FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark one:
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly period ended September 30, 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 1,324,865
------------ ---------
(Class) (Outstanding)
<PAGE>
KSB BANCORP, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheets,
September 30,1999 and December 31, 1998 2-3
Consolidated Statements of Income for the three
and nine months ended September 30,1999 and
September 30, 1998 4-5
Consolidated Statements of Stockholders'
Equity and Comprehensive Income for the three
months ended September 30,1999 and September 30, 1998 6-7
Consolidated Statements of Cash Flows for the
nine months ended September 30,1999
and September 30, 1998 8-10
Notes to Financial Statements 11-14
Item 2 Management's Discussion and Analysis of
Condition and Results of Operations 15-21
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 22
Item 3 Defaults upon Senior Securities 22
Item 4 Submission of Matters to a vote of Security
Holders 22
Item 5 Other information 22
Item 6 Exhibits and Reports on Form 8-KSB 22
Signature Page 23
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
September 30, December 31,
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents and Due
from Banks .................................. $ 2,536 $ 3,234
Interest-bearing Deposits in Banks ........... 5,692 3
Investment Securities Available for
Sale (at estimated Market Value) ............ 20,927 20,967
Investment Securities to be Held to
Maturity (estimated market value:
September 30,1999- $ 6,378;
December 31, 1998 - $ 9,444) ................ 6,278 9,271
--------- ---------
Loans:
Real Estate Mortgages ........................ 65,399 50,151
Home Equity Loans ............................ 15,783 13,657
Installment Loans ............................ 4,762 4,594
Commercial Loans ............................. 60,551 53,278
Other loans .................................. 1,059 1,075
Deferred Loan Fees ........................... (229) (224)
Allowance for Loan Losses .................... (1,909) (1,580)
--------- ---------
Total Loans (net) ............................ 145,416 120,951
--------- ---------
Other Real Estate Owned ...................... 32 147
Real Estate Loans to be Sold ................. 2,193 8,228
Federal Home Loan Bank Stock ................. 1,641 1,641
Bank Premises and Equipment, net ............. 2,454 2,563
Goodwill ..................................... 1,253 1,411
Accrued Interest Receivable .................. 963 852
Deferred Tax Asset ........................... 939 781
Cash Surrender Value of Life Insurance ....... 666 639
Other Assets ................................. 570 641
--------- ---------
TOTAL ASSETS ........................ $ 191,560 $ 171,329
========= =========
</TABLE>
2
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
September 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Deposits:
Regular Savings ..................... $ 28,814 $ 23,875
Money Market Accounts ............... 9,731 8,895
Certificates of Deposit ............. 65,393 62,877
N.O.W. Accounts ..................... 24,801 23,807
Demand Deposits ..................... 12,804 12,385
--------- ---------
Total Deposits ............................... 141,543 131,839
--------- ---------
Advances from FHLB and FRB ................... 29,952 22,647
Other borrowed funds ......................... 3,089 877
Escrows and trustee accounts for
sold loans ................................. 1,300 1,141
Accrued Income Taxes Payable ................. (64) (4)
Accrued Expenses and Other Liabilities ....... 1,049 941
Deferred Income Taxes ........................ 77 201
--------- ---------
Total Liabilities ............................ 176,946 157,642
--------- ---------
Stockholders' Equity:
Common Stock: $.01 Par Value, Issued
and Outstanding: 1,324,865 Shares at
September 30,1999 and 1,269,411 Shares
at December 31, 1998 ....................... 13 13
Additional Paid-in Capital ................... 5,172 4,842
Retained Earnings ............................ 9,914 8,796
Net unrealized gain(loss) on securities
available for sale,
net of deferred taxes ...................... (183) 211
Less: remaining obligation under employee
stock ownership plan (ESOP) ............ (32) (68)
Less: remaining obligation under Bank
Recognition Plan (BRP) ................. (21) (30)
Less: Treasury Stock (20,464
