 265,746,558 Securities sold under repurchase agreements 11,373,290 9,770,519 Federal Home Loan Bank borrowings 9,174,461 10,111,119 Accrued interest payable and other liabilities 1,033,762 1,013,623 ------------ ------------ Total liabilities 291,452,656 286,641,819 SHAREHOLDERS' EQUITY Common stock, $6.25 par value: 9,000,000 shares authorized; 1999 2,660,783 shares issued; 1998 2,654,441 shares issued 16,629,894 16,590,255 Additional paid-in capital 6,216,091 5,963,191 Retained earnings 9,685,757 8,292,636 Treasury stock at cost: 6,400 shares (56,000) (56,000) Accumulated other comprehensive income (248,003) 70,017 ------------ ------------ Total shareholders' equity 32,227,739 30,860,099 ------------ ------------ Total liabilities and shareholders' equity $323,680,395 $317,501,918 ------------ ------------ ------------ ------------ CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 Interest income Loans, including fees $4,264,065 $4,568,582 $ 8,703,674 $ 8,963,490 Taxable securities 762,553 672,465 1,445,069 1,419,169 Nontaxable securities 558,419 467,097 1,094,065 922,601 Other 242,973 112,265 404,536 216,471 ---------- ---------- ----------- ----------- Total interest income 5,828,010 5,820,409 11,647,344 11,521,731 Interest expense Deposits 2,768,829 2,606,214 5,485,013 5,167,687 Other 131,637 232,980 349,609 477,199 ---------- ---------- ----------- ----------- Total interest expense 2,900,466 2,839,194 5,834,622 5,644,886 ---------- ---------- ----------- ----------- Net interest income 2,927,544 2,981,215 5,812,722 5,876,845 Provision for loan losses 149,604 98,735 797,559 196,385 ---------- ---------- ----------- ----------- Net interest income after provision for loan losses 2,777,940 2,882,480 5,015,163 5,680,460 ---------- ---------- ----------- ----------- Other income Service charges on deposit accounts 198,215 178,610 380,247 359,989 Gain on sale of loans 680 3,529 303,332 3,529 Other income 255,377 161,799 442,710 298,299 ---------- ---------- ----------- ----------- Total other income 454,272 343,938 1,126,289 661,817 Other expense Salaries and employee benefits 943,963 870,415 1,806,284 1,674,790 Occupancy expense 83,765 90,091 171,803 165,390 Equipment expense 87,696 129,978 187,949 244,168 State franchise tax 66,569 97,041 160,529 192,241 Other expense 616,926 572,053 1,213,992 1,068,013 ---------- ---------- ----------- ----------- Total other expense 1,798,919 1,759,578 3,540,557 3,344,602 ---------- ---------- ----------- ----------- Income before income taxes 1,433,293 1,466,840 2,600,895 2,997,675 Provision for income taxes 322,550 380,800 571,614 795,886 ---------- ---------- ----------- ----------- Net income $ 1,110,743 $ 1,086,040 $ 2,029,281 $ 2,201,789 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- Basic and diluted earnings per common share $ .42 $ .41 $ .77 $ .84 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 Balance at beginning of period $31,587,281 $28,542,717 $30,860,099 $27,274,480 Net income 1,110,743 1,086,040 2,029,281 2,201,789 Unrealized gains (losses) on available-for-sale securities arising during period, net of tax (249,392) (7,021) (318,020) 361 ---------- ---------- ----------- ----------- Comprehensive income 861,351 1,079,019 1,711,261 2,202,150 Common stock issued under the dividend reinvestment program and 401(k) plan 97,351 127,681 292,539 536,264 Cash dividends ($.12 and $.24 per share in 1999; $.10 and $.20 per share in 1998) (318,244) (263,824) 636,160) (527,301) ---------- ---------- ----------- ----------- Balance at end of period $32,227,739 $29,485,593 $32,227,739 $29,485,593 ---------- ---------- ----------- ----------- ---------- ---------- ----------- ----------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1999 1998 Net cash from operating activities $ 2,439,221 $ 2,617,544 Cash flows from investing activities Securities available for sale Proceeds from maturities 9,000,000 7,000,000 Purchases (12,984,962) (4,003,044) Securities held to maturity Proceeds from maturities, calls and repayments 7,300,000 6,179,734 Purchases (17,098,498) (1,805,037) Net change in loans (4,837,217) (7,745,245) Loan sale proceeds 12,972,366 489,529 Premises and equipment expenditures, net (2,359,002) (695,557) ------------ ------------ Net cash from investing activities (8,007,313) (579,620) ------------ ------------ Cash flows from financing activities Net change in deposits 4,124,585 