<PAGE> 1
As filed with the Securities and Exchange Commission on ______________
Registration No. 333-________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
KILLBUCK BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
OHIO 6710 34-1700284
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(State or Other Jurisdiction (Primary Standard Industrial (IRS Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
165 N. MAIN STREET
KILLBUCK, OHIO 44637
(330) 276-4881
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
LUTHER E. PROPER COPIES OF COMMUNICATIONS TO:
PRESIDENT MARTIN D. WERNER, ESQ.
KILLBUCK BANCSHARES, INC. WERNER & BLANK CO., L.P.A.
165 N. MAIN 7205 W. CENTRAL AVENUE
KILLBUCK, OHIO 44637 TOLEDO, OHIO, 43617
(330) 276-4881 (419) 841-8051
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Approximate date of commencement of proposed sale of the securities to the
public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Class of Securities Amount to Offering Price Aggregate Offering Amount of
to be Registered be Registered Per Share(1) Price(1) Registration Fee(1)
<S> <C> <C> <C> <C>
Common Stock,
no par value 43,602 $33.0624971331 $1,441,591 $425.27
</TABLE>
(1) The registration fee has been computed pursuant to Rule 457(f)(2) and (3)
based on the aggregate book value of all the outstanding shares of Common
Stock, no par value, of Commercial and Savings Bank Co., as of June 30,
1998. The proposed maximum offering price per share is determined by
dividing the proposed maximum aggregate offering price by the number of
shares to be registered.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
COMMERCIAL AND SAVINGS BANK CO.
701 S. Market St.
Danville, Ohio 43014
----------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be Held on _____________
Notice is hereby given that the Special Meeting of Shareholders (the
"Meeting") of Commercial and Savings Bank Co. ("Commercial" or the "Company")
will be held at the ___________, Danville, Ohio 43014 on _________ at _______
p.m.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. A proposal to: (i) adopt, pursuant to Sections 1701.78 and
1701.831 of the Ohio Revised Code, an Agreement and Plan of
Reorganization (the "Agreement and Plan of Reorganization"), dated
April 13, 1998, by and between Commercial and Killbuck Bancshares, Inc.
("Killbuck"), a copy of which is included in the accompanying Proxy
Statement-Prospectus as Appendix A. As more fully described in the
Proxy Statement-Prospectus, the Agreement and Plan of Reorganization
provides for the Merger of Commercial with and into The Killbuck
Savings Bank Co. ("Killbuck Bank"), with Killbuck Bank surviving the
transaction. Pursuant to the Agreement and Plan of Reorganization, all
of the outstanding common shares of Commercial will be converted into
common shares of Killbuck in accordance with the terms of the Agreement
and Plan of Reorganization, and (ii) approve the transaction under the
provisions of the Ohio Control Share Acquisition Statute.
2. Such other matters as may properly come before the Meeting,
or any adjournments thereof. The Board of Directors is not aware of any
other business to come before the Meeting.
Notice is also given that Commercial shareholders have the right to
dissent and demand an appraisal of the value of their common shares in the event
the Agreement and Plan of Reorganization is adopted and the merger consummated.
The right of any dissenting shareholder to receive the value of his common
shares through the statutory appraisal process is contingent upon strict
compliance with the procedures set forth in Section 1701.85 of the Ohio General
Corporation Law, the relevant portions of which are attached as Appendix C to
the accompanying Proxy Statement-Prospectus.
Any action may be taken on the foregoing proposal at the Meeting on the
date specified above, or on any date or dates to which the Meeting may be
adjourned. Shareholders of record at the close of business on __________ will be
entitled to vote at the Meeting, and any adjournments thereof. A complete list
of shareholders entitled to vote at the Meeting will be available at the
Meeting.
You are requested to complete and sign the enclosed Form of Proxy which
is solicited on behalf of the Board of Directors, and to mail it promptly in the
enclosed envelope. The Proxy will not be used if you attend and vote at the
Meeting in person. Attendance at the Meeting will not, in and of itself,
constitute a revocation of a proxy.
By Order of the Board of Directors
Robert K. Wagner,
President, Chief Executive Officer and Director
Danville, Ohio
- --------------------
- --------------------------------------------------------------------------------
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE KILLBUCK THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED
WITHIN THE UNITED STATES.
<PAGE> 3
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
COMMERCIAL AND SAVINGS BANK CO.
701 S. MARKET ST.
DANVILLE, OHIO 43014
--------
PROSPECTUS
KILLBUCK BANCSHARES, INC.
COMMON STOCK
--------
This Prospectus of Killbuck Bancshares, Inc. ("Killbuck") relates to
the common shares of Killbuck ("Killbuck Common Stock") issuable to the
shareholders of Commercial and Savings Bank Co. ("Commercial") upon consummation
of the proposed merger of The Killbuck Savings Bank Co. ("Killbuck Bank") and
Commercial (the "Merger"). Killbuck Bank and Commercial have entered into a
Agreement and Plan of Reorganization dated April 13, 1998, (the "Agreement").
The Agreement is attached as Appendix A and incorporated herein by reference.
THIS PROSPECTUS ALSO SERVES AS THE PROXY STATEMENT OF COMMERCIAL
("PROXY STATEMENT-PROSPECTUS") FOR ITS SPECIAL MEETING OF SHAREHOLDERS (THE
"SPECIAL MEETING") TO BE HELD ON ________________. SEE "MEETING INFORMATION."
If the proposed Merger is consummated, the shareholders of Commercial
will receive shares of Killbuck Common Stock in exchange for their common shares
of Commercial (the "Commercial Common Stock") held by them on the effective date
of the Merger as set forth in the Agreement. Pursuant to the terms of the
Agreement, shareholders of Commercial will exchange each share of Commercial
Common Stock held by them on the effective date of the Merger for 2.1585 shares
of Killbuck Common.
The Merger is intended to be tax-deferred to Commercial shareholders
for federal income tax purposes. For a more complete description of the
Agreement and terms of the Merger see "The PROPOSED MERGER."
This Proxy Statement-Prospectus and form of Proxy are first being
mailed to shareholders of Commercial on or about _____________.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
ANY SUCH COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
The date of this Proxy Statement-Prospectus is ____________________.
2
<PAGE> 4
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 6
COMPLIANCE WITH THE OHIO CONTROL SHARE ACQUISITION STATUTE 6
SUMMARY 7
The Companies 8
Proposed Merger 8
Special Meeting Information 8
Vote Required 8
Reasons for the Merger; Recommendations of the Boards of Directors 9
Opinion of Financial Advisor 9
Effect on Commercial Shareholders 9
Dissenters' Rights 9
Certain Federal Income Tax Consequences 9
Accounting Treatment 10
Effective Time of the Merger 10
Conditions to the Merger; Regulatory Approval 10
Dividends 10
Termination, Amendment and Waiver 10
Interests of Certain Persons in the Merger 11
Resales of Killbuck Common Stock by Affiliates 11
Markets and Market Prices 11
Selected Financial Data 12
Comparative Per Share Data 14
MEETING INFORMATION 15
General 15
Date, Place and Time 15
Record Date 15
Votes Required 15
Voting and Revocation of Proxies 15
Solicitation of Proxies 16
PROPOSED MERGER 16
Background and Reasons for the Merger 16
Recommendation of the Commercial Board of Directors 17
Opinion of Commercial's Financial Advisor 17
Terms of the Merger 21
Effective Time of the Merger 21
Surrender of Commercial Certificates 21
Conditions to the Merger 22
Regulatory Approval 22
Conduct of Business Pending the Merger 23
Dividends 23
Termination, Amendment and Waiver 24
Management and Operations After the Merger 24
3
<PAGE> 5
TABLE OF CONTENTS (CONTINUED)
Interests of Certain Persons in the Merger 24
Effect on Employee Benefit Plans 24
Certain Federal Income Tax Consequences 24
Accounting Treatment 25
Expenses 25
Resale of Killbuck Common Stock 25
Dissenters' Rights 26
DESCRIPTION AND COMPARISON OF KILLBUCK COMMON STOCK
AND COMMERCIAL COMMON STOCK 27
General 27
Dividends 27
Preemptive Rights 27
Voting 28
Cumulative Voting 28
Liquidation 28
Liability of Directors; Indemnification 28
Antitakeover Provisions 28
INFORMATION ABOUT KILLBUCK 30
General 30
Employees 30
Competition 30
Certain Regulatory Considerations 31
Management's Discussion and Analysis of Financial Condition and
Results of Operations 35
Executive Compensation 55
Principal Shareholders and Management Ownership Information 58
Current Relationships and Related Transactions 58
Legal Proceedings 58
INFORMATION ABOUT COMMERCIAL 59
General 59
Employees 59
Competition 59
Management's Discussion and Analysis of Financial Condition
and Results of Operations 59
Voting, Principal Shareholders and Management Ownership Information 73
Current Relationships and Related Transactions 74
Legal Proceedings 74
LEGAL OPINIONS 74
EXPERTS 75
4
<PAGE> 6
TABLE OF CONTENTS (CONTINUED)
COMMERCIAL FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997, AND 1996
AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997
Report of Independent Auditors F-2
Balance Sheets F-3
Statements of Income F-4
Statements of Changes in Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
COMMERCIAL INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Unaudited Balance Sheets F-17
Unaudited Statements of Income F-18
Unaudited Statements of Changes in Shareholders'
Equity F-20
Unaudited Statements of Cash Flows F-21
Notes to Unaudited Financial Statements F-22
KILLBUCK FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997, AND 1996
AND FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997
Report of Independent Auditors F2-2
Consolidated Balance Sheets F2-3
Consolidated Statements of Income F2-4
Consolidated Statements of Changes in Shareholders'
Equity F2-5
Consolidated Statements of Cash Flows F2-6
Notes to Consolidated Financial Statements F2-7
KILLBUCK INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Unaudited Consolidated Balance Sheets F2-25
Unaudited Consolidated Statements of Income F2-26
Unaudited Consolidated Statements of Changes in
Shareholders' Equity F2-28
Unaudited Consolidated Statements of Cash Flows F2-29
Notes to Unaudited Consolidated Financial Statements F2-30
APPENDIX A A-1
Agreement and Plan of Reorganization dated April 13, 1998
APPENDIX B B-1
Opinion of Commercial's Financial Advisor
APPENDIX C C-1
Ohio Law on Dissenters' Rights
5
<PAGE> 7
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION TO OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS AND, IF GIVEN OR
MADE, THE INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO PURCHASE THE SECURITIES OFFERED HEREBY, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTIONS OR TO OR FROM ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT-PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROXY STATEMENT-PROSPECTUS RELATES
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF COMMERCIAL OR KILLBUCK SINCE THE DATE OF THIS PROXY
STATEMENT-PROSPECTUS.
AVAILABLE INFORMATION
Killbuck is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Room 1400, 75 Park Place, New York, New York 10007, and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials can also be obtained from the public reference section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a World Wide Web site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
Killbuck has filed with the Commission a Registration Statement on Form
S-4 (together with any amendments thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Killbuck Common Stock to be issued pursuant to the Merger described herein.
This Proxy Statement-Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits thereto, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. Such
additional information may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this Proxy Statement-Prospectus or in
any document incorporated herein by reference as to the contents of any contract
or other document referred to herein or therein are not necessarily complete,
and in each instance where reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement or other
document, each such statement is qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO
KILLBUCK, EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN, ARE
AVAILABLE WITHOUT CHARGE UPON REQUEST TO LUTHER E. PROPER, PRESIDENT & CHIEF
EXECUTIVE OFFICER, KILLBUCK BANCSHARES, INC., 165 N. MAIN STREET, KILLBUCK, OHIO
44637 (TELEPHONE (330) 276-4881). TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUESTS SHOULD BE MADE PRIOR TO __________________.
The following documents previously filed with the Commission by
Killbuck (Commission File No. 0-24147) are incorporated herein by reference:
(i) Killbuck's initial Form 10 for the year ended December
31, 1997;
(ii) Killbuck's Current Report on Form 10Q dated March 31,
1998;
(iii) Killbuck's Current Report on Form 10Q dated June 30,
1998.
COMPLIANCE WITH THE OHIO CONTROL SHARE ACQUISITION STATUTE
Consummation of the proposed merger of Commercial with and into
Killbuck in accordance with the terms of the Agreement and Plan of
Reorganization requires compliance with the Ohio Control Share Acquisition Act
(the "Acquisition Act") The Acquisition Act requires the advance approval of the
shareholders of an Issuing Public Corporation prior to the purchase of a
controlling interest in such corporation. Commercial is an Issuing Public
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<PAGE> 8
Corporation within the meaning of the Acquisition Act and therefore the
transactions contemplated by the Agreement and Plan of Reorganization must be
approved under the Acquisition Act. A vote For the Merger will also constitute
an affirmative vote to approve the acquisition of 100% of the outstanding shares
of Commercial Common Stock by Killbuck as required by the Acquisition Act.
Presented below is Killbuck's Acquiring Person Statement as required by the
Acquisition Act. Killbuck submitted its Acquiring Person Statement to Commercial
on the date this Proxy Statement was first mailed to Commercial shareholders.
Approval under the Acquisition Act requires the favorable vote of a majority of
the shares entitled to vote in the election of directors as well as a majority
vote of such shares excluding any shares held by interested shareholders, which
are defined to include Killbuck, any corporate officer of Commercial and any
employee of Commercial who is also a director of Commercial. In addition
"interested shares" are defined to include those acquired by any person after
the first date of public disclosure (April 13, 1998) of the Merger and prior to
the date of the Special Meeting, provided such person paid over $250,000 for
such purchased shares or such purchased shares represents greater than .05% of
the outstanding shares of the Issuing Public Corporation. As of the Record Date,
Killbuck owns no shares of Commercial. Officers and employees of Commercial who
are interested shareholders within the meaning of the Acquisition Act owned
2,388 shares of Commercial. Neither Commercial nor Killbuck are aware of any
other shares of Commercial Common Stock which could be considered as held by an
interested shareholder as defined by the Acquisition Act. Therefore approval of
the proposed acquisition of a controlling interest in Commercial by Killbuck
under the provisions of the Acquisition Act requires the affirmative vote of
10,101 shares which represents a majority of the shares entitled to vote in the
election of directors and 8,933 shares in connection with the vote which
excludes interested shares, as defined by the Acquisition Act.
Killbuck's Acquiring Person Statement under the Ohio Control Share
Acquisition Act.
1. The identity of the Acquiring Person is Killbuck
Bancshares, Inc., Killbuck, Ohio.
2. This Statement is given pursuant to ORC Section
1701.831(B).
3. Killbuck owns no shares of Commercial Common Stock.
4. If the proposed Merger is consummated, Killbuck will
acquire 100% of the voting power of Commercial Common Stock.
5. Killbuck proposes to acquire Commercial in a merger
transaction pursuant to and in accordance with the provisions
of ORC Section 1115.11(F) and the Agreement and Plan of
Reorganization. The Agreement and Plan of Reorganization is
incorporated into this Acquiring Person Statement as if fully
restated herein.
6. The proposed control share acquisition, if consummated,
will not be contrary to law. The Proxy Statement-Prospectus in
which this Acquiring Person Statement appears sets forth the
facts upon which the forgoing statement is based and is
incorporated by reference into this Acquiring Person Statement
as if fully restated herein.
SUMMARY
The following summary is not intended to be a complete description of
the proposed Merger and is qualified in all respects by the more detailed
information contained in this Proxy Statement-Prospectus, the Exhibits hereto
and the documents incorporated by reference. As used in this Proxy
Statement-Prospectus, the terms Killbuck and Commercial refer to such
corporations, respectively, and where the context requires, such corporations
and their respective subsidiaries on a consolidated basis. All information
concerning Killbuck included in this Proxy Statement-Prospectus has been
provided by Killbuck; all information concerning Commercial included in this
Proxy Statement-Prospectus has been provided by Commercial.
7
<PAGE> 9
THE COMPANIES
Killbuck Bancshares, Inc. Killbuck, an Ohio corporation, is a bank
holding company organized under Ohio law on November 29, 1991. The principal
asset of Killbuck is its investment in The Killbuck Savings Bank Company, Ohio,
sometimes referred to herein as "the Bank" or "Killbuck Bank." Killbuck's
principal offices are located at 165 N. Main St., Killbuck, Ohio (telephone
(330) 276-4881). For additional information concerning Killbuck see "INFORMATION
ABOUT Killbuck." Additional information concerning Killbuck is included in the
Killbuck documents incorporated herein by reference. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE."
Based on financial information as of June 30, 1998, Killbuck had
approximately $204 million in consolidated assets and approximately $23.4
million in consolidated equity capital.
Commercial and Savings Bank Co. Commercial Bank is a state banking
corporation duly organized under the laws of the State of Ohio. Commercial's
main office is located at 701 S. Market St., Danville, Ohio 43014 (telephone
(740) 599-6200).
Based upon financial information as of June 30, 1998, Commercial had
total assets of approximately $15.6 million and total equity of approximately
$1.4 million.
PROPOSED MERGER
Commercial and Killbuck have entered into a Agreement and Plan of
Reorganization (the "Agreement"), dated as of April 13, 1998, providing, among
other things, for the merger of Commercial with and into Killbuck (the
"Merger"). See "The Proposed Merger." Upon consummation of the Merger, each
outstanding share of Commercial Common Stock will be converted into 2.1585
shares of Killbuck Common Stock in accordance with the Exchange Ratio as defined
in the Agreement. The aggregate number of shares of Killbuck Common Stock
issuable in the Merger is 43,602.
No fractional shares of Killbuck Common Stock will be issued in the
Merger, and Killbuck will pay cash, without interest, for any fractional share
interests resulting from the respective exchange ratios in accordance with the
terms of the Agreement. See "PROPOSED MERGER--Terms of the Merger." Each
outstanding share of Killbuck Common Stock will not change by reason of the
Merger.
SPECIAL MEETING INFORMATION
Commercial Special Meeting. The Special Meeting of Commercial's
shareholders to consider and vote on the Agreement (the "Special Meeting") will
be held on ________ at ______ p.m., local time, at the ___________________,
Danville, Ohio 43017. Only holders of record of Commercial Common Stock at the
close of business on _________, 1998 (the "Record Date") will be entitled to
vote at the Special Meeting. At the Record Date, there were outstanding and
entitled to vote 20,200 shares of Commercial Common Stock.
For additional information relating to the Commercial Special Meeting,
see "SPECIAL MEETING INFORMATION."
VOTE REQUIRED
Commercial. Approval of the Agreement by the Commercial shareholders
requires the affirmative vote, in person or by proxy, of the holders of record
of at least two-thirds of the outstanding shares of Commercial Common Stock. As
of the Record Date there were 20,200 shares of Commercial Common Stock
outstanding and therefore a vote of at least 13,467 shares is required to adopt
the Agreement. In addition, approval of the proposed acquisition of a
controlling interest in Commercial by Killbuck under the provisions of the
Acquisition Act requires the affirmative vote of 10,101 shares which represents
a majority of the shares entitled to vote in the election of directors and 8,934
shares in connection with the vote which excludes interested shares, as defined
by the Acquisition Act. Each share of
8
<PAGE> 10
Commercial Common Stock is entitled to one vote.
As of the Record Date, directors and executive officers of Commercial
and their affiliates owned beneficially 2,388 shares of Commercial Common Stock
approximately 11.82% of the shares of Commercial Common Stock outstanding on
such date.
As of the Record Date, directors and executive officers of Killbuck and
their affiliates did not own, beneficially, any shares of Commercial Common
Stock.
Killbuck. Adoption of the Agreement and approval of the issuance of
Killbuck Common Stock in the Merger by Killbuck shareholders is not required.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The respective Boards of Directors of Commercial and Killbuck have each
unanimously approved the Agreement. The Board of Directors of Killbuck has also
authorized the issuance of a sufficient number of shares of Killbuck Common
Stock in the Merger. Each Board believes that the Merger is in the best
interests of the shareholders of its respective company. THE BOARD OF DIRECTORS
OF COMMERCIAL UNANIMOUSLY RECOMMENDS A VOTE FOR THE AGREEMENT AND FOR APPROVAL
UNDER THE ACQUISITION ACT. See "PROPOSED MERGER--Reasons for the Merger;
Recommendations of the Commercial Board of Directors," for a discussion of the
factors considered by the respective Boards in reaching their decisions to
approve the Agreement and Plan of Reorganization and the transactions
contemplated thereby.
OPINION OF FINANCIAL ADVISOR
Commercial's financial advisor, Young & Associates, Inc. ("Young &
Associates"), has rendered its opinion to the Board of Directors of Commercial
to the effect that the consideration to be received by the shareholders of
Commercial upon consummation of the Commercial Merger is fair and equitable,
from a financial perspective, to the holders of Commercial Common Stock. The
opinion of Young & Associates, which is attached as Appendix B to this Proxy
Statement-Prospectus, sets forth the assumptions made, the information analyzed,
and the limitations on the review undertaken in rendering such opinion. See
"PROPOSED MERGER--Opinion of Commercial's Financial Advisor."
EFFECT ON COMMERCIAL SHAREHOLDERS
Each outstanding share of Commercial Common Stock on the effective date
of the Merger will be converted in the Merger into shares of Killbuck Common
Stock as provided for in the Agreement, see "PROPOSED MERGER -- Terms of the
Merger." Thereafter, the rights of Commercial shareholders will be governed by
Ohio law and the Articles of Incorporation, as amended, and Code of Regulations
of Killbuck. See "COMPARISON OF SHAREHOLDER RIGHTS."
DISSENTERS' RIGHTS
Pursuant to Ohio Law, shareholders of Commercial have appraisal rights
and can demand to be paid the fair cash value of their shares of Commercial
Common Stock if they comply with the procedures of Section 1701.85 of the Ohio
General Corporation Law (OGCL). The full text of Section 1701.85 of the OGCL is
attached to this Proxy Statement as Appendix C. See "PROPOSED
MERGER--Dissenters' Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to qualify for federal income tax purposes as a
tax-free or tax-deferred reorganization. It is a condition to consummation of
the Merger that Killbuck and Commercial each receive an opinion of counsel that
the Merger will qualify as a tax-free or tax-deferred reorganization. Werner &
Blank Co., L.P.A., special counsel to Killbuck, has issued such opinion for the
benefit of Killbuck, Commercial and their respective shareholders. Such
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<PAGE> 11
opinion will not be binding on the Internal Revenue Service.
Shareholders of Commercial will generally recognize no gain or loss for
federal income tax purposes on the exchange of their Commercial Common Stock for
Killbuck Common Stock except to the extent they receive cash as a result of the
exercise of their statutory rights to dissent to the Merger and cash received in
exchange for any fractional share interest resulting from the Exchange Ratio.
See "PROPOSED MERGER - Certain Federal Income Tax Consequences."
COMMERCIAL SHAREHOLDERS SHOULD READ CAREFULLY THE DISCUSSION SET FORTH
UNDER "PROPOSED MERGER - CERTAIN FEDERAL INCOME TAX CONSEQUENCES" AND ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES TO THEM OF THE
MERGER UNDER FEDERAL, STATE, AND LOCAL AND ANY OTHER APPLICABLE TAX LAWS.
ACCOUNTING TREATMENT
Killbuck anticipates that the Merger will be accounted for as a
purchase transaction under applicable accounting standards. See "PROPOSED MERGER
- - Accounting Treatment."
EFFECTIVE TIME OF THE MERGER
The Agreement provides that the Merger will take place on a date
designated by Killbuck which shall be not later than thirty (30) days after
receipt of the following approvals relating to the Merger: (i) by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and the
expiration of any required waiting periods following regulatory approval, (ii)
by the shareholders of Commercial, and (iii) all other regulatory approvals have
been obtained and the regulatory waiting periods have expired, unless another
time is agreed upon in writing by the parties. Although there can be no
assurance, the Merger is expected to be consummated during the fourth quarter of
1998.
CONDITIONS TO THE MERGER; REGULATORY APPROVAL
The Merger is conditioned upon approval by the shareholders of
Commercial, the receipt of all required regulatory approvals and upon
satisfaction of other terms and conditions, including receipt of assurance that
the Merger will constitute tax-free or tax-deferred reorganization and qualify
as a purchase for accounting purposes. See "PROPOSED MERGER-Conditions to the
Merger."
Killbuck prepared an application and submitted it for filing with the
Federal Reserve Board under the provisions of the Federal Bank Merger Act. The
application approved on August 27, 1998. In addition, the Merger is conditioned
upon the receipt of the approval of the Ohio Division of Financial Institutions
("ODFI"), for which an application has been filed.
DIVIDENDS
Under the Agreement, Commercial will not declare or pay any dividends
or make any distributions other than regular cash dividends, payable at such
times and in amounts consistent with past practice and not to exceed the per
share rate paid in the prior calendar year. See "PROPOSED MERGER - Dividends."
TERMINATION, AMENDMENT AND WAIVER
The Merger may be terminated, among other reasons, (i) by mutual
consent of the Boards of Directors of Killbuck and Commercial at any time before
the Merger takes place, or (ii) by either Killbuck or Commercial if (a) the
Merger has not taken place by February 1, 1999, (b) Killbuck does not receive
all required regulatory approvals relating to the Merger, (c) any suit, action
or proceeding is pending or overtly threatened seeking to prevent or inhibit the
Merger, (d) if any warranty or representation made by the other party is
discovered to have been untrue in any material respect, (e) the other party
commits one or more material breaches of the Agreement, or (f) failure to obtain
required
10
<PAGE> 12
shareholder approval. See "PROPOSED MERGER - Termination, Amendment and
Waiver."
Killbuck and Commercial may amend, modify or waive certain terms and
conditions of the Agreement. See "PROPOSED MERGER - Termination, Amendment and
Waiver."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In the Agreement, Killbuck has agreed to interview those members of the
Board of Directors of Commercial who desire to be considered for a position as a
director of the resulting banking corporation. Killbuck has undertaken in the
Agreement, to consider, in its sole discretion, the addition of one or two such
persons to the Board of Directors of the resulting banking corporation.
RESALES OF KILLBUCK COMMON STOCK BY AFFILIATES
No restrictions on the sale or transfer of the shares of Killbuck
Common Stock issued pursuant to the Merger will be imposed solely as a result of
the Merger, other than restrictions on the transfer of such shares issued to any
Commercial shareholder who may be deemed to be an "affiliate" of Commercial for
purposes of Rule 145 under the Securities Act. Directors, executive officers and
10% shareholders are generally deemed to be affiliates for purposes of Rule 145.
Resales of Killbuck Common Stock issued to "affiliates" of Commercial
have not been registered under applicable securities laws in connection with the
Merger. Such shares may only be sold (a) under a separate registration by the
affiliates for distribution (which Killbuck has not agreed to provide), (b)
pursuant to Rule 145 under the Securities Act, or (c) pursuant to another
exemption from registration requirements under the Securities Act.
MARKETS AND MARKET PRICES
Commercial
Commercial's Common Stock is not traded on any exchange nor in the over
the counter market. There are infrequent and sporadic transactions in Commercial
Common Stock. The last trade of which management of Commercial is aware took
place on December 23, 1997 involving 5 shares at a transaction price of $55 per
share.
Killbuck Markets and Market Prices and Equivalent Per Share Data
There is no established public trading market for Killbuck's common
stock and the shares of Killbuck are not listed on any exchange. Sale price
information prior to September 30, 1998 is based on information reported to
Killbuck by individual buyers and sellers of Killbuck's stock. All information
has been adjusted for stock dividends and splits.
<TABLE>
<CAPTION>
1998
----
First Quarter Second Quarter Third Quarter
------------- --------------- -------------
High Low High Low High Low
<S> <C> <C> <C> <C>
69.50 69.50 Unknown 82.63 82.63
</TABLE>
<TABLE>
<CAPTION>
1997
----
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- --------------- ------------- --------------
High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C>
Unknown 54.30 54.30 55.99 55.51 Unknown
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
1996
----
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High Low High Low High Low High Low
<C> <C> <C> <C> <C> <C> <C> <C>
42.85 42.85 43.05 43.05 43.47 42.65 Unknown
</TABLE>
Killbuck has no outstanding options or warrants to purchase shares of
its common stock or securities convertible into shares of common stock.
SELECTED FINANCIAL DATA
The following unaudited tables present selected historical financial
information for Killbuck and Commercial. This information should be read in
conjunction with the financial statements and notes thereto included elsewhere
in or incorporated by reference to this Prospectus-Proxy Statement.
SELECTED FINANCIAL DATA
HISTORICAL
KILLBUCK BANCSHARES, INC.
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31, 6 Months Ended
---------------------------------------------------- ----------------------
1997 1996 1995 1994 1993 6-30-98 6-30-97
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of earnings:
Total interest income $15,226 $13,982 $12,811 $10,512 $9,847 $7,812 $7,419
Total interest expense 7,344 6,626 5,816 4,232 4,185 3,781 3,546
----------------------------------------------------------------------------
Net interest income 7,882 7,356 6,995 6,280 5,662 4,031 3,873
Provision for loan losses 180 180 180 180 180 90 90
----------------------------------------------------------------------------
Net interest income after provision
for loan losses 7,702 7,176 6,815 6,100 5,482 3,941 3,783
----------------------------------------------------------------------------
Security gains (losses) 0 0 0 1 49 0 0
Other income 447 439 411 432 422 255 215
----------------------------------------------------------------------------
Total noninterest income 447 439 411 433 471 255 215
Total noninterest expenses 4,036 3,799 3,610 3,532 3,379 2,203 1,983
----------------------------------------------------------------------------
Earnings before federal income taxes 4,113 3,816 3,616 3,001 2,574 1,993 2,015
Federal income tax expense 1,108 1,069 989 785 573 483 549
----------------------------------------------------------------------------
Net earnings $3,005 $2,747 $2,627 $2,216 $2,001 $1,510 $1,466
============================================================================
Balance Sheet Data (Period End)
Loans, net $119,926 $114,206 $105,258 $101,401 $93,450 $124,426 $119,770
Securities 58,477 51,208 42,171 35,320 32,674 58,637 60,222
Total assets 197,909 182,692 172,522 149,493 140,985 203,582 194,486
Deposits 163,809 157,399 150,413 132,112 126,422 167,515 164,312
Borrowings 11,455 4,815 3,329 994 0 12,318 8,518
Shareholders' equity 22,158 19,934 18,266 16,004 14,186 23,372 21,172
</TABLE>
12
<PAGE> 14
SELECTED FINANCIAL DATA
HISTORICAL
COMMERCIAL AND SAVINGS BANK CO.
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31, 6 Months Ended
----------------------------------------------------- ----------------------
1997 1996 1995 1994 1993 6-30-98 6-30-97
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of earnings:
Total interest income $1,112 $1,097 $1,008 $984 $942 $549 $540
Total interest expense 588 575 505 444 435 272 291
-------------------------------------------------------------------------------
Net interest income 524 522 503 540 507 277 249
Provision for loan losses 9 13 8 9 6 0 4
-------------------------------------------------------------------------------
Net interest income after
provision
for loan losses 515 509 495 531 501 277 245
-------------------------------------------------------------------------------
Security gains (losses) 0 0 0 0 0 0 0
Other income 55 55 62 62 63 19 27
-------------------------------------------------------------------------------
Total noninterest income 55 55 62 62 63 19 27
Total noninterest expenses 457 446 454 470 462 252 225
-------------------------------------------------------------------------------
Earnings before federal income 113 118 103 123 102 44 47
taxes
Federal income tax expense 19 21 17 24 19 7 7
-------------------------------------------------------------------------------
Net earnings $94 $97 $86 $99 $83 $37 $40
===============================================================================
Balance Sheet Data (Period End)
Loans, net $10,258 $10,648 $10,106 $9,621 $8,376 $10,624 $10,505
Securities 3,228 3,026 3,046 3,780 3,382 3,230 3,423
Total assets 15,986 15,549 15,388 14,512 14,981 15,614 15,760
Deposits 14,508 14,132 14,049 13,246 13,773 14,092 14,321
Borrowings 0 0 0 0 0 0 0
Shareholders' equity 1,405 1,325 1,247 1,176 1,091 1,442 1,367
</TABLE>
13
<PAGE> 15
COMPARATIVE PER SHARE DATA
The following unaudited table sets forth certain unaudited historical per common
share information for Killbuck and Commercial. The data is derived from
financial statements of Killbuck and Commercial incorporated by reference or
included elsewhere in this Prospectus-Proxy Statement.
SELECTED FINANCIAL DATA
PER SHARE DATA
HISTORICAL FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 6 Months Ended
---------------------------------------------- ----------------------
1997 1996 1995 1994 1993 6-30-98 6-30-97
------------------------------------------------------------------------
HISTORICAL PER SHARE DATA
KILLBUCK BANCSHARES, INC.
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income per common share 4.52 4.10 3.89 3.28 2.96 2.28 2.20
Cash dividends paid per common share 0.92 0.76 0.65 0.59 0.55 0.50 0.44
Book value per common share
(at period end) 33.48 29.86 27.06 23.71 21.02 35.31 31.72
COMMERCIAL AND SAVINGS BANK CO.
- ------------------------------------
Net income per common share 4.65 4.78 4.26 4.90 4.11 1.82 1.96
Cash dividends paid per common share 0.85 0.80 0.75 0.70 0.60 0.00 0.00
Book value per common share
(at period end) 69.55 65.59 61.73 58.22 54.01 71.39 67.67
</TABLE>
All periods shown above have been adjusted to reflect a 5 for 1 stock split,
which was effective May 1, 1998 for Killbuck Bancshares, Inc.
14
<PAGE> 16
MEETING INFORMATION
GENERAL
This Proxy Statement-Prospectus is being furnished to holders of
Commercial Common Stock in connection with the solicitation of proxies by the
Board of Directors of Commercial for use at the Special Meeting to consider and
vote upon the adoption of the Agreement and to transact such other business as
may properly come before the Special Meeting or any adjournments or
postponements thereof. Each copy of this Proxy Statement-Prospectus mailed to
the holders of Commercial Common Stock is accompanied by a form of Proxy for use
at the Special Meeting.
This Proxy Statement-Prospectus is also furnished by Killbuck to
Commercial shareholders as a Prospectus in connection with the issuance by
Killbuck of shares of Killbuck Common Stock upon consummation of the Merger in
accordance with the Agreement. This Proxy Statement-Prospectus, the attached
Notice, and the form of Proxy enclosed herewith are first being mailed to
shareholders of Commercial on or about _____________, 1998.
DATE, PLACE AND TIME
The Commercial Special Meeting: The Special Meeting will be held at
_____________________ Danville, Ohio, at _______ p.m. on ____________, 1998.
RECORD DATE
Commercial. The Board of Directors of Commercial has fixed the close of
business on ________________, 1998, as the Record Date for the determination of
the holders of Commercial Common Stock entitled to receive notice of and to vote
at the Special Meeting.
VOTES REQUIRED
Commercial. As of the Record Date, there were 20,200 shares of
Commercial Common Stock outstanding. Holders of Commercial Common Stock are
entitled to one vote per share. Under applicable provisions of Ohio Law and the
Articles of Incorporation of Commercial, the affirmative vote of at least
two-thirds of the outstanding shares of Commercial Common Stock, or 13,467
shares is required to approve the Agreement. In addition, approval of the
proposed acquisition of a controlling interest in Commercial by Killbuck under
the provisions of the Acquisition Act requires the affirmative vote of 10,101
shares which represents a majority of the shares entitled to vote in the
election of directors and 8,934 shares cast in connection with the vote which
excludes interested shares, as defined by the Acquisition Act. Each share of
Commercial Common Stock is entitled to one vote.
As of the Record Date, directors and executive officers of Commercial
and their affiliates owned beneficially an aggregate of 2,388 shares of
Commercial Common Stock or approximately 11.82% of the shares of Commercial
Common Stock outstanding on such date. As of the Record Date, directors and
executive officers of Commercial beneficially owned no shares of Killbuck Common
Stock.
VOTING AND REVOCATION OF PROXIES
Shares of Commercial Common Stock represented by a proxy properly
signed and received on or prior to the Special Meeting, unless subsequently
revoked, will be voted in accordance with the instructions thereon. IF A PROXY
IS SIGNED AND RETURNED WITHOUT INDICATING ANY VOTING INSTRUCTIONS, SHARES OF
COMMERCIAL COMMON STOCK REPRESENTED BY SUCH A PROXY WILL BE VOTED FOR THE
AGREEMENT. Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before the proxy is voted by the filing of an
instrument revoking it or of a duly executed proxy bearing a later date with the
Secretary for Commercial prior to or at the Special Meeting, or by voting in
person at the Special Meeting. Attendance at the Special Meetings will not in
and of itself constitute a revocation of a proxy.
15
<PAGE> 17
The Board of Directors of Commercial is not aware of any business to be
acted upon at the Special Meeting other than as described herein. If, however,
other matters properly come before the Special Meeting, or any adjournments or
postponements thereof, the person(s) appointed as proxies will have discretion
to vote or act thereon according to their best judgment.
Ohio law affords dissenters' rights to holders of Commercial Common
Stock in connection with the Merger. For additional information regarding
dissenters' rights see "PROPOSED MERGER -Dissenters' Rights".
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees
of Commercial who will not be specifically compensated for such services, may
solicit proxies from the shareholders of Commercial personally or by telephone
or telegram or other forms of communication. Brokerage houses, nominees,
fiduciaries, and other custodians will be requested to forward soliciting
materials to beneficial owners and will be reimbursed for the reasonable
expenses incurred in doing so.
It is not anticipated that anyone will be specially engaged to solicit
proxies or that special compensation will be paid for that purpose. Commercial
reserves the right to do so should it conclude that such efforts are needed.
Commercial will bear its own expenses in connection with the solicitation of
proxies for its Special Meeting. See "PROPOSED MERGER -- Expenses."
HOLDERS OF COMMERCIAL COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND
SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO COMMERCIAL IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
PROPOSED MERGER
This section of the Proxy Statement-Prospectus describes certain
aspects of the proposed Merger. The following description does not purport to be
complete and is qualified in its entirety by reference to the Agreement which is
attached as Appendix A to this Proxy Statement-Prospectus and is incorporated
herein by reference.
BACKGROUND AND REASONS FOR THE MERGER
Commercial. On December 22, 1997, the management of Commercial met to
discuss an indication of interest received from Killbuck with respect to a
possible merger transaction (the "Merger"). At that time the Board of Directors
authorized Commercial's management to pursue preliminary discussions with
Killbuck with a view to obtaining information regarding the Merger.
In May, 1998, the Board of Directors of Commercial engaged Young &
Associates, Inc., Kent, Ohio, ("Young & Associates") as their financial advisor
to provide an opinion to Commercial as to the fairness of the transaction to the
shareholders of Commercial from a financial standpoint, and also to conduct a
due diligence review of Killbuck. During the following weeks, Commercial and
Killbuck and their respective financial and legal advisors engaged
intermittently in negotiations concerning the terms of the Merger and each of
Killbuck and Commercial performed due diligence reviews of the other.
On April 13, 1998, Commercial's Board of Directors met to consider the
proposed terms of the Merger. This Meeting included a presentation by Young &
Associates, which included summaries of financial and valuation analyses, the
terms of the proposed acquisition, regulatory and accounting matters, and Young
& Associates' oral opinion relating to the fairness of the Merger to the
shareholders of Commercial from a financial perspective. Also at that meeting,
the Board approved Weldon Jordan and Associates to conduct the due diligence
review of Killbuck.
16
<PAGE> 18
On April 13, 1998, Commercial's Board of Directors also unanimously
approved the Merger based upon the following factors: (1) Young & Associates'
opinion that the terms of the Merger are fair to the shareholders of Commercial
from a financial perspective; (2) the overall financial terms of the Merger; (3)
Killbuck's representations with respect to the operation of Commercial after the
Merger; (4) the short-term and long-term prospects of Commercial; (5) current
long-term industry developments and trends; (6) competitive factors and (7)
considerations concerning employees of Commercial. At the conclusion of this
meeting, the Board of Directors of Commercial authorized Commercial's management
to continue to negotiate the terms of a definitive agreement with Killbuck.
Killbuck. The Board of Directors of Killbuck has concluded that the
Merger would be in the best interests of Killbuck and its shareholders. Numerous
factors were considered by the Board of Directors of Killbuck in approving and
recommending the terms of the Merger. These factors included information
concerning the financial condition, results of operations, and prospects of
Killbuck and Commercial; the capital adequacy of the resulting entity; the
historical and current market prices of each company's stock and of certain
other bank holding companies whose securities are publicly traded; the
relationship of the consideration to be paid in the Merger to such market prices
and to the book value and earnings per share of Commercial and the financial
terms of certain other recent business combinations in the banking industry.
The Board of Directors of Killbuck believes that combining with
Commercial which has established banking operations in Danville, Ohio is a
natural and desirable extension of Killbuck's market area. The Board of
Directors of Killbuck also believes that the consolidation of resources by
reason of the Merger will enable the resulting organization to provide a wider
and improved array of financial services to customers and to achieve added
flexibility in dealing with the changing competitive environment in the
financial services industry.
RECOMMENDATION OF THE COMMERCIAL BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF COMMERCIAL UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF COMMERCIAL VOTE FOR APPROVAL OF THE AGREEMENT.
OPINION OF COMMERCIAL'S FINANCIAL ADVISOR
Commercial retained Young & Associates, Inc., a financial institution
consulting firm of Kent, Ohio, to issue a fairness opinion in connection with
the Merger. Young & Associates issued its written opinion to the Board of
Directors on May 6, 1998, stating that the terms of the Merger Agreement were
fair and equitable to Commercial and its shareholders from a financial point of
view. Young & Associates updated its opinion to September 18, 1998 and
reaffirmed that the terms of the Merger Agreement were fair and equitable to
Commercial and its shareholders from a financial point of view. A copy of the
opinion of Young & Associates is set forth as Appendix B to this Joint Proxy
Statement/ Prospectus and should be read in its entirety.
Young & Associates, Inc. regularly evaluates financial institutions and
their securities for a wide range of purposes, including, but not limited to,
mergers and acquisitions. Commercial selected Young & Associates to issue a
fairness opinion on the basis of its experience, reputation, and qualifications.
Young & Associates advised Commercial and its legal advisors during the
initial negotiations between Commercial and Killbuck. The terms of the
Agreement, including the exchange ratio, were negotiated by the parties and
their legal representatives at arms-length.
Young & Associates analyzed various public and non-public sources of
information in developing our opinion, included but not limited to, (i)
financial data of Commercial from December 31, 1993 through March 31, 1998 from
published annual reports, internal bank reports, and interviews with bank
management; (ii) financial data regarding Killbuck from publicly available
regulatory reports; (iii) comparative financial data of peers for each
institution from public sources (iv) published reports from various sources
regarding transactions similar in nature to that proposed in the Merger; and (v)
the Merger Agreement itself.
Young & Associates performed several analyses which are common within
the banking industry and made
17
<PAGE> 19
certain assumptions, which it believes to be reasonable, about future
performance. As with any projection of future outcomes, actual performance may
vary. The focus of the analysis was on the value of Commercial as an independent
entity, and whether the Merger fairly compensated the shareholders of Commercial
for that value; whether the price/book ratio to Commercial given recent share
prices of Killbuck was relative to similar and recent merger transactions; and
how the earnings performance of Killbuck compared with banks sharing similar
characteristics.
Financial Analysis of Commercial and Forecast.
Young & Associates analyzed the past and present earnings performance
of Commercial, compared it with peers, and projected earnings ten years into the
future. Various assumptions were developed through interviews with management
and are believed to be reasonable and attainable.
The earnings of Commercial and Savings Bank measured by return on
average assets ("ROA") have tended to trail peer banks from December 31, 1993
through December 31, 1997. As of December 31, 1997, the last full year for which
comparative data was available at the time of this analysis, Commercial's ROA
was .6 percent compared with 1.1 for all insured banks having assets between $10
million and $25 million with one banking office in a non-metropolitan area. A
comparison of Commercial versus peer banks for 1995 and 1996 reflects ROA of .6
and .6 respectively compared with peer banks at 1.1 and 1.1 for those same
years. The return on average equity ("ROE") for Commercial also trailed peer
banks during those same periods, reflecting 6.9 percent as of December 31, 1997
versus average peers ratios of 10.0 percent. Commercial's ROE for 1995 and 1996
was 7.1 percent and 7.5 percent versus peer bank ratios of 10.1 percent and 10.0
percent for those same years.
Commercial's earnings performance has been affected positively by
acceptable control of loan losses and better than average control of operating
expenses. Net interest income and noninterest income, however, have both
consistently trailed peer banks. As of December 31, 1997, Commercial's provision
for loan losses was .06 percent of average assets, slightly below the peer level
of .08 percent. While net loans charged off as a percent of average total loans
in that year was .47 percent and exceeded peer banks, which reflected .12
percent, Commercial has had a consistent history of lower than average net
charge offs and loan loss provisions. The control of operating expenses is
supported by noninterest expenses as a percent of average assets of 2.9 percent
compared with peer banks at 3.1 percent. Once again this pattern has been
consistently maintained by Commercial.
The lower than average net interest income is a result primarily of two
factors. Interest expense as a percent of average assets at Commercial as of
December 31, 1997 is 3.7 percent compared with peer banks at 3.4 percent.
Interest income as a percent of average assets in that same year was 7.1 percent
at Commercial and 7.7 percent at peer banks. The latter is a result of the loan
mix at Commercial which is heavily weighted toward one to four family real
estate mortgage loans; 82.1 percent of all loans made by Commercial are of this
type compared with 40.6 percent at the average peer bank. This conservatism has
helped in the control of loan losses, but has kept yields on assets at levels
below peers.
Young & Associates forecasted earnings of Commercial and Savings Bank
ten years into the future based on certain assumptions which it believes to be
reasonable. Since the performance of Commercial over the past five years has
been consistent in most of the key ratios, Young & Associates assumed that the
ratio relationships, including the rate of growth would continue to show this
stability. Assets were expected to continue to grow modestly at the 2.8 percent
level and all measures of profitability components were continued at 1997 levels
with only minor adjustments. Based on these assumptions Young & Associates
believes that Commercial, as an independent financial institution, would reach
total assets of approximately $35 million in the tenth year of the forecast and
continue to achieve ROA of .6 percent and ROE at 7.9 percent.
The ten year forecast of earnings along with compound interest earnings
to shareholders from dividends paid was discounted to a present value to develop
a probable trading range of the shares of Commercial as an independent entity.
Based on that present value computation, and considering average price/earnings
ratios of Midwest community banks and average price/book multiples, Young &
Associates believes the shares of Commercial would be valued at from $50 to $60
per share in casual stock trades.
18
<PAGE> 20
Financial Analysis of Killbuck and Forecast.
