FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark one:
(X) Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the Quarterly period ended June 30, 1996
Commission File Number: 0-21500
KSB BANCORP, INC.
DELAWARE 04-3189069
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
Main Street
Kingfield, ME 04947
(Address of Principal Executive Office)
Registrant's telephone number, including area code: 207-265-2181.
Check whether the issuer (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 that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of
shares outstanding for the issuer's
classes of common stock as of the latest practicable date.
COMMON STOCK 411,055
(Class) (Outstanding)
<PAGE>
KSB BANCORP, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheets, 1
June 30, 1996 and December 31, 1995
Consolidated Statements of Income 3
Three and six months ended June 30, 1996
and June 30, 1995
Consolidated Statements of Stockholders' 4
Equity, six months ended June 30, 1996
and June 30, 1995
Consolidated Statements of Cash Flows, 5
six months ended June 30, 1996 and
June 30, 1995
Notes to Financial Statements 7-12
Item 2 Management's Discussion and Analysis of 13-18
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 19
Item 3 Defaults upon Senior Securities 19
Item 4 Submission of Matters to a vote of Security Holders 19
Item 5 Other information 19
Item 6 Exhibits and Reports on Form 8-KSB 19
Signature Page 20-21
<PAGE>
KSB BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
June 30, December 31,
1996 1995
---------- ------------
ASSETS (in thousands)
Cash and Cash Equivalents
and Due from Banks $2,348 $2,500
Interest-bearing Deposits in Banks 0 2,460
Investment Securities
Available for Sale
(at estimated Market Value) 7,857 8,377
Investment Securities to be
Held to Maturity
(estimated market value:
June 30, 1996 - 20,915;
December 31, 1995 - $19,272) 20,989 19,103
------ ------
Loans:
Real Estate Mortgages 50,501 45,913
Home Equity Loans 4,664 5,189
Installment Loans 4,701 4,495
Commercial Loans 33,265 29,220
Other loans 708 1,000
Deferred Loan Fees (216) (186)
Allowance for Loan Losses (787) (867)
------- -------
Total Loans (net) 92,836 84,764
------- -------
Other Real Estate Owned 0 41
Real Estate Loans to be Sold 1,750 1,126
Federal Home Loan Bank Stock 1,321 1,321
Bank Premises and Equipment, net 2,189 2,254
Excess of Cost over Fair Value of
Assets Acquired 671 723
Accrued Interest Receivable 848 815
Deferred Tax Asset 440 435
Cash Surrender Value of Life Insurance 505 494
Other Assets 779 820
----- ------
TOTAL ASSETS $132,533 $125,233
======= =======
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
June 30, December 31,
1996 199
---------- -----------
Deposits:
Regular Savings $21,155 $21,876
Money Market Accounts 5,326 5,763
Certificates of Deposit 61,371 55,516
N.O.W. Accounts 12,582 12,764
Demand Deposits 7,571 7,767
------- -------
Total Deposits 108,005 103,686
------- -------
Advances from FHLB 13,262 10,952
Other borrowed funds:
Escrows and trustee accounts
for sold loans 1,256 1,016
Accrued Income Taxes Payable 0 53
Accrued Expenses and
Other Liabilities 842 867
Deferred Income Taxes 124 161
------- -------
Total Liabilities 123,489 116,735
------- -------
Stockholders' Equity:
Common Stock: $.01 Par Value,
411,055 Shares Issued
and Outstanding (1) 4 4
Additional Paid-in Capital 3,501 3,475
Retained Earnings 5,905 5,360
Net unrealized loss on securities
available for sale net of deferred
taxes (76) (10)
Less: remaining obligation
under employee stock
ownership plan (ESOP) (196) (223)
Less: remaining obligation under Bank
Recognition Plan (BRP) (94) (108)
------ ------
Total Stockholders' Equity 9,044 8,498
------ ------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $132,533 $125,233
======== ========
(1) Restated to reflect 10% stock dividend.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS SIX MONTHS
ENDED ENDED
6/30/96 6/30/95 6/30/96 6/30/95
(In thousands) (In thousands)
Interest and Dividend
Income
Interest and Fees on
Loans $2,151 $1,919 $4,185 $3,553
Interest on Investment
Securities 481 569 980 1,143
Dividends 21 25 42 48
----- ----- ----- -----
Total Interest and
Dividend Income 2,653 2,513 5,207 4,744
----- ----- ----- -----
Interest Expense
Interest on Deposits 1,111 1,027 2,213 1,840
Interest on Borrowed Funds 179 236 344 574
----- ----- ----- -----
Total Interest Expense 1,290 1,263 2,557 2,414
