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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
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Commission File No. 000-24147
Killbuck Bancshares, Inc.
------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1700284
- ---------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 North Main Street
Killbuck, Ohio 44637
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(Address of principal executive offices)
Registrant's telephone number, including area code: (330) 276-2771
--------------
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock No Par Value None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, calculated by reference to the stock valuation done on Killbuck
Bancshares, Inc. common stock as of December 31, 1998 was $59,050,433.00
(Registrant has assumed that all of its executive officers and directors are
affiliates. Such assumption shall not be deemed to be conclusive for any
other purpose):
There were 705,331 shares of no par value common stock outstanding as of March
13, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the Year ended December
31, 1998. (Part II, III and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Shareholders to
be held on April 12, 1999 for the Year ended December 31, 1998. (Part III)
2
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FORM 10-K INDEX
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
3
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PART I
Killbuck Bancshares, Inc. (the "Company") may from time to time make written
or oral "forward-looking statements", including statements contained in the
Company's filings with the securities and exchange commission (including this
annual report on Form 10-K and the exhibits thereto), in its report to
shareholders and in other communications by the Company, which are made in
good faith by the Company pursuant to the "safe harbor" provisions of the
private securities litigation reform act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors
(some of which are beyond the Company's control). The following factors,
among others, could cause the Company's financial performance to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements: the strength of the United
States economy in general and the strength of the local economies in which the
Company conducts operations; the effects of, and changes in, trade, monetary
and fiscal policies and laws, including interest rate policies of the board of
governors of the federal reserve system, inflation, interest rate, market and
monetary fluctuations; the timely development of and acceptance of new
products and services of the Company and the perceived overall value of these
products and services by users, including the features, pricing and quality
compared to competitors' products and services; the willingness of users to
substitute competitors' products and services for the Company's products and
services; the success of the Company in gaining regulatory approval of its
products and services, when required; the impact of changes in financial
services' laws and regulations (including laws concerning taxes, banking,
securities and insurance); technological changes, acquisitions; changes in
consumer spending and savings habits; and the success of the Company at
managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or
on behalf of the Company.
Item 1. Business
Killbuck Bancshares, Inc. (the "Company") 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 Company 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 Company 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 35,000.
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The Bank provides a wide range of retail banking services to individuals and
small to medium-sized businesses. These services include various deposit
products, business and personal loans, credit cards, residential mortgage
loans, home equity loans, and other consumer oriented financial services
including IRA accounts, safe deposit and night depository facilities. The
Bank also has automatic teller machines located at all locations providing 24
hour banking service to our customers. The Bank belongs to MAC, a nationwide
ATM network with thousands of locations nationwide. Neither the Company nor
the Bank have any foreign operations, assets, investments or deposits.
At December 31, 1998 the Company had one wholly-owned subsidiary, The Killbuck
Savings Bank Company. The Bank has six full service offices, with five in
Holmes County and one located in Knox County. The Bank has received
regulatory approval for a new full service branch facility in Sugarcreek, Ohio
in Tuscarawas County. The Bank anticipates to break ground in the spring of
1999. On November 21, 1998 the merger of Commercial and Savings Bank Company
of Danville, Ohio with and into The Killbuck Savings Bank Company, with
Killbuck Savings Bank being the surviving bank was completed using the
purchase method of accounting. Commercial and Savings Bank Company had total
assets of approximately $15.6 million on the date of the merger and operated
out of one location in Danville, Ohio in Knox County.
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.
The Company, through its subsidiary, The Killbuck Savings Bank Company,
conducts the business of a commercial banking organization. At December 31,
1998, the Company and its subsidiary had consolidated total assets of
$231,993,893, and consolidated total equity of $27,437,211. The capital of
the Company consists of 1,000,000 authorized shares of capital stock, no par
value of which 705,331 shares were outstanding at December 31, 1998 to 931
shareholders.
The Bank is a state banking Company. 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 the Company, is regulated by the Federal Reserve Board.
Employees
As of December 31, 1998, the Bank had 74 full-time and 21 part-time employees.
The Company had no 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. No
employees are union participants or subject to a collective bargaining
agreement.
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Competition
The commercial banking business in the market areas served by the Bank is very
competitive. The Company and the Bank are in competition with commercial
banks located in their own service areas. Some competitors of the Company 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, 1998 (the most recent date for which information is available) the
Commercial and Savings Bank, Millersburg had the largest market share with
$198 million in total deposits as of such date, representing a market share of
46.04%. The Bank had the second largest market share with deposits of $167
million as of such date, representing a market share of 38.87%. Commercial
and Savings Bank had total assets as of December 31, 1998, of $300 million
compared to the Bank's total assets of $232 million as of such date.
Certain Regulatory Considerations
The following is a summary of certain statutes and regulations affecting the
Company and its subsidiary. This summary is qualified in its entirety by such
statutes and regulations.
The Company
The Company 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.
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The Company Subsidiary
The Company 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 the Company'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.
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 the Company
and the Bank, including their ability to pay dividends.
At December 31, 1998, the Company's respective total and Tier 1 risk-based
capital ratios and leverage ratios exceeded the minimum regulatory
requirements. See Note 16 in the audited consolidated financial statements
included in the Annual Report and incorporated herein by reference in the
report as Exhibit 13.
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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 the Company 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.
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 the Company 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.
8
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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. Because the Bank is presently "well capitalized" it 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 the
Company is not aware of any activity or condition that could result in
termination of the deposit insurance of the Bank.
Proposed Legislation
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 the Company or Bank.
Monetary Policies
The earnings of the Company are dependent upon the earnings of its wholly-owned
subsidiary bank. The earnings of the subsidiary bank are affected by
the policies of regulatory authorities, including the Ohio Division of
Financial Institutions, the Board of Governors of the Federal Reserve System
and the Federal Deposit Insurance Corporation. The policies and regulations
of the regulatory agencies have had and will continue to have a significant
effect on deposits, loans and investment growth, as well as the rate of
interest earned and paid, and therefore will affect the earnings of the
subsidiary bank and the Company in the future, although the degree of such
impact cannot accurately be predicted.
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Securities Laws and Compliance
As of June 30, 1998, the Company's common stock was registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act
of 1934, as amended ("1934 Act"). This registration requires ongoing
compliance with the 1934 Act and its periodic filing requirements as well as a
wide range of Federal and State securities laws. These requirements include,
but are not limited to, the filing of annual, quarterly and other reports with
the SEC, certain requirements as to the solicitation of proxies from
shareholders as well as other proxy rules, and compliance with the reporting
requirements and "short-swing" profit rules imposed by section 16 of the 1934
Act.
Item 2. Description of Property
Properties
The Company owns no real property but utilizes the main office of the Bank.
The Company's and the Bank's executive offices are located at 165 North Main
Street, Killbuck, Ohio. The Company pays no rent or other form of
consideration for the use of this facility. All offices are owned by the Bank.
The Bank has five offices located in Holmes County (1) and one in Knox County
(2). The Bank anticipates construction to begin in the spring of 1999 on a
new full service branch facility in Sugarcreek, Ohio. The Bank's total
investment in office property and equipment was $6.0 million with a net book
value $3.4 million at December 31, 1998. The offices are at the following
locations.
Main Office: (1) Berlin Branch (1) Mt. Hope Branch (1)
165 North Main Street 4853 East Main Street 8115 State Rt. 241
Killbuck, Ohio 44637 Berlin Ohio 44610 Mt. Hope, Ohio 44660
Millersburg North Millersburg South Daville Branch (2)
Branch (1) Branch (1) 701 S. Market
181 N. Washington Street 1642 S. Washington Danville, Ohio 43014
Street
Millersburg, Ohio 44654 Millersburg,
Ohio 44654
Item 3 Legal Proceedings
Neither the Bank nor the Company is involved in any material legal
proceedings. The Bank, from time to time, is a party to litigation which
arises in the ordinary course of business, such as claims to enforce liens,
claims involving the origination and servicing of loans, and other issues
related to the business of the Bank. In the opinion of management the
resolution of any such issues would not have a material adverse impact on the
financial position, results of operation, or liquidity of the Bank or the
Company.
Item 4 Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters
As of December 31, 1998, the Company had 931 shareholders of record who
collectively held 705,331 of the 1,000,000 authorized shares of the Company's
no par value stock.
There is no established public trading market for the Company's common stock
and the shares of the Company are not listed on any exchange. Sale price
information is based on information reported to the Company by individual
buyers and sellers of the Company stock. The following table summarizes the
high and low prices and dividend information for 1998 and 1997, adjusted for
the five for one stock split on May 1, 1998. Cash dividends are paid on a
semi-annual basis.
Cash
Dividends
Quarter Ended High Low Paid
- ------------------- ------- ------- ---------
1998 March 31 $69.50 $69.50 N/A
June 30 Unknown Unknown .50
September 30 82.63 82.63 N/A
December 31 90.56 85.31 .55
1997 March 31 Unknown Unknown N/A
June 30 54.30 54.30 .44
September 30 55.99 55.51 N/A
December 31 Unknown Unknown .48
The Company has paid regular semi-annual cash dividends since it became a bank
holding company in 1992, and assuming the ability to do so, it is anticipated
that the Company will continue to declare regular semi-annual cash dividends.
For information on dividends per share, net income per share and ratio of
dividends to net income per share see the Selected Financial Data on page 7 of
the Annual Report to Shareholders of Killbuck Bancshares, Inc. for the year
ended December 31, 1998, included in this report as Exhibit 13, is
incorporated herein by reference.
The ability of the Company to pay dividends will depend on the earnings of its
subsidiary bank and its financial condition, as well as other factors such as
market conditions, interest rates and regulatory requirements. Therefore, no
assurances may be given as to the continuation of the Company's ability to pay
dividends or maintain its present level of earnings. See Note 15 to the
audited Consolidated Financial Statements for a discussion on subsidiary
dividends of the Annual Report to Shareholders of Killbuck Bancshares, Inc.
for the year ended December 31, 1998, included in this report as Exhibit 13 is
incorporated herein by reference.
The common stock of the Company is not subject to any redemption provisions or
restrictions on alienability. The common stock is entitled to share pro rata
in dividends and in distributions in the event of dissolution or liquidation.
There are no options, warrants, privileges or other rights with respect to
Company stock at the present time, nor are any such rights proposed to be
issued.
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Item 6 Selected Financial Data
Selected Financial Data on page 7 of the Annual Report to Shareholders Of
Killbuck Bancshares, Inc. for the year ended December 31, 1998, included in
this report as Exhibit 13, is incorporated herein by reference.
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations on Pages 8 through 16 of the Annual Report to Shareholders of
Killbuck Bancshares, Inc. for the year ended December 31, 1998, included in
this report as Exhibit 13, is incorporated herein by reference. Additional
statistical information noted below is provided pursuant to Guide 3,
Statistical Disclosure by Bank Holding Companies.
Investment Portfolio
Book Value of Investments
Book values of investment securities at December 31 are as follows (in
thousands):
December 31,
-----------------------------
1998 1997 1996
-------- -------- --------
Securities available for sale:
U.S. Treasury securities $ 9,372 $ 9,802 $ 998
Obligations of U.S. Government
agencies 28,755 24,233 30,956
Equity securities 1,101 1,044 889
-------- -------- --------
Total available for sale 39,228 35,079 32,843
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Securities held to maturity:
Obligations of states and political
subdivisions 25,909 23,298 18,265
Corporate securities 1,640 100 100
-------- -------- --------
Total held to maturity 27,549 23,398 18,365
-------- -------- --------
Total $ 66,777 $ 58,477 $ 51,208
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MATURITY SCHEDULE OF INVESTMENTS
The following table presents the investment portfolio, the weighted average
yield and maturities at December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
After three After one
Within three months but year but After five but
months Within one year Within five years Within ten years After 10 years
-------------- --------------- ----------------- ---------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Total
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale (1)(2)
U.S. Treasury securities $ 3,705 5.97% $ 2,619 5.97% $ 3,048 5.67% $ 0 0.00% $ 0 0.00% $ 9,372
Obligations of U.S.
Government agencies and
corporations 800 5.36 705 5.72 20,480 5.78 6,770 6.08 0 0.00 28,755
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- -------
Total $ 4,505 5.86% $ 3,324 5.92% $23,528 5.77% $ 6,770 6.08% $ 0 0.00% $38,127
======= ===== ======= ===== ======= ===== ======= ===== ======= ===== =======
Held to Maturity
Obligations of states and
political subdivisions (3) $ 150 4.50% $1,785 4.63% $ 8,141 4.95% $13,619 4.74% $ 2,214 4.55% $25,909
Corporate bonds 0 0.00 0 0.00 272 5.20 1,010 5.85 358 6.15 1,640
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- -------
Total $ 150 4.50% $1,785 4.63% $ 8,413 4.96% $14,629 4.82% $ 2,572 4.77% $27,549
======= ===== ======= ===== ======= ===== ======= ===== ======= ===== =======
</TABLE>
(1) The weighted average yield has been computed using the historical
amortized cost for available for sale securities.
(2) Excludes $1,101 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, 1998.
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TYPES OF LOANS
The following table presents the composition of the loan portfolio and the
percentage of loans by type as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-residential $ 49,226 35.7% $ 41,473 34.0% $ 39,820 34.2% $ 38,264 35.7% $ 39,233 38.0%
Real estate-farm 4,376 3.2 3,847 3.1 4,589 3.9 4,578 4.3 4,956 4.8
Real estate-commercial 22,713 16.4 21,205 17.4 18,088 15.6 18,286 17.0 17,455 16.9
Real estate-construction 1,238 .9 783 .6 1,947 1.7 345 .3 1,950 1.9
Commercial and other 37,753 27.4 33,745 27.7 34,036 29.3 28,008 26.1 84 22.9
Consumer and credit card 2,585 .4 0,981 .2 7,779 .3 7,774 .6 5,960 15.5
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
$137,891 100.0% $122,034 100.0% $116,259 100.0% $107,255 100.0% $103,238 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
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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 interest, 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. Real estate commercial loans represent
the next 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. 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 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.
