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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
Killbuck Bancshares, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 34-1700284
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
165 N. Main Street, Killbuck, OH 44637
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code, (330) 276-4881
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
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- ---------------------------------------- ------------------------------------
Securities to be registered under Section 12(g) of the Act:
Common
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(Title of class)
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(Title of class)
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Killbuck Bancshares, Inc. (the "Company") was incorporated under the
laws of the State of Ohio on November 29, 1991 at the direction of management of
the Bank, for the purpose of becoming a bank holding company by acquiring all of
the outstanding shares of The Killbuck Savings Bank Company. In November, 1992,
the Company became the sole shareholder of the Bank. The Bank carries on
business under the name "The Killbuck Savings Bank Company." The principal
office of the Company is located at 165 N. Main Street, Killbuck, Ohio. The
Killbuck Savings Bank Company was established under the banking laws of the
State of Ohio in November in 1900.
The Bank is headquartered in Killbuck, Ohio, which is located in the
northeast portion of Ohio, in the County of Holmes. Holmes County has a
population of approximately 34,000.
The Bank provides customary retail and commercial banking services to
its customers, including checking and savings accounts, time deposits, NOW
accounts, safe deposit facilities, real estate mortgage loans and installment
loans. The Bank also makes secured and unsecured commercial loans.
The Bank is insured by the Federal Deposit Insurance Company, and is
regulated by the Ohio Division of Banks and the Board of Governors of the
Federal Reserve System.
Employees
As of March 31, 1998, the Bank had 65 full-time and 15 part-time
employees. The Bank provides a number of benefits for its full-time employees,
including health and life insurance, pension, workers' compensation, social
security, paid vacations, and numerous bank services.
The Company, through its affiliate, The Killbuck Savings Bank Company,
(the "Bank") conducts the business of a commercial banking organization. At
March 31, 1998, the Company and its subsidiaries had consolidated total assets
of approximately $202 million, consolidated total deposits of approximately $167
million and consolidated total equity of approximately $23 million.
The Company, through its banking affiliate, offers a broad range of
banking services to the commercial, industrial and consumer market segments
which it serves. Services include
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commercial, real estate and personal loans, checking, savings and time
deposits and other customer services such as safe deposit facilities. The
Company does not have any foreign operations, assets or investments.
The Bank is a state banking Company. The Bank is regulated by the Ohio
Division of Financial Institutions ("ODFI") and its deposits are insured by the
Federal Deposit Insurance Company to the extent permitted by law and, as a
subsidiary of the Company, is regulated by the Federal Reserve Board.
Competition
The commercial banking business in the market areas served by the Bank
is very competitive. The Company and the Bank are in competition with commercial
banks located in their own service areas. Some competitors of the Company and
the Bank are substantially larger than the Bank. In addition to local bank
competition, the Bank competes with larger commercial banks located in
metropolitan areas, savings banks, savings and loan associations, credit unions,
finance companies and other financial institutions for loans and deposits.
There are six financial institutions operating in Holmes County. As of
June 30, 1997 (the most recent date for which information is available) there
Commercial and Savings Bank, Millersburg had the largest market share with
$189 million in total deposits as of such date, representing a market share of
45.18%. The Bank had the second largest market share with deposits of $164
million as of such date, representing a market share of 39.30%. Commercial and
Savings Bank had total assets as of December 31, 1997, of $288 million compared
to the Bank's total assets of $198 million as of such date.
Certain Regulatory Considerations
The following is a summary of certain statutes and regulations
affecting the Company and its subsidiaries. This summary is qualified in its
entirety by such statutes and regulations.
The Company
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, ("BHC Act") and as such is subject to
regulation by the Federal Reserve Board. A bank holding company is required to
file with the Federal Reserve Board quarterly reports and other information
regarding its business operations and those of its subsidiaries. A bank holding
company and its subsidiary banks are also subject to examination by the Federal
Reserve Board.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before acquiring substantially all the
assets of any bank or bank holding company or ownership or control of any voting
shares of any bank or bank holding company, if, after such acquisition, it would
own or control, directly or indirectly, more than five percent (5%) of the
voting shares of such bank or bank holding company.
In approving acquisitions by bank holding companies of companies
engaged in banking-related activities, the Federal Reserve Board considers
whether the performance of any such activity by a subsidiary of the holding
company reasonably can be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, which
outweigh possible adverse effects, such as over concentration of resources,
decrease of competition, conflicts of interest, or unsound banking practices.
Bank holding companies are restricted in, and subject to, limitations
regarding transactions with subsidiaries and other affiliates.
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In addition, bank holding companies and their subsidiaries are
prohibited from engaging in certain "tie in" arrangements in connection with any
extensions of credit, leases, sales of property, or furnishing of services.
The Company Subsidiaries
The Company operates a single bank, namely, The Killbuck Savings Bank
Company. As an Ohio state chartered commercial bank the Bank is supervised and
regulated by the ODFI, and subject to laws and regulations applicable to Ohio
banks.
Capital
The Federal Reserve Board, ODFI, and FDIC require banks and holding
companies to maintain minimum capital ratios.
The Federal Reserve Board adopted final "risk-adjusted" capital
guidelines for bank holding companies. The guidelines became fully implemented
as of December 31, 1992. The ODFI and FDIC have adopted substantially similar
risk-based capital guidelines. These ratios involve a mathematical process of
assigning various risk weights to different classes of assets, then evaluating
the sum of the risk-weighted balance sheet structure against the Company's
capital base. The rules set the minimum guidelines for the ratio of capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) at 8%. At least half of the total capital is to be
composed of common equity, retained earnings, and a limited amount of perpetual
preferred stock less certain goodwill items ("Tier 1 Capital"). The remainder
may consist of a limited amount of subordinated debt, other preferred stock, or
a limited amount of loan loss reserves.
In addition, the federal banking regulatory agencies have adopted
leverage capital guidelines for banks and bank holding companies. Under these
guidelines, banks and bank holding companies must maintain a minimum ratio of
three percent (3%) Tier 1 Capital (as defined for purposes of the year-end 1992
risk-based capital guidelines) to total assets. The Federal Reserve Board has
indicated, however, that banking organizations that are experiencing or
anticipating significant growth, are expected to maintain capital ratios well in
excess of the minimum levels. As of March 31, 1998, the Company's ratio of
capital to risk-weighted assets was 19.51% and the ratio of Tier 1 Capital to
total assets was 11.35%.
Regulatory authorities may increase such minimum requirements for all
banks and bank holding companies or for specified banks or bank holding
companies. Increases in the minimum required ratios could adversely affect the
Company and the Banks, including their ability to pay dividends.
Additional Regulation
The Bank is also subject to federal regulation as to such matters as
required reserves, limitation as to the nature and amount of its loans and
investments, regulatory approval of any merger or consolidation, issuance or
retirement of their own securities, limitations upon the
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payment of dividends and other aspects of banking operations. In
addition, the activities and operations of the Bank are subject to a number of
additional detailed, complex and sometimes overlapping laws and regulations.
These include state usury and consumer credit laws, state laws relating to
fiduciaries, the Federal Truth-in-Lending Act and Regulation Z, the Federal
Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act,
the Truth in Savings Act, the Community Reinvestment Act, anti-redlining
legislation and antitrust laws.
Dividend Regulation
The ability of the Company to obtain funds for the payment of dividends
and for other cash requirements is largely dependent on the amount of dividends
which may be declared by the Bank. Generally, the Bank may not declare a
dividend, without the approval of the ODFI, if the total of dividends declared
in a calendar year exceeds the total of its net profits for that year combined
with its retained profits of the preceding two years. Other than accounts
payable incurred in the ordinary course of business the Company has no debt or
other liabilities.
Government Policies and Legislation
The policies of regulatory authorities, including the ODFI, Federal
Reserve Board, FDIC and the Depository Institutions Deregulation Committee, have
had a significant effect on the operating results of commercial banks in the
past and are expected to do so in the future. An important function of the
Federal Reserve System is to regulate aggregate national credit and money supply
through such means as open market dealings in securities, establishment of the
discount rate on member bank borrowings, and changes in reserve requirements
against member bank deposits. Policies of these agencies may be influenced by
many factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and fiscal policies of the United
States government.
The United States Congress has periodically considered and adopted
legislation which has resulted in further deregulation of both banks and other
financial institutions, including mutual funds, securities brokerage firms and
investment banking firms. No assurance can be given as to whether any additional
legislation will be adopted or as to the effect such legislation would have on
the business of the Company or the Bank.
In addition to the relaxation and elimination of certain geographic
restrictions on banks and bank holding companies, a number of regulatory and
legislative initiatives have the potential for eliminating many of the product
line barriers presently separating the services offered by commercial banks from
those offered by nonbanking institutions. For example, Congress recently has
considered legislation which would expand the scope of permissible business
activities for bank holding companies (and in some cases banks) to include
securities underwriting, insurance services and various real estate related
activities.
Deposit Insurance
The Federal Deposit Insurance Company Improvement Act of 1991
("FDICIA") was enacted in 1991. Among other things, FDICIA, requires federal
bank regulatory authorities to take "prompt corrective action" with respect to
banks that do not meet minimum capital
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requirements. For these purposes, FDICIA establishes five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
As an FDIC-insured institution, the Bank is required to pay deposit
insurance premium assessments to the FDIC. The amount each institution pays for
FDIC deposit insurance coverage is determined in accordance with a risk-based
assessment system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Institutions classified as
well-capitalized (as defined by the FDIC) and considered healthy pay the lowest
premium while institutions that are less than adequately capitalized (as defined
by the FDIC) and considered substantial supervisory concerns pay the highest
premium. Beginning in 1996, such deposit insurance runs from a cost of zero
percent to 0.27% of deposits. Because the Bank is "well-capitalized," it
currently pays the minimum deposit insurance premiums.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management of the Company is not aware of any activity
or condition that could result in termination of the deposit insurance of the
Bank.
Recent Legislation
On September 29, 1994, the Reigle/Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was signed into law. The
Interstate Act effectively permits nationwide banking. The Interstate Act
provides that one year after enactment, adequately capitalized and adequately
managed bank holding companies may acquire banks in any state, even in those
jurisdictions that currently bar acquisitions by out-of-state institutions,
subject to deposit concentration limits. The deposit concentration limits
provide that regulatory approval by the Federal Reserve Board may not be granted
for a proposed interstate acquisition if after the acquisition, the acquirer on
a consolidated basis would control more than 10% of the total deposits
nationwide or would control more than 30% of deposits in the state where the
acquiring institution is located. The deposit concentration state limit does not
apply for initial acquisitions in a state and in every case, may be waived by
the state regulatory authority. Interstate acquisitions are subject to
compliance with the Community Reinvestment Act ("CRA"). States are permitted to
impose age requirements not to exceed five years on target banks for interstate
acquisitions. States are not allowed to opt-out of interstate banking.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Consolidation of banks was not permitted until
June 1, 1997, provided that the state had not passed legislation "opting-out" of
interstate branching. If a state opted-out prior to June 1, 1997, then banks
located in that state may not participate in interstate branching. A state could
have
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opted-in to interstate branching by bank consolidation or by de novo
branching by passing appropriate legislation earlier than June 1, 1997.
Interstate branching is also subject to a 30% statewide deposit concentration
limit on a consolidated basis, and a 10% nationwide deposit concentration limit.
The laws of the host state regarding community reinvestment, fair lending,
consumer protection (including usury limits) and establishment of branches shall
apply to the interstate branches. The State of Ohio opted-in to the legislation
in May of 1997.
De novo branching by an out-of-state bank is not permitted unless the
host state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to initial acquisition of a bank in the host state other
than the deposit concentration limits.
The FDIC, together with the Federal Reserve, the ODFI and the Office of
Thrift Supervision (the "OTS"), have established rules implementing requirement
that the federal banking agencies establish operational and managerial standards
to promote the safety and soundness of federally insured depository
institutions. The guidelines establish standards for internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. In general, the guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the institution's primary federal regulator may
require the institution to submit to a plan for achieving and maintaining
compliance. Failure to submit an acceptable plan, or failure to comply with a
plan that has been accepted by the appropriate regulator, would constitute
grounds for further enforcement action.
The Federal Reserve, the ODFI and the OTS have adopted new regulations
under the Community Reinvestment Act ("CRA"). Under the new regulations, an
institution's performance in meeting the credit needs of its entire community,
including low and moderate income areas, as required by the CRA, is generally
evaluated under three tests: the "lending test," which considers the extent to
which the institution makes loans in the low and moderate income areas of its
market; the "service test," which considers the extent to which the institution
makes branches accessible to low and moderate income areas of its market and
provides other services that promote credit availability; and the "investment
test," which considers the extent to which the institution invests in community
and economic development activities. The Bank had a satisfactory CRA rating as
of its latest examination.
Proposed Legislation
In addition to the above, there have been proposed a number of
legislative and regulatory proposals designed to strengthen the federal deposit
insurance system and to improve the overall financial stability of the U.S.
banking system. It is impossible to predict whether or in what form these
proposals may be adopted in the future, and if adopted, what their effect would
be on the Company.
Year 2000
As a financial institution the Company is subject to the potential
risks to the financial services industry and the Company's business
specifically, of the "Y2K" issue. The Y2K issue is the acronym and terminology
currently utilized to describe a wide variety of application specific potential
technological problems inherent in computer software which is designed to read
only a 2 digit annual date position. Many software packages currently employed
by the financial services industry as well as by industries which provide
products and services which may effect the financial services industry, either
directly or indirectly through suppliers, customers, and other persons, are not
able to identify the advent of the year 2000 as "00." Therefore, there is wide
spread concern over the risks posed to the financial services industry which is
both highly automated and dependent upon information processing technology.
