FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark one:
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly period ended March 31, 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 1,266,918
------------ ---------
(Class) (Outstanding)
<PAGE>
KSB BANCORP, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets,
March 31, 1998 and December 31, 1997
Consolidated Statements of Income for the three
months ended March 31, 1998 and March 31, 1997
Consolidated Statements of Stockholders'
Equity, three months ended March 31, 1998
and March 31, 1997
Statement of Comprehensive Income for the three
months ended March 31, 1998 and March 31, 1997
Consolidated Statements of Cash Flows, three months
ended March 31, 1998 and March 31, 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)
March 31, December 31,
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents and Due
from Banks .................................. $ 2,802 $ 3,233
Interest-bearing Deposits in Banks ........... 7 6
Investment Securities Available for
Sale (at estimated Market Value) ............ 8,822 9,261
Investment Securities to be Held at
Maturity (estimated market value:
March 31, 1998- $13,172;
December 31, 1997 - $14,426) ................ 12,949 14,171
--------- ---------
Loans:
Real Estate Mortgages ........................ 52,268 52,710
Home Equity Loans ............................ 13,448 13,718
Installment Loans ............................ 4,692 4,255
Commercial Loans ............................. 47,428 47,057
Other loans .................................. 545 654
Deferred Loan Fees ........................... (201) (203)
Allowance for Loan Losses .................... (1,349) (1,342)
--------- ---------
Total Loans (net) ............................ 116,831 116,849
--------- ---------
Other Real Estate Owned ...................... 342 159
Real Estate Loans to be Sold ................. 4,298 2,007
Federal Home Loan Bank Stock ................. 1,641 1,538
Bank Premises and Equipment, net ............. 2,569 2,314
Goodwill ..................................... 1,571 517
Accrued Interest Receivable .................. 899 827
Deferred Tax Asset ........................... 652 661
Cash Surrender Value of Life Insurance ....... 595 588
Other Assets ................................. 659 621
--------- ---------
TOTAL ASSETS ........................ $ 154,637 $ 152,752
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
March 31, December 31,
1998 1997
--------- ---------
<S> <C> <C>
Deposits:
Regular Savings ......................... $ 22,687 $ 20,055
Money Market Accounts ................... 8,694 6,211
Certificates of Deposit ................. 64,294 58,387
N.O.W. Accounts ......................... 18,823 13,915
Demand Deposits ......................... 10,518 12,141
--------- ---------
Total Deposits ................................... 125,016 110,709
--------- ---------
Advances from FHLB ............................... 14,413 28,219
Other borrowed funds ............................. 594 0
Escrows and trustee accounts for
sold loans ..................................... 1,313 1,014
Accrued Income Taxes Payable ..................... 206 36
Accrued Expenses and Other Liabilities ........... 909 1,072
Deferred Income Taxes ............................ 151 147
--------- ---------
Total Liabilities ................................ 142,602 141,197
--------- ---------
Stockholders' Equity:
Common Stock: $.01 Par Value, Issued
and Outstanding: 1,266,918 Shares at
March 31, 1998 and 1,246,950 Shares
at December 31, 1997 ........................... 13 12
Additional Paid-in Capital ....................... 4,672 4,544
Retained Earnings ................................ 7,485 7,171
Net unrealized gain (loss) on securities
available for sale, net of deferred taxes ....... 91 73
Less: remaining obligation under employee
stock ownership plan (ESOP) ................ (105) (117)
Less: remaining obligation under Bank
Recognition Plan (BRP) ..................... (44) (51)
Less: Treasury Stock (7,964 shares at cost) ..... (77) (77)
--------- ---------
Total Stockholders' Equity ....................... 12,035 11,555
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ......................................... $ 154,637 $ 152,752
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS
ENDED
3/31/98 3/31/97
------- -------
(In thousands)
<S> <C> <C>
Interest and Dividend Income
Interest and Fees on Loans ................. $2,777 $2,332
Interest on Investment
Securities ............................... 392 449
Dividends .................................. 26 21
------ ------
Total Interest and Dividend Income ............. 3,195 2,802
------ ------
Interest Expense
Interest on Deposits ......................... 1,098 1,084
Interest on Borrowed Funds ................... 375 231
------ ------
Total Interest Expense ......................... 1,473 1,315
------ ------
Net Interest Income ............................ 1,722 1,487
Less: provision for loan losses ................ 120 120
------ ------
Net Interest Income after
provision for loan losses .................... 1,602 1,367
------ ------
Non-interest income
Mortgage servicing income .................... 72 77
Service charges and fees ..................... 199 181
Other ........................................ 49 33
