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, 1999
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 1,269,668
------------ ---------
(Class) (Outstanding)
<PAGE>
KSB BANCORP, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheets,
March 31, 1999 and December 31, 1998 2-3
Consolidated Statements of Income for the three months ended
March 31, 1999 and March 31, 1998 4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the three months ended March 31, 1999
and March 31, 1998 5-6
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and March 31, 1998 7-8
Notes to Financial Statements 9-12
Item 2 Management's Discussion and Analysis of
Condition and Results of Operations 13-17
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 18
Item 3 Defaults upon Senior Securities 18
Item 4 Submission of Matters to a vote of Security
Holders 18
Item 5 Other information 18
Item 6 Exhibits and Reports on Form 8-KSB 18
Signature Page 19
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31,
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents and Due
from Banks .................................... $ 3,528 $ 3,234
Interest-bearing Deposits in Banks ............. 0 3
Investment Securities Available for
Sale (at estimated Market Value) .............. 19,779 20,967
Investment Securities to be Held to
Maturity (estimated market value:
March 31, 1999- $ 8,422;
December 31, 1998 - $ 9,444) .................. 8,231 9,271
--------- ---------
Loans:
Real Estate Mortgages .......................... 50,047 50,151
Home Equity Loans .............................. 13,291 13,657
Installment Loans .............................. 4,623 4,594
Commercial Loans ............................... 53,505 53,278
Other loans .................................... 1,235 1,075
Deferred Loan Fees ............................. (219) (224)
Allowance for Loan Losses ...................... (1,701) (1,580)
--------- ---------
Total Loans (net) .............................. 120,781 120,951
--------- ---------
Other Real Estate Owned ........................ 58 147
Real Estate Loans to be Sold ................... 12,460 8,228
Federal Home Loan Bank Stock ................... 1,641 1,641
Bank Premises and Equipment, net ............... 2,538 2,563
Goodwill ....................................... 1,359 1,411
Accrued Interest Receivable .................... 993 852
Deferred Tax Asset ............................. 781 781
Cash Surrender Value of Life Insurance ......... 645 639
Other Assets ................................... 629 641
--------- ---------
TOTAL ASSETS .......................... $ 173,423 $ 171,329
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
March 31, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Deposits:
Regular Savings ........................... $ 23,527 $ 23,875
Money Market Accounts ..................... 8,459 8,895
Certificates of Deposit ................... 65,791 62,877
N.O.W. Accounts ........................... 22,518 23,807
Demand Deposits ........................... 11,415 12,385
--------- ---------
Total Deposits ..................................... 131,710 131,839
Advances from FHLB ................................. 23,965 22,647
Other borrowed funds ............................... 1,154 877
Escrows and trustee accounts for
sold loans ....................................... 1,256 1,141
Accrued Income Taxes Payable ....................... 234 (4)
Accrued Expenses and Other Liabilities ............. 867 941
Deferred Income Taxes .............................. 174 201
--------- ---------
Total Liabilities .................................. 159,360 157,642
--------- ---------
Stockholders' Equity:
Common Stock: $.01 Par Value, Issued
and Outstanding: 1,269,668 Shares at
March 31, 1999 and 1,269,411 Shares
at December 31, 1998 ............................. 13 13
Additional Paid-in Capital ......................... 4,890 4,842
Retained Earnings .................................. 9,161 8,796
Net unrealized gain(loss) on securities
available for sale,
net of deferred taxes ............................ 158 211
Less: remaining obligation under employee
stock ownership plan (ESOP) .................. (56) (68)
Less: remaining obligation under Bank
Recognition Plan (BRP) ....................... (26) (30)
Less: Treasury Stock (7,964 shares at cost) ....... (77) (77)
--------- ---------
Total Stockholders' Equity ......................... 14,063 13,687
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ........................................... $ 173,423 $ 171,329
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS ENDED
3/31/99 3/31/98
------ ------
(In thousands)
<S> <C> <C>
Interest and Dividend Income
Interest and Fees on Loans .............................. $2,870 $2,777
Interest on Investment Securities ....................... 505 392
Dividends ............................................. 26 26
------ ------
Total Interest and Dividend Income ......................... 3,401 3,195
------ ------
Interest Expense
