-----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, OEErw4dCxdFi9UCyihkgkD/o//dFqdlOwYuZn9mdhC+crYSS9pHopQ0tqO4mxP9E 6QfOAblxMlqc0sPM6C2k2A== 0000950152-99-008920.txt : 19991115 0000950152-99-008920.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950152-99-008920 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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-Q SEC ACT: SEC FILE NUMBER: 000-18840 FILM NUMBER: 99747672 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-Q 1 BANCFIRST OHIO CORP. 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _________________ Commission File Number 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) (740) 452-8444 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Outstanding as of November 9, 1999 ----- ---------------------------------- Common Stock, No Par Value 7,656,000 2 INDEX BANCFIRST OHIO CORP.
PART I. FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements Consolidated Balance Sheet............................... 3 Consolidated Statement of Income......................... 4 Consolidated Statement of Cash Flows..................... 5 Notes to Consolidated Financial Statements............... 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 8-21 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 21 PART II. OTHER INFORMATION Other Information ............................................... 23 Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits on Item 601 of Regulation S-K (b) Exhibit 27: Financial Data Schedule (c) Reports on Form 8-K Signatures 24
2 3 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS BANCFIRST OHIO CORP. CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS: SEPT. 30, DEC. 31, 1999 1998 ---------- ---------- Cash and due from banks $ 29,392 $ 28,731 Federal Funds sold 7 469 Securities held-to-maturity, at amortized cost (approximate fair value of $21,869 and $26,809 in 1999 and 1998, respectively) 21,916 26,518 Securities available-for-sale, at fair value 302,657 301,097 ---------- ---------- Total securities 324,573 327,615 ---------- ---------- Loans, net of unearned income 830,238 777,063 Allowance for possible loan losses (7,158) (6,643) ---------- ---------- Net loans 823,080 770,420 ---------- ---------- Bank premises and equipment, net 14,493 12,863 Accrued interest receivable 8,011 7,278 Intangible assets 12,926 11,898 Other assets 23,403 21,737 ---------- ---------- Total assets $1,235,885 $1,181,011 ========== ========== LIABILITIES: Deposits: Non-interest-bearing deposits $ 68,106 $ 65,588 Interest-bearing deposits 721,168 724,034 ---------- ---------- Total deposits 789,274 789,622 ---------- ---------- Federal funds purchased 28,000 -- Federal Home Loan Bank advances and other borrowings 330,250 296,750 Accrued interest payable 2,794 2,510 Other liabilities 1,963 4,594 ---------- ---------- Total liabilities 1,152,281 1,093,476 ---------- ---------- SHAREHOLDERS' EQUITY: Common stock, no par or stated value, 20,000,000 shares authorized, 8,162,467 and 8,076,488 shares issued in 1999 and 1998, respectively 66,276 64,096 Retained earnings 33,684 27,892 Accumulated other comprehensive income - unrealized holding losses on securities available for sale, net (5,313) (440) Treasury stock, 454,629 and 180,458 shares, at cost, in 1999 and 1998, respectively (11,043) (4,013) ---------- ---------- Total shareholders' equity 83,604 87,535 ---------- ---------- Total liabilities and shareholders' equity $1,235,885 $1,181,011 ========== ==========
The accompanying notes are an integral part of the financial statements. 3 4 BANCFIRST OHIO CORP. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------ ------------ 1999 1998 1999 1998 ------- ------- ------- ------- Interest Income: Interest and fees on loans $16,700 $16,759 $49,317 $49,941 Interest and dividends on securities: Taxable 4,852 5,155 14,487 14,004 Tax-exempt 493 381 1,356 1,014 ------- ------- ------- ------- Total interest income 22,045 22,295 65,160 64,959 ------- ------- ------- ------- Interest expense: Deposits 7,961 8,446 23,891 25,529 Borrowings 4,493 4,583 12,538 12,005 ------- ------- ------- ------- Total interest expense 12,454 13,029 36,429 37,534 ------- ------- ------- ------- Net interest income 9,591 9,266 28,731 27,425 Provision for possible loan losses 405 300 1,130 925 ------- ------- ------- ------- Net interest income after provision for possible loan losses 9,186 8,966 27,601 26,500 ------- ------- ------- ------- Other income: Trust and custodian fees 624 542 1,800 1,561 Customer service fees 576 543 1,655 1,537 Gain on sale of loans 437 868 1,694 3,005 Other 927 552 2,153 1,435 Investment securities gains, net -- -- 296 24 ------- ------- ------- ------- Total other income 2,564 2,505 7,598 7,562 ------- ------- ------- ------- Non-interest expense: Salaries and employee benefits 4,048 3,841 12,308 11,914 Net occupancy expense 432 390 1,230 1,159 Amortization of intangibles 358 344 1,060 1,052 Other 2,357 2,519 7,358 8,212 ------- ------- ------- ------- Total non-interest expense 7,195 7,094 21,956 22,337 ------- ------- ------- ------- Income before income taxes 4,555 4,377 13,243 11,725 Provision for Federal income taxes 1,403 1,387 4,159 3,700 ------- ------- ------- ------- Net income $ 3,152 $ 2,990 $ 9,084 $ 8,025 ======= ======= ======= ======= Basic earnings per share $ 0.41 $ 0.38 $ 1.16 $ 1.01 ======= ======= ======= ======= Diluted earnings per share $ 0.41 $ 0.37 $ 1.16 $ 1.01 ======= ======= ======= ======= Weighted average common shares outstanding: Basic 7,753 7,970 7,840 7,970 ======= ======= ======= ======= Diluted 7,759 7,987 7,849 7,980 ======= ======= ======= ======= Cash dividends per common share $ 0.140 $ 0.135 $ 0.420 $ 0.405 ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements. 4 5 BANCFIRST OHIO CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30 ------------ 1999 1998 --------- --------- Cash flows from operating activities: Net income $ 9,084 $ 8,025 Adjustment to reconcile net income to net cash provided by operations: Depreciation and amortization 4,267 2,480 Provision for possible loan losses 1,130 925 Gain on sale of assets (1,990) (3,029) Increase in interest receivable (733) (647) (Increase) in other assets (2,587) (1,754) Increase in interest payable 284 533 Decrease in other liabilities (73) (1,348) FHLB stock dividend (753) (880) --------- --------- Net cash provided by operating activities 8,629 4,305 --------- --------- Cash flows from investing activities: Decrease (increase) in federal funds sold and short term investments 462 (4,979) Proceeds from maturities of securities held-to-maturity 4,727 8,362 Proceeds from maturities and sales of securities available-for-sale 80,922 59,886 Purchase of securities available-for-sale (89,897) (124,438) Increase in loans, net (106,982) (56,719) Purchase of loans -- (51,466) Purchases of equipment and other assets (2,820) (3,429) Proceeds from sale of loans 54,660 95,754 Acquisition of Chornyak and Associates, Inc. (2,050) -- Purchase of bank owned life insurance -- (15,000) --------- --------- Net cash used in investing activities (60,978) (92,029) --------- --------- Cash flows from financing activities: Increase (decrease) in federal funds purchased 28,000 (12,300) Increase in Federal Home Loan Bank advances and other borrowings 33,500 89,138 Net increase (decrease) in deposits (348) 19,004 Cash dividends paid (3,292) (3,236) Purchase of stock, net (4,850) (536) --------- --------- Net cash provided by financing activities 53,010 92,070 --------- --------- Net increase in cash and due from banks 661 4,346 Cash and due from banks, beginning of period 28,731 21,650 --------- --------- Cash and due from banks, end of period $ 29,392 $ 25,996 ========= =========