Through December 31, 1997, Killbuck achieved an ROA of 1.6 percent,
placing it in the top 25 percent of the 798 banks in the Uniform Bank
Performance Report with assets between $100 million and $300 million with three
or more banking offices located in non-metropolitan areas. The ROE of Killbuck
was 14.3 percent, somewhat above that of peers at 13.5 percent. The latter
comparison should be understood in light of Killbuck's higher than peer
equity/total assets ratio of 10.9 percent versus 9.4 percent for peers. The
strong capital position would cause ROE to be somewhat lower. The earnings of
Killbuck, however, have been sufficiently strong to maintain higher capital and
still produce higher ROE. Another measure of capital adequacy is risk-based
capital to risk-weighted assets, which simply requires greater levels of capital
for greater levels of risk. Killbuck's risk-based capital to risk-weighted
assets ratio was 19.2 percent as of December 31, 1997, above the 13.8 percent
for peer banks.
Killbuck's earnings are characterized by somewhat lower net interest
income as a percent of average assets, significantly lower noninterest expense,
better than average control of loan losses, and lower noninterest income. Net
interest income through December 31, 1997 was 4.5 percent of average assets
compared with 4.7 percent for peer banks. Better than average control of
operating expenses is evidenced by noninterest income to average assets of 2.1
versus 2.9 percent for peers. Noninterest income to average assets trails peers
at .3 percent of average assets compared with peer banks at .7 percent.
Killbuck's control of loan losses is another source of strength for the
bank. While the bank has provided for future losses through its loan loss
provision at levels equal to or only slightly less than peer group banks as a
percent of average assets, it has consistently charged-off fewer total dollars
of loans as a percent of total loans. This is indicative of both control of
lending and collection functions, and conservative accounting for future
potential losses.
Young & Associates forecasted earnings of Killbuck ten years into the
future using certain assumptions which it believes to be reasonable. Two sources
aided in the development of the assumptions. The first was the October 31, 1997
stock valuation. The second was the strategic plan of Killbuck. The assumptions
considered that Killbuck would continue to make improvements in its control of
operating expenses and that the bank would also make modest improvement in its
net interest income. The growth rate of assets was assumed to be 8.0 percent in
all years, slightly below the 8.3 percent realized in 1997. Based on these
assumptions Young & Associates believes that Killbuck, as an independent
financial institution, before any consideration is given to the proposed merger,
would reach total assets of approximately $440 million in the tenth year of the
forecast and steadily improve ROA to 1.9 percent and maintain ROE near 14.0
percent.
The ten year forecast of earnings along with compound interest earnings
to shareholders from dividends paid was discounted to a present value to develop
a probable trading range of the shares of Killbuck as an independent entity.
Based on that present value computation, and considering average price/earnings
ratios of Midwest community banks and average price/book multiples, Young &
Associates believes the shares of Killbuck would be valued at from $350 to $400
per share in casual stock trades. The latest significant sale of Killbuck shares
as of this writing occurred at an equivalent pre-split price of $359 per share,
or approximately 15.8 times trailing twelve month earnings. Prior to that trade,
a significant number of shares changed hands at $400 per share.
Terms of Agreement - Exchange Ratio.
The Agreement provides that the 20,200 shares of Commercial will be
exchanged for 8,720 shares of Killbuck, or .4317 shares of Killbuck for each
share of Commercial. Based on this rate of exchange, shareholders of Commercial
would own 6.18 percent and the existing shareholders of Killbuck would own 93.82
percent, respectively, of the merged institution. Killbuck intends to execute a
stock split prior to the merger. This is provided for in the Agreement and will
not have any affect on the ultimate percentage of ownership on the respective
shareholder groups. As of the date of this writing, the exchange is estimated to
be worth approximately 2.11 to 2.35 times book value to the shareholders of
Commercial, based on the most recent trade of Killbuck at either $359 or $400
per share respectively on a pre-split basis. The parties elected not to adjust
the exchange ratio
19
<PAGE> 21
for any price fluctuations of Killbuck.
Value of Exchange to Shareholders of Commercial and Comparison.
Young & Associates constructed a computer model which merged the two
banks on a pro forma basis, which combined the two banks over the ten year
period using the assumptions detailed above. Based on the exchange ratio in the
Agreement, Commercial would contribute 2.7 percent of the combined income and
Killbuck would contribute 97.3 by year end 1998. Of the combined book value at
the time of merger, Commercial would contribute 5.7 percent and Killbuck would
contribute 94.3 percent. Shareholders of Commercial would own approximately 6.2
percent of the merged institution and shareholders of Killbuck would own 93.8
percent.
At a price of $359 per share on a pre-split basis, the shares of
Killbuck are trading at approximately 15.8 times twelve month trailing earnings.
An average PE of 23 Midwest community banks, published by The American Banker on
March 30, 1998, excluding all with ratios greater than 30 times earnings, was
19.8. The asset size of Killbuck is within the range of the banks in the sample.
The relative earning's strength of Killbuck, particularly its ability to grow
total earnings, suggest to Young & Associates that the current price is
certainly not excessive.
In the October 3, 1997 American Banker an article, "Time to Sell?..."
referring to a study by Sheshunoff Information Services, Inc. reported that for
the third quarter of 1997, the average price/book for merger/acquisitions for
banks under three billion dollars in assets was 202 percent of book value.
Considering all of the above factors, Young & Associates believes that the value
of the exchange to Commercial shareholders, therefor, compares favorably with
those transactions.
It is also important to note that, at the proposed exchange rate and
the shares of Killbuck trading at $359 per share pre-split, the shareholders of
Commercial are receiving approximately 33 times the twelve month trailing
earnings of Commercial through March 31, 1998.
Young & Associates believes the shareholders of Commercial will benefit
in the future through the proven ability of Killbuck's management to generate
earnings growth and exceptional profit performance. The size of the merged
institution, in excess of $200 million in total assets, is considered by many
banking analysts to be within the optimum range for operating efficiency. This
larger size will also allow the current Danville, Ohio office to offer a wider
variety of loans to its community, both increasing loan yields and spreading the
risk of those loans over a wider asset base.
Other Issues.
Young & Associates examined the Agreement for other issues which might
affect the shareholders of Commercial from a financial point of view and found
no issues which it felt worked to the disadvantage of the shareholders of
Commercial.
The analysis by Young & Associates was performed independently and
without limitations imposed by any of the parties involved in the Merger. In
conducting the analysis, information from publicly available financial data
resources, financial data from internal bank records of Commercial, and
representations of the parties in the Merger Agreement and/or the Joint Proxy
Statement/Prospectus. That information was assumed to be reliable and no attempt
was made to verify the information independently. It was further assumed that
the Merger will be completed as planned and that no other conditions will be
imposed which might work to the detriment of the shareholders of Commercial.
For Young & Associates' services as financial advisor in the proposed
transaction, Commercial will pay the firm a fee of $69,750, plus reasonable
out-of pocket expenses, which includes $10,000 for the issuance of this fairness
opinion, and indemnify Young & Associates against certain liabilities, including
liabilities under the securities laws.
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TERMS OF THE MERGER
At the Effective Time (as defined below), Commercial will merge with
Killbuck with the result that the former business of Commercial will be operated
by Killbuck Bank. At the Effective Time, the directors of Killbuck Bank serving
in such capacity immediately prior to the Effective Time shall continue to be
the directors of the resulting banking corporation; namely Killbuck Bank.
At the Effective Time, all of the outstanding shares of Commercial
Common Stock will be converted into shares of Killbuck Common Stock in
accordance with the terms of the Agreement and the Exchange Ratio as defined by
the Agreement. The Exchange Ratio provides that each outstanding share of
Commercial Common Stock shall be exchanged for and converted into the right to
receive 2.1585 shares of Killbuck Common Stock. In the transaction, Killbuck
expects to issue 43,602 shares of Killbuck Common Stock in the Merger.
No fractional shares of Killbuck Common Stock will be issued in the
Merger. Rather, each holder of Commercial Common Stock who otherwise would have
been entitled to a fraction of a share of Killbuck Common Stock shall receive in
lieu thereof cash, without interest, based on a value of $350 per share of
Killbuck Common Stock.
EFFECTIVE TIME OF THE MERGER
Subject to satisfaction or waiver of all other conditions contained in
the Agreement, the Merger, will become effective at a date to be specified by
Killbuck which shall not be later than thirty (30) days following the month in
which the last of the following occurs: (i) approval of the Agreement by the
Federal Reserve Board, (ii) approval of the Merger by the shareholders of
Commercial, and (iii) all other regulatory approvals have been obtained and the
regulatory waiting periods have expired. Upon filing an executed Certificate of
Merger with the Secretary of State in Ohio, the Merger will become effective at
such time as is specified in the Articles of Merger (the "Effective Time").
Subject to the conditions contained in the Agreement, the Effective Time is
currently expected to occur during the third quarter of 1998.
SURRENDER OF COMMERCIAL CERTIFICATES
As soon as practicable after the Effective Time of the Merger Killbuck
is required by the Agreement to mail to each holder of record of Commercial
Common Stock a letter of transmittal and instructions for use in surrendering
such holder's Commercial Common Stock certificates.
COMMERCIAL SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES
UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS FROM KILLBUCK.
Upon surrender to Killbuck of one or more certificates of Commercial
Common Stock together with a properly completed letter of transmittal, Killbuck
will issue and deliver to the holder of record of Commercial Common Stock, a
certificate representing the number of shares of Killbuck Common Stock to which
the holder is entitled and, where applicable, a check for the amount
representing any fractional share interest.
All Killbuck Common Stock issued pursuant to the Agreement will be
issued as of the Effective Time. No dividends or other distributions declared
with respect to Killbuck Common Stock payable to former holders of Commercial
Common Stock, pursuant to the Merger and payable to the holders thereof after
the Effective Time shall be paid until such holder surrenders such holder's
Commercial Common Stock certificates. Subject to the effect of applicable laws,
after the surrender and exchange of such certificates, the holder of
certificates for shares of Killbuck Common Stock into which the shares of
Commercial Common Stock shall have been converted shall be entitled to receive
any dividends or other distributions, but without any interest, which previously
became payable by Killbuck with respect to the shares of Commercial Common Stock
represented by such certificate or certificates.
In the case of any lost, stolen or destroyed Commercial Common Stock
certificate, Killbuck will issue a new
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certificate representing shares of Killbuck Common Stock and a check for the
cash into which a fractional share of Commercial Common Stock shall have been
converted only if Killbuck receives: (i) evidence to the reasonable satisfaction
of Killbuck that such certificate has been lost, wrongfully taken or destroyed,
(ii) such indemnity agreement as reasonably may be requested by Killbuck to save
it harmless, and (iii) evidence satisfactory to it of ownership of Commercial
Common Stock for which the certificate has been lost, wrongfully taken or
destroyed.
After the Effective Time, there will be no further registration of
transfers on the stock transfer books of Killbuck of shares of Commercial Common
Stock. Shares of Commercial Common Stock presented to Killbuck for transfer
after the Effective Time will be canceled and exchanged for certificates
representing shares of Killbuck Common Stock and cash in lieu of any fractional
share interest as provided in the Agreement.
CONDITIONS TO THE MERGER
The Merger will occur only if the Agreement is adopted by the requisite
vote of the shareholders of Commercial and the acquisition of a controlling
interest in Commercial is approved by the shareholders of Commercial as required
by the Acquisition Act. Consummation of the Merger is subject to the
satisfaction of certain other conditions, unless waived to the extent waiver is
permitted by applicable law. Such conditions include, but are not limited to,
the following: (i) the receipt of all necessary regulatory approvals, including
the approval of the Federal Reserve Board; (ii) the effectiveness of the
Registration Statement registering the shares of Killbuck to be issued in the
Merger, and the absence of a stop order suspending such effectiveness or
proceedings seeking a stop order; (iii) the absence of a temporary restraining
order, injunction or other order of any court of competent jurisdiction or other
legal restraint or prohibition preventing the consummation of the Merger; (iv)
the continued accuracy of representations and warranties by Commercial and
Killbuck regarding, among other things, the organization of the parties,
financial statements, capitalization, pending and threatened litigation,
enforceability of the Agreement and compliance with law and tax matters; (v) the
performance by Commercial and Killbuck in all material respects of each of the
obligations required to be performed by them under the Agreement; (vi) the
receipt by Commercial and Killbuck and the continuing effectiveness of opinion
of counsel as to certain federal income tax consequences of the respective
Merger; (vii) the absence of any material adverse change since December 31,
1997, in the financial condition, results of operation or business of Commercial
and Killbuck in each case, together with their respective subsidiaries taken as
a whole; (viii) the absence of any material action, suit or proceeding commenced
against Commercial and Killbuck with respect to the Merger seeking to restrain,
enjoin, prevent, change or rescind the transaction contemplated by the
Agreements or questioning the validity or legality of any such transaction; (ix)
the receipt by Commercial and Killbuck of opinions of counsel as provided in the
Agreement; (x) the receipt by Commercial of an opinion, from its financial
advisor, dated the date of the mailing of the Proxy Statement-Prospectus, that
the Merger is fair to the holders of Commercial Common Stock from a financial
point of view; and (xi) that not more than ten percent of the voting power of
the issued and outstanding shares of Commercial Common Stock shall have taken
steps, at the time the Merger shall become effective, to perfect their rights as
dissenting shareholders under Ohio law.
In addition, unless waived, each party's obligation to consummate the
Merger is subject to performance by the other party of its obligations under the
respective Agreement and the receipt of certain certificates from the other
party.
REGULATORY APPROVAL
The Merger is subject to prior approval by the Federal Reserve Board
under the Federal Bank Merger Act which requires that the Federal Reserve Board
take into consideration the financial and managerial resources and future
prospects of the respective institutions and the convenience and needs of the
communities to be served. The Federal Reserve Board may not approve the Merger
if it would result in a monopoly or be in furtherance of any combination or
conspiracy to monopolize or to attempt to monopolize the business of banking in
any part of the United States, or if its effect in any section of the country
may be substantially to lessen competition or to tend to create a monopoly, or
if it would in any other manner be a restraint of trade, unless the Federal
Reserve Board finds that the anti-competitive effects of the Merger are clearly
outweighed in the public interest by the probable effect of the transaction in
meeting the convenience and needs of the communities to be served. The Federal
Reserve Board has the authority to deny an application if it concludes that the
combined organization would have an inadequate capital position.
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The Merger may not be consummated until the 30th day following the date
of Federal Reserve Board approval, during which time the United States
Department of Justice may challenge the Merger on antitrust grounds. The
commencement of an antitrust action would stay the effectiveness of the Federal
Reserve Board's approval unless a court specifically orders otherwise. The BHC
Act and the Federal Bank Merger Act provide for the publication of notice and
public comment on the application and authorizes the regulatory agency to permit
interested parties to intervene in the proceedings.
Killbuck filed an application with the Federal Reserve Bank of
Cleveland (the "Federal Reserve Bank") seeking approval of the Merger, which was
approved on August 27, 1998.
The approval of the Federal Reserve Board is not to be interpreted as
the opinion of such regulatory authority that the Merger is fair to the
shareholders of Commercial from a financial point of view or that such
regulatory authority has considered the adequacy of the terms of the Merger. An
approval by such regulatory authority in no way constitutes an endorsement or a
recommendation of the Merger by the Federal Reserve Board.
There can be no assurance that the Department of Justice will not
challenge the Merger or if such a challenge is made, as to the result thereof.
In addition to the approval of the Federal Reserve Board, Killbuck Bank
and Commercial filed an application with the Ohio Division of Financial
Institutions ("ODFI") seeking approval of the Merger.
Other than the regulatory approvals described herein and required
compliance with certain federal and state securities laws by Killbuck in
connection with its issuance of shares of Killbuck Common Stock in connection
with the Merger with which Killbuck will comply, Killbuck and Commercial are not
aware of any other governmental approvals or actions that are required for
consummation of the Merger except as described above. Should any other approval
or action be required, it is presently contemplated that such approval or action
would be sought. There can be no assurance that any such approval or action, if
needed, could be obtained and, if such approvals or actions are obtained, there
can be no assurance as to the timing thereof.
CONDUCT OF BUSINESS PENDING THE MERGER
Under the Agreement Commercial and Killbuck are generally obligated to
operate their respective businesses only in the usual and ordinary course
consistent with past practices; use reasonable efforts to keep in force current
insurance coverage; refrain from any change in their methods of accounting or
certain other policies and refrain from taking any action that would adversely
affect or delay regulatory approval of the Agreement; give the other party and
its representatives access to information concerning its affairs as may be
reasonably requested; and with respect to Commercial refrain from paying cash
dividends except as permitted under the Agreement, see "Dividends."
DIVIDENDS
Under the Agreement, Commercial may not pay cash dividends prior to the
Effective Time of the Merger except at times and in amounts consistent with its
prior procedure, not to exceed the rate per share paid in the prior calendar
year.
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TERMINATION, AMENDMENT AND WAIVER
The Agreement may be terminated at any time prior to the Effective Time
whether before or after approval of the matters presented by the shareholders of
Commercial: (i) by mutual consent of the Boards of Directors of Commercial and
Killbuck; (ii) by either party to the Merger if all required regulatory
approvals are not received; (iii) by the Board of Directors of either party if
there has been a willful breach of any representation, warranty, covenant or
agreement by the other party which is not cured after 15 days' written notice;
(iv) by either party if the required vote of Commercial shareholders is not
received; or (v) by the Board of Directors of either party if the Merger is not
consummated by February 1, 1999.
The Agreement may not be amended except in writing signed on behalf of
both parties, whether before or after approval of the matters presented in
connection with the Merger by the shareholders of Commercial. At any time prior
to the Effective Time, either party to the Agreement may, to the extent legally
allowed, extend the time for performance of any of the obligations of the other
party, waive any inaccuracies in representations and warranties of the other and
waive compliance with any of the agreements or conditions of the Agreement.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
As a result of the Merger, the former banking business of Commercial
will be combined with that of Killbuck Bank. Killbuck expects to continue to
operate Commercial's present location. Immediately after the Effective Time of
Merger, the Board of Directors of the resulting banking corporation shall be
comprised of all those persons serving as an outside director of Killbuck Bank
immediately prior to the Effective Time of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the Record Date, executive officers and directors of Commercial
beneficially own no shares of Killbuck Common Stock and executive officers and
directors of Killbuck beneficially own no shares of Commercial Common Stock.
EFFECT ON EMPLOYEE BENEFIT PLANS
Commercial. Employees of Commercial will be eligible to participate in
the employee benefit plans of Killbuck immediately upon the consummation of the
Merger, subject to the requirements of such plans.
Killbuck. Employee benefits of Killbuck will not be changed as a result
of the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the anticipated federal
income tax consequences of the Merger to holders of Killbuck Common Stock and
Commercial Common Stock and to Killbuck and Commercial. The summary is not a
complete description of the federal income tax consequences of the Merger. Each
shareholder's individual circumstances may affect the tax consequences of the
Merger to such shareholder.
Neither Killbuck nor Commercial has requested or will receive an
advance ruling from the Internal Revenue Service (the "Service") as to the tax
consequences of the Merger. With respect to the Merger, Killbuck and Commercial
have received an opinion from special counsel to Killbuck, Werner & Blank Co.,
L.P.A. This tax opinion is based upon the current law and the current judicial
and administrative interpretations thereof. This opinion will not be binding on
the Service or any court. Consequently, there can be no assurance that the tax
consequences set forth below will continue as described herein, nor can any
assurance be given that the issues discussed below will not be challenged by the
Service, or, if so challenged, will be decided favorably to the parties to the
Merger or their shareholders.
Subject to the foregoing, the opinions of Werner & Blank Co., L.P.A.,
are substantially as follows:
(i) The merger of Commercial with and into Killbuck Bank is a
statutory merger under applicable
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law and the Merger will qualify as a "reorganization" within the
meaning of Sections 368(a)(1)(A) and (a)(2)(D) of the Internal Revenue
Code of 1986, as amended (the "Code");
(ii) No gain or loss will be recognized by Commercial or
Killbuck upon merger of Commercial with and into Killbuck;
(iii) No gain or loss will be recognized by the Commercial
shareholders who exchange, pursuant to the Merger, their shares of
Commercial Common Stock solely for shares of Killbuck Common Stock;
(iv) The federal income tax basis of the Killbuck Common Stock
to be received by the Commercial shareholders in Merger, will be the
same as the federal income tax basis of such Commercial Common Stock
surrendered therefor;
(v) The holding period of the Killbuck Common Stock to be
received by the Commercial shareholders in the Merger will include the
period during which the Commercial Common Stock surrendered was held as
a capital asset on the Effective Date of the Merger;
(vi) The payment of cash in lieu of fractional share interests
of Killbuck Common Stock will be treated as if the fractional shares
were distributed as part of the Merger and then were redeemed by
Killbuck. These cash payments will be treated as having been received
as distributions in full payment in exchange for the stock redeemed as
provided in Section 302(a) of the Code; and
(vii) Where a Commercial shareholder dissents to the Merger,
and such shareholder receives solely cash in exchange for his or her
Commercial Common Stock, such cash will be treated as having been
received by such shareholder as a distribution in redemption of his or
her shares subject to the provisions and limitations of Section 302 of
the Code.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE HAS NOT BEEN VERIFIED
WITH THE INTERNAL REVENUE SERVICE AND IS BASED UPON THE FEDERAL INTERNAL REVENUE
CODE AS IN EFFECT ON THE DATE OF THIS PROXY STATEMENT-PROSPECTUS WITHOUT
CONSIDERATION OF ANY STATE LAWS OR THE PARTICULAR FACTS OR CIRCUMSTANCES OF ANY
COMMERCIAL SHAREHOLDER.
BECAUSE OF THE COMPLEXITY OF THE FEDERAL, STATE AND LOCAL TAX LAWS, IT
IS RECOMMENDED THAT SHAREHOLDERS OF COMMERCIAL CONSULT WITH THEIR OWN TAX
ADVISORS REGARDING THE TAX CONSEQUENCES RESULTING FROM THE MERGER.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase transaction under
applicable accounting principles.
EXPENSES
The Agreement provides that whether or not the Merger is consummated,
all costs and expenses incurred in connection with the Agreement and the
transactions contemplated therein shall be paid by the party incurring such
expense.
RESALE OF KILLBUCK COMMON STOCK
The shares of Killbuck Common Stock to be issued in the Merger to
holders of Commercial Common Stock have been registered under the Securities Act
and may be freely traded by holders of Commercial Common Stock who, at the
Effective Time, are not "affiliates" of Commercial (and who are not affiliates
of Killbuck at the time of the proposed resale). Directors, executive officers,
and 10% shareholders of Commercial are generally deemed to be affiliates under
the Securities Act. Pursuant to the Agreement, Killbuck must have received from
each affiliate of
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Commercial a written undertaking to the effect that he or she will not sell or
dispose of Killbuck Common Stock acquired in the Merger other than in accordance
with the Securities Act, except under (i) a separate registration statement for
distribution (which Killbuck has not agreed to provide), or (ii) Rule 145
promulgated thereunder by the SEC, or (iii) some other exemption from
registration.
DISSENTERS' RIGHTS
Under the provisions of Ohio Revised Code, Sections 1115.19 and
1701.85, any shareholder of Commercial who does not vote in favor of the
Agreement is entitled to receive the fair cash value of his shares, upon
perfecting his right of appraisal. Not later than ten (10) days after the date
upon which the shareholders voted upon the Merger, any shareholder seeking to
perfect his appraisal right must make a written demand upon Commercial for the
fair cash value of those shares so held by him. A negative vote alone is not
sufficient to perfect rights as a dissenter. No notice of the results of the
meeting will be given to shareholders. If Commercial and the shareholder have
not come to an agreement within three (3) months of the shareholder's written
demand, the shareholder or Commercial may file a petition in court for a formal
judicial appraisal. Failure to follow the procedures enumerated in the Ohio
Revised Code, Section 1701.85, Qualifications of and Procedures for Dissenting
Shareholders, which is Exhibit C of this Proxy Statement (the Dissenters
Statute), will waive the shareholder's right of appraisal.
THE FOREGOING SUMMARY OF THE DISSENTERS' STATUTE DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO DISSENTERS' STATUTE
AND THE OTHER PROVISIONS OF THE OHIO LAW. THE FAILURE OF A SHAREHOLDER OF
COMMERCIAL TO FOLLOW THE PROCEDURES SET FORTH IN DISSENTERS' STATUTE WILL
TERMINATE SUCH SHAREHOLDER'S APPRAISAL RIGHTS. AS A CONSEQUENCE, EACH
SHAREHOLDER OF COMMERCIAL WHO DESIRES TO EXERCISE SUCH RIGHTS SHOULD REVIEW
DISSENTERS' STATUTE AND FOLLOW ITS PROVISIONS. THE COMPLETE TEXT OF THE RELEVANT
PROVISIONS OF DISSENTERS' STATUTE IS ANNEXED TO THIS PROXY STATEMENT AS APPENDIX
C.
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DESCRIPTION AND COMPARISON OF KILLBUCK COMMON STOCK
AND COMMERCIAL COMMON STOCK
GENERAL
Killbuck is an Ohio corporation governed by and subject to the Ohio
General Corporation Law ("OGCL"). Commercial is an Ohio banking corporation
organized under and governed by the laws of the State of Ohio. If the proposed
Merger is consummated, shareholders of Commercial who receive Killbuck Common
Stock will become shareholders of Killbuck and, as such, their rights as
shareholders will be governed by the OGCL and by Killbuck's Articles, Code of
Regulations and other corporate documents. The rights of holders of shares of
Commercial Common Stock differ in certain respects from the rights of holders of
Killbuck Common Stock. A summary of the material differences between the
respective rights of Commercial from that of Killbuck shareholders is set forth
below.
As of the date of this Proxy Statement/Prospectus, Killbuck was
authorized to issue 1,000,000 shares of no par value common stock ("Killbuck
Common Stock"), and had 661,900 shares of Killbuck Common Stock issued and
outstanding, and 338,100 shares available for future issuance. Pursuant to the
terms of the Merger Killbuck will issue an aggregate of 43,602 shares of
Killbuck Common Stock to shareholders of Commercial.
The authorized Common Stock of Commercial consists of 20,200 shares of
Common Stock, $10.00 par value per share all of which were issued and
outstanding as of the Record Date.
Killbuck Common Stock is not traded on any exchange. Killbuck Common
Stock is traded infrequently and sporadically.
Commercial Common Stock is not traded on any exchange nor in the
over-the-counter market. Management is aware of trades involving 1,680 shares of
Commercial Common Stock during the twelve months ended December 31, 1997.
While there are a substantial number of similarities between the
Killbuck Common Stock and the Commercial Common Stock, the rights of
shareholders of Commercial will be different after the Effective Date of the
Merger. Shareholders will be affected by differences in the Articles of
Incorporation and Code of Regulations of Killbuck and Commercial. Listed below
are the more important attributes of the Killbuck Common Stock and the
differences, if any, from the Commercial Common Stock.
DIVIDENDS
Holders of Killbuck Common Stock are entitled to dividends out of funds
legally available therefor, as governed by the OGCL, and if declared by the
Board of Directors. The amount and timing of dividends on Killbuck Common Stock
is subject to the earnings of its subsidiaries and the amounts available for
payment of dividends by such subsidiaries under banking laws and regulations.
Generally, dividends from Killbuck Bank is restricted to net profits of the
current year plus the preceding two years less dividends paid. Commercial is
subject to the same restrictions as to the amount and timing of its cash
dividends.
PREEMPTIVE RIGHTS
Pursuant to the Articles of Incorporation, shareholders of Killbuck do
not have the preemptive right to subscribe to additional shares of common stock
when issued by Killbuck. Shareholders of Commercial do have preemptive rights
pursuant to the provisions of the Articles of Incorporation of Commercial and
Ohio banking law. Preemptive rights permit a shareholder to purchase their pro
rata share of any offering, subject to certain exceptions and limitations as
provided by law.
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VOTING
On all matters to properly come before shareholders, each share of
stock of Killbuck and Commercial entitles the holder thereof to one vote,
neither gives cumulative voting rights, and for the effect of certain
"supermajority vote" requirements regarding business combinations contained in
the Articles of Incorporation of Killbuck (see "Cumulative Voting" and
"Antitakeover Provisions"). The affirmative vote of the holders of two-thirds of
the outstanding Killbuck Common Stock and Commercial Common Stock, respectively,
is required to amend the Articles of Incorporation of Killbuck and Commercial.
CUMULATIVE VOTING
Shareholders of Commercial do not have the right to vote cumulatively
in the election of Directors pursuant to the provisions of Ohio banking law.
Shareholders of Killbuck similarly do not have the right to vote cumulatively in
the election of directors pursuant to the provisions of Killbuck's Articles of
Incorporation. In cumulative voting, a shareholder may cumulate a number of
votes equal to the number of directors to be elected times the number of shares
held by the shareholder and cast all of such votes for one nominee for director,
or allocate such votes among the nominees as the shareholder sees fit.
Cumulative voting rights afford shareholders controlling a minority stock
position the opportunity to have representation on the Board of Directors.
LIQUIDATION
Holders of Killbuck and Commercial stock are entitled to a pro rata
distribution of the corporation's assets upon liquidation.
LIABILITY OF DIRECTORS; INDEMNIFICATION
Under their respective Articles of Incorporation and Code of
Regulations, Killbuck and Commercial may indemnify present or past directors,
officers, employees or agents.
ANTITAKEOVER PROVISIONS
Ohio Law applicable to Killbuck and Commercial
Both Commercial and Killbuck are Ohio-chartered corporations and are
"issuing public corporations" under the laws of Ohio, and subject to the
provisions of the Ohio Control Share Acquisition Statute (ORC Section 1701.831)
and the Merger Moratorium Act (ORC Section 1704). Pursuant to the Ohio Control
Share Acquisition Statute, the purchase of certain levels of voting power of a
company (one-fifth or more, one-third or more, or a majority) can be made only
with the prior authorization of at least a majority of the total voting power of
such company and a separate prior authorization of the holders of at least a
majority of the voting power held by shareholders other than the proposed
purchaser, officers of Killbuck and Directors of Killbuck who are also
employees. This law has the potential effect of deterring certain potential
acquisitions of Killbuck which might be beneficial to shareholders. The Merger
Moratorium Act, enacted in 1990, prohibits certain Ohio corporations from
engaging in specified types of transactions with an "interested shareholder" for
a period of three years after the shareholder becomes an "interested
shareholder" unless the shareholder receives the approval of the corporation's
board of directors prior to the acquisition of shares or the consummation of the
specified type of transaction. The anticipated effect of the Merger Moratorium
Act is to encourage a potential acquiror to negotiate with a target
corporation's board of directors prior to obtaining a 10 percent or greater
block of shares in the corporation.
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Killbuck's and Commercial's Articles of Incorporation
Killbuck's Articles of Incorporation contain provisions which can be
characterized as antitakeover in nature. These applicable provisions of
Killbuck's Articles of Incorporation are summarized below:
Business Combination Voting Provision
Killbuck has a provision in its Articles of Incorporation which
provides that in certain business combination transactions with a corporation
which owns or controls 10% or more of the Killbuck Common Stock and which are
not approved by the board of directors, a vote of the "independent shareholders"
is required in order to approve such a business combination. In such a case,
those shareholders not affiliated with the other corporation to the business
combination must approve the transaction by the affirmative vote of a majority
of share, excluding those owned or controlled by the "other corporation."
Commercial has no similar "supermajority" vote provision in its
Articles of Incorporation or its Code of Regulations.
Classified Board Provision
Killbuck currently has in operation, a classified election system for
electing their Board of Directors. Directors are elected to a designated class
and shall serve until the expiration of the term for which they are elected, and
until their successors have been duly elected and qualified. Killbuck has three
(3) classes and each director is elected to a three (3) year term such that
one-third of the Board is elected each year.
Commercial's Articles of Incorporation and Code of Regulations contain
a provision similar to that of Killbuck's "Classified Board Provision."
Commercial also has three (3) classes and each director is elected to a three
(3) year term such that one-third of the Board is elected each year.
Authorized Shares
The availability of authorized and unissued shares for future issuance
by Killbuck may be deemed to have an antitakeover effect. As of the date of the
Agreement, Killbuck had 1,000,000 authorized shares of which 661,900 were issued
and outstanding and 338,100 were available for future issuance. Killbuck will
issue 43,602 of such shares in the Merger assuming no dissenters in the
transaction. Authorized and unissued shares are available for issuance, and
thereby could be issued into "friendly hands" to dilute the ownership of an
individual or corporation that has acquired shares of Killbuck and intends to
conduct an acquisition of Killbuck that is deemed to be undesirable by the Board
of Directors of Killbuck.
Commercial does not have any authorized shares available for future
issuance.
These provisions are not the result of management's knowledge of any
effort to obtain control of Killbuck by any means. Killbuck's Articles of
Incorporation and Code of Regulations currently contain no other provisions that
were intended to be or could fairly be considered as antitakeover in nature or
effect. Further, the Board of Directors has no intention to amend the Articles
of Incorporation or Code of Regulations to add any additional antitakeover
provisions.
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INFORMATION ABOUT KILLBUCK
GENERAL
Killbuck Bancshares, Inc. (the "Killbuck") was incorporated under the
laws of the State of Ohio on November 29, 1991 at the direction of management of
the Killbuck Savings Bank Company (the "Bank,") for the purpose of becoming a
bank holding company by acquiring all of the outstanding shares of the Bank. In
November, 1992, the Killbuck became the sole shareholder of the Bank. The Bank
carries on business under the name "The Killbuck Savings Bank Company." The
principal office of the Killbuck is located at 165 N. Main Street, Killbuck,
Ohio. The Killbuck Savings Bank Company was established under the banking laws
of the State of Ohio in November in 1900.
The Bank is headquartered in Killbuck, Ohio, which is located in the
northeast portion of Ohio, in the County of Holmes. Holmes County has a
population of approximately 34,000.
The Bank provides customary retail and commercial banking services to
its customers, including checking and savings accounts, time deposits, NOW
accounts, safe deposit facilities, real estate mortgage loans and installment
loans.
The Bank also makes secured and unsecured commercial loans.
The Bank is insured by the Federal Deposit Insurance Corporation, and
is regulated by the Ohio Division of Banks and the Board of Governors of the
Federal Reserve System.
EMPLOYEES
As of September 30, 1998, the Bank had 65 full-time and 15 part-time
employees. The Bank provides a number of benefits for its full-time employees,
including health and life insurance, pension, workers' compensation, social
security, paid vacations, and numerous bank services.
Killbuck, through its affiliate, The Killbuck Savings Bank Company,
(the "Bank") conducts the business of a commercial banking organization. At June
30, 1998, Killbuck and its subsidiaries had consolidated total assets of
approximately $204 million, consolidated total deposits of approximately $168
million and consolidated total equity of approximately $23 million.
Killbuck, through its banking affiliate, offers a broad range of
banking services to the commercial, industrial and consumer market segments
which it serves. Services include commercial, real estate and personal loans,
checking, savings and time deposits and other customer services such as safe
deposit facilities. Killbuck does not have any foreign operations, assets or
investments.
The Bank is a state banking corporation. The Bank is regulated by the
Ohio Division of Financial Institutions ("ODFI") and its deposits are insured by
the Federal Deposit Insurance Corporation to the extent permitted by law and, as
a subsidiary of Killbuck, is regulated by the Federal Reserve Board.
COMPETITION
The commercial banking business in the market areas served by the Bank
is very competitive. Killbuck and the Bank are in competition with commercial
banks located in their own service areas. Some competitors of Killbuck and the
Bank are substantially larger than the Bank. In addition to local bank
competition, the Bank competes with larger commercial banks located in
metropolitan areas, savings banks, savings and loan associations, credit unions,
finance companies and other financial institutions for loans and deposits.
There are six financial institutions operating in Holmes County. As of
June 30, 1997 (the most recent date for which information is available) there
Commercial and Savings Bank, Millersburg had the largest market share with $189
million in total deposits as of such date, representing a market share of
45.18%. The Bank had the second largest market share with deposits of $164
million as of such date, representing a market share of 39.30%.
30
<PAGE> 32
Commercial and Savings Bank had total assets as of December 31, 1997, of $288
million compared to the Bank's total assets of $198 million as of such date.
CERTAIN REGULATORY CONSIDERATIONS
The following is a summary of certain statutes and regulations
affecting Killbuck and its subsidiaries. This summary is qualified in its
entirety by such statutes and regulations.
Killbuck
Killbuck is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, ("BHC Act") and as such is subject to
regulation by the Federal Reserve Board. A bank holding company is required to
file with the Federal Reserve Board quarterly reports and other information
regarding its business operations and those of its subsidiaries. A bank holding
company and its subsidiary banks are also subject to examination by the Federal
Reserve Board.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before acquiring substantially all the
assets of any bank or bank holding company or ownership or control of any voting
shares of any bank or bank holding company, if, after such acquisition, it would
own or control, directly or indirectly, more than five percent (5%) of the
voting shares of such bank or bank holding company.
In approving acquisitions by bank holding companies of companies
engaged in banking-related activities, the Federal Reserve Board considers
whether the performance of any such activity by a subsidiary of the holding
company reasonably can be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, which
outweigh possible adverse effects, such as over concentration of resources,
decrease of competition, conflicts of interest, or unsound banking practices.
Bank holding companies are restricted in, and subject to, limitations
regarding transactions with subsidiaries and other affiliates.
In addition, bank holding companies and their subsidiaries are
prohibited from engaging in certain "tie in" arrangements in connection with any
extensions of credit, leases, sales of property, or furnishing of services.
Killbuck Subsidiaries
Killbuck operates a single bank, namely, The Killbuck Savings Bank
Company. As an Ohio state chartered commercial bank the Bank is supervised and
regulated by the ODFI, and subject to laws and regulations applicable to Ohio
banks.
Capital
The Federal Reserve Board, ODFI, and FDIC require banks and holding
companies to maintain minimum capital ratios.
The Federal Reserve Board adopted final "risk-adjusted" capital
guidelines for bank holding companies. The guidelines became fully implemented
as of December 31, 1992. The ODFI and FDIC have adopted substantially similar
risk-based capital guidelines. These ratios involve a mathematical process of
assigning various risk weights to different classes of assets, then evaluating
the sum of the risk-weighted balance sheet structure against Killbuck's capital
base. The rules set the minimum guidelines for the ratio of capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) at 8%. At least half of the total capital is to be
composed of common equity, retained earnings, and a limited amount of perpetual
preferred stock less certain goodwill items ("Tier 1 Capital"). The remainder
may consist of a limited amount of subordinated debt, other preferred stock, or
a limited amount of loan loss reserves. As of June 30, 1998, Killbuck's ratio of
capital to risk-weighted assets was 19.22% and the ratio of Tier 1 Capital to
total assets was 11.48%.
31
<PAGE> 33
In addition, the federal banking regulatory agencies have adopted
leverage capital guidelines for banks and bank holding companies. Under these
guidelines, banks and bank holding companies must maintain a minimum ratio of
three percent (3%) Tier 1 Capital (as defined for purposes of the year-end 1992
risk-based capital guidelines) to total assets. The Federal Reserve Board has
indicated, however, that banking organizations that are experiencing or
anticipating significant growth, are expected to maintain capital ratios well in
excess of the minimum levels.
Regulatory authorities may increase such minimum requirements for all
banks and bank holding companies or for specified banks or bank holding
companies. Increases in the minimum required ratios could adversely affect
Killbuck and the Banks, including their ability to pay dividends.
Additional Regulation
The Bank is also subject to federal regulation as to such matters as
required reserves, limitation as to the nature and amount of its loans and
investments, regulatory approval of any merger or consolidation, issuance or
retirement of their own securities, limitations upon the payment of dividends
and other aspects of banking operations. In addition, the activities and
operations of the Bank are subject to a number of additional detailed, complex
and sometimes overlapping laws and regulations. These include state usury and
consumer credit laws, state laws relating to fiduciaries, the Federal
Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act
and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the
Community Reinvestment Act, anti-redlining legislation and antitrust laws.
Dividend Regulation
The ability of Killbuck to obtain funds for the payment of dividends
and for other cash requirements is largely dependent on the amount of dividends
which may be declared by the Bank. Generally, the Bank may not declare a
dividend, without the approval of the ODFI, if the total of dividends declared
in a calendar year exceeds the total of its net profits for that year combined
with its retained profits of the preceding two years. Other than accounts
payable incurred in the ordinary course of business Killbuck has no debt or
other liabilities.
Government Policies and Legislation
The policies of regulatory authorities, including the ODFI, Federal
Reserve Board, FDIC and the Depository Institutions Deregulation Committee, have
had a significant effect on the operating results of commercial banks in the
past and are expected to do so in the future. An important function of the
Federal Reserve System is to regulate aggregate national credit and money supply
through such means as open market dealings in securities, establishment of the
discount rate on member bank borrowings, and changes in reserve requirements
against member bank deposits. Policies of these agencies may be influenced by
many factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and fiscal policies of the United
States government.
The United States Congress has periodically considered and adopted
legislation which has resulted in further deregulation of both banks and other
financial institutions, including mutual funds, securities brokerage firms and
investment banking firms. No assurance can be given as to whether any additional
legislation will be adopted or as to the effect such legislation would have on
the business of Killbuck or the Bank.
In addition to the relaxation and elimination of certain geographic
restrictions on banks and bank holding companies, a number of regulatory and
legislative initiatives have the potential for eliminating many of the product
line barriers presently separating the services offered by commercial banks from
those offered by nonbanking institutions. For example, Congress recently has
considered legislation which would expand the scope of permissible business
activities for bank holding companies (and in some cases banks) to include
securities underwriting, insurance services and various real estate related
activities.
32
<PAGE> 34
Deposit Insurance
The Federal Deposit Insurance Company Improvement Act of 1991
("FDICIA") was enacted in 1991. Among other things, FDICIA, requires federal
bank regulatory authorities to take "prompt corrective action" with respect to
banks that do not meet minimum capital requirements. For these purposes, FDICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
As an FDIC-insured institution, the Bank is required to pay deposit
insurance premium assessments to the FDIC. The amount each institution pays for
FDIC deposit insurance coverage is determined in accordance with a risk-based
assessment system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Institutions classified as
well-capitalized (as defined by the FDIC) and considered healthy pay the lowest
premium while institutions that are less than adequately capitalized (as defined
by the FDIC) and considered substantial supervisory concerns pay the highest
premium. Beginning in 1996, such deposit insurance runs from a cost of zero
percent to 0.27% of deposits. Because the Bank is "well-capitalized," it
currently pays the minimum deposit insurance premiums.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management of Killbuck is not aware of any activity or
condition that could result in termination of the deposit insurance of the Bank.
Recent Legislation
On September 29, 1994, the Reigle/Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was signed into law. The
Interstate Act effectively permits nationwide banking. The Interstate Act
provides that one year after enactment, adequately capitalized and adequately
managed bank holding companies may acquire banks in any state, even in those
jurisdictions that currently bar acquisitions by out-of-state institutions,
subject to deposit concentration limits. The deposit concentration limits
provide that regulatory approval by the Federal Reserve Board may not be granted
for a proposed interstate acquisition if after the acquisition, the acquirer on
a consolidated basis would control more than 10% of the total deposits
nationwide or would control more than 30% of deposits in the state where the
acquiring institution is located. The deposit concentration state limit does not
apply for initial acquisitions in a state and in every case, may be waived by
the state regulatory authority. Interstate acquisitions are subject to
compliance with the Community Reinvestment Act ("CRA"). States are permitted to
impose age requirements not to exceed five years on target banks for interstate
acquisitions. States are not allowed to opt-out of interstate banking.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Consolidation of banks was not permitted until
June 1, 1997, provided that the state had not passed legislation "opting-out" of
interstate branching. If a state opted-out prior to June 1, 1997, then banks
located in that state may not participate in interstate branching. A state could
have opted-in to interstate branching by bank consolidation or by de novo
branching by passing appropriate legislation earlier than June 1, 1997.
Interstate branching is also subject to a 30% statewide deposit concentration
limit on a consolidated basis, and a 10% nationwide deposit concentration limit.
The laws of the host state regarding community reinvestment, fair lending,
consumer protection (including usury limits) and establishment of branches shall
apply to the interstate branches. The State of Ohio opted-in to the legislation
in May of 1997.
De novo branching by an out-of-state bank is not permitted unless the
host state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in the host state other
than the deposit concentration limits.
33
<PAGE> 35
The FDIC, together with the Federal Reserve, the ODFI and the Office of
Thrift Supervision (the "OTS"), have established rules implementing requirement
that the federal banking agencies establish operational and managerial standards
to promote the safety and soundness of federally insured depository
institutions. The guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. In general, the guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit to a plan for achieving and maintaining
compliance. Failure to submit an acceptable plan, or failure to comply with a
plan that has been accepted by the appropriate regulator, would constitute
grounds for further enforcement action.
The Federal Reserve, the ODFI and the OTS have adopted new regulations
under the Community Reinvestment Act ("CRA"). Under the new regulations, an
institution's performance in meeting the credit needs of its entire community,
including low and moderate income areas, as required by the CRA, is generally
evaluated under three tests: the "lending test," which considers the extent to
which the institution makes loans in the low and moderate income areas of its
market; the "service test," which considers the extent to which the institution
makes branches accessible to low and moderate income areas of its market and
provides other services that promote credit availability; and the "investment
test," which considers the extent to which the institution invests in community
and economic development activities. The Bank had a satisfactory CRA rating as
of its latest examination.
Proposed Legislation
In addition to the above, there have been proposed a number of
legislative and regulatory proposals designed to strengthen the federal deposit
insurance system and to improve the overall financial stability of the U.S.
banking system. It is impossible to predict whether or in what form these
proposals may be adopted in the future, and if adopted, what their effect would
be on Killbuck.
Year 2000
As a financial institution Killbuck is subject to the potential risks
to the financial services industry and Killbuck's business specifically, of the
"Y2K" issue. The Y2K issue is the acronym and terminology currently utilized to
describe a wide variety of application specific potential technological problems
inherent in computer software which is designed to read only a 2 digit annual
date position. Many software packages currently employed by the financial
services industry as well as by industries which provide products and services
which may effect the financial services industry, either directly or indirectly
through suppliers, customers, and other persons, are not able to identify the
advent of the year 2000 as "00." Therefore, there is wide spread concern over
the risks posed to the financial services industry which is both highly
automated and dependent upon information processing technology. Concerns include
but are not limited to possible erroneous checking account transactions,
interest calculations or payment schedules. Similarly Y2K issues extend to
possible problems with ATM systems or credit and debit cards. The potential
problems do not end at financial systems. Any machine or device controlled by a
computer is susceptible to the Y2K problem. The financial impact to the industry
as a whole to address Y2K could be substantial. The Securities and Exchange
Commission as well as all banking regulatory agencies have alerted companys
under their respective jurisdictions to consider and address the risks posited
by Y2K and to disclose where appropriate the specific impact of Y2K on Killbuck.
