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 March 31, 1997
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 415,650
(Class) (Outstanding)
<PAGE>
KSB BANCORP, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets,
March 31, 1997 and December 31, 1996
Consolidated Statements of Income
Three ended March 31, 1997
and March 31, 1996
Consolidated Statements of Stockholders'
Equity, three months ended March 31, 1997
and March 31, 1996
Consolidated Statements of Cash Flows,
three months ended March 31, 1997 and
March 31, 1996
Notes to Financial Statements
Item 2 Management's Discussion and Analysis of
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a vote of Security
Holders
Item 5 Other information
Item 6 Exhibits and Reports on Form 8-KSB
Signature Page
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31,
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents and Due from Banks ...... $ 2,637 $ 2,479
Interest-bearing Deposits in Banks ................ 0 2
Investment Securities Available for Sale
(at estimated Market Value) ..................... 6,757 7,452
Investment Securities to be Held at Maturity
(estimated market value: March 31, 1997- $22,387;
December 31, 1996 - $18,587) .................... 22,457 18,517
--------- ---------
Loans:
Real Estate Mortgages ............................. 52,355 50,873
Home Equity Loans ................................. 7,856 6,042
Installment Loans ................................. 4,313 4,401
Commercial Loans .................................. 36,920 36,400
Other loans ....................................... 633 763
Deferred Loan Fees ................................ (193) (209)
Allowance for Loan Losses ......................... (1,018) (893)
--------- ---------
Total Loans (net) ................................. 100,866 97,377
--------- ---------
Other Real Estate Owned ........................... 166 116
Real Estate Loans to be Sold ...................... 378 1,819
Federal Home Loan Bank Stock ...................... 1,321 1,321
Bank Premises and Equipment, net .................. 2,144 2,204
Goodwill .......................................... 594 620
Accrued Interest Receivable ....................... 900 768
Deferred Tax Asset ................................ 511 465
Cash Surrender Value of Life Insurance ............ 564 554
Other Assets ...................................... 698 663
--------- ---------
TOTAL ASSETS ............................. $ 139,993 $ 134,357
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
March 31, December 31,
1997 1996
--------- ---------
<S> <C> <C>
Deposits:
Regular Savings ......................... $ 21,045 $ 21,043
Money Market Accounts ................... 5,222 5,701
Certificates of Deposit ................. 58,595 59,337
N.O.W. Accounts ......................... 12,755 14,076
Demand Deposits ......................... 7,485 9,206
--------- ---------
Total Deposits ................................... 105,102 109,363
--------- ---------
Advances from FHLB ............................... 22,640 13,186
Escrows and trustee accounts for sold loans ...... 1,046 919
Accrued Income Taxes Payable ..................... 187 37
Accrued Expenses and Other Liabilities ........... 839 905
Deferred Income Taxes ............................ 148 155
--------- ---------
Total Liabilities ................................ 129,962 124,565
--------- ---------
Stockholders' Equity:
Common Stock: $.01 Par Value, Issued and
Outstanding: 415,650 Shares at March 31, 1997
and 411,055 Shares at December 31, 1996 ........ 4 4
Additional Paid-in Capital ....................... 4,364 4,325
Retained Earnings ................................ 6,034 5,749
Net unrealized loss on securities available
for sale net of deferred taxes .................. (58) (38)
Less: remaining obligation under employee stock
ownership plan (ESOP) .......................... (156) (169)
Less: remaining obligation under Bank
Recognition Plan (BRP) .......................... (72) (79)
Less: Treasury Stock (2,945 shares at cost) ..... (85) 0
Total Stockholders' Equity ....................... -- --
10,031 9,792
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 139,993 $ 134,357
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS
ENDED
3/31/97 3/31/96
------ ------
(In thousands)
<S> <C> <C>
Interest and Dividend Income
Interest and Fees on Loans ................. $2,332 $2,033
Interest on Investment
Securities ............................... 449 499
Dividends .................................. 21 21