The accompanying notes are an integral part of the financial statements 5 6 BANCFIRST OHIO CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) The consolidated financial statements for interim periods are unaudited; however, in the opinion of management of BancFirst Ohio Corp. ("Company"), the accompanying consolidated financial statements contain all material adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and results of operations and cash flows for the periods presented. The unaudited financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by generally accepted accounting principles. Reference should be made to the Company's consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998 for additional disclosures, including a summary of the Company's accounting policies. The results of operations for the three month and nine month periods ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. 1) BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, The First National Bank of Zanesville ("FNB"). All significant intercompany transactions and accounts have been eliminated in consolidation. 2) NEW ACCOUNTING PRONOUNCEMENTS In June, 1998, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 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 $50.6 million at September 30, 1999. The effective date of this statement has been delayed to fiscal years beginning after June 15, 2000. The Company has not determined what impact this standard will have on its financial statements. 3) ACQUISITION On April 5, 1999, the Company acquired Chornyak & Associates, Inc. ("Chornyak") a full service financial planning company. In connection with this acquisition the Company issued 82,000 common shares having a total market value of approximately $2.1 million in exchange for all of the outstanding shares of Chornyak. This acquisition is being accounted for as a purchase transaction. Joseph A. Chornyak has entered into an employment agreement whereby he will continue to serve as president of Chornyak. The employment agreement will expire in 2004. In connection with his employment, the Company granted Mr. Chornyak options to purchase an aggregate of 30,000 shares of the Company's common stock at exercise prices ranging from $25.00 to $31.00 per share, subject to a four year vesting schedule. 4) COMPUTATION OF EARNINGS PER SHARE The computation of earnings per share is as follows: 6 7
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1999 1998 1999 1998 ------ ------ ------ ------ (In thousands, except per share amounts) Actual weighted average common shares outstanding 7,753 7,970 7,840 7,970 Dilutive common stock equivalents: Stock options -- 13 3 6 Bonus shares - Company match 6 4 6 4 ------ ------ ------ ------ Weighted average common shares outstanding adjusted for dilutive common stock equivalents 7,759 7,987 7,849 7,980 ------ ------ ------ ------ Net income $3,152 $2,990 $9,084 $8,025 ------ ------ ------ ------ Basic earnings per share $ 0.41 $ 0.38 $ 1.16 $ 1.01 ------ ------ ------ ------ Diluted earnings per share $ 0.41 $ 0.37 $ 1.16 $ 1.01 ------ ------ ------ ------
5) COMPREHENSIVE INCOME The Company's comprehensive income, determined in accordance with SFAS No. 130, was $1,552,000 and $3,213,000 for the three months ended September 30, 1999 and 1998, respectively, and $4,211,000 and $7,849,000 for the nine months ended September 30, 1999 and 1998, respectively. 6) SUBSEQUENT EVENT On October 18, 1999, the Company completed an offering of $20 million aggregate liquidation amount of 9.875% Capital Securities, Series A, due 2029. These securities represent preferred beneficial interests in BFOH Capital Trust I, a special purpose trust formed for the purpose of the offering. The proceeds from the offering were used by the Trust to purchase Junior Subordinated Deferrable Interest Debentures from the Company. The Company intends to use the net proceeds from this transaction for general corporate purposes, including the repurchase of common stock and the purchase of securities by FNB. 7 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BANCFIRST OHIO CORP. 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 involves risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its bank subsidiary 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; prepayments of loans and securities; material unforeseen changes in the liquidity, results of operations, or other financial position of the Company's customers; uncertainties concerning the Company's or its major customers' Year 2000 compliance; 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. 8 9 BANCFIRST OHIO CORP. SELECTED FINANCIAL DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AT OR FOR THE THREE MONTHS AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1999 1998 1999 1998 ---------- ---------- ------- ------- STATEMENT OF INCOME DATA: Interest Income $ 22,045 $ 22,295 $65,160 $64,959 Interest expense 12,454 13,029 36,429 37,534 ---------- ---------- ------- ------- Net interest income 9,591 9,266 28,731 27,425 Provision for possible loan losses 405 300 1,130 925 Non-interest income 2,564 2,505 7,598 7,562 Non-interest expense 7,195 7,094 21,956 22,337 ---------- ---------- ------- ------- Income before income taxes 4,555 4,377 13,243 11,725 Provision for Federal Income taxes 1,403 1,387 4,159 3,700 ---------- ---------- ------- ------- Net income $ 3,152 $ 2,990 $ 9,084 $ 8,025 ========== ========== ======= ======= PER SHARE DATA: Basic earnings per share $ 0.41 $ 0.38 $ 1.16 $ 1.01 Diluted earnings per share 0.41 0.37 1.16 1.01 Dividends 0.14 0.14 0.42 0.41 Book value 10.85 11.25 N/A N/A Tangible book value 9.17 9.78 N/A N/A BALANCE SHEET DATA: Total assets $1,235,885 $1,180,722 N/A N/A Loans 830,238 776,658 N/A N/A Allowance for possible loan losses 7,158 6,603 N/A N/A Securities 324,573 327,490 N/A N/A Deposits 789,274 766,051 N/A N/A Borrowings 358,250 316,287 N/A N/A Shareholders' equity 83,604 89,410 N/A N/A PERFORMANCE RATIOS (1): Return on average assets 1.03% 1.02% 1.01% 0.96% Return on average equity 14.95 13.50 13.93 12.25 Tangible return on average tangible equity 19.42 16.90 17.89 17.22 Net interest margin 3.44 3.42 3.50 3.53 Interest rate spread 3.12 3.01 3.15 3.10 Non-interest income to average assets 0.84 0.85 0.85 0.90 Non interest expense to average assets (1) 2.24 2.29 2.33 2.39 Efficiency Ratio (2) 54.97 56.33 56.76 56.46 ASSET QUALITY RATIOS: Non-performing loans to total loans 0.44% 0.38% N/A N/A Non-performing assets to total assets 0.33 0.29 N/A N/A Allowance for possible loan losses to total loans 0.86 0.85 N/A N/A Allowance for possible loan losses to non-performing loans 196.2 226.6 N/A N/A Net charge-offs to average loans 0.06 0.18 0.10% 0.16% CAPITAL RATIOS: Shareholders' equity to total assets 6.76% 7.57% N/A N/A Tier 1 capital to average total assets 6.33 6.59 N/A N/A Tier 1 capital to risk-weighted assets 9.27 10.40% N/A N/A
