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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF SECURITIES EXCHANGE ACT OF 1934
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
---------------
(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 July 31, 2002: 684,972
KILLBUCK BANCSHARES, INC.
Index
Page Number
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheet as of
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Income for the
six months ended June 30, 2002 and 2001 4
Consolidated Statements of Income for the
three months ended June 30, 2002 and 2001 5
Consolidated Statements of Changes In Shareholders' Equity for the
six months ended June 30, 2002 6
Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 7
Notes to Unaudited Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11-19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Default Upon Senior Securities 21
Item 4. Submissions of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
- ----------
-2-
Killbuck Bancshares, Inc.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, December 31,
2002 2001
----------------- -----------------
ASSETS
------
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 10,153,873 $ 7,768,070
Federal funds sold 11,900,000 22,500,000
------------- -------------
Total cash and cash equivalents 22,053,873 30,268,070
------------- -------------
Investment securities:
Securities available for sale 43,385,094 51,419,900
Securities held to maturity (market value of $45,008,606
and $40,734,605) 43,057,489 39,803,246
-------------- -------------
Total investment securities 86,442,583 91,223,146
-------------- -------------
Loans (net of allowance for loan losses of $2,240,435 and
$2,260,555) 160,709,518 149,560,961
Loans held for sale 432,150 593,200
Premises and equipment, net 4,990,483 5,138,782
Accrued interest receivable 1,411,552 1,508,784
Goodwill, net 1,329,249 1,329,249
Other assets 1,770,505 1,635,996
-------------- --------------
Total assets $279,139,913 $281,258,188
============== ==============
LIABILITIES
-----------
Deposits:
Noninterest bearing demand $ 42,141,772 $ 32,198,109
Interest bearing demand 25,516,796 32,659,909
Money market 16,003,508 15,169,110
Savings 37,313,519 33,247,687
Time 116,112,876 124,696,288
-------------- -------------
Total deposits 237,088,471 237,971,103
Federal Home Loan Bank advances 4,752,791 5,226,732
Short-term borrowings 3,345,000 4,295,000
Accrued interest and other liabilities 532,038 727,901
-------------- --------------
Total liabilities 245,718,300 248,220,736
-------------- -------------
SHAREHOLDERS' EQUITY
--------------------
Common stock - No par value: 1,000,000 shares authorized,
718,431 issued 8,846,670 8,846,670
Retained earnings 26,419,005 25,445,528
Accumulated other comprehensive income 495,753 493,654
Treasury stock, at cost (31,535 and 25,144 shares) (2,339,815) (1,748,400)
-------------- --------------
Total shareholders' equity 33,421,613 33,037,452
-------------- -------------
Total liabilities and shareholders' equity $279,139,913 $281,258,188
============== ==============
See accompanying notes to the unaudtied consolidated financial statements.
-3-
Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Six Months Ended
June 30,
2002 2001
--------------- -------------
INTEREST INCOME
Interest and fees on loans $5,759,435 $ 7,307,380
Federal funds sold 111,317 413,844
Investment securities:
Taxable 1,395,174 1,328,901
Exempt from federal income tax 905,869 820,869
------------ ------------
Total interest income 8,171,795 9,870,994
------------ ------------
INTEREST EXPENSE
Deposits 3,025,635 4,715,922
Federal Home Loan Bank advances 168,607 200,770
Short term borrowings 2,476 47,946
------------ ------------
Total interest expense 3,196,718 4,964,638
------------ ------------
NET INTEREST INCOME 4,975,077 4,906,356
Provision for loan losses 90,000 172,500
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,885,077 4,733,856
------------ ------------
OTHER INCOME
Service charges on deposit accounts 299,135 275,436
Gain on sale of loans, net 54,884 22,475
Other income 88,344 91,014
------------ ------------
Total other income 442,363 388,925
------------ ------------
OTHER EXPENSE
Salaries and employee benefits 1,683,029 1,576,515
Occupancy expense 120,010 113,237
Equipment expense 355,734 323,732
Professional fees 142,577 155,361
Franchise tax 196,981 195,184
Other expenses 815,959 832,916
------------ ------------
Total other expense 3,314,290 3,196,945
------------ ------------
INCOME BEFORE INCOME TAXES 2,013,150 1,925,836
Income taxes 455,046 466,471
------------ ------------
NET INCOME $ 1,558,104 $ 1,459,365
============ ++==========
Earning per common share $ 2.26 $ 2.09
============ ============
Weighted average shares outstanding 689,912 698,120
============ ============
See accompanying notes to the unaudited consolidated financial statements.
