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 Sseptember 30, 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 1,246,950
(Class) (Outstanding)
<PAGE>
KSB BANCORP, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets,
September 30, 1997 and December 31, 1996
Consolidated Statements of Income for the three
and nine months ended September 30, 1997
and September 30, 1996
Consolidated Statements of Stockholders'
Equity, nine months ended September 30, 1997
and September 30, 1996
Consolidated Statements of Cash Flows,nine months
ended September 30, 1997 and September 30, 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)
September 30, December 31,
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents and Due
from Banks .......................... $ 2,084 $ 2,479
Interest-bearing Deposits in Banks ... 0 2
Investment Securities Available for
Sale (at estimated Market Value) .... 10,639 7,452
Investment Securities to be Held to
Maturity (estimated market value:
September 30, 1997 - $15,485
December 31, 1996 $18,587)........... 15,226 18,517
--------- ---------
Loans:
Real Estate Mortgages ................ 53,355 50,873
Home Equity Loans .................... 12,652 6,042
Installment Loans .................... 4,218 4,401
Commercial Loans ..................... 43,466 36,400
Other loans .......................... 932 763
Deferred Loan Fees ................... (177) (209)
Allowance for Loan Losses ............ (1,235) (893)
--------- ---------
Total Loans (net) .................... 113,211 97,377
--------- ---------
Other Real Estate Owned .............. 74 116
Real Estate Loans to be Sold ......... 1,352 1,819
Federal Home Loan Bank Stock ......... 1,537 1,321
Bank Premises and Equipment, net ..... 2,261 2,204
Goodwill ............................. 543 620
Accrued Interest Receivable .......... 911 768
Deferred Tax Asset ................... 633 465
Cash Surrender Value of Life Insurance 577 554
Other Assets ......................... 609 663
--------- ---------
TOTAL ASSETS ................ $ 149,657 $ 134,357
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (unaudited) (continued)
September 30, December 31,
1997 1996
--------- ---------
<S> <C> <C>
Deposits:
Regular Savings ....................... $ 20,422 $ 21,043
Money Market Accounts ................. 6,245 5,701
Certificates of Deposit ............... 57,824 59,337
N.O.W. Accounts ....................... 13,974 14,076
Demand Deposits ....................... 8,943 9,206
--------- ---------
Total Deposits ................................. 107,408 109,363
--------- ---------
Advances from FHLB ............................. 29,071 13,186
Escrows and trustee accounts for
sold loans ................................... 992 919
Accrued Income Taxes Payable ................... 80 37
Accrued Expenses and Other Liabilities ......... 949 905
Deferred Income Taxes .......................... 139 155
--------- ---------
Total Liabilities .............................. 138,639 124,565
--------- ---------
Stockholders' Equity:
Common Stock: $.01 Par Value, Issued
and Outstanding: 1,238,115 Shares at
September 30, 1997 and 1,233,165 shares
at December 31, 1996
(restated to reflect stock split) .......... 12 4
Additional Paid-in Capital ..................... 4,455 4,325
Retained Earnings .............................. 6,778 5,749
Net unrealized gain (loss) on securities
available for sale,net of deferred taxes ..... 46 (38)
Less: remaining obligation under employee
stock ownership plan (ESOP) .................... (130) (169)
Less: remaining obligation under Bank
Recognition Plan (BRP) ....................... (58) (79)
Less: Treasury Stock (8,835 shares at cost) (85) 0
--------- ---------
Total Stockholders' Equity ..................... 11,018 9,792
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ....................................... $ 149,657 $ 134,357
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS NINE-MONTHS
ENDED ENDED
9/30/97 9/30/96 9/30/97 9/30/96
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Interest and Dividend Income
Interest and Fees on Loans......... $2,651 $2,308 $7,429 $6,493
Interest on Investment
Securities ..................... 450 452 1,364 1,432
Dividends ......................... 25 22 67 63
------ ------ ------ ------
Total Interest and Dividend
Income .............................. 3,126 2,782 8,860 7,988
------ ------ ------ ------
Interest Expense
Interest on Deposits .............. 1,093 1,140 3,264 3,353
Interest on Borrowed Funds ........ 420 168 980 512
------ ------ ------ ------
Total Interest Expense .............. 1,513 1,308 4,244 3,865
------ ------ ------ ------
Net Interest Income ................. 1,613 1,474 4,616 4,123
Less: provision for loan losses ..... 120 150 360 300
------ ------ ------ ------
Net Interest Income after
provision for loan losses ......... 1,493 1,324 4,256 3,823
------ ------ ------ ------
Non-interest income
Net Securities Gains (Losses) ..... 0 0 0 (47)
Fees and Net Gains on Sold Loans... 33 7 51 34
Mortgage servicing income ......... 75 78 225 242
Service charges and fees .......... 172 185 519 517