(1) Excludes amortization expense and non-recurring expenses totaling $1,222 in the nine month period ended September 30, 1998. (2) The efficiency ratio is equal to non-interest expense (excluding amortization and non-recurring expenses) divided by net interest income on a fully tax equivalent basis plus non-interest income excluding gains on sales of securities. 9 10 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 primary contributor to the Company's income is net interest income, which is defined as the difference between the interest the Company earns on interest-earning assets, such as loans and securities, and the interest the Company pays on interest-bearing liabilities, such as deposits and borrowings. The Company's operations are also affected by non-interest income, such as checking account and trust fees and gains from sales of loans. The Company's principal operating expenses, aside from interest expense, consist of salaries and employee benefits, occupancy costs, federal deposit insurance assessments, and other general and administrative expenses. On April 5, 1999 the Company acquired Chornyak, a full service financial planning company. Chornyak provides comprehensive financial planning services to its clients and receives fees for these services either directly from, or in the form of commissions earned from handling and processing investment transactions for its clients. This acquisition was accounted for as a purchase transaction and, accordingly, the results of Chornyak are included in the Company's results of operations from the date of acquisition. AVERAGE BALANCES AND YIELDS The following table presents, 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. 10 11
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998 -------------------------- -------------------------- -------------------------- -------------------------- (Dollars in Thousands) Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate (1) (1) (1) (1) ---------- ------- ------ ---------- ------- ------ ---------- ------- ------ ---------- ------- ------ Securities: Taxable $ 288,082 $ 4,853 6.68% $ 294,802 $ 5,050 6.80% $ 293,679 $14,461 6.58% $ 263,440 $13,828 7.02% Tax exempt 32,252 758 9.32 29,920 576 7.64 33,104 2,086 8.42 26,353 1,535 7.79 ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- Total securities 320,334 5,611 6.95 324,722 5,626 6.87 326,783 16,547 6.77 289,793 15,363 7.09 Loans (2): Commercial 392,700 8,722 8.81 314,987 7,520 9.47 367,510 24,747 9.00 313,029 22,050 9.42 Real Estate 327,907 6,030 7.30 363,617 7,284 7.95 338,464 18,904 7.47 363,220 21,640 7.97 Consumer 97,117 1,965 8.03 92,288 2,023 8.70 94,843 5,718 8.06 91,409 6,355 9.30 ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- Total loans 817,724 16,717 8.11 770,892 16,827 8.66 800,817 49,369 8.24 767,658 50,045 8.72 Federal funds sold 4 -- 0.00 3,658 53 5.75 777 27 4.65 3,109 124 5.33 ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- Total earning assets (3) 1,138,062 22,328 7.78% 1,099,272 22,506 8.12% 1,128,377 65,943 7.81 1,060,560 65,532 8.26% ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- Non-interest earning assets 73,042 71,088 70,120 62,498 ---------- ---------- ---------- ---------- Total assets $1,211,104 $1,170,360 $1,198,497 $1,123,058 ========== ========== ========== ========== Interest-bearing deposits: Demand and savings deposits $ 241,338 $ 1,584 2.60% $ 217,651 $ 1,633 2.98% $ 232,933 $ 4,370 2.51% $ 212,282 $ 4,686 2.95% Time deposits 488,933 6,377 5.17 480,378 6,811 5.63 497,289 19,521 5.25 488,584 20,842 5.70 ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- Total deposits 730,271 7,961 4.33 698,029 8,444 4.80 730,222 23,891 4.37 700,866 25,528 4.87 Borrowings 328,783 4,493 5.42 314,291 4,583 5.79 312,888 12,538 5.36 272,344 12,005 5.89 ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ---- Total interest- bearing liabilities 1,059,054 12,454 4.67% 1,012,320 13,027 5.11% 1,043,110 36,429 4.67% 973,210 37,533 5.16% ------- ------- ------- ---- ------- Non-interest- bearing deposits 61,921 59,968 61,358 54,387 ---------- ---------- ---------- ---------- Subtotal 1,120,975 1,072,288 1,104,468 1,027,597 Accrued expenses and other liabilities 6,466 9,208 6,850 7,846 ---------- ---------- ---------- ---------- Total liabilities 1,127,441 1,081,496 1,111,318 1,035,443 Shareholders' equity 83,663 88,864 87,179 87,615 ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity $1,211,104 $1,170,360 $1,198,497 $1,123,058 ========== ========== ========== ========== Net interest income and interest rate spread (4) $ 9,874 3.12% $ 9,479 3.01% $29,514 3.15% $27,999 3.10% ======= ======= ======= ==== ======= Net interest margin (5) 3.44% 3.42% 3.50% 3.53% ==== ==== ==== ==== Average interest- earning assets to average interest- bearing liabilities 107.5% 108.6% 108.2% 109.9%
(1) Calculated on an annualized basis. (2) Non-accrual loans are included in the average loan balances. (3) Interest income is computed on a fully tax equivalent (FTE) basis, using a tax rate of 35% in 1999 and in 1998. (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. 11 12 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.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. 1998 1999 VS. 1998 INCREASE (DECREASE) INCREASE (DECREASE) ------------------- ------------------- (Dollars in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ------- ------- ------- ------- ------- Interest-earning assets: Securities: Taxable $ (114) $ (83) $ (197) $ 1,523 $ (890) $ 633 Non-taxable 47 135 182 418 133 551 ------ ------- ------- ------- ------- ------- Total securities (67) 52 (15) 1,941 (757) 1,184 ------ ------- ------- ------- ------- ------- Loans: Commercial 1,755 (553) 1,202 3,703 (1,006) 2,697 Real estate (683) (571) (1,254) (1,427) (1,309) (2,736) Consumer 103 (161) (58) 232 (869) (637) ------ ------- ------- ------- ------- ------- Total loans 1,175 (1,285) (110) 2,508 (3,184) (676) Fed funds sold (26) (27) (53) (83) (14) (97) ------ ------- ------- ------- ------- ------- Total interest earning assets (1) 1,082 (1,260) (178) 4,366 (3,955) 411 ------ ------- ------- ------- ------- ------- Interest-bearing liabilities: Deposits: Demand and savings deposits 167 (216) (49) 428 (744) (316) Time deposits 120 (554) (434) 365 (1,686) (1,321) ------ ------- ------- ------- ------- ------- Total interest-bearing deposits 287 (770) (483) 793 (2,430) (1,637) Borrowings 206 (296) (90) 1,685 (1,152) 533 ------ ------- ------- ------- ------- ------- Total interest-bearing liabilities 493 (1,066) (573) 2,478 (3,582) (1,104) ------ ------- ------- ------- ------- ------- Net interest income $ 589 $ (194) $ 395 $ 1,888 $ (373) $ 1,515 ====== ======= ======= ======= ======= =======
