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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
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Commission File No. 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
incorporation or organization) Identification No.)
165 North Main Street
Killbuck, Ohio 44637
- ---------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (330) 276-2771
--------------
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock No Par Value None
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 than the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, calculated by reference to the stock valuation done on Killbuck
Bancshares, Inc. common stock as of December 31, 1998 was $59,050,433.00
(Registrant has assumed that all of its executive officers and directors are
affiliates. Such assumption shall not be deemed to be conclusive for any
other purpose):
There were 705,331 shares of no par value common stock outstanding as of March
13, 1999.
1
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the Year ended December
31, 1998. (Part II, III and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Shareholders to
be held on April 12, 1999 for the Year ended December 31, 1998. (Part III)
2
FORM 10-K INDEX
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
3
PART I
Killbuck Bancshares, Inc. (the "Company") may from time to time make written
or oral "forward-looking statements", including statements contained in the
Company's filings with the securities and exchange commission (including this
annual report on Form 10-K and the exhibits thereto), in its report to
shareholders and in other communications by the Company, which are made in
good faith by the Company pursuant to the "safe harbor" provisions of the
private securities litigation reform act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors
(some of which are beyond the Company's control). The following factors,
among others, could cause the Company's financial performance to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements: the strength of the United
States economy in general and the strength of the local economies in which the
Company conducts operations; the effects of, and changes in, trade, monetary
and fiscal policies and laws, including interest rate policies of the board of
governors of the federal reserve system, inflation, interest rate, market and
monetary fluctuations; the timely development of and acceptance of new
products and services of the Company and the perceived overall value of these
products and services by users, including the features, pricing and quality
compared to competitors' products and services; the willingness of users to
substitute competitors' products and services for the Company's products and
services; the success of the Company in gaining regulatory approval of its
products and services, when required; the impact of changes in financial
services' laws and regulations (including laws concerning taxes, banking,
securities and insurance); technological changes, acquisitions; changes in
consumer spending and savings habits; and the success of the Company at
managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or
on behalf of the Company.
Item 1. Business
Killbuck Bancshares, Inc. (the "Company") was incorporated under the laws of
the State of Ohio on November 29, 1991 at the direction of management of the
Killbuck Savings Bank Company (the "Bank,") for the purpose of becoming a bank
holding company by acquiring all of the outstanding shares of the Bank. In
November, 1992, the Company became the sole shareholder of the Bank. The Bank
carries on business under the name "The Killbuck Savings Bank Company." The
principal office of the Company is located at 165 N. Main Street, Killbuck,
Ohio. The Killbuck Savings Bank Company was established under the banking
laws of the State of Ohio in November in 1900.
The Bank is headquartered in Killbuck, Ohio, which is located in the northeast
portion of Ohio, in the County of Holmes. Holmes County has a population of
approximately 35,000.
4
The Bank provides a wide range of retail banking services to individuals and
small to medium-sized businesses. These services include various deposit
products, business and personal loans, credit cards, residential mortgage
loans, home equity loans, and other consumer oriented financial services
including IRA accounts, safe deposit and night depository facilities. The
Bank also has automatic teller machines located at all locations providing 24
hour banking service to our customers. The Bank belongs to MAC, a nationwide
ATM network with thousands of locations nationwide. Neither the Company nor
the Bank have any foreign operations, assets, investments or deposits.
At December 31, 1998 the Company had one wholly-owned subsidiary, The Killbuck
Savings Bank Company. The Bank has six full service offices, with five in
Holmes County and one located in Knox County. The Bank has received
regulatory approval for a new full service branch facility in Sugarcreek, Ohio
in Tuscarawas County. The Bank anticipates to break ground in the spring of
1999. On November 21, 1998 the merger of Commercial and Savings Bank Company
of Danville, Ohio with and into The Killbuck Savings Bank Company, with
Killbuck Savings Bank being the surviving bank was completed using the
purchase method of accounting. Commercial and Savings Bank Company had total
assets of approximately $15.6 million on the date of the merger and operated
out of one location in Danville, Ohio in Knox County.
On April 13, 1998, the Board of Directors authorized an increase in the
authorized common shares from 200,000 to 1,000,000 shares and also authorized
a 5 for 1 stock split of common stock to shareholders of record on May 1,
1998.
The Company, through its subsidiary, The Killbuck Savings Bank Company,
conducts the business of a commercial banking organization. At December 31,
1998, the Company and its subsidiary had consolidated total assets of
$231,993,893, and consolidated total equity of $27,437,211. The capital of
the Company consists of 1,000,000 authorized shares of capital stock, no par
value of which 705,331 shares were outstanding at December 31, 1998 to 931
shareholders.
The Bank is a state banking Company. The Bank is regulated by the Ohio
Division of Financial Institutions ("ODFI") and its deposits are insured by
the Federal Deposit Insurance Corporation to the extent permitted by law and,
as a subsidiary of the Company, is regulated by the Federal Reserve Board.
Employees
As of December 31, 1998, the Bank had 74 full-time and 21 part-time employees.
The Company had no employees. The Bank provides a number of benefits for its
full-time employees, including health and life insurance, pension, workers'
compensation, social security, paid vacations, and numerous bank services. No
employees are union participants or subject to a collective bargaining
agreement.