------ ------
Total Interest and Dividend Income ............. 2,802 2,553
------ ------
Interest Expense
Interest on Deposits ......................... 1,084 1,101
Interest on Borrowed Funds ................... 231 164
------ ------
Total Interest Expense ......................... 1,315 1,265
------ ------
Net Interest Income ............................ 1,487 1,288
Less: provision for loan losses ................ 120 60
------ ------
Net Interest Income after
provision for loan losses .................... 1,367 1,228
------ ------
Non-interest income
Mortgage servicing income .................... 77 84
Service charges and fees ..................... 181 159
Other ........................................ 33 46
------ ------
Total Non-interest income ...................... 291 289
------ ------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Non-interest expense
Salaries and benefits ........................ 570 526
Occupancy .................................... 72 86
Equipment .................................... 172 143
FDIC Premium ................................. 7 19
Other ........................................ 355 335
-------- --------
Total Non-interest Expense ..................... 1,176 1,109
-------- --------
Net income before taxes ........................ 482 408
Income tax expense ............................. 158 126
-------- --------
Net income ..................................... $ 324 $ 282
======== ========
Earnings per share (based on weighted
average shares outstanding) .................... $ 0.83 $ 0.73
======== ========
Weighted average shares outstanding
(restated to reflect 10% stock
dividend effective August 12, 1996) ............ 392,483 386,529
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Net
Unrealized
Loss on
Adj. Adj. Securities
Retained Common Paid-in for for Available Treasury
Earnings Stock Capital ESOP BRP for Sale Stock TOTAL
-------- ----- ------- ---- --- -------- ----- -----
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended
March 31, 1997
Beginning balance $5,749 4 4,325 (169) (79) (38) -- $ 9,792
Net Income ................. 324 -- -- -- -- -- -- 324
Dividends Paid ............. (39) -- -- -- -- -- -- (39)
ESOP adjustment ............ -- -- 24 13 -- -- -- 37
BRP adjustment ............. -- -- -- -- 7 -- -- 7
Securities
adjustment ................ -- -- -- -- -- (20) -- (20)
Shares Issued under
Stock Option
Plans (5,940) ............ -- -- 54 -- -- -- -- 54
Retirement of Treas-
ury shares (1,345) ....... -- -- (39) -- -- -- 39 0
Purchases of Treasury
Shares (4,290) ........... -- -- -- -- -- -- (124) (124)
-------- --- ----- ---- --- --- ---- --------
Ending balance ............. $ 6,034 4 4,364 (156) (72) (58) (85) $ 10,031
======== = ===== ==== === === === ========
<CAPTION>
Net
Unrealized
Loss on
Adj. Adj. Securities
Retained Common Paid-in for for Available
Earnings Stock Capital ESOP BRP for Sale TOTAL
-------- ----- ------- ---- --- -------- -----
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balance........... $ 5,360 4 3,475 (223) (108) (10) $8,498
Net Income.................. 282 - - - - - 282
Dividends Paid.............. (32) - - - - - (32)
ESOP adjustment............. - - 12 14 - - 26
BRP adjustment.............. - - - - 7 - 7
Securities adjustment....... - - - - - (54) (54)
-------- -- ----- ---- ---- --- ------
Ending balance............. $ 5,610 4 3,487 (209) (101) (64) $8,727
======== == ===== ==== ==== === ======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
March 31,
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Net Income ........................................... $ 324 $ 282
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and Amortization .................... 189 164
Decrease in obligation under ESOP and BRP ........ 44 33
Provision for loan losses ........................ 120 60
Deferred Income Taxes ............................ (43) 4
Net (gains) losses on sales of loans
originated for sale ............................ (1) (4)
Originations of loans held for sale .............. (1,110) (1,915)
Proceeds from loans held for sale ................ 555 1,065
Decrease (increase) in:
Interest receivable ............................ (132) (32)
Prepaid expenses ............................... (16) (68)
Cash surrender of life insurance ............... (10) (6)
Other receivables .............................. (50) 40
Increase (decrease) in:
Interest payable ............................... 27 (9)
Accrued Expenses ............................... (41) (32)
