UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1999
[ ] 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
(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, 1999 was $54,129,446.00
(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 705,240 shares of no par value common stock outstanding as of March
11, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the Year ended December
31, 1999. (Part II, III and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Shareholders to
be held on April 10, 2000 for the Year ended December 31, 1999. (Part
III)
1
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FORM 10-K INDEX
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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
2
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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.
3
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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 national
ATM network with thousands of locations nationwide. Neither the Company nor
the Bank have any foreign operations, assets, investments or deposits.
The Company has one wholly-owned subsidiary, The Killbuck Savings Bank
Company. The Bank has seven full service offices, with five in Holmes County,
one in Knox County and one in Tuscarawas County. The new full service branch
facility in Sugarcreek, Ohio in Tuscarawas County opened in February, 2000.
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,
1999, the Company and its subsidiary had consolidated total assets of
$243,149,880, and consolidated total equity of $28,916,718. 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, 1999 to 975
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, 1999, the Bank had 80 full-time and 25 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.
4
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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, 1999 (the most recent date for which information is available) the
Commercial and Savings Bank, Millersburg had the largest market share with
$214 million in total deposits as of such date, representing a market share of
46.74%. The Bank had the second largest market share with deposits of $177
million as of such date, representing a market share of 38.56%. Commercial
and Savings Bank had total assets as of December 31, 1999, of $326 million
compared to the Bank's total assets of $243 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.
5
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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, 1999, 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.
6
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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.
FINANCIAL SERVICES MODERNIZATION ACT OF 1999
- --------------------------------------------
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (better known as the Financial Services Modernization Act of 1999) which
will, effective March 11, 2000, permit bank holding companies to become
financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in
nature. A bank holding company may become a financial holding company if each
of its subsidiary banks is well capitalized under the Federal Deposit
Insurance Corporation Act of 1991 prompt corrective action provisions, is well
managed, and has at least a satisfactory rating under the Community
Reinvestment Act by filing a declaration that the bank holding company wishes
to become a financial holding company. No regulatory approval will be
required for a financial holding company to acquire a company, other than a
bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature"
to include:
securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies;
insurance underwriting and agency;
merchant banking activities;
and activities that the Federal Reserve Board has determined to be
closely related to banking.
In addition, a financial holding company may not acquire a company that is
engaged in activities that are financial in nature unless each of the
subsidiary banks of the financial holding company has a Community Reinvestment
Act rating of satisfactory or better.
The specific effects of the enactment of the Financial Services Modernization
Act on the banking industry in general and on the Company and the Bank in
particular have yet to be determined due to the fact that the Financial
Services Modernization Act was only recently adopted.
The United States Congress has periodically considered and adopted
legislation, such as the Gramm-Leach-Bliley Act, 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 Bank or the
Company
7
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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.
8
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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), one in Knox County
(2), and one in Tuscarawas County (3). The new full service branch facility
in Sugarcreek, Ohio opened in February, 2000. The Bank's total investment in
office property and equipment was $6.8 million with a net book value $3.9
million at December 31, 1999. 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 Branch (1) Millersburg South Branch (1) Danville Branch (2)
181 N. Washington Street 1642 S. Washington Street 701 S. Market Street
Millersburg, Ohio 44654 Millersburg, Ohio 44654 Danville, Ohio 43014
Sugarcreek Branch (3)
1035 W. Main Street
Sugarcreek, Ohio 44681
ITEM 3. LEGAL PROCEEDINGS
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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 STOCKHOLDERS MATTERS
- ----------------------------------------------------------------------------
As of December 31, 1999, the Company had 975 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 1999 and 1998, 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
- ------------------ -------- --------- ---------
1999 March 31 $92.88 $92.03 N/A
June 30 94.47 93.48 .60
September 30 94.87 93.62 N/A
December 31 96.33 96.12 .65
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
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 of the
Annual Report to Shareholders of Killbuck Bancshares, Inc. for the year ended
December 31, 1999, included in this report as Exhibit 13 and 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. For a discussion on
subsidiary dividends see Note 15 to the audited Consolidated Financial
Statements of the Annual Report to Shareholders of Killbuck Bancshares, Inc.
for the year ended December 31, 1999, included in this report as Exhibit 13
and 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 of the Annual Report to Shareholders Of Killbuck
Bancshares, Inc. for the year ended December 31, 1999, 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 of the Annual Report to Shareholders of Killbuck Bancshares, Inc.
for the year ended December 31, 1999, 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,
-------------------------------------
1999 1998 1997
--------- --------- ---------
Securities available for sale:
U.S. Treasury securities $ 3,000 $ 9,372 $ 9,802
Obligations of U.S. Government
Agencies and Corporations 38,150 28,755 24,233
Equity securities 1,161 1,101 1,044
--------- --------- ---------
Total available for sale 42,311 39,228 35,079
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Securities held to maturity:
Obligations of States and
Political subdivisions 32,797 25,909 23,298
Corporate securities 1,628 1,640 100
--------- --------- ---------
Total held to maturity 34,425 27,549 23,398
--------- --------- ---------
Total $ 76,736 $ 66,777 $ 58,477
========= ========= =========
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MATURITY SCHEDULE OF INVESTMENTS
The following table presents the investment portfolio, the weighted average
yield and maturities at December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
After three After one After five
months but year but but
Within three month 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>
Available for Sale (1)
U.S. Treasury
securities $2,800 5.73% $ 200 5.39% $ - - % $ - - % $ - -% $ 3,000
Obligations of U.S.
Government Agencies
and Corporations 1,300 6.91 1,188 5.17 26,770 5.92 8,892 6.73 - - 38,150
Equity securities(2) - - - - - - - - 1,161 6.57 1,161
------ ----- ------ ----- ------- ----- ------- ----- ------ ----- -------
Total $4,100 6.10% $1,388 5.20% $26,770 5.92% $ 8,892 6.73% $1,161 6.57% $42,311
====== ===== ====== ===== ======= ===== ======= ===== ====== ===== =======
Held to Maturity
Obligations of States
and Political
subdivisions (3) $ - -% $1,532 4.94% $ 9,841 4.88% $16,371 4.67% $5,053 4.63% $32,797
Corporate bonds - - - - 552 5.36 720 5.98 356 6.15 1,628
------ ----- ------ ----- ------- ----- ------- ----- ------ ----- ------
Total $ - - % $1,532 4.94% $10,393 4.91% $17,091 4.73% $5,409 4.73% $34,425
====== ===== ====== ===== ======= ===== ======= ===== ====== ===== ======
</TABLE>
(1) The weighted average yield has been computed using the historical
amortized cost for available for sale securities.
(2) Equity securities which have no stated maturity, are comprised of common
stock of the Federal Home Loan Bank, Federal Reserve Bank and the
Independent State Bank of Ohio.
(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,
1999.
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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,
1999 1998 1997 1996 1995
--------------------- --------------------- --------------------- --------------------- ---------------------
% of % of % of % of % of
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
-------- ----------- -------- ----------- -------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-
residential $ 48,960 34.0 % $ 49,226 35.7 % $ 41,473 34.0 % $ 39,820 34.2 % $ 38,264 35.7 %
Real estate-farm 4,380 3.0 4,376 3.2 3,847 3.1 4,589 3.9 4,578 4.3
Real estate-
commercial 23,718 16.5 22,713 16.4 21,205 17.4 18,088 15.6 18,286 17.0
Real estate-
construction 1,397 1.0 1,238 .9 783 .6 1,947 1.7 345 .3
Commercial and
other 37,767 26.3 37,753 27.4 33,745 27.7 34,036 29.3 28,008 26.1
Consumer and
credit card 27,555 19.2 22,585 16.4 20,981 17.2 17,779 15.3 17,774 16.6
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
$ 143,777 100.00 % $ 137,891 100.00 % $ 122,034 100.00 % $ 116,259 100.00 % $ 107,255 100.00 %
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
</TABLE>
13
<PAGE>
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 repayment of principal resulting from economic problems of the
commercial customer, economic downturn effecting the market in general and in
the case of secured loans inadequate collateral. Consumer and credit card
loans comprise the next largest area of the Bank's loan portfolio. These
loans include consumer installment, including automobile loans as well as
personal and credit card loans. The risks inherent in these loans include
the risk of default in principal repayment and in the case of secured loans,
the risk of inadequate collateral. Real estate commercial loans represent
the next largest category and include development loans as well as investment
commercial real estate 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.