Killbuck has developed a written Y2K Compliance Program which has been
adopted by Killbuck's Board of Directors. Killbuck and its subsidiary bank have
been subject to examination by the Federal Reserve Bank of Cleveland regarding
Y2K and has not been made aware of any material deficiency as a result of such
examination. Killbuck continues to monitor its relationships with suppliers of
computer hardware and software for verification of compliance with Y2K. In
addition Killbuck has undertaken a review of all major customer relationships to
determine that such customers own Y2K computer issues are being addressed. There
can be no assurance that Killbuck will not experience adverse financial
consequences as a result of Y2K, however management, under the direction of the
Board of Directors will continue to monitor Y2K to minimize the risks associated
with it wherever
34
<PAGE> 36
identified.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Introduction
THIS DISCUSSION IS INTENDED TO FOCUS ON CERTAIN FINANCIAL INFORMATION
REGARDING KILLBUCK. THE PURPOSE OF THIS DISCUSSION IS TO PROVIDE THE READER WITH
A MORE THOROUGH UNDERSTANDING OF THE FINANCIAL STATEMENTS. THIS DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND ACCOMPANYING
NOTES CONTAINED ELSEWHERE HEREIN.
Management is not aware of any market or institutional trends, events
or uncertainties that are expected to have a material effect on liquidity,
capital resources or operations. Also, management is not aware of any current
recommendations by its regulatory authorities that would have a material effect
on liquidity, capital resources or operations.
Overview
The reported results of the Bank are dependent on a variety of factors,
including the general interest rate environment, competitive conditions in the
industry, governmental policies and regulations and conditions in the markets
for financial assets. Net interest income is the largest component of net
income, and consists of the difference between income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is primarily affected by the volume, interest
rates and composition of interest-earning assets and interest-bearing
liabilities.
Average Balances and Yields.
The following tables present for the periods indicated, the total
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. Net interest
margin refers to the net interest income divided by total interest-earning
assets and is influenced by the level and relative mix of interest-earning
assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
For the Year Ended December 31
1997 1996
-------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans (1)(2)(3) $119,552 $11,492 9.61% $112,005 $10,820 9.66%
Securities - taxable (4) 36,389 2,285 6.28% 29,940 1,898 6.34%
Securities - nontaxable 20,641 1,012 4.90% 18,268 891 4.88%
Securities - equity (4)(5) 1,008 65 6.45% 805 49 6.09%
Federal funds sold 6,749 372 5.51% 5,902 324 5.49%
------------------------- --------------------------
Total interest - earning assets 184,339 15,226 8.26% 166,920 13,982 8.38%
------------------------- --------------------------
Noninterest - earning assets
Cash and due from other institutions 6,144 5,635
Premises and equipment, net 2,888 2,914
Accrued interest 1,549 1,386
Other assets 697 571
Less allowance for loan losses (1,694) (1,619)
------------- --------------
Total $193,923 $175,807
============= ==============
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
For the Year Ended December 31
1997 1996
-------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Liabilities and Shareholders Equity
Interest bearing liabilities:
Interest bearing demand deposits $37,358 $1,207 3.23% $32,253 $928 2.88%
Savings deposits 19,421 552 2.84% 19,035 547 2.87%
Time deposits 87,375 5,091 5.83% 81,725 4,858 5.94%
Securities sold under repurchase agreements 1,147 39 3.40% 0 0 0.00%
Federal Home Loan Bank advances 6,789 455 6.70% 4,176 293 7.02%
------------------------- --------------------------
Total interest bearing liabilities 152,090 7,344 4.83% 137,189 6,626 4.83%
------------------------- --------------------------
Noninterest bearing liabilities:
Demand deposits 20,174 19,228
Accrued expenses and other liabilities 592 532
------------- --------------
20,766 19,760
Shareholder's equity 21,067 18,858
------------- --------------
Total $193,923 $175,807
============= ==============
Net interest income $7,882 $7,356
============ ============
Interest rate spread (6) 3.43% 3.55%
=========== ===========
Net yield on interest earning assets (7) 4.28% 4.41%
=========== ===========
</TABLE>
(1) For purposes of these computations, the daily average loan amounts
outstanding are net of deferred loan fees.
(2) Included in loan interest income are loan fees of $210,030 in 1997 and
$190,723 in 1996. (3) Nonaccrual loans are included in loan totals and do not
have a material impact on the information presented.
(4) Average balance is computed using the carrying value of securities. The
average yield has been computed using the historical amortized cost average
balance for available for sale securities.
(5) Equity securities is comprised of common stock of the Federal Home Loan
Bank, Federal Reserve Bank and Independent State Bank of Ohio.
(6) Interest rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing liabilities.
(7) Net yield on interest earning assets represents net interest income as a
percentage of average interest earning assets.
36
<PAGE> 38
Rate and Volume Variances
Net interest income is affected by changes in the level of
interest-earning assets and interest-bearing liabilities and changes in yields
earned on assets and rates paid on liabilities. The following table sets forth,
for the periods indicated, a summary of the impact on interest income and
interest expense of changes in average assets and liability balances and changes
in average rates. For each category of interest-earning assets and
interest-bearing liabilities information is provided on changes attributable to
(i) changes in volume (changes in average volume multiplied by old rate); (ii)
changes in rates (changes in rate multiplied by old average volume); (iii)
changes in rate-volume (changes in rate multiplied by the change in average
volume).
<TABLE>
<CAPTION>
1997 Compared to 1996
Increase (Decrease) Due to
Volume Rate Net
---------------- ----------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income
Loans $729 ($57) $672
Securities - taxable 409 (22) 387
Securities - nontaxable 116 5 121
Securities - equities 12 4 16
Federal funds sold 47 1 48
---------------- ----------------- ----------------
Total interest earning assets $1,313 ($69) $1,244
---------------- ----------------- ----------------
Interest expense
Interest bearing demand deposits $147 $132 $279
Savings deposits 11 (6) 5
Time deposits 336 (103) 233
Securities sold under
repurchase agreements 39 0 39
Federal Home Loan Bank advances 183 (21) 162
---------------- ----------------- ----------------
Total interest bearing liabilities $716 $2 $718
---------------- ----------------- ----------------
Net change in interest income $597 ($71) $526
================ ================= ================
</TABLE>
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
Net Income Net income for 1997 increased 9.4% to $3,005,000 from
$2,747,000 for 1996.
Net Interest Income Net interest income increased $526,000 or 7.2% to
$7,882,000 for 1997, due to an increase of $1,244,000 or 8.9% in interest
income, which totaled $15,226,000 for 1997 as compared to $13,982,000 for 1996.
The increase in interest income more than offset the $719,000 or 10.9% increase
in interest expense.
Interest Income The increase in interest income resulted primarily from
an increase in earnings on loans of $673,000 or 6.2% and investment securities
of $524,000 or 18.4%. These increases, which were due primarily to an increase
in the average principal balances on loans and investments of $7,500,000 and
$9,000,000, respectively, were funded by increases in deposits, repurchase
agreements and Federal Home Loan Bank advances.
Interest Expense Total interest expense increased $719,000 or 10.9%
from $6,625,000 for 1996 to $7,344,000 for 1997. The increase for 1997 was
primarily due to an increase in the average volume of interest bearing
liabilities of $14,901,000 from $137,189,000 for 1996 to $152,090,000 for 1997.
Of this amount, average FHLB advances increased from $4,176,000 for 1996 to
$6,789,000 for 1997 to help fund an increasing loan environment.
37
<PAGE> 39
Provision for Loan Losses The provision for loan losses was $180,000
for both 1997 and 1996. It was determined that the provision for loan loss for
1997 was adequate due to management's continual evaluation of the adequacy of
the allowance for loan losses which encompasses the overall risk characteristics
of the loan portfolio, trends in the Bank's delinquent and nonperforming loans,
and the impact of economic conditions on borrowers. There can be no assurances,
however, that future losses will not exceed estimated amounts or that additional
provisions for loan losses will not be required in future periods.
Other Income Other income increased by $8,000 or 1.8% from $439,000 for
1996 to $447,000 for 1997. In addition, in 1997, the Bank introduced an
alternative investment service to provide non-insured investment products which
resulted in gross income of $11,000.
Other Expense Other expense increased by $236,000 or 6.2% from
$3,800,000 for 1996 to $4,036,000 for 1997. Compensation and benefits increased
$80,000 or 4.1% due to normal salary adjustments. Occupancy and equipment
expense increased $68,000 or 12.4% primarily due to increases in depreciation
and maintenance on additional furniture and equipment. Other expenses increased
by $88,000 or 6.8% due to general overall inflation adjustments.
Income Taxes Income tax expense increased by $39,000 or 3.6% from
$1,069,000 for 1996 to $1,108,000 for 1997. The effective tax rates were 26.9%
for 1997 and 28.0% for 1996. The effective tax rate is less than the statutory
federal income tax rate of 34% due mainly to the Bank's investment in nontaxable
municipal investments.
Year 2000 A great deal of information has been disseminated about the
global computer crash that may occur in the year 2000. Many computer programs
that can only distinguish the final two digits of the year entered (a common
programming practice in earlier years) are expected to read entries for the year
2000 as the year 1900 and compute payment, interest or delinquency based on the
wrong date or are expected to be unable to compute payment, interest or
delinquency. Rapid and accurate data processing is essential to the operation of
the Bank. During 1997, the Company expended $4,000 in connection with its Y2K
compliance program and has budgeted $60,000 for 1998. The Company has not
engaged the consulting firm to assist it in addressing the issues surrounding
the Y2K issue.
The Company has developed a written Y2K Compliance Program which has
been adopted by the Company's Board of Directors. The Company [and or its
subsidiary bank] has been subject to examination by the Federal Reserve Bank of
Cleveland regarding Y2K and was not made aware of any material deficiency as a
result of such examination. The Company continues to monitor its relationships
with suppliers of computer hardware and software for verification of compliance
with Y2K. In addition the Company has undertaken a review of all major customer
relationships to determine that such customers own Y2K computer issues are being
addressed. The Company has initiated a year 2000 plan and has closely monitored
its situation by thoroughly assessing systems and programs which may be date
sensitive. The systems which are not currently year 2000 compatible are
scheduled for renovation before December 1998. There can be no assurance that
the Company will not experience adverse financial consequences as a result of
Y2K, however, management, under the direction of the Board of Directors,
continues to monitor Y2K to minimize the risks associated with it wherever
identified.
38
<PAGE> 40
Asset Quality Nonperforming loans consist of loans past due 90 days or
more and loans for which the accrual of interest has been discontinued.
Nonperforming loans totaled approximately $196,000 or 0.16% of total loans at
December 31, 1997, as compared to $153,000 or 0.13% of total loans at December
31, 1996. The nonperforming loans as a percentage of the allowance for loan
losses was 11.2% and 9.3% at December 31, 1997 and 1996 respectively.
The following table sets forth nonaccrual and past due loans at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis $121 $31
Accruing loans which are 90 days or more past due as to
interest or principal payments 75 122
---------------- ----------------
Total nonperforming loans $196 $153
================ ================
</TABLE>
Gross interest income that would have been recorded on nonaccrual loans
for the year ending December 31, 1997 if the loans had been current in
accordance with their original terms totaled approximately $6,000. The interest
income actually reflected in earnings for 1997, on nonaccrual loans was
approximately $7,000.
Management evaluates loans that are 90 days or more past due to
determine if they should be placed on nonaccrual status. Factors considered by
management include the estimated value of collateral, if any, and other
resources of the borrower that may be available to satisfy the delinquency.
There are no impaired loans at December 31, 1997 and 1996.
There are no loans as of December 31, 1997 or 1996 other than those
disclosed above as either nonperforming or impaired where known information
about the borrower caused management to have serious doubts about the borrower's
ability to comply with their contractual repayment obligations. There are also
no other interest bearing assets that would be subject to disclosure as either
nonperforming or impaired if such interest bearing assets were loans. There are
no concentration of loans to borrowers engaged in similar activities which
exceed 10% of total loans that management is aware of.
39
<PAGE> 41
Summary of Loan Loss Experience The following schedule presents an
analysis of the allowance for loan loss, average loan data and related ratio for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $1,653 $1,545
Loan charge-offs:
Real estate - residential 0 0
Real estate - farm 0 0
Real estate - commercial 0 0
Real estate - construction 0 0
Commercial and other 20 12
Consumer and credit card 170 99
---------------- ----------------
190 111
---------------- ----------------
Recoveries:
Real estate - residential 0 0
Real estate - farm 0 0
Real estate - commercial 0 0
Real estate - construction 0 0
Commercial and other 7 17
Consumer and credit card 95 22
---------------- ----------------
102 39
---------------- ----------------
Net (charge-offs)/recoveries -88 -72
Additions charged to operations 180 180
---------------- ----------------
Balance at end of period $1,745 $1,653
================ ================
Ratio of net (charge-offs)/recoveries during period to
average loans outstanding -0.07% -0.06%
</TABLE>
40
<PAGE> 42
Comparison of December 31, 1997 and 1996 Financial Condition
Total assets were $197,909,000 at December 31, 1997, an increase of
$15,217,000 or 8.3% from $182,692,000 at December 31, 1996. Those balance sheet
categories reflecting significant changes included securities held to maturity,
total loans, interest bearing deposits, repurchase agreements and Federal Home
Loan Bank advances, and are discussed below.
Securities held to maturity were $23,398,000 at December 31, 1997, an
increase of $5,033,000 or 27.4% from $18,365,000 at December 31, 1996.
Nontaxable obligations of states and political subdivisions comprised 99.6% and
99.5% of the total of securities held to maturity at December 31, 1997 and 1996,
respectively.
Total loans were $122,034,000 at December 31, 1997 an increase of
$5,775,000 or 5.0% from $116,259,000 at December 31, 1996. The majority of the
increase occurred in the real estate -commercial ($3,117,000) and consumer and
credit ($3,202,000) loan categories. The various types of loans secured by real
estate represents 55.2% of total loans at December 31, 1997, compared to 55.4%
of total loans at December 31, 1996. The remainder of the portfolio consists of
commercial, consumer and credit card loans. Late in 1997, the Bank began to
offer residential mortgage loan customers a new fixed rate product. This program
enabled the Bank to offer competitive long term fixed rates. These loans are
made with the intent to sell in the secondary loan market. The Bank generally
does not purchase or sell significant participations in loans. The Bank's loans
are primarily to customers located within its local trade area.
Interest bearing demand deposits were $37,574,000 at December 31, 1997,
an increase of $5,525,000 or 17.2% from $32,049,000 at December 31, 1996. A
decrease among various demand deposit accounts was offset by an influx of
$8,000,000 in public funds in March 1997 from a local school district for the
construction of a new facility. These funds are expected to be withdrawn over a
period of twenty-four months and have been invested in securities with similar
maturities.
Securities sold under agreements to repurchase totaling $2,710,000 at
December 31, 1997. There were no securities sold under agreements to repurchase
at December 31, 1996.
Federal Home Loan Bank advances were $8,745,000 at December 31, 1997,
an increase of $3,930,000 or 81.6% from $4,815,000 at December 31, 1996. These
borrowings are used to fund fixed rate residential real estate loans with
similar maturities.
Capital Resources and Liquidity Shareholders' equity totaled
$22,158,000 at December 31, 1997, an increase of $2,224,000 or 11.2% from
$19,934,000 at December 31, 1996. This increase reflects earnings of $3,005,000,
purchases of treasury shares of $312,000, dividends paid of $611,000 and an
increase in the net unrealized gain on securities of $142,000. Total
shareholders equity was 11.2% of total assets at December 31, 1997, compared to
10.9% at December 31,1996.
Banking regulations have established minimum capital requirements for
financial institutions including risk-based capital ratios and leveraged ratios.
As of December 31, 1997 the appropriate regulatory authorities have categorized
Killbuck and Bank as well capitalized under the regulatory framework for prompt
corrective action.
The primary sources of funds are deposits, repayment of loans,
maturities of investments, funds provided from operations and advances from the
FHLB of Cincinnati. While scheduled repayments of loans and maturities of
investment securities are predictable sources of funds, deposit flows and loan
repayments are greatly influenced by the general level of interest rates,
economic conditions and competition. The Bank uses its sources of funds to fund
existing and future loan commitments, to fund maturing certificates of deposit
and demand deposit withdrawals, to invest in other interest-earning assets, to
maintain liquidity, and to meet operating expenses.
Management monitors projected liquidity needs and determines the level
desirable, based in part on the Bank's commitments to make loans and
management's assessment of the Bank's ability to generate funds.
41
<PAGE> 43
Cash and amounts due from depository institutions and federal funds
sold totaled $14,601,000 at December 31, 1997. These assets provide the primary
source of liquidity for the Bank. In addition, management has designated a
substantial portion of the investment portfolio, ($35,079,000) as available for
sale and has an available line of credit with the Federal Home Loan Bank of
Cincinnati with a borrowing limit of approximately $15,900,000 at December 31,
1997 to provide additional sources of liquidity.
The Bank's net interest income is sensitive to changes in interest
rates. To mitigate the impact of changing interest rates on net interest income,
the Bank manages interest rate sensitivity and assets/liability products through
an assets/liability management committee. The asset/liability management
committee meets as necessary to determine the rates of interest for loans and
deposits. Rates on deposits are primarily based on the Bank's need for funds and
on a review of rates offered by other financial institutions in the Bank's
market areas. Interest rates on loans are primarily based on the interest rates
offered by other financial institutions in the Bank's primary market area, as
well, as the Bank's cost of funds.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the Bank has
instituted certain asset and liability management measures, including
underwriting long-term fixed rate loans that are saleable in the secondary
market, offering longer term deposit products and diversifying the loan
portfolio into shorter term consumer and commercial business loans. In addition,
since the mid-1980's, the Bank has originated adjustable-rate loans and as of
December 31, 1997, they comprised approximately 68% of the total loan portfolio.
The Committee manages the interest rate sensitivity of the Bank through
the determination and adjustment of asset/liability composition and pricing
strategies. The Committee then monitors the impact of the interest rate risk and
earnings consequences of such strategies for consistency with the Bank's
liquidity needs, growth, and capital adequacy. The Bank's principal strategy is
to reduce the interest rate sensitivity of interest earning assets and attempt
to match the maturities of interest earning assets with interest bearing
liabilities, while allowing for a mismatch in an attempt to increase net
interest income.
The table below provides a measure of the Bank's interest rate
sensitivity at December 31, 1997. The amount of assets or liabilities which
reprice or mature within a period were determined based on the contractual terms
of the assets or liability. Savings, NOW and money market demand deposit
accounts reprice at management's discretion and therefore are included in the
amount repricing within three months. This table may not reflect the actual
impact on the Bank's changes in interest rates because the repricing of various
categories of rate sensitive assets and liabilities are subject to other factors
such as competition, customer preference, and management influence.
42
<PAGE> 44
Period to Maturity or Repricing
<TABLE>
<CAPTION>
Within Three to After
Three Twelve One to Five Five
Months Months Years Years Total
-------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans, before allowance (1) $55,731 $34,619 $18,451 $12,870 $121,671
Securities (2) 3,273 6,224 25,654 22,283 57,434
Federal Funds Sold 8,300 0 0 0 8,300
---------------------------------------------- --------------- ----------------
Total 67,304 40,843 44,105 35,153 187,405
---------------------------------------------- --------------- ----------------
SAV., NOW, MMDA 56,951 0 0 0 56,951
Time Deposits 19,223 50,856 12,467 2,719 85,265
Other Borrowings 2,710 500 0 8,245 11,455
---------------------------------------------- --------------- ----------------
Total 78,884 51,356 12,467 10,964 153,671
---------------------------------------------- --------------- ----------------
Interest earning assets less interest bearing
liabilities (maturity gap) ($11,580) ($10,513) $31,638 $24,189 $33,734
========= ========= ======== ======== =======
Cumulative Interest Rate Sensitivity Gap ($11,580) ($22,093) $9,545 $33,734
========= ========= ======= =======
Cumulative Interest Rate Sensitivity Gap
as a percent of total interest earning assets -6.18% -11.79% 5.09% 18.00%
====== ======= ===== ======
Cumulative Interest Rate Sensitivity Gap
as a percent of total assets -5.85% -11.16% 4.82% 17.05%
====== ======= ===== ======
</TABLE>
(1) Loans exclude non-accrual loans and is net of deferred loan fees
(2) Securities exclude $1,043,000 in equity securities
43
<PAGE> 45
Market Risk The Bank's primary market risk exposure is interest rate
risk and, to a lesser extent, liquidity risk. Because of the nature of the
Bank's operations, the Bank is not subject to currency exchange or commodity
price risk and, since the Bank has no trading portfolio, it is not subject to
trading risk. Currently, the Bank has equity securities that represent only
2.97% of its investment portfolio and, therefore, equity price risk is not
significant.
The Bank actively manages interest rate sensitivity and
assets/liability products through an assets/liability management committee. The
principle purposes of asset-liability management are to maximize current net
interest income while minimizing the risk to future earnings of negative
fluctuations in net interest margin and to insure adequate liquidity exists to
meet operational needs.
Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities that are subject to repricing in a future
period of time. These differences are known as interest sensitivity gaps. The
Bank utilizes gap management as the primary means of measuring interest rate
risk. Gap analysis identifies and quantifies the Bank's exposure or
vulnerability to changes in interest rates in relationship to the Bank's
interest rate sensitivity position. A rate sensitive asset or liability is one
which is capable of being repriced (i.e., the interest rate can be adjusted or
principal can be reinvested) within a specified period of time. Subtracting
total rate sensitive liabilities (RSL) from total rate sensitive assets (RSA)
within specified time horizons nets the Bank's gap positions. These gaps reflect
the Bank's exposure to changes in market interest rates, as discussed below.
Because many of the Bank's deposit liabilities are capable of being
immediately repriced, a portion of the investment portfolio consists of rate
sensitive securities and the Bank offers variable rate loan products in order to
maintain a proper balance in its ability to reprice various interest bearing
assets and liabilities. Furthermore, the Bank's deposit rates are not tied to an
external index over which the Bank could exercise no control. As a result,
although changing market interest rates impact repricing, the Bank has retained
much of its control over repricing.
The table below, sets forth, in summary form, the Bank's repricing
analysis at December 31, 1997. The repricing analysis shown below is based upon
the repricing intervals of variable rate assets and liabilities and upon
contractual maturities of fixed rate instruments without any consideration for
prepayments.
The Bank conducts the rate sensitivity analysis through the use of a
simulation model which also monitors earnings at risk by projecting earnings of
the Bank based upon an economic forecast of the most likely interest rate
movement. The model also calculates earnings of the Bank based upon what are
estimated to be the largest foreseeable rate increase and the largest
foreseeable rate decrease. Such analysis translates interest rate movements and
the Bank's rate sensitivity position into dollar amounts by which earnings may
fluctuate as a result of rate changes. Based upon the economic forecasts of the
most likely interest rate movement, the Bank's 12 month percentage deviation of
earnings from a flat rate scenario would be 1%.
44
<PAGE> 46
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAPS
(IN THOUSANDS)
1998 1999 2000 2001 2002 Thereafter Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans:
Fixed $7,277 $3,039 $5,524 $5,933 $3,955 $12,870 $38,598
Variable 83,073 0 0 0 0 0 83,073
Securities:
Fixed 9,497 9,620 3,597 6,689 5,748 22,283 57,434
Variable 0 0 0 0 0 0 0
Other interest-earning assets 8,300 0 0 0 0 0 8,300
---------------------------------------------------------------------------------
Total interest-earning assets 108,147 12,659 9,121 12,622 9,703 35,153 187,405
---------------------------------------------------------------------------------
Interest-bearing liabilities:
Demand and savings deposits 56,951 0 0 0 0 0 56,951
Time deposits:
Fixed 69,511 5,815 3,112 2,083 710 2,719 83,950
Variable 568 747 1,315
Repurchase agreements 3,210 0 0 0 0 8,245 11,455
---------------------------------------------------------------------------------
Total interest-bearing 130,240 6,562 3,112 2,083 710 10,964 153,671
liabilities
---------------------------------------------------------------------------------
Interest rate sensitivity gap (22,093) 6,097 6,009 10,539 8,993 24,189
Cumulative rate sensitivity gap ($22,093) ($15,996) ($9,987) $552 $9,545 $33,734
=====================================================================
Interest rate sensitivity gap
as a percent of interest
earning assets (11.79%) (8.54%) (5.33%) 0.29% 5.09% 18.00%
=====================================================================
</TABLE>
The data included in the table indicates that the Bank is liability
sensitive within one year. Generally, a liability sensitive gap indicates that
declining interest rates could positively affect net interest income as expense
of liabilities would decrease more rapidly than interest income would decline.
Conversely, rising rates could negatively affect net interest income as income
from assets would increase less rapidly than deposit costs. During times of
rising interest rates, an asset sensitive gap could positively affect net
interest income as rates would be increased on a larger volume of assets as
compared to deposits. As a result, interest income would increase more rapidly
than interest expense. An asset sensitive gap could negatively affect net
interest income in an environment of decreasing interest rates as a greater
amount of interest bearing assets could be repricing at lower rates. Although
rate sensitivity analysis enables the Bank to minimize interest rate risk, the
magnitude of rate increases or decreases on assets versus liabilities may not
correlate directly. As a result, fluctuations in interest spreads can occur even
when repricing capabilities are perfectly matched.
It is the policy of the Bank to generally maintain a gap between .90
and 1.20 for the time horizon of one year. When Management believes that
interest rates will increase it can take actions to increase the RSA/RSL ratios.
When Management believes interest rates will decline, it can take actions to
decrease the RSA/RSL ratio.
45
<PAGE> 47
During 1997, in order to adjust its interest rate sensitivity, the
Bank's focus was on spreading out the maturities of time deposits within the one
year time frame while continuing the growth in variable rate loans. The above
strategy was implemented to better position the Bank for rate changes in either
direction. The Bank's asset/liability management focus for 1998 will include
improving the Bank's rate sensitivity gap. As noted above, at December 31, 1997,
the Bank was liability sensitive within one year, however, the cumulative rate
sensitivity gap was such that the Bank's earnings and capital should not be
materially affected by the repricing of assets and liabilities due to increases
or decreases in interest rates in 1998.
Changes in market interest rates can also affect the Bank's liquidity
position through the impact rate changes may have on the market value of the
Bank's investment portfolio. As noted in the above discussion relating to
securities, rapid increases in market rates can negatively impact the market
values of investment securities. As securities values decline it becomes more
difficult to sell investments to meet liquidity demands without incurring a
loss. The Bank can address this by increasing liquid funds which may be utilized
to meet unexpected liquidity needs when a decline occurs in the value of
securities.
Impact of Inflation and Changing Prices The consolidated financial
statements and the accompanying notes presented elsewhere in this document, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. Unlike most industrial companies,
virtually all the assets and liabilities are monetary in nature. The impact of
inflation is reflected in the increased cost of operations. As a result,
interest rates have a greater impact on performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Pending Accounting Pronouncements In June 1996, the FASB issued Statement
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings based on a control-oriented "financial-components"
approach. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and liabilities it has
incurred, derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The provisions of Statement No. 125
are effective for transactions occurring after December 31, 1996, except those
provisions relating to repurchase agreements, securities lending, and other
similar transactions and pledged collateral, which have been delayed until after
December 31, 1997 by Statement No. 127, "Deferral of the Effective Date of
Certain Provision of Statement No. 125, an amendment of Statement No. 125." The
adoption of the provision of Statement No. 127 is not expected to have a
material impact on financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income." The Statement establishes standards for reporting and
presentation of comprehensive income and its components (revenue, expenses,
gains and losses) in a full set of general purpose financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is presented with the same prominence as other financial
statements. The provisions of the statement are effective for all fiscal years
beginning after December 15, 1997. The adoption of this statement is not
expected to have a material impact on financial position or results of
operations.
Certain Statistical Information The following schedules present, for
the period indicated, certain financial and statistical information, or a
specific reference as to the location of the required disclosures elsewhere
herein.
Distribution Of Assets, Liabilities And Shareholders' Equity, Interest
Rates And Interest Differential
The information required under this section is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
46
<PAGE> 48
Investment Portfolio The amortized cost, unrealized gains and losses,
and estimated market values are as follows at December 31:
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury securities $ 9,781,819 $20,337 $ - $ 9,802,156
Obligations of U.S. Government
Agencies and Corporations 24,304,525 27,237 98,812 24,232,950
----------- ------- ------- -----------
Total debt securities 34,086,344 47,574 98,812 34,035,106
Equity securities 1,043,410 - - 1,043,410
----------- ------- ------- -----------
Total $35,129,754 $47,574 $98,812 $35,078,516
=========== ======= ======= ===========
Held to Maturity
Obligations of States and Political
Subdivisions $23,298,480 $575,642 $7,214 $23,866,908
Corporate Securities 100,000 - 375 99,625
----------- -------- ------ -----------
Total $23,398,480 $575,642 $7,589 $23,966,533
=========== ======== ====== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury securities $ 994,508 $ 2,992 $ - $ 997,500
Obligations of U.S. Government
Agencies and Corporations 31,225,987 18,595 288,354 30,956,228
----------- -------- -------- -----------
Total debt securities 32,220,495 21,587 288,354 31,953,728
Equity securities 889,210 - - 889,210
----------- -------- -------- -----------
Total $33,109,705 $ 21,587 $288,354 $32,842,938
=========== ======== ======== ===========
Held to Maturity
Obligations of States and Political
Subdivisions $18,264,587 $257,491 $114,124 $18,407,954
Corporate Securities 100,000 - 1,920 98,080
----------- -------- -------- -----------
Total $18,364,587 $257,491 $116,044 $18,506,034
=========== ======== ======== ===========
</TABLE>
47
<PAGE> 49
Maturity or Next Rate Adjustment Date
The following is a schedule of maturities or next rate adjustment date and
related weighted average yields of securities at December 31, 1997
<TABLE>
<CAPTION>
After three months but After one year but
Within three months Within one year Within five years
------------------------- -------------------------- ----------------------------
Amount Yield Amount Yield Amount Yield
-------------- ---------- ------------- ------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Available for Sale (1)
U.S. Treasury securities $2,496,875 5.89% $2,005,000 5.99% $ 5,300,281 5.91%
Obligations of U.S.
Government agencies and
corporations 500,000 6.06% 1,791,562 5.23% 18,188,076 6.22%
Equity securities (2) 0 0.00% 0 0.00% 0 0.00%
---------- -------- ---------- -------- ----------- --------
Total $2,996,875 5.92% $3,796,562 5.63% $23,488,357 6.15%
========== ======== ========== ======== =========== ========
Held to Maturity
Obligations of states and $ 275,519 4.14% $1,927,213 4.50% $ 9,663,493 4.96%
political subdivisions (3)
Corporate bonds 0 0.00% 0 0.00% 100,000 6.00%
---------- -------- --------- -------- ----------- --------
Total $ 275,519 4.14% $1,927,213 4.50% $ 9,763,493 4.97%
========== ======== ========== ======== =========== ========
<CAPTION>
After five but
Within ten years After 10 Years
-------------------------- -----------------------
Amount Yield Amount Yield Total
--------------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Available for Sale (1)
U.S. Treasury securities $ 0 0.00% $ 0 0.00% $ 9,802,156
Obligations of U.S.
Government agencies and
corporations 3,753,312 6.68% 0 0.00% 24,232,950
Equity securities (2) 0 0.00% 0 0.00% 0
----------- -------- -------- -------- -----------
Total $ 3,753,312 6.68% $ 0 0.00% $34,035,106
=========== ======== ======== ======== ===========
Held to Maturity
Obligations of states and $11,140,535 4.82% $291,720 4.62% $23,298,480
political subdivisions (3)
Corporate bonds 0 0.00% 0 0.00% 100,000
----------- -------- -------- -------- -----------
Total $11,140,535 4.82% $291,720 4.62% $23,398,480
=========== ======== ======== ======== ===========
</TABLE>
(1) The weighted average yield has been computed using the historical amortized
cost for available for sale securities.
(2) Excludes $1,043,410 of equity securities which have no stated maturity.
(3) Weighted average yields on nontaxable obligations have been computed based
on actual yield stated on the security.
Excluding holdings of U.S. Treasury and other agencies and corporations of the
U.S. Government, there were no investments in securities of any one issuer that
exceeded 10% of the bank's shareholder equity at December 31, 1997.
48
<PAGE> 50
Loan Portfolio Types of loans. Total loans on the balance sheet are
comprised of the following classifications as December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
<S> <C> <C>
Real estate - residential $41,473,027 $39,820,133
Real estate - farm 3,846,541 4,589,030
Real estate - commercial 21,204,753 18,087,851
Real estate - construction 782,569 1,947,042
Commercial and other 33,745,364 34,035,720
Consumer and credit card 20,981,516 17,779,182
Deferred loan fees (363,127) (399,181)
--------------------- ---------------------
$121,670,643 $115,859,777
===================== =====================
</TABLE>
The largest category of loans comprising the Bank's Loan Portfolio is
Residential Real Estate Loans. These loans are primarily single family
residential real estate loans secured by a first mortgage on the dwelling. The
risks associated with these loans are primarily the risk of default in repayment
and inadequate collateral. The second largest loan segment of the Bank's Loan
Portfolio is the Commercial and Other category. The loans comprising this
category represent loans to business interests, located primarily within the
Bank's defined market areas, with no significant industry concentration.
Commercial Loans include both secured and unsecured loans. The risks associated
with these loans are principally the risk in default of the payment of principal
resulting from economic problems of the commercial customer, economic downturn
effecting the market in general and in the case of secured loans inadequate
collateral. Consumer and credit card loans comprise the next largest area of the
Bank's loan portfolio. These loans include consumer installment including
automobile loans as well as personal loans and credit card loans. The risks
inherent in these loans include the risk of default in principal, repayment and
in the case of secured loans the risk of inadequate collateral. Real Estate
Commercial Loans represent the next largest category and include development
loans as well as investment commercial real estate such as land loans. These
loans have risks which include the risk of default in the repayment of principal
and inadequate collateral as well as the risk of cash flow interruption due to,
in the case of rental real estate, the inability to obtain or collect adequate
rental rates.
The Bank's loan policy establishes guidelines to manage credit risk and
asset quality. These guidelines include loan review and early identification of
problem loans to ensure sound credit decisions. The Bank's credit policies and
procedures are meant to minimize the risk and uncertainties inherent in lending.
In following these policies and procedures management must rely on estimates,
appraisals and evaluations of loans and the possibility that changes in these
could occur partly because of changing economic conditions. The amount and type
of collateral which the Bank requires in connection with its lending activities
is dependant upon the specific facts and circumstances of each credit facility.
The Bank's loan policy for real estate loans does set forth internal maximum
loan to value ratios for various types of real estate loans. In the case of
owner-occupied 1-4 family residential the maximum loan to value ratio is
generally 80%. Home equity loans are 75%. Improved business and industrial
property loans, improved agricultural loan involving land and construction loans
are 80%. Land development loans are 75% and raw land loans are 65%. In the case
of other types of loans the loan to value ratio is not fixed by the Loan Policy
but is dependent upon a number of other factors. The Bank does not make
uninsured conventional mortgage loans with loan to value ratios above 80%. All
loans of the Bank are monitored by a loan officer and where appropriate requests
are made to update appraisals, provide third party guarantees or take other
actions to assure the Bank of the creditworthiness of the borrow.
The Bank's loan policy contains a number of quantitative and
qualitative requirements in connection with granting loan approvals. Depending
upon the type and nature of the loan requested the Bank makes both secured and
unsecured loans. In the case of secured loans the Bank's loan policy requires
that such loans be adequately collaterized and in the case of loans secured by
real estate, accompanied by an appropriate appraisal.
49
<PAGE> 51
Pursuant the Bank's Loan Policy, the quality and liquidity of
collateral is of paramount importance and must be confirmed before the loan is
made. The Bank's Loan Policy requires that secured loans be margined so that
money received from the collateral, under foreclosure conditions, will repay the
loan. Loan officers are responsible for obtaining an objective appraisal of the
collateral prior to funding a loan . In the event the loan is renewed or
extended, the loan officer must consider the need for a new appraisal before
granting the renewal or extension.
Maturities & Sensitivities of Loans to Changes in Interest Rates The
following is a schedule of maturities and sensitivities of loans subject to
changes in interest rates as of December 31, 1997:
<TABLE>
<CAPTION>
One Over
One Year Through Five
or Less Five Years Years
--------------------- ------------------- ---------------------
<S> <C> <C> <C>
Real estate - residential $2,294,391 $864,179 $29,939,728
Real estate - farm 0 122,541 3,476,019
Real estate - commercial 10,950 1,024,824 17,880,817
Real estate - construction 440,029 0 0
Commercial and others 14,707,077 6,393,392 5,165,706
Consumer and credit card 0 94,726 659,107
</TABLE>
Balance sheet structure and interest rate changes play important role
in the growth of net interest income. The Bank's Asset/Liability Committee
(ALCO) manages the overall rate sensitivity and mix of the balance sheet to
anticipate and minimize the effects of interest rate fluctuation and maintain a
consent net interest margin. The relative measure of assets and liabilities that
will mature or are scheduled to reprice within various time categories is known
as "GAP." Because the Company has more liabilities than assets repricing within
one year at December 31, 1997, it has a negative GAP and is considered liability
sensitive. In a rising rate environments, this liability surplus would most
likely detract from net interest income. In a declining rate environment the
effect would most likely be favorable. Experience has shown that his
generalization does not fully capture the true dynamics of interest rate changes
since asset and liability rate do not adjust equally.
Risk Elements The information required under this section is set forth
under the heading "Asset Quality" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Summary of Loan Loss Experience Analysis of Loan Loss Experience. The
information required under this section is set forth under the heading "Summary
of Loan Loss Experience" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Allocation of the Allowance for Loan Losses The following table
allocates the allowance for loan losses at December 31, 1997 and 1996 to each
loan category. The allowance has been allocated according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within the following categories of loans at the dates indicated,
although the entire allowance balance is available to absorb any actual
charge-offs that may occur.
50
<PAGE> 52
<TABLE>
<CAPTION>
1997 1996
----------------------------------- -----------------------------------
Percentage Percentage
of Loans to of Loans to
Allowance Total Loans Allowance Total Loans
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Real estate - residential $402 34.00% $360 34.20%
Real estate - farm 35 3.20% 38 3.90%
Real estate - commercial 273 17.40% 239 15.60%
Real estate - construction 6 0.60% 15 1.70%
Commercial and other loans 568 27.70% 574 29.30%
Consumer and credit loans 342 17.10% 341 15.30%
Unallocated 119 0.00% 86 0.00%
---------------- ---------------- ---------------- ----------------
$1,745 100.00% $1,653 100.00%
================ ================ ================ ================
</TABLE>
The Bank reviews the adequacy of its allowance for loan losses on a
quarterly basis. In determining the adequacy of its allowance account the Bank
makes general allocations based upon loan categories such as nonaccrual and past
due loans as well as type of loans such as residential real estate, commercial,
consumer and credit card. After general allocations, the Bank makes specific
allocations for individual credits. Any remaining balance is determined to be
"unallocated." The Bank has determined that the reserve is adequate as of
December 31, 1997, based upon its analysis and experience.
Deposits
Average Amounts and Rates. The information required under this section
is set forth under the heading "Overview Average Balances and Yields" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Foreign Deposits. There are no foreign deposits at December 31, 1997.
Maturity of Time Deposits of $100,000 or More. The following is a
schedule of maturities of time deposits in amounts of $100,000 or more as of
December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Three months or less $6,013
Three through six months 7,928
Six through twelve months 6,997
Over twelve months 837
----------------
Total $21,775
================
</TABLE>
51
<PAGE> 53
Return on Equity and Assets The ratio of net income to daily average
total assets and average shareholders' equity, and certain other ratios, are as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
Percentage of net income to:
Average total assets 1.55% 1.56%
Average shareholders' equity 14.26% 14.57%
Percentage of dividends declared per common share to net
income per common share 20.36% 18.52%
Percentage of average shareholders' equity to average
total assets 10.86% 10.73%
</TABLE>
Short-Term Borrowings This information is not required as the average
amount of borrowings during the period did not exceed 30% of shareholders'
equity.
Management's Discussion And Analysis Of The Interim Period Ended June 30, 1998
Comparison Of Financial Condition At June 30, 1988 And December 31, 1997
Total assets at June 30, 1998, increased by approximately $5,673,000 or
2.9% for the first half of 1998.
Cash and cash equivalents increased by approximately $916,000 or 6.3%
from December 31, 1997, to June 30, 1998, with liquid funds held in the form of
federal funds sold increasing $1,100,000. Management increased liquid funds due
to expected loan growth.
Investment securities increased slightly by approximately $160,000 or
.3% from December 31, 1997 to June 30, 1998. The composition changed slightly
with securities available for sale decreasing by approximately $1,055,000 and
securities held to maturity increasing by approximately $1,215,000. Management
classified new purchases as held to maturity based upon their intent and ability
to hold these securities.
The loan portfolio increased by approximately $4,548,000 or 3.7% from
December 31, 1997, to June 30, 1998. The majority ($3,918,000 or 86.1%) of that
increase occurred in the commercial loan category due to the continuing demand
of commercial loans in the Bank's market area and the Bank's competitive pricing
of these loans.
Total deposits increased by approximately $3,707,000 or 2.3% for the
first six months of 1998. Interest-bearing demand deposits decreased by
approximately $3,662,000 or 9.7%, while time deposits increased by approximately
$7,166,000 or 8.4%. Management attributes this decrease/increase to current
depositors transferring deposits from interest bearing demand accounts to time
accounts and new customers opening time deposit accounts due to the current
competitive rates being offered by the Bank.
Shareholders' Equity increased by approximately $1,215,000 or 5.5%,
which was mainly due to earnings of $1,510,000 for the first six months of 1998
reduced by the cash dividends paid in June, 1998 of $331,000. Management
monitors risk-based capital and leveraged capital ratios in order to assess
compliance of the regulatory guidelines. At June 30, 1998, the total capital
ratio was 19.51%; the Tier I capital ratio was 18.26%, and the leverage ratio
was 11.55%, compared to regulatory capital requirements of 8%, 4% and 4%
respectively. These ratios are well in excess of regulatory capital
requirements.
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute
52
<PAGE> 54
payment, interest or delinquency based on the wrong date or are expected to be
unable to compute payment, interest or delinquency. Rapid and accurate data
processing is essential to the operation of the Bank.
The Company has initiated a year 2000 plan and has closely monitored
its situation by thoroughly assessing systems and programs which may be date
sensitive. The systems which are not currently year 2000 compatible are
scheduled for renovation before December 1998. There can be no assurance that
the Company will not experience adverse financial consequences as a result of
the Y2K, however, management, under the direction of the Board of Directors,
continues to monitor Y2K to minimize the risks associated with it wherever
identified. Management has estimated that the total cost to become year 2000
compliant is approximately $65,000.
Comparison Of The Results Of Operations For The Six Months Ended June 30, 1998
And 1997
Total interest income of approximately $7,812,000 for the six month
period ended June 30, 1998, compares to approximately $7,419,000 for the same
period in 1997, an increase of $393,000 or 5.3%. The majority of the overall
increase in total interest income is attributed to an increase in interest and
fees on loans of approximately $387,000 or 98.5% of the overall increase. The
increase in interest and fees on loans is due primarily to increased volume in
the loan portfolio. The daily average balances outstanding for the six month
periods of 1998 and 1997 respectively were $124,980,000 and $118,211,000, an
increase of approximately $6,769,000.
Total interest expense of approximately $3,780,000 for the six month
period ending June 30, 1998, represents an increase of $234,000 from the
approximately $3,546,000 reported for the same six month period in 1997. The
increase in interest expense on deposits of approximately $95,000 is due mainly
to an overall increase in volume. The daily average balances of interest bearing
demand deposits for the six month period of 1998 and 1997 respectively were
$36,796,000 and $35,334,000, an increase of approximately $1,462,000. The daily
average balances of savings accounts, which remained fairly stable, for the six
month period of 1998 and 1997 respectively were $19,440,000 and $19,351,000. The
daily average balances of time deposits for the six month periods of 1998 and
1997 respectively were $88,784,000 and $88,457,000 an increase of approximately
$327,000. The interest expense on Federal Home Loan Bank advances increased by
approximately $106,000 due to an increase in the daily average balance
outstanding. The daily average balances outstanding for the six month periods of
1998 and 1997 respectively were $8,952,000 and $5,789,000, an increase of
approximately $3,163,000. The interest expense on securities sold under
repurchase agreements increased by approximately $33,000 due to an increase in
the daily average balance outstanding. The daily average balances outstanding
for the six month periods of 1998 and 1997 respectively were $2,473,000 and
$455,000, an increase of approximately $2,018,000.
Net interest income of approximately $4,031,000 for the six months
ended June 30, 1998, compares to approximately $3,873,000 for the same six month
period in 1997, an increase of $158,000 or 4.1%.
Total other income for the six month period ended June 30, 1998, of
approximately $255,000 compares to approximately $216,000 for the same six month
period in 1997, an increase of $39,000 or 18.1%. Income from the alternative
investment service the Bank introduced in 1997 accounted for $19,000 or 48.7% of
this increase with the remaining increase attributed to normal activity.
Total other expense of approximately $2,203,000 for the six months
ended June 30, 1998, compares to approximately $1,983,000 for the same six month
period in 1997. This represents an increase of $220,000 or 11.1%. Net increases
in salaries and employee benefits expense of approximately $126,000,
professional fees of $43,000 and other expenses of approximately $21,000 were
the major contributors to the overall net increase. The increase in salary and
employee benefits is attributed to normal annual salary increases, staff
additions and increased hospitalization premiums and pension costs. The increase
in professional fees is attributed to costs of becoming a securities and
exchange registrant and merger expenses. The increase in other expenses were
brought about by those items that are generally thought to be normal and
recurring in nature. Net income for the six month period ended June 30, 1998,
was approximately $1,510,000, an increase of $44,000 or 3.0% from the
approximately $1,466,000 reported at June 30, 1997.
Comparison Of The Results Of Operations For The Three Months Ended June 30, 1998
And 1997.
Total interest income of approximately $3,939, 000 for the three month
period ended June 30, 1998,
53
<PAGE> 55
compares to approximately $3,816,000 for the same period in 1997, an increase of
$123,000 or 3.2%. Interest and fees on loans and interest on federal funds sold
increased respectively approximately $158,000 and $38,000 due mainly to an
increase in the balances outstanding. These increases were offset by a decrease
in investment income of approximately $73,000. This decrease is due mainly to an
overall reduction in the investment balances outstanding.
Total interest expense of approximately $1,926,000 for the three month
period ending June 30, 1998, represents an increase of $76,000 from the
approximately $1,850,000 reported for the same three month period in 1997. The
majority of the overall increase is attributed to an increase in interest
expense on Federal Home Loan Bank advances of approximately $45,000 or 59.2% of
the overall increase. This increase is attributed to an increase in the daily
average balances outstanding. The daily average balances outstanding for the
three month periods of 1998 and 1997 respectively were $9,243,000 and
$6,380,000, an increase of approximately $2,863,000.
Net interest income of approximately $2,014,000 for the three months
ended June 30, 1998, compares to approximately $1,966,000 for the same three
month period in 1997, an increase of $48,000 or 2.4%.
