-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LRJbRGVgWgiEYvi78anP1lSqQoKyt9hLTNKOXlvO6bEb3CORPDxV6vsZFj0ir4FB Fh/EqFJhKE3Qq2BCS1HJfQ== 0000950152-98-002007.txt : 19980317 0000950152-98-002007.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950152-98-002007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANCFIRST OHIO CORP CENTRAL INDEX KEY: 0000868572 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 311294136 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18840 FILM NUMBER: 98566152 BUSINESS ADDRESS: STREET 1: 422 MAIN ST CITY: ZANESVILLE STATE: OH ZIP: 43702 BUSINESS PHONE: 6144528444 MAIL ADDRESS: STREET 1: 422 MAIN STREET CITY: ZANESVILLE STATE: OH ZIP: 43701 FORMER COMPANY: FORMER CONFORMED NAME: BANCFIRST CORP /OH/ DATE OF NAME CHANGE: 19600201 10-K 1 BANCFIRST OHIO FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1997 0-18840 ----------------- ------- BancFirst Ohio Corp. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-1294136 - --------------------------------- ----------------------------------- (State or other jurisdiction (I.R.S. employer identification No.) of incorporation or organization) 422 Main Street Zanesville, Ohio 43701 - ---------------------------------------- --------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (614) 452-8444. --------------- Securities registered pursuant to section 12 (b) of the Act:
Name of each exchange Title of each class on which registered - ------------------- --------------------- None None
Securities registered pursuant to Section 12 (g) of the Act: Title of each class - --------------------------------------------------------- Common Stock, no par value - --------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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. 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. [ ] Page 1 of 65 Pages Exhibit Index Appears on Page 63 2 As of March 2, 1998 the approximate aggregate market value of the voting stock beneficially owned by non-affiliates of the registrant was $131,892,000 computed on the basis of $47.00 per share, the closing sales price on the NASDAQ-National Market on March 2, 1998. On that date, 3,982,952 shares of Common Stock, no par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year, pursuant to Regulation 14A, are incorporated by reference into Items 10, 11, 12 and 13 of Part III of this annual report. 2 3 TABLE OF CONTENTS
PART I Page(s) - ------ ------- Item 1 - Business........................................................ 4 Item 2 - Properties...................................................... 15 Item 3 - Legal Proceedings............................................... 18 Item 4 - Submission of Matters to a Vote of Security Holders.......................................... 18 PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters............................... 19 Item 6 - Selected Financial Data......................................... 20 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 21 Item 8 - Financial Statements and Supplementary Data..................... 35 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 60 PART III Item 10 - Directors and Executive Officers of the Registrant................................................ 60 Item 11 - Executive Compensation.......................................... 60 Item 12 - Security Ownership of Certain Beneficial Owners and Management..................................... 60 Item 13 - Certain Relationships and Related Transactions.............................................. 60 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 61 Signatures.................................................................... 62
3 4 ITEM 1: BUSINESS GENERAL The Company, a registered bank and savings and loan holding company organized under the laws of the State of Ohio, conducts a full-service commercial and retail banking business through its wholly-owned subsidiary banks and savings and loan association (collectively referred to as "Banking Subsidiaries"), The First National Bank of Zanesville ("FNB"), Bellbrook Community Bank ("Bellbrook") and County Savings Bank ("County"). County was acquired on August 14, 1996. At December 31, 1997, the Company had total assets of $1.08 billion, total deposits of $747.0 million and shareholders' equity of $85.3 million. The Company is headquartered in Zanesville, Ohio, the county seat of Muskingum County. Through the Banking Subsidiaries, the Company operates 25 full-service banking facilities which serve Muskingum, Licking, Franklin and Greene Counties, Ohio. The Company's primary market extends along Interstate 70 in central Ohio and includes the markets of Zanesville, Newark, Columbus, and Dayton. The Company focuses on providing personalized, high quality and comprehensive service in order to develop and maintain long-term relationships with customers. The Banking Subsidiaries offer a wide range of banking services, including commercial loans, residential and commercial real estate loans, consumer loans, personal and business checking accounts, savings accounts, demand and time deposits, safe deposit services, trust, private banking and investment services. The Company believes its profitability in recent years is in part attributable to a growth strategy that it began implementing in 1992. At December 31, 1991, the Company had nine branch offices with assets of $298.2 million (as originally reported), an equity to assets ratio of 11.82% (as originally reported), and operations heavily concentrated in Muskingum County. Management believed that increased size would allow the Company to (i) take advantage of increased operating efficiencies associated with the attendant economies of scale; (ii) achieve greater diversification of its markets and products; (iii) enhance shareholder value by more effectively leveraging its equity capital; and (iv) more effectively position itself to take advantage of acquisition opportunities in the rapidly changing financial services industry. Given the Company's dominant share in its primary market area, management recognized that the desired growth would have to come primarily from expansion into new markets. In recognition of these factors, management undertook a growth strategy which emphasized (i) acquiring existing branch locations from competing institutions as well as de novo branching; (ii) increasing lending to small businesses through the formation of small business lending centers outside Muskingum County; (iii) acquiring bank and thrift holding companies; (iv) expanding trust, private banking and investment services; (v) offering responsive decision making and personalized customer service; and (vi) improving technology to enhance services and manage the cost of operations. Management believes it has been successful in implementing its strategy. In 1992, FNB acquired a $30.6 million branch of a savings and loan association in Dresden, Ohio. Also in 1992, FNB opened the first of four small business lending centers which serve small businesses and specialize in loans guaranteed by the U.S. Department of Commerce, Small Business Administration ("SBA"). During 1997, FNB was the largest originator of SBA 7(a) loans in Ohio and was awarded the designation of Preferred Lender by the SBA. Currently, FNB has small business lending centers located in Akron, Cleveland, Columbus, Cincinnati and Dayton, Ohio and Detroit, Michigan. The Company's 1995 acquisition of Bellbrook provided access to the Dayton metropolitan market. In July 1996, FNB opened its first supermarket office, located in Reynoldsburg, Ohio. Finally, on August 14, 1996, the Company acquired County which had total assets of approximately $554 million. The Company's strategic direction has culminated in over $700 million of asset growth since December 31, 1991, an increase in excess of 250%. The Company's Board of Directors and management intend to seek continued controlled growth of the organization through selective acquisitions of banks and/or savings and loan associations. The objective of such acquisitions will be to: increase the opportunity for quality earning asset growth, deposit generation and fee-based income opportunities; diversify the earning assets portfolio and core deposit base through expansion into new geographic markets; and improve the potential profits from its combined operations through economies of scale. In furtherance of such objectives, the Company intends to continue its pursuit of business combinations which fit its strategic objectives of growth, diversification and market expansion 4 5 and which provide the potential for enhanced shareholder value. At the present time, the Company does not have any understanding or agreements for any acquisition or combination. MARKET AREA AND COMPETITION The financial services industry in the Company's primary market area is highly competitive. The Banking Subsidiaries compete actively with regional and super-regional bank holding companies, community banks, savings institutions, mortgage bankers, brokerage firms, insurance companies and loan production offices in each of their primary market areas. The primary means of competition are through interest rates, pricing and service. Changes in the financial services industry resulting from fluctuating interest rates, technological changes and deregulation have resulted in an increase in competition, cost of funds, merger activity and customer awareness of product and service differences among competitors. Management believes that the deposit mix coupled with the legal lending limit regulations of each of the Banking Subsidiaries is such that no material portion of deposits has been obtained from a single customer; and consequently, the loss of any one customer would not have a materially adverse effect on the business of any of the Banking Subsidiaries. The business of the Company and the Banking Subsidiaries is not seasonal to any material degree. REGULATION AND SUPERVISION. As a bank holding company, the Company is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System ("FRB") under the Bank Holding Company Act ("BHCA"). Under the BHCA, bank holding companies may not, in general, directly or indirectly acquire ownership or control of more than 5% of the voting shares of any company, including a bank or bank holding company, without the prior approval of the FRB. In addition, bank holding companies are generally prohibited from engaging in nonbanking (i.e., commercial or industrial) activities, subject to certain exceptions under the BHCA. As a result of the acquisition of County, the Company became a savings and loan holding company. As a savings and loan holding company, the Company is subject to regulation under the Home Owners Loan Act of 1933, as amended ("HOLA") and its examination and reporting requirements, and is subject to the supervision of the Office of Thrift Supervision ("OTS") except with respect to bank subsidiaries. The OTS has broad power to impose restrictions on savings and loan holding company activities if the OTS determines there is reasonable cause to believe that the continuation by the holding company constitutes a serious risk to the financial safety, soundness or stability of a subsidiary thrift. A restriction, issued in the form of a directive, may limit (i) the payment of dividends by subsidiary thrifts; (ii) transactions between the thrift, the savings and loan holding company, and the subsidiaries or affiliates of either; and (iii) any activities of the thrift that might create a serious risk that the liabilities of the savings and loan holding company or its other affiliates may be imposed on the thrift. With certain exceptions, a savings and loan holding company must obtain the prior written approval of the OTS before acquiring control of a thrift or savings and loan holding company through the acquisition of stock or through a merger or some other business combination. HOLA prohibits the OTS from approving an acquisition by a savings and loan holding company which would result in the holding company controlling thrifts in more than one state unless (i) the holding company is authorized to do so by the FDIC as an emergency acquisition, (ii) the holding company controls a thrift which operated an office in the additional state or states on March 5, 1987, or (iii) the statutes of the state in which the thrift to be acquired is located specifically permit a thrift chartered by such state to be acquired by an out-of-state thrift or savings and loan holding company. FNB and Bellbrook are also subject to regulation, supervision, and examination by the office of the Comptroller of Currency ("OCC"). FNB is subject to regulation, supervision, and examination by the OCC. Bellbrook is subject to regulation, supervision, and examination by the Federal Deposit Insurance Corporation ("FDIC") and the Ohio Division of Financial Institutions. County is subject to regulation, supervision, and examination by the OTS and the Ohio Division of Financial Institutions. Depository institutions are also affected by various state and federal laws, including those relating to consumer protection and similar matters, as well as by the fiscal and monetary policies of the federal government and its agencies, 5 6 including the FRB. An important purpose of these policies is to curb inflation and control recessions through control of the supply of money and credit. The FRB and/or OTS uses its powers to establish reserve requirements of depository institutions and to conduct open market operations in United States government securities so as to influence the supply of money and credit. These policies have a direct effect on the availability of loans and deposits and on interest rates charged on loans and paid on deposits, with the result that federal policies have a material effect on the earnings of depository institutions, and hence, the Company. ACQUISITIONS OF CONTROL. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the FRB and/or OTS has been given 60 days' prior written notice of such proposed acquisition and within that time period the FRB and/or OTS has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued, or unless the acquisition is subject to FRB and/or OTS approval under the BHCA. An acquisition may be made prior to the expiration of the disapproval period if the FRB and/or OTS issues written notice of its intent not to disapprove the action. Under a rebuttable presumption established by the FRB, the acquisition of more than 10% of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as the Company, would constitute the acquisition of control of such bank holding company. In addition, any "company" would be required to obtain the approval of the FRB and/or OTS under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding shares of any class of voting stock of the Company, or otherwise obtaining "control" over the Company. Under the BHCA, "control" generally means (i) the ownership or control of 25% or more of any class of voting securities of the bank holding company, (ii) the ability to elect a majority of the bank holding company's directors, or (iii) the ability otherwise to exercise a controlling influence over the management and policies of the bank holding company. REGULATORY DIVIDEND RESTRICTIONS. The Company is a legal entity separate and distinct from its subsidiaries. The principal source of cash flow of the Company, including cash flow to pay dividends on the Company's common stock and debt service on its debt, is dividends from its subsidiaries. Various federal and state statutes and regulations limit the amount of dividends that may be paid to the Company by its banking and thrift subsidiaries without regulatory approval. These regulatory limitations on dividends, coupled with other regulatory provisions discussed below, may have the effect of exacerbating any future financial difficulties by further reducing the availability of funding sources. The approval of the OCC is required for the payment of any dividend by a national bank if the total of all dividends declared by the board of directors of such bank in any calendar year would exceed the total of (i) the bank's retained net profits (as defined and interpreted by regulation) for the current year plus (ii) the retained net profits (as defined and interpreted by regulation) for the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. In addition, a national bank can pay dividends only to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined and interpreted by regulation). Under the Federal Deposit Insurance Act (the "FDI Act"), an insured depository institution may not pay any dividend if it is undercapitalized or if said payment would cause it to become undercapitalized. Also, the federal bank regulatory agencies have issued policy statements providing that depository institutions and their holding companies should generally pay dividends only out of current operating earnings. Regulations promulgated by the OTS limit the amount of dividends that may be paid by a thrift. In general, these limitations depend upon whether or not the thrift's capital equals or exceeds its fully phased-in capital requirement immediately prior to, and on a pro forma basis after giving effect to, a proposed dividend. A thrift that meets or exceeds its fully phased-in capital requirements is categorized as a "Tier 1 association" and may not, without the prior approval of the OTS, pay annual dividends in an amount in excess of (i) its net income (as defined and interpreted by regulation) for that year, plus (ii) the amount that would reduce by one-half the thrift's "surplus capital ratio" at the beginning of the year or 75% of its net income over the most recent four-quarter period. For purposes of determining the amount of dividends which may be paid by a thrift, the term "surplus capital ratio" means the percentage by which the thrift's capital-to-assets ratio exceeds the ratio of its fully phased-in capital requirement to its assets. A thrift with capital equal to or in excess of its minimum capital requirement, but less than its fully phased-in capital requirement, is subject to more stringent limitations on the amount of dividends that it may pay in any year without the prior approval of the OTS, while a thrift that does not have 6 7 capital in an amount equal to its minimum capital requirements may not pay any dividends without the prior approval of the OTS. A thrift which meets the fully phased-in capital requirements but which has received notice from the OTS that it is in need of more than normal supervision will be treated as a thrift in one of the other two classes noted above, at the discretion of the OTS, unless the OTS determines that such treatment is not necessary to ensure the thrift's safe and sound operation. The OTS also may prohibit any dividend otherwise permitted upon a determination that the dividend would constitute an unsafe or unsound practice. Among the circumstances posing such a risk would be a dividend by a Tier 1 thrift whose capital is decreasing because of substantial losses. HOLDING COMPANY STRUCTURE. Transactions involving banking subsidiaries. The Banking Subsidiaries are subject to Federal Reserve Act restrictions that limit the transfer of funds or other items of value from the Banking Subsidiaries to the Company or the Company's subsidiaries ("affiliates") in "covered transactions." In general, covered transactions include loans and other extensions of credit, investments and asset purchases, as well as other transactions involving the transfer of value from a banking subsidiary to an affiliate or for the benefit of an affiliate. Unless an exemption applies, covered transactions by a banking subsidiary with any of its affiliates is limited in amount to 10% of that banking subsidiary's capital and surplus (as defined and interpreted by regulation) and, with respect to covered transactions by a banking subsidiary with any one of its affiliates is limited in amount to 10% of the banking subsidiary's capital and surplus (as defined and interpreted by regulation) and, with respect to covered transactions with all affiliates, in the aggregate, to 20% of that banking subsidiary's capital and surplus. Furthermore, loans and extensions of credit to affiliates generally are required to be secured in specified amounts. Transactions involving thrift subsidiaries. OTS regulations impose restrictions on "covered transactions" similar to those applicable to banks. Such regulations prohibit a thrift and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. In addition, a thrift is generally prohibited from making any loan or extension of credit to any affiliate unless the affiliate is engaged solely in activities permissible to affiliates of thrifts under HOLA, and is generally prohibited from purchasing any securities of any affiliate, other than a subsidiary. A thrift and its subsidiaries may generally not purchase a low quality asset from an affiliate unless the thrift, pursuant to an independent credit evaluation, committed itself to purchase the asset prior to the time the asset was acquired by the affiliate. Covered transactions are required to be on terms consistent with safe and sound practices. LIABILITY OF COMMONLY CONTROLLED INSTITUTIONS. Under the FDI Act, an insured depository institution that is under common control with another insured depository institution is generally liable for any loss incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of such commonly controlled institution, or any assistance provided by the FDIC to any such commonly controlled institution that is in danger of default. The term "default" is defined generally to mean the appointment of a conservator or receiver and the term "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. The effect of this provision is to diminish the protection previously available to holding companies through operation of separate depository institution subsidiaries. SOURCE OF STRENGTH DOCTRINE. Under a policy asserted by the FRB, a bank holding company is expected to serve as a source of financial and managerial strength to each of its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank. This support may be sought by the FRB at times when a bank holding company may not have the resources to provide it or, for other reasons, would not otherwise be inclined to provide it. REGULATORY CAPITAL STANDARDS AND RELATED MATTERS. The FRB, the OCC, the FDIC, and the OTS have adopted substantially similar risk-based and leverage capital guidelines for United States banking organizations. The guidelines establish a systematic, analytical framework that makes regulatory capital requirements sensitive to differences in risk profiles among depository institutions, takes off-balance sheet exposure into account in assessing capital adequacy and reduces disincentives to holding liquid, low-risk assets. Risk-based capital ratios are determined by classifying assets and specified off-balance sheet financial instruments into weighted categories with higher levels of capital being required for categories perceived as representing greater risk. FRB policy also provides that banking organizations generally, and, in particular, those that are experiencing internal growth or actively making acquisitions, are expected to maintain capital positions that are substantially above the minimum supervisory levels, without significant reliance on intangible assets. 