FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark one:
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly period ended June 30, 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,
June 30, 1998 and December 31, 1997
Consolidated Statements of Income for the six
months ended June 30, 1998 and June 30, 1997
Consolidated Statements of Stockholders'
Equity, six months ended June 30, 1998
and June 30, 1997
Statement of Comprehensive Income for the six
months ended June 30, 1998 and June 30, 1997
Consolidated Statements of Cash Flows, six
months ended June 30, 1998 and June 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)
June 30, December 31,
1998 1997
--------- ----------
(in thousands)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents and Due
from Banks .................................. $ 3,180 $ 3,233
Interest-bearing Deposits in Banks ........... 2 6
Investment Securities Available for
Sale (at estimated Market Value) ............ 8,101 9,261
Investment Securities to be Held to
Maturity (estimated market value:
June 30, 1998 - $11,707;
December 31, 1997 - $14,426) ................ 11,500 14,171
--------- ---------
Loans:
Real Estate Mortgages ........................ 53,051 52,710
Home Equity Loans ............................ 12,943 13,718
Installment Loans ............................ 4,627 4,255
Commercial Loans ............................. 51,109 47,057
Other loans .................................. 757 654
Deferred Loan Fees ........................... (218) (203)
Allowance for Loan Losses .................... (1,453) (1,342)
--------- ---------
Total Loans (net) ............................ 120,816 116,849
--------- ---------
Other Real Estate Owned ...................... 279 159
Real Estate Loans to be Sold ................. 5,343 2,007
Federal Home Loan Bank Stock ................. 1,641 1,538
Bank Premises and Equipment, net ............. 2,603 2,314
Goodwill ..................................... 1,518 517
Accrued Interest Receivable .................. 800 827
Deferred Tax Asset ........................... 699 661
Cash Surrender Value of Life Insurance ....... 610 588
Other Assets ................................. 653 621
--------- ---------
TOTAL ASSETS ........................ $ 157,745 $ 152,752
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
June 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
Deposits:
Regular Savings ......................... $ 22,845 $ 20,055
Money Market Accounts ................... 7,902 6,211
Certificates of Deposit ................. 62,960 58,387
N.O.W. Accounts ......................... 17,768 13,915
Demand Deposits ......................... 11,036 12,141
--------- ---------
Total Deposits ................................... 122,511 110,709
--------- ---------
Advances from FHLB ............................... 19,755 28,219
Other borrowed funds ............................. 427 0
Escrows and trustee accounts for
sold loans ..................................... 1,452 1,014
Accrued Income Taxes Payable ..................... (18) 36
Accrued Expenses and Other Liabilities ........... 924 1,072
Deferred Income Taxes ............................ 145 147
--------- ---------
Total Liabilities ................................ 145,196 141,197
--------- ---------
Stockholders' Equity:
Common Stock: $.01 Par Value, Issued
and Outstanding: 1,266,918 Shares at
June 30, 1998 and 1,246,950 Shares
at December 31, 1997 ........................... 13 12
Additional Paid-in Capital ....................... 4,735 4,544
Retained Earnings ................................ 7,919 7,171
Net unrealized gain(loss) on securities
available for sale, net of deferred taxes ...... 89 73
Less: remaining obligation under employee
stock ownership plan (ESOP) ................ (93) (117)
Less: remaining obligation under Bank
Recognition Plan (BRP) ..................... (37) (51)
Less: Treasury Stock (7,964 shares at cost) ..... (77) (77)
--------- ---------
Total Stockholders' Equity ....................... 12,549 11,555
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ......................................... $ 157,745 $ 152,752
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS SIX-MONTHS
ENDED ENDED
6/30/98 6/30/97 6/30/98 6/30/97
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Interest and Dividend Income
Interest and Fees on Loans ..... $2,859 $2,446 $5,635 $4,778
Interest on Investment
Securities ................... 358 464 750 913
Dividends ...................... 26 22 52 43
------ ------ ------ ------
Total Interest and Dividend Income . 3,243 2,932 6,437 5,734
------ ------ ------ ------
Interest Expense
Interest on Deposits ............. 1,214 1,087 2,311 2,171
Interest on Borrowed Funds ....... 252 329 627 560
------ ------ ------ ------
