<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission File Number 0-18840
BancFirst Ohio Corp.
(Exact name of registrant as specified in its charter)
Ohio 31-1294136
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
422 Main Street Zanesville, Ohio 43701
(Address of principal executive offices)
(Zip Code)
(740) 452-8444
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding as of August 10, 1998
----- ---------------------------------
Common Stock, No Par Value 7,970,573
1
<PAGE> 2
INDEX
BANCFIRST OHIO CORP.
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheet.............................. 3
Consolidated Statement of Income........................ 4
Consolidated Statement of Cash Flows.................... 5
Notes to Consolidated Financial Statements.............. 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8-21
PART II. OTHER INFORMATION
Other Information................................................ 22-23
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits on Item 601 of Regulation S-K
(b) Exhibit 27: Financial Data Schedule
(c) Reports on Form 8-K
Signatures ............................................... 24
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
BANCFIRST OHIO CORP.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
JUNE 30, DEC. 31,
1998 1997
-----------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 30,432 $ 21,650
Federal funds sold 4,483 49
Securities held-to-maturity, at amortized cost (approximate
fair value of $29,966 and $36,645 in 1998 and 1997,
respectively) 29,012 35,223
Securities available-for-sale, at fair value 300,329 236,298
---------- ----------
Total securities 329,341 271,521
---------- ----------
Loans, net of unearned income 764,564 761,027
Allowance for possible loan losses (6,662) (6,617)
---------- ----------
Net loans 757,902 754,410
---------- ----------
Bank premises and equipment, net 10,715 8,856
Accrued interest receivable 7,117 6,946
Intangible assets 12,013 12,687
Other assets 21,063 5,499
---------- ----------
Total assets $1,173,066 $1,081,618
========== ==========
LIABILITIES:
Deposits:
Non-interest-bearing deposits $ 63,667 $ 63,846
Interest-bearing deposits 709,014 683,201
---------- ----------
Total deposits 772,681 747,047
---------- ----------
Federal funds purchased -- 12,300
Federal Home Loan Bank advances and other borrowings 307,401 227,149
Accrued interest payable 2,720 2,426
Other liabilities 2,391 7,363
---------- ----------
Total liabilities 1,085,193 996,285
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, No par or stated value, 20,000,000 shares authorized,
8,076,488 and 8,067,838 shares issued in 1998 and 1997 respectively 63,920 63,343
Retained earnings 24,936 22,057
Accumulated other comprehensive income - unrealized holding
gains on securities available for sale, net 741 1,140
Treasury stock, 111,044 and 107,660 shares, at cost, in 1998
and 1997, respectively (1,724) (1,207)
---------- ----------
Total shareholders' equity 87,873 85,333
---------- ----------
Total liabilities and shareholders' equity $1,173,066 $1,081,618
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
<TABLE>
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $16,690 $16,256 $33,182 $31,790
Interest and dividends on securities:
Taxable 4,347 4,741 8,778 9,507
Tax-exempt 327 337 633 669
Other interest income 65 19 71 60
------- ------- ------- -------
Total interest income 21,429 21,353 42,664 42,026
------- ------- ------- -------
Interest expense:
Deposits 8,603 8,252 17,083 16,184
Borrowings 3,802 3,763 7,422 7,389
------- ------- ------- -------
Total interest expense 12,405 12,015 24,505 23,573
------- ------- ------- -------
Net interest income 9,024 9,338 18,159 18,453
Provision for possible loan losses 318 317 625 615
------- ------- ------- -------
Net interest income after
provision for possible loan losses 8,706 9,021 17,534 17,838
------- ------- ------- -------
Other income:
Trust and custodian fees 566 432 1,019 854
Customer service fees 511 489 994 968
Gain on sale of loans 1,023 454 2,137 945
Other 623 363 883 483
Investment securities gains, net -- 78 24 100
------- ------- ------- -------
Total other income 2,723 1,816 5,057 3,350
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 4,239 3,695 8,073 7,276
Net occupancy expense 384 418 769 820
Amortization of intangibles 354 396 708 792
Other 3,272 2,297 5,693 4,298
------- ------- ------- -------
Total non-interest expense 8,249 6,806 15,243 13,186
------- ------- ------- -------
Income before income taxes 3,180 4,031 7,348 8,002
Provision for Federal income taxes 953 1,353 2,313 2,692
------- ------- ------- -------
Net income $ 2,227 $ 2,678 $ 5,035 $ 5,310
======= ======= ======= =======
Basic and diluted earnings per share $ 0.28 $ 0.34 $ 0.63 $ 0.67
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 7,974 7,963 7,969 7,963
======= ======= ======= =======
Diluted 7,984 7,963 7,977 7,963
======= ======= ======= =======
Cash dividends per common share $ .135 $ 0.13 $ 0.27 $ 0.26
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
<TABLE>
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------
1998 1997
--------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income 5,035 5,310
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization 2,482 2,127
Provision for possible loan losses 625 615
Gain on sale of assets (2,161) (1,045)
Increase in interest receivable (171) (696)
Decrease (increase) in other assets (952) 408
Increase in interest payable 294 779
Decrease in other liabilities (4,972) (1,671)
FHLB stock dividend (566) (505)
--------- --------
Net cash provided by (used in) operating activities (386) 5,322
--------- --------
Cash flows from investing activities:
Increase in federal funds sold and short term investments (4,434) (1,370)
Proceeds from maturities of securities held-to-maturity 6,489 3,699
Proceeds from maturities and sales of securities available-for-sale 37,601 47,188
Purchase of securities held-to-maturity -- (14)
Purchase of securities available-for-sale (102,138) (45,052)
Increase in loans, net (51,631) (17,103)
Purchase of loans (18,837) (52,132)
Purchases of equipment and other assets (2,448) (1,026)
Proceeds from sale of loans 68,076 22,460
Purchase of bank owned life insurance (15,000) --
Decrease in payable related to acquisition of County Savings Bank -- (1,500)
--------- --------
Net cash used in investing activities (82,322) (44,850)
--------- --------
Cash flows from financing activities:
Decrease in federal funds purchased (12,300) (11,650)
Increase in Federal Home Loan Bank advances and other borrowings 80,252 30,445
Net increase in deposits 25,634 22,933
Cash dividends paid (2,156) (2,070)
Reissuance (purchase) of treasury stock, net 60 (10)
--------- --------
Net cash provided by financing activities 91,490 39,648
--------- --------
Net increase in cash and due from banks 8,782 120
Cash and due from banks, beginning of period 21,650 18,856
--------- --------
Cash and due from banks, end of period $ 30,432 $ 18,976
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 6
BANCFIRST OHIO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (UNAUDITED)
The consolidated financial statements for interim periods are unaudited;
however, in the opinion of management of BancFirst Ohio Corp. ("Company"), the
accompanying consolidated financial statements contain all material adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position and results of operations and cash flows for the periods
presented. The unaudited financial statements are presented in accordance with
the requirements of Form 10-Q and do not include all disclosures normally
required by generally accepted accounting principles. Reference should be made
to the Company's consolidated financial statements and notes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1997
for additional disclosures, including a summary of the Company's accounting
policies. The results of operations for the three month and six month periods
ended June 30, 1998 are not necessarily indicative of the results to be expected
for the full year. Certain reclassifications have been made to the 1997
consolidated financial statements to conform to the 1998 presentation.
1) BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, The First National Bank of
Zanesville (FNB). On May 16, 1998, County Savings Bank (County) and the
Bellbrook Community Bank were merged under the national bank charter of
FNB. All significant intercompany transactions and accounts have been
eliminated in consolidation.
2) NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
This 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,
was $2,040 and $3,073 for the three months ended June 30,1998 and 1997,
respectively and $4,636 and $4,640 for the six months ended June 30,
1998 and 1997, respectively.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and establishes accounting and
reporting standards for derivative instruments and for hedging
activities. The provisions of this statement will primarily impact the
accounting for the Company's interest rate swap transactions which had
a total notional amount of $51.9 million at June 30, 1998. The Company
has not determined what impact this standard will have on its financial
statements.
3) COMMON STOCK
On April 7, 1998, the Company's Board of Directors declared a
two-for-one stock split in the form of a 100% stock dividend which was
paid May 19, 1998 to shareholders of record as of April 28, 1998. All
per share information has been retroactively adjusted for the effect of
this stock split.
On April 23, 1998, the Company's shareholders approved the 1997 Omnibus
Stock Incentive Plan which provides for the granting of stock options
and other stock related awards to key employees.
4) COMPUTATION OF EARNINGS PER SHARE
The computation of earnings per share is as follows. All share amounts
are adjusted to give retroactive effect to the stock split discussed in
Note 3 above:
6
<PAGE> 7
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Actual weighted average common 7,974 7,963 7,969 7,963
shares outstanding
Dilutive common stock equivalents:
Stock options 6 -- 4 --
Bonus shares - Company match 4 -- 4 --
------ ------ ------ ------
Weighted average common shares outstanding
adjusted for dilutive common stock equivalents 7,984 7,963 7,977 7,963
------ ------ ------ ------
Net Income $2,227 $2,678 $5,035 $5,310
------ ------ ------ ------
Basic earnings per share $ 0.28 $ 0.34 $ 0.63 $ 0.67
------ ------ ------ ------
Diluted earnings per share $ 0.28 $ 0.34 $ 0.63 $ 0.67
------ ------ ------ ------
</TABLE>
7
<PAGE> 8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BANCFIRST OHIO CORP.
For a comprehensive understanding of the Company's financial condition and
performance, this discussion should be considered in conjunction with the
Company's Consolidated Financial Statements, accompanying notes, and other
information contained elsewhere herein.
This discussion contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involves risks and uncertainties. Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. Factors that could cause
actual results to differ from the results discussed in the forward-looking
statements include, but are not limited to: economic conditions (both generally
and more specifically in the markets in which the Company and its Bank
Subsidiary operate); competition for the Company's customers from other
providers of financial services; government legislation and regulation (which
changes from time to time and over which the Company has no control); changes in
interest rates; prepayments of loans and securities; material unforeseen changes
in the liquidity, results of operations, or other financial position of the
Company's customers; delays in, customers' reactions to, and other unforeseen
complications with respect to the merger of the Company's banking subsidiaries;
and other risks detailed in the Company's filings with the Securities and
Exchange Commission, all of which are difficult to predict and many of which are
beyond the control of the Company.
8
<PAGE> 9
<TABLE>
BANCFIRST OHIO CORP.
SELECTED FINANCIAL DATA:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
AT OR FOR THE
AT OR FOR THE THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
1998 1997 1998 1997
-------------------------- ---------------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest income $ 21,429 $ 21,353 $42,664 $42,026
Interest expense 12,405 12,015 24,505 23,573
---------- ---------- ------- -------
Net interest income 9,024 9,338 18,159 18,453
Provision for possible loan losses 318 317 625 615
Non-interest income 2,723 1,816 5,057 3,350
Non-interest expense 8,249 6,806 15,243 13,186
---------- ---------- ------- -------
Income before income taxes 3,180 4,031 7,348 8,002
Provision for Federal income taxes 953 1,353 2,313 2,692
---------- ---------- ------- -------
Net income $ 2,227 $ 2,678 $ 5,035 $ 5,310
========== ========== ======= =======
PER SHARE DATA(1):
Basic earnings per share $ 0.28 $ 0.34 $ 0.63 $ 0.67
Diluted earnings per share 0.28 0.34 0.63 0.67
Dividends 0.14 0.13 0.27 0.26
Book value 11.03 10.11 N/A N/A
Tangible book value 9.52 8.43 N/A N/A
BALANCE SHEET DATA:
Total assets $1,173,066 $1,098,666 N/A N/A
Loans 764,564 769,356 N/A N/A
Allowance for possible loan losses 6,662 6,937 N/A N/A
Securities 329,341 278,038 N/A N/A
Deposits 772,681 755,472 N/A N/A
Borrowings 307,401 255,404 N/A N/A
Shareholders' equity 87,873 80,454 N/A N/A
PERFORMANCE RATIOS (2):
Return on average assets 0.81% 0.98% 0.92% 0.99%
Return on average equity 10.17 13.43 11.67 13.49
Tangible return on average tangible equity 13.40 18.25 15.24 18.44
Net interest margin 3.54 3.65 3.59 3.66
Interest rate spread 3.12 3.21 3.16 3.21
Non-interest income to average assets 0.99 0.67 0.93 0.62
Non-interest expense to average assets (2) 2.43 2.35 2.44 2.30
Efficiency ratio (3) 55.93 56.80 56.52 56.07
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.37% 0.41% N/A N/A
Non-performing assets to total assets 0.28 0.35 N/A N/A
Allowance for possible loan losses to total loans 0.87 0.90 N/A N/A
Allowance for possible loan losses to non-performing loans 237.6 218.9 N/A N/A
Net charge-offs to average loans (4) 0.20 0.04 0.15% 0.08%
CAPITAL RATIOS:
Shareholders' equity to total assets 7.49% 7.32% N/A N/A
Tier 1 capital to average total assets 6.88 6.28 N/A N/A
Tier 1 capital to risk-weighted assets 10.44 10.10 N/A N/A
</TABLE>
(1) Adjusted to give retroactive effect to the two-for-one stock split paid
May 19, 1998 to shareholders of record as of April 28, 1998.