7 8 Under the risk-based capital standard, the minimum consolidated ratio or total capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) required by the FRB for bank holding companies, such as the Company, is currently 8%. At least one-half of the total capital must be composed of common equity, retained earnings, qualifying noncumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain items such as goodwill and certain other intangible assets ("Tier 1 capital"). The remainder may consist of qualifying hybrid capital instruments, perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, preferred stock that does not qualify as Tier 1 capital and a limited amount of loan and lease loss reserves ("Tier 2 capital"). As of December 31, 1997, the Company's Tier 1 and total capital to risk-adjusted assets ratios were 10.4% and 11.3%, respectively. In addition to the risk-based standard, the Company is subject to minimum leverage ratio guidelines. The leverage ratio is defined to be the ratio of a bank holding company's Tier 1 capital to its total consolidated quarterly average assets less goodwill and certain other intangible assets (the "Leverage Ratio"). These guidelines provide for a minimum Leverage Ratio of 3% for bank holding companies that have the highest supervisory rating. All other bank holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%. Neither the Company nor any of the Banking Subsidiaries has been advised by the appropriate federal banking regulator of any specific Leverage Ratio applicable to it. As of December 31, 1997, the Company's Leverage Ratio was 6.5%. The Banking Subsidiaries are also subject to capital requirements substantially similar to those imposed by the FRB on bank holding companies. As of December 31, 1997, each of the Banking Subsidiaries had capital in excess of the foregoing minimum regulatory capital requirements. Under the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), the OTS is required to establish capital requirements for thrifts no less stringent than those established by the OCC with respect to banks subject to its jurisdiction. The OCC has established capital requirements for banks under its jurisdiction that are substantially similar to bank holding company capital requirements adopted by the FRB and described above. FIRREA and the regulations promulgated by the OTS thereunder require thrifts to have minimum regulatory "Tangible Capital" equal to at least 1.5% of adjusted total assets. In addition, thrifts are required to maintain minimum regulatory "Core Capital" equal to 3% of adjusted total assets, which, as discussed below, may be increased on a case by case basis, and to comply with risk-based capital requirements comparable to those applicable to banks, which currently require minimum risk-based capital equal to 8% of total risk-adjusted assets. For purposes of determining compliance with Core Capital and risk-based capital standards, thrifts may not include supervisory goodwill in the Core Capital calculation. The term "Tangible Capital" includes common stockholders' equity, non-cumulative perpetual preferred stock and related earnings, minority interests in equity accounts of consolidated subsidiaries and certain non-withdrawal accounts and pledged deposits of mutual associations, minus goodwill and other intangible assets and investments in non-includable subsidiaries. The term "Core Capital" means Tangible Capital plus qualifying supervisory goodwill and certain intangible assets. At least 50% of a thrift's risk-based capital requirement must be met with Core Capital, or "Tier 1," while the remainder may be met with supplementary, or "Tier 2 Capital." Tier 2 Capital generally includes the allowance for loan and lease losses, certain cumulative perpetual preferred stock, certain hybrid debt-equity instruments and qualifying subordinated debt. The risk-based capital regulations require the inclusion of 100% of the principal amount of mortgage loans sold with recourse ("recourse servicing") for purposes of calculating risk-weighted assets. The assets are then to be included in the appropriate risk-weighted category based on the requirements of the regulation for mortgage loans. At December 31, 1997, County had Tangible Capital and Core Capital equal to 6.88% of adjusted total assets, and risk-based capital equal to 11.68% of total risk-adjusted assets. PROMPT CORRECTIVE ACTION. The FDI Act requires the federal bank regulatory agencies to take "prompt corrective action" in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution's treatment for purposes of the prompt corrective action provisions will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. 8 9 The federal financial institution regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels. The relevant capital measures are the total capital ratio, Tier 1 capital ratio and the Leverage Ratio. Under the regulations, a national bank will be: (i) "well capitalized" if it has a total capital ratio of 10% or greater, a Tier 1 capital ratio of 6% or greater and a Leverage Ratio of 5% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total capital ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater and a Leverage Ratio of 4% or greater (3% in certain circumstances) and is not "well capitalized," (iii) "undercapitalized" if it has a total capital ratio of less than 8%, a Tier 1 capital ratio of less than 4% or a Leverage Ratio of less than 4% (3% in certain circumstances); (iv) "significantly undercapitalized" if it has a total capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a Leverage Ratio of less than 3%; and (v) "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. In addition, a depository institution's primary federal regulatory agency is authorized to downgrade the depository institution's capital category to the next lower category upon a determination that the depository institution is an unsafe or unsound condition or is engaged in an unsafe or unsound practice. An unsafe or unsound practice can include receipt by the institution of a less than satisfactory rating on its most recent examination with respect to its asset quality, management, earnings, or liquidity. As of December 31, 1997, both FNB and Bellbrook had capital levels that qualify them as "well capitalized" under such regulations. County is also "well capitalized" under OTS standards. The banking agencies are permitted to establish, on an institution by institution basis, individualized minimum capital requirements exceeding the general requirements described above. Failure to meet the capital guidelines described above could subject an insured bank to a variety of sanctions, including asset growth restrictions and termination of deposit insurance by the FDIC. The FDI Act generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be "undercapitalized." "Undercapitalized" depository institutions are subject to limitations on, among other things, asset growth; acquisition; branching; new business lines; acceptance of brokered deposits; and borrowings from the Federal Reserve System and are required to submit a capital restoration plan. The federal bank regulatory agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lessor of (i) an amount equal to 5% of the depository institution's total assets at the time it became "undercapitalized," and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. The OTS is permitted to establish, on an institution by institution basis, individualized minimum capital requirements exceeding the general requirements described above. Failure to meet the capital guidelines described above could subject an insured thrift to a variety of sanctions, including asset growth restrictions and termination of deposit insurance by the FDIC. QUALIFIED THRIFT LENDER ("QTL") TEST Except in certain cases, HOLA requires savings associations to meet a QTL test to avoid certain restrictions on their operations. Most savings associations are required to maintain 65% of their "portfolio assets" (total assets minus goodwill, intangibles, property used to conduct business and liquid assets up to 20% of assets) in "qualified thrift investments" (primarily loans and other investments related to residential real estate together with certain other assets). A savings institution's failure to meet the QTL test may result in: (i) limitations on new investments and activities; (ii) imposition of branching restrictions; (iii) loss of FHLB borrowing privileges; and (iv) limitations on the payments of dividends. 9 10 RECENT DEVELOPMENTS As a result of the Deposit Insurance Funds Act of 1996, the Secretary of the Treasury is to review recommendations for the establishment of a common charter for banks and savings associations. Accordingly, County may be required to convert its state savings association charter to either a national bank charter, a state depository institution charter, or a newly designed charter. If such a recommendation is enacted into law, the Company will no longer be regulated at the holding company level by the OTS. On February 12, 1998, FNB filed an application with the Office of the Comptroller of the Currency to merge County and Bellbrook under the national bank charter of FNB. Following this merger, if approved, County and Bellbrook will cease to exist and the Company will no longer be subject to regulation by the OTS or State of Ohio, Division of Financial Institutions. LENDING PRACTICES Loan Portfolio Composition. In accordance with its lending policies, the Company strives to maintain a diversified loan portfolio. The following table sets forth in dollar amounts the composition of the Company's loan portfolio for the past five years:
DECEMBER 31, --------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (IN THOUSANDS) Residential mortgage $ 363,333 $ 337,911 $ 105,604 $ 100,963 $ 92,036 Construction mortgage 9,215 7,716 2,859 1,232 1,695 Commercial, financial and industrial 302,098 299,630 107,015 103,415 90,268 Consumer 86,381 76,598 53,340 42,333 28,084 --------- --------- --------- --------- --------- Total loans 761,027 721,855 268,818 247,943 212,083 Allowance for possible loan losses (6,617) (6,599) (3,307) (3,095) (3,007) --------- --------- --------- --------- --------- Net loans $ 754,410 $ 715,256 $ 265,511 $ 244,848 $ 209,076 ========= ========= ========= ========= =========
The Company's loan portfolio totaled $754.4 million at December 31, 1997, representing 69.8% of total assets. At December 31, 1996, 1995 and 1994, the Company's loan portfolio represented 67.7%, 55.7% and 57.0% of total assets, respectively. Residential mortgages outstanding at December 31, 1997 represented 47.7% of the Company's total loans. As of December 31, 1997, the Company's outstanding commercial loans represented 39.7% of total loans and the Company's outstanding consumer loans constituted 11.4% of total loans. Residential mortgage. The Company originates loans secured by first lien mortgages on single-family residences located mainly in its market areas. The Company originates adjustable and fixed-rate products with a maturity of up to 30 years, although these loans may be repaid over a shorter period due to prepayments and other factors. These loans generally have a maximum loan to value ratio of 80%, although this ratio could go to 100% under certain circumstances. The Company primarily retains adjustable-rate loans, and the associated servicing, in its portfolio. The adjustable-rate mortgages currently offered by the Company have interest rates which adjust, on the applicable anniversary date of the loan, or on the loan's three, five, or seven-year anniversary, subject to annual and term limitations. Rates are generally based upon an index tied to the weekly average yield on U.S. Treasury securities (adjusted to a constant maturity), as made available by the FRB, plus a margin. The acquisition of County enhanced the Company's secondary marketing function and provided the Company with the opportunity to offer fixed-rate mortgage products while limiting the interest rate risk inherent in maintaining a large portfolio of long-term, fixed-rate assets. The Company sells loans in the secondary market on both a servicing retained and servicing released basis. At December 31, 1997, residential mortgage loans totaled $363.3 million, or 47.7% of total loans. 10 11 Construction mortgage. The Company originates loans to construct commercial real estate properties and to construct single-family residences. For owner occupied commercial construction properties, the maximum loan to value ratio is generally 75%. For non-owner occupied commercial construction properties, the maximum loan to value ratio is generally 70%. For residential construction properties, the guidelines for residential mortgages apply. All construction loans are secured by first lien mortgages. These construction lending activities generally are limited to the Company's primary market area. At December 31, 1997, construction loans totaled $9.2 million, or 1.2% of total loans. Commercial. The Company originates commercial loans for various business purposes including the acquisition and refinancing of commercial real estate. Such loans are originated for commercial purposes or secured by commercial real estate. The majority of the Company's commercial real estate loans are secured by first liens on owner-occupied properties, a majority of which is located in the Company's primary market areas. The Company's underwriting policy for commercial real estate loans generally requires that the ratio of the loan amount to the value of the collateral cannot exceed 75%. At December 31, 1997, the Company's largest commercial loan had a principal balance of $6.8 million. The Company is active in the SBA Section 7(a) lending program. Under this program, a portion of qualifying loans (typically 75%) is guaranteed by the SBA. The SBA guaranteed loans are adjustable-rate loans made at prime rate plus a margin. The Company also originates loans under the Farmer's Home Administration Business and Industry (Farmer's B&I) and other government guarantee programs. The Company generally sells the guaranteed portions of originated loans through these programs while retaining the rights to service these loans. At December 31, 1997, the guaranteed portion of loans that were held-for-sale totaled $4.6 million. Management continues to seek growth opportunities in small business lending. To date, the Company's small business lending centers in the Columbus and Cleveland market areas have produced strong results. The Columbus location is the center for the Company's small business lending operations. A small business lending center was opened in Akron, Ohio during the second quarter of 1996, and an additional small business lending center was established in Dayton, Ohio in July 1996. During 1997 additional offices were established in the Cincinnati, Ohio and Detroit, Michigan areas. In determining future activities in this area, management continually assesses the uncertainties that exist surrounding government programs, including the SBA, due to scrutiny by the United States Congress. Consumer. The Company originates consumer loans which are primarily for personal, family or household purposes, in order to offer a full range of financial services to its customers. At December 31, 1997, the Company's consumer loans amounted to $86.4 million, or 11.4% of total loans. The underwriting standards employed by the Company for consumer loans include a determination of the applicant's payment history on other debts and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Home equity loans are secured by first or second lien mortgages. The maximum loan to value ratio for first lien mortgages is generally 90%. Home equity loans that are secured by second lien mortgages generally have a loan to value ratio of at least 80% when added to the balance of the first lien mortgage. At December 31, 1997, 62.8% of the Company's consumer loans consisted of direct and indirect loans to finance the purchase of new and used automobiles and the remainder of the consumer loans consisted of loans for various other individual purposes. The targeted loan to value ratio for loans secured by new and used automobiles is 80%. Depending on market conditions and customer credit ratings, the Company may lend up to a 100% loan to value ratio. Loan Loss Experience. The Company records a provision necessary to maintain the allowance for possible loan losses at a level sufficient to provide for potential future loan losses. The provision is charged against earnings when it is established. Allowances for possible loan losses are established based on management's best judgment, which involves a continuing review of the economic conditions, changes in the size and composition of the portfolio and review of individual problem loans. Growth of the loan portfolio, loss experience, economic conditions, delinquency levels, credit mix, and analysis of selected loans are factors that affect judgments concerning the adequacy of the allowance. Actual losses on loans are charged against the allowance for possible loan losses. 11 12 The following table sets forth the allocation of the Company's allowance for possible loan losses for each of the periods presented:
DECEMBER 31, ---------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------------- -------------------- -------------------- -------------------- ------------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF OF OF OF OF LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL --------- --------- --------- -------- --------- -------- --------- -------- --------- -------- (DOLLARS IN THOUSANDS) Residential mortgage $1,120 47.7% $1,392 46.8% $ 117 39.3% $ 196 40.7% $ 183 43.4% Construction mortgage 24 1.2 24 1.1 -- 1.1 -- 0.5 -- 0.8 Commercial 2,830 39.7 2,704 41.5 3,164 39.8 1,822 41.7 2,086 42.6 Consumer 2,643 11.4 2,479 10.6 26 19.8 1,077 17.1 738 13.2 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- TOTAL $6,617 100.0% $6,599 100.0% $3,307 100.0% $3,095 100.0% $3,007 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
The increase in the allowance for possible loan losses at December 31, 1996, compared to 1995, resulted primarily from the addition of County's allowance at the time of acquisition. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". Loan maturities and repricing periods of the loan portfolio at December 31, 1997 were as follows:
WITHIN ONE TO AFTER ONE FIVE FIVE YEAR YEARS YEARS TOTAL ------ ------ ----- ----- (IN THOUSANDS) Residential mortgage $220,979 $ 71,197 $ 71,157 $363,333 Construction mortgage 8,922 293 -- 9,215 Commercial and Consumer 198,494 146,158 43,827 388,479 -------- -------- -------- -------- $428,395 $217,648 $114,984 $761,027 ======== ======== ======== ======== Loans due after one year with: Floating rates $150,919 Predetermined rates $181,713
INVESTMENT SECURITIES The Company's investment strategy is to manage the portfolio to include interest rate sensitive assets to reduce interest rate risk against interest rate sensitive liabilities. The portfolio is also structured to generate cash flows and, coupled with the readily marketable nature of such assets, it serves as a secondary source of liquidity to accommodate heavy loan demand, as well as deposit withdrawals. Subject to various government regulatory restrictions, banks and savings and loan associations may own direct obligations of the U.S. Treasury, federal agency securities, bank-qualified tax-exempt securities (including those issued by states and municipalities), certificates of deposit and time deposits, bankers' acceptances, commercial paper, corporate bonds, and mortgage-backed and asset-backed securities and related products. 12 13 The following table sets forth certain information relating to the Company's investment securities portfolio.
OBLIGATIONS OTHER U.S. OF STATE AND MORTGAGE- U.S. GOVERNMENT POLITICAL BACKED YIELD TREASURY AGENCIES SUBDIVISIONS SECURITIES OTHER TOTAL (FTE) -------- -------- ------------ ---------- ----- ----- ----- (DOLLARS IN THOUSANDS) DECEMBER 31, 1997 SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing Within one year $ 2,310 $ -- $ 1,688 $ 64,165 $ 9,670 $ 77,833 6.77% After one through five years 258 -- 5,979 91,006 4,264 101,507 6.95% After five through ten years -- 7,145 7,163 12,628 6,096 33,032 7.07% After ten years -- 5,609 2,130 15,170 1,017 23,926 7.06% ------- ------- ------- -------- ------- -------- Total carrying value $ 2,568 $12,754 $16,960 $182,969 $21,047 $236,298 ======= ======= ======= ======== ======= ======== Yield (FTE) 5.92% 7.14% 7.65% 6.86% 6.82% 6.92% Average maturity (in years) .61 9.81 6.03 6.44 11.78 7.01 Securities held-to-maturity: Maturity/Repricing Within one year $ -- $ -- $ 585 $ 3,692 $ 1,879 $ 6,156 8.57% After one through five years -- -- 3,313 10,554 743 14,610 8.02% After five through ten years -- -- 1,895 6,947 -- 8,842 8.08% After ten years -- -- -- 5,609 6 5,615 8.19% ------- ------- ------- -------- ------- -------- Total carrying value $ -- $ -- $ 5,793 $ 26,802 $ 2,628 $ 35,223 ======= ======= ======= ======== ======= ======== Fair value -- -- 5,967 28,048 2,630 36,645 Yield (FTE) -- -- 7.15% 8.20% 9.96% 8.16% Average maturity (in years) -- -- 4.29 6.19 3.42 5.68 DECEMBER 31, 1996 SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing: Within one year $ 9,793 $ -- $ 901 $ 48,200 $ 8,491 $ 67,385 6.56% After one through five years 2,088 553 6,775 97,382 -- 106,798 6.89% After five through ten years -- 6,920 5,507 17,188 4,988 34,603 6.80% After ten years -- 4,955 3,118 19,902 1,016 28,991 6.97% ------- ------- ------- -------- ------- -------- Total carrying value $11,881 $12,428 $16,301 $182,672 $14,495 $237,777 ======= ======= ======= ======== ======= ======== Yield (FTE) 7.14% 7.34% 7.69% 6.71% 6.15% 6.79% Average maturity (in years) .71 10.35 6.20 7.47 8.14 7.14 Securities held-to-maturity: Maturity/Repricing: Within one year $ -- $ 1,999 $ 475 $ 3,846 $ -- $ 6,320 7.59% After one through five years -- -- 4,782 11,868 50 16,700 8.12% After five through ten years -- -- 3,797 9,247 -- 13,044 8.00% After ten years -- -- -- 10,729 6 10,735 8.09% ------- ------- ------- -------- ------- -------- Total carrying value $ -- $ 1,999 $ 9,054 $ 35,690 $ 56 $ 46,799 ======= ======= ======= ======== ======= ======== Fair value -- 2,000 9,163 36,431 58 47,652 Yield (FTE) -- 6.55% 8.01% 8.09% 8.00% 8.01% Average maturity (in years) -- .50 4.91 7.73 4.00 6.87 DECEMBER 31, 1995 SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing: Within one year $ 8,526 $ 7,323 $ 597 $ 861 $ -- $ 17,307 6.96% After one through five years 9,777 1,025 6,773 79,059 -- 96,634 6.72 After five through ten years -- 3,042 8,023 22,346 4,320 37,731 6.78 After ten years -- -- 2,455 14,777 956 18,188 7.09 ------- ------- ------- -------- ------- -------- Total carrying value $18,303 $11,390 $17,848 $117,043 $ 5,276 $169,860 ======= ======= ======= ======== ======= ======== Yield (FTE) 7.20% 7.15% 7.59% 6.66% 5.02% 6.80% Average maturity (in years) 1.09 5.80 5.96 5.41 21.80 5.54
13 14
OBLIGATIONS OTHER U.S. OF STATE AND MORTGAGE- U.S. GOVERNMENT POLITICAL BACKED YIELD TREASURY AGENCIES SUBDIVISIONS SECURITIES OTHER TOTAL (FTE) -------- -------- ------------ ---------- ----- ----- ----- (DOLLARS IN THOUSANDS) SECURITIES HELD-TO-MATURITY: MATURITY: Within one year $ -- $ -- $ 991 $ 11 $ -- $1,002 8.27% After one through five years -- 400 1,954 35 -- 2,389 7.55 After five through ten years -- -- 4,926 43 -- 4,969 7.64 After ten years -- -- -- 32 -- 32 6.81 ------- ------ ------ ---- ------ ------ Total carrying value $ -- $ 400 $7,871 $121 $ -- $8,392 ------- ------ ------ ---- ------ ------ Fair value $ -- $ 407 $8,006 $135 $ -- $8,548 Yield (FTE) -- 7.76% 7.70% 6.81% -- 7.69% Average maturity (in years) - 4.75 5.05 4.90 -- 5.03
14 15 DEPOSITS Deposits from local markets serve as the Company's major source of funds for investments and lending. The Company offers a wide variety of retail and commercial deposit accounts designed to attract both short-term and long-term funds. Certificates of deposit, regular savings, money market deposits, and NOW checking accounts have been the primary sources of new funds for the Company. The Company does not solicit deposits outside of its market area nor does it accept deposits through deposit brokers. Maturities of the Company's time certificates of deposit of $100,000 or more outstanding at December 31, 1997 are summarized as follows:
AMOUNT ------------- (IN THOUSANDS) 3 months or less $ 63,728 3 through 6 months 17,596 6 through 12 months 22,627 Over 12 months 29,007 --------- Total $ 132,958 =========
BORROWINGS The Company has historically funded its earning assets principally through customer deposits within its primary market area. In its attempt to manage its cost of funding sources, management has pursued a strategy which includes a mix of the traditional retail funding sources, combined with the utilization of wholesale funding sources. These funding sources were utilized by management to grow the Company in its efforts to leverage its existing strong capital base. Additionally, management used such funding sources to manage the Company's interest rate risk by match funding and maintaining certain assets on its balance sheet and structuring various other funding sources which traditionally are not available to the Company in the retail market. The Company's Banking Subsidiaries are members of the Federal Home Loan Bank ("FHLB") system. This membership is maintained to enhance shareholder value through the utilization of FHLB advances to aid in the management of the Company's cost of funds by providing alternative funding sources. FHLB advances provide flexibility in the management of interest rate risk through the wide range of available products with characteristics not necessarily present in the existing deposit base, as well as the ability to manage liquidity. EMPLOYEES At December 31, 1997, the Company had 412 employees, 337 of whom were full-time and 75 of whom were part-time. Full-time employees receive a comprehensive range of employee benefit programs and salaries that management considers to be generally competitive with those provided by other major employers in its market areas. None of the Company's employees is represented by any union or other labor organization, and management believes that its employee relations are good. The Company has never experienced a work stoppage. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Company does not have any banking offices located in a foreign country and has no foreign assets, liabilities, or related income and expense for the years presented. ITEM 2: PROPERTIES The Company's headquarters and FNB's main office are located in The First National Bank Building, 422 Main Street, Zanesville, Ohio. The building is used exclusively by the Company and FNB. 15 16 All of the offices listed below are owned by the Company or its subsidiaries free and clear of any encumbrances.