Total other income for the three month period ended June 30, 1998, of
approximately $125,000 compares to approximately $111,000 for the same three
month period in 1997, an increase of $14,000 or 12.6%. Income from the
alternative investment service the Bank introduced in 1997 accounted for
approximately $4,300 of the overall increase with the remaining increase
attributed to normal activity.
Total other expense of approximately $1,054,000 for the three months
ended June 30, 1998, compares to approximately $943,000 for the same three month
period in 1997. This represents and increase of $111,000 or 11.8%. Net increases
in salaries and employee benefits expense of approximately $55,000 and
professional fees of $38,000 were the major contributors to the overall net
increases. The increase in salary and employee benefits is attributed to normal
annual salary increases, staff additions and increased hospitalization premiums
and pension costs. The increase in professional fees is attributed to costs of
becoming a securities and exchange registrant and merger expenses. Net income
for the three month period ended June 30, 1998 was approximately $794,000, an
increase of $5,000 or .6% from the approximately $789,000 reported for the same
three month period in 1997.
Liquidity Management monitors projected liquidity needs and determines
the level desirable based in part on the Bank's commitments to make loans and
management's assessment of the Bank's ability to generate funds.
The primary sources of funds are deposits, repayment of loans,
maturities of investments, funds provided from operations and advances from the
FHLB of Cincinnati. While scheduled repayments of loans and maturities of
investment securities are predictable sources of funds, deposit flows and loan
repayments are greatly influenced by the general level of interest rates,
economic conditions and competition. The Bank uses its sources of funds to fund
existing and future loan commitments, to fund maturing time deposits and demand
deposit withdrawals, to invest in other interest-earning assets, to maintain
liquidity, and to meet operating expenses.
Cash and cash equivalents totaled $15,517,000 at June 30, 1998, an
increase of $916,000 from $14,601,000 at December 31,1997. These assets provide
the primary source of liquidity for the Bank. In addition, management has
designated a substantial portion of the investment portfolio, approximately
$34,023,000 as available for sale and has an available line of credit with the
Federal Home Loan Bank of Cincinnati with a borrowing limit of $8,000,000 at
June 30, 1998, to provide additional sources of liquidity.
Cash was provided during the six month period ended June 30, 1998,
mainly from operating activities of $1,508,000, a net increase in deposits of
$3,707,000 and an increase in Federal Home Loan Bank advances of $988,000. Cash
was used during the six month period ended June 30, 1998, mainly to fund a net
increase in loans of $4,590,000 and to pay dividends of $331,000.
Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely affect its liquidity or
ability to meet its funding needs in the normal course of business.
Risk Elements The table below presents information concerning
nonperforming assets including nonaccrual loans, renegotiated loans, loans 90
days or more past due, other real estate loans and repossessed assets at June
30,
54
<PAGE> 56
1998, and December 31, 1997. A loan is classified as nonaccrual when, in the
opinion of management, there are doubts about collectability of interest and
principal. At the time the accrual of interest is discontinued, future income is
recognized only when cash is received. Renegotiated loans are those loans which
terms have been renegotiated to provide a reduction or deferral of principal or
interest as of result of the deterioration of the borrower.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
(dollars in thousands)
<S> <C> <C>
Loans on nonaccrual basis $133 $121
Loans past due 90 days or more 176 75
---- -----
Total nonperforming loans $309 $196
==== ====
Nonperforming loans as a percent of total loans .24% .16%
=== ===
Nonperforming assets as a percent of total assets .15% .10%
=== ===
Allowance for loan losses to nonperforming loans 579.94% 890.31%
====== ======
</TABLE>
The Bank had no renegotiated loans, other real estate or
repossessed assets of June 30, 1998, and December 31, 1997.
Management monitors impaired loans on a continual basis. As of
June 30, 1998, impaired loans had no material effect on the Bank's financial
position or results of operations.
The allowance for loan losses at June 30, 1998, totaled $1,792,000
or 1.4% of total loans as compared to $1,745,000 or 1.4% at December 31, 1997.
Provisions for loan losses were $90,000 for both six month periods ended June
30, 1998 and 1997.
Management performs a quarterly evaluation of the allowance for loan
losses. The evaluation incorporates internal loan review, actual historical
losses, as well as any negative economic trends in the local market. The
evaluation is presented to and approved by the Board of Directors of the Bank.
Management, through the use of the quarterly evaluation, believes that the
allowance is maintained at an adequate level. However, there can be no assurance
that the current allowance for loans losses will be adequate to absorb all
future loan losses.
EXECUTIVE COMPENSATION.
The following remuneration table sets forth all direct
remuneration paid by the Bank in 1997 to Killbuck's President and Chief
Executive Officer. No other Officers' total compensation exceeded $100,000 for
the year ended 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and All Other
Principal Position Year Salary Bonus Compensation
------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Mr. Luther E. Proper 1997 $102,500.00 $22,597.00 $7,990.95
President and Chief 1996 $95,000.00 $21,743.00 $8,161.11
Executive Officer 1995 $85,250.00 $20,279.00 $7,907.76
</TABLE>
Report of the Compensation Committee of Killbuck Bancshares, Inc. on
Compensation Under rules established by the Securities and Exchange Commission
(the "SEC"), Killbuck is required to provide certain data and information in
regard to the compensation and benefits provided to Killbuck's President and
Chief Executive Officer and, if applicable, the four other most highly
compensated Executive Officers, whose compensation exceeded $100,000 during
Killbuck's fiscal year. The disclosure requirements, as applied to Killbuck,
include only Killbuck's President and Chief Executive Officer Mr. Luther E.
Proper. The disclosure includes the use of tables
55
<PAGE> 57
and a report explaining the rationale and considerations that led to fundamental
executive compensation decisions affecting such officers. Killbuck Bancshares,
Inc. is a holding company and owns a single operating subsidiary, The Killbuck
Savings Bank Company. Killbuck Bancshares, Inc. has no direct employees. All
disclosures contained in this Proxy Statement regarding executive compensation
reflect compensation paid by The Killbuck Savings Bank Company. The Compensation
Committee of Killbuck has the responsibility of determining the compensation
policy and practices with respect to all Executive Officers. At the direction of
the Board of Directors, the Compensation Committee has prepared the following
report for inclusion in this Proxy Statement.
Compensation Philosophy. This report reflects Killbuck's compensation
philosophy as endorsed by the Compensation Committee. The Compensation Committee
makes a recommendation regarding the level of compensation for Mr. Proper. The
Compensation Committee determines the level of compensation for all other
Executive Officers within the constraints of the amounts approved by the Board.
Essentially, the executive compensation program of Killbuck has been
designed to:
- - Support a pay-for-performance policy that awards Executive Officers for
corporate performance.
- - Motivate key Executive Officers to achieve strategic business goals.
- - Provide compensation opportunities which are comparable to
those offered by other peer group companies; thus allowing Killbuck to compete
for and retain talented executives who are critical to Killbuck's long-term
success.
Salaries. Effective January 1, 1997, the Compensation Committee
recommended and the Board increased the salary paid to Mr. Proper. The increase
reflected consideration of competitive data reported in compensation surveys and
the Compensation Committee's assessment of the performance of such executives
over the intervening year and recognition of Killbuck's performance during 1996.
In addition, the Compensation Committee approved compensation increases for all
other Executive Officers of Killbuck. Executive Officer salary increase
determinations are based upon an evaluation of such executives' performance
against goals set in the prior year.
Cash Bonus Plan. Killbuck maintains a cash bonus plan (the "Bonus
Plan") which allocates a portion of Killbuck's net income for the purpose of
employee cash bonuses on an annual basis. The award of a bonus to any employee
under the terms of the Bonus Plan is discretionary and in the case of Mr. Proper
is determined by the Board of Directors upon the recommendation of the
Compensation Committee, and in all other cases is determined by the Compensation
Committee upon recommendation of management.
The Compensation Committee has determined that a significant portion of
executive compensation should be payable in an annual bonus which shall be based
principally upon the financial performance of Killbuck. The Compensation
Committee believes that it is important to reward executive management based
upon the success of Killbuck.
This Report on Compensation is submitted by the Compensation Committee Members:
John Baker, Robert Bell, Thomas Gindlesberger, Allan Mast, Luther
Proper
Compensation Committee Interlocks and Insider Participation
Mr. Luther E. Proper, Killbuck's President and Chief Executive Officer
served on the Compensation Committee of Killbuck, which is responsible for
compensation matters (see "Report of the Compensation Committee of Killbuck
Bancshares, Inc. on Compensation" in this Proxy Statement).
Although Mr. Proper served on the Compensation Committee, he did not
participate in any decisions regarding his own compensation as an Executive
Officer.
56
<PAGE> 58
Director Compensation
Directors of Killbuck, other than those persons who serve as officers
of Killbuck and its subsidiary, The Killbuck Savings Bank Company, received an
annual retainer of $6,000 during 1997. The Chairman of the Board received an
annual retainer of $7,200. Effective January 1, 1998, the fee stayed the same.
Performance Graph - Five-Year Shareholder Return Comparison
The SEC requires that Killbuck include in this Proxy Statement a
line-graph presentation comparing cumulative five-year shareholder returns on an
indexed basis with a broad equity market index and either a nationally
recognized industry standard or an index of peer companies selected by Killbuck.
Killbuck has selected the Dow Jones Equity Market Index and the Dow Jones
Regional Bank Index for purposes of this performance comparison. The chart below
compares the value of $100 invested on December 31, 1990, in Killbuck's stock,
the Dow Jones Equity Market Index and the Dow Jones Regional Bank Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG KILLBUCK
BANCSHARES, INC., DOW JONES EQUITY MARKET INDEX & DOW JONES MAJOR
REGIONAL BANK INDEX FOR FISCAL YEAR ENDING DECEMBER 31
[LINE GRAPH]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
KILLBUCK BANCSHARES, INC. $100.00 $116.40 $134.60 $188.53 $272.48 $404.92
DOW JONES EQUITY MARKET INDEX $100.00 $109.95 $110.76 $152.49 $187.63 $251.34
DOW JONES REGIONAL BANK INDEX $100.00 $105.27 $101.31 $162.02 $222.62 $347.78
</TABLE>
ASSUMES $100 INVESTED ON JANUARY 1, 1992
IN KILLBUCK BANCSHARES, INC. COMMON STOCK,
DOW JONES EQUITY MARKET INDEX & DOW JONES MAJOR
REGIONAL BANK INDEX
*TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
57
<PAGE> 59
PRINCIPAL SHAREHOLDERS AND MANAGEMENT OWNERSHIP INFORMATION
To Killbuck's knowledge, except as noted below, no person or entity owns
beneficially, directly or indirectly, 5 percent or more of Killbuck's common
stock as of September 30, 1998.
<TABLE>
<CAPTION>
Amount and Nature of % of
Name and Address of Beneficial Owner Beneficial Ownership Class
- ------------------------------------ -------------------- -----
<S> <C> <C>
The Holmes Limestone Co. 45,120 Shares 6.85%
P.O. Box 295
Berlin, Ohio 44610
Thomas D. Gindlesberger 35,000 Shares 5.29%
P.O. Box 129
Millersburg, Ohio 44654
</TABLE>
The following table sets forth, as of March 31, 1998, information as to the
beneficial ownership of Killbuck's Common Stock by each Directors and Executive
Officer and All Directors and Executive Officers as a group.
<TABLE>
<CAPTION>
Shares of Company Common
Stock Owned Beneficially as Percentage of Beneficial
of 9/30/98 Ownership as of 9/30/98
--------------------------- ------------------------
Name & Age
----------
<S> <C> <C> <C>
John W. Baker Age 53 530 .08%
Robert D. Bell (1) Age 71 2,865 .43%
Richard L. Fowler (2) Age 68 6,120 .92%
Thomas D. Gindlesberger Age 72 35,000 5.29%
Craig A. Lawhead (3) Age 40 1,300 .20%
Allan R. Mast (4) Age 48 1,970 .30%
Dean J. Mullet Age 46 130 .02%
Luther E. Proper Age 49 6,045 .91%
Kenneth E. Taylor Age 45 250 .04%
Michael S. Yoder Age 56 250 .04%
All directors and executive 54,460 8.23%
officers as a group
</TABLE>
-------------------------------------
(1) 2,506 shares owned individually, 365 shares in spouse's name.
(2) 2,475 shares owned individually, 3,645 shares owned jointly with spouse.
(3) 652 shares owned individually, 675 shares owned jointly with spouse.
(4) 375 shares owned individually, 895 shares owned jointly with spouse, 700
shares owned in name of Holmes M & M Construction.
CURRENT RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and executive officers of Killbuck and their associates are
customers of and have had transactions with Killbuck Bank from time to time in
the ordinary course of business. Such transactions have been made on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the time for comparable transactions with other persons
and did not and will not involve more than the normal risk of collectibility or
present other unfavorable features. Similar transactions may be expected to take
place in the ordinary course of business in the future.
LEGAL PROCEEDINGS
Killbuck and its subsidiary are from time to time subject to various
pending and threatened lawsuits in which claims for monetary damages are
asserted in the ordinary course of business. While any litigation involves an
element of uncertainty, management of Killbuck does not anticipate that any
currently pending or threatened litigation has the potential to materially
affect the financial condition or results of operations of Killbuck.
58
<PAGE> 60
INFORMATION ABOUT COMMERCIAL
GENERAL
Commercial is an Ohio state chartered bank. Commercial operates its
main office at 701 S. Market St., Danville, Ohio 43014.
The principal business of Commercial consists of attracting retail
deposits from the general public and investing those funds in one-to-four family
residential mortgage loans, consumer loans, commercial real estate, construction
and commercial business loans primarily in its market area. Commercial also
purchases mortgage-backed securities, invests in U.S. Agency obligations, state
and municipal securities and other permissible investments.
Commercial's revenues are derived primarily from interest on loans,
investments, income from service charges and loan originations.
Commercial owns no real or personal property of a material nature
other than its main office and the furniture, fixtures and equipment used in its
banking business. The main office of Commercial is located at 701 S. Market St.,
Danville, Ohio.
Commercial owns the land and buildings on which its main office and
branch offices are located free and clear of any major encumbrances.
EMPLOYEES
At September 30, 1998, Commercial had 6 full-time equivalent
employees. Commercial is not a party to any collective bargaining agreement and
employee relations are considered to be excellent by Commercial management.
COMPETITION
The principal market in which Commercial competes is Knox County in
Central Ohio. Commercial also competes in Holmes and Coshocton Counties. For
deposits and loans, Commercial competes with other banks, savings institutions,
credit unions, finance companies, insurance companies, and governmental
agencies.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition Total assets increased $437,000 or 2.8% from $15.6
million at December 31, 1996 to $16.0 million at December 31, 1997.
During the six month period ended June 30, 1998 total assets decreased
by $372,000 or 2.3% to $15.6 million at June 30, 1998.
Investment Portfolio - Total Investments Securities increased during
the year by approximately $202,000 or 6.7% from $3.0 million at December 31,
1996 to $3.2 million at December 31, 1997. Funds in excess of anticipated short
term loan demand were invested in investment securities to maximize
profitability.
During the six month period ended June 30, 1998 investments remain
constant with maturities being replace with purchases in the same category.
Commercial has been a conservative investor, investing primarily in
U.S. Treasury Securities and to a lesser extent U.S. Government Agencies and
Corporations and Obligations of States and Political Subdivisions. Securities
purchased typically have maturities within three years. Management has
structured the investment portfolio to have a substantial portion of the
portfolio (18% to 40%) come due each year.
59
<PAGE> 61
The following table sets forth the carrying amount of securities at the
dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------------------------
1998 1997 1996 1995
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Available for Sale
U.S. Treasury securities $600 $600 $398 $0
Equity securities (1) 22 22 22 22
---------------------------------------------------------------
Total $622 $622 $420 $22
===============================================================
Held to Maturity
U.S. Treasury Securities $2,295 $2,293 $2,291 $2,799
U.S. Government agency securities 200 200 200 0
Obligations of states and political subdivision 113 113 115 225
---------------------------------------------------------------
Total $2,608 $2,606 $2,606 $3,024
===============================================================
</TABLE>
Excluding holdings of U.S. Treasury and other agenices and corporations of the
U.S. Government, there were no investments in securities of any one issuer that
exceeded 10% of the Bank's shareholder equity at June 30, 1998.(1) Equity
securities is comprised of Federal Reserve Bank Stock.
The following schedule sets forth the maturities and the weighted yields of
securities calculated on the basis of amortized costs and rate weighted for the
scheduled maturity of each security as of June 30, 1998.
<TABLE>
<CAPTION>
Maturing
--------------------------------------------
Within After One But
One Year Within Five Years Market
------------------------------------------------------------------
Amount Yield Amount Yield Total Yield Value
------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Available for Sale
U.S. Treasury Securities $200 5.03% $400 5.89% $600 5.69% $600
Equity Securities (1) 0 0.00% 0 0.00% 0 0.00% 0
------------ ----------- ----------- ------------
$200 $400 $600 $600
============ =========== =========== ============
Held to Maturity
U.S. Government and agency $1,499 6.06% $996 6.26% $2,495 6.14% $2,506
securities
Obligations of states and 113 5.83% 0 0.00% 113 5.83% 114
political subdivisions
------------ ----------- ----------- ------------
$1,612 $996 $2,608 $2,620
============ =========== =========== ============
</TABLE>
(1) Excludes $22 of equity securities which have no stated maturity. Equity
securities is comprised entirely of Federal Reserve Bank Stock.
Loans Total gross loans amounted to $10.4 million at December 31, 1997
compared to $10.8 million at December 31, 1996, a decrease of $.4 million or
4.0%. Total real estate mortgages; construction; commercial, industrial and
agricultural; and consumer loans amounted to $7.9 million, $.1 million, $1.5
million and $.9 million which represent approximately 75%, 1%, 15% and 9% of
total loans at December 31, 1997 respectively.
60
<PAGE> 62
Total gross loans amounted to $10.8 million at June 30, 1998, an
increase of $.4 million or 3.5% from December 31, 1997. Total real estate
mortgages; construction; commercial industrial and agricultural; and consumer
loans amounted to $7.8 million, $.3 million, $1.7 million, and $1.0 million with
represents approximately 72%, 3%, 16% and 9% of total loans at June 30, 1998
respectively.
At June 30, 1998 Commercial continues to focus its primary lending
efforts in real estate mortgages, which comprise approximately 75% of the total
loan portfolio. Management believes that the conservative lending practices
employed by Commercial reduce, to an acceptable level, the impact of declining
value of real estate should a downturn in the local real estate market occur.
The bank has not incurred any real estate mortgage losses the last five years.
The amount of the loan portfolio has remained fairly constant since
December 31, 1995. The loan portfolio was $10.2 million at December 31, 1995,
$10.8 million at December 31, 1996, $10.4 million at December 31, 1997 and $10.8
million at June 30, 1998. The composition of the loan portfolio has also
remained fairly consistent with real estate mortgages representing approximately
73%, 74%, 76% and 75%, commercial industrial and agricultural loans representing
approximately 17%, 17%, 15% and 16%, and consumer loans representing
approximately 10%, 9%, 9% and 9% at December 31, 1995, 1996, 1997 and June 30,
1998, respectively.
Management desires to maintain a diversified loan portfolio in its
local market area to support the communities it serves. Although the Bank has a
diversified loan portfolio, at June 30, 1998 and December 31, 1997 and 1996,
loans outstanding to individuals, dependent on the local economic conditions are
approximately $8.1 million or 75%, $8.0 million or 76% and $8.0 million or 74%
of the loan portfolio, respectively. These loans are typically secured by
residential real estate.
The following table shows Commercial's loan distribution at the end of
each reported period:
The Bank's loan portfolio is comprised of real estate mortgages,
commercial, industrial and agricultural loans extended to businesses and farm
operations and consumer loans consisting primarily of automobile and credit card
loans.
<TABLE>
<CAPTION>
June 30, December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994 1993
-----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages $7,813 $7,758 $7,853 $7,365 $6,577 $5,704
Real estate - construction 282 90 110 60 350 20
Commercial, industrial and agricultural 1,660 1,529 1,780 1,740 1,849 1,841
Consumer 932 943 1,007 1,037 919 854
-----------------------------------------------------------------------
Total loans $10,687 $10,320 $10,750 $10,202 $9,695 $8,419
=======================================================================
</TABLE>
The following table sets forth the estimated maturity of loans
excluding real estate mortgages and consumer loans outstanding as of June 30,
1998.
<TABLE>
<CAPTION>
After One
But Within After
One Year Five Years Five Years Total
--------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Commercial, industrial and agricultural $323 $203 $1,134 $1,660
Real estate - construction (1) 0 0 282 282
--------------------------------------------------------------------
Total $323 $203 $1,416 $1,942
====================================================================
</TABLE>
61
<PAGE> 63
The following table sets forth the dollar amount of loans, excluding
real estate mortgages and consumer loans due after June 30, 1999 which have
pre-determined interest rates and which have adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates Total
--------------------------------------------------
<S> <C> <C> <C>
Commercial, industrial and agricultural $189 $1,148 $1,337
Real estate - construction 177 105 282
--------------------------------------------------
Total $366 $1,253 $1,619
==================================================
</TABLE>
(1) At the time a construction loan is approved it is automatically set up for
permanent financing.
Nonperforming Assets Commercial's nonperforming assets, which are
comprised of any nonaccrual loans and accruing loans past due 90 days or more
have been minimal in amount for the periods from December 31, 1993 through June
30, 1998. Nonperforming assets amounted to only .12% and .33% of total assets at
June 30, 1998 and December 31, 1997, respectively.
The Bank's general collection policy is to provide a late notice after
10 days past due. Delinquent accounts are contacted by telephone once the loan
becomes delinquent in excess of 30 days, with collection letters issued between
the 30th and 60th days. Notice of intent to foreclose is provided to consumer
mortgage customers between 100 and 120 days past due. At 120 days past due,
foreclosure proceedings are initiated.
Management regularly reviews the loan portfolio in order to identify
problem loans and discuss the status of delinquent loans.
The accrual of interest on a loan is generally discontinued when
management believes, after considering economic and business conditions, the
borrower's financial condition is such that collection of interest is doubtful.
Interest payments received on nonaccrual loans are recorded as income or applied
against principal according to management's judgment as to the collectibility or
such principle. The Bank had $2,000 in loans greater than 90 days past due and
still accruing interest, and $17,000 in loans on nonaccrual status and no other
real estate owned at June 30, 1998.
Since 1995, one loan has comprised the majority of nonaccrual loans and
amounts charged off. This loan was a commercial loan secured by commercial
property and business assets. The loan was made in 1990 for $115,000 and $35,000
was received on this loan through June 30, 1998. Charge off's of this loan
through June 30, 1998 totaled $63,000, leaving a balance of $17,000 as of June
30, 1998.
The following table summarizes Commercial's nonaccrual, past due loans,
restructured loans and other real estate owned:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------------------------------
1998 1997 1996 1995 1994 1993
-----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans past due 90 days or more and still accruing $2 $3 $0 $0 $0 $0
Nonaccrual loans 17 50 101 112 0 10
Restructurings 0 0 0 0 0 0
Other real estate owned 0 0 0 0 0 0
-----------------------------------------------------------------
Total nonperforming assets $19 $53 $101 $112 $0 $10
=================================================================
Nonperforming loans to total loans 0.18% 0.51% 0.94% 1.10% 0.00% 0.12%
Allowance for loan losses to nonperforming loans 331.58% 116.98% 101.98% 0.90% 0.00% 930.00%
Nonperforming loans to total assets 0.12% 0.33% 0.65% 0.73% 0.00% 0.07%
</TABLE>
62
<PAGE> 64
For the years ending December 31, 1995, 1996, 1997 and for the first
six months of 1998 interest income that would have been recorded on loans
accounted for on a nonaccrual basis under the current terms of such loans was
$11,778, $11,406, $10,282 and $2,270 respectively. In 1995 $767 was received and
reported as interest income.
Allowance for Loan Losses The allowance for loan losses was $63,000 or
.59% of total loans at June 30, 1998 compared to $62,000 or .60% of total loans
at December 31, 1997. The allowance was $103,000 or .96% of total loans at
December 31, 1996. The decrease in the allowance for loan losses resulted
primarily from charge offs of the nonaccrual loan previously mentioned. The
adequacy of the allowance for loan losses is determined by management's periodic
evaluation of individual loans, the overall risk characteristics of the various
portfolio segments, past experience with losses, the impact of economic
conditions on borrowers, and other relevant factors.
This table summarizes Commercial's loan loss experience for each of the periods
indicated:
<TABLE>
<CAPTION>
Month Ended
June 30, Years Ended December 31,
---------------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------------------- --------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $62 $103 $103 $101 $93 $93 $91
Charge-offs:
Real estate-mortgage 0 0 0 0 0 0 0
Commercial, industrial and 0 0 50 13 0 10 5
agricultural
Consumer 4 0 0 0 0 1 0
Recoveries:
Real estate-mortgage 0 0 0 0 0 0 0
Commercial, industrial and 5 0 0 1 1 2 1
agricultural Consumer 0 0 0 0 0 0 0
Net charge-offs (recoveries) (1) 0 50 12 (1) 9 4
Provison for loan losses 0 5 9 14 7 9 6
--------------------- ---------------------------------------------------
Balance, end of period $63 $108 $62 $103 $101 $93 $93
===================== ===================================================
Ratio of net charge-offs to loans
outstanding at period end 0.00% 0.00% 0.48% 0.11% 0.00% 0.09% 0.05%
Loans outstanding at period end $10,687 $10,613 $10,320 $10,750 $10,202 $9,695 $8,419
</TABLE>
63
<PAGE> 65
This table shows the allocation of the allowance for loan losses as
of the end of each reported period:
<TABLE>
<CAPTION>
June 30, December 31,
----------------- --------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------------- --------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each in Each
Category Category Category Category Category Category
to Total to Total to Total to Total to Total to Total
Amt Loans Amt Loans Amt Loans Amt Loans Amt Loans Amt Loans
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real $31 73% $32 75% $39 73% $37 72% $33 67% $29 68%
estate -
mortgage
Real 1 3% 0 1% 1 1% 0 1% 2 4% 0 0%
estate -
construction
Commercial, 23 16% 22 15% 53 17% 54 17% 49 19% 55 22%
industrial
and
agricultural
Consumer 8 8% 8 9% 10 9% 10 10% 9 10% 9 10%
------------------ ---------------------------------------------------------------------------------------
$63 100% $62 100% $103 100% $101 100% $93 100% $93 100%
================== =======================================================================================
</TABLE>
Deposits Deposits experienced a minimal decrease from December 31, 1996
to June 30, 1998.
Total deposits increased by $376,000 from $14.1 million at December 31,
1996 to 14.5 million at December 31, 1997 or 2.7%. Noninterest bearing deposits
increased $177,000 and interest bearing deposits increased $199,000.
Total deposits decreased by $416,000 from $14.5 million at December 31,
1997 to $14.1 million at June 30, 1998 or 2.9%. Noninterest bearing deposits
increased $127,000 and interest bearing deposits decreased $543,000.
There are no foreign deposits at June 30, 1998.
The monthly average amounts of deposits and rates paid on such deposits
is summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
June 30, December 31,
---------------- --------------------------------------------------------------
1998 1997 1996 1995
Amount Rate Amount Rate Amount Rate Amount Rate
---------------- --------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $1,697 $1,489 $1,387 $1,324
Interest-bearing demand deposits 1,130 2.08% 1,044 2.11% 1,012 2.08% 937 2.13%
Money market accounts 717 4.05% 745 4.03% 583 3.95% 482 3.53%
Savings depoists 3,359 2.85% 3,081 2.86% 3,126 2.91% 3,054 2.95%
Time deposits 7,342 5.40% 7,953 5.83% 7,980 5.51% 7,086 5.14%
</TABLE>
64
<PAGE> 66
Maturities of time certificates of deposit of $100,000 or more
outstanding at June 30, 1998 are summarized as follows:
<TABLE>
<S> <C>
3 months or less $300
Over 3 through 6 months 700
Over 6 through 12 months 632
Over 12 months 0
----------
Total $1,632
==========
</TABLE>
Borrowings Commercial did not have any borrowings outstanding as of
December 31, 1995, 1996, 1997 or June 30, 1998. The only borrowings the Bank
incurred during these periods were federal funds purchased during 1995 and 1996.
Impact of Inflation and Changing Prices The financial statements of
Commercial and the notes thereto, presented elsewhere herein, have been prepared
in accordance with generally accepted accounting standards, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The impact is reflected in the increased cost of
Commercial's operations. Unlike most companies, nearly all of Commercial's
assets and liabilities are monetary. As a result, interest rates have a greater
impact on Commercial's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or the
same extent as the price of goods and services.
Shareholders' Equity Shareholders' equity was $1.4 million at December
31, 1997, an increase of approximately $80,000 from $1.3 million at December 31,
1996. The increase was comprised of net profits of $94,000, offset by dividends
paid to shareholders of $17,000.
Shareholders' equity increased by $37,000 million to $1.4 million at
June 30, 1998. The increase was made up of net profits of $37,000 for the first
six months of 1998.
Commercial is subject to risk-based capital rules. These guidelines
include a common framework for defining elements of capital and a system for
relating capital to risk. The minimum risk-based capital requirement is 8%.
Additionally, the general regulatory guidelines establish a minimum ratio of
leverage capital to adjusted total assets of 4% for top rated financial
institutions, with less highly rated institutions or those with higher levels of
risk, required to maintain ratios of 100 to 200 basis points above the minimum
level. As of June 30, 1998, the most recent notification from the Federal
Deposit Insurance Corporation has categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. There have been no
conditions or events since that notification that management believes have
changed Commercial's category.
65
<PAGE> 67
The following table reflects Commercial's capital ratios for the
periods presented:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
------------------ ------------------ ------------------
(In Thousands)
<S> <C> <C> <C>
CAPITAL COMPONENTS
Tier 1 $1,441 $1,404 $1,327
Total risk-based 1,504 1,466 1,412
ASSETS
Risk-weighted assets $6,811 $6,839 $6,751
Average tangible assets 15,914 16,039 15,884
CAPITAL RATIOS
Tier 1 risk-based capital 21.16% 20.53% 19.66%
Total risk-based capital 22.08% 21.44% 20.92%
Leverage 9.05% 8.75% 8.35%
MINIMUM REGULATORY GUIDELINES
Tier 1 risk-based capital 4.00% 4.00% 4.00%
Total risk-based capital 8.00% 8.00% 8.00%
Leverage 4.00% 4.00% 4.00%
</TABLE>
Year 2000 A great deal of information has been disseminated about the
global computer crash that may occur in the year 2000. Many computer programs
that can only distinguish the final two digits of the year entered (a common
programming practice in earlier years) are expected to read entries for the year
2000 as the year 1900 and compute payment, interest or delinquency based on the
wrong date or are expected to be unable to compute payment, interest or
delinquency. Rapid and accurate data processing is essential to the operation of
the Bank. Data processing is also essential to most other financial institutions
and many other companies.
The Bank has adopted a Year 2000 plan and are assessing their systems
and programs which may be data sensitive which are not affected by the planned
merger. The Bank has incurred minimal expense at June 30, 1998 does not expect
future costs to be material relating to Year 2000.
Market Risk Management Market risk is the risk of loss arising from
adverse changes in the fair value of financial instruments due to changes in
interest rates, exchange rates and equity prices. The Bank's market risk is
comprised principally of interest rate risk. Because of the nature of the Bank's
operations, the Bank is not subject to currency exchange or commodity price
risk, and since the Bank has no trading portfolio, it is not subject to trading
risk. Currently, the Bank has equity securities that represent only .68% of its
investment portfolio and, therefore, equity price risk is not significant. The
Bank's Asset/Liability committee is responsible for reviewing the interest rate
sensitivity position of the Bank and establishing policies to monitor and limit
exposure to interest rate risk. The guidelines established by the
Asset/Liability committee are subject to review by the Bank's Board of
Directors.
Liquidity and Interest Rate Sensitivity Liquidity represents the
ability to meet cash flow requirements of both depositors and customers
requesting bank credit. Management monitors projected liquidity needs and
determines the level desirable based in part on Bank's commitment to make loans
and management's assessment of the Bank's ability to generate funds.
The primary sources of funds are deposits, repayment of loans,
maturities of investments and funds provided from operations. While scheduled
repayments of loans and maturities of investment securities are predictable
sources of funds, deposit flows and loan prepayments are greatly influenced by
the general level of interest rates, economic conditions and competition. The
Bank uses its sources of funds to fund existing and future loan commitments, to
fund maturing certificates of deposit and demand deposit withdrawals, to invest
in other
66
<PAGE> 68
interest-earning assets, to maintain liquidity, and to meet operating expenses.
At June 30, 1998 time deposits compose 52% of total deposits, with
noninterest bearing and interest bearing demand deposits, savings deposits, and
money market accounts comprise 48% of total deposits. Commercial does not broker
certificates of deposits and held no such deposits as of June 30, 1998.
Rates on deposits are primarily based on the Bank's need for funds and
on a review of rates offered by other financial institutions in the Bank's
market areas. Interest rates on loans are primarily based on the interest rates
offered by other financial institutions in the Bank's primary market area, as
well, as the Bank's cost of funds.
Commercial's certificates of deposit scheduled to mature in one year or
less totaled $6.4 million at June 30, 1998; however, historically those deposits
have renewed with the Bank, and management anticipates that this trend will
continue since the Bank offers competitive rates of interest and instrument
terms with those offered by other financial institutions in its market area. At
June 30, 1998 Commercial had unused commitments totaling approximately $872,000.
These commitments are in the form of personal and business lines of credit and
undisbursed construction loans. The Bank anticipates that its liquidity will be
sufficient to meet loan requests and deposit repayments.
One of the principal functions of the Bank's asset/liability management
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of this program is to manage the relationship
between interest earning assets and interest-bearing liabilities to minimize the
fluctuations in the net interest spread and achieve consistent growth in the net
interest income during the periods of changing interest rates.
Interest rate sensitivity is the relationship of differences in the
amounts and repricing dates of interest-earnings assets and interest-bearing
liabilities. In order to measure, the impact on the net interest income and
pre-tax income, and to limit the adverse effect on earnings due to interest rate
changes, Commercial monitors interest rate sensitivity through gap and
simulation analyses. The Bank's gap model includes certain assumptions based on
past experience and expected customer behavior during periods of rising or
falling interest rates. These assumptions have been developed through
consideration of past events combined with estimates of future pricing
practices.
The difference between a financial institution's interest rate
sensitive assets and interest rate sensitive liabilities is commonly referred to
as its "gap" or "interest rate sensitivity gap." An institution having more
interest rate sensitive assets than interest rate sensitive liabilities within a
given time period is said to have a "positive gap"; an institution having more
interest rate sensitive liabilities than interest rate sensitive assets within a
given time period is said to have a "negative gap."
The table below is presented in conformity with industry standards and
provides a measure of the Bank's interest rate sensitivity at June 30, 1998. The
amount of assets or liabilities which reprice or mature within a period were
determined based on the contractual terms of the assets or liability. Demand
savings and money market deposit accounts reprice at management's discretion and
therefore are include in the amount repricing with in three months. This table
may not reflect the actual impact on the Bank's changes in interest rates
because the repricing of various categories of rate sensitive assets and
liabilities are subject to other factors such as competition, customer
preference, and management influence.
67
<PAGE> 69
Results Of Operations
ASSET & LIABILITY INTEREST RATE SENSITIVITY
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
Within Three to After
Three Twelve One to Five Five
Months Months Years Years Total
--------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest Earning Assets
Federal Funds sold $970 $0 $0 $0 $970
Securities (1) 600 1,212 1,396 22 3,230
Loans (2) 339 330 1,248 8,753 10,670
--------------------------------------------------------------------
Total interest earning assets 1,909 1,542 2,644 8,775 14,870
--------------------------------------------------------------------
Interest Bearing Liabilities
Demand, Savings, MMDA 5,094 0 0 0 5,094
Time deposits 794 5,621 901 0 7,316
--------------------------------------------------------------------
Interest bearing liabilities 5,888 5,621 901 0 12,410
--------------------------------------------------------------------
Interest earning assets less interest
bearing liabilities (maturity gap) ($3,979) ($4,079) $1,743 $8,775 $2,460
====================================================================
Cumulative interest rate sensitivity gap ($3,979) ($8,058) ($6,315) $2,460
=====================================================
Cumulative interest rate sensitivity gap
as a percent of total interest earning assets (26.76%) (54.19%) (42.47%) 16.54%
=====================================================
Cumulative interest rate sensitivity gap
as a percent of total assets (25.48%) (51.61%) (40.44%) 15.76%
=====================================================
</TABLE>
(1) Securities include equity security of Federal Reserve Bank Stock.
(2) Loans exclude non-accrual loans and is net of deferred loan fees.
68
<PAGE> 70
The following tables present for the periods indicated, the total
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. Net interest
margin refers to the net interest income divided by total interest-earning asset
and is influenced by the level and relative mix of interest-earning assets and
interest-bearing liabilities. Average balances were computed on a monthly basis.
The average balance sheet and net interest income analysis for six
months ended June 30, 1998 and 1997 and for the years ended December 31, 1997,
1996, and 1995 is as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
-------------------------- -------------------------
Average Yield/ Average Yield/
Balance (1) Interest Rate Balance (1) Interest Rate
----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (2) $10,453 $416 7.96% $10,746 $417 7.76%
Taxable investment securities 3,116 92 5.91% 3,073 91 5.92%
Tax-exempt investment securities 113 3 5.31% 115 3 5.22%
Federal funds sold 1,346 38 5.65% 1,021 29 5.68%
-------------------------- -------------------------
Total interest-earning assets 15,028 549 7.31% 14,955 540 7.22%
Noninterest-earning assets
Cash and due from banks 470 449
Premises and equipment 232 250
Other assets 149 159
Less allowance for loan losses 64 105
------------- -------------
$15,815 $15,708
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits $1,130 $12 2.12% $1,058 $11 2.08%
Money market accounts 717 14 3.91% 718 14 3.90%
Savings deposits 3,359 48 2.86% 2,988 43 2.88%
Time deposits 7,342 198 5.39% 7,985 223 5.59%
-------------------------- -------------------------
Total interest-bearing liabilities 12,548 272 4.34% 12,749 291 4.57%
Noninterest-bearing liabilities:
Demand deposits 1,697 1,450
Other 148 164
Shareholders' equity 1,422 1,345
------------- -------------
$15,815 $15,708
============= =============
Net interest income $277 $249
============= ============
Net yield on interest-earning assets (3) 3.69% 3.33%
Interest rate spread (4) 2.97% 2.65%
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.76% 117.30%
</TABLE>
(1)Average balances were compiled on a monthly basis.
(2)Average balances include non-accrual loans.
(3)Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4)Interest rate spread represents the difference between the average yield on
interest-earning assets and the cost of interest-bearing liabilities.
69
<PAGE> 71
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance (1) Interest Rate Balance (1) Interest Rate Balance (1) Interest Rate
----------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (2) $10,634 $850 7.99% $10,712 $874 8.16% $9,961 $807 8.10%
Taxable investment securities 3,101 188 6.06% 2,991 167 5.58% 3,168 165 5.21%
Tax-emempt investment 115 5 4.35% 217 12 5.53% 255 13 5.10%
securities
Federal funds sold 1,239 69 5.57% 819 44 5.37% 361 23 6.37%
--------------------- ---------------------- ---------------------
Total interest-earning assets 15,089 1,112 7.37% 14,739 1,097 7.44% 13,745 1,008 7.33%
Noninterest-earning assets
Cash and due from banks 453 474 423
Premises and equipment 245 250 263
Other assets 154 175 146
Less allowance for loan losses 105 102 96
------------ ------------- ------------
$15,836 $15,536 $14,481
============ ============= ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Demand deposits $1,044 $22 2.11% $1,012 $21 2.08% $937 $20 2.13%
Money market accounts 745 30 4.03% 583 23 3.95% 482 17 3.53%
Savings deposits 3,081 88 2.86% 3,126 91 2.91% 3,054 90 2.95%
Time deposits 7,953 448 5.63% 7,980 440 5.51% 7,086 364 5.14%
Federal funds purchased 0 0 0.00% 8 0 0.00% 225 14 6.22%
--------------------- ---------------------- ---------------------
Total interest-bearing 12,823 588 4.59% 12,709 575 4.52% 11,784 505 4.29%
liabilities
Noninterest-bearing liabilities:
Demand deposits 1,489 1,387 1,324
Other 159 160 159
Shareholders' equity 1,365 1,280 1,214
------------ ------------- ------------
$15,836 $15,536 $14,481
============ ============= ============
--------- --------- ---------
Net interest income $524 $522 $503
========= ========= =========
Net yield on interest-earning
assets 3.47% 3.54% 3.66%
Interest rate spread 2.78% 2.92% 3.04%
Ratio of average interest-earning
assets to average
interest-bearing liabilities 117.67% 115.97% 116.64%
</TABLE>
(1)Average balances were computed on a monthly basis.
(2)Average balances include non-accrual loans.
(3)Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4)Interest rate spread represents the difference between the average yield on
interest-earning assets and the cost of interest-bearing liabilities.
70
<PAGE> 72
Net interest income is affected by changes in the level of
interest-earning assets and interest-bearing liabilities and changes in yields
earned on assets and rates paid on liabilities. The following table sets forth,
for the periods indicated a summary of the impact on interest income and
interest expense of changes in average assets and liability balances and changes
in average rates. For each category of interest-earning assets and
interest-bearing liabilities information is provided on changes attributable to
(i) changes in volume (changes in average volume multiplied by old rate; (ii)
and changes in rates (changes in rate multiplied by old average volume).
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
1998 vs 1997 1997 vs 1996
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------ --------------------------------------
Volume Rate Net Volume Rate Net
------------------------------------ --------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans ($23) $22 ($1) ($6) ($18) ($24)
Taxable investment securities 3 (2) 1 6 15 21
Tax-exempt investment securities 0 0 0 (6) (1) (7)
Federal funds sold 18 (9) 9 23 2 25
------------------------------------- -------------------------------
Total interest-earning assets (2) 11 9 17 (2) 15
------------------------------------- -------------------------------
Interest paid on:
Demand deposits 1 0 1 1 0 1
Money market accounts 0 0 0 6 1 7
Savings deposits 11 (6) 5 (1) (2) (3)
Time deposits (36) 11 (25) (1) 9 8
------------------------------------- -------------------------------
Total interest-bearing liabilities (24) 5 (19) 5 8 13
------------------------------------- -------------------------------
Change in net interest income $22 $6 $28 $12 ($10) $2
===================================== ===============================
</TABLE>
Return on Equity and Assets
The ratio of net income to average monthly total assets and monthly
average shareholders' equity, and certain other ratios, are as follows:
<TABLE>
<CAPTION>
June 30 December 31,
-------------------------- -------------------------------------
1998 1997 1997 1996 1995
-------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
Percentage of net income to:
Average total assets 0.46% 0.50% 0.59% 0.62% 0.59%
Average shareholders' equity 5.17% 5.88% 6.88% 7.54% 7.10%
Percentage of dividends declared per common
share to net income per common share N/A N/A 18.28% 16.74% 17.61%
Percentage of average shareholders' equity to
average total assets 8.99% 8.56% 8.62% 8.24% 8.33%
</TABLE>
71
<PAGE> 73
Comparison of the year ended December 31, 1997 and 1996.
Net Income Net income for 1997 was $94,000 compared to $97,000 for
1996, a decrease of $3,000 or 3.1%. The return on average assets was .59% for
1997 and .62% for 1996. The return on average equity was 6.88% for 1997 compared
to 7.54% for 1996.
Net Interest Income Net interest income increased $2,000 or .4% to
$524,000 for 1997 as compared to $522,000 for 1996. Interest income, which
totaled $1,112,000 for 1997 as compared to $1,097,000 for 1996 increased $15,000
or 1.4%. The increase in interest income was offset by an increase in interest
expense of $13,000, a 2.3% increase in interest expense.
Interest Income The increase in interest income was due to an increase
in income on federal funds sold of $25,000 or 55.2% and investment securities of
$14,000 or 7.9%. These increases were due primarily to increase in the average
principal balance on federal funds and rate increases on investments. Earnings
on loans experienced an overall decrease of $24,000 or 2.7%. This decrease was
due to a combination of a decrease in loan volume and rates.
Interest Expense Total interest expense increased $13,000 or 2.3% from
$575,000 for 1996 to $588,000 for 1997. The increase for 1997 was primarily due
to an increase in the average volume of money market accounts and an increase in
the rate paid on time deposits.
Provision for Loan Losses The provision for loan losses amounted to
$9,000 for 1997 compared to $13,000 in 1996. Management continually evaluates
the adequacy of the allowance for loan losses, which encompasses the overall
risk characteristics of the loan portfolio, trends in the Bank's delinquent and
nonperforming loans, and the impact of economic conditions on borrowers. There
can be no assurances, however, that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.
Other Income Other income was $55,000 for both 1997 and 1996. Service
fees on deposit accounts decreased by $2,000 while other service charges and
fees increased by $2,000.
Other Expense Other expense increased by $11,000 or 2.5% from $446,000
for 1996 to $457,000 for 1997. Compensation and benefits increased $5,000 or
2.3% due to normal salary adjustments. Occupancy and equipment expense increased
$5,000 or 5.6% primarily due to increases in maintenance and supplies. Other
expenses increased by $1,000 or .7% due to general overall adjustments to the
expense accounts.
Income Taxes Income tax expense decreased by $2,000 from $21,000 for
1996 to $19,000 for 1997 as a result of a lower level of pre-tax income. The
effective tax rate is less than the statutory federal income tax rate of 34% due
mainly to the Bank's level of income and tax-exempt income.
Comparison of the six months ended June 30, 1998 and 1997
Net Income Net income amounted to $37,000 in 1998 compared to $40,000
in 1997, a decrease of $3,000 or 7.5%. The annualized return on average assets
was .46% for 1998 and .50% for 1997. The annualized return on average equity was
5.17% in 1998 compared to 5.88% in 1997.
Net Interest Income Net interest income increased $28,000 or 11.2% to
$277,000 for 1998 as compared to $249,000 for 1997. Total interest income
increased $9,000 while total interest expense decreased $19,000.
Interest Income The majority of the increase in interest income was due
to an increase in income on federal funds sold of $9,000. This increase was due
to an increase in the average balance of federal funds sold of $325,000, offset
by a slight decline in the yield paid on federal funds.
Interest Expense Total interest expense decreased by $19,000 or 6.5%
from $291,000 for 1997 to $272,000 for 1998. Interest expense on time deposits
decreased by $25,000 while interest expense on savings deposits increased
$5,000. The majority of the decrease in time deposit expense was due to a
decrease in the average balance outstanding of $643,000. The majority of the
increase in savings deposit expense was due to an increase in
72
<PAGE> 74
the average balance outstanding of $371,000.
