SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998
COMMISSION FILE NUMBER 000-24147
KILLBUCK BANCSHARES, INC.
(Exact name of registrant as specified in its Charter)
OHIO 34-1700284
- ---- ----------
(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 and zip code)
(330) 276-2771
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes x (2) No ___
State the number of shares outstanding of each of the issues classes of
commerce equity as of the latest practicable date:
Class: Common stock, no par value outstanding at October 30,1998: 66l,900
KILLBUCK BANCSHARES, INC.
Index
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) as of
September 30, 1998 and December 31, 1997 3
Consolidated Statement of Income (unaudited)
For the nine months ended September 30, 1998 and 1997 4
Consolidated Statement of Income (unaudited)
For the three months ended September 30, 1998 and 1997 5
Consolidated Statement of Changes in Shareholders' Equity (unaudited)
For the nine months ended September 30, 1998 6
Consolidated Statement of Cash Flows (unaudited)
For the nine months ended September 30, 1998 and 1997 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Default Upon Senior Securities 15
Item 4. Submissions of Matters to a Vote of
Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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Killbuck Bancshares, Inc.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository
institutions $ 6,467,086 $ 6,300,777
Federal funds sold 18,700,000 8,300,000
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Total cash and cash equivalents 25,167,086 14,600,777
------------ ------------
Investment securities:
Securities available for sale 33,340,951 35,078,516
Securities held to maturity (market value
of $27,568,804 and $23,966,533) 26,664,668 23,398,480
------------ ------------
Total investment securities 60,005,619 58,476,996
------------ ------------
Loans (net of unearned income of $338,045
and $363,127) 123,896,855 121,670,643
Less: allowance for loan losses 1,845,209 1,744,586
------------ ------------
Net loans 122,051,646 119,926,057
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Premises and equipment, net 2,936,531 2,808,078
Accrued interest 1,660,478 1,633,451
Other assets 575,308 463,271
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Total assets $212,396,668 $197,908,630
============ ============
LIABILITIES
Deposits:
Noninterest bearing demand $ 21,420,264 $ 21,592,573
Interest bearing demand 36,004,469 37,574,203
Savings 21,142,022 19,376,757
Time 96,532,453 85,265,101
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Total deposits 175,099,208 163,808,634
Securities sold under repurchase agreements 2,920,002 2,710,000
Federal Home Loan Bank advances 9,577,500 8,745,174
Accrued interest and other liabilities 527,146 487,213
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Total liabilities 188,123,856 175,751,021
============ ============
SHAREHOLDERS' EQUITY
Common stock - 1,000,000 shares authorized,
675,000 issued with no par value at
September 30, 1998 and December 31, 1997 2,700,000 2,700,000
Capital surplus 3,106,500 3,106,500
Retained earnings 18,944,802 17,018,414
Net unrealized gain (loss) on securities
available for sale 154,998 (33,817)
Treasury stock, at cost (13,100 shares) (633,488) (633,488)
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Total shareholders' equity 24,272,812 22,157,609
------------ ------------
Total liabilities and shareholders'
equity $212,396,668 $197,908,630
============ ============
See accompanying notes to the unaudited consolidated financial statements.
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Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Nine Months Ended
September 30,
1998 1997
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INTEREST INCOME
Interest and fees on loans $ 8,977,587 $ 8,537,222
Federal funds sold 422,829 246,853
Investment securities:
Taxable 1,574,509 1,783,404
Tax exempt 892,121 735,891
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Total interest income 11,867,046 11,303,370
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INTEREST EXPENSE
Deposits 5,285,987 5,112,853
Federal Home Loan Bank advances 461,705 319,657
Securities sold under repurchase agreements 60,017 20,939
------------ ------------
Total interest expense 5,807,709 5,453,449
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NET INTEREST INCOME 6,059,337 5,849,921
Provision for loan losses 135,000 135,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 5,924,337 5,714,921
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OTHER INCOME
Service fees on deposit accounts 299,971 281,330
Other income 80,428 45,220
Gain on sale of loans 25,786 675
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Total other income 406,185 327,225
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OTHER EXPENSE
Salaries and employee benefits 1,703,361 1,578,082
Occupancy expense 137,109 130,466
Equipment expense 348,796 337,004
Professional fees 153,131 115,896
Franchise tax 249,123 224,057
Other expenses 744,042 656,378
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Total other expense 3,335,562 3,041,883
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INCOME BEFORE INCOME TAXES 2,994,960 3,000,263
Income taxes 737,622 815,786
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NET INCOME $ 2,257,338 $ 2,184,477
============ ============
PER SHARE DATA
Earning per common share $ 3.41 $ 3.27
============ ============
Average shares outstanding 661,900 667,247
============ ============
See accompanying notes to the unaudited consolidated financial statements.
