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, 1998
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 1,269,411
(Class) (Outstanding)
<PAGE>
KSB BANCORP, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets,
September 30, 1998 and December 31, 1997
Consolidated Statements of Income for the three and nine
months ended September 30, 1998 and September 30, 1997
Consolidated Statements of Stockholders'
Equity, nine months ended September 30, 1998
and September 30, 1997
Statement of Comprehensive Income for the nine
months ended September 30, 1998 and September 30, 1997
Consolidated Statements of Cash Flows, nine
months ended September 30, 1998 and September 30, 1997
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,
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents and Due
from Banks .................................. $ 3,909 $ 3,233
Interest-bearing Deposits in Banks ........... 0 6
Investment Securities Available for
Sale (at estimated Market Value) ............ 7,459 9,261
Investment Securities to be Held to
Maturity (estimated market value:
September 30, 1998 - $10,586
December 31, 1997 - $14,426) ................ 10,377 14,171
--------- ---------
Loans:
Real Estate Mortgages ........................ 53,247 52,710
Home Equity Loans ............................ 13,564 13,718
Installment Loans ............................ 4,743 4,255
Commercial Loans ............................. 53,918 47,057
Other loans .................................. 1,557 654
Deferred Loan Fees ........................... (226) (203)
Allowance for Loan Losses .................... (1,540) (1,342)
--------- ---------
Total Loans (net) ............................ 125,263 116,849
--------- ---------
Other Real Estate Owned ...................... 235 159
Real Estate Loans to be Sold ................. 7,072 2,007
Federal Home Loan Bank Stock ................. 1,641 1,538
Bank Premises and Equipment, net ............. 2,561 2,314
Goodwill ..................................... 1,465 517
Accrued Interest Receivable .................. 965 827
Deferred Tax Asset ........................... 735 661
Cash Surrender Value of Life Insurance ....... 617 588
Other Assets ................................. 586 621
--------- ---------
TOTAL ASSETS ........................ $ 162,885 $ 152,752
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
September 30, December 31,
1998 1997
--------- ----------
<S> <C> <C>
Deposits:
Regular Savings ......................... $ 23,121 $ 20,055
Money Market Accounts ................... 9,177 6,211
Certificates of Deposit ................. 62,936 58,387
N.O.W. Accounts ......................... 22,059 13,915
Demand Deposits ......................... 11,477 12,141
--------- ---------
Total Deposits ................................... 128,770 110,709
--------- ---------
Advances from FHLB ............................... 18,026 28,219
Other borrowed funds ............................. 814 0
Escrows and trustee accounts for
sold loans ..................................... 1,119 1,014
Accrued Income Taxes Payable ..................... (4) 36
Accrued Expenses and Other Liabilities ........... 938 1,072
Deferred Income Taxes ............................ 146 147
--------- ---------
Total Liabilities ................................ 149,809 141,197
--------- ---------
Stockholders' Equity:
Common Stock: $.01 Par Value, Issued
and Outstanding: 1,269,411 Shares at
September 30, 1998 and 1,246,950 Shares
at December 31, 1997 ........................... 13 12
Additional Paid-in Capital ....................... 4,799 4,544
Retained Earnings ................................ 8,352 7,171
Net unrealized gain(loss) on securities
available for sale, net of deferred taxes....... 103 73
Less: remaining obligation under employee
stock ownership plan (ESOP) ................ (81) (117)
Less: remaining obligation under Bank
Recognition Plan (BRP) ..................... (33) (51)
Less: Treasury Stock (7,964 shares at cost)...... (77) (77)
--------- ---------
Total Stockholders' Equity ....................... 13,076 11,555
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ......................................... $ 162,885 $ 152,752
========= =========
</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
------------------ ------------------
9/30/98 9/30/97 9/30/98 9/30/97
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Interest and Dividend Income
Interest and Fees on Loans ..... $3,000 $2,651 $8,635 $7,429
Interest on Investment
Securities ................... 339 450 1,089 1,364
Dividends ...................... 26 25 78 67
------ ------ ------ ------
Total Interest and Dividend Income . 3,365 3,126 9,802 8,860
------ ------ ------ ------
Interest Expense
Interest on Deposits ............. 1,238 1,093 3,549 3,264
Interest on Borrowed Funds ....... 270 420 897 980
------ ------ ------ ------
Total Interest Expense ............. 1,508 1,513 4,446 4,244
------ ------ ------ ------
Net Interest Income ................ 1,857 1,613 5,356 4,616
Less: provision for loan losses .... 120 120 360 360
------ ------ ------ ------
Net Interest Income after
provision for loan losses ........ 1,737 1,493 4,996 4,256
