-----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, NuXy9x7x5MCsj7ASEupd2F7lhgcga1Jahggx5JdeuCAbEgUzE09mBO7GAjZXIuwW BiNCPN/jsI9o3hZkuUDQ+g== 0000950152-99-001772.txt : 19990310 0000950152-99-001772.hdr.sgml : 19990310 ACCESSION NUMBER: 0000950152-99-001772 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990309 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: 99561111 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 CORP. 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, 1998 0-18840 ----------------- ------- BancFirst Ohio Corp. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-1294136 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 422 Main Street Zanesville, Ohio 43701 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (740) 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 66 Pages Exhibit Index Appears on Page 63 2 As of March 1, 1999 the approximate aggregate market value of the voting stock beneficially owned by non-affiliates of the registrant was $141,735,000 computed on the basis of $25.25 per share, the closing sales price on the NASDAQ - National Market on March 1, 1999. On that date, 7,870,948 shares of Common Stock, no par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the registrant's Proxy Statement for the 1999 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. 3 TABLE OF CONTENTS -----------------
PART I - ------ Page(s) Item 1 - Business...................................................... 4 Item 2 - Properties.................................................... 13 Item 3 - Legal Proceedings............................................. 17 Item 4 - Submission of Matters to a Vote of Security Holders.......................................... 17 PART II - ------- Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters............................... 18 Item 6 - Selected Financial Data....................................... 19 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations............. 20 Item 8 - Financial Statements and Supplementary Data................... 34 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 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, The First National Bank of Zanesville ("FNB"). Effective May 16, 1998, Bellbrook Community Bank ("Bellbrook") and County Savings Bank ("County") were merged under the national bank charter of FNB. At December 31, 1998, the Company had total assets of $1.18 billion, total deposits of $790 million and shareholders' equity of $88 million. The Company is headquartered in Zanesville, Ohio, the county seat of Muskingum County. Through FNB, 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. FNB offers 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 and 1998, 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, Canton, Cleveland, Columbus, Cincinnati and Dayton, Ohio, Indianapolis, Indiana and Louisville, Kentucky. The Company's 1995 acquisition of Bellbrook provided access to the Dayton metropolitan market. In August 1996, the Company acquired County which had total assets of approximately $554 million. In October 1998, FNB opened a new branch location in Washington Township, Ohio, also in the Dayton metropolitan market. An additional branch location is being constructed in New Albany, Ohio, a rapidly growing suburb of Columbus, Ohio. The Company's strategic direction has culminated in over $800 million of asset growth since December 31, 1991. 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 objectives 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 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, except as discussed under "Recent Developments". 4 5 MARKET AREA AND COMPETITION The financial services industry in the Company's primary market area is highly competitive. FNB competes 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 its 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 that FNB is subjected to is such that no material portion of FNB's deposits or loans have been obtained from a single customer. Consequently, the loss of any one customer would not have a materially adverse effect on its business. The business of the Company and FNB 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. FNB is also subject to regulation, supervision, and examination by the Office of the Comptroller of Currency ("OCC"). 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, 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 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 has been given 60 days' prior written notice of such proposed acquisition and within that time period the FRB 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 approval under the BHCA. An acquisition may be made prior to the expiration of the disapproval period if the FRB 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 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 5 6 debt service on its debt, is dividends from its subsidiaries. Various federal regulations limit the amount of dividends that may be paid to the Company by FNB 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. HOLDING COMPANY STRUCTURE. TRANSACTIONS INVOLVING BANKING SUBSIDIARIES. FNB is subject to Federal Reserve Act restrictions that limit the transfer of funds or other items of value from FNB to the Company 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. 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, and the FDIC 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. 6 7 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, 1998, the Company's Tier 1 and total capital to risk-adjusted assets ratios were 10.3% and 11.2%, 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 FNB has been advised by the appropriate federal banking regulator of any specific Leverage Ratio applicable to it. As of December 31, 1998, the Company's Leverage Ratio was 6.5%. The OCC has established capital requirements for banks under its jurisdiction that are substantially similar to those imposed by the FRB on bank holding companies. As of December 31, 1998, FNB had capital in excess of such minimum regulatory capital requirements. 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. 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, 1998, FNB had capital levels that met "well capitalized" standards under such regulations. 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 7 8 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. RECENT DEVELOPMENTS In February 1999, the Company filed an application with the OCC seeking regulatory approval for the acquisition of the outstanding stock of a company which provides financial planning services and related investment services. At the date of this report, the Company has not executed an agreement with respect to such acquisition, but expects the consideration for such acquisition to be the issuance of approximately 76,000 shares of its common stock. The Company believes the acquisition will close at the end of the first quarter 1999. 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, ---------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (IN THOUSANDS) Residential mortgage $353,635 $363,333 $337,911 $105,604 $100,963 Construction mortgage 10,203 9,215 7,716 2,859 1,232 Commercial, financial and industrial 323,544 302,098 299,630 107,015 103,415 Consumer 89,681 86,381 76,598 53,340 42,333 -------- -------- -------- -------- -------- Total loans 777,063 761,027 721,855 268,818 247,943 Allowance for possible loan losses (6,643) (6,617) (6,599) (3,307) (3,095) -------- -------- -------- -------- -------- Net loans $770,420 $754,410 $715,256 $265,511 $244,848 ======== ======== ======== ======== ========
The Company's loan portfolio totaled $770.4 million at December 31, 1998, representing 65.2% of total assets. At December 31, 1997, 1996 and 1995, the Company's loan portfolio represented 69.8%, 67.7% and 55.7% of total assets, respectively. Residential mortgages outstanding at December 31, 1998 represented 45.5% of the Company's total loans. As of December 31, 1998, the Company's outstanding commercial loans represented 41.6% of total loans, outstanding consumer loans constituted 11.6% of total loans and construction mortgage loans constituted 1.3% 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 generally adjust on the applicable one, three, five or seven year anniversary date of the loan, subject to annual and term limitations. Rates are 8 9 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. Fixed-rate mortgage products offered by the Company are generally sold in the secondary market, thus limiting the interest rate risk inherent in maintaining a large portfolio of long-term, fixed-rate assets. The Company sells such loans on both a servicing retained and servicing released basis. 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. 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, 1998, the Company's largest commercial loan had a principal balance of $4.3 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, 1998, the guaranteed portion of loans that were held-for-sale totaled $2.6 million, while the unguaranteed portion of loans held by the Company in its portfolio totaled $21.6 million. Management continues to seek growth opportunities in small business lending. To date, the Company has established small business lending centers in the Columbus, Cleveland, Akron/Canton and Cincinnati, Ohio and Indianapolis, Indiana, and Louisville, Kentucky market areas. The Columbus location is the center for the Company's small business lending operations. 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. 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 85% when added to the balance of the first lien mortgage. At December 31, 1998, 36% of the Company's consumer loans consisted of home equity loans. At December 31, 1998, 53% 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 9 10 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. The allowance for loan losses is allocated according to the amount systematically estimated as necessary to provide for the inherent losses within the various categories of loans. General allocations of the allowance are based primarily on previous charge-off experience adjusted for changes in the risk characteristics of each category. In addition, classified and non-performing loans are evaluated separately and specific reserves are allocated based on expected losses on each individual classified or non-performing loans. The following table sets forth the allocation of the Company's allowance for possible loan losses for each of the periods presented:
DECEMBER 31, ------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1998 1997 1996 1995 1994 -------------------- -------------------- --------------------- -------------------- -------------------- Percent of Percent of Percent of Percent of Percent of Loans to Loans to Loans to Loans to Loans to Allowance Total Allowance Total Allowance Total Allowance Total Allowance Total --------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- Residential mortgage $ 946 45.5% $1,120 47.7% $1,392 46.8% $ 117 39.3% $ 196 40.7% Construction mortgage 25 1.3 24 1.2 24 1.1 -- 1.1 -- 0.5 Commercial 2,947 41.6 2,830 39.7 2,704 41.5 3,164 39.8 1,822 41.7 Consumer 2,725 11.6 2,643 11.4 2,479 10.6 26 19.8 1,077 17.1 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- TOTAL $6,643 100.0% $6,617 100.0% $6,599(1) 100.0% $3,307 100.0% $3,095 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
(1) 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 the Company acquired County. Changes in the amount of allowance allocated to each loan category at December 31, 1998 as compared to December 31, 1997 primarily resulted from changes in the amount of loans outstanding in each category. Loan maturities and repricing periods of the loan portfolio at December 31, 1998 were as follows:
WITHIN ONE ONE TO FIVE AFTER FIVE YEAR YEARS YEARS TOTAL ---------- ----------- ---------- -------- Commercial $154,785 $121,847 $ 46,912 $323,544 Real estate mortgage 172,471 129,730 51,434 353,635 Real estate - construction 5,478 3,177 1,548 10,203 Consumer 37,295 46,485 5,901 89,681 -------- -------- -------- -------- $370,029 $301,239 $105,795 $777,063 ======== ======== ======== ======== Loans due after one year with: Floating rates $258,908 Predetermined rates $148,126
10 11 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 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. 11 12 The following table sets forth certain information relating to the Company's investment securities portfolio.
OBLIGATIONS OTHER U.S. OF STATE MORTGAGE- U.S. GOVERNMENT AND POLITICAL BACKED YIELD TREASURY AGENCIES SUBDIVISIONS SECURITIES OTHER TOTAL (FTE) -------- ---------- ------------- ---------- ------- -------- ----- (DOLLARS IN THOUSANDS) DECEMBER 31, 1998 - --------------------------------- SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing Within one year $ -- $ 173 $ 1,264 $ 15,268 $ 50 $ 16,755 6.63% After one through five years 265 -- 3,308 94,130 3,907 101,610 6.80% After five through ten years -- 2,503 8,278 83,733 22,592 117,106 6.35% After ten years -- 2,162 9,496 28,657 25,311 65,626 6.95% ------- ------- ------- -------- ------- -------- Total carrying value $ 265 $ 4,838 $22,346 $221,788 $51,860 $301,097 ======= ======= ======= ======== ======= ======== Amortized cost 251 4,759 21,724 222,537 52,503 301,774 Yield (FTE) 6.55% 6.81% 7.69% 6.62% 6.32% 6.65% Average maturity (in years) 3.3 10.7 12.1 6.1 18.2 8.7 SECURITIES HELD-TO-MATURITY: Maturity/Repricing Within one year $ -- $ -- $ 396 $ 2 $ -- $ 398 7.27% After one through five years -- -- 3,520 12,139 1,849 17,508 7.81% After five through ten years -- -- 1,280 6,839 493 8,612 7.82% After ten years -- -- -- -- -- -- --% ------- ------- ------- -------- ------- -------- Total carrying value $ -- $ -- $ 5,196 $ 18,980 $ 2,342 $ 26,518 ======= ======= ======= ======== ======= ======== Fair value -- -- 5,413 19,054 2,342 26,809 Yield (FTE) -- -- 7.53% 7.53% 10.64% 7.80% Average maturity (in years) -- -- 3.7 4.4 3.2 4.1 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 ======= ======= ======= ======== ======= ======== Amortized cost 2,558 12,619 16,627 181,750 21,017 234,571 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 ======= ======= ======= ======== ======= ======== Amortized cost 11,775 12,446 16,090 182,509 14,495 237,315 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
12 13 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, 1998 are summarized as follows:
AMOUNT -------------- (IN THOUSANDS) 3 months or less $ 68,107 3 through 6 months 32,842 6 through 12 months 25,309 Over 12 months 14,903 ------- Total $141,161 =======
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. FNB is a member 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, 1998, the Company had 428 employees, 356 of whom were full-time and 72 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. 13 14 All of the offices listed below are owned by the Company or FNB free and clear of any encumbrances.