- -4-
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
September 30,
1998 1997
------------ ------------
INTEREST INCOME
Interest and fees on loans $ 2,999,104 $ 2,926,898
Federal funds sold 211,881 93,237
Investment securities:
Taxable 554,716 606,642
Tax exempt 308,410 257,566
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Total interest income 4,074,111 3,884,343
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INTEREST EXPENSE
Deposits 1,845,022 1,767,294
Federal Home Loan Bank advances 162,785 126,254
Securities sold under repurchase agreements 19,448 13,421
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Total interest expense 2,027,255 1,906,969
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NET INTEREST INCOME 2,046,856 1,977,374
Provision for loan losses 45,000 45,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 2,001,856 1,932,374
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OTHER INCOME
Service fees on deposit accounts 99,890 94,109
Other income 25,904 16,850
Gain on sale of loans 6,811 675
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Total other income 132,605 111,634
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OTHER EXPENSE
Salaries and employee benefits 574,615 575,201
Occupancy expense 51,864 48,606
Equipment expense 116,369 114,611
Professional fees 21,197 26,722
Franchise tax 83,155 74,828
Other expenses 285,290 219,077
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Total other expense 1,132,490 1,059,045
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INCOME BEFORE INCOME TAXES 1,001,971 984,963
Income taxes 254,463 266,095
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NET INCOME $ 747,508 $ 718,868
============ ============
PER SHARE DATA
Earning per common share $ 1.13 $ 1.08
============ ============
Average shares outstanding 661,900 667,750
============ ============
See accompanying notes to the unaudited consolidated financial statements.
- -5-
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Net
Unrealized
Gain (Loss) on
Securities Total Other
Common Capital Retained Available for Treasury Shareholders' Comprehensive
Stock Surplus Earnings Sale Stock Equity Income
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 2,700,000 $ 3,106,500 $17,018,414 $ (33,817) $ (633,488) $22,157,609
Net income 2,257,338 2,257,338 $ 2,257,338
Other comprehensive income
Net unrealized gain
on securities 188,815 188,815 188,815
Dividends paid (330,950) (330,950)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 1998 $ 2,700,000 $ 3,106,500 $18,944,802 $ 154,998 $ (633,488) $24,272,812 $ 2,446,153
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to the unaudited consolidated financial statements.
- -6-
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
1998 1997
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Operating Activities
Net income $ 2 ,257,338 $ 2,184,477
Adjustments to reconcile net income to net
cash provided by Operating activities:
Provision for loan losses 135,000 135,000
Provision for depreciation and amortization 210,457 191,829
Origination of loans held for sale (2,822,349) (67,500)
Proceeds from the sale of loans 2,848,135 68,175
Increase in accrued interest and
other assets (230,968) (149,160)
Increase (decrease) in accrued expenses and
other liabilities 34,567 (152,748)
Gain on sale of loans (25,786) (675)
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Net cash provided by operating activities 2,406,394 2,209,398
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INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 19,569,418 7,759,476
Purchases (17,522,051) (12,555,748)
Investment securities held to maturity:
Proceeds from maturities and repayments 1,159,585 604,871
Purchases (4,450,837) (4,511,879)
Net increase in loans (2,260,589) (5,349,474)
Purchase of premises and equipment (337,563) (83,482)
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Net cash used for investing activities (3,842,037) (14,136,236)
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FINANCING ACTIVITIES
Net increase in deposits 11,290,574 8,549,129
Proceeds from advances from Federal Home
Loan Bank 1,500,000 2,900,000
Payments on advances from Federal Home
Loan Bank (667,674) (249,269)
Net increase in repurchase agreements 210,002 1,645,000
Dividends paid (330,950) (293,700)
Purchase of treasury shares - (277,540)
------------ ------------
Net cash provided by financing activities 12,001,952 12,273,620
------------ ------------
Net increase in cash and cash equivalents 10,566,309 346,782
Cash and cash equivalents at beginning of period 14,600,777 12,240,758
------------ ------------
Cash and cash equivalents at end of period $ 25,167,086 $ 12,587,540
============ ============
Supplemental Disclosures of Cash Flows Information
Cash paid during the period for:
Interest on deposits and borrowings $ 5,811,554 $ 5,493,854
============ ============
Income taxes $ 755,913 $ 806,332
============ ============
See accompanying notes to the unaudited consolidated financial statements.