(2) Excludes amortization expense and non-recurring expenses totaling
$1,222 in the three month and six month periods ended June 30, 1998.
(3) The efficiency ratio is equal to non-interest expense (excluding
amortization and non-recurring expenses) divided by net interest income
on a fully tax equivalent basis plus non-interest income excluding
gains on sales of securities.
(4) Ratios are stated on an annualized basis.
9
<PAGE> 10
OVERVIEW
The reported results of the Company primarily reflect the operations of
the Company's bank subsidiary. The Company's results of operations are dependent
on a variety of factors, including the general interest rate environment,
competitive conditions in the industry, governmental policies and regulations
and conditions in the markets for financial assets. Like most financial
institutions, the primary contributor to the Company's income is net interest
income, which is defined as the difference between the interest the Company
earns on interest-earning assets, such as loans and securities, and the interest
the Company pays on interest-bearing liabilities, such as deposits and
borrowings. The Company's operations are also affected by non-interest income,
such as checking account and trust fees and gains from sales of loans. The
Company's principal operating expenses, aside from interest expense, consist of
salaries and employee benefits, occupancy costs, federal deposit insurance
assessments, and other general and administrative expenses.
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.
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
............1998........... ...........1997........... ............1998........... ...........1997...........
(Dollars in Thousands) (Dollars in Thousands)
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate(1) Balance Expense Rate(1) Balance Expense Rate(1) Balance Expense Rate(1)
---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Taxable $ 249,787 $ 4,347 6.98% $ 271,498 $ 4,739 7.00% $ 247,499 $ 8,778 7.15% $ 273,833 $ 9,505 7.00%
Tax-exempt 25,800 496 7.71 25,435 511 8.06 24,540 959 7.88 25,361 1,013 8.05
---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total securities 275,587 4,843 7.05 296,933 5,250 7.09 272,039 9,737 7.22 299,194 10,518 7.09
Loans (2):
Commercial 311,700 7,395 9.52 317,367 7,559 9.55 312,034 14,530 9.39 312,924 14,840 9.56
Real estate 354,795 7,011 7.93 359,836 7,020 7.83 363,018 14,356 7.97 350,355 13,549 7.80
Consumer 96,665 2,301 9.55 72,789 1,714 9.44 90,962 4,332 9.60 74,535 3,460 9.36
---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total loans 763,160 16,707 8.78 749,992 16,293 8.71 766,014 33,218 8.74 737,814 31,849 8.70
Federal funds
sold 5,070 63 4.98 1,545 19 4.93 2,830 71 5.06 2,566 60 4.72
---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total earning
assets (3) 1,043,817 21,613 8.31% 1,048,470 21,562 8.25% 1,040,883 43,026 8.34% 1,039,574 42,427 8.23%
---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Non-interest-
earning assets 58,749 46,334 58,132 45,294
---------- ---------- ---------- ----------
Total assets $1,102,566 $1,094,804 $1,099,015 $1,084,868
========== ========== ========== ==========
Interest-bearing
deposits:
Demand and
savings
deposits $ 209,434 $ 1,538 2.95% $ 203,141 $ 1,367 2.70% $ 209,553 $ 3,053 2.94% $ 203,767 $ 2,700 2.67%
Time deposits 491,465 7,065 5.77 496,973 6,886 5.56 492,755 14,031 5.74 489,917 13,487 5.55
---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total deposits 700,899 8,603 4.92 700,114 8,253 4.73 702,308 17,084 4.91 693,684 16,187 4.71
Borrowings 257,336 3,801 5.92 255,806 3,762 5.90 251,023 7,422 5.96 253,470 7,387 5.88
---------- ------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-
bearing
liabilities 958,235 12,404 5.19% 955,920 12,015 5.04% 953,331 24,506 5.18% 947,154 23,574 5.02%
------- ---- ------- ---- ------- ---- ------- ----
Non-interest-
bearing deposits 53,868 49,193 51,550 48,293
---------- ---------- ---------- ----------
Subtotal 1,012,103 1,005,113 1,004,881 995,447
Accrued expenses
and other
liabilities 2,615 9,681 7,154 10,052
---------- ---------- ---------- ----------
Total
liabilities 1,014,718 1,014,794 1,012,035 1,005,499
Shareholders'
equity 87,847 80,010 86,980 79,369
---------- ---------- ---------- ----------
Total liabilities
and shareholders'
equity $1,102,566 $1,094,804 $1,099,015 $1,084,868
========== ========== ========== ==========
Net interest
income and
interest rate
spread (4) $ 9,209 3.12% $ 9,547 3.21% $18,520 3.16% $18,853 3.21%
======= ==== ======= ==== ======= ==== ======= ====
Net interest
margin (5) 3.54% 3.65% 3.59% 3.66%
==== ==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities 108.9% 109.7% 109.2% 109.8%
</TABLE>
(1) Calculated on an annualized basis.
(2) Non-accrual loans are included in the average loan balances.
(3) Interest income is computed on a fully tax equivalent (FTE) basis,
using a tax rate of 35% in 1998 and 34% in 1997.
(4) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percentage
of average interest earning assets.