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, 1999 (dollars in thousands):
After 1 Year
Within Within
1 Year 5 Years After 5 Years Total
-------- ------------ ------------- --------
Real estate - commercial $ 274 $ 1,541 $ 21,903 $ 23,718
Real estate - construction 1,397 - - 1,397
Commercial and other 19,700 13,262 4,805 37,767
-------- ---------- ---------- --------
$ 21,371 $ 14,803 $ 26,708 $ 62,882
======== ========== ========== ========
Fixed interest rates $ 5,942 $ 7,174 $ 1,770 $ 14,886
Variable interest rates 15,429 7,629 24,938 47,996
-------- ---------- ---------- --------
$ 21,371 $ 14,803 $ 26,708 $ 62,882
======== ========== ========== ========
14
<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. At
December 31, 1999 the majority (85.95%) of the non accrual loans is comprised
of three loans. One is a commercial loan for $110,000 and the other two are
commercial real estate loans for $85,303 and $51,359 respectively. The
commercial loan is secured by a certificate of deposit for $50,000 and
residential real estate with approximately $185,000 worth of equity. The two
commercial real estate loans are secured by commercial real estate appraised
for $110,000 and $65,000 respectively. The following table 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,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual basis $ 287 $ 21 $ 121 $ 31 $ 62
Loans past due 90 days or more 312 155 75 122 7
Renegotiated loans - - - - -
------ ------ ------ ------ ------
Total nonperforming loans 599 176 196 153 69
Other real estate - 73 - - -
Repossessed assets - - - - -
------ ------ ------ ------ ------
Total nonperforming assets $ 599 $ 249 $ 196 $ 153 $ 69
====== ====== ====== ====== ======
Nonperforming loans as a percent of total loans .42% .13% .16% .13% .06%
====== ====== ====== ====== ======
Nonperforming loans as a percent of total assets .25% .08% .10% .08% .04%
====== ====== ====== ====== ======
Nonperforming assets as a percent of total assets .25% .11% .10% .08% .04%
====== ====== ====== ====== ======
</TABLE>
The amount of interest income that would have been recognized had the loans
performed in accordance with their original terms was approximately $19,969
and the amount of interest income that was recognized was $-0- for the year
ended December 31, 1999.
There are no loans as of December 31, 1999, 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.
15
<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,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year $ 1,851 $ 1,745 $ 1,653 $ 1,545 $ 1,378
Provision charged to expense 240 183 180 180 180
Charge-offs:
Real estate-residential 0 1 0 0 31
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 171 35 20 12 7
Consumer and credit card 113 181 170 99 81
-------- -------- -------- -------- --------
Total charge-offs 284 217 190 111 119
-------- -------- -------- -------- --------
Recoveries:
Real estate-residential 0 0 0 0 0
Real estate-farm 0 0 0 0 0
Real estate-commercial 0 0 0 0 1
Real estate-construction 0 0 0 0 0
Commercial and other 13 7 7 17 27
Consumer and credit card 67 40 95 22 78
-------- -------- -------- -------- --------
Total recoveries 80 47 102 39 106
-------- -------- -------- -------- --------
Net charge-offs 204 170 88 72 13
Business acquisition 0 93 0 0 0
-------- -------- -------- -------- --------
Allowance for loan losses at end of period $ 1,887 $ 1,851 $ 1,745 $ 1,653 1,545
======== ======== ======== ======== ========
Total loans outstanding $143,777 $137,891 $122,034 $116,259 $107,255
======== ======== ======== ======== ========
Average loans outstanding $140,202 $127,214 $119,552 $112,005 $106,307
======== ======== ======== ======== ========
Allowance for loan losses as a percent of total loans 1.31% 1.34% 1.43% 1.42% 1.44%
Net charge-offs as a percent of average loans .15% .13% .07% .06% .01%
</TABLE>
16
<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, 1999, 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 for
the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------------ ------------------- ------------------ ------------------ ------------------
% % % % %
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 $ 412 34.0% $ 467 35.7% $ 402 34.0% $ 360 34.2% $ 328 35.7%
Real estate-farm 21 3.0 28 3.2 35 3.1 38 3.9 38 4.3
Real estate-
commercial 321 16.5 257 16.4 273 17.4 229 15.6 198 17.0
Real estate-
construction 10 1.0 11 .9 6 .6 15 1.7 3 .3
Commercial and
other loans 646 26.3 762 27.4 568 27.7 574 29.3 640 26.1
Consumer and
credit loans 477 19.2 326 16.4 342 17.2 341 15.3 269 16.6
Unallocated 0 N/A 0 N/A 119 N/A 96 N/A 69 N/A
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
$ 1,887 100.0% $ 1,851 100.0% $ 1,745 100.0% $ 1,653 100.0% $ 1,545 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
17
<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 1.51% 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, 1999, 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.
18
<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 1.56% and a 2% immediate
decrease in interest rates would decrease earnings by 1.54%.
The data included in the table that follows indicates that the Bank is
liability sensitive within one year. Generally, a liability sensitive gap
indicates that declining interest rates could positively affect net interest
income as expense of liabilities would decrease more rapidly than interest
income would decline. Conversely, rising rates could negatively affect net
interest income as income from assets would increase less rapidly than
deposit costs. During times of rising interest rates, an asset sensitive gap
could positively affect net interest income as rates would be increased on a
larger volume of assets as compared to deposits. As a result, interest
income would increase more rapidly than interest expense. An asset sensitive
gap could negatively affect net interest income in an environment of
decreasing interest rates as a greater amount of interest bearing assets
could be repricing at lower rates. Although rate sensitivity analysis
enables the Bank to minimize interest rate risk, the magnitude of rate
increases or decreases on assets versus liabilities may not correlate
directly. As a result, fluctuations in interest spreads can occur even when
repricing capabilities are perfectly matched.
It is the policy of the Bank to generally maintain a gap 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 1999, 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 2000 will
include improving the Bank's rate sensitivity gap. As noted above, at
December 31, 1999 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 2000.
19
<PAGE>
Changes in market interest rates can also affect the Bank's liquidity
position through the impact rate changes may have on the market value of the
Bank's investment portfolio. 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 as of December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAPS
(IN THOUSANDS)
2000 2001 2002 2003 2004 Thereafter Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans:
Fixed $ 9,738 $ 3,108 $ 5,727 $ 8,688 $ 5,792 $ 22,627 $ 55,680
Variable 88,097 - - - - - 88,097
Securities:
Fixed 7,020 7,144 8,290 10,059 11,670 32,553 76,736
Variable - - - - - - -
Other interest-earning assets 9,056 - - - - - 9,056
--------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets 113,911 10,252 14,017 18,747 17,462 55,180 229,569
--------- --------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Demand and savings deposits 66,500 - - - - - 66,500
Time deposits:
Fixed 87,939 6,998 2,737 2,117 1,662 3,848 105,301
Variable 817 186 - - - - 1,003
Short-term borrowings 4,900 - - - - - 4,900
FHLB advances - - - - - 7,113 7,113
--------- --------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 160,156 7,184 2,737 2,117 1,662 10,961 184,817
--------- --------- --------- --------- --------- --------- ---------
Interest rate sensitivity gap (46,245) 3,068 11,280 16,630 15,800 44,219
--------- --------- --------- --------- --------- ---------
Cumulative rate sensitivity gap $ (46,245) $ (43,177) $ (31,897) $ (15,267) $ 533 $ 44,752
========= ========= ========= ========= ========= =========
Cumulative interest rate
sensitivity gap
as a percent of interest
earning assets (20.14)% (18.81)% (13.89)% (6.65)% .23% 19.49%
========= ========= ========= ========= ========= =========
</TABLE>
20
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
- --------------------------------------------------
The report of independent auditors and consolidated financial statements
included in the Annual Report to shareholders of Killbuck Bancshares, Inc.
for the year ended December 31, 1999, included in this report as Exhibit 13,
are incorporated herein by reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS 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, 1999. 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 42 Vice president and treasurer of Company
since 1992; Executive vice president of
bank since 1990.
John D. Boley 39 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.
21
<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 included in the Annual Report to
Shareholders for the year ended December 31, 1999, 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, 1999, are incorporated by reference in item 8.:
Report of Independent Auditors'
Consolidated Balance Sheet at December 31, 1999 and 1998
Consolidated Statement of Income for the Years ended December 31, 1999,
1998 and 1997
Consolidated Statement of Changes in Shareholders' Equity for the Years ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the Years ended December 31, 1999,
1998 and 1997
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 1999.
22
<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 Commercial and Savings Bank
Company*
12 Statement regarding computation of ratios.
13 Portions of the 1999 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 13, 2000 for the Annual Shareholders
meeting to be held April 10, 2000.**
*Incorporated by reference to an identically numbered exhibit to the Form 10
(File No. 000-24147) filed with SEC on April 30, 1998 and subsequently
amended on July 8, 1998 and July 31, 1998.