----- ----- ----- -----
Net Interest Income 1,363 1,250 2,650 2,330
Less: provision for loan
losses 90 95 150 140
----- ----- ----- -----
Net Interest Income after
provision for loan losses 1,273 1,155 2,500 2,190
----- ----- ----- -----
Non-interest income
Net Securities gains
(losses) (46) 0 (46) 0
Fees on sold loans 13 18 25 27
Net gains on loans sold (1) 10 3 20
Mortgage servicing income 80 80 164 164
Service charges and fees 171 139 331 261
Other 21 25 51 53
----- ----- ----- -----
Total Non-interest income 238 272 528 525
----- ----- ----- -----
Non-interest expense
Salaries and benefits 515 565 1,041 1,078
Occupancy 75 82 161 168
Equipment 147 150 290 294
FDIC Premium 21 47 40 94
Advertising & Promotion 29 46 56 80
Other 290 318 598 637
----- ----- ----- -----
Total Non-interest Expense 1,077 1,208 2,186 2,351
----- ----- ----- -----
Net income before taxes 434 219 842 364
Income tax expense 139 59 265 100
----- ----- ----- -----
Net income $295 $160 $577 $264
===== ===== ===== =====
Earnings per share (based
on weighted average shares
outstanding) $0.76 $0.42 $1.49 $0.69
===== ===== ===== =====
Weighted average shares
outstanding (restated to
reflect 10% stock
dividend effective
August 12, 1996) 388,112 381,943 387,356 381,157
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Net
Unrealized
Loss on
Adj. Adj. Securities
Retained Common Paid-in for for Available
Earnings Stock Capital ESOP BRP for Sale TOTAL
-------- ------ ------- ---- ---- -------- ------
(in Thousands)
Six-months ended June 30, 1996
- ---------------------------------
Beginning
balance $5,360 4 3,475 (223)(108) (10) $8,498
Net Income 577 - - - - - 577
Dividends
Paid (32) - - - - (32)
ESOP
adjustment - - 26 27 - 53
BRP
adjustment - - - - 14 14
Securities
adjustment - - - - - (66) (66)
----- ----- ------ ----- --- --- ----
Ending
balance $5,905 4 3,501 (196) (94) (76) $9,044
======== ====== ====== ===== === ==== =====
Net
Unrealized
Loss on
Adj. Adj. Securities
Retained Common Paid-in for for Available
Earnings Stock Capital ESOP BRP for Sale TOTAL
-------- ------- -------- ---- --- --------- -----
(in Thousands)
Six-months ended June 30, 1995
- ---------------------------------
Beginning
balance $4,602 4 3,436 (280)(141) - $7,621
Net Income 264 - - - - - 264
Dividends
Paid (27) - - - - - (27)
ESOP
adjustment - - 15 29 - - 44
BRP
adjustment - - - - 18 - 18
------- ----- ------ ----- --- ----
Ending
balance $4,839 4 3,451 (251)(123) $7,920
======= ====== ====== ===== ==== =====
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
June 30,
1996 1995
-------- --------
(In thousands)
Net Income $577 $264
Adjustments to reconcile
net income to net cash
provided by operating activities
Depreciation and Amortization 350 307
Decrease in obligation under
ESOP and RRP 68 62
Provision for loan losses 150 140
Deferred Income Taxes (8) (51)
Net (gains) losses on sales of
loans originated for sale 6 (20)
Net (gain) loss on sale of securities 46 0
Net losses on sale of other real estate
owned 14 0
Decrease (increase) in:
Interest receivable (31) (213)
Prepaid expenses (66) (94)
Cash surrender of life insurance (11) (6)
Originations of Loans to be Sold (2,372) (3,573)
Sales of Loans to be Sold 1,743 3,291
Other receivables 40 115
Increase (decrease) in:
Interest payable (10) (38)
Accrued Expenses (42) 92
Accrued Taxes payable (53) (35)
Deferred Origination Fees 29 (30)
Other payables 27 (51)
------ ------
Total Adjustments (120) (104)
------ ------
Net Cash from Operation Activities (457) 160
------ ------
<PAGE>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
held to maturity (5,364) 0
Proceeds from maturities and prin-
cipal payments on investment
securities held to maturity 3,345 1,834
Proceeds from maturities and prin-
cipal payments on investment
securities available for sale 410 0
Net (increase)decrease in loans (8,252) (8,136)
Capital expenditures (111) (147)
Net purchases of FHLB stock 0 (168)
Net (increase)decrease in other assets 39 39
Net proceeds from sale of other
real estate owned 27 0
------ ------
Net cash used in investing activities (9,906) (6,578)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received through branch acquisition,
net of acquisition premium 0 12,314
Net increase (decrease) in time deposit
accounts 5,855 4,943
Net increase (decrease) in other deposit
accounts (1,536) (4,172)
Net increase (decrease) in FHLB advances 2,310 (6,990)