11
<PAGE> 12
RATE AND VOLUME VARIANCES
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table
discloses the dollar changes in the Company's net interest income attributable
to changes in levels of interest-earning assets or interest-bearing liabilities
(volume), changes in average yields on interest-earning assets and average rates
on interest-bearing liabilities (rate) and the combined volume and rate effects
(total). For the purposes of this table, the change in interest due to both rate
and volume has been allocated to volume and rate change in proportion to the
relationship of the dollar amounts of the change in each. In general, this table
provides an analysis of the effect on income of balance sheet changes which
occurred during the periods and the changes in interest rate levels.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 VS. 1997 1998 VS. 1997
INCREASE (DECREASE) INCREASE (DECREASE)
------------------- -------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities:
Taxable $(379) $ (13) $(392) $ (914) $ 187 $ (727)
Non-taxable 7 (22) (15) (33) (21) (54)
----- ----- ----- ------ ----- ------
Total securities (372) (35) (407) (947) 166 (781)
----- ----- ----- ------ ----- ------
Loans:
Commercial (135) (29) (164) (42) (268) (310)
Real estate (98) 89 (9) 490 317 807
Consumer 562 25 587 763 109 872
----- ----- ----- ------ ----- ------
Total loans 329 85 414 1,211 158 1,369
----- ----- ----- ------ ----- ------
Fed funds sold 43 1 44 6 5 11
----- ----- ----- ------ ----- ------
Total interest-
earning assets (1) 1 50 51 270 329 599
Interest-bearing liabilities:
Deposits:
Demand and savings deposits 42 129 171 77 276 353
Time deposits (76) 255 179 78 466 544
----- ----- ----- ------ ----- ------
Total interest-bearing
deposits (34) 384 350 155 742 897
Borrowings 22 17 39 (71) 106 35
----- ----- ----- ------ ----- ------
Total interest-bearing
liabilities (11) 400 389 84 848 932
----- ----- ----- ------ ----- ------
Net interest income $ 12 $(350) $(338) $ 186 $(519) $ (333)
===== ===== ===== ====== ===== ======
</TABLE>
(1) Computed on a fully tax equivalent basis, assuming a tax rate of 35%.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
1997
Net Income. Net income for the three months ended June 30, 1998
decreased 16.8% to $2.2 million, compared to net income of $2.7 million for the
three months ended June 30, 1997. Basic and diluted earnings per share in the
second quarter of 1998 equaled $0.28, compared to $0.34 for the same period in
1997. The results for the 1998 period include the after tax financial effects of
merger, integration and restructuring charges totaling $794,000, or $.10 per
share. Net interest income decreased 3.36% while non-interest income increased
49.9% in the three months ended June 30, 1998, as compared to the same period in
1997, and non-interest expense increased 21.2%. Excluding non-recurring charges
of $1.2 million, non-interest expense increased 3.2%. The provision for possible
loan losses was comparable to
12
<PAGE> 13
the prior year period. The Company's net interest margin decreased to 3.54% for
the second quarter of 1998, compared to 3.65% for the same period in 1997,
reflecting the effects of the Company's purchase in 1998 of bank-owned life
insurance as well as margin compression that has occurred as a result of the
lower interest rate environment. Increases in non-interest income resulted
primarily from higher levels of gains on sales of loans and fee income.
Non-interest expense increased primarily due to costs associated with additional
loan production activities. The Company's return on average assets and return on
average equity were .81% and 10.17%, respectively, in the second quarter of
1998, compared to .98% and 13.43%, respectively, in the second quarter of 1997.
Adjusted for the effects of non-recurring charges in 1998, the Company's returns
on average assets and return on average equity were 1.10% and 13.79%,
respectively.
Interest Income. Total interest income increased .36% to $21.4 million
for the three months ended June 30, 1998, compared to $21.4 million for the
second quarter of 1997. This increase resulted from a 6 basis point increase in
the average yield on earning assets offset in part by a $4.7 million decrease in
average earning assets. The increase in the average balance of loans of $13.2
million, or 1.8% was consistent with the Company's emphasis on increasing the
loan portfolio.
The weighted average yield on interest-earning assets increased
slightly to 8.31% during the three months ended June 30, 1998, compared to 8.25%
during the same three month period in 1997. The Company's yield on average loans
increased from 8.71% during the three months ended June 30, 1997 to 8.78% during
the three months ended June 30, 1998 primarily as a result of a change in mix of
the loan portfolio. The average balance of lower yielding residential loans
decreased $5.0 million while higher yielding commercial and consumer loans
increased $38.2 million. Yields on the investment portfolio decreased from 7.09%
during the second quarter of 1997 to 7.05% during the second quarter of 1998,
primarily as a result of repayments of higher yielding securities. Further
prepayments of loans and securities in the future could have an adverse affect
on the Company's average yield on earning assets as well as the Company's net
interest margin as a result of the prepayment of higher yielding assets that are
replaced with lower yielding assets originated in the current interest rate
environment.
Interest Expense. Total interest expense increased 3.2% to $12.4
million for the three months ended June 30, 1998, compared to $12.0 million for
the three months ended June 30, 1997. Interest expense increased due to a higher
average balance of interest-bearing liabilities outstanding and due to a higher
cost of funds during the first quarter of 1998, as compared to the same period
in 1997. The average balance of interest-bearing deposit accounts increased
$785,000, or .11%, from the second quarter in 1997 to the second quarter in
1998. Average interest-bearing liabilities increased .2%, from $955.9 million to
$958.2 million.
The Company's cost of funds increased to 5.19% in the three months
ended June 30, 1998 compared to 5.04% in the same period of 1997. The cost of
funds was affected by higher borrowing levels relative to total interest-bearing
liabilities as well as the continued shift by customers out of traditional
savings accounts into higher yielding certificates of deposit or money market
accounts. The Company's cost of funds was also affected by costs associated with
interest rate swap transactions that have been utilized to extend the repricing
terms of a portion of the Company's borrowings that reprice on a short term
basis. At June 30, 1998 the Company had interest rate swap transactions
outstanding with a total notional amount of $51.9 million compared to $27.5
million at June 30, 1997. All swap contracts require the Company to pay a fixed
rate of interest in return for receiving a variable rate of interest.
Provision for Possible Loan Losses. The provision for possible loan
losses was $318,000 for the three months ended June 30, 1998, compared to
$317,000 in the second quarter of 1997. Total non-performing loans decreased to
$2.8 million, or .37% of total loans at June 30, 1998, from $3.2 million, or
.41% of total loans at June 30, 1997. The allowance for possible loan losses at
June 30, 1998 was $6.7 million, or .87% of total loans and 237.6% of
non-performing loans compared to $6.9 million, or .90% of total loans and 218.9%
of non-performing loans at June 30, 1997. Management's estimate of the adequacy
of its allowance for possible loan losses is based upon its continuing review of
prevailing national and local economic conditions, changes in the size and
composition of the portfolio and individual problem credits. Growth of the loan
portfolio, loss experience, economic conditions, delinquency levels, 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:
13
<PAGE> 14
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Trust and custodian fees $ 566 $ 432 $1,019 $ 854
Customer service fees 511 489 994 968
Investment securities gains 78 24 100
Gains on sales of loans 1,023 454 2,137 945
Other 623 363 883 483
------ ------ ------ ------
TOTAL $2,723 $1,816 $5,057 $3,350
====== ====== ====== ======
Total non-interest income was $2.7 million for the three months ended
June 30,1998, compared to $1.8 million for the three months ended June 30, 1997.