Other ............................. 25 25 77 76
------ ------ ------ ------
Total Non-interest income ........... 305 295 872 822
------ ------ ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) (continued)
THREE-MONTHS NINE-MONTHS
ENDED ENDED
9/30/97 9/30/96 9/30/97 9/30/96
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Non-interest expense
Salaries and benefits ............. 547 511 1,657 1,552
Occupancy ......................... 64 66 210 225
Equipment ......................... 178 163 545 452
FDIC Premium ...................... 7 196 21 236
Other ............................. 326 269 1,048 924
---------- ---------- ---------- ----------
Total Non-interest Expense .......... 1,122 1,205 3,481 3,389
---------- ---------- ---------- ----------
Net income before taxes ............. 676 414 1,647 1,256
Income tax expense .................. 228 132 524 397
---------- ---------- ---------- ----------
Net income .......................... $ 448 $ 282 $ 1,123 $ 859
========== ========== ========== ==========
Earnings per share (based on weighted
average shares outstanding) ....... $ 0.38 $ 0.24 $ 0.95 $ 0.74
========== ========== ========== ==========
Weighted average shares
outstanding (restated to
reflect 10% stock dividend
effective August 12, 1996
and three-for-one stock split
effective July 10,1997) ........... 1,190,990 1,168,615 1,185,101 1,164,135
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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)
Nine months ended September 30, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning
balance ...... $ 5,749 4 4,325 (169) (79) (38) -- $ 9,792
Net Income ..... 1,123 -- -- -- -- -- -- 1,123
Dividends Paid . (86) -- -- -- -- -- -- (86)
Stock split
effected in
the form of a
dividend ..... (8) 8 -- -- -- -- -- 0
ESOP adjustment -- -- 115 39 -- -- -- 154
BRP adjustment . -- -- -- -- 21 -- -- 21
Securities
adjustment .... -- -- -- -- -- 84 -- 84
Shares Issued
under Stock
Option Plans .. -- -- 15 -- -- -- -- 15
Retirement of
Purchases of
Treasury Shares -- -- -- -- -- -- (85) (85)
-------- -- ----- ---- --- --- --- --------
Ending
balance ....... $ 6,778 12 4,455 (130) (58) 46 (85) $ 11,018
======== == ===== ==== === === === ========
</TABLE>
<PAGE>
<TABLE>
<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)
Nine months ended September 30, 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning
balance $5,360 4 3,475 (223) (108) (10) $8,498
Net Income 859 - - - - - 859
Cash Dividends
Paid (75) - - - - - (75)
Stock Dividends
Paid (783) - 783 - - - -
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
====== == ===== ==== === === ======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
September 30,
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Net Income ......................................... $ 1,123 $ 859
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and Amortization .................. 564 530
Decrease in obligation under ESOP and BRP ...... 175 109
Provision for loan losses ...................... 360 300
Deferred Income Taxes .......................... (227) (60)
Net loss on default of Security ................ 0 47
Net (gains) losses on sales of loans
originated for sale ........................... (36) (14)
Originations of loans held for sale ............ (4,382) (3,603)
Proceeds from loans held for sale .............. 2,468 3,306
Net loss on sale of Other real
estate owned ............................... 0 14
Decrease (increase) in:
Interest receivable .......................... (147) (112)
Prepaid expenses ............................. 6 (59)
Cash surrender of life insurance ............. (23) (55)
Other receivables ............................ (37) 39
Increase (decrease) in:
Interest payable ............................. 72 (34)
Accrued Expenses ............................. 1 182
Accrued Taxes payable ........................ 43 (8)
Deferred Origination Fees .................... (32) 40
Other payables ............................... (29) 43
-------- --------
Total Adjustments ................................ (1,224) 665
-------- --------
Net Cash from Operating Activities ............... (101) 1,524
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (continued)
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
held to maturity ............................... 0 (5,364)
Proceeds from maturities and principal
payments on investment
securities held to maturity .................... 3,174 4,679
Purchase of investment securities
available for sale ............................ (7,018) 0
Proceeds from maturities and principal
payments on investment
securities available for sale .................. 3,943 682
Net increase in loans ............................ (13,820) (11,213)
Proceeds from sale of other real
estate owned ................................... 116 27
Net purchases of Federal Home Loan
Bank stock ..................................... (216) 0
Capital expenditures ............................. (373) (209)
Net (increase)decrease in other assets ........... 52 58
-------- --------
Net cash used in investing activities ............ (14,142) (11,340)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in time deposit