Accrued Taxes payable .......................... 150 50
Deferred Origination Fees ...................... 16 3
Other payables ................................. (52) 11
------- -------
Total Adjustments .................................. (354) (636)
------- -------
Net Cash from Operation Activities ................. (30) (354)
------- -------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CASH FLOWS FROM INVESTING ACTIVITIES
<S> <C> <C>
Purchase of investment securities
held to maturity ................................. (4,987) (5,364)
Proceeds from maturities and principal
payments on investment
securities held to maturity ...................... 1,006 889
Proceeds from maturities and principal
payments on investment
securities available for sale .................... 660 152
Net(increase)decrease in loans ..................... (1,678) 702
Capital expenditures ............................... (43) (31)
Net (increase)decrease in other assets ............. 17 20
------- -------
Net cash used in investing activities .............. (5,025) (3,632)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in time deposit accounts .... (742) 1,821
Net increase (decrease) in other deposit accounts ... (3,519) (999)
Net increase (decrease) in FHLB advances ............ 9,454 1,016
Net increase (decrease) in escrow accounts ......... 127 43
Proceeds from stock issuance
under option plans (1,650 shares) ................ 15 0
Net Purchase of (treasury)stock issued under
option plans (2,945) ............................. (85) 0
Cash dividends paid on common stock(net of ESOP) ..... (39) (32)
------- -------
Net cash provided by financing activities .......... 5,211 1,849
------- -------
Net increase (decrease) in cash and
cash equivalents .................................. 156 (2,137)
Cash and cash equivalents, beginning of period(1) .... 2,481 4,960
------- -------
Cash and cash equivalents, end of period (1) ......... $ 2,637 $ 2,823
======= =======
(1) Includes interest-earning deposits in banks
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<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 March 31, 1997 and December 31, 1996, the consolidated statements
of income for the three months ended March 31, 1997 and March 31, 1996, and the
consolidated statements of stockholders' equity and cash flows for the three
months ended March 31, 1997, and March 31, 1996. All significant intercompany
transactions and balances are eliminated in consolidation. The income reported
for 1997 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.
<PAGE>
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.
FASB Statement 125 (FAS 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", took effect January 1,
1997. The Company had no transactions which fell under FAS 125, therefore there
is no effect on the financial statements for 1997.
For other accounting policies, refer to the financial statements filed in the
form 10-KSB for the year-end December 31, 1996.
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.
<PAGE>
The following is a summary of investment securities at amortized cost and
estimated market values ($ in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------ ------ ------ ------
<S> <C> <C> <C> <C>
March 31, 1997
AVAILABLE FOR SALE
U.S. Government Agency
securities ............... 3,500 -- 2 3,498
Mortgage-backed Securities . 3,345 -- 86 3,259
------ ------ ------ ------
Total Available for Sale ... 3,845 -- 88 6,757
====== ====== ====== ======
TO BE HELD TO MATURITY
Corporate Bonds ............ 6 -- -- 6
Mortgage-backed Securities . 20,768 127 209 20,686
REMIC ...................... 1,683 12 -- 1,695
------ ------ ------ ------
Total to be Held to Maturity 22,457 139 209 22,387
====== ====== ====== ======
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------ ------ ------ ------
<S> <C> <C> <C> <C>
December 31,1996
AVAILABLE FOR SALE
U.S. Government Agency
securities ................ 4,000 1 2 3,999
Mortgage-backed Securities . 3,510 -- 57 3,453
------ ------ ------ ------
Total Available for Sale ... 7,510 1 59 7,452
====== ====== ====== ======
TO BE HELD TO MATURITY
Corporate Bonds ............ 22 -- -- 22
Mortgage-backed Securities . 16,729 160 108 16,781
REMIC ...................... 1,766 18 -- 1,784
------ ------ ------ ------
Total to be Held to Maturity 18,517 178 108 18,587
====== ====== ====== ======
</TABLE>
<PAGE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows for the three months