Trust and custodian fees increased 31.0% to $566,000 in the second
quarter of 1998 from $432,000 in the second quarter of 1997. Growth in trust
income continued to result primarily from the expansion of the customer base as
well as higher asset values.
Customer service fees, representing service charges on deposits and
fees for other banking services, increased 4.5% in the second quarter of 1998 to
$511,000 from $489,000 in the second quarter of 1997.
During the second quarter of 1997, the Company sold approximately $11.2
million of investment securities, realizing gains of $78,000. Proceeds from
these sales were used to fund increases in the loan portfolio. The Company had
no sales of securities during the second quarter of 1998.
Gains on sales of loans totaled $1.0 million for the three months ended
June 30, 1998 compared to $454,000 for the three months ended June 30, 1997.
During the second quarter of 1998, the Company sold $6.9 million of the
guaranteed portion of its SBA and other government guarantee loan originations
in the secondary market compared to $5.5 million during the second quarter of
1997, realizing gains of $655,000 in 1998 compared to gains of $381,000 in 1997.
Also, the Company recorded gains of $368,000 from the sales of residential loans
during the second quarter of 1998 compared to $73,000 in 1997. Loan origination
and sale activity during 1998 continued to benefit from the favorable interest
rate environment.
The Company intends to continue to place emphasis on its small business
lending activities, including the evaluation of expansion into new markets. The
change in the political climate in Washington, D.C. to one of less government
combined with growing budget constraints, may subject many existing government
programs to much scrutiny and possible cutbacks. It is not currently known
whether the SBA program will be impacted. Management believes that any such
cutbacks could negatively affect the Company's activities in the SBA lending
programs as well as the planned expansion of such activities.
Other income increased $260,000 to $623,000 in the second quarter of
1998 compared to $363,000 in the second quarter of 1997 primarily as a result of
earnings on bank-owned life insurance which totaled $220,000 in 1998 compared to
no such amounts in 1997.
Non-Interest Expense. The following table sets forth the Company's
non-interest expense for the periods indicated:
14
<PAGE> 15
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits $4,239 $3,695 $ 8,073 $ 7,276
Occupancy expense 384 418 769 820
Furniture, fixtures and equipment 205 191 412 385
Data processing 236 269 577 533
Taxes other than income taxes 235 253 452 524
Federal deposit insurance 75 79 146 112
Amortization of goodwill and other intangibles 354 396 708 792
Other 2,521 1,505 4,106 2,744
------ ------ ------- -------
TOTAL $8,249 $6,806 $15,243 $13,186
====== ====== ======= =======
</TABLE>
Total non-interest expense increased $1.4 million to $8.2 million for
the three months ended June 30, 1998, compared to $6.8 million for the three
months ended June 30, 1997. Excluding non-recurring merger, integration and
restructuring charges of $1.2 million, non-interest expenses increased $221,000,
or 3.2%, during the second quarter of 1998 compared to the same period in 1997.
This increase generally resulted from expansion of the Company's loan production
activities over the past year.
Salaries and employee benefits accounted for approximately 51.4% of
total non-interest expense in the three months ended June 30, 1998 compared to
54.3% in the second quarter of 1997. The average full time equivalent staff was
386 in 1998 compared to 364 in 1997. Excluding non-recurring salary and employee
benefits expense of $378,000, such expenses increased $166,000, or 4.5%.
Net occupancy expense decreased 8.1% to $384,000 in the second quarter
of 1998 from $418,000 in the second quarter of 1997. This decrease resulted from
lower rent and depreciation expenses.
Furniture, fixtures and equipment expense increased $14,000, or 7.3% in
the second quarter of 1998. The increase in furniture and equipment expense was
due principally to higher depreciation costs.
Data processing expense decreased $33,000, or 12.3%, in the second
quarter of 1998. Lower costs in 1998 resulted from the conversion of County's
data processing during the first quarter of 1998.
Taxes other than income taxes decreased $18,000, or 7.1%, in the second
quarter of 1998 compared to the second quarter of 1997. This decrease resulted
from the recognition of credits for overpayment of taxes in prior years.
Federal deposit insurance expense decreased $4,000 to $75,000 in 1998
from $79,000 in the second quarter of 1997.
Amortization of goodwill and other intangible assets resulting from the
application of purchase accounting in connection with the County acquisition
totaled $348,000 during the second quarter of 1998 compared to $389,000 in the
second quarter of 1997.
Excluding $844,000 of non-recurring merger, integration and
restructuring charges, other non-interest expenses were $1.7 million during the
second quarter of 1998 compared to $1.5 million in the second quarter of 1997,
resulting primarily from expansion of 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 divided by the net revenue stream, which is the sum of net interest
income on a tax-equivalent basis and non-interest income excluding net
investment securities gains or losses. The Company's efficiency ratio was 55.9%
for the second quarter of 1998, compared to 56.8% for the comparable period in
1997. Controlling costs and improving productivity, as measured by the
efficiency ratio, is considered by management a primary factor in enhancing
performance.
15
<PAGE> 16
Provision for Income Taxes. The Company's provision for Federal income
taxes was $953,000, or 30.0% of pretax income, for the three months ended June
30, 1998 compared to $1.4 million, or 33.6% of pretax income, for the three
months ended June 30, 1997. The effective tax rate for each period differed from
the federal statutory rate principally as a result of tax-exempt income from
obligations of states and political subdivisions and non-taxable loans, earnings
on bank-owned life insurance, and the non-deductibility, for tax purposes, of
goodwill and core deposit intangible amortization expense.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997.
Net Income. Net income for the six months ended June 30, 1998 decreased
5.2% to $5.0 million, or $.63 per basic and diluted share, compared to net
income of $5.3 million, or $.67 per share, for the six months ended June 30,
1997. Net interest income decreased 1.6% and non-interest income increased 51.0%
in the six months ended June 30, 1998, as compared to the same period in 1997
while non-interest expense increased 15.6%. Excluding the effects of
non-recurring charges, non-interest expense increased 6.3%. The provision for
possible loan losses was basically unchanged from the comparative period. The
Company's net interest margin decreased to 3.59% for the six months ended June
30, compared to 3.66% for the same period in 1997, primarily reflecting the
effect of the Company's purchase of bank-owned life insurance in January 1998.
