<PAGE> 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, 1996
........................
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 0-13161
First-Knox Banc Corp.
............................................
(Exact name of registrant as specified in its charter)
Ohio 31-1121049
................... (IR.S Employer
(State or other jurisdiction of incorporation Identification No.)
or organization)
One South Main Street, Mount Vernon, Ohio 43050
..............................................................
(Address of principal executive offices)
(Zip Code)
(614) 399-5500
................................
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
..... .....
Number of shares of Common Stock, Par Value $3.125 per share at November 6, 1996
Authorized 6,000,000
Issued 3,755,618
Outstanding 3,755,618
Page 1 of 21
Exhibit Index at Page 19
<PAGE> 2
FIRST-KNOX BANC CORP.
FORM 10-Q
QUARTER ENDED September 30, 1996
Part I - Financial Information
Interim Financial Information required by Rule 10-01 of Regulation S-X and Item
303 of Regulation S-K is included in this Form 10-Q as referenced below:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Item 1. Unaudited Financial Statements:
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Income . . . . . . . . . . . . . . 4
Condensed Consolidated Statement
of Changes in Shareholders' Equity . . . . . . . . . . . . 5
Condensed Consolidated Statement of Cash Flows . . . . . . . 6
Notes to the Consolidated Financial Statements . . . . . . . 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . 13
Part II - Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . N/A
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . N/A
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . N/A
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . N/A
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . N/A
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 19
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
Page 2
<PAGE> 3
FIRST-KNOX BANC CORP
Consolidated Balance Sheet
($ Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and non-interest bearing deposits with banks $ 16,038 $ 17,012
Federal funds sold -- 3,400
--------- ---------
Total cash and cash equivalents 16,038 20,412
Investment securities available for sale,
at fair value (Note 2) 121,713 94,694
Mortgage-backed securities available for sale,
at fair value (Note 2) 55,830 37,294
--------- ---------
Total securities 177,543 131,988
Loans & lease financing (Note 3) 352,071 330,641
Allowance for loans and lease losses (Note 4) (4,438) (4,166)
--------- ---------
Net loans and leases 347,633 326,475
Premises and equipment, net 10,712 10,993
Accrued interest receivable and other assets 8,737 7,031
--------- ---------
TOTAL ASSETS $ 560,663 $ 496,899
========= =========
LIABILITIES
Deposits
Non-interest bearing demand $ 51,804 $ 54,706
Interest-bearing demand 44,623 39,882
Savings 96,967 99,133
Time 232,764 210,346
--------- ---------
Total deposits 426,158 404,067
Short-term borrowings 19,848 7,986
Long-term debt (Note 5) 62,643 33,415
Accrued interest payable and other liabilities 3,975 4,772
--------- ---------
TOTAL LIABILITIES 512,624 450,240
--------- ---------
SHAREHOLDERS' EQUITY (Note 1)
Common Stock, par value $3.125 per share;
6,000,000 shares authorized; 3,747,713 issued
and outstanding in 1996 and 3,650,225 shares
issued in 1995 11,712 11,407
Paid-in-capital 25,849 24,042
Retained earnings 10,411 11,187
Net unrealized holding gains on securities
available for sale 67 1,912
Common stock in treasury
(89,965 shares in 1995) -- (1,889)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 48,039 46,659
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 560,663 $ 496,899
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 3
<PAGE> 4
FIRST-KNOX BANC CORP.