LOCATION DESCRIPTION -------- ----------- 1. Main Office 422 Main Street Six story building with a basement built in Zanesville, OH 43701 1934 with approximately 34,302 square feet. 2. Duncan Falls Office Main & Mound Streets One story building built in 1959 with 1,148 Duncan Falls, OH 43734 square feet. 3. Frazeysburg Office Third & State Streets One story building built in 1959 with 1,302 Frazeysburg, OH 43822 square feet. 4. Maple-Bell Office 2801 Maple Avenue One story building built in 1972 with 2,316 Zanesville, OH 43701 square feet. 5. New Concord Office 27 East Main Street One story building with basement, built in New Concord, OH 43762 1962 with 4,478 square feet. 6. Terrace Point Office 1820 Maple Avenue One story building with basement, built in Zanesville, OH 43701 1959 with 2,427 square feet. 7. Zane Plaza Office 225 N. Maysville Avenue One story building built in 1965 with 2,386 Zanesville, OH 43701 square feet. 8. Dresden Office 727 Main Street Two story building built in 1930 with 1,000 Dresden, OH 43821 square feet. 9. Arlington Office 3005 Northwest Blvd. One story building acquired in 1977 with Upper Arlington, OH 43221 approximately 2,170 square feet. 10. Bexley Office 2585 East Main Street One story building acquired in 1977 with Bexley, OH 43209 approximately 2,814 square feet. 11. Clintonville Office 4311 North High Street One story building acquired in 1982 with Columbus, OH 43215 approximately 1,847 square feet. 12. Granville Office 222 East Broadway A two story building acquired in 1998 with Granville, OH 43023 approximately 4,239 square feet.
14 15 13. Heath Office 580 Hebron Road One story building built in 1962 with Heath OH 43056 approximately 1,987 square feet. 14. Newark - Downtown Office 42 North Third Street Two story building with a basement built in Newark, OH 43055 1955 with approximately 13,400 square feet. 15. Newark - 21st Street Office One story building built in 1975 with 973 North 21st Street approximately 1,600 square feet. This Newark, OH 43055 building is located on property that is subject to a ground lease dated January 1, 1975 for a term of 99 years, with a 99 year renewal option. Monthly rental payments are $450. 16. Pataskala Office 26 West Broad Street One story building built in 1973 with Pataskala, OH 43062 approximately 1,385 square feet. 17. Utica Office 8 North Main Street One story building built in 1976 with Utica, OH 43080 approximately 828 square feet. 18. Bellbrook Office 2010 Lakeman Drive One story building built in 1971 with Bellbrook, OH 45305 approximately 5,700 square feet. 19. Washington Township Office 500 Miamisburg Centerville Rd. One story building built in 1998 with Centerville, OH 45459 approximately 5,300 square feet.
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 $43,884, 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. FNB intends to close this office in April 1999. The former 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 $4,380. This office space is currently being subleased by the Company under which it receives monthly rental payments of $4,181. 15 16 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 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 was renewed for a term of 2 years commencing June 1, 1998 and expiring on May 31, 2000, with monthly rental payments of $1,078. The Canton Loan Production Office, 1030 North Main Street, Canton, Ohio is leased office space in a building consisting of approximately 650 square feet. The lease is for a term of 2 years commencing September 1, 1998 and expiring August 31, 2000, with monthly rental payments of $690. 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 Indianapolis Loan Production Office, 8900 Keystone Crossing, Indianapolis, Indiana 46240 is leased office space in a building consisting of 594 square feet. The lease if for a term of 3 years commencing August 1, 1998 and expiring on July 31, 2001, with monthly rental payments of $879. The Louisville Loan Production Office, 10401 Linn Station Road, Louisville, Kentucky 40223 is leased office space in a building consisting of 732 square feet. The lease is for a term of 5 years commencing February 1, 1999 and expiring January 31, 2004, with a current monthly rental payment of $854. The Capitol Square 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 August 1, 1998 and expiring July 31, 1999, with monthly rental payments of $ 500. The Company does not intend to renew this lease. 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 third of 3 two year renewal periods, with monthly rental payments of $5,543. The Operations Center Annex, 7020 Huntley Road, Worthington, Ohio 43085 is leased space in an office building consisting of 3,200 square feet. The lease is for a term of 27 months, commencing May 15, 1998 and expiring August 30, 2000, with monthly rental payments of $1,500. Investment and Financial Services office, 1799 Marion Waldo Road, Marion, Ohio 43002 is leased office space in a building consisting of approximately 1,200 square feet. The lease is for a term of three years commencing September 15, 1998 and expiring September 14, 2001, with monthly rental payments of $833. The aggregate annual rentals paid during the Company's last fiscal year does not exceed five percent of its operating expenses. 16 17 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 - SUBMISSION 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 1998. 17 18 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED - ----------------------------------------------------------------- STOCKHOLDER MATTERS ------------------- QUARTERLY MARKET AND DIVIDEND INFORMATION Per Share Data
1998 1997 ------------------------------- ------------------------------- MARKET PRICE Market Price ----------------- CASH ----------------- Cash HIGH LOW DIVIDENDS High Low Dividends ----------------- --------- ----------------- --------- 1st Quarter $26.25 $23.38 $.135 $16.75 $14.75 $.130 2nd Quarter 35.00 23.75 .135 19.63 16.25 .130 3rd Quarter 35.50 25.00 .135 20.50 18.38 .130 4th Quarter 31.50 27.00 .140 25.50 19.38 .135
QUARTERLY MARKET AND DIVIDEND INFORMATION On April 30 1993, the Company's common stock commenced trading on the National Association of Securities Dealers Automated Quotation System (NASDAQ) National Market System 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 1,143 and 1,137 shareholders of the Company's common stock at December 31, 1998 and 1997, 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 FNB, as well as existing cash balances. As discussed in Note 17 to the consolidated financial statements, certain restrictions exist regarding the ability of FNB to pay dividends. 18 19 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY - ----------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996(5) 1995 1994 ---------- ---------- ---------- -------- -------- (Dollars in Thousands Except per Share Data) STATEMENT OF INCOME DATA: Interest income $ 86,657 $ 84,692 $ 53,177 $ 34,063 $ 27,652 Interest expense 50,150 48,256 28,630 16,357 11,259 ---------- ---------- ---------- -------- -------- Net interest income 36,507 36,436 24,547 17,706 16,393 Provision for possible loan losses 1,225 1,221 1,257 967 338 Non-interest income 9,948 7,768 6,258 4,984 3,801 Non-interest expense 29,827 26,677 21,235 12,805 11,410 ---------- ---------- ---------- -------- -------- Income before income taxes and extraordinary item 15,403 16,306 8,313 8,918 8,446 Provision for federal income tax 4,835 5,536 2,354 2,706 2,572 ---------- ---------- ---------- -------- -------- Income before extraordinary item 10,568 10,770 5,959 6,212 5,874 Extraordinary item-prepayment charges on early repayment of Federal Home Loan Bank Advances, net of tax 400 -- -- -- -- ---------- ---------- ---------- -------- -------- Net income $ 10,168 $ 10,770 $ 5,959 $ 6,212 $ 5,874 ========== ========== ========== ======== ======== PER SHARE DATA: (1) Income before extraordinary item $ 1.33 $ 1.35 $ .89 $ 1.04 $ .99 Net income 1.28 1.35 .89 1.04 .99 Dividends .55 .53 .51 .47 .45 Book value 11.09 10.72 9.79 8.42 7.38 Tangible book value 9.58 9.13 8.01 8.40 7.36 BALANCE SHEET DATA: Total assets $1,181,011 $1,081,618 $1,056,920 $476,429 $429,384 Loans 777,063 761,027 721,855 268,818 247,943 Allowance for possible loan losses 6,643 6,617 6,599 3,307 3,095 Securities 327,615 271,521 284,576 178,252 153,595 Deposits 789,622 747,047 732,689 348,545 320,836 Borrowings 296,750 239,449 236,609 74,135 63,525 Shareholders' equity 87,535 85,333 77,894 50,010 43,844 PERFORMANCE RATIOS: Return on average assets 0.89% 0.98% 0.85% 1.38% 1.48% Return on average equity 11.55 13.20 10.05 13.05 13.28 Net interest margin 3.48 3.55 3.78 4.27 4.49 Interest rate spread 3.05 3.08 3.22 3.55 3.89 Non-interest income to average assets 0.88 0.71 0.90 1.11 0.95 Non-interest expense to average assets(2) 2.36 2.30 2.59 2.84 2.87 Efficiency ratio(3) 56.81 56.67 57.33 56.63 56.10 ASSET QUALITY RATIO: Non-performing loans to total loans 0.48 0.29 0.35 0.38 0.21 Non-performing assets to total assets 0.37 0.28 0.29 0.22 0.12 Allowance for possible loan losses to total losses 0.85 0.87 0.91 1.23 1.25 Allowance for possible loan losses to non- performing loans 178.3 298.3 258.0 322.9 608.1 Net charge-offs to average loans 0.16 0.16 0.19 0.29 0.11 CAPITAL RATIOS:(4) Shareholders' equity to total assets 7.41 7.89 7.37 10.50 10.21 Tier 1 capital to total assets 6.52 6.52 6.06 10.49 10.18 Tier 1 capital to risk-weighted assets 10.34 10.37 10.08 17.70 20.32
(1) Per share data has been restated to reflect all stock dividends and stock splits. (2) Excludes amortization of intangibles and non-recurring charges totaling $1,629 in 1998 for merger, restructuring and branch closing costs and $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 non-recurring 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 non-recurring 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. 19 20 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 FNB 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; 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 subsidiary. 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 Company's primary source of income is net interest income. Net interest income 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. 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 by dividing net interest income on a fully tax equivalent basis ("FTE") by total interest-earning assets. The net interest margin 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 amount based on the statutory federal income tax rate. All average balances are daily average balances. Non-accruing loans are included in average loan balances. 20 21
YEAR ENDED DECEMBER 31, 1998 1997 1996 ---------------------------------------------------------------------------------------------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE INTEREST COST BALANCE EXPENSE RATE(1) BALANCE EXPENSES RATE(1) ---------- -------- ------ ---------- ------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) Securities: Taxable $ 272,760 $18,514 6.79% $ 265,450 $18,184 6.85% $191,758 $13,082 6.82% Non-taxable (1) 27,246 2,130 7.82 25,357 2,007 7.91 25,632 1,983 7.74 ---------- ------- ---------- ------- -------- ------- Total securities 300,006 20,644 6.88 290,807 20,191 6.94 217,390 15,065 6.93 Loans: Commercial 315,242 29,776 9.45 312,385 29,654 9.49 186,409 18,121 9.72 Real estate 362,580 28,599 7.89 361,709 28,187 7.79 197,505 14,645 7.42 Consumer 91,865 8,275 9.01 77,705 7,062 9.09 61,600 5,810 9.43 ---------- ------- ---------- ------- -------- ------- Total loans(2) 769,687 66,650 8.66 751,799 64,903 8.63 445,514 38,576 8.66 Federal funds sold 2,907 154 5.30 6,794 364 5.36 5,055 268 5.30 ---------- ------- ---------- ------- -------- ------- Total earning assets(3) 1,072,600 87,448 8.15 1,049,400 85,458 8.14% 667,959 53,909 8.07 Non interest-earning assets 63,978 ------- 46,541 ------- 30,423 ------- ---------- ---------- -------- Total assets $1,136,578 $1,095,941 $698,382 ========== ========== ======== Interest Bearing Deposits: Demand and savings $ 215,358 $ 6,251 2.90% $ 205,556 $ 5,455 2.65% $170,835 $ 4,546 2.66% Time deposits 489,265 27,648 5.65 496,975 27,907 5.62 288,100 16,393 5.69 ---------- ------- ---------- ------- -------- ------- Total 704,623 33,899 4.81 702,531 33,362 4.75 458,935 20,939 4.56 Borrowings 279,004 16,251 5.82 250,852 14,894 5.94 131,818 7,693 5.84 ---------- ------- ---------- ------- -------- ------- Total interest-bearing liabilities 983,627 50,150 5.10% 953,383 48,256 5.06% 590,753 28,632 4.85% Non interest-bearing deposits 56,845 ------- 48,933 41,520 ------- ---------- ---------- -------- Subtotal 1,040,472 1,002,316 632,273 Other liabilities 8,108 12,040 6,796 ---------- ---------- -------- Total liabilities 1,048,580 1,014,356 639,069 Shareholders' equity 87,998 81,585 59,313 ---------- ---------- -------- Total liabilities and shareholders' equity $1,136,578 $1,095,941 $698,382 ========== ========== ======== Net interest income and interest rate spread(4) $37,297 3.05% $37,202 3.08% $25,277 3.22% ======= ==== ======= ==== ======= ==== Net interest margin(5) 3.48% 3.55% 3.78% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities 109.0% 110.1% 113.1%