accounts ......................................... (1,513) 3,995
Net increase (decrease) in other deposit
accounts ......................................... (442) 1,686
Net increase (decrease) in FHLB advances .......... 15,885 1,980
Net increase (decrease) in escrow accounts ........ 72 229
Proceeds from stock issuance
under option plan ................................ 15 0
Net Purchase of (treasury)stock issued under
option plan ...................................... (85) 0
Cash dividends paid on common stock
(net of ESOP) .................................... (86) (75)
-------- --------
Net cash provided by financing
activities ...................................... 13,846 7,815
-------- --------
Net increase (decrease) in cash and
cash equivalents ................................ (397) (2,001)
Cash and cash equivalents, beginning of
period(1) ........................................ 2,481 4,960
-------- --------
Cash and cash equivalents, end of
period (1) ....................................... $ 2,084 $ 2,959
======== ========
</TABLE>
(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, 1997 and December 31, 1996, the consolidated
statements of income for the three and nine months ended September 30, 1997 and
Septmber 30, 1996, and the consolidated statements of stockholders' equity and
cash flows for the nine months ended September 30, 1997, and September 30, 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.
<PAGE>
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 strata 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 that 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.
Investment Securities: 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
prepayment which can affect the yields realized on the securities by increasing
or decreasing the period over which premiums and discounts are recognized.
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 that fell under FAS 125, therefore there
is no effect on the financial statements for 1997.
On June 30, 1997 FASB Statement 130 (FAS130), "Reporting Comprehensive Income"
was issued, effective for fiscal years beginning after December 15, 1997. It is
the intent of the Company to limit its presentation of such information to
disclosure only.
On June 30, 1997 FASB Statement 130 (FAS131), "Disclosures about Segments of an
Enterprise and Related Information", was issued, effective for periods beginning
after December 15, 1997. It is the intent of the Company to limit its
presentation of such information to disclosure only.
For other accounting policies, refer to the financial statements filed in the
form 10-KSB for the year-end December 31, 1996.
<PAGE>
NOTE 2 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows for the nine months
ended September 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1997 $ 893,456
Provision for loan losses 360,000
Charged-off loans 49,861
Recoveries 31,337
-------
$1,234,932
==========
</TABLE>
Impaired loan period information:
Information regarding impaired loans is as follows for the nine months ended
September 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Average investment in impaired loans: 1,672,049
Interest Income recognized on
impaired loans including interest income
recognized on cash basis 134,979
Interest Income recognized on impaired
loans on cash basis 149,219
</TABLE>
Impaired loan period end information:
Information regarding impaired loans at September 30, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance of impaired loans 1,674,854
less:
portion for which no allowance
for loan losses is allocated (1,609,235)
---------
Portion of impaired loan balance for
which an allowance for credit
losses is allocated 65,619
==========
Portion of allowance for loan losses
allocated to the impaired loan
balance 31,833
</TABLE>
<PAGE>
Note 3 - 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 4 - 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 5 - 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. Effective July 10, 1997 the Company paid
a three-for-one stock split in the form of a 200% stock dividend. Per share
information is restated retroactively to reflect the dividends. 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 6 - 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, 1997 and
December 31, 1996, the Bank had commitments to make loans totaling $4,183,000
and $1,029,000 and unused lines of credit totaling $16,570,000 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 7 - INTEREST RATE SWAPS, FLOORS, CEILINGS
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 (LIBOR), 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, 1997, pays at the rate
of 5.71%. 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 LIBOR
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,
1997, pays at the rate of 5.71%. Net interest income for the period ending
September 30, 1997 was $21,979. 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, 1997
was $38,182.
<PAGE>
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 (LIBOR), but pays nothing if LIBOR exceeds 6%.