Consolidated Statement of Income (Unaudited)
($ Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ending Nine Months Ending
September 30, September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases, including fees ........ $ 7,795 $ 7,364 $ 22,856 $ 21,240
Investment and mortgage-backed securities
Taxable .............................. 1,809 1,337 4,452 3,864
Non-taxable .......................... 731 698 2,158 2,098
Federal funds sold ...................... 104 66 304 153
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME ................ 10,439 9,465 29,770 27,355
----------- ----------- ----------- -----------
Interest expense:
Deposits ................................ 4,166 3,954 12,172 11,087
Short-term borrowings ................... 93 94 271 294
Long-term debt .......................... 931 493 1,894 1,493
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE ............... 5,190 4,541 14,337 12,874
----------- ----------- ----------- -----------
NET INTEREST INCOME .................. 5,249 4,924 15,433 14,481
Provision for loan &
lease losses (Note 4) ................... 211 166 543 402
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 5,038 4,758 14,890 14,079
----------- ----------- ----------- -----------
Other income:
Income from fiduciary activities ........ 195 174 570 498
Service charges, commissions and fees ... 598 548 1,787 1,742
Loan sale gains, net .................... -- 27 -- 27
Securities gains (losses), net .......... (11) -- (11) (20)
Other ................................... 15 27 40 76
----------- ----------- ----------- -----------
TOTAL OTHER INCOME ................... 797 776 2,386 2,323
----------- ----------- ----------- -----------
Other expense:
Salaries & employee benefits ............ 1,822 1,882 5,190 5,379
Occupancy and equipment ................. 585 530 1,796 1,572
FDIC Insurance .......................... 1 (12) 3 414
Other ................................... 1,357 1,223 4,156 3,794
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSE .................. 3,765 3,623 11,145 11,159
----------- ----------- ----------- -----------
Income before federal income taxes ......... 2,070 1,911 6,131 5,243
Federal income tax expense ................. 466 423 1,415 1,097
----------- ----------- ----------- -----------
NET INCOME ................................. $ 1,604 $ 1,488 $ 4,716 $ 4,146
=========== =========== =========== ===========
Earnings per common share (Note 1):
Primary ...... $ 0.42 $ 0.39 $ 1.24 $ 1.08
Fully diluted $ 0.42 $ 0.39 $ 1.24 $ 1.08
=========== =========== =========== ===========
Weighted average common shares
outstanding (Note 1): Primary ...... 3,797,557 3,775,761 3,794,909 3,827,272
Fully diluted 3,798,265 3,783,744 3,795,591 3,831,324
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 4
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FIRST-KNOX BANC CORP.
Condensed Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
($ Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ending Nine Months Ending
September 30, September 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period .................................................... $46,520 $42,821 $46,659 $40,832
Net income ...................................................................... 1,604 1,488 4,716 4,146
Issuance of 2863 and 9,047 shares in 1996 and 5,348 and 8,588 shares in 1995
for stock options exercised ................................................. 59 60 144 95
Treasury stock purchased - 96,322 common shares ................................. (1,926)
Cash dividends, declared at a per share rate of $.17 and $.436 in 1996 and
$.114 and $.324 in 1995 .................................................... (638) (426) (1,635) (1,217)
Change in net unrealized holding gain (loss) on securities
available for sale ........................................................... 494 (21) (1,845) 1,992
------- ------- ------- -------
Balance, end of period .......................................................... $48,039 $43,922 $48,039 $43,922
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 5
<PAGE> 6
FIRST-KNOX BANC CORP.
Condensed Consolidated Statement of Cash Flows (Unaudited)
($ Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ending
September 30,
1996 1995
-------- --------
<S> <C> <C>
Net cash provided by operating activities ........................ $ 4,346 $ 4,222
Cash Flows from Investing Activities:
Purchases of investment securities
held to maturity ........................................... (1,279)
Proceeds from calls, payments and maturities of investment
securities held to maturity ................................ 1,533
Purchases of investment and mortgage-backed securities
available for sale ......................................... (72,290) (24,724)
Proceeds from calls, payments and maturities of investment and
mortgage-backed securities available for sale .............. 13,970 10,304
Proceeds from sales of investment and mortgage-backed
securities available for sale .............................. 10,032 13,462
Net increase in loans and leases ............................. (21,701) (21,964)
Proceeds from sale of loans .................................. 1,578
Expenditures for premises and equipment ...................... (525) (1,520)
-------- --------
Net cash provided by (applied to) investing activities ...... (70,514) (22,610)
-------- --------
Cash Flows from Financing Activities:
Net increase in deposit accounts ............................. 22,091 24,178
Net increase in short-term borrowings ........................ 11,862 (4,656)
Proceeds from long-term debt ................................. 30,000
Payments on long-term debt ................................... (772) (1,294)
Cash dividends paid .......................................... (1,531) (1,246)
Issuance of common stock ..................................... 144 95
Purchase of treasury shares .................................. (1,926)
-------- --------
Net cash provided by financing activities ............... 61,794 15,151
-------- --------
Net increase (decrease) in cash and cash equivalents ............. (4,374) (3,237)
Cash and cash equivalents at beginning of period ............. 20,412 18,110
-------- --------
Cash and cash equivalents at end of period ....................... 16,038 14,873
======== ========
Supplemental cash flow information:
Interest paid ................................................ $ 14,543 $ 12,317
======== ========
Income taxes paid ............................................ $ 1,460 $ 1,052
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 6
<PAGE> 7
FIRST-KNOX BANC CORP.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1 - SUMMARY OF ACCOUNTING POLICIES:
The consolidated financial statements include the accounts of
the First-Knox Banc Corp. (the Corporation), and its
wholly-owned subsidiaries; The First-Knox National Bank
(First-Knox), and The Farmers and Savings Bank (Farmers). All
significant intercompany transactions have been eliminated.