-4-
Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended
June 30,
2002 2001
--------------- ----------------
INTEREST INCOME
Interest and fees on loans $ 2,842,021 $ 3,587,516
Federal funds sold 49,873 245,568
Investment securities:
Taxable 671,716 643,599
Exempt from federal income tax 461,321 420,338
------------ ------------
Total interest income 4,024,931 4,897,021
------------ ------------
INTEREST EXPENSE
Deposits 1,437,709 2,310,330
Federal Home Loan Bank advances 82,583 98,574
Short term borrowings 1,146 17,952
------------ ------------
Total interest expense 1,521,438 2,426,856
------------ ------------
NET INTEREST INCOME 2,503,493 2,470,165
Provision for loan losses 45,000 90,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,458,493 2,380,165
------------ ------------
OTHER INCOME
Service charges on deposit accounts 157,007 143,238
Gain on sale of loans, net 19,346 11,637
Other income 47,222 50,549
------------ ------------
Total other income 223,575 205,424
------------ ------------
OTHER EXPENSE
Salaries and employee benefits 895,570 836,637
Occupancy expense 48,426 47,226
Equipment expense 182,923 154,008
Professional fees 68,412 65,541
Franchise tax 98,955 97,158
Other expenses 430,657 433,709
------------ ------------
Total other expense 1,724,943 1,634,279
------------ ------------
INCOME BEFORE INCOME TAXES 957,125 951,310
Income taxes 201,484 217,171
------------ ------------
NET INCOME $ 755,641 $ 734,139
============ ============
Earning per common share $ 1.09 $ 1.05
============ ============
Weighted average shares outstanding 691,251 697,579
============ ============
See accompanying notes to the unaudited consolidated financial statements.
-5-
Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002
Accumuulated
Other Total
Common Retained Comprehensive Treasury Shareholders' Comprehensive
Stock Earnings Income Stock Equity Income
------------ ----------- ------------- ----------- ------------- -------------
Balance, December 31, 2001 $ 8,846,670 $25,445,528 $ 493,654 $(1,748,400) $33,037,452
Net income 1,558,104 1,558,104 $ 1,558,104
Purchase of Treasury stock (591,415) (591,415)
Other comprehensive income:
Net unrealized gain on securities 2,099 2,099 2,099
-----------
Comprehensive income $ 1,560,203
===========
Cash dividends paid ($.85 per share) (584,627) (584,627)
------------ ----------- ----------- ----------- -----------
Balance, June 30, 2002 $ 8,846,670 $26,419,005 $ 495,753 $(2,339,815) $33,421,613
============ =========== =========== =========== ===========
See accompanying notes to the unaudited consolidated financial statements.