Net increase (decrease) in escrow accounts 240 412
Cash dividends paid on common stock
(net of ESOP) (32) (27)
---- ----
Net cash provided by financing activities 6,837 6,480
---- ----
Net increase (decrease) in cash and
cash equivalents (2,612) 62
Cash and cash equivalents, beginning
of period (1) 4,960 2,007
------ -----
Cash and cash equivalents, end of
period (1) $2,348 $2,069
======= ======
(1) Includes interest-earning
deposits in banks
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
KSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions
for Form 10-QSB and, therefore, do not include all disclosures
required by generally accepted accounting
principles for complete presentation of financial statements. In
the opinion of management, the consolidated
financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present
fairly the consolidated balance sheets of KSB Bancorp, Inc., (the
"Company") and Kingfield Savings Bank
(the "Bank"), as of June 30, 1996 and December 31, 1995, the
consolidated statements of income for the
three and six months ended June 30, 1996 and June 30, 1995,
and the consolidated statements of
stockholders' equity and cash flows for the six months ended
June 30, 1996, and June 30, 1995. All
significant intercompany transactions and balances are eliminated
in consolidation. The income reported
for 1996 period is not necessarily indicative of the results that
may be expected for the full year.
The allowance for loan losses is increased by charges to income
and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of
the allowance is based on the Bank's
past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
FASB Standard No. 114 was adopted at January 1, 1995. Under this
standard, loans considered to be
impaired are reduced to the present value of expected future cash
flows or to the fair value of collateral, by
allocating a portion of the allowance for loan losses to such
loans. If these allocations cause the allowance
for loan losses to require an increase, such increase is reported
as bad debt expense. The effect of adopting
this standard is reported as bad debt expense, and was not
significant for 1995. The carrying values of
impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows,
and increases in the present value of expected cash flows due to
the passage of time. Cash payments
representing interest income are reported as such. Other cash
payments are reported as reductions in
carrying value, while increases due to changes in estimates of
future payments and due to the passage of
time are reported as bad debt expense and decreases are reported
as reductions in bad debt expense.
Loan Servicing Rights: The company originates mortgage loans for
sale to the secondary market, and sells the
loans with servicing retained. Effective January 1, 1996, the
Company adopted FASB Statement 122 (FAS
122) in accounting for mortgage servicing rights, which requires
capitalizing the rights to service originated
mortgage loans. Prior to adoption of FAS 122, only purchased
mortgage servicing rights were capitalized.
Beginning in 1996, the total cost of mortgage loans purchased or
originated with the intent to sell is allocated
between the loan servicing right and the mortgage loan without
servicing, based on their relative fair values.
The capitalized cost of loan servicing rights is amortized in
proportion to, and over the period of, estimated
net future servicing revenue.
Mortgage servicing rights are periodically evaluated for
impairment by stratifying them based on predominant
risk characteristics of the underlying serviced loans, such as
loan type, term, and note rate. Impairment
represents the excess of cost of an individual mortgage servicing
rights stratum over its fair value, and is
recognized through a valuation allowance.
Fair values for individual stratum are based on the present value
of estimate future cash flows using a discount
rate commensurate with the risk involved. Estimates of fair
value include assumptions about prepayment,
default and interest rates, and other factors which are subject
to change over time. Changes in these
underlying assumptions could cause the fair value of loan
servicing rights, and the related valuation
allowance, to change significantly in the future.
For other accounting policies, refer to the financial statements
filed in the form 10-KSB for the year-end
December 31, 1995.