Interest on Deposits ..................................... 1,192 1,098
Interest on Borrowed Funds ............................... 325 375
------ ------
Total Interest Expense ..................................... 1,517 1,473
------ ------
Net Interest Income ........................................ 1,884 1,722
Less: provision for loan losses ............................ 150 120
------ ------
Net Interest Income after
provision for loan losses ................................ 1,734 1,602
------ ------
Non-interest income
Net Fees & Gains on Loans Sold ........................... 1 11
Mortgage servicing income ................................ 69 72
Service charges and fees ................................. 205 199
Other .................................................... 43 38
------ ------
Total Non-interest income .................................. 318 320
------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) (continued)
THREE-MONTHS ENDED
3/31/99 3/31/98
------ ------
(In thousands)
<S> <C> <C>
Non-interest expense
Salaries and benefits .................................... 696 637
Occupancy ................................................ 92 88
Equipment ................................................ 206 183
FDIC Premium ............................................. 8 7
Other .................................................... 355 356
------ ------
Total Non-interest Expense ................................. 1,357 1,271
------ ------
Net income before taxes .................................... 695 651
Income tax expense ......................................... 238 232
------ ------
Net income ................................................. $ 457 $ 419
====== ======
Basic earnings per share (see Note 2) ..................... $ 0.37 $ 0.34
====== ======
Diluted earnings per share (see Note 2) .................... $ 0.35 $ 0.33
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Three months ended March 31, 1999
- ---------------------------------
Net
Unrealized
Gain(Loss) on
Adj. Adj Securities
Common Paid-in Retained for for Available Treasury
Stock Capital Earnings ESOP BRP for Sale Stock TOTAL
------- ------ ------- ---- --- --- --- --------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning
balance $ 13 $4,842 $ 8,796 $(68) (30) 211 (77) $ 13,687
Net Income - - 457 - - - - 457
Change in Unrealized
Gain on Securities
Available for Sale,
net of Deferred
Taxes ($ 26,974) - - - - - (53) - (53)
------- ------ ------- ---- --- --- --- --------
Total Comprensive
Income - - 457 - - (53) - 404
Dividends Paid - - (92) - - - - (92)
ESOP adjustment - 44 - 12 - - - 56
BRP adjustment - - - - 4 - - 4
Shares Issued (257) - 4 - - - - - 4
------- ------ ------- ---- --- --- --- --------
Ending
balance $ 13 $4,890 $ 9,161 $(56) (26) 158 (77) $ 14,063
======= ====== ======= ==== === === === ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31, 1998
- ---------------------------------
Net
Unrealized
Gain(Loss) on
Adj. Adj Securities
Common Paid-in Retained for for Available Treasury
Stock Capital Earnings ESOP BRP for Sale Stock TOTAL
------ ------ ------- ---- --- -- --- -------
(in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning
Balance $ 12 $4,544 $ 7,171 (117) (51) 73 (77) $11,555
Net Income - - 419 - - - - 419
Change in Unrealized
Loss on Securities
Available for Sale,
net of Deferred
Taxes ($ 9,702) - - - - - 18 - 18
------ ------ ------- ---- --- -- --- -------
Total Comprensive
Income - - 419 - - 18 - 437
Dividends Paid - - (45) - - - - (45)
ESOP adjustment - 68 - 12 - - - 80
BRP adjustment - - - - 7 - - 7
Shares Issued
under Stock
Option Plans (23,879) 1 72 - - - - - 73
Retirement of
Treasury shares (3,911) - (12) (60) - - - 72 0
Purchases of
Treasury Shares (3,911) - - - - - - (72) (72)
------ ------ ------- ---- --- -- --- -------
Ending balance $ 13 $4,672 $ 7,485 (105) (44) 91 (77) $12,035
====== ====== ======= ==== === == === =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
March 31,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Net Income ......................................... $ 457 $ 419
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and Amortization .................. 188 181
Decrease in obligation under ESOP and BRP ...... 60 88
Provision for loan losses ...................... 150 120
Deferred Income Taxes .......................... 0 2
Net (gains) losses on sales of loans
originated for sale ........................... 0 (9)
Originations of loans held for sale ............ (4,232) (2,911)
Proceeds from loans held for sale .............. 0 630
Decrease (increase) in:
Interest receivable .......................... (140) (73)
Prepaid expenses ............................. (17) (73)
Cash surrender of life insurance ............. (7) (6)
Other receivables ............................ 12 20
Increase (decrease) in:
Interest payable ............................. 14 (36)
Accrued Expenses ............................. (80) (71)
Accrued Taxes payable ........................ 238 170