The contract expires June 1998. The Bank paid a premium of $22,500 for the
contract that is recognized into interest income on a straight-line basis over
the life of the contract. The estimated market value of the floor agreement as
of September 30, 1997 is $8,403.
In July 1997, the Bank entered into an interest rate ceiling agreement in the
notional amount of $10,000,000 whereby the Bank pays nothing if LIBOR is less
than 6.50% but receives the difference between LIBOR and 6.50% if LIBOR exceeds
6.50%. The contract expires July 1999. The Bank paid a premium of $33,000 that
will be recognized into income on a straight-line basis over the life of the
contract. The estimated market value of the ceiling agreement at September 30,
1997 is $19,541. The Bank uses interest rate floor and ceiling agreements to
partially protect its net interest income stream against the effect of changing
interest rates on prime-based loans.
Note 8 - LOAN SERVICING
The unpaid principal balance of mortgage loans serviced for others, which are
not included on the balance sheet, was $75,073,000 and $78,827,000 at September
30, 1997 and December 31, 1996, respectively. The balances of loans sold and
serviced for others related to servicing rights that have been capitalized was
$2,264,000 and $5,165,000 at September 30, 1997 and December 31, 1996,
respectively. The remaining balances 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 September 30, 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 $16.2 million before applying the effect of the
interest rate floor or the interest rate ceiling. This represents a negative
one-year cumulative interest rate sensitivity gap ratio of 10.8% of total
assets. This "negative" gap position compares to a cumulative "negative"
one-year gap position of $14.3 million or 10.7% of total assets at December 31,
1996. 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, 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
accounts, which totaled $22.1 million at September 30, 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 $29.1 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 14.0.
<PAGE>
<TABLE>
<CAPTION>
At September 30, 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) ................. 49,714 14,040 7,040 12,653 83,447
Other loans (1) ...................... 13,740 9,582 5,246 3,960 32,528
Mortgage-backed securities ........... 6,852 6,626 5,171 6,216 24,865
Investment securities(3) ............. 2,537 0 0 0 2,537
-------- -------- -------- -------- --------
Total Interest-earning assets....... 72,843 30,248 17,457 22,829 143,377
-------- -------- -------- -------- --------
Less:
Non-performing loans ................... (1,129) (216) (81) (581) (2,007)
Unearned discount and deferred fees .... (105) (30) (15) (27) (177)
-------- -------- -------- -------- --------
Net interest-earning assets ........ 71,609 30,002 17,361 22,221 141,193
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Fixed- and variable-rate
passbook accounts ................... 14,441 2,101 1,448 3,206 21,196
NOW accounts ........................... 5,170 5,309 2,107 1,388 13,974
Money market accounts .................. 6,245 0 0 0 6,245
Certificate & club accounts ............ 32,321 22,844 2,659 0 57,824
Borrowings ............................. 24,619 3,000 1,452 0 29,071
-------- -------- -------- -------- --------
Total interest-bearing
liabilities ........................ 82,796 33,254 7,666 4,594 128,310
-------- -------- -------- -------- --------
Effect of Interest Rate Swaps(4) ....... (5,000) 5,000
-------- --------
Interest sensitivity gap per
period ............................... (16,187) 1,748 9,695 17,627
======== ======== ======== ========
Cumulative interest sensitivity
gap .................................. (16,187) (14,439) (4,744) 12,883
======== ======== ======== ========
Cumulative interest sensitivity
gap as a percentage of total
assets -10.8% - 9.6% -3.2% 8.6%
Cumulative net interest-earning
assets as a percentage of
interest sensitive liabilities 81.6% 87.6% 96.2% 110.0%
</TABLE>
(1) For purposes of the GAP analysis, mortgage and other loans are not reduced
by the allowance for loan losses.
(2) Includes $1,352,000 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 $1,537,000.
(4) Includes $2,000,000 swap maturing November 1997, $5,000,000 swap maturing
June 1999 Does not include interest rate ceiling or floor.
<PAGE>
III. Financial Condition
Total assets increased $15.3 million or 11.4% to $149.7 million at September 30,
1997. This was primarily attributable to an increase in the loan portfolio of
$15.8 million. The Bank also purchased $7.0 million in mortgage-backed
securities as part of its interest-rate risk strategy. At the same time, the
Bank received $4.1 million in principal payments on existing mortgage-backed
securities and $3.0 million government agency notes were called or matured. 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 $2.0 million or 1.8%. Most of the decrease is the
result of customers moving funds out of CD's into other investments and banks.