NOTE 2 - INVESTMENT SECURITIES
Investment Securities Available for Sale: Investment securities
available for sale consist of securities that the
Bank anticipates could be made available for sale in response to
changes in market interest rates, liquidity
needs, changes in funding sources and other similar factors.
These assets are specifically identified and are
carried at fair value. Amortization of premiums and accretion of
discounts are recognized in interest income
using the interest method over the period to maturity.
Unrealized holding gains and losses for these assets,
net of related income taxes, are excluded from earnings and are
reported as a net amount in a separate
component of stockholders' equity. When a decline in market
value is considered other than temporary, the
loss is recognized in the consolidated statement of income,
resulting in the establishment of a new cost basis
for the security. Mortgage-backed securities are subject to risk
of repayment which can affect the yields
realized on the securities by increasing or decreasing the period
over which premiums and discounts are
recognized.
The following is a summary of investment securities at amortized
cost and estimated market values ($ in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- --------- ------
June 30, 1996
AVAILABLE FOR SALE
U.S. Government Agency
securities 3,999 2 23 3,978
Corporate Bonds - - - -
Mortgage-backed
Securities 3,972 - 93 3,879
REMIC - - - -
----- ----- ----- -----
Total Available
for Sale 7,971 2 116 7,857
===== ===== ===== =====
TO BE HELD TO MATURITY
U.S. Government Agency
securities - - - -
Corporate Bonds 55 - - 55
Mortgage-backed
Securities 18,928 121 210 18,839
REMIC 2,006 15 - 2,021
------ ----- ----- -----
Total to be Held
to Maturity 20,989 136 210 20,915
====== ===== ===== ======
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- --------- ------
December 31,1995
AVAILABLE FOR SALE
U.S. Government Agency
securities 3,999 3 9 3,993
Corporate Bonds - - - -
Mortgage-backed
Securities 4,393 - 9 4,384
REMIC - - - -
----- ---- ----- -----
Total Available
for Sale 8,392 3 18 8,377
====== ===== ===== =====
TO BE HELD TO MATURITY
U.S. Government Agency
securities - - - -
Corporate Bonds 95 1 - 96
Mortgage-backed
Securities 16,968 236 96 17,108
REMIC 2,039 29 - 2,068
------ ----- ---- ------
Total to be Held
to Maturity 19,102 266 96 19,272
====== ===== ==== ======
<PAGE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows for the
six months ended June 30, 1996:
Balance at January 1, 1996 $866,770
Provision for loan losses 150,000
Charged-off loans (230,433)
Recoveries 786
--------
$787,123
========
Impaired loan period information:
Information regarding impaired loans is as follows for the six
months ended June 30, 1996:
Average investment in impaired loans: 1,116,678
Interest Income recognized on
impaired loans including
interest income recognized
on cash basis 54,914
Interest Income recognized on
impaired loans on cash basis 54,914
Impaired loan period end information:
Information regarding impaired loans at June 30, 1996 is as
follows:
Balance of impaired loans 1,002,534
less:
portion for which no allowance
for loan losses is allocated (679,554)
---------
Portion of impaired loan balance for
which an allowance for credit
losses is allocated 322,980
===========
Portion of allowance for loan losses
allocated to the impaired loan
balance 150,929
Note 4 - LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses
are recognized in a valuation allowance by
charges to income.
NOTE 5 - EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED
(Goodwill)
The excess of cost over fair value of net assets acquired in
branch acquisitions is amortized to expense using
the straight line method over ten years.
NOTE 6 - EARNINGS PER COMMON SHARE
The earnings per share computation is based upon the weighted
average number of shares of stock
outstanding during the period. Only ESOP shares that have been
committed to be released are considered
outstanding. Effective August 12, 1996 the Company will pay a
10% stock dividend. Per share information is
restated retroactively to reflect the dividend.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off balance
sheet risk in the normal course of business to meet
financing needs of its customers. The financial instruments
include commitments to make loans and unused
lines of credit. The Bank's exposure to credit loss in the event
of nonperformance by the other party to the
financial instrument for commitments to make loans and unused
lines of credit is represented by the
contractual amount of those instruments. The Bank follows the
same credit policy to make such
commitments as it follows for those loans recorded in the
financial statements. At June 30, 1996 and
December 31, 1995, the Bank had commitments to make loans
totaling $2,716,000 and $2,637,400 and unused
lines of credit totaling $9,841,000 and $10,152,295,
respectively. Commitments to make loans may expire
without being used, therefore the amount does not necessarily
represent future cash commitments.