-6-
Killbuck Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
2002 2001
--------------- ----------------
Operating Activities
Net income $ 1,558,104 $ 1,459,365
Adjustments to reconcile net income to net cash provided by
Operating activities:
Provision for loan losses 90,000 172,500
Gain on sale of loans (54,884) (22,475)
Provision for depreciation and amortization 290,502 262,750
Origination of loans held for sale (6,096,613) (3,760,510)
Proceeds from the sale of loans 6,312,546 3,841,985
Federal Home Loan Bank stock dividend (33,958) (35,600)
Net Change in:
Accrued interest and other assets (4,401) 233,447
Accrued expenses and other liabilities (195,862) (24,543)
------------- -------------
Net cash provided by operating activities 1,865,434 2,126,919
------------- -------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from maturities and repayments 16,033,150 23,240,705
Purchases (7,987,046) (19,013,306)
Investment securities held to maturity:
Proceeds from maturities and repayments 897,348 505,621
Purchases (4,202,433) (3,210,751)
Net increase in loans (11,238,557) (2,127,753)
Purchase of premises and equipment (99,478) (641,206)
------------- -------------
Net cash used in investing activities (6,597,016) (1,246,690)
------------- -------------
FINANCING ACTIVITIES
Net increase in demand, money market and savings deposits 7,700,780 1,885,814
Net (decrease) increase in time deposits (8,583,412) 3,108,417
Repayment of Federal Home Loan Bank advances (473,941) (544,860)
Net decrease in short term borrowings (950,000) (725,816)
Purchase of Treasury stock (591,415) (469,869)
Dividends paid (584,627) (558,062)
------------- -------------
Net cash provided by (used in) financing activities (3,482,615) 2,695,624
------------- -------------
Net increase (decrease) in cash and cash equivalents (8,214,197) 3,575,853
Cash and cash equivalents at beginning of period 30,268,070 20,512,736
------------- -------------
Cash and cash equivalents at end of period $22,053,873 $24,088,589
============= =============
Supplemental Disclosures of Cash Flows Information
Cash Paid During the Period For:
Interest on deposits and borrowings $ 3,291,580 $ 5,002,585
============= =============
Income taxes $ 480,358 $ 324,000
============= =============
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 reviewed 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, 2001 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.
NOTE 3 - COMPREHENSIVE INCOME
The Company is required to present comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income is
comprised of the following:
Six Months Six Months
Ended June Ended June
30, 2002 30, 2001
------------- --------------
Net income $1,558,104 $1,459,365
Other comprehensive income:
Net unrealized gain on securities 3,181 482,341
Tax effect (1,082) (163,996)
---------- ----------
Total comprehensive income $1,560,203 $1,777,710
========== ==========
Three Months Three Months
Ended June Ended June
30, 2002 30, 2001
------------- --------------
Net income $ 755,641 $ 734,139
Other comprehensive income:
Net unrealized gain on securities 551,711 64,274
Tax effect (187,582) (21,853)
---------- ----------
Total comprehensive income $1,119,770 $ 776,560
========== ==========
-8-
NOTE 4 - NEW ACCOUNTING STANDARDS
In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, Business Combinations,
effective for all business combinations initiated after June 30, 2001, as well
as all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The new statement requires that the purchase
method of accounting be used for all business combinations and prohibits the use
of the pooling-of-interests method. FAS No. 141 also specifies criteria which
must be met for intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill. The adoption of
FAS No. 141 did not have a material effect on the Company's financial position
or results of operations.
On January 1, 2002, the Company adopted FAS No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
This statement changes the accounting for goodwill from an amortization method
to an impairment-only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
this statement. However, this new statement did not amend FAS No. 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions, which requires
recognition and amortization of unidentified intangible assets relating to the
acquisition of financial institutions or branches thereof. The FASB has
undertaken a limited scope project to reconsider the provisions of FAS No. 72 in
2002 and has issued an exposure draft of a proposed statement, Acquisitions of
Certain Financial Institutions, that would remove acquisitions of financial
institutions from the scope of FAS No. 72. The adoption of this proposed
statement would require all goodwill originating from acquisitions that meet the
definition of a business combination as defined in Emerging Issues Task Force
Issue ("EITF") No. 98-3 to be discontinued. The adoption of FAS No. 142 did have
a material effect on the Company's financial position or results of operations.
Application of the non-amortization provisions of FAS No. 142 resulted in an
increase in net income of $55,000 or $.08 per share during the six months end
June 30, 2002. This statement among other things, eliminates the regularly
scheduled amortization of goodwill and replaces this method with a two-step
process for testing the impairment of goodwill on at least annual basis. This
approach could cause more volatility in the Company's reported net income
because of impairment losses, if any, could occur irregularly and in varying
amounts. The Company adopted this statement on January 1, 2002 the beginning of
its fiscal year, and immediately upon adoption stopped amortizing goodwill of
$1.3 million.
In August 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of a liability be recognized
when incurred for the retirement of a long-lived asset and the value of the
asset be increased by that amount. The statement also requires that the
liability be maintained at its present value in subsequent periods and outlines
certain disclosures for such obligations. The new statement takes effect for
fiscal years beginning after June 15, 2002. The adoption of this statement,
which is effective January 1, 2003, is not expected to have a material effect on
the Company's financial statements.
