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 March 31, 1999
Commission File Number 000-24147
KILLBUCK BANCSHARES, INC.
(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 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.
Yes X No
----- -----
State the number of shares outstanding for each of the issuer's classes of
common equity as of the latest practicable date:
Class: Common Stock, no par value
Outstanding at May 5, 1999: 705,331
KILLBUCK BANCSHARES, INC.
Index
Page Number
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited):
Consolidated balance sheet
March 31, 1999 and December 31, 1998 3
Consolidated statements of income
Three months ended March 31, 1999 and 1998 4
Consolidated statements of shareholders' equity
Three months ended March 31, 1999 5
Consolidated statements of cash flows
Three months ended March 31, 1999 and 1998 6
Notes to unaudited consolidated financial statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition And Results of Operations 8-12
PART II. OTHER INFORMATION 13
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SIGNATURES 14
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Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, December 31,
1999 1998
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ASSETS
Cash and cash equivalents:
Cash and amounts due from depository
institutions $ 6,869,483 $ 6,972,224
Federal funds sold 13,500,000 15,200,000
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Total cash and cash equivalents 20,369,483 22,172,224
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Investment securities:
Securities available for sale 35,314,801 39,228,084
Securities held to maturity (market
value of $30,389,000 and $28,341,531) 29,773,570 27,549,053
----------- -----------
Total investment securities 65,088,371 66,777,137
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Loans (net of allowance for loan losses of
$1,900,639 and $1,851,175) 139,390,356 135,644,314
Loans held for sale - 233,750
Premises and equipment, net 3,445,478 3,368,645
Accrued interest 1,832,284 1,629,508
Other assets 2,340,085 2,168,315
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Total assets $232,466,057 $231,993,893
=========== ===========
LIABILITIES
Deposits:
Noninterest bearing demand $ 22,262,885 $ 26,150,636
Interest bearing demand 25,323,204 25,576,971
Money market 15,662,410 12,182,491
Savings 26,248,918 25,707,998
Time 103,347,120 102,460,585
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Total deposits 192,844,537 192,078,681
Short term borrowings 2,835,002 3,335,000
Federal Home Loan Bank advances 8,186,020 8,587,302
Accrued interest and other liabilities 516,665 555,699
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Total liabilities 204,382,224 204,556,682
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SHAREHOLDERS' EQUITY
Common stock no par value: 1,000,000
shares authorized, 718,431 issued 8,846,670 8,846,670
Retained earnings 19,945,206 19,215,493
Accumulated other comprehensive income (loss) (74,555) 8,536
Treasury stock, at cost (13,100 shares) (633,488) (633,488)
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Total shareholders' equity 28,083,833 27,437,211
----------- -----------
Total liabilities and
shareholders' equity $232,466,057 $231,993,893
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
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Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
March 31,
1999 1998
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INTEREST INCOME
Interest and fees on loans $3,134,804 $2,966,046
Federal funds sold 114,993 107,344
Investment securities:
Taxable 579,799 505,863
Exempt from federal income tax 325,529 287,235
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Total interest income 4,155,125 3,866,488
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INTEREST EXPENSE
Deposits 1,874,911 1,684,812
Federal Home Loan Bank advances 142,678 147,683
Short term borrowings 18,182 22,293
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Total interest expense 2,035,771 1,854,788
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NET INTEREST INCOME 2,119,354 2,011,700
Provision for loan losses 60,000 45,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 2,059,354 1,966,700
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OTHER INCOME
Service fees on deposit accounts 112,766 95,727
Gain on sale of loans 14,808 6,180
Other income 26,540 34,289
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Total other income 154,114 136,196
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OTHER EXPENSE
Salaries and employee benefits 584,147 617,685
Occupancy expense 48,987 50,501
Equipment expense 139,570 111,296
Professional fees 73,978 68,410
Franchise tax 86,488 82,984
Other expenses 321,527 218,319
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Total other expense 1,254,697 1,149,195
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INCOME BEFORE INCOME TAXES 958,771 953,701
Income taxes 229,058 237,404
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NET INCOME $ 729,713 $ 716,297
========= =========
Earning per common share $ 1.03 $ 1.08
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Weighted Average shares outstanding 705,331 661,900
========= =========
See accompanying notes to the unaudited consolidated financial statements.
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Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999
Accumulated
Other Total
Common Retained Comprehensive Treasury Shareholders' Comprehensive
Stock Earnings Income (Loss) Stock Equity Income
----------- ----------- ------------- ---------- ------------ ------------
Balance, December 31, 1998 $ 8,846,670 $19,215,493 $ 8,536 $ (633,488) $27,437,211
Net income 729,713 729,713 $729,713
Other comprehensive income:
Net unrealized loss
on securities (83,091) (83,091) (83,091)
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Comprehensive income $646,622
---------- ----------- ---------- ---------- ----------- ========
Balance, March 31, 1999 $8,846,670 $19,945,206 $ (74,555) $ (633,488) $28,083,833
========== =========== ========== ========== ===========
See accompanying notes to the unaudited consolidated financial statements.
