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 September 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
September 30, 1996 and December 31, 1995
Consolidated Statements of Income 3
Three and nine months ended September 30, 1996
and September 30, 1995
Consolidated Statements of Stockholders' 4
Equity, nine months ended September 30, 1996
and September 30, 1995
Consolidated Statements of Cash Flows, 5
nine months ended September 30, 1996 and
September 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)
September 30, December 31,
1996 1995
------------- -----------
ASSETS
(in thousands)
Cash and Cash Equivalents and
Due from Banks $ 2,959 $ 2,500
Interest-bearing Deposits in Banks 0 2,460
Investment Securities Available for Sale
(at estimated Market Value) 7,587 8,377
Investment Securities to be Held to Maturity
(estimated market value: Sept 30, 1996
19,620; December 31, 1995 - $19,272) 19,612 19,103
------- -------
Loans:
Real Estate Mortgages 51,368 45,913
Home Equity Loans 4,735 5,189
Installment Loans 4,728 4,495
Commercial Loans 35,167 29,220
Other loans 744 1,000
Deferred Loan Fees (226) (186)
Allowance for Loan Losses (879) (867)
------- -------
Total Loans (net) 95,637 84,764
------- -------
Other Real Estate Owned 0 41
Real Estate Loans to be Sold 1,438 1,126
Federal Home Loan Bank Stock 1,321 1,321
Bank Premises and Equipment, net 2,196 2,254
Excess of Cost over Fair Value of
Assets Acquired 646 723
Accrued Interest Receivable 928 815
Deferred Tax Asset 465 435
Cash Surrender Value of Life Insurance 548 494
Other Assets 742 820
-------- --------
TOTAL ASSETS $134,079 $125,233
======== ========
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
September 30, December 31,
1996 1995
----------- ----------
Deposits:
Regular Savings $ 20,950 $ 21,876
Money Market Accounts 6,398 5,763
Certificates of Deposit 59,511 55,516
N.O.W. Accounts 13,238 12,764
Demand Deposits 9,270 7,767
-------- --------
Total Deposits 109,367 103,686
-------- --------
Advances from FHLB 12,932 10,952
Escrows and trustee accounts for sold loans 1,245 1,016
Accrued Income Taxes Payable 44 53
Accrued Expenses and Other Liabilities 1,059 867
Deferred Income Taxes 101 161
-------- --------
Total Liabilities 124,748 116,735
-------- --------
Stockholders' Equity:
Common Stock: $.01 Par Value,
411,055 Shares Issued and Outstanding 4 4
Additional Paid-in Capital 4,305 3,475
Retained Earnings 5,361 5,360
Net unrealized loss on securities
available for sale net of deferred taxes (70) (10)
Less: remaining obligation
under employee stock ownership plan (ESOP) (182) (223)
Less: remaining obligation under Bank
Recognition Plan (BRP) (87) (108)
-------- --------
Total Stockholders' Equity 9,331 8,498
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $134,079 $125,233
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS NINE MONTHS
ENDED ENDED
9/30/96 9/30/95 9/30/96 9/30/95
(In thousands) (In thousands)
Interest and Dividend Income
Interest and Fees on Loans $2,308 $2,025 $6,493 $5,578
Interest on Investment Securities 452 551 1,432 1,694
Dividends 22 21 63 69
------ ------ ------ ------
Total Interest and Dividend Income 2,782 2,597 7,988 7,341
------ ------ ------ ------
Interest Expense
Interest on Deposits 1,140 1,080 3,353 2,919
Interest on Borrowed Funds 168 228 512 802
------ ------ ------ ------
Total Interest Expense 1,308 1,308 3,865 3,721
------ ------ ------ ------
Net Interest Income 1,474 1,289 4,123 3,620
Less: provision for loan losses 150 105 300 245
------ ------ ------ ------
Net Interest Income after
provision for loan losses 1,324 1,184 3,823 3,375
------ ------ ------ ------
Non-interest income
Net Securities gains (losses) 0 0 (47) 0
Fees on sold loans (4) 19 20 46
Net gains on loans sold 11 6 14 26
Mortgage servicing income 78 82 242 246
Service charges and fees 185 145 517 405
Other 25 19 76 72
------ ------ ------ ------
Total Non-interest income 295 271 822 795
------ ------ ------ ------
Non-interest expense
Salaries and benefits 511 525 1,552 1,603
Occupancy 66 74 227 242
Equipment 163 151 452 445
FDIC Premium 196 25 236 119
Advertising & Promotion 25 32 80 112
Other 244 339 842 976
------ ------ ------ ------
Total Non-interest Expense 1,205 1,146 3,389 3,497
------ ------ ------ ------