-9-
On January 1, 2002, the Company adopted FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. FAS 144 supercedes FAS 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends APB Opinion No. 30, Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business. FAS 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. The adoption of FAS
No. 144 did not have a material effect on the Company's financial statements.
In April 2002, the FASB issued FAS No. 145, "Recission of FASB Statement No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". FAS
No. 145 rescinds FAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. This
statement also amends FASB FAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
statement also makes technical corrections to existing pronouncements, which are
not substantive but in some cases may change accounting practice. FAS No. 145 is
effective for transactions occurring after May 15, 2002. The adoption of FAS No.
145 did not have a material effect on the Company's financial position or
results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). The new statement will be effective for exit or disposal
activities initiated after December 31, 2002, the adoption of which is not
expected to have a material effect on the Company's financial statements.
-10-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the ability to control costs
and expenses, and general economic conditions. Killbuck Bancshares, Inc.
undertakes no obligation to publicly release the results of any revisions to
those forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The Company conducts no significant business or operations of its own other than
holding all of the outstanding stock of the Killbuck Savings Bank Company. As a
result, references to the Company generally refer to the Bank unless the context
indicates otherwise.
Financial Condition
Total assets at June 30, 2002 were $279,140,000 compared to $281,258,000 at
December 31, 2001, a decrease of $2,118,000 or .8%.
Cash and cash equivalents decreased by $8,214,000 or 27.1% from December 31,
2001 to June 30, 2002, with federal funds sold decreasing $10,600,000. This
decrease was used to fund the Bank's loan demand at June 30, 2002.
Total investments decreased by $4,781,000 or 5.2% from December 31, 2001 to June
30, 2002. There was a net decrease of $8,035,000 in available for sale U.S.
Government Agency securities due to called and maturing securities while
securities held to maturity increased by $3,254,000. The Bank continued to have
increased purchases of investment securities during the first six months of 2002
due to the callable options on some of the available for sale securities.
Net loans increased by $11,148,000 or 7.5% from December 31, 2001 to June 30,
2002. A decrease of $72,000 occurred in the consumer loan category while real
estate loan balances increased by $11,174,000 and commercial loans increased by
$46,000.
Total deposits at June 30, 2002 were $237,088,000 compared to $237,971,000 at
December 31, 2001, a decrease of $883,000 or .4%. Time deposits decreased
$8,583,000, demand accounts increased $2,800,000 and money market and savings
accounts increased $4,900,000. Management attributes these changes to normal
transfers of funds within the deposit accounts and the general decline in
interest rates.
Federal Home Loan Bank advances and short-term borrowings decreased $474,000 and
$950,000 respectively at June 30, 2002 from December 31, 2001.
-11-
Shareholders' Equity increased by $384,000 or 1.2%, which was mainly due to
earnings of $1,558,000 for the first six months of 2002 accentuated by a $2,100
increase in the unrealized gain on securities included in other comprehensive
income, and offset by the purchase of Treasury stock for $591,000 and dividends
paid totaling $585,000. Management monitors risk-based capital and leveraged
capital ratios in order to assess compliance of the regulatory guidelines. At
June 30, 2002, the total capital ratio was 18.95%; the Tier I capital ratio was
17.72%, and the leverage ratio was 11.37%, compared to regulatory capital
requirements of 8.00%, 4.00% and 4.00% respectively. These ratios are well in
excess of regulatory capital requirements.
-12-
RESULTS OF OPERATIONS
Comparison of the Six Months Ended June 30, 2002 and 2001
---------------------------------------------------------
Total interest income of approximately $8,172,000 for the six-month period ended
June 30, 2002, compares to $9,871,000 for the same period in 2001, a decrease of
$1,699,000 or 17.2%. The majority of the overall decrease in total interest
income is attributed to a decrease in interest and fees on loans of $1,548,000
or 91.1% of the overall decrease. The decrease in interest and fees on loans is
due to a decrease in the yield on loans. Average loan balances were $156,898,000
for the first six months of 2002 compared to $153,955,000 for the first six
months of 2001 and the yield on loans decreased to 7.3% for the first six months
of 2002 compared to 9.5% for the first six months of 2001. Investment income
increased $151,000 or 7.0% for the six-month period ended June 30, 2002 compared
to the same period for 2001. The increase in investment income is due to an
increase in volume. Average investment balances were $92,551,000 compared to
$76,120,000 and the yields were 4.97% compared to 5.65% for the first six months
of 2002 and 2001 respectively. See "Average Balance Sheet" for the six-month
periods ended June 30, 2002 and 2001.
