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, 1999
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
--------------------------------------
(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 October 26, 1999: 705,331
KILLBUCK BANCSHARES, INC.
Index
Page Number
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheet (unaudited) as of
September 30, 1999 and December 31, 1998 3
Consolidated Statement of Income (unaudited)
For the nine months ended September 30, 1999 and 1998 4
Consolidated Statement of Income (unaudited)
For the three months ended September 30, 1999 and 1998 5
Consolidated Statement of Changes in Shareholders'
Equity (unaudited)
For the nine months ended September 30, 1999 6
Consolidated Statement of Cash Flows (unaudited)
For the nine months ended September 30, 1999 and 1998 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 9-16
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Default Upon Senior Securities 17
Item 4. Submissions of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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- -2-
Killbuck Bancshares, Inc.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents:
Cash and amounts due from
depository institutions $ 8,669,587 $ 6,972,224
Federal funds sold 9,700,000 15,200,000
------------ ------------
Total cash and cash equivalents 18,369,587 22,172,224
------------ ------------
Investment securities:
Securities available for sale 39,997,904 39,228,084
Securities held to maturity (market
value of $33,250,567 and $28,341,531) 33,683,013 27,549,053
------------ ------------
Total investment securities 73,680,917 66,777,137
------------ ------------
Loans (net of allowance for loan losses
of $1,948,782 and $1,851,175) 136,718,572 135,644,314
Loans held for sale - 233,750
Premises and equipment, net 3,582,801 3,368,645
Accrued interest 2,030,380 1,629,508
Other assets 2,242,772 2,168,315
------------ ------------
Total assets $236,625,029 $231,993,893
============ ============
LIABILITIES
Deposits:
Noninterest bearing demand $ 27,606,639 $ 26,150,636
Interest bearing demand 26,105,712 25,576,971
Money market 10,371,766 12,182,491
Savings 27,484,512 25,707,998
Time 104,698,015 102,460,585
------------ ------------
Total deposits 196,266,644 192,078,681
Short term borrowings 3,520,001 3,335,000
Federal Home Loan Bank advances 7,575,587 8,587,302
Accrued interest and other liabilities 398,571 555,699
------------ ------------
Total liabilities 207,760,803 204,556,682
------------ ------------
SHAREHOLDERS' EQUITY
Common stock no par value:
1,000,000 shares authorized,
718,431 issued 8,846,670 8,846,670
Retained earnings 21,011,226 19,215,493
Accumulated other comprehensive
income (loss) (360,182) 8,536
Treasury stock, at cost (13,100 shares) (633,488) (633,488)
------------ ------------
Total shareholders' equity 28,864,226 27,437,211
------------ ------------
Total liabilities and shareholders'
equity $236,625,029 $231,993,893
============ ============
See accompanying notes to the unaudited consolidated financial statements.
- -3-
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Nine Months Ended
September 30,
1999 1998
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INTEREST INCOME
Interest and fees on loans $ 9,458,423 $ 8,977,587
Federal funds sold 409,967 422,829
Investment securities:
Taxable 1,703,850 1,573,004
Tax exempt 1,055,058 893,626
----------- -----------
Total interest income 12,627,298 11,867,046
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INTEREST EXPENSE
Deposits 5,646,256 5,285,987
Federal Home Loan Bank advances 409,555 461,705
Short term borrowings 54,576 60,017
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Total interest expense 6,110,387 5,807,709
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NET INTEREST INCOME 6,516,911 6,059,337
Provision for loan losses 180,000 135,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 6,336,911 5,924,337
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OTHER INCOME
Service charges on deposit accounts 355,352 299,971
Gain on sale of loans 36,870 25,786
Other income 87,105 80,428
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Total other income 479,327 406,185
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OTHER EXPENSE
Salaries and employee benefits 1,899,644 1,703,361
Occupancy expense 131,744 137,109
Equipment expense 421,725 348,796
Professional fees 213,357 153,131
Franchise tax 268,874 249,123
Other expenses 968,503 744,042
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Total other expense 3,903,847 3,335,562
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INCOME BEFORE INCOME TAXES 2,912,391 2,994,960
Income taxes 693,459 737,622
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NET INCOME $ 2,218,932 $ 2,257,338