Net income before taxes 414 309 1,256 673
Income tax expense 132 91 397 190
------ ------ ------ ------
Net income $282 $218 $859 $483
====== ====== ====== ======
Earnings per share (based
on weighted average shares
outstanding) $0.72 $0.57 $2.21 $1.26
====== ====== ====== ======
Weighted average shares outstanding
(restated to reflect 10% stock
dividend effective August 12, 1996) 389,608 383,510 388,112 381,950
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)
Nine-months ended Sept 30, 1996
- ---------------------------------
Beginning balance $5,360 4 3,475 (223) (108) (10) $8,498
Net Income 859 - - - - - 859
Cash Dividends Paid (75) - - - - - (75)
Stock Dividend Paid (783) - 783 - - - 0
ESOP adjustment - - 47 41 - 88
BRP adjustment - - - - 21 21
Securities adjustment - - - - - (60) (60)
------ ----- ------ ----- ----- ---- ------
Ending balance $5,361 4 4,305 (182) (87) (70) $9,331
====== ===== ====== ===== ===== ==== ======
Net
Unrealized
Loss on
Adj. Adj. Securities
Retained Common Paid-in for for Available
Earnings Stock Capital ESOP BRP for Sale TOTAL
-------- ------ ------- ---- ---- ---------- ------
(in Thousands)
Nine-months ended Sept 30, 1995
- ---------------------------------
Beginning balance $4,602 4 3,436 (280) (141) - $7,621
Net Income 483 - - - - - 483
Dividends Paid (64) - - - - - (64)
ESOP adjustment - - 23 43 - - 66
BRP adjustment - - - - 26 - 26
------ ----- ------ ----- ----- ---- ------
Ending balance $5,021 4 3,459 (237) (115) - $8,132
====== ===== ====== ===== ===== ==== ======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
September 30,
1996 1995
-------- --------
(In thousands)
Net Income $859 $483
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and Amortization 530 479
Decrease in obligation under ESOP and RRP 109 92
Provision for loan losses 300 245
Deferred Income Taxes (60) (86)
Net (gains) losses on sales of
loans originated for sale (14) (26)
Net (gain) loss on sale of securities 47 0
Net losses on sale of other real estate owned 14 7
Decrease (increase) in:
Interest receivable (112) (167)
Prepaid expenses (59) (57)
Cash surrender of life insurance (55) (10)
Originations of Loans to be Sold (3,603) (4,424)
Sales of Loans to be Sold 3,306 4,162
Other receivables 39 181
Increase (decrease) in:
Interest payable (34) (24)
Accrued Expenses 182 161
Accrued Taxes payable (8) (66)
Deferred Origination Fees 40 (43)
Other payables 43 (170)
------- -------
Total Adjustments 665 254
------- -------
Net Cash from Operating Activities 1,524 737
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
held to maturity (5,364) 0
Proceeds from maturities and principal
payments on investment
securities held to maturity 4,679 3,226
Proceeds from maturities and principal
payments on investment securities
available for sale 682 0
Net (increase)decrease in loans (11,213) (9,915)
Capital expenditures (209) (233)
Net purchases of FHLB stock 0 (168)
Net (increase)decrease in other assets 58 59
Net proceeds from sale of other real estate owned 27 38
-------- -------
Net cash used in investing activities (11,340) (6,993)
-------- -------
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received through branch acquisition,
net of acquisition premium 0 12,314
Net increase (decrease) in time deposit accounts 3,995 4,767
Net increase (decrease) in other deposit
accounts 1,686 (2,163)
Net increase (decrease) in FHLB advances 1,980 (9,174)
Net increase (decrease) in escrow accounts 229 361
Cash dividends paid on common stock (net of ESOP) (75) (64)
------ -------
Net cash provided by financing activities 7,815 6,041
------ -------
Net increase (decrease) in cash and
cash equivalents (2,001) (215)
Cash and cash equivalents, beginning of period (1) 4,960 2,007
------- -------
Cash and cash equivalents, end of period (1) $2,959 $1,792
======= =======
(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 September 30, 1996 and December 31, 1995, the
consolidated statements of income for the three and nine months ended
September 30, 1996 and September 30, 1995, and the consolidated statements of
stockholders' equity and cash flows for the nine months ended September 30,
1996, and September 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 rights 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.