(1) Calculated on an annualized basis. (2) Non-accrual loans are included in the average loan balances. (3) Computed on an FTE basis utilizing a 35% tax rate in 1998 and 34% tax rate in 1997 and 1996. The Applicable adjustments were $790, $766, and $732 for the years ended December 31, 1998, 1997, and 1996, 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. 21 22 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, 1998 VS. 1997 1997 VS. 1996 INCREASE (DECREASE) INCREASE (DECREASE) ----------------------------- ------------------------------- (IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ----- ------ ------- ----- ------- Interest-earning assets: Loans: Commercial $ 270 $(148) $ 122 $11,968 $(435) $11,533 Real estate 68 344 412 12,760 782 13,542 Consumer 1,276 (63) 1,213 1,470 (218) 1,252 ------ ----- ------ ------- ----- ------- Total loans 1,614 133 1,747 26,198 129 26,327 Securities Taxable 497 (167) 330 5,048 54 5,102 Non-taxable 148 (25) 123 (21) 45 24 ------ ----- ------ ------- ----- ------- Total securities 645 (192) 453 5,027 99 5,126 Fed funds sold (206) (4) (210) 93 3 96 ------ ----- ------ ------- ----- ------- Total interest-earning assets 2,053 (63) 1,990 31,318 231 31,549 ------ ----- ------ ------- ----- ------- Interest-bearing liabilities: Deposits: Demand and savings deposits 268 528 796 921 (12) 909 Time deposits (435) 176 (259) 11,732 (218) 11,514 ------ ----- ------ ------- ----- ------- Total interest-bearing deposits (167) 704 537 12,653 (230) 12,423 Borrowings 1,644 (286) 1,358 7,065 136 7,201 ------ ----- ------ ------- ----- ------- Total interest-bearing liabilities 1,477 418 1,895 19,718 (94) 19,624 ------ ----- ------ ------- ----- ------- Net interest income $ 576 $(481) $ 95 $11,600 $ 325 $11,925 ====== ===== ====== ======= ===== =======
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Net Income. The Company's net income totaled $10.2 million for the year ended December 31, 1998, a decrease of $602,000, or 5.6% from 1997. Basic and diluted earnings per share (hereinafter referred to as "earnings per share") in 1998 equaled $1.28, compared to $1.35 in 1997, a 5.2% decrease. Income before extraordinary item totaled $10.6 million, or $1.33 per share, in 1998. During 1998, the Company repaid various fixed rate Federal Home Loan Bank (FHLB) advances that had interest rates in excess of current market rates. In connection with this early extinguishment of debt, the Company paid prepayment charges of $613,000 which were recorded, net of taxes of $213,000, as an extraordinary item. Operating results in 1998 also include the after tax effects of charges totaling $1.1 million recorded as a result of merger, restructuring and planned branch closing activities. Earnings in 1998 adjusted to exclude the effects of non-recurring charges were $11.6 million, or $1.46 per share. Net interest income and non-interest income increased .2% and 28.1%, respectively, in 1998 as compared to 1997 while non-interest expense, excluding non-recurring charges, increased 5.7%. The provision for possible loan losses was $1.2 million in both 1998 and 1997. The Company's net interest margin decreased to 3.48% in 1998 as compared to 3.55% in 1997, primarily reflecting the effects of the Company's purchase in January 1998 of bank-owned life insurance, which is included in the Company's balance sheet as a non-interest earning asset. In addition, lower interest rates and a flattening of the yield curve adversely affected the net interest margin throughout 1998. Increases in non-interest income resulted primarily from higher gains on sales of loans and earnings on bank-owned life insurance. The increase in non-interest expense primarily resulted from costs associated with additional loan production activities. The Company's 22 23 return on average assets and return on average equity were .89% and 11.55%, respectively, in 1998, compared to .98% and 13.20%, respectively, in 1997. Excluding the non-recurring charges noted above, the Company's return on average assets and return on average equity in 1998 were 1.02% and 13.21%, respectively. Interest Income. Total interest income increased 2.3% to $86.7 million for 1998, compared to $84.7 million for 1997. This increase resulted from a $23.2 million, or 2.2%, increase in average interest-earning assets in 1998. The average balance of loans increased $17.9 million, or 2.4%, while the average balance of securities increased $9.2 million, or 3.2%. The weighted average yield on interest-earning assets was 8.15% in 1998, an increase of 1 basis point from 1997. The Company's yield on average loans increased from 8.63% in 1997 to 8.66% in 1998. Yields on the investment portfolio decreased from 6.94% in 1997 to 6.88% in 1998. Interest Expense. Total interest expense increased 3.9% to $50.2 million for 1998 as compared to $48.3 million for 1997. Interest expense increased due to a higher average balance of interest-bearing liabilities outstanding and due to a higher cost of funds during 1998 as compared to 1997. The average balance of interest-bearing deposit accounts increased $2.1 million, or .3%, to $704.6 million in 1998 as compared to $702.5 million in 1997. Average interest-bearing liabilities increased 3.2%, from $953.4 million to $983.6 million. The Company's cost of funds increased to 5.10% in 1998 as compared to 5.06% in 1997. The higher cost of funds in 1998 was primarily a result of the continued shift by customers into higher yielding certificates of deposit and money market accounts as well as higher borrowing levels relative to total interest-bearing liabilities. Provision for Possible Loan Losses. The provision for possible loan losses was $1.2 million in 1998 and 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 increased to $3.7 million at December 31, 1998, from $2.2 million at December 31, 1997. Net charge-offs totaled $1.2 million, or .16% of average loans, in both 1998 and 1997. The allowance for possible loan losses at December 31, 1998 was $6.6 million, or .85% of total loans and 178.3% of non-performing loans compared to $6.6 million, or .87% of total loans and 298.3% of non-performing loans at December 31, 1997. 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, nature and adequacy of underlying collateral, credit mix and selected credits are factors that affect judgments concerning the adequacy of the allowance. Non-Interest Income. Total non-interest income increased 28.1% to $9.9 million in 1998 as compared to $7.8 million in 1997. The following table sets forth the Company's non-interest income for the periods indicated:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ------ ------ ------ (IN THOUSANDS) Trust and custodian fees $2,121 $1,807 $1,451 Customer service fees 2,129 2,040 1,807 Investment securities gains 34 88 43 Gain on sale of loans 3,677 2,202 1,839 Other 1,987 1,631 1,118 ------ ------ ------ Total $9,948 $7,768 $6,258 ====== ====== ======
Trust and custodian fees increased 17.4% to $2.1 million in 1998 from $1.8 million in 1997. Growth in trust income continued to result primarily from the expansion of the customer base as well as higher asset values. Customer service fees, representing service charges on deposits and fees for other banking services, increased 4.4% in 1998 to $2.1 million from $2.0 million in 1997. This increase resulted from the Company's continued emphasis on increasing fee income on fee-based accounts. 23 24 Gains on sales of loans increased $1.5 million to $3.7 million for 1998 compared to $2.2 million for 1997. During 1998, the Company sold $26.7 million of the guaranteed portion of its SBA and other government guarantee loan originations in the secondary market compared to $19.7 million during 1997, realizing gains of $1.6 million in 1998 compared to gains of $1.5 million in 1997. Also, the Company recorded gains of $1.6 million from the sales of residential loans during 1998 compared to $689,000 in 1997. Loan origination and sale activity during 1998 continued to benefit from the favorable interest rate environment. The Company intends to continue to place emphasis on its small business lending activities, including the evaluation of expansion into new markets. The nature of the political climate in Washington, D.C. may subject existing government programs to much scrutiny and possible cutbacks. One component of the Clinton Administration's current budget proposal is to reduce by approximately 5% funding available for the SBA 7(a) program as well to reduce lender and borrower fees. It is not currently known whether the SBA program will ultimately be impacted. Management believes that any such cutbacks could negatively affect the Company's activities in the SBA lending programs as well as the planned expansion of such activities. Other income increased $356,000 to $2.0 million in 1998 compared to $1.6 million in 1997 primarily as a result of earnings on bank-owned life insurance which totaled $794,000 in 1998 compared to no such amount in 1997. This increase was offset in part by a $500,000 gain recognized in 1997 in connection with the curtailment of post retirement benefits provided to certain Company employees. Non-Interest Expense. Total non-interest expense increased $3.2 million to $29.8 million in 1998, compared to $26.7 million in 1997. Excluding non-recurring charges totaling $1.6 million recorded in 1998 in connection with two planned branch closings and merger, integration and restructuring activities, total non-interest expenses were $28.2 million in 1998 compared to $26.7 million in 1997, representing an increase of $1.5 million, or 5.7%. This increase generally resulted from expansion of the Company's loan production activities. The following table sets forth the Company's non-interest expense for the period indicated:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ------- ------- ------- (IN THOUSANDS) Salaries and employee benefits $15,764 $14,720 $ 9,995 Net occupancy expense 1,540 1,630 1,221 Furniture and equipment expense 898 789 564 Data processing expense 1,095 1,086 831 Taxes other than income taxes 850 986 709 Federal deposit insurance 263 249 2,697 Amortization of intangibles 1,376 1,525 549 Other 8,043 5,692 4,669 ------- ------- ------- Total $29,827 $26,677 $21,235 ======= ======= =======
Salaries and employee benefits accounted for approximately 58.8% of total operating expenses (non-interest expense less amortization of intangibles and non-recurring charges) in 1998 compared to 58.5% in 1997. The average full time equivalent staff level increased 8.0% to 392 in 1998 compared to 363 in 1997. Excluding non-recurring salary and employee benefits expense of $378,000 in 1998, salaries and employee benefits increased 4.5%, from $14.7 million in 1997 to $15.4 million in 1998. In general, higher salaries and employee benefits costs resulted from the addition of loan production personnel. Net occupancy expense decreased 5.5% to $1.5 million in 1998 from $1.6 million in 1997. This decrease resulted primarily from lower rent and depreciation expenses. 24 25 Furniture and equipment expense increased $109,000, or 13.8% in 1998. This increase was due principally to higher depreciation costs. Data processing expense was $1.1 million in 1998 and 1997. Costs associated with the conversion of County's and Bellbrook's data processing systems during 1998 were offset by ongoing cost savings achieved as a result of these systems conversions. Taxes other than income taxes decreased $136,000, or 13.8%, in 1998 compared to 1997. This decrease resulted primarily from changes in tax laws that had a favorable impact on the Company's franchise tax liability in 1998. Federal deposit insurance expense increased $14,000 to $263,000 in 1998 from $249,000 in 1997, primarily as a result of higher deposit levels. Amortization of goodwill and other intangibles resulting from the application of purchase accounting in connection with the County acquisition totaled $1.4 million during 1998 compared to $1.5 million in 1997. Excluding non-recurring charges of $1.3 million in 1998, other non-interest expenses increased $1.1 million, or 19.3%, 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. The net revenue stream is the sum of net interest income on a FTE basis and non-interest income excluding net investment securities gains or losses and non-recurring income. The Company's efficiency ratio was 56.8% for 1998, as compared to 56.7% for 1997 and 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 decreased $701,000 to $4.8 million in 1998, for an effective tax rate of 31.4%. This compared to Federal income tax expense of $5.5 million in 1997 which represented an effective tax rate of 34.0%. The decrease in expense as a percentage of pre-tax income in 1998 resulted from an increase in the amount of earnings exempt from taxes. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 Net Income. The Company's net income totaled $10.8 million for the year ended December 31, 1997, an increase of $4.8 million, or 80.7% from 1996. Earnings per share in 1997 equaled $1.35, compared to $.89 in 1996, a 51.7% 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 $1.14 per share. Net interest income and non-interest income increased 48.4% and 24.1%, respectively, in 1997 as compared to 1996 while non-interest expense increased 25.6%. The provision for possible loan losses remained fairly constant, decreasing $36,000, or 2.9%. The Company's net interest margin decreased to 3.55% 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 non-recurring 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. Excluding the non-recurring 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. 