5
Competition
The commercial banking business in the market areas served by the Bank is very
competitive. The Company and the Bank are in competition with commercial
banks located in their own service areas. Some competitors of the Company and
the Bank are substantially larger than the Bank. In addition to local bank
competition, the Bank competes with larger commercial banks located in
metropolitan areas, savings banks, savings and loan associations, credit
unions, finance companies and other financial institutions for loans and
deposits.
There are six financial institutions operating in Holmes County. As of June
30, 1998 (the most recent date for which information is available) the
Commercial and Savings Bank, Millersburg had the largest market share with
$198 million in total deposits as of such date, representing a market share of
46.04%. The Bank had the second largest market share with deposits of $167
million as of such date, representing a market share of 38.87%. Commercial
and Savings Bank had total assets as of December 31, 1998, of $300 million
compared to the Bank's total assets of $232 million as of such date.
Certain Regulatory Considerations
The following is a summary of certain statutes and regulations affecting the
Company and its subsidiary. This summary is qualified in its entirety by such
statutes and regulations.
The Company
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, ("BHC Act") and as such is subject to
regulation by the Federal Reserve Board. A bank holding company is required
to file with the Federal Reserve Board quarterly reports and other information
regarding its business operations and those of its subsidiaries. A bank
holding company and its subsidiary banks are also subject to examination by
the Federal Reserve Board.
The BHC Act requires every bank holding company to obtain the prior approval
of the Federal Reserve Board before acquiring substantially all the assets of
any bank or bank holding company or ownership or control of any voting shares
of any bank or bank holding company, if, after such acquisition, it would own
or control, directly or indirectly, more than five percent (5%) of the voting
shares of such bank or bank holding company.
In approving acquisitions by bank holding companies of companies engaged in
banking-related activities, the Federal Reserve Board considers whether the
performance of any such activity by a subsidiary of the holding company
reasonably can be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency, which outweigh
possible adverse effects, such as over concentration of resources, decrease of
competition, conflicts of interest, or unsound banking practices.
Bank holding companies are restricted in, and subject to, limitations
regarding transactions with subsidiaries and other affiliates.
In addition, bank holding companies and their subsidiaries are prohibited from
engaging in certain "tie in" arrangements in connection with any extensions of
credit, leases, sales of property, or furnishing of services.
6
The Company Subsidiary
The Company operates a single bank, namely, The Killbuck Savings Bank Company.
As an Ohio state chartered commercial bank the Bank is supervised and
regulated by the ODFI, and subject to laws and regulations applicable to Ohio
banks.
Capital
The Federal Reserve Board, ODFI, and FDIC require banks and holding companies
to maintain minimum capital ratios.
The Federal Reserve Board adopted final "risk-adjusted" capital guidelines for
bank holding companies. The guidelines became fully implemented as of
December 31, 1992. The ODFI and FDIC have adopted substantially similar risk-
based capital guidelines. These ratios involve a mathematical process of
assigning various risk weights to different classes of assets, then evaluating
the sum of the risk-weighted balance sheet structure against the Company's
capital base. The rules set the minimum guidelines for the ratio of capital
to risk-weighted assets (including certain off-balance sheet activities, such
as standby letters of credit) at 8%. At least half of the total capital is to
be composed of common equity, retained earnings, and a limited amount of
perpetual preferred stock less certain goodwill items ("Tier 1 Capital"). The
remainder may consist of a limited amount of subordinated debt, other
preferred stock, or a limited amount of loan loss reserves.
In addition, the federal banking regulatory agencies have adopted leverage
capital guidelines for banks and bank holding companies. Under these
guidelines, banks and bank holding companies must maintain a minimum ratio of
three percent (3%) Tier 1 Capital (as defined for purposes of the year-end
1992 risk-based capital guidelines) to total assets. The Federal Reserve
Board has indicated, however, that banking organizations that are experiencing
or anticipating significant growth, are expected to maintain capital ratios
well in excess of the minimum levels.
Regulatory authorities may increase such minimum requirements for all banks
and bank holding companies or for specified banks or bank holding companies.
Increases in the minimum required ratios could adversely affect the Company
and the Bank, including their ability to pay dividends.
At December 31, 1998, the Company's respective total and Tier 1 risk-based
capital ratios and leverage ratios exceeded the minimum regulatory
requirements. See Note 16 in the audited consolidated financial statements
included in the Annual Report and incorporated herein by reference in the
report as Exhibit 13.
7
Additional Regulation
The Bank is also subject to federal regulation as to such matters as required
reserves, limitation as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuance or retirement of
their own securities, limitations upon the payment of dividends and other
aspects of banking operations. In addition, the activities and operations of
the Bank are subject to a number of additional detailed, complex and sometimes
overlapping laws and regulations. These include state usury and consumer
credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending
Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation
B, the Fair Credit Reporting Act, the Truth in Savings Act, the Community
Reinvestment Act, anti-redlining legislation and antitrust laws.
Dividend Regulation
The ability of the Company to obtain funds for the payment of dividends and
for other cash requirements is largely dependent on the amount of dividends
which may be declared by the Bank. Generally, the Bank may not declare a
dividend, without the approval of the ODFI, if the total of dividends declared
in a calendar year exceeds the total of its net profits for that year combined
with its retained profits of the preceding two years.