These interim financial statements are prepared without audit
and reflect all adjustments of a normal and recurring nature
which, in the opinion of management, are necessary to present
fairly the consolidated financial position of First-Knox Banc
Corp. at September 30, 1996 and its results of operations and
cash flows for the periods presented. The accompanying
consolidated financial statements do not purport to contain
all the necessary financial disclosures required by generally
accepted accounting principles that might otherwise be
necessary in the circumstances. Accordingly, these financial
statements should be read in conjunction with the 1995
consolidated financial statements and notes thereto of
First-Knox Banc Corp. included in its Annual Report on Form
10-K for the year ended December 31, 1995.
The provision for income taxes is based upon the effective tax
rate expected to be applicable for the entire year.
Primary earnings per share is computed based on the weighted
average shares outstanding during the year plus common
equivalent shares arising from dilutive stock options, using
the treasury stock method. Fully diluted earnings per share
reflects additional dilution related to stock options due to
the use of market price at the end of the period when higher
than average price for the period. All share and per share
data has been adjusted for a 5% stock dividend distributed in
September 1996.
During the first nine months of 1996, options on 35,550 shares
were granted. During the first nine months of 1996 options for
9,441 common shares and 1,048 stock appreciation rights were
exercised. There was no material compensation recognized
during the first nine months of 1996 or the first nine months
of 1995 related to stock appreciation rights. At September 30,
1996, exercisable options and stock appreciation rights were
124,252 and 19,613, respectively. At September 30, 1996,
there were outstanding options for 209,327 common shares and
44,807 outstanding stock appreciation rights.
The Corporation, through its subsidiary banks, grants
residential, consumer, and commercial loans to customers in
the central Ohio counties of Knox, Morrow, Holmes, Ashland and
Richland. In addition the Corporation is in the business of
commercial and consumer leasing. Commercial loans, residential
real estate loans, consumer loans and leases were 30.8%,
47.3%, 21.3%, and 0.6% of total loans and leases respectively,
at September 30, 1996.
Page 7
<PAGE> 8
Note 1 - SUMMARY OF ACCOUNTING POLICIES (Continued):
On January 1, 1996, the Corporation adopted SFAS 122
"Accounting for Mortgage Servicing Rights." This pronouncement
requires companies to recognize, as separate assets, rights to
service mortgage loans for others, however those loans are
acquired. A company that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans
and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans
to mortgage servicing rights and to loans (without the
mortgage servicing rights) based on their relative fair
values. Mortgage servicing rights recorded as a separate asset
will be amortized in proportion to, and over the period, of
estimated net servicing income. The impact of adopting this
pronouncement in 1996 was not material.
On January 1, 1996, the Corporation adopted SFAS 123
"Accounting for Stock-Based Compensation." SFAS encourages but
does not require entities to use a fair value based method to
account for stock-based compensation plans such as the
Corporation's stock options plans. If the fair value
accounting encouraged by SFAS No. 123 is not adopted, entities
must disclose the pro forma effect on net income and earnings
per share had the accounting been adopted. Fair value of a
stock option is to be estimated using an option-pricing model
that considers exercise price, expected life of the option,
current price of the stock, expected price volatility,
expected dividends on the stock, and the risk-free interest
rate. The Corporation elected not to expense the fair value of
options granted and will disclose the pro forma effect on net
income and earnings per share in the annual financial
statements. The impact of adopting this pronouncement in 1996
was not material.
The Corporation in its normal course of business, makes
commitments to extend credit which are not reflected in the
financial statements. At September 30, 1996, unused credit
lines amounted to approximately $51,886,000 and commitments
under outstanding letters of credit amounted to approximately
$498,000. Since many commitments to make loans expire without
being used, the amount does not necessarily represent future
cash commitments. Collateral obtained related to the
commitments is determined using management's credit evaluation
of the borrower and may include real estate, vehicles,
business assets, deposits, and other items. In management's
opinion these commitments represent normal banking
transactions, and no material losses are expected to result
therefrom.
Residential real estate loans originated and intended for sale
in the secondary market are carried at the lower of cost or
estimated market in the aggregate. Net unrealized losses are
recognized in a valuation allowance by charges to income.
Certain items in the 1995 financial statements have been
reclassified to correspond with the 1996 presentation.