**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.
23
<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: /s/ 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, 2000
- ------------------------ Officer and Director
Luther E. Proper
/s/ John W. Baker Director March 13, 2000
- ------------------------
John W. Baker
/s/ Robert D. Bell Director March 13, 2000
- ------------------------
Robert D. Bell
/s/ Ted Bratton Director March 13, 2000
- ------------------------
Ted Bratton
/s/ Richard L. Fowler Director March 13, 2000
- ------------------------
Richard L. Fowler
/s/ Thomas D. Gindlesberger Director March 13, 2000
- ------------------------
Thomas D. Gindlesberger
/s/ Allan R. Mast Director March 13, 2000
- ------------------------
Allan R. Mast
/s/ Dean J. Mullet Director March 13, 2000
- ------------------------
Dean J. Mullet
/s/ Kenneth F. Taylor Director March 13, 2000
- ------------------------
Kenneth F. Taylor
/s/ Michael S. Yoder Director March 13, 2000
- ------------------------
Michael S. Yoder
24
<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, 1999, 1998, 1997, 1996 and
1995, 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,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net income $ 3,018,327 $ 2,915,961 $ 3,005,462 $ 2,746,981 $ 2,626,728
Weighted Average
Shares Outstanding 705,331 666,779 665,215 669,465 675,000
Per Share Amount $ 4.28 $ 4.37 $ 4.52 $4.10 $ 3.89
</TABLE>
Cash dividends/Average
Shares Outstanding =
Cash dividends declared
Per share
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash dividends $ 881,664 $ 718,882 $ 611,412 $ 507,792 $ 438,750
Average shares outstanding 705,331 684,650 664,578 668,147 675,000
Per Share Amount $ 1.25 $ 1.05 $ .92 $ .76 $ .65
</TABLE>
Shareholders' Equity/Shares
Outstanding at period end =
Book Value per share
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Shareholders' Equity $28,916,718 $27,437,211 $22,157,609 $19,933,740 $18,265,569
Shares outstanding 705,331 705,331 661,900 667,500 675,000
Per Share Amount $41.00 $38.90 $33.48 $29.86 $27.06
</TABLE>
<PAGE>
Net Income/Average
Assets = Return on
Average Assets
<TABLE>
<CAPTION>
(In Thousands)
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Income $ 3,018 $ 2,916 $ 3,005 $ 2,747 $ 2,627
Average Assets $234,279 $208,565 $193,923 $175,807 $158,199
Return on Average Assets 1.29% 1.40% 1.55% 1.56% 1.66%
</TABLE>
Net Income/Average
Shareholders' equity =
Return on Average Equity
<TABLE>
<CAPTION>
(In Thousands)
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Income $ 3,018 $ 2,916 $ 3,005 $ 2,747 $ 2,627
Average
Shareholders' Equity $ 28,238 $ 23,615 $ 21,067 $ 18,858 $ 17,286
Return on Average Equity 10.69% 12.35% 14.26% 14.57% 15.20%
</TABLE>
Cash dividends per share/
Net income per share =
Dividends Payout Ratio
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash dividends per share $ 1.25 $ 1.05 $ .92 $ .76 $ .65
Net income per share $ 4.28 $ 4.37 $ 4.52 $ 4.10 $ 3.89
Dividend Payout Ratio 29.21% 24.03% 20.35% 18.54% 16.71%
</TABLE>
<PAGE>
Average Equity/Average
Assets = Average Equity
To Average Assets
<TABLE>
<CAPTION>
(In Thousands)
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Average
Shareholders' Equity $ 28,238 $ 23,615 $ 21,067 $ 18,858 $ 17,286
Average Assets $234,279 $208,565 $193,923 $175,807 $158,199
Average Equity to
Average Assets 12.05% 11.32% 10.86% 10.73% 10.93%
</TABLE>
Loans/Total deposits =
Loan to Deposit Ratio
<TABLE>
<CAPTION>
(In Thousands)
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total loans $143,777 $137,891 $122,034 $116,259 $107,255
Total deposits $201,738 $192,079 $163,809 $157,399 $150,413
Loan to Deposit Ratio 71.27% 71.79% 74.50% 73.86% 71.31%
</TABLE>
Allowance for Loan Loss/
Total Loan = Allowance
To Total Loan Ratio
<TABLE>
<CAPTION>
(In Thousands)
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Allowance $ 1,888 $ 1,851 $ 1,745 $ 1,653 $ 1,545
Total loans $143,777 $137,891 $122,034 $116,259 $107,255
Allowance to total
Loan ratio 1.31% 1.34% 1.43% 1.42% 1.44%
</TABLE>
<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 consumer loans. The Bank also makes secured and unsecured
commercial loans.
STOCK MARKET INFORMATION
There is no established public trading market for our common stock and our
shares are not listed on any exchange. Sale price information is based on
information reported to us by individual buyers and sellers of our stock. The
following table summarizes the high and low prices and dividend information
for 1999 and 1998, 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
- ----------------- ------- ------- ---------
1999 March 31 $ 92.88 $ 92.03 N/A
June 30 94.47 93.48 .60
September 30 94.87 93.62 N/A
December 31 96.33 96.12 .65
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
At December 31, 1999 the Company had approximately 975 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,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
For The Year:
Total interest income $ 17,069 $ 16,024 $ 15,224 $ 13,982 $ 12,811
Total interest expense 8,201 7,892 7,344 6,626 5,816
---------- ---------- ---------- ---------- ----------
Net interest income 8,868 8,132 7,880 7,356 6,995
Provision for loan losses 240 183 180 180 180
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 8,628 7,949 7,700 7,176 6,815
Total other income 646 558 449 439 411
Total other expense 5,319 4,574 4,036 3,799 3,610
---------- ---------- ---------- ---------- ----------
Income before
income taxes 3,955 3,933 4,113 3,816 3,616
Income tax expense 937 1,017 1,108 1,069 989
---------- ---------- ---------- ---------- ----------
Net income $ 3,018 $ 2,916 $ 3,005 $ 2,747 $ 2,627
========== ========== ========== ========== ==========
Per share data
Net earnings (1) $ 4.28 $ 4.37 $ 4.52 $ 4.10 $ 3.89
Dividends (1) $ 1.25 $ 1.05 $ 0.92 $ 0.76 $ 0.65
Book value (at period end)(1) $41.00 $38.90 $33.48 $29.86 $27.06
Average no. of shares outstanding (1) 705,331 666,779 665,215 669,465 675,000
Year-end balances:
Total loans $ 143,777 $ 137,891 $ 122,034 $ 116,259 $ 107,255
Securities 76,736 66,777 58,477 51,208 42,171
Total assets 243,150 231,994 197,909 182,692 172,522
Deposits 201,738 192,079 163,809 157,399 150,413
Borrowings 12,013 11,922 11,455 4,815 3,329
Shareholders' equity 28,917 27,437 22,158 19,934 18,266
Significant ratios:
Return on average assets 1.29% 1.40% 1.55% 1.56% 1.66%
Return on average equity 10.69 12.35 14.26 14.57 15.20
Dividends per share to net
income per share 29.21 24.03 20.35 18.54 16.71
Average equity to
average assets 12.05 11.32 10.86 10.73 10.93
Loans to deposits 71.27 71.79 74.50 73.86 71.31
Allowance for loan
loss to total loans 1.31 1.34 1.43 1.42 1.44
</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 Company 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. We are 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, we 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 us the opportunity to
attract new customers from the Danville area.
In 1999 construction began on a new branch facility in Sugarcreek, Ohio. The
branch opened for business in February, 2000. This new location will give us
a presence in the Sugarcreek, Ohio area and allows us to develop new business
and deposit relationships in this area.
RESULTS OF OPERATIONS
SUMMARY
For 1999, we recorded net income of $3.0 million compared to $2.9 million for
1998 and $3.0 million for 1997.
Other operating income was $646,000 for 1999 compared to $558,000 for 1998 and
$449,000 for 1997.
Total other operating expenses were $5.3 million in 1999 compared to $4.6
million in 1998 and $4.0 million in 1997.
Earnings per share for 1999 were $4.28 compared to $4.37 for 1998 and $4.52
for 1997. These earnings per share are adjusted for the 5 for 1 stock split
in 1998.
8
<PAGE>
NET INTEREST INCOME
Our net interest income increased by $736,000 in 1999 from 1998 and $252,000
in 1998 from 1997.
Total interest income increased by $1,045,000 or 6.52% for 1999 from 1998.
The increase of $1,045,000 for 1999 resulted primarily from an increase of
$655,000 in interest income on loans and $461,000 in interest income on
investment securities. The increases in loan and investment security interest
income resulted primarily from increases in the average outstanding balances
of the loan and investment portfolios of $13.0 million and $10.5 million
respectively.
The increase in loan volume served to offset the reduction in the current
yield on the loan portfolio which declined .41 basis points to 9.06%. The
decline in yield is due to a general decline in long-term interest rates,
combined with increased competition for loan customers.
Total interest income increased by $800,000 or 5.26% for 1998 from 1997 due
mainly to an increase in the average outstanding balance of the loan and
federal funds sold of $7.6 million and $5.2 million respectively.
The yield on earning assets was 7.70%, 8.06% and 8.26% for 1999, 1998 and 1997
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 1999 increased by $308,000 from 1998 and by $548,000 for
1998 from 1997. These increases were due mainly to increases in the average
volume of interest bearing liabilities which rose $17.3 million during 1999
and $10.7 million during 1998. The average volume of time deposits and
interest bearing demand deposits increased $9.9 million and $5.4 million
respectively in 1999 while time deposits, interest bearing demand deposits,
and Federal Loan Bank advances increased $6.9 million, $1.2 million and $2.3
million respectively for 1998.
The cost on interest bearing liabilities was 4.55% for 1999 and 4.85% for
1998, and 4.83% for 1997. The decrease for 1999 is due mainly to a decrease
in the cost of time deposits of .34 basis points.