Deferred Origination Fees .................... (5) (2)
Other payables ............................... (8) (79)
------- -------
Total Adjustments ................................ (3,827) (2,049)
------- -------
Net Cash from Operating Activities ............... (3,370) (1,630)
------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and principal
payments on investment
securities held to maturity ...................... 1,024 1,194
Proceeds from maturities and principal
payments on investment
securities available for sale .................... 1,103 461
Net(increase)decrease in loans ..................... (1) 403
Proceeds from sale of Other Real Estate
Owned ............................................ 113 114
Net Purchases of Federal Home Loan Bank
Stock ............................................ 0 (104)
Captial Expenditures ............................... (85) (193)
Net (increase) decrease in other assets ............ 13 17
-------- --------
Net cash provided by (used in)
investing activities ............................ 2,167 1,892
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received through branch acquisition,
net of acquisition premium ....................... 0 14,632
Net increase (decrease) in time deposits ............ 2,914 (422)
Net increase (decrease) in other deposits ........... (3,044) (1,424)
Net increase (decrease) in FHLB advances
and other borrowings ............................. 1,595 (13,733)
Net increase (decrease) in escrow accounts ......... 116 300
Proceeds from stock issuance
under option plans (1,650 shares) ................ 0 72
Proceeds from other stock issuance ................. 4 0
Net Purchase of (treasury)stock issued
under option plans (2,945) ....................... 0 (72)
Cash dividends paid on common stock
(net of ESOP) ...................................... (91) (45)
-------- --------
Net cash provided by financing activities .......... 1,494 (692)
-------- --------
Net increase (decrease) in cash and
cash equivalents .................................. 291 (430)
Cash and cash equivalents, beginning of
period(1) .......................................... 3,237 3,239
-------- --------
Cash and cash equivalents, end of
period (1) ......................................... $ 3,528 $ 2,809
======== ========
</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, 1999 and December 31, 1998, the consolidated statements
of income for the three months ended March 31, 1999 and March 31, 1998, and the
consolidated statements of stockholders' equity, comprehensive income and cash
flows for the three months ended March 31, 1999, and March 31, 1998. All
significant intercompany transactions and balances are eliminated in
consolidation. The income reported for 1999 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, 1998.
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. The following table sets forth the computation
of basic and diluted earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31,
1999 1998
---------- ----------
<S> <C> <C>
Net Income as reported ......................... $ 456,641 418,725
========== ==========
Weighted-average shares outstanding ............ 1,239,113 1,219,889
Effect of dilutive potential common shares
stock options ................................ 48,956 53,373
---------- ----------
Adjusted Weighted-average shares
outstanding .................................. 1,288,069 1,273,262
========== ==========
Basic earnings per share ....................... $ 0.37 $ 0.34
Diluted earnings per share ..................... $ 0.35 $ 0.33
</TABLE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows for the three months
ended March 31, 1999:
Balance at January 1, 1998 $1,580,233
Provision for loan losses 150,000
Charged-off loans 61,380
Recoveries 31,888
----------
Balance at March 31, 1999 $1,700,741
==========
Note 4 - LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
NOTE 5 - EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED (Goodwill)
The excess of cost over fair value of net assets acquired in branch acquisitions
is amortized to expense using the straight line method over ten years. In March,
1998 the Bank acquired the Madison, Maine branch of KeyBank of Maine. The
acquisition was accounted for under the purchase method of accounting for
business combinations. The following is a summary of the transaction:
<PAGE>
<TABLE>
<CAPTION>
($ in 000's)
------------
<S> <C>
Loans acquired $ 799
Fixed Assets 168
Goodwill 1,089
Other Assets 8
Deposits Assumed (16,673)
Other Liabilities (23)
--------
Net cash received $ 14,632
========
</TABLE>
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, 1999 and
December 31, 1998, the Bank had commitments to make loans totaling $3,869,000
and $2,067,000 and unused lines of credit totaling $18,429,000 and $18,111,000,
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, 1999,
pays at the rate of 5.00%. Net interest income for the period ending March 31,
1999 was $16,785. 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, 1999 was
$16,263.
