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Exhibit 13 (CSB BANCORP, INC. LOGO)
    
    2003ANNUAL REPORT
TO SHAREHOLDERS




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TABLE OF CONTENTS  FINANCIAL HIGHLIGHTSA LETTER FROM OUR PRESIDENTSENIOR MANAGEMENTBOARD OF DIRECTORS2003 FINANCIAL REVIEWREPORT OF INDEPENDENT AUDITORSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSSUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSOFFICERS OF THE COMMERCIAL AND SAVINGS BANKEX-11 Computation of Per Share EarningsEX-13 Annual ReportEX-21 SubsidiaryEX-23.1 Consent of Clifton Gunderson LLPEX-31.1 302 CertEX-31.2EX-32.1 906 CertEX-32.2 906 Cert    Table of Contents  
 FINANCIAL HIGHLIGHTS
    
    (CSB BANCORP, INC. LOGO)
 FOR THE YEAR ENDED DECEMBER 31
    
    2003
    
    2002
    
    % Change(Dollars in thousands, except per share data)CONSOLIDATED RESULTSNet interest income
    
    $
    10,783
    
    
    $
    10,233
    
    
    
    5
    %Net interest income -
fully taxable-equivalent (FTE) basis
    
    
    11,765
    
    
    
    11,361
    
    
    
    4
    %Noninterest income
    
    
    2,155
    
    
    
    2,037
    
    
    
    6
    %Credit for loan losses
    
    
    51
    
    
    
    587
    
    
    
    -91
    %Noninterest expense
    
    
    10,799
    
    
    
    10,999
    
    
    
    -2
    %Net income
    
    
    2,060
    
    
    
    1,923
    
    
    
    7
    %AT YEAR-ENDLoans
    
    $
    210,796
    
    
    $
    197,109
    
    
    
    7
    %Assets
    
    
    306,180
    
    
    
    304,713
    
    
    
    <1
    %Deposits
    
    
    248,958
    
    
    
    239,976
    
    
    
    4
    %Shareholders equity
    
    
    34,718
    
    
    
    33,742
    
    
    
    3
    %Cash dividends declared
    
    
    0.48
    
    
    
    0.30
    
    
    
    60
    %Book value
    
    
    13.13
    
    
    
    12.83
    
    
    
    2
    %Market price
    
    
    17.00
    
    
    
    16.05
    
    
    
    6
    %FINANCIAL PERFORMANCEReturn on average assets
    
    
    0.68
    %
    
    
    0.65
    %Return on average equity
    
    
    6.00
    %
    
    
    5.76
    %Net interest margin
    
    
    3.81
    %
    
    
    3.73
    %Efficiency ratio
    
    
    83.00
    %
    
    
    90.00
    %CAPITAL RATIOSRisk-based capital:Tier 1
    
    
    16.90
    %
    
    
    16.90
    %Total
    
    
    18.10
    %
    
    
    18.10
    %Leverage
    
    
    11.20
    %
    
    
    11.20
    %
 2003 ANNUAL REPORT TO SHAREHOLDERS




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(CSB BANCORP, INC. LOGO)
    
    A LETTER FROM OUR PRESIDENT
 DEAR FELLOW SHAREHOLDER: During 2003 CSB Bancorp generated net earnings of $2,060,000 that were 7%
greater than 2002, increased its declared cash dividends by 60%, lowered its
non-interest expenses by over 10% and saw its stock price rise 5.9%! While these results represent progress, there is still room for improvement. We had a year that, based on industry performance standards, met some
objectives, exceeded others and significantly missed certain critical
benchmarks to which we aspired. During the year, with the exception of our
Chief Financial Officer, we completely replaced the executive management of
the bank. In an industry and a year where all around us there were
consolidations, start-ups, acquisitions, loan sales, new branch offices in
new markets, stock offerings and buy backs we did none of this in order to
concentrate on our core business. We have set targets that are
more reflective of our industry
peers and I want you to know
what these targets are. We believe these efforts have positioned us for improved performance over
the foreseeable future. In the rest of this letter I would like to review
our accomplishments of 2003 and share our goals and strategies for 2004 and
beyond. As you undoubtedly know, CSB has undergone three years of change and
restructuring. That period is officially closed. We have set targets that
are more reflective of our industry peers and I want you to know what these
targets are. These strategies are the result of the efforts of the directors, executive
officers and associates of CSB Bancorp and The Commercial and Savings Bank. We
have assembled a very honest and focused group of experienced professionals,
who day in and day out, manage your company in a manner that you will be
proud of. 2003 Financial Performance Financial performance improved throughout the year. Net income of $2,060,000 for 2003 was up over 2002 net of $1,923,000. This is
a 7% increase. Likewise, our earnings per share of $0.78 beat 2002 per share
performance of $0.73, also a 7% improvement. While these are important
improvements, there were several items associated with the banks
restructuring activities that impacted our performance. In the first quarter bank management chose to lower the Allowance for Loan and
Lease Losses (ALLL) by $51,000. This was motivated by a review of specific
loss reserves that had been assigned to individual problem credits. One
particular credit was paid off and the specific reserve allocation was
eliminated. Rather than leave the funds in the reserve, management lowered the
reserve and increased income. In addition, it is important to note that CSB incurred special one-time
charges in 2003 of approximately $400,000 on a pre-tax basis, which included
severance payments to the former CEO as well as costs associated with
replacing several former CSB executives. From a shareholder perspective, this is an important series of events. These
are one-time costs and should not reappear in 2004. 2003 ANNUAL REPORT TO SHAREHOLDERS 3




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A LETTER FROM OUR PRESIDENTcontinued
    
    (CSB BANCORP, INC. LOGO)
 Operating Targets In its purest form, banking is a simple business. You attract depositors
with interest rates they are willing to accept. You then turn around and
employ those deposits in loans or other investments, hopefully at a higher
rate. The difference between what you earned from the loans and
investments, and what you paid on deposits, less any funds you put in your
Loan Loss Reserve (a savings account for good loans that may not be
collected in full), is called the Net Interest Margin (NII) and can be
expressed in either a dollar or percent format. To
this result you add noninterest income (NII), subtract noninterest
expense (NIE) and the result is pre-tax net income. Deduct taxes and you
have net profit after tax (NPAT). The financial services industry, from a net income point of view,
historically holds two ratios in high regard  Return on Assets (ROA) which
measures our NPAT divided by our average assets, and Return on Equity (ROE)
which takes those same earnings and divides them by our shareholder equity. we do not seek to be
average but desire to
prudently exceed our peers. I apologize if this is too simplistic, but I want to stress that in a number
of areas we are returning to basics. CSB has set 2004 operating targets that
more closely mirror the standards of our industry, with acceptable levels of
stretch performance built in. In other words, we do not seek to be average
but desire to prudently exceed our peers. CSBs net interest margin, measured by dollars increased $550,000 in 2003
versus 2002. This is a critical number as it represents managements
ability to profitably price its loans, purchase investments and pay deposit
rates. On a percentage basis our NIM increased from 3.73% to 3.81%, 2002 to
2003. This too is a positive trend. Candidly speaking, throughout the banking industry this ratio is under severe
pressure. Both nationally and locally, interest rates (from both a borrower and
depositor perspective) are at 40-year lows. Our challenge is to make sound
loans that are priced fairly, invest excess funds in securities that provide
minimal risk, yet pay depositors interest rates that are attractive and
simultaneously market competitive. Competition for both deposits and loans is becoming more intense as additional
financial service providers enter our markets or existing companies adopt more
aggressive pricing philosophies. We welcome good competition as it mandates
that we perform at higher levels. We will selectively choose, however, to not
respond to foolish competition that is driven by market share acquisition or
the sacrifice of prudent credit risk. You will find elsewhere in this annual report a page that defines key
operating ratios. For 2004 we have put plans in place to exit the year with
performance levels that approach these ratios. We have work to do and are
committed to ultimately exceeding all of these targets. 2004 Marketplace Outlook We expect modest economic growth in our marketplace. Our three main
industries  tourism, lumber and agriculture  have different drivers for their
individual growth while sharing a common dependence on weather. In
conversations with leaders in each of these areas we are confident that all
impact items have been identified and not left to chance. We expect interest rates to remain relatively unchanged for the first half of
the year with small increases occurring in both the third and fourth quarters.
We have budgeted accordingly. Our industry continues to experience institutional dichotomy. On one hand
there are aggressive acquisitions, mergers and consolidations while
simultaneously we observe the creation and expansion of new banks and
financial service providers. Our conclusion is that customers, both commercial
and consumer, desire locally managed financial service providers. We support
this concept and our strategies will mirror this desire. I am confident that 2004 will be a positive year for our marketplace and our
company. 4 2003 ANNUAL REPORT TO SHAREHOLDERS




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(CSB BANCORP, INC. LOGO)
    
    A LETTER FROM OUR PRESIDENTcontinued
 Management Culture Your company has undergone virtually a complete change in its executive
management. We share common principles, philosophies and goals that reflect
the high ethical standards of our marketplace. We will not compromise the company or ourselves. Performance to sound industry
standards, not short-term financial spikes, will drive our financial decisions
and resulting performance. We value the individual contributions of each of our
associates and seek to maximize their skills through additional training,
education and exposure. We support the cultural diversity of our marketplace,
and will actively reach out for opportunities to grow together. We too are shareholders and
will always act with the
value of the shareholder as
our first concern. I believe we have a blend of directors whose experiences and professional
background will serve you well. Our management and associate personnel are
equipped with the requisite skills to service the needs of our markets, while
being also focused on a commitment to continuous enhancement of these skills. We support the intense regulatory environment in which we operate. We
recognize that regulation is an important part of our business and strive to
be outstanding partners with the multiple regulatory agencies with whom we
interface. We too are shareholders and will always act with the value of the shareholder
as our first concern. In closing, I am thrilled to be part of the CSB Bancorp team! My wife
Janice and I are most pleased to be back in the area and, as I write this
letter, we are building a new home in Berlin Township, Holmes County. I ask for your continued support of our company. Refer a friend who does
not bank with us today. Call or visit me with any service issues you become
aware of. If there is a particular service or product that we do not offer,
let us know and we will attempt to satisfy that need. As we move into our 125th year of serving our communities, my commitment to
you is to provide the levels of leadership, performance and security that
you deserve and expect! -s- John J. LimbertJOHN J. LIMBERTPresident, Chief Executive Officer
 2003 ANNUAL REPORT TO SHAREHOLDERS 5




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(CSB BANCORP, INC. LOGO)
 
 SENIOR MANAGEMENTleft-right A. LEE MILLERSenior Vice President,
Chief Financial Officer JOHN J. LIMBERTPresident,
Chief Executive Officer RICK L. GINTHERSenior Vice President,
Chief Lending Officer PAUL D. GREIGSenior Vice President,
Chief Operations/
Information Officer (PHOTO OF CSB STAFF) 
 BOARD OF DIRECTORSleft-right DANIEL J. MILLER
    
    J. THOMAS LANG
    
    EDDIE L. STEINERPhysician
    
    Veterinarian, Dairy Farmer
    
    Vice President of ProductionEast Holmes Family Care, Inc.
    
    Spring Hill Farms, Inc.
    
    Smith Dairy Products CompanyROBERT K. BAKER
    
    JOHN R. WALTMAN
    
    JEFFERY A. ROBB, SR.Co-Owner and Controller
    
    Attorney
    
    PresidentBakerwell, Inc.
    
    Critchfield, Critchfield & Johnston
    
    Robb Companies, Inc.RONALD E. HOLTMAN
    
    JOHN J. LIMBERT
    
    SAMUEL M. STEIMELAttorney
    
    President and Chief Executive Officer
    
    AttorneyLogee, Hostetler, Stutzman & Lehman
    
    The Commercial and Savings Bank
    
    Steimel Law Office
 6 2003 ANNUAL REPORT TO SHAREHOLDERS




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(CSB BANCORP, INC. LOGO)
    
    2003 FINANCIAL REVIEW
 INTRODUCTION CSB Bancorp, Inc. (the Company), is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended, and was
incorporated under the laws of the State of Ohio in 1991. The Commercial
and Savings Bank (the Bank), an Ohio banking corporation chartered in
1879, is a wholly-owned subsidiary of the Company. The Bank is a member of
the Federal Reserve system, and its deposits are insured up to the maximum
provided by law by the Federal Deposit Insurance Corporation. The primary
banking regulators of the Bank are the Ohio Division of Financial
Institutions and the Federal Reserve Board. The Bank provides retail and commercial banking services to its
customers including checking and savings accounts, time deposits, safe
deposit facilities, personal loans, commercial loans, real estate
mortgage loans, installment loans, IRAs, night depository facilities and
trust services. Its customers are located primarily in Holmes County and
portions of surrounding counties in Ohio. The general economic
conditions in the Companys market area have been sound. Unemployment
statistics have generally been among the lowest in the State of Ohio,
and the area has experienced stable to rising real estate values. The following discussion is presented to aid in understanding the
Companys consolidated financial condition and results of operations,
and should be read in conjunction with the audited consolidated
financial statements and related notes. FORWARD

LOOKING STATEMENTS Certain statements contained in Managements Discussion and Analysis of
Financial Condition and Results of Operations are not related to
historical results, but are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements involve a number of risks and uncertainties. Any
forward-looking statements made by the Company herein and in future
reports and statements are not guarantees of future performance, and
actual results may differ materially from those in forward-looking
statements because of various factors. The Company does not undertake,
and specifically disclaims, any obligation to publicly release the
result of any revisions to any forward-looking statements to reflect the
occurrence of unanticipated events or circumstances after the date of
such statements. 2003 ANNUAL REPORT TO SHAREHOLDERS 7




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2003 FINANCIAL REVIEW
    
    (CSB BANCORP, INC. LOGO)
 SELECTED FINANCIAL DATA
The following table sets forth certain selected
consolidated financial information. 2003
    
    2002

    
    2001

    
    2000

    
    1999(Dollars in thousands, except, per share data)Statements of income:Total interest income
    
    $
    15,414
    
    
    $
    16,700
    
    
    $
    21,656
    
    
    $
    25,497
    
    
    $
    23,707Total interest expense
    

    
    4,631
    
    
    
    6,467
    
    
    
    11,471
    
    
    
    12,782
    
    
    
    11,682Net interest income
    
    
    10,783
    
    
    
    10,233
    
    
    
    10,185
    
    
    
    12,715
    
    
    
    12,025Provision (credit) for loan losses
    
    
    (51

    )
    
    
    (587
    )
    
    
    35
    
    
    
    6,142
    
    
    
    1,100Net interest income after
provision (credit) for loan losses
    
    
    10,834
    
    
    
    10,820
    
    
    
    10,150
    
    
    
    6,573
    
    
    
    10,925Noninterest income
    
    
    2,155
    
    
    
    2,037
    
    
    
    1,976
    
    
    
    2,019
    
    
    
    2,063Noninterest expenses
    
    
    10,799
    
    
    
    10,999
    
    
    