=========== ===========
Earnings per share $ 3.15 $ 3.41
=========== ===========
Average shares outstanding 705,331 661,900
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
- -4-
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
September 30,
1999 1998
----------- ----------
INTEREST INCOME
Interest and fees on loans $ 3,160,547 $2,999,104
Federal funds sold 128,063 211,881
Investment securities:
Taxable 595,528 553,211
Tax exempt 373,166 309,915
----------- ----------
Total interest income 4,257,304 4,074,111
----------- ----------
INTEREST EXPENSE
Deposits 1,871,096 1,845,022
Federal Home Loan Bank advances 129,795 162,785
Short term borrowings 19,176 19,448
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Total interest expense 2,020,067 2,027,255
----------- ----------
NET INTEREST INCOME 2,237,237 2,046,856
Provision for loan losses 60,000 45,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 2,177,237 2,001,856
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OTHER INCOME
Service charges on deposit accounts 121,556 99,890
Gain on sale of loans 5,933 6,811
Other income 28,276 25,904
----------- ----------
Total other income 155,765 132,605
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OTHER EXPENSE
Salaries and employee benefits 723,584 574,615
Occupancy expense 47,663 51,864
Equipment expense 137,833 116,369
Professional fees 55,122 21,197
Franchise tax 92,114 83,155
Other expenses 317,227 285,290
----------- ----------
Total other expense 1,373,543 1,132,490
----------- ----------
INCOME BEFORE INCOME TAXES 959,459 1,001,971
Income taxes 220,932 254,463
----------- ----------
NET INCOME $ 738,527 $ 747,508
=========== ===========
Earnings per share $ 1.05 $ 1.13
=========== ===========
Average shares outstanding 705,331 661,900
=========== ===========
See accompanying notes to the unaudited consolidated financial
statements.
- -5-
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 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 2,218,932 2,218,932 $2,218,932
Other comprehensive income:
Net unrealized loss on
securities (368,718) (368,718) (368,718)
----------
Comprehensive income $1,850,214
==========
Dividends paid (423,199) (423,199)
---------- ----------- --------- --------- -----------
Balance, September 30, 1999 $8,846,670 $21,011,226 $(360,182) $(633,488) $28,864,226
========== =========== ========= ========= ===========
See accompanying notes to the unaudited consolidated financial statements.
- -6-
Killbuck Bancshares, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
1999 1998
------------ -----------
Operating Activities
Net income $ 2,218,932 $ 2,257,338
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 180,000 135,000
Depreciation, amortization and accretion, net 287,594 210,457
Gain on sale of loans (36,870) (25,786)
Origination of loans held for sale (3,422,150) (2,822,349)
Proceeds from the sale of loans 3,692,771 2,848,135
Loss on sale of real estate 9,104 -
Federal Home Loan Bank stock dividend (44,400) (43,000)
Increase in accrued interest and other assets (329,047) (230,968)
(Decrease) increase in accrued expenses and
other liabilities (157,129) 34,567
------------ -----------
Net cash provided by operating activities 2,398,805 2,363,394
------------ -----------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 12,272,655 19,569,418
Purchases (13,593,307) (17,479,051)
Investment securities held to maturity:
Proceeds from maturities and repayments 555,450 1,159,585
Purchases (6,742,769) (4,450,837)
Net increase in loans (1,254,258) (2,260,589)
Purchase of premises and equipment (450,597) (337,563)
Decrease in other real estate owned 73,334 -
------------ -----------
Net cash used in investing activities (9,139,492) (3,799,037)
------------ -----------
FINANCING ACTIVITIES
Net increase (decrease)in demand,
money market and savings deposits 1,950,533 (839,051)
Increase in time deposits 2,237,430 12,129,625
Proceeds from Federal Home Loan Bank advances - 1,500,000
Repayment of Federal Home Loan Bank advances (1,011,715) (667,674)
Net increase in short term borrowings 185,001 210,002
Dividends paid (423,199) (330,950)
------------ -----------
Net cash provided by financing activities 2,938,050 12,001,952
------------ -----------
Net (decrease) increase in cash and cash
equivalents (3,802,637) 10,566,309
Cash and cash equivalents at beginning
of period 22,172,224 14,600,777
------------ -----------
Cash and cash equivalents at end of period $ 18,369,587 $25,167,086
============ ============
Supplemental Disclosures of Cash Flows Information
Cash paid during the period for:
Interest on deposits and borrowings $ 6,114,723 $ 5,811,554
============ ============
Income taxes $ 710,417 $ 755,913
============ ============
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.