- -7-
Killbuck Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Killbuck
Bancshares, Inc. (the "Company") and its wholly-owned subsidiary Killbuck
Savings Bank Company (the "Bank"). All significant intercompany balances and
transactions have been eliminated in the consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do
not necessarily include all information that would be included in audited
financial statements. The information furnished reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results of operations. All such adjustments are of a normal recurring nature.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year or any other
interim period.
NOTE 2 - EARNINGS PER SHARE
Earnings per share are calculated based upon the weighted number of shares of
stock outstanding during the period. In February, 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Statement No. 128 replaced the
previous reporting requirement of primary and fully diluted earnings per share
with basic and diluted earnings per share. The Company maintains a simple
capital structure, therefore, there is no dilutive effect on earning per
share.
NOTE 3 - STOCK SPLIT
On April 13, 1998 the board of directors authorized an increase in the
authorized common shares from 200,000 to 1,000,000 shares and also authorized
a 5 for 1 stock split of common stock to shareholders of record on May 1,1998.
Per share amounts in the accompanying financial statements have been adjusted
for the split.
NOTE 4 - COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted the Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income." In adopting Statement No.
130, the Company is required to present comprehensive income and its
components in a full set of general purpose financial statements. The Company
has elected to report the effects of Statement No. 130 as part of the
Statement of Changes in Shareholders' Equity.
NOTE 5 - PLAN OF MERGER
On April 13, 1998, Killbuck Bancshares, Inc. (Killbuck) and The Commercial and
Savings Bank Co. (Commercial) of Danville, Ohio, executed an agreement and
plan of reorganization to merge subject to shareholder and regulatory
approval. Under the terms of the agreement, all outstanding shares of
Commercial will be exchanged for 2.1585 shares of Killbuck. This exchange
ratio of 2.1585 is adjusted for Killbuck's five for one stock split on May 1,
1998. All regulatory approvals have been received and the vote by
Commercial's shareholders on the merger is scheduled for November 19, 1998,
with a merger effective date of November 21, 1998 scheduled.
- -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
Total assets at September 30, 1998, increased by approximately $14,488,000 or
7.3% for the first nine months of 1998.
Cash and cash equivalents increased approximately $10,566,000 or 72.4% from
December 31, 1997, to September 30, 1998, with liquid funds held in the form
of federal funds sold increasing $10,400,000. The increase in federal funds
is due to a slowdown in loan growth and the current investment interest rate
environment.
Investment securities increased slightly by approximately $1,529,000 or 2.6%
from December 31, 1997 to September 30, 1998. The composition changed
slightly with securities available for sale decreasing by approximately
$1,738,000 due to maturities and securities held to maturity increasing by
approximately $3,266,000. Management classified new purchases as held to
maturity based upon their intent and ability to hold these securities.
The loan portfolio increased by approximately $2,226,000 or 1.8% from December
31, 1997, to September 30, 1998. Each major loan category of mortgages,
commercial and consumer increased for the first nine months of 1998 by
approximately $1,462,000, $523,000 and $241,000 respectively.
Total deposits increased by approximately $11,291,000 or 6.9% for the first
nine months of 1998. Savings deposits increased by approximately $1,765,000
or 9.1%. Interest-bearing demand deposits decreased by approximately
$1,570,000 or 4.2%, and time deposits increased by approximately $11,267,000
or 13.2%. Management attributes this decrease/increase to current depositors
transferring deposits from interest bearing demand accounts to time accounts
and new customers opening time deposit accounts due to the current competitive
rates being offered by the Bank.