25 26 Interest Income. Total interest income increased 59.3% to $84.7 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 8.14% in 1997, an increase of 7 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 8.63% 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. 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. Non-Interest Income. Total non-interest income increased 24.1% to $7.8 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 12.9% 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 $513,000 increase in other income to $1.6 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. 26 27 Non-Interest Expense. Total non-interest expense increased $5.4 million, or 25.6%, 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 non-recurring 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 as well as costs associated with the increased size of the Company. Salaries and employee benefits accounted for approximately 58.5% of total operating expenses (non-interest expense less amortization of intangibles and non-recurring 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 47.3%, from $10.0 million in 1996 to $14.7 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. Net occupancy expense increased 33.5% to $1.6 million in 1997 from $1.2 million in 1996. This increase resulted from occupancy expenses of $800,000 added by County in 1997 compared to $407,000 in 1996. Furniture and equipment expense increased $225,000, or 39.9% in 1997. Expenses of $317,000 were added by County, in 1997 compared to $108,000 in 1996. Data processing expense increased $255,000 in 1997, or 30.7% to $1.1 million from $831,000 in 1996. In addition to $333,000 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 $139,000 to $249,000 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 $1.5 million added by County in 1997 compared to $395,000 in 1996, other non-interest expenses increased $393,000, or 9.0%, primarily as a result of the expanded volume of business activities. 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. 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. FNB formally documents its evaluation of the adequacy of the allowance for possible loan losses on a quarterly basis and the evaluations are reviewed and discussed with its boards of directors. 27 28 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 $607,000 of such property at December 31, 1998 and $785,000 at December 31, 1997. Non-performing loans totaled $3.7 million, or 0.48% of total loans, at December 31, 1998, compared to $2.2 million, or 0.29% of total loans, at year-end 1997. The increase in non-performing loans from year end 1997 resulted equally from increases in non-performing single family residential mortgage loans and commercial loans. Based on management's evaluation of each non-performing loan, the increase in non-performing loans did not have a significant effect on the assessment of the adequacy of the allowance for loan losses. Non-performing assets totaled $4.3 million, or 0.37% of total assets at December 31, 1998, compared to $3.0 million, or 0.28% of total assets, at December 31, 1997. 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, --------------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ----- (DOLLARS IN THOUSANDS) Non-accrual loans $1,294 $ 832 $ 991 $ 440 $ 237 Accruing loans 90 days or more past due 2,432 1,386 1,567 584 272 ------ ------ ------ ------ ----- Total non-performing loans 3,726 2,218 2,558 1,024 509 Other real estate owned 607 785 539 24 -- ------ ------ ------ ------ ----- Total non-performing assets $4,333 $3,003 $3,097 $1,048 $ 509 ====== ====== ====== ====== ===== Non-performing loans to total loans 0.48% 0.29% 0.35% 0.38% 0.21% Non-performing assets to total assets 0.37% 0.28% 0.29% 0.22% 0.12%
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 allowance for loan losses is increased by the provision for loan losses and recoveries and is decreased by charged-off loans. The evaluation process to determine potential losses includes consideration of the industry, the general economic environment, historical losses by loan type, changes in the size and composition of the portfolio, delinquency trends and specific conditions of the individual borrower. While analytical techniques are used to identify potential losses on loans, future additions may be necessary based on loan growth and changes in economic conditions. 28 29 The following table summarizes the Company's loan loss experience, and provides a breakdown of the charge-off, recovery and other activity for the periods indicated:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance at beginning of period $ 6,617 $ 6,599 $ 3,307 $ 3,095 $ 3,007 Charge-offs: Residential mortgage (87) (32) (12) (10) (3) Construction mortgage -- -- -- -- -- Commercial (890) (666) (67) (373) (15) Consumer (825) (1,074) (1,020) (479) (302) -------- -------- -------- -------- -------- Total charge-offs (1,802) (1,772) (1,099) (862) (320) -------- -------- -------- -------- -------- Recoveries: Residential mortgage 46 8 5 2 -- Construction mortgage -- -- -- -- -- Commercial 267 91 41 12 1 Consumer 290 470 227 93 69 -------- -------- -------- -------- -------- Total recoveries 603 569 273 107 70 -------- -------- -------- -------- -------- Net charge-offs (1,199) (1,203) (826) (755) (250) Provision charged to operations 1,225 1,221 1,257 967 338 County's allowance for possible loan losses at time of acquisition -- -- 2,861 -- -- -------- -------- -------- -------- -------- Balance at end of period $ 6,643 $ 6,617 $ 6,599 $ 3,307 $ 3,095 ======== ======== ======== ======== ======== Loans outstanding at end of period $777,063 $761,027 $721,855 $268,818 $247,943 Average loans outstanding $769,687 $751,799 $445,514 $261,706 $232,282 Allowance as a percent of loans outstanding 0.85% 0.87% 0.91% 1.23% 1.25% Net charge-offs to average loans 0.16% 0.16% 0.19% 0.29% 0.11% Allowance for possible loan losses to non-performing loans 178.3% 298.3% 258.0% 322.9% 608.1%
The allowance for possible loan losses totaled $6.6 million at December 31, 1998 and 1997, representing 0.85% of total loans at December 31, 1998, compared to .87% of total loans at December 31, 1997. 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 years ended December 31, 1998 and 1997 were $1.2 million. Net charge-offs as a percentage of average loans in 1998 and 1997 were .16%, which is consistent with the Company's five year historical net charge-off percentage. 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 178.3% at December 31, 1998, compared to 298.3% at the end of 1997. 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 0.48% of total loans at December 31, 1998 compared to .29% at December 31, 1997. COMPARISON OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 FINANCIAL CONDITION Total assets amounted to $1.18 billion at December 31, 1998, as compared to $1.08 billion at December 31, 1997, an increase of $99.4 million, or 9.2%. Total investment securities increased by $56.1 million to $327.6 million. This increase resulted from the purchase of securities to achieve asset growth supported by the Company's increasing capital levels. 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, 1998, 91.9% 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 8.1%. This compares to 87.0% and 13.0% classified as available-for-sale and held to maturity, respectively, at December 31, 1997. 29 30 Total loans increased $16.0 million, or 2.1%, to $777.1 million at December 31, 1998. The Company continues to emphasize increasing earning assets and earning asset yields with the loan portfolio. Growth in the loan portfolio during 1998 was slowed as a result of early prepayments of loans in the portfolio. Premises and equipment increased $4.0 million to $12.9 million at December 31, 1998. This increase resulted primarily from the construction of a new branch in Centerville, Ohio and the commencement of construction of a new branch located in New Albany, Ohio which is expected to be completed in May 1999. Also, data processing equipment and software purchases associated with system conversions and enhancement of technology throughout the Company contributed to the increase. Deposits totaled $789.6 million at December 31, 1998, an increase of $42.6 million over total deposits at December 31, 1997. The Company continues to emphasize growth in its existing retail deposit base provided that deposit growth is cost effective compared to alternative funding sources. Total interest-bearing deposits accounted for 91.7% of total deposits at December 31, 1998 as compared to 91.5% at December 31, 1997. Other assets increased from $5.5 million at December 31, 1997 to $21.7 million at December 31, 1998 primarily as a result of the Company's purchase of $15.0 million of bank-owned life insurance. The book value of this asset at December 31, 1998 is $15.8 million. Total borrowings, including federal funds purchased, increased $57.3 million to $296.8 million at December 31, 1998, as compared to $239.4 million at December 31, 1997. This increase resulted from funding needs associated with increases in the securities portfolio. 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. The investment portfolio serves as an additional source of liquidity for the Company. At December 31, 1998, securities with a market value of $301.1 million were classified as available-for-sale, representing 91.9% 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 $5.0 million and $14.1 million for 1998 and 1997, respectively. FNB is a member of the 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. The Company obtained a $15 million term loan with a financial institution in order to partially fund the acquisition of County. This loan had an outstanding balance of $13.8 million at December 31, 1998. Under terms of the loan agreement, the Company is required to make quarterly interest payments and annual principal payments based upon a 10-year amortization. Principal payments commenced in February 1998. The unpaid loan balance is due in full in September 2003. At December 31, 1998 the Company has pledged 67% 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 Company's 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, on a consolidated basis, a minimum annualized return on average assets of not less than 0.75% ; and (iv) the Company maintain, on a consolidated basis, a ratio of non-performing loans to equity capital of less than 30 31 25.0% and a minimum ratio of allowance for possible loan losses to non-performing loans of 75.0%. At December 31, 1998, 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 its banking subsidiaries, merge or consolidate, and engage in business activity unrelated to banking. Shareholders' equity at December 31, 1998 was $87.5 million, compared to $85.3 million at December 31, 1997, an increase of $2.2 million, or 2.6%. This increase resulted primarily from earnings of $10.2 million, offset by a $1.6 million decrease in unrealized gains (losses) on available-for-sale securities, dividend payments totaling $4.3 million and purchases of treasury stock (net) of $2.3 million. 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, 1998, the Company had a total risk-based capital ratio of 11.2%, of which 10.3% consisted of Tier 1 capital. The leverage ratio of the Company at December 31, 1998, was 6.5%. Cash dividends declared to shareholders of the Company totaled $4.3 million, or $.545 per share, during 1998. This compared to dividends of $4.2 million, or $.535 per share, for 1997. Cash dividends paid as a percentage of net income amounted to 42.6% and 38.8% for the years ended December 31, 1998 and 1997, respectively. At its April 1998 meeting, the Company's board of directors authorized a two-for-one stock split in the form of a 100% stock dividend, payable May 19, 1998 to shareholders of record on April 28, 1998. This stock split had no effect on the total capital of the Company. 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. The Company's Board of Directors and management intend to seek continued controlled growth of the organization through selective acquisitions which fit the Company's strategic objectives of growth, diversification and market expansion and which provide the potential for enhanced shareholder value. At the present time, the Company does not have any understandings or agreements for any acquisitions or combination except for the acquisition of a company which provides financial planning and investment services as discussed in "Item 1. Business - Recent Developments." 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, 1998. 31 32
Projected Net Increase Change in Interest Rates Income Interest (Decrease) % Change - -------------------------- --------------- ---------- -------- 200 basis point increase $34,765 $(331) (0.94)% No Change 35,096 -- -- 200 basis point decrease 34,369 (727) (2.07)
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, 1998. 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.