Note 8 - INTEREST RATE SWAPS
The Bank is a party to two interest rate swap agreements. The
first, dated November 1994, has a "notional
amount" of $2,000,000 on which it is obligated to pay interest
based on the three month LIBOR rate, adjusting
quarterly, and receives a fixed-rate payment. The contract
matures November 1997. The Bank receives a fixed
rate of 4.91% and, as of June 30, 1996, pays at the rate of
5.50%. The second agreement, dated June 1996, has
a "notional amount" of $5,000,000 on which the Bank is obligated
to pay interest based on the three month
LIBOR rate adjusting quarterly, and receives a fixed-rate
payment. This contract matures June, 1999. The Bank
receives a fixed-rate of 6.63% and as of June 30, 1996, pays at
the rate of 5.5625%. Net interest expense for
the period ending June 30, 1996 was $5,006. The Bank has
utilized interest rate swaps to partially protect its
net interest income stream against the effects of falling rates
on prime-based loans. The "notional" amount is a
figure used to calculate settlement payments and does not
represent exposure to credit loss. The estimated
market value of the Bank's interest rate swaps at June 30, 1996
was ($22,077). The Bank is party to an interest
rate floor agreement in the notional amount of $5,000,000, dated
June 1996, whereby the Bank receives the
difference between 6% and the three-month LIBOR rate, but pays
nothing if the LIBOR rate exceeds 6%. The
contract expires June, 1998. The Bank paid a premium of $22,500
for the contract which is recognized into
interest income on a straight-line basis over the life of the
contract. The estimated market value of the
agreement $27,492.
Note 9 - LOAN SERVICING
The unpaid principal balance of mortgage loans serviced for
others, which are not included on the balance
sheet, was $78,130,000 and $81,219,879 at June 30, 1996 and
December 31, 1995, respectively. The balance
of loans serviced for others related to servicing rights that
have been capitalized was $1,065,165 and $0 at
June 30, 1996 and December 31, 1995, respectively. The remaining
balance of loans serviced for others also
have servicing rights associated with them; however, these
servicing rights arose prior to adoption of FAS
122, and accordingly, have not been capitalized on the balance
sheet.
The carrying value and fair value of capitalized loan servicing
rights at June 30, 1996 was $9,000. No valuation
allowance has yet been established.
<PAGE>
KSB BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
I. General
The Company's results of operations are dependent primarily on
the Bank. The Bank's primary source of
earnings is its net interest income, which is the difference
between the interest income earned on its loans,
mortgage-backed securities and investment portfolio versus its
cost of funds, which consists of the interest
paid on deposits and borrowings.
To a lesser extent but still significant is the effect of the
Bank's secondary mortgage market activities in which
the Bank originates residential mortgage loans for the secondary
mortgage market and subsequently sells the
loans while retaining servicing rights and fees.
The Company's operating expenses consist principally of employee
compensation and benefits, occupancy and
equipment expenses, Federal Deposit Insurance Corporation
premiums and other general and administrative
expenses. The Company's results of operations are significantly
affected by general economic and
competitive conditions, particularly changes in market interest
rates, as well as government policies and
actions of regulatory authorities.
II. Interest Rate Sensitivity
At June 30, 1996, the Bank's total interest-bearing liabilities
maturing or repricing within one year exceeded
total interest-earning assets maturing or repricing in the same
period by $17.0 million representing a negative
one-year cumulative interest rate sensitivity gap ratio of 14.8%
of total assets. This "negative" gap position
compares to a cumulative "positive" one-year gap position of $6.6
million or 5.2% of total assets at December
31, 1995. The change in the dollar gap is largely the result of
the management's decision to protect against
falling rates by entering into a $5.0 million interest rate swap
and a $5.0 million interest rate floor to add to
the Bank's current $2.0 million interest rate swap. The $5.0
million swap pays the Bank 6.63% fixed through
June 1999 and the Bank pays three month LIBOR. The interest rate
floor pays the Bank the difference
between 6% and the three month LIBOR until June 1998, but the
Bank pays nothing if the three month LIBOR
exceeds 6%. Management feels that if rates decrease the Bank's
prime-based loans will immediately reprice
downward, but the Bank will not be able to drop rates
correspondingly on its fixed-rate passbook and NOW
accounts and MMDA accounts, a large portion of which are
currently carried in the "one year or less" column
in the gap calculation. Balances in the Bank's adjustable-rate
loans which reprice in one to three years or less
are stable while fixed rate 15-year loan balances are up $5.0
million since December 31, 1995. This contributes
to the "negative" gap position. Management determined that the
Bank could hold some saleable 15-year
mortgages (which typically pay off in five to seven years)
without undue interest rate risk. The "gap"
measurement is based on an internal analysis by Bank management,
which includes subjective evaluation of the
rate sensitivity of the Bank's money market and other short-term
deposit accounts, and certain assumptions
regarding prepayments on the Bank's loan and mortgage-backed
security portfolio. (Refer to Interest rate
sensitivity table which follows).