    11,604
    
    
    
    9,191
    
    
    
    7,573Income (loss) before income taxes
    
    
    2,190
    
    
    
    1,858
    
    
    
    522
    
    
    
    (599
    )
    
    
    5,415Income tax provision (credit)
    
    
    130
    
    
    
    (65
    )
    
    
    (537
    )
    
    
    (920
    )
    
    
    1,149Net income
    
    $
    2,060
    
    
    $
    1,923
    

    
    $
    1,059
    
    
    $
    321
    
    
    $
    4,266Per share of common stockBasic and diluted income
    
    $
    0.78
    
    
    $
    0.73
    
    
    $
    0.40
    
    
    $
    0.12
    
    
    $
    1.61Dividends
    
    
    0.48
    
    
    
    0.30
    
    
    
    0.10
    
    
    
    0.45
    
    
    
    0.70Book value
    
    
    13.13
    
    
    
    12.83
    
    
    
    12.46
    
    
    
    12.02
    
    
    
    12.49Average basic common shares outstanding
    
    
    2,638,360
    
    
    
    2,630,931
    
    
    
    2,625,241
    
    
    
    2,628,998
    
    
    
    2,651,910Average diluted common shares
outstanding
    
    
    2,641,887
    
    
    
    2,634,558
    
    
    
    2,626,014
    
    
    
    2,629,733
    
    
    
    2,652,836Year-end balances:Loans, net (includes held for sale)
    
    $
    210,796
    
    
    $
    197,109
    
    
    $
    164,916
    
    
    $
    198,358
    
    
    $
    194,862Securities
    
    
    67,773
    
    
    
    73,088
    
    
    
    92,607
    
    
    
    96,550
    
    
    
    105,387Total assets
    
    
    306,180
    
    
    
    304,713
    
    
    
    306,345
    
    
    
    325,212
    
    
    
    326,546Deposits
    
    
    248,958
    
    
    
    239,976
    
    
    
    251,430
    
    
    
    268,583
    
    
    
    269,939Borrowings
    
    
    21,372
    
    
    
    29,828
    
    
    
    21,317
    
    
    
    24,048
    
    
    
    22,545Shareholders equity
    
    
    34,718
    
    
    
    33,742
    
    
    
    32,721
    
    
    
    31,540
    
    
    
    33,202Average balances:Loans, net
    
    $
    206,685
    
    
    $
    177,592
    
    
    $
    180,157
    
    
    $
    203,790
    
    
    $
    187,893Securities
    
    
    70,027
    
    
    
    80,176
    
    
    
    90,538
    
    
    
    100,216
    
    
    
    99,993Total assets
    
    
    302,601
    
    
    
    295,399
    
    
    
    314,153
    
    
    
    325,880
    
    
    
    322,022Deposits
    
    
    236,525
    
    
    
    235,080
    
    
    
    260,677
    
    
    
    264,795
    
    
    
    268,881Borrowings
    
    
    30,981
    
    
    
    25,971
    
    
    
    20,532
    
    
    
    28,108
    
    
    
    19,357Shareholders equity
    
    
    34,360
    
    
    
    33,382
    
    
    
    31,921
    
    
    
    32,083
    
    
    
    32,454Selected ratios:Net yield on average interest-earning
assets
    
    
    3.81
    %
    
    
    3.73
    %
    
    
    3.45
    %
    
    
    4.11
    %
    
    
    3.96
    %Return on average total assets
    
    
    0.68
    
    
    
    0.65
    
    
    
    0.34
    
    
    
    0.10
    
    
    
    1.32Return on average shareholders equity
    
    
    6.00
    
    
    
    5.76
    
    
    
    3.32
    
    
    
    1.00
    
    
    
    13.14Average shareholders equity as
a percent of average total assets
    
    
    11.35
    
    
    
    11.30
    
    
    
    10.16
    
    
    
    9.85
    
    
    
    10.08Net loan charge-offs as a percent
of average loans
    
    
    0.09
    
    
    
    0.40
    
    
    
    1.86
    
    
    
    1.01
    
    
    
    0.30Allowance for loan losses as
a percent of loans at year-end
    
    
    1.15
    
    
    
    1.35
    
    
    
    2.38
    
    
    
    3.62
    
    
    
    1.72Shareholders equity as a percent
of total year-end assets
    
    
    11.34
    
    
    
    11.07
    
    
    
    10.68
    
    
    
    9.70
    
    
    
    10.17
 8 2003 ANNUAL REPORT TO SHAREHOLDERS




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(CSB BANCORP, INC. LOGO)
    
    2003 FINANCIAL REVIEW
 RESULTS
OF OPERATIONS Net Income Net income totaled $2.1 million in 2003, an increase of $137,000, or 7.1%, from
2002. Net income per share was $0.78 and $0.73 for the years ended December 31,
2003 and 2002, respectively. Return on average assets was 0.68% in 2003, as
compared to 0.65% in 2002, and return on average shareholders equity was 6.00%
in 2003 compared to 5.76% in 2002. Net income for 2002 was $1.9 million or $0.73 per share, as compared to $1.1
million or $0.40 per share for 2001. This equated to a return on average assets
of 0.65% in 2002 and 0.34% in 2001, while the return on average shareholders
equity for the same periods was 5.76% and 3.32%. Net Interest Income Net interest income is the largest component of the Companys net income and
consists of the difference between income generated on interest-earning assets
and interest expense incurred on interest-bearing liabilities. Volumes,
interest rates and composition of interest-earning assets and interest-bearing
liabilities affect net interest income. Interest income for 2003 was $15.4 million, decreasing $1.3 million from $16.7
million in 2002. Interest and fees on loans was $12.5 million, a decrease of
$186,000, or 1.5%, from 2002, attributable to the decreased yield on loans of
103 basis points in 2003 from 2002. Interest income on securities decreased
$923,000, or 24.0%, to $2.9 million as compared to 2002 of $3.8 million, due
primarily to the $6.2 million decrease in the average balance of tax-exempt
securities in 2003 as compared to 2002 and the 147 basis points decrease in
average yield on taxable securities from 2002 to 2003. Other interest income
decreased $176,000 to $36,000 in 2003 compared to $212,000 in 2002, primarily
as a result of a decrease in the average federal funds sold balance, from $13.1
million in 2002 to $3.6 million in 2003 and a decrease in the average yield
from 1.61% in 2002 to 0.99% in 2003. Interest income for 2002 was $16.7 million, decreasing $5.0 million from $21.7
million in 2001. Interest and fees on loans was $12.6 million, a decrease of
$3.8 million, or 23.2%, from 2001, mostly attributable to the $5.5 million
decrease in the average balance of loans and the
decreased yield on loans of 184 basis points in 2002. Interest income on
securities decreased $780,000, or 16.8%, to $3.8 million as compared to
2001 of $4.6 million, due primarily to the $10.4 million decrease in the
average balance of securities in 2002 as compared to 2001. Other interest
income decreased $350,000 to $212,000 in
2002 compared to $562,000 in 2001, primarily as a result
of a decrease in the average federal funds sold balance,
from $17.9 million in 2001 to $13.1 million in 2002 and
a decrease in the average yield from 3.11% in 2001 to 1.61% in 2002. Interest expense for 2003 was $4.6 million, a decrease of $1.8 million, or
28.4%, from 2002. The Companys interest expense on deposits decreased $1.9
million in 2003, due primarily to the decrease in deposit interest rates
during 2003, as cost of deposits decreased to 1.87% in 2003, compared to
2.78% in 2002 and the average balance of time deposits decreased $5.7
million, or 4.5%. Interest expense on other borrowings increased $79,000
due to the $5.0 million increase in average balance in 2003 as compared to
2002. Interest expense for 2002 was $6.5 million, a decrease of $5.0 million, or
43.6%, from 2001. The Companys interest expense on deposits decreased $5.0
million in 2002, due primarily to the decrease in deposit interest rates
during 2002, as cost of deposits decreased to 2.78% in 2002, compared to
4.58% in 2001 and the average balance of time deposits decreased $33.1
million, or 20.7%. Interest expense on other borrowings decreased $51,000
due to the 96 basis point decrease in the cost of these funds in 2002 as
compared to 2001. Net interest income for 2003 increased by $550,000 to $10.8 million. The
increase was attributed to an $8.4 million increase in average
interest-earning assets and an 8 basis point increase in the net interest
margin. Net interest income for 2001 was $10.2 million. The following tables provide detailed analysis of changes in average
balances, yields, and net interest income identifying that portion of the
changes due to change in average volume versus that portion due to change
in average rates. 2003 ANNUAL REPORT TO SHAREHOLDERS 9




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2003 FINANCIAL REVIEW
    

(CSB BANCORP, INC. LOGO)
 AVERAGE BALANCES, RATES AND YIELDS(Dollars in thousands) 2003
    
    2002

    
    2001Average
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    AverageBalance (1)
    
    Interest
    
    Rate (2)
    
    Balance (1)
    
    Interest
    
    Rate (2)
    
    Balance (1)
    
    Interest
    
    Rate (2)Interest-earning assetsFederal funds sold
    
    $
    3,591
    
    
    $
    35
    
    
    
    0.99
    %
    
    $
    13,131
    
    
    $
    211
    
    
    
    1.61
    %
    
    $
    17,896
    
    
    $
    557
    
    
    
    3.11
    %Interest-earning deposits
    
    
    29
    
    
    
    1
    
    
    
    0.52
    
    
    
    36
    
    
    
    1
    
    
    
    1.41
    
    
    
    132
    
    
    
    5
    
    
    
    4.25Securities:Taxable
    
    
    30,806
    
    
    
    1,020
    
    
    
    3.31
    
    
    
    34,722
    
    
    
    1,659
    
    
    
    4.78
    
    
    
    40,403
    
    
    
    2,222
    
    
    
    5.50Tax exempt
    
    
    39,221
    
    
    
    1,905
    
    
    
    4.85
    
    
    
    45,454
    
    
    
    2,190
    
    
    
    4.82
    
    
    
    50,135
    
    
    
    2,407
    
    
    
    4.80Loans (3)
    
    
    209,231
    
    
    
    12,453
    
    
    
    5.95
    
    
    
    181,147
    
    
    
    12,639
    
    
    
    6.98
    
    
    
    186,665
    
    
    
    16,465
    
    
    
    8.82Total interest-earning assets
    
    
    282,878
    
    
    
    15,414
    
    
    
    5.45
    
    
    
    274,490
    
    
    
    16,700
    
    
    
    6.08
    
    
    
    295,231
    
    
    
    21,656
    
    
    
    7.34Noninterest-earning assetsCash and due from banks
    
    
    11,090
    
    
    
    
    
    
    
    
    
    
    
    10,591
    
    
    
    
    
    
    
    
    
    
    
    10,246Bank premises and
equipment, net
    
    
    8,847
    
    
    
    
    
    
    
    
    
    
    
    8,910
    
    
    
    
    
    
    
    
    
    
    
    9,340Other assets
    
    
    2,332
    
    
    
    
    
    
    
    
    
    
    
    4,963
    
    
    
    
    
    
    
    
    
    
    
    5,844Allowance for loan losses
    
    
    (2,546
    )
    
    
    
    
    
    
    
    
    
    
    (3,555
    )
    
    
    
    
    
    
    
    
    
    
    (6,508
    )Total assets
    
    $
    302,601
    
    
    
    
    
    
    
    
    
    
    $
    295,399
    
    
    
    
    
    
    
    
    
    
    $
    314,153Interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.92
    %
    
    $
    40,625
    
    
    $
    634
    
    
    
    1.56
    %Demand deposits
    
    $
    46,687
    
    
    $
    191
    
    
    
    0.41
    %
    
    $
    44,456
    
    
    $
    409
    
    
    
    0.92
    %
    
    $
    40,625
    
    
    $
    634
    
    
    
    1.56
    %Savings deposits
    
    
    37,989
    
    
    
    199
    
    
    
    0.53
    
    
    
    35,759
    
    
    
    355
    
    
    
    0.99
    
    
    
    33,508
    
    
    
    696
    
    
    
    2.08Time deposits
    
    
    121,298
    
    
    
    3,459
    
    
    
    2.85
    
    
    
    126,981
    
    
    
    5,000
    
    
    
    3.94
    
    
    
    160,098
    
    
    
    9,387
    
    
    
    5.86Other borrowed funds
    
    
    30,981
    
    
    
    782
    
    
    
    2.52
    
    
    
    25,971
    
    
    
    703
    
    
    
    2.71
    
    
    
    20,532
    
    
    
    754
    
    
    
    3.67Total interest-bearing liabilities
    
    
    236,955
    
    
    
    4,631
    
    
    
    1.95
    
    
    
    233,167
    
    
    
    6,467
    
    
    
    2.77
    
    
    
    254,763
    
    
    
    11,471
    
    
    
    4.50Noninterest-bearing liabilities
and shareholders equityDemand deposits
    
    
    30,551
    
    
    
    
    
    
    
    
    
    
    
    27,884
    
    
    
    
    
    
    
    
    
    
    
    26,446Other liabilities
    
    
    735
    
    
    
    
    
    
    
    
    
    
    
    966
    
    
    
    
    
    
    
    
    
    
    
    1,023Shareholders equity
    
    
    34,360
    
    
    
    
    
    
    
    
    
    
    
    33,382
    
    
    
    
    
    
    
    
    
    
    
    31,921Total liabilities and equity
    
    $
    302,601
    
    
    
    
    
    
    
    
    
    
    $
    295,399
    
    
    
    
    
    
    
    
    
    
    $
    314,153Net interest income
    
    
    
    
    
    $
    10,783
    
    
    
    
    
    
    
    
    
    
    $
    10,233
    
    
    
    
    
    
    
    
    
    
    $
    10,185Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.81
    %
    
    
    
    
    
    
    
    
    
    
    3.73
    %
    
    
    
    
    
    
    
    
    
    
    3.45
    %
  (1)
    
    Average balances have been computed on an average daily basis.(2)
    
    Average rates have been computed based on the amortized cost of the
corresponding asset or liability.(3)
    
    Average loan balances include nonaccrual loans. 10 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    2003 FINANCIAL REVIEW
 RATE/VOLUME ANALYSIS OF
CHANGES IN INCOME AND EXPENSE(1) (Dollars in thousands) 2003 v. 2002
    
    2002 v. 2001Change in
    
    
    
    
    
    
    
    
    
    Change inIncome/
    
    Volume
    
    Rate
    
    Income/
    
    Volume
    
    RateExpense
    
    Effect
    
    Effect
    
    Expense
    
    Effect
    
    EffectInterest IncomeFederal funds sold
    
    $
    (176
    )
    
    $
    (114
    )
    
    $
    (62
    )
    
    $
    (346
    )
    
    $
    (123
    )
    
    $
    (223
    )Interest-earning deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (3
    )
    
    
    (1
    )Securities:Taxable
    
    
    (639
    )
    
    
    (172
    )
    
    
    (467
    )
    
    
    (563
    )
    
    
    (291
    )
    