Due mainly to a decrease in the yield on total earning assets, the net yield
on earning assets has decreased the last three years. The net yield on
interest earning assets was 4.00%, 4.09% and 4.27% for 1999, 1998 and 1997
respectively.
The following table sets forth, for the periods indicated, information
regarding the total dollar amounts of interest income from average
interest-earning assets and the resulting yields, the total dollar amount of
interest expense on average interest-bearing liabilities and the resulting
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
----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
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) $140,202 $ 12,698 9.06% $127,214 $ 12,043 9.47% $119,552 $ 11,490 9.61%
Securities-taxable (4) 38,778 2,309 5.95% 33,800 2,070 6.12% 36,389 2,296 6.31%
Securities-nontaxable 30,345 1,420 4.68% 24,857 1,201 4.83% 20,641 1,001 4.85%
Securities-equity (4)(5) 1,137 72 6.33% 1,078 70 6.49% 1,008 65 6.45%
Federal funds sold 11,115 570 5.13% 11,904 640 5.38% 6,749 372 5.51%
-------- -------- -------- -------- -------- --------
Total interest-
earnings assets 221,577 17,069 7.70% 198,853 16,024 8.06% 184,339 15,224 8.26%
-------- -------- --------
Noninterest-earning assets
Cash and due from
other Institutions 7,292 6,625 6,144
Premises and equipment,
net 3,533 2,891 2,888
Accrued interest 1,301 1,164 1,549
Other assets 2,515 842 697
Less allowance for
loan losses (1,939) (1,810) (1,694)
-------- -------- --------
Total $234,279 $208,565 $193,923
======== ======== ========
10
<PAGE>
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS (CONTINUED)
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31
----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
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 $ 27,102 $ 691 2.55% 21,655 $ 549 2.54% $ 20,464 523 2.56%
Money market accounts 11,364 401 3.53% 15,364 620 4.04% 16,894 684 4.05%
Savings deposits 26,583 829 3.12% 19,745 589 2.98% 19,421 552 2.84%
Time deposits 104,202 5,660 5.43% 94,289 5,437 5.77% 87,375 5,091 5.83%
Short term borrowings 3,090 86 2.78% 2,637 79 3.00% 1,147 39 3.40%
Federal Home Loan Bank Advances 7,805 534 6.84% 9,132 618 6.77% 6,789 455 6.70%
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities 180,146 8,201 4.55% 162,822 7,892 4.85% 152,090 7,344 4.83%
Noninterest bearing liabilities:
Demand deposits 25,144 21,290 20,174
Accrued expenses and other liabilities 751 838 592
Shareholder's equity 28,238 23,615 21,067
------- ------- -------
Total $234,279 $208,565 $193,923
======= ======= =======
Net interest income $ 8,868 $ 8,132 $ 7,880
======== ======== =======
Interest rate spread (6) 3.15% 3.21% 3.43%
====== ====== ======
Net yield on interest earning assets (7) 4.00% 4.09% 4.27%
====== ====== ======
</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 $252,742,
$217,604, and $210,030 in 1999, 1998 and 1997, 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>
1999 Compared to 1998 1998 Compared to 1997
--------------------------------- -----------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
--------------------------------- -----------------------------------
Volume Rate Net Volume Rate Net
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans $ 1,230 $ (575) $ 655 $ 736 $ (183) $ 553
Securities-taxable 305 (66) 239 (163) (63) (226)
Securities-nontaxable 265 (46) 219 207 (7) 200
Securities-equities 4 (2) 2 4 1 5
Federal funds sold (42) (28) (70) 284 (16) 268
---------- ---------- --------- ---------- ---------- ----------
Total interest earning
Assets 1,762 (717) 1,045 1,068 (268) 800
---------- ---------- --------- ---------- ---------- ----------
Interest expense
Interest bearing demand 138 4 142 30 (4) 26
Money market accounts (162) (57) (219) (61) (3) (64)
Savings deposits 204 36 240 9 28 37
Time deposits 572 (349) 223 403 (57) 346
Short-term borrowing 14 (7) 7 51 (11) 40
Federal Home Loan Bank
Advances (90) 6 (84) 157 6 163
---------- ---------- --------- ---------- ---------- ----------
Total interest bearing
Liabilities 676 (367) 309 589 (41) 548
---------- ---------- --------- ---------- ---------- ----------
Net change in interest income $ 1,086 $ (350) $ 736 $ 479 $ (227) $ 252
========= ========== ========= ========== ========== ==========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $240,000 for 1999, $183,000 for 1998 and
$180,000 for 1997. We make 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 1.31%, 1.34%
and 1.43% for 1999, 1998 and 1997 respectively.
OTHER INCOME
Other income, which is comprised principally of fees and charges on
customers' deposit accounts, increased $88,000 or 15.9% to $646,000 in 1999
from $558,000 in 1998, and increased $108,000 or 24.02% in 1998 from 1997.
Service charges on customer accounts increased $75,000 or 18.31% in 1999 due
to increased deposit activity caused by the merger of Commercial and Savings
Bank Company in late 1998 and increases in new deposit accounts. The Bank
started to sell fixed rate loans in the secondary market in late 1997. Gains
for these sales were $42,000 in 1999, $42,000 in 1998 and $2,000 in 1997.
Income from the alternative investment service the Bank introduced in 1997
was $32,000 for 1999 and $31,000 for 1998 and $11,000 for 1997.
12
<PAGE>
OTHER EXPENSE
Other expense increased $745,000 or 16.28% to $5.3 million in 1999 as
compared to $4.6 million in 1998 and increased $538,000 or 13.34% for 1998
from $4.0 million in 1997.
Salary and employee benefits for 1999 totaled $2.6 million, an increase of
$313,000 or 13.61% from $2.3 million in 1998 and increased $273,000 for 1998
or 13.47% from $2.0 million in 1997. This increase represents the effect of
a full year's expense associated with new employees due to the merger with
Commercial and Savings Bank Company in November, 1998 and normal recurring
employee cost increases for annual salary increases, staff additions and
employee benefits for 1999. The increase for 1998 was due to an increase in
hospitalization insurance costs, effect of a part year's expense associated
with new employees due to the merger in November, 1998 and normal recurring
employee cost increases for annual salary increases, staff additions and
employee benefits. For 2000, in addition to normal recurring salary, benefit
adjustments and staff additions, it is expected salary and benefit costs will
increase due to additional employees for the new branch office in Sugarcreek,
Ohio.
Occupancy and equipment expense increased $97,000 in 1999 and $27,000 in
1998. The increase in expense during 1999 was attributable to a full year of
occupancy and equipment expense on the Danville branch and additional
improvements and equipment purchases for operations in 1999. For 1998, the
increases were attributable to normal and recurring items. For 2000, it is
expected occupancy and equipment expense will increase due to the addition of
the new branch office in Sugarcreek, Ohio.
Other expenses for 1999 totaled $2.0 million, a $334,000 or 20.51% increase
from the $1.6 million reported in 1998 and a $238,000 or 17.09% increase for
1998 from the 1997 total of $1.4 million. The major increases in 1999 were
in professional fees of $70,000 and other expenses of $225,000. The increase
in professional fees of $70,000 is mainly attributed to costs associated with
the completion of the merger and costs of becoming a securities and exchange
registrant. The increase in other expense is due mainly to the recognition
of a full year of goodwill amortization associated with the merger and
increases in normal and recurring expenses associated with a new branch and
existing branches. The increase of $238,000 in 1998 from 1997 in other
expenses is attributable to increases in normal and recurring items and
recognition of a partial year of amortization of goodwill and other costs
associated with the merger . For 2000, in addition to normal recurring
increases, other expense is expected to increase due to the addition of the
new branch in Sugarcreek, Ohio.
INCOME TAX EXPENSE
Income tax expense decreased by $79,000 for 1999 to $937,000 from $1.0
million in 1998 and decreased $92,000 in 1998 from $1.1 million in 1997. The
effective rate on taxes for 1999, 1998 and 1997 was 23.7%, 25.9% and 26.9%
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, 1999 AND 1998
Total assets at December 31, 1999 amounted to $243.2 million, an increase of
$11.2 million compared to $232.0 million at December 31,1998.
Cash and cash equivalents decreased $5.3 million or 24.12% from December 31,
1998 to December 31, 1999, with liquid funds held in the form of federal
funds sold decreasing $6.5 million. The decrease in federal funds sold at
December 31, 1999 was used to help fund loan and investment growth in 1999.
Total investment securities increased $9.9 million or 14.91% from December
31, 1998 to December 31, 1999. The increase in investments was funded by the
increase in deposits and the decrease in federal funds in 1999. 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 $143.8 million at December 31, 1999 an increase of $5.9
million or 4.27% from $137.9 million at December 31, 1998. Of this $5.9
million increase approximately $5.0 million was in the consumer and credit
loan portfolio. Of this $5.0 million increase, vehicle loans increased $2.1
million and consumer loans on vacant land increased $2.7 million. Late in
1997 we began to offer residential mortgage customers a new fixed rate
product. This program enables us to offer competitive long-term fixed rates.
These loans are made with the intent to sell in the secondary loan market.