------ ------ ------ ------
Non-interest income
Net Fees & Gains on Loans Sold ... 34 33 88 51
Mortgage servicing income ........ 66 75 209 225
Service charges and fees ......... 204 172 621 519
Other ............................ 31 25 90 77
------ ------ ------ ------
Total Non-interest income .......... 335 305 1,008 872
------ ------ ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Non-interest expense
Salaries and benefits .............. 648 547 1,939 1,657
Occupancy .......................... 75 64 241 210
Equipment .......................... 206 178 580 545
FDIC Premium ....................... 7 7 22 21
Other .............................. 351 326 1,118 1,048
---------- ---------- ---------- ----------
Total Non-interest Expense .......... 1,287 1,122 3,900 3,481
---------- ---------- ---------- ----------
Net income before taxes .............. 785 676 2,104 1,647
Income tax expense ................... 276 228 742 524
---------- ---------- ---------- ----------
Net income ........................... $ 509 $ 448 $ 1,362 $ 1,123
========== ========== ========== ==========
Basic earnings per share (see Note 2) $ 0.41 $ 0.38 $ 1.11 $ 0.95
========== ========== ========== ==========
Weighted Average Shares Outstanding
(Restated to reflect three-for-one
stock split in the form of a 200% stock
dividend effective July 10,1997)...... 1,228,056 1,190,990 1,224,010 1,185,101
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Nine months ended September 30, 1998
Net
Unrealized
Gain (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>
Beginning
balance ...... $ 7,171 12 4,544 (117) (51) 73 (77) 11,555
Net Income ..... 1,362 -- -- -- -- -- -- 1,362
Dividends Paid . (113) -- -- -- -- -- -- (113)
ESOP adjustment -- -- 188 36 -- -- -- 224
BRP adjustment . -- -- -- -- 18 -- -- 18
Securities
Adjustment .... -- -- -- -- -- 30 -- 30
Shares Issued
under Stock
Option Plan ... -- 1 81 -- -- -- -- 82
Retirement of
Treasury shares
(4,418) (68) -- (14) -- -- -- 82 0
Purchases of
Treasury Shares
(4,418) -- -- -- -- -- -- (82) (82)
------- -- ----- --- --- -- --- -------
Ending
balance ...... $ 8,352 13 4,799 (81) (33) 103 (77) $13,076
======= == ===== === === === === =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1997
Net
Unrealized
Gain (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>
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 200%
stock 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
======== == ===== ==== == == === ========
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
NINE MONTHS ENDED
September 30,
-----------------------
1998 1997
------- --------
(In thousands)
<S> <C> <C>
Net Income ....................................... $ 1,362 1,123
Other Comprehensive income:
Unrealized gains (losses) on securities,
arising during the period .................... 45 127
Less: tax effect .............................. (15) (43)
------- -------
Subtotal Other Comprehensive Income .............. 30 84
------- -------
Comprehensive income ............................. $ 1,392 $ 1,207
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
September 30,
--------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Net Income ........................................... $ 1,362 $ 1,123
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and Amortization .................... 572 564
Decrease in obligation under ESOP and BRP ........ 242 175
Provision for loan losses ........................ 360 360
Deferred Income Taxes ............................ (90) (227)
Net (gains) losses on sales of loans
originated for sale ............................. (83) (36)
Originations of loans held for sale .............. (9,631) (4,382)
Proceeds from loans held for sale ................ 4,648 2,468
Decrease (increase) in:
Interest receivable ............................ (139) (147)
Prepaid expenses ............................... (69) 6
Cash surrender of life insurance ............... (28) (23)
Other receivables .............................. 43 (37)
Increase (decrease) in:
Interest payable ............................... (35) 72
Accrued Expenses ............................... 58 1
Accrued Taxes payable .......................... (40) 43
Deferred Origination Fees ...................... 23 (32)
Other payables ................................. (180) (29)
------- -------
Total Adjustments .................................. (4,349) (1,224)
------- -------
Net Cash from Operating Activities ................. (2,987) (101)
------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
available for sale ............................. 0 (7,018)
Proceeds from maturities and principal
payments on investment
securities held to maturity .................... 3,722 3,174
Proceeds from maturities and principal
payments on investment securities
available for sale ............................. 1,829 3,943
Net(increase)decrease in loans ................... (8,314) (13,820)
Proceeds from sale of Other Real Estate
Owned .......................................... 240 116
Net Purchases of Federal Home Loan Bank
Stock .......................................... (104) (216)
Capital Expenditures ............................. (401) (373)