Concerns include but are not limited to possible erroneous checking account
transactions, interest calculations or payment schedules. Similarly Y2K issues
extend to possible problems with ATM systems or credit and debit cards. The
potential problems do not end at financial systems. Any machine or device
controlled by a computer is susceptible to the Y2K problem. The financial impact
to the industry as a whole to address Y2K could be substantial. The Securities
and Exchange Commission as well as all banking regulatory agencies have alerted
companys under their respective jurisdictions to consider and address the risks
posited by Y2K and to disclose where appropriate the specific impact of Y2K on
the Company.
The Company has developed a written Y2K Compliance Program which has
been adopted by the Company's Board of Directors. The Company and its subsidiary
bank have been subject to examination by the Federal Reserve Bank of Cleveland
regarding Y2K and has not been made aware of any material deficiency as a result
of such examination. The Company continues to monitor its relationships with
suppliers of computer hardware and software for verification of compliance with
Y2K. In addition the Company has undertaken a review of all major customer
relationships to determine that such customers own Y2K computer issues are being
addressed. There can be no assurance that the Company will not experience
adverse financial consequences as a result of Y2K, however management, under the
direction of the Board of Directors will continue to monitor Y2K to minimize the
risks associated with it wherever identified.
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ITEM 2. FINANCIAL INFORMATION.
Selected Financial Information
The following table sets forth certain selected financial information of the
Company and is qualified in its entirety by reference to the detailed
information and financial statements of the Company included elsewhere herein.
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands of dollars, except shares and per share data)
Statements of earnings:
Total interest income $15,226 $13,982 $12,811 $10,512 $9,847
Total interest expense 7,344 6,626 5,816 4,232 4,185
----- ----- ----- ----- -----
Net interest income 7,882 7,356 6,995 6,280 5,662
Provision for loan losses 180 180 180 180 180
--- --- --- --- ---
Net interest income after provision
for loan losses 7,702 7,176 6,815 6,100 5,482
Security gains (losses) 0 0 0 1 49
Other 447 439 411 432 422
--- --- --- --- ---
Total noninterest income 447 439 411 433 471
Total noninterest expenses 4,036 3,799 3,610 3,532 3,379
----- ----- ----- ----- -----
Earnings before federal income taxes 4,113 3,816 3,616 3,001 2,574
Federal income tax expense 1,108 1,069 989 785 573
----- ----- --- --- ---
Net earnings $3,005 $2,747 $2,627 $2,216 $2,001
====== ====== ====== ====== ======
Per share of common stock
Net earnings $22.59 $20.52 $19.46 $16.42 $14.82
Dividends $4.60 $3.80 $3.25 $2.95 $2.75
Book value $166.54 $148.88 $135.30 $118.55 $105.08
Average common shares outstanding 133,043 133,893 135,000 135,000 135,000
Year-end balances:
Loans, net 119,926 114,206 105,258 101,401 93,450
Securities 58,477 51,208 42,171 35,320 32,674
Total assets 197,909 182,692 172,522 149,493 140,985
Deposits 163,809 157,399 150,413 132,112 126,422
Borrowings 11,455 4,815 3,329 994 0
Shareholders' equity 22,158 19,934 18,266 16,004 14,186
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
This discussion is intended to focus on certain financial information regarding
the Company and Bank. The purpose of this discussion is to provide the reader
with a more thorough
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understanding of the financial statements. This discussion should be
read in conjunction with the financial statements and accompanying notes
contained elsewhere herein.
Management is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on liquidity, capital
resources or operations. Also, management is not aware of any current
recommendations by its regulatory authorities that would have a material effect
on liquidity, capital resources or operations.
OVERVIEW
The reported results of the Bank are dependent on a variety of factors,
including the general interest rate environment, competitive conditions in the
industry, governmental policies and regulations and conditions in the markets
for financial assets. Net interest income is the largest component of net
income, and consists of the difference between income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is primarily affected by the volume, interest
rates and composition of interest-earning assets and interest-bearing
liabilities.
AVERAGE BALANCES AND YIELDS. The following tables present for the periods
indicated, the total amount of interest income from average interest-earning
assets and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates, and the net
interest margin. Net interest margin refers to the net interest income divided
by total interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
For the Year Ended December 31
1997 1996
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Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
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(Dollars in thousands)
Assets
Interest earning assets:
Loans (1)(2)(3) $119,552 $11,492 9.61% $112,005 $10,820 9.66%
Securities - taxable (4) 36,389 2,285 6.28% 29,940 1,898 6.34%
Securities - nontaxable 20,641 1,012 4.90% 18,268 891 4.88%
Securities - equity (4)(5) 1,008 65 6.45% 805 49 6.09%
Federal funds sold 6,749 372 5.51% 5,902 324 5.49%
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Total interest - earning assets 184,339 15,226 8.26% 166,920 13,982 8.38%
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Noninterest - earning assets
Cash and due from other institutions 6,144 5,635
Premises and equipment, net 2,888 2,914
Accrued interest 1,549 1,386
Other assets 697 571
Less allowance for loan losses (1,694) (1,619)
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Total $193,923 $175,807
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Liabilities and Shareholders Equity
Interest bearing liabilities:
Interest bearing demand deposits $37,358 $1,207 3.23% $32,253 $928 2.88%
Savings deposits 19,421 552 2.84% 19,035 547 2.87%
Time deposits 87,375 5,091 5.83% 81,725 4,858 5.94%
Securities sold under repurchase agreements 1,147 39 3.40% 0 0 0.00%
Federal Home Loan Bank advances 6,789 455 6.70% 4,176 293 7.02%
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Total interest bearing liabilities 152,090 7,344 4.83% 137,189 6,626 4.83%
------------------------- --------------------------
Noninterest bearing liabilities:
Demand deposits 20,174 19,228
Accrued expenses and other liabilities 592 532
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20,766 19,760
Shareholder's equity 21,067 18,858
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Total $193,923 $175,807
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Net interest income $7,882 $7,356
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Interest rate spread (6) 3.43% 3.55%
========== ==========
Net yield on interest earning assets (7) 4.28% 4.41%
========== ==========
(1) For purposes of these computations, the daily average loan amounts
outstanding are net of deferred loan fees.
(2) Included in loan interest income are loan fees of $210,030 in 1997 and
$190,723 in 1996.
(3) Nonaccrual loans are included in loan totals and do not have a material
impact on the information presented.
(4) Average balance is computed using the carrying value of securities. The
average yield has been computed using the historical amortized
cost average balance for available for sale securities.
(5) Equity securities is comprised of common stock of the Federal Home Loan
Bank, Federal Reserve Bank and Independent State Bank of Ohio.
(6) Interest rate spread represents the difference between the average yield
on interest earning assets and the average cost of interest bearing
liabilities.
(7) Net yield on interest earning assets represents net interest income as a
percentage of average interest earning assets.
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RATE AND VOLUME VARIANCES
Net interest income is affected by changes in the level of interest-earning
assets and interest-bearing liabilities and changes in yields earned on assets
and rates paid on liabilities. The following table sets forth, for the periods
indicated, a summary of the impact on interest income and interest expense of
changes in average assets and liability balances and changes in average rates.
For each category of interest-earning assets and interest-bearing liabilities
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
1997 Compared to 1996
Increase (Decrease) Due to
Volume Rate Net
---------------- ----------------- ----------------
(Dollars in thousands)
Interest income
Loans $729 ($57) $672
Securities - taxable 409 (22) 387
Securities - nontaxable 116 5 121
Securities - equities 12 4 16
Federal funds sold 47 1 48
---------------- ----------------- ----------------
Total interest earning assets $1,313 ($69) $1,244
---------------- ----------------- ----------------
Interest expense
Interest bearing demand deposits $147 $132 $279
Savings deposits 11 (6) 5
Time deposits 336 (103) 233
Securities sold under
repurchase agreements 39 0 39
Federal Home Loan Bank advances 183 (21) 162
---------------- ----------------- ----------------
Total interest bearing liabilities $716 $2 $718
---------------- ----------------- ----------------
Net change in interest income $597 ($71) $526
================ ================= ================
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NET INCOME Net income for 1997 increased 9.4% to $3,005,000 from $2,747,000 for
1996.
NET INTEREST INCOME Net interest income increased $526,000 or 7.2% to $7,882,000
for 1997, due to an increase of $1,244,000 or 8.9% in interest income, which
totaled $15,226,000 for 1997 as compared to $13,982,000 for 1996. The increase
in interest income more than offset the $719,000 or 10.9% increase in interest
expense.
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INTEREST INCOME The increase in interest income resulted primarily from an
increase in earnings on loans of $673,000 or 6.2% and investment securities of
$524,000 or 18.4%. These increases, which were due primarily to an increase in
the average principal balances on loans and investments of $7,500,000 and
$9,000,000, respectively, were funded by increases in deposits, repurchase
agreements and Federal Home Loan Bank advances.
INTEREST EXPENSE Total interest expense increased $719,000 or 10.9% from
$6,625,000 for 1996 to $7,344,000 for 1997. The increase for 1997 was primarily
due to an increase in the average volume of interest bearing liabilities of
$14,901,000 from $137,189,000 for 1996 to $152,090,000 for 1997. Of this amount,
average FHLB advances increased from $4,176,000 for 1996 to $6,789,000 for 1997
to help fund an increasing loan environment.
PROVISION FOR LOAN LOSSES The provision for loan losses was $180,000 for both
1997 and 1996. It was determined that the provision for loan loss for 1997 was
adequate due to management's continual evaluation of the adequacy of the
allowance for loan losses which encompasses the overall risk characteristics of
the loan portfolio, trends in the Bank's delinquent and nonperforming loans, and
the impact of economic conditions on borrowers. There can be no assurances,
however, that future losses will not exceed estimated amounts or that additional
provisions for loan losses will not be required in future periods.
OTHER INCOME Other income increased by $8,000 or 1.8% from $439,000 for 1996 to
$447,000 for 1997. In addition, in 1997, the Bank introduced an alternative
investment service to provide non-insured investment products which resulted in
gross income of $11,000.
OTHER EXPENSE Other expense increased by $236,000 or 6.2% from $3,800,000 for
1996 to $4,036,000 for 1997. Compensation and benefits increased $80,000 or 4.1%
due to normal salary adjustments. Occupancy and equipment expense increased
$68,000 or 12.4% primarily due to increases in depreciation and maintenance on
additional furniture and equipment. Other expenses increased by $88,000 or 6.8%
due to general overall inflation adjustments.
YEAR 2000 A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of the Bank.. During
1997, the Company expended $4,000 in connection with its Y2K compliance program
and has budgeted $60,000 for 1998. The Company has not engaged the consulting
firm to assist it in addressing the issues surrounding the Y2K issue.
The Company has developed a written Y2K Compliance Program which has
been adopted by the Company's Board of Directors. The Company [and or its
subsidiary bank] has been subject to examination by the Federal Reserve Bank of
Cleveland regarding Y2K and was not made aware of any material deficiency as a
result of such examination. The Company continues to monitor its relationships
with suppliers of computer hardware and software for verification of compliance
with Y2K. In addition the Company has undertaken a review of all major customer
relationships to determine that such customers own Y2K computer issues are being
addressed. The Company has initiated a year 2000 plan and has closely monitored
its situation by thoroughly assessing systems and programs which may be date
sensitive. The systems which are not currently year 2000 compatible are
scheduled for renovation before December 1998. There can be no assurance that
the Company will not experience adverse financial consequences as a result of
Y2K, however, management, under the direction of the Board of Directors,
continues to monitor Y2K to minimize the risks associated with it wherever
identified.
INCOME TAXES Income tax expense increased by $39,000 or 3.6% from $1,069,000 for
1996 to $1,108,000 for 1997. The effective tax rates were 26.9% for 1997 and
28.0% for 1996. The effective tax rate is less than the statutory federal income
tax rate of 34% due mainly to the Bank's investment in nontaxable municipal
investments.
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ASSET QUALITY
Nonperforming loans consist of loans past due 90 days or more and loans for
which the accrual of interest has been discontinued. Nonperforming loans totaled
approximately $196,000 or 0.16% of total loans at December 31, 1997, as compared
to $153,000 or 0.13% of total loans at December 31, 1996. The nonperforming
loans as a percentage of the allowance for loan losses was 11.2% and 9.3% at
December 31, 1997 and 1996 respectively.
The following table sets forth nonaccrual and past due loans at December 31:
1997 1996
---------------- ----------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis $121 $31
Accruing loans which are 90 days or more past due as to
interest or principal payments 75 122
---------------- ----------------
Total nonperforming loans $196 $153
================ ================
Gross interest income that would have been recorded on nonaccrual loans for the
year ending December 31, 1997 if the loans had been current in accordance with
their original terms totaled approximately $6,000. The interest income actually
reflected in earnings for 1997, on nonaccrual loans was approximately $7,000.
Management evaluates loans that are 90 days or more past due to determine if
they should be placed on nonaccrual status. Factors considered by management
include the estimated value of collateral, if any, and other resources of the
borrower that may be available to satisfy the delinquency.
There are no impaired loans at December 31, 1997 and 1996.
There are no loans as of December 31, 1997 or 1996 other than those disclosed
above as either nonperforming or impaired where known information about the
borrower caused management to have serious doubts about the borrower's ability
to comply with their contractual repayment obligations. There are also no other
interest bearing assets that would be subject to disclosure as either
nonperforming or impaired if such interest bearing assets were loans. There are
no concentration of loans to borrowers engaged in similar activities which
exceed 10% of total loans that management is aware of.