shares at cost) ........................ (249) (77)
--------- ---------
Total Stockholders' Equity ................... 14,614 13,687
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ..................................... $ 191,560 $ 171,329
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE-MONTHS NINE-MONTHS
ENDED ENDED
9/30/99 9/30/98 9/30/99 9/30/98
----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Interest and Dividend Income
Interest and Fees on Loans $3,163 $3,000 $9,045 $8,635
Interest on Investment
Securities 431 339 1,405 1,089
Dividends 27 26 80 78
----- ----- ----- -----
Total Interest and Dividend Income 3,621 3,365 10,530 9,802
----- ----- ----- -----
Interest Expense
Interest on Deposits 1,234 1,238 3,637 3,549
Interest on Borrowed Funds 404 270 1,078 897
----- ----- ----- -----
Total Interest Expense 1,638 1,508 4,715 4,446
----- ----- ----- -----
Net Interest Income 1,983 1,857 5,815 5,356
Less: provision for loan losses 250 120 550 360
----- ----- ----- -----
Net Interest Income after
provision for loan losses 1,733 1,737 5,265 4,996
----- ----- ----- -----
Non-interest income
Net Fees & Gains on Loans Sold 5 33 11 88
Mortgage servicing income 65 67 200 209
Service charges and fees 238 204 659 621
Other 49 31 125 90
----- ----- ----- -----
Total Non-interest income 357 335 995 1,008
----- ----- ----- -----
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Non-interest expense
Salaries and benefits 739 648 2,142 1,939
Occupancy 75 75 250 241
Equipment 212 206 620 580
FDIC Premium 7 7 22 22
Other 476 351 1,219 1,118
----- ----- ----- -----
Total Non-interest Expense 1,509 1,287 4,253 3,900
----- ----- ----- -----
Net income before taxes 581 785 2,007 2,104
Income tax expense 157 276 639 742
----- ----- ----- -----
Net income $424 $509 $1,368 $1,362
===== ===== ===== =====
Basic earnings per share (see Note 2) $0.33 $0.41 $1.09 $1.11
Fully Diluted Earnings per Share $0.33 $0.40 $1.08 $1.07
Weighted-average shares outstanding 1,285,951 1,228,396 1,254,532 1,224,350
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Nine months ended September 30,1999
- ------------------------------------- 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 - - 1,368 - - - - 1,368
Change in Unrealized
Gain on Securities
Available for Sale,
net of Deferred
Taxes ($202,667) - - - - - (394) - (394)
------- ------ ------- ---- ---- ----- ----- -------
Total Comprensive
Income - - 1,368 - - (394) - 974
Dividends Paid - - (184) - - - - (184)
ESOP adjustment - 123 - 36 - - - 159
BRP adjustment - - - - 9 - - 9
Shares Issued (63,144) - 230 - - - - - 230
Retirement of
Treasury shares
(7,690 shares) - (23) (66) - - - 89 0
Purchases of
Treasury shares
(20,190 shares) - - - - - - (261) (261)
------- ------ ------- ---- ---- ----- ----- -------
Ending
balance $ 13 $5,172 $ 9,914 $(32) $(21) $(183) $(249) $14,614
======= ====== ======= ==== ==== ===== ===== =======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1998
- -------------------------------------
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 - - 1,362 - - - - 1,362
Change in Unrealized
Gain on Securities
Available for Sale,
net of Deferred
Taxes ($15,464) - - - - - 30 - 30
------- ------ ------- ---- ---- ----- ----- -------
Total Comprensive
Income - - 1,362 - - 30 - 1,392
Dividends Paid - - (113) - - - - (113)
ESOP adjustment - 188 - 36 - - - 224
BRP adjustment - - - - 18 - - 18
Shares Issued
under Stock
Option Plans 1 81 - - - - - 82
Retirement of
Treasury shares
(4418) - (14) (68) - - - 82 0
Purchases of
Treasury Shares
(3,911) - - - - - - (82) (82)
------- ------ ------- ---- ---- ----- ----- -------
Ending
balance $ 13 $4,799 $ 8,352 $(81) $(33) $ 103 $ (77) $13,076
======= ====== ======= ==== ==== ===== ===== =======
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
KSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
September 30,
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Net Income ........................................... $ 1,367 $ 1,362
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and Amortization .................... 551 572
Decrease in obligation under ESOP and BRP ........ 168 242
Provision for loan losses ........................ 550 360
Deferred Income Taxes ............................ (78) (90)
Net gains on sales of loans
originated for sale ............................. 0 (83)