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.
- -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999
-------------------------------------------------------
AND DECEMBER 31, 1998
---------------------
Total assets at September 30, 1999 were approximately
$236,625,000 compared to approximately $231,994,000 at December
31, 1998.
Cash and cash equivalents decreased by approximately $3,803,000
or 17.2% from December 31, 1998, to September 30, 1999, with
liquid funds held in the form of federal funds sold decreasing
$5,500,000 and cash and amounts due from depository institutions
increasing approximately $1,697,000. These funds were used to
help fund loan growth and the purchases of securities held to
maturity.
Investment securities available for sale increased by
approximately $770,000 or 2.0% from December 31, 1998, as a
result of purchases in excess of maturities of available for sale
securities. Investments held to maturity increased approximately
$6,134,000 or 22.3%. Management increased the held to maturity
investments, which are municipal securities, due to favorable tax
equivalent rates for this type of investment during the first
nine months of 1999.
The loan portfolio increased by approximately $938,000 or .7%
from December 31, 1998, to September 30, 1999. An increase of
approximately $1,360,000 occurred in the commercial loan category
while real estate and consumer loan balances decreased
approximately $149,000 and $273,000 respectively. Management
attributes the increase in commercial lending to the local
economic conditions and the decline in real estate loans to the
Bank selling their new fixed rate loans in the secondary market
along with normal repayments.
Total deposits at September 30, 1999 were approximately
$196,267,000 compared to $192,079,000 at December 31, 1998, an
increase of $4,188,000 or 2.2%. Noninterest bearing accounts
increased approximately $1,456,000, interest bearing demand and
money market accounts decreased approximately $1,282,000, savings
accounts increased approximately $1,777,000, and time deposit
accounts increased approximately $2,237,000. Management
attributes these changes to normal activity within the deposit
accounts.
Shareholders' Equity increased by approximately $1,427,000 or
5.2%, which was mainly due to net earnings of approximately
$2,219,000 for the first nine months of 1999, offset by a
$369,000 unrealized loss on securities included in other
comprehensive income and the payment of approximately $423,000 in
dividends. Management monitors risk-based capital and leveraged
capital ratios in order to assess compliance of the regulatory
guidelines. At September 30, 1999, the total capital ratio was
20.15%; the Tier I capital ratio was 18.95%, and the leverage
ratio was 11.85%, compared to regulatory capital requirements of
8%, 4% and 4% respectively. These ratios are well in excess of
regulatory capital requirements.
Construction began on a new branch office in Sugarcreek, Ohio in
July, 1999 with completion anticipated in late 1999 or early
2000. The total cost of the new branch is estimated at
approximately $840,000.
- -9-
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- ---------------------------------------------------------------
Total interest income of approximately $12,627,000 for the nine
month period ended September 30, 1999, compares to approximately
$11,867,000 for the same period in 1998, an increase of $760,000
or 6.4%. The majority of the overall increase in total interest
income is attributed to an increase in interest and fees on loans
of approximately $481,000 or 63.3% 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 $139,747,000 for the
first nine months of 1999 compared to $125,158,000 for the first
nine months of 1998. The increase caused by volume was offset by
a decline in the yield on loans. The annualized yield on loans
was 9.02% for the nine month period ended September 30, 1999 and
9.56% for the comparable 1998 period. The decrease in the yield
for the nine month period ended September 30, 1999 is
attributable to an overall decline in lending rates. The
increase in interest on investment securities of $292,000 is due
mainly to increased average balances outstanding for 1999
compared to 1998.
Total interest expense of approximately $6,110,000 for the nine
month period ending September 30, 1999, represents an increase of
$302,000 from the approximately $5,808,000 reported for the same
nine month period in 1998. The increase in interest expense on
deposits of approximately $360,000 is due mainly to increases in
volume due to the deposits acquired in the merger. Average
interest bearing deposit balances were approximately $167,575,000
for the first nine months of 1999 compared to $147,279,000 for
the first nine months of 1998. The increase caused by volume was
offset by a decrease in the cost of deposits. The annualized
cost of deposits was 4.49% and 4.79% for the nine month periods
ended September 30, 1999 and 1998 respectively. The decrease in
the cost of deposits for the nine month period ended September
30, 1999 is attributable mainly to an increase in the percent of
the overall interest bearing deposits in NOW and savings
accounts. The NOW and savings accounts comprised 26.9% and 31.0%
of the total interest bearing deposits for the nine months ended
September 30, 1999 and 1998 respectively. A decrease of
approximately $52,000 for interest expense incurred on Federal
Home Loan Bank advances, due to the average outstanding balance
of Federal Home Loan Bank advances decreasing approximately
$1,532,000 for the nine months ended September 30, 1999 compared
to 1998.