Net (increase) decrease in other assets .......... 52 52
-------- --------
Net cash provided by (used in)
investing activities .......................... (2,976) (14,142)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received through branch acquisition,
net of acquisition premium ..................... 14,632 0
Net increase (decrease) in time deposits .......... (1,778) (1,513)
Net increase (decrease) in other deposits ......... 3,687 (442)
Net increase (decrease) in FHLB advances
and other borrowings ........................... (9,900) 15,885
Net increase (decrease) in escrow accounts ....... 105 72
Proceeds from stock issuance
under option plans ............................. 81 15
Net Purchase of treasury stock issued
under option plans ............................. (81) (85)
Cash dividends paid on common stock
(net of ESOP) .................................... (113) (86)
-------- --------
Net cash provided by financing activities......... 6,633 13,846
-------- --------
Net increase (decrease) in cash and
cash equivalents ................................ 670 (397)
Cash and cash equivalents, beginning of
period(1) ........................................ 3,239 2,481
-------- --------
Cash and cash equivalents, end of
period (1) ....................................... $ 3,909 $ 2,084
======== ========
</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, 1998 and December 31, 1997, the consolidated
statements of income for the nine months ended September 30, 1998 and September
30, 1997, and the consolidated statements of stockholders' equity, comprehensive
income and cash flows for the nine months ended September 30, 1998, and
September 30, 1997. All significant intercompany transactions and balances are
eliminated in consolidation. The income reported for 1998 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.
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.
For other accounting policies, refer to the financial statements filed in the
form 10-KSB for the year-end December 31, 1997.
NOTE 2 - STOCKHOLDERS EQUITY/EARNINGS PER SHARE
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share."
SFAS 128 specifies the computation and disclosure requirements for earnings per
share for entities with publicly held common stock or potential common stock.
The effect of SFAS No. 128 on the Company's financial statements is to
retroactively present diluted earnings per share, in addition to basic earnings
per share already presented.
<PAGE>
The basic 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. Potential common
stock is considered in the calculation of weighted-average shares outstanding
for diluted earnings per share. In 1997, the Company declared a three-for-one
stock split effected in the form of a 200% stock dividend. Earnings and cash
dividends per share and weighted-average shares outstanding have been
retroactively restated to reflect the stock dividend.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net Income as reported ......................... $1,362,458 $1,123,529
========== ==========
Weighted-average shares outstanding ............ 1,224,010 1,185,101
Effect of dilutive potential common shares
stock options ................................ 54,066 85,335
---------- ----------
Adjusted Weighted-average shares
outstanding .................................. 1,278,076 1,270,436
========== ==========
Basic earnings per share ....................... $ 1.11 $ 0.95
Diluted earnings per share ..................... $ 1.07 $ 0.88
</TABLE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows for the nine months
ended September 30, 1998:
Balance at January 1, 1998 $1,341,828
Provision for loan losses 360,000
Charged-off loans 204,923
Recoveries 42,749
----------
Balance at September 30, 1998 $1,539,654
==========
Note 4 - LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
<PAGE>
NOTE 5 - EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED (Goodwill)
The excess of cost over fair value of net assets acquired in branch acquisitions
is amortized to expense using the straight line method over ten years. In March,
1998 the Bank acquired the Madison, Maine branch of KeyBank of Maine. The
acquisition was accounted for under the purchase method of accounting for
business combinations. The following is a summary of the transaction:
($ in 000's)
---------
Loans acquired .. $ 799
Fixed Assets .... 168
Goodwill ........ 1,089
Other Assets .... 8
Deposits Assumed (16,673)
Other Liabilities (23)
--------
Net cash received $ 14,632
========
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, 1998 and
December 31, 1997, the Bank had commitments to make loans totaling $6,290,405
and $2,731,000 and unused lines of credit totaling $17,461,860 and $16,293,000,
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
The Bank is a party to an interest rate swap agreement with the Federal Home
Loan Bank of Boston dated June 1996, which has a "notional amount" of
$5,000,000. 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, 1998, pays at the rate of 5.50%. Net interest income for the period ending
September 30, 1998 was $30,520. 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 swap at September 30,
1998 was $51,554.