We originated and sold $4.7 million and $4.9 million of loans in 1999 and
1998. Profit on the sale of these loans was $42,000 for both 1999 and 1998.
Information detailing the composition of the loan portfolio is presented in
Note 5 to the consolidated financial statements.
13
<PAGE>
Total deposits increased $9.7 million or 5.03% from December 31, 1998 to
December 31, 1999. All deposit accounts increased with the exception of
money market accounts. The increases are attributable to new deposit account
growth and internal growth for existing accounts. The decrease in money
market accounts of $3.4 million in 1999 is due to a decrease in public fund
accounts. See also, "Average Balance Sheets and Net Interest Analysis" for
information related to the average amount and average interest paid on
deposit accounts during 1999 and 1998. Information related to the maturity
of time deposits of $100,000 and over at December 31, 1999 is presented in
Note 8 of the accompanying consolidated financial statements.
Advances were $7.1 million and $8.6 million at December 31, 1999 and 1998
respectively. These borrowings were used to fund fixed rate residential real
estate loans with similar maturities. New borrowings totaled $-0- and $1.5
million in 1999 and 1998 respectively.
Shareholders' equity increased $1.5 million during 1999 to $28.9 million at
December 31, 1999 from $27.4 million at December 31, 1998. This increase was
the result of an increase of $2.1 million in net retained earnings during the
year and an unrealized loss on securities available for sale of $.6 million.
MARKET RISK AND ASSET/LIABILITY MANAGEMENT
Our primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. Because of the nature of our operations, we are not
subject to currency exchange or commodity price risk and, since we have no
trading portfolio, it is not subject to trading risk. Currently, we have
equity securities that represent only 1.51% of its investment portfolio and,
therefore, equity price risk is not significant.
We actively manage interest rate sensitivity and asset/liability products
through an asset/liability management committee. The principle objectives 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, we have
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, we have originated adjustable-rate loans and
as of December 31, 1999, they comprised approximately 62% of the total loan
portfolio.
LIQUIDITY
Liquidity represents our ability to meet normal cash flow requirements of our
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 $3.4 and $3.2
million in cash during 1999 and 1998 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 $17.6 million
in funds during 1999, principally for the net funding of loans and the net
purchase of investments totaling $6.1 million and $11.0 million respectively.
For 1998, investing activities used $9.6 million, 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.
14
<PAGE>
Financing activities consisted of the solicitation and repayment of customer
deposits, borrowings and repayments and the payment of dividends. For 1999,
financing activities provided $8.9 million, comprised mainly of net deposit
increases of $9.7 million, repayment of Federal Home Loan Bank advances of
$1.5 million, net short-term borrowings increases of $1.6 million and payment
of dividends of $.9 million. For 1998 financing activities provided $14.0
million, comprised mainly of net deposit increases of $14.3 million, net
Federal Home Loan Bank advance repayments of $.2 million, net short-term
borrowing increases of $.6 million and payment of dividends of $.7 million.
In addition to using the loan, investment and deposit portfolios as sources
of liquidity, we have access to funds from the Federal Home Loan Bank of
Cincinnati. We also have a ready source of funds through the
available-for-sale component of the investment securities portfolio.
CAPITAL RESOURCES
Capital adequacy is our ability 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. We
continually monitor these capital requirements and believe the Company to be
in compliance with these regulations at December 31, 1999.
Our regulatory capital position at December 31, 1999, as compared to the
minimum regulatory capital requirements imposed on us by banking regulators
at that date is presented in Note 16 of the accompanying consolidated
financial statements. We are not aware of any actions contemplated by
banking regulators which would result in us 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
The Company relies on computers to conduct its business and information
systems processing. Industry experts were concerned that on January 1, 2000,
some computers might not be able to interpret the new year properly, causing
computer malfunctions. Some banking experts remain concerned that some
computers may not be able to interpret additional dates in the year 2000
properly. The Company has operated and evaluated its computer operating
systems following January 1, 2000 and has not identified any errors or
experienced any computer system malfunctions. Nevertheless, the Company
continues to monitor its computer operating systems to assess whether
its systems are at risk of misinterpreting any future dates and will develop,
if needed, appropriate contingency plans to prevent any potential system
malfunction or correct any system failures. The Company has not been
informed of any such problem experienced by its vendors or its customers.
The Company will continue to monitor its significant vendors of goods and
services and customers with respect to any Year 2000 problems they may
encounter, as those issues may effect its ability to continue operations,
or might adversely affect the company's financial position, results of
operations and cash flows. At this time, the Company does not believe that
these potential problems will materially impact the ability to continue
operations. However, no assurance can be given that this will be the case.
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, 1999 and 1998, 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,
1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ S.R. Snodgrass, A.C.
Steubenville, Ohio
January 28, 2000
S.R. Snodgrass, A.C.
626 North Fourth Street
Steubenville, OH 43952-1982
Phone: 740-282-2771
Facsimile: 740-282-1606
17
<PAGE>
<TABLE>
<CAPTION>
Killbuck Bancshares, Inc.
CONSOLIDATED BALANCE SHEET
December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 8,123,806 $ 6,972,224
Federal funds sold 8,700,000 15,200,000
------------ ------------
Total cash and cash equivalents 16,823,806 22,172,224
------------ ------------
Investment securities:
Securities available for sale 42,311,490 39,228,084
Securities held to maturity (market value of $33,578,899
and $28,341,531) 34,424,679 27,549,053
------------ ------------
Total investment securities 76,736,169 66,777,137
------------ ------------
Loans (net of allowance for loan losses of $1,887,773 and
$1,851,175) 141,521,075 35,644,314
Loans held for sale 356,000 233,750
Premises and equipment, net 3,851,975 3,368,645
Accrued interest 1,622,480 1,629,508
Other assets 2,238,375 2,168,315
------------ ------------
Total assets $243,149,880 $231,993,893
============ ============
LIABILITIES
Deposits:
Noninterest bearing demand $28,935,106 $ 26,150,636
Interest bearing demand 29,579,519 25,576,971
Money market 8,746,151 12,182,491
Savings 28,173,933 25,707,998
Time 106,303,749 102,460,585
------------ ------------
Total deposits 201,738,458 192,078,681
Federal Home Loan Bank advances 7,112,753 8,587,302
Short-term borrowings 4,900,000 3,335,000
Accrued expenses and other liabilities 481,951 555,699
------------ ------------
Total liabilities 214,233,162 204,556,682
------------ ------------
SHAREHOLDERS' EQUITY
Common stock No par value: 1,000,000 shares authorized,
718,431 issued 8,846,670 8,846,670
Retained earnings 21,352,156 19,215,493
Accumulated other comprehensive income (loss) (648,620) 8,536
Treasury stock, at cost (13,100 shares) (633,488) (633,488)
------------ ------------
Total shareholders' equity 28,916,718 27,437,211
------------ ------------
Total liabilities and shareholders' equity $243,149,880 $231,993,893
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $12,698,236 $12,043,400 $11,489,797
Federal funds sold 568,636 639,968 372,153
Investment securities:
Taxable 2,381,982 2,129,061 2,349,656
Exempt from federal income tax 1,419,777 1,211,898 1,012,341
----------- ----------- -----------
Total interest income 17,068,631 16,024,327 15,223,947
----------- ----------- -----------
INTEREST EXPENSE
Deposits 7,580,106 7,194,761 6,850,752
Federal Home Loan Bank advances 534,468 618,347 454,791
Short term borrowings 85,826 79,351 38,637
----------- ----------- -----------
Total interest expense 8,200,400 7,892,459 7,344,180
----------- ----------- -----------
NET INTEREST INCOME 8,868,231 8,131,868 7,879,767
Provision for loan losses 240,000 183,000 180,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,628,231 7,948,868 7,699,767
----------- ----------- -----------
OTHER INCOME
Service charges on deposit accounts 483,071 408,321 375,676
Gain on sale of loans, net 41,581 41,712 2,033
Other income 121,232 107,491 71,850
----------- ----------- -----------
Total other income 645,884 557,524 449,559
----------- ----------- -----------
OTHER EXPENSE
Salaries and employee benefits 2,615,225 2,301,849 2,028,629
Occupancy and equipment 741,289 643,854 616,445
Other expense 1,962,189 1,628,186 1,390,581
----------- ----------- -----------
Total other expense 5,318,703 4,573,889 4,035,655
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,955,412 3,932,503 4,113,671
Income taxes 937,085 1,016,542 1,108,209
----------- ----------- -----------
NET INCOME $ 3,018,327 $2,915,961 $ 3,005,462
=========== =========== ===========
EARNINGS PER SHARE $ 4.28 $ 4.37 $ 4.52
=========== =========== ===========
AVERAGE SHARES OUTSTANDING 705,331 666,779 665,215
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other Total
Common Retained Comprehensive Treasury Shareholders' Comprehensive
Stock Earnings Income (Loss) Stock Equity Income
---------- ----------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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, net of tax of $73,280 142,249 142,249 142,249
-------------
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, net of tax of $21,818 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
Net income 3,018,327 3,018,327 $ 3,018,327
Other comprehensive income:
Unrealized loss on available for sale
securities, net of tax benefit
of $338,535 (657,156) (657,156) (657,156)
-------------
Comprehensive income $ 2,361,171
=============
Cash dividends paid ($1.25 per share) (881,664) (881,664)
---------- ----------- -------------- ------------ -------------
BALANCE, DECEMBER 31, 1999 $8,846,670 $21,352,156 $ (648,620) $ (633,488) $ 28,916,718
========== =========== ============== ============= ==============
</TABLE>