The following table sets forth the amounts of interest earning
assets and interest-bearing liabilities
outstanding at June 30, 1996 which are anticipated by the Bank,
based upon certain assumptions, to reprice
or mature in each of the future time periods shown. Except as
stated below, the amount of assets and
liabilities shown which reprice or mature during a particular
period were determined in accordance with
the earlier of term to repricing or the contractual terms of the
asset or liability. Fixed-rate Passbook Savings
and NOW accounts, which totaled $20.1 million at June 30, 1996
are assumed to be withdrawn at the annual
percentage rates of 17% and 37% respectively. Money market
accounts are assumed to reprice in three-months
or less. Certificate accounts are assumed to reprice at the date
of contractual maturity. Fixed-rate mortgages
totaling $24.1 million (included in the "Mortgage Loans"
category) are amortized using a constant prepayment
rate ("CPR") of 8.0 which approximates the Bank's prior
experience. Fixed-rate loans in "other loans" are
amortized with the assumption of no prepayment. Mortgage backed
securities are amortized primarily using a
CPR of 15.0.
At June 30, 1996
(dollars in thousands)
Over Over
1 year 1year- 3 years- More than
or less 3 years 5 years 5 years TOTAL
Interest-earning
assets:
Mortgage loans(1)(2) 41,450 11,856 4,160 12,353 69,819
Other loans (1) 10,149 8,909 3,452 2,485 24,995
Interest-bearing deposits 0 0 0 0 0
Mortgage-backed securities 7,830 6,668 4,898 5,510 24,906
Investment securities(3) 4,375 1,000 0 0 5,375
------ ------ ----- ------ ------
Total Interest-earning
assets 63,804 28,433 12,510 20,348 125,095
------ ------ ----- ------ -------
Less:
Non-performing loans (1,148) (200) (37) (287) (1,672)
Unearned discount and
deferred fees (128) (37) (13) (38) (215)
------ ------ ------ ----- -------
Net interest-earning
assets 62,528 28,196 12,460 20,023 123,208
------ ------ ------ ------ -------
Interest-bearing liabilities:
Fixed- and variable-rate
passbook accounts 15,948 1,936 1,334 2,951 22,169
NOW accounts 4,655 4,781 1,897 1,249 12,582
Money market accounts 5,326 0 0 0 5,326
Certificate & club accounts 33,782 17,806 9,783 0 61,371
Borrowings 10,810 1,000 1,452 0 13,262
------ ------ ------ ------ -------
Total interest-bearing
liabilities 70,521 25,523 14,466 4,200 114,710
------ ------ ------ ------ -------
Effect of Interest
Rate Swaps(4) (12,000) 12,000
------ ------ ------ ------
Interest sensitivity gap
per period (19,993) 14,673 (2,006) 15,823
====== ====== ====== ======
Cumulative interest
sensitivity gap (19,693) (5,319) (7,325) 8,498
====== ====== ====== ======
Cumulative interest
sensitivity gap as a
percentage of total
assets -14.8% -3.9% -5.4% 6.3%
Cumulative net interest-
earning assets as a
percentage of interest
sensitive liabilities 75.8% 94.5% 93.4% 107.4%
(1) For purposes of the GAP analysis, mortgage and other loans
are not reduced by the allowance for loan losses.
(2) Includes $1,750,000 of Loans Held for Sale balance which is
placed in the "1 year or less" repricing category.
(3) Non-amortizing U.S. Government agency investments. Includes
Federal Home Loan Bank Stock of $1,321,000.
(4) Includes $2,000,000 swap maturing November 1997, $5,000,000
swap maturing June 1999 and $5,000,000 floor maturing June 1998.