Net Gains on loan participations sold ............ (4) 0
Originations of loans held for sale .............. (2,813) (9,631)
Proceeds from loans held for sale ................ 619 4,648
Proceeds from loan participations sold ........... 1,000 0
Decrease (increase) in:
Interest receivable ............................ (112) (139)
Prepaid expenses ............................... (13) (69)
Cash surrender of life insurance ............... (28) (28)
Other receivables .............................. 30 43
Increase (decrease) in:
Interest payable ............................... 34 (35)
Accrued Expenses ............................... 83 58
Accrued Taxes payable .......................... (60) (40)
Deferred Origination Fees ...................... 4 23
Other payables ................................. (10) (180)
------- -------
Total Adjustments .................................. (79) (4,349)
------- -------
Net Cash from Operating Activities ................. 1,288 (2,987)
------- -------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and principal
payments on investment
securities held to maturity ................ 2,958 3,722
Purchase of investment securities
Available for Sale ......................... (3,510) 0
Proceeds from maturities and principal
payments on investment
securities available for sale .............. 2,938 1,829
Net increase in loans ........................ (17,938) (8,314)
Proceeds from sale of
Other Real Estate Owned .................... 267 240
Net Purchases of
Federal Home Loan Bank Stock ............... 0 (104)
Capital Expenditures ......................... (222) (401)
Net decrease in other assets ................. 45 52
-------- --------
Net cash used in
investing activities ...................... (15,462) (2,976)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received through branch acquisition,
net of acquisition premium ................. 0 14,632
Net increase (decrease) in time deposits ...... 2,516 (422)
Net increase in other deposits ................ 7,187 3,687
Net increase (decrease) in FHLB advances
and other borrowings ....................... 9,517 (990)
Net increase in escrow accounts ............... 159 105
Proceeds from stock issuance
under option plans ......................... 138 81
Proceeds from other stock issuance ............ 4 0
Net Purchase of Treasury stock ................ (172) (81)
Cash dividends paid on common stock
(net of ESOP) .............................. (184) (45)
-------- --------
Net cash provided by financing
Activities ................................. 19,165 16,967
-------- --------
Net increase in cash and
cash equivalents ............................ 4,991 11,004
Cash and cash equivalents, beginning of
period(1) .................................... 3,237 3,239
-------- --------
Cash and cash equivalents, end of
period (1) ................................... $ 8,228 $ 14,243
======== ========
</TABLE>
(1) Includes interest-earning deposits in banks
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
The Company had the following noncash transactions:
Net increase (decrease) required by
Statement of Financial Accounting
Standards No. 115
Unrealized loss on securities
Available for Sale ......................... $ 596 $ (45)
Deferred income tax assets ................... 202 (15)
Net unrealized loss on securities
Available for Sale ......................... 394 (30)
Net transfer from loans to other
real estate owned ............................. 148 316
Net transfer from Loans to be Sold
to Portfolio .................................. 8,230 0
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
10
<PAGE>
KSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not include all
disclosures required by generally accepted accounting principles for complete
presentation of financial statements. In the opinion of management, the
consolidated financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the consolidated balance
sheets of KSB Bancorp, Inc., (the "Company") and Kingfield Savings Bank (the
"Bank"), as of September 30,1999 and December 31, 1998, the consolidated
statements of income for the three and nine months ended September 30,1999 and
September 30, 1998, and the consolidated statements of stockholders' equity,
comprehensive income and cash flows for the nine months ended September 30,1999,
and September 30, 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.