    
    (272
    )Tax exempt
    
    
    (285
    )
    
    
    (303
    )
    
    
    18
    
    
    
    (217
    )
    
    
    (226
    )
    
    
    9Loans
    
    
    (186
    )
    
    
    1,672
    
    
    
    (1,858
    )
    
    
    (3,826
    )
    
    
    (474
    )
    
    
    (3,352
    )Total interest income
    
    
    (1,286
    )
    
    
    1,083
    
    
    
    (2,369
    )
    
    
    (4,956
    )
    
    
    (1,117
    )
    
    
    (3,839
    )Interest ExpenseDemand deposits
    
    
    (218
    )
    
    
    9
    
    
    
    (227
    )
    
    
    (225
    )
    
    
    67
    
    
    
    (292
    )Savings deposits
    
    
    (156
    )
    
    
    12
    
    
    
    (168
    )
    
    
    (341
    )
    
    
    50
    
    
    
    (391
    )Time deposits
    
    
    (1,541
    )
    
    
    (215
    )
    
    
    (1,326
    )
    
    
    (4,387
    )
    
    
    (1,694
    )
    
    
    (2,693
    )Other borrowed funds
    
    
    79
    
    
    
    126
    
    
    
    (47
    )
    
    
    (51
    )
    
    
    173
    
    
    
    (224
    )Total interest expense
    
    
    (1,836
    )
    
    
    (68
    )
    
    
    (1,768
    )
    
    
    (5,004
    )
    
    
    (1,404
    )
    
    
    (3,600
    )Net interest income
    
    $
    550
    
    
    
    1,151
    
    
    
    (601
    )
    
    $
    48
    
    
    $
    287
    
    
    $
    (239
    )
  (1)
    
    Changes attributable to both volume and rate, which cannot be
segregated, have been allocated based on the absolute value of the
change due to volume and the change due to rate. The following table reconciles net interest income as shown in the financial
statements to taxable equivalent net interest income: 2003
    
    2002
    
    2001Net interest income
    
    $
    10,783,073
    
    
    $
    10,232,966
    
    
    $
    10,185,459Taxable equivalent adjustment (1)
    
    
    981,555
    
    
    
    1,128,235
    
    
    
    1,239,955Net interest
incomefully taxable equivalent
    
    $
    11,764,628
    
    
    $
    11,361,201
    
    
    $
    11,425,414Net interest yield
    
    
    3.81
    %
    
    
    3.73
    %
    
    
    3.45
    %Taxable equivalent adjustment (1)
    
    
    0.35
    
    
    
    0.41
    
    
    
    0.42Net interest
yield  taxable equivalent
    
    
    4.16
    %
    
    
    4.14
    %
    
    
    3.87
    %
  (1)
    
    Taxable equivalent adjustments have been computed assuming a 34% tax rate. 2003 ANNUAL REPORT TO SHAREHOLDERS 11




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##### Table of Contents



2003 FINANCIAL REVIEW
    
    (CSB BANCORP, INC. LOGO)
 Provision (Credit) for Loan Losses During 2003, the Company reported a credit for loan losses of $51,000
compared to a credit for loan losses of $587,000 for 2002 and a provision
for loan losses of $35,000 for 2001. The credits in 2003 and 2002 resulted
from the resolution and payoff of certain large classified credits, as well
as aggressive collection procedures and strong underwriting standards. These
factors contributed to an improved charge-off experience rate which is a
component of managements calculation of the allowance for loan losses. The
decrease in classified assets during 2003 includes an $18,000 decrease in
impaired loans and a $551,000 decrease in loans on nonaccrual of interest
offset by a $175,000 increase in loans over 90 days past due and still
accruing interest. As part of managements aggressive collection efforts,
the Bank incurred approximately $85,000 and $135,000 of external collection
costs in 2003 and 2002, respectively, mostly representing legal and other
professional fees. These costs are reported as noninterest expenses in the
consolidated statement of income. See Financial Condition
 Allowance for
Loan Losses for additional discussion and information relative to the
provision (credit) for loan losses. Noninterest Income Total noninterest income increased $118,000, or 5.8%, to $2.2 million in
2003. Increases over 2002 of $42,000 in trust services and $62,000 in gain
on sale of loans, were partially offset by a $17,000 decrease in service
charges on deposit accounts and a $114,000 decrease in gain on sale of
securities. In addition, gains on sale of other real estate owned amounted
to $115,000 in 2003, compared to a loss of $3,000 in 2002. Total noninterest income increased $61,000, or 3.1%, to $2.0 million in
2002. Increases of $75,000 in service charges on deposit accounts, $86,000
in securities gains, and $64,000 in other income were partially offset by
a $48,000 decrease in trust and financial services, and an $84,000
decrease in gain on sale of loans. Noninterest Expenses Total noninterest expenses decreased $199,000, or 1.8%, during 2003. The
largest component of noninterest expenses is salaries and employee benefits,
which decreased $38,000 or 0.7% in 2003. The slight decrease relates to cost
reduction efforts in officer salaries and a slight headcount reduction which
more than offset the normal salary adjustments and rising costs of employee
benefits. Professional and director fees increased $26,000, or 3.0%, to
$894,000. Income Taxes The provision for income taxes amounted to $130,000 in 2003, compared to
credits of $65,000 in 2002 and $537,000 in 2001. The provision in 2003, as
compared to a credit in 2002 was the direct result of a $332,000 increase in
income before income taxes and a $285,000 decrease in tax-exempt securities
interest income. The credits in 2002 and 2001 resulted from a net loss
before income taxes after consideration of nontaxable interest income. FINANCIAL CONDITION Total assets of the Company were $306.2 million at December 31, 2003,
compared to $304.7 million at December 31, 2002, representing an increase of
$1.5 million, or 0.5%. Net loans increased $13.7 million with the loan
growth funded primarily by a $5.4 million decrease in cash and cash
equivalents and a $5.3 million decrease in securities. A $9.0 million
increase in deposits was partially offset by a $5.9 million decrease in
Federal Home Loan Bank (FHLB) borrowings and a $2.6 million decrease in
securities sold under repurchase agreements. Securities Total securities decreased $5.3 million, or 7.2%, from $73.1 million at
year-end 2002 to $67.8 million at year-end 2003. Available-for-sale
securities increased $6.3 million while held-to-maturity securities
decreased $11.7 million. The securities portfolio at year-end 2003 consisted
of U.S. Treasury, U.S. government corporations and agencies, obligations of
state and political subdivisions and corporate securities. Restricted
securities primarily consists of FHLB stock. Since one of the primary functions of the securities portfolio is to
provide a source of liquidity, it is structured such that maturities and
cash flows satisfy the Companys liquidity needs and asset/liability
management requirements. Securities classified as held-to-maturity are carried at amortized cost, and
include securities that management has the positive intent and ability to
hold to maturity. Securities classified as available-for-sale include those
that may be sold before maturity for liquidity, asset/liability management
or other reasons. 12 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    2003 FINANCIAL REVIEW
 Loans Total loans amounted to $213.3 million at year-end 2003, compared to $199.8
million at year-end 2002, representing an increase of $13.4 million or
6.7%. The loan portfolio at December 31, 2003 and 2002 was composed of
approximately 58% commercial and commercial real estate loans. The Company
recorded a decrease of $1.3 million, or 1.8%, in commercial loans; an
increase of $7.5 million, or 18%, in commercial real estate loans; a $7.3
million, or 11.1%, increase in residential real estate loans; a decrease of
$132,000, or 1.1%, in installment and credit card loans; and an increase of
$51,000 in construction loans. The increase in commercial real estate loans was partially due to the
Banks entering into several participation loan agreements with local and
regional financial institutions. These loans are subject to the same
underwriting standards as other commercial real estate loans in the Banks
portfolio and were all performing at December 31, 2003. Agriculture production loans totaled approximately $816,000 at year-end
2003, and are included in the commercial, commercial real estate and
residential real estate categories. Credit card loans, which are primarily
unsecured, totaled $2.5 million, or 1.2%, of loans at year-end 2003. Demand
for commercial business loans, as well as both commercial and residential
real estate loans, was stable in 2003. Management believes the Companys
local service areas will experience continued economic strength and a
continued need for these types of lending products in 2004. Allowance for Loan Losses The allowance for loan losses is maintained at a level considered adequate
to cover loan losses that are currently anticipated based on past loss
experience, general economic conditions, changes in mix and size of the
loan portfolio, information about specific borrower situations, and other
factors and estimates which are subject to change over time. Management
periodically reviews selected large loans, delinquent and other problem
loans, and selected other loans. Collectibility of these loans is evaluated
by considering current financial position and performance of the borrower,
estimated market value of the collateral, the Companys collateral position
in relationship to other creditors, guarantees and other potential sources
of repayment. Management forms judgments, which are subjective, as to the
probability of loss and the amount of loss on these loans as well as other
loans taken together. The Banks Allowance for Loan and Lease Losses Policy
includes, among other items, provisions for classified loans and a
provision for the remainder of the portfolio and historical data, including
past charge-offs. The allowance for loan losses totaled $2.5 million or 1.15% of total loans
at year-end 2003, down from $2.7 million or 1.35% of total loans at
year-end 2002. Net charge-offs for 2003 totaled $191,000, compared to
$732,000 in 2002 and $3.5 million in 2001. During the third and fourth
quarters of 2002, the Company sold $1.3 million of commercial and
commercial real estate loans that resulted in $494,000 of the charge-offs
in 2002. During the second quarter of 2001, the Company sold $7.5 million
of commercial and commercial real estate loans that resulted in $1.6
million of the charge-offs in 2001. For many of the other loans that have
been charged-off, management is continuing collection efforts, and future
recoveries may occur. The Bank maintains an internal watch list, on which it places loans
where managements analysis of the borrowers operating results and
financial condition indicates that the borrowers cash flows are
inadequate to meet its debt service requirements, and loans where there
exists an increased risk that such a shortfall may occur. Nonperforming loans, which consist of loans past due 90 days or more and
nonaccrual loans aggregated $1.3 million or 0.6%
of loans at year-end 2003 compared to $1.7 million or 0.9% of loans at year-end
2002. Impaired loans decreased at year-end
from $916,000 in 2002 to $897,000 in 2003. Management has assigned loss
allocations to absorb the estimated losses on
these impaired loans, and these allocations are included in the total allowance
for loan losses balance. 2003 ANNUAL REPORT TO SHAREHOLDERS 13




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##### Table of Contents



2003 FINANCIAL REVIEW
    
    (CSB BANCORP, INC. LOGO)
 Other Assets Net premises and equipment decreased $507,000 to $8.6 million at year-end
2003 from $9.1 million at year-end 2002. The decrease in 2003 was due to
depreciation exceeding the relatively low volume of equipment purchases.
Other assets, including accrued interest receivable, decreased $1.0 million
to $1.8 million at year-end 2003 largely due to a $595,000 decrease in net
tax assets and a $320,000 decrease in accrued interest receivable. Deposits Deposits are obtained from individuals and businesses located in the Banks
market area. For deposits, the Bank must compete with products offered by
other traditional financial institutions as well as other investment options
such as mutual funds. Total deposits increased $9.0 million, or 3.7%, to
$249.0 million at year-end 2003, compared to $240.0 million at year-end
2002. Noninterest-bearing deposits increased $1.1 million, or 3.5%, to $33.5
million compared to $32.4 million at year-end 2002. Interest-bearing
deposits increased $7.8 million or 3.8% at year-end 2003 compared to
year-end 2002. Interest-bearing demand deposits increased slightly to $50.9
million, and statement and passbook savings increased $948,000. Time
deposits in excess of $100,000 increased $8.8 million while other
certificates of deposit decreased $2.0 million. Other Funding The Company obtains additional funds through securities sold under
repurchase agreements and advances from the FHLB. These borrowings totaled
$21.4 million at year-end 2003. These funding sources provided a net
decrease in cash of $8.5 million from year-end 2002 to year-end 2003. A $5
million advance from the FHLB was partially offset by the repayment of a $10
million advance, a $2.6 million decrease in repurchase agreements and
$868,000 principal payments on single mortgage advances from the FHLB. The
repurchase agreements are uninsured, so the Company pledges securities
against these customer funds. CAPITAL RESOURCES Total shareholders equity increased from $33.7 million at December 31, 2002
to $34.7 million at December 31, 2003. This increase was primarily due to
net income of $2.1 million, offset by dividends declared of $1.3 million.
Shareholders equity increased $261,000 in 2003 and $120,000 in 2002 as a
portion of dividends declared was reinvested by shareholders in common stock
under the Companys dividend reinvestment program. Banking regulations have established minimum capital ratios for banks and
bank holding companies. Therefore, the Company and the Bank must meet a
risk-based capital requirement, which defines two tiers of capital and
compares each to the Companys risk-weighted assets. The Companys assets
and certain off-balance-sheet items, such as loan commitments, are each
assigned a risk factor such that assets with potentially higher credit risk
will require more capital support than assets with lower risk. These
regulations require the Company to have a minimum total risk-based capital
ratio of 8%, at least half of which must be Tier 1 capital. The Companys
Tier 1 capital is its shareholders equity before any unrealized gain or
loss on securities available for sale, while total risk-based capital
includes Tier 1 capita! and a limited amount of the allowance for loan
losses. In addition, a bank or bank holding companys leverage ratio (which
for the Company equals its shareholders equity before any unrealized gain
or loss on securities available for sale divided by average assets) must be
maintained at a minimum of 4%. The Companys and Banks actual capital
amounts are believed by management to meet all applicable capital adequacy
requirements, as further disclosed in Note 10 to the consolidated financial
statements. Dividends paid by the Bank are the primary source of funds available to the
Company for payment of dividends to shareholders
and for other working capital needs. The payment of dividends by the Bank to
the Company is subject to restrictions by regulatory
authorities, which generally limit dividends to current and prior two years
retained earnings, as defined by regulation. In addition, dividend payments
generally cannot reduce regulatory capital levels below the minimum
regulatory guidelines discussed above. 14 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    2003 FINANCIAL REVIEW
 LIQUIDITY Liquidity refers to the Companys ability to generate sufficient cash to
fund current loan demand, meet deposit withdrawals, pay operating expenses
and meet other obligations. The Companys primary sources of liquidity are
cash and cash equivalents, which totaled $17.2 million at December 31,
2003, a decrease of $5.4 million from year-end 2002. Net income, securities
available-for-sale, maturities or calls of securities held to maturity, and
loan repayments also serve as sources of liquidity. Cash and cash
equivalents and securities maturing within one year represent 8.5% of total
assets at year-end 2003, as compared to 11.0% at year-end 2002. Other
sources of liquidity include, but are not limited to, purchase of federal
funds, advances from the FHLB, adjustments of interest rates to attract
deposits, and borrowing at the Federal Reserve discount window. Management
believes that its sources of liquidity are adequate to meet the needs of
the Company. As summarized in the consolidated statements of cash flows, the most
significant investing activities for the Company in 2003 included the
maturities and calls of securities totaling $49.8 million offset by a $44.5
million in purchases, and net loan originations of $13.6 million. The
Companys financing activities included $9.0 million increase in deposits,
$2.6 million reduction in repurchase agreements, and $5.0 million in
proceeds from FHLB advances offset by $10.9 million in repayments. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The most significant market risk to which the Company is exposed is
interest rate risk. The business of the Company and the composition of
its balance sheet consists of investments in interest-earning assets
(primarily loans and securities), which are funded by interest-bearing
liabilities (deposits and borrowings). These financial instruments have
varying levels of sensitivity to changes in the market rates of
interest, resulting in market risk. None of the Companys financial
instruments are held for trading purposes. The Company manages interest rate risk regularly through the Banks Asset
Liability Committee. The Committee meets on a monthly basis and reviews
various asset and liability management information, including but not
limited to, the Banks liquidity position, projected sources and uses of
funds, interest rate risk position and economic conditions. The Company monitors its interest rate risk through a sensitivity or
shock analysis, whereby it measures potential changes in its future
earnings and the fair values of its financial instruments that may result
from one or more hypothetical changes in interest rates. This analysis is
performed by estimating the expected cash flows of the Companys financial
instruments using interest rates in effect at year-end 2003 and 2002. For
the fair value estimates, the cash flows are then discounted to year-end to
arrive at an estimated present value of the Companys financial
instruments. Hypothetical changes in interest rates are then applied to the
financial instruments, and the cash flows and fair values are again
estimated using these hypothetical rates. For the net interest income
estimates, the hypothetical rates are applied to the financial instruments
based on the assumed cash flows. The Company applies these interest rate
shocks to its financial instruments up and down 200 basis points in 100
basis point increments. 2003 ANNUAL REPORT TO SHAREHOLDERS 15