------ ------
Total Non-interest income ...................... 320 291
Non-interest expense
Salaries and benefits .......................... 637 570
Occupancy ...................................... 88 72
Equipment ...................................... 183 172
FDIC Premium ................................... 7 7
Other .......................................... 356 355
------ ------
Total Non-interest Expense ....................... 1,271 1,176
------ ------
Net income before taxes .......................... 651 482
Income tax expense ............................... 232 158
------ ------
Net income ....................................... $ 419 $ 324
====== ======
Basic earnings per share (see Note 2) ........... $ 0.34 $ 0.28
====== ======
Diluted earnings per share (see Note 2) .......... $ 0.33 $ 0.26
</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)
Three months ended
March 31, 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 419 - - - - - - 419
Dividends Paid (45) - - - - - - (45)
ESOP adjustment - - 68 12 - - - 80
BRP adjustment - - - - 7 - - 7
Securities
Adjustment - - - - - 18 - 18
Shares Issued
under Stock
Option Plans
(23,879) - 1 72 - - - - 73
Retirement of
Treasury shares
(3,911) (60) - - (12) - - 72 0
Purchases of
Treasury Shares
(3,911) - - - - - - (72) (72)
Ending ------ -- ----- ---- --- -- --- -------
balance $7,485 13 4,672 (105) (44) 91 (77) $12,035
====== == ===== ==== === == === =======
</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)
Three months ended
March 31, 1997
- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning
balance $5,749 4 4,325 (169) (79) (38) - $9,792
Net Income 324 - - - - - - 324
Dividends Paid (39) - - - - - - (39)
ESOP adjustment - - 24 13 - - - 37
BRP adjustment - - - - 7 - - 7
Securities
Adjustment - - - - - (20) - (20)
Shares Issued
under Stock
Option Plans
(17,820) - - 54 - - - - 54
Retirement of
Treasury shares
(4,035) - - (39) - - - 39 0
Purchases of
Treasury Shares
(12,870) - - - - - - (124) (124)
Ending ------ - ----- ---- --- --- ---- -------
balance $6,034 4 4,364 (156) (72) (58) (85) $10,031
====== = ===== ==== === === ==== =======
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
THREE MONTHS ENDED
March 31,
1998 1997
----- -----
(In thousands)
<S> <C> <C>
Net Income ......................................... $ 419 324
Other Comprehensive income:
Unrealized gains (losses) on securities,
arising during the period ...................... 28 (30)
Less: tax effect ................................ (10) 10
----- -----
Subtotal Other Comprehensive Income ................ 18 (20)
----- -----
Comprehensive income ............................... $ 437 $ 304
===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
March 31,
1998 1997
------- --------
(In thousands)
<S> <C> <C>
Net Income ....................................... $ 419 $ 324
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and Amortization ................ 181 189
Decrease in obligation under ESOP and BRP .... 88 44
Provision for loan losses .................... 120 120
Deferred Income Taxes ........................ 2 (43)
Net (gains) losses on sales of loans
originated for sale ......................... (9) (1)
Originations of loans held for sale .......... (2,911) (1,110)
Proceeds from loans held for sale ............ 630 555
Decrease (increase) in:
Interest receivable ........................ (73) (132)
Prepaid expenses ........................... (73) (16)
Cash surrender of life insurance ........... (6) (10)
Other receivables .......................... 20 (50)
Increase (decrease) in:
Interest payable ........................... (36) 27
Accrued Expenses ........................... (71) (41)
Accrued Taxes payable ...................... 170 150
Deferred Origination Fees .................. (2) 16
Other payables ............................. (79) (52)
------- -------
Total Adjustments .............................. (2,049) (354)
------- -------
Net Cash from Operation Activities ............. (1,630) (30)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities
held to maturity ............................... 0 (4,987)
Proceeds from maturities and principal
payments on investment
securities held to maturity .................... 1,194 1,006
Proceeds from maturities and principal
payments on investment
securities available for sale .................. 461 660
Net(increase)decrease in loans ................... 403 (1,678)
Proceeds from sale of Other Real Estate
Owned .......................................... 114 0
Net Purchases of Federal Home Loan Bank
Stock .......................................... (104) 0
Captial Expenditures ............................. (193) (43)
Net (increase) decrease in other assets .......... 17 17
-------- --------
Net cash provided by (used in)
investing activities .......................... 1,892 (5,025)
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received through branch acquisition,
Net of acquisition premium ..................... 14,632 0
Net increase (decrease) in time deposit
accounts ......................................... (422) (742)
Net increase (decrease) in other deposit
accounts ......................................... (1,424) (3,519)
Net increase (decrease) in FHLB advances .......... (13,733) 9,454
Net increase (decrease) in escrow accounts ....... 300 127