The Bank was party to an interest rate floor agreement in the notional amount of
$5,000,000, dated June 1996, whereby the Bank received the difference between 6%
and the three-month LIBOR rate, but received nothing if the LIBOR rate exceeded
6%. The contract expired June, 1998. The Bank paid a premium of $22,500 for the
contract which was recognized into interest income on a straight-line basis over
<PAGE>
the life of the contract. The Bank has an interest rate cap in the notional
amount of $10,000,000 on which it receives the excess of the three-month LIBOR
rate, adjusted quarterly, over 6.50%. The cap matures July 1999. The Bank paid a
premium of $33,000 that is recognized into income on a straight-line basis over
the life of the contract. No interest income has been received on the cap. The
estimated market value of the agreement as of September 30, 1998 is $ 54. The
Bank uses interest rate floor and cap agreements to partially protect its net
interest income stream against the effect of falling 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 $70,498,879 and $75,111,000 at September
30, 1998 and December 31, 1997, respectively. Mortgage servicing rights of
$50,603 and $38,456 are capitalized at September 30, 1998 and December 31, 1997,
respectively, and are included in other assets. The amortized cost approximates
fair value at September 30, 1998.
<PAGE>
KSB BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
I. General
The Company's results of operations are dependent primarily on the Bank. The
Bank's primary source of earnings is its net interest income, which is the
difference between the interest income earned on its loans, mortgage-backed
securities and investment portfolio versus its cost of funds, which consists of
the interest paid on deposits and borrowings.
To a lesser extent but still significant is the effect of the Bank's secondary
mortgage market activities in which the Bank originates residential mortgage
loans for the secondary mortgage market and subsequently sells the loans while
retaining servicing rights and fees.
The Company's operating expenses consist principally of employee compensation
and benefits, occupancy and equipment expenses and other general and
administrative expenses. The Company's results of operations are significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates, as well as government policies and actions of regulatory
authorities.
In March, 1998 the Bank acquired the Madison, Maine branch of KeyBank of Maine.
The acquisition was accounted for under the purchase method of accounting for
business combinations. The following is a summary of the transaction:
Balance Average
($ in 000's) Rate
-------- -----
Loans acquired ............ $ 799 11.32%
Fixed Assets .............. 168
Goodwill .................. 1,089
Other Assets .............. 8
Now, DDA and Sweep accounts (6,693) 2.89%
Savings/MMDA accounts ..... (3,652) 2.01%
Time Deposits ............. (6,328) 5.22%
Other Liabilities ......... (23)
--------
Net cash received ......... $ 14,632
========
Pursuant to the acquisition of cash in the transaction, the Bank repaid
variable-rate daily borrowings from the Federal Home Loan Bank of Boston (FHLB).
The branch is expected to produce approximately $330,000 in expenses including
the amortization of goodwill. It is expected that new loan production,
consisting mainly of conforming 1-4 family residential mortgage and commercial
real estate mortgages will increase and that fee income from core deposit
related accounts will generate approximately $50,000 in annual income.
<PAGE>
II. Interest Rate Sensitivity
A number of measures are used to monitor and manage interest-rate risk,
including income simulation and interest sensitivity (gap) analyses. An
income-simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest
rates. Key assumptions in the model include prepayment speeds on
mortgage-related assets; cash flows and maturities of derivative and other
financial instruments held for purposes other than trading; changes in market
conditions on loan and deposit pricing; deposit sensitivity; customer
preferences; and management's financial capital plans. These assumptions are
inherently uncertain and, as a result, the model cannot precisely estimate net
interest income or precisely predict the impact of higher or lower interest
rates on net interest income. Actual results will differ from simulated results
due to timing, magnitude, and frequency of interest rate changes and changes in
market conditions and management strategies, among other factors.