<PAGE>
Fair values for individual strata are based on the present value of estimated
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.
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows for the nine months
ended September 30, 1996:
Balance at January 1, 1996 $866,770
Provision for loan losses 300,000
Charged-off loans (313,996)
Recoveries 26,530
---------
$879,304
=========
Impaired loan period information:
Information regarding impaired loans is as follows for the nine months ended
September 30, 1996:
Average investment in impaired loans: 1,178,885
Interest Income recognized on impaired loans
including interest income recognized
on cash basis 83,635
Interest Income recognized on
impaired loans on cash basis 77,144
<PAGE>
NOTE 3 (CONTINUED)
Impaired loan period end information:
Information regarding impaired loans at September 30, 1996 is as follows:
Balance of impaired loans 1,126,947
less:
portion for which no allowance
for loan losses is allocated (661,021)
----------
Portion of impaired loan balance for
which an allowance for credit
losses is allocated 465,926
==========
Portion of allowance for loan losses
allocated to the impaired loan balance 144,780
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 paid 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
September 30, 1996 and December 31, 1995, the Bank had commitments to make
loans totaling $1,418,000 and $2,637,400 and unused lines of credit totaling
$10,297,000 and $10,152,295, respectively. Commitments to make loans may
expire without being used, therefore the amount does not necessarily represent
future cash commitments.
<PAGE>
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 September 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 September 30, 1996, pays at the rate of 5.5625%. Net interest expense for
the period ending September 30, 1996 was $4,529. 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 September 30, 1996 was ($2,009). 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 at
September 30, 1996 is $27,569.
Note 9 - LOAN SERVICING
The unpaid principal balance of mortgage loans serviced for others, which are
not included on the balance sheet, was $77,334,880 and $81,219,879 at
September 30, 1996 and December 31, 1995, respectively. The balance of loans
serviced for others related to servicing rights that have been capitalized was
$3,350,600 and $0 at September 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
September 30, 1996 was $15,000. No valuation allowance has yet been
established.
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.
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.
<PAGE>
II. Interest Rate Sensitivity
At September 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 $21.1 million representing a negative
one-year cumulative interest rate sensitivity gap ratio of 15.7% 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. Conversely, if rates rise,
increases in rates on these accounts will most likely lag rendering them less
sensitive than the table might indicate. Additionally, the interest rate
floor would reach its 6% "strike rate" so it is rate sensitive only in a
falling rate scenario. 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 $5.6 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. Growth in the Bank's deposits has taken
place primarily in certificates of deposit of 1-year terms or less. Balances
in renewing longer term certificates are also shifting to a 1 year or shorter
terms. This factor significantly increases the "negative" gap position. This
situation, however, has significantly reduced interest expense over the nine
month period. 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 September 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 $20.6 million at September 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 $24.6 million (included in the
"Mortgage Loans" category) are amortized using a constant prepayment rate
("CPR") of 9.0. Fixed-rate loans in "other loans" are amortized with the
assumption of no prepayment. Mortgage-backed securities are amortized
primarily using a CPR of 10.0.