LOCATION DESCRIPTION -------- ----------- FNB 1. Main Office 422 Main Street Six story building built in 1934 with approximately 34,302 square Zanesville, OH 43701 feet. 2. Duncan Falls Office Main & Mound Streets Duncan Falls, OH 43734 One story building built in 1959 with 1,148 square feet. 3. Frazeysburg Office Third & State Streets Frazeysburg, OH 43822 One story building built in 1959 with 1,302 square feet. 4. Maple-Bell Office 2801 Maple Avenue Zanesville, OH 43701 One story building built in 1972 with 2,316 square feet. 5. New Concord Office 27 East Main Street One story building with basement, built in 1962 with 4,478 square New Concord, OH 43762 feet. 6. Terrace Point Office 1820 Maple Avenue One story building with basement, built in 1959 with 2,427 square Zanesville, OH 43701 feet. 7. Zane Plaza Office 225 N. Maysville Avenue Zanesville, OH 43701 One story building built in 1965 with 2,386 square feet. 8. Dresden Office 727 Main Street Dresden, OH 43821 Two story building built in 1930 with 1,000 square feet. COUNTY 1. Arlington Office One story building acquired in 1977 with approximately 2,170 square 3005 Northwest Blvd. feet. Upper Arlington, OH 43221 2. Bexley Office 2585 East Main Street One story building acquired in 1977 with approximately 2,814 square Bexley, OH 43209 feet. 3. Clintonville Office One story building acquired in 1982 with approximately 1,847 square 4311 North High Street feet. Columbus, OH 43215 4. Heath Office One story building built in 1962 with approximately 1,987 square 580 Hebron Road feet. Heath OH 43056
16 17
5. Newark - Downtown Office Two story building with a basement built in 1955 with approximately 42 North Third Street 13,400 square feet. Newark, OH 43055 6. Newark - 21st Street Office One story building built in 1975 with approximately 1,600 square 973 North 21st Street feet. This building is located on property that is subject to a Newark, OH 43055 ground lease dated January 1, 1975 for a term of 99 years, with a 99 year renewal option. Monthly rental payments are $450. 7. Pataskala Office One story building built in 1973 with approximately 1,385 square 26 West Broad Street feet. Pataskala, OH 43062 8. Utica Office One story building built in 1976 with approximately 828 square feet. 8 North Main Street Utica, OH 43080 BELLBROOK 1. Main Office One story building built in 1971 with approximately 5,700 square 2010 Lakeman Drive feet. Bellbrook, OH 45305
The following locations are leased by FNB: The Sunrise Office, 80 Sunrise Center, Zanesville, Ohio , 43701, is a one story building built in 1980, containing 2,420 square feet. FNB is purchasing the land on a land contract basis. The original amount of the land contract was $75,000. The present balance of the land contract is $52,311, with monthly principal and interest payments of $903. The Colony Square Office, 3575 Maple Avenue, Zanesville, Ohio, 43701, is a one story building built in 1982 with 994 square feet. The building is locate on property subject to a ground lease dated February 25, 1982, with a base lease of 15 years followed by a series of five year renewal options aggregating 25 years, favoring the Bank. The current monthly rental payment is $2,300. The Reynoldsburg Financial Center, 6300 East Livingston Avenue, Reynoldsburg, Ohio 43068, is leased space in a supermarket. The lease is for a term of 15 years commencing March 5, 1996 and expiring March 31, 2011, with monthly rental payments of $3,583. This lease may be terminated at the option of FNB on the fifth or tenth anniversaries (March 2001 or March 2006) with 6 months prior notice. The Newark Financial Center, 1040 North 21st Street, Newark, Ohio, 43055, is subleased office space within a building consisting of approximately 2,400 square feet. The sublease is for a term of 50 months, commencing on August 1, 1994, and expiring September 29, 1998, with monthly rental payments of $3,870. The Heath Financial Center, 792 Hebron Road, Heath, Ohio, 43056, is subleased office space within a building consisting of approximately 1,700 square feet. The sublease is for a term of 50 months, commencing on August 1, 1994, and expiring September 29, 1998, with monthly rental payments of $2,500. The Columbus Business Financial Center, Gahanna, Ohio 43230, is leased office space within a building consisting of approximately 3,136 square feet. The lease is for a term of five (5) years, commencing September 21, 1995 and expiring on September 30, 2000, with monthly rental payments of $4,258. 17 18 The Cleveland Loan Production Office, 6140 West Creek Road, Independence, Ohio 44131, is leased office space in a building consisting of approximately 1,443 square feet. The lease is for a term of three years commencing March 1, 1997, and expiring on February 29, 2000, with monthly rental payments of $1,503. The Akron/Canton Loan Production Office, 175 Montrose West Avenue, Copley Township, Ohio 44321, is leased office space in a building consisting of approximately 781 square feet. The lease is for a term of 2 years commencing June 1, 1996 and expiring on May 31, 1998, with monthly rental payments of $1,074. The Cincinnati Loan Production Office, 4000 Executive Park Dr., Cincinnati, Ohio 45241, is leased office space in a building consisting of 652 square feet. The lease is for a term of three years commencing January 1, 1998, and expiring December 31, 2000, with monthly rental payments of $758. The Detroit Loan Production Office, 12900 Hall Rd., Sterling Heights, Michigan 48313, is leased space in a building consisting of 200 square feet. The lease is for a term of one year commencing December 2, 1997, and expiring December 2, 1998, with monthly rental payments of $600. The following locations are leased by County: The Corporate offices (including the Capitol Square branch office), 66 South Third Street, Columbus, Ohio, 43215 is a two story building with a lower level with 15,000 square feet. The lease is for a term of five years commencing August 1993 followed by a series of five year renewal options aggregating 20 years. Minimum monthly rental payments are $ 15,122. The Granville office, 143 East Broadway, Granville, Ohio, 43023 is leased space in an office building consisting of 689 square feet. The lease is for a term of 10 years commencing January, 1983 followed by one 10 year renewal option. Minimum monthly rental payments are $901. The Chillicothe Loan Production office, 38 S. Paint Street, Chillicothe, OH 45601 is leased space in an office building consisting of 800 square feet. The lease is for a term of one year commencing September 1, 1997 and expiring September 1, 1998, with monthly rental payments of $ 500. The Operations Center, 7099 Huntley Road, Worthington, Ohio, 43085 is leased space in an office building consisting of 12,500 square feet. The lease is in the second of 3 two year renewal periods, with monthly rental payments of $5,200. The aggregate annual rentals paid during the Company's last fiscal year does not exceed five percent of its operating expenses. ITEM 3: LEGAL PROCEEDINGS There are no material pending legal proceedings against the Company, other than ordinary litigation incidental to its business. In the opinion of management, the ultimate resolution of these proceedings will not have a material effect on the financial position of the Company. ITEM 4 - SUMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted for a vote of security holders of the Company during the fourth quarter of 1997. 18 19 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS QUARTERLY MARKET AND DIVIDEND INFORMATION
PER SHARE DATA 1997 1996 ------------------------------------------ ------------------------------------------ MARKET PRICE Market Price --------------------------- CASH --------------------------- Cash HIGH LOW DIVIDENDS High Low Dividends --------------------------- -------------- --------------------------- -------------- 1st Quarter $ 33.50 $ 29.50 $ .26 $ 35.50 $ 29.50 $ .25 2nd Quarter 39.25 32.50 .26 36.50 30.50 .25 3rd Quarter 41.00 36.75 .26 32.00 27.25 .25 4th Quarter 51.00 38.75 .27 32.00 28.25 .26
QUARTERLY MARKET AND DIVIDEND INFORMATION On April 30 1993, the Company's common stock commenced trading on the NASDAQ Stock Market under the symbol BFOH. The high and low market prices represent high and low sales prices for the Company's common stock as furnished to the Company by NASDAQ. There were 1,137 and 1,167 shareholders of the Company's common stock at December 31, 1997 and 1996, respectively. The Company plans to continue to pay quarterly cash dividends. The ability of the Company to pay cash dividends is based upon receiving dividends from its Banking Subsidiaries, as well as existing cash balances. As discussed in Note 16 to the consolidated financial statements, certain restrictions exist regarding the ability of the Banking Subsidiaries to pay dividends. 19 20 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997 1996 (5) 1995 1994 1993 ---------- ---------- -------- -------- -------- (DOLLARS IN THOUSANDS) STATEMENT OF INCOME DATA: Interest income $ 84,569 $ 53,177 $ 34,063 $ 27,652 $ 24,863 Interest expense 48,256 28,630 16,357 11,259 9,321 ---------- ---------- -------- -------- -------- Net interest income 36,313 24,547 17,706 16,393 15,542 Provision for possible loan losses 1,221 1,257 967 338 799 Non-interest income 7,916 6,258 4,984 3,801 3,569 Non-interest expense 26,702 21,235 12,805 11,410 10,568 ---------- ---------- -------- -------- -------- Income before income taxes 16,306 8,313 8,918 8,446 7,744 Provision for federal income tax 5,536 2,354 2,706 2,572 2,323 ---------- ---------- -------- -------- -------- Net income $ 10,770 $ 5,959 $ 6,212 $ 5,874 $ 5,421 ---------- ---------- -------- -------- -------- PER SHARE DATA: (1) Net income $ 2.71 $ 1.78 $ 2.09 $ 1.98 $1.82 Dividends 1.05 1.01 0.94 0.89 0.82 Book value 21.44 19.57 16.82 14.76 14.23 Tangible book value 18.25 16.01 16.80 14.72 14.17 BALANCE SHEET DATA: Total assets $1,081,618 $1,056,920 $476,429 $429,384 $387,202 Loans 761,027 721,855 268,818 247,943 212,083 Allowance for possible loan losses 6,617 6,599 3,307 3,095 3,007 Securities 271,521 284,576 178,252 153,595 148,724 Deposits 747,047 732,689 348,545 320,836 310,586 Borrowings 239,449 236,609 74,135 63,525 32,986 Shareholders' equity 85,333 77,894 50,010 43,844 42,295 PERFORMANCE RATIOS: Return on average assets 0.98% 0.85% 1.38% 1.48% 1.51% Return on average equity 13.20 10.05 13.05 13.28 13.19 Net interest margin 3.53 3.78 4.27 4.49 4.78 Interest rate spread 3.07 3.22 3.55 3.89 4.22 Non-interest income to average assets 0.72 0.90 1.11 0.95 0.99 Non-interest expense to average assets(2) 2.30 2.59 2.84 2.87 2.94 Efficiency ratio(3) 56.70 57.33 56.63 56.10 56.09 ASSET QUALITY RATIOS: Non-performing loans to total loans 0.29 0.35 0.38 0.21 0.19 Non-performing assets to total assets 0.28 0.29 0.22 0.12 0.11 Allowance for possible loan losses to total loans 0.87 0.91 1.23 1.25 1.42 Allowance for possible loan losses to non-performing loans 298.3 258.0 322.9 608.1 731.6 Net charge-offs to average loans 0.16 0.19 0.29 0.11 0.09 CAPITAL RATIOS:(4) Shareholders' equity to total assets 7.89 7.37 10.50 10.21 10.92 Tier 1 capital to total assets 6.52 6.06 10.49 10.18 10.89 Tier 1 capital to risk-weighted assets 10.37 10.08 17.70 20.32 20.90
(1) Per share data has been restated to reflect all stock dividends and stock splits. (2) Excludes amortization of intangibles and nonrecurring charges totaling $2,632 in 1996 related to the special one-time SAIF assessment and restructuring costs. (3) The efficiency ratio is equal to non-interest expense (excluding nonrecurring charges) less amortization of intangible assets divided by net interest income determined on a fully tax equivalent basis plus non-interest income less gains or losses on securities transactions and nonrecurring income. (4) For definitions and further information relating to the Company's regulatory capital requirements, see "Supervision and Regulation." (5) The Company's acquisition of County in August 1996 significantly affects the comparability of the Company's results of operations for prior years. 20 21 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY For a comprehensive understanding of the Company's financial condition and performance, this discussion should be considered in conjunction with the Company's Consolidated Financial Statements, accompanying notes, and other information contained elsewhere herein. This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its Banking Subsidiaries operate); competition for the Company's customers from other providers of financial services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; delays in, customer reactions to, and other unforeseen complications with respect to, the planned merger of County and Bellbrook into FNB and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. OVERVIEW The reported results of the Company primarily reflect the operations of the Company's bank and thrift subsidiaries. The Company's results of operations are dependent on a variety of factors, including the general interest rate environment, competitive conditions in the industry, governmental policies and regulations and conditions in the markets for financial assets. Like most financial institutions, the primary contributor to the Company's income is net interest income, which is defined as the difference between the interest the Company earns on interest-earning assets, such as loans and securities, and the interest the Company pays on interest-bearing liabilities, such as deposits and borrowings. The Company's operations are also affected by non-interest income, such as checking account and trust fees and gains from sales of loans. The Company's principal operating expenses, aside from interest expense, consist of salaries and employee benefits, occupancy costs and other general and administrative expenses. On August 14, 1996, the Company acquired County in a transaction accounted for under the purchase method of accounting for business combinations. Accordingly, the Company's consolidated financial statements include the operating results of County from the date of acquisition. At the time of acquisition, County had approximately $554 million in total assets, $411 million in loans and $365 million in total deposits. The Company also recorded goodwill and other intangible assets of $14.5 million as a result of the application of purchase accounting. Funding for the acquisition was provided by proceeds from the issuance of 1 million shares of common stock, $15 million of bank borrowings and approximately $7 million of available cash. On June 30, 1995, the Company acquired Bellbrook in a transaction accounted for under the pooling-of-interests method of accounting for business combinations. Accordingly, the Company's consolidated financial statements have been restated for the periods prior to the transaction to include Bellbrook. Average Balances and Yields. The following tables present, for each of the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and percentage rates, and the net interest margin. Net interest margin is calculated on a fully tax equivalent basis ("FTE"), and refers to net interest income divided by total interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. FTE income includes tax exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. All average balances are daily average balances. Non-accruing loans are included in average loan balances. 21 22
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ---------------------------- ---------------------------- -------------------------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSES RATE(1) BALANCE EXPENSES RATE(1) BALANCE EXPENSES RATE(1) ---------- -------- ------- ---------------------------- ------- -------- ------- (DOLLARS IN THOUSANDS) Securities: Taxable $ 265,450 $18,184 6.85% $191,758 $13,082 6.82% $143,206 $ 9,631 6.73% Tax-exempt 25,357 2,007 7.91 25,632 1,983 7.74 21,931 1,738 7.92 ---------- ------- -------- ------- -------- ------- Total securities 290,807 20,191 6.94 217,390 15,065 6.93 165,137 11,369 6.88 Loans (2): Commercial 312,385 29,617 9.48 186,409 18,121 9.72 108,189 10,836 10.02 Real estate 361,709 28,113 7.77 197,505 14,645 7.42 104,978 8,319 7.92 Consumer 77,705 7,050 9.07 61,600 5,810 9.43 48,539 4,016 8.27 ---------- ------- -------- ------- -------- ------- Total loans 751,799 64,780 8.62 445,514 38,576 8.66 261,706 23,171 8.85 Federal funds sold 6,794 364 5.36 5,055 268 5.30 3,510 193 5.50 ---------- ------- -------- ------- -------- ------- Total earning assets(3) 1,049,400 85,335 8.13% 667,959 53,909 8.07% 430,353 34,733 8.07% ------- ------- ------- Non-interest-earning assets 46,541 30,423 20,066 ---------- -------- -------- Total assets $1,095,941 $698,382 $450,419 ========== ======== ======== Interest-bearing deposits: Demand and savings deposits $ 205,556 $ 5,455 2.65% $170,835 $ 4,546 2.66% $155,480 $ 4,417 2.84% Time deposits 496,975 27,907 5.62 288,100 16,393 5.69 142,987 8,008 5.60 ---------- ------- -------- ------- -------- ------- Total 702,531 33,362 4.75 458,935 20,939 4.56 298,467 12,425 4.16 Borrowings 250,852 14,894 5.94 131,818 7,693 5.84 63,488 3,932 6.19 ---------- ------- -------- ------- -------- ------- Total interest-bearing liabilities 953,383 48,256 5.06% 590,753 28,632 4.85% 361,955 16,357 4.52% Non-interest-bearing deposits 48,933 ------- 41,520 ------- 38,310 ------- ---------- -------- -------- Total interest-bearing liabilities and non-interest-bearing deposits 1,002,316 632,273 400,265 Accrued expenses and other 12,040 6,796 2,555 ---------- -------- -------- Total liabilities 1,014,356 639,069 402,820 Shareholders' equity 81,585 59,313 47,599 ---------- -------- -------- Total liabilities and shareholders' equity $1,095,941 $698,382 $450,419 ========== ======== ======== Net interest income and interest rate spread(4) $37,079 3.07% $25,277 3.22% $18,376 3.55% ======= ==== ======= ==== ======== ==== Net interest margin(5) 3.53% 3.78% 4.27% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities 110.1% 113.1% 118.9%
(1) Calculated on an annualized basis. (2) Non-accrual loans are included in the average loan balances. (3) Computed on an FTE bases utilizing a 34% tax rate. The applicable adjustments were $766, $732 and $670 for the years ended December 31, 1997, 1996 and 1995, respectively. (4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) The net interest margin represents net interest income as a percentage of average interest-earning assets. 22 23 Rate and Volume Variances. Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table discloses the dollar changes in the Company's net interest income attributable to changes in levels of interest-earning assets or interest-bearing liabilities (volume), changes in average yields on interest-earning assets and average rates on interest-bearing liabilities (rate) and the combined volume and rate effects (total). For the purposes of this table, the change in interest due to both rate and volume has been allocated to volume and rate change in proportion to the relationship of the dollar amounts of the change in each. In general, this table provides an analysis of the effect on income of balance sheet changes which occurred during the periods and the changes in interest rate levels.