Total interest expense of $3,197,000 for the six-month period ending June 30,
2002 represents a decrease of $1,768,000 from the $4,965,000 reported for the
same six-month period in 2001. The decrease in interest expense on deposits of
$1,690,000 is due mainly to the decreases in the rates of deposit accounts.
Average interest bearing deposits were $203,609,000 for the first six months of
2002 compared to $192,739,000 for the first six months of 2001. The cost on
interest bearing deposits was 2.36%, compared to 3.93% for the six-month periods
of 2002 and 2001 respectively. See "Average Balance Sheet" for the six-month
periods ended June 30, 2002 and 2001.
Net interest income of $4,975,000 for the six months ended June 30, 2002,
compares to $4,906,000 for the same six-month period in 2001, an increase of
$69,000 or 1.4%.
Total other income for the six month period ended June 30, 2002, of $442,000
compares to $389,000 for the same six month period in 2001, a increase of
$53,000 or 13.6%. The increase of $24,000 in service charges on deposit accounts
was attributable to normal activity within the deposit accounts due to an
increase in non-time deposit accounts. Gains on sale of loans increased $33,000
due to increased activity caused by declining fixed loan rates. Other income
decreased $3,000 due to a decrease of $10,000 in Federal Home Loan Bank dividend
income.
Total other expense of $3,314,000 for the six months ended June 30, 2002,
compares to $3,197,000 for the same six-month period in 2001. This represents an
increase of $117,000 or 3.7%. Salary and employee benefits increased
approximately $106,000 due to additional staff being hired as a result of
opening the branch in Howard, Ohio in July 2001 and normal increases in salaries
and employee benefits. The increases in the remaining expense accounts were
attributable to the opening of the branch in Howard, Ohio and increases in items
that are normal and recurring in nature. Of the $17,000 decrease in other
expenses, a $55,000 decrease was due to the adoption of the Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. Management periodically evaluates goodwill
for impairment. At this time, no impairment has been recognized.
-13-
Net income for the six-month period ended June 30, 2002, was $1,558,000, an
increase of $99,000 or 6.8% from the $1,459,000 reported at June 30, 2001.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 2002 and 2001
-----------------------------------------------------------
Total interest income of approximately $4,025,000 for the three-month period
ended June 30, 2002, compares to $4,897,000 for the same period in 2001, a
decrease of $872,000 or 17.8%. The majority of the overall decrease in total
interest income is attributed to a decrease in interest and fees on loans of
$746,000 or 85.6% of the overall decrease. The decrease in interest and fees on
loans is due to a decrease in the yield on the loan portfolio. Average loan
balances were $160,158,000 compared to $154,289,000 and the yield was 7.1%
compared to 9.3% for this three-month period of 2002 and 2001 respectively. The
increase in interest on investment securities of $69,000 was due to an increase
in the average balances outstanding of $91,657,000 for 2002 compared to
$74,947,000 for 2001 and the yield was 4.9% compared to 5.7% for this
three-month period of 2002 and 2001 respectively. See "Average Balance Sheet"
for the three-month periods ended June 30, 2002 and 2001.
Total interest expense of $1,521,000 for the three-month period ending June 30,
2002, represents a decrease of $906,000 from the $2,427,000 reported for the
same three-month period in 2001. The decrease in interest expense on deposits of
$873,000 is due mainly to a decrease in yield. Average interest bearing deposits
were $202,725,000 for this three-month period of 2002 compared to $194,365,000
for the same three months of 2001. The cost of interest bearing deposits was
2.2% compared to 3.9% for this three-month period of 2002 and 2001 respectively.
See "Average Balance Sheet" for the three-month periods ended June 30, 2002 and
2001.
