<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1999 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 identification No.)
incorporation or organization)
422 Main Street
Zanesville, Ohio 43701
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (740) 452-8444.
--------------
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------------ ------------------------------------
None None
- ------------------------------------ ------------------------------------
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
- ---------------------------------------------
Common Stock, no par value
- ---------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No.
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
1
<PAGE> 2
As of March 1, 2000 the approximate aggregate market value of the
voting stock beneficially owned by non-affiliates of the registrant was
$166,791,000 computed on the basis of $20.375 per share, the closing sales price
on the NASDAQ - National Market on March 1, 2000. On that date, 7,551,576 shares
of Common Stock, no par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's Proxy Statement for the 2000 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.
2
<PAGE> 3
TABLE OF CONTENTS
-----------------
PART I Page(s)
Item 1 - Business.............................................. 4
Item 2 - Properties............................................ 15
Item 3 - Legal Proceedings..................................... 16
Item 4 - Submission of Matters to a Vote of
Security Holders.................................... 16
PART II
Item 5 - Market for Registrant's Common Equity and
Related Stockholder Matters......................... 17
Item 6 - Selected Financial Data............................... 18
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................... 19
Item 8 - Financial Statements and Supplementary Data........... 34
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............. 61
PART III
Item 10 - Directors and Executive Officers of the
Registrant.......................................... 61
Item 11 - Executive Compensation................................ 61
Item 12 - Security Ownership of Certain Beneficial
Owners and Management............................... 61
Item 13 - Certain Relationships and Related
Transactions........................................ 61
PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................. 62
Signatures.......................................................... 63
3
<PAGE> 4
ITEM 1: BUSINESS
- -----------------
GENERAL
The Company was organized as a bank holding company under the laws of
the State of Ohio. It conducts a full-service commercial and retail banking
business through its wholly-owned subsidiary, The First National Bank of
Zanesville ("FNB"). Effective May 16, 1998, the Company merged its two other
banking subsidiaries, Bellbrook Community Bank ("Bellbrook") and County Savings
Bank ("County") with FNB under the national bank charter of FNB. The Company
also owns 100% of the outstanding common shares of BFOH Capital Trust I, a
special purpose trust that was formed in October 1999 for the purpose of issuing
capital securities. FNB owns a full service financial planning company that
conducts business under the name Chornyak & Associates, Inc. ("Chornyak").
Chornyak was acquired in April 1999.
The Company is headquartered in Zanesville, Ohio, the county seat of
Muskingum County. Through FNB, the Company operates 22 full-service banking
facilities which serve Muskingum, Licking, Franklin, Greene and Montgomery
Counties, Ohio. Its primary market extends along Interstate 70 in central Ohio
and includes the markets of Zanesville, Newark, Columbus, and Dayton. The
Company primarily focuses on providing personalized, high quality and
comprehensive banking services in order to develop and maintain long-term
relationships with customers. FNB offers a wide range of banking services,
including:
- commercial and commercial real estate loans;
- Small Business Administration loans;
- residential real estate loans;
- consumer loans;
- personal and business checking accounts;
- savings accounts;
- demand and time deposits;
- safe deposit services; and
- trust, private banking, financial planning and investment services.
COMPANY STRATEGY
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:
- take advantage of increased operating efficiencies associated with the
attendant economies of scale;
- achieve greater diversification of its markets and products;
- enhance shareholder value by more effectively leveraging its equity
capital; and
- more effectively position itself to take advantage of acquisition
opportunities in the rapidly changing financial services industry.
Given its significant market share in its primary market area, the
Company recognized that its desired growth would have to come primarily from
expansion into new markets. In recognition of these factors, management
undertook a growth strategy which emphasized:
- acquiring existing branch locations from competing institutions as well
as de novo branching;
- increasing lending to small businesses through the formation of small
business lending centers outside Muskingum County;
- acquiring bank and thrift holding companies;
- expanding trust, private banking and investment services; and
- improving technology to enhance services and manage the cost of
operations.
4
<PAGE> 5
The Company believes that 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. Later in 1992, FNB opened the first of four small
business lending centers to serve small businesses and specialize in loans
guaranteed by the U.S. Department of Commerce, Small Business Administration
("SBA"). During 1997, 1998 and 1999, FNB was the largest originator of SBA 7(a)
loans in Ohio. FNB has also been awarded the designation of Preferred Lender by
the SBA. Currently, FNB has small business lending centers located in Cleveland,
Columbus, Cincinnati and Dayton, Ohio, Indianapolis, Indiana, Louisville,
Kentucky and Detroit, Michigan.
