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