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Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
1999 1998
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Operating Activities
Net income $ 729,713 $ 716,297
Adjustments to reconcile net income
to net cash provided by
Operating activities:
Provision for loan losses 60,000 45,000
Gain on sale of loans (14,808) (6,180)
Provision for depreciation and
amortization 93,882 74,789
Origination of loans held for sale (1,286,625) (651,000)
Proceeds from the sale of loans 1,535,183 657,180
Federal Home Loan Bank stock dividend (14,700) (14,200)
Increase in accrued interest
and other assets (331,742) (186,337)
(Decrease) increase in accrued
expenses and other liabilities (39,034) 204,845
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Net cash provided by operating
activities 731,869 840,394
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INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 7,300,000 9,325,657
Purchases (3,498,800) (4,482,633)
Investment securities held to maturity:
Proceeds from maturities and repayments 150,000 388,675
Purchases (2,392,172) (1,120,777)
Net increase in loans (3,806,042) (3,490,669)
Purchase of premises and equipment (152,172) (72,491)
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Net cash (used in) provided by
investing activities (2,399,186) 547,762
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FINANCING ACTIVITIES
Net decrease in demand, money market
and savings deposits (120,679) (1,431,363)
Net increase in time deposits 886,535 5,049,487
Net decrease in short term borrowings (499,998) (475,000)
Repayment of Federal Home Loan
Bank advances (401,282) (154,297)
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Net cash (used in) provided by
financing activities (135,424) 2,988,827
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Net (decrease) increase in cash and
cash equivalents (1,802,741) 4,376,983
Cash and cash equivalents at beginning
of period 22,172,224 14,600,777
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Cash and cash equivalents at end of period $20,369,483 $18,977,760
=========== ===========
Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings $ 2,016,335 $ 1,857,218
=========== ===========
Income taxes $ - $ -
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See accompanying notes to the unaudited consolidated financial statements.
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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.
These statements should be read in conjunction with the consolidated
statements of and for the year ended December 31, 1998 and related notes which
are included on the Form 10-K (file no. 000-24147)
NOTE 2 EARNINGS PER SHARE
The Company currently maintains a simple capital structure; therefore, there
are no dilutive effects on earnings per share. As such, earnings per share
are calculated using the weighted number of shares for the period.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
Total assets at March 31, 1999 were approximately $232,500,000 compared to
approximately $232,000,000 at December 31, 1998.
Cash and cash equivalents decreased by approximately $1,803,000 or 8.1% from
December 31, 1998, to March 31, 1999, with liquid funds held in the form of
federal funds sold decreasing $1,700,000. These funds were used to help fund
loan growth.
Investment securities available for sale decreased by approximately $3,913,000
or 10.0% from December 31, 1998, as a result of maturities in excess of
purchases of available for sale securities. Investments held to maturity
increased approximately $2,225,000 or 8.1%. Management increases the held to
maturity investments, which are municipal securities, due to favorable tax
equivalent rates for this type of investment during the first three months of
1999.
The loan portfolio increased by approximately $3,697,000 or 2.8% from December
31, 1998, to March 31, 1999. An increase of approximately $3,982,000 occurred
in the commercial loan category while real estate and consumer loan balances
remained relatively unchanged.
Total deposits at March 31, 1999 were approximately $192,845,000 compared to
$192,079,000 at December 31, 1998. The only significant change in the major
categories of deposits was a decrease of approximately $3,888,000 in
noninterest bearing accounts and an increase of approximately $3,480,000 in
the money market accounts. Management attributes these changes to normal
transfers of public funds.
Shareholders' Equity increased by approximately by $647,000 or 2.4%, which was
mainly due to earnings of approximately $730,000 for the first three months of
1999 offset by a $83,000 decrease in the unrealized gain on securities
included in other comprehensive income. Management monitors risk-based
capital and leveraged capital ratios in order to assess compliance of the
regulatory guidelines. At March 31, 1999, the total capital ratio was 19.54%;
the Tier I capital ratio was 18.29%, and the leverage ratio was 11.70%,
compared to regulatory capital requirements of 8%, 4% and 4% respectively.
These ratios are well in excess of regulatory capital requirements.
The Bank anticipates construction to begin on its new branch in Sugarcreek,
Ohio, in the second quarter of 1999 with completion anticipated in late 1999
or early 2000.
Rapid and accurate data processing is essential to the Bank's operations.
Many computer programs that 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.g. 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.
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BANK'S OWN COMPUTERS AND SOFTWARE
The Bank has spent approximately $13,000 to upgrade its computer system and
software during the first three months of 1999. The Bank does not expect to
have material costs to address this risk through the rest of 1999. The Bank
believes that they are year 2000 compliant in this risk area. However, there
is no assurance that the year 2000 issue could not 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 for
the rest of 1999 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 who provide the Bank processing
services 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, a contingency plan is being developed
and is expected to be completed by June 30, 1999.