Based on the results of the simulation model as of September 30, 1998, the
Company would expect a decrease in net interest income of $111,000 or 1.6% of
net interest income if interest rates gradually decrease from current rates by
200 basis points over a 12-month period, and a decrease in net-interest income
of $105,000 or 1.5% if interest rates gradually increase from current rates by
200 basis points over a 12-month period. These results are both within Board-set
tolerance limits of 7.5%.
III. Financial Condition
Total assets increased $10.1 million, or, 6.6% to $162.9 million at September
30, 1998. This was primarily attributable to an increase in loans (including
loans to be sold) of $13.5 million. During the same nine-month period ending
September 30, 1998 the Bank received $5.6 million in principal payments on
mortgage-backed securities. The Bank's acquisition of $16.7 million of deposits
and $0.8 of loans from KeyBank of Maine did not significantly add to total
assets. Net cash of $14.6 million received in the transaction was used to pay
down borrowings from the FHLB.
Total deposits and other borrowed funds (which consists of customer repurchase
agreements, or "sweep" accounts) increased $2.2 million or 2.0% after removing
the effect of the March deposit acquisition from KeyBank. Most of the increase
is attributable to N.O.W. accounts which are seasonally high due to the influx
of deposits from municipal customers. Certificates of deposit decreased $1.7
million or 3.0%. (Deposit shortfalls are typically replaced in the short-term by
FHLB borrowings.)
Advances from FHLB at September 30, 1998 totaling $18.0 million includes $16.4
million of fixed-rate borrowings and $1.6 million of variable-rate daily
borrowings from the Federal Home Loan Bank of Boston. The fixed-rate borrowings
mature $3.0 million within the next six months and $13.4 million in 1999 and
beyond. The $13.4 million maturing 1999 and beyond includes a $5.0 million FHLB
advance carrying a rate of 4.99% and is callable quarterly starting January 14,
1999. Based on short-term rates as of early November, 1998, the Bank expects the
advance to be called.
Investment securities To Be Held to Maturity and Available for Sale consist
primarily of Mortgage-backed securities which are predominantly of the type
issued by U.S. Government agencies. Of these, $1.8 million are variable-rate
securities adjusting annually. The remainder are fixed-rate in nature.
<PAGE>
Non-performing loans at September 30, 1998 decreased by $22,000 to $2,068,000,
or 1.6% of total net loans, compared to $2,090,000, or 1.8% of total net loans
at December 31, 1997. The current balance is represented primarily 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 $1,166,000 and $1,197,000 at December 31, 1997 and
September 30, 1998, respectively. Other Real estate owned increased by a net of
$76,000.
IV. Comparison of Operating Results
The Company reported net income of $509,000 for the three-month period ended
September 30, 1998, which represents a $61,000 increase, or 13.6%, from the
$448,000 net income reported for the comparable three-month period in 1997. Net
interest income after provision for loan losses increased by $244,000, or 16.3%.
Non-interest income increased $30,000, or 9.8%, and operating expenses for the
same comparable periods increased by $165,000, or 14.7%.
The increase in net interest income is attributable to a 8.3% increase in
average earning assets for the 1998 period compared to 1997. In addition, the
interest margin for the third quarter of 1998 increased from that of the third
quarter of 1997 by approximately 29 basis points. Loan volume was the primary
component of the increase in earning assets. The addition of the Madison deposit
base contributed to the increase in the net interest margin.
Non-interest income increased 9.8% for the third quarter of 1998 when compared
to the third quarter of 1997. Service charges and other fees increased by
$32,000, or 19%, over the previous year's quarter due primarily to the
acquisition of the Madison branch and the fee income it produced. Gains on the
sales of mortgages were unchanged because loan sale volumes are similar for the
comparable periods. Management intends to securitize $4.4 million of loans
currently held for sale along with $5.0 million which are currently in
portfolio. While there will be no material decrease in net income as a result of
the transaction, the Bank will pay a guarantee fee in return for non-recourse on
the transaction, thereby mitigating the Bank's credit risk on the loans.