Net interest income of $2,503,000 for the three months ended June 30, 2002,
compares to $2,470,000 for the same three-month period in 2001, an increase of
$33,000 or 1.3%.
Total other income for the three month period ended June 30, 2002, of $224,000
compares to $205,000 for the same three month period in 2001, an increase of
$19,000 or 9.3%. The service fee income on deposits increased $14,000 due to an
increase in the accounts being serviced. Gains on sale of loans increased $7,000
due to the Bank's increased activity caused by declining fixed loan rates.
Total other expense of $1,725,000 for the three months ended June 30, 2002,
compares to $1,634,000 for the same three-month period in 2001. This represents
an increase of $91,000 or 5.6%. Salary and employee benefits increased $59,000
in part to new employees due to the opening of the branch in Howard, Ohio in
July, 2001 and normal recurring employee cost increases for salary and employee
benefits. Of the $3,000 decrease in other expenses, a $28,000 decrease was due
to the adoption of FASB's Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. Management periodically evaluates goodwill
for impairment. At this time, no impairment has been recognized. The $25,000
increase was due in part to the opening of the branch in Howard, Ohio and
increases in other expenses that are generally thought to be normal and
recurring in nature.
Net income for the three-month period ended June 30, 2002, was $756,000, an
increase of $22,000 or 3.0% from the $734,000 reported at June 30, 2001.
-14-
Liquidity
---------
Management monitors projected liquidity needs and determines the level desirable
based in part on the Company's commitments to make loans and management's
assessment of the Company'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 Company 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
$22,054,000 at June 30, 2002. These assets provide the primary source of
liquidity for the Company. In addition, management has designated a substantial
portion of the investment portfolio, $43,385,000 as available for sale and has
an available unused line of credit of $16,720,000 with the Federal Home Loan
Bank of Cincinnati to provide additional sources of liquidity at June 30, 2002.
As of June 30, 2002, the Company had commitments to fund loans of approximately
$4,488,000 and unused lines of credit totaling $18,112,000.
Cash was provided during the six month period ended June 30, 2002, mainly from
operating activities of $1.9 million, and the maturities and repayments of
investment securities of $16.9 million. Cash was used during the six month
period ended June 30, 2002, mainly to fund a net increase in loans of $11.2
million, for the purchase of investment securities of $12.2 million, and for a
decrease in deposits of $.9 million. In addition $1.4 million was also used to
reduce Federal Home Loan Bank advances and short-term borrowings during the
first six months of 2002, $.6 million was used to purchase Treasury Stock, and
$.6 million was used to pay dividends to shareholders. Cash and cash equivalents
totaled $22.1 million at June 30, 2002, a decrease of $8.2 million from $30.3
million at December 31, 2001.
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.
-15-
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 June 30, 2002, and December 31, 2001. A
loan is classified as nonaccrual when, in the opinion of management, there are
doubts about collectibility 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.
June 30, December 31,
2002 2001
------------ ------------
(dollars in thousands)
Loans on nonaccrual basis $321 $221
Loans past due 90 days or more 75 125
Renegotiated loans - -
---- ----
Total nonperforming loans 396 346
Other real estate - -
Repossessed assets - -
---- ----
Total nonperforming assets $396 $346
==== ====
Nonperforming loans as a percent of total loans 0.24% 0.23%
Nonperforming loans as a percent of total assets 0.14% 0.12%
Nonperforming assets as a percent of total assets 0.14% 0.12%
Management monitors impaired loans on a continual basis. As of June 2002,
impaired loans had no material effect on the Company's financial position or
results from operations.
The allowance for loan losses at June 30, 2002, totaled approximately $2,240,000
or 1.4% of total loans as compared to approximately $2,261,000 or 1.5% at
December 31, 2001. Provisions for loan losses were $90,000 for the six months
ended June 30, 2002 and $173,000 for the six months ended June 30, 2001.
The level of funding for the provision is a reflection of the overall loan
portfolio. Nonperforming loans consist of approximately $258,000 in one to four
family residential mortgages, $1,000 in commercial loans and $137,000 in
consumer loans. The collateral requirements on such loans reduce the risk of
potential losses to an acceptable level in management's opinion.