(1) Computed on a fully tax equivalent basis, assuming a tax rate of 35%. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Net Income. Net income for the three months ended September 30, 1999 increased 5.4% to $3.2 million, compared to net income of $3.0 million for the three months ended September 30, 1998. Basic and diluted earnings per share in the third quarter of 1999 equaled $0.41, compared to $0.38 and $0.37, respectively, for the same period in 1998. Net interest income increased 3.5% while non-interest income increased 2.4% in the three months ended September 30, 1999, as compared to the same period in 1998, and non-interest expense increased 1.4%. The provision for possible loan losses increased 35% from the prior year period. The Company's net interest margin increased to 3.44% for the third quarter of 1999, compared to 3.42% for the same period in 1998. Increases in non-interest income resulted primarily from higher levels of fee income, particularly SBA net service fee income and financial planning fee income. The Company's return on average assets and return on average equity were 1.03% and 14.95%, respectively, in the third quarter of 1999, compared to 1.02% and 13.50%, respectively, in the third quarter of 1998. The Company's tangible earnings (net income excluding amortization of intangibles) for the three months ended September 30, 1999 were $3.5 million, or $0.44 per diluted share, representing an annualized return on tangible equity of 19.42%. 12 13 Interest Income. Total interest income decreased 1.1% to $22.0 million for the three months ended September 30, 1999, compared to $22.3 million for the third quarter of 1998. This decrease resulted from a 34 basis point decrease in the average yield on earning assets offset in part by a $38.8 million increase in average earning assets. The increase in the average balance of loans of $46.8 million, or 6.1%, was consistent with the Company's emphasis on increasing the loan portfolio. The weighted average yield on interest-earning assets decreased to 7.78% during the three months ended September 30, 1999, compared to 8.12% during the same three month period in 1998. The Company's yield on average loans decreased from 8.66% during the three months ended September 30, 1998 to 8.11% during the three months ended September 30, 1999, primarily as a result of refinancing activity and competitive pressures on market interest rates. Yields on the investment portfolio increased slightly from 6.87% during the third quarter of 1998 to 6.95% during the third quarter of 1999. Interest Expense. Total interest expense decreased 4.4% to $12.5 million for the three months ended September 30, 1999, compared to $13.0 million for the three months ended September 30, 1998. Interest expense decreased due to a 44 basis point decrease in the cost of funds, offset in part by a $46.7 million, or 4.6%, increase in the average balance of interest-bearing liabilities. The Company's cost of funds decreased to 4.67% in the three months ended September 30, 1999 compared to 5.11% in the same period of 1998. The cost of funds benefited from the repricing of maturing certificates of deposit at lower rates, interest rate reductions on demand and savings deposits and the repayment and refinancing of higher rate FHLB advances in December 1998. Provision for Possible Loan Losses. The provision for possible loan losses was $405,000 for the three months ended September 30, 1999, compared to $300,000 for the third quarter of 1998. Total non-performing loans were $3.6 million at September 30, 1999 compared to $2.9 million at September 30, 1998. The allowance for possible loan losses at September 30, 1999 was $7.2 million, or .86% of total loans and 196.2% of non-performing loans compared to $6.6 million, or .85% of total loans and 226.6% of non-performing loans at September 30, 1998. Management's estimate of the adequacy of its allowance for possible loan losses is based upon its continuing review of prevailing national and local economic conditions, changes in the size and composition of the portfolio and individual problem credits. Growth of the loan portfolio, loss experience, economic conditions, delinquency levels, credit mix and selected credits are factors that affect judgments concerning the adequacy of the allowance. Non-Interest Income. Total non-interest income was $2.6 million for the three months ended September 30,1999, compared to $2.5 million for the three months ended September 30, 1998. The following table sets forth the Company's non-interest income for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------- ------------- 1999 1998 1999 1998 ------ ------ ------ ------ (In Thousands) Trust and custodian fees $ 624 $ 542 $1,800 $1,561 Customer service fees 576 543 1,655 1,537 Investment securities gains -- -- 296 24 Gains on sales of loans 437 868 1,694 3,005 Other 927 552 2,153 1,435 ------ ------ ------ ------ TOTAL $2,564 $2,505 $7,598 $7,562 ====== ====== ====== ======
13 14 Trust and custodian fees increased 15.1% to $624,000 in the third quarter of 1999 from $542,000 in the third quarter of 1998. 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 6.1% in the third quarter of 1999 to $576,000 from $543,000 in the third quarter of 1998. Increased fee income related primarily to overdraft related fees. Gains on sales of loans totaled $437,000 for the three months ended September 30, 1999 compared to $868,000 for the three months ended September 30, 1998. During the third quarter of 1999, the Company sold $3.8 million of the guaranteed portion of its SBA and other government guarantee loan originations in the secondary market compared to $5.3 million during the third quarter of 1998, realizing gains of $305,000 in 1999 compared to $444,000 in 1998. Also, the Company recorded gains of $132,000 from the sales of residential loans during the third quarter of 1999 compared to $426,000 in 1998. Loan origination and sale activity during 1999 has declined due to the higher 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. It is not currently known whether the SBA program will 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 $375,000 to $927,000 in the third quarter of 1999 compared to $552,000 in the third quarter of 1998, primarily as a result of financial planning fee income of Chornyak which totaled $196,000 in 1999 with no comparable amount in 1998 and SBA net servicing income which increased $70,000 due to a decrease in amortization of servicing assets caused by lower prepayment levels. Non-Interest Expense. Total non-interest expense increased $101,000 to $7.2 million for the three months ended September 30, 1999, compared to $7.1 million for the three months ended September 30, 1998. The following table sets forth the Company's non-interest expense for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 1999 1998 1999 1998 ------ ------ ------- ------- (In thousands) Salaries and employee benefits $4,048 $3,841 $12,308 $11,914 Occupancy expense 432 390 1,230 1,159 Furniture, fixtures and equipment 214 219 690 631 Data processing 284 221 906 798 Taxes other than income taxes 173 268 684 720 Federal deposit insurance 69 48 207 194 Amortization of goodwill and other intangibles 358 344 1,060 1,052 Other 1,617 1,763 4,871 5,869 ------ ------ ------- ------- TOTAL $7,195 $7,094 $21,956 $22,337 ====== ====== ======= =======