Non-interest expense increased by $165,000, or 14.7%, from the third quarter of
1997 to the third quarter of 1998. Salary expense increased by $101,000,
including $10,000 from the increase in ESOP expense due to the rise in market
value of the Company's stock, $36,000 in new salaries for Madison personnel and
the remainder from salary, staffing and director fee increases. Management has
installed an upgraded mainframe computer which was necessary to accommodate
anticipated upgrades in the Bank's main applications software and to greatly
speed its daily processing. The result will be enhanced customer service and
response time and moderate cost savings from reduced processing time. The
upgrade will also facilitate the Year 2000 readiness plan. It is expected that
the added book expense will be $30,000 for 1998 and $70,000 for 1999.
The Company reported net income of $1,362,000 for the nine-month period ended
September 30, 1998, which represents a $239,000 increase, or 21.3%, from the
$1,123,000 net income reported for the comparable nine-month period in 1997. Net
interest income after provision for loan losses increased by $740,000 or 17.4%.
Non-interest income increased $136,000, or 15.6%, and operating expenses for the
same comparable periods increased by $419,000, or 12.0%.
<PAGE>
The increase in net interest income is attributable to a 9.9% increase in
earning assets for the 1998 period compared to 1997. In addition, the interest
margin for the nine months ending September 30, 1998 increased from that of the
1997 period by approximately 25 basis points. Loan volume was the primary
component of the increase in earning assets. The addition of the Madison deposit
base contributed to the increase in the net interest margin.
Non-interest income increased 15.6% for the first nine months of 1998 when
compared to the first nine months of 1997. Service charges and other fees
increased by $102,000 or 19.7% over the previous year's period due primarily to
the acquisition of the Madison branch as well as increases in the collections of
fees on loan accounts and loan applications. Gains on the sale of mortgages
increased compared to the 1997 period because in 1997 the Bank placed more
saleable loans into its portfolio whereas this year to-date the Bank is selling
more of them. Management has entered into a commitment to securitize $4.4
million of saleable loans in December, 1998.
Non-interest expense increased by $419,000, or 12.0%, from the first nine months
of 1997 to the nine-month period ending September 30, 1998. Salary expense
increased by $282,000, including $73,000 from the increase in ESOP expense due
to the rise in market value of the Company's stock, $76,000 in new salaries for
Madison personnel and the remainder from salary and staffing increases. Included
in other expenses in the first nine months of 1998 were $37,000 in one-time
expenses and $95,000 in recurring expenses associated with the acquisition of
the Madison branch. Expenses in the 1997 period included a $20,000 investment in
the Bank's sales and quality service program and $40,000 in loan processing
expenses connected with a new loan promotion.
V. Liquidity and Capital Resources
A primary function of asset/liability management includes assuring adequate
liquidity that reflects the ability of the Bank to meet the cash flow
requirements of its customers without significant loss to the Bank.
Liquidity comes from five sources in the balance sheet --- the Bank's investment
portfolio, deposits, borrowings, loan repayments and profits.
Liquidity is needed to fund increased loan demand and to cover the seasonal
outflows of deposits. The Bank's investment portfolio, that consists primarily
of mortgage-backed securities, provides liquidity through repayment of principal
and interest and through its availability as collateral for borrowings and
public sector deposit accounts.
The Bank's primary approach to measuring liquidity is utilizing a Basic
Surplus/Deficit model. It is used to calculate liquidity over 30-day horizon, by
examining the relationship between liquid assets and short-term liabilities,
which are vulnerable to non-replacement within a 30-day period. The Bank's
minimum policy level of liquidity under this model is 5% of total assets. At
September 30, 1998, the 30-day ratio was 9.0%(20.1% including borrowable funds
available from the Federal Home Loan Bank of Boston).
Stockholder's equity at September 30, 1998 was $13.1 million, an increase of
$1,521,000 or 13.6% over total equity at December 31, 1997. The increase
resulted from net income of $1,362,000 for the period, $242,000 in adjustments
related to the Employee Stock Ownership Plan (ESOP) and the Bank Recognition
Retention Plan (RRP), less $113,000 net dividends paid to stockholders. The net
<PAGE>
unrealized loss on securities available for sale increased by $30,000 for the
nine months (net of deferred tax liability of $15,000). The Company issued
23,879 new shares under stock option plans resulting in an addition to paid-in
capital of $81,000. It subsequently repurchased 4,418 of the shares costing
$81,000, retiring all of them, bringing the net increase in reported equity to
$1,521,000.