Total Interest Expense ............. 1,466 1,416 2,938 2,731
------ ------ ------ ------
Net Interest Income ................ 1,777 1,516 3,499 3,003
Less: provision for loan losses .... 120 120 240 240
------ ------ ------ ------
Net Interest Income after
provision for loan losses ........ 1,657 1,396 3,259 2,763
------ ------ ------ ------
Non-interest income
Net Fees & Gains on Loans Sold ... 43 15 54 17
Mortgage servicing income ........ 70 73 142 150
Service charges and fees ......... 219 167 418 348
Other ............................ 21 21 59 52
------ ------ ------ ------
Total Non-interest income .......... 353 276 673 567
------ ------ ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Non-interest expense
Salaries and benefits .............. 655 540 1,292 1,110
Occupancy .......................... 78 74 165 144
Equipment .......................... 191 195 374 367
FDIC Premium ....................... 7 7 15 15
Other .............................. 411 367 767 723
---------- ---------- ---------- ----------
Total Non-interest Expense .......... 1,342 1,183 2,613 2,359
---------- ---------- ---------- ----------
Net income before taxes .............. 668 489 1,319 971
Income tax expense ................... 234 138 466 296
---------- ---------- ---------- ----------
Net income ........................... $ 434 $ 351 $ 853 $ 675
========== ========== ========== ==========
Basic earnings per share (see Note 2) $ 0.35 $ 0.30 $ 0.70 $ 0.57
========== ========== ========== ==========
1,223,996 1,186,717 1,221,954 1,182,108
</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)
Six months ended June 30, 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning
balance $7,171 12 4,544 (117) (51) 73 (77) $11,555
Net Income 853 - - - - - - 853
Dividends Paid (45) - - - - - - (45)
ESOP adjustment - - 131 24 - - - 155
BRP adjustment - - - - 14 - - 14
Securities
Adjustment - - - - - 16 - 16
Shares Issued
under Stock
Option Plan - 1 72 - - - - 73
Retirement of
Treasury shares
(3,911) (60) - (12) - - - 72 0
Purchases of
Treasury Shares
(3,911) - - - - - - (72) (72)
------ -- ----- --- --- -- --- -------
Ending
balance $7,919 13 4,735 (93) (37) 89 (77) $12,549
====== == ===== === === == === =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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)
Six months ended June 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 675 - - - - - - 675
Dividends Paid (37) - - - - - - (37)
Stock split effected
in the form of a 200%
stock dividend (8) 8 - - - - - 0
ESOP adjustment - - 70 26 - - - 96
BRP adjustment - - - - 14 - - 14
Securities
Adjustment - - - - - 0 - 0
Shares Issued
under Stock
Option Plans - - 15 - - - - 15
Retirement of
Purchases of
Treasury Shares - - - - - - (85) (85)
------ -- ----- ---- --- --- --- -------
Ending
Balance $6,379 12 4,410 (143) (65) (38) (85) $10,470
====== == ===== ==== === === === =======
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
SIX MONTHS ENDED
June 30,
1998 1997
-------------------
(In thousands)
<S> <C> <C>
Net Income ......................................... $ 853 675
Other Comprehensive income:
Unrealized gains (losses) on securities,
arising during the period ...................... 24 (1)
Less: tax effect ................................ (8) 1
----- -----
Subtotal Other Comprehensive Income ................ 16 0
----- -----
Comprehensive income ............................... $ 869 $ 675
===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
June 30,
1998 1997
------- --------
(In thousands)
<S> <C> <C>
Net Income ........................................... $ 853 $ 675
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and Amortization .................... 380 376
Decrease in obligation under ESOP and BRP ........ 170 110
Provision for loan losses ........................ 240 240
Deferred Income Taxes ............................ (49) (104)
Net (gains) losses on sales of loans
originated for sale ............................. (44) (11)
Originations of loans held for sale .............. (6,316) (2,450)
Proceeds from loans held for sale ................ 3,024 1,042
Decrease (increase) in:
Interest receivable ............................ 26 (61)
Prepaid expenses ............................... (63) 30
Cash surrender of life insurance ............... (22) (17)
Other receivables .............................. (7) (5)
Increase (decrease) in:
Interest payable ............................... (39) 66
Accrued Expenses ............................... 11 (26)
Accrued Taxes payable .......................... (54) (49)
Deferred Origination Fees ...................... 16 (35)
Other payables ................................. (143) (40)
------- -------
Total Adjustments .................................. (2,870) (934)