ended March 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1997 .............................. $ 893,456
Provision for loan losses ............................... 120,000
Charged-off loans ....................................... --
Recoveries .............................................. 4,521
----------
$1,017,977
==========
</TABLE>
Impaired loan period information:
Information regarding impaired loans is as follows for the three months ended
March 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Average investment in impaired loans: ..................... 1,288,729
Interest Income recognized on
impaired loans including
interest income recognized
on cash basis .......................................... 38,632
Interest Income recognized on
impaired loans on cash basis ........................... 38,579
</TABLE>
Impaired loan period end information:
Information regarding impaired loans at March 31, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance of impaired loans ................................ 1,632,350
less:
portion for which no allowance
for loan losses is allocated ......................... (1,489,946)
----------
Portion of impaired loan balance for
which an allowance for credit
losses is allocated ................................... 142,404
==========
Portion of allowance for loan losses
allocated to the impaired loan
balance ......................................... 78,618
</TABLE>
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.
<PAGE>
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. The Financial Accounting Standards Board
recently issued FAS 128, "Earnings Per Share" effective for years ending after
December 15, 1997. The Company does not expect this Statement to have a material
effect on the financial statements in 1997.
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 March 31, 1997 and
December 31, 1996, the Bank had commitments to make loans totaling $3,812,000
and $1,029,000 and unused lines of credit totaling $13,722,000 and $13,185,000,
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 March 31, 1997, 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 March 31, 1997, pays at the rate of 5.625%. Net interest income for the
period ending March 31, 1997 was $8,844. 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 March 31, 1997
was ($23,011). 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 Bank uses interest rate
floor agreements to partially protect its net interest income stream against the
effect of falling rates on prime-based loans The estimated market value of the
agreement as of March 31, 1997 is $9,247.
<PAGE>
Note 9 - LOAN SERVICING
The unpaid principal balance of mortgage loans serviced for others, which are
not included on the balance sheet, was $76,168,000 and $78,827,000 at March 31,
1997 and December 31, 1996, respectively. The balances of loans sold and
serviced for others related to servicing rights that have been capitalized was
$555,000 and $5,165,000 at March 31, 1997 and December 31, 1996, 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.
<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 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 March 31, 1997, 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 $28.0 million representing a negative one-year
cumulative interest rate sensitivity gap ratio of 20.0% of total assets. This
"negative" gap position compares to a cumulative "positive" one-year gap
position of $19.3 million or 14.4% of total assets at December 31, 1996. The
change in the dollar gap is partly the result of the management's decision to
further protect against falling rates by purchasing $5.0 million in fixed-rate
mortgage backed securities funded by three-month Federal Home Loan Bank (FHLB)
advances. 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. If rates increase, the spread on the new investment would
narrow, however, increases in rates on fixed-rate liabilities would lag, thereby
mitigating the affect on net interest margins. Management also determined that
the Bank could hold approximately $2.0 million in 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 March 31, 1997 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
<PAGE>
accounts, which totaled $20.6 million at March 31, 1997 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 $28.4 million (included in the "Mortgage Loans" category) are
amortized using a constant prepayment rate ("CPR") of 9.0 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 10.2.