Estimated Percent Change in Interest Rates NPV Change Change - ------------------------ ------- --------- ------- 200 basis point increase $86,938 $ (5,564) (6.02)% 100 basis point increase 92,375 (127) (0.14) Base scenario 92,502 -- -- 100 basis point decrease 82,979 (9,523) (10.29) 200 basis point decrease 74,860 (17,642) (19.07)
The preceding table indicates that at December 31, 1998, in the event of a sudden and sustained change in prevailing market interest rates, the Company's NPV would be expected to decrease. At December 31, 1998, 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. These assumptions include levels of market interest rates, loan prepayments ranging from 6% to 50% for adjustable rate loans and 10% to 50% for fixed rate loans and deposit decay rates. The computed forecasted effects 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. 32 33 The following table reflects the Company's gap position at December 31, 1998. 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.
AS OF DECEMBER 31, 1998 1 YEAR OR LESS 1 TO 3 YEARS 3 TO 5 YEARS OVER 5 YEARS TOTAL -------------- ------------ ------------ ------------ ---------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Federal funds sold $ 469 $ -- $ -- $ -- $ 469 Loans 542,430 111,445 58,785 64,403 777,063 Investment securities 159,566 69,930 29,323 68,796 327,615 -------- -------- ------- -------- ---------- Total 702,465 181,375 88,108 133,199 1,105,147 -------- -------- ------- -------- ---------- INTEREST-BEARING LIABILITIES: Demand, interest-bearing 124,972 -- -- -- 124,972 Savings 102,463 -- -- -- 102,463 Time 392,019 85,084 19,496 -- 496,599 Borrowings 186,500 40,000 25,250 45,000 296,750 -------- -------- ------- -------- ---------- Total 805,954 125,084 44,746 45,000 1,020,784 Off balance sheet items - interest rate swaps (40,625) 20,625 20,000 -- -- -------- -------- ------- -------- ---------- Total gap (62,864) 35,666 23,362 88,199 $ 84,363 ======== ======== ======= ======== ========== Cumulative gap $(62,864) $(27,198) $(3,836) $ 84,363 ======== ======== ======= ======== Cumulative gap as a percentage of total assets (5.32)% (2.30)% (.32)% 7.14% ======== ======== ======= ========
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, 1998 and 1997, the Company had $51.9 million and $52.5 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 $344,000, $147,000 and $28,000 during 1998, 1997 and 1996, respectively, and is included with interest on borrowings. The following summarizes information with respect to swap contracts outstanding at December 31, 1998:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE MATURITY NOTIONAL AMOUNT RECEIVE RATE PAY RATE - -------------------- --------------- ---------------- ---------------- 1999 $11,250 5.26% 6.14 2000 6,250 5.23 6.32 2001 14,375 5.29 6.36 2002 20,000 5.25 6.29 ------- ---- ---- Total $51,875 5.26% 6.28% ======= ==== ====
33 34 CONTINGENCIES AND UNCERTAINTIES - YEAR 2000 The Year 2000 Issue concerns the inability of information systems to properly recognize and process date-sensitive information beyond December 31, 1999. This could cause a system failure or other computer errors, leading to a disruption in the operation of such systems. All of the Company's banking operations have been converted to a core data processing system that the Company began utilizing in 1996. Substantially all of the software utilized by the Company is purchased or licensed from external providers. The Company has conducted a review of its data processing systems to ensure that all data processing applications are Year 2000 compliant. This review project has seven phases: 1) identify applications; 2) assign primary responsibility; 3) contact vendors for certification; 4) determine testing plan and perform test procedures; 5) determine impact of non compliance; 6) correct non compliance situations; and 7) develop contingency plan. Testing of all critical systems has been substantially completed and contingency plans are being developed. Based on its assessment at this time, management does not anticipate any disruption in the Company's operations as a result of the Year 2000 Issue. In addition, the Company has implemented procedures for identifying potential problems that the Company's borrowers may experience. The Company has also held seminars for borrowers and other customers to assist them in addressing the Year 2000 Issue. To date, costs associated with required modifications necessary to become Year 2000 compliant have not been significant. The Company estimates that it will incur additional costs of approximately $250,000 to $300,000 primarily for equipment and software purchases relating to Year 2000 compliance. These cost estimates are based on currently available information and may change as the Company continues its Year 2000 project. 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. 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, 1998, 1997 AND 1996 -------------------------------------- 34 35 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF BANCFIRST OHIO CORP. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of BancFirst Ohio Corp. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Columbus, Ohio January 22, 1999 36 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 AND 1997 (DOLLARS IN THOUSANDS)
DECEMBER 31, 1998 1997 ---------- ---------- ASSETS Cash and due from banks (Note 3) $ 28,731 $ 21,650 Federal Funds sold 469 49 Securities held-to-maturity (approximate fair value of $26,809 and $36,645 at December 31, 1998 and 1997, respectively), (Note 4) 26,518 35,223 Securities available-for-sale, at fair value 301,097 236,298 ---------- ---------- Total investment securities 327,615 271,521 ---------- ---------- Loans (Notes 5 and 6) 777,063 761,027 Allowance for possible loan losses (6,643) (6,617) ---------- ---------- Net loans 770,420 754,410 ---------- ---------- Premises and equipment, net (Note 7) 12,863 8,856 Accrued interest receivable 7,278 6,946 Goodwill and other intangibles 11,898 12,687 Other assets 21,737 5,499 ---------- ---------- Total assets $1,181,011 $1,081,618 ========== ========== LIABILITIES Deposits (Note 8): Noninterest-bearing deposits $ 65,588 $ 63,846 Interest-bearing deposits 724,034 683,201 ---------- ---------- Total deposits 789,622 747,047 Federal funds purchased (Note 9) -- 12,300 Federal Home Loan Bank advances and other borrowings (Note 10) 296,750 227,149 Accrued interest payable 2,510 2,426 Other liabilities 4,594 7,363 ---------- ---------- Total liabilities 1,093,476 996,285 ---------- ---------- Commitments and contingencies (Notes 15, 16 and 20) SHAREHOLDERS' EQUITY (NOTE 17) Common stock, no par value 20,000,000 shares authorized: shares issued - 8,076,488 in 1998; 8,067,838 in 1997 64,096 63,343 Retained earnings 27,892 22,057 Accumulated other comprehensive income (Note 22) (440) 1,140 Less: 180,458 and 107,660 shares of common stock in treasury, at cost, at December 31, 1998 and 1997, respectively (4,013) (1,207) ---------- ---------- Total shareholders' equity 87,535 85,333 ---------- ---------- Total liabilities and shareholders' equity $1,181,011 $1,081,618 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 36 37 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1998 1997 1996 ---------- ---------- ---------- Interest income: Interest and fees on loans $ 66,529 $ 64,820 $ 38,518 Interest and dividends on securities: Taxable 18,566 18,184 13,076 Tax exempt 1,408 1,324 1,315 Other interest income 154 364 268 ---------- ---------- ---------- Total interest income 86,657 84,692 53,177 ---------- ---------- ---------- Interest expense: Time deposits, $100 and over 5,988 6,209 3,755 Other deposits 27,911 27,153 17,183 Borrowings 16,251 14,894 7,692 ---------- ---------- ---------- Total interest expense 50,150 48,256 28,630 ---------- ---------- ---------- Net interest income 36,507 36,436 24,547 Provision for possible loan losses (Note 6) 1,225 1,221 1,257 ---------- ---------- ---------- Net interest income after provision for possible loan losses 35,282 35,215 23,290 ---------- ---------- ---------- Other income: Trust and custodian fees 2,121 1,807 1,451 Customer service fees 2,129 2,040 1,807 Investment securities gains, net 34 88 43 Gains on sale of loans 3,677 2,202 1,839 Other 1,987 1,631 1,118 ---------- ---------- ---------- Total other income 9,948 7,768 6,258 ---------- ---------- ---------- Other expenses: Salaries and employee benefits 15,764 14,720 9,995 Net occupancy expense 1,540 1,630 1,221 Furniture and equipment expense 898 789 564 Data processing expense 1,095 1,086 831 Taxes other than income taxes 850 986 709 Federal deposit insurance 263 249 2,697 Amortization of intangibles 1,376 1,525 549 Other 8,041 5,692 4,669 ---------- ---------- ---------- Total other expenses 29,827 26,677 21,235 ---------- ---------- ---------- Income before income taxes and extraordinary item 15,403 16,306 8,313 Provision for federal income taxes (Note 13) 4,835 5,536 2,354 ---------- ---------- ---------- Income before extraordinary item 10,568 10,770 5,959 Extraordinary item - prepayment charges on early repayment of Federal Home Loan Bank advances, net of tax of $213 400 -- -- ---------- ---------- ---------- Net income $ 10,168 $ 10,770 $ 5,959 ========== ========== ========== Basic and diluted earnings per share: Before extraordinary item $ 1.33 $ 1.35 $ 0.89 Extraordinary item (0.05) -- -- ---------- ---------- ---------- After extraordinary item $ 1.28 $ 1.35 $ 0.89 ========== ========== ========== Weighted average number of shares outstanding 7,959,362 7,960,996 6,709,950 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 37 38 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
ACCUMULATED COMMON STOCK CAPITAL IN OTHER TOTAL ------------------- EXCESS RETAINED COMPREHENSIVE TREASURY COMPREHENSIVE SHAREHOLDERS' SHARES AMOUNT OF PAR VALUE EARNINGS INCOME STOCK INCOME EQUITY ----------------------------------------------------------------------------------------------- Balance as December 31, 1995 6,067,838 $30,340 $ 6,889 $13,022 $ 942 $(1,183) $50,010 Net income -- -- -- 5,959 -- -- $ 5,959 5,959 Other comprehensive income, net of tax - unrealized losses on available-for-sale securities, net of reclassification adjustment -- -- -- -- (638) -- (638) (638) ------- Comprehensive income $ 5,321 Issuance of common shares 2,000,000 10,000 15,824 -- -- -- ======= 25,824 Treasury stock, 17,006 shares issued -- -- 94 -- -- 160 254 Cash dividend -- -- -- (3,515) -- -- (3,515) --------- ------- -------- ------- ------- ------- ------- Balance at December 31, 1996 8,067,838 40,340 22,807 15,466 304 (1,023) 77,894 --------- ------- -------- ------- ------- ------- ------- Net income -- -- -- 10,770 -- -- $10,770 10,770 Other comprehensive income, net of tax - unrealized gains on available-for-sale securities, net of reclassification adjustment -- -- -- -- 836 -- 836 836 ------- ------- Comprehensive income $11,606 Elimination of par value -- 22,807 (22,807) -- -- -- ======= -- Purchase of 23,308 shares of common stock at cost -- -- -- -- -- (433) (433) Treasury stock, 24,488 shares issued -- 196 -- -- -- 249 445 Cash dividend -- -- -- (4,179) -- -- (4,179) --------- ------- -------- ------- ------- ------- ------- Balance at December 31, 1997 8,067,838 63,343 -- 22,057 1,140 (1,207) 85,333 --------- ------- -------- ------- ------- ------- ------- Net income -- -- -- 10,168 -- -- $10,168 10,168 Other comprehensive income, net of tax - unrealized losses on available-for-sale securities net of reclassification adjustment -- -- -- -- (1,580) -- (1,580) (1,580) ------- Comprehensive income -- -- -- -- -- -- $ 8,588 -- Issuance of common shares 8,650 203 -- -- -- -- ======= 203 Purchase of 116,000 shares of common stock at cost (3,394) (3,394) Treasury stock, 43,202 shares issued -- 550 -- -- -- 588 1,138 Cash dividend -- -- -- (4,333) -- -- (4,333) --------- ------- -------- ------- ------- ------- ------- Balance at December 31, 1998 8,076,488 $64,096 $ -- $27,892 $ (440) $(4,013) $87,535 ========= ======= ======== ======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 38 39 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