DECEMBER 31, 1997 VS. 1996 1996 VS. 1995 INCREASE (DECREASE) INCREASE(DECREASE) ----------------------------- ---------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ---- ----- ------ ---- ----- (IN THOUSANDS) Interest-earning assets: Loans: Commercial $ 11,954 $(458) $11,496 $ 7,613 $(328) $ 7,285 Real estate 12,730 738 13,468 6.893 (567) 6,326 Consumer 1,469 (229) 1,240 1,180 614 1,794 -------- ----- ------- ------- ----- ------- Total loans 26,153 51 26,204 15,686 (281) 15,405 Securities: Taxable 5,048 54 5,102 3,310 141 3,451 Tax-exempt (21) 45 24 287 (42) 245 -------- ----- ------- ------- ----- ------- Total securities 5,027 99 5,126 3,597 99 3,696 Federal funds sold 93 3 96 82 (7) 75 -------- ----- ------- ------- ----- ------- Total interest-earning assets(1) 31,273 153 31,426 19,365 (189) 19,176 -------- ----- ------- ------- ----- ------- Interest-bearing liabilities: Deposits: Demand and savings deposits 921 (12) 909 419 (290) 129 Time deposits 11,732 (218) 11,514 8,255 130 8,385 -------- ----- ------- ------- ----- ------- Total interest-bearing deposits 12,653 (230) 12,423 8,674 (160) 8,514 Borrowings 7,065 136 7,201 4,000 (239) 3,761 -------- ----- ------- ------- ----- ------- Total interest-bearing liabilities 19,718 (94) 19,624 12,674 (399) 12,275 -------- ----- ------- ------- ----- ------- Net interest income $ 11,555 $ 247 $11,802 $ 6,691 $ 210 $ 6,901 ======== ===== ======= ======= ===== =======
(1) Computed on a fully tax-equivalent basis, assuming a tax rate of 34%. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Net Income. Net income of the Company totaled $10.8 million for the year ended December 31, 1997, an increase of $4.8 million, or 80.7% from 1996. Basic and diluted earnings per share (hereinafter referred to as "earnings per share") in 1997 equaled $2.71, compared to $1.78 in 1996, a 52.2% increase. Operating results in 1996 include after tax charges of $1.5 million for the one-time special assessment to recapitalize the SAIF and $213,000 for restructuring costs incurred in connection with the consolidation of overlapping operations of the Company's banking and thrift subsidiaries. Earnings in 1996 adjusted to exclude the effects of these non-recurring charges were $7.7 million, or $2.29 per share. Net interest income and non-interest income increased 47.9% and 26.5%, respectively, in 1997 as compared to 1996 while non-interest expense increased 25.7%. The provision for possible loan losses remained fairly constant, decreasing $36,000, or 2.9%. The Company's net interest margin decreased to 3.53% in 1997 as compared to 3.78% in 1996, primarily reflecting the lower net interest margin on County's interest-earning assets as well as the interest cost on acquisition related borrowings. In addition, lower interest rates and a flattening of the yield curve adversely affected the net interest margin in the fourth quarter of 1997. Increases in non-interest income resulted from higher gains on sales of loans, higher levels of fee income and the inclusion of County's operating results for a full year in 1997 compared to four and one half months in 1996. Non-interest expense, excluding the effects of nonrecurring charges noted above, increased primarily as a result of the inclusion of County's operating expenses for a full year in 1997 compared to a partial year in 1996. The Company's return on average assets and return on average equity were .98% and 13.20%, respectively, in 1997, compared to .85% and 10.05%, respectively, in 1996. 23 24 Excluding the nonrecurring charges in 1996 noted above, the Company's return on average assets and return on average equity in 1996 were 1.10% and 12.98%, respectively. The lower return on assets in 1997 compared to 1996 resulted primarily from the lower earnings contribution of County relative to its average assets. Interest Income. Total interest income increased 59.0% to $84.6 million for 1997, compared to $53.2 million for 1996. This increase resulted from a $381.4 million, or 57.1%, increase in average interest-earning assets in 1997. The average balance of loans increased $306.3 million, or 68.7%. These increases related primarily to County which contributed $559.7 million to average earning assets in 1997 compared to $209.0 million in 1996 and $447.6 million to average loans in 1997 compared to $161.9 million in 1996. The weighted average yield on interest-earning assets was 8.13% in 1997, an increase of 6 basis points from 1996, reflecting a relatively stable interest rate environment during most of 1997. The Company's yield on average loans decreased from 8.66% in 1996 to 8.62% in 1997. This resulted primarily from a slightly lower yield on County's loan portfolio due to a higher portion of such loans consisting of lower yielding residential mortgage loans. Yields on the investment portfolio remained relatively stable, increasing from 6.93% in 1996 to 6.94% in 1997. Interest Expense. Total interest expense increased 68.6% to $48.3 million for 1997 as compared to $28.6 million for 1996. Interest expense increased due to a higher average balance of interest-bearing liabilities outstanding and due to a higher cost of funds during 1997 as compared to 1996. The average balance of deposit accounts increased $243.6 million, or 53.1%, to $702.5 million in 1997 as compared to $458.9 million in 1996. Average interest-bearing liabilities increased 61.4%, from $590.8 million to $953.4 million. These increases also primarily resulted from the acquisition of County which contributed $520.6 million to average interest-bearing liabilities in 1997 compared to $195.2 million in 1996 and $364.4 million to average total deposits in 1997 compared to $138.4 million in 1996. The Company's marketing efforts and continued deposit growth at new branch offices as well as funding required by the Company's asset growth strategies also contributed to the increase in average interest-bearing liabilities. The Company's cost of funds increased to 5.06% in 1997 as compared to 4.85% in 1996 primarily due to a higher cost of funds associated with County's interest-bearing liabilities. The cost of funds was also affected by the continued shift by customers into higher yielding certificates of deposit as well as higher borrowing levels relative to total interest-bearing liabilities. Provision for Possible Loan Losses. The provision for possible loan losses decreased $36,000, or 2.9%, to $1.2 million in 1997. The provision for possible loan losses was considered sufficient by management for maintaining an adequate allowance for possible loan losses. Total non-performing loans decreased to $2.2 million at December 31, 1997, from $2.6 million at December 31, 1996. The allowance for possible loan losses at December 31, 1997 was $6.6 million, or .87% of total loans and 298.3% of non-performing loans compared to $6.6 million, or .91% of total loans and 258.0% of non-performing loans at December 31, 1996. Management's estimate of the adequacy of its allowance for possible loan losses is based upon its continuing review of prevailing national and local economic conditions, changes in the size and composition of the portfolio and individual problem credits. Growth of the loan portfolio, loss experience, economic conditions, delinquency levels, credit mix and selected credits are factors that affect judgments concerning the adequacy of the allowance. Non-Interest Income. The following table sets forth the Company's non-interest income for the periods indicated:
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ---- ---- ---- (IN THOUSANDS) Trust and custodian fees $1,807 $1,451 $1,259 Customer service fees 2,023 1,807 1,714 Investment securities gains 88 43 136 Gain on sale of loans 2,202 1,839 1,310 Other 1,796 1,118 565 ------ ------ ------ Total $7,916 $6,258 $4,984 ------ ------ ------
24 25 Total non-interest income increased 26.5% to $7.9 million in 1997, as compared to $6.3 million in 1996. The increase in 1997 was primarily a result of a $1.3 million increase in fees and other income. Fees and other income contributed by County totaled $1.4 million in 1997 compared to $321,000 in 1996. The 1997 total includes a $500,000 gain recognized in connection with the curtailment of post retirement benefits provided to certain Company employees. This curtailment resulted from the Company revising its employee benefit programs to be consistent between its Banking Subsidiaries. The increase in non-interest income was also a result of a $363,000 increase in gains on sales of loans. The Company realized gains of $1.2 million from the sale of SBA loan originations in 1997 compared to $1.8 million in 1996, $689,000 from the sale of residential mortgage loans in 1997 compared to $ 41,000 in 1996 and $299,000 from the sale of Farmers B&I loans in 1997 compared to no such gains in 1996. The increase in gains from sales of residential mortgage loans was primarily attributed to the inclusion of County's results for a full year in 1997 as well as the lower interest rate environment in 1997 as compared to 1996. Also, during the fourth quarter of 1997, the Company originated and held in its portfolio $4.6 million of the guaranteed portion of SBA loan originations that would have been otherwise been sold. Customer service fees, representing service charges on deposits and fees from other banking services, increased 12.0% in 1997, to $2.0 million, from $1.8 million in 1996. This increase resulted from increased basic fee structures as well as from fee income contributed by County to the 1997 results compared to 1996. Trust income increased 24.5% to $1.8 million in 1997 from $1.5 million in 1996. The growth in trust and custodian fee income resulted primarily from the expansion of the Company's customer base and higher asset values. The $678,000 increase in other income to $1.8 million in 1997 compared to $1.1 million in 1996 was primarily attributed to the gain recognized as a result of a curtailment of post retirement benefits, previously discussed, as well as to County's loan service fee and related income. Non-Interest Expense. The following table sets forth the Company's non-interest expense for the periods indicated:
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ---- ---- ---- (IN THOUSANDS) Salaries and employee benefits $14,442 $ 9,995 $ 6,866 Net occupancy expense 2,118 1,221 752 Furniture and equipment expense 708 564 408 Data processing expense 1,079 831 647 Taxes other than income taxes 986 709 518 Federal deposit insurance 374 2,697 430 Amortization of intangibles 1,525 549 28 Other 5,470 4,669 3,156 ------- ------- ------- Total $26,702 $21,235 $12,805 ------- ------- -------
Total non-interest expense increased $5.5 million, or 25.7%, to $26.7 million in 1997 as compared to $21.2 million in 1996. Included in the 1996 totals are pretax charges of $2.3 million for the one time special SAIF assessment and $323,000 for restructuring costs incurred in connection with the consolidation of overlapping operations, previously discussed. In addition, other non-interest expenses added by County that are included in the 1997 results totaled $10.9 million compared to $4.0 million in 1996. Excluding nonrecurring expenses and non-interest expenses added as a result of the County acquisition, total non-interest expenses were $15.8 million in 1997 compared to $14.6 million in 1996, representing an increase of $1.2 million or 8.2%. This increase generally resulted from expansion of the Company's operating activities over the past year as well as costs associated with the increased size of the Company. Salaries and employee benefits accounted for approximately 57.4% of total operating expenses (non-interest expense less amortization of intangibles and nonrecurring charges) in 1997 compared to 55.4% in 1996. The average full time equivalent staff level was 363 in 1997 compared to 274 in 1996. Salaries and employee benefits increased 44.5%, from $10.0 million in 1996 to $14.4 million in 1997, with $3.4 million of the increase resulting from a full year of expenses contributed by County in 1997 compared to a partial year in 1996. In general, higher salaries and employee benefits costs resulted from the Company's continued market expansion as well as new product offerings and an increase in the size of the organization. 25 26 Net occupancy expense increased 73.5% to $2.1 million in 1997 from $1.2 million in 1996. This increase resulted from occupancy expenses of $1.3 million added by County in 1997 compared to $407,000 in 1996. Furniture and equipment expense increased $144,000, or 25.5% in 1997. Expenses of $236,000 were added by County, in 1997 compared to $108,000 in 1996. Data processing expense increased $248,000 in 1997, or 29.8% to $1.1 million from $831,000 in 1996. In addition to $326,000 of expenses added by County in 1997 compared to $112,000 in 1996, higher costs in 1997 resulted from the expansion of technology throughout the Company, the majority of which were implemented during the second half of 1996, to enhance customer service, increase efficiencies and improve information management systems. Taxes other than income taxes increased $277,000, or 39.1%, in 1997 compared to 1996. This increase resulted from $430,000 of expenses added by County in 1997 compared to $140,000 in 1996, offset in part by a benefit recognized as a result of a refund of prior years' taxes. Excluding the special one time SAIF assessment of $2.3 million, Federal deposit insurance expense decreased $14,000 to $374,000 in 1997 from $388,000 in 1996. This decrease resulted from lower premium assessment rates that took effect during 1997 on SAIF insured deposits. Amortization of goodwill and other intangibles resulting from the application of purchase accounting in connection with the County acquisition totaled $1.5 million during 1997 compared to $521,000 in 1996. Excluding the effects of non-recurring charges of $323,000 in 1996 and expenses of $1.3 million added by County in 1997 compared to $395,000 in 1996, other non-interest expenses increased $171,000, or 4.3%, primarily as a result of the expanded volume of business activities. The efficiency ratio is one method used in the banking industry to assess profitability. It is defined as non-interest expense less amortization expense and non-recurring charges divided by the net revenue stream, which is the sum of net interest income on a FTE basis and non-interest income excluding net investment securities gains or losses and nonrecurring income. The Company's efficiency ratio was 56.7% for 1997, as compared to 57.3% for 1996. Controlling costs and improving productivity, as measured by the efficiency ratio, is considered by management a primary factor in enhancing performance. Provision for Income Taxes. The provision for Federal income taxes increased $3.2 million to $5.5 million in 1997, for an effective tax rate of 34.%. This compared to Federal income tax expense of $2.4 million in 1996 which represented an effective tax rate of 28.3%. The increase in expense in 1997 resulted from the overall increase in the level of taxable earnings. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 Net Income. Net income of the Company totaled $6.0 million for the year ended December 31, 1996, a decrease of $253,000, or 4.1% from 1995. Earnings per share in 1996 equaled $1.78, compared to $2.09 in 1995, a 14.8% decrease. Operating results in 1996 include after tax charges of $1.5 million for the one-time special assessment to recapitalize the SAIF and $213,000 for restructuring costs incurred in connection with the consolidation of overlapping operations of the Company's banking and thrift subsidiaries. Net interest income and non-interest income increased 38.6% and 25.6%, respectively, in 1996 as compared to 1995 while the provision for possible loan losses and non-interest expense increased 30.0% and 65.8%, respectively. The Company's net interest margin decreased to 3.78% in 1996 as compared to 4.27% in 1995, primarily reflecting the lower net interest margin on County's interest earning assets as well as the interest cost on acquisition related borrowings. Increases in non-interest income resulted from higher gains on sales of the guaranteed portion of SBA loans, higher levels of fee income and the inclusion of County's operating results from August 14, 1996. The provision for possible loan losses increased primarily due to an increase in net charge-offs as well as an increase in loan delinquencies. Non-interest expense increased due to the nonrecurring charges noted above as well as the inclusion of County's operating expenses and higher cost associated with the expansion of trust and other operating activities. The Company's return on average assets and return on average equity were .85% and 10.05%, respectively, in 1996, compared to 1.38% and 13.05%, respectively, in 1995. Excluding the nonrecurring charges noted above, the Company's return on 26 27 average assets and return on average equity in 1996 were 1.10% and 12.98%, respectively. The lower return on assets in 1996 compared to 1995 resulted primarily from the lower earnings contribution of County relative to its average assets. Interest Income. Total interest income increased 56.1% to $53.2 million for 1996, compared to $34.1 million for 1995. This increase resulted from a $237.6 million, or 55.2%, increase in average interest-earning assets in 1996. The average balance of loans increased $183.8 million, or 70.2%. These increases resulted primarily from the acquisition of County which contributed $209.0 million of the increase in average earning assets and $161.9 million of the increase in average loans. The weighted average yield on interest-earning assets was 8.07% in 1996, basically unchanged from 1995, reflecting the relatively stable interest rate environment in 1996. The Company's yield on average loans decreased from 8.85% in 1995 to 8.66% in 1996 This resulted primarily from a slightly lower yield on County's loan portfolio due to a higher portion of such loans consisting of lower yielding residential mortgage loans. Yields on the investment portfolio remained relatively stable, increasing from 6.88% in 1995 to 6.93% in 1996. Interest Expense. Total interest expense increased 75.0% to $28.6 million for 1996 as compared to $16.4 million for 1995. Interest expense increased due to a higher average balance of interest-bearing liabilities outstanding and due to a higher cost of funds during 1996 as compared to 1995. The average balance of deposit accounts increased $160.5 million, or 53.8%, to $458.9 million in 1996 as compared to $298.5 million in 1995. Average interest-bearing liabilities increased 63.2%, from $362.0 million to $590.8 million. These increases also primarily resulted from the acquisition of County which contributed $195.2 million to the increase in average interest bearing liabilities and $138.4 million to the increase in total deposits. The Company's marketing efforts and continued deposit growth at new branch offices as well as funding required by the Company's asset growth strategies also contributed to the increase in average interest-bearing liabilities. The Company's cost of funds increased to 4.85% in 1996 as compared to 4.52% in 1995 primarily due to a higher cost of funds associated with County's interest-bearing liabilities. The cost of funds was also affected by the continued shift by customers into higher yielding certificates of deposit. Provision for Possible Loan Losses. The provision for possible loan losses increased 30.0% to $1.3 million in 1996, as compared to $967,000 in 1995. The increase in the provision for possible loan losses was affected by a higher level of net charge-offs, $826,000 versus $755,000 during 1996 and 1995, respectively, as well as a higher level of non-performing loans. Total non-performing loans increased to $2.6 million at December 31, 1996, from $1.0 million at December 31, 1995, with County adding $482,000 to the 1996 total. The allowance for possible loan losses at December 31, 1996 was $6.6 million, or .91% of total loans and 258.0% of non-performing loans compared to $3.3 million, or 1.23% of total loans and 322.9% of non-performing loans at December 31, 1995. Non-Interest Income. Total non-interest income increased 25.6% to $6.3 million in 1996, as compared to $5.0 million in 1995. The increase in 1996 was a result of a $838,000 increase in fees and other income, $321,000 of which was contributed by County. This increase was also a result of a $529,000 increase in gains on sales of loans. During 1996, the Company sold approximately $14.4 million of the guaranteed portion of its SBA loan originations in the secondary market compared to $11.5 million in 1995, realizing gains of $1.8 million compared to $1.3 million. Customer service fees, representing service charges on deposits and fees from other banking services, increased 5.4% in 1996, to $1.8 million, from $1.7 million in 1995. This increase resulted from increased basic fee structures as well as from fee income contributed by County to the 1996 results. Trust income increased 15.3% to $1.5 million in 1996, from $1.3 million in 1995. The growth in trust and custodian fee income resulted primarily from the expansion of the Company's customer base and higher asset values. The $553,000 increase in other income to $1.1 million in 1996 compared to $565,000 in 1995 was primarily attributable to County's loan service fee and related income as well as a higher volume of fee related accounts in 1996 compared to 1995. Non-Interest Expense. Total non-interest expense increased $8.4 million, or 65.8%, to $21.2 million in 1996 as compared to $12.8 million in 1995. Included in the 1996 totals are pretax charges of $2.3 million for the one time special SAIF assessment and $323,000 for restructuring costs incurred in connection with the consolidation of overlapping operations, previously discussed. In addition, other non-interest expenses added by County that are included in the 1996 27 28 results totaled $3.8 million. Excluding nonrecurring expenses and non-interest expenses added as a result of the County acquisition, total non-interest expenses were $14.6 million in 1996 compared to $12.8 million in 1995, representing an increase of $1.8 million or 13.8%. This increase generally resulted from expansion of the Company's operating activities over 1996. Salaries and employee benefits accounted for approximately 55.4% of total operating expenses in 1996 compared to 53.7% in 1995. The average full time equivalent staff level was 274 in 1996 compared to 196 in 1995. Salaries and employee benefits increased 45.6%, from $6.9 million in 1995 to $10.0 million in 1996, with $2.0 million of the increase added by County. In general, higher salaries and employee benefits costs resulted from the Company's continued market expansion as well as new product offerings. Net occupancy expense increased 62.4% to $1.2 million in 1996 from $752,000 in 1995. This increase resulted from occupancy expenses of $407,000 added by County with the remainder attributed to the expansion of the Company's small business lending centers and the opening of a supermarket branch in July 1996. Furniture and equipment expense increased $156,000, or 38.2% in 1996. In addition to expenses of $108,000 added by County, the increase in furniture and equipment expense was due principally to higher depreciation costs associated with equipment additions. Data processing expense increased $184,000 in 1996, or 28.4% to $831,000 from $647,000 in 1995. In addition to $112,000 of expenses added by County, higher costs in 1996 resulted from the expansion of technology throughout the Company to enhance customer service, increase efficiencies and improve information management systems. Taxes other than income taxes increased $191,000, or 36.9%, in 1996 compared to 1995. This increased resulted from $140,000 of expenses added by County as well as from higher equity levels (on which such taxes are based) of the Banking Subsidiaries. Excluding the special one time SAIF assessment of $2.3 million, Federal deposit insurance expense decreased $42,000 to $388,000 in 1996 from $430,000 in 1995. This decrease resulted from lower BIF premium assessment rates that took effect during the second quarter of 1995, more than offsetting deposit insurance costs of $349,000 added by County. Amortization of goodwill and other intangibles resulting from the application of purchase accounting in connection with the County acquisition totaled $521,000 during 1996 with no comparable amount in 1995. Increases in other non-interest expenses, excluding nonrecurring charge of $323,000 and expenses of $395,000 added by County, totaled $795,000 and were primarily related to the expanded volume of business activities. The Company's efficiency ratio (excluding nonrecurring charges) was 57.3% for 1996, as compared to 56.6% for 1995. Operating expense levels increased slightly in 1996 as a result of the Company's expansion into new markets, increase growth and volume of activities, and overall inflation. Provision for Income Taxes. The provision for Federal income taxes decreased $352,000 to $2.4 million in 1996, for an effective tax rate of 28.3%. This compared to Federal income tax expense of $2.7 million in 1995 which represented an effective tax rate of 30.3%. The decrease in expense in 1996 resulted from the overall decrease in the level of taxable earnings. The effective tax rate for each period differs from the federal statutory rate of 34% principally as a result of tax-exempt income from obligations of states and political subdivisions and non-taxable loans. ASSET QUALITY Non-Performing Assets. To maintain the level of credit risk of the loan portfolio at an appropriate level, management sets underwriting standards and internal lending limits and provides for proper diversification of the portfolio by placing constraints on the concentration of credits within the portfolio. In monitoring the level of credit risk within the loan portfolio, management utilizes a formal loan review process to monitor, review, and consider relevant factors in evaluating specific credits in determining the adequacy of the allowance for possible loan losses. The Banking Subsidiaries formally document their evaluation of the adequacy of 28 29 the allowance for possible loan losses on a quarterly basis and the evaluations are reviewed and discussed with their respective boards of directors. Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is in doubt. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings. Property acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is classified as "other real estate owned" until such time as it is sold or otherwise disposed of. The Company owned $785,000 of such property at December 31, 1997 and $539,000 at December 31, 1996. Non-performing loans totaled $2.2 million, or 0.29% of total loans, at December 31, 1997, compared to $2.6 million, or 0.35% of total loans, at year-end 1996. Non-performing assets totaled $3.0 million, or 0.28% of total assets at December 31, 1997, compared to $3.1 million, or 0.29% of total assets, at December 31, 1996. Management of the Company is not aware of any material amounts of loans outstanding, not disclosed in the table below, for which there is significant uncertainty as to the ability of the borrower to comply with present payment terms. The following is an analysis of the composition of non-performing assets:
DECEMBER 31, ------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Non-accrual loans $ 832 $ 991 $ 440 $237 $181 Accruing loans 90 days or more past due 1,386 1,567 584 272 230 ------ ------ ------ ---- ---- Total non-performing loans 2,218 2,558 1,024 509 411 Other real estate owned 785 539 24 -- -- ------ ------ ------ ---- ---- Total non-performing assets $3,003 $3,097 $1,048 $509 $411 ------ ------ ------ ---- ---- Non-performing loans to total loans 0.29% 0.35% 0.38% 0.21 % 0.19% Non-performing assets to total assets 0.28% 0.29% 0.22% 0.12 % 0.11%
Allowance for Possible Loan Losses. The Company records a provision necessary to maintain the allowance for possible loan losses at a level sufficient to provide for potential future credit losses. The provision is charged against earnings when it is established. An allowance for possible loan losses is established based on management's best judgment, which involves continuing review of prevailing national and local economic conditions, changes in the size and composition of the portfolio and review of individual problem credits. Growth of the loan portfolio, loss experience, economic conditions, delinquency levels, credit mix, and selected credits are factors that affect judgments concerning the adequacy of the allowance. Actual losses on loans are charged against the allowance. 29 30 The following table summarizes the Company's loan loss experience, and provides a breakdown of the allowance for possible loan losses at the dates indicated.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Balance at beginning of period $ 6,599 $ 3,307 $ 3,095 $ 3,007 $ 2,384 Charge-offs: Residential mortgage (32) (12) (10) (3) -- Construction mortgage -- -- -- -- -- Commercial (666) (67) (373) (15) (21) Consumer (1,074) (1,020) (479) (302) (242) --------- --------- --------- --------- --------- Total charge-offs (1,772) (1,099) (862) (320) (263) --------- --------- --------- --------- --------- Recoveries: Residential mortgage 8 5 2 -- -- Construction mortgage -- -- -- -- -- Commercial 91 41 12 1 3 Consumer 470 227 93 69 84 --------- --------- --------- --------- --------- Total recoveries 569 273 107 70 87 --------- --------- --------- --------- --------- Net charge-offs (1,203) (826) (755) (250) (176) Provision charged to operations 1,221 1,257 967 338 799 County's allowance for possible loan losses at time of acquisition -- 2,861 -- -- -- --------- --------- --------- --------- --------- Balance at end of period $ 6,617 $ 6,599 $ 3,307 $ 3,095 $ 3,007 --------- --------- --------- --------- --------- Loans outstanding at end of period $ 761,027 $ 721,855 $ 268,818 $ 247,943 $ 212,083 Average loans outstanding $ 751,799 $ 445,514 $ 261,706 $ 232,282 $ 196,393 Allowance as a percent of loans outstanding 0.87% 0.91% 1.23% 1.25% 1.42% Net charge-offs to average loans 0.16% 0.19% 0.29% 0.11% 0.09% Allowance for possible loan losses to non-performing loans 298.3% 258.0% 322.9% 608.1% 731.6%
The allowance for possible loan losses totaled $6.6 million at December 31, 1997 and 1996, representing 0.87% of total loans at December 31, 1997, compared to 91% of total loans at December 31, 1996. Charge-offs represent the amount of loans actually removed as earning assets from the balance sheet due to uncollectibility. Amounts recovered on previously charged-off assets are netted against charge-offs, resulting in net charge-offs for the period. Net loan charge-offs for the year ended December 31, 1997 were $1.2 million, compared to net charge-offs of $826,000 for the year ended December 31, 1996. Charge-offs have been made in accordance with the Company's standard policy and have occurred primarily in the commercial and consumer loan portfolios. The allowance for possible loan losses as a percentage of non-performing loans ("coverage ratio") was 298.3% at December 31, 1997, compared to 258.0% at the end of 1996. Although used as a general indicator, the coverage ratio is not a primary factor in the determination of the adequacy of the allowance by management. Total non-performing loans as a percentage of total loans remained a relatively low 0.29% of total loans at December 31, 1997 compared to .35% at December 31, 1996. The decrease in non-performing loans resulted primarily from charge-offs as well as from transfers to other real estate owned. COMPARISON OF DECEMBER 31, 1997 AND DECEMBER 31, 1996 FINANCIAL CONDITION Total assets amounted to $1.08 billion at December 31, 1997, as compared to $1.06 billion at December 31, 1996, an increase of $24.7 million, or 2.3%. Total investment securities decreased by $13.1 million to $271.5 million. This decrease resulted primarily from sales of securities to fund loan growth as well as prepayments of mortgage-backed securities. The Company's general investment strategy is to manage the investment portfolio to include rate sensitive assets, matched against interest sensitive liabilities to reduce interest rate risk. In recognition of this strategy, as well as to provide a secondary source of liquidity to accommodate loan demand and possible deposit withdrawals, the Company has chosen to classify the majority of its investment securities as available-for-sale. At December 31, 1997, 87.0% of the total investment portfolio was classified as available-for-sale, while those securities which the Company intends to hold to maturity represented the remaining 13.0%. This compares to 83.6% and 16.4% classified as available-for-sale and held to maturity, respectively, at December 31, 1996. 30 31 Total loans increased $39.2 million, or 5.4%, to $761.0 million at December 31, 1997. This overall increase in the loan portfolio was consistent with the Company's continued strategy of increasing assets and improving yields on earning assets while adhering to prudent underwriting standards. Premises and equipment increased $894,000 to $8.9 million at December 31, 1997 primarily as a result of the Company's installation of ATM's at County's branches as well as continued expansion of markets and services. Deposits totaled $747.0 million at December 31, 1997, an increase of $14.4 million over the balance at December 31, 1996. This increase is primarily attributed to $15 million of public funds deposits that were obtained at an approximately 25 to 30 basis point lower cost than alternative funding sources. Total interest-bearing deposits accounted for 91.5% of total deposits at December 31, 1997 as compared to 92.3% at December 31, 1996. Total borrowings increased $2.8 million to $239.4 million at December 31, 1997, as compared to $236.6 million at December 31, 1996. Total borrowings at December 31, 1997 and 1996 include $15.0 million of borrowings obtained by the Company to partially fund the acquisition of County. Pursuant to the loan agreement, the Company borrowed $15.0 million in the form of a seven-year term loan expiring September 1, 2003, with interest payable at a floating rate equal to LIBOR plus 1.35%. The Company is required to make quarterly interest payments, and will be required to make annual principal payments beginning in February 1998, based upon a 10-year amortization. The Company has pledged all of the stock of FNB as security for the loan. The loan agreement contains certain financial covenants which requires that (i) the Company maintain a minimum ratio of total capital to risk-weighted assets of 10%; (ii) each of the Banking Subsidiaries, which represent greater than 10% of the Company's consolidated capital, maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, Tier 1 capital to average assets of 5.0% and total capital to risk-weighted assets of 10.0%; (iii) the Company maintain a minimum annualized return on average assets of not less than 0.75% ; (iv) FNB, Bellbrook and County maintain a minimum annualized return on average assets of not less than 1.00%. 0.75% and 0.65% respectively; and (v) each of FNB, Bellbrook and County maintain a ratio of non-performing loans to equity capital of less than 25.0% and a minimum ratio of allowance for possible loan losses to non-performing loans of 100.0%, 50.0% and 50.0%, respectively. At December 31, 1997, the Company was in compliance with each of these financial covenants. The loan agreement also restricts the Company's ability to sell assets, grant security interests in the stock of the Banking Subsidiaries, merge or consolidate, and engage in business activity unrelated to banking. LIQUIDITY AND CAPITAL RESOURCES The objective of liquidity management is to ensure the availability of funds to accommodate customer loan demand as well as deposit withdrawals while continuously seeking higher yields from longer term lending and investing opportunities. This is accomplished principally by maintaining sufficient cash flows and liquid assets along with consistent stable core deposits and the capacity to maintain immediate access to funds. These immediately accessible funds may include federal funds sold, unpledged marketable securities, reverse repurchase agreement or available lines of credit from the FRB, FHLB, or other financial institutions. An important factor in the preservation of liquidity is the maintenance of public confidence, as this facilitates the retention and growth of a large, stable supply of core deposits in funds. The Company's principal source of funds to satisfy short-term liquidity needs comes from cash, due from banks and federal funds sold. Changes in the balance of cash and due from banks are due to changes in volumes of federal funds sold, and the float and reserve related to deposit accounts, which may fluctuate significantly on a day-to-day basis. The investment portfolio serves as an additional source of liquidity for the Company. At December 31, 1997, securities with a market value of $236.3 million were classified as available-for-sale, representing 87.0% of the total investment portfolio. Classification of securities as available-for-sale provides for flexibility in managing net interest margin, interest rate risk, and liquidity. Cash flows from operating activities amounted to $14.1 million and $12.4 million for 1997 and 1996, respectively. The Company's bank and thrift subsidiaries are members of FHLB. Membership provides an opportunity to control the bank's cost of funds by providing alternative funding sources, to provide flexibility in the management of interest rate risk through the wide range of available funding sources, to manage liquidity via immediate access to such funds, and to provide flexibility through utilization of customized funding products to fund various loan and investment product and strategies. Shareholders' equity at December 31, 1997 was $85.3 million, compared to $77.9 million at December 31, 1996, an increase of $7.4 million, or 9.5%. This increase resulted primarily from earnings of $10.8 million and an $836,000 increase in 31 32 unrealized gains on available-for-sale securities, offset in part by dividend payments totaling $4.2 million. The change in unrealized gains on available for sale securities was primarily attributed to changes in interest rates. Under the risk-based capital guidelines, a minimum capital to risk-weighted assets ratio of 8.0% is required, of which, at least 4.0% must consist of Tier 1 capital (equity capital net of goodwill). Additionally, a minimum leverage ratio (Tier 1 capital to total assets) of 3.0% must be maintained. At December 31, 1997, the Company had a total risk-based capital ratio of 11.3%, of which 10.4% consisted of Tier 1 capital. The leverage ratio of the Company at December 31, 1997, was 6.5%. Cash dividends declared to shareholders of the Company totaled $4.2 million, or $1.05 per share, during 1997. This compared to dividends of $3.5 million, or $1.01 per share, for 1996. Cash dividends paid as a percentage of net income amounted to 38.8% and 59.0% for the years ended December 31, 1997 and 1996, respectively. Following receipt of shareholder approval on April 17, 1997, the Company amended its Articles of Incorporation to increase the number of authorized shares of common stock from 7,500,000 to 20,000,000 and to eliminate par value per share of common stock. Management believes that these amendments will provide the Company with greater financial flexibility and enable it to more effectively utilize and manage its equity capital. These changes to the Company's Articles of Incorporation had no effect on the total capital of the Company. Considering the Company's capital adequacy, profitability, available liquidity sources and funding sources, the Company's liquidity is considered by management to be adequate to meet current and projected needs. INTEREST RATE RISK MANAGEMENT The Company's principal market risk exposure is interest rates. The objectives of the Company's interest rate risk management are to minimize the adverse effects of changing interest rates on the earnings of the Company while maintaining adequate liquidity and optimizing net interest margin. Interest rate risk is managed by maintaining an acceptable matching of the Company's asset and liability maturity and repricing periods, thus controlling and limiting the level of earnings volatility arising from rate movements. Modeling simulations to project the potential effect of various rate scenarios on net interest income are the primary tools utilized by management to measure and manage interest rate exposure within established policy limits. The Company's Asset/Liability Management Committee ("ALCO") monitors rate sensitive assets and liabilities and develops appropriate strategies and pricing policies. Interest rate sensitivity measures the exposure of net interest income to changes in interest rates. In its simulations, management estimates the effect on net interest income of changes in the overall level of interest rates. ALCO policy guidelines provide that a 200 basis point increase or decrease over a 12-month period should not result in more than a 12.5% negative impact on net interest income. The following table summarizes results of simulations as of December 31, 1997.