See accompanying notes to the consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,018,327 $ 2,915,961 $ 3,005,462
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 240,000 183,000 180,000
Depreciation, amortization and accretion, net 414,035 307,868 245,393
Gain on sale of loans, net (41,581) (41,712) (2,033)
Origination of loans held for sale (4,674,850) (4,924,449) (282,300)
Proceeds from the sale of loans 4,594,181 4,732,411 284,333
Federal Home Loan Bank stock dividend (60,500) (57,800) (53,300)
(Increase) decrease in accrued interest and other assets (31,268) 80,983 (77,114)
(Decrease) increase in accrued expenses and other
liabilities (75,547) (5,076) (57,407)
(Decrease) increase in federal income tax payable (1,799) (86,032) 6,466
(Decrease) increase in deferred federal income tax (22,661) 69,582 17,580
------------ ------------- -------------
Net cash provided by operating activities 3,358,337 3,174,736 3,267,080
------------ ------------- -------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 15,067,374 25,874,036 14,051,028
Purchases (19,131,130) (27,154,089) (16,051,726)
Investment securities held to maturity:
Proceeds from maturities and repayments 1,967,986 2,786,713 2,249,094
Purchases (8,885,152) (6,856,609) (7,262,638)
Net increase in loans (6,116,761) (5,195,049) (5,899,602)
Purchase of premises and equipment (550,970) (395,902) (119,386)
Decrease in other real estate owned 73,334 - -
Cash funds acquired in business acquisition - 1,296,338 -
------------ ------------- -------------
Net cash used in investing activities (17,575,319) (9,644,562) (13,033,230)
------------ ------------- -------------
FINANCING ACTIVITIES
Net increase in deposits 9,659,777 14,304,976 6,409,485
Proceeds from Federal Home Loan Bank advances - 1,500,000 4,600,000
Repayment of Federal Home Loan Bank advances (1,474,549) (1,657,872) (669,474)
Net increase in short-term borrowings 1,565,000 625,000 2,710,000
Purchase of treasury shares - - (312,430)
Cash dividends paid including fractions shares (881,664) (730,831) (611,412)
------------ ------------- -------------
Net cash provided by financing activities 8,868,564 14,041,273 12,126,169
------------ ------------- -------------
(Decrease) increase in cash and cash equivalents (5,348,418) 7,571,447 2,360,019
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,172,224 14,600,777 12,240,758
------------ ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,823,806 $ 22,172,224 $ 14,600,777
============ ============= =============
</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 the Company include its wholly owned
subsidiary, the Bank. All intercompany transactions have been eliminated in
consolidation. The investment in subsidiary on the parent company financial
statements is carried at the parent company's equity in the underlying net
assets.
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 may
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 and
ability to hold to maturity are stated at cost adjusted for amortization of
premium and accretion of discount which are computed using 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 on 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
- -----
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.
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.
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 large groups of smaller balance homogeneous loans and 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
- ----------------------
Premises and equipment are stated at cost less 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.
REAL ESTATE OWNED
- -----------------
Real estate acquired in settlement of loans is stated at the lower of the
recorded investment in the property or its fair value minus estimated costs of
sale. Prior to foreclosure the value of the underlying collateral is written
down by a charge to the allowance for loan losses if necessary. Any
subsequent write-downs are charged against operating expenses. Operating
expenses of such properties, net of related income and losses on their
disposition, are included in other expenses.
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. As
of December 31, 1999 and 1998 respectively, net goodwill of $1,550,790 and
$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.
23
<PAGE>
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.
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
- --------------------
The Company is required to present comprehensive income in a full set of
general purpose financial statements for all periods presented. Other
comprehensive income (loss) is comprised exclusively of unrealized holding
gains (losses) on the available for sale securities portfolio. The Company
has elected to report the effects of other comprehensive income (loss) as
part of the 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 1999, 1998 and 1997 were $8,229,575, $7,809,677, and
$7,359,808, respectively. Cash payments for income taxes for 1999, 1998, and
1997 were $960,417, $1,055,913, and $1,081,332 respectively.
PENDING ACCOUNTING PRONOUNCEMENTS
- ---------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended for in June, 1999
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities Deferral of the Effective Date of FASB Statement No. 133." 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 security
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, 2000. Earlier adoption is permitted for any fiscal
quarter that begins after the issue date of this Statement.
RECLASSIFICATION OF COMPARATIVE AMOUNTS
- ---------------------------------------
Certain amounts in prior year consolidated financial statements have been
reclassified to conform to the current year presentation. These
reclassifications had no effect on shareholders' equity or 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>
1999 1998
---------------------------- ----------------------------
Institution Maturity Balance Maturity Balance
----------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C>
National Bank of Detroit - $ - 1-04-99 $ 8,000,000
National City Bank 1-3-00 3,700,000 1-04-99 7,200,000
Independent State Bank of Ohio 1-3-00 5,000,000 -
----------- -----------
$ 8,700,000 $15,200,000
=========== ===========
</TABLE>
4. INVESTMENT SECURITIES
The amortized cost of securities and their estimated market values are
as follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,998,811 $ 1,455 $ 610 $ 2,999,656
Obligations of U.S. Government
Agencies and Corporations 39,133,728 - 983,604 38,150,124
----------- ---------- ----------- ------------
Total debt securities 42,132,539 1,455 984,214 41,149,780
Equity securities 1,161,710 - - 1,161,710
----------- ---------- ----------- -----------
Total $43,294,249 $ 1,455 $ 984,214 $42,311,490
=========== ========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
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>
25
<PAGE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Obligations of States and Political
Subdivisions $32,797,040 $ 106,508 $ 843,411 $32,060,137
Corporate Securities 1,627,639 - 108,877 1,518,762
----------- ----------- ----------- -----------
Total $34,424,679 $ 106,508 $ 952,288 $33,578,899
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
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>
The amortized cost and estimated market values of debt securities at
December 31, 1999, 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 Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,498,811 $ 4,487,593 $ 1,532,435 $ 1,544,150
Due after one year through five years 28,492,608 27,770,306 10,393,347 10,360,974
Due after five through ten years 9,141,120 8,891,881 17,091,122 16,575,608
Due after ten years - - 5,407,775 5,098,167
------------ ------------ ------------ ------------
$ 42,132,539 $ 41,149,780 $ 34,424,679 $ 33,578,899
============ ============ ============ ============
</TABLE>
Investment securities with an approximate carrying value of $31,225,000 and
$30,600,000 at December 31, 1999 and 1998, respectively were pledged to
secure public deposits, securities sold under agreement to repurchase and for
other purposes as required or permitted by law. There were no security sales
in 1999, 1998 and 1997.
26
<PAGE>
5. LOANS
Major classification of loans are summarized as follows:
1999 1998
------------- -------------
Real estate - residential $ 48,959,970 $ 49,226,429
Real estate - farm 4,380,211 4,376,208
Real estate - commercial 23,717,573 22,713,385
Real estate - construction 1,396,523 1,237,523
Commercial and other loans 37,767,378 37,752,447
Consumer and credit loans 27,555,540 22,584,896
------------- -------------
143,777,195 137,890,888
Less allowance for loan losses (1,887,773) (1,851,175)
Less net deferred loan fees (368,347) (395,399)
------------- -------------
Loans, net $ 141,521,075 $ 135,644,314
============= =============
Loans held for sale at December 31, 1999 and 1998 were $356,000 and $233,750
respectively. In 1999 the Bank started servicing loans originated and sold
in the secondary market. The Bank is currently collecting a fee of .25% for
servicing these loans. Real estate loans serviced for Freddie Mac, which are
not included in the consolidated balance sheet, totaled $900,691 at
December 31, 1999.
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.
1999 1998 1997
------------ ------------ ------------
Principal outstanding $ 287,017 $ 21,323 $ 120,805
Contractual interest due $ 19,969 $ 923 $ 6,120
Interest income recognized $ 0 $ 0 $ 7,000
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, 1999
and 1998, loans outstanding to individuals and businesses are dependent upon
the local economic conditions in its immediate trade area.
The Bank entered into transactions with certain directors, executive
officers, significant stockholders, and their affiliates. 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, 1999 is as
follows:
Balance Amounts Balance
12-31-1998 Additions Collected 12-31-1999
---------- --------- --------- ----------
$ 293,210 $ 808,600 $ 243,471 $ 858,339
6. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1 $ 1,851,175 $ 1,744,586 $ 1,653,322
Add:
Provision charged to operations 240,000 183,000 180,000
Loan recoveries 80,135 47,657 101,397
Acquired in business acquisition - 93,001 -
Less: Loans charged off (283,537) (217,069) (190,133)
------------ ------------ ------------
Balance, December 31 $ 1,887,773 $ 1,851,175 $ 1,744,586
============ ============ ============
</TABLE>
27
<PAGE>
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 909,930 $ 909,930
Building and improvements 3,265,750 2,728,374
Furniture, fixtures and equipment 2,616,955 2,363,977
------------ ------------
6,792,635 6,002,281
Less accumulated depreciation 2,940,660 2,633,636
------------ ------------
Total $ 3,851,975 $ 3,368,645
============ ============
</TABLE>
Depreciation expense charged to operations was $321,492 for 1999, $283,300
for 1998, and $285,094 for 1997.
8. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $27,186,935 and $27,715,774 at
December 31, 1999 and 1998, respectively.
Interest expense on certificates of deposit $100,000 and over amounted to
$1,487,708 in 1999, $1,496,632 in 1998, and $1,306,783 in 1997.
The following table sets forth the remaining maturity of time certificates of
deposits of $100,000 or more at December 31, 1999.
December 31,
1999
------------
3 months or less $ 6,276,334
Over 3 through 6 months 8,588,521
Over 6 through 12 months 11,619,617
Over 12 months 702,463
------------
Total $ 27,186,935
============
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:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
------------ ------------
<S> <C> <C>
Short-term borrowings:
Ending balance $ 4,900,000 $ 3,335,000
Maximum month-end balance during the year 4,900,000 3,440,000
Average month-end balance during the year 3,275,567 2,763,000
Weighted average at year end 3.28% 2.58%
Weighted average rate during the year 2.62% 2.88%
</TABLE>
The Company has pledged investment securities with carrying values of
$5,803,550 and $4,013,900 as of December 31, 1999 and 1998,
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, 1999 are as follows:
Year Ending
December 31, Amount
------------ ----------
2000 $ 822,116
2001 746,687
2002 681,181
2003 623,394
2004 572,636
2005 and thereafter 3,666,739
----------
Total $7,112,753
==========
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, 1999 and 1998 the Bank had a
borrowing capacity of approximately $22.7 and $17.0 million, respectively
with the FHLB. At December 31, 1999 and 1998 there was $7,112,753 and
$8,587,302, respectively borrowed against this credit arrangement.
11. EMPLOYEE BENEFIT PLANS
The Bank maintains 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 1999 and
1998 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 1999, 1998
and 1997 amounted to $180,369, $153,374 and $136,666, respectively.
29
<PAGE>
12. OTHER OPERATING EXPENSE
Other operating expense included the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Stationery, supplies and printing $ 166,224 $ 155,064 $ 137,760
Professional fees 257,986 187,813 144,027
Franchise tax 361,089 333,689 298,457
Other 1,176,890 951,620 810,337
----------- ----------- -----------
Total $ 1,962,189 $ 1,628,186 $ 1,390,581
=========== =========== ===========
</TABLE>
13. INCOME TAXES
The provision for federal income taxes for the years ended December 31
consist of:
1999 1998 1997
----------- ----------- -----------
Current payable $ 959,746 $ 946,960 $1,090,629
Deferred (22,661) 69,582 17,580
----------- ----------- -----------
Total provision $ 937,085 $ 1,016,542 $1,108,209
=========== =========== ===========
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>
1999 1998 1997
---------------------- ---------------------- ----------------------
% 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 $1,344,840 34.0% $1,337,051 34.0% $1,398,648 34.0%
Tax exempt income (482,724) (12.2) (408,414) (10.4) (340,323) (8.3)
Non-deductible interest
Expense 81,600 2.1 64,937 1.7 53,716 1.3
Other, net (6,631) ( .2)% 22,968 .6 (3,832) (.1)
---------- ----------- ---------- ---------- ---------- -----------
Tax expense
and effective rate $ 937,085 23.7% $1,016,542 25.9% $1,108,209 26.9%
========== =========== ========== ========== ========== ===========
</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:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $ 48,255 $ 435,761
Deferred loan fees 25,817 40,097
Net unrealized loss on securities 334,138 -
---------- ----------
Deferred tax asset 808,210 475,858
---------- ----------
Deferred Tax Liabilities:
Premise and equipment depreciation 256,213 268,113
Stock dividends 79,900 59,500
Net unrealized gain on securities - 4,397
Other, net 7,185 40,132
---------- ----------
Deferred tax liabilities 343,298 372,142
---------- ----------
Net deferred tax assets $ 464,912 $ 103,716
========== ==========
</TABLE>
No valuation allowance was established at December 31, 1999 and 1998 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:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Commitments to extend credit $ 13,014,017 $ 17,872,990
Standby letters of credit 964,224 607,681
------------ ------------
Total $ 13,978,241 $ 18,480,671
============ ============
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The 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 generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities
to customers. 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 1999 or 1998.
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 2000, without the approval of the regulatory authorities, is
$4,040,650 plus 2000 profits retained up to the date of the dividend
declaration.
Included in cash and due from banks are required federal reserves of
$2,225,000 and $1,124,000 at December 31, 1999 and 1998, 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, 1999 and 1998.
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, 1999 and 1998, that the Company and
Bank meets all capital adequacy requirements to which they are subject.
As of December 31, 1999, 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):
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Amount Ratio Amount Ratio
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
---------------------------------------
Actual $ 29,700 19.85% $ 27,432 19.64%
For Capital Adequacy Purposes 11,970 8.00 11,173 8.00
To be well capitalized 14,962 10.00 13,967 10.00
Tier 1 Capital (to Risk Weighted Assets)
----------------------------------------
Actual $ 27,829 18.60% $ 25,685 18.39%
For Capital Adequacy Purposes 5,985 4.00 5,587 4.00
To be well capitalized 8,977 6.00 8,380 6.00
Tier 1 Capital (to Average Assets)
----------------------------------
Actual $ 27,829 11.55% $ 25,68 5 11.25%
For Capital Adequacy Purposes 9,641 4.00 9,134 4.00
To be well capitalized 12,052 5.00 11,418 5.00
</TABLE>
17. OTHER COMPREHENSIVE INCOME
Other comprehensive income included in the Consolidated Statement of
Shareholders' Equity consists solely of net unrealized gains and losses on
available for sales securities. The Company incurred an unrealized net loss for
the period ended December 31, 1999 of $657,156. For the periods ended
December 31, 1998 and 1997, the Company incurred unrealized net gains of
$42,353 and $142,249, respectively.
32
<PAGE>
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 8,123,806 $ 8,123,806 $ 6,972,224 $ 6,972,224
Federal funds sold 8,700,000 8,700,000 15,200,000 15,200,000
Securities available for sale 42,311,490 42,311,490 39,228,084 39,228,084
Securities held to maturity 34,424,679 33,578,899 27,549,053 28,341,531
Net loans 141,521,075 144,230,000 135,644,314 141,319,000
Loans held for sale 356,000 357,285 233,750 236,087
Accrued interest receivable 1,622,480 1,622,480 1,629,508 1,629,508
------------ ------------ ------------ ------------
Total $237,059,530 $238,923,960 $226,456,933 $232,926,434
============ ============ ============ ============
Financial liabilities:
Deposits $201,738,458 $202,004,000 $192,078,681 $193,434,000
Federal Home Loan Bank advances 7,112,753 7,200,000 8,587,302 9,661,000
Short term borrowings 4,900,000 4,900,000 3,335,000 3,335,000
Accrued interest payable 339,999 339,999 369,174 369,174
------------ ------------ ------------ ------------
Total $214,091,210 $214,443,999 $204,370,157 $206,799,174
============ ============ ============ ============
</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 AND LOANS HELD FOR SALE
- ---------------------------------------------
The fair value of investment securities and loans held for sale are 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.
19. 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>
20. PARENT COMPANY
The following are parent only condensed financial statements:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 309,847 $ 16,709
Investment in bank subsidiary 28,606,871 27,420,502
------------ ------------
Total assets $ 28,916,718 $ 27,437,211
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity $ 28,916,718 $ 27,437,211
------------ ------------
Total liabilities and shareholders' equity $ 28,916,718 $ 27,437,211
============ ============
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INCOME
Dividends from bank subsidiary $ 1,175,000 $ 718,950 $ 921,412
Operating expenses 300 172 8,323
----------- ----------- -----------
Income before income taxes 1,174,700 718,778 913,089
Income tax benefit (102) (58) (2,830)
----------- ----------- -----------
Income before equity in undistributed net income
of subsidiary 1,174,802 718,836 915,919
Equity in undistributed net income of subsidiary 1,843,525 2,197,125 2,089,543
----------- ----------- -----------
NET INCOME $ 3,018,327 $ 2,915,961 $ 3,005,462
=========== =========== ===========
</TABLE>
35
<PAGE>
20. PARENT COMPANY (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,018,327 $ 2,915,961 $ 3,005,462
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (1,843,525) (2,197,125) (2,089,543)
Amortization - - 8,109
----------- ----------- -----------
Net cash provided by operating activities 1,174,802 718,836 924,028
----------- ----------- -----------
FINANCING ACTIVITIES
Purchase of treasury shares - - (312,430)
Dividends paid including fractional shares (881,664) (730,831) (611,412)
----------- ----------- -----------
Net cash used in financing activities (881,664) (730,831) (923,842)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 293,138 (11,995) 186
CASH AT BEGINNING OF YEAR 16,709 28,704 28,518
----------- ----------- -----------
CASH AT END OF YEAR $ 309,847 $ 16,709 $ 28,704
=========== =========== ============
</TABLE>
36
EXHIBIT 24
Consent of Independent Auditors
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated January 28,
2000 relative to the consolidated balance sheet of Killbuck Bancshares, Inc.
as of December 31, 1999 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, 1999. Said report is included in the 1999
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, 2000
S.R. Snodgrass, A.C.