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##### Table of Contents



2003 FINANCIAL REVIEW
    
    (CSB BANCORP, INC. LOGO)


The following table presents an analysis of the estimated sensitivity of the
Companys annual net interest income to sudden and
sustained 100 basis point changes in market interest rates at December 31,
2003 and 2002:

2003

Change inInterest Rates
    
    Net Interest
    
    Dollar
    
    Percentage(basis points)
    
    Income
    
    Change
    
    Change(Dollars in thousands)+200
    
    $
    12,094
    
    
    $
    1,152
    
    
    
    10.5
    %+100
    
    
    11,479
    
    
    
    537
    
    
    
    4.90
    
    
    10,942
    
    
    
    0
    
    
    
    0.0-100
    
    
    10,534
    
    
    
    (408)
    
    
    
    (3.7)-200
    
    
    9,965
    
    
    
    (977)
    
    
    
    (8.9)


2002 Change inInterest Rates
    
    Net Interest
    
    Dollar
    
    Percentage(basis points)
    
    Income
    
    Change
    
    Change(Dollars in thousands)+200
    
    $
    12,043
    
    
    $
    877
    
    
    
    7.9
    %+100
    
    
    11,618
    
    
    
    452
    
    
    
    4.00
    
    
    11,166
    
    
    
    0
    
    
    
    0.0-100
    
    
    10,853
    
    
    
    (313)
    
    
    
    (2.8)-200
    
    
    10,544
    
    
    
    (622)
    
    
    
    (5.6)
 Management reviews its rate shock position with the Board on a periodic
basis. The Company was within all Board-approved limits at December 31, 2003
and 2002. Significant Assumptions and Other Considerations The above analysis is based on numerous assumptions, including relative
levels of market interest rates, loan prepayments and reactions of
depositors to changes in interest rates, and should not be relied upon as
being indicative of actual results. Further, the analysis does not
necessarily contemplate all actions the Company may undertake in response
to changes in interest rates. Securities owned by the Company will generally repay at their stated
maturities. Many of the Companys loans permit the borrower to prepay the
principal balance prior to maturity without penalty. The likelihood of
prepayment depends on a number of factors, including current interest rate
and interest rate index (if any) on the loan, the financial ability of the
borrower to refinance, the economic benefit to be obtained from refinancing,
availability of refinancing at attractive terms, as well as economic and
other factors in specific geographic areas which affect the sales and price
levels of collateral real property. In a changing interest rate environment,
prepayments may increase or decrease on fixed- and adjustable-rate loans
depending on the current relative levels and expectations of future short-
and long-term interest rates. Prepayments on adjustable-rate residential
mortgage loans generally increase when long-term interest rates fall or are
at historically low levels relative to short-term interest rates, thus
making fixed-rate loans more desirable. While savings and checking deposits
generally may be withdrawn upon the customers request without prior notice,
a continuing relationship with customers resulting in future deposits and
withdrawals is generally predictable, resulting in a dependable and
uninterrupted source of funds. No change in the rates on such deposits is
assumed when market rates increase or decrease 100 basis points. When market
rates increase or decrease 200 basis points, the analysis assumes a
corresponding 50 basis point change in the rates paid on such deposits.
Short-term borrowings have fixed maturities. Time deposits generally have
early withdrawal penalties, which discourage customer withdrawal prior to
maturity. Certain advances from the FHLB carry prepayment penalties and are
expected to be repaid in accordance with their contractual terms. 16 2003 ANNUAL REPORT TO SHAREHOLDERS




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(CSB BANCORP, INC. LOGO)
    
    2003 FINANCIAL REVIEW
 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company discloses the estimated fair value of its financial instruments
at December 31, 2003 and 2002 in Note 13 to the consolidated financial
statements. Fair value of the Companys financial instruments experienced
modest changes in 2003. Estimated fair value of loans amounted to 100.8% of
the carrying value in 2003, decreasing from 102.0% in 2002. The fair value
of securities decreased to 103.4% of carrying value in 2003, from 104.0% in
2002. Estimated fair value of time deposits decreased slightly to 100.5% of
carrying value in 2003 from 100.6% in 2002. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued a new pronouncement in
December 2002 to provide alternative methods of transition for an entity
that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation. While this pronouncement may
impact future financial statement disclosures, it is not expected to
have a significant impact on the consolidated financial statements.
Management is unaware of any other recently issued, but not yet adopted,
accounting pronouncements that will have a future impact on the
consolidated financial statements of the Company. SIGNIFICANT
ACCOUNTING POLICIES The Companys consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United
States of America and follow general practices within the commercial
banking industry. Application of these principles requires management to
make estimates, assumptions, and judgments that affect the amounts
reported in the financial statements. These estimates, assumptions, and
judgments are based upon the information available as of the date of the
financial statements. The most significant accounting policies followed by the Company are
presented in the Summary of Significant Accounting Policies. These
policies, along with the other disclosures presented in the Notes to
Consolidated Financial Statements and the 2003 Financial Review, provide
information about how significant assets and liabilities are valued in
the financial statements and how those values are determined. Management
has identified the determination of the allowance for loan losses as the
accounting area that requires the most subjective and complex estimates,
assumptions, and judgments and, as such, could be the most subject to
revision as new information becomes available. As previously noted in the section entitled Allowance for Loan Losses,
management performs analysis to assess the adequacy of its allowance for
loan losses. This analysis encompasses a variety of factors including the
potential loss exposure for individually reviewed loans, the historical
loss experience, the volume of nonperforming loans (i.e., loans in
nonaccrual status or past due 90 days or more), the volume of loans past
due, any significant changes in lending or loan review staff, an
evaluation of current and future local and national economic conditions,
any significant changes in the volume or mix of loans within each
category, a review of the significant concentrations of credit, and any
legal, competitive, and regulatory concerns. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles,
requiring measurement of financial position and results of operations
primarily in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, most assets and liabilities of the Company are
monetary in nature. Therefore, interest rates have a more significant
impact on a financial institutions performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as prices of goods and services. The
liquidity, maturity, structure, and quality of the Companys assets and
liabilities are critical to maintenance of acceptable performance levels. 2003 ANNUAL REPORT TO SHAREHOLDERS 17




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##### Table of Contents



2003 FINANCIAL REVIEW
    
    (CSB BANCORP, INC. LOGO)
 COMMON STOCK AND SHAREHOLDER INFORMATION Common shares of the Company are not traded on an established market. Shares
are traded through broker/dealers under the symbol CSBB.OB and through
private transactions. The table below represents the range of high and low
prices paid for transactions known to the Company. Management does not have
knowledge of prices paid on all transactions. Because of the lack of an
established market, these prices may not reflect the prices at which stock
would trade in an active market. These quotations reflect interdealer
prices, without markup, markdown or commission, and may not represent actual
transactions. The chart specifies cash dividends declared by the Company to
its shareholders during 2003 and 2002. No assurances can be given that
dividends will be declared, or if declared, what the amount of any such
dividends will be. Additional information concerning restrictions over the
payment of dividends is included in Note 10 of the consolidated financial
statements. Quarter Ended
    
    High
    
    Low
    
    Dividends Declared (1)March 31, 2003
    
    $
    18.50
    
    
    $
    16.50
    
    
    $
    315,937June 30, 2003
    
    
    18.00
    
    
    
    17.00
    
    
    
    316,398September 30, 2003
    
    
    17.50
    
    
    
    15.50
    
    
    
    316,871December 31, 2003
    
    
    17.55
    
    
    
    17.00
    
    
    
    317,322March 31, 2002
    
    $
    20.00
    
    
    $
    16.75
    
    
    $
    June 30, 2002
    
    
    19.85
    
    
    
    18.75
    
    
    
    262,952September 30, 2002
    
    
    19.15
    
    
    
    17.00
    
    
    
    263,191December 31, 2002
    
    
    17.50
    
    
    
    16.05
    
    
    
    263,026
  (1)
    
    First quarter 2002 dividend of $0.05 was not approved by
regulators until April 5, 2002. Therefore, it was considered declared
in second quarter. An additional $0.05 dividend was declared later in
the second quarter. As of December 31, 2003, CSB Bancorp, Inc. had approximately 1,211
shareholders and 2,644,350 outstanding shares of common stock. TRANSFER AGENT Registrar and Transfer Company
Attn: Investor Relations
10 Commerce Drive
Cranford, NJ07016
800-368-5948 ANNUAL AND OTHER REPORTS; SHAREHOLDERS AND GENERAL INQUIRIES CSB Bancorp, Inc. is required to file an annual report on Form 10-K annually
with the Securities and Exchange Commission. Copies of the Form 10-K annual
report and the Companys quarterly reports may be obtained without charge by
contacting: A. Lee Miller, Chief Financial Officer
CSB Bancorp, Inc.
6 West Jackson Street
Millersburg, Ohio 44654
Phone 330-674-9015 or 800-654-9015 The annual meeting of shareholders is currently scheduled to be Wednesday,
April 21, 2004 at 7:00 pm at the Carlisle Inn in Sugarcreek, Ohio. 18 2003 ANNUAL REPORT TO SHAREHOLDERS




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(CSB BANCORP, INC. LOGO)
    
    REPORT OF INDEPENDENT AUDITORS
 (CLIFTON GUNDERSON LLP LOGO) Shareholders and Board of Directors
CSB Bancorp, Inc.
Millersburg, Ohio We audited the accompanying consolidated balance sheets of CSB Bancorp,
Inc. and subsidiary as of December 31, 2003 and 2002, and the related
consolidated statements of income, shareholders equity, and cash flows for
each of the three years in the period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CSB
Bancorp, Inc. and subsidiary as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. (CLIFTON GUNDERSON LLP)
Toledo, Ohio
January 30, 2004 2003 ANNUAL REPORT TO SHAREHOLDERS 19




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CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
    
    (CSB BANCORP, INC. LOGO)
 2003
    
    2002ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    12,327,227
    
    
    $
    12,079,581Interest-earning deposits in other banks
    
    
    147,154
    
    
    
    192,115Federal funds sold
    
    
    4,727,000
    
    
    
    10,293,000Total cash and cash equivalents
    
    
    17,201,381
    
    
    
    22,564,696SECURITIESAvailable-for-sale, at fair value
    
    
    28,990,615
    
    
    
    22,671,668Held-to-maturity, at amortized cost (fair value of
$38,395,177 in 2003 and $50,756,761 in 2002)
    
    
    36,092,027
    
    
    
    47,822,882Restricted stock, at cost
    
    
    2,690,600
    
    
    
    2,593,500Total securities
    
    
    67,773,242
    
    
    
    73,088,050LOANS
    
    
    213,254,462
    
    
    
    199,809,915Less allowance for loan losses
    
    
    2,458,864
    
    
    
    2,700,643Net loans
    
    
    210,795,598
    
    
    
    197,109,272PREMISES AND EQUIPMENT, NET
    
    
    8,563,276
    
    
    
    9,070,238ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
    
    
    1,846,292
    
    
    
    2,880,868TOTAL ASSETS
    
    $
    306,179,789
    
    
    $
    304,713,124LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIESDeposits:Noninterest-bearing
    
    $
    33,539,061
    
    
    $
    32,397,210Interest-bearing
    
    
    215,418,686
    
    
    
    207,578,723Total deposits
    
    
    248,957,747
    
    
    
    239,975,933Securities sold under repurchase agreements
    
    
    11,859,052
    
    
    
    14,448,384Federal Home Loan Bank borrowings
    
    
    9,512,481
    
    
    
    15,380,060Accrued interest payable and other liabilities
    
    
    1,132,971
    
    
    
    1,166,463Total liabilities
    
    
    271,462,251
    
    
    
    270,970,840SHAREHOLDERS EQUITYCommon stock, $6.25 par value. Authorized 9,000,000
shares; issued 2,667,786 shares
    
    
    16,673,667
    
    
    
    16,673,667Additional paid-in capital
    
    
    6,413,915
    
    
    
    6,413,915Retained earnings
    
    
    12,214,751
    
    
    
    11,621,292Treasury stock at cost - 23,436 shares in 2003
and 37,528 shares in 2002
    
    
    (645,938
    )
    
    
    (1,088,312
    )Accumulated other comprehensive income
    
    
    61,143
    
    
    
    121,722Total shareholders equity
    
    
    34,717,538
    
    
    
    33,742,284TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    306,179,789
    
    
    $
    304,713,124
 These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies and notes
to consolidated financial statements. 20 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2003, 2002 and 2001
 2003
    
    2002
    
    2001INTEREST AND DIVIDEND INCOMELoans, including fees
    
    $
    12,452,881
    
    
    $
    12,639,261
    
    
    $
    16,465,458Taxable securities
    
    
    1,020,512
    
    
    
    1,658,996
    
    
    
    2,221,656Nontaxable securities
    
    
    1,905,372
    
    
    
    2,190,103
    
    
    
    2,406,972Other
    
    
    35,666
    
    
    
    211,435
    
    
    
    562,273Total interest and dividend income
    
    
    15,414,431
    
    
    
    16,699,795
    
    
    
    21,656,359INTEREST EXPENSEDeposits
    
    
    3,849,339
    
    
    
    5,764,027
    
    
    
    10,717,243Other
    
    
    782,019
    
    
    
    702,802
    
    
    