Projected Increase Change in Interest Rates Net Interest Income (Decrease) %Change ------------------------ ------------------- ---------- ------- 200 basis point increase $ 34,804 $ (218) (0.63)% No Change 35,022 -- -- 200 basis point decrease 34,470 (552) (1.58)
Management also measures the Company's exposure to interest rate risk by computing estimated changes in the net present value (NPV) of cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market rate sensitive instruments in the event of sudden and sustained increases in market interest rates. The following table presents the Company's projected change in NPV for various levels of interest rates as of December 31, 1997. All market rate sensitive instruments included in these computations are classified as either held to maturity or available for sale. The Company holds no trading securities: 32 33
Change In Actual Percent Interest Rates NPV Change Change - -------------- --- ------ ------ 200 basis point increase $ 77,425 $(9,538) (10.97)% 100 basis point increase 81,815 (5,148) (5.92) Base scenario 86,963 -- -- 100 basis point decrease 89,823 2,860 3.29 200 basis point decrease 86,275 (688) (0.79)
The preceding table indicates that at December 31, 1997, in the event of a sudden and sustained increase in prevailing market interest rates, the Company's NPV would be expected to decrease. At December 31, 1997, the Company's estimated changes in NPV were within limitations established by the Company's Board of Directors. Computations of forecasted effects of hypothetical interest rate changes are based on numerous assumptions, including levels of market interest rates, loan prepayments ranging from 15% to 30% for adjustable rate loans and 6% to 10% for fixed rate loans and deposit decay rates and should not be relied upon as indicative of actual future results. Further, the computations do not contemplate any actions the ALCO could undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual results may differ from those projections presented should market conditions vary from assumptions used in the calculations of NPV. Certain assets, such as adjustable rate loans, which represent one of the Company's primary loan products, have features which restrict changes in interest rates on a short term basis and over the life of the assets. In addition, the proportion of adjustable rate loans in the Company's loan portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in NPV calculations. Finally, the ability of many borrowers to repay their adjustable rate mortgage loans could decrease in the event of interest rate increases. Interest rate sensitivity gap ("gap") analysis measures the difference between assets and liabilities repricing or maturing within specified time periods. Although a useful tool, gap analysis has several limitations. Gap analysis assumes a consistent reaction in the rates of all rate-sensitive assets and liabilities to changes in overall rates. Additionally, it does not consider changes to the overall slope of the yield curve or other factors which affect the timing and pricing of the balance sheet. A positive gap, or asset sensitive position, indicates a higher level of rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specified time horizons and would generally imply a favorable effect on net interest income in periods of rising interest rates. Conversely, a negative gap, or liability sensitive position, results when rate-sensitive liabilities exceed the amount of rate-sensitive assets repricing or maturing within applicable time frames and would generally imply a favorable impact on net interest income in periods of declining interest rates. The following table reflects the Company's gap position at December 31, 1997. Savings and interest-bearing demand deposits are essentially subject to immediate withdrawal and rate change and, accordingly, are classified in the one year or less time period. However, historical experience indicates, and it is expected, that a portion of these deposits represent long-term core deposits and, accordingly, are less than 100% rate sensitive. Mortgage-backed securities included in investments are included at the earlier of repricing or maturity. As a result of these assumptions, management believes that the gap analysis overstates the liability-sensitive nature of the Company's balance sheet. 33 34
1 YEAR 1 TO 3 3 TO 5 OVER 5 AS OF DECEMBER 31, 1997 OR LESS YEARS YEARS YEARS TOTAL - ----------------------- ------- ----- ----- ----- ----- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Federal funds sold $ 49 $ -- $ -- $ -- $ 49 Loans 455,017 154,226 55,102 96,682 761,027 Investment securities 106,782 61,391 33,950 69,398 271,521 --------- --------- -------- -------- ---------- Total 561,848 215,617 89,052 166,080 1,032,597 --------- --------- -------- -------- ---------- INTEREST-BEARING LIABILITIES: Demand, interest-bearing 106,325 -- -- -- 106,325 Savings 88,835 -- -- -- 88,835 Time 301,513 166,924 18,966 638 488,041 Borrowings 184,625 28,767 12,215 13,842 239,449 --------- --------- -------- -------- ---------- Total 681,298 195,691 31,181 14,480 922,650 Off balance sheet items - interest rate swaps (51,875) 17,500 34,375 -- -- --------- --------- -------- -------- ---------- Total gap (67,575) 2,426 23,496 151,600 $ 109,947 --------- --------- -------- -------- ---------- Cumulative gap $ (67,575) $ (65,149) $(41,653) $109,947 --------- --------- -------- -------- Cumulative gap as a percentage of total assets (6.25)% (6.02)% (3.85)% 10.17% --------- --------- -------- --------
The Company has entered into certain interest rate swap contracts as part of its asset-liability management program to assist in managing the Company's interest rate risk and not for speculative reasons. The notional principal amount of these instruments reflect the extent of the Company's involvement in this type of financial instrument and do not represent the Company's risk of loss due to counterparty nonperformance or due to declines in market value of the swap contracts from changing interest rates. Such swaps are accounted for as hedges on a historical cost basis, with the related swap income or expense recognized currently. At December 31, 1997 and 1996, the Company had $52.5 million and $27.5 million, respectively, of notional swap principal contracts outstanding related to asset-liability management activities These swaps were entered into principally to manage the timing differences in repricing characteristics of various variable rate borrowings. All swap contracts require the Company to pay a fixed rate of interest in return for receiving a variable rate of interest based on the three month LIBOR. The net expense associated with interest rate swap contracts was $147,000 during 1997 and $28,000 during 1996 and is included with interest on borrowings. The following summarizes information with respect to swap contracts outstanding at December 31, 1997:
Notional Weighted-Average Weighted-Average Maturity Amount Receive Rate Pay Rate -------- ------ ------------ -------- 1998 $ 625 5.88% 6.58% 1999 11,250 5.93 6.14 2000 6,250 5.82 6.32 2001 14,375 5.92 6.36 2002 20,000 5.73 6.29 -------- ---- ---- Total $ 52,500 5.84% 6.29 % -------- ---- ----
CONTINGENCIES AND UNCERTAINITIES - YEAR 2000 The Company has conducted a review of its more significant data processing systems to identify the applications that could be affected by the start of a new century (the "Year 2000 Issue"). During 1996, FNB converted to a new core data processing software system. County converted to this system in February, 1998 and the Company currently plans to convert Bellbrook to this system later in 1998 or 1999. Based upon these conversions as well as the Company's aforementioned review of system applications, the Year 2000 Issue is not expected to pose significant operational problems for the Company. In addition, the Company is in the process of reviewing its ancillary systems for potential problems that could occur as a result of the Year 2000 Issue as well as developing procedures for identifying potential problems that the Company's borrowers may experience. Consideration is also being given to providing assistance to such borrowers in addressing the Year 2000 Issue. Management does not expect the additional costs of bringing the Company's systems into Year 2000 compliance to have a materially adverse effect on the Company's financial condition, results of operations or liquidity. 34 35 IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services. RECENT DEVELOPMENTS On February 12, 1998, FNB filed an application with the OCC to merge County and Bellbrook under the national bank charter of FNB. This merger is subject to regulatory approval. Following the merger, the Company expects to realize annual cost savings of approximately $700,000 through the consolidation of data processing, operations and accounting. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding the market risk of the Company's financial instruments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Interest Rate Risk Management". ITEM 8: REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 35 36 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF BANCFIRST OHIO CORP. We have audited the accompanying consolidated balance sheets of BancFirst Ohio Corp. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BancFirst Ohio Corp. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Columbus, Ohio January 23, 1998 36 37 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, --------------------------- 1997 1996 ---- ---- ASSETS Cash and due from banks (Note 3) $ 21,650 $ 18,856 Federal Funds sold 49 2,193 Securities held-to-maturity (approximate fair value of $36,645 and $47,652 at December 31, 1997 and 1996, respectively), (Note 4) 35,223 46,799 Securities available-for-sale, at fair value 236,298 237,777 ----------- ----------- Total investment securities 271,521 284,576 ----------- ----------- Loans (Notes 5 and 6) 761,027 721,855 Allowance for possible loan losses (6,617) (6,599) ----------- ----------- Net loans 754,410 715,256 ----------- ----------- Premises and equipment, net (Note 7) 8,856 7,962 Accrued interest receivable 6,946 6,696 Goodwill and other intangibles 12,687 14,187 Other assets 5,499 7,194 ----------- ----------- Total assets $ 1,081,618 $ 1,056,920 ----------- ----------- LIABILITIES Deposits (Note 8): Noninterest-bearing deposits $ 63,846 $ 56,179 Interest-bearing deposits 683,201 676,510 ----------- ----------- Total deposits 747,047 732,689 Federal funds purchased (Note 9) 12,300 11,650 Federal Home Loan Bank advances and other borrowings (Note 10) 227,149 224,959 Accrued interest payable 2,426 2,255 Other liabilities 7,363 7,473 ----------- ----------- Total liabilities 996,285 979,026 ----------- ----------- Commitments and contingencies (Notes 14, 15 and 20) SHAREHOLDERS' EQUITY (Note 16) Common stock, no par value, 20,000,000 shares authorized; 4,033,919 shares issued 63,343 -- Common stock, $10 par value, 7,500,000 shares authorized; 4,033,919 shares issued -- 40,340 Capital in excess of par value -- 22,807 Retained earnings 22,057 15,466 Unrealized holding gains on securities available for sale, net 1,140 304 Less: 53,830 and 54,420 shares of common stock in treasury, at cost, at December 31, 1997 and 1996, respectively (1,207) (1,023) ----------- ----------- Total shareholders' equity 85,333 77,894 ----------- ----------- Total liabilities and shareholders' equity $ 1,081,618 $ 1,056,920 ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements. 37 38 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- Interest income: Interest and fees on loans $ 64,697 $ 38,518 $ 23,088 Interest and dividends on securities: Taxable 17,539 12,877 9,611 Tax exempt 1,324 1,315 1,148 Other interest income 1,009 467 216 --------- --------- --------- Total interest income 84,569 53,177 34,063 --------- --------- --------- Interest expense: Time deposits, $100 and over 6,209 3,755 2,498 Other deposits 27,153 17,183 9,927 Borrowings 14,894 7,692 3,932 --------- --------- --------- Total interest expense 48,256 28,630 16,357 --------- --------- --------- Net interest income 36,313 24,547 17,706 Provision for possible loan losses (Note 6) 1,221 1,257 967 --------- --------- --------- Net interest income after provision for possible loan losses 35,092 23,290 16,739 --------- --------- --------- Other income: Trust and custodian fees 1,807 1,451 1,259 Customer service fees 2,023 1,807 1,714 Investment securities gains, net 88 43 136 Gain on sale of loans 2,202 1,839 1,310 Other 1,796 1,118 565 --------- --------- --------- Total other income 7,916 6,258 4,984 --------- --------- --------- Other expenses: Salaries and employee benefits 14,442 9,995 6,866 Net occupancy expense 2,118 1,221 752 Furniture and equipment expense 708 564 408 Data processing expense 1,079 831 647 Taxes other than income taxes 986 709 518 Federal deposit insurance 374 2,697 430 Amortization of intangibles 1,525 549 28 Other 5,470 4,669 3,156 --------- --------- --------- Total other expenses 26,702 21,235 12,805 --------- --------- --------- Income before income taxes 16,306 8,313 8,918 Provision for federal income taxes (Note 13) 5,536 2,354 2,706 --------- --------- --------- Net income $ 10,770 $ 5,959 $ 6,212 --------- --------- --------- Basic and diluted earnings per share $ 2.71 $ 1.78 $ 2.09 --------- --------- --------- Weighted average number of shares outstanding 3,980,498 3,354,975 2,973,694 --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. 38 39 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNREALIZED HOLDING GAINS (LOSSES) CAPITAL ON IN SECURITIES TOTAL COMMON STOCK EXCESS AVAILABLE- SHARE- ------------------ OF PAR RETAINED FOR-SALE, TREASURY HOLDERS' SHARES AMOUNT VALUE EARNINGS NET STOCK EQUITY ------ ------ ----- -------- --- ----- ------ Balance at December 31, 1994 3,033,919 $30,340 $ 6,845 $ 9,525 $(1,711) $(1,155) $ 43,844 Purchase of 5,000 shares common stock, at cost -- -- -- -- -- (139) (139) Treasury stock, 6,220 shares issued -- -- 44 -- -- 105 149 Pooled affiliate stock activity -- -- -- -- -- 6 6 Cash dividend ($.94 per share) -- -- -- (2,715) -- -- (2,715) Change in unrealized gains (losses), net of income taxes of $1,367 -- -- -- -- 2,653 -- 2,653 Net income -- -- -- 6,212 -- -- 6,212 --------- ------ -------- -------- ------- ------ ------ Balance at December 31, 1995 3,033,919 30,340 6,889 13,022 942 (1,183) 50,010 --------- ------ -------- -------- ------- ------ ------ Issuance of 1,000,000 shares of common stock 1,000,000 10,000 15,824 -- -- -- 25,824 Treasury stock, 8,503 shares issued -- -- 94 -- -- 160 254 Cash dividend ($1.01 per share) -- -- -- (3,515) -- -- (3,515) Change in unrealized gains (losses), net of income taxes of $(329) -- -- -- -- (638) -- (638) Net income -- -- -- 5,959 -- -- 5,959 --------- ------ -------- -------- ------- ------ ------ Balance at December 31, 1996 4,033,919 40,340 22,807 15,466 304 (1,023) 77,894 --------- ------ -------- -------- ------- ------ ------ Elimination of par value -- 22,807 (22,807) -- -- -- -- Purchase of 11,654 shares common stock, at cost -- -- -- -- -- (433) (433) Treasury stock, 12,244 shares issued -- 196 -- -- -- 249 445 Cash dividend ($1.05 per share) -- -- -- (4,179) -- -- (4,179) Change in unrealized gains (losses), net of income taxes of $432 -- -- -- -- 836 -- 836 Net income -- -- -- 10,770 -- -- 10,770 --------- ------ -------- -------- ------- ------ ------ Balance at December 31, 1997 4,033,919 $63,343 $ -- $ 22,057 $ 1,140 $(1,207) $ 85,333 --------- ------ -------- -------- ------- ------ ------
The accompanying notes are an integral part of the consolidated financial statements. 39 40 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
DECEMBER 31, ----------------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $ 10,770 $ 5,959 $ 6,212 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 3,943 2,564 849 Provision for possible loan losses 1,221 1,257 967 Deferred taxes payable 1,083 786 (14) Gains on sale of assets (2,290) (1,882) (1,446) Increase in interest receivable (250) (29) (392) Decrease (increase) in other assets 191 3,568 (3,775) Increase in interest payable 171 393 676 Increase in other liabilities 300 375 658 FHLB stock dividend (1,079) (576) (293) -------- -------- -------- Net cash provided by operating activities 14,060 12,415 3,442 -------- -------- -------- Cash flows from investing activities: Decrease (increase) in federal funds sold 2,144 407 (2,300) Proceeds from maturities of securities held-to-maturity 11,412 2,767 12,427 Proceeds from maturities and sales of securities available-for-sale 95,102 71,911 38,707 Purchase of securities held-to-maturity (14) (663) (5,846) Purchase of securities available-for-sale (91,697) (62,783) (66,511) Purchase of loans (75,710) (24,045) -- Increase in loans, net (41,060) (39,870) (32,173) Acquisition of County Savings Bank, net of cash acquired (1,500) (42,407) -- Purchases of equipment and other assets (2,028) (1,491) (600) Proceeds from sale of assets 78,592 24,535 12,505 -------- -------- -------- Net cash used in investing activities (24,759) (71,639) (43,791) -------- -------- -------- Cash flows from financing activities: Net increase in deposits 14,820 19,748 27,709 Net proceeds from issuance of common stock -- 25,824 -- Increase (decrease) in federal funds purchased 650 4,250 (3,250) Increase in other borrowings 2,190 2,417 13,860 Proceeds from acquisition debt -- 15,000 -- Cash dividends paid (4,179) (3,515) (2,715) Purchase of treasury stock (433) -- (139) Reissuance of treasury stock and other 445 254 155 -------- -------- -------- Net cash provided by financing activities 13,493 63,978 35,620 -------- -------- -------- Net increase (decrease) in cash and due from banks 2,794 4,754 (4,729) Cash and due from banks, beginning of period 18,856 14,102 18,831 -------- -------- -------- Cash and due from banks, end of period $ 21,650 $ 18,856 $ 14,102 -------- -------- -------- Supplemental cash flow disclosures: Income taxes paid $ 3,300 $ 2,255 $ 2,360 Interest paid $ 48,547 $ 28,397 $ 15,681 Noncash transfers: Transfer of capital in excess of par to common stock $ 22,807 -- -- Transfer of securities from held-to-maturity to available-for-sale -- -- $ 51,759
The accompanying notes are an integral part of the consolidated financial statements. 40 41 BANCFIRST OHIO CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES: The following is a summary of the significant accounting policies followed in the preparation of the consolidated financial statements. Principles of Consolidation: The consolidated financial statements include the accounts of BancFirst Ohio Corp. (Company) and its wholly-owned subsidiaries, The First National Bank of Zanesville (FNB), Bellbrook Community Bank (Bellbrook) and County Savings Bank (County), acquired in August 1996 (see Note 2). All significant intercompany accounts and transactions have been eliminated in consolidation. Investment Securities: Investment securities are classified upon acquisition into one of three categories: held-to-maturity, available-for-sale, or trading. Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to the Company's liquidity needs, changes in market interest rates, and asset-liability management strategies, among others. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of applicable income taxes. At December 31, 1997 and 1996, the Company did not hold any trading securities. Gains and losses on the disposition of investment securities are accounted for on the completed transaction basis using the specific identification method. Income Recognition: Income earned by the Company and its subsidiaries is recognized on the accrual basis of accounting. The Company suspends the accrual of interest on loans when, in management's opinion, the collection of all or a portion of the interest has become doubtful. When a loan is placed on non-accrual, all previously accrued and unpaid interest deemed uncollectible is charged against either the loan loss reserve or the current period interest income depending on the period the interest was recorded. In future periods, interest will be included in income to the extent received only if complete principal recovery is reasonably assured. Loans Held for Sale: Loans held for sale are carried at the lower of aggregate cost or market value and are included with loans on the balance sheet. Such loans totaled $10,018 at December 31, 1997. Loan Servicing Rights: Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which provides accounting guidance for servicing assets. Adoption of this Statement had no impact on the Company's 1997 financial statements. Under SFAS No. 125, the total cost of loans originated and sold or purchased is allocated between loans and servicing rights based on the relative fair values of each. The servicing rights are capitalized and amoritized over the estimated servicing lives of the underlying loans. Amortization is calculated based on the estimated net servicing revenue, 41 42 considering various factors including prepayment experience and market rates. Impairment of the carrying value of capitalized loan servicing rights is periodically evaluated by management in relation to the estimated fair value of those rights. Provision for Possible Loan Losses: The provision for possible loan losses charged to operating expense is based upon management's evaluation of potential losses in the current loan portfolio and past loss experience. In management's opinion, the provision is sufficient to maintain the allowance for possible loan losses at a level that adequately provides for potential loan losses. On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures". Under this standard, loans considered to be impaired are reduced to the present value of expected future cash flows, and secured loans that are in foreclosure are recorded at the fair value of the underlying collateral securing the loan. The difference between the recorded investment in the loan and the impaired valuation is the amount of impairment. A specific allocation of the allowance for possible loan losses is assigned to such loans. If these allocations require an increase to the allowance, the increase is reported as bad debt expense. Adopting this standard did not require an adjustment to the provision for possible loan losses. Interest Rate Swap Contracts The Company has entered into certain interest rate swap contracts as part of its asset-liability management program to assist in managing the Company's interest rate risk and not for speculative reasons. The notional principal amount of these instruments reflect the extent of the Company's involvement in this type of financial instrument and do not represent the Company's risk of loss due to counterparty nonperformance or due to declines in market value of the swap contracts from changing interest rates. Such swaps are accounted for as hedges on an accrual basis since the swaps were entered into principally to manage the timing differences in repricing characteristics of various outstanding variable rate borrowings. The related swap income or expense is recognized currently, and recorded in the same category as the interest income or expense on the hedged item. Goodwill and Other Identified Intangibles: Intangible assets are amortized using straight-line and accelerated methods over the estimated remaining benefit periods which approximate 25 years for goodwill, 15 years for core deposit intangibles and 5 years for covenants not to compete. Premises and Equipment: Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation expense is computed principally on the straight-line method over the estimated useful lives of the assets generally ranging from 3 to 35 years. Upon the sale or other disposition of assets, cost and related accumulated depreciation are removed from the accounts, and the resultant gain or loss is recognized. Maintenance and repairs are charged to operating expense while additions and betterments are capitalized. Other Real Estate Owned: Other real estate owned represents properties acquired through customers' loan defaults. Other real estate owned is stated at an amount equal to the loan balance prior to foreclosure plus cost incurred for improvements to the property, but not more than fair market value of the property. As of December 31, 1997 and 1996, other real estate owned was $785 and $539, respectively, and is included on the balance sheet in other assets. Investment in Subsidiaries (Parent Company Only): The Company's investment in subsidiaries represents the total equity of the Parent Company's wholly-owned subsidiaries, using the equity method of accounting for investments. 