11
<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>
NINE MONTHS ENDED
September 30,
1999 1998
---------- ----------
<S> <C> <C>
Net Income as reported ....................... $1,367,384 1,362,458
========== ==========
Weighted-average shares outstanding .......... 1,254,532 1,224,010
Effect of dilutive potential, common
Shares' stock options ...................... 9,494 54,066
---------- ----------
Adjusted Weighted-average shares
outstanding ................................ 1,264,026 1,278,076
========== ==========
Basic earnings per share ..................... $ 1.09 $ 1.11
Diluted earnings per share ................... $ 1.08 $ 1.07
</TABLE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows for the nine months
ended September 30,1999:
Balance at January 1, 1999 $1,580,233
Provision for loan losses 550,000
Charged-off loans 266,599
Recoveries 44,943
----------
Balance at September 30,1999 $1,908,577
==========
12
<PAGE>
NOTE 4 - LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.
NOTE 5 - EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED (Goodwill)
The excess of cost over fair value of net assets acquired in branch acquisitions
is amortized to expense using the straight line method over ten years. In March,
1998 the Bank acquired the Madison, Maine branch of KeyBank of Maine. The
acquisition was accounted for under the purchase method of accounting for
business combinations. The following is a summary of the transaction:
($ in 000's)
-----------
Loans acquired $ 799
Fixed Assets 168
Goodwill 1,089
Other Assets 8
Deposits Assumed (16,673)
Other Liabilities (23)
--------
Net cash received $ 14,632
========
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off balance sheet risk in the
normal course of business to meet financing needs of its customers. The
financial instruments include commitments to make loans and unused lines of
credit. The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to make loans and unused
lines of credit is represented by the contractual amount of those instruments.
The Bank follows the same credit policy to make such commitments as it follows
for those loans recorded in the financial statements. At September 30,1999 and
December 31, 1998, the Bank had commitments to make loans totaling $5,079,000
and $2,067,000 and unused lines of credit totaling $21,681,000 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 was a party to an interest rate swap agreement with the Federal Home
Loan Bank of Boston dated June, 1996 which had a "notional amount" of
$5,000,000. The Bank was obligated to pay interest based on the three-month
LIBOR rate adjusting quarterly, and received a fixed-rate payment. This contract
matured June, 1999. The Bank received a fixed-rate of 6.63% and as of June
13
<PAGE>
30, 1999, paid at the rate of 5.00%. Net interest income for the period ending
June 30,1999 was $34,737. 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 Bank had
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 matured July 24, 1999. The Bank paid a premium of $33,000 that was
recognized into income on a straight-line basis over the life of the contract.
No interest income was received on the cap. 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 $71,478,492 and $75,951,000 at September
30,1999 and December 31, 1998, respectively. Mortgage servicing rights of
$45,571 and $53,542 are capitalized at December 31, 1998 and September 30,1999
and are included in other assets. The amortized cost approximates fair value at
both dates.
14
<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.
15
<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 August 31, 1999, the Company
would expect an increase in net interest income of $238,000, or 3.1% of net
interest income projected in a flat-rate environment, if interest rates
gradually decrease from current rates by 200 basis points over a 12-month
period. At the same date, the Company would expect a decrease in net-interest
income of $379,000 or 4.9% 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%. The liability sensitivity is in part due to
management's decision to hold fixed-rate loans funding them with relatively
short-term liabilities in order to enhance net interest income overall.
III. Financial Condition
-------------------
Total assets increased $20.2 million or 11.8% to $191.6 million at September
30,1999. Included in assets is $5.0 million which was invested in an
interest-bearing deposit at the Federal Home Loan Bank of Boston on September 30
as a result of the Bank's receiving a $5.0 million deposit from a customer. The
funds were withdrawn by the customer on October 4 and the interest-bearing
deposit was reduced by $5.0 million. Excluding the effect of this unusual
transaction, assets would have grown by $15.2 million or 8.9%. This growth was
primarily attributable to an increase of $18.4 million in the portfolio of
residential loans, including Loans to be Sold. During the nine-month period
ending September 30,1999 the Bank received $5.9 million in principal payments on
mortgage-backed securities and invested $3.5 million in intermediate-term
Federal Agency and corporate bonds.