Proceeds from stock issuance
under option plans (1,650 shares) .............. 72 15
Net Purchase of (treasury)stock issued under
option plans (2,945) ........................... (72) (85)
Cash dividends paid on common stock
(net of ESOP) .................................... (45) (39)
-------- --------
Net cash provided by financing activities ........ (692) 5,211
-------- --------
Net increase (decrease) in cash and
cash equivalents ................................ (430) 156
Cash and cash equivalents, beginning of
period(1) ........................................ 3,239 2,481
-------- --------
Cash and cash equivalents, end of
period (1) ....................................... $ 2,809 $ 2,637
======== ========
</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 March 31, 1998 and December 31, 1997, the consolidated statements
of income for the three months ended March 31, 1998 and March 31, 1997, and the
consolidated statements of stockholders' equity, comprehensive income and cash
flows for the three months ended March 31, 1998, and March 31, 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>
THREE MONTHS ENDED
March 31,
1998 1997
---------- ----------
<S> <C> <C>
Net Income as reported ................... $ 418,725 $ 324,167
========== ==========
Weighted-average shares outstanding ...... 1,219,889 1,177,448
Effect of dilutive potential common shares
stock options .......................... 53,373 72,080
---------- ----------
Adjusted Weighted-average shares
outstanding ............................ 1,273,262 1,249,528
========== ==========
Basic earnings per share ................. $ 0.34 $ 0.28
Diluted earnings per share ............... $ 0.33 $ 0.26
</TABLE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows for the three months
ended March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1998 $1,341,828
Provision for loan losses 120,000
Charged-off loans 118,853
Recoveries 6,160
-------
Balance at March 31, 1998 $1,349,135
==========
</TABLE>
<PAGE>
Impaired loan period information:
Information regarding impaired loans is as follows for the three months ended
March 31, 1998:
Average investment in impaired loans: 2,003,696
Interest Income recognized on
impaired loans including interest income
recognized on cash basis 51,170
Interest Income recognized on impaired
loans on cash basis 59,491
Impaired loan period end information:
Information regarding impaired loans at March 31, 1998 is as follows:
Balance of impaired loans 1,955,817
less:
portion for which no allowance
for loan losses is allocated (1,764,030)
---------
Portion of impaired loan balance for
which an allowance for credit
losses is allocated 191,787
==========
Portion of allowance for loan losses
allocated to the impaired loan
balance 154,787
Note 4 - LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
<PAGE>
NOTE 5 - EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED (Goodwill)
The excess of cost over fair value of net assets acquired in branch acquisitions
is amortized to expense using the straight line method over ten years. In March,
1998 the Bank acquired the Madison, Maine branch of KeyBank of Maine. The
acquisition was accounted for under the purchase method of accounting for
business combinations. The following is a summary of the transaction:
($ 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 March 31, 1998 and
December 31, 1997, the Bank had commitments to make loans totaling $5,106,000
and $2,731,000 and unused lines of credit totaling $17,331,000 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 March 31, 1998,
pays at the rate of 5.69%. Net interest income for the period ending March 31,
1998 was $8,097. 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 March 31, 1998 was
$41,983. The Bank is party to an interest rate floor agreement in the notional
amount of $5,000,000, dated June 1996, whereby the Bank receives the difference
between 6% and the three-month LIBOR rate, but pays nothing if the LIBOR rate
exceeds 6%. The contract expires June, 1998. The Bank paid a premium of $22,500
for the contract which is recognized into interest income on a straight-line
basis over the life of the contract. The estimated market value of the agreement
<PAGE>
as of March 31, 1998 is $3,950. 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 March 31,
1998 is $ 4,046. 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 and rising rates on short-term borrowings and
certificates of deposits.
Note 8 - LOAN SERVICING
The unpaid principal balance of mortgage loans serviced for others, which are
not included on the balance sheet, was $72,839,000 and $75,111,000 at March 31,
1998 and December 31, 1997, respectively. Mortgage servicing rights of $38,456
are capitalized at December 31, 1997 and March 31, 1998 and are included in
other assets. The amortized cost approximates fair value at March 31, 1998.
<PAGE>
KSB BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
I. General
The Company's results of operations are dependent primarily on the Bank. The
Bank's primary source of earnings is its net interest income, which is the
difference between the interest income earned on its loans, mortgage-backed
securities and investment portfolio versus its cost of funds, which consists of
the interest paid on deposits and borrowings.