Deposits typically are replaced in the short-term by FHLB borrowings.
Borrowed funds at September 30, 1997 totaling $29.1 million includes $27.5
million of fixed-rate borrowings and $1.6 million of variable-rate daily
borrowings from the Federal Home Loan Bank of Boston (FHLB). The fixed-rate
borrowings mature $18.5 million within the next six months and $9.0 million in
1998 and beyond.
In October, 1997 the Company entered into an agreement to purchase the Madison
branch of KeyBank of Maine. The branch currently has approximately $13.7 million
in deposits and $0.9 million in loans. The net cash the Bank receives will be
used to pay down FHLB borrowings.
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, $2.8 million are variable-rate securities adjusting
annually. The remaining securities are fixed-rate in nature.
Non-performing loans at September 30, 1997 increased to $2,007,000 or 1.8% 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.
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 $500,706 and
$898,000 at December 31, 1996 and September 30, 1997, respectively. Not included
in the September 30, 1997 balance is $291,944 of state and federal government
guaranteed portions of non-accrual loans.
IV. Comparison of Operating Results
The Company reported net income of $448,000 for the three-month period ended
September 30, 1997, which represents a $166,000 increase from the $282,000 net
income reported for the comparable three-month period in 1996. The 1996 period
included a $115,000 (net of income taxes) special FDIC assessment. Net interest
income after provision for loan losses increased by $169,000 or 12.8%.
Non-interest income increased slightly. Operating expenses for the same
comparable periods increased by $92,000 or 8.9% after removing from the 1996
period the effect of the special FDIC assessment of $175,000 (pre-tax).
The increase in net interest income is attributable to an 11.1% increase in
earning assets for the 1997 period compared to 1996. The interest margin for the
third quarter of 1997 decreased from that of the third quarter of 1996 by
approximately 10 basis points from 4.66% to 4.56%. The provision for loan losses
for the curent period was $30,000 less than that of the third quarter 1996.
Non-interest income increased slightly for the third quarter of 1997---$10,000
or 3.4%---when compared to 1996. Service charges on deposit accounts decreased
due to the high level of fees for non-sufficient funds checks in the second
quarter of 1996. Loan sales increased in the 1997 period as compared to the 1996
third quarter resulting in an increase in Fees and Net Gains on Loans Sold.
<PAGE>
Non-interest expense increased by $92,000 or 8.9% from the three-months ended
September 30, 1996 to the three-months ended September 30, 1997 after removing
the one-time $175,000 special FDIC assessment in September, 1996. Salaries and
benefits increased by $36,000 due to an increase in the Bank's ESOP expense that
increases when the value of the Company's stock increases. The increase in
equipment expense reflects the Bank's investment in equipment to meet
technological demands and reduce future operating costs. Other expenses for 1997
include $12,000 in one-time promotional expenses for home equity lines of
credit, $10,000 in training and $10,000 in technology consulting.
Income for the nine months ended September 30, 1997 was $1,123,000 compared to
$859,000 for the 1996 period - a 30.7% increase. The increase would have been
$149,000 or 15.3% without the $115,000 (after-tax) effect of the September, 1996
FDIC assessment.
Net interest after provision for loan losses increased 11.3% from $3,823,000 for
the first three quarters of 1996 to $4,256,000 for the first three quarters of
1997. The increase is attributable to a 10.0% increase in interest-earning
assets and an 8 basis point increase in net interest margin, offset by a $60,000
increase in the provision for loan losses. Based on the current makeup of the
deposits of KeyBank's Madison branch which is expected to be purchased effective
in March, 1998 the Bank's margin would improve as a result of replacing higher
cost FHLB borrowings with lower cost acquired deposits.
Non-interest income was relatively unchanged from the nine months ended
September 30, 1996 to the 1997 period after removing the effect of the 1996 loss
of $47,000 on the default of a GNMA security. Mortgage servicing income
decreased $17,000 or 7.0% from the nine months ended September 30, 1996 to the
nine months ended September 30, 1997 due to a decreasing loan servicing
portfolio. Decreased mortgage loan demand and management's decision to place
$2.0 million of saleable loans into portfolio have contributed to this decrease.
Other mortgage-related income is up by $17,000 for the nine month period due to
a recent burst of mortgage activity and third quarter loan sales.