1,648,865 Net change in securities sold under repurchase agreements 1,602,771 285,863 Principal reductions on FHLB borrowings (936,658) (1,060,734) Shares issued for 401(k) plan 105,758 454,181 Cash dividends paid (449,379) (445,218) ------------ ------------ Net cash from financing activities 4,447,077 882,957 ------------ ------------ Net change in cash and cash equivalents (1,121,015) 2,920,881 Beginning cash and cash equivalents 25,608,187 14,335,042 ------------ ------------ Ending cash and cash equivalents $24,487,172 $17,255,923 ------------ ------------ ------------ ------------ Supplemental disclosures Interest paid $ 5,838,988 $ 5,666,920 Income taxes paid 502,000 775,000 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 June 30, 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 Six Months Ended June 30, June 30, 1999 1998 1999 1998 Weighted average common shares outstanding (basic) $2,652,314 $2,637,702 $2,650,473 $2,631,830 Dilutive effect of assumed exercise of stock options 950 956 961 923 ---------- ---------- ---------- ---------- Weighted average common shares outstanding (diluted) 2,653,264 2,638,658 2,651,434 2,632,753 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 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, 2000, 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: June 30, 1999 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale Debt securities U.S. Treasury securities $ 5,013,005 $ 26,331 $ --- $ 5,039,336 Obligations of U.S. government corporations and agencies 23,943,550 16,098 (418,190) 23,541,458 ----------- ---------- ---------- ----------- Total debt securities available for sale 28,956,555 42,429 (418,190) 28,580,794 Other securities 2,121,700 --- --- 2,121,700 ----------- ---------- ---------- ----------- Total securities available for sale $31,078,255 $ 42,429 $(418,190) $30,702,494 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- Held to maturity U.S. Treasury securities $ 5,114,561 $ 46,157 $ --- $ 5,160,718 Obligations of U.S. government corporations and agencies 19,505,128 6,155 (407,854) 19,103,429 Obligations of states and political subdivisions 47,384,780 506,802 (458,516) 47,433,066 ----------- ---------- ---------- ----------- Total debt securities held to maturity $72,004,469 $ 559,114 $(866,370) $71,697,213 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- December 31, 1998 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 six months of 1999 or 1998. The amortized cost and fair values of debt securities at June 30, 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 $ 4,009,811 $ 4,027,929 $ 6,048,804 $ 6,095,707 Due from one to five years 24,946,744 24,552,865 30,045,600 29,717,742 Due from five to ten years --- --- 22,963,922 22,976,950 Due after ten years --- --- 12,946,143 12,906,814 ----------- ----------- ----------- ----------- $28,956,555 $28,580,794 $72,004,469 $71,697,213 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consisted of the following: June 30, 1999 December 31, 1998 Commercial $ 85,845,110 $ 86,971,202 Commercial real estate 32,909,390 33,136,841 Residential real estate 30,863,349 33,684,743 Residential real estate loans held for sale 17,500,979 23,636,259 Installment and credit card 17,399,503 16,992,208 Construction 4,621,324 3,154,733 ------------ ------------ Subtotal 189,139,655 197,575,986 Allowance for loan losses (3,252,638) (2,887,721) Net deferred loan fees (729,717) (864,270) ------------ ------------ $185,157,300 $193,823,995 During the first six 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 six months ended June 30, 1999 and 1998 is as follows: 1999 1998 Beginning balance $2,887,721 $2,349,039 Provision for loan losses 797,559 196,385 Charge-offs (443,915) (389,005) Recoveries 11,273 16,391 ---------- ---------- Balance - June 30 $3,252,638 $2,172,810 Impaired loans at June 30, 1999 and December 31, 1998 are as follows: June 30, December 31, 1999 1998 Loans with no allowance for loan losses allocated $ 791,670 $ 141,509 Loans with allowance for loan losses allocated 2,295,547 1,453,837 Amount of allowance allocated 542,842 412,284 Impaired loans for the six months ended June 30, 1999 and 1998 are as follows: 1999 1998 Average of impaired loans $2,347,500 $1,391,000 Interest income recognized during impairment 82,596 35,301 Cash basis interest income recognized 76,269 34,212 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, 