Government Policies and Legislation
The policies of regulatory authorities, including the ODFI, Federal Reserve
Board, FDIC and the Depository Institutions Deregulation Committee, have had a
significant effect on the operating results of commercial banks in the past
and are expected to do so in the future. An important function of the Federal
Reserve System is to regulate aggregate national credit and money supply
through such means as open market dealings in securities, establishment of the
discount rate on member bank borrowings, and changes in reserve requirements
against member bank deposits. Policies of these agencies may be influenced by
many factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and fiscal policies of the United
States government.
The United States Congress has periodically considered and adopted legislation
which has resulted in further deregulation of both banks and other financial
institutions, including mutual funds, securities brokerage firms and
investment banking firms. No assurance can be given as to whether any
additional legislation will be adopted or as to the effect such legislation
would have on the business of the Company or the Bank.
In addition to the relaxation and elimination of certain geographic
restrictions on banks and bank holding companies, a number of regulatory and
legislative initiatives have the potential for eliminating many of the product
line barriers presently separating the services offered by commercial banks
from those offered by nonbanking institutions. For example, Congress recently
has considered legislation which would expand the scope of permissible
business activities for bank holding companies (and in some cases banks) to
include securities underwriting, insurance services and various real estate
related activities.
8
Deposit Insurance
The Federal Deposit Insurance Company Improvement Act of 1991 ("FDICIA") was
enacted in 1991. Among other things, FDICIA, requires federal bank regulatory
authorities to take "prompt corrective action" with respect to banks that do
not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
As an FDIC-insured institution, the Bank is required to pay deposit insurance
premium assessments to the FDIC. The amount each institution pays for FDIC
deposit insurance coverage is determined in accordance with a risk-based
assessment system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Institutions classified as well-
capitalized (as defined by the FDIC) and considered healthy pay the lowest
premium while institutions that are less than adequately capitalized (as
defined by the FDIC) and considered substantial supervisory concerns pay the
highest premium. Because the Bank is presently "well capitalized" it pays the
minimum deposit insurance premiums.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance
temporarily during the hearing process for a permanent termination of
insurance if the institution has no tangible capital. Management of the
Company is not aware of any activity or condition that could result in
termination of the deposit insurance of the Bank.
Proposed Legislation
There have been proposed a number of legislative and regulatory proposals
designed to strengthen the federal deposit insurance system and to improve the
overall financial stability of the U.S. banking system. It is impossible to
predict whether or in what form these proposals may be adopted in the future,
and if adopted, what their effect would be on the Company or Bank.
Monetary Policies
The earnings of the Company are dependent upon the earnings of its wholly-owned
subsidiary bank. The earnings of the subsidiary bank are affected by
the policies of regulatory authorities, including the Ohio Division of
Financial Institutions, the Board of Governors of the Federal Reserve System
and the Federal Deposit Insurance Corporation. The policies and regulations
of the regulatory agencies have had and will continue to have a significant
effect on deposits, loans and investment growth, as well as the rate of
interest earned and paid, and therefore will affect the earnings of the
subsidiary bank and the Company in the future, although the degree of such
impact cannot accurately be predicted.
9
Securities Laws and Compliance
As of June 30, 1998, the Company's common stock was registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act
of 1934, as amended ("1934 Act"). This registration requires ongoing
compliance with the 1934 Act and its periodic filing requirements as well as a
wide range of Federal and State securities laws. These requirements include,
but are not limited to, the filing of annual, quarterly and other reports with
the SEC, certain requirements as to the solicitation of proxies from
shareholders as well as other proxy rules, and compliance with the reporting
requirements and "short-swing" profit rules imposed by section 16 of the 1934
Act.
Item 2. Description of Property
Properties
The Company owns no real property but utilizes the main office of the Bank.
The Company's and the Bank's executive offices are located at 165 North Main
Street, Killbuck, Ohio. The Company pays no rent or other form of
consideration for the use of this facility. All offices are owned by the Bank.
The Bank has five offices located in Holmes County (1) and one in Knox County
(2). The Bank anticipates construction to begin in the spring of 1999 on a
new full service branch facility in Sugarcreek, Ohio. The Bank's total
investment in office property and equipment was $6.0 million with a net book
value $3.4 million at December 31, 1998. The offices are at the following
locations.
Main Office: (1) Berlin Branch (1) Mt. Hope Branch (1)
165 North Main Street 4853 East Main Street 8115 State Rt. 241
Killbuck, Ohio 44637 Berlin Ohio 44610 Mt. Hope, Ohio 44660
Millersburg North Millersburg South Daville Branch (2)
Branch (1) Branch (1) 701 S. Market
181 N. Washington Street 1642 S. Washington Danville, Ohio 43014
Street
Millersburg, Ohio 44654 Millersburg,
Ohio 44654
Item 3 Legal Proceedings
Neither the Bank nor the Company is involved in any material legal
proceedings. The Bank, from time to time, is a party to litigation which
arises in the ordinary course of business, such as claims to enforce liens,
claims involving the origination and servicing of loans, and other issues
related to the business of the Bank. In the opinion of management the
resolution of any such issues would not have a material adverse impact on the
financial position, results of operation, or liquidity of the Bank or the
Company.