42 43 Common Stock: During 1997, the Company's shareholders approved amendments to the Articles of Incorporation to increase the number of authorized shares of common stock to 20,000,000 from 7,500,000 and to eliminate par value per share of common stock. These changes to the Articles of Incorporation had no effect on the total capital of the Company. Earnings Per Common Share: Effective December 31, 1997, the Company adopted SFAS No. 128 "Earnings Per Share" which establishes standards for the computation, presentation, and disclosure requirements for earnings per share. Basic earnings per common share is computed on the basis of the weighted average number of shares outstanding during the period. Diluted earnings per common share is computed on the basis of the weighted average number of common shares adjusted for the dilutive effect of outstanding stock options or other common stock equivalents. The assumed exercise of stock options granted in December 1997 (see Note 12) had no dilutive effect. The weighted average number of shares outstanding for all periods has been adjusted to reflect the 1995 acquisition accounted for as a pooling-of-interests. Statement of Cash Flows: For the purposes of presenting the statement of cash flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet caption "cash and due from banks." Use of Estimates in Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company's net interest income and the value of its recorded assets and liabilities. Reclassification: Certain reclassifications have been made to prior period amounts to conform to the 1997 presentation. 2. MERGERS AND ACQUISITIONS: On August 14, 1996, the Company acquired County in a transaction accounted for under the purchase method of accounting for business combinations. Accordingly, the Company's consolidated financial statements include the operating results of County from the date of acquisition. At the time of acquisition, County had approximately $554,000 in total assets, $411,000 in loans and $365,000 in total deposits. The Company also recorded goodwill and other intangible assets of $14,708 as a result of the application of purchase accounting. Funding for the acquisition was provided by proceeds of $25,824 (net of underwriting discounts and offering expenses totaling $2,176) from the issuance of 1 million shares of common stock, $15,000 of bank borrowings and approximately $7,000 of available cash. The following summarizes the pro-forma results of operations for the years ended December 31, 1996 and 1995 as if County had been acquired at the beginning of each period presented: 43 44
YEARS ENDED DECEMBER 31, ---------------- 1996 1995 ---- ---- Net Interest Income $33,327 $30,820 Net Income $ 7,043 $ 8,637 Basic and diluted earnings per share $ 1.77 $ 2.17
On June 30, 1995, the Company completed its merger with Bellbrook, a bank holding company in Bellbrook, Ohio, a suburb of Dayton, with total assets of approximately $23,000. The transaction was accounted for under the pooling-of-interests method of accounting for business combinations and accordingly, the consolidated financial statements have been restated for the periods prior to the merger to include Bellbrook. In connection with the transaction, the Company issued 158,959 of its common shares to Bellbrook's shareholders. 3. CASH AND DUE FROM BANKS: The Company is required to maintain average reserve balances with the Federal Reserve Bank. The average required reserve amounted to $5,975 and $5,893 at December 31, 1997 and 1996, respectively. 4. INVESTMENT SECURITIES: During 1995, the Financial Accounting Standards Board (FASB) released a special report entitled, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities". This report provided for a one-time opportunity from November 15 to December 31, 1995, to reclassify securities between held-to-maturity and available-for-sale classifications. At December 31, 1995, FNB reclassified certain securities from held-to-maturity to available-for-sale. These securities had an amortized cost of $51,759 and a market value of $52,067 at the date of transfer, resulting in an increase in the carrying value of investments by $308 and a net increase to shareholders' equity of $203 to reflect the unrealized holding gains, net of federal income taxes. 44 45 The amortized cost and estimated fair value of investment securities are as follows:
DECEMBER 31, 1997 ---------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Securities Available-for-Sale: U.S. Treasury securities $ 2,558 $ 10 $ -- $ 2,568 Securities of other government agencies 12,619 143 8 12,754 Obligations of states and political subdivisions 16,627 390 57 16,960 Other securities 21,017 30 -- 21,047 Mortgage-backed and related securities 181,750 1,625 406 182,969 -------- ------ -------- -------- $234,571 $2,198 $ 471 $236,298 -------- ------ -------- -------- Securities Held-to-Maturity: Obligations of states and political subdivisions $ 5,793 $ 175 $ 1 $ 5,967 Industrial revenue bonds and other 2,628 2 -- 2,630 Mortgage-backed securities 26,802 1,246 -- 28,048 -------- ------ -------- -------- $ 35,223 $1,423 $ 1 $ 36,645 -------- ------ -------- --------
DECEMBER 31, 1996 ---------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Securities Available-for-Sale: U.S. Treasury securities $ 11,775 $ 107 $ 1 $ 11,881 Securities of other government agencies 12,446 48 66 12,428 Obligations of states and political subdivisions 16,090 266 55 16,301 Other securities 14,495 -- -- 14,495 Mortgage-backed securities 182,509 1,127 964 182,672 -------- ------ -------- -------- $237,315 $1,548 $1,086 $237,777 -------- ------ -------- -------- Securities Held-to-Maturity: Securities of other government agencies $ 1,999 $ 1 $ -- $ 2,000 Obligations of states and political subdivisions 6,266 121 12 6,375 Industrial Revenue Bonds and other 2,844 2 -- 2,846 Mortgage-backed securities 35,690 741 -- 36,431 -------- ------ -------- -------- $ 46,799 $ 865 $ 12 $ 47,652 -------- ------ -------- --------
45 46 The amortized cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
DECEMBER 31, 1997 --------------------------- ESTIMATED AMORTIZED FAIR COST VALUE ---- ----- Securities Available-for-Sale Within one year $ 3,973 $ 3,998 After one through five years 6,509 6,641 After five through ten years 19,775 19,999 After ten years 22,564 22,691 -------- -------- 52,821 53,329 Mortgage-backed and related securities 181,750 182,969 -------- -------- $234,571 $236,298 -------- -------- Securities Held-to-Maturity Within one year $ 734 $ 739 After one through five years 5,786 5,860 After five through ten years 1,895 1,990 After ten years 6 8 -------- -------- 8,421 8,597 Mortgage-backed securities 26,802 28,048 -------- -------- $35,223 $ 36,645 -------- --------
Proceeds from sales of securities available-for-sale during 1997, 1996 and 1995 were $22,195, $16,337, and $12,098, respectively. Gross gains of $125, $60 and $144 and gross losses of $37, $17 and $8 were realized on sales in 1997, 1996 and 1995, respectively. Securities available-for-sale with a fair value of $ 141,165 at December 31, 1997 were pledged to secure public deposits and for other purposes required by law. 5. LOANS: The composition of the loan portfolio is as follows:
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Commercial, financial and industrial $302,098 $299,630 Real estate--mortgage 363,333 337,911 Real estate--construction 9,215 7,716 Consumer 86,381 76,598 -------- -------- $761,027 $721,855 -------- --------
46 47 The Company has made loans to certain directors, executive officers, and their affiliates in the ordinary course of business. An analysis of the year ended December 31, 1997 activity with respect to these related party loans is as follows:
DECEMBER 31, 1997 ---- Beginning balance $2,926 New loans 1,710 Repayments (921) Loans no longer classified as related party loans (103) ------ Ending balance $3,612 ------
At December 31, 1997 and 1996, and for the years then ended, the recorded investment in loans considered to be impaired under SFAS No. 114 and interest income recognized related thereto was not material. Also, at December 31, 1997 loans serviced for others totaled $229,310. 6. ALLOWANCE FOR POSSIBLE LOAN LOSSES: An analysis of activity in the allowance for possible loan losses is as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ---- ---- ---- Balance at beginning of period $ 6,599 $ 3,307 $ 3,095 Provision charged to operations 1,221 1,257 967 Addition due to acquisition -- 2,861 -- Loans charged off (1,772) (1,099) (862) Loan recoveries 569 273 107 ------- ------- ------- Net charge-offs (1,203) (826) (755) ------- ------- ------- Balance at end of period $ 6,617 $ 6,599 $ 3,307 ------- ------- -------
47 48 7. PREMISES AND EQUIPMENT: Premises and equipment are summarized below:
DECEMBER 31, ------------------------ 1997 1996 ---- ---- Land $ 1,726 $ 1,623 Buildings and improvements 7,844 7,354 Furniture, fixture and equipment 10,000 8,502 Construction in progress -- 60 ------- ------- 19,570 17,539 Less accumulated depreciation and amortization 10,714 9,577 ------- ------- Premises and equipment, net $ 8,856 $ 7,962 ------- -------
Total depreciation expense was $1,134, $902 and $793 for the years ended December 31, 1997, 1996 and 1995, respectively. 8. DEPOSITS: A summary of deposits is as follows:
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Demand, noninterest-bearing $ 63,846 $ 56,179 Demand, interest-bearing 106,325 117,373 Savings 88,835 82,034 Time, $100 and over 132,958 125,599 Time, other 355,083 351,504 -------- -------- $747,047 $732,689 -------- --------
9. FEDERAL FUNDS PURCHASED: Federal funds purchased generally have one- to four-day maturities. The following table reflects the maximum month-end outstandings, average daily outstandings, average rates paid during the year, and the average rates paid at year-end for federal funds purchased:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 ---- ---- ---- Federal funds purchased: Average balance $ 1,605 $ 2,016 $ 2,532 Average rate 6.29 % 6.10% 6.30% Maximum month-end balance $12,300 $11,650 $12,600 Balance at year-end $12,300 $11,650 $ 7,400 Average rate on balance at year-end 6.07 % 7.50% 5.75%
48 49 10. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS Federal Home Loan Bank (FHLB) advances and other borrowings are as follows:
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Term reverse repurchase agreement (5.95%) due 1997 $ -- $ 5,000 Term reverse repurchase agreement (6.05%) due 1998 5,000 5,000 Term reverse repurchase agreement (6.10%) due 1999 5,000 -- FHLB Advances (average rate 6.34%) 202,149 199,959 Term debt with a financial institution (7.31%) due 2003 15,000 15,000 -------- -------- $227,149 $224,959 -------- --------
Minimum annual retirements on borrowings for the next five years consisted of the following at December 31, 1997:
WEIGHTED MATURITY AVERAGE PRINCIPAL (PERIOD ENDING) INTEREST RATE REPAYMENT --------------- ------------- --------- 1998 6.33% $172,325 1999 6.22 22,266 2000 6.61 6,501 2001 6.61 7,088 2002 6.79 5,127 2003 and thereafter 7.10 13,842 ---- -------- Total 6.39% $227,149 ---- --------
FHLB advances must be secured by eligible collateral as specified by the FHLB. Accordingly, the Company has a blanket pledge of its first mortgage loan portfolio as collateral for the advances outstanding at December 31, 1997 with a required minimum ratio of collateral to advances of 150%. The term reverse repurchase agreements are with Salomon Brothers, Inc. under which the Company sold mortgage-backed securities classified as available-for-sale and with a current carrying and fair value of $12,198 and $10,303 and accrued interest of $102 and $71 at December 31, 1997 and 1996, respectively. The reverse repurchase agreements have a weighted average maturity of one year at December 31, 1997 and 1996. The term debt with a financial institution was obtained by the Company to partially fund the acquisition of County. Under terms of the loan agreement, the Company is required to make quarterly interest payments commencing 90 days from the funding date (August 14, 1996) and annual principal payments commencing February 1998. The unpaid loan balance is due in full September 1, 2003. The loan agreement contains certain financial covenants, all of which the Company was in compliance with at December 31, 1997. Also, 100% of the stock of FNB collateralizes this borrowing. 11. RETIREMENT PLANS: The Company has a defined contribution plan which covers substantially all full-time employees. Contributions to the plan are based upon a predetermined percentage of the employees' base compensation. Expenses related to the plan for the years ended December 31, 1997, 1996 and 1995 were approximately $275, $435, and $333, respectively. The Company also has 401(k) Retirement Plans which cover substantially all employees with more than one year of service. The Company makes contributions to the plans pursuant to salary savings elections and discretionary contributions as set forth by the provisions of the plans. Employees direct the investment of account balances from plan alternatives. Operations have been charged $396, $240, and $111 for contributions to the plans for the years ended December 31, 1997, 1996 and 1995, respectively. 49 50 The Company maintains an employee stock purchase plan whereby eligible employees and directors, through their plan contributions, may purchase shares of the Company's stock. Such shares, up to a maximum of 18,000 shares, are purchased from treasury stock at fair market value. Minimal expenses were incurred by the Company for the years ended December 31, 1997 and 1996, and 1995, in connection with the plan. The Company currently provides certain health care benefits for eligible retirees, using the accrual method of accounting for the projected costs of providing postretirement benefits during the period of employee service. The Company previously accounted for such benefits on a cash basis. Such amounts did not differ significantly from those calculated under the accrual method of accounting. The Company will continue to fund these benefit costs as claims are incurred. During 1997, the Company changed its employee benefit program to no longer provide post retirement benefits to employees who were not eligible to retire as of December 31, 1997. As a result of this plan curtailment, a gain of $500 was recognized and is included in other income in 1997. At December 31, 1997 and 1996, the recorded liability for post retirement benefits was $560 and $1,003, respectively. For the years ended December 31, 1997, 1996, and 1995, health care benefit costs for eligible retirees was $143, $101, and $39, respectively. 12. STOCK INCENTIVE PLAN The Company's Board of Directors has adopted, subject to shareholder approval, the 1997 Omnibus Stock Incentive Plan (the Plan) which provides for the granting of stock options and other stock related awards to key employees. Under the Plan, 400,000 authorized but unissued or reacquired common shares are reserved for issuance. In December 1997, stock options for 46,060 shares were granted, 11,515 shares each at $47.00, $50.00, $53.00 and $56.00 per share, and such grants are subject to approval of the shareholders at the Company's 1998 annual meeting. The market value of the Company's common stock at the date of grant was $47.00 per share. The options vest ratably over four years and expire in December 2017. No compensation expense was recognized in 1997 related to the Plan. Also under the Plan, the Company adopted the 1997 Bonus Shares Program whereby eligible employees receiving annual bonus awards may elect to receive up to 50% of such awards in common shares of the Company ("bonus shares"). Employees who elect to receive bonus shares in lieu of cash will receive additional matching shares from the Company equal to 50% of the bonus shares, provided that the employee is continuously employed by the Company and continuously owns the bonus shares for five years from the date of issuance of the bonus shares. Eligible employees elected to receive $203 of their 1997 bonuses in bonus shares which resulted in the issuance of 4,325 shares in 1998, subject to approval of the Plan. In the event the Plan receives shareholder approval, the Company will be required to adopt SFAS No. 123 "Accounting for Stock-Based Compensation" which encourages, but does not require, adoption of a fair value-based accounting method for employee stock-based compensation arrangements. As permitted by the statement, the Company intends to follow prior accounting standards in accounting for its stock options. For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of the stock options granted in 1997 was estimated at the date of grant using a Black-Scholes option pricing model. The weighted average assumptions used in the option pricing model were a risk-free interest rate of 5.75%, an expected life of the option of 7 years, an expected dividend yield of 2.25% and a volatility factor of 21.61%. For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Had compensation cost for the Company been determined consistent with SFAS No. 123, net income and basic and diluted earnings per share for the year ended December 31, 1997 would have been $10,759 and $2.70, respectively. 50 51 13. INCOME TAXES: The provision for income taxes is summarized below:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---- ---- ---- Current $4,453 $1,568 $2,720 Deferred 1,083 786 (14) ------ ------ ------ Provision for income taxes $5,536 $2,354 $2,706 ------ ------ ------
The following is a reconciliation of income tax at the federal statutory rate to the effective rate of tax on the financial statements:
YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 ---- ---- ---- Tax at federal statutory rate 35% 34% 34% Permanent differences: Tax-exempt interest, net of allowed interest expense (3) (6) (4) Amortization of intangibles and other 2 -- -- -- -- -- Effective tax rate 34% 28% 30% -- -- --
51 52 Deferred income taxes are recognized at prevailing income tax rates for temporary differences between financial statement and income tax bases of assets and liabilities. The components of the net deferred tax asset (liability) were as follows:
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Deferred tax assets arising from: Allowance for possible loan losses $ 2,179 $ 2,054 Reserve for health insurance 226 383 Depreciation 24 24 Amortization of intangibles 181 -- Purchase accounting adjustments 7 242 Serviced loan interest 113 151 Other 252 362 ---------- ---------- Total deferred tax assets 2,982 3,216 ---------- ---------- Deferred tax liabilities arising from: Gain on sale of loans 1,304 1,072 Deferred loan fees and costs 953 952 FHLB stock dividends 944 475 Unrealized holding gains on securities 589 157 Other, net 273 127 ---------- ---------- Total deferred tax liabilities 4,063 2,783 ---------- ---------- Net deferred tax asset (liability) $ (1,081) $ 433 ---------- ----------