DECEMBER 31, 1998 1997 1996 --------- -------- -------- Cash flow from operating activities: Net income $ 10,168 $ 10,770 $ 5,959 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 2,813 3,943 2,564 Provision for possible loan losses 1,225 1,221 1,257 Deferred taxes payable (104) 1,083 786 Gains on sale of assets (3,711) (2,290) (1,882) Increase in interest receivable (332) (250) (29) Decrease (increase) in other assets (2,335) 191 3,568 Increase in interest payable 84 171 393 Increase (decrease) in other liabilities (1,841) 300 375 FHLB stock dividend (992) (1,079) (576) --------- -------- -------- Net cash provided by operating activities 4,975 14,060 12,415 --------- -------- -------- Cash flows from investing activities: Decrease (increase) in federal funds sold (420) 2,144 407 Proceeds from maturities of securities held-to-maturity 9,030 11,412 2,767 Proceeds from maturities and sales of securities available-for-sale 99,592 95,102 71,911 Purchase of securities held-to-maturity -- (14) (663) Purchase of securities available-for-sale (166,985) (91,697) (62,783) Purchase of loans (61,573) (75,710) (24,045) Increase in loans, net (71,669) (41,060) (39,870) Acquisition of County Savings Bank, net of cash acquired -- (1,500) (42,407) Purchase of equipment and other assets (4,007) (2,028) (1,491) Purchase of bank-owned life insurance (15,000) -- -- Proceeds from sale of assets 120,235 78,592 24,535 --------- -------- -------- Net cash used in investing activities (90,797) (24,759) (71,639) --------- -------- -------- Cash flows from financing activities: Purchase of deposits 8,002 -- -- Net increase in deposits, excluding purchase of deposits 33,986 14,820 19,748 Net proceeds from issuance of common stock 203 -- 25,824 Increase (decrease) in federal funds purchased (12,300) 650 4,250 Net increase in Federal Home Loan Bank advances and other borrowings 69,601 2,190 2,417 Proceeds from acquisition debt -- -- 15,000 Cash dividends paid (4,333) (4,179) (3,515) Purchase of treasury stock (3,394) (433) -- Reissuance of treasury stock and other 1,138 445 254 --------- -------- -------- Net cash provided by financing activities 92,903 13,493 63,978 --------- -------- -------- Net increase in cash and due from banks 7,081 2,794 4,754 Cash and due from banks, beginning of period 21,650 18,856 14,102 --------- -------- -------- Cash and due from banks, end of period $ 28,731 $ 21,650 $ 18,856 ========= ======== ======== Supplemental cash flow disclosures: Income taxes paid $ 6,100 $ 3,300 $ 2,255 Interest paid $ 50,066 $ 48,547 $ 28,397 Non cash transfers: Transfer of capital in excess of par to common stock -- $ 22,807 --
The accompanying notes are an integral part of the consolidated financial statements. 39 40 BANCFIRST OHIO CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 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 subsidiary, The First National Bank of Zanesville (FNB). Effective May 16, 1998, Bellbrook Community Bank (Bellbrook) and County Savings Bank (County) were merged under the national bank charter of FNB. 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 other comprehensive income, net of applicable income taxes. At December 31, 1998 and 1997, 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. 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 amortized over the estimated servicing lives of the underlying loans. Amortization is calculated based on the estimated net servicing revenue, 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. 40 41 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. 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. 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, 10 to 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, 1998 and 1997, other real estate owned was $607 and $785, 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. 41 42 Common Stock: At its April 1998 meeting, the Company's board of directors authorized a two-for-one stock split in the form of a 100% stock dividend, payable May 19, 1998, to shareholders of record on April 28, 1998. All share and per share amounts have been restated to reflect this split. 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: 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 utilizing the treasury stock method. The weighted average number of shares outstanding for all periods has been adjusted to reflect the two-for-one stock split discussed above. Stock Incentive Plans The Company has adopted 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 has elected to account for its stock incentive plan under APB Opinion No. 25 pursuant to which no compensation cost has been recognized related to stock options that have been granted. 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. Comprehensive Income Effective January 1, 1998 the Company adopted SFAS No. 130 "Reporting Comprehensive Income" which establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all other nonowner changes in equity. The only component of comprehensive income that the Company is required to report is unrealized holding gains (losses) on available-for-sale securities. Reclassification: Certain reclassifications have been made to prior period amounts to conform to the 1998 presentation. 42 43 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 one 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 year ended December 31, 1996 as if County had been acquired at the beginning of such period: Net Interest Income $33,327 Net Income $ 7,043 Basic and diluted earnings per share $ .89 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 $5,084 and $5,975 at December 31, 1998 and 1997, respectively. 4. INVESTMENT SECURITIES: The amortized cost and estimated fair value of investment securities are as follows:
DECEMBER 31, 1998 ---------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- Securities Available-for-Sale: U.S. Treasury securities $ 251 $ 14 $ -- $ 265 Securities of other government agencies 4,759 82 3 4,838 Obligations of states and political subdivisions 21,724 674 52 22,346 Corporate obligations and other securities 52,503 319 962 51,860 Mortgage-backed and related securities 222,537 974 1,723 221,788 -------- ------ ------ -------- $301,774 $2,063 $2,740 $301,097 ======== ====== ====== ======== Securities Held-to-Maturity: Obligations of states and political subdivisions $ 5,196 $ 218 $ 1 $ 5,413 Industrial revenue bonds and other 2,342 -- -- 2,342 Mortgage-backed securities 18,980 303 229 19,054 -------- ------ ------ -------- $ 26,518 $ 521 $ 230 $ 26,809 ======== ====== ====== ========
43 44
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 ======== ====== ==== ========
The amortized cost and estimated fair value of debt securities at December 31, 1998, 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, 1998 AMORTIZED ESTIMATED COST FAIR VALUE --------- ---------- Securities Available-for Sale Within one year $ 1,408 $ 1,487 After one through five years 7,358 7,480 After five through ten years 33,120 33,373 After ten years 37,285 36,902 -------- -------- 79,171 79,242 Mortgage-backed and related securities 222,603 221,855 -------- -------- $301,774 $301,097 ======== ======== Securities Held-to-Maturity Within one year $ 396 $ 400 After one through five years 5,369 5,498 After five through ten years 1,773 1,857 After ten years -- -- -------- -------- 7,538 7,755 Mortgage-backed and related securities 18,980 19,054 -------- -------- $ 26,518 $ 26,809 ======== ========
Proceeds from sales of securities available-for-sale during 1998, 1997 and 1996 were $8,777, $22,195, and $16,337, respectively. Gross gains of $48, $125 and $60 and gross losses of $14, $37 and $17 were realized on sales in 1998, 1997 and 1996, respectively. Securities available-for-sale with a fair value of $113,813 at December 31, 1998 were pledged to secure public deposits and for other purposes required by law. 44 45 5. LOANS: The composition of the loan portfolio is as follows:
DECEMBER 31, --------------------- 1998 1997 -------- -------- Commercial, financial and industrial $323,544 $302,098 Real estate--mortgage 353,635 363,333 Real estate--construction 10,203 9,215 Consumer 89,681 86,381 -------- -------- $777,063 $761,027 ======== ========
Loans held for sale totaling $6,375 and $10,018 at December 31, 1998 and 1997, respectively, are included in the above totals. 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, 1998 activity with respect to these related party loans is as follows:
DECEMBER 31, 1998 ------------ Beginning balance $ 3,612 New loans 1,085 Repayments (628) Loans no longer classified as related party loans (1,942) ------- Ending balance $ 2,127 =======
At December 31, 1998 and 1997, and for the years then ended, the recorded investment in loans considered to be impaired and interest income recognized related thereto was not material. Also, at December 31, 1998 and 1997 loans serviced for others totaled $253,323 and $229,310, respectively. 6. ALLOWANCE FOR POSSIBLE LOAN LOSSES: An analysis of activity in the allowance for possible loan losses is as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ------- ------- ------- Balance at beginning of period $ 6,617 $ 6,599 $ 3,307 Provision charged to operations 1,225 1,221 1,257 Addition due to acquisition -- -- 2,861 Loans charged off (1,802) (1,772) (1,099) Loan recoveries 603 569 273 ------- ------- ------- Net charge-offs (1,199) (1,203) (826) ------- ------- ------- Balance at end of period $ 6,643 $ 6,617 $ 6,599 ======= ======= =======
45 46 7. PREMISES AND EQUIPMENT: Premises and equipment are summarized below:
DECEMBER 31, ------------------- 1998 1997 ------- ------- Land $ 2,643 $ 1,726 Buildings and improvements 10,372 7,844 Furniture, fixture and equipment 8,831 10,000 Construction in progress 628 -- ------- ------- 22,474 19,570 Less accumulated depreciation and amortization 9,611 10,714 ------- ------- Premises and equipment, net $12,863 $ 8,856 ======= =======