III. Financial Condition
Total assets increased $7.3 million or 5.8% to $132.5 million at
June 30, 1996. This was primarily attributable to
the internal generation of $8.6 million of net new loans. The
Bank also purchased $5.3 million in short-term
mortgage-backed securities to make better use of short-term
liquidity. Total portfolio loans increased by
$8.1 million, or 9.5%. Real Estate Loans to Be Sold increased by
$0.6 million to $1.7 million. The Bank will put
approximately $3.0 million of saleable loans, which have terms of
15 years or less, into its portfolio in July
1996. The Bank's Commercial Loan demand remains strong as the
Bank continues to establish itself in the
Lewiston market.
Total deposits increased $4.3 million or 4.2% with a continued
shift from lower-cost demand and money market
deposits into short-term (6-12 months) certificate of deposit.
Borrowed funds at June 30, 1996 totaling $13.3 million includes
$10.5 million of fixed-rate borrowings and
$2.9 million of variable-rate daily borrowings from the Federal
Home Loan Bank of Boston. The fixed-rate
borrowings mature $7.0 million within three-months, $2.0 million
in 1997 and $1.5 million in October 2000.
Investment securities To Be Held to Maturity and Available for
Sale consist primarily of U.S.
Government-Agency and Agency-backed notes and Mortgage-backed
securities which are predominantly of
the type issued by U.S. Government agencies. Of these, $3.6
million are variable-rate securities adjusting
annually. The remainder are fixed-rate in nature.
Non-performing loans at June 30, 1996 were stable at $1,672,000,
or 1.9% of total loans, compared to
$1,645,000, or 1.9% of total loans at December 31, 1995. The
current balance is represented by loans
well-secured by real estate and/or loans carrying SBA or Finance
Authority of Maine (FAME) guarantees.
Currently, the SBA, VA or FAME guarantee $397,000 of the
$1,672,000 total. Also included in
non-performing loans are loans which are less than ninety days
past due, but whose interest is recognized
on a cash basis only. These loans are restructured loans or were
non-accrual loans in the recent past and have
not yet demonstrated the ability to stay current. Amounts of
such loans are $710,000 and $835,000 at
December 31, 1995 and June 30, 1996, respectively. The Bank has
charged off $230,000 net loans for the year.
These losses had already been provided for in the Bank's past
loan loss provision. Management anticipates
adding $180,000 to the loan loss allowance through December 1996
based on current loan volumes and loan
quality.
IV. Comparison of Operating Results
The Company reported net income of $295,000 for the three-month
period ended June 30, 1996, which
represents a $135,000 increase from the $160,000 net income
reported for the comparable three-month
period in 1995. Net interest income after provision for loan
losses increased by $118,000 or 10.2%,
non-interest income decreased by $34,000 or 12.5% for the
three-months ended June 30, 1996 compared
to the same period for 1995, and operating expenses for the same
comparable periods decreased by $131,000
or 10.8%.
The increase in net interest income is attributable to a 5%
increase in earning assets for the 1996 period
compared to 1995. In addition, interest spreads increased from
those of the second quarter of 1995 by
approximately 22 basis points.
Non-interest income relating to the Bank's secondary mortgage
market activities decreased from $108,000 for
the three-months ended June 30, 1995 to $92,000 for the
comparable period of 1996. The decrease resulted
from the 1996 period being a period of rising interest rates
which resulted in the Bank incurring losses on
mortgage loans it sold during the period. In addition the volume
of loans sold in the 1996 period was lower.
Other service charges, fees and other income increased by $28,000
from $164,000 in the 1995 period to
$192,000 for the 1996 period reflecting greater use of the Bank's
fee-based deposit services and seasonal
increase in net income from Canadian currency exchange
transactions. The 1996 period included a $46,000
non-recurring loss from the default and payoff of a 100%
guaranteed GNMA mortgage-backed security. The
Bank held the security at a premium which had not fully amortized
into interest income and had to be written
off. This security was backed by a single guaranteed loan which
defaulted. The Bank's other
mortgage-backed securities are each backed by multiple loans
therefore the risk of any material default is
minimal.