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 June 30, 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. June 30, December 31, 1999 1998 Fixed Variable Fixed Variable Rate Rate Rate Rate Commitments to make loans (at market rates) $ 320,905 $--- $1,230,165 $1,326,760 Unused lines of credit and letters of credit 1,641,379 34,252,298 3,105,699 28,532,674 NOTE 5 - COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES (Continued) 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 six 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 June 30, 1999, compared to December 31, 1998, and the consolidated results of operations for the quarterly period ending June 30, 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 $323.7 million at June 30, 1999, compared to $317.5 million at December 31, 1998, representing an increase of $6.2 million or 1.9%. Total securities increased approximately $13.3 million during the six months. 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, 1999, approximately 10.0% of the securities portfolio matures within one year. Net loans decreased $8.7 million, or 4.5%, to $185.2 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 $1.1 million, or 1.3%, primarily as a result of reduced demand for such loans in the local market area. Residential real estate loans decreased $9.0 million after the aforementioned sale. As a percentage of loans, the allowance for loan losses was 1.72% at June 30, 1999 and 1.47% at December 31, 1998. Loans past due more than 90 days and loans placed on nonaccrual status, were approximately $3.1 million, or 1.63% of total loans at June 30, 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 $2.2 million, or 41.1%, during the first six months 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 June 30, 1999, the ratio of net loans to deposits was 68.6%, 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 $2.0 million, less $636,000 of cash dividends declared. The cash dividend represents 31.3% of net income for the first six months 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 $293,000 during the first six months of 1999. The Company and its subsidiary met all regulatory capital requirements at June 30, 1999. The Company's ratio of total capital to risk-weighted assets was 17.2% at June 30, 1999, while Tier 1 risk-based capital ratio was 16.0%. Regulatory minimums call for a total risk-based capital ratio of 8.0%, at least one- half of which must be Tier 1 capital. The Company's leverage ratio was 10.1% at June 30, 1999, which exceeds the regulatory minimum of 3% to 5%. RESULTS OF OPERATIONS Net income for the six months ended June 30, 1999 was $2.0 million, or $.77 per share, compared to $2.2 million, or $.84 per share, earned during the same period last year, a decrease of $173,000 or 7.8%. Second quarter net income was $1.1 million, or $.42 per share, in 1999, compared to $1.1 million, or $.41 per share, for the second quarter of 1998. The primary factor contributing to the six month 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 was $5.8 million for the first six months of 1999, a 1.1% decrease from 1998. Interest and fees on loans decreased $260,000, or 2.9%, which resulted primarily from the sale of $13.0 million in mortgage loans during the first six months. Also, as the loan sale proceeds and the deposit funds were invested in securities from federal funds sold, interest on securities increased $197,000 and other interest income increased $188,000 for the first half of 1999, compared to the first half of 1998. Net interest income for the second quarter of 1999 totaled $2.9 million, down 1.8% from $3.0 million in the second quarter of 1998. Most of this decrease resulted from the reduction in yield of the loan sale proceeds that were invested in investment securities. Income from taxable investments increased $90,000, or 13.4%, from the second quarter of 1998 to 1999, while income from nontaxable securities increased $91,000, or 19.6%, for the same period. Interest expense increased $190,000, or 3.4%, for the six months ended June 30, 1999, compared to the six months ended June 30, 1998. This increase was the result of increased volumes on interest-bearing accounts and slightly higher rates. For the second quarter of 1999 compared to the same period in 1998, interest expense increased $61,000, or 2.2%. This increase was primarily volume related. The provision