626 North Fourth Street
Steubenville, Ohio 43952-1982
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-31-1999
<CASH> 8,124
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,311
<INVESTMENTS-CARRYING> 34,425
<INVESTMENTS-MARKET> 33,579
<LOANS> 143,765
<ALLOWANCE> 1,888
<TOTAL-ASSETS> 243,150
<DEPOSITS> 201,738
<SHORT-TERM> 4,900
<LIABILITIES-OTHER> 482
<LONG-TERM> 7,113
0
0
<COMMON> 8,847
<OTHER-SE> 20,070
<TOTAL-LIABILITIES-AND-EQUITY> 243,150
<INTEREST-LOAN> 12,698
<INTEREST-INVEST> 3,802
<INTEREST-OTHER> 568
<INTEREST-TOTAL> 17,068
<INTEREST-DEPOSIT> 7,580
<INTEREST-EXPENSE> 8,200
<INTEREST-INCOME-NET> 8,868
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,319
<INCOME-PRETAX> 3,955
<INCOME-PRE-EXTRAORDINARY> 3,955
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,018
<EPS-BASIC> 4.28
<EPS-DILUTED> 4.28
<YIELD-ACTUAL> 4.00
<LOANS-NON> 287
<LOANS-PAST> 312
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,851
<CHARGE-OFFS> 283
<RECOVERIES> 80
<ALLOWANCE-CLOSE> 1,888
<ALLOWANCE-DOMESTIC> 1,888
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
KILLBUCK BANCSHARES, INC
NOTICE OF ANNUAL MEETING
AND
PROXY STATEMENT
ANNUAL SHAREHOLDER MEETING
APRIL 10, 2000
<PAGE>
KILLBUCK BANCSHARES, INC.
165 N. Main Street
Killbuck, OH 44637
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD
April 10, 2000
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 10,
2000, 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 B 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 11, 2000, 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 13, 2000
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.
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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 10, 2000, 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 13, 2000.
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 11, 2000,
will be eligible to vote at the Annual Meeting or any adjournment thereof. As
of March 11, 2000, the Corporation had outstanding 705,240 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 57,438 shares of the
Corporation's common stock as of February 29, 2000, representing 8.14 percent
of the outstanding common stock of the Corporation.
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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 outstanding common stock as of February 29, 2000.
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 B (term
to expire in 2000) 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 Past Director of the
Five Years Corporation
Since
- ------------ -------------------------------- ---------------
Robert D. Bell Chairman of the Board, Killbuck 1992
(Age 73) Bancshares, Inc. and The Killbuck
Term expires 2000 Savings Bank Co.
Allan R. Mast Co-Owner Holmes M&M Construction 1992
(Age 50)
Term expires 2000
Luther E. Proper President and CEO, Killbuck Bancshares 1992
(Age 50) and The Killbuck Savings Bank Co
Term expires 2000
THE DIRECTORS UNANIMOUSLY RECOMMEND A VOTE IN FAVOR OF THIS PROPOSAL #1.
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INFORMATION WITH RESPECT TO DIRECTORS NOT STANDING FOR REELECTION
Name and Age Principal Occupation During Director of the
Past 5 Years Corporation Since
- ------------ --------------------------- -----------------
John W. Baker County Commissioner 1992
(Age 55) (President, Burgett Insurance
Term expires 2002 through December 31, 1997)
Ted Bratton Farmer 1999
(Age 39)
Term expires 2001
Richard L. Fowler President, Mobile Homes of Ohio 1992
(Age 68)
Term expires 2002
Thomas D. Gindlesberger Attorney-at-Law 1992
(Age 73)
Term expires 2001
Dean J. Mullet President, Mullet Cabinet 1996
(Age 47)
Term expires 2001
Kenneth E. Taylor Farmer 1992
(Age 47)
Term expires 2002
Michael S. Yoder Owens-Brockway
(Age 58) (Retired 1999) 1994
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.
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SECURITY OWNERSHIP OF MANAGEMENT
Shares of Corporation
Common Stock Percentage of
Owned Beneficially as Beneficial Ownership
Name & Age of 2/29/00 as of 2/29/00
- ---------- ---------- -------------
John W. Baker (1) 106 .02%
Robert D. Bell (2) 2,865 .41%
Ted Bratton (3) 245 .03%
Richard L. Fowler (4) 7,938 1.13%
Thomas D. Gindlesberger 35,000 4.96%
Craig A. Lawhead (5) 1,500 .21%
Allan R. Mast (6) 1,980 .28%
Dean J. Mullet (7) 190 .03%
Luther E. Proper 6,700 .95%
Kenneth E. Taylor 514 .07%
Michael S. Yoder (8) 400 .06%
All directors and executive
officers as a group (11 persons) 57,438 8.14%
- -------------------------------------------------------------------
(1) 100 shares owned individually, 6 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, 20
owned by son.
(4) 3,993 shares owned individually, 3,945 shares owned jointly with spouse.
(5) 625 shares owned individually, 855 shares owned jointly with spouse,
20 shares in minor daughter's name.
(6) 375 shares owned individually, 905 shares owned jointly with spouse,
700 shares owned in name of Holmes M & M Construction.
(7) 130 owned individually, 60 owned in name of Mullet Cabinet.
(8) 250 owned individually, 150 owned in spouse's name.
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 1999, the Board met once
to consider and act upon the nomination of Directors.
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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 1999.
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, Bratton, Gindlesberger, and Mast
(Chairman). The Executive Committee met 12 times during 1999.
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 1999, 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
1999.
Director Compensation
---------------------
Directors of the Corporation and its subsidiary, The Killbuck Savings
Bank Company, received an annual retainer of $6,000 during 1999. The Chairman
of the Board received an annual retainer of $8,400. Effective January 1,
2000, the fee stayed the same. In addition, committee members receive $150
per committee meeting attended.
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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 1999, 1998 and 1997 to the Corporation's President and Chief
Executive Officer. No other Officers total compensation exceeded $100,000 for
the year ended 1999.
SUMMARY COMPENSATION TABLE
Annual Compensation
All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- ------ ----- ------------
Mr. Luther E. Proper 1999 $123,500 $21,790 $1,641
President and Chief 1998 $116,000 $22,844 $1,717
Executive Officer 1997 $108,500 $22,597 $1,990
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.
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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.
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, 1999, 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 1998. 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, Ted Bratton, 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.
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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, 1994, in the Corporation's stock, the Dow Jones Equity Market Index and
the Dow Jones Regional Bank Index.
(Line graph belongs in this area)
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG KILBUCK
BANCSHARES, INC., DOW JONES EQUITY MARKET INDEX & DOW JONES MAJOR REGIONAL
BANK INDEX FOR FISCAL YEAR ENDING DECEMBER 31
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
KILLBUCK
BANCSHARES, INC. $100.00 $140.07 $202.44 $300.84 $408.76 $437.73
DOW JONES EQUITY
MARKET INDEX $100.00 $137.67 $169.39 $226.91 $291.91 $351.37
DOW JONES REGIONAL
BANK INDEX $100.00 $159.93 $219.70 $343.19 $385.68 $331.35
ASSUMES $100 INVESTED ON JANUARY 1, 1995
IN KILLBUCK BANCSHARES, INC. COMMON STOCK,
DOW JONES EQUITY MARKET INDEX & DOW JONES MAJOR
REGIONAL BANK INDEX
*TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
10
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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 1999.
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. During 1999, Mr. Thomas Gindlesberger provided
legal services to the Corporation, for which his firm received $30,000. The
Corporation expects to retain the services of Mr. Gindlesberger in the future.
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 1999 all Section 16(a) filing requirements
applicable to its officers and Directors were complied with. 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, 1999. It is the intention of the Corporation to appoint S. R.
Snodgrass, A.C. as Independent Auditor for 2000. 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.
11
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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 2001, 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, 2000. On any other proposal raised by a stockholder
for next 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, 2001.
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 2001 must
provide notice of such nominee to the Corporation not later than January 30,
2001. 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 1999 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.
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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 10, 2000
The undersigned hereby appoints Richard L. Fowler, Thomas D. Gindlesberger and
Michael S. Yoder, 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 11, 2000, at the
stockholders meeting, to be held at The Killbuck Savings Bank Company, 165 N.
Main Street, Killbuck, Ohio on April 10, 2000 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 B
The Board of Directors recommends a vote for the election of directors.
Nominees: Robert D. Bell, Allan R. Mast and Luther E. Proper
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: , 2000
-------------- -------------------------------------------
- -------------------------------------------
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.)