Non-interest expense decreased by $131,000 or 10.8% from the
three-months ended June 30, 1995 to the
three-months ended June 30, 1996. The Bank instituted numerous
cost-cutting measures during 1995
including staff reductions, closure of its Waterville, Maine,
office. and modifications of seasonal
operations in its Sugarloaf/USA office. Salary reductions of
$50,000 and lowering of normal operating
expenses of $28,000 contributed significantly to the decrease. In
addition, assessments paid to the Bank's
deposit insurer, the FDIC, decreased by $26,000.
For the six months ended June 30, 1996 the Company reported net
income of $577,000 compared to
$264,000 for the 1995 period.
Net interest income after provision for loan losses increased by
$310,000 or 14.2% due to an increase in
interest spread of approximately 30 basis points and an increase
in average earning assets of
approximately 7%. In March 1995 the Bank acquired four branches
from Fleet Bank of Maine which
increased 1995's earning assets by $19 million. A full six
months benefit of the increase is included in the
1996 period whereas only three-months benefit is in the 1995
period.
Non-interest income increased by only $3,000 or 0.6% for the
first six months of 1996 compared to the same
period of 1995. This includes the $46,000 loss on securities,
without which the increase would have been
$49,000 or 9.3%. Deposit-related service charges and fees
increased by $70,000 or 26.8%. The 1995 period
included only three-months of income from the branches acquired.
In addition, the second quarter of 1996
saw an increase in the use of fee-based services and a seasonal
increase in income from Canadian currency
exchange transactions. Income on mortgage origination and sale
activity was down by $19,000 due to the
lower volume of sales during the 1996 period sales at losses
during 1996's rising rate period.
Operating expenses for the six-month period ended June 30, 1996
were down 7% from $2.35 million to $2.19
million. The decrease is largely attributable to cost cutting
measures taken in 1995.
Expenses in 1996 reflect a full six months of operating the
acquired Fleet branches and included in 1995 first
quarter expenses are the one-time start-up costs associated with
the branch acquisitions. Approximately
one-third of the decrease is attributable to a decrease of
$54,000 in fees assessed by the FDIC. A portion
($35.1 million) of the Bank's deposits are insured by the Savings
Association Insurance Fund (SAIF) (an arm
of the FDIC) in connection with the Bank's acquisition of First
Federal Savings Association of Lewiston from
the Resolution Trust Corporation in 1994. Under an FDIC
recapitalization plan being considered in the U.S.
Congress, the SAIF deposits would be assessed a one-time fee
(currently estimated at $230,000) by SAIF
which would be charged to current income. Future assessments
would be reduced substantially under the plan.
V. Liquidity and Capital Resources
The primary objective of the Bank's mortgage-backed securities
and investment securities portfolios is to
provide for liquidity needs of the Company and to contribute to
profitability by providing a stable cash
flow of dependable earnings. It is not the intent of management
to sell these securities to generate liquidity.
The Bank has in place available lines of credit secured by these
securities. In addition, the Bank currently has
access to substantial additional funds through its borrowing
capacity at the Federal Home Loan Bank of
Boston.
Stockholder's equity at June 30, 1996 was $9.04 million, an
increase of $546,000 or 6.4% over total equity at
December 31, 1995. The increase resulted from net income of
$577,000 for the period, $67,000 in adjustments
related to the Employee Stock Ownership Plan (ESOP) and the Bank
Recognition Retention Plan (RRP), less a
$37,000 dividend paid to stockholders plus a $5,000 return of
accumulated dividends on unallocated shares
of the ESOP. The net unrealized loss on securities available for
sale increased by $66,000 for the six-months
(net of deferred tax asset of $34,000), bringing the net increase
in reported equity to $546,000.
At June 30, 1996, the Company's ratio of core capital to total
assets equaled 6.35%. This represents an
increase from the December 31, 1995 ratio of 6.24%.
At June 30, 1996, the Bank's ratio of core capital to total
assets equaled 6.3% compared to 6.0% at December
31, 1995. The Bank's net income of $593,000 accounted for the
increase.
The ratio of the Bank's risk-based capital to risk-weighted
assets at June 30, 1996 was 10.9% compared to
11.0% at December 31, 1995. The Bank's capital ratios are derived
from data presented in the Bank's FDIC call
reports.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults upon Senior Securities
None
Item 4 Submission of Matters to a vote of Security
Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
a) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
KSB BANCORP, INC.
Dated: August 14, 1996 /s/ John E. Thien
John E. Thien
Chief Financial Officer
and duly Authorized Officer
of the Registrant
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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