    753,657Total interest expense
    
    
    4,631,358
    
    
    
    6,466,829
    
    
    
    11,470,900NET INTEREST INCOME
    
    
    10,783,073
    
    
    
    10,232,966
    
    
    
    10,185,459PROVISION (CREDIT) FOR LOAN LOSSES
    
    
    (51,000
    )
    
    
    (586,521
    )
    
    
    34,801NET INTEREST INCOME, AFTER PROVISION
(CREDIT) FOR LOAN LOSSES
    
    
    10,834,073
    
    
    
    10,819,487
    
    
    
    10,150,658NONINTEREST INCOMEService charges on deposit accounts
    
    
    790,587
    
    
    
    807,206
    
    
    
    732,705Merchant fees
    
    
    207,811
    
    
    
    212,109
    
    
    
    243,225Trust services
    
    
    375,929
    
    
    
    334,089
    
    
    
    381,833Securities gains
    
    
    1,068
    
    
    
    114,822
    
    
    
    28,828Gain on sale of loans
    
    
    68,267
    
    
    
    5,843
    
    
    
    90,204Gain (loss) on sale of other real estate owned
    
    
    114,836
    
    
    
    (3,350
    )
    
    
    5,952Other
    
    
    596,855
    
    
    
    566,342
    
    
    
    492,847Total noninterest income
    
    
    2,155,353
    
    
    
    2,037,061
    
    
    
    1,975,594NONINTEREST EXPENSESSalaries and employee benefits
    
    
    5,516,584
    
    
    
    5,554,344
    
    
    
    5,279,958Occupancy expense
    
    
    647,157
    
    
    
    622,037
    
    
    
    645,607Equipment expense
    
    
    490,483
    
    
    
    534,296
    
    
    
    538,566Franchise tax expense
    
    
    408,544
    
    
    
    377,274
    
    
    
    358,546Professional and director fees
    
    
    894,314
    
    
    
    868,257
    
    
    
    1,634,110Other expenses
    
    
    2,842,235
    
    
    
    3,042,202
    
    
    
    3,147,387Total noninterest expenses
    
    
    10,799,317
    
    
    
    10,998,410
    
    
    
    11,604,174Income before income taxes
    
    
    2,190,109
    
    
    
    1,858,138
    
    
    
    522,078FEDERAL INCOME TAX PROVISION (CREDIT)
    
    
    130,000
    
    
    
    (65,000
    )
    
    
    (537,000
    )NET INCOME
    
    $
    2,060,109
    
    
    $
    1,923,138
    
    
    $
    1,059,078NET INCOME PER SHAREBasic and diluted
    
    $
    .78
    
    
    $
    .73
    
    
    $
    .40
 These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies and notes to
consolidated financial statements. 2003 ANNUAL REPORT TO SHAREHOLDERS 21




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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years ended December 31, 2003, 2002 and 2001
    
    (CSB BANCORP, INC. LOGO)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    otherCommon
    
    paid-in
    
    Retained
    
    Treasury
    
    comprehensivestock
    
    capital
    
    earnings
    
    stock
    
    income (loss)
    
    TotalBALANCE AT
DECEMBER 31, 2000
    
    $
    16,673,667
    
    
    $
    6,413,915
    
    
    $
    9,840,016
    
    
    $
    (1,338,432
    )
    
    $
    (49,232
    )
    
    $
    31,539,934Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,059,078
    
    
    
    
    
    
    
    
    
    
    
    1,059,078Change in net unrealized
gain (loss), net of
reclassification
adjustments and related
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    315,653
    
    
    
    315,653Total
comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,374,731Shares issued from treasury
under dividend reinvestment
program
    
    
    
    
    
    
    
    
    
    
    (60,227
    )
    
    
    125,556
    
    
    
    
    
    
    
    65,329Shares issued from treasury
as employee compensation
    
    
    
    
    
    
    
    
    
    
    (5,250
    )
    
    
    9,052
    
    
    
    
    
    
    
    3,802Purchase of 11 treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (194
    )
    
    
    
    
    
    
    (194
    )Cash dividends declared, $.10
per share
    
    
    
    
    
    
    
    
    
    
    (262,465
    )
    
    
    
    
    
    
    
    
    
    
    (262,465
    )BALANCE AT DECEMBER 31, 2001
    
    
    16,673,667
    
    
    
    6,413,915
    
    
    
    10,571,152
    
    
    
    (1,204,018
    )
    
    
    266,421
    
    
    
    32,721,137Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    1,923,138
    
    
    
    
    
    
    
    
    
    
    
    1,923,138Change in net unrealized
gain (loss), net of
reclassification
adjustments and related
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,699
    )
    
    
    (144,699
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,778,439Shares issued from treasury
under dividend reinvestment
program
    
    
    
    
    
    
    
    
    
    
    (83,829
    )
    
    
    203,434
    
    
    
    
    
    
    
    119,605Purchase of 5,013 treasury
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,728
    )
    
    
    
    
    
    
    (87,728
    )Cash dividends declared, $.30
per share
    
    
    
    
    
    
    
    
    
    
    (789,169
    )
    
    
    
    
    
    
    
    
    
    
    (789,169
    )BALANCE AT DECEMBER 31, 2002
    
    
    16,673,667
    
    
    
    6,413,915
    
    
    
    11,621,292
    
    
    
    (1,088,312
    )
    
    
    121,722
    
    
    
    33,742,284Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    2,060,109
    
    
    
    
    
    
    
    
    
    
    
    2,060,109Change in net unrealized
gain (loss), net of
reclassification
adjustments and related
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,579
    )
    
    
    (60,579
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,995,530Shares issued from treasury
under dividend reinvestment
program
    
    
    
    
    
    
    
    
    
    
    (200,122
    )
    
    
    461,119
    
    
    
    
    
    
    
    260,997Purchase of 1,043 treasury
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,745
    )
    
    
    
    
    
    
    (18,745
    )Cash dividends declared, $.48
per share
    
    
    
    
    
    
    
    
    
    
    (1,266,528
    )
    
    
    
    
    
    
    
    
    
    
    (1,266,528
    )BALANCE AT DECEMBER 31, 2003
    
    $
    16,673,667
    
    
    $
    6,413,915
    
    
    $
    12,214,751
    
    
    $
    (645,938
    )
    
    $
    61,143
    
    
    $
    34,717,538
 These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies and notes
to consolidated financial statements. 22 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
 2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    2,060,109
    
    
    $
    1,923,138
    
    
    $
    1,059,078Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization of premises and equipment
    
    
    723,841
    
    
    
    720,316
    
    
    
    630,778Deferred income taxes
    
    
    (113,793
    )
    
    
    1,426,542
    
    
    
    435,642Provision (credit) for loan losses
    
    
    (51,000
    )
    
    
    (586,521
    )
    
    
    34,801Gain on sale of loans
    
    
    (68,267
    )
    
    
    (5,843
    )
    
    
    (90,204
    )Securities gains
    
    
    (1,068
    )
    
    
    (114,822
    )
    
    
    (28,828
    )Loss (gain) on sale of premises and equipment
    
    
    
    
    
    
    (1,762
    )
    
    
    30,913Shares issued from treasury as employee compensation
    
    
    
    
    
    
    
    
    
    
    3,802Loss (gain) on sale of other real estate owned
    
    
    (114,836
    )
    
    
    3,350
    
    
    
    (5,952
    )Security amortization, net of accretion
    
    
    14,764
    
    
    
    88,983
    
    
    
    69,010Federal Home Loan Bank stock dividends
    
    
    (97,100
    )
    
    
    (109,700
    )
    
    
    (145,000
    )Secondary market loan sale proceeds
    
    
    7,933,025
    
    
    
    3,871,289
    
    
    
    7,139,958Originations of secondary market loans held-for-sale
    
    
    (7,864,758
    )
    
    
    (3,865,446
    )
    
    
    (7,058,420
    )Effects of changes in operating assets and liabilities:Net deferred loan fees
    
    
    (21,088
    )
    
    
    (166,716
    )
    
    
    (263,299
    )Accrued interest receivable
    
    
    320,468
    
    
    
    406,812
    
    
    
    648,333Accrued interest payable
    
    
    (41,701
    )
    
    
    (184,174
    )
    
    
    (151,233
    )Other assets and liabilities
    
    
    758,858
    
    
    
    557,806
    
    
    
    (1,129,917
    )Net cash provided by operating activities
    
    
    3,437,454
    
    
    
    3,963,252
    
    
    
    1,179,462CASH FLOWS FROM INVESTING ACTIVITIESSecurities available-for-sale:Proceeds from maturities and repayments
    
    
    38,128,846
    
    
    
    31,129,822
    
    
    
    26,665,843Purchases
    
    
    (44,537,368
    )
    
    
    (20,497,528
    )
    
    
    (34,770,000
    )Securities held-to-maturity:Proceeds from maturities and repayments
    
    
    11,714,947
    
    
    
    8,803,000
    
    
    
    12,630,000Proceeds from sale of loans
    
    
    
    
    
    
    780,732
    
    
    
    5,957,710Loan originations, net of repayments
    
    
    (13,614,238
    )
    
    
    (32,605,933
    )
    
    
    27,712,783Proceeds from sale of other real estate
    
    
    169,000
    
    
    
    327,486
    
    
    
    90,952Proceeds from sale of premises and equipment
    
    
    
    
    
    
    11,450
    
    
    
    114,093Property and equipment expenditures
    
    
    (216,879
    )
    
    
    (459,672
    )
    
    
    (717,886
    )Purchase of other real estate
    
    
    
    
    
    
    
    
    
    
    (85,000
    )Net cash provided by (used in) investing activities
    
    
    (8,355,692
    )
    
    
    (12,510,643
    )
    
    
    37,598,495
 These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies and notes
to consolidated financial statements. 2003 ANNUAL REPORT TO SHAREHOLDERS 23




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
    
    (CSB BANCORP, INC. LOGO)
 2003
    
    2002
    
    2001CASH FLOWS FROM FINANCING ACTIVITIESNet change in deposits
    
    $
    8,981,814
    
    
    $
    (11,453,797
    )
    
    $
    (17,153,189
    )Net change in securities sold under repurchase agreements
    
    
    (2,589,332
    )
    
    
    (508,641
    )
    
    
    (626,502
    )Federal Home Loan Bank borrowings:Proceeds
    
    
    5,000,000
    
    
    
    10,000,000
    
    
    
    Repayments
    
    
    (10,867,579
    )
    
    
    (979,728
    )
    
    
    (2,105,039
    )Purchase of treasury shares
    
    
    (18,745
    )
    
    
    (87,728
    )
    
    
    (194
    )Cash dividends paid
    
    
    (951,235
    )
    
    
    (406,538
    )
    
    
    (197,136
    )Net cash used in financing activities
    
    
    (445,077
    )
    
    
    (3,436,432
    )
    
    
    (20,082,060
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (5,363,315
    )
    
    
    (11,983,823
    )
    
    
    18,695,897CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    22,564,696
    
    
    
    34,548,519
    
    
    
    15,852,622CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    17,201,381
    
    
    $
    22,564,696
    
    
    $
    34,548,519SUPPLEMENTAL DISCLOSURESCash paid during the year for:Interest
    
    $
    4,673,059
    
    
    $
    6,651,003
    
    
    $
    11,622,133Income taxes
    
    $
    20,000
    
    
    $
    
    
    
    $
    Noncash
investing activity  transfer of loans to other
real estate owned
    
    $
    
    
    
    $
    385,000
    
    
    $
    Noncash
financing activity  payments of dividends
through issuance of treasury shares, under dividend
reinvestment program
    
    $
    260,997
    
    
    $
    119,605
    
    
    $
    65,329
 These consolidated financial statements should be read only in
connection with the accompanying summary of significant accounting policies
and notes to consolidated financial statements. 24 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 CSB Bancorp, Inc. (the Company), is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended, and was incorporated under
the laws of the State of Ohio in 1991. The Commercial and Savings Bank (the
Bank), an Ohio banking corporation chartered in 1879, is a wholly-owned
subsidiary of the Company. The Bank is a member of the Federal Reserve system,
and its deposits are insured up to the maximum provided by law by the Federal
Deposit Insurance Corporation. The primary banking regulators of the Bank are
the Ohio Division of Financial Institutions and the Federal Reserve Board. The Bank provides financial services 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 Banks income is derived from commercial and retail lending activities and
investments in securities. Its primary deposit products are checking,
savings, and term certificate accounts, and its primary lending products are
residential mortgage, commercial, and installment loans. Substantially all
loans are secured by specific items of collateral including business assets,
consumer assets and real estate. Commercial loans are expected to be repaid
from cash flow from operations of business. Real estate loans are secured by
both residential and commercial real estate. Significant accounting policies followed by the Company are presented below: USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS In preparing consolidated financial statements in conformity with generally
accepted accounting principles management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and reported amounts of revenues and expenses
during each reporting period. Actual results could differ from those estimates.
The most significant area involving the use of managements estimates and
assumptions is the allowance for loan losses. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany balances
and transactions have been eliminated in consolidation. The Bank has established a trust department and the assets held by the
Bank in fiduciary or agency capacities for its customers are not included
in the consolidated balance sheets as such items are not assets of the
Bank. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, and federal
funds sold which mature overnight or within three days. CASH RESERVE REQUIREMENTS The Bank is required by the Federal Reserve to maintain reserves consisting of
cash on hand and noninterest-earning balances on deposit with the Federal
Reserve Bank. The required reserve balance at December 31, 2003 and 2002 was
$1,879,000 and $1,226,000, respectively. SECURITIES Securities are designated at the time of purchase as either
held-to-maturity or available-for-sale. Securities designated as
held-to-maturity are carried at their amortized cost. Securities
designated as available-for-sale are carried at fair value, with
unrealized gains and losses, net of applicable income taxes, on such
securities recognized as other comprehensive income (loss). The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization and accretion is included in
interest and dividends on securities. Investments in Federal Home Loan Bank and Federal Reserve Bank stock are
classified as restricted securities, carried at cost, and evaluated for
impairment. Gains and losses on sales of securities are accounted for on a completed
transaction basis, using the specific identification method, and are included
in noninterest income. Securities are written down to fair value when a decline
in fair value is not temporary. 2003 ANNUAL REPORT TO SHAREHOLDERS 25