-16-
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. Although the Company maintains its
allowance for loan losses at a level that it considers to be adequate to provide
for the inherent risk of loss in its portfolio, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods.
-17-
Average Balance Sheet for the Six-Month Period Ended June 30
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
Period Ended
-----------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------ ---------- ----- ------------ ---------- ------
Assets
- ------
Interest Earnings Assets:
Loans (1)(2)(3) $156,897,785 $5,759,435 7.34% $153,954,549 $7,307,380 9.49%
Securities-taxable (4) 52,842,288 1,395,174 5.28% 40,856,272 1,328,901 6.51%
Securities-nontaxable 39,709,104 905,869 4.56% 35,264,140 820,869 4.66%
Federal funds sold 13,429,790 111,317 1.66% 16,900,858 413,844 4.90%
----------- ---------- ---- ------------- ---------- ----
Total interest earnings assets 262,878,967 8,171,795 6.22% 246,975,819 9,870,994 7.99%
----------- --------- ---- ------------ --------- ----
Noninterest earning assets:
Cash and due from other institutions 8,534,509 7,744,845
Premises and equipment, net 5,099,309 4,754,602
Accrued interest 1,400,137 1,517,801
Other assets 3,717,193 3,756,511
Less allowance for loan losses (2,277,064) (2,228,344)
----------- --------------
Total noninterest earnings assets 16,474,084 15,545,415
---------- -------------
Total Assets $279,353,051 $262,521,234
============ ============
Liabilities and Shareholders' Equity
- ------------------------------------
Interest bearing liabilities:
Interest bearing demand $31,367,645 $164,797 1.05% $ 27,937,619 308,735 2.21%
Money market accounts 16,466,469 164,738 2.00% 10,975,074 199,036 3.63%
Savings deposits 34,931,071 295,340 1.69% 29,394,129 418,174 2.85%
Time deposits 120,843,771 2,400,760 3.97% 124,432,426 3,789,977 6.09%
Short term borrowings 3,860,092 2,476 .13% 3,700,636 47,946 2.59%
Federal Home Loan Advances 4,979,332 168,607 6.77% 5,912,242 200,770 6.79%
------------- ---------- ---- ------------ ---------- ----
Total interest bearing liabilities 212,448,380 3,196,718 3.01% 202,352,126 4,964,638 4.91%
----------- --------- ---- ----------- --------- ----
Noninterest bearing liabilities:
Demand deposits 32,569,889 27,133,243
Accrued expenses and other liabilities 1,985,540 1,151,265
------------- ------------
Total noninterest bearing liabilities 34,555,429 28,284,508
------------- ------------
Shareholders' equity 32,349,242 31,884,600
------------- ------------
Total Liabilities and Shareholders' Equity $279,353,051 $262,521,234
============= ============
Net interest income $4,975,077 $4,906,356
========== ==========
Interest rate spread (6) 3.21% 3.08%
==== ====
Net yield on interest earning assets (7) 3.79% 3.97%
==== ====
(1) For purposes of these computations, the average loan amounts outstanding are net of deferred loan fees.
(2) Included in loan interest income are loan related fees of $185,952 and $143,398 in 2002 and 2001, respectively.
(3) Nonaccrual loans are include in loan totals and do not have a material impact on the information presented.
(4) Average balance is computed using the carrying value of securities. The average yield has been computed using the historical
amortized cost average balance for available for sale securities.
(5) Interest rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
(6) Net yield on interest earning assets represents net interest income as a percentage of average interest earning assets.