Provision for Loan Losses The provision for loan losses amounted to
$-0- for 1998 and $4,500 for 1997. The decrease in the provision is the result
of management's continual evaluation of the loan portfolio.
Other Income Other income decreased by $8,000. This decrease is mainly
attributable to a decline for 1998 in activity relating to returned check
charges.
Other Expense Other expense increased by $27,000 or 12.0% from $225,000
for 1997 to $252,000 for 1998. The increase was primarily the result of
increases in salaries and employee benefits of $4,000 due to normal salary and
benefit adjustments and increases in legal and professional fees of $22,000 due
to the pending merger.
Federal Income Tax Income tax expense was approximately $7,000 for both
1998 and 1997 due to the level of pre-tax income remaining fairly constant for
1998 and 1997. The effective rate is less than the standard federal income tax
rate of 34% due mainly to the Bank's level of income and tax-exempt income.
Comparison of the three months ended June 30, 1998 and 1997
Net Income Net income was $18,000 for both 1998 and 1997.
Net Interest Income Net interest income increased $19,000 or 15.2% to
$144,000 for 1998, as compared to $125,000 for 1997. Total interest income
increased $7,000 while total interest expense decreased $12,000.
Interest Income Income from federal funds sold increased $7,000 due
mainly to an increased in 1998 of $490,000 in the average balance of federal
funds sold. A $3,000 increase in interest and fees on loans was offset by a
$3,000 decrease in investment income.
Interest Expense Total interest expense decreased by $11,000 or 7.4%
from $148,000 for 1997 to $137,000 for 1998. This decrease is mainly attributed
to a decrease in 1998 of $660,000 in the average balance of time deposits.
Provision for Loan Losses The provision for loan losses amounted to
$-0- for 1998 and $3,000 for 1997. The decrease in the provision is the result
of management's continual evaluation of the loan portfolio.
Other Income Other income decreased by $5,000. This decrease is mainly
attributable to a decline for 1998 in activity relating to returned check
charges.
Other Expense Other expense increased by $17,000. Professional and
legal fees increased $21,000 due to the pending merger, while all other expenses
combined decreased $4,000.
Federal Income Tax Income tax expense was approximately $3,000 for both
1998 and 1997 due to the level of pre-tax income remaining fairly constant for
1998 and 1997. The effective rate is less than the statutory federal income tax
rate of 34% due mainly to the Bank's level of income and tax-exempt income.
VOTING, PRINCIPAL SHAREHOLDERS AND MANAGEMENT INFORMATION
Holders of record of Commercial Common Stock at the close of business
on the Record Date will be entitled to vote at the Special Meeting of
shareholders. On the Record Date there were 20,200 shares of Commercial Common
Stock issued and outstanding. Each share of Commercial Common Stock is entitled
to one vote on each matter presented for shareholder action.
73
<PAGE> 75
There are no beneficial owners of 5% or more of outstanding Commercial
Common Stock.
The following table shows certain information concerning the number of
shares of Commercial Common Stock held as of September 30, 1998, by each
director of Commercial and by all of Commercial's directors and executive
officers as a group:
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially owned at
Name & Age September 30, 1998 Percent of Class
---------- ------------------ ----------------
<S> <C> <C> <C>
Lawrence E. Payne Age 68 960(1) 4.75%
Lanny Parrish Age 60 190(2) *
Richard E. Burwell Age 73 183(3) *
Donald D. Rogers Age 53 330(4) 1.63%
Wendell Spearman Age 78 205(5) 1.01%
Ted Bratton Age 38 105(6) *
Robert K. Wagner Age 63 200 *
Judy Klavins Age 58 165(7) *
Donald C. Weiser Age 75 50 *
All Directors and Executive Officers as a 2,388 11.82%
group
</TABLE>
- --------------------------------------------
*Indicates less than one percent.
(1) Includes 555 shares owned individually and 405 shares owned by spouse.
(2) Includes 50 shares owned individually, 10 shares owned by estate of
deceased wife and 130 shares owned by estate of deceased mother.
(3) Includes 108 shares owned as trustee and 75 shares owned individually.
(4) Includes 50 shares owned individually and 280 shares owned jointly with
spouse.
(5) Includes 143 shares owned individually and 62 shares owned jointly with
spouse.
(6) Includes 55 shares owned individually and 50 shares owned jointly with
spouse.
(7) Includes 146 shares owned individually and 19 shares owned by spouse.
CURRENT RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and executive officers of Commercial and their associates
are customers of and have had transactions with Commercial from time to time in
the ordinary course of business. Such transactions have been made on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the time for comparable transactions with other persons
and did not and will not involve more than the normal risk of or
present other unfavorable features. Similar transactions may be expected to take
place in the ordinary course of business in the future.
LEGAL PROCEEDINGS
There is no pending litigation of a material nature in which
Commercial is a party or to which any of its property is subject. Further, there
is no material legal proceeding in which any director, executive officer,
principal shareholder or affiliate of Commercial, or any associate of any such
director, executive officer, principal shareholder or affiliate, is a party or
has a material interest adverse to Commercial. None of the ordinary routine
litigation in which Commercial is involved is expected to have a material
adverse effect on the financial condition, results of operations or business of
Commercial.
LEGAL OPINIONS
Certain legal matters in connection with the Merger will be passed upon
for Killbuck by Werner & Blank Co., L.P.A., Toledo, Ohio and by Dinsmore &
Shohl, LLP, Cincinnati, Ohio, for Commercial.
74
<PAGE> 76
EXPERTS
The consolidated financial statements of Killbuck as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 have been audited by S.R. Snodgrass, A.C., independent auditors in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The financial statements of Commercial as of December 31, 1997, and for
the year then ended December 31, 1997, have been audited by S.R. Snodgrass,
A.C., independent auditors in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
75
<PAGE> 77
COMMERCIAL & SAVINGS BANK CO.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
COMMERCIAL FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997, AND 1996
AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 1997
Report of Independent Auditors F-2
Balance Sheets F-3
Statements of Income F-4
Statements of Changes in Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
COMMERCIAL INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Unaudited Balance Sheets F-17
Unaudited Statements of Income F-18
Unaudited Statements of Changes in Shareholders' Equity F-20
Unaudited Statements of Cash Flows F-21
Notes to Unaudited Financial Statements F-22
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
The Commercial and Savings Bank Co.
Danville, Ohio
We have audited the accompanying balance sheet of The Commercial and Savings
Bank Co. as of December 31, 1997, and the related statements of income, changes
in shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Commercial and Savings Bank
Co. as of December 31, 1997, and the results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ S. R. Snodgrass
Steubenville, Ohio
July 24, 1998
F-2
<PAGE> 79
THE COMMERCIAL AND SAVINGS BANK CO.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 415,437 $ 314,860
Federal funds sold 1,700,000 1,140,000
------------- -------------
Total cash and cash equivalents 2,115,437 1,454,860
------------- -------------
Investment securities:
Securities available for sale 622,150 419,588
Securities held to maturity (market value of $2,619,518 and
$2,617,610) 2,605,636 2,605,970
------------- -------------
Total investment securities 3,227,786 3,025,558
------------- -------------
Loans 10,320,246 10,750,442
Less allowance for loan losses 62,096 102,815
------------- -------------
Net loans 10,258,150 10,647,627
------------- -------------
Premises and equipment, net 237,523 255,695
Accrued interest 98,014 99,102
Other assets 49,341 66,011
------------- -------------
Total assets $ 15,986,251 $ 15,548,853
============= =============
LIABILITIES
Deposits:
Noninterest bearing demand $ 1,554,430 $ 1,377,475
Interest bearing demand 1,888,106 1,743,243
Savings 3,298,131 2,994,424
Time 7,767,112 8,016,960
------------- -------------
Total deposits 14,507,779 14,132,102
Accrued expenses and other liabilities 73,088 91,543
------------- -------------
Total liabilities 14,580,867 14,223,645
------------- -------------
SHAREHOLDERS' EQUITY
Common stock - 20,200 shares authorized, issued and
outstanding with $10 par value 202,000 202,000
Capital surplus 544,300 544,300
Retained earnings 657,723 581,025
Net unrealized gain (loss) on securities available for sale 1,361 (2,117)
------------- -------------
Total shareholders' equity 1,405,384 1,325,208
------------- -------------
Total liabilities and shareholders' equity $ 15,986,251 $ 15,548,853
============= =============
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE> 80
THE COMMERCIAL AND SAVINGS BANK CO.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 850,356 $ 873,693
Federal funds sold 69,284 44,653
Investment securities:
Taxable 187,647 166,870
Tax exempt 5,033 11,563
------------ -----------
Total interest income 1,112,320 1,096,779
INTEREST EXPENSE
Deposits 588,180 574,879
------------ -----------
NET INTEREST INCOME 524,140 521,900
Provision for loan losses 9,000 13,500
------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 515,140 508,400
- --------------------------------------------------- ------------ -----------
OTHER INCOME
Service fees on deposit accounts 38,434 40,743
Other 16,264 14,610
------------ -----------
Total other income 54,698 55,353
------------ -----------
OTHER EXPENSE
Salaries and employee benefits 218,955 214,284
Occupancy expense 34,452 32,672
Equipment expense 59,387 55,998
Other expenses 143,884 143,023
------------ -----------
Total other expense 456,678 445,977
------------ -----------
INCOME BEFORE INCOME TAXES 113,160 117,776
Income taxes 19,292 21,225
------------ -----------
NET INCOME $ 93,868 $ 96,551
============ ===========
PER SHARE DATA
Earnings per common share $4.65 $4.78
===== =====
Average shares outstanding 20,200 20,200
====== ======
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE> 81
THE COMMERCIAL AND SAVINGS BANK CO.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Securities Total
Common Capital Retained Available Shareholders'
Stock Surplus Earnings For Sale Equity
----- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 (UNAUDITED) $202,000 $544,300 $500,634 $ - $1,246,934
Net income 96,551 96,551
Dividends paid ($.80 per share) (16,160) (16,160)
Net unrealized loss on securities (2,117) (2,117)
-------- -------- -------- ------- ----------
BALANCE, DECEMBER 31, 1996 (UNAUDITED) 202,000 544,300 581,025 (2,117) 1,325,208
Net income 93,868 93,868
Dividends paid ($.85 per share) (17,170) (17,170)
Net unrealized gain on securities 3,478 3,478
-------- -------- -------- ------- ----------
BALANCE, DECEMBER 31, 1997 $202,000 $544,300 $657,723 $ 1,361 $1,405,384
======== ======== ======== ======= ==========
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE> 82
THE COMMERCIAL AND SAVINGS BANK CO.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 93,868 $ 96,551
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 9,000 13,500
Provision for depreciation and amortization 26,621 29,962
Decrease in accrued interest and other assets 17,757 24,167
Decrease in accrued expenses and other liabilities (16,962) (1,483)
(Decrease) increase in federal income tax payable (2,708) 5,216
Decrease in deferred federal income tax (577) (3,992)
---------- -----------
Net cash provided by operating activities 126,999 163,921
---------- -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (196,656) (400,562)
Investment securities held to maturity:
Proceeds from maturities 601,000 2,221,703
Purchases (596,844) (1,802,169)
Net decrease (increase) in loans 380,477 (555,267)
Purchases of premises and equipment (12,907) (26,098)
---------- -----------
Net cash provided by (used for) investing activities 175,070 (562,393)
---------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings
deposit accounts 625,526 (142,166)
Net (decrease) increase in time deposits (249,848) 225,181
Cash dividends paid (17,170) (16,160)
---------- -----------
Net cash provided by financing activities 358,508 66,855
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 660,577 (331,617)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,454,860 1,786,477
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,115,437 $ 1,454,860
========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE> 83
THE COMMERCIAL AND SAVINGS BANK CO.
NOTES TO DECEMBER 31, 1997 FINANCIAL STATEMENTS
(ALL DATA RELATED TO DECEMBER 31, 1996 AND THE
YEAR THEN ENDED ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of The Commercial and Savings Bank
Co. conform with generally accepted accounting principles and with general
practice within the banking industry.
A summary of the significant accounting and reporting policies applied in
the presentation of the financial statements follows:
NATURE OF OPERATIONS
The Commercial and Savings Bank Co. is a full service state chartered bank
located in Danville, Ohio. The Bank is regulated and supervised by the State of
Ohio, Division of Banks and the Board of Govenors of the Federal Reserve Bank.
The bank derives its income from banking and bank-related services which include
interest earnings on real estate, commercial and consumer loan financing as well
as interest earnings on investment securities and charges for deposit services
to its customers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is based
on estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans, management obtains independent appraisals for
significant collateral.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgments about information available to them at the time
of their examination. Because of these factors, it is reasonably possible that
the estimated losses on loans may change materially in the near term. However,
the amount of the change that is reasonably possible cannot be estimated.
INVESTMENTS SECURITIES
Investment securities are classified, at the time of purchase, based upon
managements' intention and ability, as securities held to maturity or securities
available for sale. Debt securities acquired with the intent to hold to maturity
are stated at cost adjusted for amortization of premium and accretion of
discount which are computed using a method which approximates the effective
interest method. Certain other equity securities have been classified as
available for sale to serve principally as a source of liquidity. Unrealized
holding gains and losses on available for sale securities are reported as a
separate component of stockholders' equity, net of tax, until realized. Realized
securities gains and losses are computed using the specific identification
method. Interest and dividends on investment securities are recognized as
income when earned.
Common stock of the Federal Reserve Bank is accounted for at cost and is
classified with equity securities available for sale.
F-7
<PAGE> 84
LOANS
Loans are stated at their outstanding principal, less the allowance for loan
losses and any net deferred loan fees. Interest income on loans is recognized on
the accrual method. Accrual of interest on loans is discontinued when management
believes, after considering economic and business conditions and collection
effects, that the borrower's financial condition is such that collection of
interest is doubtful.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents the amount which management
estimates is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance, and all recoveries are credited to it. The
allowance for loan losses is established through a provision for loan losses
which is charged to operations. The provision is based upon management's
periodic evaluation of individual loans, the overall risk characteristics of the
various portfolio segments, past experience with losses, the impact of economic
conditions on borrowers, and other relevant factors. The estimates used in
determining the adequacy of the allowance for loan losses including the amounts
and timing of future cash flows expected on impaired loans, are particularly
susceptible to significant change in the near term.
Impaired loans are commercial and commercial real estate loans for
which it is probable that the Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Bank individually
evaluates such loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. The Bank
may choose to place a loan on nonaccrual status due to payment delinquency or
uncertain collectibility, while not classifying the loan as impaired, provided
the loan is not a commercial or commercial real estate classification. Factors
considered by management in determining impairment include payment status and
collateral value. The amount of impairment for these types of loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original interest rate, and its recorded
value, or as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral.
Mortgage loans secured by one-to-four family properties and all
consumer loans are generally of smaller balances, and a homogeneous nature, thus
are measured for impairment collectively. Loans that experience insignificant
payment delays, which are defined as 90 days or less, generally are not
classified as impaired. Management determines the significance of payment delays
on a case-by-case basis, taking into consideration all of the circumstances
concerning the loan, the credit worthiness and payment history of the borrower,
the length of the payment delay, and the amount of shortfall in relation to the
principal and interest owed.
PREMISES AND EQUIPMENT
Land is carried at cost. Other premises and equipment are carried at cost
net of accumulated depreciation. Depreciation is computed using the
straight-line method based principally on the estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred while major additions
and improvements are capitalized. Gains and losses on dispositions are included
in current operations.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.
F-8
<PAGE> 85
EARNINGS PER SHARE
Earnings per share are calculated based upon the weighted number of shares
of stock outstanding during the year.
In February, 1997 the Financial Accounting Standard Board issued Statement
No. 128 "Earnings Per Share" ("EPS"). The statement established new standards
for computing and presenting earnings per share and requires dual presentation
of "basic" and "diluted" earnings per share on the face of the income statement.
The provision of the statement are effective for the period ending December 31,
1997. The Bank maintains a simple capital structure, therefore, there are no
dilutive effects on earnings per share.
CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents include cash
and non-interest bearing deposits with financial institutions and federal funds
sold. Generally, federal funds are sold for one-day periods. The Bank reports
net cash flows for customer loan transactions, deposit transactions, and
interest-bearing deposits with other financial institutions. Cash payments for
interest in 1997 and 1996 were $590,025 and $581,273, respectively. Cash
payments for income taxes in 1997 and 1996 were $22,577 and $20,000,
respectively.
CONCENTRATIONS OF CREDIT RISK
The Bank, through its only location in Danville, Ohio, services its
customers mainly in Knox County, Ohio and the surrounding counties. The Bank's
loans are generally secured by specific items of collateral including real
property, consumer assets and business assets. Real estate loans account for
approximately 83% of the loan portfolio at December 31, 1997 and are secured by
both residential and commercial real estate.
Deposit accounts of U.S. Government and State and Political
subdivisions account for approximately 15% of total deposits of the Bank at
December 31, 1997.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." The
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings based
on a control-oriented "financial-components" approach. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes liabilities
when extinguished. The provisions of Statement No. 125 are effective for
transactions occurring after December 31, 1996, except those provisions relating
to repurchase agreements, securities lending, and other similar transactions and
pledged collateral, which have been delayed until after December 31, 1997 by
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of
Statement No. 125, an amendment of Statement No. 125." The adoption of the
provisions of Statement No. 127 is not expected to have a material impact on
financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. It requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. The provisions of the
statement are effective for all fiscal years beginning after December 15, 1997.
The adoption of this statement is not expected to have a material impact on
financial position or results of operations.
F-9
<PAGE> 86
2. FEDERAL FUNDS SOLD
Federal funds sold at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------------------------- -------------------------
Institution Maturity Balance Maturity Balance
----------- -------- ------- -------- -------
<S> <C> <C> <C> <C>
National Bank of Detroit 1-02-98 $ 500,000 1-02-97 $ 500,000
Huntington National Bank 1-02-98 1,200,000 1-02-97 640,000
----------- -----------
$ 1,700,000 $ 1,140,000
=========== ===========
</TABLE>
3. INVESTMENT SECURITIES
The amortized cost of securities and their estimated market values at
December 31 are as follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $597,689 $2,969 $908 $599,750
Equity securities 22,400 - - 22,400
-------- ------ ---- --------
Total $620,089 $2,969 $908 $622,150
======== ====== ==== ========
<CAPTION>
1996
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $400,423 $ - $3,235 $397,188
Equity securities 22,400 - - 22,400
-------- ------ ------ --------
Total $422,823 $ - $3,235 $419,588
======== ====== ====== ========
SECURITIES HELD TO MATURITY
<CAPTION>
1997
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $2,292,419 $12,832 $346 $2,304,905
Obligations of U.S. Government
Agencies and Corporations 200,000 688 - 200,688
Obligations of States and Political
Subdivisions 113,217 708 - 113,925
---------- ------- ---- ----------
Total $2,605,636 $14,228 $346 $2,619,518
========== ======= ==== ==========
</TABLE>
F-10
<PAGE> 87
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $2,290,534 $15,483 $3,657 $2,302,360
Obligations of U.S. Government
Agencies and Corporations 200,000 1,550 - 201,550
Obligations of States and Political
Subdivisions 115,436 - 1,736 113,700
---------- ------- ------ ----------
Total $2,605,970 $17,033 $5,393 $2,617,610
========== ======= ====== ==========
</TABLE>
The contractual maturities of securities available for sale and
securities to be held to maturity at December 31, 1997 are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities Available Securities to be
For Sale Held to Maturity
----------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $400,158 $399,250 $ 899,509 $ 900,780
Due after one year through five years 197,531 200,500 1,706,127 1,718,738
-------- -------- ---------- ----------
$597,689 $599,750 $2,605,636 $2,619,518
======== ======== ========== ==========
</TABLE>
Investment securities with an approximate carrying value of $1,988,000
and $1,796,000 at December 31, 1997 and 1996, respectively were pledged to
secure public deposits and for other purposes as required or permitted by law.
There were no securities called or sold in 1997 or 1996.
4. LOANS
Major classification of loans at December 31, are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Real estate - residential $ 7,827,020 $ 7,924,098
Real estate - farm 735,503 620,031
Real estate - construction 89,807 109,543
Commercial and other loans 828,533 1,218,227
Consumer 836,291 870,216
Credit cards 71,471 80,445
----------- -----------
10,388,625 10,822,560
Allowance for loan losses (62,096) (102,815)
Net deferred loan fees (68,379) (72,118)
----------- -----------
Loans, net $10,258,150 $10,647,627
=========== ===========
</TABLE>
The Bank's primary business activity is with customers located within
its local trade area. Residential, commercial, personal, and agricultural loans
are granted. The Bank also selectively funds loans originated outside of its
trade area provided such loans meet its credit policy guidelines. Loans
outstanding to individuals and businesses are dependent upon the local economic
conditions in its immediate trade area.
F-11
<PAGE> 88
4. LOANS (CONTINUED)
At December 31, 1997, the Bank had loans totaling $3,845 which were
past due 90 days or more and still accruing interest. Presented below are total
nonaccuring loans at December 31, 1997 and 1996 which in management's opinion
did not meet the definition of impaired. Also shown is the additional income
that would have been earned if those loans had been current throughout the years
ended.
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
Nonaccrual loans $50,000 $101,000
Interest earned (if current) $10,282 $ 11,406
</TABLE>
5. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C> <C>
Balance, January 1 $102,815 $101,158
Provision for loan losses 9,000 13,500
Recoveries 281 842
Credits charged off (50,000) (12,685)
-------- --------
Balance, December 31 $ 62,096 $102,815
======== ========
</TABLE>
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Land and premises $403,435 $402,335
Furniture, fixtures and equipment 466,529 454,722
-------- --------
869,964 857,057
Less accumulated depreciation 632,441 601,362
-------- --------
Total $237,523 $255,695
======== ========
</TABLE>
Depreciation expense charged to operations was $31,079 and $30,511 for
1997 and 1996, respectively.
7. DEPOSITS
Time deposits include certificates of deposit in denominations of
$100,000 or more. Such deposits aggregated $1,928,812 and $2,028,497 at
December 31, 1997 and 1996, respectively.
Interest expense on certificates of deposit $100,000 and over amounted
to $110,292 and $109,402 in 1997 and 1996, respectively.
The following table sets forth the remaining maturity of time
certificates of deposits of $100,000 or more at December 31, 1997.
<TABLE>
<S> <C>
3 months or less $ 900,000
Over 3 through 6 months 110,849
Over 6 through 12 months 800,000
Over 12 months 117,963
----------
Total $1,928,812
==========
</TABLE>
F-12
<PAGE> 89
8. EMPLOYEE BENEFIT PLAN
The Bank sponsors a defined benefit pension plan that covers certain
employees based on their age and months of service. The plan is funded by
individually allocated retirement income and retirement annuity contracts.
Assets of the plan equal cash values of the contracts. The allocated insurance
contract's cash values fully guarantee the amount of benefit payments.
Pension costs charged to operating expense amounted to $25,310 and
$23,413 for 1997 and 1996 respectively.
9. OTHER EXPENSE
Other expense at December 31 included the following:
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Stationery, supplies and printing $ 10,175 $ 6,826
Directors and committee fees 11,250 9,600
Franchise tax 19,910 18,704
Legal and accounting 16,273 17,913
Professional fees 11,729 11,963
Other 74,547 78,017
-------- --------
Total $143,884 $143,023
======== ========
</TABLE>
10. INCOME TAXES
Federal income taxes applicable to income were comprised as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Current payable $19,869 $25,217
Deferred (577) (3,992)
------- -------
Total $19,292 $21,225
======= =======
</TABLE>
The following is a reconcilement of federal income tax expense to the
amount computed at the expected statutory rate.
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computed tax at expected statutory rate $ 38,474 $ 40,043
Surtax exemption (11,092) (10,860)
Tax-exempt income (6,048) (6,580)
Other (2,042) (1,378)
-------- --------
$ 19,292 $ 21,225
======== ========
</TABLE>
F-13
<PAGE> 90
Deferred tax assets and liabilities included in other liabilities at
December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Deferred Tax Assets:
Deferred loan fees $ 5,943 $ 7,691
Non-accrual loan interest 3,077 1,056
Net unrealized loss on securities - 1,091
------- -------
Deferred tax asset 9,020 9,838
------- -------
Deferred Tax Liabilities:
Allowance for loan losses 11,661 12,227
Premise and equipment depreciation 11,684 10,867
Net unrealized gain on securities 701 -
Other, net 317 872
------- -------
Deferred tax liabilities 24,363 23,966
------- -------
Net deferred tax liabilities $15,343 $14,128
======= =======
</TABLE>
11. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
In the normal course of business, the Bank has outstanding commitments
and contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying financial
statements. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Bank uses the same credit policies in making
such commitments as it does for instruments that are included in the balance
sheet.
Financial instruments whose contract amount represents credit risk were
as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Commitments for real estate $110,193 $169,857
Lines of credit $134,605 $104,687
Credit card arrangements $215,737 $230,923
</TABLE>
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 amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness 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. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
These commitments represent normal banking transactions and in management's
opinion, no material losses are expected from these commitments.
CONTINGENT LIABILITIES
The Bank is subject to claims and lawsuits which arise primarily in the
ordinary course of business. It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not have a
material adverse effect on the financial position of the Bank.
F-14
<PAGE> 91
12. RELATED PARTY TRANSACTIONS
In the normal course of business, loans are extended to directors,
executive officers, and their associates. In management's opinion, all of these
loans are on substantially the same terms and conditions as loans to other
individuals and businesses of comparable credit worthiness and do not represent
more than the normal risk of collection. A summary of loan activity for those
directors, executive officers, and their associates with aggregate loan balances
in excess of $60,000 for the year ended December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Amount
1996 Additions Collected 1997
----------- --------- --------- -----------
<S> <C> <C> <C>
$107,372 $-0- $2,721 $104,651
</TABLE>
13. REGULATORY MATTERS
The approval of regulatory authorities is required if the total of all
dividends declared by the Bank in any calendar year exceeds net profits as
defined for that year combined with its retained net profits for the two
preceding calendar years less any required transfers to surplus. Under this
formula, the amount available for payment of dividends by the Bank in 1998,
without the approval of the regulatory authorities, is $173,250 plus 1998
profits retained up to the date of the dividend declaration.
Included in cash and due from banks are required federal reserves of
$30,000 at December 31, 1997 and 1996, for facilitating the implementation of
monetary policy by the Federal Reserve System. The required reserves are
computed by applying prescribed ratios to the classes of average deposit
balances. These are held in the form of cash on hand and/or balances maintained
directly with the Federal Reserve Bank.
14. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
the regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by the regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios 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, 1997 and 1996, that the Bank meets all capital
adequacy requirements to which they are subject.
As of December 31, 1997, notification from the appropriate regulatory
authority has categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum Total Risk-Based, Tier 1 Risk-Based and Tier 1
Leverage ratios as set forth in the table below. There have been no conditions
or events since that notification that management believes have changed this
category. The following table sets forth the Bank's capital position and minimum
requirements as of December 31:
F-15
<PAGE> 92
<TABLE>
<CAPTION>
1997 1996
------------------------ --------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Actual $1,466,119 21.44% $1,412,325 20.92%
For Capital Adequacy Purposes 547,120 8.00% 540,080 8.00%
To be well capitalized 683,900 10.00% 675,100 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Actual $1,404,023 20.53% $1,327,325 19.66%
For Capital Adequacy Purposes 273,560 4.00% 270,040 4.00%
To be well capitalized 410,340 6.00% 405,060 6.00%
Tier 1 Capital (to Average Assets)
Actual $1,404,023 8.75% $1,327,325 8.36%
For Capital Adequacy Purposes 641,560 4.00% 635,360 4.00%
To be well capitalized 801,950 5.00% 794,200 5.00%
</TABLE>
15. PLAN OF MERGER
On April 13, 1998, The Commercial and Savings Bank Co. (Commercial) of
Danville, Ohio and Killbuck Bancshares, Inc. (Killbuck), executed an agreement
and plan of reorganization to merge subject to shareholder and regulatory
approval. Under the terms of the agreement, all outstanding shares of Commercial
will be exchanged for 2.1585 shares of Killbuck. This exchange ratio of 2.1585
is adjusted for Killbuck's five for one stock split on May 1, 1998.
F-16
<PAGE> 93
THE COMMERCIAL AND SAVINGS BANK CO.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 420,558 $ 415,437
Federal funds sold 970,000 1,700,000
------------- ------------
Total cash and cash equivalents 1,390,558 2,115,437
------------- ------------
Investment securities:
Securities available for sale 622,213 622,150
Securities held to maturity (market value of $2,621,497
and $2,619,518) 2,607,756 2,605,636
------------- ------------
Total investment securities 3,229,969 3,227,786
------------- ------------
Loans 10,687,441 10,320,246
Less allowance for loan losses 63,001 62,096
------------- ------------
Net loans 10,624,440 10,258,150
------------- ------------
Premises and equipment, net 227,564 237,523
Accrued interest 104,762 98,014
Other assets 36,544 49,341
------------- ------------
Total assets $ 15,613,837 $ 15,986,251
============= ============
LIABILITIES
Deposits:
Noninterest bearing demand $ 1,681,678 $ 1,554,430
Interest bearing demand 1,742,790 1,888,106
Savings 3,351,904 3,298,131
Time 7,315,492 7,767,112
------------- ------------
Total deposits 14,091,864 14,507,779
Accrued expenses and other liabilities 80,382 73,088
------------- ------------
Total liabilities 14,172,246 14,580,867
------------- ------------
SHAREHOLDERS' EQUITY
Common stock - 20,200 shares authorized, issued
and outstanding with $10 par value 202,000 202,000
Capital surplus 544,300 544,300
Retained earnings 694,456 657,723
Net unrealized gain on securities available for sale 835 1,361
------------- ------------
Total shareholders' equity 1,441,591 1,405,384
------------- ------------
Total liabilities and shareholders' equity $ 15,613,837 $ 15,986,251
============= ============
</TABLE>
See accompanying notes to the unaudited financial statements.
F-17
<PAGE> 94
THE COMMERCIAL AND SAVINGS BANK CO.
STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
-------- --------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $415,819 $416,728
Federal funds sold 38,189 28,687
Investment securities:
Taxable 92,252 92,063
Tax exempt 2,823 2,519
-------- --------
Total interest income 549,083 539,997
-------- --------
INTEREST EXPENSE
Deposits 272,409 290,704
-------- --------
Total interest expense 272,409 290,704
-------- --------
NET INTEREST INCOME 276,674 249,293
Provision for loan losses -- 4,500
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 276,674 244,793
-------- --------
OTHER INCOME
Service fees on deposit accounts 12,653 19,875
Other 6,212 7,072
-------- --------
Total other income 18,865 26,947
-------- --------
OTHER EXPENSE
Salaries and employee benefits 116,252 111,881
Occupancy expense 15,756 14,930
Equipment expense 29,534 29,048
Other expenses 90,427 69,042
-------- --------
Total other expense 251,969 224,901
-------- --------
INCOME BEFORE INCOME TAXES 43,570 46,839
Income taxes 6,837 7,269
-------- --------
NET INCOME $ 36,733 $ 39,570
======== ========
PER SHARE DATA
Earnings per common share $ 1.82 $ 1.96
======== ========
Average shares outstanding 20,200 20,200
======== ========
</TABLE>
See accompanying notes to the unaudited financial statements.
F-18
<PAGE> 95
THE COMMERCIAL AND SAVINGS BANK CO.
STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 211,724 $ 207,715
Federal funds sold 21,006 13,786
Investment securities:
Taxable 46,692 50,146
Tax exempt 1,424 1,373
--------- ---------
Total interest income 280,846 273,020
--------- ---------
INTEREST EXPENSE
Deposits 136,450 147,775
--------- ---------
Total interest expense 136,450 147,775
--------- ---------
NET INTEREST INCOME 144,396 125,245
Provision for loan losses - 3,000
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 144,396 122,245
--------- ---------
OTHER INCOME
Service fees on deposit accounts 6,230 11,285
Other 2,052 1,991
--------- ---------
Total other income 8,282 13,276
--------- ---------
OTHER EXPENSE
Salaries and employee benefits 55,181 59,451
Occupancy expense 8,235 7,497
Equipment expense 14,944 13,838
Other expenses 53,182 34,053
--------- ---------
Total other expense 131,542 114,839
--------- ---------
INCOME BEFORE INCOME TAXES 21,136 20,682
Income taxes 3,153 2,775
--------- ---------
NET INCOME $ 17,983 $ 17,907
========= =========
PER SHARE DATA
Earnings per common share $ .89 $ .89
========= =========
Average shares outstanding 20,200 20,200
======= =======
</TABLE>
See accompanying notes to the unaudited financial statements.
F-19
<PAGE> 96
THE COMMERCIAL AND SAVINGS BANK CO.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Securities Total Total
Common Capital Retained Available Shareholders' Comprehensive
Stock Surplus Earnings For Sale Stock Income
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 202,000 $ 544,300 $ 657,723 $ 1,361 $1,405,384
Net income 36,733 36,733 $ 36,733
Other comprehensive income
Net unrealized gain on securities (526) (526) (526)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 1998 $ 202,000 $ 544,300 $ 694,456 $ 835 $1,441,591 $ 36,207
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to the unaudited financial statements.
F-20
<PAGE> 97
THE COMMERCIAL AND SAVINGS BANK CO.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 36,733 $ 39,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses -- 4,500
Provision for depreciation and amortization 7,385 14,067
Decrease in accrued interest and other assets 6,049 9,037
Increase (decrease) in accrued expenses and other liabilities 7,565 (18,464)
----------- -----------
Net cash provided by operating activities 57,732 48,710
----------- -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 200,000 --
Purchases (200,406) (196,656)
Investment securities held to maturity:
Proceeds from maturities and repayments -- 400,000
Purchases -- (596,843)
Net (increase) decrease in loans (366,290) 137,894
Purchase of premises and equipment -- (3,792)
----------- -----------
Net cash used for investing activities (366,696) (259,397)
----------- -----------
FINANCING ACTIVITIES
Net increase in demand and savings
deposit accounts 35,705 252,762
Net decrease in time deposits (451,620) (64,158)
----------- -----------
Net cash (used for) provided by financing activities (415,915) 188,604
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (724,879) (22,083)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,115,437 1,454,860
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,390,558 $ 1,432,777
=========== ===========
</TABLE>
See accompanying notes to the unaudited financial statements.
F-21
<PAGE> 98
THE COMMERCIAL AND SAVINGS BANK CO.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accounting and financial reporting policies of The Commercial and
Savings Bank Co. conform to generally accepted accounting principles and to
general practice within the banking industry. In the opinion of management, the
accompanying unaudited financial statements of The Commercial and Savings Bank
Co. contain all adjustments, consisting of only normal and recurring
adjustments, necessary for the fair presentation of the Bank's financial
position, results of operations and cash flows for the periods presented. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year or any other interim period.
2. PLAN OF MERGER
On April 13, 1998 Commercial and Savings Bank Co. (Commercial) of
Danville, Ohio and Killbuck Bancshares, Inc. (Killbuck) executed an agreement
and plan of reorganization to merge subject to shareholder and regulatory
approval. Under the terms of the agreement, all outstanding shares of Commercial
will be exchanged for 2.1585 shares of Killbuck. This exchange ratio of 2.1585
is adjusted for Killbuck's five for one stock split on May 1, 1998.
F-22
<PAGE> 99
KILLBUCK BANCSHARES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
KILLBUCK FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997, AND 1996
AND FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997
Report of Independent Auditors F2-2
Consolidated Balance Sheets F2-3
Consolidated Statements of Income F2-4
Consolidated Statements of Changes in Shareholders' Equity F2-5
Consolidated Statements of Cash Flows F2-6
Notes to Consolidated Financial Statements F2-7
KILLBUCK INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Unaudited Consolidated Balance Sheets F2-25
Unaudited Consolidated Statements of Income F2-26
Unaudited Consolidated Statements of Changes in Shareholders' Equity F2-28
Unaudited Consolidated Statements of Cash Flows F2-29
Notes to Unaudited Consolidated Financial Statements F2-30
</TABLE>
F2-1
<PAGE> 100
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Killbuck Bancshares, Inc.
We have audited the accompanying consolidated balance sheet of Killbuck
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of Killbuck's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Killbuck Bancshares,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As explained in the notes to the consolidated financial statements, effective
January 1, 1995, Killbuck adopted a new method of accounting for impairment of
loans and related allowance for loan losses.
/s/ S. R. Snodgrass, A. C.
Steubenville, Ohio
January 23, 1998
F2-2
<PAGE> 101
KILLBUCK BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 6,300,777 $ 6,140,758
Federal funds sold 8,300,000 6,100,000
------------- -------------
Total cash and cash equivalents 14,600,777 12,240,758
Investment securities:
Securities available for sale 35,078,516 32,842,938
Securities held to maturity (market value of $23,966,533
and $18,506,034) 23,398,480 18,364,587
------------- -------------
Total investment securities 58,476,996 51,207,525
Loans, net 119,926,057 114,206,455
Premises and equipment, net 2,808,078 2,973,786
Accrued interest 1,633,451 1,506,926
Other assets 463,271 556,708
------------- -------------
Total assets $ 197,908,630 $ 182,692,158
============= =============
LIABILITIES
Deposits:
Noninterest bearing demand $ 21,592,573 $ 20,904,824
Interest bearing demand 37,574,203 32,048,553
Savings 19,376,757 19,848,413
Time 85,265,101 84,597,359
------------- -------------
Total deposits 163,808,634 157,399,149
Securities sold under repurchase agreements 2,710,000 --
Federal Home Loan Bank advances 8,745,174 4,814,648
Accrued expenses and other liabilities 487,213 544,621
------------- -------------
Total liabilities 175,751,021 162,758,418
------------- -------------
SHAREHOLDERS' EQUITY
Common stock - 200,000 shares authorized, 135,000
issued with no par value 2,700,000 2,700,000
Capital surplus 3,106,500 3,106,500
Retained earnings 17,018,414 14,624,364
Net unrealized loss on securities available for sale (33,817) (176,066)
Treasury stock, at cost (2,620 and 1,500 shares) (633,488) (321,058)
------------- -------------
Total shareholders' equity 22,157,609 19,933,740
------------- -------------
Total liabilities and shareholders' equity $ 197,908,630 $ 182,692,158
============= =============
</TABLE>
See accompanying notes to the consolidated financial statements.
F2-3
<PAGE> 102
KILLBUCK BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $11,491,831 $10,819,285 $10,282,897
Federal funds sold 372,153 324,411 430,348
Investment securities:
Taxable 2,349,656 1,947,044 1,265,371
Tax exempt 1,012,341 890,981 832,428
----------- ----------- -----------
Total interest income 15,225,981 13,981,721 12,811,044
----------- ----------- -----------
INTEREST EXPENSE
Deposits 6,850,752 6,331,213 5,690,017
Federal Home Loan Bank advances 454,791 292,726 125,588
Other 38,637 1,521 332
----------- ----------- -----------
Total interest expense 7,344,180 6,625,460 5,815,937
----------- ----------- -----------
NET INTEREST INCOME 7,881,801 7,356,261 6,995,107
Provision for loan losses 180,000 180,000 180,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,701,801 7,176,261 6,815,107
----------- ----------- -----------
OTHER INCOME
Service fees on deposit accounts 375,676 383,377 348,715
Other 71,849 55,946 62,066
----------- ----------- -----------
Total other income 447,525 439,323 410,781
----------- ----------- -----------
OTHER EXPENSE
Salaries and employee benefits 2,028,629 1,948,362 1,812,393
Occupancy expense 164,505 157,771 151,336
Equipment expense 451,940 390,502 319,269
Other 1,390,581 1,302,928 1,327,144
----------- ----------- -----------
Total other expense 4,035,655 3,799,563 3,610,142
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,113,671 3,816,021 3,615,746
Income taxes 1,108,209 1,069,040 989,018
----------- -----------
NET INCOME $ 3,005,462 $ 2,746,981 $ 2,626,728
=========== =========== ===========
PER SHARE DATA
Earnings per common share $ 22.59 $ 20.52 $ 19.46
=========== =========== ===========
Average shares outstanding 133,043 133,893 135,000
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F2-4
<PAGE> 103
KILLBICK BANCSHARES, INC. AND
SUBSIDARY CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Securities Total
Common Capital Retained Available Treasury Shareholders'
Stock Surplus Earnings For Sale Stock Equity
---------- ---------- ------------ ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $2,700,000 $3,106,500 $ 10,197,197 $ -- $ -- $ 16,003,697
Net income 2,626,728 2,626,728
Dividends paid (3.25 per share) (438,750) (438,750)
Net unrealized gain on securities 73,894 73,894
---------- ---------- ------------ --------- --------- ------------
BALANCE, DECEMBER 31, 1995 2,700,000 3,106,500 12,385,175 73,894 -- 18,265,569
Net income 2,746,981 2,746,981
Dividends paid ($3.80 per share) (507,792) (507,792)
Purchase of treasury shares (326,628) (326,628)
Sale of treasury shares 5,570 5,570
Net unrealized loss on securities (249,960) (249,960)
---------- ---------- ------------ --------- --------- ------------
BALANCE, DECEMBER 31, 1996 2,700,000 3,106,500 14,624,364 (176,066) (321,058) 19,933,740
Net income 3,005,462 3,005,462
Dividends paid ($4.60 per share) (611,412) (611,412)
Purchase of treasury shares (312,430) (312,430)
Net unrealized gain on securities 142,249 142,249
---------- ---------- ------------ --------- --------- ------------
BALANCE, DECEMBER 31, 1997 $2,700,000 $3,106,500 $ 17,018,414 $ (33,817) $(633,488) $ 22,157,609
========== ========== ============ ========= ========= ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F2-5
<PAGE> 104
KILLBUCK BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,005,462 $ 2,746,981 $ 2,626,728
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 180,000 180,000 180,000
Provision for depreciation and amortization 245,393 303,523 222,740
Gain on sale of loans (2,033) -- --
Loss on sale of equipment -- -- 35,443
Origination of loans held for sale (282,300) -- --
Proceeds from the sale of loans 284,333 -- --
Increase in accrued interest and other assets (130,414) (454,936) (420,738)
(Increase) decrease in accrued expenses and other liabilities (57,407) 45,592 108,717
Increase (decrease) in federal income tax payable 6,466 (49,501) 21,331
Increase in deferred federal income tax 17,580 7,212 17,312
------------ ------------ ------------
Net cash provided by operating activities 3,267,080 2,778,871 2,791,533
------------ ------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 14,051,028 7,766,611 --
Purchases (16,051,726) (17,237,326) --
Investment securities held to maturity:
Proceeds from maturities and repayments 2,249,094 4,054,565 10,400,500
Purchases (7,262,638) (3,869,746) (16,973,156)
Net increase in loans (5,899,602) (9,128,417) (4,036,936)
Proceeds from sale of equipment -- -- 6,164
Purchase of premises and equipment (119,386) (582,894) (760,665)
------------ ------------ ------------
Net cash used in investing activities (13,033,230) (18,997,207) (11,364,093)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings
deposit accounts 5,741,743 2,191,323 (3,028,785)
Net increase in time deposits 667,742 4,794,740 21,329,795
Net increase in Federal Home Loan Bank advances 3,930,526 1,485,170 2,335,523
Net increase in repurchase agreements 2,710,000 -- --
Purchase of treasury shares (312,430) (326,628) --
Proceeds from sale of treasury shares -- 5,570 --
Dividends paid (611,412) (507,792) (438,750)
------------ ------------ ------------
Net cash provided by financing activities 12,126,169 7,642,383 20,197,783
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,360,019 (8,575,953) 11,625,223
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,240,758 20,816,711 9,191,488
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,600,777 $ 12,240,758 $ 20,816,711
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F2-6
<PAGE> 105
KILLBUCK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Killbuck Bancshares, Inc., a
bank holding Company, and its subsidiary, Killbuck Saving Bank Company, conform
with generally accepted accounting principles and with general practice within
the banking industry.
A summary of the significant accounting and reporting policies applied
in the presentation of the consolidated financial statements follows:
NATURE OF OPERATIONS
Killbuck Bancshares, Inc. is an Ohio corporation organized as the
holding company of The Killbuck Savings Bank Company. The Bank is a
state-chartered bank located in Ohio. Killbuck and its subsidiary derive
substantially all their income from banking and bank-related services which
include interest earnings on residential real estate, commercial mortgage,
commercial and consumer loan financing as well as interest earnings on
investment securities and charges for deposit services to its customers. The
Board of Governors of the Federal Reserve System supervises the holding company
and bank, while the Bank is also subject to regulation and supervision by the
Ohio Division of Banks.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Killbuck
Bancshares, Inc. and its wholly owned subsidiary, The Killbuck Savings Bank
Company, after elimination of all material intercompany transactions and
balances.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is
based on estimates that are particularly susceptible to significant changes in
the economic environment and market conditions. In connection with the
determination of the estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Bank's loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although the Bank
has a diversified loan portfolio, a substantial portion of its debtors' ability
to honor their contracts is dependent on local economic conditions in the
agricultural and tourism industry.
F2-7
<PAGE> 106
While management uses available information to recognize losses on
loans, further reductions in the carrying amounts of loans may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
estimated losses on loans. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in the near
term. However, the amount of the change that is reasonably possible cannot be
estimated.
INVESTMENTS SECURITIES
Investment securities are classified, at the time of purchase, based
upon managements' intention and ability, as securities held to maturity or
securities available for sale. Debt securities acquired with the intent to hold
to maturity are stated at cost adjusted for amortization of premium and
accretion of discount which are computed using a method which approximates the
effective interest method. Certain other debt and equity securities have been
classified as available for sale to serve principally as a source of liquidity.
Unrealized holding gains and losses for available for sale securities are
reported as a separate component of stockholders' equity, net of tax, until
realized. Realized securities gains and losses are computed using the specific
identification method. Interest and dividends on investment securities are
recognized as income when earned.
Common stock of the Federal Home Loan Bank, Federal Reserve Bank and
Independent State Bank of Ohio represent ownership in institutions which are
wholly-owned by other financial institutions. These securities are accounted for
at cost and are classified with equity securities available for sale.
LOANS HELD FOR SALE
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost or market value determined on an aggregate basis.
Net unrealized losses are recognized in a valuation allowance through charges to
income. Gains and losses on the sale of loans held for sale are determined using
the specific identification method. At December 31, 1997 and 1996, there were no
loans held for sale.
LOANS
Loans are stated at their outstanding principal, less the allowance for
loan losses and any net deferred loan fees. Interest income on loans is
recognized on the accrual method when a loan is placed on nonaccrual, any
previously accrued interest is reversed against current income.
Loan origination and commitment fees, as well as certain direct
origination costs, are deferred and amortized as a yield adjustment over the
lives of the related loans using the interest method. Amortization of deferred
loan fees is discontinued when a loan is placed on nonaccrual status.