Item 4 Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
10
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters
As of December 31, 1998, the Company had 931 shareholders of record who
collectively held 705,331 of the 1,000,000 authorized shares of the Company's
no par value stock.
There is no established public trading market for the Company's common stock
and the shares of the Company are not listed on any exchange. Sale price
information is based on information reported to the Company by individual
buyers and sellers of the Company stock. The following table summarizes the
high and low prices and dividend information for 1998 and 1997, adjusted for
the five for one stock split on May 1, 1998. Cash dividends are paid on a
semi-annual basis.
Cash
Dividends
Quarter Ended High Low Paid
- ------------------- ------- ------- ---------
1998 March 31 $69.50 $69.50 N/A
June 30 Unknown Unknown .50
September 30 82.63 82.63 N/A
December 31 90.56 85.31 .55
1997 March 31 Unknown Unknown N/A
June 30 54.30 54.30 .44
September 30 55.99 55.51 N/A
December 31 Unknown Unknown .48
The Company has paid regular semi-annual cash dividends since it became a bank
holding company in 1992, and assuming the ability to do so, it is anticipated
that the Company will continue to declare regular semi-annual cash dividends.
For information on dividends per share, net income per share and ratio of
dividends to net income per share see the Selected Financial Data on page 7 of
the Annual Report to Shareholders of Killbuck Bancshares, Inc. for the year
ended December 31, 1998, included in this report as Exhibit 13, is
incorporated herein by reference.
The ability of the Company to pay dividends will depend on the earnings of its
subsidiary bank and its financial condition, as well as other factors such as
market conditions, interest rates and regulatory requirements. Therefore, no
assurances may be given as to the continuation of the Company's ability to pay
dividends or maintain its present level of earnings. See Note 15 to the
audited Consolidated Financial Statements for a discussion on subsidiary
dividends of the Annual Report to Shareholders of Killbuck Bancshares, Inc.
for the year ended December 31, 1998, included in this report as Exhibit 13 is
incorporated herein by reference.
The common stock of the Company is not subject to any redemption provisions or
restrictions on alienability. The common stock is entitled to share pro rata
in dividends and in distributions in the event of dissolution or liquidation.
There are no options, warrants, privileges or other rights with respect to
Company stock at the present time, nor are any such rights proposed to be
issued.
11
Item 6 Selected Financial Data
Selected Financial Data on page 7 of the Annual Report to Shareholders Of
Killbuck Bancshares, Inc. for the year ended December 31, 1998, included in
this report as Exhibit 13, is incorporated herein by reference.
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations on Pages 8 through 16 of the Annual Report to Shareholders of
Killbuck Bancshares, Inc. for the year ended December 31, 1998, included in
this report as Exhibit 13, is incorporated herein by reference. Additional
statistical information noted below is provided pursuant to Guide 3,
Statistical Disclosure by Bank Holding Companies.
Investment Portfolio
Book Value of Investments
Book values of investment securities at December 31 are as follows (in
thousands):
December 31,
-----------------------------
1998 1997 1996
-------- -------- --------
Securities available for sale:
U.S. Treasury securities $ 9,372 $ 9,802 $ 998
Obligations of U.S. Government
agencies 28,755 24,233 30,956
Equity securities 1,101 1,044 889
-------- -------- --------
Total available for sale 39,228 35,079 32,843
-------- -------- --------
Securities held to maturity:
Obligations of states and political
subdivisions 25,909 23,298 18,265
Corporate securities 1,640 100 100
-------- -------- --------
Total held to maturity 27,549 23,398 18,365
-------- -------- --------
Total $ 66,777 $ 58,477 $ 51,208
======== ========= ========
12
MATURITY SCHEDULE OF INVESTMENTS
The following table presents the investment portfolio, the weighted average
yield and maturities at December 31, 1998 (dollars in thousands):
After three After one
Within three months but year but After five but
months Within one year Within five years Within ten years After 10 years
-------------- --------------- ----------------- ---------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Total
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- -------
Available for Sale (1)(2)
U.S. Treasury securities $ 3,705 5.97% $ 2,619 5.97% $ 3,048 5.67% $ 0 0.00% $ 0 0.00% $ 9,372
Obligations of U.S.
Government agencies and
corporations 800 5.36 705 5.72 20,480 5.78 6,770 6.08 0 0.00 28,755
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- -------
Total $ 4,505 5.86% $ 3,324 5.92% $23,528 5.77% $ 6,770 6.08% $ 0 0.00% $38,127
======= ===== ======= ===== ======= ===== ======= ===== ======= ===== =======
Held to Maturity
Obligations of states and
political subdivisions (3) $ 150 4.50% $1,785 4.63% $ 8,141 4.95% $13,619 4.74% $ 2,214 4.55% $25,909
Corporate bonds 0 0.00 0 0.00 272 5.20 1,010 5.85 358 6.15 1,640
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- -------
Total $ 150 4.50% $1,785 4.63% $ 8,413 4.96% $14,629 4.82% $ 2,572 4.77% $27,549
======= ===== ======= ===== ======= ===== ======= ===== ======= ===== =======
(1) The weighted average yield has been computed using the historical
amortized cost for available for sale securities.
(2) Excludes $1,101 of equity securities which have no stated maturity.
(3) Weighted average yields on nontaxable obligations have been computed
based on actual yield stated on the security.