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14
SUMMARY OF LOAN LOSS EXPERIENCE
The following schedule presents an analysis of the allowance for loan loss,
average loan data and related ratio for the years ended December 31:
1997 1996
---------------- ----------------
(Dollars in thousands)
Balance at beginning of period $1,653 $1,545
Loan charge-offs:
Real estate - residential 0 0
Real estate - farm 0 0
Real estate - commercial 0 0
Real estate - construction 0 0
Commercial and other 20 12
Consumer and credit card 170 99
---------------- ----------------
190 111
---------------- ----------------
Recoveries:
Real estate - residential 0 0
Real estate - farm 0 0
Real estate - commercial 0 0
Real estate - construction 0 0
Commercial and other 7 17
Consumer and credit card 95 22
---------------- ----------------
102 39
---------------- ----------------
Net (charge-offs)/recoveries -88 -72
Additions charged to operations 180 180
---------------- ----------------
Balance at end of period $1,745 $1,653
================ ================
Ratio of net (charge-offs)/recoveries during period to
average loans outstanding -0.07% -0.06%
COMPARISON OF DECEMBER 31, 1997 AND 1996 FINANCIAL CONDITION
Total assets were $197,909,000 at December 31, 1997, an increase of $15,217,000
or 8.3% from $182,692,000 at December 31, 1996. Those balance sheet categories
reflecting significant changes included securities held to maturity, total
loans, interest bearing deposits, repurchase agreements and Federal Home Loan
Bank advances, and are discussed below.
14
15
Securities held to maturity were $23,398,000 at December 31, 1997, an increase
of $5,033,000 or 27.4% from $18,365,000 at December 31, 1996. Nontaxable
obligations of states and political subdivisions comprised 99.6% and 99.5% of
the total of securities held to maturity at December 31, 1997 and 1996,
respectively.
Total loans were $122,034,000 at December 31, 1997 an increase of $5,775,000 or
5.0% from $116,259,000 at December 31, 1996. The majority of the increase
occurred in the real estate -commercial ($3,117,000) and consumer and credit
($3,202,000) loan categories. The various types of loans secured by real estate
represents 55.2% of total loans at December 31, 1997, compared to 55.4% of total
loans at December 31, 1996. The remainder of the portfolio consists of
commercial, consumer and credit card loans. Late in 1997, the Bank began to
offer residential mortgage loan customers a new fixed rate product. This program
enabled the Bank to offer competitive long term fixed rates. These loans are
made with the intent to sell in the secondary loan market. The Bank generally
does not purchase or sell significant participations in loans. The Bank's loans
are primarily to customers located within its local trade area.
Interest bearing demand deposits were $37,574,000 at December 31, 1997, an
increase of $5,525,000 or 17.2% from $32,049,000 at December 31, 1996. A
decrease among various demand deposit accounts was offset by an influx of
$8,000,000 in public funds in March 1997 from a local school district for the
construction of a new facility. These funds are expected to be withdrawn over a
period of twenty-four months and have been invested in securities with similar
maturities.
Securities sold under agreements to repurchase totaling $2,710,000 at December
31, 1997. There were no securities sold under agreements to repurchase at
December 31, 1996.
Federal Home Loan Bank advances were $8,745,000 at December 31, 1997, an
increase of $3,930,000 or 81.6% from $4,815,000 at December 31, 1996. These
borrowings are used to fund fixed rate residential real estate loans with
similar maturities.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity totaled $22,158,000 at December 31, 1997, an increase of
$2,224,000 or 11.2% from $19,934,000 at December 31, 1996. This increase
reflects earnings of $3,005,000, purchases of treasury shares of $312,000,
dividends paid of $611,000 and an increase in the net unrealized gain on
securities of $142,000. Total shareholders equity was 11.2% of total assets at
December 31, 1997, compared to 10.9% at December 31,1996.
Banking regulations have established minimum capital requirements for financial
institutions including risk-based capital ratios and leveraged ratios. As of
December 31, 1997 the appropriate regulatory authorities have categorized the
Company and Bank as well capitalized under the regulatory framework for prompt
corrective action.
The primary sources of funds are deposits, repayment of loans, maturities of
investments, funds provided from operations and advances from the FHLB of
Cincinnati. While scheduled repayments of loans and maturities of investment
securities are predictable sources of funds,
15
16
deposit flows and loan repayments are greatly influenced by the general
level of interest rates, economic conditions and competition. The Bank uses its
sources of funds to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating expenses.
Management monitors projected liquidity needs and determines the level
desirable, based in part on the Bank's commitments to make loans and
management's assessment of the Bank's ability to generate funds.
Cash and amounts due from depository institutions and federal funds sold totaled
$14,601,000 at December 31, 1997. These assets provide the primary source of
liquidity for the Bank. In addition, management has designated a substantial
portion of the investment portfolio, ($35,079,000) as available for sale and has
an available line of credit with the Federal Home Loan Bank of Cincinnati with a
borrowing limit of approximately $15,900,000 at December 31, 1997 to provide
additional sources of liquidity.
The Bank's net interest income is sensitive to changes in interest rates. To
mitigate the impact of changing interest rates on net interest income, the Bank
manages interest rate sensitivity and assets/liability products through an
assets/liability management committee. The asset/liability management committee
meets as necessary to determine the rates of interest for loans and deposits.
Rates on deposits are primarily based on the Bank's need for funds and on a
review of rates offered by other financial institutions in the Bank's market
areas. Interest rates on loans are primarily based on the interest rates offered
by other financial institutions in the Bank's primary market area, as well, as
the Bank's cost of funds.
In an effort to reduce interest rate risk and protect itself from the negative
effects of rapid or prolonged changes in interest rates, the Bank has instituted
certain asset and liability management measures, including underwriting
long-term fixed rate loans that are saleable in the secondary market, offering
longer term deposit products and diversifying the loan portfolio into shorter
term consumer and commercial business loans. In addition, since the mid-1980's,
the Bank has originated adjustable-rate loans and as of December 31, 1997, they
comprised approximately 68% of the total loan portfolio.
The Committee manages the interest rate sensitivity of the Bank through the
determination and adjustment of asset/liability composition and pricing
strategies. The Committee then monitors the impact of the interest rate risk and
earnings consequences of such strategies for consistency with the Bank's
liquidity needs, growth, and capital adequacy. The Bank's principal strategy is
to reduce the interest rate sensitivity of interest earning assets and attempt
to match the maturities of interest earning assets with interest bearing
liabilities, while allowing for a mismatch in an attempt to increase net
interest income.
The table below provides a measure of the Bank's interest rate sensitivity at
December 31, 1997. The amount of assets or liabilities which reprice or mature
within a period were determined based on the contractual terms of the assets or
liability. Savings, NOW and money market demand deposit accounts reprice at
management's discretion and therefore are included in the
16
17
amount repricing within three months. This table may not reflect the
actual impact on the Bank's changes in interest rates because the repricing of
various categories of rate sensitive assets and liabilities are subject to other
factors such as competition, customer preference, and management influence.
PERIOD TO MATURITY OR REPRICING
Within Three to After
Three Twelve One to Five Five
Months Months Years Years Total
-------------------------------------------------------------------------------
(Dollars in Thousands)
Loans, before allowance (1) $55,731 $34,619 $18,451 $12,870 $121,671
Securities (2) 3,273 6,224 25,654 22,283 57,434
Federal Funds Sold 8,300 0 0 0 8,300
-------------------------------------------------------------------------------
Total 67,304 40,843 44,105 35,153 187,405
-------------------------------------------------------------------------------
SAV., NOW, MMDA 56,951 0 0 0 56,951
Time Deposits 19,223 50,856 12,467 2,719 85,265
Other Borrowings 2,710 500 0 8,245 11,455
-------------------------------------------------------------------------------
Total 78,884 51,356 12,467 10,964 153,671
-------------------------------------------------------------------------------
Interest earning assets less interest bearing
liabilities (maturity gap) ($11,580) ($10,513) $31,638 $24,189 $33,734
===============================================================================
Cumulative Interest Rate Sensitivity Gap ($11,580) ($22,093) $9,545 $33,734
===============================================================================
Cumulative Interest Rate Sensitivity Gap
as a percent of total interest earning assets -6.18% -11.79% 5.09% 18.00%
Cumulative Interest Rate Sensitivity Gap
as a percent of total assets -5.85% -11.16% 4.82% 17.05%
===============================================================================
(1) Loans exclude non-accrual loans and is net of deferred loan fees
(2) Securities exclude $1,043,000 in equity securities
MARKET RISK
The Bank's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. Because of the nature of the Bank's operations, the Bank
is not subject to currency exchange or commodity price risk and, since the Bank
has no trading portfolio, it is not subject to trading risk. Currently, the Bank
has equity securities that represent only 2.97% of its investment portfolio and,
therefore, equity price risk is not significant.
The Bank actively manages interest rate sensitivity and assets/liability
products through an assets/liability management committee. The principle
purposes of asset-liability management are to maximize current net interest
income while minimizing the risk to future earnings of negative fluctuations in
net interest margin and to insure adequate liquidity exists to meet operational
needs.
Interest rate sensitivity is measured as the difference between the volume of
assets and liabilities that are subject to repricing in a future period of time.
These differences are known as interest sensitivity gaps. The Bank utilizes gap
management as the primary means of measuring interest rate risk. Gap analysis
identifies and quantifies the Bank's exposure or vulnerability to changes in
interest rates in relationship to the Bank's interest rate sensitivity position.
A rate sensitive asset or liability is one which is capable of being repriced
(i.e., the interest rate can be adjusted or principal can be reinvested) within
a specified period of time. Subtracting total rate sensitive liabilities (RSL)
from total rate sensitive assets (RSA) within specified time horizons nets the
Bank's gap positions. These gaps reflect the Bank's exposure to changes in
market interest rates, as discussed below.
Because many of the Bank's deposit liabilities are capable of being immediately
repriced, a portion of the investment portfolio consists of rate sensitive
securities and the Bank offers variable rate loan products in order to maintain
a proper balance in its ability to reprice various interest bearing assets and
liabilities. Furthermore, the Bank's deposit rates are not tied to an external
index over which the Bank could exercise no control. As a result, although
changing market interest rates impact repricing, the Bank has retained much of
its control over repricing.
The table below, sets forth, in summary form, the Bank's repricing analysis at
December 31, 1997. The repricing analysis shown below is based upon the
repricing intervals of variable rate assets and liabilities and upon contractual
maturities of fixed rate instruments without any consideration for prepayments.
The Bank conducts the rate sensitivity analysis through the use of a simulation
model which also monitors earnings at risk by projecting earnings of the Bank
based upon an economic forecast of the most likely interest rate movement. The
model also calculates earnings of the Bank based upon what are estimated to be
the largest foreseeable rate increase and the largest foreseeable rate decrease.
Such analysis translates interest rate movements and the Bank's rate sensitivity
position into dollar amounts by which earnings may fluctuate as a result of rate
changes. Based upon the economic forecasts of the most likely interest rate
movement, the Bank's 12 month percentage deviation of earnings from a flat rate
scenario would be 1%.
INTEREST RATE SENSITIVITY GAPS
(IN THOUSANDS)
1998 1999 2000 2001 2002 Thereafter Total
--------------------------------------------------------------------------------
Interest-earnings assets:
Loans:
Fixed $7,277 $3,039 $5,524 $5,933 $3,955 $12,870 $38,598
Variable 83,073 0 0 0 0 0 83,073
Securities:
Fixed 9,497 9,620 3,597 6,689 5,748 22,283 57,434
Variable 0 0 0 0 0 0 0
Other interest-earning assets 8,300 0 0 0 0 0 8,300
--------------------------------------------------------------------------------
Total interest-earning assets 108,147 12,659 9,121 12,622 9,703 35,153 187,405
--------------------------------------------------------------------------------
Interest-bearing liabilities:
Demand and savings deposits 56,951 0 0 0 0 0 56,951
Time deposits:
Fixed 69,511 5,815 3,112 2,083 710 2,719 83,950
Variable 568 747 1,315
Repurchase agreements 3,210 0 0 0 0 8,245 11,455
--------------------------------------------------------------------------------
Total interest-bearing
liabilities 130,240 6,562 3,112 2,083 710 10,964 153,671
--------------------------------------------------------------------------------
Interest rate sensitivity gap (22,093) 6,097 6,009 10,539 8,993 24,189
Cumulative rate sensitivity gap ($22,093) ($15,996) ($9,987) $552 $9,545 $33,734
====================================================================
Interest rate sensitivity gap
as a percent of interest
earning assets (11.79%) (8.54%) (5.33%) 0.29% 5.09% 18.00%
====================================================================
The data included in the table indicates that the Bank is liability sensitive
within one year. Generally, a liability sensitive gap indicates that declining
interest rates could positively affect net interest income as expense of
liabilities would decrease more rapidly than interest income would decline.
Conversely, rising rates could negatively affect net interest income as income
from assets would increase less rapidly than deposit costs. During times of
rising interest rates, an asset sensitive gap could positively affect net
interest income as rates would be increased on a larger volume of assets as
compared to deposits. As a result, interest income would increase more rapidly
than interest expense. An asset sensitive gap could negatively affect net
interest income in an environment of decreasing interest rates as a greater
amount of interest bearing assets could be repricing at lower rates. Although
rate sensitivity analysis enables the Bank to minimize interest rate risk, the
magnitude of rate increases or decreases on assets versus liabilities may not
correlate directly. As a result, fluctuations in interest spreads can occur even
when repricing capabilities are perfectly matched.