<TABLE>
<CAPTION>
At March 31, 1997
(dollars in thousands)
Over Over
1 year 1 year- 3 years- More than
or less 3 years 5 years 5 years TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning
assets:
Mortgage loans(1)(2) ................. 45,244 11,149 5,323 12,477 74,193
Other loans (1) ...................... 10,798 8,330 4,505 4,566 28,199
Mortgage-backed securities ........... 7,052 6,586 5,296 6,861 25,795
Investment securities(3) ............. 4,827 0 0 0 4,827
-------- -------- -------- -------- --------
Total Interest-earning assets 67,921 26,065 15,124 23,904 133,014
-------- -------- -------- -------- --------
Less:
Non-performing loans ................... (1,585) (242) (16) (280) (2,123)
Unearned discount and deferred fees .... (117) (29) (14) (32) (192)
-------- -------- -------- -------- --------
Net interest-earning assets ........ 66,219 25,794 15,094 23,592 130,699
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Fixed- and variable-rate
passbook accounts ................... 15,324 2,030 1,398 3,098 21,850
NOW accounts ........................... 4,719 4,846 1,923 1,267 12,755
Money market accounts .................. 5,222 0 0 0 5,222
Certificate & club accounts ............ 39,720 14,996 3,879 0 58,595
Borrowings ............................. 19,188 2,000 1,452 0 22,640
-------- -------- -------- -------- --------
Total interest-bearing
liabilities ........................ 84,173 23,872 8,652 4,365 121,062
-------- -------- -------- -------- --------
Effect of Interest Rate Swaps(4) ....... (10,000) 10,000
-------- -------- -------- --------
Interest sensitivity gap per
period ............................... (27,954) 11,922 6,442 19,227
======== ======== ======== ========
Cumulative interest sensitivity
gap .................................. (27,954) (16,032) (9,590) 9,637
======== ======== ======== ========
Cumulative interest sensitivity
gap as a percentage of total
assets ............................... -20.0% -11.5% -6.9% 6.9%
Cumulative net interest-earning
assets as a percentage of
interest sensitive liabilities ....... 70.3% 85.2% 91.8% 108.0%
<PAGE>
(1) For purposes of the GAP analysis, mortgage and other loans are not reduced
by the allowance for loan losses.
(2) Includes $378,000 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.
</TABLE>
III. Financial Condition
Total assets increased $5.6 million or 4.2% to $140.0 million at March 31, 1997.
This was primarily attributable to an increase in the loan portfolio of $3.5
million. The Bank also purchased $5.0 million in mortgage-backed securities as
part of its interest-rate risk strategy. At the same time, the Bank received
$1.2 million in principal payments on existing mortgage-backed securities. The
Bank put approximately $2.0 million of saleable loans, most of which have terms
of 15 years or less, into its portfolio in March, 1997.
Total deposits decreased $4.3 million or 3.9%. Most of the decrease, which
occurred in transaction accounts, was seasonal and due to inordinately high
balances at December 31, 1996. However, a portion of the decrease is the result
of customers moving their balances to fixed-rate certificate of deposit (CD)
accounts. At the same time some current CD customers are moving funds out of
CD's into other investments and Banks. These funds typically are replaced in the
short-term by FHLB borrowings.
Borrowed funds at March 31, 1997 totaling $22.6 million includes $18.9 million
of fixed-rate borrowings and $3.7 million of variable-rate daily borrowings from
the Federal Home Loan Bank of Boston. The fixed-rate borrowings mature $15.5
million within the next nine months and $3.4 million in 1998 and beyond.
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, $3.2 million are variable-rate securities adjusting
annually. The remainder are fixed-rate in nature.
Non-performing loans at March 31, 1997 increased by $228,000 to $2,123,000 or
2.1% of total loans, compared to $1,895,000, or 1.9% of total loans at December
31, 1996. 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 $534,000 of the $2,123,000
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 $500,709 and $964,000 at December 31, 1996 and March 31, 1997, respectively.
IV. Comparison of Operating Results
The Company reported net income of $324,000 for the three-month period ended
March 31, 1997, which represents a $42,000 increase from the $282,000 net income
reported for the comparable three-month period in 1996. Net interest income
after provision for loan losses increased by $139,000 or 11.3%. Non-interest
income was virtually unchanged at $291,000, and operating expenses for the same
comparable periods increased by $67,000 or 6.8%.