Shareholders' Equity increased by approximately $2,115,000 or 9.5%, which was
mainly due to earnings of $2,257,000 for the first nine months of 1998 reduced
by the cash dividends paid in June, 1998 of $331,000, and an increase in the
net unrealized gain on securities of $189,000. Management monitors risk-based
capital and leveraged capital ratios in order to assess compliance of the
regulatory guidelines. At September 30, 1998, the total capital ratio was
20.81%; the Tier I capital ratio was 18.78%, and the leverage ratio was
11.34%, compared to regulatory capital requirements of 8%, 4% and 4%
respectively. These ratios are well in excess of regulatory capital
requirements.
The Bank has purchased land in Sugarcreek, Ohio for the purpose of building a
branch facility. A branch application for Sugarcreek, Ohio has been filed
with the proper regulatory agencies. The bank anticipates construction to
begin in the spring of 1999 with completion anticipated in the fall of 1999.
- -9-
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND 1997
Total interest income of approximately $11,867,000 for the nine month period
ended September 30, 1998, compares to approximately $11,303,000 for the same
period in 1997, an increase of $564,000 or 5.0%. Federal fund interest income
increased $176,000 while investment income decreased $52,000. The majority of
the overall increase in total interest income is attributed to an increase in
interest and fees on loans of approximately $440,000 or 78.0% of the overall
increase. The daily average balances of loans outstanding for the nine month
periods of 1998 and 1997 respectively were $124,919,000 and $119,221,000, an
increase of approximately $5,698,000.
Total interest expense of approximately $5,808,000 for the nine month period
ending September 30, 1998, represents an increase of $354,000 from the
approximately $5,454,000 reported for the same nine month period in 1997. The
increase in interest expense on deposits is approximately $173,000. The daily
average balances of interest bearing demand deposits for the nine month period
of 1998 and 1997, respectively, were $36,694,000 and $36,727,000, a decrease
of approximately $33,000. The daily average balances of savings accounts for
the nine month period of 1998 and 1997, respectively, were $19,784,000 and
$19,477,000, an increase of $307,000. The daily average balances of time
deposits for the nine month periods of 1998 and 1997, respectively, were
$90,897,000 and $88,256,000 an increase of approximately $2,641,000. The
interest expense on Federal Home Loan Bank advances increased by approximately
$142,000. The daily average balances of Federal Home Loan Bank advances
outstanding for the nine month periods of 1998 and 1997, respectively, were
$9,179,000 and $6,329,000, an increase of approximately $2,850,000. The
interest expense on securities sold under repurchase agreements increased by
approximately $39,000. The daily average balances of securities sold under
repurchase agreements outstanding for the nine month periods of 1998 and 1997,
respectively, were $2,492,000 and $784,000, an increase of approximately
$1,708,000.
Net interest income of approximately $6,059,000 for the nine months ended
September 30, 1998, compares to approximately $5,850,000 for the same nine
month period in 1997, an increase of $209,000 or 3.6%.
Total other income for the nine month period ended September 30, 1998, of
approximately $406,000 compares to approximately $327,000 for the same nine
month period in 1997, an increase of $79,000 or 24.2%. Income from the
alternative investment service the Bank introduced in 1997 accounted for
$20,300 or 25.7% of this increase. The Bank also started to sell fixed rate
loans in the secondary market in 1997. The gains from the sale of fixed rate
loans in the secondary market accounted for $25,000 or 31.6% of this increase
with the remaining increase attributed to normal activity.
- -10-
Total other expense of approximately $3,336,000 for the nine months ended
September 30, 1998, compares to approximately $3,042,000 for the same nine
month period in 1997. This represents an increase of $294,000 or 9.7%. Net
increases in salaries and employee benefits expense of approximately $125,000,
professional fees of $37,000 and other expenses of approximately $88,000 were
the major contributors to the overall net increase. The increase in salary
and employee benefits is attributed to normal annual salary increases, staff
additions and increased hospitalization premiums and pension costs. The
increase in professional fees is mainly attributed to costs of becoming a
securities and exchange registrant. The increase in other expenses were
brought about by merger expenses and those items that are generally thought to
be normal and recurring in nature. Net income for the nine month period ended
September 30, 1998, was approximately $2,257,000, an increase of $73,000 or
3.3% from the approximately $2,184,000 reported at September 30, 1997.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1998 AND 1997.