Total deposits and other borrowed funds (which consists of customer repurchase
agreements, or "sweep" accounts), exclusive of the $5.0 million deposit
discussed above, grew by $6.9 million or 5.2% for the first nine months of the
year. Some of the increase is seasonal, due to increases in balances from
municipalities whose tax receipts are relatively high in the fall of the year.
The increase in "sweep" accounts is the result of the Bank's ability to attract
funds to this market-rate account which is indexed at 1/2% below the 90-day U.S.
Treasury Constant. While total balances have grown, there has been a continuing
change in the deposit mix from lower cost deposits to, primarily, one-year
Certificates of Deposit. Total Certificates of Deposit grew $2.5 million for the
period.
16
<PAGE>
Advances from FHLB at September 30,1999, totaling $30.0 million, includes $26.0
million of fixed-rate borrowings and $4.0 million in adjustable-rate term
borrowings (averaging 11 Basis Points below 3-month LIBOR). The fixed-rate
borrowings mature $16.5 million within the next six months and $9.5 million in
beyond March of 2000.
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, $1.5 million are variable-rate
securities adjusting annually. The remainder are fixed-rate in nature.
Non-performing loans at September 30,1999 declined by $564,000 to $1,805,000 or
1.2% of total net loans, compared to $2,369,000, or 1.8% of total loans at
December 31, 1998. (Net loans at December 31, 1998 includes $8.2 million of
Loans to be Sold placed into the Bank's residential portfolio in 1999). 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 $604,000 at December 31, 1998 and September 30,1999, respectively. Other
Real estate owned decreased due to sales of properties acquired through
foreclosure.
IV. Comparison of Operating Results
-------------------------------
On July 27, 1999 the Company entered into an agreement with Camden National
Corp. ("Camden")(AMEX: CAC) to be acquired by Camden. As a result the Company
has incurred $135,000 of one-time merger expenses to-date and is estimating up
to an additional $150,000 for the fourth quarter of 1999. The merger expenses
include: the expense of the investment banking firm retained by the Company to
assist in the analysis of the transaction and "due diligence" process; legal
expenses; expenses of preparation, printing and mailing of the combined proxy
document. Merger expenses are generally not deductible as a business expense for
Federal income tax purposes.
The Company reported net income of $424,000 for the three-month period ended
September 30,1999, which represents an $85,000 decrease, or 16.7%, from the
$509,000 net income reported for the comparable three-month period in 1998.
Included in the results of operations are $135,000 of one-time merger expenses
and a $79,000 non-recurring tax benefit resulting from the tax treatment of the
exercise of options by directors of the Company. Without these items, net income
would have been $480,000 for the quarter. Net interest income before provision
for loan losses increased by $126,000 or 6.8%. The increase is attributable to a
14.3%, or $21.2 million increase in average 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 third quarter of 1999 decreased from
that of the third quarter of 1998 by approximately 30 basis points. The increase
in net interest income was offset by an increase of $130,000 in the Provision
for Loan Losses as compared to the third quarter of 1998. The increase in the
provision is attributable to the increase in loan volume and increase in
17
<PAGE>
charged-off loans. The total Allowance for Loan Losses at September 30, 1999 is
$1,909,000, or 1.28% of total net loans (including loans held for sale),
compared with $1,580,000 or 1.21% at December 31, 1998 and $1,540,000 or 1.15%
at September 30, 1998.
Non-interest income increased by $22,000 or 6.6% for the third quarter of 1999
when compared to the third quarter of 1998. Service charges and other fees
increased by $34,000 or 16.7% over the previous year's quarter due to an
increase in the Bank's service charge schedule effective July, 1999. Net fees
and Gains on Loans Sold declined because of management's decision to place
saleable loans into portfolio rather than sell them. Only $619,000 of
residential loans were sold in the first nine months of 1999 and no gains or
losses were recognized. The sale of one commercial loan participation for $1.0
million resulted in a gain of $4,500.