Page 8
<PAGE> 9
Note 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES:
The amortized costs and estimated fair values are as follows
at September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
September 30, 1996
INVESTMENT SECURITIES AVAILABLE FOR SALE GROSS GROSS ESTIMATED
($ amounts in thousands): AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $30,612 $108 ($171) $30,549
Obligations of states and
political subdivisions 57,009 1,050 (809) $57,250
Obligations of U.S. government
corporations and agencies 26,610 (35) 26,575
Other securities 7,012 327 7,339
-------- ------ ------- --------
Total investment securities 121,243 1,485 (1,015) 121,713
Mortgage-backed securities 56,198 231 (599) 55,830
-------- ------ ------- --------
TOTAL $177,441 $1,716 ($1,614) $177,543
======== ====== ======= ========
December 31, 1995
INVESTMENT SECURITIES AVAILABLE FOR SALE
($ amounts in thousands): GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
U.S. Treasury securities COST GAINS LOSSES VALUE
Obligations of U.S. government --------- ---------- ---------- ---------
corporations and agencies
U.S. Treasury securities $27,955 $312 ($51) $28,216
Obligations of states and
political subdivisions 53,407 1,867 (77) 55,197
Obligations of U.S. government
corporations and agencies 6,932 59 6,991
Other securities 4,041 249 4,290
-------- ------ ----- --------
Total investment securities 92,335 2,487 (128) 94,694
Mortgage-backed securities 36,756 636 (98) 37,294
-------- ------ ----- --------
TOTAL $129,091 $3,123 ($226) $131,988
======== ====== ===== ========
</TABLE>
Proceeds from the sales of investment and mortgage-backed
securities for the nine months ending September 30, 1996 were
$13,970,000 resulting in gross gains of $11,000 and gross
losses of $22,000. Proceeds from the sales of investment and
mortgage-backed securities for the nine months ending
September 30, 1995 were $13,462,000 resulting in gross gains
of $67,000 and gross losses of $87,000.
At September 30, 1996, the percentages of the portfolio
maturing in various time frames had not changed significantly
from December 31, 1995.
Page 9
<PAGE> 10
Note 3 - LOANS AND LEASE FINANCING:
Loans and leases are comprised of the following ($ amounts
in thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Residential real estate loans held for sale...... $ 5,020
Residential real estate loans.................... $165,323 147,927
Commercial real estate loans..................... 12,317 9,548
Commercial and industrial loans.................. 92,283 88,632
Consumer and credit card loans................... 75,498 73,137
Obligations of states and
political subdivisions......................... 4,364 4,678
Lease financing, net............................. 2,286 1,699
-------- --------
$352,071 $330,641
======== ========
</TABLE>
Note 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES:
Activity in the allowance for possible loan and lease losses
is summarized as follows for the nine months ended
September 30. ($ amounts in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Balance, beginning of period..................... $4,166 $3,876
Provision for loan and lease losses.............. 543 402
Losses charged to the allowance.................. (408) (428)
Recoveries....................................... 137 198
-------- --------
Balance, end of period...................... $4,438 $4,048
======== ========
</TABLE>
Loans and leases over 90 days past due and still accruing
interest approximated $1,636,000 at September 30, 1996
and $862,000 at December 31, 1995. Loans on non-accrual
status were $377,000 at September 30, 1996 and $197,000 at
December 31, 1995. Impaired loans were not material
at any date or during any period presented.
Page 10
<PAGE> 11
Note 5 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
($ amounts in thousands):
September 30, December 31,
Description 1996 1995
----------- -------- -------
<S> <C> <C>
Fixed rate Federal Home Loan Bank
advances with monthly principal and
interest payments:
5.60% Advance due August 1, 2003 ............................ $2,246 $2,442
6.35% Advance due August 1, 2013 ............................ 2,746 2,812
5.95% Advance due March 1, 2004 ............................. 602 649
5.70% Advance due May 1, 2004 ............................... 4,889 5,262
5.85% Advance due January 1, 2016 ........................... 4,910 5,000
Fixed rate Federal Home Loan Bank
advances with monthly interest payments:
5.35% Advance due February 1, 1999 .......................... 5,000 5,000
5.60% Advance due April 1, 1999 ............................. 5,000 5,000
5.70% Advance due June 1, 1999 .............................. 7,000 7,000
6.35% Advance due March 1, 2004 ............................. 250 250
6.15% Advance due July 21, 1997........................ 10,000
6.60% Advance due July 21, 1999........................ 10,000
6.90% Advance due July 21, 2001........................ 10,000
------- -------
$62,643 $33,415
======= =======
</TABLE>
At September 30, 1996, Federal Home Loan Bank (FHLB) advances are
collateralized by all shares of FHLB stock owned by the
Corporation (totaling $6,285,200) and by 100% of the Corporation's
qualified real estate-backed investments and mortgage loan
portfolio (totaling approximately $217,338,000). Based on the
carrying amount of FHLB stock owned by the Corporation, total FHLB
advances are limited to approximately $73,170,000 at September 30,
1996. Future advances to be received by the Corporation, above
this limit, require additional purchases of FHLB stock.