The 1995 acquisition of Bellbrook provided access to the Dayton
metropolitan market. In August 1996, the Company acquired County which had total
assets of approximately $554 million. In October 1998, FNB opened a new branch
location in Washington Township, Ohio, located in the Dayton metropolitan
market. In April 1999 the Company acquired Chornyak, a full service financial
planning company. An additional branch location was opened in May 1999 in New
Albany, Ohio, a rapidly growing suburb of Columbus, Ohio. As a result of this
growth strategy, the Company's assets have increased by more than $800 million
since December 31, 1991.
The Company's Board of Directors and management intend to seek
continued controlled growth of the organization through selective acquisitions
of banks and/or savings and loan associations. The objectives of such
acquisitions will be to:
- - increase the opportunity for quality earning asset growth, deposit
generation and fee-based income opportunities;
- - diversify the earning assets portfolio and core deposit base through
expansion into new geographic markets;
- - improve the potential profits from its combined operations through
economies of scale; and
- - enhance shareholder value.
In furtherance of such objectives, the Company intends to continue its
pursuit of business combinations which fit its strategic objectives of growth,
diversification and market expansion and which provide the potential for
enhanced shareholder value. At the present time, the Company does not have any
understanding or agreements for any acquisition or combination, except for the
acquisition of Milton Federal Financial Corporation as discussed under "Recent
Developments".
RECENT DEVELOPMENTS
On January 13, 2000 the Company entered into an agreement to acquire
Milton Federal Financial Corporation ("Milton") whereby Milton would be merged
into the Company. Under the terms of the agreement, the Company will exchange
.444 shares of its common stock and $6.80 for each of the issued and outstanding
shares of Milton. It will also redeem Milton's outstanding stock options for
cash equal to the acquisition price per share less the exercise price of the
options prior to closing. Based on the Company's closing price of $20.375 per
share on January 12, 2000, the transaction would be valued at approximately $33
million. The Company will account for the merger as a purchase and expects to
consummate the merger in the second quarter of 2000, pending approval by
Milton's shareholders, regulatory approvals and other customary conditions of
closing. Milton has granted the Company an option to purchase up to 19.9% of
Milton's outstanding shares upon the occurrence of certain events.
At December 31, 1999, Milton had total assets of $260.0 million,
deposits of $166.3 million and shareholders' equity of $25.3 million. For its
fiscal year ended September 30, 1999 and the quarter ended December 31, 1999,
Milton reported net income of $1.6 million and $449,000, respectively.
RISK FACTORS
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY MANAGE ITS GROWTH.
The Company's general strategy for growth has been to acquire banks and
related businesses that it believes are compatible with its business. The
Company completed the acquisition of County in 1996. At that time, County had
total assets approximately equal to the Company's total assets. Since the
completion of the acquisition, the Company has worked to integrate County's
operations and personnel with FNB. Because the Company did not have systems and
infrastructure in
5
<PAGE> 6
place at the time of the acquisition to accommodate the resulting doubling of
its size, a greater amount of time than initially anticipated has been spent
developing systems to accommodate the growth that resulted from this
acquisition. At present, the Company believes its infrastructure is now in place
to accommodate additional growth from acquisitions. To the extent that the
Company continues to grow, it cannot give assurance that it will be able to
adequately and efficiently manage such growth. Moreover, it may not be able to
obtain regulatory approval for any acquisition it may want to make. Acquiring
other banks and businesses will involve risks, including:
- potential exposure to liabilities of banks and businesses it acquires;
- difficulty and expense of integrating the operations and personnel of
banks and businesses;
- potential disruption of its businesses;
- inability to hire and train a sufficient number of skilled employees;
- impairment of relationships with customers of the bank and businesses
it acquires; and
- incurrence of amortization expense for any acquisition accounted for as
a purchase.
If the Company fails to manage its growth effectively, its business,
financial condition and results of operations could be materially and adversely
affected.
CHANGING ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION IN ONE MARKET MAY
UNFAVORABLY IMPACT THE COMPANY
The operations of the Company are concentrated in the State of Ohio. As
a result of this geographic concentration, the Company's results depend largely
upon economic conditions in this area. A deterioration in economic conditions in
this markets could:
- increase loan delinquencies;
- increase problem assets and foreclosures;
- increase claims and lawsuits;
- decrease demand for the Company's products and services; and
- decrease the value of collateral for loans, especially real
estate, in turn reducing customers' borrowing power, the value of
assets associated with problem loans and collateral coverage.