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATE
The following table presents maturity distribution and interest rate
sensitivity of real estate commercial, real estate - construction and
commercial and other loans at December 31, 1998 (dollars in thousands):
After 1 Year
Within Within
1 Year 5 Years After 5 Years Total
------- ------------ ------------- -------
Real estate commercial $ 410 $ 1,295 $21,008 $22,713
Real estate construction 1,238 0 0 1,238
Commercial and other 18,695 13,064 5,993 37,752
------- -------- ------- -------
$20,343 $14,359 $27,001 $61,703
======= ======== ======= =======
Fixed interest rates $ 5,465 $ 6,404 $ 3,202 $15,071
Variable interest rates 14,878 7,955 23,799 46,632
------- -------- ------- -------
$20,343 $14,359 $27,001 $61,703
======= ======== ======= =======
15
<PAGE>
RISK ELEMENTS
Loans are subject to ongoing periodic monitoring by management and the board
of directors. 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 a result of the deterioration of the borrower. The
table below presents information concerning nonperforming assets including
nonaccrual loans, loans 90 days or more past due, renegotiated loans, other
real estate and repossessed assets at December 31, (dollars in thousands).
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual basis $ 21 $121 $ 31 $ 62 $206
Loans past due 90 days or more 155 75 122 7 173
Renegotiated loans - - - - -
---- ---- ---- ----- ----
Total nonperforming loans 176 196 153 69 379
Other real estate 73 - - - -
Repossessed assets - - - - -
---- ---- ---- ----- ----
Total nonperforming assets $249 $196 $153 $ 69 $379
==== ==== ==== ===== ====
Nonperforming loans as a percent of total loans .13% .16% .13% .06% .37%
====== ====== ====== ====== ======
Nonperforming loans as a percent of total assets .08% .10% .08% .04% .25%
====== ====== ====== ====== ======
Nonperforming assets as a percent of total assets .11% .10% .08% .04% .25%
====== ====== ====== ====== ======
</TABLE>
The amount of interest income that would have been recognized had the loans
performed in accordance with their original terms was approximately $923 and
the amount of interest income that was recognized was $-0- for the year ended
December 31, 1998.
There are no loans as of December 31, 1998, 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 no
concentration of loans to borrowers engaged in similar activities which exceed
10% of total loans that management is aware of. Based upon the ongoing
quarterly review and assessment of credit quality, management is not aware of
any trends or uncertainties related to any accounts which might have a
material adverse effect on future earnings, liquidity or capital resources.
There are no other interest bearing assets that would be subject to disclosure
as either nonperforming or impaired if such interest bearing assets were
loans.
16
<PAGE>
LOAN LOSS EXPERIENCE
Management makes periodic provisions to the allowance for loan losses to
maintain the allowance at an acceptable level commensurate with the credit
risks inherent in the loan portfolio. There can be no assurances, however,
that additional provisions will not be required in future periods. The
following table presents a summary of loan losses by loan type and changes in
the allowance for loan losses for the years ended December 31, (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year $ 1,745 $ 1,653 $ 1,545 $ 1,378 $ 1,239
Provision charged to expense 183 180 180 180 180
Charge-offs:
Real estate-residential 1 0 0 31 0
Real estate-farm 0 0 0 0 0
Real estate-commercial 0 0 0 0 0
Real estate-construction 0 0 0 0 0
Commercial and other 35 20 12 7 8
Consumer and credit card 181 170 99 81 89
-------- -------- -------- -------- --------
Total charge-offs 217 190 111 119 97
-------- -------- -------- -------- --------
Recoveries:
Real estate-residential 0 0 0 0 0
Real estate-farm 0 0 0 0 0
Real estate-commercial 0 0 0 1 0
Real estate-construction 0 0 0 0 0
Commercial and other 7 7 17 27 18
Consumer and credit card 40 95 22 78 38
-------- -------- -------- -------- --------
Total recoveries 47 102 39 106 56
-------- -------- -------- -------- --------
Net charge-offs 170 88 72 13 41
Business acquisition 93 0 0 0 0
-------- -------- -------- -------- --------
Allowance for loan losses at end of period $1,851 $1,745 $1,653 $1,545 $1,378
======== ======== ======== ======== ========
Total loans outstanding $137,891 $122,034 $116,259 $107,255 $103,298
======== ======== ======== ======== ========
Average loans outstanding $127,214 $119,552 $112,005 $106,307 $ 99,826
======== ======== ======== ======== ========
Allowance for loan losses as a percent of total loans 1.34% 1.43% 1.42% 1.44% 1.34%
Net charge-offs as a percent of average loans .13% .07% .06% .01% .04%
</TABLE>
17
<PAGE>
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, nonaccrual, past due and
classified loans. 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, 1998, based upon its analysis and experience. However, there can
be no assurance that the current allowance for loan losses will be adequate to
absorb all future loan losses.
The following table presents management's estimate of the allocation of the
allowance for loan losses among the loan categories, although the entire
allowance balance is available to absorb any actual charge-offs that may
occur, along with the percentage of loans in each category to total loans
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
% % % % %
of of of of of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate residential $ 467 35.7% $ 402 34.0% $ 360 34.2% $ 328 35.7% $ 320 38.0%
Real estate farm 28 3.2% 35 3.1% 38 3.9% 38 4.3% 39 4.8%
Real estate commercial 257 16.4% 273 17.4% 229 15.6% 198 17.0% 236 16.9%
Real estate construction 11 .9% 6 .6% 15 1.7% 3 .3% 15 1.9%
Commercial and other loans 762 27.4% 568 27.7% 574 29.3% 640 26.1% 503 22.9%
Consumer and credit loans 326 16.4% 342 17.2% 341 15.3% 269 16.6% 221 15.5%
Unallocated 0 0.0% 119 0.0% 96 0.0% 69 0.0% 44 0.0%
-------- ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,851 100.0% $1,745 100.0% $1,653 100.0% $1,545 100.0% $1,378 100.0%
======== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
18
<PAGE>
Item 7A Quantitative and Qualitative Disclosures About 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 1.65% of its
investment portfolio and, therefore, equity price risk is not significant.
The Bank's loan portfolio, concentrated primarily within the surrounding
market area, is subject to risks associated with the local economy. Since all
of the interest earning assets and interest bearing liabilities are located at
the Bank all of the interest rate risk lies at the Bank level. As a result,
all significant interest rate risk management procedures are performed at the
Bank level.
The Bank actively manages interest rate sensitivity and asset/liability
products through an asset/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.
In an effort to reduce interest rate risk and protect itself from the negative
effects or 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, 1998, they comprised approximately 62% of the total
loan portfolio.
One of the principal functions of the Company'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
net interest income during periods of changing interest rates.
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.
19
<PAGE>
Because many of the Bank's deposit liabilities are capable of being
immediately repriced, the Bank offers variable rate loan products in order to
help 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. As a result, although changing market interest
rates impact repricing, the Bank has retained much of its control over
repricing.
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. A 2% immediate increase in
interest rates would increase earnings by 7.70% and a 2% immediate decrease in
interest rates would decrease earnings by 7.61%.
The data included in the table that follows indicates that the Bank is
liability sensitive within one to two years. 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 rate 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 ratio within a range
that is plus 20 percent to minus 10 percent of total assets 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.
During 1998, 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 to make 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 1999 will include
improving the Bank's rate sensitivity gap. As noted above, at December 31,
1998 the Bank was liability sensitive, 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 1999.
20
<PAGE>
Changes in market interest rate 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. 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.
The following table presents the Bank's interest rate sensitivity gap position
(dollars in thousands):
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAPS
(IN THOUSANDS)
1999 2000 2001 2002 2003 Thereafter Total
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans:
Fixed $ 7,521 $ 3,568 $ 5,263 $ 6,766 $ 4,510 $ 25,198 $ 52,826
Variable 85,065 0 0 0 0 0 85,065
Securities:
Fixed 9,764 7,587 8,732 6,116 9,506 25,072 66,777
Variable 0 0 0 0 0 0 0
Other interest-earning assets 15,200 0 0 0 0 0 15,200
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets 117,550 11,155 13,995 12,882 14,016 50,270 219,868
-------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Demand and savings deposits 63,467 0 0 0 0 0 63,467
Time deposits:
Fixed 79,330 11,617 3,806 923 2,075 3,341 101,092
Variable 1,067 302 0 0 0 0 1,369
Short-term borrowings 3,335 0 0 0 0 0 3,335
FHLB advances 0 0 0 0 0 8,587 8,587
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 147,199 11,919 3,806 923 2,075 11,928 177,850
-------- -------- -------- -------- -------- -------- --------
Interest rate sensitivity gap (29,649) (764) 10,189 11,959 11,941 38,342
Cumulative rate sensitivity gap $(29,649) $(30,413) $(20,224) $ (8,265) $ 3,676 $ 42,018
======== ======== ======== ======== ======== ========
Interest rate sensitivity gap
as a percent of interest
earning assets (13.48%) (13.83%) (9.20%) (3.76%) 1.67% 19.11%
======== ======== ======== ======== ======== ========
</TABLE>
21
<PAGE>
Item 8 Financial Statements and Supplementary Data
The report of independent auditors and consolidated financial statements,
included on pages 17 through 36 of the Annual Report to shareholders of
Killbuck Bancshares, Inc. for the year ended December 31, 1998, included in
this report as Exhibit 13, are incorporated herein by reference.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10 Directors and Executive Officers of Registrant
The following table lists the Non-Director, Executive Officers of the Company
and its subsidiary, Killbuck Savings Bank Company, and certain other
information with respect to each individual, as of December 31, 1998. The
information required by this item with respect to Directors and other
executive officers of the Company and its subsidiary, Killbuck Savings Bank
Company, is incorporated herein by reference to the information under the
heading "Election of Directors and Information with Respect to Directors and
Officers" in the Proxy Statement of the Company. The information required
regarding disclosure of any known late filings or failure by an insider to
file a report required by Section 16(a) of the Securities Exchange Act is
incorporated herein by reference to the information under the heading
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Proxy Statement of the Company.
Name Age All Positions with Company and Bank
- ---------------- --- ----------------------------------------------------
Craig A. Lawhead 41 Vice president and treasurer of Company since 1992;
Executive vice president of bank since 1990.
John D. Boley 38 Vice president and secretary of Company since 1992;
Senior vice president and cashier of Bank since 1990.
Executive officers of the Company and Bank reside in or near Killbuck, Ohio
and all of the executive officers have been with the Company and Bank the past
five years.
Item 11 Executive Compensation
Information required by this item is incorporated herein by reference to the
information under the heading "Executive Compensation and Other Information"
in the Proxy Statement of the Company.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated herein by reference to the
information under the heading "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement of the Company.
22
<PAGE>
Item 13 Certain Relationships and Related Transactions
Information required by this item is incorporated herein by reference to the
information under the heading "Certain Relationships and Related Transactions"
in the Proxy Statement of the Company and in Note 5 of the Notes to
Consolidated Financial statements appearing at Page 27 of the Annual Report to
Shareholders for the year ended December 31, 1998, included in this report as
Exhibit 13, and incorporated herein by reference.
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8
Financial Statements and Schedules
The following consolidated financial statements of Killbuck Bancshares, Inc.
and subsidiary, included in the Annual Report to Shareholders for the year
ended December 31, 1998, are incorporated by reference in item 8:
Report of Independent Auditors'
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statement of Income for the Years ended December 31, 1998,
1997 and 1996
Consolidated Statement of Changes in Shareholders' Equity for the Years ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
Schedules are omitted because they are inapplicable, not required, or the
information is included in the consolidated financial statements or notes
thereto.
Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
23
<PAGE>
Exhibits
--------
The following exhibits are filed herewith and/or are incorporated herein by
reference.
Exhibit
Number Description
- ------- -------------------------------------------------------------------
3(i) Certificate and Articles of Incorporation of Killbuck Bancshares,
Inc.*
3(ii) Code of regulations of Killbuck Bancshares, Inc.*
10 Agreement and plan of reorganization with Commercil Savings Bank
Company*
12 Statement regarding computation of ratios.
13 Portions of the 1998 Annual Report to Shareholders
22 Subsidiary of the Holding Company.*
24 Consent of S.R. Snodgrass, A.C.
27 Financial Data Schedule (electronic filing only)
99 Proxy statement dated March 15, 1999 for the Annual Shareholders
meeting to be held April 12, 1999.(1)
*Incorporated by reference to an identically numbered exhibit to the Form 10
(File No. 0-24147) filed with SEC on April 30, 1998 and subsequently amended
on July 8, 1998 and July 31, 1998.
(1) Except for the portions of the proxy expressly incorporated by reference,
the proxy is furnished solely for the information of the Commission and is
not deemed "filed" as part hereof.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Killbuck Bancshares, Inc.