Total interest income of approximately $4,074,000 for the three month period
ended September 30, 1998, compares to approximately $3,884,000 for the same
period in 1997, an increase of $190,000 or 4.9%. Interest and fees on loans
and interest on federal funds sold increased respectively approximately
$72,000 and $119,000 due mainly to an increase in the balances outstanding.
These increases were offset by a slight decrease in investment income of
approximately $1,000.
Total interest expense of approximately $2,027,000 for the three month period
ending September 30, 1998, represents an increase of $120,000 from the
approximately $1,907,000 reported for the same three month period in 1997.
The majority of the overall increase is attributed to an increase in interest
expense on deposits of approximately $78,000 or 65.0% of the overall increase.
Interest expense on Federal Home Loan Bank advances and securities sold under
repurchase agreements increased approximately $36,000 and $6,000 respectively.
These increases are attributed mainly to an increase in the balances
outstanding.
Net interest income of approximately $2,047,000 for the three months ended
September 30, 1998, compares to approximately $1,977,000 for the same three
month period in 1997, an increase of $70,000 or 3.5%.
Total other income for the three month period ended September 30, 1998, of
approximately $133,000 compares to approximately $112,000 for the same three
month period in 1997, an increase of $21,000 or 18.8%. Gains from the sale of
fixed rate loans in the secondary market which the Bank started in 1997
accounted for $6,000 or 28.6% of this increase with the remaining increase
attributed to normal activity.
Total other expense of approximately $1,132,000 for the three months ended
September 30, 1998, compares to approximately $1,059,000 for the same three
month period in 1997. This represents and increase of $73,000 or 6.9%. Net
increases in franchise tax of approximately $8,000 and other expenses of
$66,000 were major contributors to the overall net increases. The increase in
other expenses were brought about by merger expenses and those items that are
generally thought to be normal and recurring in nature. Net income for the
three month period ended September 30, 1998 was approximately $748,000, an
increase of $29,000 or 4.0% from the approximately $719,000 reported for the
same three month period in 1997.
- -11-
LIQUIDITY
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.
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, 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 time deposits and
demand deposit withdrawals, to invest in other interest-earning assets, to
maintain liquidity, and to meet operating expenses.
Cash and cash equivalents totaled $25,167,000 at September 30, 1998, an
increase of $10,566,000 from $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,
approximately $33,341,000 as available for sale and has an available line of
credit with the Federal Home Loan Bank of Cincinnati with a borrowing limit of
$8,000,000 at September 30, 1998, to provide additional sources of liquidity.
Cash was provided during the nine month period ended September 30, 1998,
mainly from operating activities of $2,406,000, a net increase in deposits of
$11,291,000 and a net increase in Federal Home Loan Bank advances of $832,000.
Cash was used during the nine month period ended September 30, 1998, mainly to
fund a net increase in loans of $2,261,000 and investments of $1,244,000.
Management is not aware of any conditions, including any regulatory
recommendations or requirements, which would adversely affect its liquidity or
ability to meet its funding needs in the normal course of business.
- -12-
RISK ELEMENTS
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other
real estate loans and repossessed assets at September 30, 1998, and December
31, 1997. A loan is classified as nonaccrual when, in the opinion of
management, there are doubts about collectability of interest and principal.
At the time the accrual of interest is discontinued, future income is
recognized only when cash is received. Renegotiated loans are those loans
which terms have been renegotiated to provide a reduction or deferral of
principal or interest as of result of the deterioration of the borrower.
September 30, December 31,
1998 1997
(dollars in thousands)
---------- ----------
Loans on nonaccrual basis $ 63 $ 121
Loans past due 90 days or more 184 75
Renegotiated loans - -
---------- ----------
Total nonperforming loans 247 196
Other real estate 73 -
Repossessed assets - -
---------- ----------
Total nonperforming assets $ 320 $ 196
========== =========
Nonperforming loans as a percent of total loans .20% .16%
========== =========
Nonperforming assets as a percent of total assets .15% .10%
========== =========
Allowance for loan losses to nonperforming loans 747.05% 890.09%
========== =========
Management monitors impaired loans on a continual basis. As of September 30,
1998, impaired loans had no material effect on the Bank's financial position
or results of operations.