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, 1999 is $ 0. 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
<PAGE>
NOTE 8 - LOAN SERVICING
The unpaid principal balance of mortgage loans serviced for others, which are
not included on the balance sheet, was $73,401,000 and $75,951,000 at March 31,
1999 and December 31, 1998, respectively. Mortgage servicing rights of $45,571
and $50,088 are capitalized at December 31, 1998 and March 31, 1999 and are
included in other assets. The amortized cost approximates fair value at both
dates.
<PAGE>
KSB BANCORP, INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
I. General
-------
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as statements relating to financial
condition and future prospects, loan loss reserve adequacy, year 2000 readiness,
simulation of changes in interest rates, prospective results of operations,
capital spending and financing sources, and revenue sources. Forward-looking
statements, which are based on various assumptions (some of which are beyond the
Company's control), may be identified by reference to a future period or
periods, or by the use of forward-looking terminology; such as "may", "will",
"believe", "expect", "estimate", "anticipate", "continue", or similar terms or
variations on those terms, or the negative of those terms. Such forward-looking
statements reflect the current view of management and are based on information
currently available to them, and upon current expectations, estimates, and
projections regarding the Company and its industry, management's belief with
respect thereto, and certain assumptions made by management. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors. Accordingly, actual results
could differ materially from those set forth in forward-looking statements due
to a variety of factors, including, but not limited to, those related to the
economic environment, particularly in the market areas in which the Company
operates, competitive products and pricing, fiscal and monetary policies of the
U.S. Government, changes in government regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management, asset/liability management, changes in
technology, changes in the securities markets, and the availability of and the
costs associated with sources of liquidity.
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.
<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, 1999, the Company
would expect a decrease in net interest income of $90,000 or 1.2% 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
$102,000 or 1.4% 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 $2.1 million or 1.2% to $173.4 million at March 31, 1999.
This was primarily attributable to an increase in the portfolio of loans to be
sold of $4.2 million. During the three-month period ending March 31, 1999 the
Bank received $2.2 million in principal payments on mortgage-backed securities.
Total deposits and other borrowed funds (which consists of customer repurchase
agreements, or "sweep" accounts) remained static for the first quarter, with a
change in the deposit mix from lower cost deposits to, primarily, one-year
Certificates of Deposit.
Advances from FHLB at March 31, 1999 totaling $24.0 million includes $17.0
million of fixed-rate borrowings, $6.0 million in adjustable-rate term
borrowings (averaging 11 Basis Points below LIBOR) and $1.0 million of
variable-rate daily borrowings from the Federal Home Loan Bank of Boston. The
fixed-rate borrowings mature $7.5 million within the next nine months and $9.5
million in 2000 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, $1.9 million are variable-rate
securities adjusting annually. The remainder are fixed-rate in nature.
Non-performing loans at March 31, 1999 declined by $432,000 to $1,937,000 or
1.6% of total net loans, compared to $2,369,000, or 2.0% of total loans at
December 31, 1998. The current balance is primarily 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 $1,121,000 and $554,000 at December 31, 1998 and March
31, 1999, respectively. Other Real estate owned decreased due to sales of
properties acquired through foreclosure.
<PAGE>
IV. Comparison of Operating Results
-------------------------------
The Company reported net income of $457,000 for the three-month period ended
March 31, 1999, which represents a $38,000 increase, or 9.1%, from the $419,000
net income reported for the comparable three-month period in 1998. Net interest
income after provision for loan losses increased by $132,000 or 8.2%. The
increase is attributable to a 13%, or $19.7 million increase in earning assets
for the 1999 period compared to 1998. Loan volume was the primary component of
the increase in earning assets. The interest margin for the first quarter of
1999 decreased from that of the first quarter of 1998 by approximately 17 basis
points.