-------------------------
(Registrant)
By: Luther E. Proper
---------------------
Luther E. Proper
President and Chief Executive Officer/Director
(Duly authorized representative)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signatures Description Date
- --------------------- -------------------------- --------------
/s/ Luther E. Proper
- -------------------- President, Chief Executive March 13, 1999
Luther E. Proper Officer and Director
/s/ John W. Baker
- -------------------- Director March 13, 1999
John W. Baker
/s/ Robert D. Bell
- -------------------- Director March 13, 1999
Robert D. Bell
/s/ Ted Bratton
- -------------------- Director March 13, 1999
Ted Bratton
/s/ Richard L. Fowler
- -------------------- Director March 13, 1999
Richard L. Fowler
/s/ Thomas D. Gindlesberger
- -------------------- Director March 13, 1999
Thomas D. Gindlesberger
/s/ Allan R. Mast
- -------------------- Director March 13, 1999
Allan R. Mast
/s/ Dean J. Mullet
- -------------------- Director March 13, 1999
Dean J. Mullet
/s/ Kenneth F. Taylor
- -------------------- Director March 13, 1999
Kenneth F. Tayor
/s/ Michael S. Yoder
- -------------------- Director March 13, 1999
Michael S. Yoder
25
<PAGE>
EXHIBIT 12
Statement Regarding Computation of Ratios
The following formulas were used to calculate the ratios in the Selected
Financial Data for the years ended December 31, 1998, 1997, 1996, 1995 and
1994, included in this report as Exhibit 13.
(Calculation)
Net Income/Weighted average shares of common stock outstanding for the period
= Earnings Per Share.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net income $ 2,915,961 $ 3,005,462 $ 2,746,981 $ 2,626,728 $ 2,216,437
Weighted Average
Shares Outstanding 666,779 665,215 669,465 675,000 675,000
Per Share Amount $4.37 $4.52 $4.10 $3.89 $3.28
</TABLE>
Cash dividends/Average
Shares Outstanding =
Cash dividends declared
Per share
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash dividends $ 718,882 $ 611,412 $ 507,792 $ 438,750 $ 398,250
Average shares outstanding 684,650 664,578 668,147 675,000 675,000
Per Share Amount $1.05 $.92 $.76 $.65 $.59
</TABLE>
Stockholders' Equity/Shares
Outstanding at period end =
Book Value per share
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Shareholders' Equity $27,437,211 $22,157,609 $19,933,740 $18,265,569 $16,003,697
Shares outstanding 705,331 661,900 667,500 675,000 675,000
Per Share Amount $38.90 $33.48 $29.86 $27.06 $23.71
</TABLE>
<PAGE>
Net Income/Average
Assets = Return on
Average Assets
(In Thousands)
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net Income $ 2,916 $ 3,005 $ 2,747 $ 2,627 $ 2,216
Average Assets $208,565 $193,923 $175,807 $158,199 $145,894
Return on Average Assets 1.40% 1.55% 1.56% 1.66% 1.52%
Net Income/Average
Shareholders' equity =
Return on Average Equity
(In Thousands)
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net Income $ 2,916 $ 3,005 $ 2,747 $ 2,627 $ 2,216
Average
Shareholders' Equity $ 23,615 $ 21,067 $ 18,858 $ 17,286 $ 15,253
Return on Average Equity 12.35% 14.26% 14.57% 15.20% 14.53%
Cash dividends per share/
Net income per share =
Dividends Payout Ratio
(In Thousands)
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Cash dividends per share $ 1.05 $ .92 $ .76 $ .65 $ .59
Net income per share $ 4.37 $ 4.52 $ 4.10 $ 3.89 $ 3.28
Dividend Payout Ratio 24.03% 20.35% 18.54% 16.71% 17.99%
<PAGE>
Average Equity/Average
Assets = Average Equity
To Average Assets
(In Thousands)
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Average
Shareholders' Equity $ 23,615 $ 21,067 $ 18,858 $ 17,286 $ 15,253
Average Assets $208,565 $193,923 $175,807 $158,199 $145,894
Average Equity to
Average Assets 11.32% 10.86% 10.73% 10.93% 10.46%
Loans/Total deposits =
Loan to Deposit Ratio
(In Thousands)
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Total loans $137,891 $122,034 $116,259 $107,255 $103,238
Total deposits $192,079 $163,809 $157,399 $150,413 $132,112
Loan to Deposit Ratio 71.79% 74.50% 73.86% 71.31% 78.14%
Allowance for Loan Loss/
Total Loan = Allowance
To Total Loan Ratio
(In Thousands)
December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Allowance $ 1,851 $ 1,745 $ 1,653 $ 1,545 $ 1,378
Total loans $137,891 $122,034 $116,259 $107,255 $103,238
Allowance to total
Loan ratio 1.34% 1.43% 1.42% 1.44% 1.34%
<PAGE>
Killbuck Bancshares, Inc.
Corporate Profile
Killbuck Bancshares, Inc. (the "Company") was incorporated under the laws of
the State of Ohio on November 29, 1991 at the direction of management of the
Bank, for the purpose of becoming a bank holding company by acquiring all of
the outstanding shares of The Killbuck Savings Bank Company. In November,
1992, the Company 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 Company 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 of 1900. The Bank is headquartered in Killbuck,
Ohio, which is located in the northeast portion of Ohio, in Holmes County.
The Bank is insured by the Federal Deposit Insurance Corporation, and is
regulated by the Ohio Division of Financial Institutions and the Board of
Governors of the Federal Reserve System.
The Bank provides customary retail and commercial banking services to its
customers, including checking and savings accounts, time deposits, interest-
bearing accounts, safe deposit facilities, real estate mortgage loans and
installment loans. The Bank also makes secured and unsecured commercial
loans.
Stock Market Information
There is no established public trading market for the Company's common stock
and the shares of the Company are not listed on any exchange. Sale price
information is based on information reported to the Company by individual
buyers and sellers of the Company stock. The following table summarizes the
high and low prices and dividend information for 1998 and 1997, adjusted for
the five for one stock split on May 1, 1998. Cash dividends are paid on a
semi-annual basis.
Cash
Dividends
Quarter Ended High Low Paid
- ----------------- ------- ------- ---------
1998 March 31 $69.50 $69.50 N/A
June 30 Unknown Unknown .50
September 30 82.63 82.63 N/A
December 31 90.56 85.31 .55
1997 March 31 Unknown Unknown N/A
June 30 54.30 54.30 .44
September 30 55.99 55.51 N/A
December 31 Unknown Unknown .48
At December 31, 1998 the Company had approximately 931 shareholders of record.
- -6-
<PAGE>
Selected Financial Data
The following table sets forth general information and ratios of the
Company at the dates indicated (in thousands except per share data
and shares).
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Statements of earnings:
Total interest income $ 16,024 $ 15,224 $ 13,982 $ 12,811 $ 10,512
Total interest expense 7,892 7,344 6,626 5,816 4,232
-------- -------- -------- -------- ---------
Net interest income 8,132 7,880 7,356 6,995 6,280
Provision for loan losses 183 180 180 180 180
-------- -------- -------- -------- ---------
Net interest income after
provision for loan losses 7,949 7,700 7,176 6,815 6,100
-------- -------- -------- -------- ---------
Security gains (losses) 0 0 0 0 1
Other 558 449 439 411 432
-------- -------- -------- -------- ---------
Total noninterest income 558 449 439 411 433
Total noninterest expenses 4,574 4,036 3,799 3,610 3,532
-------- -------- -------- -------- ---------
Earnings before federal
income taxes 3,933 4,113 3,816 3,616 3,001
Federal income tax expense 1,017 1,108 1,069 989 785
-------- -------- -------- -------- ---------
Net earnings $ 2,916 $ 3,005 $ 2,747 $ 2,627 $ 2,216
======== ======== ======== ======== =========
Per share data
Net earnings (1) $4.37 $4.52 $4.10 $3.89 $3.28
Dividends (1) $1.05 $0.92 $0.76 $0.65 $0.59
Book value (at period end)(1) $38.90 $33.48 $29.86 $27.06 $23.71
Average no. of shares outstanding (1) 666,779 665,215 669,465 675,000 675,000
Year-end balances:
Total loans $137,891 $122,034 $116,259 $107,255 $103,238
Securities 66,777 58,477 51,208 42,171 35,320
Total assets 231,994 197,909 182,692 172,522 149,493
Deposits 192,079 163,809 157,399 150,413 132,112
Borrowings 11,922 11,455 4,815 3,329 994
Shareholders' equity 27,437 22,158 19,934 18,266 16,004
Significant ratios:
Return on average assets 1.40% 1.55% 1.56% 1.66% 1.52%
Return on average equity 12.35 14.26 14.57 15.20 14.53
Dividends per share to net
income per share 24.03 20.35 18.54 16.71 17.99
Average equity to
average assets 11.32 10.86 10.73 10.93 10.46
Loans to deposits 71.79 74.50 73.86 71.31 78.14
Allowance for loan
loss to total loans 1.34 1.43 1.42 1.44 1.34
</TABLE>
(1) Adjusted for 5 for 1 stock split in 1998.
- -7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Killbuck Bancshares, Inc. ("Killbuck" or the "Company") is the parent holding
company for the Killbuck Savings Bank Company (the "Bank"). The following
discussion and analysis is intended to provide information about the financial
condition and results of operation of the Company and should be read in
conjunction with the audited Consolidated Financial Statements, footnotes and
other discussions appearing elsewhere in this annual report and the Company's
Form 10-K.
Certain information presented in this discussion and analysis and other
statements concerning future performance, developments or events, and
expectations for growth and market forecasts constitute forward-looking
statements which are subject to a number of risks and uncertainties, including
interest rate fluctuations, changes in local or national economic conditions,
and government and regulatory actions which might cause actual results to
differ materially from stated expectations or estimates.
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. 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. 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.
During 1998, the Company completed the merger of Commercial and Savings Bank
Company of Danville, Ohio with, and into the Bank. This merger will allow us
to better serve our existing clients in this area, while allowing the Bank the
opportunity to attract new customers from the Danville area.
Also during 1998, the Bank acquired land in Sugarcreek, Ohio for the purpose
of building a branch facility. The Bank anticipates construction to begin in
the spring of 1999 with completion anticipated in late 1999 or early 2000.
This new location will give the Bank a presence in the Sugarcreek, Ohio area
and allow the Bank the opportunity to attract new customers in this area.
RESULTS OF OPERATIONS
Summary
For 1998 Killbuck posted net income of $2.9 million compared to $3.0 million
for 1997 and $2.7 million for 1996.
Other operating income was $558,000 for 1998 compared to $449,000 for 1997 and
$439,000 for 1996.
Total other operating expenses were $4.6 million in 1998 compared to $4.0
million in 1997 and $3.8 million in 1996.
Earnings per share for 1998 were $4.37 compared to $4.52 for 1997 and $4.10
for 1996. These earnings per share are adjusted for the 5 for 1 stock split
in 1998 and for the additional shares issued due to the merger in 1998.
- -8-
<PAGE>
NET INTEREST INCOME
The Company's net interest income increased by $252,000 in 1998 from 1997 and
$524,000 in 1997 from 1996.
Total interest income increased by $800,000 or 5% for 1998 from 1997. The
increase of $800,000 for 1998 resulted primarily from an increase of $553,000
in interest income on loans and $268,000 in interest income on Federal Funds
sold. The increase in loan and Federal Funds sold interest income resulted
primarily from an increase in the average outstanding balance of the loan
portfolio of $7.7 million and an increase in the average outstanding balance
of Federal Funds sold of $5.2 million.
The increase in loan volume served to offset the reduction in the current
yield on the loan portfolio which declined 14 basis points to 9.47%. The
decline in yield is due to a general decline in long-term interest rates,
combined with increased competition for loan customers. Should the current
interest rate environment prevail and the level of competition continue, it is
possible the overall yield on the loan portfolio will decline further.
Total interest income increased by $1.2 million or 9% for 1997 from 1996 due
mainly to an increase in the average outstanding balance of the loan and
investment portfolios of $7.5 million and $9.0 million respectively.
The yield on earning assets was 8.06%, 8.26% and 8.38% for 1998, 1997 and 1996
respectively. The decrease in the yield on earning assets is attributable to
the general decline in interest rates and increased competition for loans.
Interest expense for 1998 increased by $548,000 from 1997 and by $718,000 for
1997 from 1996. These increases were due mainly to increases in the average
volume of interest bearing liabilities which rose $10.7 million during 1998
and $14.9 million during 1997. The average volume of time deposit and Federal
Home Loan Bank advances increased $6.9 million and $2.3 million respectively
in 1998 while time deposits, interest bearing demand and money market, and
Federal Loan Bank advances increased $5.7 million, $5.1 million and $2.6
million respectively for 1997.
The cost on interest bearing liabilities was 4.85% for 1998 and 4.83% for 1997
and 1996. The slight increase for 1998 is due to an increase in the
percentage of higher yield paying categories of time deposits and Federal Home
Loan Bank advances for 1998.
As a result of the decrease in the yield on total earning assets and the
slight increase in cost of interest-bearing liabilities, the net yield on
earning assets has decreased the last three years. The net yield on interest
earning assets is 4.09%, 4.27% and 4.41% for 1998, 1997 and 1996 respectively.