Total depreciation expense was $1,329, $1,134 and $902 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. DEPOSITS: A summary of deposits is as follows:
DECEMBER 31, --------------------- 1998 1997 -------- -------- Demand, noninterest-bearing $ 65,588 $ 63,846 Demand, interest-bearing 124,972 106,325 Savings 102,463 88,835 Time, $100 and over 141,161 132,958 Time, other 355,438 355,083 -------- -------- $789,622 $747,047 ======== ========
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, --------------------------------- 1998 1997 1996 ------- ------- ------- Federal funds purchased: Average balance $ 3,204 $ 1,605 $ 2,016 Average rate 6.17% 6.29% 6.10% Maximum month-end balance $13,800 $12,300 $11,650 Balance at year-end $ -- $12,300 $11,650 Average rate on balance at year-end -- 6.07% 7.50%
46 47 10. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS Federal Home Loan Bank (FHLB) advances and other borrowings are as follows:
DECEMBER 31, --------------------- 1998 1997 -------- -------- Term reverse repurchase agreements (average rate 5.54% in 1998; 6.08% in 1997) $ 55,000 $ 10,000 FHLB Advances (average rate 5.16% in 1998; 6.34% in 1997) 228,000 202,149 Term debt with a financial institution (6.63% in 1998; 7.31% in 1997), due 2003 13,750 15,000 -------- -------- $296,750 $227,149 ======== ========
Minimum annual retirements on borrowings for the next five years consisted of the following at December 31, 1998:
MATURITY WEIGHTED AVERAGE PRINCIPAL (PERIOD ENDING) INTEREST RATE REPAYMENT --------------- ------------- --------- 1999 5.33% $116,500 2000 5.25 52,500 2001 5.27 12,500 2002 6.63 2,500 2003 5.33 17,750 2004 and thereafter 5.24 95,000 ---- -------- Total 5.30% $296,750 ==== ========
In December 1998, the Company prepaid $34,465 of FHLB advances that had a weighted average interest rate of 6.19%. In connection with this early repayment of debt, the Company paid prepayment penalties totaling $613 which have been recorded, net of taxes of $213, as an extraordinary item in the 1998 consolidated statement of income. 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, 1998 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 $62,137 and $12,198 and accrued interest of $367 and $102 at December 31, 1998 and 1997, respectively. The reverse repurchase agreements have a weighted average maturity of 7.9 years at December 31, 1998 and one year at December 31, 1997. Also, $10,000 of such reverse repurchase agreements at December 31, 1998 are callable in 1999, $14,000 are callable in 2000 and $21,000 are callable in 2001. 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. Annual principal payments commenced 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, 1998. Also, 67% of the stock of FNB collateralizes this borrowing at December 31, 1998. 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, 1998, 1997 and 1996 were approximately $128, $275, and $435, respectively. 47 48 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 $499, $396, and $240 for contributions to the plans for the years ended December 31, 1998, 1997 and 1996, respectively. 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 are purchased from treasury stock at fair market value. Minimal expenses were incurred by the Company for the years ended December 31, 1998 and 1997, and 1996, 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 post retirement benefits during the period of employee service. 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, 1998 and 1997, the recorded liability for post retirement benefits was $501 and $560, respectively. For the years ended December 31, 1998, 1997, and 1996, health care benefit costs for eligible retirees was $43, $143, and $101, respectively. 12. STOCK INCENTIVE PLAN The Company has adopted 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, 800,000 authorized but unissued or reacquired common shares are reserved for issuance. All options granted were at a price that equaled or exceeded the market value of the Company's common stock at the date of grant. The options vest ratably over four years and expire 20 years from the date of grant. No compensation expense was recognized in 1998 or 1997 related to the Plan. The summary of stock option activity is as follows:
WEIGHTED WEIGHTED OPTIONS AVERAGE EXERCISE OPTIONS AVERAGE EXERCISE OUTSTANDING PRICE EXERCISABLE PRICE ----------- ---------------- ----------- ---------------- December 31, 1996 -- -- Options granted 92,120 $25.75 ------- ------ December 31, 1997 92,120 25.75 -- -- Options granted 85,000 33.00 Stock Options cancelled 2,880 25.75 ------- ------ December 31, 1998 174,240 $29.29 22,310 $23.50 ======= ======
The following table summarizes information about stock options outstanding at December 31, 1998:
AVERAGE REMAINING AVERAGE EXERCISE AVERAGE EXERCISE OPTIONS CONTRACTUAL LIFE PRICE - OPTIONS OPTIONS PRICE - OPTIONS EXERCISE PRICE RANGE OUTSTANDING (YEARS) OUTSTANDING EXERCISABLE EXERCISABLE - -------------------- ----------- ---------------- ---------------- ----------- ---------------- $23.50 to $25.00 44,620 19.00 $24.25 22,310 $23.50 $25.01 to $30.00 65,870 19.32 28.14 -- -- $30.01 to $35.00 42,500 20.00 33.00 -- -- $35.01 to $40.00 21,250 20.00 36.00 -- -- ------- ----- ------ ------ ------ Total 174,240 19.49 $29.29 22,310 $23.50 ======= ===== ====== ====== ======
48 49 For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of the stock options granted in 1998 and 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 as follows:
1998 1997 ------ ------ Risk-free interest rate 4.75% 5.75% Expected dividend yield 2.00% 2.25% Expected option life (years) 7.00 7.00 Expected volatility 31.37% 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, income before extraordinary items, net income and basic and diluted earnings per share for the years ended December 31, 1998 and 1997 would have been as follows:
1998 1997 ------- ------- Net income, as reported $10,168 $10,770 Pro forma net income 9,974 10,759 Earnings per share, as reported: Basic 1.28 1.35 Diluted 1.28 1.35 Proforma earnings per share: Basic 1.25 1.35 Diluted 1.25 1.35
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 $115 and $203 of their 1998 and 1997 bonuses, respectively, in bonus shares which resulted in the issuance of 3,979 shares in 1999 and 8,650 shares in 1998. 13. INCOME TAXES: The provision for income taxes is summarized below:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------------------------------- Current $4,939 $4,553 $1,568 Deferred (104) 1,083 786 ------ ------ ------ Provision for income taxes $4,835 $5,536 $2,354 ====== ====== ======
49 50 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, 1998 1997 1996 ----------------------- Tax at federal statutory rate 35% 35% 34% Permanent differences: Tax-exempt interest, net of allowed interest expense (3) (3) (6) Increase in cash surrender value of life insurance (2) -- -- Amortization of intangibles and other 1 2 -- --- --- --- Effective tax rate 31% 34% 28% === === ===
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, 1998 1997 ---------------------- Deferred tax assets arising from: Allowance for possible loan losses $2,341 $ 2,179 Reserve for health insurance 212 226 Depreciation -- 24 Amortization of intangibles 353 181 Purchase accounting adjustment -- 7 Service loan interest 78 113 Unrealized holding losses on securities 235 -- Other 467 252 ------ ------- Total deferred tax assets 3,686 2,982 ------ ------- Deferred tax liabilities arising from: Gain on sale of loans 1,423 1,304 Deferred loan fees and costs 379 953 FHLB stock dividends 1,369 944 Unrealized holding gains on securities -- 589 Purchase accounting adjustments 157 -- Depreciation 93 -- Other, net 418 273 ------ ------- Total deferred tax liabilities 3,839 4,063 ------ ------- Net deferred tax asset (liability) $ (153) $(1,081) ====== =======
Net deferred tax assets and liabilities and federal income tax expense in future years can be significantly affected by changes in enacted tax rates. 50 51 14. EARNINGS PER SHARE The computation of earnings per share for the years ended December 31, 1998, 1997 and 1996 is as follows. All share amounts have been adjusted to give retroactive effect to the two for one stock split in 1998:
1998 1997 1996 ---------- ---------- ---------- Income before extraordinary item $ 10,568 $ 10,770 $ 5,959 Extraordinary item (400) -- -- ---------- ---------- ---------- Net income $ 10,168 $ 10,770 $ 5,959 ========== ========== ========== Weighted average shares outstanding 7,959,362 7,960,996 6,709,950 Basic earnings per share: Before extraordinary item $ 1.33 $ 1.35 $ 0.89 Extraordinary item (0.05) -- -- ---------- ---------- ---------- After extraordinary item $ 1.28 $ 1.35 $ 0.89 ========== ========== ========== Weighted average shares outstanding 7,959,362 7,960,996 6,709,950 Diluted effect due to stock incentive plans 11,222 -- -- ---------- ---------- ---------- Weighted average shares outstanding, as adjusted 7,970,584 7,960,996 6,709,950 Diluted earnings per share: Before extraordinary item $ 1.33 $ 1.35 $ 0.89 Extraordinary item (0.05) -- -- ---------- ---------- ---------- After extraordinary item $ 1.28 $ 1.35 $ 0.89 ========== ========== ==========
15. 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, 1998 follows: 1999 $ 436 2000 242 2001 80 2002 28 2003 28 2004 and thereafter 373 ------ $1,187 ======
Rent expense under all lease obligations, including month-to-month agreements, aggregated approximately $573, $512, and $319 for the years ended December 31, 1998, 1997 and 1996, respectively. 16. 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. 51 52 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, 1998 1997 -------------------- Financial instruments whose contract amounts represent credit risk: Loan commitments $96,337 $77,354 Standby letters of credit 551 456
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 $51,875 and $52,500, respectively, of notional swap principal contracts outstanding at December 31, 1998 and 1997 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, 1998, 1997 and 1996, interest expense on swap contracts was $344, $147 and $28, respectively, and is included with interest expense on borrowings. 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 $2,516 and $1,948 of which $420 and $367 represent outstanding balances at December 31, 1998 and 1997, 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 guarantees on individual credits ranging from 29% to 80% of principal balances. The total of such commitments at December 31, 1998 and 1997, were $15,657 and $18,760, respectively, with guaranteed principal by the SBA totaling $10,496 and $12,806, 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. 17. SHAREHOLDERS' EQUITY: The payment of dividends by FNB is subject to regulatory restrictions by 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, dividend payments may not reduce capital levels below 52 53 minimum regulatory guidelines. At December 31, 1998, $441 of the retained earnings of FNB is available for the payment of dividends to the Company without regulatory agency approval. 18. 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 subsidiary 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, 1998, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notifications from the various primary regulators of the Company and its subsidiary 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. 53 54 Actual capital amounts and ratios of the Company and FNB are as follows:
To Be Well Capitalized Under For Capital Adequacy Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1998: Total Capital (to Risk-Weighted Assets): Consolidated $82,588 11.24% $58,761 8.00% $73,451 10.00% FNB 78,448 10.69 58,720 8.00 73,400 10.00 Tier 1 Capital (to Risk-Weighted Assets): Consolidated 75,945 10.34 29,381 4.00 44,071 6.00 FNB 74,559 10.16 29,360 4.00 44,040 6.00 Tier 1 Capital (to Average Assets): Consolidated 75,945 6.52 34,940 3.00 58,233 5.00 FNB 74,559 6.40 34,972 3.00 58,287 5.00
19. FAIR VALUE OF FINANCIAL INSTRUMENTS: The amounts provided below 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. 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 54 55 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--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. Interest Rate Swaps--Estimated fair values are based on quoted market prices. 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, 1998 DECEMBER 31, 1997 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Cash and due from banks $ 28,731 $ 28,731 $ 21,650 $121,650 Federal funds sold 469 469 49 49 Securities available-for-sale 301,097 301,097 236,298 236,298 Securities held-to-maturity 26,518 26,809 35,223 936,645 Loans, net of allowance for loan losses 770,420 777,604 754,410 755,177 Demand and savings deposits 293,023 293,023 259,006 259,006 Time deposits 496,599 500,518 488,041 490,055 Federal funds purchased -- -- 12,300 12,300 Federal Home Loan Bank advances and other borrowings 296,750 298,014 227,149 227,192 Interest rate swaps -- (1,495) -- (579)
55 56 20. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION: Parent Company only condensed financial information is as follows:
CONDENSED BALANCE SHEET DECEMBER 31, 1998 AND 1997 DECEMBER 31, 1998 1997 -------- -------- Assets: Cash $ 663 $ -- Investment in repurchase agreement with subsidiary 14,000 8,000 Investment in subsidiaries 84,554 88,938 Intangible assets 1,600 2,200 Other assets 529 1,560 ======== ======== Total assets $101,346 $100,698 ======== ======== Liabilities and equity: Long-term borrowings $ 13,750 $ 15,000 Other liabilities 61 365 -------- -------- Total liabilities 13,811 15,365 Shareholders' equity 87,535 85,333 -------- -------- Total liabilities and equity $101,346 $100,698 ======== ========
CONDENSED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND 1996 YEAR ENDED DECEMBER 31, 1998 1997 1996 ------- ------- ------ Dividends from subsidiaries $14,750 $ 9,000 $7,500 Interest income 3 3 7 Interest expense (1,044) (1,138) (422) Operating expenses (1,695) (2,121) (895) ------- ------- ------ Income before income tax and equity in earnings of subsidiaries 12,014 5,744 6,190 Federal income tax benefit 959 1,029 520 ------- ------- ------ Income before equity in earnings of subsidiaries 12,973 6,773 6,710 Earnings of subsidiaries in excess of (less than) dividends (2,805) 3,997 (751) ------- ------- ------ Net income $10,168 $10,770 $5,959 ======= ======= ======
56 57 CONDENSED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND 1996
YEAR ENDED DECEMBER 31, 1998 1997 1996 ------- ------- -------- Cash flows from operating activities: Net income $10,168 $10,770 $ 5,959 Adjustments to reconcile net income to net cash provided by operations: Amortization and depreciation 621 628 218 (Increase) decrease in other assets 1,009 (1,086) 1,412 (Decrease) increase in other liabilities (304) 548 (201) Earnings less than (in excess of) dividends 2,805 (3,997) 751 ------- ------- -------- Net cash provided by operating activities 14,299 6,863 8,139 ------- ------- -------- Cash flows from investing activities: Acquisition of County -- (1,500) (46,612) Investment in subsidiary -- (500) -- Purchase of equipment and other assets -- (2) (321) Decrease (increase) in repurchase agreement with subsidiary (6,000) (1,000) 1,530 ------- ------- -------- Net cash used for investing activities (6,000) (3,002) (45,403) ------- ------- -------- Cash flows from financing activities: Issuance of common stock 203 -- 25,824 Increase (decrease) in long-term debt (1,250) -- 15,000 Cash dividends paid (4,333) (4,179) (3,515) Purchase of treasury stock (3,394) (433) -- Treasury shares issued and other 1,138 445 254 ------- ------- -------- Net cash provided by (used in) financing activities (7,636) (4,167) 37,563 ------- ------- -------- Net increase (decrease) in cash 663 (306) 299 Cash, beginning of period -- 306 7 ------- ------- -------- Cash, end of period $ 663 $ -- $ 306 ======= ======= ========
The Parent Company paid $6,100, $3,300 and $2,255 for income taxes in 1998, 1997 and 1996, respectively, and $1,064, $1,133 and $277 for interest in 1998, 1997 and 1996, respectively. 21. 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 $.23 per share. 57 58 22. COMPREHENSIVE INCOME: Other comprehensive income consists of the following:
1998 1997 1996 ------- ------ ----- Unrealized holding gains (losses) on available-for-sale securities arising during period $(2,370) $1,356 $(923) Tax (expense) or benefit 812 (462) 313 ------- ------ ----- Net of tax amount (1,558) 894 (610) ------- ------ ----- Less: Reclassification adjustment for gains included in net income (34) (88) (43) Tax expense 12 30 15 ------- ------ ----- Net of tax amount (22) (58) (28) ------- ------ ----- Net unrealized gains (losses) on available-for-sale securities $(1,580) $ 836 $(638) ======= ====== =====
23. NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and establishes accounting and reporting standards for derivative instruments and for hedging activities. The provisions of this statement will primarily impact the accounting for the Company's interest rate swap transactions which had a total notional amount of $51,875 at December 31, 1998 (see Note 16). The Company has not determined what impact this standard will have on its financial statements. In June 1997, SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" was issued and is effective for periods beginning after December 15, 1997. This statement requires that a public enterprise report financial and descriptive information about its reportable operating segments. The Company has determined that it has one reportable segment - community banking. Accordingly, the additional disclosure and other information requirements of this statement are not applicable. 58 59 24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1998 and 1997:
(Dollars in thousands except per share FIRST SECOND THIRD FOURTH amounts) QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1998 Interest Income $21,235 $21,429 $22,295 $21,698 Net interest income 9,135 9,024 9,266 9,082 Provision for possible loan losses 307 318 300 300 Income before income taxes and extraordinary item 4,168 3,180 4,377 3,678 Income before extraordinary item 2,808 2,227 2,990 2,543 Net income 2,808 2,227 2,990 2,143 Basic earnings per share before extraordinary item $ 0.35 $ 0.28 $ 0.38 $ 0.32 Diluted earnings per share before extraordinary item $ 0.35 $ 0.28 $ 0.37 $ 0.32 Basic earnings per share $ 0.35 $ 0.28 $ 0.38 $ 0.27 Diluted earnings per share $ 0.35 $ 0.28 $ 0.37 $ 0.27 1997 Interest income $20,673 $21,353 $21,358 $21,308 Net interest income 9,115 9,338 9,053 8,930 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 $ 0.33 $ 0.34 $ 0.34 $ 0.34
See Note 10 concerning the extraordinary item recorded in the fourth quarter of 1998 related to the prepayment of FHLB advances. Also, the after tax effects of non-recurring merger, restructuring and branch closing charges totaled $794 in the second quarter of 1998 and $263 in the fourth quarter of 1998. 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 22, 1999, 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, 1998 and 1997 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996 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 63. (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: /s/ William F. Randles ------------------------------------ William F. Randles Director and Chairman of the Board Dated: Zanesville, Ohio March 9, 1999 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 - ---------- ----- ---- /s/ Philip E. Burke - ------------------------- Director March 9, 1999 Philip E. Burke /s/ Gary N. Fields - ------------------------- Director and Chief March 9, 1999 Gary N. Fields Executive Officer /s/ Milman H. Linn, III - ------------------------- Director March 9, 1999 Milman H. Linn, III /s/ James L. Nichols - ------------------------- Director March 9, 1999 James L. Nichols /s/ Karl C. Saunders - ------------------------- Director March 9, 1999 Karl C. Saunders /s/ J. W. Straker, Jr. - ------------------------- Director March 9, 1999 J. W. Straker, Jr. /s/ William F. Randles - ------------------------- Director and Chairman March 9, 1999 William F. Randles of the Board /s/ Kim M. Taylor - ------------------------- Chief Financial Officer March 9, 1999 Kim M. Taylor and Chief Accounting Officer
62 63 Exhibit List and Index BancFirst Ohio Corp. Form 10-K for the year ended December 31, 1998
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). *21.1 Subsidiaries of the Company 64 *23.1 Consent of PricewaterhouseCoopers LLP 65 *27.1 Financial Data Schedule 66
- ----------------- *Filed herewith. 63 EX-21.1 2 EXHIBIT 21.1 1 EXHIBIT NO. 21.1 SUBSIDIARIES OF THE CORPORATION - ---------------- Name of Subsidiary State of Incorporation - ------------------ ---------------------- The First National Bank of Zanesville National banking association under 422 Main Street the laws of the United States Zanesville, OH 43701 The First National Bank of Zanesville operates under the name of First National Bank in Muskingum County, Ohio and under the divisional name of Bank First National outside of Muskingum County. EX-23.1 3 EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS March 9, 1999 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 22, 1999, on our audits of the consolidated financial statements of BancFirst Ohio Corp. and Subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Columbus, Ohio EX-27.1 4 EXHIBIT 27.1
9 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 28,731 0 469 0 301,097 26,518 26,809 777,063 (6,643) 1,181,011 789,622 116,500 7,104 180,250 0 0 64,096 23,439 1,181,011 66,529 19,974 154 86,657 33,899 50,150 36,507 1,225 34 29,827 15,403 10,568 (400) 0 10,168 1.28 1.28 8.15 1,294 2,432 0 0 6,617 (1,802) 603 6,643 6,643 0 0
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