------- -------
Net Cash from Operating Activities ................. (2,017) (259)
------- -------
</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 .................... 2,618 2,055
Proceeds from maturities and principal
payments on investment securities
available for sale ............................. 1,171 3,525
Net(increase)decrease in loans ................... (3,727) (7,900)
Proceeds from sale of Other Real Estate
Owned .......................................... 184 117
Net Purchases of Federal Home Loan Bank
Stock .......................................... (104) (103)
Capital Expenditures ............................. (335) (235)
Net (increase) decrease in other assets .......... 35 34
-------- --------
Net cash provided by (used in)
investing activities .......................... (158) (9,525)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received through branch acquisition,
net of acquisition premium ..................... 14,632 0
Net increase (decrease) in time deposits .......... (1,754) (684)
Net increase (decrease) in other deposits ......... (2,595) (3,952)
Net increase (decrease) in FHLB advances
and other borrowings ........................... (8,558) 15,171
Net increase (decrease) in escrow accounts ....... 438 384
Proceeds from stock issuance
under option plans ............................. 72 15
Net Purchase of treasury stock issued
under option plans ............................. (72) (85)
Cash dividends paid on common stock
(net of ESOP) .................................... (45) (36)
-------- --------
Net cash provided by financing activities......... 2,118 10,813
-------- --------
Net increase (decrease) in cash and
cash equivalents ................................ (57) 1,029
Cash and cash equivalents, beginning of
period(1) ........................................ 3,239 2,481
-------- --------
Cash and cash equivalents, end of
period (1) ....................................... $ 3,182 $ 3,510
======== ========
</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 June 30, 1998 and December 31, 1997, the consolidated statements
of income for the six months ended June 30, 1998 and June 30, 1997, and the
consolidated statements of stockholders' equity, comprehensive income and cash
flows for the six months ended June 30, 1998, and June 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>
SIX MONTHS ENDED
June 30,
1998 1997
---------- ----------
<S> <C> <C>
Net Income as reported ......................... $ 853,005 $ 675,426
========== ==========
Weighted-average shares outstanding ............ 1,221,954 1,182,108
Effect of dilutive potential common shares
stock options ................................ 57,291 80,893
---------- ----------
Adjusted Weighted-average shares
outstanding .................................. 1,279,245 1,263,001
========== ==========
Basic earnings per share ....................... $ 0.70 $ 0.57
Diluted earnings per share ..................... $ 0.67 $ 0.53
</TABLE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows for the six months
ended June 30, 1998:
Balance at January 1, 1998 $1,341,828
Provision for loan losses 240,000
Charged-off loans 185,069
Recoveries 55,990
----------
Balance at June 30, 1998 $1,452,749
==========
Note 4 - LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
<PAGE>
NOTE 5 - EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED (Goodwill)
The excess of cost over fair value of net assets acquired in branch acquisitions
is amortized to expense using the straight line method over ten years. In March,
1998 the Bank acquired the Madison, Maine branch of KeyBank of Maine. The
acquisition was accounted for under the purchase method of accounting for
business combinations. The following is a summary of the transaction:
($ 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 June 30, 1998 and
December 31, 1997, the Bank had commitments to make loans totaling $8,738,775
and $2,731,000 and unused lines of credit totaling $16,981,907 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 June 30,
1998, pays at the rate of 5.69%. Net interest income for the period ending June
30, 1998 was $19,403. 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 June 30, 1998 was
$37,644. 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 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
<PAGE>
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 June 30,
1998 is $591. 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 $71,745,281 and $75,111,000 at June 30,
1998 and December 31, 1997, respectively. Mortgage servicing rights of $38,456
and $46,083 are capitalized at December 31, 1997 and June 30, 1998,
respectively, and are included in other assets. The amortized cost approximates
fair value at June 30, 1998.