The following table sets forth, for the periods indicated, information
regarding the total dollar amounts of interest income from interest-earning
assets and the resulting average yields, the total dollar amount of interest
expense on interest-bearing liabilities and the resulting average rate paid,
net interest income, interest rate spread and the net yield on interest-
earning assets (dollars in thousands):
- -9-
<PAGE>
Average Balance Sheet and Net Interest Analysis
<TABLE>
<CAPTION>
For the Year Ended December 31
--------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans (1)(2)(3) $127,214 $ 12,043 9.47% $119,552 $ 11,490 9.61% $112,005 $ 10,820 9.66%
Securities taxable (4) 33,800 2,059 6.09% 36,389 2,285 6.28% 29,940 1,898 6.34%
Securities nontaxable 24,857 1,212 4.88% 20,641 1,012 4.90% 18,268 891 4.88%
Securities equity (4)(5) 1,078 70 6.49% 1,008 65 6.45% 805 49 6.09%
Federal funds sold 11,904 640 5.38% 6,749 372 5.51% 5,902 324 5.49%
-------- -------- -------- -------- -------- --------
Total interest earnings assets 198,853 16,024 8.06% 184,339 15,224 8.26% 166,920 13,982 8.38%
-------- -------- --------
Noninterest-earning assets
Cash and due from other Institutions 6,625 6,144 5,635
Premises and equipment, net 2,891 2,888 2,914
Accrued interest 1,164 1,549 1,386
Other assets 842 697 571
Less allowance for loan losses (1,810) (1,694) (1,619)
-------- -------- --------
Total $208,565 $193,923 $175,807
======== ======== ========
</TABLE>
- -10-
<PAGE>
Average Balance Sheet and Net Interest Analysis (Continued)
<TABLE>
<CAPTION>
For the Year Ended December 31
--------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities and Shareholders
Equity
Interest bearing liabilities:
Interest bearing demand $ 21,655 $ 549 2.54% $ 20,464 $ 523 2.56% $ 18,770 $ 485 2.58%
Money market accounts 15,364 620 4.04% 16,894 684 4.05% 13,483 443 3.29%
Savings deposits 19,745 589 2.98% 19,421 552 2.84% 19,035 547 2.87%
Time deposits 94,289 5,437 5.77% 87,375 5,091 5.83% 81,725 4,858 5.94%
Short term borrowings 2,637 79 3.00% 1,147 39 3.40% 0 0 0.00
Federal Home Loan Bank Advances 9,132 618 6.77% 6,789 455 6.70% 4,176 293 7.02%
-------- -------- -------- -------- -------- --------
Total interest bearing
liabilities 162,822 7,892 4.85% 152,090 7,344 4.83% 137,189 6,626 4.83%
-------- -------- --------
Noninterest bearing liabilities:
Demand deposits 21,290 20,174 19,228
Accrued expenses and other
liabilities 838 592 532
Shareholder's equity 23,615 21,067 18,858
-------- -------- --------
Total $208,565 $193,923 $175,807
======== ======== ========
Net interest income $ 8,132 $ 7,880 $ 7,356
======== ======== ========
Interest rate spread (6) 3.21% 3.43% 3.55%
====== ====== ======
Net yield on interest earning assets (7) 4.09% 4.27% 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 related fees of $217,604,
$210,030, and $190,723 in 1998, 1997 and 1996, respectively.
(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.
- -11-
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. 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) and (ii) changes in rates
(changes in rate multiplied by old average volume). Changes which are not
solely attributable to rate or volume are allocated to changes in rate due to
rate sensitivity of interest-earning assets and interest-bearing liabilities
(dollars in thousands).
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
------------------------------- ------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
------------------------------- ------------------------------
Volume Rate Net Volume Rate Net
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $ 736 $ (183) $ 553 $ 729 $ (57) $ 672
Securities-taxable (163) (63) (226) 409 (22) 387
Securities-nontaxable 207 (7) 200 116 5 121
Securities-equities 4 1 5 12 4 16
Federal funds sold 284 (16) 268 47 1 48
------- -------- ------- ------- -------- -------
Total interest earning
assets 1,068 (268) 800 1,313 (69) 1,244
------- -------- ------- ------- -------- -------
Interest expense
Interest bearing demand 30 (4) 26 40 (2) 38
Money market accounts (61) (3) (64) 118 123 241
Savings deposits 9 28 37 11 (6) 5
Time deposits 403 (57) 346 336 (103) 233
Short-term borrowing 51 (11) 40 39 0 39
Federal Home Loan Bank
advances 157 6 163 183 (21) 162
------- -------- ------- ------- -------- -------
Total interest bearing
liabilities 589 (41) 548 727 (9) 718
------- -------- ------- ------- -------- -------
Net change in interest income $ 479 $ (227) $ 252 $ 586 $ (60) $ 526
======= ======== ======= ======= ======== =======
</TABLE>
Provision for Loan Losses
The provision for loan losses was $183,000 for 1998 and $180,000 for both 1997
and 1996. Management makes periodic provisions to the allowance for loan
losses to maintain the allowance at an acceptable level commensurate with the
credit risks inherent in the loan portfolio. There can be no assurances,
however, that additional provisions will not be required in future periods.
The allowance for loan losses as a percent of total loans was 1.34%, 1.43% and
1.42% for 1998, 1997 and 1996 repectively.
Other Income
Other income, which is comprised principally of fees and charges on customers'
deposit accounts increased $109,000 or 24% to $558,000 in 1998 from $449,000
in 1997, and increased $10,000 or 2% in 1997 from 1996. The Bank started to
sell fixed rate loans in the secondary market in late 1997. Gains for these
sales were $42,000 in 1998 and $2,000 in 1997. Income from the alternative
investment service the Bank introduced in 1997 was $31,000 for 1998 and
$11,000 for 1997. Service charges on customer accounts increased $33,000 or
9% in 1998 due to increased deposit activity.
- -12-
<PAGE>
Other Expense
Other expense increased $538,000 or 13% to $4.6 million in 1998 as compared to
$4.0 million in 1997 and increased $237,000 or 6% for 1997 from $3.8 million
in 1996.
Salary and employee benefits for 1998 totaled $2.3 million, an increase of
$273,000 or 13% from $2.0 million in 1997 and increased $80,000 for 1997 or 4%
from $1.9 million in 1996. Of this total increase for 1998, hospitalization
costs accounted for $63,000 or 23% of the increase. This was due to an
increase in the amount of self funded insurance costs paid by the Bank in
1998. Also, approximately $16,000 represents the effect of a part year's
expense associated with new employees due to the merger with Commercial and
Savings Bank Company in November, 1998. Normal recurring employee cost
increases for annual salary increases, staff additions and pension benefits
accounted for the remaining increase for 1998 and all of the increase for
1997. For 1999, in addition to normal recurring salary and benefit
adjustments, it is expected salary and benefit costs will increase due to a
full year of additional employees caused by the merger and additional staff
for the new branch office in Sugarcreek, Ohio.
Occupancy and equipment expense increased $27,000 in 1998 and $68,000 in 1997.
These expense increases were attributable to normal and recurring items for
1998. The increase of $68,000 in 1997 was primarily due to increases in
depreciation and maintenance on additional furniture and equipment for 1997.
For 1999 occupancy and equipment expense will increase due to the addition of
Danville office for a full year due to the merger in November, 1998 and a new
branch office in Sugarcreek, Ohio in 1999.
Other expenses for 1998 totaled $1.6 million, a $238,000 or 17% increase from
the $1.4 million reported in 1997 and an $88,000 or 7% increase for 1997 from
the 1996 total of $1.3 million. The major increases in 1998 were in
professional fees of $44,000 and other expenses of $141,000. The increase in
professional fees of $44,000 is mainly attributed to costs of becoming a
securities and exchange registrant in 1998. The increase in other expenses
for 1998 were brought about by merger expenses of $66,000 and those items that
are normal and recurring in nature. The increase of $72,000 in 1997 from 1996
in other expenses is attributable to items normal and recurring in nature.
For 1999, in addition to normal recurring increases in other expense, the
amortization of intangible assets due to the merger will increase other
expenses by approximately $111,000 and other expense will also increase due to
the addition of the Danville office for a full year and the new branch in
Sugarcreek, Ohio.
Income Tax Expense
Income tax expense decreased by $91,000 for 1998 to $1.0 million from $1.1
million in 1997 and increased $39,000 in 1997 from $1.1 million in 1996. The
effective rate on taxes for 1998, 1997 and 1996 was 25.8%, 26.9% and 28.0%
respectively. The effective tax rate is affected by the amount of tax exempt
income earned by the Company each year.
Comparison of Financial Condition at December 31, 1998 and 1997
Total assets at December 31, 1998 amounted to $232.0 million, an increase of
$34.1 million compared to $197.9 million at December 31,1997. This increase
of $34.1 million represents growth by the Bank of $17.0 million or 9% during
1998 and an increase of $17.1 million caused by the merger of Commercial and
Savings Bank Company with and into Killbuck Savings Bank Company.
Cash and cash equivalents increased $7.6 million or 52% from December 31, 1997
to December 31, 1998, with liquid funds held in the form of federal funds sold
increasing $6.9 million. Approximately $1.3 million of the total increase to
cash and cash equivalents was due to the merger. The increase in federal
funds sold at December 31, 1998 is due to the slowdown in loan growth and the
current investment interest rate environment.
Total investment securities increased $8.3 million or 14% from December 31,
1997 to December 31, 1998. Approximately $3.1 million of this total increase
was due to the merger. The increase in investments was funded by the increase
in deposit accounts in 1998. Information detailing the book value of the
investment portfolio by security type and classification is present in Note 4
to the consolidated financial statements.
Total loans were $137.9 million at December 31, 1998 an increase of $15.9
million or 13% from $122.0 million at December 31, 1997. Approximately $10.7
million of this total increase was due to the merger. Of this $10.7 million
approximately $8.4 million was in residential real estate loans. The Bank's
generated loan growth in 1998 was primarily from the commercial and other loan
category. This segment of the loan portfolio increased approximately $4.0
million or 77% of the Bank's $5.2 million loan growth.
- -13-
<PAGE>
Late in 1997 the Bank began to offer residential mortgage customers a new
fixed rate product. This program enables 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 originated $4.9 million and $282,000 of loans
in 1998 and 1997 respectively. Profit on the sale of these loans was $42,000
and $2,000 for 1998 and 1997 respectively.
Total deposits increased $28.2 million or 17% from December 31, 1997 to
December 31, 1998. Approximately $13.9 million of this total increase was due
to the merger. The largest increase in the Bank's generated deposit growth
was in the time deposit accounts. Time deposits increased approximately $9.9
million or 69% of the Bank's total $14.3 million deposit growth. Management
attributes this increase to current depositors transferring deposits from
interest bearing accounts to time accounts and new customers opening time
deposit accounts due to the current competitive rates being offered by the
Bank. See also, "Average Balance Sheets and Net Interest Analysis" for
information related to the average amount and average interest paid on deposit
accounts during 1998 and 1997. Information related to the maturity of time
deposits of $100,000 and over at December 31, 1998 is presented in Note 8 of
the accompanying consolidated financial statements.
Advances were $8.6 million and $8.7 million at December 31, 1998 and 1997
respectively. The borrowings are used to fund fixed rate residential real
estate loans with similar maturities. New borrowings totaled $1.5 million and
$4.6 million in 1998 and 1997 respectively.
Shareholders' equity increased $5.3 million during 1998 to $27.4 million at
December 31, 1998 from $22.1 million at December 31, 1997. This increase was
the result of $2.2 million net retained earnings during the year and an
increase of $3.1 million in capital due to the merger of Commercial Savings
Bank Company with and into Killbuck Savings Bank Company. In May, 1998 the
Company had a 5 for 1 stock split and in November, 1998 issued 43,431 shares
in conjunction with the merger.
Market Risk and Asset/Liability Management
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 1.65% of its
investment portfolio and, therefore, equity price risk is not significant.
The Bank actively manages interest rate sensitivity and asset/liability
products through an asset/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.
In an effort to reduce interest rate risk and protect itself from the negative
effects or 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, 1998, they comprised approximately 62% of the total
loan portfolio.
Liquidity
Liquidity represents the Company's ability to meet normal cash flow
requirements of its customers for the funding of loans and repayment of
deposits. Liquidity is generally derived from the repayments and maturities
of loans and investment securities, and the receipt of deposits. Management
monitors liquidity daily, and on a monthly basis incorporates liquidity
management into its asset/liability program.
Operating activities, as presented in the statement of cash flows in the
accompanying consolidated financial statements, provided $3.2 and 3.3 million
in cash during 1998 and 1997 respectively, generated principally from net
income and depreciation and amortization.
Investing activities consist primarily of loan originations and repayments,
and investment purchases and maturities. These activities used $9.6 million
in funds during 1998, principally for the net funding of loans and the net
purchase of investments totaling $5.2 million and $5.4 million respectively,
offset by $1.3 million of cash acquired in the merger. For 1997, investing
activities used $13.0 million, principally for the net funding of loans and
the net purchase of investments totaling $5.9 million and $7.0 million
respectively.
- -14-
<PAGE>
Financing activities consisted of the solicitation and repayment of customer
deposits, borrowings and repayments and the payment of dividends. For 1998,
financing activities provided $14.0 million, comprised mainly of net deposit
increases of $14.3 million. For 1997 financing activities provided $12.1
million, comprised mainly of net deposit increases of $6.4 million, net
Federal Home Loan Bank advance increases of $3.9 million and net short-term
borrowing increases of $2.7 million.
In addition to using the loan, investment and deposit portfolios as sources of
liquidity, the Company has access to funds from the Federal Home Loan Bank of
Cincinnati. The Company also has a ready source of funds through the
available-for-sale component of the investment securities portfolio.
Capital Resources
Capital adequacy is the ability of the Company to support growth while
protecting the interests of shareholders and depositors. Bank regulatory
agencies have developed certain capital ratio requirements, which are used to
assist them in monitoring the safety and soundness of financial institutions.
Management continually monitors these capital requirements and believes the
Company to be in compliance with these regulations at December 31, 1998.