The Company did not record a valuation allowance at December 31, 1996 as the net deferred tax asset was considered to be realizable based on the level of anticipated future taxable income. Net deferred tax assets and liabilities and federal income tax expense in future years can be significantly affected by changes in enacted tax rates. County qualified under provisions of the Internal Revenue Code which permitted deductions for bad debts based on a percentage of taxable income before such deductions or based on specified experience formulas. On August 20, 1996, President Clinton signed into law the Small Business Job Protection Act which included a repeal of the special thrift bad debt provisions. Although the percentage of taxable income method will no longer be available to County, the tax requirement to invest in certain qualifying types of investments and loans has been eliminated, thus providing greater flexibility to County in structuring its balance sheet to maximize returns. These related tax changes had no significant impact on the Company's financial position or results of operations. 14. LEASE COMMITMENTS: The Company leases equipment, land at two branch locations, and certain office space. One land lease has five renewal options for five years each and the other has a lease term until 2073. A summary of noncancelable future operating lease commitments at December 31, 1997 follows: 1998 $ 512 1999 301 2000 148 2001 93 2002 16 2003 and thereafter 389 ------- $ 1,459 -------
52 53 Rent expense under all lease obligations, including month-to-month agreements, aggregated approximately $512, $319, and $155 for the years ended December 31, 1997, 1996 and 1995, respectively. 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk, necessary to meet the financing needs of its customers. These financial instruments include loan commitments, and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The total amounts of financial instruments with off-balance-sheet risk are as follows:
DECEMBER 31, ------------------------ 1997 1996 ---- ---- Financial instruments whose contract amounts represent credit risk: Loan commitments $ 77,354 $ 47,646 Standby letters of credit 456 734
Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. Interest rate swaps generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount. Notional amounts represent agreed upon amounts on which calculations of interest payments to be exchanged are based. Notional amounts do not represent direct credit exposures. The actual market or credit exposure of this type of financial instrument is significantly less than the notional amount. Direct credit exposure is limited to the net difference between the calculated pay and receive amounts on each transaction, which is generally netted and paid or received monthly, and the inability of the counterparty to meet the terms of the contract. This risk is normally a small percentage of the notional amount and fluctuates as interest rates move up and down. Market risk is more directly measured by the fair values of the interest rate swap agreements. The Company had $52,500 and $27,500, respectively, of notional swap principal contracts outstanding at December 31, 1997 and 1996 related to asset-liability management activities. These swap contracts have maturity dates ranging from December 1999 to October 2002 and require the Company to pay a fixed rate of interest ranging from 6.09% to 6.58% in return for receiving a variable rate of interest based on the three month London Inter Bank Offered Rate (LIBOR). For the years ended December 31, 1997 and 1996, interest expense on swap contracts was $147 and $28, respectively, and is included with interest expense on borrowings. No such contracts were outstanding during 1995. The Company offers credit cards in an agency capacity for another institution. Under certain circumstances, the credit cards are issued with recourse to the Company. The total of these credit lines with recourse to the Company is approximately $1,948 and $2,022 of which $367 and $329 represent outstanding balances at December 31, 1997 and 1996, respectively. In addition to the financial instruments with off-balance sheet risks, the Company has commitments to lend money which have been approved by the Small Business Administration's (SBA) 7(a) program. Such commitments carry SBA 53 54 guarantees on individual credits ranging from 29% to 80% of principal balances. The total of such commitments at December 31, 1997 and 1996, were $18,760 and $13,966, respectively, with guaranteed principal by the SBA totaling $12,806 and $8,415, respectively. The Company has no significant concentrations of credit risk with any individual counter-party. The Company's lending is concentrated primarily in the State of Ohio market area. 16. SHAREHOLDERS' EQUITY: The payment of dividends by banking subsidiaries is subject to regulatory restrictions by various regulatory authorities. These restrictions for national banks provide that dividends in any calendar year generally shall not exceed the total net profits of that year plus the retained net profits of the preceding two years. In addition, for all banks, dividend payments may not reduce capital levels below minimum regulatory guidelines. At December 31, 1997, $10,494 of the retained earnings of the banking subsidiaries is available for the payment of dividends to the Company without regulatory agency approval. 17. REGULATORY CAPITAL REQUIREMENTS: The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiaries must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulators to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the applicable regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notifications from the various primary regulators of the Company and its subsidiaries categorized each entity as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. 54 55 The Company's actual capital amounts and ratios are as follows:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1997: Total Capital (to Risk-Weighted Assets): Consolidated $77,859 11.32% $55,045 8.00% $68,806 10.00% FNB 38,979 13.66 22,821 8.00 28,526 10.00 County 41,039 11.68 28,097 8.00 35,122 10.00 Bellbrook 3,640 10.25 2,840 8.00 3,550 10.00 Tier 1 Capital (to Risk-Weighted Assets): Consolidated 71,319 10.37 27,522 4.00 41,284 6.00 FNB 35,718 12.52 11,410 4.00 17,115 6.00 County 38,094 10.85 N/A N/A 21,073 6.00 Bellbrook 3,306 9.31 1,420 4.00 2,130 6.00 Tier 1 Capital (to Average Assets): Consolidated 71,319 6.52 32,802 3.00 54,670 5.00 FNB 35,718 7.37 14,539 3.00 24,231 5.00 County 38,094 6.60 17,310 3.00 28,851 5.00 Bellbrook 3,306 7.86 1,263 3.00 2,104 5.00
18. FAIR VALUE OF FINANCIAL INSTRUMENTS: Provided below is the information required by SFAS No. 107, "Disclosures About Fair Value of Financial Instruments". The amounts provided represent estimates of fair values at a particular point in time. Significant estimates regarding economic conditions, loss experience, risk characteristics associated with particular financial instruments and other factors were used for the purposes of this disclosure. These estimates are subjective in nature and involve matters of judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could have a material impact on the estimates shown. While the estimated fair value amounts are designed to represent estimates of the amounts at which these instruments could be exchanged in a current transaction between willing parties, many of the Company's financial instruments lack an available trading market as characterized by willing parties engaging in an exchange transaction. In addition, with the exception of its available-for-sale securities portfolio, it is the Company's intent to hold its financial instruments to maturity and, therefore, it is not probable that the fair values shown will be realized. The value of long-term relationships with depositors (core deposit intangible) and other customers are not reflected in the estimated fair values. In addition, the estimated fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to make that value: Cash and Due From Banks, Federal Funds Sold and Federal Funds Purchased --The carrying amount approximates fair value. 55 56 Investment Securities--Estimated fair values are based on quoted market prices, when available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans--In order to determine the fair values for loans, the loan portfolio was segmented based on loan type, credit quality and repricing characteristics. For residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. For certain variable rate loans with no significant credit concerns and frequent repricings, estimated fair values are based on the carrying values. The fair values of other loans are estimated using discounted cash flow analyses. The discount rates used in these analyses are based on origination rates for similar loans. Where appropriate, adjustments have been made for credit and other costs so as to more accurately reflect market rates. The estimate of maturity is based on historical experience with repayments and current economic and lending conditions. Deposits--Under SFAS No. 107, the fair value of demand deposits, savings accounts and certain money market deposits with no stated maturity is equal to the amount payable on demand. The estimated fair value of fixed maturity certificates of deposit is based on discounted cash flow analyses using market rates currently offered for deposits of similar remaining maturities. Federal Home Loan Bank advances and other borrowings--Estimated fair value of Federal Home Loan Bank advances and other borrowings were based on discounted cash flow analyses using current rates for the same advances. Commitments to Extend Credit and Stand-by Letters of Credit -- The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter-parties. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with counter-parties at the reporting date. The fair values of financial instruments were as follows:
December 31, 1997 December 31, 1996 -------------------------- -------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash and due from banks $ 21,650 $ 21,650 $ 18,856 $ 18,856 Federal funds sold 49 49 2,193 2,193 Securities available-for-sale 236,298 236,298 237,777 237,777 Securities held-to-maturity 35,223 36,645 46,799 47,652 Loans, net of allowance for loan losses 754,410 755,177 715,256 717,875 Demand and savings deposits 259,006 259,006 255,586 255,586 Time deposits 488,041 490,055 477,103 478,188 Federal funds purchased 12,300 12,300 11,650 11,650 Federal Home Loan Bank advances and other borrowings 227,149 227,192 224,959 224,763 Interest rate swaps -- (579) -- (73)
19. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION: Parent Company only condensed financial information is as follows: 56 57 CONDENSED BALANCE SHEET DECEMBER 31, 1997 AND 1996
DECEMBER 31, -------------------------- 1997 1996 ---- ---- Assets: Cash $ -- $ 306 Investment in repurchase agreement with subsidiary 8,000 7,000 Investment in subsidiaries 88,938 83,605 Intangible assets 2,200 2,800 Other assets 1,560 500 ---------- -------- Total assets $ 100,698 $ 94,211 ---------- -------- Liabilities and equity: Long-term borrowings $ 15,000 $ 15,000 Other liabilities 365 1,317 ---------- -------- Total liabilities 15,365 16,317 Shareholders' equity 85,333 77,894 ---------- -------- Total liabilities and equity $ 100,698 $ 94,211 ---------- --------
CONDENSED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND 1995
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ---- ---- ---- Dividends from subsidiaries $ 9,000 $ 7,500 $ 2,000 Interest income 3 7 16 Interest expense (1,138) (422) -- Operating expenses (2,121) (895) (477) -------- --------- ------- Income before income tax and equity in earnings of subsidiaries 5,744 6,190 1,539 Federal income tax benefit 1,029 520 128 -------- --------- ------- Income before equity in earnings of subsidiaries 6,773 6,710 1,667 Earnings in excess of (less than) dividends 3,997 (751) 4,545 -------- --------- ------- Net income $ 10,770 $ 5,959 $ 6,212 -------- --------- -------
57 58 CONDENSED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND 1995
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $ 10,770 $ 5,959 $ 6,212 Adjustments to reconcile net income to net cash provided by operations: Amortization and depreciation 628 218 9 (Increase) decrease in other assets (1,086) 1,412 (1,539) (Decrease) increase in other liabilities 548 (201) (15) Earnings less than (in excess of) dividends (3,997) 751 (4,545) -------- -------- ------- Net cash provided by operating activities 6,863 8,139 122 -------- -------- ------- Cash flows from investing activities: Acquisition of County (1,500) (46,612) -- Investment in subsidiary (500) -- -- Purchase of equipment and other assets (2) (321) (13) Decrease (increase) in repurchase agreement with subsidiary (1,000) 1,530 2,570 -------- -------- ------- Net cash provided by (used for) investing activities (3,002) (45,403) 2,557 -------- -------- ------- Cash flows from financing activities: Issuance of common stock -- 25,824 -- Increase in long-term debt -- 15,000 -- Cash dividends paid (4,179) (3,515) (2,715) Purchase of treasury stock (433) -- (139) Treasury shares issued and other 445 254 155 -------- -------- ------- Net cash provided by (used in) financing activities (4,167) 37,563 (2,699) -------- -------- ------- Net increase (decrease) in cash (306) 299 (20) Cash, beginning of period 306 7 27 -------- -------- ------- Cash, end of period $ -- $ 306 $ 7 -------- -------- -------
The Parent Company paid $3,300, $2,255 and $2,360 for income taxes in 1997, 1996 and 1995 and $1,133 and $277 for interest in 1997 and 1996. 20. SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION: On September 30, 1996, President Clinton signed into law the Deposit Insurance Funds Act of 1996, which included provisions recapitalizing the Savings Association Insurance Fund (SAIF), provides for the eventual merger of the thrift fund with the Bank Insurance Fund (BIF), and reallocates payment of the annual Financing Corp. (FICO) bond obligation. As part of the package, the Federal Deposit Insurance Corp. (FDIC) imposed a special one-time assessment of 65.7 basis points applied against SAIF assessable deposits as of December 31, 1995, which brought the SAIF up to the statutorily prescribed 1.25% designated reserve ratio. The special assessment, which was paid in November 1996, was included as a $2,309 pretax charge to the Company's operations in September 1996. This assessment reduced the Company's earnings in 1996 by approximately $1,524 or $.45 per share. 58 59 21. NEW ACCOUNTING PRONOUNCEMENTS: SFAS No. 130 "Reporting Comprehensive Income" was issued in June 1997 and is effective for financial statements issued for periods beginning after December 15, 1997. The statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company's comprehensive income, determined in accordance with the provisions of the statement, for the year ended December 31, 1997 was $11.6 million. In June 1996, the FASB issued an Exposure Draft, "Accounting for Derivative and Similar Financial Instruments and for Hedging Activities" (the Exposure Draft), which, if adopted as issued, would significantly change the accounting for derivative and hedging activities. The Exposure Draft would require that all derivative financial instruments be recognized and recorded at fair value. However, key aspects of the Exposure Draft continue to be discussed and are subject to change; accordingly the impact, if any, to the Company is not presently known. In December 1996, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125" was issued. Under SFAS No. 127 the effective date of the SFAS No. 125 requirements related to transfers of financial assets was deferred to those transfers occurring after December 31, 1997, specifically, such transfers involving repurchase agreements. The Company will adopt SFAS No. 127 as required, although it is not expected to have a material impact on the Company's statement of position or results of operations. 22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1997 and 1996:
First Second Third Fourth (Dollars in thousands except per share amounts) Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1997 Interest Income $20,651 $21,305 $21,316 $21,297 Net interest income 9,093 9,290 9,011 8,919 Provision for possible loan losses 298 317 304 302 Income before income taxes 3,971 4,031 4,132 4,172 Net income 2,632 2,678 2,724 2,736 Basic and diluted earnings per share $ 0.66 $ 0.67 $ 0.68 $0.69 1996 Interest income $ 9,141 $ 8,965 $14,765 $20,306 Net interest income 4,733 4,517 6,612 8,685 Provision for possible loan losses 292 318 316 331 Income (loss) before income taxes 2,618 2,144 (83) 3,634 Net income 1,855 1,552 46 2,506 Basic and diluted earnings per share $ 0.62 $ 0.52 $ 0.01 $0.63
59 60 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements between the Company and its independent auditors on accounting and financial disclosure matters during the periods covered by this report. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT * ITEM 11: EXECUTIVE COMPENSATION * ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT * ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS * * Reference is made to the information under the captions "Election of Directors," "Executive Officers," "Executive Compensation, "Security Ownership of Certain Beneficial Owners and Management," and "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 23, 1998, which is incorporated by this reference into this annual report. 60 61 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements BancFirst Ohio Corp. and Subsidiaries: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (a) (2) Financial Statement Schedules Other schedules to the financial statements for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a) (3) Exhibits List and Index on page 61. (b) None (c) The exhibits required by Item 601 of Regulation S-K are filed as a separate part of this report. 61 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BANCFIRST OHIO CORP. By:____________________________________ William F. Randles Director and Chairman of the Board Dated: Zanesville, Ohio March __, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ---- (Signed) /s/ PHILLIP E. BURKE Director March __, 1998 - --------------------------------------- Philip E. Burke (Signed) /s/ GARY N.. FIELDS Director and Chief March __, 1998 - --------------------------------------- Executive Officer Gary N. Fields (Signed) /s/ RICHARD O. JOHNSON Director March __, 1998 - --------------------------------------- Richard O. Johnson (Signed) /s/ MILMAN H. LINN, III Director March __, 1998 - --------------------------------------- Milman H. Linn, III (Signed) /s/ JAMES L. NICHOLS Director March __, 1998 - --------------------------------------- James L. Nichols (Signed) /s/ KARL C. SAUNDERS Director March __, 1998 - --------------------------------------- Karl C. Saunders (Signed) /s/ J. W. STRAKER, JR. Director March __, 1998 - --------------------------------------- J. W. Straker, Jr. (Signed) /s/ WILLIAM F. RANDLES Director and Chairman March __, 1998 - --------------------------------------- of the Board William F. Randles (Signed) /s/ KIM M. TAYLOR Chief Financial Officer and March __, 1998 - --------------------------------------- Chief Accounting Officer Kim M. Taylor
62 63 Exhibit List and Index BancFirst Ohio Corp. Form 10-K for the year ended December 31, 1997
SEQUENTIALLY EXHIBIT NO. DESCRIPTION NUMBERED PAGE - ----------- ----------- ------------- 2.1 Stock Purchase Agreement by and between the Company and First Financial Group, Inc. dated March 27, 1996 (incorporated by reference to Exhibit 2.1 to the Company's --- Registration Statement on Form S-3, Registration No. 333-06707). 3.1 Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1991, Exhibit 3.3 to the Company's form 10-K for the year ended December 31, 1992 and Exhibit 3.6 to --- the Company's Form 10-K for the year ended December 31, 1994). 3.2 Code of Regulations of the Company, as amended (incorporated by reference to Exhibit 3.2 to the Company's form 10-K for the year ended December 31, 1991, Exhibit 3.4 to the Company's Form 10-K for the year ended December 31, 1992 an Exhibit 3.5 to the --- Company's Form 10-K for the ended December 31, 1993). 10.3 Loan Agreement by and between the Company and LaSalle National Bank dated August 14, 1996 (incorporated by reference to Exhibit 10.1 to the Company's Registration --- Statement on Form S-3, Registration No. 333-06707). *11.1 Computation of Per Share Earnings 64 *21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the --- Company's Form 10-K for the year ended December 31, 1996) *23.1 Consent of Coopers & Lybrand 65 *27.1 Financial Data Schedule ---
- ------------------ *Filed herewith. 63 EX-11.1 2 EXHIBIT 11.1 1
EXHIBIT NO. 11.1 COMPUTATION OF PER SHARE EARNINGS - ------------------------------------------------------------------------------------------------------------------ FOR THE YEARS ENDED DECEMBER 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Gross Weighted Average Common Shares Outstanding 4,033,919 3,413,636 3,034,092 Weighted Average Treasury Shares Outstanding 53,421 58,661 60,398 --------- --------- --------- Net Weighted Average Common Shares Outstanding 3,980,498 3,354,975 2,973,694 --------- --------- --------- Net Income ($ in thousands) $10,770 $5,959 $6,212 --------- --------- --------- Basic and diluted earnings per share $ 2.71 $ 1.78 $ 2.09 --------- --------- ---------
64 EX-23.1 3 EXHIBIT 23.1 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of BancFirst Ohio Corp. on Form S-8 (File Nos. 33-64288 and 33-64436) of our report dated January 23, 1998, on our audits of the consolidated financial statements of BancFirst Ohio Corp. and Subsidiaries as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996, and 1995, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Columbus, Ohio March 11, 1998 EX-27.1 4 EXHIBIT 27.1
9 1,000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 21,650 0 49 0 236,298 35,223 36,645 761,027 (6,617) 1,081,618 747,047 12,300 9,789 227,149 0 0 63,343 21,990 1,081,618 64,697 18,863 1,009 84,569 33,362 48,256 36,313 1,221 88 26,702 16,306 10,770 0 0 10,770 2.71 2.71 8.13 832 1,394 0 0 6,599 (1,772) 569 6,617 6,617 0 0
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