THE COMPANY MAY BE UNABLE TO INTEGRATE SUCCESSFULLY OPERATIONS OR TO ACHIEVE
EXPECTED COST SAVINGS ASSOCIATED WITH THE MILTON ACQUISITION
The earnings, financial condition and prospects of the Company
following the proposed merger with Milton will depend in part on the Company's
ability to integrate successfully Milton's operations and to continue to
implement its own business plan. Among the issues which the Company could face
are:
- unexpected problems with risks, operations, personnel, technology or
credit;
- loss of customers and employees of Milton;
- difficulty in working with Milton's employees and customers;
- the assimilation of new operations, sites and personnel could divert
resources from regular banking and operations;
- operations acquired by the Company may not generate enough revenue to
offset acquisition costs; and
- instituting and maintaining uniform standards, controls, procedures and
policies.
Further, although the Company's Board of Directors anticipates cost
savings as a result of the merger to be meaningful, the Company may be unable to
fully realize any of the potential cost savings expected. Finally, any cost
savings which are realized may be offset by losses in revenues or other charges
to earnings.
THE COMPANY MAY BE UNABLE TO MANAGE INTEREST RATE RISKS, WHICH COULD REDUCE ITS
NET INTEREST INCOME.
The Company's results of operations are affected principally by net
interest income, which is the difference between interest earned on loans and
investments and interest expense paid on deposits and other borrowings. The
Company cannot predict or control changes in interest rates. Regional and local
economic conditions and the policies of regulatory authorities, including
monetary policies of the Board of Governors of the Federal Reserve System,
affect interest income and interest
6
<PAGE> 7
expense. The Company takes measures intended to manage the risks from changes in
market interest rates. However, changes in interest rates can still have a
material adverse effect on the Company's profitability.
In addition, certain assets and liabilities may react in different
degrees to changes in market interest rates. For example, interest rates on some
types of assets and liabilities may fluctuate prior to changes in broader market
interest rates, while interest rates on other types may lag behind. Some of the
Company's assets, such as adjustable rate mortgages, have features including
rate caps, which restrict changes in their interest rates.
Interest rates are highly sensitive to many factors that are beyond the
Company's control. Some of these factors include:
- inflation;
- recession;
- unemployment;
- money supply;
- international disorders; and
- instability in domestic and foreign financial markets.
Changes in interest rates may affect:
- the level of voluntary prepayments on loans; and
- the receipt of payment on mortgage-backed securities resulting in
the receipt of proceeds that may be reinvested at a lower rate
than the loan or mortgage-backed security being prepaid.
Although the Company pursues an asset-liability management strategy
designed to control its risk from changes in market interest rates, changes in
interest rates can still have a material adverse effect on its profitability.
CHANGES IN THE SBA PROGRAM OR INCREASED COMPETITION FOR SUCH LOANS COULD
ADVERSELY AFFECT THE COMPANY'S PROFITABILITY
The SBA lending program is a federal government program. The U.S.
Congress continues to scrutinize government programs, including the SBA lending
program. The Company cannot provide assurance that its participation in the SBA
lending program will continue in its present manner. The company's strategic
plan includes an emphasis on continued growth of its SBA lending program. Loans
generated through this program contain portions (typically 75%) which are
guaranteed by the government. The Company has typically sold these guaranteed
portions in the secondary market. The non-interest income the Company generates
from these sales has been an important source of revenue for the Company, and
continues to play a significant role in earnings. Future non-interest income
from these activities depends on the Company's ability to originate and sell
loans under the SBA lending program. If the U.S. Congress changes the SBA
lending program, or if the Company has increased competition for such loans, its
operating results could be adversely affected.
MARKET AREA AND COMPETITION
The financial services industry in the Company's primary market area is
highly competitive. FNB competes actively with regional and super-regional bank
holding companies, community banks, savings institutions, mortgage bankers,
brokerage firms, insurance companies and loan production offices in each of its
primary market areas. The primary means of competition are through interest
rates, pricing and service.
Changes in the financial services industry resulting from fluctuating
interest rates, technological changes and deregulation have resulted in an
increase in competition, cost of funds, merger activity and customer awareness
of product and service differences among competitors.
Management believes that the deposit mix coupled with the legal lending
limit regulations that FNB is subjected to is such that no material portion of
FNB's deposits or loans have been obtained from a single customer. Consequently,
the loss
7
<PAGE> 8
of any one customer would not have a materially adverse effect on its business.