<PAGE>
INTEREST RATE SENSITIVITY TABLE
At September 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) $44,044 $11,075 $4,507 $11,291 $70,917
Other loans (1) 11,540 8,855 4,099 2,769 27,263
Interest-bearing deposits 0 0 0 0 0
Mortgage-backed securities 6,946 6,287 4,478 5,472 23,174
Investment securities(3) 4,346 1,000 0 0 5,346
-------- ------- ------- ------- --------
Total Interest-earning
assets 66,876 27,208 13,084 19,532 126,700
-------- ------- ------- ------- --------
Less:
Non-performing loans (1,497) (34) (37) (265) (1,833)
Unearned discount and
deferred fees (140) (35) (14) (36) (226)
-------- ------- ------- ------- --------
Net interest-earning
assets 65,239 27,139 13,033 19,231 124,641
-------- ------- ------- ------- --------
Interest-bearing liabilities:
Fixed- and variable-rate
passbook accounts 15,424 1,899 1,308 2,897 21,528
NOW accounts 4,898 5,030 1,997 1,313 13,238
Money market accounts 6,398 0 0 0 6,398
Certificate & club accounts 37,132 13,720 8,927 0 59,779
Borrowings 10,480 1,000 1,452 0 12,932
-------- ------- ------- ------- --------
Total interest-bearing
liabilities $74,332 $21,649 $13,684 $4,210 $113,875
-------- ------- ------- -------- --------
Effect of Interest
Rate Swaps and floors(4) (12,000) 12,000
-------- ------- ------- --------
Interest sensitivity gap
per period (21,093) 17,490 (651) 15,021
======== ======= ======= ========
Cumulative interest
sensitivity gap $(21,093) $(3,604) $(4,255) $10,766
======== ======= ======= ========
Cumulative interest
sensitivity gap as a
percentage of total
assets -15.7% -2.7% -3.2% 8.0%
Cumulative net interest-
earning assets as a
percentage of interest
sensitive liabilities 75.6% 96.2% 96.1% 109.5%
(1) For purposes of the GAP analysis, mortgage and other loans are not reduced
by the allowance for loan losses.
(2) Includes $1,438,000 of Loans Held for Sale 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 which is placed in the "1 year or less"
category.
(4) Includes $2,000,000 swap maturing November 1997, $5,000,000 swap maturing
June 1999 and $5,000,000 floor maturing June 1998.<PAGE>
III. Financial Condition
Total assets increased $8.8 million or 7.1% to $134.1 million at September 30,
1996. This was primarily attributable to the internal generation of $11.2
million of net new loans. The Bank also purchased $5.4 million in short-term
mortgage-backed securities to make better use of short-term liquidity. Total
portfolio loans increased by $10.9 million, or 12.8%. Real Estate Loans to Be
Sold increased by $0.3 million to $1.4 million. The Bank 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 $5.7 million or 5.5% with a continued shift from
lower-cost savings deposits into short-term (6-12 months) certificates of
deposit. The increase in demand deposits is largely attributable to a
deposit of construction funds of a local school district. The Bank
anticipates run off of the remaining balance of the school's $1.0 million
deposit over the next year.
Borrowed funds at September 30, 1996 totaling $12.9 million includes $12.4
million of fixed-rate borrowings and $0.5 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, $4.0 million in 1997 and
$1.4 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, $3.5 million are variable-rate securities
adjusting annually. The remainder are fixed-rate in nature.
Non-performing loans at September 30, 1996 were up slightly at $1,833,000, 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 $383,000 of the
$1,833,000 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 $1,029,000 at December 31, 1995 and
September 30, 1996, respectively. The Bank has charged off $287,000 net loans
for the year. These losses had already been provided for in the Bank's past
loan loss provision.
IV. Comparison of Operating Results
The Company reported net income of $282,000 for the three-month period ended
September 30, 1996, which represents a $64,000 increase from the $218,000 net
income reported for the comparable three-month period in 1995. Net interest
income after provision for loan losses increased by $140,000 or 11.8%,
non-interest income increased by $24,000 or 8.9% for the three-months ended
September 30, 1996 compared to the same period for 1995, and operating
expenses for the same comparable periods increased by $59,000 or 5.1%.