The aggregate minimum future principal payments on long-term debt
are $269,000 in 1996, $11,587,000 in 1997, $1,576,000 in 1998,
$28,576,000 in 1999, $1,587,000 in 2000 and $19,048,000
thereafter.
PAGE 11
<PAGE> 12
Note 6 - SUBSEQUENT EVENT:
On October 28, 1996, the Corporation entered into an Agreement and
Plan of Merger ("Agreement") with Park National Corporation ("Park
National"), a bank holding company headquartered in Newark, Ohio,
whereby First-Knox Banc Corp. will be merged with and into Park
National. Under the terms of the Agreement, Park National will
exchange 0.5914 shares of Park National common stock for each
outstanding share of First-Knox Banc Corp. common stock in a tax free
exchange. Park National expects to issue an aggregate of 2,345,000
shares of common stock to complete the merger which will be accounted
for as a pooling-of-interests. The exact exchange ratio will be
determined pursuant to a formula that is based upon, among other
things, the market price of Park National common stock and the number
of shares of First-Knox Banc Corp. common stock oustanding or subject
to options prior to closing. The transaction is valued at
approximately $29.00 per share of First-Knox Banc Corp. common stock,
or approximately $114.3 million based on the $48.75 closing price of
Park National common stock on October 25, 1996. Closing of the
transaction is subject to certain conditions including regulatory
approval and the approval of the shareholders of First-Knox Banc Corp.
and Park National.
Page 12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The following discussion focuses on the consolidated financial condition of
First-Knox Banc Corp. at September 30, 1996, compared to December 31, 1995, and
the results of operations for the three and nine months periods ended September
30, 1996, compared to the same period in 1995. The purpose of this discussion is
to provide a better understanding of the consolidated financial statements. This
discussion should be read in conjunction with the financial statements, notes
and tables included elsewhere in this report and the First-Knox Banc Corp. 1995
Annual Report on Form 10-K. The Registrant cautions that any forward looking
statements contained in this report, in a report incorporated by reference to
this report or made by management of the company involve risks and uncertainties
and are subject to change based on various important factors. The forward
looking statements could cause actual results to differ materially from those
expressed or implied. The Registrant is not aware of any market or institutional
trends, events or uncertainties that will have or are reasonably likely to have
a material effect on liquidity, capital resources or operations except as
discussed herein. Other than as discussed herein, the Registrant is not aware of
any current recommendations by regulatory authorities which would have such
effect if implemented.
Financial Condition
- -------------------
Liquidity
- ---------
Liquidity relates to the Corporation's ability to meet cash demands of its
customers and their credit needs. Liquidity is provided by the Corporation's
ability to readily convert assets to cash and raise funds in the market place.
Traditional asset liquidity is provided by cash and readily marketable,
short-term assets such as federal funds sold and deposits in other banks.
Cash, amounts due from banks and federal funds sold totaled $16.04 million at
September 30, 1996. Investment and mortgage-backed securities available for sale
were $177.54 million at September 30, 1996. This amount increased by $45.56
million from December 31, 1995 balances. These assets, as well as anticipated
deposit growth and scheduled loan payments and maturing investment securities,
provide the Corporation with an adequate source of funds for expected future
demand for loans and for fluctuations in deposit volume. They also provide
management with the flexibility to change the composition of interest earning
assets as market conditions change in the future.
Liability liquidity relates to the Corporation's ability to retain existing
deposits, obtain new deposits and borrow in the marketplace. Total deposits
increased $22.09 million for the nine months ended September 30, 1996. Demand
deposits experienced a $1.84 million or 1.94% increase, savings and time
deposits increased $20.25 million or
Page 13
<PAGE> 14
6.54% during the first nine months of 1996. Management anticipates core deposits
to experience moderate growth or remain stable during the rest of the year.
Access to advances from the Federal Home Loan Bank (FHLB) described in Note 5 is
a supplemental source of cash to meet liquidity needs. The FHLB allows these
borrowings to be utilized for any purpose.
Capital Resources
- -----------------
Shareholders' equity totaled $48.04 million at September 30, 1996, compared to
$46.66 million at December 31, 1995. This increase was due primarily to earnings
retention which more than offset a decrease in the net unrealized holding gain
on securities available for sale. The ratio of shareholders' equity to assets
was 8.57% at September 30, 1996 and 9.39% at December 31, 1995.
Cash dividends declared during the nine months ended September 30, 1996 were
$1,635,000 or $.436 per share representing 34.67% of net income and an increase
of 34.35% over the first nine months of 1995.