Excluding holdings of U.S. Treasury and other agencies and corporations of the
U.S. Government, there were no investments in securities of any one issuer
that exceeded 10% of the Bank's shareholder equity at December 31, 1998.
13
TYPES OF LOANS
The following table presents the composition of the loan portfolio and the
percentage of loans by type as follows (dollars in thousands):
December 31,
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Real estate-residential $ 49,226 35.7% $ 41,473 34.0% $ 39,820 34.2% $ 38,264 35.7% $ 39,233 38.0%
Real estate-farm 4,376 3.2 3,847 3.1 4,589 3.9 4,578 4.3 4,956 4.8
Real estate-commercial 22,713 16.4 21,205 17.4 18,088 15.6 18,286 17.0 17,455 16.9
Real estate-construction 1,238 .9 783 .6 1,947 1.7 345 .3 1,950 1.9
Commercial and other 37,753 27.4 33,745 27.7 34,036 29.3 28,008 26.1 84 22.9
Consumer and credit card 2,585 .4 0,981 .2 7,779 .3 7,774 .6 5,960 15.5
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
$137,891 100.0% $122,034 100.0% $116,259 100.0% $107,255 100.0% $103,238 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
14
The largest category of loans comprising the Bank's loan portfolio is
residential real estate loans. These loans are primarily single family
residential real estate loans secured by a first mortgage on the dwelling.
The risks associated with these loans are primarily the risk of default in
repayment and inadequate collateral. The second largest loan segment of the
Bank's loan portfolio is the commercial and other category. The loans
comprising this category represent loans to business interest, located
primarily within the Bank's defined market areas, with no significant industry
concentration. Commercial loans include both secured and unsecured loans.
The risks associated with these loans are principally the risk in default of
the payment of principal resulting from economic problems of the commercial
customer, economic downturn effecting the market in general and in the case of
secured loans inadequate collateral. Real estate commercial loans represent
the next category and include development loans as well as investment
commercial real estate such as land loans. These loans have risks which
include the risk of default in the repayment of principal and inadequate
collateral as well as the risk of cash flow interruption due to, in the case
of rental real estate, the inability to obtain or collect adequate rental
rates. Consumer and credit card loans comprise the next largest area of the
Bank's loan portfolio. These loans include consumer installment, including
automobile loans as well as personal and credit card loans. The risks
inherent in these loans include the risk of default in principal, repayment
and in the case of secured loans, the risk of inadequate collateral.
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATE
The following table presents maturity distribution and interest rate
sensitivity of real estate commercial, real estate - construction and
commercial and other loans at December 31, 1998 (dollars in thousands):
After 1 Year
Within Within
1 Year 5 Years After 5 Years Total
------- ------------ ------------- -------
Real estate commercial $ 410 $ 1,295 $21,008 $22,713
Real estate construction 1,238 0 0 1,238
Commercial and other 18,695 13,064 5,993 37,752
------- -------- ------- -------
$20,343 $14,359 $27,001 $61,703
======= ======== ======= =======
Fixed interest rates $ 5,465 $ 6,404 $ 3,202 $15,071
Variable interest rates 14,878 7,955 23,799 46,632
------- -------- ------- -------
$20,343 $14,359 $27,001 $61,703
======= ======== ======= =======
15
RISK ELEMENTS
Loans are subject to ongoing periodic monitoring by management and the board
of directors. 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 a result of the deterioration of the borrower. The
table below presents information concerning nonperforming assets including
nonaccrual loans, loans 90 days or more past due, renegotiated loans, other
real estate and repossessed assets at December 31, (dollars in thousands).
December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
Loans on nonaccrual basis $ 21 $121 $ 31 $ 62 $206
Loans past due 90 days or more 155 75 122 7 173
Renegotiated loans - - - - -
---- ---- ---- ----- ----
Total nonperforming loans 176 196 153 69 379
Other real estate 73 - - - -
Repossessed assets - - - - -
---- ---- ---- ----- ----
Total nonperforming assets $249 $196 $153 $ 69 $379
==== ==== ==== ===== ====
Nonperforming loans as a percent of total loans .13% .16% .13% .06% .37%
====== ====== ====== ====== ======
Nonperforming loans as a percent of total assets .08% .10% .08% .04% .25%
====== ====== ====== ====== ======
Nonperforming assets as a percent of total assets .11% .10% .08% .04% .25%
====== ====== ====== ====== ======
The amount of interest income that would have been recognized had the loans
performed in accordance with their original terms was approximately $923 and
the amount of interest income that was recognized was $-0- for the year ended
December 31, 1998.
There are no loans as of December 31, 1998, other than those disclosed above
as either nonperforming or impaired, where known information about the
borrower caused management to have serious doubts about the borrower's ability
to comply with their contractual repayment obligations. There are no
concentration of loans to borrowers engaged in similar activities which exceed
10% of total loans that management is aware of. Based upon the ongoing
quarterly review and assessment of credit quality, management is not aware of
any trends or uncertainties related to any accounts which might have a
material adverse effect on future earnings, liquidity or capital resources.
There are no other interest bearing assets that would be subject to disclosure
as either nonperforming or impaired if such interest bearing assets were
loans.