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##### Table of Contents



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
    (CSB BANCORP, INC. LOGO)
 LOANS Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are stated at their
outstanding principal amount, adjusted for charge-offs, the allowance for
loan losses and any deferred loan fees or costs on originated loans.
Interest is accrued based upon the daily outstanding principal balance. Loan
origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Interest income is not reported when full repayment is in doubt, typically
when the loan is impaired or payments are past due over 90 days. All
interest accrued but not collected for loans that are placed on nonaccrual
or charged-off is reversed against interest income. The interest on these
loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to income. Loan losses
are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management
and is based upon managements periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrowers ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available. A loan is considered impaired when, based on current information and events,
it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrowers prior payment record, and the amount of the shortfall in relation
to the principal and interest owed. Impairment is measured on a loan by loan
basis for commercial, commercial real estate, and construction loans by
either the present value of expected future cash flows discounted at the
loans effective interest rate, the loans obtainable market price, or the
fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
disclosures. OTHER REAL ESTATE OWNED Other real estate acquired through or in lieu of foreclosure is initially
recorded at the lower of cost or fair value, less estimated costs to sell,
and any loan balance in excess of fair value is charged to the allowance for
loan losses. Subsequent valuations are periodically performed and
write-downs are included in other operating expense, as are gains or losses
upon sale and expenses related to maintenance of the properties. Other real
estate owned amounted to $54,164 at December 31, 2002 (none at December 31,
2003). PREMISES AND EQUIPMENT Premises and equipment is stated at cost less accumulated depreciation and
amortization. Upon the sale or disposition of the assets, the difference
between the depreciated cost and proceeds is charged or credited to income.
Depreciation and amortization is determined based on the estimated useful
lives of the individual assets (typically 20 to 40 years for buildings and 3
to 10 years for equipment) and is computed using both accelerated and
straight-line methods. 26 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 SERVICING Mortgage servicing rights are recognized as an asset when acquired through
sale of loans. Capitalized servicing rights are reported in other assets and
are amortized into noninterest income in proportion to, and over the period
of, the estimated future net servicing income of the underlying loans.
Servicing assets are evaluated for impairment based upon the fair value of
the rights as compared to amortized cost. Any impairment is recognized
through a valuation allowance to the extent that fair value is less than the
capitalized amount. REPURCHASE AGREEMENTS Substantially all securities sold under repurchase agreements represent
amounts advanced by various customers. Securities are pledged to cover those
obligations which are not deposits and not covered by federal deposit
insurance. ADVERTISING COSTS All advertising costs are expensed as incurred. FEDERAL INCOME TAXES Deferred income taxes are provided on temporary differences between
financial statement and income tax reporting. Temporary differences are
differences between the amounts of assets and liabilities, reported for
financial statement purposes and their tax bases. Deferred tax assets are
recognized for temporary differences that will be deductible in future
years tax returns and for operating loss and tax credit carryforwards.
Deferred tax assets are reduced by a valuation allowance if it is deemed
more likely than not that some or all of the deferred tax assets will not be
realized. Deferred tax liabilities are recognized for temporary differences
that will be taxable in future years tax returns. The Bank is not currently subject to state and local income taxes. STOCK-BASED COMPENSATION Employee compensation expense under stock option plans is reported if
options are granted below market price at the grant date. Pro forma
disclosures of compensation cost of stock-based awards have been determined
using the fair value method that considers the time value of the option
considering the volatility of the Companys stock and the risk-free interest
rate over the expected life of the option using a Black-Scholes valuation
model. Had compensation cost for stock options been measured using FASB
Statement No. 123, net income and earnings per share would have been the pro
forma amounts indicated below. The pro forma effect may increase in the
future if more options are granted. 2003
    
    2002
    
    2001Net income as reported
    
    $
    2,060,109
    
    
    $
    1,923,138
    
    
    $
    1,059,078Pro forma net income
    
    
    2,031,391
    
    
    
    1,904,729
    
    
    
    1,032,078Basic earnings per share as reported
    
    
    .78
    
    
    
    .73
    
    
    
    .40Pro forma basic earnings per share
    
    
    .77
    
    
    
    .72
    
    
    
    .39Diluted earnings per share as reported
    
    
    .78
    
    
    
    .73
    
    
    
    .40Pro forma diluted earnings per share
    
    
    .77
    
    
    
    .72
    
    
    
    .39
 The pro forma effects are computed using option pricing models,
using the following weighted-average assumptions as of grant date. 2003
    
    2002
    
    2001Risk-free interest rate
    
    
    2.75
    %
    
    
    3.0
    %
    
    
    3.5
    %Expected option life (years)
    
    
    6.4
    
    
    
    9.5
    
    
    
    10.0Dividend yield
    
    
    2.5
    %
    
    
    2.5
    %
    
    
    2.5
    %
 2003 ANNUAL REPORT TO SHAREHOLDERS 27




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##### Table of Contents



SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    
    (CSB BANCORP, INC. LOGO)
 COMPREHENSIVE INCOME Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. PER SHARE DATA Basic net income per share is computed based on the weighted average number of
shares of common stock outstanding during each year, after restatement for
stock dividends. Diluted income per common share includes the dilutive effect
of additional potential common shares issuable under stock options. The weighted average number of common shares outstanding for basic and
diluted earnings per share computations were as follows: 2003
    
    2002
    
    2001Weighted average common shares outstanding (basic)
    
    
    2,638,360
    
    
    
    2,630,931
    
    
    
    2,625,241Dilutive effect of assumed exercise of stock
options
    
    
    3,527
    
    
    
    3,627
    
    
    
    773Weighted average common shares outstanding
(diluted)
    
    
    2,641,887
    
    
    
    2,634,558
    
    
    
    2,626,014
 Dividends per share are based on the number of shares outstanding at the record
date. RECLASSIFICATIONS Certain reclassifications of 2002 and 2001 amounts have been made to conform
with the 2003 presentation. This information is an integral part of the accompanying
consolidated financial statements. 28 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SECURITIES Securities consist of the following at December 31, 2003 and 2002: Gross
    
    GrossAmortized
    
    unrealized
    
    unrealized
    
    Faircost
    
    gains
    
    losses
    
    valueDecember 31, 2003Available-for-sale:Obligations of U.S. government
corporations and agencies
    
    $
    24,018,719
    
    
    $
    73,383
    
    
    $
    7,872
    
    
    $
    24,084,230Mortgage-backed securities
    
    
    4,263,078
    
    
    
    4,782
    
    
    
    7,600
    
    
    
    4,260,260Corporate security
    
    
    616,177
    
    
    
    29,948
    
    
    
    
    
    
    
    646,125Total available-for-sale
    
    
    28,897,974
    
    
    
    108,113
    
    
    
    15,472
    
    
    
    28,990,615Held-to-maturity:U.S. Treasury security
    
    
    101,599
    
    
    
    32,557
    
    
    
    
    
    
    
    134,156Obligations of U.S.
government corporations and
agencies
    
    
    1,000,000
    
    
    
    11,875
    
    
    
    
    
    
    
    1,011,875Obligations of states and
political subdivisions
    
    
    34,990,428
    
    
    
    2,258,718
    
    
    
    
    
    
    
    37,249,146Total held-to-maturity
    
    
    36,092,027
    
    
    
    2,303,150
    
    
    
    
    
    
    
    38,395,177Restricted stock
    
    
    2,690,600
    
    
    
    
    
    
    
    
    
    
    
    2,690,600Total securities
    
    $
    67,680,601
    
    
    $
    2,411,263
    
    
    $
    15,472
    
    
    $
    70,076,392December 31, 2002Available-for-sale:Obligations of U.S.
government corporations and
agencies
    
    $
    18,521,998
    
    
    $
    153,478
    
    
    $
    
    
    
    $
    18,675,476Mortgage-backed securities
    
    
    3,338,616
    
    
    
    14
    
    
    
    
    
    
    
    3,338,630Corporate security
    
    
    626,626
    
    
    
    30,936
    
    
    
    
    
    
    
    657,562Total available-for-sale
    
    
    22,487,240
    
    
    
    184,428
    
    
    
    
    
    
    
    22,671,668Held-to-maturity:U.S. Treasury security
    
    
    101,644
    
    
    
    34,575
    
    
    
    
    
    
    
    136,219Obligations of U.S.
government corporations and
agencies
    
    
    7,000,912
    
    
    
    183,148
    
    
    
    
    
    
    
    7,184,060Obligations of states and
political subdivisions
    
    
    40,720,326
    
    
    
    2,716,156
    
    
    
    
    
    
    
    43,436,482Total held-to-maturity
    
    
    47,822,882
    
    
    
    2,933,879
    
    
    
    
    
    
    
    50,756,761Restricted stock
    
    
    2,593,500
    
    
    
    
    
    
    
    
    
    
    
    2,593,500Total securities
    
    $
    72,903,622
    
    
    $
    3,118,307
    
    
    $
    
    
    
    $
    76,021,929
 2003 ANNUAL REPORT TO SHAREHOLDERS 29




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    (CSB BANCORP, INC. LOGO)
 NOTE
1  SECURITIES (CONTINUED) The amortized cost and fair value of securities at December 31, 2003, by
contractual maturity, are shown below. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Amortized
    
    Faircost
    
    valueAvailable-for-sale:Due in one year or less
    
    $
    1,499,150
    
    
    $
    1,499,250Due after one through five years
    
    
    23,135,746
    
    
    
    23,231,105Mortgage-backed securities
    
    
    4,263,078
    
    
    
    4,260,260Total available-for-sale
    
    $
    28,897,974
    
    
    $
    28,990,615Held-to-maturity:Due in one year or less
    
    $
    7,430,024
    
    
    $
    7,578,259Due after one through five years
    
    
    15,878,513
    
    
    
    17,006,625Due after five years through ten years
    
    
    12,681,891
    
    
    
    13,676,137Due after ten years
    
    
    101,599
    
    
    
    134,156Total held-to-maturity
    
    $
    36,092,027
    
    
    $
    38,395,177
 Securities with a carrying value of approximately $47,526,000 and
$39,552,000 were pledged at December 31, 2003 and 2002, respectively, to
secure public deposits, as well as other deposits and borrowings as required
or permitted by law. Restricted stock primarily consists of investments in Federal Home Loan
Bank of Cincinnati and Federal Reserve Bank of Cleveland stock. The
Banks investment in Federal Home Loan Bank stock amounted to
$2,420,600 and $2,323,500 at December 31, 2003 and 2002, respectively. Gross gains realized from sales or recovery of previous impairment
write-offs of securities available-for-sale amounted to $1,068 in 2003,
$114,822 in 2002, and $28,828 in 2001, with the income tax provision
applicable to such gains amounting to $363 in 2003, $39,039 in 2002, and
$9,802 in 2001. There were no gross realized losses in 2003, 2002 and 2001. 30 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SECURITIES (CONTINUED) The following table presents gross unrealized losses and fair value of
securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2003: Securities in a Continuous Unrealized Loss PositionLess Than
    
    12 Months12 Months
    
    or More
    
    TotalUnrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fairloss
    
    value
    
    loss
    
    value
    
    loss
    
    valueObligations of U.S. Government
corporations and agencies
    
    $
    7,872
    
    
    $
    5,487,658
    
    
    $
    
    
    
    $
    
    
    
    $
    7,872
    
    
    $
    5,487,658Mortgage-backed securities
    
    
    7,600
    
    
    
    3,582,507
    
    
    
    
    
    
    
    
    
    
    
    7,600
    
    
    
    3,582,507Corporate security
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. Treasury security
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of states and political
subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    15,472
    
    
    $
    9,070,165
    
    
    $
    
    
    
    $
    
    
    
    $
    15,472
    
    
    $
    9,070,165
 There were six securities in an unrealized loss position at December 31, 2003,
none of which were in a continuous unrealized loss position for twelve months
or more. Management has considered industry analyst reports, sector credit
reports and volatility in the bond market in concluding that the unrealized
losses as of December 31, 2003 were primarily the result of customary and
expected fluctuations in the bond market. As a result, all security impairments
as of December 31, 2003 are considered temporary. NOTE 2  LOANS Loans consist of the following at December 31, 2003 and 2002: 2003
    
    2002Commercial
    
    $
    73,558,796
    
    
    $
    74,907,083Commercial real estate
    
    
    49,160,157
    
    
    
    41,665,397Residential real estate
    
    
    72,944,329
    
    
    
    65,652,751Installment and credit card
    
    
    12,250,616
    
    
    
    12,381,939Construction
    
    
    5,503,312
    
    
    
    5,452,456Deferred loan fees, net
    
    
    (162,748
    )
    
    
    (249,711
    )Loans
    
    $
    213,254,462
    
    
    $
    199,809,915
 2003 ANNUAL REPORT TO SHAREHOLDERS 31




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    (CSB BANCORP, INC. LOGO)
 NOTE 2  LOANS (CONTINUED) The following represents a summary of the activity in the allowance
for loan losses for the years ended December 31, 2003, 2002 and 2001: 2003
    
    2002
    
    2001Beginning balance
    
    $
    2,700,643
    
    
    $
    4,019,302
    
    
    $
    7,460,370Provision (credit) for loan losses
    
    
    (51,000
    )
    
    
    (586,521
    )
    
    
    34,801Loans charged-off
    
    
    (337,533
    )
    
    
    (1,165,247
    )
    
    
    (3,747,814
    )Recoveries
    
    
    146,754
    
    
    
    433,109
    
    
    
    271,945Ending balance
    
    $
    2,458,864
    
    
    $
    2,700,643
    
    
    $
    4,019,302
 During 2002, the Bank sold certain commercial and commercial real estate
loans with an outstanding principal balance aggregating approximately
$1,275,000 and received total proceeds of $780,732, with a charge to the
allowance for loan losses of approximately $494,000. There was no gain or
loss recorded on the sales. In 2001, the Bank reached an agreement to sell certain commercial and
commercial real estate loans with an outstanding principal balance
approximating $7,527,000. After recording a charge to the allowance for
loan losses of $1,608,557, the Bank completed the sale in April 2001
resulting in proceeds of $5,957,710. There was no gain or loss recorded
on the sale. As a result of an increase in nonperforming loans during 2000 and a
regulatory examination performed in the second quarter of 2000,
management analyzed certain of its credits, resulting in increased loan
charge-offs and specific and general allocation of its allowance for loan
losses, which caused an increase in the provision for loan losses during
the year. Certain of these credits were favorably resolved during the
three year period, resulting in actual loan charge-offs being less than
the specific allocations provided. As a result of these favorable
outcomes, the Bank recognized a credit for loan losses of $51,000 in 2003
and $586,521 in 2002. Impaired loans were as follows: 2003
    
    2002Year-end loans with no allowance for loan losses allocated
    
    $
    
    
    
    $
    Year-end loans with allowance for loan losses allocated
    
    
    897,370
    
    
    
    915,705Amount of the allowance allocated
    
    
    250,781
    
    
    
    239,270
 2003
    
    2002
    
    2001Average of impaired loans during the year
    
    $
    1,135,417
    
    
    $
    2,496,740
    
    
    $
    9,707,662Interest income recognized during impairment
    
    
    51,740
    
    
    
    105,169
    
    
    
    787,279Cash-basis interest income recognized
    
    
    51,039
    
    
    
    105,169
    
    
    
    766,353
 Nonperforming loans, including certain impaired loans and smaller balance
homogenous loans such as residential mortgage and consumer loans that are
collectively evaluated for impairment, were as follows at December 31,
2003 and 2002: 2003
    
    2002Loans past due over 90 days still accruing interest
    
    $
    175,000
    
    
    $
    Nonaccrual loans
    
    
    1,170,000
    
    
    