Regulatory Capital Requirements
- -------------------------------
The Corporation complies with the capital requirements established by the
Federal Reserve System, which are summarized as follows:
<TABLE>
<CAPTION>
Capital Position
as of
Regulatory
Minimum September 30, 1996 December 31, 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Tier I risk-based
capital....... 4.00% 14.55% 14.29%
Total risk-based
capital....... 8.00% 15.71% 15.45%
Tier I leverage 3.00% - 5.00% 8.41% 8.84%
</TABLE>
Under "Prompt Corrective Action" regulations adopted in September 1992, the FDIC
has defined five categories of capitalization (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized). The Corporation meets the "well capitalized" definition,
which requires a total risk-based capital ratio of at least 10%, a leverage
ratio of at least 5%, and the absence of any written agreement, order, or
directive from a regulatory agency. "Well capitalized" status affords the
Corporation the ability to operate with the greatest flexibility under the
current laws and regulations. Under a current regulatory proposal, interest rate
risk would become an additional element in measuring risk-based capital. This
proposed change is not expected to significantly impact the Corporation's
compliance with capital guidelines.
Page 14
<PAGE> 15
Changes in Financial Condition
- ------------------------------
Consolidated total assets were $560.66 million at the end of the current period
after recording growth of $63.76 million or 12.83% during the first nine months
of 1996. This growth was funded primarily by FHLB advances which increased by
$39.23 million and deposits which increased $22.09 million. These new FHLB
advances were used to purchase investment and mortgage-backed securities during
the third quarter of 1996. Loans and leases increased by $21.43 million, and
investments and mortgage-backed securities increased by $45.56 million during
the first nine months of 1996. The residential real estate loan portfolio
increased by $12.38 million or 8.09%, while commercial and other loans increased
$6.11 million or 5.94%. Consumer and credit card loans increased by $2.36
million or 3.23%, while lease financing balances increased by $.59 million or
34.55%. Short-term borrowings increased by $11.86 million or 148.53% during the
first nine months of 1996, primarily from the addition of a $10 million
short-term FHLB advance.
The allowance for loan and lease losses as a percentage of loans and leases was
1.26% at the end of the current period and 1.26% at the end of 1995. Net loan
and lease charge-offs were $271,000 for the first nine months of 1996,
representing an annualized rate of .11% of the average loan and lease balances.
This represented an increase of $41,000 in net charge-offs compared to the first
nine months of 1995. Commercial loans had net charge offs of $51,000 compared to
net charge-offs of $124,000 during the first nine months of 1995. Net
charge-offs for consumer and credit card loans were $103,000 higher than 1995.
Loans past due more than 90 days plus loans placed in non-accrual status were
$2.01 million or .58% of outstanding balances at September 30, 1996 compared to
$1.06 million or .32% of outstanding balances at the end of 1995.
The interest rate sensitivity of the Corporation has not changed significantly
from that of December 31, 1995 as disclosed in the Corporation's 1995 annual
report on Form 10-K.
Results of Operations-Third Quarter 1996 vs. Third Quarter 1995
- ---------------------------------------------------------------
Consolidated net income of $1,604,000 for the third quarter of 1996 was 7.80%
over the $1,488,000 recorded for the third quarter of 1995. Expressed as
annualized returns on average assets and average shareholders' equity, net
income for 1996 was 1.16% and 13.37% compared to 1.22% and 13.62% for 1995.
Fully diluted earnings per share increased $.03 to $.42 per share for the third
quarter 1996 compared to the same period in 1995. These per share amounts were
restated to reflect the 5% stock dividend distributed in September 1996.
The increased level of net income for the third quarter of 1996 compared to the
third quarter of 1995, resulted primarily from higher net interest income.
Increased net interest income resulted from a $56.75 million or 12.44% increase
in average earning assets. The annualized net interest margin rate (net interest
income adjusted for tax-exempt income restated to a pre-tax equivalent based on
the statutory federal tax rate [FTE] divided by average earning assets) was
4.43% in the third quarter of 1996 and 4.64% for the same period in 1995.
Page 15
<PAGE> 16
The net interest spread percentage (the FTE average earning assets yield minus
the average cost of funds) declined by 16 basis points to 3.83% for the third
quarter 1996 compared to the same period of a year ago. Management expects the
net interest margin rate for 1996 to finish at lower levels than those
experienced in 1995.
The provision for loan and lease losses increased by $45,000 or 27.11% during
the third quarter of 1996 compared to the same period last year. Net loan and
lease charge-offs were up $41,000 or 17.83% compared to the same period a year
ago. Net loan and lease charge-offs for the third quarter of 1996 and 1995 were
at an annualized rate of .09% and .04%, respectively. Management anticipates
higher loan and lease charge-offs and a higher provision for loan and lease
losses in 1996 compared to the full year levels experienced in 1995.