Increases in non-interest income resulting from higher levels of fee income and
gains on sales of loans were offset by lower net interest income and higher
expense levels. Excluding the effects of non-recurring charges, non-interest
expense increased primarily due to costs associated with additional loan
production activities. The Company's return on average assets and return on
average equity were .92% and 11.67%, respectively, for the six months ended June
30, 1998, compared to .99% and 13.49%, respectively, for the six months ended
June 30, 1997. Adjusted for the effects of non-recurring charges in 1998, the
Company's return on average assets and return on average equity were 1.07% and
13.51%, respectively.
Interest Income. Total interest income increased 1.5% to $42.7 million
for the six months ended June 30, 1998, compared to $42.0 million for the
comparable period in 1997. This increase resulted primarily from an 11 basis
point increase in the average yield on interest-earning assets. Average earning
assets totaled $1.04 billion for the six months ended June 30, 1998 and 1997
while the average balance of loans increased $28.2 million, or 3.8%. The
increase in loan balances was consistent with the Company's emphasis on loan
growth to increase overall yields on earning assets.
The weighted average yield on interest-earning assets increased
slightly to 8.34% during the six months ended June 30, 1998, compared to 8.23%
during the same six month period in 1997. The Company's yield on average loans
increased from 8.70% during the six months ended June 30, 1997 to 8.74% during
the six months ended June 30, 1998. The average yield in both periods benefited
from approximately $182,000 in 1998 and $155,000 in 1997 of additional accretion
of discounts on SBA loans as a result of prepayments. Yields on the investment
portfolio increased from 7.09% during 1997 to 7.22% during 1998. Investment
yields during 1998 have also benefited from additional accretion of discounts on
securities resulting from prepayments.
Interest Expense. Total interest expense increased 4.0% to $24.5
million for the six months ended June 30, 1998, compared to $23.6 million for
the six months ended June 30, 1997. Interest expense increased due to a higher
average balance of interest-bearing liabilities outstanding and due to a higher
cost of funds during the first six months of 1998, as compared to the same
period in 1997. The average balance of interest-bearing deposit accounts
increased $8.6 million, or 1.2%, during the six months ended June 30, 1998
compared to 1997. Average interest-bearing liabilities increased .65%, from
$947.2 million to $953.3 million.
The Company's cost of funds increased to 5.18% for the six months ended
June 30, 1998 compared to 5.02% for the same period of 1997, primarily due to
the continued shift by customers out of traditional savings accounts into higher
yielding certificates of deposit and money market accounts. The Company's cost
of funds was also affected by interest rate swap transactions, previously
discussed.
Provision for Possible Loan Losses. The provision for possible loan
losses was $625,000 for the six months ended June 30, 1998, compared to $615,000
for the six months ended June 30, 1997 and was considered sufficient to maintain
the Company's allowance for possible loan losses at an adequate level.
16
<PAGE> 17
Non-Interest Income. Total non-interest income was $5.1 million for the
six months ended June 30, 1998, compared to $3.4 million for the six months
ended June 30, 1997. This increase was primarily attributed to increases in
gains on sales of loans. During the six months ended June 30, 1998, the Company
sold approximately $13.5 million of the guaranteed portion of its SBA and other
government guaranteed loan originations in the secondary market compared to
$11.7 million in the first six months of 1997, realizing gains of $1.3 million
in 1998, compared to gains of $854,000 in 1997. In addition, the Company sold
$52.4 million of residential real estate loans realizing gains of $867,000 in
the first six months of 1998, compared to $91,000 of gains on sales of loans
totaling $9.8 million in 1997.
Customer service fees, representing service charges on deposits and
fees from other banking services, increased 2.7% for the six months ended June
30, 1998 to $994,000, from $968,000 for the comparable period of 1997. Trust
income increased 19.3% to $1.0 million in 1998, from $854,000 in 1997. Growth in
trust and custodian fees resulted primarily from the expansion of the customer
base and higher asset values. The $400,000 increase in other income to $883,000
in 1998 compared to $483,000 in 1997 resulted primarily from earnings on
bank-owned life insurance which totaled $360,000 with no comparable amount in
1997. Also, net servicing fee income on SBA loans increased approximately
$120,000 partially as a result of a reduction in amortization of capitalized
servicing assets due to prepayments (see also Interest Income above regarding
additional accretion of related discounts). At June 30, 1998, unamortized
capitalized servicing assets related to SBA loans totaled $2.2 million while
discounts associated with the retained portion of SBA loans totaled $2.0
million.
Non-Interest Expense. Total non-interest expense increased $2.1 million
to $15.2 million for the six months ended June 30, 1998, compared to $13.2
million for the six months ended June 30, 1997. Excluding non-recurring expenses
of $1.2 million, non-interest expenses increased $835,000, or 6.3%, during the
first six months of 1998 compared to the same period in 1997. This increase
generally resulted from expansion of the Company's operating and loan production
activities over the past year. For the six months ended June 30, 1998, the
Company's efficiency ratio was 56.5%, compared to 56.1% for the six months ended
June 30, 1997.
Salaries and employee benefits accounted for approximately 53.0% of
total non-interest expense for the six months ended June 30, 1998 compared to
55.2% in 1997. The average full time equivalent staff was 382 in 1998 compared
to 361 in 1997. Excluding non-recurring salary and employee benefits expense of
$378,000 in 1998, such expenses increased $419,000, or 5.8% primarily as a
result of staff additions associated with increased loan production activities.
Net occupancy expense decreased 6.2% to $769,000 for the first six
months of 1998 from $820,000 for the first six months of 1997. This decrease
resulted from lower rent and depreciation expenses.
Furniture, fixtures and equipment expense increased $27,000, or 7.0%
for the six months ended June 30, 1998. The increase in furniture and equipment
expense was due principally to higher depreciation costs.
Data processing expense increased $44,000, or 8.3%, for the six months
ended June 30, of 1998. Higher costs in 1998 resulted from continued enhancement
of technology throughout the Company. Costs associated with the conversion of
County's data processing systems during the first quarter of 1998 also
contributed to the higher expense level.
Taxes other than income taxes decreased $72,000, or 13.7%, for the
first six months 1998 compared to the same period in 1997. This decrease
resulted from credits for overpayment of taxes in prior years.
Federal deposit insurance expense increased $34,000 to $146,000 in 1998
from $112,000 in 1997 primarily as a result of the expense in 1997 being reduced
$44,000 for a credit received as a result of changes to the Savings Association
Insurance Fund assessment rates for the fourth quarter of 1996.
Amortization of goodwill and other intangible assets resulting from the
application of purchase accounting in connection with the County acquisition
totaled $696,000 during the first six months of 1998 compared to $778,000 in
1997.