    1,721,000
 Loans serviced for others approximated $25,598,000 and $19,586,000 at
December 31, 2003 and 2002, respectively. 32 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3  PREMISES AND EQUIPMENT Premises and equipment consist of the following at December 31, 2003 and 2002: 2003
    
    2002Land and improvements
    
    $
    1,007,927
    
    
    $
    989,877Buildings and improvements
    
    
    8,406,896
    
    
    
    8,442,336Furniture and equipment
    
    
    5,565,389
    
    
    
    5,389,169Leasehold improvements
    
    
    79,979
    
    
    
    79,97915,060,191
    
    
    
    14,901,361Accumulated depreciation
    
    
    6,496,915
    
    
    
    5,831,123Premises and equipment, net
    
    $
    8,563,276
    
    
    $
    9,070,238
 The Bank leases certain office locations. Total rental expense under these
leases approximated $72,000, $77,000, and $67,000 in 2003, 2002, and 2001,
respectively. Future minimum lease payments at December 31, 2003 are not
material. NOTE 4  INTEREST-BEARING DEPOSITS Interest-bearing deposits at December 31, 2003 and 2002 are as follows: 2003
    
    2002Demand
    
    $
    50,873,110
    
    
    $
    50,785,182Statement and passbook savings
    
    
    38,924,341
    
    
    
    37,976,444Time deposits:In excess of $100,000
    
    
    37,579,321
    
    
    
    28,747,123Other
    
    
    88,041,914
    
    
    
    90,069,974Total interest-bearing deposits
    
    $
    215,418,686
    
    
    $
    207,578,723At December 31, 2003, stated maturities of time deposits were as follows:2004
    
    $
    77,687,5352005
    
    
    11,796,0242006
    
    
    20,511,1092007
    
    
    8,834,0292008 and beyond
    
    
    6,792,538Total
    
    $
    125,621,235
 2003 ANNUAL REPORT TO SHAREHOLDERS 33




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    (CSB BANCORP, INC. LOGO)
 NOTE 5  BORROWINGS During 2003, the Bank borrowed $5,000,000 from the Federal Home Loan Bank
under a secured note, maturing April 2005, with interest at 2.08%. During
2002, the Bank borrowed $10,000,000 from the Federal Home Loan Bank under
a secured note, with interest at 3.44%, which matured and was paid in
full in November 2003. The Bank also borrowed from the Federal Home Loan
Bank to fund certain fixed-rate residential real estate loans during the
mid-1990s. Such borrowings carry fixed interest rates ranging from 5.65%
to 7.15% at December 31, 2003, with 10, 15 or 20 year maturities. Monthly
principal and interest payments are due on the borrowings. In addition, a
principal curtailment of 10% of outstanding principal balance is due on
the anniversary date of each borrowing. Future estimated principal payments on Federal Home Loan Bank borrowings,
including curtailments, are as follows: 2004
    
    $
    767,2472005
    
    
    5,677,3962006
    
    
    568,4422007
    
    
    475,5122008
    
    
    417,127Thereafter
    
    
    1,606,757Total
    
    $
    9,512,481
 Federal Home Loan Bank borrowings are collateralized by the Banks
Federal Home Loan Bank stock and certain qualifying mortgage loans. Securities sold under agreements to repurchase generally mature within
three months from the transaction date. Physical control is maintained
for all securities sold under repurchase agreements. Information
concerning securities sold under agreements to repurchase for 2003 and
2002 is as follows: 2003
    
    2002Average balance during the year
    
    $
    12,884,508
    
    
    $
    13,759,609Average interest rate during the year
    
    
    .61
    %
    
    
    .82
    %Maximum month-end balance during the year
    
    $
    13,737,563
    
    
    $
    15,596,344
 NOTE 6  INCOME TAXES The provision (credit) for income taxes consists of the following for the
years ended December 31, 2003, 2002 and 2001: 2003
    
    2002
    
    2001Current
    
    $
    243,793
    
    
    $
    (1,491,542
    )
    
    $
    (972,642
    )Deferred
    
    
    (113,793
    )
    
    
    1,426,542
    
    
    
    435,642Total income tax provision (credit)
    
    $
    130,000
    
    
    $
    (65,000
    )
    
    $
    (537,000
    )
 34 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6  INCOME TAXES (CONTINUED) The significant components of the provision (credit) for deferred income
taxes for the years ended December 31, 2003, 2002, and 2001, were as
follows: 2003
    
    2002
    
    2001Tax effect of temporary differences, exclusive of item listed
below
    
    $
    (113,793
    )
    
    $
    439,542
    
    
    $
    435,642Impact of
change in tax law  Job Creation and Worker
Assistance Act of 2002
    
    
    
    
    
    
    987,000
    
    
    
    Total deferred income tax provision (credit)
    
    $
    (113,793
    )
    
    $
    1,426,542
    
    
    $
    435,642
 The enactment on March 9, 2002 of the Job Creation and Worker Assistance
Act of 2002, enabled the Company to carryback net operating losses for a
period of five years, as opposed to the normal two-year carryback period.
Consequently, refundable income taxes at December 31, 2001, were increased
and deferred tax assets decreased approximately $987,000 as a result of
this tax law change. The income tax provision (credit) attributable to income from operations
differs from the amounts computed by applying the statutory federal
income tax rate of 34% to income before income taxes as follows: 2003
    
    2002
    
    2001Expected provision using statutory federal income tax rate
    
    $
    744,600
    
    
    $
    631,800
    
    
    $
    177,500Tax-exempt income on state and municipal securities and
political subdivision loans
    
    
    (662,900
    )
    
    
    (756,400
    )
    
    
    (842,200
    )Interest expense associated with carrying certain state
and municipal securities and political subdivision loans
    
    
    41,400
    
    
    
    68,800
    
    
    
    126,600Other
    
    
    6,900
    
    
    
    (9,200
    )
    
    
    1,100Total income tax provision (credit)
    
    $
    130,000
    
    
    $
    (65,000
    )
    
    $
    (537,000
    )
 The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 2003 and 2002, are as
follows: 2003
    
    2002Allowance for loan losses
    
    $
    381,400
    
    
    $
    484,300Alternative minimum tax credit carryforwards
    
    
    772,000
    
    
    
    501,000Net operating loss carryforward
    
    
    31,600
    
    
    
    Other
    
    
    30,100
    
    
    
    37,200Deferred tax assets
    
    
    1,215,100
    
    
    
    1,022,500Unrealized gain on securities available-for-sale
    
    
    (31,498
    )
    
    
    (62,706
    )Depreciation of premises and equipment
    
    
    (406,100
    )
    
    
    (310,200
    )Federal Home Loan Bank stock dividends
    
    
    (326,700
    )
    
    
    (294,300
    )Deferred loan fees
    
    
    (20,800
    )
    
    
    (63,800
    )Other
    
    
    (28,002
    )
    
    
    (34,494
    )Deferred tax liabilities
    
    
    (813,100
    )
    
    
    (765,500
    )Net deferred tax assets
    
    $
    402,000
    
    
    $
    257,000
 2003 ANNUAL REPORT TO SHAREHOLDERS 35




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    (CSB BANCORP, INC. LOGO)
 NOTE 6  INCOME TAXES (CONTINUED) The Company has available at December 31, 2003, a net operating loss
carryforward of approximately $93,000 which is available to reduce future
regular federal taxable income and expires in 2023. The Company also has
available at December 31, 2003, alternative minimum tax credit
carryforwards of approximately $772,000 which may be utilized in the
future to the extent computed regular tax exceeds the alternative minimum
tax. The Company believes it is more likely than not that the benefit of
deferred tax assets will be realized. Consequently, no valuation
allowance for deferred tax assets is deemed necessary at December 31,
2003 and 2002. The Companys 2001 and 2002 consolidated federal income tax returns are
currently under examination by the Internal Revenue Service. Management
of the Company and the exam agent have had correspondence regarding
certain matters identified during the exam. Management does not believe
final resolution of these matters will have a significant adverse impact
on the Companys consolidated financial statements. NOTE 7  EMPLOYEE BENEFITS The Bank sponsors a contributory 401(k) profit-sharing plan covering
substantially all employees who meet certain age and service
requirements. The Plan permits investing in the Companys common stock
subject to various limitations and provides for discretionary profit
sharing and matching contributions. The discretionary profit-sharing
contribution is determined annually by the Board of Directors and
amounted to 3% of each eligible participants compensation for 2003, 2002
and 2001. The Plan also provides for a 100% Bank match of participant
contributions up to a maximum of 2% of each participants annual
compensation. Expense under the Plan amounted to $164,000, $197,000 and
$134,000 for 2003, 2002 and 2001, respectively. Effective May 20, 2003, the Board of Directors granted options to
purchase 10,000 shares of common stock at an exercise price of $17.75 per
share through May 19, 2008, to an executive officer. The Board of
Directors also granted options to two executive officers of the Bank to
purchase 1,000 shares each of common stock at an exercise price of $17.50
through July 31, 2008. Effective December 31, 2002, the Board of Directors granted to various
officers and employees of the Bank, options to purchase a total of 14,660
shares of common stock under the Companys Share Incentive Plan. The
options are exercisable on the anniversary of the grant date in annual
20% increments. The exercise price for the options is the December 31,
2002 market price of $16.05 per share and the options expire 10 years
from the grant date. On March 1, 2001, the Board of Directors granted options to purchase
20,000 shares of common stock at an exercise price of $15.00 per share to
an executive officer who resigned in July 2003. The options expire 10
years from the grant date. The following summarizes stock options activity for the years ended December 31, 2003, 2002 and 2001: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    34,660
    
    
    $
    15.44
    
    
    
    20,000
    
    
    $
    15.00
    
    
    
    
    
    
    $
    Granted
    
    
    12,000
    
    
    
    17.71
    
    
    
    14,660
    
    
    
    16.05
    
    
    
    20,000
    
    
    
    15.00Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (4,175
    )
    
    
    (16.05
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    42,485
    
    
    $
    16.02
    
    
    
    34,660
    
    
    $
    15.44
    
    
    
    20,000
    
    
    $
    15.00Options exercisable at year end
    
    
    34,097
    
    
    $
    16.02
    
    
    
    20,000
    
    
    $
    15.00
    
    
    
    20,000
    
    
    $
    15.00
 The remaining weighted average life of options outstanding at
December 31, 2003 is 6.4 years and the remaining weighted average
life of options exercisable at December 31, 2003 is 5.7 years. 36 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 8  FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments are primarily loan commitments to extend credit
and letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the
consolidated balance sheets. The contract amount of these instruments
reflects the extent of involvement the Bank has in these financial
instruments. The Banks exposure to credit loss in the event of the nonperformance by
the other party to the financial instruments for loan commitments to
extend credit and letters of credit is represented by the contractual
amounts of these instruments. The Bank uses the same credit policies in
making loan commitments as it does for on-balance sheet loans. The following financial instruments whose contract amount represents credit
risk were outstanding at December 31, 2003 and 2002 (dollars in thousands): 2003
    
    2002Commitments to extend credit
    
    $
    46,714
    
    
    $
    48,290Letters of credit
    
    $
    368
    
    
    $
    185
 Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements. The Bank evaluates
each customers credit worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Bank upon extension of
credit is based on managements credit evaluation of the customer.
Collateral held varies but may include accounts receivable; inventory;
property, plant and equipment; and income-producing commercial properties. Letters of credit are written conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party and are
reviewed for renewal at expiration. All letters of credit outstanding at
December 31, 2003, are due on demand or expire in 2004. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The Bank requires collateral
supporting these commitments when deemed necessary. NOTE 9-RELATED-PARTY TRANSACTIONS In the ordinary course of business, loans are granted to executive
officers, directors and their related business interests. The
following is an analysis of activity of related-party loans for the
years ending December 31, 2003 and 2002: 2003
    
    2002Balance at beginning of year
    
    $
    6,299,088
    
    
    $
    2,622,121New loans and advances
    
    
    5,056,942
    
    
    
    5,274,233Repayments, including loans sold
    
    
    (4,839,811
    )
    
    
    (1,597,266
    )Balance at end of year
    
    $
    6,516,219
    
    
    $
    6,299,088
 Deposits from executive officers, directors and their related
business interests at December 31, 2003 and 2002 were approximately
$4,217,000 and $2,340,000, respectively. 2003 ANNUAL REPORT TO SHAREHOLDERS 37




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    (CSB BANCORP, INC. LOGO)
 NOTE 10  REGULATORY MATTERS The Company (on a consolidated basis) and Bank are subject to various
regulatory capital requirements administered by the federal and state
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct
material effect on the Companys and Banks financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific
capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding
companies. Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and
of Tier 1 capital to average assets (as defined). Management believes,
as of December 31, 2003 and 2002, that the Company and Bank met all
capital adequacy requirements to which they are subject. As of December 31, 2003, the most recent notification from federal
and state banking agencies categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain
minimum total-risk based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the following tables. There are no conditions
or events since that notification that management believes have
changed the Banks category. The actual capital amounts and ratios of the Company and Bank as of
December 31, 2003 and 2002, are also presented in the following table
(dollars in thousands): Minimum required
    
    Minimum required to be wellfor capital
    
    capitalized under promptActual
    
    adequacy purposes
    
    corrective action regulationsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2003Total capital (to risk-weighted assets)Consolidated
    
    $
    37,112
    
    
    
    18.1
    %
    
    $
    16,381
    
    
    
    8.0
    %
    
    $
    N/A
    
    
    
    N/ABank
    
    
    35,159
    
    
    
    17.4
    
    
    
    16,210
    
    
    
    8.0
    
    
    
    20,262
    
    
    
    10.0
    %Tier I capital (to risk-weighted assets)Consolidated
    
    
    34,653
    
    
    
    16.9
    
    
    
    8,190
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    32,700
    
    
    
    16.1
    
    
    
    8,105
    
    
    
    4.0
    
    
    
    12,157
    
    
    
    6.0Tier I capital (to average assets)Consolidated
    
    
    34,653
    
    
    
    11.2
    
    
    
    12,335
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    32,700
    
    
    
    10.7
    
    
    
    12,249
    
    
    
    4.0
    
    
    
    15,311
    
    
    
    5.0As of December 31, 2002Total capital (to risk-weighted assets)Consolidated
    
    $
    36,080
    
    
    
    18.1
    %
    
    $
    15,910
    
    
    
    8.0
    %
    
    $
    N/A
    
    
    
    N/ABank
    
    
    34,328
    
    
    
    17.4
    
    
    
    15,758
    
    
    
    8.0
    
    
    
    19,698
    
    
    
    10.0
    %Tier I capital (to risk-weighted assets)Consolidated
    
    
    33,615
    
    
    
    16.9
    
    
    
    7,955
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    31,863
    
    
    
    16.2
    
    
    
    7,879
    
    
    
    4.0
    
    
    
    11,819
    
    
    
    6.0Tier I capital (to average assets)Consolidated
    
    
    33,615
    
    
    
    11.2
    
    
    