Salaries and employee benefits increased $207,000, or 5.4%, and accounted for approximately 56.3% of total non-interest expense in the three months ended September 30, 1999 compared to 54.1% in the third quarter of 1998. The average full time equivalent staff was 383 in 1999 compared to 387 in 1998. The increase in expense was attributed to normal salary increases and higher benefit costs. Net occupancy expense increased 10.8% to $432,000 in the third quarter of 1999 from $390,000 in the third quarter of 1998. This increase was attributed to new branch locations opened in October 1998 and May 1999. Furniture, fixtures and equipment expense decreased $5,000, or 2.3% in the third quarter of 1999 from the comparable period of 1998. 14 15 Data processing expense increased $63,000, or 28.5%, in the third quarter of 1999 from the comparable period of 1998. Increased costs in 1999 resulted from higher software and maintenance costs related to technological enhancements to the Company's data processing systems. Taxes other than income taxes decreased $95,000, or 35.4%, in the third quarter of 1999 compared to the third quarter of 1998. This decrease resulted from refunds received for prior year taxes as a result of the favorable outcome of a pending tax case. Federal deposit insurance expense increased $21,000 to $69,000 in 1999 from $48,000 in the third quarter of 1998. Amortization of goodwill and other intangible assets resulting from the application of purchase accounting in connection with the County acquisition totaled $315,000 during the third quarter of 1999 compared to $338,000 in the third quarter of 1998. This decrease was offset by $26,000 of goodwill amortization resulting from the Chornyak acquisition in 1999 and $14,000 relating to a December 1998 branch acquisition. Other non-interest expenses were $1.6 million during the third quarter of 1999 compared to $1.8 million in the third quarter of 1998. This decrease of $146,000, or 8.3%, resulted primarily from merger efficiencies and cost control initiatives. The efficiency ratio is one method used in the banking industry to assess profitability. It is defined as non-interest expense less amortization expense divided by the net revenue stream, which is the sum of net interest income on a tax-equivalent basis and non-interest income excluding net investment securities gains or losses. The Company's efficiency ratio was 55.0% for the third quarter of 1999, compared to 56.3% for the comparable period in 1998. 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 Company's provision for Federal income taxes was $1.4 million, or 30.8% of pretax income, for the three months ended September 30, 1999 compared to $1.4 million, or 31.7% of pretax income, for the three months ended September 30, 1998. The effective tax rate for each period differed from the federal statutory rate principally as a result of tax-exempt income from obligations of states and political subdivisions and non-taxable loans, earnings on bank-owned life insurance, and the non-deductibility, for tax purposes, of goodwill and core deposit intangible amortization expense. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998. Net Income. Net income for the nine months ended September 30, 1999 was $9.1 million, or $1.16 per basic and diluted share, compared to net income of $8.0 million, or $1.01 per basic and diluted share, for the nine months ended September 30, 1998. Net interest income increased 4.8% and non-interest income increased .5% in the nine months ended September 30, 1999, as compared to the same period in 1998 while non-interest expense decreased 1.7%. Excluding the effects of non-recurring merger, integration and restructuring charges totaling $1.2 million that were recorded in the second quarter of 1998, non-interest expense increased 4.0%. The provision for possible loan losses increased 22.2% from the comparative period. The Company's net interest margin decreased to 3.50% for the nine months ended September 30, 1999, compared to 3.53% for the same period in 1998. The Company's return on average assets and return on average equity were 1.01% and 13.93%, respectively, for the nine months ended September 30, 1999, compared to .96% and 12.25%, respectively, for the nine months ended September 30, 1998. Adjusted for the effects of non-recurring charges in 1998, the Company's return on average assets and return on average equity were 1.05% and 13.46%, respectively, for the nine months ended September 30, 1998. Interest Income. Total interest income increased .3% to $65.2 million for the nine months ended September 30, 1999, compared to $65.0 million for the comparable period in 1998. This increase resulted from a $67.8 million increase in average earning assets for the nine months ended September 30, 1999 compared to 1998, offset in part by a 45 basis point decrease in the average yield on interest-earning assets. The average balance of loans increased $33.2 million, or 4.3%. The increase in loan balances was consistent with the Company's emphasis on loan growth to increase overall yields on earning assets. 15 16 The weighted average yield on interest-earning assets decreased to 7.81% during the nine months ended September 30, 1999, compared to 8.26% during the comparable period in 1998. The Company's yield on average loans decreased from 8.72% during the nine months ended September 30, 1998 to 8.24% during the nine months ended September 30, 1999. The decrease in yield has resulted primarily from refinancing activity over the past year and competitive pressures on market rates. Yields on the investment portfolio decreased from 7.09% during 1998 to 6.77% during 1999. Investment yields during 1998 benefited from additional accretion of discounts on securities resulting from prepayments. Also, higher yielding securities have been maturing as well as prepaying and have been replaced with lower yielding securities. Interest Expense. Total interest expense decreased 2.9% to $36.4 million for the nine months ended September 30, 1999, compared to $37.5 million for the nine months ended September 30, 1998. Interest expense decreased due to a lower cost of funds, offset in part by a higher balance of interest-bearing liabilities during the first nine months of 1999, as compared to the same period in 1998. The average balance of interest-bearing deposit accounts increased $29.4 million, or 4.2%, during the nine months ended September 30, 1999 compared to 1998 while the average balance of borrowings increased 14.9%, from $272.3 million to $312.9 million. The Company's cost of funds decreased to 4.67% for the nine months ended September 30, 1999 compared to 5.16% for the same period of 1998, primarily due to the repricing of maturing certificates of deposit at lower rates, interest rate reductions on demand and savings accounts and the repayment and refinancing of higher rate FHLB advances in December 1998. Provision for Possible Loan Losses. The provision for possible loan losses was $1.1 million for the nine months ended September 30, 1999, compared to $925,000 for the nine months ended September 30, 1998 and was considered sufficient to maintain the Company's allowance for possible loan losses at an adequate level. The increased provision in 1999 resulted primarily from increases in, as well as a change in the mix of, the loan portfolio. Non-Interest Income. Total non-interest income was $7.6 million for both the nine months ended September 30, 1999 and 1998. Increases in fee and other income were offset by decreases in gains on sales of loans. During the nine months ended September 30, 1999, the Company sold approximately $16.6 million of the guaranteed portion of its SBA and other government guaranteed loan originations in the secondary market compared to $18.6 million in the first nine months of 1998, realizing gains of $1.1 million in 1999, compared to gains of $1.7 million in 1998. In addition, the Company sold $36.4 million of residential real estate loans realizing gains of $610,000 in the first nine months of 1999, compared to $1.3 million of gains on sales of loans totaling $74.1 million in 1998. Customer service fees, representing service charges on deposits and fees from other banking services, increased 7.7% for the nine months ended September 30, 1999 to $1.7 million. Trust income increased 15.3% to $1.8 million in 1999, from $1.6 million in 1998. Growth in trust and custodian fees resulted primarily from the expansion of the customer base and higher asset values. The $718,000 increase in other income to $2.1 million in 1999 compared to $1.4 million in 1998 resulted primarily from financial planning fee income of $440,000 with no comparable amount in 1998, higher levels of electronic banking fee income and increased earnings from bank-owned life insurance. Non-Interest Expense. Excluding non-recurring merger, integration and restructuring charges of $1.2 million in 1998, non-interest expenses increased $841,000, or 4.0%, during the first nine months of 1999 compared to the same period in 1998. This increase generally resulted from expansion of the Company's operating and loan production activities over the later part of 1998, offset in part by efficiencies achieved from the May 1998 merger of the Company's banking subsidiaries. For the nine months ended September 30, 1999, the Company's efficiency ratio was 56.8%, compared to 56.5% for the nine months ended September 30, 1998. Excluding non-recurring merger, integration and restructuring salary and employee benefits expense of $378,000 in 1998, such expenses increased $772,000, or 6.7% primarily as a result of staff additions associated with increased loan production activities. Adjusted for non-recurring expenses in 1998, salaries and employee benefits accounted for 56.1% of total non-interest expense for the nine months ended September 30, 1999 compared to 54.6% in 1998. The average full-time equivalent staff was 385 in 1999 compared to 383 in 1998. 16 17 Net occupancy expense increased 6.1%, or $71,000 for the first nine months of 1999 compared to the first nine months of 1998. This increase resulted primarily from higher costs associated with new branch facilities opened and acquired in the fourth quarter of 1998 and second quarter of 1999. Furniture, fixtures and equipment expense increased $59,000, or 9.4% for the nine months ended September 30, 1999 compared to the same period in 1998. The increase in furniture and equipment expense was due principally to higher depreciation costs. Data processing expense totaled $906,000 for the nine months ended September 30, 1999, compared to $798,000 in 1998. Higher costs in 1999 have resulted from equipment and software enhancements due to technological advancements. Taxes other than income taxes decreased $36,000, or 5.0%, for the first nine months in 1999 compared to the same period in 1998. This decrease resulted from credits for overpayment of taxes in prior years, discussed previously. Federal deposit insurance expense increased $13,000 to $207,000 in 1999 from $194,000 in 1998. Amortization of goodwill and other intangible assets approximated $1.1 million during both the nine months ended September 30, 1999 and 1998. Excluding $844,000 of non-recurring merger, integration and restructuring charges in 1998, other non-interest expenses decreased to $4.9 million during the nine months ended September 30, 1999 from $5.0 million during the same period in 1998. This decrease resulted primarily from efficiencies achieved from the May 1998 merger of the Company's banking subsidiaries and cost control initiatives. Provision for Income Taxes. The Company's provision for Federal income taxes was $4.2 million, or 31.4% of pretax income, for the nine months ended September 30, 1999 compared to $3.7 million, or 31.6% of pretax income, for the nine months ended September 30, 1998. The effective tax rate for each period differed from the federal statutory rate principally as a result of tax-exempt income from obligations of states and political subdivisions and non-taxable loans, earnings on bank-owned life insurance, and the non-deductibility, for tax purposes, of goodwill and core deposit intangible amortization expense. ASSET QUALITY Non-performing Assets. To maintain the level of credit risk of the loan portfolio at an appropriate level, management sets underwriting standards and internal lending limits and provides for proper diversification of the portfolio by placing constraints on the concentration of credits within the portfolio. In monitoring the level of credit risk within the loan portfolio, management utilizes a formal loan review process to monitor, review, and consider relevant factors in evaluating specific credits in determining the adequacy of the allowance for possible loan losses. The Company's banking subsidiary formally documents its evaluation of the adequacy of the allowance for possible loan losses on a quarterly basis and the evaluation is reviewed and discussed with its board of directors. Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is in doubt. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings. Property acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is classified as "other real estate owned" until such time as it is sold or otherwise disposed of. The Company owned $476,000 of such property at September 30, 1999 and $512,000 at September 30, 1998. Non-performing loans totaled $3.6 million, or 0.44% of total loans, at September 30, 1999, compared to $2.9 million, or 0.38% of total loans, at September 30, 1998. Non-performing assets totaled $4.1 million, or .33% of total assets at September 30, 1999, compared to $3.4 million, or .29% of total assets at September 30, 1998. 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 and restructured loans: 17 18