Net interest income of approximately $6,517,000 for the nine
months ended September 30, 1999, compares to approximately
$6,059,000 for the same nine month period in 1998, an increase of
$458,000 or 7.6%.
Total other income for the nine month period ended September 30,
1999, of approximately $479,000 compares to approximately
$406,000 for the same nine month period in 1998, an increase of
$73,000 or 18.0%. The service charge income on deposits
increased approximately $55,000 due to an increase in the
accounts being serviced due to the merger. Gains on sale of
loans increased approximately $11,000 due to the Bank's increased
involvement in offering fixed rate loans for sale in the
secondary market.
- -10-
RESULTS OF OPERATIONS (continued)
Total other expense of approximately $3,904,000 for the nine
months ended September 30, 1999, compares to approximately
$3,336,000 for the same nine month period in 1998. This
represents an increase of $568,000 or 17.0%. Salary and employee
benefits increased approximately $196,000 or 11.5%. The increase
in salary and employee benefits is attributable to an increase in
staff due to the merger and normal wage and benefit increases.
The increase in other expenses of approximately $225,000 was due
in part to the merger, which caused an increase in various
expense accounts such as data processing, advertising and
promotion, stationery and postage, correspondent bank charges and
goodwill amortization. Goodwill amortization expense accounted
for approximately $83,000 or 36.9% of the increase in other
expenses. 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 nine month period ended September 30, 1999,
was approximately $2,219,000, a decrease of $38,000 or 1.7% from
the approximately $2,257,00 reported at September 30, 1998.
Comparison of the Three Months Ended September 30, 1999 and 1998
- ----------------------------------------------------------------
Total interest income of approximately $4,257,000 for the three
month period ended September 30, 1999, compares to approximately
$4,074,000 for the same period in 1998, an increase of $183,000
or 4.5%. The majority of the overall increase in total interest
income is attributed to an increase in interest and fees on loans
of approximately $161,000 or 88.0% 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 $139,547,000 for this
three months of 1999 compared to $124,798,000 for the same three
months of 1998. The annualized yield on loans was 9.06% and
9.61% for the three month periods ended September 30, 1999 and
1998 respectively. The decrease in federal funds sold interest
of approximately $84,000 was due to a decrease in the average
outstanding balances for 1999 compared to 1998. The increase in
interest on investment securities of $106,000 is due mainly to
increased average balances outstanding for 1999 compared to 1998.
Total interest expense of approximately $2,020,000 for this three
month period ending September 30, 1999, represents a decrease of
$7,000 from the approximately $2,027,000 reported for the same
three month period in 1998. The increase in interest expense on
deposits of approximately $26,000 is due mainly to increases in
volume due to the deposits acquired in the merger. Average
interest bearing deposit balances were approximately $169,186,000
for this three month period of 1999 compared to $152,067,000 for
the same three months of 1998. The annualized cost on deposits
was 4.42% and 4.85% for the three month periods ended September
30, 1999 and 1998 respectively. This increase was offset by a
decrease in interest expense of approximately $33,000 for Federal
Home Loan Bank advances. The average outstanding balance of
Federal Home Loan Bank advances decreased approximately
$1,985,000 for the third quarter for 1999 compared to 1998.
- -11-
RESULTS OF OPERATIONS (continued)
Net interest income of approximately $2,237,000 for the three
months ended September 30, 1999, compares to approximately
$2,047,000 for the same three month period in 1998, an increase
of $190,000 or 9.3%.
Total other income for the three month period ended September 30,
1999, of approximately $156,000 compares to approximately
$133,000 for the same three month period in 1998, an increase of
$23,000 or 17.3%. The service charge income on deposits
increased approximately $22,000, caused mostly to an increase in
the accounts being serviced due to the merger.