    11,999
    
    
    
    4.0
    
    
    
    N/A
    
    
    
    N/ABank
    
    
    31,863
    
    
    
    10.7
    
    
    
    11,924
    
    
    
    4.0
    
    
    
    14,905
    
    
    
    5.0
 The Companys primary source of funds with which to pay dividends is
dividends received from the Bank. The payment of dividends by the Bank
to the Company is subject to restrictions by its regulatory agency.
These restrictions generally limit dividends to current and prior
two-years retained earnings. Also, dividends may not reduce capital
levels below the minimum regulatory requirements disclosed above.
Under these provisions, approximately $2,016,000 was available for
dividends on January 1, 2004, without the need to obtain the approval
of the State of Ohio Division of Financial Institutions. 38 2003 ANNUAL REPORT TO SHAREHOLDERS




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##### Table of Contents



(CSB BANCORP, INC. LOGO)
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 11  CONDENSED PARENT COMPANY FINANCIAL INFORMATION A summary of condensed financial information of the parent company as
of December 31, 2003 and 2002 and for each of the three years in the
period ended December 31, 2003 are as follows:
CONDENSED BALANCE SHEETS 2003
    
    2002ASSETSCash deposited with subsidiary bank
    
    $
    1,667,505
    
    
    $
    1,406,200Investment in subsidiary bank
    
    
    32,765,194
    
    
    
    31,989,558Security held-to-maturity
    
    
    498,930
    
    
    
    498,743Other assets
    
    
    103,231
    
    
    
    110,809Total assets
    
    $
    35,034,860
    
    
    $
    34,005,310LIABILITIES AND SHAREHOLDERS EQUITYLiability
 dividends payable
    
    $
    317,322
    
    
    $
    263,026Shareholders equity:Common stock
    
    
    16,673,667
    
    
    
    16,673,667Additional paid-in capital
    
    
    6,413,915
    
    
    
    6,413,915Retained earnings
    
    
    12,214,751
    
    
    
    11,621,292Treasury stock
    
    
    (645,938
    )
    
    
    (1,088,312
    )Accumulated other comprehensive income
    
    
    61,143
    
    
    
    121,722Total shareholders equity
    
    
    34,717,538
    
    
    
    33,742,284Total liabilities and shareholders equity
    
    $
    35,034,860
    
    
    $
    34,005,310
 CONDENSED STATEMENTS OF INCOME 2003
    
    2002
    
    2001Interest on security
    
    $
    24,837
    
    
    $
    24,837
    
    
    $
    24,837Dividends from subsidiary
    
    
    1,266,528
    
    
    
    789,169
    
    
    
    262,465Total income
    
    
    1,291,365
    
    
    
    814,006
    
    
    
    287,302Operating expenses
    
    
    104,471
    
    
    
    107,670
    
    
    
    130,429Income before taxes and
undistributed equity income of
subsidiary
    
    
    1,186,894
    
    
    
    706,336
    
    
    
    156,873Income tax benefit
    
    
    37,000
    
    
    
    36,608
    
    
    
    44,346Equity income in subsidiary, net of dividends
    
    
    836,215
    
    
    
    1,180,194
    
    
    
    857,859Net income
    
    $
    2,060,109
    
    
    $
    1,923,138
    
    
    $
    1,059,078
 2003 ANNUAL REPORT TO SHAREHOLDERS 39




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    (CSB BANCORP, INC. LOGO)
 NOTE 11  CONDENSED
PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)CONDENSED STATEMENTS OF CASH FLOWS 2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    2,060,109
    
    
    $
    1,923,138
    
    
    $
    1,059,078Adjustments to reconcile net income to cash provided by operations:Shares issued from treasury as employee compensation
    
    
    
    
    
    
    

    
    
    
    3,802Security accretion
    
    
    (187
    )
    
    
    (188
    )
    
    
    (187
    )Equity income in subsidiary, net of dividends
    
    
    (836,215
    )
    
    
    (1,180,194
    )
    
    
    (857,859
    )Change in other assets
    
    
    7,578
    
    
    
    (241
    )
    
    
    (19,102
    )Net cash from operating activities
    
    
    1,231,285
    
    
    
    742,515
    
    
    
    185,732Cash flows from financing activities:Purchase of treasury shares
    
    
    (18,745
    )
    
    
    (87,728
    )
    
    
    (194
    )Cash dividends paid
    
    
    (951,235
    )
    
    
    (406,538
    )
    
    
    (197,136
    )Net cash from financing activities
    
    
    (969,980
    )
    
    
    (494,266
    )
    
    
    (197,330
    )Net change in cash
    
    
    261,305
    
    
    
    248,249
    
    
    
    (11,598
    )Cash at beginning of year
    
    
    1,406,200
    
    
    
    1,157,951
    
    
    
    1,169,549Cash at end of year
    
    $
    1,667,505
    
    
    $
    1,406,200
    
    
    $
    1,157,951
 NOTE 12  OTHER COMPREHENSIVE INCOME The components of other comprehensive income and related tax effects
are as follows for the years ended December 31, 2003, 2002 and 2001: 2003
    
    2002
    
    2001Unrealized holding gains (losses) on available-for-sale securities
    
    $
    (90,719
    )
    
    $
    (104,419
    )
    
    $
    507,089Less reclassification adjustment for securities gains recognized
in income
    
    
    (1,068
    )
    
    
    (114,822
    )
    
    
    (28,828
    )Net unrealized holding gains (losses)
    
    
    (91,787
    )
    
    
    (219,241
    )
    
    
    478,261Tax effect
    
    
    (31,208
    )
    
    
    (74,542
    )
    
    
    162,608Other comprehensive income (loss)
    
    $
    (60,579
    )
    
    $
    (144,699
    )
    
    $
    315,653
 40 2003 ANNUAL REPORT TO SHAREHOLDERS




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(CSB BANCORP, INC. LOGO)
    
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13  FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of recognized financial instruments as
of December 31, 2003 and 2002, are as follows (dollars in
thousands): 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    Fairamounts
    
    value
    
    amounts
    
    valueFinancial assets:Cash and cash equivalents
    
    $
    17,201
    
    
    $
    17,201
    
    
    $
    22,565
    
    
    $
    22,565Securities
    
    
    67,773
    
    
    
    70,076
    
    
    
    73,088
    
    
    
    76,022Loans, net
    
    
    210,796
    
    
    
    212,543
    
    
    
    197,109
    
    
    
    201,040Total
    
    $
    295,770
    
    
    $
    299,820
    
    
    $
    292,762
    
    
    $
    299,627Financial liabilities:Deposits
    
    $
    248,958
    
    
    $
    250,223
    
    
    $
    239,976
    
    
    $
    241,373Securities sold under
agreements to repurchase
    
    
    11,859
    
    
    
    11,859
    
    
    
    14,448
    
    
    
    14,448Federal Home Loan Bank borrowings
    
    
    9,512
    
    
    
    9,808
    
    
    
    15,380
    
    
    
    17,341Total
    
    $
    270,329
    
    
    $
    271,890
    
    
    $
    269,804
    
    
    $
    273,162
 The preceding summary does not include accrued interest receivable,
accrued interest payable, and other liabilities which are also considered
financial instruments. The estimated fair value of such items is
considered to be their carrying amount. The Bank also has unrecognized financial instruments at December 31, 2003
and 2002. These financial instruments relate to commitments to extend
credit and letters of credit. The contract amount of such financial
instruments approximated to $47,082,000 at December 31, 2003 and
$48,475,000 at December 31, 2002. Such amounts are also considered to be
the estimated fair values. The following methods and assumptions were used to estimate the fair value
of each class of financial instruments shown above: Cash and cash equivalents Fair value is determined to be the carrying amount for these items (which
include cash on hand, due from banks, and federal funds sold) because
they represent cash or mature in 90 days or less and do not represent
unanticipated credit concerns. Securities The fair value of securities (both available-for-sale and
held-to-maturity) is determined based on quoted market prices of the
individual securities or, if not available, estimated fair value was
obtained by comparison to other known securities with similar risk and
maturity characteristics. Such value does not consider possible tax
ramifications or estimated transaction costs. Loans Fair value for loans was estimated for portfolios of loans with similar
financial characteristics. For adjustable rate loans, which reprice at
least annually and generally possess low risk characteristics, the
carrying amount is believed to be a reasonable estimate of fair value.
For fixed rate loans, the fair value is estimated based on secondary
market quotes from various dealers, considering weighted average rates
and terms of the portfolio, adjusted for credit and interest rate risk
inherent in the loans. Fair value for nonperforming loans is based on
recent appraisals or estimated discounted cash flows. The estimated value
of credit card loans is based on existing loans and does not include the
value that relates to estimated cash flows from new loans generated from
existing cardholders over the remaining life of the portfolio. 2003 ANNUAL REPORT TO SHAREHOLDERS 41




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    (CSB BANCORP, INC. LOGO)
 Deposit liabilities The fair value of core deposits, including demand deposits, savings accounts,
and certain money market deposits, is the amount payable on demand. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
offered at year end for deposits of similar remaining maturities. The estimated
fair value does not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the marketplace. Other financial instruments The fair value of commitments to extend credit and letters of credit is
determined to be the contract amount since these financial instruments
generally represent commitments at existing rates. The fair value of federal
funds purchased and securities sold under repurchase agreements is determined
to be the carrying amount since these financial instruments represent
obligations which are due on demand. The fair value of borrowed funds is
determined based on a discounted cash flow analysis. The fair value estimates of financial instruments are made at a specific point
in time based on relevant market information. These estimates do not reflect
any premium or discount that could result from offering for sale at one time
the entire holdings of a particular financial instrument over the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. Since no ready market exists for a
significant portion of the financial instruments, fair value estimates are
largely based on judgments after considering such factors as future expected
credit losses, current economic conditions,
risk characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect these estimates. NOTE 14  CONTINGENT LIABILITIES In the normal course of business, the Company and its subsidiary may be
involved in various legal actions, but in the opinion of management and its
legal counsel, the ultimate disposition of such matters is not expected to have
a material adverse effect on the consolidated financial statements. The Bank has entered into employment agreements with various officers. Upon the
occurrence of certain types of termination of employment, the Bank may be
required to make specified severance payments if termination occurs within a
specified period of time, generally two years from the date of the agreement,
or pursuant to certain change in control transactions. NOTE 15  QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of selected quarterly financial data (unaudited)
for the years ended December 31, 2003 and 2002: Basic andNet
    
    
    
    
    
    dilutedInterest
    
    interest
    
    Net
    
    earnings perincome
    
    income
    
    income
    
    common share2003First quarter
    
    $
    3,959,148
    
    
    $
    2,732,834
    
    
    $
    597,832
    
    
    $
    0.23Second quarter
    
    
    3,937,783
    
    
    
    2,749,329
    
    
    
    571,614
    
    
    
    0.21Third quarter
    
    
    3,814,367
    
    
    
    2,673,319
    
    
    
    338,685
    
    
    
    0.13Fourth quarter
    
    
    3,703,133
    
    
    
    2,627,591
    
    
    
    551,978
    
    
    
    0.212002First quarter
    
    $
    4,314,450
    
    
    $
    2,409,113
    
    
    $
    376,389
    
    
    $
    0.14Second quarter
    
    
    4,171,423
    
    
    
    2,487,271
    
    
    
    504,858
    
    
    
    0.19Third quarter
    
    
    4,126,898
    
    
    
    2,609,171
    
    
    
    635,657
    
    
    
    0.24Fourth quarter
    
    
    4,087,024
    
    
    
    2,727,411
    
    
    
    406,234
    
    
    
    0.16
 This information is an integral part of the accompanying consolidated financial statements. 42 2003 ANNUAL REPORT TO SHAREHOLDERS




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(CSB PICTURE)




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(CSB PICTURE)




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(CSB BANCORP, INC. LOGO)
    
    OFFICERS OF THE COMMERCIAL AND SAVINGS BANK
 LINDA C. AMOS
    
    Assistant Vice President/Mortgage Loan OfficerWILLIAM D. ARNOLD
    
    Vice President/Banking Center ManagerREBECCA A. BAKER
    
    Assistant Vice President/Banking Center ManagerPAMELA S. BASINGER
    
    Assistant Vice President/Financial OfficerDEBORAH S. BERNER
    
    Vice President/Retail ServicesPAMELA L. BROMUND
    
    Assistant Vice President/Loan Operations SupervisorC. DAWN BUTLER
    
    Assistant Vice President/Banking Center ManagerCOLBY M. CHAMBERLIN
    
    Vice President/Retail/Small Business Lending SupervisorDALE J. CLINTON
    
    Vice President/Internal AuditorPEGGY L. CONN
    
    Corporate SecretaryPAULA S. FOY
    
    Vice President/Banking Center ManagerREBECCA J. FRYBARGER
    
    Assistant Vice President/Banking Center ManagerRICK L. GINTHER
    
    Senior Vice President/Chief Lending OfficerLORETTA GRAY
    
    Assistant Cashier/ Assistant Banking Center ManagerPAUL D. GREIG
    
    Senior Vice President/Chief Operation/Information OfficerTERRI L. JOHN
    
    Vice President/Commercial LenderSTEPHEN K. KILPATRICK
    
    First Vice President/ Credit and Loan AdministrationJOHN J. LIMBERT
    
    President/Chief Executive OfficerJASON R. MCCULLOCH
    
    Assistant Vice President/Brokerage ManagerA. LEE MILLER
    
    Senior Vice President/Chief Financial OfficerDANIEL L. MUSE
    
    Operations OfficerROBERT D. OSWALD
    
    Senior Vice President/CashierSHAWN E. OSWALD
    
    Vice President/Information System DirectorTHOMAS S. RUMBAUGH
    
    Vice President/Trust OfficerREBECCA J. SHULTZ
    
    Assistant Vice President/Loan OfficerSCOTT A. STALLMAN
    
    Operations OfficerHARLAND L. STEBBINS
    
    Vice President/Commercial LenderERIC D. STROUSE
    
    Vice President/Commercial LenderRONALD L. STUTZMAN
    
    Banking Center ManagerDOUGLAS W. THIESSEN
    
    Vice President/Compliance OfficerWILLIAM R. TINLIN
    
    Vice President/Recovery/SecurityA. MIEKE TUERPITZ
    
    Assistant Cashier/Banking Center ManagerI. MILTON WAYLAND
    
    Assistant Vice President/Loan OfficerKERRIE L. WEAVER
    
    Assistant Vice President/IRA AdministratorJANE C. WHITMER
    
    Assistant Cashier/Assistant Banking Center ManagerERVIN C. YODER
    
    Vice President/Banking Center Manager
 (PHOTO IN MEMORIAM LOGO) 2003 ANNUAL REPORT TO SHAREHOLDERS 43




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##### Table of Contents



(CSB LOGO)  24 HOUR XPRESS
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    OPERATIONS CENTER
    
    LOAN DEPARTMENT91 N. Clay, Millersburg
    
    91 N. Clay, Millersburg
    
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