At September 30, 1998, the Company's ratio of core capital to total assets
equaled 7.12%. This represents a decrease from the December 31, 1997 ratio of
7.20%.
At September 30, 1998, the Bank's ratio of core capital to total assets equaled
6.91% compared to 7.05% at December 31, 1997.
The ratio of the Bank's risk-based capital to risk-weighted assets at September
30, 1998 was 11.12% compared to 11.70% at December 31, 1997. The Bank's capital
ratios are derived from data presented in the Bank's FDIC call reports.
The decreases in the Company's and the Bank's capital ratios are due to the
intangible assets arising from the acquisition of deposits from KeyBank which
are deducted from capital in arriving at the ratios. This is offset by the
increase in equity as outlined above.
YEAR 2000 READINESS
The Year 2000 (`Y2K') issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
may be unable to properly interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to disruptions in
operations. In 1997, Kingfield Bank developed a five-phase methodology for Y2K
systems compliance.
Phase I, or Awareness, consisted of defining the Y2K issue at Kingfield Bank;
informing the Board of Directors, Management and key customers of the issue; and
developing a strategy of addressing the issue in all areas of the company. This
phase has been completed.
Phase II, or Assessment, consists of identifying all software, hardware and
customer/vendor interdependencies affected by the Y2K issue. This phase is
essentially complete but management realizes that additional issues might arise
that may require additional assessment.
Phase III, or Renovation, includes various upgrades to hardware and software to
ensure Y2K compliance. This phase is expected to be completed by January 31,
1999. In September, 1998, the Bank installed new mainframe hardware. The Y2K
issue was not the overall reason for the addition. The new hardware is Y2K
compliant and facilitates software testing (the software is also certified
compliant, but will be tested as part of Phase IV Validation). The overriding
motivation for purchase of the hardware was to provide better, faster customer
service by speeding up processing and backup time for the Bank's application
processes. The hardware and software are certified as Y2K compliant. The
purchased hardware and associated software will be capitalized in accordance
with normal policy. The majority of costs associated with new software or
upgraded hardware would have been incurred in the normal course of operations
regardless of the year 2000 issue.
<PAGE>
Phase IV, or Validation, consists of testing all hardware and software in use by
the company as well as testing the interfaces between company and external
systems. Systems in use by critical suppliers of services will be monitored for
testing progress by management. The company plans having the Validation phase
completed by March 31, 1999. The Bank uses a nationally recognized third party
service provider who provides software to process its most mission-critical data
processing related to its loans, deposits, general ledger and other financial
applications. The service provider has informed the Bank that its software is
Y2K compliant. Testing of the third party provider's programs has commenced and
is expected to be completed by March 31, 1999. Phase V, or Implementation, will
be completed by June 30, 1999 and will result in the certification of all
hardware and software as Y2K compliant. Contingency plans have been developed
for all mission critical systems and will be executed if any systems fail to
meet certification criteria. The Company is in the process of assessing these
plans in light of the possible impact of Year 2000 failures and will modify
plans as more becomes known about evolving scenarios. The Company's reasonably
most likely worst-case Y2K scenarios may include the failure of a vendor or
third party provider, which is beyond the Company's control. In the event a
failure occurs, the Company expects to be able to implement contingency systems.
The Bank plans to put into place stand-by liquidity (at a nominal cost) in the
event unusual levels of deposit outflows occur as a result of customers' fear of
system failures.
The Company is adequately addressing the Year 2000 issue and the current
preparations and testing being conducted all seek to minimize any potential
adverse affect on the Bank or its customers. Material costs are not expected to
be incurred. The commercial and residential loan portfolios, as well as the
significant depositor list, are currently being analyzed by our Year 2000 team
for material exposure to the Y2K issue. No material exposure is expected due to
the diverse nature of our loan and deposit portfolios.
The company's regulatory agency, the Federal Deposit Insurance Corporation
(`FDIC'), has been monitoring, and plans to continue monitoring, the company's
progress in addressing the Y2K issue.
<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
None
A current report on From 8-K was filed March 26, 1998 to report the acquisition
by the Bank of the Madison, Maine branch of KeyBank of Maine pursuant to Item 5
of the Form 8K.
<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 16, 1998 /s/ John E. Thien
------------------
John E. Thien
Chief Financial Officer
and duly Authorized Officer
of the Registrant
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