Non-interest expense increased $92,000 for the comparable periods but would have
been up $267,000 or 8.3% if the 1996 period had not included the $175,000
(pre-tax) FDIC assessment. Salaries and benefits increased by $105,000 or 6.8%
primarily due to an increase in ESOP expense that is based on the market value
of the Company's stock. The difference between the stock value and its original
issue price is used to calculate the ESOP expense. The difference increases the
Company's paid-in capital resulting in no net change in total capital. (There is
no tax benefit to the ESOP transaction.) The increase in ESOP expense from 1996
to 1997 is $66,000 or 63% of the total salary and benefit increase. The
remainder of the salaries increase is due to normal pay increases, salary
restructuring and increases in payments under bonus plans. The 20.6% increase in
equipment expense reflects the Bank's investment in equipment and technology to
meet future demands and reduce future operating costs. The increase in other
expenses of $123,000 or 13.3% includes $38,000 in one-time costs of training,
$20,000 in technology consulting and $50,000 in promotional expenses for home
equity lines of credit.
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.
<PAGE>
Stockholder's equity at September 30, 1997 was $11.0 million, an increase of
$1,226,000 or 12.5% over total equity at December 31, 1996. The increase
resulted from net income of $1,123,000 for the period, $175,000 in adjustments
related to the Employee Stock Ownership Plan (ESOP) and the Bank Recognition
Retention Plan (RRP), less a $90,000 dividend paid to stockholders plus a $4,000
return of accumulated dividends on unallocated shares of the ESOP and RRP. The
Company issued 17,820 new shares under stock option plans resulting in an
addition to paid-in capital of $54,000. It subsequently repurchased 12,870 of
the shares while retiring 4,035 shares costing $124,000, bringing the net
increase in reported equity to $1,226,000. (Number of shares adjusted for
three-for-one stock split declared June 30, 1997). There was also an $84,000
increase in the unrealized gain/loss on available for sale securities.
At September 30, 1997, the Company's ratio of core capital to total assets
equaled 6.99%. This represents an increase from the December 31, 1996 ratio of
6.85%. In October, 1997, the Company entered an agreement to purchase the
Madison branch of Key Bank of Maine to purchase $13.7 million in deposits and
$0.9 million in loans. The net cash received will be used to pay down FHLB
borrowings so no material increase in the Company assets will result. However,
based on current balances and the premium payment the Company agreed on, the
Company's core capital ratio would fall to approximately 6.25%. This calculation
does not include any expected increases in capital between now and the
anticipated March, 1998 closing of the sale.
At September 30, 1997, the Bank's ratio of core capital to total assets equaled
6.79% compared to 6.68% at December 31, 1996. The Bank's net income of
$1,150,000 accounted for the increase.
The ratio of the Bank's risk-based capital to risk-weighted assets at September
30, 1997 was 11.02% compared to 11.28% at December 31, 1996. Although the Bank's
risk-based capital increased by $1,595,000, its risk-weighted assets increased
by $16,563,000 due to the increase in the commercial and home equity loan
portfolios. If this calculation were done pro forma assuming the aforementioned
branch acquisition, risk-based capital ratio would be approximately 10%. 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 13, 1997 /s/ John E. Thien
------------------
John E. Thien
Chief Financial Officer
and duly Authorized Officer
of the Registrant
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,084
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,639
<INVESTMENTS-CARRYING> 15,226
<INVESTMENTS-MARKET> 15,485
<LOANS> 114,623
<ALLOWANCE> 1,235
<TOTAL-ASSETS> 149,657
<DEPOSITS> 108,400
<SHORT-TERM> 24,619
<LIABILITIES-OTHER> 1,168
<LONG-TERM> 4,452
0
0
<COMMON> 12
<OTHER-SE> 11,006
<TOTAL-LIABILITIES-AND-EQUITY> 149,657
<INTEREST-LOAN> 7,429
<INTEREST-INVEST> 1,431
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,860
<INTEREST-DEPOSIT> 3,264
<INTEREST-EXPENSE> 4,244
<INTEREST-INCOME-NET> 4,616
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,481
<INCOME-PRETAX> 1,647
<INCOME-PRE-EXTRAORDINARY> 1,647
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,123
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.95
<YIELD-ACTUAL> 4.55
<LOANS-NON> 2,007
<LOANS-PAST> 292
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 893
<CHARGE-OFFS> 50
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 1,235
<ALLOWANCE-DOMESTIC> 1,235
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