Total other expense of approximately $1,374,000 for the three
months ended September 30, 1999, compares to approximately
$1,132,000 for the same three month period in 1998. This
represents an increase of $242,000 or 21.4%. Salary and employee
benefits expense increased approximately $149,000 in part to new
employees due to the merger in 1998 and normal recurring employee
cost increases for salary, staff additions and benefits. The
increase in other expenses of approximately $32,000 was due in
part to the merger which caused an increase in various expense
accounts, with goodwill amortization expense of approximately
$28,000 accounting for the majority of the increase in other
expense. 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 September 30, 1999,
was approximately $739,000, a decrease of $9,000 or 1.2% from the
approximately $748,000 reported for the three month period ended
September 30, 1998.
- -12-
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 $18,370,000 at September 30,
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 $39,998,000 as
available for sale and has an available unused line of credit of
approximately $10,400,000 with the Federal Home Loan Bank of
Cincinnati to provide additional sources of liquidity at
September 30, 1999.
Cash was provided during the nine month period ended September 30
1999, mainly from proceeds from the maturity and repayment of
investment securities of approximately $12.8 million, an increase
in deposits of approximately $4.2 million and $2.4 million from
operating activities. Cash was used during the nine month period
ended September 30, 1999, mainly for the purchase of investment
securities of approximately $20.3 million and to fund a net
increase in loans of $1.3 million. In addition, approximately
$1.6 million was also used to reduce Federal Home Loan Bank
advances, short term borrowings, purchase of premises and
equipment and pay dividends during the first nine months of 1999.
Cash and cash equivalents totaled $18.4 million at September 30,
1999, a decrease of $3.8 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.
The Company has adopted a cash reserves and liquidity plan for
the final quarter of 1999. The Company has made arrangements to
utilize the discount window through the Federal Reserve Bank of
Cleveland. The Company, at this point, does not anticipate
having to use the discount window and does not anticipate to have
any material costs to address this area for the rest of 1999.
- -13-
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, 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 in which the 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,
1999 1998
------------- ------------
(dollars in thousands)
Loans on nonaccrual basis $276 $ 21
Loans past due 90 days or more 245 155
Renegotiated loans - -
---- ----
Total nonperforming loans 521 176
Other real estate - 73
Repossessed assets - -
---- ----
Total nonperforming assets $521 $249
==== ====
Nonperforming loans as a percent of total loans .38% .13%
==== ====
Nonperforming loans as a percent of total assets .22% .08%
==== ====
Nonperforming assets as a percent of total assets .22% .11%
==== ====
Management monitors impaired loans on a continual basis. As of
September 1999, impaired loans had no material effect on the
company's financial position or results from operations.
The allowance for loan losses at September 30, 1999, totaled
approximately $1,949,000 or 1.4% of total loans as compared to
approximately $1,851,000 or 1.3% at December 31, 1998.
Provisions for loan losses were $180,000 and $135,000 for the
nine months ended September 30, 1999 and 1998 respectively.
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 $276,000 in one to four family
residential mortgages, $85,000 in commercial real estate,
$100,000 in commercial loans and $60,000 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.
- -14-
YEAR 2000 EVALUATION
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 computers 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 has spent approximately $23,000 to upgrade its computer
system and software during the first nine 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.
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
written contingency plan and business resumption plan has been
completed, validated, and tested. In June of 1999, the Board of
Directors approved such plan. The plan will be updated for any
changes in the Company's mission critical applications. Plan
updates and changes through the remainder of 1999 are subject to
additional validation, testing and approval upon implementation.
- -15-
CONTINGENCY PLAN (Continued)
While the Company's year 2000 plan was designed to significantly
address the year 2000 problems, the occurrence of utility service
companies being unable to provide the necessary service to
operate the Company's data systems or provide sufficient sanitary
conditions for its offices could negatively impact the Company.
Successful and timely completion of the year 2000 plan is based
upon the Company's best estimates derived form various
assumptions of future events which are inherently uncertain,
including the progress and results of its testing plans, and all
vendors, suppliers and customer readiness.
Despite the Company's best efforts to address the year 2000
problems, the vast number of external entities that have direct
and indirect business relationships with the Company, such as,
customers, vendors, payment system providers and other financial
institutions, make it impossible to assure that a failure to
achieve compliance by one or more of these entities would not
have a material adverse impact on the Company's business or its
consolidated financial statements.
- -16-
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.
- -17-
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
Date: By:/s/Jon D. Boley
--------------
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Jon D. Boley
Principal Financial Officer
- -18-