The Bank's regulatory capital position at December 31, 1998, as compared to
the minimum regulatory capital requirements imposed on the Bank by banking
regulators at that date is presented in Note 16 of the accompanying
consolidated financial statements. Management is not aware of any actions
contemplated by banking regulators which would result in the Bank being in
non-compliance with capital requirements.
Impact of Inflation 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 of 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.
- -15-
<PAGE>
Year 2000 Evaluation
Rapid and accurate data processing is essential to the Bank's operations.
Many computer programs that can only distinguish the final two digits of the
year entered (a common programming practice in prior years) are expected to
read entries for the year 2000 as the year 1900 or as zero and incorrectly
attempt to compute payment, interest, delinquency and other data. The Bank
has been evaluating both information technology (computer systems) and non-
information technology systems (e.g. vault timers, electronic door lock and
elevator controls). Based upon such evaluations, management has determined
that the Bank has year 2000 risk in three areas: (1) Bank's own computer and
software, (2) computers of others used by the Bank's borrowers, and (3)
computers of others who provide the Bank with processing of certain services.
BANK'S OWN COMPUTERS AND SOFTWARE. The Bank has spent approximately $33,000
through December 31, 1998 to upgrade its computer system and software. The
upgrade is expected to eliminate the year 2000 risk. The Bank does not expect
to have material costs to address this risk in 1999. The Bank expects, though
there is no assurance, to be year 2000 compliant in this risk area by March
31, 1999. However, if such modifications are not made or completed on a
timely basis, the year 2000 issue could have a material impact on the
operations of the Bank.
COMPUTERS OF OTHERS USED BY OUR BORROWERS. The Bank has evaluated most of
their borrowers and does not believe the year 2000 problem should, on an
aggregate basis, impact their ability to make payments to the Bank. The Bank
believes that most of their residential borrowers are not dependent on their
home computers for income and that none of their commercial borrowers are so
large that a year 2000 problem would render them unable to collect revenue or
rent and, in turn, continue to make loan payments to the Bank. The Bank does
not expect any material costs to address this risk area and believes they will
be year 2000 compliant in this risk area by March 31, 1999.
COMPUTERS OF OTHERS WHO PROVIDE US WITH PROCESSING OF CERTAIN SERVICES. This
risk is primarily focused on vendors who provide the Bank processing services
in the areas of credit cards, individual retirement accounts and automatic
teller machine transactions. All of these vendors have represented to the
Bank that they are year 2000 compliant.
CONTINGENCY PLAN. The Bank has continually monitored its year 2000 situation
by thoroughly assessing its systems and programs. Although the Bank
anticipates its systems and programs to be year 2000 compliant by March 31,
1999, a contingency plan is being developed and is expected to be completed by
June 30, 1999. As part of the contingency plan, an agreement with Bankers
Systems has been executed. This agreement includes a provision for supplying
the Bank with forms necessary for day-to-day operations should the computer
based loan and deposit documentation systems fail.
- -16-
<PAGE>
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, 1998 and 1997, 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,
1998. These financial statements are the responsibility of the Company'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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ S.R. Snodgrass, A.C.
Steubenville, Ohio
January 26, 1999
S.R. Snodgrass, A.C.
626 North Fourth Street
Steubenville, Ohio 43952
Phone: 740-282-2771
Facsimile: 740-282-1606
- -17-
<PAGE>
Killbuck Bancshares, Inc.
CONSOLIDATED BALANCE SHEET
December 31,
1998 1997
------------- -------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 6,972,224 $ 6,300,777
Federal funds sold 15,200,000 8,300,000
------------- -------------
Total cash and cash equivalents 22,172,224 14,600,777
------------- -------------
Investment securities:
Securities available for sale 39,228,084 35,078,516
Securities held to maturity (market
value of $28,341,531 and $23,966,533) 27,549,053 23,398,480
------------- -------------
Total investment securities 66,777,137 58,476,996
------------- -------------
Loans (net of allowance for loan losses
of $1,851,175 and $1,744,586) 135,644,314 119,926,057
Loans held for sale 233,750 -
Premises and equipment, net 3,368,645 2,808,078
Accrued interest 1,629,508 1,633,451
Other assets 2,168,315 463,271
------------- -------------
Total assets $231,993,893 $197,908,630
============= =============
LIABILITIES
Deposits:
Noninterest bearing demand $ 26,150,636 $ 21,592,573
Interest bearing demand 25,576,971 20,525,238
Money market 12,182,491 17,048,965
Savings 25,707,998 19,376,757
Time 102,460,585 85,265,101
------------- -------------
Total deposits 192,078,681 163,808,634
Short-term borrowings 3,335,000 2,710,000
Federal Home Loan Bank advances 8,587,302 8,745,174
Accrued expenses and other liabilities 555,699 487,213
------------- -------------
Total liabilities 204,556,682 175,751,021
------------- -------------
SHAREHOLDERS' EQUITY
Common stock - No par value: 1,000,000
shares authorized, 718,431 and
675,000 issued 8,846,670 5,806,500
Retained earnings 19,215,493 17,018,414
Accumulated other comprehensive
income (loss) 8,536 (33,817)
Treasury stock, at cost (13,100 shares) (633,488) (633,488)
------------- -------------
Total shareholders' equity 27,437,211 22,157,609
------------- -------------
Total liabilities and
shareholders' equity $231,993,893 $197,908,630
============= =============
See accompanying notes to the consolidated financial statements.
- -18-
<PAGE>
<TABLE>
<CAPTION>
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $12,043,400 $11,489,797 $10,819,285
Federal funds sold 639,968 372,153 324,411
Investment securities:
Taxable 2,129,061 2,349,656 1,947,044
Exempt from federal income tax 1,211,898 1,012,341 890,981
----------- ----------- -----------
Total interest income 16,024,327 15,223,947 13,981,721
----------- ----------- -----------
INTEREST EXPENSE
Deposits 7,194,761 6,850,752 6,331,213
Federal Home Loan Bank advances 618,347 454,791 292,726
Short term borrowings 79,351 38,637 1,521
----------- ----------- -----------
Total interest expense 7,892,459 7,344,180 6,625,460
----------- ----------- -----------
NET INTEREST INCOME 8,131,868 7,879,767 7,356,261
Provision for loan losses 183,000 180,000 180,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,948,868 7,699,767 7,176,261
----------- ----------- -----------
OTHER INCOME
Service charges on deposit accounts 408,321 375,676 383,377
Gain on sale of loans, net 41,712 2,033 -
Other income 107,491 71,850 55,946
----------- ----------- -----------
Total other income 557,524 449,559 439,323
----------- ----------- -----------
OTHER EXPENSE
Salaries employee benefits 2,301,849 2,028,629 1,948,362
Occupancy and equipment 643,854 616,445 548,273
Other expense 1,628,186 1,390,581 1,302,928
----------- ----------- -----------
Total other expense 4,573,889 4,035,655 3,799,563
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,932,503 4,113,671 3,816,021
Income taxes 1,016,542 1,108,209 1,069,040
----------- ----------- -----------
NET INCOME $ 2,915,961 $3,005,462 $ 2,746,981
=========== =========== ===========
EARNINGS PER SHARE $ 4.37 $ 4.52 $ 4.10
=========== =========== ===========
AVERAGE SHARES OUTSTANDING 666,779 665,215 669,465
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
- -19-
<PAGE>
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Treasury Shareholders' Comprehensive
Stock Earnings Income (Loss) Stock Equity Income
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 5,806,500 $12,385,175 $ 73,894 $ - $18,265,569
Net income 2,746,981 2,746,981 $ 2,746,981
Other comprehensive income:
Unrealized loss on available for sale
securities (249,960) (249,960) (249,960)
-----------
Comprehensive income $ 2,497,021
===========
Cash dividends paid ($.76 per share) (507,792) (507,792)
Purchase of treasury shares (326,628) (326,628)
Sale of treasury shares 5,570 5,570
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31,1996 5,806,500 14,624,364 (176,066) (321,058) 19,933,740
Net income 3,005,462 3,005,462 $ 3,005,462
Other comprehensive income:
Unrealized gain on available for sale
securities 142,249 142,249 142,249
-----------
Comprehensive income $ 3,147,711
===========
Cash Dividends paid ($.92 per share) (611,412) (611,412)
Purchase of treasury shares (312,430) (312,430)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 5,806,500 17,018,414 (33,817) (633,488) 22,157,609
Net income 2,915,961 2,915,961 $ 2,915,961
Other comprehensive income:
Unrealized gain on available for sale
securities 42,353 42,353 42,353
-----------
Comprehensive income $ 2,958,314
===========
Cash dividends paid ($1.05 per share) (718,882) (718,882)
Business acquisition 3,040,170 3,040,170
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ 8,846,670 $19,215,493 $ 8,536 $ (633,488) $27,437,211
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
- -20-
<PAGE>
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,915,961 $ 3,005,462 $ 2,746,981
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 183,000 180,000 180,000
Depreciation, amortization and accretion, net 307,868 245,393 303,523
Gain on sale of loans, net (41,712) (2,033) -
Origination of loans held for sale (4,924,449) (282,300) -
Proceeds from the sale of loans 4,732,411 284,333 -
Decrease (increase) in accrued interest
and other assets 23,183 (130,414) (454,936)
Increase (decrease) in accrued expenses and
other liabilities (5,076) (57,407) 45,592
Increase (decrease) in federal income
tax payable (86,032) 6,466 (49,501)
Increase in deferred federal income tax 69,582 17,580 7,212
------------ ------------ ------------
Net cash provided by operating activities 3,174,736 3,267,080 2,778,871
------------ ------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 25,874,036 14,051,028 7,766,611
Purchases (27,154,089) (16,051,726) (17,237,326)
Investment securities held to maturity:
Proceeds from maturities and repayments 2,786,713 2,249,094 4,054,565
Purchases (6,856,609) (7,262,638) (3,869,746)
Net increase in loans (5,195,049) (5,899,602) (9,128,417)
Purchase of premises and equipment (395,902) (119,386) (582,894)
Cash funds acquired in business acquisition 1,296,338 - -
------------ ------------ ------------
Net cash used for investing activities (9,644,562) (13,033,230) (18,997,207)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 14,304,976 6,409,485 6,986,063
Proceeds from Federal Home Loan Bank advances 1,500,000 4,600,000 1,800,000
Repayment of Federal Home Loan Bank advances (1,657,872) (669,474) (314,830)
Net increase in short-term borrowings 625,000 2,710,000 -
Purchase of treasury shares - (312,430) (326,628)
Proceeds from sale of treasury shares - - 5,570
Cash dividends paid including fractions shares (730,831) (611,412) (507,792)
------------ ------------ ------------
Net cash provided by financing activities 14,041,273 12,126,169 7,642,383
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 7,571,447 2,360,019 (8,575,953)
Cash and cash equivalents at beginning of year 14,600,777 12,240,758 20,816,711
------------ ------------ ------------
Cash and cash equivalents at end of year $22,172,224 $14,600,777 $12,240,758
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
- -21-
<PAGE>
Killbuck Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting and reporting policies applied in the
presentation of the consolidated financial statements follows:
Nature of Operations and Basis of Presentation
Killbuck Bancshares, Inc. (the "Company") is an Ohio corporation organized as
the holding company of The Killbuck Savings Bank Company (the "Bank"). The
Bank is a state-chartered bank located in Ohio. The Company and its subsidiary
operate in the single industry of commercial banking and 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 through six locations. 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 Financial Institutions.
The consolidated financial statements of Company include its wholly owned
subsidiary, the Bank. All intercompany transactions have been eliminated in
consolidation.
The accounting principles followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and
with general practice within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the balance sheet
date and related revenues and expenses for the period. Actual results could
differ significantly from those estimates.
Investment Securities
Investment securities are classified, at the time of purchase, based upon
management's 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
level yield 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 shareholders' 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.
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 generally discontinued
when it is determined that a reasonable doubt exists as to the collectibility
of principal, interest, or both. Loans are returned to accrual status when
past due interest is collected, and the collection of principal is probable.
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.
- -22-
<PAGE>
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 Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
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 Company 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 over the estimated useful lives of the assets. Maintenance and repairs
are expensed as incurred while major additions and improvements are
capitalized.
Intangible Assets and Liabilities
Goodwill represents the amount by which the market value of the stock issued
in the merger of Commercial Saving Bank Co. (Commercial) of Danville, Ohio
with and into The Killbuck Savings Bank Company exceeded the market value of
the assets, liabilities and capital of Commercial on the date of the merger.
Goodwill of $1,661,561 is included in other assets on the balance sheet and is
being amortized using the straight-line method over fifteen years.
Market value adjustments to various asset and liabilities accounts are being
amortized using the straight-line method over the period to be benefited. The
market value adjustments are components of their respective account balances
on the balance sheet.
Employee Benefits Plans
The Bank maintains an integrated money purchase pension plan and a 401(K) plan
covering eligible employees. The Bank's contributions are based upon the
plan's contribution formula.
Income Taxes
The Company 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.
- -23-
<PAGE>
Earnings Per Share
The Company currently maintains a simple capital structure; therefore, there
are no dilutive effects on earnings per share. As such, earnings per share
are calculated using the weighted number of shares for the period.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards 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 for all
periods presented. The Company has elected to report the effects of Statement
No. 130 as part of the Consolidated Statement of Changes in Shareholders'
Equity.
Cash Flow Information
For purposes of reporting cash flows, cash and cash equivalents include cash
and amounts due from financial institutions and federal funds sold. Cash
payments for interest in 1998, 1997 and 1996 were $7,809,677, $7,359,808, and
$6,633,764, respectively. Cash payments for income taxes for 1998, 1997, and
1996 were $1,055,913, $1,081,332, and $1,111,330 respectively.