It is the policy of the Bank to generally maintain a gap between .90 and 1.20
for the time horizon of one year. When Management believes that interest rates
will increase it can take actions to increase the RSA/RSL ratios. When
Management believes interest rates will decline, it can take actions to decrease
the RSA/RSL ratio.
During 1997, in order to adjust its interest rate sensitivity, the Bank's focus
was on spreading out the maturities of time deposits within the one year time
frame while continuing the growth in variable rate loans. The above strategy was
implemented to better position the Bank for rate changes in either direction.
The Bank's asset/liability management focus for 1998 will include improving the
Bank's rate sensitivity gap. As noted above, at December 31, 1997, the Bank was
liability sensitive within one year, however, the cumulative rate sensitivity
gap was such that the Bank's earnings and capital should not be materially
affected by the repricing of assets and liabilities due to increases or
decreases in interest rates in 1998.
Changes in market interest rates can also affect the Bank's liquidity position
through the impact rate changes may have on the market value of the Bank's
investment portfolio. As noted in the above discussion relating to securities,
rapid increases in market rates can negatively impact the market values of
investment securities. As securities values decline it becomes more difficult to
sell investments to meet liquidity demands without incurring a loss. The Bank
can address this by increasing liquid funds which may be utilized to meet
unexpected liquidity needs when a decline occurs in the value of securities.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the accompanying notes presented
elsewhere in this document, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
17
18
due to inflation. Unlike most industrial companies, virtually all the assets and
liabilities are monetary in nature. The impact of inflation is reflected in the
increased cost of operations. As a result, interest rates have a greater impact
on performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings based on a
control-oriented "financial-components" approach. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. The provisions of Statement No. 125 are effective for transactions
occurring after December 31, 1996, except those provisions relating to
repurchase agreements, securities lending, and other similar transactions and
pledged collateral, which have been delayed until after December 31, 1997 by
Statement No. 127, "Deferral of the Effective Date of Certain Provision of
Statement No. 125, an amendment of Statement No. 125." The adoption of the
provision of Statement No. 127 is not expected to have a material impact on
financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. It requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. The provisions of the
statement are effective for all fiscal years beginning after December 15, 1997.
The adoption of this statement is not expected to have a material impact on
financial position or results of operations.
CERTAIN STATISTICAL INFORMATION
The following schedules present, for the period indicated, certain financial and
statistical information, or a specific reference as to the location of the
required disclosures elsewhere herein.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL
The information required under this section is set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
18
19
INVESTMENT PORTFOLIO
The amortized cost, unrealized gains and losses, and estimated market values are
as follows at December 31:
1997
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ -------------
Available for Sale
U.S. Treasury securities $ 9,781,819 $ 20,337 $ - $ 9,802,156
Obligations of U.S. Government
Agencies and Corporations 24,304,525 27,237 98,812 24,232,950
----------- -------- ------- -----------
Total debt securities 34,086,344 47,574 98,812 34,035,106
Equity securities 1,043,410 - - 1,043,410
----------- -------- ------- -----------
Total $35,129,754 $ 47,574 $98,812 $35,078,516
=========== ======== ======= ===========
Held to Maturity
Obligations of States and Political
Subdivisions $23,298,480 $575,642 $ 7,214 $23,866,908
Corporate Securities 100,000 - 375 99,625
----------- -------- ------- -----------
Total $23,398,480 $575,642 $ 7,589 $23,966,533
=========== ======== ======= ===========
1996
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ---------- -----------
Available for Sale
U.S. Treasury securities $ 994,508 $ 2,992 $ - $ 997,500
Obligations of U.S. Government
Agencies and Corporations 31,225,987 18,595 288,354 30,956,228
----------- -------- -------- -----------
Total debt securities 32,220,495 21,587 288,354 31,953,728
Equity securities 889,210 - - 889,210
----------- -------- -------- -----------
Total $33,109,705 $ 21,587 $288,354 $32,842,938
=========== ======== ======== ===========
Held to Maturity
Obligations of States and Political
Subdivisions $18,264,587 $257,491 $114,124 $18,407,954
Corporate Securities 100,000 - 1,920 98,080
----------- -------- -------- -----------
Total $18,364,587 $257,491 $116,044 $18,506,034
=========== ======== ======== ===========
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20
MATURITY OR NEXT RATE ADJUSTMENT DATE
The following is a schedule of maturities or next rate adjustment date and
related weighted average yields of securities at December 31, 1997
After three months but After one year but
Within three months Within one year Within five years
------------------------- -------------------------- ---------------------------
Amount Yield Amount Yield Amount Yield
-------------- ---------- -------------- ---------- ---------------- ---------
Available for Sale (1)
U.S. Treasury securities $2,496,875 5.89% $2,005,000 5.99% $5,300,281 5.91%
Obligations of U.S. Government
agencies and corporations 500,000 6.06% 1,791,562 5.23% 18,188,076 6.22%
Equity securities (2) 0 0.00% 0 0.00% 0 0.00%
-------------- ---------- -------------- ---------- ---------------- ---------
Total $2,996,875 5.92% $3,796,562 5.63% $23,488,357 6.15%
============== ========== ============== ========== ================ =========
Held to Maturity
Obligations of states and
political
subdivisions (3) $275,519 4.14% $1,927,213 4.50% $9,663,493 4.96%
Corporate bonds 0 0.00% 0 0.00% 100,000 6.00%
-------------- ---------- -------------- ---------- ---------------- ---------
Total $275,519 4.14% $1,927,213 4.50% $9,763,493 4.97%
============== ========== ============== ========== ================ =========
After five but
Within ten years After 10 Years
------------------------- -----------------------
Amount Yield Amount Yield Total
-------------- ---------- ------------ --------- ----------------
Available for Sale (1)
U.S. Treasury securities $0 0.00% $0 0.00% $9,802,156
Obligations of U.S. Government
agencies and corporations 3,753,312 6.68% 0 0.00% 24,232,950
Equity securities (2) 0 0.00% 0 0.00% 0
-------------- ---------- ------------ --------- ----------------
Total $3,753,312 6.68% $0 0.00% $34,035,106
============== ========== ============ ========= ================
Held to Maturity
Obligations of states and
political
subdivisions (3) $11,140,535 4.82% $291,720 4.62% $23,298,480
Corporate bonds 0 0.00% 0 0.00% 100,000
-------------- ---------- ------------ --------- ----------------
Total $11,140,535 4.82% $291,720 4.62% $23,398,480
============== ========== ============ ========= ================
(1) The weighted average yield has been computed using the historical amortized
cost for available for sale securities.
(2) Excludes $1,043,410 of equity securities which have no stated maturity.
(3) Weighted average yields on nontaxable obligations have been computed based
on actual yield stated on the security.
Excluding holdings of U.S. Treasury and other agencies and corporations of the
U.S. Government, there were no investments in securities of any one issuer that
exceeded 10% of the bank's shareholder equity at December 31, 1997.
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21
LOAN PORTFOLIO
Types of loans. Total loans on the balance sheet are comprised of the following
classifications as December 31:
1997 % 1996 %
--------------------- ---------------------
Real estate - residential $41,473,027 34.09 $39,820,133 34.37
Real estate - farm 3,846,541 3.16 4,589,030 3.96
Real estate - commercial 21,204,753 17.43 18,087,851 15.61
Real estate - construction 782,569 .64 1,947,042 1.68
Commercial and other 33,745,364 27.74 34,035,720 29.38
Consumer and credit card 20,981,516 17.24 17,779,182 15.35
Deferred loan fees (363,127) (399,181)
--------------------- ---------------------
$121,670,643 $115,859,777
===================== =====================
The largest category of loans comprising the Bank's Loan Portfolio is
Residential Real Estate Loans. These loans are primarily single family
residential real estate loans secured by a first mortgage on the dwelling. The
risks associated with these loans are primarily the risk of default in repayment
and inadequate collateral. The second largest loan segment of the Bank's Loan
Portfolio is the Commercial and Other category. The loans comprising this
category represent loans to business interests, located primarily within the
Bank's defined market areas, with no significant industry concentration.
Commercial Loans include both secured and unsecured loans. The risks associated
with these loans are principally the risk in default of the payment of principal
resulting from economic problems of the commercial customer, economic downturn
effecting the market in general and in the case of secured loans inadequate
collateral. Consumer and credit card loans comprise the next largest area of the
Bank's loan portfolio. These loans include consumer installment including
automobile loans as well as personal loans and credit card loans. The risks
inherent in these loans include the risk of default in principal, repayment and
in the case of secured loans the risk of inadequate collateral. Real Estate
Commercial Loans represent the next largest category and include development
loans as well as investment commercial real estate such as land loans. These
loans have risks which include the risk of default in the repayment of principal
and inadequate collateral as well as the risk of cash flow interruption due to,
in the case of rental real estate, the inability to obtain or collect adequate
rental rates.
The Bank's loan policy establishes guidelines to manage credit risk and asset
quality. These guidelines include loan review and early identification of
problem loans to ensure sound credit decisions. The Bank's credit policies and
procedures are meant to minimize the risk and uncertainties inherent in lending.
In following these policies and procedures management must rely on estimates,
appraisals and evaluations of loans and the possibility that changes in these
could occur partly because of changing economic conditions. The amount and type
of collateral which the Bank requires in connection with its lending activities
is dependant upon the specific facts and circumstances of each credit facility.
The Bank's loan policy for real estate loans does set forth internal maximum
loan to value ratios for various types of real estate loans. In the case of
owner-occupied 1-4 family residential the maximum loan to value ratio is
generally 80%. Home equity loans are 75%. Improved business and industrial
property loans, improved agricultural loan involving land and construction loans
are 80%. Land development loans are 75% and raw land loans are 65%. In the case
of other types of loans the loan to value ratio is not fixed by the Loan Policy
but is dependent upon a number of other factors. The Bank does not make
uninsured conventional mortgage loans with loan to value ratios above 80%. All
loans of the Bank are monitored by a loan officer and where appropriate requests
are made to update appraisals, provide third party guarantees or take other
actions to assure the Bank of the creditworthiness of the borrow.
The Bank's loan policy contains a number of quantitative and qualitative
requirements in connection with granting loan approvals. Depending upon the type
and nature of the loan requested the Bank makes both secured and unsecured
loans. In the case of secured loans the Bank's loan policy requires that such
loans be adequately collaterized and in the case of loans secured by real
estate, accompanied by an appropriate appraisal.
Pursuant the Bank's Loan Policy, the quality and liquidity of collateral is of
paramount importance and must be confirmed before the loan is made. The Bank's
Loan Policy requires that secured loans be margined so that money received from
the collateral, under foreclosure conditions, will repay the loan. Loan officers
are responsible for obtaining an objective appraisal of the collateral prior to
funding a loan . In the event the loan is renewed or extended, the loan officer
must consider the need for a new appraisal before granting the renewal or
extension.
MATURITIES & SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following is a schedule of maturities and sensitivities of loans subject to
changes in interest rates as of December 31, 1997:
One Over
One Year Through Five
or Less Five Years Years
--------------------- ------------------- ---------------------
Real estate - residential $2,294,391 $864,179 $29,939,728
Real estate - farm 0 122,541 3,476,019
Real estate - commercial 10,950 1,024,824 17,880,817
Real estate - construction 440,029 0 0
Commercial and others 14,707,077 6,393,392 5,165,706
Consumer and credit card 0 94,726 659,107
Balance sheet structure and interest rate changes play important role in the
growth of net interest income. The Bank's Asset/Liability Committee (ALCO)
manages the overall rate sensitivity and mix of the balance sheet to anticipate
and minimize the effects of interest rate fluctuation and maintain a consent net
interest margin. The relative measure of assets and liabilities that will mature
or are scheduled to reprice within various time categories is known as "GAP."
Because the Company has more liabilities than assets repricing within one year
at December 31, 1997, it has a negative GAP and is considered liability
sensitive. In a rising rate environments, this liability surplus would most
likely detract from net interest income. In a declining rate environment the
effect would most likely be favorable. Experience has shown that his
generalization does not fully capture the true dynamics of interest rate changes
since asset and liability rate do not adjust equally.
RISK ELEMENTS
The information required under this section is set forth under the heading0
"Asset Quality" in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
21
22
SUMMARY OF LOAN LOSS EXPERIENCE
Analysis of Loan Loss Experience. The information required under this section is
set forth under the heading "Summary of Loan Loss Experience" in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Allocation of the Allowance for Loan Losses. The following table allocates the
allowance for loan losses at December 31, 1997 and 1996 to each loan category.
The allowance has been allocated according to the amount deemed to be reasonably
necessary to provide for the possibility of losses being incurred within the
following categories of loans at the dates indicated, although the entire
allowance balance is available to absorb any actual charge-offs that may occur.
1997 1996
----------------------------------- -----------------------------------
Percentage Percentage
of Loans to of Loans to
Allowance Total Loans Allowance Total Loans
---------------- ---------------- ---------------- ----------------
Real estate - residential $402 34.00% $360 34.20%
Real estate - farm 35 3.20% 38 3.90%
Real estate - commercial 273 17.40% 229 15.60%
Real estate - construction 6 0.60% 15 1.70%
Commercial and other loans 568 27.70% 574 29.30%
Consumer and credit loans 342 17.10% 341 15.30%
Unallocated 119 0.00% 96 0.00%
---------------- ---------------- ---------------- ----------------
$1,745 100.00% $1,653 100.00%
================ ================ ================ ================
The Bank reviews the adequacy of its allowance for loan losses on a quarterly
basis. In determining the adequacy of its allowance account the Bank makes
general allocations based upon loan categories such as nonaccrual and past due
loans as well as type of loans such as residential real estate, commercial,
consumer and credit card. After general allocations, the Bank makes specific
allocations for individual credits. Any remaining balance is determined to be
"unallocated." The Bank has determined that the reserve is adequate as of
December 31, 1997, based upon its analysis and experience.