F2-8
<PAGE> 107
ALLOWANCE FOR LOAN LOSSES
Effective January 1, 1995, Killbuck adopted Statement of Financial
Accounting Standards Statement No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by Statement No. 118. Under this Standard, Killbuck
estimates credit losses on impaired loans based on the present value of expected
cash flows or fair value of the underlying collateral if the loan repayment is
expected to come from the sale or operation of such collateral. Statement 118
amends Statement 114 to permit a creditor to use existing methods for
recognizing interest income on impaired loans eliminating the income recognition
provisions of Statement 114. The adoption of these statements did not have a
material effect on Killbuck's financial position or results of operations.
Impaired loans are commercial and commercial real estate loans for
which it is probable that Killbuck will not be able to collect all amounts due
according to the contractual terms of the loan agreement. Killbuck individually
evaluates such loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. Killbuck
may choose to place a loan on nonaccrual status due to payment delinquency or
uncertain collectibility, while not classifying the loan as impaired, provided
the loan is not a commercial or commercial real estate classification. Factors
considered by management in determining impairment include payment status and
collateral value. The amount of impairment for these types of loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original interest rate, and its recorded
value, or as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral.
Mortgage loans secured by one-to-four family properties and all
consumer loans are generally of smaller balances, and a homogeneous nature, thus
are measured for impairment collectively. Loans that experience insignificant
payment delays, which are defined as 90 days or less, generally are not
classified as impaired. Management determines the significance of payment delays
on a case-by-case basis, taking into consideration all of the circumstances
concerning the loan, the credit worthiness and payment history of the borrower,
the length of the payment delay, and the amount of shortfall in relation to the
principal and interest owed.
The allowance for loan losses represents the amount which management
estimates is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance, and all recoveries are credited to it. The
allowance for loan losses is established through a provision for loan losses
which is charged to operations. The provision is based upon management's
periodic evaluation of individual loans, the overall risk characteristics of the
various portfolio segments, past experience with losses, the impact of economic
conditions on borrowers, and other relevant factors. The estimates used in
determining the adequacy of the allowance for loan losses including the amounts
and timing of future cash flows expected on impaired loans, are particularly
susceptible to significant change in the near term.
F2-9
<PAGE> 108
PREMISES AND EQUIPMENT
Land is carried at cost. Other premises and equipment are carried at
cost net of accumulated depreciation. Depreciation is computed using the
straight-line method based principally on the estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred while major additions
and improvements are capitalized. Gains and losses on dispositions are included
in current operations.
INCOME TAXES
Killbuck and its subsidiary file a consolidated federal income tax
return. Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.
EARNINGS PER SHARE
Earnings per share are calculated based upon the weighted number of
shares of stock outstanding during the year.
In February, 1997 the Financial Accounting Standard Board issued
Statement No. 128 "Earnings Per Share" ("EPS"). The statement established new
standards for computing and presenting earnings per share and requires dual
presentation of "basic" and "diluted" earnings per share on the face of the
income statement. The provision of the statement are effective for the period
ending December 31, 1997. Killbuck maintains a simple capital structure,
therefore there are no dilutive effects on earnings per share.
CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents include
cash and non-interest bearing deposits with financial institutions and federal
funds sold. Generally, federal funds are sold for one-day periods. Killbuck
reports net cash flows for customer loan transactions, deposit transactions, and
interest-bearing deposits with other financial institutions. Cash payments for
interest in 1997, 1996 and 1995 were $7,359,808, $6,633,764, and $5,708,289,
respectively. Cash payments for income taxes for 1997, 1996, and 1995 were
$1,081,332, $1,111,330, and $943,892 respectively.
F2-10
<PAGE> 109
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." The
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings based
on a control-oriented "financial-components" approach. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes liabilities
when extinguished. The provisions of Statement No. 125 are effective for
transactions occurring after December 31, 1996, except those provisions relating
to repurchase agreements, securities lending, and other similar transactions and
pledged collateral, which have been delayed until after December 31, 1997 by
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of
Statement No. 125, an amendment of Statement No. 125." The adoption of the
provisions of Statement No. 127 is not expected to have a material impact on
financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. It requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. The provisions of the
statement are effective for all fiscal years beginning after December 15, 1997.
The adoption of this statement is not expected to have a material impact on
financial position or results of operations.
RECLASSIFICATION OF COMPARATIVE AMOUNTS
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the current year presentation. These
reclassifications had no effect on net income.
2. FEDERAL FUNDS SOLD
Federal funds sold at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ------------------------------
Institution Maturity Balance Maturity Balance
------------------------ -------- ----------- --------- -----------
<S> <C> <C> <C> <C>
National Bank of Detroit 1-02-98 $7,000,000 1-02-97 $5,000,000
National City Bank 1-02-98 1,300,000 1-02-97 1,100,000
---------- ----------
$8,300,000 $6,100,000
========== ==========
</TABLE>
F2-11
<PAGE> 110
3. INVESTMENT SECURITIES
The amortized cost of securities and their estimated market values are as
follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 9,781,819 $20,337 $ -- $ 9,802,156
Obligations of U.S. Government
Agencies and Corporations 24,304,525 27,237 98,812 24,232,950
----------- ------- ------- -----------
Total debt securities 34,086,344 47,574 98,812 34,035,106
Equity securities 1,043,410 -- -- 1,043,410
----------- ------- ------- -----------
Total $35,129,754 $47,574 $98,812 $35,078,516
=========== ======= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 994,508 $ 2,992 $ -- $ 997,500
Obligations of U.S. Government
Agencies and Corporations 31,225,987 18,595 288,354 30,956,228
----------- ------- -------- -----------
Total debt securities 32,220,495 21,587 288,354 31,953,728
Equity securities 889,210 -- -- 889,210
----------- ------- -------- -----------
Total $33,109,705 $21,587 $288,354 $32,842,938
=========== ======= ======== ===========
</TABLE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of States and Political
Subdivisions $23,298,480 $575,642 $7,214 $23,866,908
Corporate Securities 100,000 -- 375 99,625
----------- -------- ------ -----------
Total $23,398,480 $575,642 $7,589 $23,966,533
=========== ======== ====== ===========
</TABLE>
F2-12
<PAGE> 111
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of States and Political
Subdivisions $18,264,587 $257,491 $114,124 $18,407,954
Corporate Securities 100,000 -- 1,920 98,080
----------- -------- -------- -----------
Total $18,364,587 $257,491 $116,044 $18,506,034
=========== ======== ======== ===========
</TABLE>
The contractual maturities of securities available for sale and
securities to be held to maturity at December 31, 1997 are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities Available Securities to be
For Sale Held to Maturity
--------------------------- ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 6,795,581 $ 6,793,437 $ 2,202,732 $ 2,222,549
Due after one year through five years 23,542,827 23,488,357 9,763,493 10,024,020
Due after five through ten years 3,747,936 3,753,312 11,140,535 11,426,701
Due after ten years -- -- 291,720 293,263
----------- ----------- ----------- -----------
$34,086,344 $34,035,106 $23,398,480 $23,966,533
=========== =========== =========== ===========
</TABLE>
Proceeds of securities as a result of calls prior to maturity during
1997, 1996 and 1995 were $8,322,527, $4,574,442 and $4,400,000, respectively,
resulting in gross gains of $-0- in 1997, $-0- in 1996 and $-0- in 1995.
Investment securities with an approximate carrying value of $30,960,000
and $19,435,000 at December 31, 1997 and 1996, respectively were pledged to
secure public deposits and for other purposes as required or permitted by law.
During 1997, 1996 and 1995, Killbuck did not sell any securities.
F2-13
<PAGE> 112
4. LOANS
Major classification of loans are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
<S> <C> <C>
Real estate - residential $ 41,473,027 $ 39,820,133
Real estate - farm 3,846,541 4,589,030
Real estate - commercial 21,204,753 18,087,851
Real estate - construction 782,569 1,947,042
Commercial and other loans 33,745,364 34,035,720
Consumer and credit loans 20,981,516 17,779,182
------------- -------------
122,033,770 116,258,958
Allowance for loan losses (1,744,586) (1,653,322)
Net deferred loan fees (363,127) (399,181)
------------- -------------
Loans, net $ 119,926,057 $ 114,206,455
============= =============
</TABLE>
Killbuck's primary business activity is with customers located within
its local trade area. Residential, commercial, personal, and agricultural loans
are granted. Killbuck also selectively funds loans originated outside of its
trade area provided such loans meet its credit policy guidelines. Although
Killbuck has a diversified loan portfolio, at December 31, 1997 and 1996, loans
outstanding to individuals and businesses are dependent upon the local economic
conditions in its immediate trade area.
At December 31, 1997, Killbuck had loans totaling $75,411 which were
past due 90 days or more and still accruing interest. Presented below are total
nonaccuring loans at December 31, 1997, 1996 and 1995. Also shown is the
additional income that would have been earned if those loans had been current
throughout the years ended.
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ----------
<S> <C> <C> <C>
Nonaccrual loans $120,805 $30,510 $62,315
Interest earned (if current) $ 6,120 $ 924 $ 2,186
</TABLE>
5. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- -------------- ---------------
<S> <C> <C> <C>
Balance, January 1 $1,653,322 $1,545,682 $1,378,387
Provision for loan losses 180,000 180,000 180,000
Recoveries 101,397 38,858 106,500
Credits charged off (190,133) (111,218) (119,205)
---------- ---------- ----------
Balance, December 31 $1,744,586 $1,653,322 $1,545,682
========== ========== ==========
</TABLE>
F2-14
<PAGE> 113
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
Land $ 588,526 $ 575,779
Building and improvements 2,089,582 2,059,197
Furniture, fixtures and equipment 1,905,762 1,829,508
---------- ----------
4,583,870 4,464,484
Less accumulated depreciation 1,775,792 1,490,698
---------- ----------
Total $2,808,078 $2,973,786
========== ==========
</TABLE>
Depreciation expense charged to operations was $285,094 for 1997,
$271,259 for 1996, and $192,621 for 1995.
7. DEPOSITS
Time deposits include certificates of deposit in denominations of
$100,000 or more. Such deposits aggregated $21,775,164 and $22,430,895 at
December 31, 1997 and 1996, respectively.
Interest expense on certificates of deposit $100,000 and over amounted
to $1,306,783 in 1997, $1,258,753 in 1996, and $1,099,591 in 1995.
The following table sets forth the remaining maturity of time
certificates of deposits of $100,000 or more at December 31, 1997.
<TABLE>
<CAPTION>
December 31,
1997
--------------
<S> <C> <C>
3 months or less $ 6,012,514
Over 3 through 6 months 7,928,423
Over 6 through 12 months 6,996,967
Over 12 months 837,260
------------
Total $ 21,775,164
============
</TABLE>
F2-15
<PAGE> 114
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Killbuck has retail repurchase agreements with customers in their
respective local market areas. These borrowings are collateralized with
securities owned by the bank and held in their safekeeping account at an
independent correspondent bank. The following table summarizes certain
information relative to these borrowings at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------- -----------
<S> <C> <C>
Outstanding at period end $ 2,710,000 $ -
Weighted average interest rate at period end 3.27% -
Maximum amount outstanding as of any month-end $ 2,710,000 -
Average amount outstanding $ 1,494,000 -
Approximate weighted average interest rate during the year 3.10% -
</TABLE>
9. FEDERAL HOME LOAN BANK ADVANCES
Killbuck's advances consist of the following:
<TABLE>
<CAPTION>
Balance
Interest -------------------------------
Rate 1997 1996
--------- ------------- --------------
<S> <C> <C> <C>
Fixed Rate Federal Home Loan Bank Advances with Monthly principal and
interest payments:
Advance due August 1, 2009 7.60% $ 361,179 $ 422,596
Advance due January 1, 2010 8.15% 298,147 355,817
Advance due June 1, 2010 8.90% 305,874 363,295
Advance due April 1, 2012 7.05% 488,810 -
Advance due May 1, 2012 6.90% 686,440 -
Advance due July 1, 2012 6.50% 690,700 -
Advance due October 1, 2012 6.40% 697,674 -
Advance due December 1, 2012 6.35% 1,000,000 -
Advance due October 1, 2015 8.20% 348,340 442,344
Advance due November 1, 2015 7.75% 397,777 488,166
Advance due November 1, 2015 6.55% 426,823 462,066
Advance due February 1, 2016 6.00% 721,848 782,291
Advance due October 1, 2016 7.20% 444,608 499,063
Advance due October 1, 2016 6.75% 438,026 499,010
Advance due February 1, 2017 6.55% 490,677 -
Advance due February 1, 2017 7.20% 448,251 -
Fixed Rate Federal Home Loan Bank Advances with
Monthly interest payments:
Advance due December 1, 1998 5.67% 500,000 500,000
----------- -----------
Total Federal Home Loan Bank Advances $8,745,174 $4,814,648
========== ==========
</TABLE>
The Bank has pledged, as collateral for advances from the FHLB of
Cincinnati all stock in the Federal Home Loan Bank and certain other qualifying
collateral.
F2-16
<PAGE> 115
The aggregate minimum future annual principal payments on the advances
are $801,503 in 1998, $323,104 in 1999, $346,273 in 2000, $371,120 in 2001,
$397,775 in 2002 and $6,505,399 after 2002.
Killbuck has an available line of credit with the Federal Home Loan
Bank of Cincinnati (FHLB) with a borrowing limit of approximately $15,900,000.
This credit line is subject to annual renewal, incurs no service charges, and is
secured by a blanket security agreement on Killbuck's outstanding residential
mortgage loans and FHLB stock.
10. EMPLOYEE BENEFIT PLANS
In 1997 the Bank adopted an integrated money purchase pension plan and
a 401(k) plan.
Under the integrated money purchase pension plan contribution formula,
the Bank, for each plan year, will contribute an amount equal to 8% of an
employee's compensation for the plan year and 5.7% of the amount of an
employee's excess compensation for the plan year. Excess compensation is a
participant's compensation in excess of the designated integration level. This
designated integration level is 100% of the taxable wage base in effect at the
beginning of the plan year. The federal government annually adjusts the taxable
wage base. This plan does not permit nor require employees to make contributions
to the plan.
The 401(k) plan allows employees to make salary reduction contributions
to the plan up to 10% of their compensation for the plan year. For each plan
year, the Bank may contribute to the plan an amount of matching contributions
for a particular plan year. The Bank may choose not to make matching
contributions for a particular plan year. For 1997 the Bank matched 25% of the
employees voluntary contributions up to 1% of the employee's compensation.
Both plans cover substantially all employees with one year of service
and attained age 21.
The Bank terminated its defined benefit pension plan in 1997. This plan
was funded by individually allocated retirement income and retirement annuity
contracts. Assets of the plan equal cash values of the contracts. The allocated
insurance contracts cash values fully guarantee the amount of benefit payments.
This plan's assets were transferred to the respective individual's account in
the integrated money purchase pension plan.
The pension costs charged to operating expense for the years 1997, 1996
and 1995 amounted to $136,666, $133,074 and $128,105, respectively.
11. OTHER OPERATING EXPENSE
Other operating expense included the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Stationery, supplies and printing $ 137,760 $ 158,071 $ 119,582
Insurance and bonding 55,236 39,675 193,702
Franchise tax 298,457 273,464 239,445
Other 899,128 831,718 774,415
---------- ---------- ----------
Total $1,390,581 $1,302,928 $1,327,144
========== ========== ==========
</TABLE>
F2-17
<PAGE> 116
12. INCOME TAXES
Federal income taxes applicable to income were comprised as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Current payable $1,090,629 $1,061,828 $971,706
Deferred 17,580 7,212 17,312
---------- ---------- --------
Total $1,108,209 $1,069,040 $989,018
========== ========== ========
</TABLE>
The following is a reconcilement of federal income tax expense to the
amount computed at the expected statutory rate.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Computed tax at expected statutory rate $ 1,398,648 $ 1,297,447 $ 1,229,354
Tax-exempt income (340,323) (303,943) (277,599)
Non-deductible interest expense 53,716 48,960 41,584
Other (3,832) 26,576 (4,321)
----------- ----------- -----------
$ 1,108,209 $ 1,069,040 $ 989,018
=========== =========== ===========
</TABLE>
Deferred tax assets and liabilities included in other assets at
December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $456,499 $425,469
Deferred loan fees 36,297 64,448
Net unrealized loss on securities 17,421 90,701
-------- --------
Deferred tax asset 510,217 580,618
-------- --------
Deferred Tax Liabilities:
Premise and equipment depreciation 243,173 223,996
Other, net 6,969 5,687
-------- --------
Deferred tax liabilities 250,142 229,683
-------- --------
Net deferred tax assets $260,075 $350,935
======== ========
</TABLE>
F2-18
<PAGE> 117
13. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ---------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 6,300,777 $ 6,300,777 $ 6,140,758 $ 6,140,758
Federal funds sold 8,300,000 8,300,000 6,100,000 6,100,000
Securities available for sale 35,078,516 35,078,516 32,842,938 32,842,938
Securities held to maturity 23,398,480 23,966,533 18,364,587 18,506,034
Net loans 119,926,057 123,285,000 114,206,455 116,710,000
Accrued interest receivable 1,633,451 1,633,451 1,506,926 1,506,926
------------ ------------ ------------ ------------
Total $194,637,281 $198,564,277 $179,161,664 $181,806,656
============ ============ ============ ============
Financial liabilities:
Deposits $163,808,634 $164,205,000 $157,399,149 $157,717,000
Federal Home Loan Bank advances 8,745,174 9,007,000 4,814,648 4,892,000
Repurchase agreements 2,710,000 2,710,000 -- --
Accrued interest payable 283,995 283,995 299,723 299,723
------------ ------------ ------------ ------------
Total $175,547,803 $176,205,995 $162,513,520 $162,908,723
============ ============ ============ ============
</TABLE>
F2-19
<PAGE> 118
Financial instruments are defined as cash, evidence of ownership
interest in an entity, or a contract which creates an obligation or right to
receive or deliver cash or another financial instrument from/to a second entity
on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties other than
in a forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for
financial instruments should be based upon management's judgment regarding
current economic conditions, interest rate risk, expected cash flows, future
estimated losses, and other factors as determined through various option pricing
formulas or simulation modeling. As many of these assumptions result from
judgments made by management based upon estimates which are inherently
uncertain, the resulting estimated fair values may not be indicative of the
amount realizable in the sale of a particular financial instrument. In addition,
changes in assumptions on which the estimated fair values are based may have a
significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and
equipment are not considered financial instruments, the estimated fair value of
financial instruments would not represent the full value of Killbuck.
Killbuck employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not available
based upon the following assumptions:
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD, ACCRUED INTEREST RECEIVABLE,
REPURCHASE AGREEMENTS, AND ACCRUED INTEREST PAYABLE
The fair value is equal to the current carrying value.
INVESTMENT SECURITIES
The fair value of securities held to maturity and available for sale is
equal to the available quoted market price. If no quoted market price is
available, fair value is estimated using the quoted market price for similar
securities.
LOANS, DEPOSITS, AND ADVANCES FROM FEDERAL HOME LOAN BANK
The fair value of loans is estimated by discounting the future cash
flows using a simulation model which estimates future cash flows and constructs
discount rates that consider reinvestment opportunities, operating expenses,
non-interest income, credit quality, and prepayment risk. Demand, savings, and
money market deposit accounts are valued at the amount payable on demand as of
year end. Fair values for time deposits and Federal Home Loan Bank borrowings
are estimated using a discounted cash flow calculation that applies contractual
costs currently being offered in the existing portfolio to current market rates
being offered for deposits and borrowings of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT
The financial instruments are generally not subject to sale and
estimated fair values are not readily available. The contractual amounts of
unfunded commitments and letters of credit are presented subsequently in this
report.
14. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
In the normal course of business, Killbuck has outstanding commitments
and contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying consolidated
financial statements. Killbuck's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the contractual
or notional amount of those instruments. Killbuck uses the same credit policies
in making such commitments as it does for instruments that are included in the
consolidated balance sheet.
F2-20
<PAGE> 119
Financial instruments whose contract amount represents credit risk were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Commitments for real estate construction $1,091,831 $ 553,958
Home equity lines of credit $2,966,769 $2,998,676
Credit card arrangements $1,248,306 $1,238,346
Commercial letters of credit $9,447,565 $8,461,789
Standby letters of credit $ 647,731 $ 821,847
</TABLE>
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 amounts do not necessarily
represent future cash requirements. Killbuck evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by Killbuck upon extension of credit, is based on management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by
Killbuck to guarantee the performance of a customer to a third party. Standby
letters of credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Killbuck's policy for obtaining collateral, and the
nature of such collateral, is essentially the same as that involved in making
commitments to extend credit.
Killbuck has not been required to perform any financial guarantees
during the past two years. Killbuck has not incurred any losses on its
commitments in either 1997 and 1996.
CONTINGENT LIABILITIES
Killbuck and its subsidiary are subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of the Bancorp.
15. REGULATORY MATTERS
The approval of regulatory authorities is required if the total of all
dividends declared by the Bank in any calendar year exceeds net profits as
defined for that year combined with its retained net profits for the two
preceding calendar years less any required transfers to surplus. Under this
formula, the amount available for payment of dividends by the Bank to Killbuck
in 1998, without the approval of the regulatory authorities, is $4,005,709 plus
1998 profits retained up to the date of the dividend declaration.
Included in cash and due from banks are required federal reserves of
$1,081,000 and $1,045,000 at December 31, 1997 and 1996, respectively, for
facilitating the implementation of monetary policy by the Federal Reserve
System. The required reserves are computed by applying prescribed ratios to the
classes of average deposit balances. These are held in the form of cash on hand
and/or balances maintained directly with the Federal Reserve Bank.
16. REGULATORY CAPITAL REQUIREMENTS
Killbuck (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by the regulators that, if undertaken,
could have a direct material effect on Killbuck's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, both entities must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities, and certain
off-balance sheet
F2-21
<PAGE> 120
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.
Quantitative measures established by the regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios 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, 1997 and 1996, that Killbuck and Bank meets all
capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the
appropriate regulatory authority has categorized Killbuck and Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an entity must maintain minimum Total
Risk-Based, Tier 1 Risk-Based and Tier 1 Leverage ratios at least 100 to 200
basis points above those ratios set forth in the table below. There have been no
conditions or events since that notification that management believes have
changed this category. The capital position of Killbuck does not materially
differ from the Banks, therefore, the following table sets forth the Bank's
capital position and minimum requirements as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------
Amount Ratio Amount Ratio
----------- -------- -------- ------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Actual $22,129 18.08% $19,897 17.03%
For Capital Adequacy Purposes 9,792 8.00% 9,345 8.00%
To be well capitalized 12,240 10.00% 11,681 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Actual $22,163 18.11% $20,073 17.18%
For Capital Adequacy Purposes 4,896 4.00% 4,673 4.00%
To be well capitalized 7,344 6.00% 7,009 6.00%
Tier 1 Capital (to Average Assets)
Actual $22,163 11.11% $20,073 11.11%
For Capital Adequacy Purposes 7,977 4.00% 7,229 4.00%
To be well capitalized 9,971 5.00% 9,036 5.00%
</TABLE>
17. PLAN OF MERGER
On December 22, 1997 Killbuck Bancshares, Inc. ("Killbuck") and
Commercial and Savings Bank Co. of Danville, Ohio ("Commercial") executed a
letter of intent which provides for Killbuck to acquire Commercial subject to
the negotiation of a definitive agreement comprising the specific terms and
conditions for the transaction. A definitive agreement has not been executed as
of the date of this report.
F2-22
<PAGE> 121
18. PARENT COMPANY
The following are parent only condensed financial statements:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Cash $ 28,704 $ 28,518
Investment in bank subsidiary 22,128,904 19,897,112
Other assets -- 8,109
----------- -----------
Total assets $22,157,608 $19,933,739
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity $22,157,608 $19,933,739
----------- -----------
Total liabilities and shareholders' equity $22,157,608 $19,933,739
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiary $ 921,412 $ 836,791 $ 438,750
Operating expenses 8,323 9,054 9,050
----------- ----------- -----------
Income before income taxes 913,089 827,737 429,700
Income tax benefit (2,830) (3,078) (3,077)
----------- ----------- -----------
Income before equity in undistributed net income
of subsidiary 915,919 830,815 432,777
Equity in undistributed net income of subsidiary 2,089,543 1,916,166 2,193,951
----------- ----------- -----------
NET INCOME $ 3,005,462 $ 2,746,981 $ 2,626,728
=========== =========== ===========
</TABLE>
F2-23
<PAGE> 122
18. PARENT COMPANY (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,005,462 $ 2,746,981 $ 2,626,728
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (2,089,543) (1,916,166) (2,193,951)
Amortization 8,109 8,848 8,846
Other -- -- 6,483
----------- ----------- -----------
Net cash provided by operating activities 924,028 839,663 448,106
----------- ----------- -----------
FINANCING ACTIVITIES
Purchase of treasury shares (312,430) (326,628) --
Proceeds from sale of treasury shares -- 5,570 --
Dividends paid (611,412) (507,792) (438,750)
----------- ----------- -----------
Net cash used in financing activities (923,842) (828,850) (438,750)
----------- ----------- -----------
NET INCREASE IN CASH 186 10,813 9,356
CASH AT BEGINNING OF YEAR 28,518 17,705 8,349
----------- ----------- -----------
CASH AT END OF YEAR $ 28,704 $ 28,518 $ 17,705
=========== =========== ===========
</TABLE>
F2-24
<PAGE> 123
KILLBUCK BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- ----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 6,116,643 $ 6,300,777
Federal funds sold 9,400,000 8,300,000
------------- -------------
Total cash and cash equivalents 15,516,643 14,600,777
------------- -------------
Investment securities:
Securities available for sale 34,023,300 35,078,516
Securities held to maturity (market value of $25,140,601
and $23,966,533) 24,613,948 23,398,480
------------- -------------
Total investment securities 58,637,248 58,476,996
------------- -------------
Loans (net of unearned income of $346,128 and $363,127) 126,218,377 121,670,643
Less: allowance for loan losses 1,792,261 1,744,586
------------- -------------
Net loans 124,426,116 119,926,057
------------- -------------
Premises and equipment, net 2,800,268 2,808,078
Accrued interest 1,640,487 1,633,451
Other assets 560,858 463,271
------------- -------------
Total assets $ 203,581,620 $ 197,908,630
============= =============
LIABILITIES
Deposits:
Noninterest bearing demand $ 21,164,464 $ 21,592,573
Interest bearing demand 33,912,249 37,574,203
Savings 20,007,510 19,376,757
Time 92,431,225 85,265,101
------------- -------------
Total deposits 167,515,448 163,808,634
Securities sold under repurchase agreements 2,585,000 2,710,000
Federal Home Loan Bank advances 9,733,404 8,745,174
Accrued interest and other liabilities 375,279 487,213
------------- -------------
Total liabilities 180,209,131 175,751,021
------------- -------------
SHAREHOLDERS' EQUITY
Common stock - 1,000,000 shares authorized, 675,000 issued
with no par value at June 30, 1998 and December 31, 1997 2,700,000 2,700,000
Capital surplus 3,106,500 3,106,500
Retained earnings 18,197,294 17,018,414
Net unrealized gain (loss) on securities available for sale 2,183 (33,817)
Treasury stock, at cost (13,100 shares) (633,488) (633,488)
------------- -------------
Total shareholders' equity 23,372,489 22,157,609
------------- -------------
Total liabilities and shareholders' equity $ 203,581,620 $ 197,908,630
============= =============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F2-25
<PAGE> 124
KILLBUCK BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
--------------- ----------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $5,997,458 $5,610,324
Federal funds sold 210,948 153,616
Investment securities:
Taxable 1,019,793 1,176,762
Tax exempt 583,711 478,325
---------- ----------
Total interest income 7,811,910 7,419,027
---------- ----------
INTEREST EXPENSE
Deposits 3,440,965 3,345,559
Federal Home Loan Bank advances 298,920 193,403
Securities sold under repurchase agreements 40,569 7,518
---------- ----------
Total interest expense 3,780,454 3,546,480
---------- ----------
NET INTEREST INCOME 4,031,456 3,872,547
Provision for loan losses 90,000 90,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,941,456 3,782,547
---------- ----------
OTHER INCOME
Service fees on deposit accounts 200,081 187,221
Other income 54,524 28,370
---------- ----------
Total other income 254,605 215,591
---------- ----------
OTHER EXPENSE
Salaries and employee benefits 1,128,746 1,002,881
Occupancy expense 85,245 81,860
Equipment expense 232,427 222,393
Professional fees 131,934 89,174
Franchise tax 165,968 149,229
Other expenses 458,752 437,301
---------- ----------
Total other expense 2,203,072 1,982,838
---------- ----------
INCOME BEFORE INCOME TAXES 1,992,989 2,015,300
Income taxes 483,159 549,691
---------- ----------
NET INCOME $1,509,830 $1,465,609
========== ==========
PER SHARE DATA
Earning per common share $ 2.28 $ 2.20
========== ==========
Average shares outstanding 661,900 667,500
========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F2-26
<PAGE> 125
KILLBUCK BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
------------ ----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,025,232 $2,867,239
Federal funds sold 103,604 65,286
Investment securities:
Taxable 513,930 634,455
Tax exempt 296,476 248,947
---------- ----------
Total interest income 3,939,242 3,815,927
---------- ----------
INTEREST EXPENSE
Deposits 1,756,153 1,735,820
Federal Home Loan Bank advances 151,237 106,587
Securities sold under repurchase agreements 18,276 7,452
---------- ----------
Total interest expense 1,925,666 1,849,859
---------- ----------
NET INTEREST INCOME 2,013,576 1,966,068
Provision for loan losses 45,000 45,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 1,968,576 1,921,068
---------- ----------
OTHER INCOME
Service fees on deposit accounts 104,354 96,670
Other income 20,235 14,702
---------- ----------
Total other income 124,589 111,372
---------- ----------
OTHER EXPENSE
Salaries and employee benefits 511,061 456,498
Occupancy expense 34,744 33,380
Equipment expense 121,131 111,274
Professional fees 63,524 25,138
Franchise tax 82,984 74,615
Other expenses 240,433 242,076
---------- ----------
Total other expense 1,053,877 942,981
---------- ----------
INCOME BEFORE INCOME TAXES 1,039,288 1,089,459
Income taxes 245,755 300,808
---------- ----------
NET INCOME $ 793,533 $ 788,651
========== ==========
PER SHARE DATA
Earning per common share $ 1.20 $ 1.18
========== ==========
Average shares outstanding 661,900 667,500
========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F2-27
<PAGE> 126
KILLBUCK BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Securities Total Other
Common Capital Retained Available for Treasury Shareholders' Comprehensive
Stock Surplus Earnings Sale Stock Equity Income
---------- ---------- ----------- --------------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $2,700,000 $3,106,500 $17,018,414 $ (33,817) $(633,488) $22,157,609
Net income 1,509,830 1,509,830 $1,509,830
Other comprehensive income
Net unrealized gain on securities 36,000 36,000 36,000
Dividends paid (330,950) (330,950)
---------- ---------- ----------- --------- --------- ----------- ----------
BALANCE, JUNE 30, 1998 $2,700,000 $3,106,500 $18,197,294 $ 2,183 $(633,488) $23,372,489 $1,545,830
========== ========== =========== ========= ========= =========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F2-28
<PAGE> 127
KILLBUCK BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,509,830 $ 1,465,609
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses 90,000 90,000
Provision for depreciation and amortization 142,995 151,510
Origination of loans held for sale (2,005,249) -
Proceeds from the sale of loans 2,005,249 -
Increase in accrued interest and other assets (123,169) (362,342)
Decrease in accrued expenses and other liabilities (111,934) (60,943)
------------ ------------
Net cash provided by operating activities 1,507,722 1,283,834
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 10,625,657 5,084,476
Purchases (9,507,560) (12,042,248)
Investment securities held to maturity:
Proceeds from maturities and repayments 799,585 485,335
Purchases (2,027,548) (2,452,294)
Net increase in loans (4,590,059) (5,653,857)
Purchase of premises and equipment (131,025) (40,687)
------------ ------------
Net cash used for investing activities (4,830,950) (14,619,275)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 3,706,814 6,912,932
Proceeds from advances from Federal Home Loan Bank 1,500,000 2,200,000
Payments on advances from Federal Home Loan Bank (511,770) (196,870)
Net (decrease) increase in repurchase agreements (125,000) 1,700,000
Dividends paid (330,950) (293,700)
------------ ------------
Net cash provided by financing activities 4,239,094 10,322,362
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 915,866 (3,013,079)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,600,777 12,240,758
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,516,643 $ 9,227,679
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 3,775,016 $ 3,567,914
============ ============
Income taxes $ 500,000 $ 506,332
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
F2-29
<PAGE> 128
KILLBUCK BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Killbuck
Bancshares, Inc. (the "Company") and its wholly-owned subsidiary Killbuck
Savings Bank Company (the "Bank"). All significant intercompany balances and
transactions have been eliminated in the consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments which are, in the
opinion of management, necessary for a fair statement of the results of
operations. All such adjustments are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for the full year or any other interim period.
NOTE 2 - EARNINGS PER SHARE
Earnings per share are calculated based upon the weighted number of shares of
stock outstanding during the period. In February, 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share." Statement No. 128 replaced the previous reporting
requirement of primary and fully diluted earnings per share with basic and
diluted earnings per share. The Company maintains a simple capital structure,
therefore, there is no dilutive effect on earnings per share.
NOTE 3 - STOCK SPLIT
On April 13, 1998 the board of directors authorized an increase in the
authorized common shares from 200,000 to 1,000,000 shares and also authorized a
5 for 1 stock split of common stock to shareholders of record on May 1,1998. Per
share amounts in the accompanying financial statements have been adjusted for
the split.
NOTE 4 - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income." In adopting Statement No.
130, the Company is required to present comprehensive income and its components
in a full set of general purpose financial statements. The Company has elected
to report the effects of Statement No. 130 as part of the Statement of Changes
in Shareholders' Equity.
NOTE 5 - PLAN OF MERGER
On April 13, 1998, Killbuck Bancshares, Inc. (Killbuck) and The Commercial and
Savings Bank Co. (Commercial) of Danville, Ohio, executed an agreement and plan
of reorganization to merge subject to shareholder and regulatory approval. Under
the terms of the agreement, all outstanding shares of Commercial will be
exchanged for 2.1585 shares of Killbuck. This exchange ratio of 2.1585 is
adjusted for Killbuck's five for one stock split on May 1, 1998.
F2-30
<PAGE> 129
APPENDIX A
<PAGE> 130
AGREEMENT AND PLAN OF REORGANIZATION
This is an AGREEMENT dated ____________________, 1998, between Killbuck
Bancshares, Inc. (hereinafter called "Killbuck") and Commercial and Savings Bank
Co. (hereinafter called "Commercial").
WITNESSETH:
Killbuck is a corporation duly organized under the laws of the State of
Ohio. Its principal office is located at 165 N. Main St., Killbuck, Ohio. As of
the date hereof, Killbuck had authorized capital stock consisting of 200,000
shares of common stock, without par value ("Killbuck Common Shares") of which a
total of 132,380 shares are issued and outstanding and 2,620 shares of treasury
stock. Killbuck owns all of the outstanding capital stock of The Killbuck
Savings Bank Company. (hereinafter referred to as the "Subsidiary").
Commercial is an Ohio state banking corporation duly organized under
the laws of the State of Ohio. Its principal office is located at 701 S. Market
St., Danville, Knox County, Ohio. As of the date hereof, Commercial has
authorized capital stock consisting of 20,200 authorized shares of common stock,
$10.00 par value per share ("Commercial Common Stock"), all of which shares are
issued and outstanding and none were shares of treasury stock owned by
Commercial.
At least a majority of the entire Board of Directors of Killbuck and at
least a majority of the entire Board of Directors of Commercial, respectively,
have approved the entering into of this Agreement and have authorized the
execution and delivery of this Agreement. The Boards of Directors of Killbuck
and Commercial have determined that it is in the best interests of their
respective corporations and Shareholders that Commercial become a wholly owned
subsidiary corporation of Killbuck. After the execution of this Agreement,
Killbuck and Commercial will cause, subject to the terms and conditions set
forth in this Agreement, the merger of Commercial with and into Killbuck Bank,
in accordance with the terms set forth in the Merger Agreement attached hereto
and designated Appendix A (the "Merger Agreement"). From and after the time the
merger of Commercial and Killbuck Bank shall become effective, (the "Merger")
and as and when required by this Agreement and the Merger Agreement, Killbuck
will issue its Common Shares in exchange for all of the issued and outstanding
shares of Commercial Common Stock.
In consideration of mutual covenants and agreements herein contained,
Killbuck and Commercial hereby make this Agreement and prescribe the terms and
conditions of the Merger and the mode of carrying the Merger
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<PAGE> 131
into effect as follows:
1. Execution of Merger Agreement. As soon as practicable after the date
hereof, Killbuck Bank and Commercial will enter into the Merger
Agreement. Upon consummation of the Merger, each share of Commercial
Common Stock, (other than Dissenter Shares, as defined in Section 5)
shall be converted into the right to receive .4317 duly authorized,
validly issued, fully paid and non-assessable Killbuck Common Shares,
in accordance with the provisions regarding the exchange of shares set
forth in the Merger Agreement, subject to adjustment in the event of
any stock dividend, stock split or other general distribution of
Killbuck Common Stock prior to the Merger.
2. Articles of Incorporation and Code of Regulations. The Articles of
Incorporation and Code of Regulations of Killbuck Bank shall be the
Articles of Incorporation and Code of Regulations of the surviving
banking corporation upon the consummation of the Merger of Commercial
with and into Killbuck Bank.
3. Discussions with Others; Other Offers. On and after the date
hereof, except with the written consent of Killbuck, Commercial shall
not directly or indirectly solicit or encourage (nor shall Commercial
permit any of its officers, directors, employees or agents directly or
indirectly to solicit or encourage), including by way of furnishing
information, any inquiries or proposals for a merger, consolidation,
share exchange or similar transaction involving Commercial or for the
acquisition of the stock or all or substantially all of the assets or
business of Commercial, or discuss with or enter into conversations
with any person, other than Commercial shareholders or employees,
concerning any such merger, consolidation, share exchange, acquisition
or other transaction, other than the share exchange with Killbuck;
provided, however, that Commercial may communicate information about
any such proposals or inquiries to its shareholders if and to the
extent that it is required to do so in order to reasonably comply with
its legal obligations. Commercial will promptly notify Killbuck orally
(to be confirmed in writing as soon as practicable thereafter) of all
of the relevant details relating to any inquiries or proposals that it
may receive relating to any such matters, including actions it intends
to take with respect to such matters.
In order to induce Killbuck to enter into this Agreement and
incur the substantial expenses involved in effectuating the
transactions contemplated herein, Commercial agrees and does hereby
promise to pay to Killbuck the sum of $100,000, upon Killbuck's demand
therefor, in the event that the
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<PAGE> 132
Commercial shareholders fail to approve this Agreement or the Merger
Agreement as a result of Commercial's decision to entertain offers from
and negotiate with a bona fide offeree other than Killbuck.
4. Undertakings of the Parties. Killbuck and Commercial further covenant
and agree as follows:
(a) As soon as the Registration Statement referenced in (c) below
shall become effective or an exemption to registration relied
upon, this Agreement and the Merger Agreement shall be
submitted to the Shareholders of Commercial for approval and
adoption at a special meeting of Shareholders to be called and
held in accordance with law and the Articles of Incorporation
and Code of Regulations of Commercial.
(b) As promptly as possible after the date hereof, each of
Killbuck and Commercial shall use its best efforts, separately
and jointly with the other party, in good faith to take or
cause to be taken all such steps as shall be necessary or
advisable to obtain all consents and approvals of governmental
authorities as are required by law or otherwise to effect the
share exchange, including without limitation the approval of
the Federal Reserve Board (the "Board"), the approval of the
Ohio Department of Commerce (Division of Financial
Institutions Office of Banks and Savings & Loans) and the
approval of the Federal Deposit Insurance Corporation, and
shall do any and all acts and things reasonably necessary or
advisable in order to cause the share exchange to be
consummated on the terms provided in this Agreement and to
complete the Merger as promptly as practicable. Killbuck and
Commercial will cooperate in complying with and in the
preparation of proxy and registration statements under federal
and state securities laws so as to facilitate the exchange of
shares as contemplated by this Agreement and the Merger
Agreement.
(c) Each party will assume and pay all of its fees and expenses
incurred by it incident to the negotiation, preparation and
execution of this Agreement, obtain the requisite regulatory
and shareholder consents and approvals and take all other acts
incidental to, contemplated by or in pursuance of this
Agreement. Killbuck shall be responsible for preparing and
filing at no expense to Commercial: (i) any and all required
regulatory applications necessary in connection with the
transactions contemplated by this Agreement; and (ii) an S-4
Registration Statement to be filed with the Securities and
Exchange Commission to register the Killbuck Common Shares to
be
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<PAGE> 133
issued in connection with the transactions contemplated by
this Agreement or shall secure a suitable exemption from
registration; provided, however, that such registration
statement will not cover resales by any persons who may be
considered "underwriters" under Rule 145(c) of the Securities
Act of 1933, as amended (the "1933 Act") and (iii) any
documents to be filed or action required to be taken under any
applicable state securities or "Blue Sky" laws in connection
with the Merger.
(d) Between the date of this Agreement and the effective time of
the Merger, each party (reviewee) will afford to the
representatives of the other party (reviewer), including its
counsel and auditors, during normal business hours, full
access to any and all assets of, or information with respect
to, reviewee to the end that reviewer may have full
opportunity to make an investigation, in advance of the
effective time as it shall reasonably desire in order to
effectuate the purposes of this Agreement. To the extent
reasonable under the circumstances, the officers of receivee
will confer with the representatives of reviewer and will
furnish to reviewer either orally or by means of such records,
documents, and memoranda as are reasonably available or
capable of preparation (all of which reviewer will be
permitted to make copies of) and such other information as
reviewer may reasonably request. All information furnished by
one party to another party in connection with this Agreement
and the transactions contemplated hereby will be kept
confidential by such other party and will be used only in
connection with this Agreement and the transactions
contemplated hereby, except to the extent that such
information: (i) is already known to such other party when
received; (ii) thereafter becomes lawfully obtainable from
other sources; or (iii) is required to be disclosed in any
document filed with the Securities and Exchange Commission,
the Board, or any other governmental agency or authority. In
the event that this Agreement is terminated, each party will
return to the other party or destroy any documents received by
it from the other party that contain any such confidential
information.
(e) After (i) receipt of the Board's prior approval of Killbuck's
acquisition of Commercial; (ii) the approval of the
Shareholders of Commercial; and (iii) the regulatory waiting
period(s) have expired, Killbuck shall designate the date as
of which Killbuck desires the Merger to become
A-4
<PAGE> 134
effective and the time the Merger shall become effective shall
occur at the time and on the date so designated, provided,
that the date so designated shall not be later than 30 days
following the last of the events described above (i-iii) shall
occur.
(f) Subject to the terms and conditions of this Agreement,
Killbuck and Commercial each agree that, subject to applicable
laws and to the fiduciary duties of its respective directors,
each will promptly take or cause to be taken all action, and
promptly do or cause to be done all things necessary, proper
or advisable under applicable laws and regulations to
consummate and make effective the Merger and other
transactions contemplated by this Agreement.
(g) Killbuck shall offer the existing employees of Commercial the
opportunity to become employees of Killbuck Bank (i.e. the
surviving banking corporation under the Merger Agreement)
following consummation of the Merger; provided, however, that
nothing in this section or elsewhere in this Agreement shall
be deemed to be a contract of employment or be construed to
give said employees any rights other than as employees at will
under Ohio law and said employees shall not be deemed to be
third-party beneficiaries of this provision. Commercial's
employees who become employees of Killbuck Bank after the
Merger will have their years of service credited toward
eligibility and vesting in Killbuck's qualified retirement
plans, but shall be treated as new employees for purposes of
accrual of benefits under any such qualified plans. With
respect to all non-qualified benefits plans (such as vacation,
sick days, and policies of like import) Commercial's employees
who become employees of Killbuck after the Merger will have
their years of service credited toward the determination of
whether and to the extent that they participate in such
non-qualified plans, but shall be treated as new employees for
purposes of the determination of the accrual of any benefit
based on past service.
(h) Commercial shall, prior to the time the Merger shall become
effective, take such actions, in consultation with Killbuck,
as shall be necessary or desirable to cause termination of any
qualified retirement plans of Commercial at or after the
effective date of Merger.
(i) Killbuck and Commercial acknowledge that the transactions
contemplated hereby are subject to the provisions of the
Securities Act of 1933, as amended (the "Act") and Rule 145
thereunder.
A-5
<PAGE> 135
Killbuck agrees to prepare and file, as soon as practicable
after the execution of this Agreement, the Registration
Statement under and pursuant to the provisions of the Act for
the purposes of registering the Killbuck Common Shares to be
issued in connection with the transactions contemplated hereby
or in lieu thereof to secure a suitable exemption therefrom.
Commercial agrees to provide promptly to Killbuck information
concerning the business and financial condition and affairs of
Commercial as may be required or appropriate for inclusion in
any such Registration Statement and to cause its counsel and
auditors to cooperate with Killbuck counsel and auditors in
the preparation of any such Registration Statement. Killbuck
agrees to use its best efforts to have such Registration
Statement declared effective under the Act as soon as may be
practicable, and Commercial agrees to distribute the
prospectus/proxy statement (to be prepared by and furnished at
Killbuck's expense) contained in such Registration Statement
(the Commercial "Prospectus/Proxy Statement") to Commercial
shareholders prior to the scheduled meeting of Commercial
shareholders that will be held to consider approval of this
Agreement and the Merger Agreement. Except to the extent
permitted by Rule 145(b), Killbuck and Commercial agree not to
publish any communication other than the Prospectus/Proxy
Statement, in respect of this Agreement, the Merger Agreement,
or the transactions contemplated therein. Any communication by
either party under Rule 145(b) will be made only upon the
written approval of the other. Killbuck and Commercial agree
that, between the date the Registration Statement becomes
effective and the effective time of the Merger, they will keep
each other advised on a current basis of material developments
concerning their respective businesses, including any event
which would cause the Prospectus/proxy Statement to contain an
untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not
misleading. Killbuck shall not be required to maintain the
effectiveness of the Registration Statement for the purpose of
resale of Killbuck Common Shares by Commercial shareholders
who may be deemed to be affiliates of Commercial, as such term
is defined in Rule 144 promulgated under the Act (the
"Affiliates") .