Pending Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement provides accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring the recognition of those items as
assets or liabilities in the statement of financial position, recorded at fair
value. Statement No. 133 precludes a held-to-maturity security from being
designated as a hedged item; however, at the date of initial application of
this Statement, an entity is permitted to transfer any held-to-maturity
securities into the available-for-sale or trading categories. The unrealized
holding gain or loss on such transferred securities shall be reported
consistent with the requirements of Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Such transfers do not raise an
issue regarding an entity's intent to hold other debt securities to maturity
in the future. This Statement applies prospectively for all fiscal quarters
of all years beginning after June 15, 1999. Earlier adoption is permitted for
any fiscal quarter that begins after the issue date of this Statement.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and provides guidance for determining whether computer software
is for internal use. The Company will adopt SOP 98-1 in the first quarter of
1999 and does not believe the effect of adoption will be material.
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.
During 1998, retroactive recognition was given for the elimination of the
stated value of the Company's Common Stock. This caused the capital surplus
to be reduced to zero, with the balance of $3,106,500 being reclassified to
Common Stock. Such action had no effect on Total Shareholders' Equity
disclosed previously.
2. 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 consolidated financial statements
have been restated to reflect the stock split.
- -24-
<PAGE>
3. FEDERAL FUNDS SOLD
Federal funds sold at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
Institution Maturity Balance Maturity Balance
<S> <C> <C> <C> <C>
National Bank of Detroit 1-04-99 $ 8,000,000 1-02-98 $ 7,000,000
National City Bank 1-04-99 7,200,000 1-02-98 1,300,000
----------- -----------
$15,200,000 $ 8,300,000
=========== ===========
</TABLE>
4. INVESTMENT SECURITIES
The amortized cost of securities and their estimated market values are as
follows:
<TABLE>
<CAPTION>
Securities available for sale
1998
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 9,312,753 $ 59,431 $ - $ 9,372,184
Obligations of U.S. Government
Agencies and Corporations 28,801,188 40,191 86,689 28,754,690
----------- ---------- ---------- -----------
Total debt securities 38,113,941 99,622 86,689 38,126,874
Equity securities 1,101,210 - - 1,101,210
----------- ---------- ---------- -----------
Total $39,215,151 $ 99,622 $ 86,689 $39,228,084
=========== ========== ========== ===========
</TABLE>
<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>
- -25-
<PAGE>
<TABLE>
<CAPTION>
Securities held to maturity
1998
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of States and Political
Subdivisions $25,909,260 $ 822,022 $ 7,341 $26,723,941
Corporate Securities 1,639,793 781 22,984 1,617,590
----------- ----------- ---------- -----------
Total $27,549,053 $ 822,803 $ 30,325 $28,341,531
=========== =========== ========== ===========
</TABLE>
<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>
The amortized cost and estimated market values of debt securities at
December 31, 1998, by contractual maturity, 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>
Available For Sale Held to Maturity
------------------------- ------------------------
Estimated Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 7,818,322 $ 7,850,284 $ 1,959,461 $ 1,979,397
Due after one year through five years 23,495,619 23,507,123 8,388,139 8,671,979
Due after five through ten years 6,800,000 6,769,467 14,630,043 15,069,466
Due after ten years - - 2,571,410 2,620,689
----------- ----------- ----------- -----------
$38,113,941 $38,126,874 $27,549,053 $28,341,531
=========== =========== =========== ===========
</TABLE>
Investment securities with an approximate carrying value of $30,600,000 and
$30,960,000 at December 31, 1998 and 1997, respectively were pledged to secure
public deposits, securities sold under agreement to repurchase and for other
purposes as required or permitted by law.
- -26-
<PAGE>
5. LOANS
Major classification of loans are summarized as follows:
1998 1997
------------- --------------
Real estate - residential $ 49,226,429 $ 41,473,027
Real estate - farm 4,376,208 3,846,541
Real estate - commercial 22,713,385 21,204,753
Real estate - construction 1,237,523 782,569
Commercial and other loans 37,752,447 33,745,364
Consumer and credit loans 22,584,896 20,981,516
------------- --------------
137,890,888 122,033,770
Less allowance for loan losses (1,851,175) (1,744,586)
Less net deferred loan fees (395,399) (363,127)
------------- --------------
Loans, net $135,644,314 $119,926,057
============= ==============
Total nonaccrual loans and the related interest for the years ended December
31 are as follows. In management's opinion, these loans did not meet the
definition of impaired loans.
1998 1997 1996
------- -------- -------
Principal outstanding $21,323 $120,805 $30,510
Contractual interest due $ 923 $ 6,120 $ 924
Interest income recognized $ 0 $ 7,000 $ 0
The Company's primary business activity is with customers located within its
local trade area. Residential, commercial, personal, and agricultural loans
are granted. The Company also selectively funds loans originated outside of
its trade area provided such loans meet its credit policy guidelines.
Although the Company has a diversified loan portfolio at December 31, 1998 and
1997, loans outstanding to individuals and businesses are dependent upon the
local economic conditions in its immediate trade area.
In the normal course of business, loans are extended to directors, executive
officers and their associates. A summary of loan activity for those
directors, executive officers, and their associates with loan balances in
excess of $60,000 for the year ended December 31, 1998 is as follows:
Balance Amount Balance
12-31-1997 Addition Collected 12-31-1998
---------- -------- --------- ----------
$ 589,091 $276,627 $ 572,508 $ 293,210
========== ======== ========= ==========
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses follows:
1998 1997 1996
---------- ---------- ----------
Balance, January 1 $1,744,586 $1,653,322 $1,545,682
Add:
Provision charged to
operations 183,000 180,000 180,000
Loan recoveries 47,657 101,397 38,858
Acquired in business
acquisition 93,001 - -
Less: Loans charged off (217,069) (190,133) (111,218)
---------- ---------- ----------
Balance, December 31 $1,851,175 $1,744,586 $1,653,322
========== ========== ==========
- -27-
<PAGE>
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1998 1997
---------- ----------
Land $ 909,930 $ 588,526
Building and improvements 2,728,374 2,089,582
Furniture, fixtures and equipment 2,363,977 1,905,762
---------- ----------
6,002,281 4,583,870
Less accumulated depreciation 2,633,636 1,775,792
---------- ----------
Total $3,368,645 $2,808,078
========== ==========
Depreciation expense charged to operations was $283,300 for 1998, $285,094 for
1997, and $217,259 for 1996.
8. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $27,715,774 and $21,775,164 at December 31,
1998 and 1997, respectively.
Interest expense on certificates of deposit $100,000 and over amounted to
$1,496,632 in 1998, $1,306,783 in 1997, and $1,258,753 in 1996.
The following table sets forth the remaining maturity of time certificates of
deposits of $100,000 or more at December 31, 1998.
December 31,
1998
-----------
3 months or less $ 7,184,579
Over 3 through 6 months 9,436,920
Over 6 through 12 months 8,916,707
Over 12 months 2,177,568
-----------
Total $27,715,774
===========
9. SHORT-TERM BORROWINGS
Short-term borrowings consists of securities sold under agreements to
repurchase. These retail repurchase agreements are with customers in their
respective loan market areas. These borrowings are collateralized with
securities owned by the Bank and held in their safekeeping account at an
independent correspondent bank. The outstanding balances and related
information for short-term borrowings are summarized as follows:
Year Ended December 31,
1998 1997
---------- ----------
Short-term borrowings:
Ending balance $3,335,000 $2,710,000
Maximum month-end balance during the year 3,440,000 2,710,000
Average month-end balance during the year 2,763,000 1,494,000
Weighted average at year end 2.58% 3.27%
Weighted average rate during the year 2.88% 3.10%
The Company has pledged investment securities with carrying values of
$4,013,900 and $3,480,950 as of December 31, 1998 and 1997, respectively, as
collateral for the repurchase agreements.
- -28-
<PAGE>
10. FEDERAL HOME LOAN BANK ADVANCES
The Federal Home Loan Bank advances have monthly principal and interest
payments due with maturity dates from 2009 through 2017. Interest rates range
from 6.00% to 8.90% on the advances. The scheduled aggregate minimum future
principal payments on the advances outstanding as of December 31, 1998 are as
follows:
Year Ending
December 31, Amount
------------ -----------
1999 $ 448,618
2000 480,506
2001 514,694
2002 551,348
2003 590,644
2004 and thereafter 6,001,492
-----------
Total $ 8,587,302
===========
The Bank maintains a credit arrangement with Federal Home Loan Bank of
Cincinnati, Ohio ("FHLB"). The FHLB borrowings, when used, are collateralized
by the Bank's investment in Federal Home Loan Bank stock and a blanket
collateral pledge agreement with FHLB under which the Bank has pledged certain
qualifying assets equal to 150 percent of the unpaid amount of the outstanding
balances. At December 31, 1998 and 1997 the Bank had a borrowing capacity of
approximately $17.0 and $15.9 million, respectively with the FHLB. At
December 31, 1998 and 1997 there was $8,587,302 and $8,745,174, respectively
borrowed against this credit arrangement.
11. 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 1998 and 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 1998, 1997 and
1996 amounted to $153,374, $136,666 and $133,074, respectively.
- -29-
<PAGE>
12. OTHER OPERATING EXPENSE
Other operating expense included the following:
1998 1997 1996
---------- ---------- ----------
Stationery, supplies and printing $ 155,064 $ 137,760 $ 158,071
Professional fees 187,813 144,027 133,169
Franchise tax 333,689 298,457 273,464
Other 951,620 810,337 738,224
---------- ---------- ----------
Total $1,628,186 $1,390,581 $1,302,928
========== ========== ==========
13. INCOME TAXES
The provision for federal income taxes for the years ended December 31 consist
of:
1998 1997 1996
---------- ---------- ----------
Current payable $ 946,960 $1,090,629 $1,061,828
Deferred 69,582 17,580 7,212
---------- ---------- ----------
Total provision $1,016,542 $1,108,209 $1,069,040
========== ========== ==========
The following is a reconcilement between the actual provision for federal
income taxes and the amount of income taxes which would have been provided at
statutory rates for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- -------------------- --------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
---------- -------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate $1,337,051 34.0 % $1,398,648 34.0 % $1,297,447 34.0 %
Tax exempt income (408,414) (10.4) (340,323) (8.3) (303,943) (8.0)
Non-deductible interest
expense 64,937 1.7 53,716 1.3 48,960 1.3
Other, net 22,968 .6 (3,832) (.1) 26,576 .7
---------- -------- ---------- ------- ---------- -------
Tax expense
and effective rate $1,016,542 25.9 % $1,108,209 26.9 % $1,069,040 28.0 %
========== ======== ========== ======= ========== =======
</TABLE>
The tax effects of deductible and taxable temporary differences that gave rise
to significant portions of the net deferred tax assets and liabilities at
December 31 are as follows:
1998 1997
-------- --------
Deferred Tax Assets:
Allowance for loan losses $435,761 $456,499
Deferred loan fees 40,097 36,297
Net unrealized loss on securities - 17,421
-------- --------
Deferred tax asset 475,858 510,217
-------- --------
Deferred Tax Liabilities:
Premise and equipment depreciation 268,113 243,173
Stock dividends 59,500 -
Net unrealized gain on securities 4,397 -
Other, net 40,132 6,969
-------- --------
Deferred tax liabilities 372,142 250,142
-------- --------
Net deferred tax assets $103,716 $260,075
-------- --------
No valuation allowance was established at December 31, 1998 and 1997 in view
of certain tax strategies coupled with the anticipated future taxable income
as evidenced by the Company's earnings potential.
- -30-
<PAGE>
14. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In the normal course of business, the Company 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. The Company'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 Company uses the
same credit policies in making such commitments as it does for instruments
that are included in the consolidated balance sheet. These commitments were
comprised of the following at December 31:
1998 1997
----------- -----------
Commitments to extend credit $17,872,990 $14,754,471
Standby letters of credit 607,681 647,731
----------- -----------
Total $18,480,671 $15,402,202
=========== ===========
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 Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company 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 the Company to
guarantee the performance of a customer to a third party. Standby letters of
credit generaly 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. The Company's policy for obtaining collateral, and the nature
of such collateral, is essentially the same as that involved in making
commitments to extend credit.
The Company has not been required to perform any financial guarantees during
the past two years. The Company has not incurred any losses on its
commitments in either 1998 or 1997.
Contingent Liabilities
The Company 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 Company.
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 the
Company in 1999, without the approval of the regulatory authorities, is
$4,286,668 plus 1999 profits retained up to the date of the dividend
declaration.
Included in cash and due from banks are required federal reserves of
$1,124,000 and $1,081,000 at December 31, 1998 and 1997, 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.
Federal law prevents the Company from borrowing from the Bank unless the loans
are secured by specific obligations. Further, such secured loans are limited
in amount to ten percent of the Bank's capital. The Company had no such
borrowings at December 31, 1998 and 1997.