Non-interest income of $797,000 during the third quarter of 1996 represented an
annualized .59% of average assets compared to $776,000 or .64% of average assets
for the same period in 1995. There were no loan sales in both the third quarter
of 1996 or third quarter of 1995. Approximately $4.9 million of mortgage loans
held for sale were moved into a long-term investment position during the third
quarter of 1996. This action was in concert with management's intent to fully
utilize the leverage of shareholder's equity.
Non-interest expenses increased $142,000 or 3.92% over the third quarter 1995.
Employee salaries and benefits decreased by $60,000 or 3.19% over the same
period in 1995. This decline was largely due primarily to lowered employee group
health insurance costs. All other non-interest expenses including occupancy
expense, advertising, and franchise taxes were higher by $202,000 or 11.60% over
1995.
As a percentage of income before federal income taxes, federal income tax
expense was 22.51% in 1996 and 22.14% in 1995. These effective tax rates are
lower than the statutory tax rate of 34% due primarily to tax exempt income from
obligations of states and political subdivisions and non-taxable loans.
Results of Operations-Nine Months 1996 vs. Nine Months 1995
- -----------------------------------------------------------
Consolidated net income of $4,716,000 for the first nine months of 1996 was
13.75% over the $4,146,000 recorded for the same period in 1995. Expressed as
annualized returns on average assets and average shareholders' equity, net
income for 1996 was 1.22% and 13.39% compared to 1.17% and 13.02% for 1995.
Fully diluted earnings per share increased $.16 to $1.24 per share for the nine
months of 1996 compared to the same period in 1995. These per share amounts were
restated to reflect the 5% stock dividend distributed in September, 1996.
The increased level of net income for the nine months of 1996 compared to the
first nine months of 1995, resulted primarily from higher net interest income,
reduced FDIC insurance expense, and lower personnel expense. These items are
discussed more fully below.
Page 16
<PAGE> 17
Increased net interest income resulted from a $38.80 million or 8.69% increase
in average earning assets. The annualized net interest margin rate (net interest
income adjusted for tax-exempt income restated to a pre-tax equivalent based on
the statutory federal tax rate [FTE] divided by average earning assets) was
4.59% in 1996 and 4.70% during the same period in 1995.
The net interest spread percentage (the FTE average earning assets yield minus
the average cost of funds) declined by 10 basis points to 3.95% for the first
nine months of 1996 compared to the same period of a year ago. Management
expects the net interest margin rate for 1996 to remain at lower levels than
those experienced in 1995.
The provision for loan and lease losses increased by $141,000 or 35.08% during
the first nine months of 1996 compared to the same period last year. Net loan
and lease charge-offs were up $41,000 or 17.83% compared to the same period a
year ago. Net loan and lease charge-offs for the first nine months of 1996 and
1995 were at an annualized rate of .11% and .10%, respectively. Management
anticipates both loan and lease charge-offs and the provision for loan and lease
losses for 1996 to be higher than the full year levels experienced in 1995.
Non-interest income of $2,386,000 during the first nine months of 1996
represented an annualized .62% of average assets compared to $2,323,000 or .66%
of average assets for the same period in 1995. Fiduciary income essentially kept
pace with trust asset growth. There were no loan sales in both 1996 and 1995
periods.
Non-interest expenses decreased $14,000 or .13% over the same period in 1995. A
reduction in FDIC insurance expense of $411,000 was a significant contributor to
this decrease. Employee salaries and benefits decreased by $189,000 or 3.51%
over the same period in 1995. This decline was largely due to a one time
adjustment which significantly lowered employee group health insurance costs.
All other non-interest expenses including occupancy expense, advertising, and
franchise taxes were higher by $586,000 or 10.92% over 1995.
As a percentage of income before federal income taxes, federal income tax
expense was 23.08% in 1996 and 20.92% in 1995. These effective tax rates are
lower than the statutory tax rate of 34% due primarily to tax exempt income from
obligations of states and political subdivisions and non-taxable loans.