SEPTEMBER 30, 1999 1998 ------ ------ (DOLLARS IN THOUSANDS) Non-accrual loans $2,368 $ 298 Accruing loans 90 days or more past due 1,280 2,616 ------ ------ Total non-performing loans 3,648 2,914 Other real estate owned 476 512 ------ ------ Total non-performing assets $4,124 $3,426 ====== ====== Restructured loans $2,986 $ -- ====== ====== Non-performing loans to total loans 0.44% 0.38% Non-performing assets to total assets 0.33% 0.29% Non-performing loans plus restructured loans to total loans 0.80% 0.38%
Restructured loans consist of one loan that was restructured in May 1999. At September 30, 1999, this loan was current in accordance with its restructured terms. Allowance for Possible Loan Losses. The Company records a provision necessary to maintain the allowance for possible loan losses at a level sufficient to provide for potential future credit losses. The provision is charged against earnings when it is established. An allowance for possible loan losses is established based on management's best judgment, which involves a continuing review of prevailing national and local economic conditions, changes in the size and composition of the portfolio and review of individual problem credits. Growth of the loan portfolio, loss experience, economic conditions, delinquency levels, credit mix, and selected credits are factors that affect judgments concerning the adequacy of the allowance. Actual losses on loans are charged against the allowance. The following table summarizes the Company's loan loss experience, and provides a breakdown of the allowance for possible loan losses at the dates indicated.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance at beginning of period $ 6,873 $ 6,662 $ 6,643 $ 6,617 Provision charged to expense 405 300 1,130 925 Loans charged-off (384) (544) (1,168) (1,445) Recoveries of loans previously charged off 264 185 553 506 -------- -------- -------- -------- Balance at end of period $ 7,158 $ 6,603 $ 7,158 $ 6,603 ======== ======== ======== ======== Loans outstanding at end of period $830,238 $776,658 N/A N/A Average loans outstanding $817,725 $770,892 $800,817 $767,658 Allowance as a percentage of loans outstanding 0.86% 0.85% N/A N/A Net charge-offs to average loans (annualized) 0.06% 0.18% 0.10% 0.16% Allowance for possible loan losses to non-performing loans 196.2 226.6 N/A N/A Allowance for possible loan losses to non-performing loans Plus restructured loans 107.9 226.6 N/A N/A
The allowance for possible loan losses totaled $7.2 million at September 30, 1999, representing .86% of total loans, compared to $6.6 million at September 30, 1998, or .85% of total loans. 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 three months and nine months ended September 30, 1999 were $120,000 and $615,000, respectively, compared to net 18 19 charge-offs of $359,000 and $939,000, respectively, for the same periods in 1998. 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 196.2% at September 30, 1999, compared to 226.6% at September 30, 1998. 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 0.44% of total loans at September 30, 1999. COMPARISON OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 FINANCIAL CONDITION Total assets were $1.24 billion at September 30, 1999, compared to $1.18 billion at December 31, 1998, an increase of $54.9 million, or 4.6%. Total investment securities decreased by $3.0 million to $324.6 million at September 30, 1999 compared to December 31, 1998. The Company's general investment strategy is to manage the 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 September 30, 1999, 93.2% 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 6.8%. This compares to 91.9% and 8.1% classified as available-for-sale and held to maturity, respectively, at December 31, 1998. Total loans increased $53.2 million to $830.2 million at September 30, 1999 compared to December 31, 1998. Management continues to emphasize increasing earning assets and earning asset yields with the loan portfolio. Premises and equipment increased from $12.9 million at December 31, 1998 to $14.5 million at September 30, 1999. This increase has resulted primarily from the construction of a new branch facility in New Albany, Ohio which opened in the second quarter of 1999. Other assets increased from $21.7 million at December 31, 1998 to $23.4 million at September 30, 1999 primarily as a result of increases in the cash surrender value of bank-owned life insurance, prepaid expenses and accounts receivable associated with lending activities. Total deposits decreased to $789.3 million at September 30, 1999 from $789.6 million at December 31, 1998. The Company continues to emphasize growth in its existing retail deposit base provided incremental deposit growth is cost effective compared to alternative funding sources. Total interest-bearing deposits accounted for 91.4% of total deposits at September 30, 1999, compared to 91.7% at December 31, 1998. Total borrowings, including federal funds purchased, increased $61.5 million to $358.3 million at September 30, 1999, compared to $296.8 million at December 31, 1998. This increase resulted primarily from funding needs associated with increases in the loan 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 agreements or available lines of credit from the Federal Reserve Bank, Federal Home Loan Bank (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. 19 20 The Company's principal source of funds to satisfy short-term liquidity needs comes from cash, due from banks, federal funds sold and borrowing capabilities through the FHLB as well as other sources. Changes in the balance of cash and due from banks are due to changes in volumes of federal funds sold, and the float and reserves related to deposit accounts, which may fluctuate significantly on a day-to-day basis. The investment portfolio serves as an additional source of liquidity for the Company. Securities with a market value of $302.7 million were classified as available-for-sale as of September 30, 1999, representing 93.2% 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. The Company's bank subsidiary is a member of FHLB. Membership provides an opportunity to control the bank's cost of funds by providing alternative funding sources, to provide flexibility in the management of interest rate risk through the wide range of available funding sources, to manage liquidity via immediate access to such funds, and to provide flexibility through utilization of customized funding products to fund various loan and investment products 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 has an outstanding balance of $6.3 million at September 30, 1999. Under the terms of the loan agreement, the Company is required to make quarterly interest payments and annual principal payments, based on a ten-year amortization, which commenced in February 1998. The unpaid loan balance is due in full September 1, 2003. The loan agreement also contains certain financial covenants, all of which the Company was in compliance with at September 30, 1999. Shareholders' equity at September 30, 1999 was $83.6 million, compared to prior year-end shareholders' equity of $87.5 million, a decrease of $3.9 million. This decrease resulted from purchases of treasury stock (net) totaling $6.9 million and the change in unrealized holding losses on available for sale securities, offset in part by the retention of earnings (net of dividends paid). 