- -31-
<PAGE>
16. REGULATORY CAPITAL REQUIREMENTS
The Company 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 the Company'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 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 Company and 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, 1998 and 1997, that the Company and Bank meets
all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the appropriate
regulatory authority has categorized the Company 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 consolidated capital position of the Company does
not materially differ from the Banks, therefore, the following table sets
forth the Company's capital position and minimum requirements as of December
31 (dollars in thousands):
1998 1997
---------------- ----------------
Amount Ratio Amount Ratio
------- ------ ------- ------
Total Capital (to Risk Weighted Assets)
---------------------------------------
Actual $27,432 19.64% $23,724 19.38%
For Capital Adequacy Purposes 11,173 8.00 9,792 8.00
To be well capitalized 13,967 10.00 12,240 10.00
Tier 1 Capital (to Risk Weighted Assets)
----------------------------------------
Actual $25,685 18.39% $22,191 18.13%
For Capital Adequacy Purposes 5,587 4.00 4,896 4.00
To be well capitalized 8,380 6.00 7,344 6.00
Tier 1 Capital (to Average Assets)
----------------------------------
Actual $25,685 11.25% $22,191 11.13%
For Capital Adequacy Purposes 9,134 4.00 7,977 4.00
To be well capitalized 11,418 5.00 9,971 5.00
- -32-
<PAGE>
17. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 6,972,224 $ 6,972,224 $ 6,300,777 $ 6,300,777
Federal funds sold 15,200,000 15,200,000 8,300,000 8,300,000
Securities available for sale 39,228,084 39,228,084 35,078,516 35,078,516
Securities held to maturity 27,549,053 28,341,531 23,398,480 23,966,533
Net loans 135,644,314 141,319,000 119,926,057 123,285,000
Loans held for sale 233,750 236,087 - -
Accrued interest receivable 1,629,508 1,629,508 1,633,451 1,633,451
------------ ------------ ------------ ------------
Total $226,456,933 $232,926,434 $194,637,281 $198,564,277
============ ============ ============ ============
Financial liabilities:
Deposits $192,078,681 $193,434,000 $163,808,634 $164,205,000
Short term borrowings 3,335,000 3,335,000 2,710,000 2,710,000
Federal Home Loan Bank advances 8,587,302 9,661,000 8,745,174 9,007,000
Accrued interest payable 369,174 369,174 283,995 283,995
------------ ------------ ------------ ------------
Total $204,370,157 $206,799,174 $175,547,803 $176,205,995
============ ============ ============ ============
</TABLE>
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 and liabilities such as deferred tax assets and liabilities,
premises and equipment and many other operational elements of the Company, are
not considered financial instruments, but have value, this estimated fair
value of financial instruments would not represent the full market value of
the Company.
The Company 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,
Short-Term Borrowings, and Accrued Interest Payable
The fair value approximates the current carrying value.
- -33-
<PAGE>
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 Federal Home Loan Bank Advances
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
advances 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 and Standby Letters of Credit
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of credit,
and the fair value, determined by discounting the remaining contractual fee
over the term of the commitment using fees currently charged to enter into
similar agreements with similar credit risk, are not considered material for
disclosure. The contractual amounts of unfunded commitments and letters of
credit are presented previously in the commitments and contingent liabilities
note.
18. Merger
The merger of Commercial and Savings Bank Company of Danville, Ohio, with and
into The Killbuck Savings Bank Company, with Killbuck Savings Bank being the
surviving bank was completed on November 21, 1998 using the purchase method of
accounting.
Each outstanding share of Commercial and Savings Bank Company was exchanged
for 2.1585 shares of Killbuck Bancshares, Inc. stock in a tax free exchange.
A total of 43,471 shares of Killbuck Bancshares, Inc. stock were issued to
shareholders of Commercial and Savings Bank Company, with cash being paid for
any fractional shares. Commercial and Savings Bank Company had total assets
of $15.6 million on the date of the merger and operated out of one location in
Danville, Ohio.
- -34-
<PAGE>
19. PARENT COMPANY
The following are parent only condensed financial statements:
CONDENSED BALANCE SHEET
December 31,
1998 1997
----------- -----------
ASSETS
Cash $ 16,709 $ 28,704
Investment in bank subsidiary 27,420,502 22,128,905
----------- -----------
Total assets $27,437,211 $22,157,609
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity $27,437,211 $22,157,609
----------- -----------
Total liabilities and
shareholders' equity $27,437,211 $22,157,609
=========== ===========
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
1998 1997 1996
---------- ---------- -----------
INCOME
Dividends from bank
subsidiary $ 718,950 $ 921,412 $ 836,791
Operating expenses 172 8,323 9,054
---------- ---------- ----------
Income before income
taxes 718,778 913,089 827,737
Income tax benefit (58) (2,830) (3,078)
---------- ---------- ----------
Income before equity in
undistributed net income
of subsidiary 718,836 915,919 830,815
Equity in undistributed net income of
subsidiary 2,197,125 2,089,543 1,916,166
---------- ---------- ----------
NET INCOME $2,915,961 $3,005,462 $2,746,981
========== ========== ==========
- -35-
<PAGE>
19. PARENT COMPANY (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
---------- ---------- ----------
OPERATING ACTIVITIES
Net income $2,915,961 $3,005,462 $2,746,981
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
net income of subsidiary (2,197,125) (2,089,543) (1,916,166)
Amortization - 8,109 8,848
Net cash provided by
operating activities 718,836 924,028 839,663
---------- ---------- ----------
FINANCING ACTIVITIES
Purchase of treasury shares - (312,430) (326,628)
Proceeds from sale of treasury
shares - - 5,570
Dividends paid including
fractional shares (730,831) (611,412) (507,792)
---------- ---------- ----------
Net cash used in
financing activities (730,831) (923,842) (828,850)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH (11,995) 186 10,813
CASH AT BEGINNING OF YEAR 28,704 28,518 17,705
---------- ---------- ----------
CASH AT END OF YEAR $ 16,709 $ 28,704 $ 28,518
========== ========== ==========
- -36-
<PAGE>
Killbuck Banchshares', Inc. Annual Report for the year ended December 31, 1998
filed with the Securities and Exchange Commission on Form 10-K, including
exhibits, is available without charge upon written request. For a copy of
the form 10-K or any other investor information, please contact our Investor
Relations officer at our Killbuck, Ohio office. The Annual Meeting of
Shareholders will be held on April 12, 1999 at 7:30 P.M. at the Killbuck office.
<PAGE>
EXHIBIT 24
Consent of Independent Auditors
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated January 26,
1999 relative to the consolidated balance sheet of Killbuck Bancshares, Inc.
as of December 31, 1998 and 1997, 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, 1998. Said report is included in the
1998 Annual Report to Shareholders of Killbuck Bancshares, Inc. (Exhibit 13 to
this Form 10-K).
/s/ S.R. Snodgrass, A.C.
Steubenville, Ohio
March 14, 1999
S.R. Snodgrass, A.C.
626 North Fourth Street
Steubenville, Ohio 43952
Phone: 740-282-2771
Facsimile: 740-282-1606
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,972
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,228
<INVESTMENTS-CARRYING> 27,549
<INVESTMENTS-MARKET> 28,342
<LOANS> 137,729
<ALLOWANCE> 1,851
<TOTAL-ASSETS> 231,994
<DEPOSITS> 192,079
<SHORT-TERM> 3,335
<LIABILITIES-OTHER> 556
<LONG-TERM> 8,587
0
0
<COMMON> 8,847
<OTHER-SE> 18,590
<TOTAL-LIABILITIES-AND-EQUITY> 231,994
<INTEREST-LOAN> 12,043
<INTEREST-INVEST> 3,341
<INTEREST-OTHER> 640
<INTEREST-TOTAL> 16,024
<INTEREST-DEPOSIT> 7,195
<INTEREST-EXPENSE> 7,892
<INTEREST-INCOME-NET> 8,132
<LOAN-LOSSES> 183
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,574
<INCOME-PRETAX> 3,933
<INCOME-PRE-EXTRAORDINARY> 3,933
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,916
<EPS-PRIMARY> 4.37
<EPS-DILUTED> 4.37
<YIELD-ACTUAL> 4.09
<LOANS-NON> 21
<LOANS-PAST> 155
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,745
<CHARGE-OFFS> 217
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 1,851
<ALLOWANCE-DOMESTIC> 1,851
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
KILLBUCK BANCSHARES, INC.
NOTICE OF ANNUAL MEETING
AND
PROXY STATEMENT
ANNUAL SHAREHOLDERS MEETING
APRIL 12, 1999
<PAGE>
KILLBUCK BANCSHARES, INC.
165 N. Main Street
Killbuck, OH 44637
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD
April 12, 1999
TO THE HOLDERS OF SHARES OF COMMON STOCK:
Notice is hereby given that the Annual Meeting of the Shareholders of
Killbuck Bancshares, Inc. (the "Corporation") will be held at the main office
of the Corporation, 165 N. Main Street, Killbuck, Ohio, on Monday, April 12,
1999, at 7:30 p.m. (local time), for the purpose of considering and voting
upon the following matters:
1. The election of three Directors (to be elected to Class A of the
Corporation's staggered Board of Directors) to serve a three-year term or
until their successors shall have been elected and qualified.
2. To transact such other business as may properly come before the meeting
or any adjournment thereof. The Board of Directors at present knows of no
other business to be presented by or on behalf of the Corporation.
Shareholders of record at the close of business on March 13, 1999, are
the only shareholders entitled to notice of and to vote at the Annual
Shareholders Meeting.
By order of the Board of Directors
Luther E. Proper
Luther E. Proper, President and Chief
Executive Officer
March 15, 1999
IMPORTANT
WHETHER YOU EXPECT TO ATTEND THE MEETING OR NOT, PLEASE MARK, SIGN, DATE,
AND RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED SELF-ADDRESSED ENVELOPE
AS PROMPTLY AS POSSIBLE. NO POSTAGE IS REQUIRED.
2
<PAGE>
KILLBUCK BANCSHARES, INC.
KILLBUCK, OHIO
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Killbuck Bancshares, Inc. (the "Corporation") of
proxies to be voted at the Annual Meeting of Shareholders to be held on
Monday, April 12, 1999, in accordance with the foregoing notice.
Killbuck Bancshares, Inc. is a registered bank holding company of which The
Killbuck Saving Bank Company (hereinafter collectively "Corporation") is its
principal subsidiary.
The solicitation of proxies on the enclosed form is made on behalf of the
Board of Directors of the Corporation. All costs associated with the
solicitation will be borne by the Corporation. The Corporation does not
intend to solicit proxies other than by use of the mails, but certain officers
and regular employees of the Corporation or its subsidiaries, without
additional compensation, may use their personal efforts, by telephone or
otherwise, to obtain proxies. The proxy materials are first being mailed to
shareholders on or about March 15, 1999.
Any shareholder executing a proxy has the right to revoke it by the
execution of a subsequently dated proxy, by written notice delivered to the
Secretary of the Corporation prior to the exercise of the proxy or in person
by voting at the meeting. The shares will be voted in accordance with the
direction of the shareholder as specified on the proxy. In the absence of
instructions, the proxy will be voted "FOR" the election of the three persons
listed in this Proxy Statement.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on March 13, 1999,
will be eligible to vote at the Annual Meeting or any adjournment thereof. As
of March 13, 1999, the Corporation had outstanding 705,331 shares of no par
value common stock. Shareholders are entitled to one vote for each share of
common stock owned as of the record date.
All Directors and Executive Officers of the Corporation as a group (comprised
of eleven individuals), beneficially held 56,619 shares of the Corporation's
common stock as of February 28, 1999, representing 8.03 percent of the
outstanding common stock of the Corporation.
3
<PAGE>
Principal Shareholders:
- -----------------------
To the Corporation's knowledge, except as noted below, no person or entity
owns beneficially, directly or indirectly, 5 percent or more of the
Corporation's common stock as of February 28, 1999.
Amount and Nature of % of
Name and Address of Beneficial Owner Beneficial Ownership Class
- ------------------------------------ -------------------- -----
The Holmes Limestone Co. 45,120 Shares 6.40%
P.O. Box 295
Berlin, Ohio 44610
PROPOSAL #1 ELECTION OF DIRECTORS AND INFORMATION
WITH RESPECT TO DIRECTORS AND OFFICERS
Classification System for the Election of Directors
The Corporation has a staggered system for the election of Directors.
Directors are divided into three classes as nearly equal in number as
possible. The Corporation has ten Directors, and they are elected to serve a
three-year term.
Information with Respect to Nominees
The following information is provided with respect to each Class A (term
to expire in 1999) nominee for Director and each present and continuing
Director whose term of office extends beyond the Annual Meeting of the
Corporation's Shareholders. Those nominees receiving the greatest number of
votes will be elected as Directors. There is no minimum number of votes
required to elect a Director.
Name and Age Principal Occupation During Director of the
- ------------ --------------------------- -----------------
Past Five Years Corporation Since
--------------- -----------------
John W. Baker County Commissioner 1992
(Age 54) (President, Burgett Insurance through
Term expires 1999 December 31, 1997)
Richard L. Fowler President, Mobile Homes of Ohio 1992
(Age 67)
Term expires 1999
Kenneth E. Taylor Farmer 1992
(Age 46)
Term expires 1999
THE DIRECTORS UNANIMOUSLY RECOMMEND A VOTE IN FAVOR OF THIS PROPOSAL #1.
4
<PAGE>
Information with respect to directors not standing for reelection
Name and Age Principal Occupation During Director of the
- ------------ --------------------------- -----------------
Past Five Years Corporation Since
--------------- -----------------
Robert D. Bell Chairman of the Board, Killbuck 1992
(Age 72) Bancshares, Inc. an The Killbuck
Term expires 2000 Savings Bank
Ted Bratton Farmer 1999
(Age 38)
Term expires 2001
Thomas D. Gindlesberger Attorney-at-Law 1992
(Age 72)
Term expires 2001
Allan R. Mast Co-Owner Holmes M&M Construction 1992
(Age 49)
Term expires 2000
Dean J. Mullet President, Mullet Cabinet 1992
(Age 46)
Term expires 2001
Luther E. Proper President and CEO, Killbuck Bancshares 1992
(Age 49) and The Killbuck Savings Bank Co.