16
LOAN LOSS EXPERIENCE
Management makes periodic provisions to the allowance for loan losses to
maintain the allowance at an acceptable level commensurate with the credit
risks inherent in the loan portfolio. There can be no assurances, however,
that additional provisions will not be required in future periods. The
following table presents a summary of loan losses by loan type and changes in
the allowance for loan losses for the years ended December 31, (dollars in
thousands):
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Allowance for loan losses at beginning of year $ 1,745 $ 1,653 $ 1,545 $ 1,378 $ 1,239
Provision charged to expense 183 180 180 180 180
Charge-offs:
Real estate-residential 1 0 0 31 0
Real estate-farm 0 0 0 0 0
Real estate-commercial 0 0 0 0 0
Real estate-construction 0 0 0 0 0
Commercial and other 35 20 12 7 8
Consumer and credit card 181 170 99 81 89
-------- -------- -------- -------- --------
Total charge-offs 217 190 111 119 97
-------- -------- -------- -------- --------
Recoveries:
Real estate-residential 0 0 0 0 0
Real estate-farm 0 0 0 0 0
Real estate-commercial 0 0 0 1 0
Real estate-construction 0 0 0 0 0
Commercial and other 7 7 17 27 18
Consumer and credit card 40 95 22 78 38
-------- -------- -------- -------- --------
Total recoveries 47 102 39 106 56
-------- -------- -------- -------- --------
Net charge-offs 170 88 72 13 41
Business acquisition 93 0 0 0 0
-------- -------- -------- -------- --------
Allowance for loan losses at end of period $1,851 $1,745 $1,653 $1,545 $1,378
======== ======== ======== ======== ========
Total loans outstanding $137,891 $122,034 $116,259 $107,255 $103,298
======== ======== ======== ======== ========
Average loans outstanding $127,214 $119,552 $112,005 $106,307 $ 99,826
======== ======== ======== ======== ========
Allowance for loan losses as a percent of total loans 1.34% 1.43% 1.42% 1.44% 1.34%
Net charge-offs as a percent of average loans .13% .07% .06% .01% .04%
17
The Bank reviews the adequacy of its allowance for loan losses on a quarterly
basis. In determining the adequacy of its allowance account the Bank makes
general allocations based upon loan categories, nonaccrual, past due and
classified loans. After general allocations, the Bank makes specific
allocations for individual credits. Any remaining balance is determined to be
unallocated. The Bank has determined that the reserve is adequate as of
December 31, 1998, based upon its analysis and experience. However, there can
be no assurance that the current allowance for loan losses will be adequate to
absorb all future loan losses.
The following table presents management's estimate of the allocation of the
allowance for loan losses among the loan categories, although the entire
allowance balance is available to absorb any actual charge-offs that may
occur, along with the percentage of loans in each category to total loans
(dollars in thousands):
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
% % % % %
of of of of of
Loans Loans Loans Loans Loans
to to to to to
Total Total Total Total Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Real estate residential $ 467 35.7% $ 402 34.0% $ 360 34.2% $ 328 35.7% $ 320 38.0%
Real estate farm 28 3.2% 35 3.1% 38 3.9% 38 4.3% 39 4.8%
Real estate commercial 257 16.4% 273 17.4% 229 15.6% 198 17.0% 236 16.9%
Real estate construction 11 .9% 6 .6% 15 1.7% 3 .3% 15 1.9%
Commercial and other loans 762 27.4% 568 27.7% 574 29.3% 640 26.1% 503 22.9%
Consumer and credit loans 326 16.4% 342 17.2% 341 15.3% 269 16.6% 221 15.5%
Unallocated 0 0.0% 119 0.0% 96 0.0% 69 0.0% 44 0.0%
-------- ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,851 100.0% $1,745 100.0% $1,653 100.0% $1,545 100.0% $1,378 100.0%
======== ====== ====== ====== ====== ====== ====== ====== ====== ======
18
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The Bank's primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. Because of the nature of the Bank's operations, the
Bank is not subject to currency exchange or commodity price risk and, since
the Bank has no trading portfolio, it is not subject to trading risk.
Currently, the Bank has equity securities that represent only 1.65% of its
investment portfolio and, therefore, equity price risk is not significant.
The Bank's loan portfolio, concentrated primarily within the surrounding
market area, is subject to risks associated with the local economy. Since all
of the interest earning assets and interest bearing liabilities are located at
the Bank all of the interest rate risk lies at the Bank level. As a result,
all significant interest rate risk management procedures are performed at the
Bank level.
The Bank actively manages interest rate sensitivity and asset/liability
products through an asset/liability management committee. The principle
purposes of asset-liability management are to maximize current net interest
income while minimizing the risk to future earnings of negative fluctuations
in net interest margin and to insure adequate liquidity exists to meet
operational needs.
In an effort to reduce interest rate risk and protect itself from the negative
effects or rapid or prolonged changes in interest rates, the Bank has
instituted certain asset and liability management measures, including
underwriting long-term fixed rate loans that are saleable in the secondary
market, offering longer term deposit products and diversifying the loan
portfolio into shorter term consumer and commercial business loans. In
addition, since the mid-1980's, the Bank has originated adjustable-rate loans
and as of December 31, 1998, they comprised approximately 62% of the total
loan portfolio.
One of the principal functions of the Company's asset/liability management
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of this program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize
the fluctuations in the net interest spread and achieve consistent growth in
net interest income during periods of changing interest rates.