Non-interest expense increased by $222,000 from the third quarter of 1998 to the
third quarter of 1999. Merger expenses of $135,000 incurred in the 1999 quarter
account for a major portion of the increase. Salary expense increased by $91,000
(which includes a $14,000 decline in the ESOP expense component due to the
change in market value of the Company's stock). The increase is due to planned
staffing increases and salary increases. These additions will facilitate future
growth.
In anticipation of the merger with Camden National Corp., management expects to
accelerate the ESOP component of its salary expense. The net expected result for
the fourth quarter would be an ESOP "market-value related" expense of $177,000
which is accompanied by an increase in the Company's Paid-In capital. The
expense results from valuing at current market value the remaining released ESOP
shares and recording as expense the amount which the market value exceeds the
$3.03 cost of the shares. The offsetting entry is made to the Company's
Shareholder Equity account (Paid-In Capital). The acceleration of the original
cost of the shares would result in an additional $22,000 expense which otherwise
would have been recognized in fiscal 2000.
The Company reported net income of $1,368,000 for the nine-month period ended
September 30, 1999, which represents a slight increase from the $1,362,000 net
income reported for the comparable nine-month period in 1998. Net interest
income before provision for loan losses increased by $459,000 or 8.6%.
Non-interest income declined by $13,000, or 1.3%, and operating expenses for the
same comparable periods increased by $353,000, or 9.1%. Exclusive of the
$135,000 of merger expense, the increase in operating expense is $218,000 or
5.6%.
The increase in net interest income is attributable to a 13.7% increase in
average earning assets for the 1999 period compared to 1998. The interest margin
for the first nine months of 1999 decreased from that of the first half of 1998
by approximately 21 basis points. Loan volume was the primary component of the
increase in earning assets. The addition of the Madison deposit base in March,
1998 was a positive influence on the net interest margin. The Provision for Loan
Losses increased in the 1999 period by $190,000 due to the increase in loan
volume and an increase in charged-off loans.
18
<PAGE>
Non-interest income decreased for the nine months ending September 30, 1999 when
compared to the nine month period of 1998. Service charges and fees increased by
$38,000 or 6.1% over the previous year's period due primarily to the acquisition
of the Madison branch in March, 1998 as well as increases in the Bank's service
charge schedule. There were virtually no sales of residential mortgages for the
1999 period (a $1.0 million commercial participation was sold, resulting in a
$4,500 gain). Management placed into portfolio most of its saleable loans in
order to enhance growth in future interest income and provide some protection
from falling interest rates---thus, the decrease in Net Gains on Loans Sold.
Other income increased as a result of increases in Safe Deposit fee collections
and ATM fees.
Non-interest expense increased by $353,000 or 9.1% during the period as compared
with the first nine months of 1998. Salary expense increased by $203,000 (which
includes a $65,000 decline in the ESOP expense component due to the drop in
market value of the Company's stock). Of the increase, $28,000 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 are
adding approximately $10,000 per month to salary expense. These additions will
facilitate future growth. "Other" expenses, which increased by $101,000, include
$135,000 of non-recurring merger-related expenses.
V. Liquidity and Capital Resources
-------------------------------
A primary function of asset/liability management includes assuring adequate
liquidity that reflects the ability of the Bank to meet the cash flow
requirements of its customers without significant loss to the Bank.
Liquidity comes from five sources in the balance sheet --- the Bank's investment
portfolio, deposits, borrowings, loan repayments and profits.
Liquidity is needed to fund increased loan demand and to cover the seasonal
outflows of deposits. The Bank's investment portfolio, that consists primarily
of mortgage-backed securities, provides liquidity through repayment of principal
and interest and through its availability as collateral for borrowings and
public sector deposit accounts.
The Bank's primary approach to measuring liquidity is utilizing a Basic
Surplus/Deficit model. It is used to calculate liquidity over 30-day horizon, by
examining the relationship between liquid assets and short-term liabilities,
which are vulnerable to non-replacement within a 30-day period. The Bank's
minimum policy level of liquidity under this model is 5% of total assets. At
September 30,1999, the 30-day ratio was approximately 6.5%, (16.1% including
borrowable funds available from the Federal Home Loan Bank of Boston). The
change from previous periods results from placing saleable loans into portfolio,
thereby removing them from basic liquid assets. Because of the improved
liquidity position management has postponed taking steps to securitize
approximately $16,000,000 of its FHLMC-conforming 1-4 family residential
mortgages, as reported in the Company's previous report on Form 10QSB.