<PAGE>
KSB BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
I. General
The Company's results of operations are dependent primarily on the Bank. The
Bank's primary source of earnings is its net interest income, which is the
difference between the interest income earned on its loans, mortgage-backed
securities and investment portfolio versus its cost of funds, which consists of
the interest paid on deposits and borrowings.
To a lesser extent but still significant is the effect of the Bank's secondary
mortgage market activities in which the Bank originates residential mortgage
loans for the secondary mortgage market and subsequently sells the loans while
retaining servicing rights and fees.
The Company's operating expenses consist principally of employee compensation
and benefits, occupancy and equipment expenses and other general and
administrative expenses. The Company's results of operations are significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates, as well as government policies and actions of regulatory
authorities.
In March, 1998 the Bank acquired the Madison, Maine branch of KeyBank of Maine.
The acquisition was accounted for under the purchase method of accounting for
business combinations. The following is a summary of the transaction:
Balance Average
($ 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.
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
<PAGE>
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 July 31, 1998, the Company
would expect a decrease in net interest income of $33,000 or 0.5% 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
$119,000 or 1.7% 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 $5.0 million, or, 3.3% to $157.7 million at June 30,
1998. This was primarily attributable to an increase in loans (including loans
to be sold) of $7.3 million. During the same six-month period ending June 30,
1998 the Bank received $3.8 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) decreased $4.4 million or 4.2% after removing
the effect of the March deposit acquisition from KeyBank. Most of the decrease,
which occurred in transaction accounts, was seasonal and due to high balances at
December 31, 1997. This was offset by an increase in Regular Savings accounts.
Certificates of deposit decreased $1.7 million or 3.0%. Deposit shortfalls are
typically are replaced in the short-term by FHLB borrowings.
Advances from FHLB at June 30, 1998 totaling $19.8 million includes $18.5
million of fixed-rate borrowings and $1.3 million of variable-rate daily
borrowings from the Federal Home Loan Bank of Boston. The fixed-rate borrowings
mature $6.0 million within the next six months and $12.5 million in 1999 and
beyond.
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, $2.1 million are variable-rate
securities adjusting annually. The remainder are fixed-rate in nature.
Non-performing loans at June 30, 1998 increased by $377,000 to $2,467,000, or
2.0% of total net loans, compared to $2,090,000, or 1.8% of total 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
<PAGE>
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 $876,000 and $1,197,000 at December 31, 1997 and June
30, 1998, respectively. Other Real estate owned increased by $120,000 due to
acquisitions of properties through foreclosure.
IV. Comparison of Operating Results
The Company reported net income of $434,000 for the three-month period ended
June 30, 1998, which represents a $83,000 increase, or 23.6%, from the $351,000
net income reported for the comparable three-month period in 1997. Net interest
income after provision for loan losses increased by $261,000, or 18.7%.
Non-interest income increased $77,000, or 27.9%, and operating expenses for the
same comparable periods increased by $159,000, or 13.4%.