The allowance for loan losses at September 30, 1998, totaled approximately
$1,845,000 or 1.49% of total loans as compared to $1,745,000 or 1.43% at
December 31, 1997. Provisions for loan losses were $135,000 for both nine
month periods ended September 30, 1998 and 1997.
Management performs a quarterly evaluation of the allowance for loan losses.
The evaluation incorporates internal loan review, actual historical losses, as
well as any negative economic trends in the local market. The evaluation is
presented to and approved by the Board of Directors of the Bank. Management,
through the use of the quarterly evaluation, believes that the allowance is
maintained at an adequate level. However, there can be no assurance that the
current allowance for loans losses will be adequate to absorb all future loan
losses.
- -13-
YEAR 2000 EVALUATION
Rapid and accurate data processing is essential to the Bank's operations.
Many computer programs can only distinguish the final two digits of the year
entered (a common programming practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt
to compute payment, interest, delinquency and other data. The Bank has been
evaluating both information technology (computer systems) and non-information
technology systems (e.q. vault timers, electronic door lock and elevator
controls). Based upon such evaluations, management has determined that the
Bank has year 2000 risk in three areas: (1) Bank's own computer and software,
(2) computers of others used by the Bank's borrowers, and (3) computers of
others who provide the Bank with processing of certain services.
BANK'S OWN COMPUTERS AND SOFTWARE. The Bank expects to spend approximately
$65,000 through December 31, 1998 to upgrade its computer system and software.
This upgrade is expected to eliminate the year 2000 risk. The Bank does not
expect to have material costs to address this risk after December 31, 1998.
At September 30, 1998 approximately $40,000 has been expensed. The Bank
expects, though there is no assurance, to be year 2000 compliant in this risk
area by December 31, 1998. However, if such modifications are not made or
completed on a timely basis, the year 2000 issue could have a material impact
on the operations of the Bank.
COMPUTERS OF OTHERS USED BY OUR BORROWERS. The Bank has evaluated most of
their borrowers and does not believe the year 2000 problem should, on an
aggregate basis, impact their ability to make payments to the Bank. The Bank
believes that most of their residential borrowers are not dependent on their
home computers for income and that none of their commercial borrowers are so
large that a year 2000 problem would render them unable to collect revenue or
rent and, in turn, continue to make loan payments to the Bank. The Bank does
not expect any material costs to address this risk area and believes they are
year 2000 compliant in this risk area.
COMPUTERS OF OTHERS WHO PROVIDE US WITH PROCESSING OF CERTAIN SERVICES. This
risk is primarily focused on vendors that provide the Bank processing
servicing in the areas of credit cards, individual retirement accounts and
automatic teller machine transactions. All of these vendors have represented
to the Bank that they are year 2000 compliant.
CONTINGENCY PLAN. The Bank has continually monitored its year 2000 situation
by thoroughly assessing its systems and programs. Although the Bank
anticipates its systems and programs to be year 2000 compliant by December 31,
1998, a contingency plan agreement with Bankers Systems has been executed.
This agreement includes a provision for supplying the Bank with forms
necessary for day-to-day operations, should the computer based loan and
deposit documentation systems fail.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in the rights of the Company's security holders
None
Item 3 - Defaults by the Company on its senior securities
None
Item 4 - Results of votes of security holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a) The following exhibits are included in this report or incorporated
herein by reference:
3(i) Articles of Incorporation of Killbuck Bancshares, Inc.*
3(ii) Code of Regulations of Killbuck Bancshares, Inc.*
10 Agreement and Plan of Reorganization with Commercial and
Savings Bank Co.*
21 Subsidiaries of Registrant*
27 Financial Data Schedule (in electronic filing only)
b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
*Incorporated by reference to an identically numbered exhibit to
the Form 10 (File No. 0-24147) filed with SEC on April 30, 1998
and subsequently amended on July 8, 1998 and July 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Killbuck Bancshares, Inc.
Date: _______________ By: /s/Luther E. Proper
-------------------------------
Luther E. Proper
President and Chief Executive Officer
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