19
<PAGE>
Stockholder's equity at September 30,1999 was $ 14.6 million, an increase of
$927,000 or 6.8% over total equity at December 31, 1998. The increase resulted
from net income of $1,368,000 for the period, $168,000 in adjustments related to
the Employee Stock Ownership Plan (ESOP) and the Bank Recognition Retention Plan
(RRP), less $184,000 net dividends paid to stockholders. The net unrealized loss
on securities available for sale increased by $394,000 for the nine months (net
of deferred tax liability of $203,000). The Company issued 63,144 new shares
pursuant exercises of options by management and the Board while accepting 7,690
shares at market value in payment of officers' options exercises. The 7,690
shares were simultaneously retired. In May, 1999 the Company bought 12,500
shares on the open market at $13.75 per share and placed the shares into
Treasury at $172,000.
The Company's ratio of core capital to total assets equaled 7.4% and 7.3% at
September 30,1999 and December 31, 1998, respectively. The Bank's ratio of core
capital to total assets equaled 7.4% at September 30, 1999 and 7.1% at December
31, 1998.
The ratio of the Company's risk-based capital to risk-weighted assets at
September 30,1999 was 11.65% compared to 11.98% at December 31, 1998. The
Company's capital ratios are derived from data presented in the Company's FRB
call reports.
The ratio of the Bank's risk-based capital to risk-weighted assets at September
30,1999 was 11.71% 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 has been 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
20
<PAGE>
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 was completed by April 30, 1999. Phase V, or
Implementation, was completed as of June 30, 1999 and has resulted 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.
Other Matters
- -------------
On July 27, 1999, the Company entered into an Agreement and Plan of Merger (the
"Merger") with Camden National Corporation, a Maine corporation ("Camden") and
Camden Acquisition Subsidiary, Inc. ("CASI"), a Delaware corporation and
wholly-owned subsidiary of the Camden. The Merger Agreement provides for a
series of related transactions pursuant to which the Company will be merged with
and into the Camden, with the Camden being the surviving corporation. The
Company's subsidiary bank, Kingfield Savings Bank (the "bank") will be merged
with United Bank,a subsidiary bank of Camden, with the Bank as the surviving
21
<PAGE>
company. The Boards of Directors of the Company and Camden approved the Merger
Agreement, and all of the transactions contemplated thereby, at their respective
meetings held on July 27, 1999. The consummation of the Merger is subject to
certain customary conditions, including, without limitation, the approval of the
stockholders of each of the Company and Camden and certain regulatory approvals.
Stockholders' meetings for both companies are to be held on November 16, 1999 at
which time approval of the Merger Agreement by the Company's stockholders will
be sought. Under the Merger Agreement, at the Effective Time (as such term is
defined in the Merger Agreement), each outstanding share of common stock, par
value $0.01 per share, of the Company (the "Company Common Stock") will be
converted into the right to receive 1.136 shares of Camden's common stock, no
par value (the "Camden Common Stock"). Each holder of Company Common Stock who
would otherwise be entitled to receive a fractional share of Camden Common Stock
will receive cash in lieu thereof. For additional information, please see the
Company's Current Report on Form 8-K as filed with the Securities and Exchange
Commission ("SEC") on August 11, 1999 and combined proxy statement filed with
the SEC on October 5, 1999.
22
<PAGE>
PART II. OTHER INFORMATION
- -------- -----------------
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults upon Senior Securities
None
Item 4 Submission of Matters to a vote of Security
Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KSB BANCORP, INC.
Dated: November 15, 1999 /s/ John E. Thien
-----------------
John E. Thien
Chief Financial Officer
and duly Authorized Officer
of the Registrant
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