The increase in net interest income is attributable to a 9.8% increase in
earning assets for the 1998 period compared to 1997. In addition, the interest
margin for the second quarter of 1998 increased from that of the second quarter
of 1997 by approximately 30 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 27.9% for the second quarter of 1998 when compared
to the second quarter of 1997. Service charges and other fees increased by
$52,000, or 31%, over the previous year's quarter due primarily to the
acquisition of the Madison branch and the fee income it produced. Collections of
fees on loan accounts and loan applications and income from Canadian currency
transactions also increased. Gains on the sales of mortgages increased for the
period because the Bank sold more loans in 1998 rather than placing them into
portfolio, as was the case in 1997.
Non-interest expense increased by $159,000, or 13.4%, from the second quarter of
1997 to the period ending June 30, 1998. Salary expense increased by $115,000,
including $17,000 from the increase in ESOP expense due to the rise in market
value of the Company's stock, $27,000 in new salaries for Madison personnel and
the remainder from salary and staffing increases. Included in other expenses in
the second quarter of 1998 were $13,000 in one-time expenses and $50,000 in
recurring expenses associated with the acquisition of the Madison branch of
KeyBank. Management is in the process of installing an upgraded mainframe
computer which is 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 $853,000 for the six-month period ended June
30, 1998, which represents a $178,000 increase, or 26.4%, from the $675,000 net
income reported for the comparable six-month period in 1997. Net interest income
after provision for loan losses increased by $496,000 or 18.0%. Non-interest
income increased $106,000, or 18.7%, and operating expenses for the same
comparable periods increased by $254,000, or 10.8%.
The increase in net interest income is attributable to a 10.7% increase in
earning assets for the 1998 period compared to 1997. In addition, the interest
margin for the first half of 1998 increased from that of the first half of 1997
by approximately 24 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.
<PAGE>
Non-interest income increased 18.7% for the first half of 1998 when compared to
the first half of 1997. Service charges and other fees increased by $70,000 or
20% 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 some saleable loans into its
portfolio whereas this year the Bank is selling more of them. Management has
plans to place $3-4 million of saleable loans into portfolio in the third
quarter.
Non-interest expense increased by $254,000, or 10.8%, from the first half of
1997 to the six-month period ending June 30, 1998. Salary expense increased by
$182,000, including $61,000 from the increase in ESOP expense due to the rise in
market value of the Company's stock, $40,000 in new salaries for Madison
personnel and the remainder from salary and staffing increases. Included in
other expenses in the first half of 1998 were $37,000 in one-time expenses and
$55,000 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
June 30, 1998, the 30-day ratio was 8.0%(21.1% including borrowable funds
available from the Federal Home Loan Bank of Boston).
Stockholder's equity at June 30, 1998 was $12.5 million, an increase of $994,000
or 8.6% over total equity at December 31, 1997. The increase resulted from net
income of $853,000 for the period, $170,000 in adjustments related to the
Employee Stock Ownership Plan (ESOP) and the Bank Recognition Retention Plan
(RRP), less $45,000 net dividends paid to stockholders. The net unrealized loss
on securities available for sale increased by $16,000 for the six months (net of
deferred tax liability of $8,000). The Company issued 23,879 new shares under
stock option plans resulting in an addition to paid-in capital of $72,000. It
subsequently repurchased 3,911 of the shares costing $72,000, retiring all of
them, bringing the net increase in reported equity to $994,000.
At June 30, 1998, the Company's ratio of core capital to total assets equaled
7.07%. This represents a decrease from the December 31, 1997 ratio of 7.25%.
<PAGE>
At June 30, 1998, the Bank's ratio of core capital to total assets equaled 6.85%
compared to 7.05% at December 31, 1997.
The ratio of the Bank's risk-based capital to risk-weighted assets at June 30,
1998 was 11.10% 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.
<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
b) 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: August 14, 1998 /s/ John E. Thien
-----------------
John E. Thien
Chief Financial Officer
and duly Authorized Officer
of the Registrant
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