Pending Merger
- --------------
As discussed earlier, on October 28, 1996, the Corporation entered into an
Agreement and Plan of Merger ("Agreement") with Park National Corporation ("Park
National"), a bank holding company headquartered in Newark, Ohio, whereby
First-Knox Banc Corp. will be merged with and into Park National. Under the
terms of the agreement, Park National will exchange 0.5914 shares of Park
National common stock for each outstanding share of First-Knox Banc Corp. common
stock in a tax free exchange. Park National expects to issue an aggregate of
2,345,000 shares of common stock to complete the merger which will be accounted
for as a pooling-of-interests. The exact exchange ratio will be determined
pursuant to a formula that is based upon, among other things, the market price
of Park National common stock and the number of shares of First-Knox Banc Corp.
common stock outstanding or subject to options prior to closing. The transaction
is valued at approximately $29.00 per share of
Page 17
<PAGE> 18
First-Knox Banc Corp. common stock, or approximately $114.3 million based on the
$48.75 closing price of Park National common stock on October 25, 1996. Closing
of the transaction is subject to certain conditions including regulatory
approval and the approval of the shareholders of First-Knox Banc Corp. and Park
National.
Page 18
<PAGE> 19
PART II - OTHER INFORMATION
(Items which are not applicable have been omitted)
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
Description Location
----------------------------- --------------------------
<S> <C>
4(b) First-Knox Banc Corp. Divided Incorporated herein
Reinvestment Plan by reference to the
Corporation's Registration
Statement on Form S-3
(Registration No. 33-52590)
4(b)1 Amendment to the First-Knox Banc Corp. Incorporated herein
Dividend Reinvestment Plan by reference to exhibit
4(b)1 to the March 31, 1995
Form 10-Q
10(a) Summary of Incentive Compensation Plan Incorporated herein
dated December 9, 1983 by reference to exhibit
10(a) to the 1992 Form 10-K
10(b) Employees Retirement Plan dated January 1, 1984 Incorporated herein
by reference to exhibit
10(a) to the 1986 Form 10-K
10(c) Supplemental Retirement Agreement dated Incorporated herein
August 11, 1987 by reference to exhibit
10(c) to the 1992 Form 10-K
</TABLE>
Page 19
<PAGE> 20
<TABLE>
<S> <C>
10(d) Non-qualified Stock Option and Incorporated herein
Stock Appreciation Rights Plan by reference to exhibit 23
to the 1989 Form 10-K
10(e) First-Knox Banc Corp. Savings Retirement Incorporated herein
Plan by reference to exhibit 10(e)
to the 1993 Form 10-K
10(f) Project Services Agreement between First-Knox Incorporated herein
National Bank and Sverdrup Building Corporation by reference to exhibit 10(f)
to the 1993 Form 10-K
10(g) First-Knox Banc Corp. Stock Option and Incorporated herein
Stock Appreciation Rights Plan by reference to exhibit
10(g) to the March 31, 1995
Form 10-Q
11 Statement regarding computation of Page 7 - Note 1 to consolidated
per share earnings financial statements
23 Consent of Independent Accountants Incorporated herein
by reference to exhibit 23
to the 1995 Form 10-K
</TABLE>
(b) No reports on Form 8-K were filed during the fiscal quarter covered by this
report.
Page 20
<PAGE> 21
SIGNATURES
----------
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.
First-Knox Banc Corp.
(Registrant)
Date November 13, 1996 /S/ Carlos E. Watkins
----------------- -------------------------------
By Carlos E. Watkins
President and Chief Executive Officer
Date November 13, 1996 /S/ Gordon E. Yance
----------------- -------------------------------
By Gordon E. Yance
Vice President & Treasurer
Page 21
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000756899
<NAME> FIRST-KNOX BANC CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,454
<INT-BEARING-DEPOSITS> 584
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 177,543
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 352,071
<ALLOWANCE> 4,438
<TOTAL-ASSETS> 560,663
<DEPOSITS> 426,158
<SHORT-TERM> 19,848
<LIABILITIES-OTHER> 3,975
<LONG-TERM> 62,643
<COMMON> 11,712
0
0
<OTHER-SE> 36,327
<TOTAL-LIABILITIES-AND-EQUITY> 560,663
<INTEREST-LOAN> 22,856
<INTEREST-INVEST> 6,914
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 29,770
<INTEREST-DEPOSIT> 12,172
<INTEREST-EXPENSE> 14,337
<INTEREST-INCOME-NET> 15,433
<LOAN-LOSSES> 543
<SECURITIES-GAINS> (11)
<EXPENSE-OTHER> 11,145
<INCOME-PRETAX> 6,131
<INCOME-PRE-EXTRAORDINARY> 4,716
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,716
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 4.59
<LOANS-NON> 377
<LOANS-PAST> 1,636
<LOANS-TROUBLED> 2,290
<LOANS-PROBLEM> 7,105
<ALLOWANCE-OPEN> 4,166
<CHARGE-OFFS> 408
<RECOVERIES> 137
<ALLOWANCE-CLOSE> 4,438
<ALLOWANCE-DOMESTIC> 1,480
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,958
</TABLE>