DEPOSITS
Average Amounts and Rates. The information required under this section is set
forth under the heading "Overview - Average Balances and Yields" in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Foreign Deposits. There are no foreign deposits at December 31, 1997.
Maturity of Time Deposits of $100,000 or More. The following is a schedule of
maturities of time deposits in amounts of $100,000 or more as of December 31,
1997 (in thousands):
Three months or less $6,013
Three through six months 7,928
Six through twelve months 6,997
Over twelve months 837
----------------
Total $21,775
================
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23
RETURN ON EQUITY AND ASSETS
The ratio of net income to daily average total assets and average shareholders'
equity, and certain other ratios, are as follows:
December 31,
1997 1996
---------------- ----------------
Percentage of net income to:
Average total assets 1.55% 1.56%
Average shareholders' equity 14.26% 14.57%
Percentage of dividends declared per common share to net
income per common share 20.36% 18.52%
Percentage of average shareholders' equity to average
total assets 10.86% 10.73%
SHORT-TERM BORROWINGS
This information is not required as the average amount of borrowings during the
period did not exceed 30% of shareholders' equity.
ITEM 3. PROPERTIES.
The Bank owns or leases the real property used in its business as
follows:
Main Office: Berlin, Branch
165 N. Main Street 4843 East Main St.
Killbuck, Ohio 44637 Berlin, Ohio 44610
Mt. Hope Branch Millersburg North Office
8115 State Rt. 241 181 N. Washington St.
Mt. Hope, Ohio 44660 Millersburg, Ohio 44654
Millersburg South Office
1642 S. Washington St.
Millersburg, Ohio 44654
23
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS:
To the Company's knowledge, except as noted below, no person or entity owns
beneficially, directly or indirectly, 5 percent or more of the Company's common
stock as of March 31, 1998.
Amount and Nature of % of
Name and Address of Beneficial Owner Beneficial Ownership Class
- ---------------------------------------------------------------------------------------------
The Holmes Limestone Co. 9024 Shares 6.85%
P.O. Box 295
Berlin, Ohio 44610
Thomas D. Gindlesberger 7000 Shares 5.29%
P.O. Box 129
Millersburg, Ohio 44654
MANAGEMENT:
The following table sets forth, as of March 31, 1998, information as to the
beneficial ownership of the Company's Common Stock by each Directors and
Executive Officer and All Directors and Executive Officers as a group.
Shares of Company Common
Stock Owned Beneficially as Percentage of Beneficial
Name & Age of 3/31/98 Ownership as of 3/31/98
---------- ---------- -------------------------
John W. Baker 106 .08%
Robert D. Bell (1) 573 .43%
Richard L. Fowler (2) 1224 .92%
Thomas D. Gindlesberger 7000 5.29%
Craig A. Lawhead (3) 260 .20%
Allan R. Mast (4) 394 .30%
Dean J. Mullet 26 .02%
Luther E. Proper 1209 .91%
Kenneth E. Taylor 50 .04%
Michael S. Yoder 50 .04%
All directors and executive 10892 8.23%
officers as a group
---------------------------------
- -------------
(1) 500 shares owned individually, 73 shares in spouse's name.
(2) 495 shares owned individually, 729 shares owned jointly with spouse.
(3) 125 shares owned individually, 135 shares owned jointly with spouse.
(4) 75 shares owned individually, 179 shares owned jointly with spouse, 140
shares owned in name of Holmes M & M Construction.
24
25
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS:
PRINCIPAL
NAME & AGE OCCUPATION DIRECTOR SINCE
---------- ----------- --------------
Richard L. Fowler President, Mobile Homes of 1992
(Age 68) Ohio
Robert D. Bell Chairman of the Board, 1992
(Age 71) Killbuck Bancshares, Inc.
and The Killbuck Savings
Bank Co.
Luther E. Proper President and CEO, Killbuck 1992
(Age 49) Bancshares and The Killbuck
Savings Bank Co.
Thomas D. Gindlesberger Attorney-at-Law 1992
(Age 72)
Dean J. Mullet President, Mullet Cabinet 1992
(Age 46)
Kenneth E. Taylor Farmer 1992
(Age 45)
John W. Baker President, Burgett Insurance 1992
(Age 53)
Michael S. Yoder Owens-Brockway 1992
(Age 56)
Allan R. Mast Co-Owner Holmes M&M 1992
(Age 48) Construction
25
26
Executive Officer:
PRINCIPAL
NAME & AGE OCCUPATION
---------- -----------
Luther E. Proper President and CEO, Killbuck
(Age 49) Bancshares and The Killbuck
Savings Bank Co
Craig A. Lawhead Executive Vice President,
(Age 40) Killbuck Bancshares, and
The Killbuck Savings Bank
Co.
Each individual has held the position noted during the past five years.
ITEM 6. EXECUTIVE COMPENSATION.
The following remuneration table sets forth all direct remuneration
paid by the Bank in 1997 to the Company's President and Chief Executive
Officer. No other Officers' total compensation exceeded $100,000 for the year
ended 1997.
SUMMARY COMPENSATION TABLE
Annual Compensation
------------------------
Name and All Other
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ----- -----------
Mr. Luther E. Proper 1997 $102,500 $22,597 $7,990.95
President and Chief 1996 $95,000 $21,743 $8,161.11
Executive Officer 1995 $85,250 $20,279 $7,907.76
REPORT OF THE COMPENSATION COMMITTEE OF KILLBUCK BANCSHARES, INC. ON
COMPENSATION
Under rules established by the Securities and Exchange Commission (the
"SEC"), the Company is required to provide certain data and information in
regard to the compensation and benefits provided to the Company's President and
Chief Executive Officer and, if applicable, the four other most highly
compensated Executive Officers, whose compensation exceeded $100,000 during the
Company's fiscal year. The disclosure requirements, as applied to the Company,
include only the Company's President and Chief Executive Officer Mr. Luther E.
Proper. The disclosure includes the use of tables and a report explaining the
rationale and considerations that led to fundamental executive compensation
decisions affecting such officers. Killbuck Bancshares, Inc. is a holding
company and owns a single operating subsidiary, The Killbuck Savings Bank
Company. Killbuck Bancshares, Inc. has no direct employees. All disclosures
contained in this Proxy Statement regarding executive compensation reflect
26
27
compensation paid by The Killbuck Savings Bank Company. The Compensation
Committee of the Company has the responsibility of determining the compensation
policy and practices with respect to all Executive Officers. At the direction of
the Board of Directors, the Compensation Committee has prepared the following
report for inclusion in this Proxy Statement.
Compensation Philosophy. This report reflects the Company's
compensation philosophy as endorsed by the Compensation Committee. The
Compensation Committee makes a recommendation regarding the level of
compensation for Mr. Proper. The Compensation Committee determines the level of
compensation for all other Executive Officers within the constraints of the
amounts approved by the Board.
Essentially, the executive compensation program of the Company has been
designed to:
- - Support a pay-for-performance policy that awards Executive Officers for
corporate performance.
- - Motivate key Executive Officers to achieve strategic business goals.
- - Provide compensation opportunities which are comparable to those offered by
other peer group companies; thus allowing the Company to compete for and
retain talented executives who are critical to the Company's long-term
success.
Salaries. Effective January 1, 1997, the Compensation Committee
recommended and the Board increased the salary paid to Mr. Proper. The increase
reflected consideration of competitive data reported in compensation surveys and
the Compensation Committee's assessment of the performance of such executives
over the intervening year and recognition of the Company's performance during
1996. In addition, the Compensation Committee approved compensation increases
for all other Executive Officers of the Company. Executive Officer salary
increase determinations are based upon an evaluation of such executives'
performance against goals set in the prior year.
Cash Bonus Plan. The Company maintains a cash bonus plan (the "Bonus
Plan") which allocates a portion of the Company's net income for the purpose of
employee cash bonuses on an annual basis. The award of a bonus to any employee
under the terms of the Bonus Plan is discretionary and in the case of Mr. Proper
is determined by the Board of Directors upon the recommendation of the
Compensation Committee, and in all other cases is determined by the Compensation
Committee upon recommendation of management.
The Compensation Committee has determined that a significant portion of
executive compensation should be payable in an annual bonus which shall be based
principally upon the financial performance of the Company. The Compensation
Committee believes that it is important to reward executive management based
upon the success of the Company.
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28
THIS REPORT ON COMPENSATION IS SUBMITTED BY THE COMPENSATION COMMITTEE MEMBERS:
John Baker, Robert Bell, Thomas Gindlesberger, Allan Mast, Luther
Proper
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Luther E. Proper, the Company's President and Chief Executive
Officer served on the Compensation Committee of the Company, which is
responsible for compensation matters (see "Report of the Compensation Committee
of Killbuck Bancshares, Inc. on Compensation" in this Proxy Statement).
Although Mr. Proper served on the Compensation Committee, he did not
participate in any decisions regarding his own compensation as an Executive
Officer.
Director Compensation
Directors of the Company, other than those persons who serve as
officers of the Company and its subsidiary, The Killbuck Savings Bank Company,
received an annual retainer of $6,000 during 1997. The Chairman of the Board
received an annual retainer of $7,200. Effective January 1, 1998, the fee
stayed the same.
PERFORMANCE GRAPH - FIVE-YEAR SHAREHOLDER RETURN COMPARISON
The SEC requires that the Company include in this Proxy Statement a
line-graph presentation comparing cumulative five-year shareholder returns on an
indexed basis with a broad equity market index and either a nationally
recognized industry standard or an index of peer companies selected by the
Company. The Company has selected the Dow Jones Equity Market Index and the Dow
Jones Regional Bank Index for purposes of this performance comparison. The chart
below compares the value of $100 invested on December 31, 1990, in the Company's
stock, the Dow Jones Equity Market Index and the Dow Jones Regional Bank Index.
28
29
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG KILLBUCK
BANCSHARES, INC., DOW JONES EQUITY MARKET INDEX & DOW JONES MAJOR
REGIONAL BANK INDEX FOR FISCAL YEAR ENDING DECEMBER 31
[LINE GRAPH]
ASSUMES $100 INVESTED ON JANUARY 1, 1992 *TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
IN KILLBUCK BANCSHARES, INC. COMMON STOCK,
DOW JONES EQUITY MARKET INDEX & DOW JONES MAJOR
REGIONAL BANK INDEX
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
KILLBUCK BANCSHARES, INC. $100.00 $116.40 $134.60 $188.53 $272.48 $404.92
DOW JONES EQUITY MARKET INDEX $100.00 $109.95 $110.76 $152.49 $187.63 $251.34
DOW JONES REGIONAL BANK INDEX $100.00 $105.27 $101.31 $162.02 $222.62 $347.78
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Some of the directors, officers and principal shareholders of the
Company and/or the Bank and the companies with which they are associated were
customers of and have had banking transactions with the Bank in the ordinary
course of the Bank's business in the past and up to the present time. All loans
and commitments for loans included in such transactions were made on
substantially the same terms including interest rates and collateral as were
prevailing at the time for comparable transactions with other persons. In the
opinion of the Board of Directors of the Bank, these loans and commitments for
loans do not involve more than a normal risk of collectability or present other
unfavorable features.
29
30
The Company and/or the Bank have had, and expect to have in the future,
banking transactions in the ordinary course of its business with directors,
officers, principal shareholders and their associates, on substantially the same
terms, including interest rates and collateral on loans, as those prevailing at
the same time for comparable transactions with others. Such transactions will
not involve more than the normal risk of collectability or present other
unfavorable features.
ITEM 8. LEGAL PROCEEDINGS.
There is no pending litigation which, in the opinion of management,
will adversely impact the financial condition of the Company or the Bank. There
is litigation threatened by a bank customer which has not been initiated as of
the preparation of this offering circular. In the event that the threatened
litigation is initiated, management and its counsel do not believe that any loss
other than those associated with the collection process shall be incurred.
Consequently, it is the opinion of management that the threatened litigation
shall not have a material adverse impact upon the financial condition of the
Company and the Bank.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
a. Market Information
There is no established public trading market for the Company's common
stock and the shares of the Company are not listed on any exchange. Sale price
information prior to March 31, 1998 is based on information reported to the
Company by individual buyers and sellers of the Company's stock.
1998
First Quarter Second Quarter
------------- -------------
High Low High Low
347.51 Unknown
1997
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High Low High Low High Low High Low
Unknown 271.50 279.93 277.54 Unknown
1996
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High Low High Low High Low High Low
214.23 215.25 217.33 213.27 Unknown
The Company currently has 132,380 shares of common stock outstanding.
All of such shares are and, upon effectiveness of this Registration Statement,
will be eligible for sale in the open market without restriction or registration
under the Securities Act of 1933, as amended (the "Securities Act"), except for
shares held by affiliates of the Company, which shares are and will be subject
to resale
30
31
limitations under Rule 144 promulgated under the Securities Act. As of
April 30, 1998, directors and executive officers of the Company had beneficial
ownership of an aggregate of 10,892 shares of the Company's common stock, none
of which is restricted stock. The Company has two shareholders (Holmes Limestone
and Thomas Gindlesberger) with beneficial ownership of more than five percent of
its outstanding shares and no shareholders holding restricted shares other than
directors and executive officers.
In general, under Rule 144, commencing ninety days after the effective
date of this Registration Statement, affiliates of the Company may sell within
any three-month period a number of shares that does not exceed the greater of
one percent of the number of then outstanding shares of common stock or the
average weekly trading volume of the common stock in the over-the-counter market
during the four calendar weeks preceding commencement of the sales in question.