Non-interest income increased slightly for the first quarter of 1999 when
compared to the first quarter of 1998. Service charges and other fees increased
by $6,000 or 3% over the previous year's quarter due to the increased
collections of fees on loan and deposit accounts. Net fees and Gains on Loans
Sold declined because of management's decision to hold saleable loans rather
than sell. No loans were sold in the first quarter and no gains or losses were
recognized. This decision is part of the current Asset/Liability strategy to
guard against declines in interest income due to falling rates. The loans would
be funded with 1-2 year liabilities to guard against declines in interest income
due to rising rates.
Non-interest expense increased by $86,000 or 6.8% from the first quarter of 1998
to the period ending March 31, 1999. Salary expense increased by $59,000 (which
includes a $24,000 decline in the ESOP expense component due to the drop in
market value of the Company's stock). Of the increase, $30,000 is attributable
to the operation of the Madison branch. The remainder is due to planned staffing
increases and salary increases. Increases in staffing starting in May, 1999 will
add approximately $10,000 per month to current salary expense. These additions
will facilitate future growth. Included in other expenses in the first quarter
of 1999 were $47,000 in expenses associated with the Madison branch compared to
$34,000 for the 1998 period.
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
March 31, 1999, the 30-day ratio was 8.2% (21.6% including borrowable funds
available from the Federal Home Loan Bank of Boston).
<PAGE>
Stockholder's equity at March 31, 1999 was $14.1 million, an increase of
$376,000 or 2.7% over total equity at December 31, 1998. The increase resulted
from net income of $457,000 for the period, $60,000 in adjustments related to
the Employee Stock Ownership Plan (ESOP) and the Bank Recognition Retention Plan
(RRP), less $92,000 net dividends paid to stockholders. The net unrealized loss
on securities available for sale decreased by $53,000 for the three months (net
of deferred tax liability of $27,000). The Company issued 257 new shares
pursuant to an agreement with the Board of Directors to pay a portion of their
fees in stock. This resulted in an addition to paid-in capital of $4,000.
At both March 31, 1999 and December 31, 1998, the Company's ratio of core
capital to total assets equaled 7.3% and the Bank's ratio of core capital to
total assets equaled 7.1%.
The ratio of the Bank's risk-based capital to risk-weighted assets at March 31,
1999 was 12.0% compared to 11.70% at December 31, 1998. The Bank's capital
ratios are derived from data presented in the Bank's FDIC call reports.
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 was completed in April, 1999. In September
1998, the Bank installed new mainframe hardware. The Y2K issue was not the
primary 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 by the vendors as Y2K compliant. The
purchased hardware and associated software are being capitalized in accordance
with normal policy. The costs associated with new software or upgraded hardware
would have been incurred in the normal course of operations regardless of the
year 2000 issue.
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 completed the Validation phase in
March, 1999. The Bank uses a nationally recognized third party service provider
who provides software to over 3,500 financial institutions to provide
application 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
(and has been since 1988). Testing of the third party provider's programs has
commenced and is expected to be completed by March 31, 1999.
<PAGE>
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 has in place stand-by liquidity
available to it in the event unusual levels of deposit outflows occur as a
result of customers' fear of system failures.
Management believes the Company is adequately addressing the Year 2000 issue and
that the current preparations and testing being conducted all seek to minimize
any potential adverse effect on the Bank or its customers. 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. It is estimated that the Company's cost of remediation
during 1998 was under $5,000 direct expenses and fewer than 1,500 total hours
spent by management and staff. 1999 expenses are expected to be under $20,000,
including $10,000 for computer software, $5,000 for customer awareness efforts
and $5,000 miscellaneous.
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. The FDIC has provided substantial guidance
to the Bank concerning 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
a) None
b) None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KSB BANCORP, INC.
Dated: May 14, 1999 /s/ John E. Thien
-----------------
John E. Thien
Chief Financial Officer
and duly Authorized Officer
of the Registrant
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