Interest rate sensitivity is measured as the difference between the volume of
assets and liabilities that are subject to repricing in a future period of
time. These differences are known as interest sensitivity gaps. The Bank
utilizes gap management as the primary means of measuring interest rate risk.
Gap analysis identifies and quantifies the Bank's exposure or vulnerability to
changes in interest rates in relationship to the Bank's interest rate
sensitivity position. A rate sensitive asset or liability is one which is
capable of being repriced (i.e., the interest rate can be adjusted or
principal can be reinvested) within a specified period of time. Subtracting
total rate sensitive liabilities (RSL) from total rate sensitive assets (RSA)
within specified time horizons nets the Bank's gap positions. These gaps
reflect the Bank's exposure to changes in market interest rates, as discussed
below.
19
Because many of the Bank's deposit liabilities are capable of being
immediately repriced, the Bank offers variable rate loan products in order to
help maintain a proper balance in its ability to reprice various interest
bearing assets and liabilities. Furthermore, the Bank's deposit rates are not
tied to an external index. As a result, although changing market interest
rates impact repricing, the Bank has retained much of its control over
repricing.
The Bank conducts the rate sensitivity analysis through the use of a
simulation model which also monitors earnings at risk by projecting earnings
of the Bank based upon an economic forecast of the most likely interest rate
movement. The model also calculates earnings of the Bank based upon what are
estimated to be the largest foreseeable rate increase and the largest
foreseeable rate decrease. Such analysis translates interest rate movements
and the Bank's rate sensitivity position into dollar amounts by which earnings
may fluctuate as a result of rate changes. A 2% immediate increase in
interest rates would increase earnings by 7.70% and a 2% immediate decrease in
interest rates would decrease earnings by 7.61%.
The data included in the table that follows indicates that the Bank is
liability sensitive within one to two years. Generally, a liability sensitive
gap indicates that declining interest rates could positively affect net
interest income as expense of liabilities would decrease more rapidly than
interest income would decline. Conversely, rising rate could negatively
affect net interest income as income from assets would increase less rapidly
than deposit costs. During times of rising interest rates, an asset sensitive
gap could positively affect net interest income as rates would be increased on
a larger volume of assets as compared to deposits. As a result, interest
income would increase more rapidly than interest expense. An asset sensitive
gap could negatively affect net interest income in an environment of
decreasing interest rates as a greater amount of interest bearing assets could
be repricing at lower rates. Although rate sensitivity analysis enables the
Bank to minimize interest rate risk, the magnitude of rate increases or
decreases on assets versus liabilities may not correlate directly. As a
result, fluctuations in interest spreads can occur even when repricing
capabilities are perfectly matched.
It is the policy of the Bank to generally maintain a gap ratio within a range
that is plus 20 percent to minus 10 percent of total assets for the time
horizon of one year. When Management believes that interest rates will
increase it can take actions to increase the RSA/RSL ratios. When Management
believes interest rates will decline, it can take actions to decrease the
RSA/RSL ratio.
During 1998, in order to adjust its interest rate sensitivity, the Bank's
focus was on spreading out the maturities of time deposits within the one year
time frame while continuing to make variable rate loans. The above strategy
was implemented to better position the Bank for rate changes in either
direction. The Bank's asset/liability management focus for 1999 will include
improving the Bank's rate sensitivity gap. As noted above, at December 31,
1998 the Bank was liability sensitive, however, the cumulative rate
sensitivity gap was such that the Bank's earnings and capital should not be
materially affected by the repricing of assets and liabilities due to
increases or decreases in interest rates in 1999.
20
Changes in market interest rate can also affect the Bank's liquidity position
through the impact rate changes may have on the market value of the Bank's
investment portfolio. Rapid increases in market rates can negatively impact
the market values of investment securities. As securities values decline it
becomes more difficult to sell investments to meet liquidity demands without
incurring a loss. The Bank can address this by increasing liquid funds which
may be utilized to meet unexpected liquidity needs when a decline occurs in
the value of securities.
The following table presents the Bank's interest rate sensitivity gap position
(dollars in thousands):
INTEREST RATE SENSITIVITY GAPS
(IN THOUSANDS)
1999 2000 2001 2002 2003 Thereafter Total
-------- -------- -------- -------- -------- -------- --------
Interest-earnings assets:
Loans:
Fixed $ 7,521 $ 3,568 $ 5,263 $ 6,766 $ 4,510 $ 25,198 $ 52,826
Variable 85,065 0 0 0 0 0 85,065
Securities:
Fixed 9,764 7,587 8,732 6,116 9,506 25,072 66,777
Variable 0 0 0 0 0 0 0
Other interest-earning assets 15,200 0 0 0 0 0 15,200
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets 117,550 11,155 13,995 12,882 14,016 50,270 219,868
-------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Demand and savings deposits 63,467 0 0 0 0 0 63,467
Time deposits:
Fixed 79,330 11,617 3,806 923 2,075 3,341 101,092
Variable 1,067 302 0 0 0 0 1,369
Short-term borrowings 3,335 0 0 0 0 0 3,335
FHLB advances 0 0 0 0 0 8,587 8,587
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 147,199 11,919 3,806 923 2,075 11,928 177,850
-------- -------- -------- -------- -------- -------- --------
Interest rate sensitivity gap (29,649) (764) 10,189 11,959 11,941 38,342
Cumulative rate sensitivity gap $(29,649) $(30,413) $(20,224) $ (8,265) $ 3,676 $ 42,018
======== ======== ======== ======== ======== ========
Interest rate sensitivity gap
as a percent of interest
earning assets (13.48%) (13.83%) (9.20%) (3.76%) 1.67% 19.11%
======== ======== ======== ======== ======== ========
21
Item 8 Financial Statements and Supplementary Data
The report of independent auditors and consolidated financial statements,
included on pages 17 through 36 of the Annual Report to shareholders of
Killbuck Bancshares, Inc. for the year ended December 31, 1998, included in
this report as Exhibit 13, are incorporated herein by reference.