(j) Each Affiliate of Commercial shall furnish to Killbuck a
certificate representing that such Affiliate
A-6
<PAGE> 136
will not sell, assign, or transfer any of the Killbuck Common
Shares received by such Affiliate as a result of the
transactions contemplated by this Agreement, except pursuant
to (a) registration under the act or (b) a transaction
permitted by Rule 145 under the Act, or (c) a transaction in
which, in the opinion of counsel satisfactory to Killbuck, or
in accordance with a "no action" letter from the staff of the
Securities and Exchange Commission, the Killbuck Common Shares
are not required to be registered under the Act; and in the
event of sale or other disposition pursuant to Rule 145 such
Affiliate will supply satisfactory evidence of compliance with
such Rule to Killbuck. With respect to such representations,
each Affiliate shall agree to hold harmless and indemnify
Killbuck and Killbuck's officers and directors from and
against any losses, claims, damages, expenses (including
reasonable attorneys' fees), or liabilities to which Killbuck
or any officer or director of Killbuck may become subject
under the Act or otherwise as a result of the untruth, breach,
or failure of such representations. Each Affiliate shall
further agree that the certificate or certificates
representing the Killbuck Common Shares issued to such
Affiliate upon the consummation of the Share Exchange may bear
the following restrictive legend:
"The shares represented by this certificate have been
issued or transferred to the registered holder as a
result of a transaction to which Rule 145 under the
Securities Act of 1933, as amended (the "Act"), applies.
The shares represented by this certificate may not be
sold, transferred or assigned, and the issuer shall not
be required to give effect to any attempted sale,
transfer or assignment, except pursuant to (i) current
registration under the Act, (ii) a transaction permitted
by Rule 145 and as to which the issuer has received
reasonable and satisfactory evidence of compliance with
the provisions of Rule 145, or (iii) a transaction in
which, in the opinion of counsel satisfactory to the
issuer or in accordance with a "no action" letter from
the staff of the Securities and Exchange Commission,
such shares are not required to be registered under the
Act."
Killbuck covenants and agrees to remove the foregoing
restrictive legend from the certificate or certificates
A-7
<PAGE> 137
representing the Killbuck Common Shares issued to an Affiliate
and to cancel any stop order instructions with respect thereto
upon (i) receipt of advice from its counsel that such actions
are appropriate under the then existing circumstances, or (ii)
upon request of the holder thereof at anytime after that
period ending one year following the Merger, provided that the
holder thereof is not, and has not for at least the thirty day
period ending prior to the request been an affiliate of
Killbuck.
(k) Killbuck shall, to the extent required by applicable state
securities or "blue sky" laws, as promptly as practicable
after the furnishing by Commercial of all information
regarding Commercial required or desirable to be reflected
therein file with applicable state securities or blue sky
administrators, use its best efforts to cause to become
effective or be approved, all registration statements or
applications required to be so filed with respect to the
issuance of the Killbuck Common Shares in connection with the
Agreement of Merger.
(l) On the date the Registration Statement becomes effective and
at the effective time of the Merger, Commercial shall deliver
to Killbuck a certificate signed by the principal executive
officer and by the principal financial officer of Commercial
to the effect that the information contained in the
Registration Statement relating to the business and financial
condition and affairs of Commercial does not contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading. On the date the
Registration Statement becomes effective and at the effective
time of the Merger, Killbuck shall deliver to Commercial a
certificate signed by the chief executive officer and by the
chief financial officer of Killbuck to the effect that the
Registration Statement (other than the information contained
therein relating to the business and financial condition and
affairs of Commercial) does not contain any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements
therein not misleading.
(m) Killbuck undertakes to consider and interview, after the
effective time of the Merger, such directors of Commercial as
shall desire to be considered for a position as a director of
the resulting banking corporation after the merger of
Commercial with and into Subsidiary, and Killbuck may
A-8
<PAGE> 138
in its sole discretion add one or two such persons to the
Board of Directors of the Subsidiary.
5. Dissenting Shareholders. Holders of Commercial Common Stock, who do not
vote their shares in favor of the Merger and otherwise comply in all
respects to perfect dissenters' rights, will be entitled to dissenters'
or appraisal rights, if any, pursuant to and solely upon strict
compliance with, the applicable provisions of Ohio law (collectively,
the "Dissenting Shares").
6. Tax Opinion. Killbuck, for the benefit of Killbuck, Commercial and
Commercial's Shareholders, shall obtain a written opinion of it's
counsel, to the effect that:
(a) The statutory merger of Killbuck Bank with and into Commercial
will constitute a reorganization within the meaning of
Section 368(a)(1)(A) and (a)(2)(E) of the Internal Revenue
Code;
(b) No gain or loss will be recognized by Commercial as a
consequence of the transactions herein contemplated;
(c) No gain or loss will be recognized by the Shareholders of
Commercial on the exchange of their shares of Commercial
Common Stock for Killbuck Common Shares (disregarding for this
purpose any cash received for fractional share interests to
which they may be entitled);
(d) The federal income tax basis of the Killbuck Common Shares
received by the Shareholders of Commercial for their shares of
Commercial Common Stock will be the same as the federal income
tax basis of the Commercial Common Stock surrendered in
exchange therefor; and
(e) The holding period of the Killbuck Common Shares received by a
shareholder of Commercial in exchange for shares of Commercial
Common Stock will include the period for which the Commercial
Common Stock exchanged therefor was held, provided the
exchanged Commercial Common Stock was held as a capital asset
by such shareholder on the date of the exchange.
7. Representations and Warranties of Killbuck. Killbuck represents and
warrants to Commercial as follows:
(a) Killbuck is a corporation duly organized and validly
existing under the laws of the State of Ohio, is a registered
bank holding company under the Bank Holding Company Act of
1956, as amended, and is qualified to do business in the State
of Ohio, together with all other jurisdictions where it is
both required to so qualify and the failure to so qualify
would have material and adverse consequences to Killbuck.
Killbuck has full power and authority (including all licenses,
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<PAGE> 139
franchises, permits and other governmental authorizations
which are legally required) to engage in the businesses and
activities now conducted by it, including the businesses of
Subsidiary. As of December 31, 1997, the authorized capital
stock of Killbuck consisted of 200,000 shares of common stock,
without par value, of which a total of 132,380 shares were
issued and outstanding and 2,620 shares were held by Killbuck
as treasury stock. All of said shares of capital stock are
fully paid and nonassessable and are not issued in violation
of the preemptive rights of any shareholder.
(b) Killbuck has furnished to Commercial copies of its audited
Consolidated Balance Sheets as of December 31, 1997, and 1996,
and the Consolidated Statements of Income, Shareholders'
Equity and Statements of Cash Flows for the two years ended
December 31, 1997, 1996 and 1995, together with the notes
thereto. Each of the aforementioned financial statements was
prepared in accordance with Generally Accepted Accounting
Principles, consistently applied and is true and correct in
all material respects and together present fairly the
consolidated financial position and results of operations of
Killbuck as of the dates and for the periods therein set
forth. Such financial statements do not, as of the dates
thereof, include any material asset or omit any material
liability, absolute or contingent, or other fact, the
inclusion or omission of which renders such financial
statements, in light of the circumstances under which they
were made, misleading in any material respect. Since December
31, 1997, there has not been any material adverse change in
the financial condition, results of operations, business or
prospects of Killbuck and the Subsidiary on a consolidated
basis.
(c) The Board of Directors of Killbuck has authorized execution
of this Agreement and the Merger Agreement and approved the
merger of Subsidiary and Commercial as contemplated herein and
therein. Killbuck and Subsidiary have all requisite power and
authority to enter into this Agreement and the Merger
Agreement and Killbuck and Subsidiary have the authority to
consummate the transactions contemplated hereby. This
Agreement constitutes the valid and legally binding obligation
of Killbuck and this Agreement and the consummation of the
transactions contemplated herein have been duly authorized and
approved on behalf of Killbuck
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<PAGE> 140
by all requisite corporate action. Provided the required
approvals are obtained from the Board, neither the execution
and delivery of this Agreement or the Merger Agreement nor the
consummation of the Merger will conflict with, result in the
breach of, constitute a default under or accelerate the
performance provided by the terms of any law, or any rule or
regulation of any governmental agency or authority or any
judgment, order or decree of any court or other governmental
agency to which Killbuck or Subsidiary may be subject, any
contract, agreement or instrument to which Killbuck or
Subsidiary is a party or by which Killbuck or Subsidiary is
bound or committed, or the Articles of Incorporation or Code
of Regulations of Killbuck or Subsidiary, or constitute an
event which with the lapse of time or action by a third party,
could, to the best of Killbuck's knowledge, result in the
default under any of the foregoing or result in the creation
of any lien, charge or encumbrance upon any of the assets or
properties of Killbuck or Subsidiary or upon any of the stock
of Killbuck or Subsidiary; except, however, in the case of
contracts, agreements or instruments, such defaults, conflicts
or breaches which either (i) will be cured or waived prior to
the time the Merger becomes effective, or (ii) if not so cured
or waived would not, in the aggregate, have any material
adverse effect on the financial condition, results of
operations or business of Killbuck on a consolidated basis.
(d) There is no litigation, action, suit, investigation or
proceeding pending or, to the best of the knowledge after due
inquiry of Killbuck and its executive officers, threatened,
against or affecting Killbuck and/or the Subsidiary or
involving any of their respective properties or assets, at law
or in equity, before any federal, state, municipal, local or
other governmental authority, involving a material amount
which, if resolved adversely to the interest of Killbuck and
the Subsidiary, would materially affect the financial
conditions or operations of Killbuck and the Subsidiary and/or
its ability to perform under this Merger Agreement, and to the
best of the knowledge and belief after due inquiry of Killbuck
and its executive officers, no one has asserted and no one has
reasonable or valid grounds on which it reasonably can be
expected that anyone will assert any such claims against
Killbuck and the Subsidiary based upon the wrongful action or
inaction of Killbuck and the Subsidiary or any of their
respective officers, directors or employees.
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(e) At the time the Merger shall become effective and on such
subsequent date when the former Shareholders of Commercial
surrender their Commercial share certificates for
cancellation, the Killbuck Common Shares to be received by
Shareholders of Commercial will have been duly authorized and
validly issued by Killbuck and will be fully paid and
nonassessable.
(f) Killbuck has not incurred and will not incur directly or
indirectly any liability for brokerage, finders', agents' or
investment bankers' fees or commissions in connection with
this Agreement or the transactions contemplated thereby.
(g) The Pension Plan for the Employees of Killbuck Bancshares,
Inc. and its affiliates and any other plan which purport to be
qualified plans under Section 401(a) of the Internal Revenue
Code is so qualified and is in compliance in all material
respects with the applicable requirements of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
All material notices, reports and other filings required under
applicable law to be given or made to or with any governmental
agency with respect to the plans have been timely filed or
delivered where failure to file will result in a penalty or
result in disqualification of the plan. Killbuck has no
knowledge either of any circumstances which would adversely
affect the qualifications of the plans or their compliance
with the applicable requirements of ERISA, or of any
"reportable event" (as such term is defined in Section 4043(b)
of ERISA) or any "prohibited transaction" (as such term is
defined in Section 406 of ERISA and Section 4975(c) of the
Internal Revenue Code) which has occurred since the date on
which said section became applicable to the plans. With
respect to those plans which are defined benefit plans within
the meaning of ERISA, such plans meet the minimum funding
standards set forth in the Internal Revenue Code and ERISA.
(h) Since December 31, 1997, each of Killbuck and the Subsidiary
has conducted business only in the ordinary course, and has
preserved its corporate existence, business and goodwill
intact.
(i) Killbuck and the Subsidiary each have good and marketable
title to all assets and properties, whether real or personal,
tangible or intangible, including without limitation the
capital stock of the Subsidiary and all other assets and
properties reflected in Killbuck's Balance Sheet of December
31, 1997 or acquired subsequent thereto (except to the extent
that such assets and
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properties have been disposed of for fair value in the
ordinary course of business since December 31, 1997) subject
to no liens, mortgages, security interests, encumbrances,
pledges or charges of any kind, except: (i) those items that
secure liabilities that are reflected in said Balance Sheet;
(ii) statutory liens for taxes not yet delinquent; and (iii)
minor defects and irregularities in title and encumbrances
which do not materially impair the use thereof for the
purposes for which they are held; and such liens, mortgages,
security interests, encumbrances and charges are not in the
aggregate, material to the assets and properties of Killbuck.
Killbuck or its Subsidiary as lessee has the contractual right
under valid leases to occupy, use, possess and control all
material property leased by Killbuck or its Subsidiary.
(j) To the best of the knowledge after due inquiry of Killbuck
and its executive officers, Killbuck and the Subsidiary have
complied with all laws, regulations and orders applicable to
them and to the conduct of their respective businesses,
including without limitation, all statutes, rules and
regulations pertaining to the conduct of banking activities
except for possible technical violations which together with
any penalty which results therefrom are or will be of no
material consequence to either Killbuck or the Subsidiary.
Neither Killbuck nor the Subsidiary is the subject of, nor a
party to, any regulatory action or agreement such as letter
agreements, memorandum of understanding, cease and desist
orders or like agreements. Neither Killbuck nor the Subsidiary
are in default under, and no event has occurred which, with
the lapse of time or action by a third party, could, to the
best of Killbuck's knowledge after due inquiry, result in the
default under the terms of any judgment, decree, order, writ,
rule or regulation of any governmental authority or court,
whether federal, state or local and whether at law or in
equity, where the default(s) could reasonably be expected to
have a material adverse effect on the financial conditions,
results of operations or business of Killbuck and the
Subsidiary on a consolidated basis.
(k) Killbuck and Subsidiary have duly filed all federal, state,
county and local income, excise, real and personal property
and other tax returns and reports (including, but not limited
to, social security, withholding, unemployment insurance, and
sales and use taxes) required to have been filed by Killbuck
up to the date hereof. To the best of the knowledge and belief
of Killbuck all
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such returns are true and correct in all material respects,
and Killbuck has paid or, prior to the time the Merger shall
become effective, will pay all taxes, interest and penalties
shown on such return or reports or claimed (other than those
claims being contested in good faith and which have been
disclosed to Commercial) to be due to any federal, state,
county, local or other taxing authority, and there is, and at
the time the Merger shall become effective will be, no basis
for any additional claim or assessment which might materially
and adversely affect Killbuck or the Subsidiary, and for which
an adequate reserve has not been established. To the best of
its knowledge and belief, Killbuck has paid or made adequate
provision in its financial statements or its books and records
for all taxes payable in respect of all periods ending as of
the date thereof. To the best of its knowledge and belief
Killbuck has, or at the time the Merger shall become effective
will have, no material liability for any taxes, interest or
penalties of any nature whatsoever, except for those taxes
which may have arisen up to the time the Merger shall become
effective in the ordinary course of business and are properly
accrued on the books of Killbuck as of the time the Merger
shall become effective.
(l) To the best of its knowledge and belief, but without having
undertaken an environmental audit, Killbuck has no knowledge
of any underground storage tanks, any hazardous substances,
hazardous waste, pollutant or contaminant, including, but not
limited to, asbestos (except as previously disclosed to
Commercial in a letter of even date herewith), PCB's or urea
formaldehyde, having been generated, released into, stored or
deposited over, upon or below (in storage tanks or otherwise)
Killbuck's or Subsidiary's premises or any other real property
owned or leased by Killbuck or Subsidiary other than other
real estate owned, for which no investigation was conducted by
Killbuck, but for which Killbuck has no knowledge of such, or
into any water systems on or below the surface of the Killbuck
or Subsidiary premises or any other real property owned or
leased by Killbuck or Subsidiary other than other real estate
owned, for which no investigation was conducted by Killbuck,
but for which Killbuck has no knowledge of such from any
source whatsoever. As used in this Agreement, the terms
"hazardous substance," "hazardous waste," pollutant" and
"contaminant" mean any substance, waste, pollutant or
contaminant
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included within such terms under any applicable Federal, state
or local statute or regulation.
8. Representations and Warranties of Commercial. Commercial represents and
warrants to Killbuck that, except as set forth in the disclosure letter
dated of even date herewith (the "Disclosure Letter") and attached
hereto and made a part hereof, as follows
(a) Commercial is a banking corporation duly organized and validly
existing in good standing under the laws of the State of Ohio.
Commercial has full power and authority (including all
licenses, franchises, permits and other governmental
authorizations which are legally required) to engage in the
businesses and activities now conducted by it. As of the date
of this Agreement, the authorized capital stock of Commercial
consists of 20,200 shares of common stock with $10 par value,
all of which shares are issued and outstanding and none are
shares of treasury stock owned by Commercial. All of said
shares of capital stock are fully paid and nonassessable and
are not issued in violation of the preemptive rights of any
shareholder. There are no outstanding options, warrants or
commitments of any kind relating to Commercial's capital
stock.
(b) Commercial has furnished to Killbuck copies of all financial
statements relating to Commercial, as filed with the
appropriate regulatory agencies, as of and for the years ended
December 31, 1997 and 1996. Each of the aforementioned
financial statements is and shall be prepared in accordance
with Generally Accepted Accounting Principles or applicable
regulatory accounting principles applicable to Commercial
consistently applied and is and shall be true and correct in
all material respects and together present fairly the
consolidated financial position and results of operations of
Commercial as of the dates and for the periods therein set
forth. Commercial financial statements do not and will not, as
of the dates thereof, include any asset in excess of $5,000 or
omit any liability in excess of $5,000, absolute or
contingent, or other fact, the inclusion or omission of which
renders such financial statements, in light of the
circumstances under which they were made, misleading in any
material respect. Since December 31, 1997, there has not been
any change in the financial condition, results of operations,
business or prospects of Commercial (including, without
limitation, any adverse trend in the loan loss experience of
Commercial) which in the aggregate, has had a material adverse
effect on Commercial's condition.
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(c) The Board of Directors of Commercial has authorized
execution of this Agreement. Subject to the approval by the
Shareholders of Commercial, Commercial has all requisite power
and authority to enter in this Agreement and the Merger
Agreement. Commercial has the authority to consummate the
transactions contemplated hereby so that, provided all
required corporate and regulatory approvals are obtained,
neither the execution and delivery of this Agreement, the
Merger Agreement nor the consummation of the Merger will
conflict with, result in the breach of, constitute a default
under or accelerate the performance provided by the terms of
any law, or any rule or regulation of any governmental agency
or authority or any judgment, order or decree of any court or
other governmental agency to which Commercial may be subject,
any contract, agreement or instrument to which Commercial is a
party or by which Commercial is bound or committed, or the
Articles of Incorporation or Code of Regulations of
Commercial, or constitute an event which with the lapse of
time or action by a third party, could, to the best of
Commercial's knowledge, result in the default under any of the
foregoing or result in the creation of any lien, charge,
encumbrance upon any of the assets, property or capital stock
of Commercial, except, however, in the case of contracts,
agreements or instruments, such defaults, conflicts or
breaches which either (i) will be cured or waived prior to the
time the Merger becomes effective, or (ii) if not so cured or
waived would not, in the aggregate, have any material adverse
effect on the financial condition, results of operations or
business of Commercial.
(d) Except as disclosed in Subsection (d) of the Disclosure
Letter, there is no litigation, action, suit, investigation or
proceeding pending or, to the best of their knowledge after
due inquiry of Commercial and its executive officers, overtly
threatened, against or affecting Commercial or involving any
of their respective properties or assets, at law or in equity,
before any federal, state, municipal, local or other
governmental authority, involving in excess of $5,000, and to
the best of the knowledge and belief after due inquiry of
Commercial and its executive officers, no one has asserted and
no one has reasonable or valid ground on which it reasonably
can be expected that anyone will assert any such claims
against Commercial based upon the wrongful action or inaction
of Commercial or its respective officers, directors or
employees.
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(e) Commercial has good and marketable title to all assets and
properties, whether real or personal, tangible or intangible
reflected in Commercial's Balance Sheet of December 31, 1997
or acquired subsequent thereto (except to the extent that such
assets and properties have been disposed of for fair value in
the ordinary course of business since December 31, 1997)
subject to no liens, mortgages, security interests,
encumbrances, pledges or charges of any kind, except: (i)
those items that secure liabilities that are reflected in said
Balance Sheet; (ii) statutory liens for taxes not yet
delinquent; and (iii) minor defects and irregularities in
title and encumbrances which do not impair the use thereof for
the purposes for which they are held; and such liens,
mortgages, security interests, encumbrances and charges are
not in the aggregate, material to the assets and properties of
Commercial. Commercial as lessee has the contractual right
under valid leases to occupy, use, possess and control all
material property leased by Commercial.
(f) To the best of the knowledge after due inquiry of Commercial
and its executive officers, Commercial has complied with all
laws, regulations and orders applicable to it and to the
conduct of its business, including without limitation, all
statutes, rules and regulations pertaining to the conduct of
its banking activities except for possible technical
violations which together with any penalty which results
therefrom are or will be of no material consequence to
Commercial. Except as disclosed in Subsection (f) of the
Disclosure Letter, Commercial is not the subject of, nor is a
party to, any regulatory actions or agreement such as letter
agreements, memorandum of understanding, cease and desist
order or like agreements. Commercial is not in default under,
and no event has occurred which, with the lapse of time or
action by a third party, could, to the best of Commercial's
knowledge after due inquiry, result in the default under the
terms of any judgment, decree, order, writ, rule or regulation
of any governmental authority or court, whether federal, state
or local and whether at law or in equity.
(g) Except as disclosed in Subsection (g) of the Disclosure
Letter, Commercial has not, since December 31, 1997 to the
date hereof: (i) issued or sold any of its capital stock or
any corporate debt securities; (ii) granted any option for the
purchase of capital stock; (iii) declared or set aside or paid
any dividend or other distribution in respect of its capital
stock except as permitted
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pursuant to Section 9(a) hereof or, directly or indirectly,
purchased, redeemed or otherwise acquired any shares of such
stock; (iv) incurred any obligation or liability (absolute or
contingent), except for obligations reflected in this
Agreement or the Merger Agreement, and except for obligations
or liabilities incurred in the ordinary course of business, or
mortgaged, pledged or subjected to lien or encumbrance (other
than statutory liens for taxes not yet delinquent) any of its
assets or properties; (v) discharged or satisfied any lien or
encumbrance or paid any obligation or liability (absolute or
contingent), other than the current portion of any long term
liabilities which become due after December 31, 1997, current
liabilities included in its financial statements as of
December 31, 1997, current liabilities incurred since the date
thereof in the ordinary course of business and liabilities
incurred in carrying out the transactions contemplated by this
Agreement or the Merger Agreement; (vi) sold, exchanged or
otherwise disposed of any of its capital assets worth in
excess of $5,000 outside the ordinary course of business;
(vii) made any officers' salary increase or wage increase
other than in the ordinary course of business, entered into
any employment contract with any officer or salaried employee
or, instituted any employee welfare, bonus, stock option,
profit-sharing, retirement or similar plan or arrangement;
(viii) suffered any damage, destruction or loss, whether or
not covered by insurance, involving in excess of $5,000,
affecting its business, property or assets or waived (except
for fair consideration) any rights of value which are material
in the aggregate, considering its business taken as a whole;
or (ix) entered or agreed to enter into any agreement or
arrangement granting any preferential right to purchase any of
its assets, properties or rights or requiring the consent of
any party to the transfer and assignment of any such assets,
properties or rights.
(h) Except as disclosed in Subsection (h) of the Disclosure
Letter, Commercial is not a party to or bound by any written
or oral: (i) employment or consulting contract which is not
terminable by it on 60 days or less notice, (ii) employee
bonus, deferred compensation, pension, stock bonus or
purchase, profit-sharing, retirement or stock option plan,
(iii) other employee benefit or welfare plan, or (iv) other
executory material agreements which in any case obligate
Commercial to make any payment(s) which in the aggregate
exceed $5,000 per year except for contracts terminable on
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60 days notice. All such pension, stock bonus or purchase,
profit-sharing, defined benefit and retirement plans set forth
under the caption "Qualified Plans" in the Commercial Document
List (hereinafter referred to collectively as the "plans") are
qualified plans under Section 401(a) of the Internal Revenue
Code and in compliance in all material respects with ERISA.
All material notices, reports and other filings required under
applicable law to be given or made to or with any governmental
agency with respect to the plans have been timely filed or
delivered where failure to file would result in a penalty
and/or result in disqualification of the plan. Commercial has
no knowledge either of any circumstances which would adversely
affect the qualification of the plans or their compliance with
ERISA, or of any unreported "reportable event" (as such term
is defined in ERISA) or, any "prohibited transaction" (as such
term is defined in Section 406 of ERISA and Section 4975(c) of
the Internal Revenue Code) which has occurred since the date
on which said sections became applicable to the plans. The
plans meet the minimum funding standards set forth in the
Internal Revenue Code and ERISA.
(i) Commercial has duly filed all federal, state, county and local
income, excise, real and personal property and other tax
returns and reports (including, but not limited to, social
security, withholding, unemployment insurance, and sales and
use taxes) required to have been filed by Commercial up to the
date hereof. Except as set forth in Subsection (i) of the
Disclosure Letter, to the best of the knowledge and belief of
Commercial all such returns are true, are correct in all
material respects, and Commercial has paid or, prior to the
time the Merger shall become effective, will pay all taxes,
interest and penalties shown on such return or reports or
claimed together than those claims being contested in good
faith and which have been disclosed to Killbuck to be due to
any federal, state, county, local or other taxing authority,
and there is, and at the time the Merger shall become
effective will be, no basis for any additional claim or
assessment in excess of $5,000 and for which an adequate
reserve has not been established. To the best of its knowledge
and belief, Commercial has paid, made or will make adequate
provision in its financial statements or its books and records
for all taxes payable in respect of all periods ending as of
the date thereof. To the best of its knowledge and belief,
Commercial has, or at the time the
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Merger shall become effective will have, no liability for any
taxes, interest or penalties of any nature whatsoever, in
excess of $5,000 except for those taxes which may have arisen
up to the time the Merger shall become effective in the
ordinary course of business and are properly accrued on the
books of Commercial as of the time the Merger shall become
effective.
(j) To the best of its knowledge and belief, but without having
undertaken an environmental audit, Commercial has no knowledge
of any underground storage tanks, any hazardous substances,
hazardous waste, pollutant or contaminant, including, but not
limited to, asbestos (except as disclosed in Subsection (j) of
the Disclosure Letter), PCB's or urea formaldehyde, having
been generated, released into, stored or deposited over, upon
or below (in storage tanks or otherwise) Commercial's premises
or any other real property owned or leased by Commercial other
than other real estate owned, for which no investigation was
conducted by Commercial, but for which Commercial has no
knowledge of such, or into any water systems on or below the
surface of the Commercial premises or any other real property
owned or leased by Commercial other than other real estate
owned, for which no investigation was conducted by Commercial,
but for which Commercial has no knowledge of such from any
source whatsoever. As used in this Agreement, the terms
"hazardous substance," "hazardous waste," pollutant" and
"contaminant" mean any substance, waste, pollutant or
contaminant included within such terms under any applicable
Federal, state or local statute or regulation.
(k) Commercial has not incurred and will not incur any liability
for brokerage, finders', agents', or investment bankers' fees
or commissions in connection with this Agreement or the Merger
Agreement or the transactions contemplated hereby and thereby.
(l) Subject to their fiduciary duties, the directors of Commercial
executing this Agreement shall vote the shares of Commercial
held directly by them in favor of adoption of the Agreement.
(m) All contracts and commitments (whether written or oral) that
may have a material effect on the business of Commercial are
disclosed in subsection (m) of the Disclosure Letter and
copies of any such written contracts or commitments have been
provided to Killbuck. All contracts and commitments for the
lease or purchase of equipment or services have been entered
into on an
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arm's length basis.
(n) The deposits of Commercial are insured by the Federal Deposit
Insurance Corporation in accordance with the Federal Deposit
Insurance Act ("FDIA"). Commercial has paid all assessments
and filed all reports required under the FDIA and is in
compliance, in all material respects, with all regulatory
requirements imposed in connection with the insurance of its
deposits.
(o) To the best of Commercial's knowledge and belief, the reserves
for possible loan losses on the outstanding loans of
Commercial (if any, as reflected in the balance sheet of
Commercial as of December 31, 1997 (the "1997 Balance Sheet")
are adequate to absorb all known and anticipated loan losses
in the loan portfolio of Commercial, net of recoveries
relating to loans previously charged off. Except as set forth
in subsection (o) of the Disclosure Letter, there are no loans
of Commercial the present principal balance of which is in
excess of $5,000 that have been classified orally or in
writing by bank examiners (regulatory or internal) as "Other
Loans Specifically Mentioned," "Substandard," "Doubtful," or
"Loss," as of the last examination date (which shall include
the date on which any examination prior to the effective time
is concluded). To the best of Commercial's knowledge and
belief, each loan in the principal amount of $5,000 or greater
reflected as an asset of Commercial in the 1997 Balance Sheet
or acquired by Commercial since December 31, 1997, is the
legal, valid and binding obligation of the obligor and any
guarantor named therein, and no such loan is subject to any
defense, offset or counterclaim. Except for pledges to secure
public and trust deposits, to the best of Commercial's
knowledge and belief, none of the investments reflected in the
1997 Balance Sheet under the heading "Investment Securities,"
and none of the investments made by Commercial since December
31, 1997, is subject to any restriction, whether contractual
or statutory, which impairs the ability of Commercial freely
to dispose of such investment at any time. Commercial is not a
party to any repurchase agreements. Except as set forth in
subsection (o) of the Disclosure Letter, and except for
transactions aggregating less than $ 5,000, Commercial has not
sold or otherwise disposed of any assets in a transaction in
which the acquirer of such assets or any other person has the
right, either conditionally or absolutely, to require
Commercial to repurchase or otherwise re acquire
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any such assets.
(p) Subsection (q) of the Disclosure Letter contains a list and a
brief description of all insurance policies currently in force
with respect to Commercial. All premiums due on such policies
have been paid, and such policies will continue to remain in
force through the Effective Time. Subsection (q) of the
disclosure letter also contains a description of all claims in
excess of $1,000 currently pending under such insurance
policies, together with a list of all other claims in excess
of $1,000 which have been filed during the last three (3)
years and a description of the disposition thereof.
(q) Except to the extent reflected or reserved against in the 1997
Balance Sheet or in the notes thereto, as of the date of such
Balance Sheet, Commercial has no liabilities or obligations,
secured or unsecured, whether accrued, absolute, contingent or
otherwise, which would materially and adversely affect the
financial condition, results of operations, assets, or
business of Commercial.
(r) Except for loans made in the ordinary course of business,
Commercial has no business relationships, business
transactions or indebtedness with or to any of its officers
and directors.
9. Action by Commercial Pending Effective Time. Commercial agrees that
from the date of this Agreement until the time the Merger shall become
effective, except with prior written permission of Killbuck:
(a) Beginning with the date hereof and until such time as the
Merger shall become effective, Commercial will not declare or
pay any dividends or make any distributions other than regular
cash dividends, payable at such times and in amounts
consistent with past practice and not to exceed the per share
rate paid in the prior calendar year. If, prior to the
consummation of the Merger, Commercial shall declare a stock
dividend or make distributions upon or subdivide, split up,
reclassify or combine its shares of common stock in any
security convertible into its common stock, appropriate
adjustment or adjustments will be made in the foregoing per
share dividend rate.
(b) Commercial will not issue, sell, grant any option for, or
acquire for value any shares of its capital stock or otherwise
effect any change in connection with its capitalization.
(c) Except as otherwise set forth in or contemplated by this
Agreement or the Merger Agreement,
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Commercial will carry on its businesses in substantially the
same manner as heretofore, keep in full force and effect
insurance comparable in amount and scope of coverage to that
now maintained by it and use its best efforts to maintain and
preserve its business organization intact.
(d) Commercial will not: (i) enter into any transaction other than
in the ordinary course of business or incur or agree to incur
any obligation or liability except liabilities incurred and
obligations entered into in the ordinary course of business;
(ii) change its lending, investment, liability management and
other policies in any respect; (iii) except as committed for
adjustment as of the date hereof and consistent with prior
practice, grant any general or uniform increase in the rates
of pay of employees; (iv) incur or commit to any capital
expenditures other than in the ordinary course of business, or
(v) merge into, consolidate with or sell its assets to any
other corporation or person, or permit any other corporation
to be merged or consolidated with it or acquire all of the
assets of any other corporation or person.
(e) Commercial will not change its method of accounting in effect
at December 31, 1997 except as required by changes in
generally accepted accounting principles and concurred in by
Commercial's independent auditors, or change any of its
methods of reporting income and deductions for Federal income
tax purposes from those employed in the preparation of
Commercial's Federal income tax returns for the taxable year
ending December 31, 1997, except for changes required by law.
(f) Commercial will promptly advise Killbuck in writing of all
material actions taken by the directors and Shareholders of
Commercial, furnish Killbuck with copies of all minutes of
such action and monthly interim financial statements of
Commercial as they become available, and keep Killbuck fully
informed concerning all developments which in the opinion of
Commercial may have a material effect upon the business,
properties or condition (either financial or otherwise) of
Commercial.
10. Action by Killbuck Pending Effective Time. Killbuck agrees that from
the date of this Agreement until the time the Merger shall become
effective:
(a) Killbuck will carry on its business in substantially the same
manner as heretofore except as
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otherwise set forth in or contemplated by this Agreement, and
Killbuck will keep in full force and effect insurance
comparable in amount and scope of coverage to that now
maintained by it and use its best efforts to maintain and
preserve its business organization intact.
(b) Killbuck will not change its methods of accounting in effect
at December 31, 1997, except as required by changes in
generally accepted accounting principles as concurred in by
Killbuck's independent auditors, or change any of its methods
of reporting income and deductions for Federal income tax
purposes from those employed in the preparation of the Federal
income tax returns of Killbuck's Subsidiary for the taxable
year ended December 31, 1997, except for changes required by
law or take any action which could jeopardize the tax free
nature of the Merger.
(c) Killbuck will furnish Commercial with copies of monthly
interim financial statements of Killbuck and keep Commercial
fully informed concerning all developments which in the
opinion of Killbuck may have a material effect upon the
business, properties or condition (either financial or
otherwise) of Killbuck.
11. Conditions to Obligations of Killbuck. The obligations of Killbuck
under this Agreement and the Merger Agreement are subject, unless
waived by Killbuck, to the satisfaction of the following conditions on
or prior to the time the Merger shall become effective:
(a) There shall not have been any material adverse change or
discovery of a condition or the occurrence of an event which
has or is likely to result in such a change, in the financial
condition, aggregate net assets, Shareholders' equity,
business or operating results of Commercial from December 31,
1997 to the time the Merger shall become effective.
(b) Commercial shall not have paid cash dividends from the date
hereof to the time the Merger shall become effective except as
permitted under this Agreement.
(c) All representations by Commercial contained in this Agreement
and the Merger Agreement shall be true in all material
respects at, or as of, the time the Merger shall become
effective as though such representations were made at and as
of said date, except for changes contemplated by this
Agreement or the Merger Agreement and except also for
representations as of a specified time
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other than the time the Merger shall become effective, which
shall be true in all material respects at such specified time.
In addition, all amendments to the Disclosure Letter shall
have been approved by Killbuck in accordance with Section 19.
(d) Killbuck shall have received the opinion of legal counsel for
Commercial, dated the time the Merger shall become effective,
substantially to the effect set forth in Exhibit AAppendix A
hereto.
(e) Commercial shall have performed or satisfied in all material
respects all undertakings, agreements and conditions required
by this Agreement or the Merger Agreement to be performed or
satisfied by it at or prior to the time the Merger shall
become effective.
(f) At the time the Merger shall become effective, no suit, action
or proceeding shall be pending or overtly threatened before
any court or other governmental agency by the federal or state
government in which it is sought to restrain or prohibit the
consummation of the Merger, and no other suit, action or
proceeding shall be pending or overtly threatened and no
liability or claim shall have been asserted against Commercial
which Killbuck shall in good faith determine, with advice of
counsel: (i) has a reasonable likelihood of being successfully
prosecuted and (ii) if successfully prosecuted, would
materially and adversely affect the benefits hereunder
intended for Killbuck.
(g) Prior to the time the Merger shall become effective, Killbuck
shall not have been deprived of adequate opportunity to
conduct such review and examination of the business,
properties, and condition (financial or otherwise) of
Commercial as Killbuck shall have deemed prudent. In the event
Commercial receives a written examination report or written
agreement with a state or federal banking regulatory agency,
Killbuck shall have an opportunity to review such examination
report or written agreement for a period of thirty days and
may, at its option, elect to terminate its obligations under
this Agreement during such review period.
(h) Holders of Commercial Common Stock who are entitled to
exercise in the aggregate not more than 10% of the voting
power of the issued and outstanding Commercial Common Stock as
of the time the Merger shall become effective shall have taken
steps to perfect their rights as dissenting Shareholders
pursuant to the provisions the Sections 1115.19 and 1701.85 of
the Ohio Revised
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Code so that if, at the time the Merger shall become
effective, holders of more than 10% of such shares shall have
taken such steps, Killbuck may, at its option, refuse to
consummate the Merger.
(i) Commercial shall have furnished Killbuck certificates, signed
on its behalf by the Chairman or President and the Secretary
or an Assistant Secretary of Commercial and dated the time the
Merger shall become effective, to the effect that to the best
of their knowledge, after due inquiry, the conditions
described in Paragraphs (a), (b), (c), and (f) of this Section
11 have been fully satisfied.
(j) Killbuck shall have received from each Affiliate a certificate
in the form specified by Killbuck.
(k) Killbuck shall have received from Commercial the officers'
certificates required pursuant to Section 4 (m) hereof.
(l) Each of (i) the Board of Directors of Commercial, (ii)
Commercial' shareholders and (iii) Killbuck's shareholders
shall have approved this Agreement and the Agreement of
Merger.
(m) Prior to the Closing, Commercial will have provided Killbuck
with a list of all certificates of deposit or checking,
savings or other deposits and a list of all certificates of
deposit or checking, savings or other deposits owned by
directors and officers of Commercial and their affiliates as
of the last day of the calendar month immediately prior to the
Closing. In addition, Commercial shall provide Killbuck with a
list of (i) all certificates of deposit, checking, savings or
other deposits in excess of $100,000 and (ii) all customers
with aggregate deposits in excess of $100,000.
(n) Killbuck shall have received evidence, satisfactory to it,
that Commercial shall have taken such actions as are necessary
to secure supplemental Medicare medical insurance (to be
implemented at or prior to the effective time of the Merger)
for any former director of Commercial presently insured on
Commercial's group medical insurance policy, and caused the
corresponding removal from the group term medical insurance
policy of Commercial such director and such director's family.
12. Conditions to Obligations of Commercial. The obligations of Commercial
under this Agreement or the Merger Agreement are subject, unless waived
by Commercial, to the satisfaction on or prior to the time the Merger
shall become effective of the following conditions:
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(a) There shall not have been any material adverse change or
discovery of a condition or the occurrence of an event which
has or is likely to result in such a change, in the financial
condition, aggregate net assets, Shareholders' equity,
business, or operating results of Killbuck from December 31,
1997, to the time the Merger shall become effective.
(b) All representations by Killbuck contained in this Agreement
and the Merger Agreement shall be true in all material
respects at, or as of, the time the Merger shall become
effective as though such representations were made at and as
of said date, except for changes contemplated by this
Agreement and the Merger Agreement, and except also for
representations as of a specified time other than the time the
Merger shall become effective, which shall be true in all
material respects at such specified time.
(c) Commercial shall have received the opinion of counsel for
Killbuck dated the time the Merger shall become effective
substantially to the effect set forth in Exhibit B hereto.
(d) Killbuck shall have performed or satisfied in all material
respects all undertakings, agreements and conditions required
by this Agreement and the Merger Agreement to be performed or
satisfied by it at or prior to the time the Merger shall
become effective.
(e) At the time the Merger shall become effective, no suit, action
or proceeding shall be pending or overtly threatened before
any court or other governmental agency of the federal or state
government in which it is sought to restrain, prohibit or set
aside consummation of the Merger and no other suit, action or
proceeding shall be pending or overtly threatened and no
liability or claim shall have been asserted against Killbuck
which Commercial shall in good faith determine, with advice of
counsel: (i) has a reasonable likelihood of being successfully
prosecuted and (ii) if successfully prosecuted, would
materially and adversely affect the benefits hereunder
intended for Commercial and its Shareholders.
(f) Killbuck shall have furnished Commercial a certificate, signed
by the Chairman or President and by the Secretary or Assistant
Secretary of Killbuck and dated the time the Merger shall
become effective to the effect that to the best of their
knowledge after due inquiry the conditions described in
Paragraphs (a), (b), and (e) of this Section 12 have been
fully satisfied.
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(g) Killbuck and Commercial shall have received the tax opinion
called for pursuant to Section 6 of this Agreement and there
shall exist as of, at or immediately prior to the time the
Merger shall become effective no facts or circumstances which
would render such opinion inapplicable in any respect to the
transactions to be consummated hereunder.
(h) Prior to the time the Merger shall become effective,
Commercial shall not have been deprived of adequate
opportunity to conduct such review and examination of the
business, properties, and condition (financial or otherwise)
of Killbuck as Commercial shall have deemed prudent. In the
event Killbuck receives a written examination report or
written agreement with a state or federal banking regulatory
agency, Commercial shall have an opportunity to review such
examination report or written agreement for a period of thirty
days and may, at its option, elect to terminate its
obligations under this Agreement during such review period.
13. Conditions to Obligations of All Parties. In addition to the provisions
of Sections 11 and 12 hereof, the obligations of Killbuck and
Commercial to cause the transactions contemplated herein to be
consummated shall be subject to the satisfaction of the following
conditions on or prior to the time the Merger shall become effective:
(a) The parties hereto shall have received all necessary approvals
of governmental agencies and authorities of the transactions
contemplated by this Agreement and each of such approvals
shall remain in full force and effect at the time the Merger
shall become effective and such approvals and the transactions
contemplated thereby shall not have been contested by any
federal or state governmental authority by formal proceeding,
or contested by any other third party by formal proceeding
which the Board of Directors or the party asserting a failure
of a condition under this Section 13(a) shall in good faith
determine, with the advice of counsel: (i) has a reasonable
likelihood of being successfully prosecuted and (ii) if
successfully prosecuted, would materially and adversely affect
the benefits hereunder intended for such party. It is
understood that, if any contest as aforesaid is brought by
formal proceedings, Killbuck may, but shall not be obligated
to, answer and defend such contest. Killbuck shall notify
Commercial promptly upon receipt of all necessary governmental
approvals.
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(b) The registration statement required to be filed by Killbuck
pursuant to Section 4(c) of this Agreement shall have become
effective by an order of the Securities and Exchange
Commission or a suitable exemption shall be available
therefrom, the shares of Killbuck Common Shares to be
exchanged in the Merger shall have been qualified or exempted
under all applicable state securities laws, and if filed there
shall have been no stop order issued or threatened by the
Securities and Exchange Commission that suspends or would
suspend the effectiveness of the registration statement, and
no proceeding shall have been commenced, pending or overtly
threatened for such purpose.
(c) This Agreement and the Merger Agreement shall have been duly
adopted, ratified and confirmed by the requisite affirmative
votes of the Shareholders of Commercial.
14. Non-survival of Representations and Warranties. The respective
representations and warranties of Killbuck and Commercial set forth
shall expire at the effective time of the Merger.
15. Governing Law. This Agreement shall be construed and interpreted
according to the applicable laws of the State of Ohio.
16. Assignment. This Agreement and the Merger Agreement and all of the
provisions hereof and thereof shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor the Merger Agreement
nor any of the rights, interest, or obligations hereunder or thereunder
shall be assigned by either of the parties hereto without the prior
written consent of the other party.
17. Satisfaction of Conditions; Termination.
(a) Killbuck agrees to use its best effort to obtain satisfaction
of the conditions insofar as they relate to Killbuck, and
Commercial agrees to use its best efforts to obtain the
satisfaction of the conditions insofar as they relate to
Commercial. If any material condition to the obligations of
Killbuck set forth in Section 11 or 13 is not substantially
satisfied at the time or times contemplated thereby and such
condition is not waived by Killbuck, or if any material
condition to the obligations of Commercial set forth in
Section 12 or 13 is not substantially satisfied at the time or
times contemplated thereby and such condition is not waived by
Commercial, or if at any
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time prior to the time the Merger shall become effective, it
shall become reasonably certain that such condition will not
be substantially satisfied and such condition is not waived by
Killbuck or Commercial, as the case may be, either Killbuck or
Commercial may terminate this Agreement by written notice to
the other party after the expiration of fifteen (15) days
written notice to the other party during which time such other
party shall have an opportunity to cure such defect in said
condition. This Agreement may be terminated and abandoned
(either before or after the meetings of Shareholders
contemplated hereby) by mutual written consent of Killbuck and
Commercial authorized by their respective Boards of Directors.
In the event of such termination caused otherwise than by
breach of this Agreement by any of the parties hereto, this
Agreement shall cease and terminate, the acquisition of
Commercial as provided herein shall not be consummated, and
neither Killbuck nor Commercial shall have any further
liability under this Agreement of any nature whatever,
including any liability for damages. In the event this
Agreement is terminated, the duties of both parties with
respect to confidential information set forth in Sections 4(d)
shall survive any such termination. In addition to the other
grounds for termination of this Agreement set forth herein,
this Agreement can be terminated by written notice by either
party to the other, in each case authorized by its Board of
Directors, if the Merger shall not have been consummated by
February 1, 1999, or the date of such notice, whichever is
later.
(b) If termination of this Agreement shall be judicially
determined to have been caused by breach of this Agreement,
then, in addition to other remedies at law or equity for
breach of this Agreement, the party so found to have breached
this Agreement shall indemnify the other parties for their
respective costs, fees and expenses of its counsel,
accountants and other experts and advisors as well as fees and
expenses incident to negotiation, preparation and execution of
this Agreement and related actions and its Shareholders'
meetings and actions.
18. Waivers, Amendments. Any of the provisions of this Agreement may
be waived at any time by the party which is, or the Shareholders of
which are, entitled to the benefit thereof, by resolution of the Board
of Directors of such party. This Agreement may be amended or modified
in whole or in part by an agreement in writing executed in the same
manner (but not necessarily by the same person) as this Agreement and
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which makes reference to this Agreement, pursuant to a resolution,
adopted by the Boards of Directors of the respective parties, provided,
however, such amendment or modification may be made in this manner by
the respective Boards of Directors of Killbuck and Commercial at
anytime prior to a favorable vote of such party's Shareholders, (if
such shareholder approval is otherwise required) but may be made after
a favorable vote by the Shareholders (if such shareholders approval is
otherwise required) of such party, only if, in the opinion of its Board
of Directors, such amendment or modification will not have any material
adverse effect on the benefits intended under this Agreement for the
Shareholders of such party and will not require resolicitation of any
proxies from such Shareholders.
19. Entire Agreement. This Agreement supersedes any other agreement,
whether written or oral, that may have been made or entered into by
Killbuck and Commercial or by any officer or officers of such parties
relating to the acquisition of the business or the capital stock of
Commercial by Killbuck. This Agreement, including the exhibits and
schedules hereto (which shall include the Disclosure Letter and the
Merger Agreement) together constitute the entire agreement of the
parties, and there are no agreements or commitments except as set forth
herein and therein. This Agreement and the Merger Agreement may only be
amended in a writing signed by the parties hereto and thereto. The
Disclosure Letter may be amended by Commercial from time to time after
the date hereof upon the prior written consent of Killbuck.