17
<PAGE> 18
Excluding $844,000 of non-recurring merger, integration and
restructuring charges, other non-interest expenses increased to $3.3 million
during the six months ended June 30, 1998 from $2.7 million during the same
period in 1997, primarily as a result of expanded activities.
Provision for Income Taxes. The Company's provision for Federal income
taxes was $2.3 million, or 31.5% of pretax income, for the six months ended June
30, 1998 compared to $2.7 million, or 33.6% of pretax income, for the six months
ended June 30, 1997. The effective tax rate for each period differed from the
federal statutory rate principally as a result of tax-exempt income from
obligations of states and political subdivisions and non-taxable loans, earnings
on bank-owned life insurance, and the non-deductibility, for tax purposes, of
goodwill and core deposit intangible amortization expense.
ASSET QUALITY
Non-performing Assets. To maintain the level of credit risk of the loan
portfolio at an appropriate level, management sets underwriting standards and
internal lending limits and provides for proper diversification of the portfolio
by placing constraints on the concentration of credits within the portfolio. In
monitoring the level of credit risk within the loan portfolio, management
utilizes a formal loan review process to monitor, review, and consider relevant
factors in evaluating specific credits in determining the adequacy of the
allowance for possible loan losses. The Company's banking subsidiary formally
documents its evaluation of the adequacy of the allowance for possible loan
losses on a quarterly basis and the evaluation is reviewed and discussed with
its board of directors.
Failure to receive principal and interest payments when due on any loan
results in efforts to restore such loan to current status. Loans are classified
as non-accrual when, in the opinion of management, full collection of principal
and accrued interest is in doubt. Continued unsuccessful collection efforts
generally lead to initiation of foreclosure or other legal proceedings. Property
acquired by the Company as a result of foreclosure or by deed in lieu of
foreclosure is classified as "other real estate owned" until such time as it is
sold or otherwise disposed of. The Company owned $532,000 of such property at
June 30, 1998 and $677,000 at June 30, 1997.
Non-performing loans totaled $2.8 million, or 0.37% of total loans, at
June 30, 1998, compared to $3.2 million, or 0.41% of total loans, at June 30,
1997. Non-performing assets totaled $3.3 million, or 0.28% of total assets at
June 30, 1998, compared to $3.8 million, or .35% of total assets at June 30,
1997. Management of the Company is not aware of any material amounts of loans
outstanding, not disclosed in the table below, for which there is significant
uncertainty as to the ability of the borrower to comply with present payment
terms. The following is an analysis of the composition of non-performing assets:
JUNE 30,
1998 1997
----------------------
(DOLLARS IN THOUSANDS)
Non-accrual loans $ 242 $1,410
Accruing loans 90 days or more past due 2,562 1,759
------ ------
Total non-performing loans 2,804 3,169
Other real estate owned 532 677
------ ------
Total non-performing assets $3,336 $3,846
====== ======
Non-performing loans to total loans 0.37% 0.41%
Non-performing assets to total assets 0.28% 0.35%
Allowance for Possible Loan Losses. The Company records a provision
necessary to maintain the allowance for possible loan losses at a level
sufficient to provide for potential future credit losses. The provision is
charged against earnings when it is established. An allowance for possible loan
losses is established based on management's best judgment, which involves a
continuing review of prevailing national and local economic conditions, changes
in the size and composition of the portfolio and review of individual problem
credits. Growth of the loan portfolio, loss experience, economic conditions,
delinquency levels, credit mix, and selected credits are factors that affect
judgments concerning the adequacy of the allowance. Actual losses on loans are
charged against the allowance.
18
<PAGE> 19
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>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 6,719 $ 6,691 $ 6,617 $ 6,599
Provision charged to expense 318 317 625 615
Loans charged-off (517) (251) (901) (582)
Recoveries of loans previously
charged off 142 180 321 305
-------- -------- -------- --------
Balance at end of period $ 6,662 $ 6,937 $ 6,662 $ 6,937
======== ======== ======== ========
Loans outstanding at end of period $764,564 $769,356 N/A N/A
Average loans outstanding $763,160 $749,992 $766,014 $737,814
Allowance as a percentage of loans outstanding 0.87% 0.90% N/A N/A
Net charge-offs to average loans (annualized) 0.20% 0.04% 0.15% 0.08%
Allowance for possible loan losses to
nonperforming loans 237.6 218.9 N/A N/A
</TABLE>
The allowance for possible loan losses totaled $6.7 million at June 30,
1998, representing .87% of total loans, compared to $6.9 million at June 30,
1997, or .90% of total loans. Charge-offs represent the amount of loans actually
removed as earning assets from the balance sheet due to uncollectibility.
Amounts recovered on previously charged-off assets are netted against
charge-offs, resulting in net charge-offs for the period. Net loan charge-offs
for the three months and six months ended June 30, 1998 were $375,000 and
$580,000, respectively, compared to net charge-offs of $71,000 and $277,000,
respectively, for the same periods in 1997. 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 237.6% at June 30, 1998, compared
to 218.9% at June 30, 1997. Although used as a general indicator, the coverage
ratio is not a primary factor in the determination of the adequacy of the
allowance by management. Total non-performing loans as a percentage of total
loans remained a relatively low 0.37% of total loans at June 30, 1998.
COMPARISON OF JUNE 30, 1998 AND DECEMBER 31, 1997 FINANCIAL CONDITION
Total assets amounted to $1.17 billion at June 30, 1998, compared to
$1.10 billion at December 31, 1997, an increase of $91.4 million, or 8.5%.
Total investment securities increased by $57.8 million to $329.3
million as a result of the purchase of securities to achieve asset growth
supported by the Company's increasing capital levels. The Company's general
investment strategy is to manage the 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 June 30, 1998, 91.2% of the total investment portfolio
was classified as available-for-sale, while those securities which the Company
intends to hold to maturity represented the remaining 8.8%. This compares to
87.0% and 13.0% classified as available-for-sale and held to maturity,
respectively, at December 31, 1997.
19
<PAGE> 20
Total loans increased $3.5 million to $764.6 million at June 30, 1998.
Management continues to emphasize increasing earning assets and earning asset
yields with the loan portfolio. Growth in the loan portfolio during 1998 has
been slowed as a result of the early prepayment of loans in the portfolio.
Premises and equipment increased from $8.9 million at December 31, 1997
to $10.7 million at June 30, 1998. This increase primarily resulted from data
processing equipment and software purchases associated with the conversion of
County's data processing systems and enhancement of technology throughout the
Company. Also, the Company has commenced construction of a new branch in
Centerville, Ohio and purchased the land for another planned branch in New
Albany, Ohio.