<PAGE>
The increase in net interest income is attributable to a 9% increase in earning
assets for the 1997 period compared to 1996. In addition, the interest margin
for the first quarter of 1997 increased from that of the second quarter of 1996
by approximately 21 basis points.
Non-interest income remained constant for the first quarter of 1997 when
compared to 1996. Fees on mortgage servicing declined by $7,000 due to a
decrease in the Bank's serviced loan portfolio. Other income, which includes
income related to the sale of mortgage loans, decreased due to management's
decision to place $2.0 million of saleable loans into portfolio rather than sell
them. Other service charges, fees and other income increased by $22,000 from
$159,000 in the 1996 period to $181,000 for the 1997 period reflecting greater
use of the Bank's fee-based deposit services and seasonal increase in net income
from Canadian currency exchange transactions.
Non-interest expense increased by $67,000 or 6.8% from the three-months ended
March 31, 1996 to the three-months ended March 31, 1997. Salaries and benefits
increased by $44,000 due to normal pay increases, salary restructurings and
increases in payments under bonus plans. Other expenses for 1997 include $27,000
in one-time charges for equipment write-offs and training.
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 March 31, 1997 was $10.0 million, an increase of
$239,000 or 2.4% over total equity at December 31, 1996. The increase resulted
from net income of $324,000 for the period, $37,000 in adjustments related to
the Employee Stock Ownership Plan (ESOP) and the Bank Recognition Retention Plan
(RRP), less a $41,000 dividend paid to stockholders plus a $2,000 return of
accumulated dividends on unallocated shares of the ESOP. The net unrealized loss
on securities available for sale increased by $20,000 for the six months (net of
deferred tax asset of $10,000). The Company issued 5,940 new shares under stock
option plans resulting in an addition to paid-in capital of $54,000. It
subsequently repurchased 4,290 of the shares while retiring 1,345 shares costing
$124,000, bringing the net increase in reported equity to $239,000.
At March 31, 1997, the Company's ratio of core capital to total assets equaled
6.77%. This represents a decrease from the December 31, 1996 ratio of 6.85%.
At March 31, 1997, the Bank's ratio of core capital to total assets equaled
6.77% compared to 6.68% at December 31, 1996. The Bank's net income of $330,000
less dividends of $40,000 accounted for the increase.
The ratio of the Bank's risk-based capital to risk-weighted assets at March 31,
1997 was 11.49% compared to 11.28% at December 31, 1996. 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: May 15, 1997 /s/ John E. Thien
-----------------
John E. Thien
Chief Financial Officer
and duly Authorized Officer
of the Registrant
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,637
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,757
<INVESTMENTS-CARRYING> 22,457
<INVESTMENTS-MARKET> 22,387
<LOANS> 102,077
<ALLOWANCE> 1,018
<TOTAL-ASSETS> 139,993
<DEPOSITS> 106,148
<SHORT-TERM> 19,188
<LIABILITIES-OTHER> 1,174
<LONG-TERM> 3,452
0
0
<COMMON> 4
<OTHER-SE> 10,027
<TOTAL-LIABILITIES-AND-EQUITY> 139,993
<INTEREST-LOAN> 2,332
<INTEREST-INVEST> 470
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,802
<INTEREST-DEPOSIT> 1,084
<INTEREST-EXPENSE> 1,315
<INTEREST-INCOME-NET> 1,487
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,176
<INCOME-PRETAX> 482
<INCOME-PRE-EXTRAORDINARY> 482
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324
<EPS-PRIMARY> .83
<EPS-DILUTED> .83
<YIELD-ACTUAL> 4.58
<LOANS-NON> 2,123
<LOANS-PAST> 40
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 893
<CHARGE-OFFS> 0
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 1,018
<ALLOWANCE-DOMESTIC> 1,018
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