Sales under Rule 144 are also subject to certain requirements as to the manner
of sale, notice to the Securities and Exchange Commission, and the availability
of current public information about the Company.
The Company has no outstanding options or warrants to purchase shares
of its common stock or securities convertible into shares of common stock.
b. Holders
The number of holders of record of the Company's common stock at April
30, 1998 was 533.
c. Dividends
Dividends per share declared by the Company on the common stock during
the first four months of 1998 and the years of 1997 and 1996 are as follows:
1998 1997 1996
Month
June $0.00 $2.20 $1.80
December $0.00 $2.40 $2.00
TOTALS $0.00 $4.60 $3.80
===== ===== =====
The Company currently expects that comparable annual cash dividends
will continue to be paid in the future. However, see Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources
and Liquidity and Notes to Consolidated Financial Statements - Dividend
Restrictions (Footnote No. 15) for additional information on dividend
restrictions.
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32
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
During 1995, 1996 and 1997 the Company sold 26 of its common shares in
one transaction which was sold in reliance upon an exemption from registration
under 3(a)(11) of the Securities Act of 1933,
Date Number of Shares Price
- ---- ---------------- -----
8/23/96 26 $214.23 to Dean Mullett,
Director
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The Company has 200,000 of shares authorized and 132,380 shares outstanding as
of April 30, 1998. Effective May 1, 1998, the Company will have a 5 for 1 stock
split.
The holders of the Shares have no preemptive right to acquire other or
additional Shares which may, from time to time, be authorized and issued by the
Company.
Each Share of Common Stock of the Company entitles the holder thereof
to (1) vote on all matters. Shareholders of the Company do not have cumulative
voting rights in the election of directors.
The Articles of Incorporation of the Company contains provisions
providing for indemnification of the Company's Directors and Officers and the
purchase of insurance in connection with such indemnification.
The Articles of Incorporation also contain certain provisions to
protect the interest of the Company and its shareholders from any hostile
takeover attempts. A vote of at least a majority of the "disinterested shares"
of capital stock of the Company is required to approve certain mergers,
consolidations, sale of substantially all of the assets and similar transactions
involving control of the Company. In addition the Articles of Incorporation
contain a provision which "classifies" the board into three classes and provides
for the election of directors to three-year terms. The removal of a director
requires the affirmative vote of three-fourths of the outstanding shares of the
Company. These provisions and limitations will make it more difficult for
companies or persons to acquire control of the Company without the support of
the Board of Directors of the Company. However, these provisions also could
deter offers for Shares in the Company which might be viewed by certain
Investors not to be in their best interest.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Company's Code of Regulations.
The Code of Regulations of the Company provide for mandatory indemnification of
any person who was or is a party or is threatened to made a party to any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative (other than an action by or in the
32
33
right of the Company) by reason of the fact that such person is or was a
director of the company. The Code of Regulations provides for permissive
indemnification in the case of actions by or in the right of the Company.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Registrant's Financial Statements are attached hereto as an exhibit.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with the independent accountants on matters of
accounting principles or financial statement disclosure required to be reported
under this item. There has been no change in accountants.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
A. Annual Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets,
December 31, 1997 and 1996
Consolidated Statements of Earnings,
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows,
Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements,
December 31, 1997, 1996 and 1995
B. Exhibits
2. Plan of acquisition, reorganization, arrangement, liquidation,
or succession
3. Articles of incorporation and by-laws
4. Instruments defining the rights of security holders, including
indentures
9. Voting trust agreement
10. Material contracts
11. Statement re computation of per share earnings
12. Statements re computation of ratios
16. Letter re change in certifying accountant
21. Subsidiaries of the registrant
24. Power of attorney
27. Financial data schedule
99. Additional exhibits
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34
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
Killbuck Bancshares, Inc.
Date: July 31, 1998
By: /s/ Luther E. Proper
------------------------------------
Luther E. Proper, President
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35
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
(a) Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(b) Exhibits
(2) Not Applicable
(3), (i) Articles of Incorporation and Code of Regulations
(4) None
(9) None
(10) Agreement and Plan of Reorganization with Commercial and
Savings Bank Co.,
(11) Not Applicable - Registrant has a simple capital structure
comprised of solely common stock and no debt securities
outstanding.
(12) Not Applicable - Registrant has a simple capital structure
comprised of solely common stock.
(16) None
(21) Subsidiaries of the Registrant
(24) Not Applicable
(27) Financial Data Schedule
(99) None
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36
KILLBUCK BANCSHARES, INC.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Page
Number
Report of Independent Auditors 37
Financial Statements: 38
Consolidated Balance Sheet 39
Consolidated Statement of Income 40
Consolidated Statement of Changes in Shareholders' Equity 41
Consolidated Statement of Cash Flows 42
Notes to Consolidated Financial Statements
36
37
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Killbuck Bancshares, Inc.
We have audited the accompanying consolidated balance sheet of Killbuck
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Killbuck Bancshares,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As explained in the notes to the consolidated financial statements, effective
January 1, 1995, the Company adopted a new method of accounting for impairment
of loans and related allowance for loan losses.
S. R. Snodgrass, A. C.
Steubenville, Ohio
January 23, 1998
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38
KILLBUCK BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31,
1997 1996
---- ----
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 6,300,777 $ 6,140,758
Federal funds sold 8,300,000 6,100,000
------------ ------------
Total cash and cash equivalents 14,600,777 12,240,758
Investment securities:
Securities available for sale 35,078,516 32,842,938
Securities held to maturity (market value of $23,966,533
and $18,506,034) 23,398,480 18,364,587
------------ ------------
Total investment securities 58,476,996 51,207,525
Loans, net 119,926,057 114,206,455
Premises and equipment, net 2,808,078 2,973,786
Accrued interest 1,633,451 1,506,926
Other assets 463,271 556,708
------------ ------------
Total assets $197,908,630 $182,692,158
============ ============
LIABILITIES
Deposits:
Noninterest bearing demand $ 21,592,573 $ 20,904,824
Interest bearing demand 37,574,203 32,048,553
Savings 19,376,757 19,848,413
Time 85,265,101 84,597,359
------------ ------------
Total deposits 163,808,634 157,399,149
Securities sold under repurchase agreements 2,710,000 -
Federal Home Loan Bank advances 8,745,174 4,814,648
Accrued expenses and other liabilities 487,213 544,621
------------ ------------
Total liabilities 175,751,021 162,758,418
------------ ------------
SHAREHOLDERS' EQUITY
Common stock - 200,000 shares authorized, 135,000
issued with no par value 2,700,000 2,700,000
Capital surplus 3,106,500 3,106,500
Retained earnings 17,018,414 14,624,364
Net unrealized loss on securities available for sale (33,817) (176,066)
Treasury stock, at cost (2,620 and 1,500 shares) (633,488) (321,058)
------------ ------------
Total shareholders' equity 22,157,609 19,933,740
------------ ------------
Total liabilities and shareholders' equity $197,908,630 $182,692,158
============ ============
See accompanying notes to the consolidated financial statements.
38
39
KILLBUCK BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1997 1996 1995
---- ---- ----
INTEREST INCOME
Interest and fees on loans $11,491,831 $10,819,285 $10,282,897
Federal funds sold 372,153 324,411 430,348
Investment securities:
Taxable 2,349,656 1,947,044 1,265,371
Tax exempt 1,012,341 890,981 832,428
----------- ----------- -----------
Total interest income 15,225,981 13,981,721 12,811,044
----------- ----------- -----------
INTEREST EXPENSE
Deposits 6,850,752 6,331,213 5,690,017
Federal Home Loan Bank advances 454,791 292,726 125,588
Other 38,637 1,521 332
----------- ----------- -----------
Total interest expense 7,344,180 6,625,460 5,815,937
----------- ----------- -----------
NET INTEREST INCOME 7,881,801 7,356,261 6,995,107
Provision for loan losses 180,000 180,000 180,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,701,801 7,176,261 6,815,107
----------- ----------- -----------
OTHER INCOME
Service fees on deposit accounts 375,676 383,377 348,715
Other 71,849 55,946 62,066
----------- ----------- -----------
Total other income 447,525 439,323 410,781
----------- ----------- -----------
OTHER EXPENSE
Salaries and employee benefits 2,028,629 1,948,362 1,812,393
Occupancy expense 164,505 157,771 151,336
Equipment expense 451,940 390,502 319,269
Other 1,390,581 1,302,928 1,327,144
----------- ----------- -----------
Total other expense 4,035,655 3,799,563 3,610,142
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,113,671 3,816,021 3,615,746
Income taxes 1,108,209 1,069,040 989,018
----------- ----------- -----------
NET INCOME $ 3,005,462 $ 2,746,981 $ 2,626,728
=========== =========== ===========
PER SHARE DATA
Earnings per common share $ 22.59 $ 20.52 $ 19.46
=========== =========== ===========
Average shares outstanding 133,043 133,893 135,000
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
39
40
KILLBUCK BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Common Capital Retained
Stock Surplus Earnings
----- ------- --------
BALANCE, DECEMBER 31, 1994 $2,700,000 $3,106,500 $10,197,197
Net income 2,626,728
Dividends paid (3.25 per share) (438,750)
Net unrealized gain on securities
---------- ---------- -----------
BALANCE, DECEMBER 31, 1995 2,700,000 3,106,500 12,385,175
Net income 2,746,981
Dividends paid ($3.80 per share) (507,792)
Purchase of treasury shares
Sale of treasury shares
Net unrealized loss on securities
---------- ---------- -----------
BALANCE, DECEMBER 31, 1996 2,700,000 3,106,500 14,624,364
Net income 3,005,462
Dividends paid ($4.60 per share) (611,412)
Purchase of treasury shares
Net unrealized gain on securities
---------- ---------- -----------
BALANCE, DECEMBER 31, 1997 $2,700,000 $3,106,500 $17,018,414
========== ========== ===========
Net
Unrealized
Gain (Loss) on
Securities Total
Available Treasury Shareholders'
For Sale Stock Equity
-------- ----- ------
BALANCE, DECEMBER 31, 1994 $ - $ - $16,003,697
Net income 2,626,728
Dividends paid (3.25 per share) (438,750)
Net unrealized gain on securities 73,894 73,894
--------- ---------- -----------
BALANCE, DECEMBER 31, 1995 73,894 - 18,265,569
Net income 2,746,981
Dividends paid ($3.80 per share) (507,792)
Purchase of treasury shares (326,628) (326,628)
Sale of treasury shares 5,570 5,570
Net unrealized loss on securities (249,960) (249,960)
--------- ---------- -----------
BALANCE, DECEMBER 31, 1996 (176,066) (321,058) 19,933,740
Net income 3,005,462
Dividends paid ($4.60 per share) (611,412)
Purchase of treasury shares (312,430) (312,430)
Net unrealized gain on securities 142,249 142,249
--------- -------- -----------
BALANCE, DECEMBER 31, 1997 $ (33,817) $(633,488) $22,157,609
========= ========= ===========
See accompanying notes to the consolidated financial statements.
40
41
KILLBUCK BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES
Net income $ 3,005,462 $ 2,746,981 $ 2,626,728
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 180,000 180,000 180,000
Provision for depreciation and amortization 245,393 303,523 222,740
Gain on sale of loans (2,033) - -
Loss on sale of equipment - - 35,443
Origination of loans held for sale (282,300) - -
Proceeds from the sale of loans 284,333 - -
Increase in accrued interest and other assets (130,414) (454,936) (420,738)
(Increase) decrease in accrued expenses and other liabilities (57,407) 45,592 108,717
Increase (decrease) in federal income tax payable 6,466 (49,501) 21,331
Increase in deferred federal income tax 17,580 7,212 17,312
----------- ----------- -----------
Net cash provided by operating activities 3,267,080 2,778,871 2,791,533
----------- ----------- -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 14,051,028 7,766,611 -
Purchases (16,051,726) (17,237,326) -
Investment securities held to maturity:
Proceeds from maturities and repayments 2,249,094 4,054,565 10,400,500
Purchases (7,262,638) (3,869,746) (16,973,156)
Net increase in loans (5,899,602) (9,128,417) (4,036,936)
Proceeds from sale of equipment - - 6,164
Purchase of premises and equipment (119,386) (582,894) (760,665)
----------- ----------- -----------
Net cash used in investing activities (13,033,230) (18,997,207) (11,364,093)
----------- ----------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in demand and savings
deposit accounts 5,741,743 2,191,323 (3,028,785)
Net increase in time deposits 667,742 4,794,740 21,329,795
Net increase in Federal Home Loan Bank advances 3,930,526 1,485,170 2,335,523
Net increase in repurchase agreements 2,710,000 - -
Purchase of treasury shares (312,430) (326,628) -
Proceeds from sale of treasury shares - 5,570 -
Dividends paid (611,412) (507,792) (438,750)
----------- ----------- -----------
Net cash provided by financing activities 12,126,169 7,642,383 20,197,783
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 2,360,019 (8,575,953) 11,625,223
Cash and cash equivalents at beginning of year 12,240,758 20,816,711 9,191,488
----------- ----------- -----------
Cash and cash equivalents at end of year $14,600,777 $12,240,758 $20,816,711
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
41
42
KILLBUCK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Killbuck Bancshares, Inc., a bank
holding Company, and its subsidiary, Killbuck Saving Bank Company, conform with
generally accepted accounting principles and with general practice within the
banking industry.