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10 Directors and Executive Officers of Registrant
The following table lists the Non-Director, Executive Officers of the Company
and its subsidiary, Killbuck Savings Bank Company, and certain other
information with respect to each individual, as of December 31, 1998. The
information required by this item with respect to Directors and other
executive officers of the Company and its subsidiary, Killbuck Savings Bank
Company, is incorporated herein by reference to the information under the
heading "Election of Directors and Information with Respect to Directors and
Officers" in the Proxy Statement of the Company. The information required
regarding disclosure of any known late filings or failure by an insider to
file a report required by Section 16(a) of the Securities Exchange Act is
incorporated herein by reference to the information under the heading
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Proxy Statement of the Company.
Name Age All Positions with Company and Bank
- ---------------- --- ----------------------------------------------------
Craig A. Lawhead 41 Vice president and treasurer of Company since 1992;
Executive vice president of bank since 1990.
John D. Boley 38 Vice president and secretary of Company since 1992;
Senior vice president and cashier of Bank since 1990.
Executive officers of the Company and Bank reside in or near Killbuck, Ohio
and all of the executive officers have been with the Company and Bank the past
five years.
Item 11 Executive Compensation
Information required by this item is incorporated herein by reference to the
information under the heading "Executive Compensation and Other Information"
in the Proxy Statement of the Company.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated herein by reference to the
information under the heading "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement of the Company.
22
Item 13 Certain Relationships and Related Transactions
Information required by this item is incorporated herein by reference to the
information under the heading "Certain Relationships and Related Transactions"
in the Proxy Statement of the Company and in Note 5 of the Notes to
Consolidated Financial statements appearing at Page 27 of the Annual Report to
Shareholders for the year ended December 31, 1998, included in this report as
Exhibit 13, and incorporated herein by reference.
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8
Financial Statements and Schedules
The following consolidated financial statements of Killbuck Bancshares, Inc.
and subsidiary, included in the Annual Report to Shareholders for the year
ended December 31, 1998, are incorporated by reference in item 8:
Report of Independent Auditors'
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statement of Income for the Years ended December 31, 1998,
1997 and 1996
Consolidated Statement of Changes in Shareholders' Equity for the Years ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
Schedules are omitted because they are inapplicable, not required, or the
information is included in the consolidated financial statements or notes
thereto.
Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
23
Exhibits
--------
The following exhibits are filed herewith and/or are incorporated herein by
reference.
Exhibit
Number Description
- ------- -------------------------------------------------------------------
3(i) Certificate and Articles of Incorporation of Killbuck Bancshares,
Inc.*
3(ii) Code of regulations of Killbuck Bancshares, Inc.*
10 Agreement and plan of reorganization with Commercil Savings Bank
Company*
12 Statement regarding computation of ratios.
13 Portions of the 1998 Annual Report to Shareholders
22 Subsidiary of the Holding Company.*
24 Consent of S.R. Snodgrass, A.C.
27 Financial Data Schedule (electronic filing only)
99 Proxy statement dated March 15, 1999 for the Annual Shareholders
meeting to be held April 12, 1999.(1)
*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.
(1) Except for the portions of the proxy expressly incorporated by reference,
the proxy is furnished solely for the information of the Commission and is
not deemed "filed" as part hereof.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Killbuck Bancshares, Inc.
-------------------------
(Registrant)
By: Luther E. Proper
---------------------
Luther E. Proper
President and Chief Executive Officer/Director
(Duly authorized representative)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signatures Description Date
- --------------------- -------------------------- --------------
/s/ Luther E. Proper
- -------------------- President, Chief Executive March 13, 1999
Luther E. Proper Officer and Director
/s/ John W. Baker
- -------------------- Director March 13, 1999
John W. Baker
/s/ Robert D. Bell
- -------------------- Director March 13, 1999
Robert D. Bell
/s/ Ted Bratton
- -------------------- Director March 13, 1999
Ted Bratton
/s/ Richard L. Fowler
- -------------------- Director March 13, 1999
Richard L. Fowler
/s/ Thomas D. Gindlesberger
- -------------------- Director March 13, 1999
Thomas D. Gindlesberger
/s/ Allan R. Mast
- -------------------- Director March 13, 1999
Allan R. Mast
/s/ Dean J. Mullet
- -------------------- Director March 13, 1999
Dean J. Mullet
/s/ Kenneth F. Taylor
- -------------------- Director March 13, 1999
Kenneth F. Tayor
/s/ Michael S. Yoder
- -------------------- Director March 13, 1999
Michael S. Yoder
25