-18-
Average Balance Sheet for the Three-Month Period Ended June 30
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
Period Ended
-----------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------ ---------- ----- ------------ ---------- ------
Assets
- ------
Interest Earnings Assets:
Loans (1)(2)(3) $160,158,176 $2,842,021 7.10% $154,288,612 $3,587,516 9.30%
Securities-taxable (4) 51,021,029 671,716 5.27% 38,855,430 643,599 6.63%
Securities-nontaxable 40,636,054 461,321 4.54% 36,092,270 420,338 4.66%
Federal funds sold 11,029,915 49,873 1.81% 19,562,276 245,568 5.02%
------------ ----------- ---- -------------- ---------- ----
Total interest earnings assets 262,845,174 4,024,931 6.13% 248,798,588 4,897,021 7.87%
------------ ----------- ---- -------------- ---------- ----
Noninterest earning assets:
Cash and due from other institutions 8,361,875 8,060,391
Premises and equipment, net 5,057,604 4,831,315
Accrued interest 1,506,728 1,535,367
Other assets 3,802,908 3,825,796
Less allowance for loan losses (2,264,831) (2,268,099)
------------ -------------
Total noninterest earnings assets 16,464,284 15,984,770
------------ -------------
Total Assets $279,309,458 $264,783,358
============ =============
Liabilities and Shareholders' Equity
- ------------------------------------
Interest bearing liabilities:
Interest bearing demand $31,724,543 $83,859 1.06% $ 28,134,830 142,861 2.03%
Money market accounts 16,129,221 81,010 2.01% 10,998,206 99,216 3.61%
Savings deposits 35,863,658 152,628 1.70% 30,256,779 197,470 2.61%
Time deposits 119,007,658 1,120,212 3.77% 124,975,043 1,870,783 5.99%
Short term borrowings 3,572,209 1,146 .13% 3,721,148 17,952 1.93%
Federal Home Loan Advances 4,871,742 82,583 6.78% 5,799,605 98,574 6.80%
------------ ----------- ---- -------------- ---------- ----
Total interest bearing liabilities 211,169,031 1,521,438 2.88% 203,885,611 2,426,856 4.76%
------------ ----------- ---- -------------- ---------- ----
Noninterest bearing liabilities:
Demand deposits 33,657,391 27,641,911
Accrued expenses and other liabilities 2,397,810 1,231,549
------------ --------------
Total noninterest bearing liabilities 36,055,201 28,873,460
------------ -------------
Shareholders' equity 32,085,226 32,024,287
------------ -------------
Total Liabilities and Shareholders' Equity $279,309,458 $264,783,358
============ =============
Net interest income $2,503,493 $2,470,165
=========== ==========
Interest rate spread (6) 3.25% 3.11%
==== ====
Net yield on interest earning assets (7) 3.81% 3.97%
==== ====
(1) For purposes of these computations, the average loan amounts outstanding are net of deferred loan fees.
(2) Included in loan interest income are loan related fees of $80,205 and $77,142 in 2002 and 2001, respectively.
(3) Nonaccrual loans are include in loan totals and do not have a material impact on the information presented.
(4) Average balance is computed using the carrying value of securities. The average yield has been computed using the historical
amortized cost average balance for available for sale securities.
(5) Interest rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
(6) Net yield on interest earning assets represents net interest income as a percentage of average interest earning assets.
-19-
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The principal market risk affecting the Company is interest rate risk. The Bank
does not maintain a trading account for any class of financial instrument and
the Company is not affected by foreign currency exchange rate risk or commodity
price risk. Because the Bank does not hold any equity securities which would be
considered significant, the Company is not subject to equity price risk.
The Company, like other financial institutions, is subject to interest rate risk
to the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. One of the principal financial objectives is to
achieve long-term profitability while reducing its exposure to fluctuations in
interest rates. The Company has sought to reduce exposure of its maturities and
interest rates primarily by originating variable-rate lending products. Both the
variable interest rates inherent in the commercial real estate and real estate
loan portfolios, and the short duration loan products, mitigate the Company's
exposure to dramatic interest rate movements.
-20-
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
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
The following represents the results of matters submitted to a vote
of the shareholders at the annual meeting held on April 22, 2002:
Affixing the number of directors at nine for 2002:
For 536,373
Abstain 0
Absent 182,058
Election of Directors:
The following directors were elected with terms to expire April 2004:
For Withheld
John W. Baker 531,229 5,144
Richard L. Fowler 531,229 5,144
Kenneth Taylor 531,229 5,144
Item 5 - Other Information
None
-21-
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*
99.1 Independent Accountant's Report
99.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as enacted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
-22-
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: August 12, 2002 By:/s/Luther E. Proper
----------------------------
Luther E. Proper
President and
Chief Executive Officer
Date: August 12, 2002 By:/s/Diane Knowles
----------------------------
Diane Knowles
Chief Financial Officer
-23-