A summary of the significant accounting and reporting policies applied in the
presentation of the consolidated financial statements follows:
Nature of Operations
Killbuck Bancshares, Inc. is an Ohio corporation organized as the holding
company of The Killbuck Savings Bank Company. The Bank is a state-chartered bank
located in Ohio. The Company and its subsidiary derive substantially all their
income from banking and bank-related services which include interest earnings on
residential real estate, commercial mortgage, commercial and consumer loan
financing as well as interest earnings on investment securities and charges for
deposit services to its customers. The Board of Governors of the Federal Reserve
System supervises the holding company and bank, while the Bank is also subject
to regulation and supervision by the Ohio Division of Banks.
Basis of Consolidation
The consolidated financial statements include the accounts of Killbuck
Bancshares, Inc. and its wholly owned subsidiary, The Killbuck Savings Bank
Company, after elimination of all material intercompany transactions and
balances.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans, management obtains independent appraisals for
significant collateral.
The Bank's loans are generally secured by specific items of collateral including
real property, consumer assets, and business assets. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent on local economic conditions in the
agricultural and tourism industry.
42
43
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgments about information available to them at the time
of their examination. Because of these factors, it is reasonably possible that
the estimated losses on loans may change materially in the near term. However,
the amount of the change that is reasonably possible cannot be estimated.
Investments Securities
Investment securities are classified, at the time of purchase, based upon
managements' intention and ability, as securities held to maturity or securities
available for sale. Debt securities acquired with the intent to hold to maturity
are stated at cost adjusted for amortization of premium and accretion of
discount which are computed using a method which approximates the effective
interest method. Certain other debt and equity securities have been classified
as available for sale to serve principally as a source of liquidity. Unrealized
holding gains and losses for available for sale securities are reported as a
separate component of stockholders' equity, net of tax, until realized. Realized
securities gains and losses are computed using the specific identification
method. Interest and dividends on investment securities are recognized as income
when earned.
Common stock of the Federal Home Loan Bank, Federal Reserve Bank and Independent
State Bank of Ohio represent ownership in institutions which are wholly-owned by
other financial institutions. These securities are accounted for at cost and are
classified with equity securities available for sale.
Loans Held for Sale
Mortgage loans originated and held for sale in the secondary market are carried
at the lower of cost or market value determined on an aggregate basis. Net
unrealized losses are recognized in a valuation allowance through charges to
income. Gains and losses on the sale of loans held for sale are determined using
the specific identification method. At December 31, 1997 and 1996, there were no
loans held for sale.
Loans
Loans are stated at their outstanding principal, less the allowance for loan
losses and any net deferred loan fees. Interest income on loans is recognized on
the accrual method when a loan is placed on nonaccrual, any previously accrued
interest is reversed against current income.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
43
44
Allowance for Loan Losses
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards Statement No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by Statement No. 118. Under this Standard, the Company estimates
credit losses on impaired loans based on the present value of expected cash
flows or fair value of the underlying collateral if the loan repayment is
expected to come from the sale or operation of such collateral. Statement 118
amends Statement 114 to permit a creditor to use existing methods for
recognizing interest income on impaired loans eliminating the income recognition
provisions of Statement 114. The adoption of these statements did not have a
material effect on the Company's financial position or results of operations.
Impaired loans are commercial and commercial real estate loans for which it is
probable that the Company will not be able to collect all amounts due according
to the contractual terms of the loan agreement. The Company individually
evaluates such loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. The
Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired, provided the loan is not a commercial or commercial real estate
classification. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for these
types of loans is determined by the difference between the present value of the
expected cash flows related to the loan, using the original interest rate, and
its recorded value, or as a practical expedient in the case of collateralized
loans, the difference between the fair value of the collateral and the recorded
amount of the loans. When foreclosure is probable, impairment is measured based
on the fair value of the collateral.
Mortgage loans secured by one-to-four family properties and all consumer loans
are generally of smaller balances, and a homogeneous nature, thus are measured
for impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as impaired.
Management determines the significance of payment delays on a case-by-case
basis, taking into consideration all of the circumstances concerning the loan,
the credit worthiness and payment history of the borrower, the length of the
payment delay, and the amount of shortfall in relation to the principal and
interest owed.
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance, and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses which is
charged to operations. The provision is based upon management's periodic
evaluation of individual loans, the overall risk characteristics of the various
portfolio segments, past experience with losses, the impact of economic
conditions on borrowers, and other relevant factors. The estimates used in
determining the adequacy of the allowance for loan losses including the amounts
and timing of future cash flows expected on impaired loans, are particularly
susceptible to significant change in the near term.
44
45
Premises and Equipment
Land is carried at cost. Other premises and equipment are carried at cost net of
accumulated depreciation. Depreciation is computed using the straight-line
method based principally on the estimated useful lives of the assets.
Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in
current operations.
Income Taxes
The Company and its subsidiary file a consolidated federal income tax return.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.
Earnings Per Share
Earnings per share are calculated based upon the weighted number of shares of
stock outstanding during the year.
In February, 1997 the Financial Accounting Standard Board issued Statement No.
128 "Earnings Per Share" ("EPS"). The statement established new standards for
computing and presenting earnings per share and requires dual presentation of
"basic" and "diluted" earnings per share on the face of the income statement.
The provision of the statement are effective for the period ending December 31,
1997. The Company maintains a simple capital structure, therefore there are no
dilutive effects on earnings per share.
Cash Flow Information
For purposes of reporting cash flows, cash and cash equivalents include cash and
non-interest bearing deposits with financial institutions and federal funds
sold. Generally, federal funds are sold for one-day periods. The Company reports
net cash flows for customer loan transactions, deposit transactions, and
interest-bearing deposits with other financial institutions. Cash payments for
interest in 1997, 1996 and 1995 were $7,359,808, $6,633,764, and $5,708,289,
respectively. Cash payments for income taxes for 1997, 1996, and 1995 were
$1,081,332, $1,111,330, and $943,892 respectively.
45
46
Pending Accounting Pronouncements
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings based on a
control-oriented "financial-components" approach. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. The provisions of Statement No. 125 are effective for transactions
occurring after December 31, 1996, except those provisions relating to
repurchase agreements, securities lending, and other similar transactions and
pledged collateral, which have been delayed until after December 31, 1997 by
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of
Statement No. 125, an amendment of Statement No. 125." The adoption of the
provisions of Statement No. 127 is not expected to have a material impact on
financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. It requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. The provisions of the
statement are effective for all fiscal years beginning after December 15, 1997.
The adoption of this statement is not expected to have a material impact on
financial position or results of operations.
Reclassification of Comparative Amounts
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation. These
reclassifications had no effect on net income.
2. FEDERAL FUNDS SOLD
Federal funds sold at December 31 consists of the following:
1997 1996
----------------------------- ------------------------------
Institution Maturity Balance Maturity Balance
----------- -------- ---------- -------- ----------
National Bank of Detroit 1-02-98 $7,000,000 1-02-97 $5,000,000
National City Bank 1-02-98 1,300,000 1-02-97 1,100,000
---------- ----------
$8,300,000 $6,100,000
========== ==========
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3. INVESTMENT SECURITIES
The amortized cost of securities and their estimated market values are as
follows:
SECURITIES AVAILABLE FOR SALE
1997
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- ------------
U.S. Treasury securities $ 9,781,819 $20,337 $ - $ 9,802,156
Obligations of U.S. Government
Agencies and Corporations 24,304,525 27,237 98,812 24,232,950
----------- ------- ------- -----------
Total debt securities 34,086,344 47,574 98,812 34,035,106
Equity securities 1,043,410 - - 1,043,410
----------- ------- ------- -----------
Total $35,129,754 $47,574 $98,812 $35,078,516
=========== ======= ======= ===========
1996
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Treasury securities $ 994,508 $ 2,992 $ - $ 997,500
Obligations of U.S. Government
Agencies and Corporations 31,225,987 18,595 288,354 30,956,228
----------- ------- -------- -----------
Total debt securities 32,220,495 21,587 288,354 31,953,728
Equity securities 889,210 - - 889,210
----------- ------- -------- -----------
Total $33,109,705 $21,587 $288,354 $32,842,938
=========== ======= ======== ===========
SECURITIES HELD TO MATURITY
1997
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- -----------
Obligations of States and Political
Subdivisions $23,298,480 $575,642 $7,214 $23,866,908
Corporate Securities 100,000 - 375 99,625
----------- -------- ------ -----------
Total $23,398,480 $575,642 $7,589 $23,966,533
=========== ======== ====== ===========
47
48
1996
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------ -----------
Obligations of States and Political
Subdivisions $18,264,587 $257,491 $114,124 $18,407,954
Corporate Securities 100,000 - 1,920 98,080
----------- -------- -------- -----------
Total $18,364,587 $257,491 $116,044 $18,506,034
=========== ======== ======== ===========
The contractual maturities of securities available for sale and securities to be
held to maturity at December 31, 1997 are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or repay obligations with or without call or prepayment penalties.
Securities Available Securities to be
For Sale Held to Maturity
-------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- ----------- ----------- ----------
Due in one year or less $ 6,795,581 $ 6,793,437 $ 2,202,732 $ 2,222,549
Due after one year through five years 23,542,827 23,488,357 9,763,493 10,024,020
Due after five through ten years 3,747,936 3,753,312 11,140,535 11,426,701
Due after ten years - - 291,720 293,263
----------- ----------- ----------- -----------
$34,086,344 $34,035,106 $23,398,480 $23,966,533
=========== =========== =========== ===========
Proceeds of securities as a result of calls prior to maturity during 1997, 1996
and 1995 were $8,322,527, $4,574,442 and $4,400,000, respectively, resulting in
gross gains of $-0- in 1997, $-0- in 1996 and $-0- in 1995.
Investment securities with an approximate carrying value of $30,960,000 and
$19,435,000 at December 31, 1997 and 1996, respectively were pledged to secure
public deposits and for other purposes as required or permitted by law. During
1997, 1996 and 1995, the Company did not sell any securities.
48
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4. LOANS
Major classification of loans are summarized as follows:
1997 1996
-------------- --------------
Real estate - residential $ 41,473,027 $ 39,820,133
Real estate - farm 3,846,541 4,589,030
Real estate - commercial 21,204,753 18,087,851
Real estate - construction 782,569 1,947,042
Commercial and other loans 33,745,364 34,035,720
Consumer and credit loans 20,981,516 17,779,182
------------ ------------
122,033,770 116,258,958
Allowance for loan losses (1,744,586) (1,653,322)
Net deferred loan fees (363,127) (399,181)
------------ ------------
Loans, net $119,926,057 $114,206,455
============ ============
The Company's primary business activity is with customers located within its
local trade area. Residential, commercial, personal, and agricultural loans are
granted. The Company also selectively funds loans originated outside of its
trade area provided such loans meet its credit policy guidelines. Although the
Company has a diversified loan portfolio, at December 31, 1997 and 1996, loans
outstanding to individuals and businesses are dependent upon the local economic
conditions in its immediate trade area.
At December 31, 1997, the Company had loans totaling $75,411 which were past due
90 days or more and still accruing interest. Presented below are total
nonaccuring loans at December 31, 1997, 1996 and 1995. Also shown is the
additional income that would have been earned if those loans had been current
throughout the years ended.
1997 1996 1995
---------- --------- --------
Nonaccrual loans $120,805 $30,510 $62,315
Interest earned (if current) $ 6,120 $ 924 $ 2,186
5. ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses follows:
1997 1996 1995
---------- ---------- ----------
Balance, January 1 $1,653,322 $1,545,682 $1,378,387
Provision for loan losses 180,000 180,000 180,000
Recoveries 101,397 38,858 106,500
Credits charged off (190,133) (111,218) (119,205)
---------- ---------- ----------
Balance, December 31 $1,744,586 $1,653,322 $1,545,682
========== ========== ==========
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50
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1997 1996
---------- ----------
Land $ 588,526 $ 575,779
Building and improvements 2,089,582 2,059,197
Furniture, fixtures and equipment 1,905,762 1,829,508
---------- ----------
4,583,870 4,464,484
Less accumulated depreciation 1,775,792 1,490,698
---------- ----------
Total $2,808,078 $2,973,786
========== ==========
Depreciation expense charged to operations was $285,094 for 1997, $271,259 for
1996, and $192,621 for 1995.
7. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $21,775,164 and $22,430,895 at December 31, 1997
and 1996, respectively.
Interest expense on certificates of deposit $100,000 and over amounted to
$1,306,783 in 1997, $1,258,753 in 1996, and $1,099,591 in 1995.
The following table sets forth the remaining maturity of time certificates of
deposits of $100,000 or more at December 31, 1997.
December 31,
1997
------------
3 months or less $6,012,514
Over 3 through 6 months 7,928,423
Over 6 through 12 months 6,996,967
Over 12 months 837,260
------------
Total $21,775,164
============
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51
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company has retail repurchase agreements with customers in their respective
local market areas. These borrowings are collateralized with securities owned by
the bank and held in their safekeeping account at an independent correspondent
bank. The following table summarizes certain information relative to these
borrowings at December 31:
1997 1996
----------- ----------
Outstanding at period end $2,710,000 $ -
Weighted average interest rate at period end 3.27% -
Maximum amount outstanding as of any month-end $2,710,000 -
Average amount outstanding $1,494,000 -
Approximate weighted average interest rate during the year 3.10% -
9. FEDERAL HOME LOAN BANK ADVANCES
The Company's advances consist of the following:
Balance
Interest -------
Rate 1997 1996
--------- ------------- -----------
Fixed Rate Federal Home Loan Bank Advances with
Monthly principal and interest payments:
Advance due August 1, 2009 7.60% $ 361,179 $ 422,596
Advance due January 1, 2010 8.15% 298,147 355,817
Advance due June 1, 2010 8.90% 305,874 363,295
Advance due April 1, 2012 7.05% 488,810 -
Advance due May 1, 2012 6.90% 686,440 -
Advance due July 1, 2012 6.50% 690,700 -
Advance due October 1, 2012 6.40% 697,674 -
Advance due December 1, 2012 6.35% 1,000,000 -
Advance due October 1, 2015 8.20% 348,340 442,344
Advance due November 1, 2015 7.75% 397,777 488,166
Advance due November 1, 2015 6.55% 426,823 462,066
Advance due February 1, 2016 6.00% 721,848 782,291
Advance due October 1, 2016 7.20% 444,608 499,063
Advance due October 1, 2016 6.75% 438,026 499,010
Advance due February 1, 2017 6.55% 490,677 -
Advance due February 1, 2017 7.20% 448,251 -
Fixed Rate Federal Home Loan Bank Advances with
Monthly interest payments:
Advance due December 1, 1998 5.67% 500,000 500,000
---------- ----------
Total Federal Home Loan Bank Advances $8,745,174 $4,814,648
========== ==========
The Bank has pledged, as collateral for advances from the FHLB of Cincinnati all
stock in the Federal Home Loan Bank and certain other qualifying collateral.