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 September 30, 1999, the Company had a total risk-based capital ratio of 10.1%, of which 9.3% consisted of Tier 1 capital. The leverage ratio for the Company at September 30, 1999, was 6.3%. Cash dividends paid to shareholders of the Company totaled $3.3 million, or $0.420 per share, during the first nine months of 1999. This compares to dividends of $3.2 million, or $0.405 per share, for the same period in 1998. Cash dividends paid as a percentage of net income amounted to 36.2% and 40.3% for the nine months ended September 30, 1999 and 1998, respectively. In April 1999 the Company issued 82,000 common shares in connection with the acquisition of Chornyak, a full service financial planning company. The Company also entered into a five-year employment agreement with the sole shareholder of Chornyak. Under the terms of such agreement, the Company granted this individual an option to purchase up to 30,000 common shares, subject to a four-year vesting schedule. On October 18, 1999, the Company completed an offering of $20 million aggregate liquidation amount of 9.875% Capital Securities, Series A, due 2029. These securities represent preferred beneficial interests in BFOH Capital Trust I, a special purpose trust formed for the purpose of the offering. The proceeds from the offering were used by the Trust to purchase Junior Subordinated Deferrable Interest Debentures from the Company. Under Federal Reserve Board regulations, these Capital Securities may represent up to 25% of a bank holding company's Tier I capital. The Company intends to use the net proceeds from the offering for general corporate purposes, including the repurchase of common stock and the purchase of securities by FNB. 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 understanding or agreements for any acquisition or combination. 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. 20 21 CONTINGENCIES AND UNCERTAINITIES - YEAR 2000 The Year 2000 Issue concerns the potential liability of information systems to properly recognize and process data-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. This concern includes both the impact such failure might have on the Company as well as its customers. All of the Company's banking operations have been converted to a core data processing system that the Company acquired and began utilizing in 1996. Substantially all of the software utilized by the Company is purchased or licensed from external providers. One of the acquisition requirements was that the systems be full date expanded and thus ready for the millennium change. 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 and perform a testing plan to independently verify certifications; 5) determine the impact of a system not being in compliance; 6) correct non compliance situations; and 7) develop a contingency plan. Testing of all critical systems has been completed and contingency plans have been developed. Based on its assessment at this time, management does not anticipate any significant 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 customers may experience. This identification process considered exposures to credit quality should borrowers experience difficulties and exposures to liquidity due to difficulties experienced by depositors. A process for monitoring customer trends has been developed to address any pressure on liquidity. 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 approximated $300,000 and primarily represent equipment and software purchases. The Company estimates that it will incur additional costs of no more than $100,000 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. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the Company's asset and liability management policies as well as the potential impact of interest rate changes upon the market value of the Company's portfolio equity, see "Management's Discussion and Analysis - Interest Rate Risk Management" in the Company's 1998 Annual Report to Shareholders. The following summarizes the Company's simulations of net interest income and net present value (NPV) as of June 30, 1999, the most recent period for which this information is available: 21 22
PROJECTED CHANGE FROM % CHANGE FROM CHANGE IN INTEREST RATES AMOUNT BASE BASE - ----------------------------- ------- ------- ------ Net interest income: 200 basis point increase $39,624 (1,077) (2.65)% Base scenario-no change 40,701 N/A N/A 200 basis point decrease 40,164 (537) (1.32) NPV: 200 basis point increase 72,592 (23,777) (24.67) Base scenario 96,369 N/A N/A 200 basis point decrease 97,108 739 0.77
22 23 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION The proxy holders for the 2000 annual meeting of shareholders will use their discretion in voting on any and all matters brought before the 2000 annual meeting which were not provided to the Company in an advance notice on or prior to February 3, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits on Item 601 of Regulation S-K Exhibit 3(a) - Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to Company's Form 10-K for 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). Exhibit 3(b) - Code of Regulations, as amended (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 3,1, 1991, Exhibit 3.4 to the Company's Form 10-K for the year ended December 31, 1992 and Exhibit 3.5 to the Company's Form 10-K for the year ended December 31, 1993). (b) Exhibit 27: Financial Data Schedule (c) Reports on Form 8-K - None - 23 24 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BancFirst Ohio Corp. (Registrant) Date: November 12, 1999 /s/ Gary N. Fields ------------------ Gary N. Fields President and Chief Executive Officer Date: November 12, 1999 /s/ Kim M. Taylor ----------------- Kim M. Taylor Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 24 EX-27 2 EXHIBIT 27
9 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 29,392 0 7 0 302,657 21,916 21,869 830,238 (7,158) 1,235,885 789,274 28,000 4,757 330,250 0 0 66,276 17,328 1,235,885 49,317 15,816 27 65,160 23,891 36,429 28,731 1,130 296 21,956 13,243 9,084 0 0 9,084 1.16 1.16 7.81 1,753 1,895 0 0 6,643 (1,168) 553 7,158 7,158 0 0
-----END PRIVACY-ENHANCED MESSAGE-----