Term expires 2000
Michael S. Yoder Owens-Brockway 1992
(Age 57)
Term expires 2001
The business experience of each of the above-listed nominees and
Directors during the past five years was that typical to a person engaged in
the principal occupation listed. Unless otherwise indicated, each of the
nominees and Directors has had the same position or another executive position
with the same employer during the past five years.
Shareholders desiring to nominate individuals to serve as Directors may
do so by following the procedure outlined in the Corporation's Code of
Regulations requiring advance notice to the Corporation of such nomination and
certain information regarding the proposed nominee.
5
<PAGE>
Security Ownership of Management
Shares of Corporation
Common Stock Percentage of
Owned Beneficially Beneficially Ownership
Name & Age of 2/28/99 as of 2/28/99
- ---------- ---------- -------------
John W. Baker(1) 530 .08%
Robert D. Bell (2) 2,865 .41%
Ted Bratton(3) 225 .03%
Richard L. Fowler (4) 7,328 1.04%
Thomas D. Gindlesberger 35,000 4.96%
Craig A. Lawhead (5) 1,480 .21%
Allan R. Mast (6) 1,970 .28%
Dean J. Mullet 130 .02%
Luther E. Proper 6,461 .92%
Kenneth E. Taylor 400 .06%
Michael S. Yoder 250 .04%
All directors and executive
officers as a group
(11 persons) 56,639 8.03%
(1) 424 shares owned individually, 106 shares owned by son.
(2) 2,500 shares owned individually, 365 shares in spouse's name.
(3) 118 shares owned individually, 107 shares owned jointly with spouse.
(4) 3,683 shares owned individually, 3,645 shares owned jointly with
spouse.
(5) 625 shares owned individually, 835 shares owned jointly with spouse,
20 shares in minor daughter's name.
(6) 375 shares owned individually, 895 shares owned jointly with spouse,
700 shares owned in name of Holmes M & M Construction.
Committees and Compensation of the Board of Directors
Committees
----------
The Board of Directors conducts its business through meetings of the
Board and through its committees. In accordance with the Code of Regulations
of the Corporation, the Board of Directors has appointed and maintains an
Audit Committee, Executive Committee, Investment Committee, Securities
Committee and Loan Committee.
The Corporation's nominating function is performed by the Board of
Directors acting as a committee of the whole. In conducting its nominating
function, the Board of Directors of the Corporation is responsible for making
annual nominations for Directors to fill vacancies created by expired terms of
Directors and from time to time, making appointments to fill vacancies created
prior to the expiration of a Director's term. During 1998, the Board met once
to consider and act upon the nomination of Directors.
6
<PAGE>
The Audit Committee reviews with the Corporation's independent auditors,
the audit plan, the scope and results of their audit engagement and the
accompanying management letter, if any; reviews the scope and results of the
Corporation's internal auditing procedures; consults with the independent
auditors and management with regard to the Corporation's accounting methods
and the adequacy of its internal accounting controls; approves professional
services provided by the independent auditors; reviews the independence of the
independent auditors; and reviews the range of the independent auditors' audit
and nonaudit fees. The Audit Committee is composed of Messrs. Baker, Mast,
Taylor and Yoder (Chairman). The Audit Committee met 4 times during 1998.
The Executive Committee is responsible for administering the
Corporation's employee benefit plans; setting the compensation of the
President and Chief Executive Officer; reviewing the criteria that form the
basis for management's officer and employee compensation recommendations and
reviewing management's recommendations in this regard. The Executive
Committee is composed of Messrs. Baker, Bell, Gindlesberger, and Mast
(Chairman). The Executive Committee met 12 times during 1998.
The Investment Committee is responsible for reviewing the securities
portfolio of the Corporation. The Corporation's Securities Committee reviews
and makes recommendations to the full Board on matters affecting the market
for the Corporation's common stock and the Corporation's dividend policy.
The Loan Committee reviews loan policy matters and approves loan requests
as required by internal policy.
The Board of Directors of the Corporation meets bi-monthly for its
regular meetings and upon call for special meetings. During 1998, the Board
met 24 times. All Directors of the Corporation attended at least 75 percent
of the Board and Committee Meetings that they were scheduled to attend during
1998.
Director Compensation
- ---------------------
Directors of the Corporation and its subsidiary, The Killbuck Savings Bank
Company, received an annual retainer of $6,000 during 1998. The Chairman of
the Board received an annual retainer of $8,400. Effective January 1, 1999,
the fee stayed the same. In addition, committee members receive $150 per
committee meeting attended.
7
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation
The following remuneration table sets forth all direct remuneration paid
by the Bank in 1998, 1997 and 1996 to the Corporation's President and Chief
Executive Officer. No other Officers' total compensation exceeded $100,000
for the year ended 1998.
Summary Compensation Table
Annual Compensation
-------------------
All Other
Name and Principal Position Year Salary Bonus Compensation
Mr. Luther E. Proper 1998 $110,000 $22,844 $7,717
President and Chief
Executive Officer 1997 $102,500 $22,597 $7,990
1996 $ 95,000 $21,743 $8,161
Report of the Executive Committee of Killbuck Bancshares, Inc. on Compensation
Under rules established by the Securities and Exchange Commission (the
"SEC"), the Corporation is required to provide certain data and information in
regard to the compensation and benefits provided to the Corporation's
President and Chief Executive Officer and, if applicable, the four other most
highly compensated Executive Officers, whose compensation exceeded $100,000
during the Corporation's fiscal year. The disclosure requirements, as applied
to the Corporation, include only the Corporation's President and Chief
Executive Officer Mr. Luther E. Proper. The disclosure includes the use of
tables 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 Executive Committee of the Corporation 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 Executive Committee has prepared the following report for
inclusion in this Proxy Statement.
Compensation Philosophy.
----------------------- This report reflects the Corporation's
compensation philosophy as endorsed by the Executive Committee. The Executive
Committee makes a recommendation regarding the level of compensation for Mr.
Proper. The Executive 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 the Corporation has
been designed to:
- - Support a pay-for-performance policy that awards Executive Officers for
corporate performance.
8
<PAGE>
- - 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 the Corporation to compete for and
retain talented executives who are critical to the Corporation's long-term
success.
Salaries.
-------- Effective January 1, 1998, the Executive 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
Executive Committee's assessment of the performance of such executives over
the intervening year and recognition of the Corporation's performance during
1997. In addition, the Executive Committee approved compensation increases
for all other Executive Officers of the Corporation. Executive Officer salary
increase determinations are based upon an evaluation of such executives'
performance against goals set in the prior year.
Cash Bonus Plan.
--------------- The Corporation maintains a cash bonus plan (the "Bonus
Plan") which allocates a portion of the Corporation'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 Executive Committee, and in all other cases is
determined by the Executive Committee upon recommendation of management.
The Executive 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 the Corporation. The
Executive Committee believes that it is important to reward executive
management based upon the success of the Corporation.
This Report on Compensation is submitted by the Executive Committee Members:
John Baker, Robert Bell, Thomas Gindlesberger, Allan Mast,
Executive Committee Interlocks and Insider Participation
Mr. Luther E. Proper, the Corporation's President and Chief Executive
Officer served as an Ex Officio member of the Executive Committee of the
Corporation, which is responsible for compensation matters (see "Report of the
Executive Committee of Killbuck Bancshares, Inc. on Compensation" in this
Proxy Statement).
Although Mr. Proper attends meetings of the Executive Committee as an Ex
Officio member, he did not attend those portions of meetings, nor participate
in any decisions, regarding his own compensation as an Executive Officer.
9
<PAGE>
Performance Graph - Five-Year Shareholder Return Comparison
The SEC requires that the Corporation 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 the
Corporation. The Corporation 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, 1993, in the Corporation's stock, the Dow Jones Equity Market Index and
the Dow Jones Regional Bank Index.
(line graph belongs here)
<TABLE>
<CAPTION>
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
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Killbuck Bancshares, Inc. $100.00 $115.63 $161.96 $234.09 $347.86 $472.65
Dow Jones Equity Market Index $100.00 $100.74 $138.69 $170.63 $228.57 $294.05
Dow Jones Regional Bank Index $100.00 $ 96.24 $153.91 $211.43 $320.28 $371.17
</TABLE>
ASSUMES $100 INVESTED ON JANUARY 1, 1994
IN KILLBUCK BANCSHARES, INC. COMMON STOCK,
DOW JONES EQUITY MARKET INDEX & DOW JONES MAJOR
REGIONAL BANK INDEX
* TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
10
<PAGE>
Certain Relationships and Related Transactions
Directors of the Corporation and their associates were customers of, and
have had transactions with, the Corporation in the ordinary course of business
during 1998.
These transactions consisted of extensions of credit by the Corporation
in the ordinary course of business and were made on substantially the same
terms as those prevailing at the time for comparable transactions with other
persons. In the opinion of the management of the Corporation, those
transactions do not involve more than a normal risk of being collectible or
present other unfavorable features. The Corporation expects to have, in the
future, banking transactions in the ordinary course of its business with
Directors and their associates on the same terms, including interest rates and
collateral on loans, as those prevailing at the time of comparable
transactions with others.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's officers and Directors, and persons who own more than ten
percent of a registered class of the Corporation's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Corporation with copies of all
Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Corporation or written representations that no Form 5s were required, the
Corporation believes that during 1998 all Section 16(a) filing requirements
applicable to its officers and Directors were complied with, except for the
late reporting a single transaction on a Form 4 by Mr. Proper. The
Corporation has no shareholders who are ten percent beneficial owners.
Selection of Auditors
S. R. Snodgrass, A.C. has been appointed to serve as the Independent
Auditor for the Corporation and its subsidiary for the fiscal year ended
December 31, 1998. It is the intention of the Corporation to appoint S. R.
Snodgrass, A.C. as Independent Auditor for 1999. Representatives of S. R.
Snodgrass, A.C. are expected to be present at the Annual Meeting to respond
to appropriate questions from shareholders and to have the opportunity to make
any statements they consider appropriate.
Shareholder Proposals
If any stockholder of the Corporation wishes to submit a proposal to be
included in next year's Proxy Statement and acted upon at the annual meeting
of the Corporation to be held in 2000, the proposal must be received by the
Secretary of the Corporation at the principal executive offices of the
Corporation, , 165 N. Main Street, Killbuck, Ohio 44637, prior to the close of
business on November 17, 1999. On any other proposal raised by a stockholder
for next
11
<PAGE>
year's annual meeting, the Corporation intends that proxies received by it
will be voted in the interest of the Corporation in accordance with the
judgment of the persons named in the proxy and the proposal will be considered
untimely, unless notice of the proposal is received by the Corporation not
later than January 30, 2000.
The Corporation's Code of Regulations establish advance notice procedures
as to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors. In order to make a
director nomination at a stockholder meeting, it is necessary that you notify
the Corporation: (i) with respect to an election to be held at an annual
meeting of Shareholders, not fewer than 45 days in advance of the
corresponding date for the date of the preceding year's annual meeting of
Shareholders, and (ii) with respect to an election to be held at a special
meeting of Shareholders for the election of Directors, the close of business
on the seventh day following the date on which notice of such meeting is first
given to Shareholders. Therefore a shareholder desiring to make a nomination
for consideration at the annual meeting of the Corporation in 2000 must
provide notice of such nominee to the Corporation not later than January 30,
2000. In addition, the notice must meet all other requirements contained in
the Corporation's Code of Regulations. Any stockholder who wishes to take
such action should obtain a copy of the Code of Regulations and may do so by
written request addressed to the Secretary of the Corporation at the principal
executive offices of the Corporation.
Other Matters
The Board of Directors of the Corporation is not aware of any other
matters that may come before the meeting. However, the enclosed Proxy will
confer discretionary authority with respect to matters which are not known to
the Board of Directors at the time of printing hereof and which may properly
come before the meeting. A copy of the Corporation's 1998 report filed with
the Securities and Exchange Commission, on Form 10-K, will be available
without charge to shareholders on request. Address all requests, in writing,
for this document to: Mr. Luther E. Proper, President & CEO, Killbuck
Bancshares, Inc., 165 N. Main Street, Killbuck, Ohio 44637.
12
<PAGE>
KILLBUCK BANCSHARES, INC.
165 N. Main Street, Killbuck, Ohio 44637
PROXY
PLEASE SIGN AND RETURN IMMEDIATELY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS APRIL 12, 1999
The undersigned hereby appoints Robert D. Bell, Allan R. Mast and Luther
E. Proper, 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 March 13, 1999, at the stockholders
meeting, to be held at The Killbuck Savings Bank Company, 165 N. Main Street,
Killbuck, Ohio on April 12, 1999 at 7:30 p.m. (local time), or any
adjournments thereof, upon all matters as set forth in the Notice of Annual
Meeting and Proxy Statement, receipt of which is hereby acknowledged.
1. ELECTION OF THREE DIRECTORS TO CLASS A
The Board of Directors recommends a vote for the election of directors.
Nominees: John W. Baker, Richard L. Fowler and Kenneth E. Taylor
For All the Nominees Withholding Authority for All the Nominees
[ ] [ ]
(To withhold authority to vote for any one or more nominees, draw a line
through such nominee's name.)
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR AN ADJOURNMENT THEREOF.
This proxy will be voted as directed above, and if no direction is given, will
be voted FOR PROPOSAL 1.
Dated: , 1999
--------------- --------------------------------------------
--------------------------------------------
Signatures of stockholder(s)
This proxy must be signed exactly as the name appears hereon.
(When signing as Attorney, Executor, Administrator, Trustee, Guardian,
please give full title. If more than one Trustee, all should sign.
All joint owners must sign.)