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52
The aggregate minimum future annual principal payments on the advances are
$801,503 in 1998, $323,104 in 1999, $346,273 in 2000, $371,120 in 2001, $397,775
in 2002 and $6,505,399 after 2002.
The Company has an available line of credit with the Federal Home Loan Bank of
Cincinnati (FHLB) with a borrowing limit of approximately $15,900,000. This
credit line is subject to annual renewal, incurs no service charges, and is
secured by a blanket security agreement on the Company's outstanding residential
mortgage loans and FHLB stock.
10. EMPLOYEE BENEFIT PLANS
In 1997 the Bank adopted an integrated money purchase pension plan and a
401(k) plan.
Under the integrated money purchase pension plan contribution formula, the Bank,
for each plan year, will contribute an amount equal to 8% of an employee's
compensation for the plan year and 5.7% of the amount of an employee's excess
compensation for the plan year. Excess compensation is a participant's
compensation in excess of the designated integration level. This designated
integration level is 100% of the taxable wage base in effect at the beginning of
the plan year. The federal government annually adjusts the taxable wage base.
This plan does not permit nor require employees to make contributions to the
plan.
The 401(k) plan allows employees to make salary reduction contributions to the
plan up to 10% of their compensation for the plan year. For each plan year, the
Bank may contribute to the plan an amount of matching contributions for a
particular plan year. The Bank may choose not to make matching contributions for
a particular plan year. For 1997 the Bank matched 25% of the employees voluntary
contributions up to 1% of the employee's compensation.
Both plans cover substantially all employees with one year of service and
attained age 21.
The Bank terminated its defined benefit pension plan in 1997. This plan was
funded by individually allocated retirement income and retirement annuity
contracts. Assets of the plan equal cash values of the contracts. The allocated
insurance contracts cash values fully guarantee the amount of benefit payments.
This plan's assets were transferred to the respective individual's account in
the integrated money purchase pension plan.
The pension costs charged to operating expense for the years 1997, 1996 and 1995
amounted to $136,666, $133,074 and $128,105, respectively.
11. OTHER OPERATING EXPENSE
Other operating expense included the following:
1997 1996 1995
---------- ---------- ----------
Stationery, supplies and printing $ 137,760 $ 158,071 $ 119,582
Insurance and bonding 55,236 39,675 193,702
Franchise tax 298,457 273,464 239,445
Other 899,128 831,718 774,415
---------- ---------- ----------
Total $1,390,581 $1,302,928 $1,327,144
========== ========== ==========
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12. INCOME TAXES
Federal income taxes applicable to income were comprised as follows:
1997 1996 1995
---------- ----------- --------
Current payable $1,090,629 $1,061,828 $971,706
Deferred 17,580 7,212 17,312
---------- ---------- --------
Total $1,108,209 $1,069,040 $989,018
========== ========== ========
The following is a reconcilement of federal income tax expense to the amount
computed at the expected statutory rate.
1997 1996 1995
---------- ---------- ----------
Computed tax at expected statutory rate $1,398,648 $1,297,447 $1,229,354
Tax-exempt income (340,323) (303,943) (277,599)
Non-deductible interest expense 53,716 48,960 41,584
Other (3,832) 26,576 (4,321)
---------- ---------- ----------
$1,108,209 $1,069,040 $ 989,018
========== ========== ==========
Deferred tax assets and liabilities included in other assets at December 31
consist of the following:
1997 1996
--------- ---------
Deferred Tax Assets:
Allowance for loan losses $456,499 $425,469
Deferred loan fees 36,297 64,448
Net unrealized loss on securities 17,421 90,701
-------- --------
Deferred tax asset 510,217 580,618
-------- --------
Deferred Tax Liabilities:
Premise and equipment depreciation 243,173 223,996
Other, net 6,969 5,687
-------- --------
Deferred tax liabilities 250,142 229,683
-------- --------
Net deferred tax assets $260,075 $350,935
======== ========
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13. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at December 31 are as
follows:
1997 1996
------------------------------ ---------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ------------ ------------ -----------------
Financial assets:
Cash and due from banks $ 6,300,777 $ 6,300,777 $ 6,140,758 $ 6,140,758
Federal funds sold 8,300,000 8,300,000 6,100,000 6,100,000
Securities available for sale 35,078,516 35,078,516 32,842,938 32,842,938
Securities held to maturity 23,398,480 23,966,533 18,364,587 18,506,034
Net loans 119,926,057 123,285,000 114,206,455 116,710,000
Accrued interest receivable 1,633,451 1,633,451 1,506,926 1,506,926
------------ ------------ ------------ ------------
Total $194,637,281 $198,564,277 $179,161,664 $181,806,656
============ ============ ============ ============
Financial liabilities:
Deposits $163,808,634 $164,205,000 $157,399,149 $157,717,000
Federal Home Loan Bank advances 8,745,174 9,007,000 4,814,648 4,892,000
Repurchase agreements 2,710,000 2,710,000 - -
Accrued interest payable 283,995 283,995 299,723 299,723
------------ ------------ ------------ ------------
Total $175,547,803 $176,205,995 $162,513,520 $162,908,723
============ ============ ============ ============
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Financial instruments are defined as cash, evidence of ownership interest in an
entity, or a contract which creates an obligation or right to receive or deliver
cash or another financial instrument from/to a second entity on potentially
favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments should be based upon management's judgment regarding current
economic conditions, interest rate risk, expected cash flows, future estimated
losses, and other factors as determined through various option pricing formulas
or simulation modeling. As many of these assumptions result from judgments made
by management based upon estimates which are inherently uncertain, the resulting
estimated fair values may not be indicative of the amount realizable in the sale
of a particular financial instrument. In addition, changes in assumptions on
which the estimated fair values are based may have a significant impact on the
resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are not
considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available based
upon the following assumptions:
Cash and Due from Banks, Federal Funds Sold, Accrued Interest Receivable,
Repurchase Agreements, and Accrued Interest Payable
The fair value is equal to the current carrying value.
Investment Securities
The fair value of securities held to maturity and available for sale is equal to
the available quoted market price. If no quoted market price is available, fair
value is estimated using the quoted market price for similar securities.
Loans, Deposits, and Advances from Federal Home Loan Bank
The fair value of loans is estimated by discounting the future cash flows using
a simulation model which estimates future cash flows and constructs discount
rates that consider reinvestment opportunities, operating expenses, non-interest
income, credit quality, and prepayment risk. Demand, savings, and money market
deposit accounts are valued at the amount payable on
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demand as of year end. Fair values for time deposits and Federal Home Loan Bank
borrowings are estimated using a discounted cash flow calculation that applies
contractual costs currently being offered in the existing portfolio to current
market rates being offered for deposits and borrowings of similar remaining
maturities.
Commitments to Extend Credit
The financial instruments are generally not subject to sale and estimated fair
values are not readily available. The contractual amounts of unfunded
commitments and letters of credit are presented subsequently in this report.
14. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
In the normal course of business, the Company has outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying consolidated financial
statements. The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Company uses the same credit policies in making
such commitments as it does for instruments that are included in the
consolidated balance sheet.
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Financial instruments whose contract amount represents credit risk were as
follows:
1997 1996
----------- -----------
Commitments for real estate construction $ 1,091,831 $ 553,958
Home equity lines of credit $ 2,966,769 $ 2,998,676
Credit card arrangements $ 1,248,306 $ 1,238,346
Commercial letters of credit $ 9,447,565 $ 8,461,789
Standby letters of credit $ 647,731 $ 821,847
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Standby letters of
credit generaly have fixed expiration dates or other termination clauses and may
require payment of a fee. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Company's policy for obtaining collateral, and the nature of such
collateral, is essentially the same as that involved in making commitments to
extend credit.
The Company has not been required to perform any financial guarantees during the
past two years. The Company has not incurred any losses on its commitments in
either 1997 and 1996.
Contingent Liabilities
The Company and its subsidiary are subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Bancorp.
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15. REGULATORY MATTERS
The approval of regulatory authorities is required if the total of all dividends
declared by the Bank in any calendar year exceeds net profits as defined for
that year combined with its retained net profits for the two preceding calendar
years less any required transfers to surplus. Under this formula, the amount
available for payment of dividends by the Bank to the Company in 1998, without
the approval of the regulatory authorities, is $4,005,709 plus 1998 profits
retained up to the date of the dividend declaration.
Included in cash and due from banks are required federal reserves of $1,081,000
and $1,045,000 at December 31, 1997 and 1996, respectively, for facilitating the
implementation of monetary policy by the Federal Reserve System. The required
reserves are computed by applying prescribed ratios to the classes of average
deposit balances. These are held in the form of cash on hand and/or balances
maintained directly with the Federal Reserve Bank.
16. REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by the regulators that, if undertaken,
could have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, both entities must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by the regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to average assets (as defined). Management believes, as of
December 31, 1997 and 1996, that the Company and Bank meets all capital adequacy
requirements to which they are subject.
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As of December 31, 1997, the most recent notification from the appropriate
regulatory authority has categorized the Company and Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, an entity must maintain minimum Total Risk-Based, Tier 1
Risk-Based and Tier 1 Leverage ratios at least 100 to 200 basis points above
those ratios set forth in the table below. There have been no conditions or
events since that notification that management believes have changed this
category. The capital position of the Company does not materially differ from
the Banks, therefore, the following table sets forth the Bank's capital position
and minimum requirements as of December 31:
1997 1996
------------------ ------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Total Capital (to Risk Weighted Assets)
Actual $22,129 18.08% $19,897 17.03%
For Capital Adequacy Purposes 9,792 8.00% 9,345 8.00%
To be well capitalized 12,240 10.00% 11,681 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Actual $22,163 18.11% $20,073 17.18%
For Capital Adequacy Purposes 4,896 4.00% 4,673 4.00%
To be well capitalized 7,344 6.00% 7,009 6.00%
Tier 1 Capital (to Average Assets)
Actual $22,163 11.11% $20,073 11.11%
For Capital Adequacy Purposes 7,977 4.00% 7,229 4.00%
To be well capitalized 9,971 5.00% 9,036 5.00%
17. PLAN OF MERGER
On December 22, 1997 Killbuck Bancshares, Inc. ("Killbuck") and Commercial and
Savings Bank Co. of Danville, Ohio ("Commercial") executed a letter of intent
which provides for Killbuck to acquire Commercial subject to the negotiation of
a definitive agreement comprising the specific terms and conditions for the
transaction. A definitive agreement has not been executed as of the date of this
report.
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18. PARENT COMPANY
The following are parent only condensed financial statements:
CONDENSED BALANCE SHEETS
December 31,
1997 1996
----------- ------------
ASSETS
Cash $ 28,704 $ 28,518
Investment in bank subsidiary 22,128,904 19,897,112
Other assets - 8,109
----------- -----------
Total assets $22,157,608 $19,933,739
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity $22,157,608 $19,933,739
----------- -----------
Total liabilities and shareholders' equity $22,157,608 $19,933,739
=========== ===========
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
1997 1996 1995
------ ----- -----
INCOME
Dividends from bank subsidiary $ 921,412 $ 836,791 $ 438,750
Operating expenses 8,323 9,054 9,050
---------- ---------- ----------
Income before income taxes 913,089 827,737 429,700
Income tax benefit (2,830) (3,078) (3,077)
---------- ---------- ----------
Income before equity in undistributed net income
of subsidiary 915,919 830,815 432,777
Equity in undistributed net income of subsidiary 2,089,543 1,916,166 2,193,951
---------- ---------- ----------
NET INCOME $3,005,462 $2,746,981 $2,626,728
========== ========== ==========
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18. PARENT COMPANY (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 3,005,462 $ 2,746,981 $ 2,626,728
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiary (2,089,543) (1,916,166) (2,193,951)
Amortization 8,109 8,848 8,846
Other - - 6,483
----------- ----------- -----------
Net cash provided by operating activities 924,028 839,663 448,106
----------- ----------- -----------
FINANCING ACTIVITIES
Purchase of treasury shares (312,430) (326,628) -
Proceeds from sale of treasury shares - 5,570 -
Dividends paid (611,412) (507,792) (438,750)
----------- ----------- -----------
Net cash used in financing activities (923,842) (828,850) (438,750)
----------- ----------- -----------
NET INCREASE IN CASH 186 10,813 9,356
CASH AT BEGINNING OF YEAR 28,518 17,705 8,349
----------- ----------- -----------
CASH AT END OF YEAR $ 28,704 $ 28,518 $ 17,705
=========== =========== ===========
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