Other assets increased from $5.5 million at December 31, 1997 to $21.1
million at June 30, 1998 primarily as a result of the Company's purchase of
$15.0 million of bank-owned life insurance.
Total deposits increased to $772.7 million at June 30, 1998 from $747.0
million at December 31, 1997. The Company continues to emphasize growth in its
existing retail deposit base provided incremental deposit growth is cost
effective compared to alternative funding sources. Total interest-bearing
deposits accounted for 91.8% of total deposits at June 30, 1998, compared to
91.5% at December 31, 1997.
Total borrowings, including federal funds purchased, increased $68.0
million to $307.4 million at June 30, 1998, compared to $239.4 million at
December 31, 1997. This increase resulted primarily from funding needs
associated with increases in the securities portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure the availability of
funds to accommodate customer loan demand as well as deposit withdrawals while
continuously seeking higher yields from longer term lending and investing
opportunities. This is accomplished principally by maintaining sufficient cash
flows and liquid assets along with consistent stable core deposits and the
capacity to maintain immediate access to funds. These immediately accessible
funds may include federal funds sold, unpledged marketable securities, reverse
repurchase agreements or available lines of credit from the Federal Reserve
Bank, Federal Home Loan Bank (FHLB), or other financial institutions. An
important factor in the preservation of liquidity is the maintenance of public
confidence, as this facilitates the retention and growth of a large, stable
supply of core deposits in funds.
The Company's principal source of funds to satisfy short-term liquidity
needs comes from cash, due from banks, federal funds sold and borrowing
capabilities through the FHLB as well as other sources. Changes in the balance
of cash and due from banks are due to changes in volumes of federal funds sold,
and the float and reserves related to deposit accounts, which may fluctuate
significantly on a day-to-day basis. The investment portfolio serves as an
additional source of liquidity for the Company. Securities with a market value
of $300.3 million were classified as available-for-sale as of June 30, 1998,
representing 91.2% of the total investment portfolio. Classification of
securities as available-for-sale provides for flexibility in managing net
interest margin, interest rate risk, and liquidity.
The Company's bank subsidiary is a member of FHLB. Membership provides
an opportunity to control the bank's cost of funds by providing alternative
funding sources, to provide flexibility in the management of interest rate risk
through the wide range of available funding sources, to manage liquidity via
immediate access to such funds, and to provide flexibility through utilization
of customized funding products to fund various loan and investment products and
strategies.
The Company obtained a $15 million term loan with a financial
institution in order to partially fund the acquisition of County. Under the
terms of the loan agreement, the Company is required to make quarterly interest
payments and annual principal payments, based on a ten year amortization, which
commenced in February 1998. The unpaid loan balance is due in full September 1,
2003. The loan agreement also contains certain financial covenants, all of which
the Company was in compliance with at June 30, 1998.
20
<PAGE> 21
Shareholders' equity at June 30, 1998 was $87.9 million, compared to
prior year-end shareholders' equity of $85.3 million, an increase of $2.5
million. This increase resulted from the retention of earnings, net of dividends
paid of $2.2 million, offset by the change in unrealized gains on
available-for-sale securities from a net gain of $1.1 million at December 31,
1997 to a net gain of $741,000 at June 30, 1998.
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 June 30, 1998, the Company had a total risk-based capital ratio
of 11.37%, of which 10.44% consisted of Tier 1 capital. The leverage ratio for
the Company at June 30, 1998, was 6.88%.
Cash dividends declared to shareholders of the Company totaled $2.2
million, or $0.27 per share, during the first six months of 1998. This compares
to dividends of $2.1 million, or $0.26 per share, for the same period in 1997.
Cash dividends paid as a percentage of net income amounted to 42.8% and 39.0%
for the six months ended June 30, 1998 and 1997, respectively.
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.
CONTINGENCIES AND UNCERTAINITIES - YEAR 2000
The Company has conducted a review of its 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, which will be utilized by all of the Company's
banking operations before the end of the third quarter 1998. Based upon this
conversion 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. The Company has also reviewed its
ancillary systems for potential problems that could occur as a result of the
Year 2000 Issue, has contacted software vendors, and has commenced the testing
process of all critical systems for Year 2000 compliance. In addition, the
Company has implemented 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, and does not
anticipate any disruption in its operations as a result of Year 2000 compliance.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 1998, the Company held its Annual Meeting of Shareholders,
the results of which follows:
1. To approve and ratify the appointment of Coopers & Lybrand L.L.P.
as independent auditors for the year ended December 31, 1998:
Abstaining/
-----------
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
2,807,367 5,922 44,954
2. Election of Class II directors:
Votes Against/
--------------
Votes For Withheld
--------- --------
Philip E. Burke 2,830,040 28,202
Gary N. Fields 2,830,037 28,205
James L. Nichols 2,829,840 28,402
3. To approve the adoption of the Company's 1997 Omnibus Stock
Incentive Plan:
Abstaining/
-----------
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
2,063,041 292,223 61,982
ITEM 5. OTHER INFORMATION
The proxy holders for the 1999 annual meeting of shareholders will use
their discretion in voting on any and all matters brought before the
1999 annual meeting which were not provided to the Company in an
advance notice on or prior to February 4, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits on Item 601 of Regulation S-K
Exhibit 3(a) - Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Company's Form 10- K for year ended
December 31, 1991, Exhibit 3.3 to the Company's Form 10-K for the year
ended December 31,
22
<PAGE> 23
1992 and Exhibit 3.6 to the Company's Form 10-K for the year ended
December 31, 1994).
Exhibit 3(b) - Code of Regulations, as amended (incorporated by
reference to Exhibit 3.2 to the Company's Form 10-K for the year ended
December 3,1, 1991, Exhibit 3.4 to the Company's Form 10-K for the year
ended December 31, 1992 and Exhibit 3.5 to the Company's Form 10-K for
the year ended December 31, 1993).
(b) Exhibit 27: Financial Data Schedule
(c) Reports on Form 8-K - None -
23
<PAGE> 24
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BancFirst Ohio Corp.
(Registrant)
Date: August 13, 1998 (Signed) /s/ Gary N. Fields
---------------------------------------------------
Gary N. Fields
President and
Chief Executive Officer
Date: August 13, 1998 (Signed) /s/ Kim M. Taylor
---------------------------------------------------
Kim M. Taylor
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
24
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