To a lesser extent but still significant is the effect of the Bank's secondary
mortgage market activities in which the Bank originates residential mortgage
loans for the secondary mortgage market and subsequently sells the loans while
retaining servicing rights and fees.
The Company's operating expenses consist principally of employee compensation
and benefits, occupancy and equipment expenses and other general and
administrative expenses. The Company's results of operations are significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates, as well as government policies and actions of regulatory
authorities.
In March, 1998 the Bank acquired the Madison, Maine branch of KeyBank of Maine.
The acquisition was accounted for under the purchase method of accounting for
business combinations. The following is a summary of the transaction:
<TABLE>
<CAPTION>
Balance Average
($ in 000's) Rate
----------- ------
<S> <C> <C>
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
========
</TABLE>
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 March 31, 1998, the Company
would expect a decrease in net interest income of $68,000 or 1.0% 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
$72,000 or 1.1% 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 $1.9 million or 1.2% to $154.6 million at March 31, 1998.
This was primarily attributable to an increase in the portfolio of loans to be
sold of $2.3 million. During the three-month period ending March 31, 1998 the
Bank received $1.7 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 $1.8 million or 1.6% 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.
Deposit shortfalls are typically are replaced in the short-term by FHLB
borrowings.
Advances from FHLB at March 31, 1998 totaling $14.4 million includes $14.0
million of fixed-rate borrowings and $0.4 million of variable-rate daily
borrowings from the Federal Home Loan Bank of Boston. The fixed-rate borrowings
mature $5.5 million within the next nine months and $8.5 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, $2.5 million are variable-rate
securities adjusting annually. The remainder are fixed-rate in nature.
<PAGE>
Non-performing loans at March 31, 1998 decreased by $204,000 to $1,886,000 or
1.6% of total net loans, compared to $2,090,000, or 1.8% of total loans at
December 31, 1997. 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 $876,000 and $947,000 at December 31, 1997 and March 31, 1998, respectively.
Other Real estate owned increased by $183,000 due to acquisitions of properties
through foreclosure.
IV. Comparison of Operating Results
The Company reported net income of $419,000 for the three-month period ended
March 31, 1998, which represents a $95,000 increase, or 29.3%, from the $324,000
net income reported for the comparable three-month period in 1997. Net interest
income after provision for loan losses increased by $235,000 or 17.2%.
Non-interest income increased $29,000, 0r 10.0%, and operating expenses for the
same comparable periods increased by $95,000 or 8.1%.
The increase in net interest income is attributable to a 10% increase in earning
assets for the 1998 period compared to 1997. In addition, the interest margin
for the first quarter of 1998 increased from that of the second quarter of 1997
by approximately 20 basis points. Loan volume was the primary component of the
increase in earning assets.
Non-interest income increased 10% for the first quarter of 1998 when compared to
the first quarter of 1997. Service charges and other fees increased by $18,000
or 10% over the previous year's quarter due to the increased collections of fees
on loan and deposit accounts. Other income increased due to the recognition of
gains on the sale of mortgages and increased use of the Bank's ATM expanded
system.
Non-interest expense increased by $95,000 or 8.1% from the first quarter of 1997
to the period ending March 31, 1998. Salary expense increased by $67,000,
including $44,000 from the increase in ESOP expense due to the rise in market
value of the Company's stock. Included in other expenses in the first quarter of
1998 were $25,000 in one-time expenses and $16,000 in recurring expenses
associated with the March acquisition of the Madison branch of KeyBank and
$9,000 in computer network consulting fees. Expenses in the 1997 period included
a $20,000 investment in the Bank's sales and quality service program and $7,000
in equipment write-offs connected with technology upgrades.
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.
<PAGE>
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
March 31, 1998, the 30-day ratio was 7.7% (20.4% including borrowable funds
available from the Federal Home Loan Bank of Boston).
Stockholder's equity at March 31, 1998 was $12.0 million, an increase of
$479,000 or 4.1% over total equity at December 31, 1997. The increase resulted
from net income of $419,000 for the period, $87,000 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 $18,000 for the three months (net
of deferred tax liability of $10,000). 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 $479,000.
At March 31, 1998, the Company's ratio of core capital to total assets equaled
6.83%. This represents a decrease from the December 31, 1997 ratio of 7.25%.
At March 31, 1998, the Bank's ratio of core capital to total assets equaled
6.63% compared to 7.05% at December 31, 1997.
The ratio of the Bank's risk-based capital to risk-weighted assets at March 31,
1998 was 10.95% 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: May 15, 1998 /s/ John E. Thien
-----------------
John E. Thien
Chief Financial Officer
and duly Authorized Officer
of the Registrant
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