for loan losses was $150,000 for the second quarter of 1999 and $798,000 during the first half of 1999, increases of $51,000, or 51.5%, and $601,000, or 306%, from the provisions for comparable periods in 1998. These provisions were made in recognition of management's analysis of impaired and nonaccrual loans, "watch list" loans and continued loan origination volume. Other income for the first half of 1999 increased approximately $464,000, primarily as a result of the $303,000 gain on the sale of loans in 1999 discussed above. Also contributing to the increase was a $144,000, or 48.4% increase, in other income, primarily as a result of an increase in trust and financial services income. Other income for the second quarter of 1999 increased $110,000, or 32.1%. Other expenses increased $39,000, or 2.2%, for the three months ended June 30, 1999 and $196,000, or 5.9%, for the six months ended June 30, 1999, compared to the same periods in 1998. 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 8.4% in the second quarter and 7.9% for the six month period, due primarily to normal merit increases and additional staffing in the lending area. These increases were partially offset by decreases in equipment expense and state franchise tax. The decrease in equipment expense was due in part to the full depreciation of several fixed assets during the current periods. State franchise tax is down due to a $31,000 refund claim on previous years as a result of a recent court ruling. The provisions for income taxes of $323,000 for the second quarter and $572,000 during the first half of 1999 reflected an effective rate of 22.5% and 22.0%, compared to effective rates of 26.0% and 26.6% for the same time periods in 1998. The decrease in effective rates resulted from increased nontaxable interest income. 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 June 30, 1999, the Company had incurred $21,000 of operating expenses and $44,000 of capital expenditures for Year 2000 readiness. In addition to these costs, the Company has estimated it has incurred $92,000 of internal personnel costs through June 30, 1999. Management developed contingency plans for mission-critical systems, where applicable. These contingency plans include both remediation and business resumption plans. These contingency plans are based on the results of the above-mentioned testing. The Company completed the design of contingency plans by June 30, 1999. Management will continue to concentrate its efforts on the testing of its contingency planning and on customer awareness programs. 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, 1999 from that presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. FORM 10-Q Quarter ended June 30, 1999 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 14, 1999, the Company held the Annual Meeting of Shareholders at which shareholders voted upon the election of three (3) directors for Class I Nominees for three-year terms expiring in 2002. The results of the voting on these matters were as follows: Nominee Votes for Withheld Douglas D. Akins 2,260,781 7,454 J. Thomas Lang 2,251,494 9,324 F. Joanne Vincent 2,245,667 15,151 The following are directors who were not up for election at the meeting and whose terms of office as directors continued after the meeting: David W. Kaufman H. Richard Maxwell Daniel J. Miller Samuel P. Riggle, Jr. David C. Sprang Samuel M. Steimel 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 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.) 21 27 Financial Data Schedule 22 (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: August 4, 1999 /s/--------------------------- Douglas D. Akins President Chief Executive Officer Date: August 4, 1999 /s/--------------------------- A. Lee Miller Senior Vice President Chief Financial Officer CSB BANCORP, INC. EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 Net income $1,110,743 $1,086,040 $2,029,281 $2,201,789 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Average basic shares outstanding 2,652,314 2,637,702 2,650,473 2,631,830 Add: Effect of stock options 950 956 961 923 ---------- ---------- ---------- ---------- Average diluted shares outstanding 2,653,264 2,638,658 2,651,434 2,632,753 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic and diluted earnings per common share $ 0.42 $ 0.41 $ 0.77 $ 0.84 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------