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1999 and 1998
------------------------------------------------------------
Total interest income of approximately $4,155,000 for the three month period
ended March 31, 1999, compares to approximately $3,866,000 for the same period
in 1998, an increase of $289,000 or 7.5%. The majority of the overall
increase in total interest income is attributed to an increase in interest and
fees on loans of approximately $169,000 or 58.5% of the overall increase. The
increase in interest and fees on loans is due primarily to increased volume in
the loan portfolio due to the loans acquired in the merger of the Commercial
and Savings Bank of Danville, Ohio with and into Killbuck Bancshares, Inc. in
November, 1998. Average loan balances were approximately $124,014,000 for the
first three months of 1998 compared to $138,220,000 for the first three months
of 1999.
Total interest expense of approximately $2,036,000 for the three month period
ending March 31, 1999, represents an increase of $181,000 from the
approximately $1,855,000 reported for the same three month period in 1998.
The increase in interest expense on deposits of approximately $190,000 is due
mainly to increases in volume due to the deposits acquired in the merger.
Average interest bearing deposits were approximately $143,489,000 for the
first three months of 1998 compared to $164,323,000 for the first three months
of 1999.
Net interest income of approximately $2,119,000 for the three months ended
March 31, 1999, compares to approximately $2,012,000 for the same three month
period in 1998, an increase of $107,000 or 5.3%.
Total other income for the three month period ended March 31, 1999, of
approximately $154,000 compares to approximately $136,000 for the same three
month period in 1998, an increase of $18,000 or 13.2%. The service fee income
on deposits increased approximately $17,000 due to an increase in the accounts
being serviced due to the merger. Gains on sale of loans increased
approximately $9,000 due to the Bank's increased involvement in offering fixed
rate loans for sale in the secondary market.
Total other expense of approximately $1,255,000 for the three months ended
March 31, 1999, compares to approximately $1,149,000 for the same three month
period in 1998. This represents an increase of $106,000 or 9.2%. Salary and
employee benefits decreased approximately $34,000 due an unexpected refund of
approximately $33,000 for employee hospitalization benefits. The increase in
other expense of approximately $103,000 was due in part to the merger which
caused an increase in data processing of approximately $19,000, advertising
and promotion of approximately $10,000, correspondent bank charges of
approximately $11,000 and goodwill amortization of approximately $28,000.
Increases in other expenses were brought about by those items that are
generally thought to be normal and recurring in nature. Net income for the
three month period ended March 31, 1999, was approximately $730,000, an
increase of $14,000 or 2.0% from the approximately $716,000 reported at March
31, 1998.
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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 amounts due from depository institutions and federal funds sold
totaled approximately $20,369,000 at March 31, 1999. These assets provide the
primary source of liquidity for the Bank. In addition, management has
designated a substantial portion of the investment portfolio, approximately
$35,315,000 as available for sale and has an available unused line of credit
of approximately $8,814,000 with the Federal Home Loan Bank of Cincinnati to
provide additional sources of liquidity at March 31, 1999.
Cash was provided during the three month period ended March 31, 1999, mainly
from a net increase in deposits of $766,000 and the maturity of investment
securities of $7.5 million. Cash was used during the three month period ended
March 31, 1999, mainly to fund a net increase in loans of $3.8 million, and
for the purchase of investment securities of $5.9 million. In addition
$901,000 was also used to reduce Federal Home Loan Bank advances and short
term borrowings during the first three months of 1999. Cash and cash
equivalents totaled $20.4 million at March 31, 1999, a decrease of $1.8
million from $22.2 million at December 31,1998.
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.
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Risk Elements
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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 March 31, 1999, and December 31,
1998. 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.
March 31, December 31,
1999 1998
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(dollars in thousands)
Loans on nonaccrual basis $ 99 $ 21
Loans past due 90 days or more 316 155
Renegotiated loans - -
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Total nonperforming loans 415 176
Other real estate 73 73
Repossessed assets - -
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Total nonperforming assets $488 $249
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Nonperforming assets as a percent of total assets .29% .13%
==== ====
Nonperforming loans as a percent of total assets .18% .08%
==== ====
Nonperforming assets as a percent of total assets .21% .11%
==== ====
Management monitors impaired loans on a continual basis. As of March 1999,
impaired loans had no material effect on the company's financial position or
results from operations.
The allowance for loan losses at March 31, 1999, totaled approximately
$1,901,000 or 1.3% of total loans as compared to approximately $1,851,000 or
1.3% at December 31, 1998. Provisions for loan losses were $60,000 for the
three months ended March 31, 1999 and $45,000 at March 31, 1998.
The level of funding for the provision is a reflection of the overall increase
in loans and is not an indication of any decline in the quality of the loan
portfolio. Nonperforming loans consist of approximately $89,000 in one to
four family residential mortgages, $86,000 in commercial real estate, $211,000
in commercial loans and $29,000 in consumer loans. The collateral
requirements on such loans reduce the risk of potential losses to an
acceptable level in management's opinion.
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.
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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 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
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Luther E. Proper
President and
Chief Executive Officer
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