The increase in net interest income is attributable to a 5.8% increase in
earning assets for the 1996 period compared to 1995. In addition, interest
spreads increased from those of the third quarter of 1995.
Non-interest income relating to the Bank's secondary mortgage market
activities decreased from $107,000 for the three-months ended September 30,
1995 to $85,000 for the comparable period of 1996. The decrease resulted from
lower volume of mortgage sales activity in the 1996 period compared to 1995.
Other service charges, fees and other income increased by $46,000 from
$164,000 in the 1995 period to $210,000 for the 1996 period reflecting greater
use of the Bank's fee-based deposit services.
Non-interest expense increased by $59,000 or 5.1% from the three-months ended
September 30, 1995 to the three-months ended September 30, 1996. Included in
1996's expenses is a one-time FDIC assessment of $175,800 imposed on deposits
the Bank acquired in 1994 from an institution insured by the FDIC's SAIF--
Savings Association Insurance Fund. The assessment was imposed by FDIC under
a recapitalization plan passed by Congress on September 30, 1996. This plan
includes reductions in future assessments. It is anticipated that the
subsequent lowering of annual assessments will save the Bank $70,000 per year
over the next 3 years. Without the special assessment, expenses would have
decreased by $117,000 or 10.2%. 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 which had great impact on 1996 expenses. 1995 expenses included
$27,000 in loss on disposal of equipment in the Waterville office. Salary
reductions of $30,000 and lowering of normal operating expenses of $33,000
contributed significantly to the decrease.
For the nine months ended September 30, 1996 the Company reported net income
of $859,000 compared to $483,000 for the 1995 period.
Net interest income after provision for loan losses increased by $448,000 or
13.3% due to an increase in interest spread and an increase in average earning
assets of approximately 6.5%. In March 1995 the Bank acquired four branches
from Fleet Bank of Maine which increased 1995's earning assets by $19 million.
A full nine months benefit of the increase is included in the 1996 period
whereas only six-months benefit is in the 1995 period.
Non-interest income increased by $27,000 or 3.4% for the first nine months of
1996 compared to the same period of 1995. The 1996 period included a $47,000
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 curtailed. Without the $47,000 loss the
increase would have been $74,000 or 9.3%. Deposit-related service charges and
fees increased by $112,000 or 27.7%. The 1995 period included only six-months
of income from the branches acquired in March of that year. In addition, the
third quarter of 1996 saw an increase in the use of fee-based services on
deposit accounts. Income on mortgage origination and sale activity was down
by $38,000 due to the lower volume of sales during the 1996 period and sales
at losses during 1996's rising rate period.
Operating expenses for the nine-month period ended September 30, 1996 were
down 3% from $3.50 million to $3.39 million. Without the special FDIC
assessment of $176,000 expenses would have been down by $284,000 or 8%. The
decrease is largely attributable to cost cutting measures taken in 1995 and a
decrease in regular FDIC deposit assessments of $60,000. Future assessments
are expected to be $70,000 per year lower under the FDIC's new plan.
Expenses in 1996 reflect a full nine 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.
<PAGE>
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 September 30, 1996 was $9.33 million, an increase of
$833,000 or 9.8% over total equity at December 31, 1995. The increase
resulted from net income of $859,000 for the period, $109,000 in adjustments
related to the Employee Stock Ownership Plan (ESOP) and the Bank Recognition
Retention Plan (RRP), less a $80,000 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 $60,000 for
the nine-months ($91,000 net of deferred tax asset of $31,000), bringing the
net increase in reported equity to $833,000.
At September 30, 1996, the Company's ratio of core capital to total assets
equaled 6.51%. This represents an increase from the December 31, 1995 ratio
of 6.24%.
At September 30, 1996, the Bank's ratio of core capital to total assets
equaled 6.37% compared to 6.0% at December 31, 1995. The Bank's net income of
$877,000 accounted for the increase.
The ratio of the Bank's risk-based capital to risk-weighted assets at
September 30, 1996 was 11.1% 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.
<PAGE>
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
<PAGE>
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:November 12, 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
SEPTEMBER 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
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