20. Captions; Counterparts. The captions in this Agreement are for
convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement. This
Agreement may be executed in several counterparts, each of which shall
constitute one and the same instrument.
21. Notices. All notices and other communications hereunder shall be deemed
to have been duly given if forwarded by regular First Class United
States Mail, postage prepaid, or a nationally recognized overnight
courier service. All notices and other communications hereunder given
to any party shall be communicated to the remaining party to this
Agreement by mail in the same manner as herein provided.
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a) If to Killbuck, to:
Luther E. Proper
President
Killbuck Bancshares, Inc.
165 N. Main
Killbuck, OH 44637
With copies to:
Martin D. Werner, Esq.
Werner & Blank Co., LPA
7205 W. Central Ave.
Toledo, OH 43617
(419) 841-8051/PH
(419) 841-8380/FX
(b) If to Commercial, to:
Mr. Robert K. Wagner
President
Commercial and Savings Bank Co.
701 South Market Street
Danville, OH 43014
With copies to:
Clifford A. Roe, Jr., Esq.
Dinsmore & Shohl, L.L.P.
1900 Chemed Center
255 East Fifth Street
Cincinnati, Ohio 45202-3172
(513) 977-8200/PH
(513) 977-8141/FX
22. Publicity. Killbuck and Commercial agree to consult with and obtain the
consent of the other, prior to any media release or other public
disclosures as to the matters covered by this Agreement, except as may
be required by law.
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24. Knowledge. Whenever a representation or warranty is made herein as
being "to the knowledge of" a party hereto or the officers or directors
thereof, it is understood that an officer has made or caused to be made
by personnel or representatives competent to determine the accuracy
thereof (and the results thereof reported to him) an investigation
which is appropriate to determine the accuracy of such representation
or warranty.
IN WITNESS WHEREOF, this Agreement has been executed the day and year
first above written.
ATTEST: Killbuck Bancshares, Inc.,
Killbuck Bancshares, Inc. By: /s/ Luther E. Proper
- ----------------------------------- -------------------------------
By: /s/ Craig Lawhead Luther E. Proper, President
--------------------------------
Its: V.P./Treasurer
-------------------------------
ATTEST: Commercial and Savings Bank Co.
/s/ Judy C. Klavins By: /s/ Robert K. Wagner
- ----------------------------------- ------------------------------
By: Judy C. Klavins Robert K. Wagner, President
--------------------------------
Its: Vice President/Cashier
-------------------------------
As individuals and with respect solely to the understanding made in Section 8(l)
of this Agreement.
/s/ Robert K. Wagner /s/ Lanny A. Parrish
- ----------------------------------- ---------------------------------
/s/ Richard E. Burwell
- ----------------------------------- ---------------------------------
/s/ Theodore A. Bratton
- ----------------------------------- ---------------------------------
/s/ Donald D. Rogers
- ----------------------------------- ---------------------------------
/s/ Donald C. Weiser
- ----------------------------------- ---------------------------------
/s/ Wendell Spearman
- ----------------------------------- ---------------------------------
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<PAGE> 163
APPENDIX A
MERGER AGREEMENT
THIS MERGER AGREEMENT (this "Agreement") dated as of __________, 1998,
is by and between The Killbuck Savings Bank Company, Ohio ("Killbuck Bank"), an
Ohio state banking corporation and wholly owned subsidiary of Killbuck
Bancshares, Inc., ("Killbuck") and Commercial and Savings Bank Co., Danville,
Ohio ("Commercial"), an Ohio state banking corporation and is joined in by
Killbuck, the sole shareholder of Killbuck Bank.
WITNESSETH:
WHEREAS, the Board of Directors of the Killbuck Bank and the Board of
Directors of Commercial have determined that it is in the best interests of the
Killbuck Bank and Commercial to merge Commercial with and into Killbuck Bank in
accordance with the provisions of the laws of the State of Ohio (the "Merger");
and
WHEREAS, the Board of Directors of Commercial and the Board of
Directors of Killbuck Bank have each adopted a resolution approving this
Agreement and have directed that the Merger Agreement be submitted to the
shareholders of Commercial and Killbuck Bank entitled to vote in respect thereof
for adoption and approval;
NOW, THEREFORE, the parties hereto, subject to the terms and conditions
contained herein, agrees as follows:
ARTICLE I
Constituent Corporations
Commercial and Killbuck Bank shall be the constituent banking
corporations with respect to the Merger.
ARTICLE II
Merger
Effective as of the date set forth in the Certificate of Merger filed
in accordance with Section 1115.11 (F) of the Ohio Revised Code with the
Superintendent of Banks for the State of Ohio (the "Effective Time"), Commercial
shall be merged into Killbuck Bank and Killbuck Bank shall be the surviving
banking corporation (the "Surviving Corporation"), which after the effective
time of the Merger shall be known as "The Killbuck Savings Bank Company."
ARTICLE III
Articles of Incorporation, Etc.
1. At the Effective Time, the Articles of Incorporation and Code of
Regulations of Killbuck shall constitute the Articles of Incorporation
Code of Regulations of the Surviving Corporation.
2. The Surviving Corporation's main office shall be located
165 N. Main St., Killbuck, Ohio, until otherwise changed in
accordance with law.
3. The officers of Killbuck Bank immediately prior to the Effective Time
shall be the officers of the Surviving Corporation, each to hold office
until his respective successor is duly elected or appointed and
qualified in accordance with the provisions of the Articles of
Incorporation and Code of Regulations of the Surviving Corporation and
of applicable law, or until his earlier death, resignation or removal.
The officers of Commercial immediately prior to the Effective Time
shall be appointed as officers of the
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<PAGE> 164
Surviving Corporation by the Board of Directors immediately after the
Effective Time, to hold such officer and titles as shall be determined
by the Board of Directors of the Surviving Corporation.
4. The directors of the Surviving Corporation shall be all of
the directors of Killbuck immediately prior to the Effective
Time.
ARTICLE IV
Manner of Converting and Exchanging Stock and Capital Structure
1. Subject to the provisions of this Article IV, the manner of converting
and exchanging the shares of the constituent corporation's stock at the
Effective Time shall be as follows.
Conversion and Exchange of Shares.
(a) At the time the Merger shall become effective;
(i) All of the outstanding certificates for shares of
Commercial Common Stock shall, subject to statutory
dissenters rights as provided Ohio Revised Code
Section 1115.19 and 1701.85, be converted into the
right to receive .4317 duly authorized, validly
issued, fully paid and non-assessable Killbuck Common
Shares, subject to pro rata adjustment in the event
of any stock dividend, stock split or other general
distribution of Killbuck Common Stock prior to the
Merger.
(ii) The shares of Killbuck Common Stock issued and
outstanding immediately prior to the time the Merger
shall become effective shall continue to be issued
and outstanding shares of the Surviving Corporation
and shall be held by Killbuck.
(b) No fractional shares or scrip representing fractional Killbuck
Common Shares will be issued by Killbuck in connection with
the Merger, but in lieu thereof, any holder of Commercial
Common Stock entitled to such a fractional share shall, upon
surrender of the certificate or certificates formerly
representing such Commercial Common Stock, be paid cash,
without interest, by Killbuck for such fractional share(s).
The cash paid for fractional shares shall be based upon $350
per share of Killbuck Common Shares.
(c) As soon as practicable after the time the Merger shall become
effective, and subject to the provisions set forth above
relating to the fractional shares, Killbuck will distribute to
the former holders of Commercial Common Stock in exchange for
and upon surrender for cancellation by such holders of a
certificate or certificates formerly representing shares of
Commercial Common Stock the certificate(s) for Killbuck Common
Shares in accordance with the provisions regarding the
exchange of shares of Commercial Common Stock set forth in
paragraph 1(a)(i) of this Merger Agreement. Each certificate
formerly representing Commercial Common Stock (other than
certificates representing shares of Commercial Common Stock
subject to the rights of dissenting shareholders) shall be
deemed for all purposes to evidence the ownership of the
number of whole Killbuck Common Shares and cash for fractional
share interests in Killbuck Common Shares into which such
shares have been converted. Certificates representing shares
of Commercial Common Stock held by a stockholder of
Commercial, shall be aggregated together in determining the
number of fractional shares for which such shareholder shall
receive cash as provided for herein. Until surrender of the
certificate or certificates formerly representing shares of
Commercial Common Stock, the holder thereof shall not be
entitled to receive any dividend or other payment or
distribution payable to holders of Killbuck Common Shares.
Upon such surrender (or in lieu of surrender other provisions
reasonably satisfactory to Killbuck as are made as set forth
in the next
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following paragraph), there shall be paid to the person
entitled thereto the aggregate amount of dividends or other
payments or distributions (in each case without interest)
which became payable after the time the Merger shall become
effective on the whole Killbuck Common Shares represented by
the certificates issued upon such surrender and exchange or in
accordance with such other provisions, as the case may be.
After the time the Merger shall become effective, the holders
of certificates formerly representing shares of Commercial
Common Stock shall cease to have rights with respect to such
shares except such rights, if any, as a holder of certificates
formerly representing shares of Commercial Common Stock may
have as dissenting shareholders pursuant to Ohio law and
except as aforesaid, their sole rights shall be to exchange
said certificates for certificates for Killbuck Common Shares
in accordance with this Merger Agreement.
Certificates formerly representing shares of Commercial Common
Stock surrendered for cancellation by each shareholder
entitled to exchange shares of Commercial Common Stock for
Killbuck Common Shares by reason of the Merger shall be
accompanied by such appropriate instruments of transfer as
Killbuck may reasonably require, provided, however, that if
there be delivered to Killbuck by any person who is unable to
produce any such certificate formerly representing shares of
Commercial Common Stock for transfer (i) evidence to the
reasonable satisfaction of Killbuck that any such certificate
has been lost, wrongfully taken or destroyed, and (ii) such
indemnity agreement as reasonably may be requested by Killbuck
to save it harmless, and (iii) evidence to the reasonable
satisfaction of Killbuck that such person is the owner of the
shares theretofore represented by each certificate claimed by
him to be lost, wrongfully taken or destroyed and that he is
the person who would be entitled to present each such
certificate and to receive Killbuck Common Shares pursuant to
this Merger Agreement, then Killbuck (or an Exchange Agent, as
the case may be), in the absence of actual notice to it that
any shares theretofore represented by any such certificate
have been acquired by a bona fide purchaser, shall deliver to
such person the certificate(s) representing Killbuck Common
Shares which such person would have been entitled to receive
upon surrender of each such lost, wrongfully taken or
destroyed certificate representing shares of Commercial Common
Stock.
2. After the Effective Time, there shall be no transfers of the stock
transfer books of Killbuck Bank of any certificates representing shares
of Killbuck Bank Common Stock. After the Effective Time, upon
presentation to the Surviving Corporation of certificates formerly
representing capital stock of Killbuck Bank, such certificates shall be
canceled.
3. The Resulting Corporation shall have a capital structure equal to the
following:
(a) Common stock of $2,700,000, consisting of 5,400 shares o $500
par value all of which will be issued and outstanding
immediately following the Effective Time of the Merger; and
(b) Surplus of $3,853,300; and
(c) Net Undivided undivided profits, including capital reserves,
of $18,237,291, adjusted for all earnings and losses between
January 1June 30, 1998, and the Effective Time of the Merger.
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<PAGE> 166
ARTICLE V
Effect of Merger
From and after the Effective Time, the Surviving Corporation shall have
all of the rights, interests, privileges, powers, immunities and franchises
(public and private) of each of the constituent corporations, and all property
(real, personal and mixed), all debts due on whatever account, and all other
chooses in action, of each of the constituent corporations. All interests of or
belonging to or due to either of the constituent corporations shall thereupon be
deemed to be transferred to and vested in the Surviving Corporation without act
or deed and no title to any real estate or any interest therein vested in either
of the constituent corporations shall revert or be in any way impaired because
of the Merger.
ARTICLE VI
Surviving Corporation
From and after the Effective Time, the Surviving Corporation shall be
responsible for all obligations of each of the constituent corporations and each
claim existing and each action or proceeding pending by or against either of the
constituent corporations may be prosecuted as if the Merger had not taken place,
and the Surviving Corporation may be substituted in the place of such
constituent corporation. No right of any creditor of either constituent
corporation and no lien upon the property of either constituent corporation
shall be impaired by the Merger.
ARTICLE VII
Further Documents
If at any time the Surviving Corporation shall consider or be advised
that any further assignments, conveyances or assurances in law are necessary or
desirable to vest, perfect or confirm of record in the Surviving Corporation the
title to any property or rights of the constituent corporations, or otherwise to
carry out the provisions hereof, the persons who were the proper officers and
directors of the constituent corporations immediately prior to the Effective
Time (or their successors in office) shall execute and deliver any and all
proper deeds, assignments and assurances in law, and do all things necessary or
proper, to vest, perfect or confirm title to such property or rights in the
Surviving Corporation, including, but not limited to, filing with each court or
other public tribunal, agency or officer by which Commercial or Killbuck Bank
have been appointed in the capacity of fiduciary or agent, and in the court file
of each estate, suit or proceeding in which any of them has been acting, a
statement setting forth the information required by law or otherwise to carry
out the provisions hereof.
ARTICLE VIII
Termination
Notwithstanding the adoption and approval of this Agreement and the
Merger by the shareholders of Commercial and Killbuck Bank, this Agreement and
the Merger may be terminated:
(a) At any time prior to the Effective Time, by the mutual
consent of the Boards of Directors of Commercial and Killbuck
Bank; or
(b) This Merger Agreement shall automatically terminate in the
event of the termination of the Agreement and Plan of
Reorganization dated April 13, 1998 by and between
Commercial and Killbuck to which it relates.
(c) At any time prior to the Effective Time, by Commercial or
Killbuck Bank if there shall have been a final judicial
determination (as to which all periods for appeal shall have
expired and no appeal
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<PAGE> 167
shall be pending) that any material provision of this
Agreement or of the Merger is illegal, invalid or
unenforceable;
In the event that this Agreement is terminated pursuant to this Article
VIII, the Merger provided for herein shall be abandoned automatically and
without any further act or deed by the parties hereto.
ARTICLE IX
Conditions to Consummation of the Merger
The consummation of the Merger pursuant to this Merger Agreement and
the obligations of the parties hereto is subject to the satisfaction of the
provisions and conditions of the Agreement and Plan of Reorganization by and
between Commercial and Killbuck dated April 13, 1998.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and attested to on their behalf by the following directors and officers
thereunto duly authorized as of the day and year first written above.
Commercial and Savings Bank Co.: The Killbuck Savings Bank Company
By: By:
---------------------------- ------------------------------
Robert K. Wagner, President Luther E. Proper, President
Attest: Attest:
- ------------------------------- ---------------------------------
by: by: Jon D. Boley
----------------------------
its: its: Cashier
---------------------------
Killbuck Bancshares, Inc.:
By:
----------------------------
Luther E. Proper, President
Attest:
- -------------------------------
by: Jon D. Boley
its: Secretary
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<PAGE> 168
APPENDIX B
OPINION OF COMMERCIAL'S FINANCIAL ADVISOR
B-1
<PAGE> 169
September 18, 1998
Board of Directors
Commercial & Savings Bank Company
701 South Market Street
P. O. Box 50
Danville, Ohio 43014-0050
Attention: Robert K. Wagner., President
Members of the Board:
You have requested our opinion as to the fairness to Commercial and Savings Bank
Co., Inc ("Commercial") and its shareholders, from a financial point of view, of
the terms of the Merger Agreement ("Merger") dated April 13, 1998
between Killbuck Bancshares, Inc. ("Killbuck") and Commercial and Savings Bank
Co., Inc. The Merger will be completed through a merger of Commercial with and
into Killbuck. Commercial will become, as a result, a wholly-owned subsidiary of
Killbuck.
Subject to dissenters' rights, all of the outstanding shares of Commercial will
be converted into the right to receive shares of Killbuck as set forth in the
Exchange Ratio provision of the Merger. Based on the Exchange Ratio,
shareholders of Commercial will receive .4317 shares of Killbuck for each share
of Commercial held at the time of the Merger, subject to adjustment in the event
of any stock dividend, stock split or other general distribution of Killbuck
Common Stock prior to the Merger.
We analyzed various public and non-public sources of information in developing
our opinion, included but not limited to, (i) financial data of Commercial from
December 31, 1993 through March 31, 1998 from published annual reports, internal
bank reports, and interviews with bank management; (ii) financial data regarding
Killbuck from publicly available regulatory reports; (iii) comparative financial
data of peers for each institution from public sources (iv) published reports
from various sources regarding transactions similar in nature to that proposed
in the Merger; and (v) the Merger Agreement itself.
Our analysis forecasted the potential future flow of income likely to be
generated by Commercial, over a ten-year horizon. This step required both a
study of historical trends of Commercial from national peer group data to
develop a consensus on assumptions used to forecast potential future results.
The assumptions were considered to be reasonable and attainable should
Commercial have continued to operate without the merger. We then calculated the
present value of that ten-year flow of income to arrive at both a multiple of
book value and a price-to-earnings ratio to suggest a probable trading range for
the shares of Commercial.
We also analyzed the financial performance of Killbuck compared with banks with
similar characteristics using available peer group data, other sources similar
to those provided by Commercial, and a stock valuation conducted for the bank as
of October 31, 1997. We continued our analysis of Killbuck by forecasting its
earnings performance over the same ten-year time horizon as we used in the
analysis of Commercial.
Using the forecasts developed for the two institutions, we then constructed a
pro forma balance sheet and income statement representing a merger of the
institutions. We considered various methods of determining possible percentages
of ownership to each institution's shareholders. In all instances the proposed
exchange ratio compared favorably to the results derived from those calculations
from the perspective of the shareholders of Commercial.
We also considered the merger in light of similar recent transactions and the
share prices, based on recent trades, of the two institutions and again found
the results to be fair and equitable to the shareholders of Commercial.
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<PAGE> 170
In conducting our analysis, we assumed the information provided to us or
publicly available was both accurate and complete. We assumed further that the
transaction was a tax-free reorganization without adverse tax implications to
the shareholders of either Commercial or Killbuck shareholders, and that the
transaction will be completed as planned without other conditions which would
work to the detriment of the shareholders of Commercial.
Based on our analysis as described and qualified above, we believe that the
terms of the Merger, from a financial viewpoint, are fair and equitable to the
shareholders of Commercial and Savings Bank Co.
Commercial will pay Young & Associates, Inc. a fee for the issuance of the
fairness opinion plus reasonable out-of pocket expenses, and will indemnify
Young & Associates against certain liabilities, including liabilities under the
securities laws.
Young & Associates, Inc.
B-3
<PAGE> 171
APPENDIX C
Ohio Revised Code Section 1701.85
Qualifications of and Procedures for Dissenting Shareholders
Section 1701.85 - Qualifications of and Procedures for
Dissenting Shareholders.
(A) (1) A shareholder of a domestic corporation is entitled to
relief as a dissenting shareholder in respect of the proposals
in Sections 1701.74, 1701.76, and 1701.84 of the Revised Code,
only in compliance with this section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a
record holder of the shares of the corporation as to which he
seeks relief as of the date fixed for the determination of
shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and
such shares shall not have been voted in favor of the
proposal. Not later than 10 days after the date on which the
vote on such proposal was taken at the meeting of the
shareholders, the shareholder shall deliver to the corporation
a written demand for payment to him of the fair cash value of
the shares as to which he seeks relief, stating his address,
the number and class of such shares, and the amount claimed by
him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division
(C) of Section 1701.84 of the Revised Code in the case of a
merger pursuant to Section 1701.80 of the Revised Code and a
dissenting shareholder entitled to relief under division (E)
of Section 1701.801 of the Revised Code in the case of a
merger pursuant to Section 1701.801 of the Revised Code shall
be a record holder of the shares of the corporation as to
which he seeks relief as of the date on which the agreement of
merger was adopted by the directors of that corporation.
Within 20 days after he has been sent the notice provided in
Section 1701.80 or 1701.801 of the Revised Code, the
shareholder shall deliver to the corporation a written demand
for payment with the same information as that provided for in
division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on
the constituent corporation involved constitutes service on
the surviving or the new corporation, whether served before,
on, or after the effective date of the merger or
consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the
certificates representing the shares as to which he seeks
relief, he, within 15 days from the date of the sending of
such request, shall deliver to the corporation the
certificates requested, in order that the corporation may
forthwith endorse on them a legend to the effect that demand
for the fair cash value of such shares has been made. The
corporation promptly shall return such endorsed certificates
to the shareholder. Failure on the part of the shareholder to
deliver such certificates terminates his rights as a
dissenting shareholder, at the option of the corporation,
exercised by written notice sent to him within 20 days after
the lapse of the 15 day period, unless a court for good cause
shown otherwise directs. If shares represented by a
certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a
similar legend, together with the name of the original
dissenting holder of such shares. Upon receiving a demand for
payment from a dissenting shareholder who is the record holder
of uncertificated securities, the corporation shall make an
appropriate notation of the demand for payment in its
shareholder records. If uncertificated shares for which
payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend
required for certificate securities as provided in this
paragraph. A transferee of the shares so endorsed, or of
uncertificated securities where such notation has been made,
acquires only such rights in the corporation as the original
dissenting holder of such shares had immediately after the
service of a demand for payment of the fair cash value of the
shares. Such request by the corporation is not an admission by
the corporation that the shareholder is entitled
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<PAGE> 172
to relief under this section.
(B) Unless the corporation and the dissenting shareholder shall have come
to an agreement on the fair cash value per share of the shares as to
which he seeks relief, the shareholder or the corporation, which in
case of a merger or consolidation may be the surviving or the new
corporation, within three months after the service of the demand by the
shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation which issued
such shares is located, or was located at the time when the proposal
was adopted by the shareholders of the corporation, or, if the proposal
was not required to be submitted to the shareholders, was approved by
the directors. Other dissenting shareholders, within the period of
three months, may join as plaintiffs, or may be joined as defendants in
any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the
facts, including the vote and the facts entitling the dissenting
shareholder to the relief demanded. No answer to such complaint is
required. Upon the filing of the complaint, the court, on motion of the
petitioner, shall enter an order fixing a date for a hearing on the
complaint, and requiring that a copy of the complaint and a notice of
the filing and of the date for hearing be given to the respondent or
defendant in the manner in which the summons is required to be served
or substituted service is required to be made in other cases. On the
day fixed for the hearing on the complaint or any adjournment of it,
the court shall determine from the complaint and from such evidence as
is submitted by either party whether the shareholder is entitled to be
paid the fair cash value of any shares and, if so, the number and class
of such shares. If the court finds that the shareholder is so entitled,
the court may appoint one or more persons as appraisers to receive
evidence and to recommend a decision on the amount of the fair cash
value. The appraisers have such power and authority as is specified in
the order of their appointment. The court thereupon shall make a
finding as to the fair cash value of a share, and shall render judgment
against the corporation for the payment of it, with interest at such
rate and from such date as the court considers equitable. The costs of
the proceeding, including reasonable compensation to the appraisers to
be fixed by the court, shall be assessed or apportioned as the court
considers equitable. The proceeding is a special proceeding, and final
orders in it may be vacated, modified, or reversed on appeal pursuant
to the Rules of Appellate Procedure and, to the extent not in conflict
with those rules, Chapter 2505 of the Revised Code. If, during the
pendency of any proceeding instituted under this section, a suit or
proceeding is or has been instituted to enjoin or otherwise to prevent
the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed
until the final determination of the other suit or proceeding. Unless
any provision in Division (D) of this section is applicable, the fair
cash value of the shares as agreed upon by the parties or as fixed
under this section shall be paid within thirty days after the date of
final determination of such value under this division, the effective
date of the amendment to the articles, or the consummation of the other
action involved, whichever occurs last. Upon the occurrence of the last
such event, payment shall be made immediately to a holder of
uncertificated securities entitled to such payment. In the case of
holders of shares represented by certificates, payment shall be made
only upon and simultaneously with the surrender to the corporation of
the certificates representing the shares for which such payment is
made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be
determined as of the day prior to that on which the vote by the
shareholders was taken and, in the case of a merger pursuant to Section
1701.80 or 1701.801 of the Revised Code, fair cash value as to
shareholders of a constituent subsidiary corporation shall be
determined as of the day before the adoption of the agreement of merger
by the directors of the particular subsidiary corporation. The fair
cash value of a share for the purposes of this section is the amount
that a willing seller, under no compulsion to sell, would be willing to
accept, and that a willing buyer, under no compulsion to purchase,
would be willing to pay, but in no event shall the fair cash value of
it exceed the amount specified in the demand of the particular
shareholder. In computing such fair cash value, any appreciation or
depreciation in market value resulting from the proposal submitted to
the directors or to the shareholders shall be excluded.
(D) The right and obligation of a dissenting shareholder to receive such
fair cash value and to sell such shares as to which he seeks relief,
and the right and obligation of the corporation to purchase such shares
and to pay the fair cash value of them terminates if:
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<PAGE> 173
(1) Such shareholder has not complied with this section, unless
the corporation by its directors waives such failure;
(2) The corporation abandons, or is finally enjoined or prevented
from carrying out, or the shareholders rescind their adoption,
of the action involved;
(3) The shareholder withdraws his demand, with the consent of the
corporation by its directors;
(4) The corporation and the dissenting shareholder shall not have
come to an agreement as to the fair cash value per share, and
neither the shareholder nor the corporation shall have filed
or joined in a complaint under Division (B) of this section
within the period provided.
(E) From the time of giving the demand, until either the termination of the
rights and obligations arising from it or the purchase of the shares by
the corporation, all other rights accruing from such shares, including
voting and dividend or distribution rights, are suspended. If during
the suspension, any dividend or distribution is paid in money upon
shares of such class, or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in
substitution for such shares, an amount equal to the dividend,
distribution, or interest which, except for the suspension, would have
been payable upon such shares or securities, shall be paid to the
holder of record as a credit upon the fair cash value of the shares. If
the right to receive fair cash value is terminated otherwise than by
the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the
suspension, would have been made shall be made to the holder of record
of the shares at the time of termination.
C-3
<PAGE> 174
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION oF DIRECTORS AND OFFICERS.
Ohio General Corporation Law ("OGCL") provides that Ohio corporations
may indemnify an individual made a party to any threatened, pending, or
completed action, suit or proceeding whether civil, criminal, administrative or
investigative, because the individual is or was a director, officer, employee or
agent of the corporation, against liability incurred in the proceeding if the
person: (i) acted in good faith and (ii) the individual believes his conduct was
in the corporation's best interest or was not opposed to the corporation's best
interest.
The OGCL further provides that a corporation shall indemnify an
individual who was fully successful on the merits or otherwise in any proceeding
to which the director, officer, employee or agent was a party because the
individual was or is a director, officer, employee or agent of the corporation,
for reasonable expenses incurred by the director in connection with the
proceeding. The OGCL also provides that a corporation may purchase and maintain
insurance on behalf of the individual who is or was a director, officer,
employee or agent of the corporation or who, while a director, officer, employee
or agent of the corporation is or was serving at the request of the corporation
as a director, officer, partner, trustee, employer or agent of another foreign
or domestic corporation, partnership, joint venture, trust, employee benefit
plan or other enterprises, against liability asserted against or incurred by the
individual in that capacity or arising from the individual status as a director,
officer, employee, or agent.
Registrant maintains a directors' and officers' liability insurance
policy for the purpose of providing indemnification to its directors and
officers in the event of such a threatened, pending or completed action.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS
The exhibits filed pursuant to this Item 21 immediately follow the
Exhibit Index. The following is a description of the applicable exhibits
required for Form S-4 provided by Item 601 of Regulation S-K.
Exhibit Number Description
(1) Not Applicable.
(2) The Merger Agreement by and between Killbuck
Bancshares, Inc. and Commercial and Savings
Bank Co., dated April 13, 1998, is attached
as Exhibit A to the Proxy Statement-Prospectus.
<PAGE> 175
Exhibit Number Description
(3) Articles of Incorporation and Code of Regulations.
A. Registrant's Articles of Incorporation are
incorporated herein by reference from its
Form 10 Registration Statement, as amended,
File #0-24147, effective June 30, 1998.
A.1 Amendment to Articles of Incorporation.
B. Registrant's Code of Regulations are
incorporated herein by reference from its
Form 10 Registration Statement, as amended,
File #0-24147, effective June 30, 1998.
(4) Instruments defining the rights of Killbuck Bancshares, Inc.
shareholders, including indentures.
A. Instruments defining the rights of Killbuck
Bancshares, Inc. shareholders are
included in the Articles of Incorporation
and Code of Regulations.
(5) Opinion of Werner & Blank Co., L.P.A., regarding
Killbuck Bancshares, Inc. Common Stock, and Consent
(8) Opinion of Werner & Blank Co., L.P.A., regarding
certain tax matters, and Consent.
(9) Not Applicable.
(10) The Agreement and Plan or Reorganization with
Commercial Savings Bank Company is enclosed as an
exhibit to the Proxy/Prospectus filed as a part of
this registration statement.
(11) Not Applicable - Registrant has a simple capital
structure comprised of solely common stock and no
debt securities outstanding.
(12) Not Applicable - Registrant has a simple capital
structure comprised of solely common
stock.
(15) Not Applicable
(16) Not Applicable.
<PAGE> 176
Exhibit Number Description
(21) The Registrant has a single subsidiary, namely
Killbuck Savings Bank Company, 165 N.
Main Street, Killbuck, Ohio 44637.
(22) None.
(23) Consents of Experts and Counsel.
A. Consent of S. R. Snodgrass, AC
B. Consent of Young & Associates, Inc.
C. Consent of Werner & Blank Co., L.P.A. (the
consent is contained in that firm's opinions
filed as Exhibits (5) and (8)).
(24) Power of Attorney.
(25) Not Applicable.
(26) Not Applicable.
(27) Financial Data Schedule
(99) Additional Exhibits.
Form of Proxy to be delivered to Shareholders of
Commercial and Savings Bank Co.
<PAGE> 177
ITEM 22. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes as follows:
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or
events arising after the Effective Date of
the Registration Statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the Registration
Statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the Registration
Statement or any material change to the
information set forth in the Registration
Statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to officers, directors,
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been
<PAGE> 178
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel that matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
B. The undersigned Registrant hereby undertakes to respond to requests for
information that are incorporated by reference into the
Prospectus/Proxy Statement pursuant to Items 4, 10(b), 11, or 13 of
this form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in the documents
filed subsequent to the Effective Date of this Registration Statement
through the date of responding to the request.
C. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in this Registration Statement when it became
effective.
<PAGE> 179
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of Killbuck, State of Ohio, this 24th day of
September, 1998.
Killbuck Bancshares, Inc.
By:/s/ Luther E. Proper
---------------------------------
Luther E. Proper
President & CEO
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Further, each signature shall designate
authorization of and pursuant to the power of attorney herein described.
/s/ Luther E. Proper 9-24-98
- --------------------------------------------- ---------
Luther E. Proper, President, CEO & Director
/s/ Craig A. Lawhead 9-24-98
- --------------------------------------------- ---------
Craig A. Lawhead, Executive Vice President,
(Principal Accounting Officer)
Richard L. Fowler, Director
Robert D. Bell, Director
Thomas D. Gindlesberger, Director
Dean J. Mullet, Director
*Kenneth E. Taylor, Director
*John W. Baker, Director
*Michael S. Yoder, Director
*Allan R. Mast, Director
*By: /s/ Luther E. Proper 9-24-98
----------------------------------- ---------
Luther E. Proper, Attorney-in-Fact
<PAGE> 180
Exhibit Index
Exhibit 3A.1 Amendment to Articles of Incorporation
Exhibit 5 Legal Opinion - Werner & Blank Co., LPA
Exhibit 8 Tax Opinion - Werner & Blank Co., LPA
Exhibit 23 Consents of Experts and Counsel
A. Consents of S.R. Snodgrass, AC
B. Consent of Young & Associates, Inc.
C. Consent of Werner & Blank Co., L.P.A. (the consent
is contained in that firm's opinions filed as
Exhibits (5) and (8)).
Exhibit 24 Power of Attorney
Exhibit 27 Financial Data Schedule
Exhibit 99 Form of Proxy Card
B-Form of Proxy Card for Special Meeting of Commercial and Savings Bank Co.
<PAGE> 1
EXHIBIT 3A.1 - AMENDMENT TO ARTICLES OF INCORPORATION
CERTIFICATE OF ADOPTION
OF
AMENDMENT TO THE ARTICLES OF INCORPORATION
OF
KILLBUCK BANCSHARES, INC.
The undersigned, Luther E. Proper and Jon D. Boley, President and
Secretary, respectively, of Killbuck Bancshares, Inc., an Ohio corporation,
hereby certify that the following resolution was duly adopted by the
Shareholders of Killbuck Bancshares, Inc. on April 13, 1998, by a vote of in
excess of two-thirds of the outstanding shares of its voting common stock;
namely 103,877 shares in favor, no shares opposed, and 2 shares abstaining.
Resolved, that the Articles of Incorporation of Killbuck Bancshares,
Inc. be and the same hereby are duly amended to cause a 5:1 stock split,
pursuant to which each outstanding share of the Corporation's no par value
common shares shall be converted into five shares of the Corporation's no par
value common stock and Article Fourth of the Articles of Incorporation is hereby
amended to read in its entirety as follows:
FOURTH: The maximum number of shares which the Corporation is authorized to have
outstanding is one million (1,000,000), all of which shall be designated as
Common Stock, without par value.
The undersigned further certify that the resolution adopting such
Amendment to the Articles of Incorporation is still in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Adoption of Amendment to the Articles of Incorporation this 27th day of May,
1998.
/s/ Luther E. Proper
--------------------------------
Luther E. Proper, President
/s/ Jon D. Boley
--------------------------------
Jon D. Boley, Secretary
<PAGE> 1
EXHIBIT 5 - LEGAL OPINION
[WERNER & BLANK CO. L.P.A. LETTERHEAD]
September 30, 1998
Board of Directors
Commercial and Savings Bank Co.
701 S. Market St.
Danville, OH
RE: S-4 Registration Statement for Shares of Killbuck Bancshares, Inc. Common
Stock
Gentlemen:
We have acted as counsel to Killbuck Bancshares, Inc. (the "Company") in
connection with the preparation of its S-4 Registration Statement to be filed on
or about September 30, 1998, with the Securities and Exchange Commission, for
the purpose of registering shares of the Company to be issued to shareholders of
Commercial and Savings Bank Co. ("Commercial"), pursuant to the terms and
conditions of a Merger Agreement dated as of April 13, 1998, (the "Agreement").
In connection with the filing of the Registration Statement, we are providing
this opinion as to the shares to be registered under the Securities Act of 1933
and issued in connection with the Agreement.
We are of the opinion that the shares of common stock of the Company are duly
authorized, and when issued in accordance with the terms of the Agreement, will
be validly issued, fully paid and nonassessable.
This opinion is intended solely for your use and other than its inclusion in the
Registration Statement of the Company and reference to it in the Proxy
Statement-Prospectus issued in connection therewith, may not be quoted,
circulated or copied without our express prior written consent.
Very truly yours,
/s/ Werner & Blank Co., LPA
Werner & Blank Co., L.P.A.
<PAGE> 1
EXHIBIT 8 - TAX OPINION
[WERNER & BLANK CO. L.P.A. LETTERHEAD]
September 30, 1998
Board of Directors
Killbuck Bancshares, Inc.
165 N. Main Street
Killbuck, OH 44637
and
Board of Directors
Commercial and Savings Bank Co.
701 S. Market St.
Danville, OH
Ladies and Gentlemen: You have requested our opinion as to the federal income
tax consequences of the transactions contemplated by a certain Merger Agreement
dated as of April 13, 1998, by and between Killbuck Bancshares, Inc.
("Killbuck") and Commercial and Savings Bank Co. ("Commercial"), hereinafter
referred to as the "Agreement." Our opinion is made in reliance upon and is
limited to the following facts and circumstances:
FACTS
Commercial is an Ohio corporation, is a registered bank holding company and is
located in Danville, Ohio. Killbuck is an Ohio corporation, is a registered bank
holding company and is located in Killbuck, Ohio.
Killbuck and Commercial have only common shares outstanding. Commercial is to be
merged into Killbuck, under the Articles of Incorporation of Killbuck and in
compliance with applicable Ohio law.
Each share of Commercial common stock outstanding on the effective date of the
transaction will be converted into shares of common stock of Killbuck as
provided by the Agreement. The effect of the consummation of the transaction and
the exchange of shares will be that shareholders of Commercial will become
shareholders of Killbuck, and Killbuck will own all of the outstanding common
stock of Commercial.
The business of Commercial and Killbuck (and affiliates) will continue
substantially unchanged after the effective date of the transaction.
<PAGE> 2
No fractional shares will be issued in the transaction. In lieu thereof, holders
otherwise entitled to receive such fractional shares will be issued cash.
We are not aware, and have been advised by the management of Commercial that
they have no knowledge, of any plan or intention on the part of shareholders of
Commercial to sell or otherwise dispose of an amount of the Killbuck shares to
be received in the transaction, which could reduce Commercial's shareholders
ownership of Killbuck shares after the merger of Commercial and Killbuck to
shares having an aggregate value as of the effective date of the transaction, of
less than fifty percent (50%) of the value of all the formerly outstanding
shares of Commercial as of the same date.
The transaction will be carried out pursuant to and in accordance with all
applicable corporate and banking laws relating to the transaction. On the
effective date, Killbuck will succeed to all assets of Commercial and will be
liable for the liabilities of Commercial then existing or arising as a result of
the transactions.
Following the consummation of the transaction resulting in the merger of
Commercial with and into Killbuck, Killbuck will continue to operate the
business of Commercial and its existing affiliates in substantially the same
manner.
Arms-length negotiations were carried on between the management of Killbuck and
management of Commercial which led to the Agreement and fixed the terms of the
transaction. Consideration was given to both financial and nonfinancial factors
involved in the transaction and the business benefits from the transaction were
discussed and considered by the parties.
In the opinion of the management of Killbuck and Commercial, its employees and
customers will benefit from the affiliation. It is also expected that the
transaction will better enable the resulting corporation to compete with other
financial institutions.
OPINION
Based upon the above, it is our opinion that the Agreement will have the
following federal income tax consequences:
1. The merger of Commercial with and into Killbuck will constitute a
"Statutory Merger" within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended, and Commercial and Killbuck will
each be a "party to a reorganization" within the meaning of Section 368(b).
2. No gain or loss will be recognized by Commercial as a result of the
transfer of its assets to and the assumption of its liabilities by
Killbuck. Section 361(a) and 357(a).
3. No gain or loss will be recognized by Commercial's shareholders who
exchange their respective shares solely for Killbuck shares. Section
354(a).
4. The basis of the Killbuck shares received by Commercial's shareholders in
exchange for their shares will be the same as the basis in the shares
exchanged therefor, respectively. Section 358(a).
<PAGE> 3
5. The holding period of the Killbuck shares received by Commercial's
shareholders will include the period during which shares exchanged therefor
were held, provided such shares were held as a capital asset.
Section 1223(1).
6. The payment of cash in lieu of fractional shares for the purpose of
mechanically rounding off the fractions resulting from the exchange, will,
in each instance, constitute a distribution not essentially equivalent to a
dividend within the meaning of Section 302(b)(1) of the Internal Revenue
Code of 1986, as amended. The amount received will be treated as a
distribution in full payment in exchange for the shareholders' fractional
share of interest under Section 302(a) of the Code.
7. Gain or loss will be recognized by each Commercial shareholder who dissents
and receives only cash in exchange for all of the shares owned by them.
This letter is solely for your information and use, and except: (i) for its
reliance upon by Killbuck, Commercial and their respective shareholders; and
(ii) to the extent that such may be referred to in the Proxy
Statement-Prospectus to be distrubuted to the shareholders of Killbuck and
Commercial and in the related Registration Statement to be filed with the
Securities and Exchange Commission as an exhibit to same, it is not to be used,
circulated, quoted or otherwise referred to for any other purpose, or relied
upon by any other person, for whatever reason without our prior written consent.
Very truly yours,
/s/ Werner & Blank Co., LPA
Werner & Blank Co., L.P.A.
<PAGE> 1
EXHIBIT 23.A CONSENT OF INDEPENDENT ACCOUNTANTS
[S.R. SNODGRASS LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in the registration statement of Killbuck
Bancshares, Inc. on Form S-4 of our report dated January 23, 1998 on the
consolidated financial statements of Killbuck Bancshares, Inc. as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997.
Further, we consent to the incorporation in this registration statement of our
report dated July 24, 1998 of The Commercial and Savings Bank Company as of and
for the year ended December 31, 1997.
We also consent to the reference to us under the heading "experts" in the proxy
statement-prospectus which is a part of the registration statement.
/s/ S. R. Snodgrass, A.C.
Steubenville, Ohio
September 17, 1998
<PAGE> 1
EXHIBIt 23.B
CONSENT OF INVESTMENT BANKER
We hereby consent to the discussion relative to our opinion delivered to the
Baord of Directors of Commerical and Savings Bank Co., Inc. in connection with
its proposed merger with Killbuck Bancshares, Inc. in the Proxy
Statement-Prospectus included in Killbuck Bancshares, Inc.'s Registration
Statement on Form S-4 under the heading "Opinion of Commercial's Financial
Advisor," to the references to our firm in such Proxy Statement-Prospectus and
to the inclusion of such opinion as an appendix to the Proxy Statement and
Prospectus.
/s/ Tom P. Smith
-------------------------------
Tom P. Smith
Consultant
Young & Associates, Inc.
Kent, Ohio
September 18, 1998
<PAGE> 1
EXHIBIT 24. POWER OF ATTORNEY
POWERS OF ATTORNEY
DIRECTORS OF KILLBUCK BANCSHARES, INC.
Know all men by these presents that each person whose name is signed
below has made, constituted and appointed, and by this instrument does make,
constitute and appoint Luther E. Proper, his true and lawful attorney with full
power of substitution and resubstitution to affix for him and in his name, place
and stead, as attorney-in-fact, his signature as director or officer, or both,
of Killbuck Bancshares, Inc., an Ohio corporation, (the "Company"), to a
Registration Statement on Form S-4 or other form registering common stock of the
Company under the Securities Act of 1933 in connection with the Company's
acquisition of Commercial and Savings Bank Co., and to any and all amendments,
post effective amendments and exhibits to that Registration Statement, and to
any and all applications and other documents pertaining thereto, giving and
granting to such attorney-in-fact full power and authority to do and perform
every act and thing whatsoever necessary to be done in the premises, as fully as
he might or could do if personally present, and hereby ratifying and confirming
all that said attorney-in-fact or any such substitute shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, this Power of Attorney has been signed at Killbuck,
Ohio, this 14th day of September, 1998.
/s/ Luther E. Proper
- --------------------------------
Luther E. Proper
- --------------------------------
Richard L. Fowler
- --------------------------------
Robert D. Bell
- --------------------------------
Thomas D. Gindlesberger
- --------------------------------
Dean J. Mullet
/s/ Kenneth E. Taylor
- --------------------------------
Kenneth E. Taylor
/s/ John W. Baker
- --------------------------------
John W. Baker
/s/ Michael S. Yoder
- --------------------------------
Michael S. Yoder
/s/ Allan R. Mast
- --------------------------------
Allan R. Mast
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,117
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,023
<INVESTMENTS-CARRYING> 24,614
<INVESTMENTS-MARKET> 25,141
<LOANS> 126,218
<ALLOWANCE> 1,792
<TOTAL-ASSETS> 203,582
<DEPOSITS> 167,516
<SHORT-TERM> 2,585
<LIABILITIES-OTHER> 375
<LONG-TERM> 9,733
0
0
<COMMON> 2,700
<OTHER-SE> 20,673
<TOTAL-LIABILITIES-AND-EQUITY> 203,582
<INTEREST-LOAN> 5,997
<INTEREST-INVEST> 1,604
<INTEREST-OTHER> 211
<INTEREST-TOTAL> 7,812
<INTEREST-DEPOSIT> 3,441
<INTEREST-EXPENSE> 3,781
<INTEREST-INCOME-NET> 4,031
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,203
<INCOME-PRETAX> 1,993
<INCOME-PRE-EXTRAORDINARY> 1,993
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,510
<EPS-PRIMARY> 2.28
<EPS-DILUTED> 2.28
<YIELD-ACTUAL> 4.13
<LOANS-NON> 133
<LOANS-PAST> 176
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,745
<CHARGE-OFFS> 74
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 1,792
<ALLOWANCE-DOMESTIC> 1,781
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 11
</TABLE>
<PAGE> 1
EXHIBITS 99 - FORM OF PROXY CARDS
PROXY FOR SPECIAL MEETING OF COMMERCIAL AND SAVINGS BANK CO.
DANVILLE, OHIO
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned shareholder of
Commercial and Savings Bank Co. ("Commercial"), do hereby nominate, constitute,
and appoint _____________, ___________, and __________, or any one of them,
(with full power of substitution for me and in my name, place and stead), to
vote all the common stock of said Corporation, standing in my name on its books
on _______________, at the Special Meeting of its shareholders to be held at
_____________________ on _______________ at _______ p.m., or any adjournments
thereof with all the powers the undersigned would possess if personally present
as follows:
1. To consider and act upon: (i) a proposal to ratify, confirm, approve
and adopt, pursuant to Ohio Revised Code Sections 1701.78 and 1701.831
a Merger Agreement dated as of April 13, 1998, (the "Agreement") by and
between Commercial and Killbuck Bancshares, Inc., an Ohio corporation
and bank holding company ("Killbuck"), with such Agreement providing
for, among other things, the merger of Commercial with and into
Killbuck. Each outstanding share of Commercial Common Stock will be
converted into Killbuck Common Stock in accordance with the terms of
the Agreement; and (ii) to approve the transaction under the provisions
of the Ohio Control Share Acquisition Statute.
For [ ] Against [ ] Abstain [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSITION.
2. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING
OR ANY ADJOURNMENT THEREOF.
This proxy confers authority to vote "FOR" the propositions listed above
unless "AGAINST" or "ABSTAIN" is indicated. If any other business is
presented at said meeting, this proxy shall be voted in accordance with the
recommendations of management. All shares represented by properly executed
proxies will be voted as directed.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE
REVOKED PRIOR TO ITS EXERCISE BY EITHER WRITTEN NOTICE OR PERSONALLY AT THE
MEETING OR BY A SUBSEQUENTLY DATED PROXY.
Date:_______________________, 1998 _______________________________
_______________________________ (L.S.)
(Signature(s) of Shareholder(s))
(When signing as Attorney, Executor, Administrator, Trustee, or Guardian,
please give full title. If more than one Trustee, all should sign. All
joint owners must sign.)