The business of the Company and FNB is not seasonal to any material degree.
REGULATION AND SUPERVISION
As a bank holding company, the Company is subject to regulation,
supervision and examination by the Board of Governors of the Federal Reserve
System ("FRB") under the Bank Holding Company Act ("BHCA"). Under the BHCA, bank
holding companies may not, in general, directly or indirectly acquire ownership
or control of more than 5% of the voting shares of any company, including a bank
or bank holding company, without the prior approval of the FRB. In addition,
bank holding companies are generally prohibited from engaging in nonbanking
(i.e., commercial or industrial) activities, subject to certain exceptions under
the BHCA.
FNB is also subject to regulation, supervision, and examination by the
Office of the Comptroller of Currency ("OCC"). Depository institutions are also
affected by various state and federal laws, including those relating to consumer
protection and similar matters, as well as by the fiscal and monetary policies
of the federal government and its agencies, including the FRB. An important
purpose of these policies is to curb inflation and control recessions through
control of the supply of money and credit. The FRB uses its powers to establish
reserve requirements of depository institutions and to conduct open market
operations in United States government securities so as to influence the supply
of money and credit. These policies have a direct effect on the availability of
loans and deposits and on interest rates charged on loans and paid on deposits,
with the result that federal policies have a material effect on the earnings of
depository institutions, and hence, the Company.
ACQUISITIONS OF CONTROL. The Change in Bank Control Act prohibits a
person or group of persons from acquiring "control" of a bank holding company
unless the FRB has been given 60 days' prior written notice of such proposed
acquisition and within that time period the FRB has not issued a notice
disapproving the proposed acquisition or extending for up to another 30 days the
period during which such a disapproval may be issued, or unless the acquisition
is subject to FRB approval under the BHCA. An acquisition may be made prior to
the expiration of the disapproval period if the FRB issues written notice of its
intent not to disapprove the action. Under a rebuttable presumption established
by the FRB, the acquisition of more than 10% of a class of voting stock of a
bank holding company with a class of securities registered under Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as
the Company, would constitute the acquisition of control of such bank holding
company.
In addition, any "company" would be required to obtain the approval of
the FRB under the BHCA before acquiring 25% (5% in the case of an acquirer that
is a bank holding company) or more of the outstanding shares of any class of
voting stock of the Company, or otherwise obtaining "control" over the Company.
Under the BHCA, "control" generally means (i) the ownership or control of 25% or
more of any class of voting securities of the bank holding company, (ii) the
ability to elect a majority of the bank holding company's directors, or (iii)
the ability otherwise to exercise a controlling influence over the management
and policies of the bank holding company.
REGULATORY DIVIDEND RESTRICTIONS. The Company is a legal entity
separate and distinct from its subsidiaries. The principal source of cash flow
of the Company, including cash flow to pay dividends on the Company's common
stock and debt service on its debt (including distributions to the Trust for
payment of distributions on the Trust Preferred Capital Securities), is
dividends from its subsidiaries. Various federal regulations limit the amount of
dividends that may be paid to the Company by FNB without regulatory approval.
These regulatory limitations on dividends, coupled with other regulatory
provisions discussed below, may have the effect of exacerbating any future
financial difficulties by further reducing the availability of funding sources.
The approval of the OCC is required for the payment of any dividend by
a national bank if the total of all dividends declared by the board of directors
of such bank in any calendar year would exceed the total of (i) the bank's
retained net profits (as defined and interpreted by regulation) for the current
year plus (ii) the retained net profits (as defined and interpreted by
regulation) for the preceding two years, less any required transfer to surplus
or a fund for the retirement of any preferred stock. In addition, a national
bank can pay dividends only to the extent that retained net profits (including
the portion transferred to surplus) exceed bad debts (as defined and interpreted
by regulation).
8
<PAGE> 9
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.
TRANSACTIONS INVOLVING BANKING SUBSIDIARIES. FNB is subject to Federal
Reserve Act restrictions that limit the transfer of funds or other items of
value from FNB to the Company in "covered transactions." In general, covered
transactions include loans and other extensions of credit, investments and asset
purchases, as well as other transactions involving the transfer of value from a
banking subsidiary to an affiliate or for the benefit of an affiliate. Unless an
exemption applies, covered transactions by a banking subsidiary with any of its
affiliates is limited in amount to 10% of that banking subsidiary's capital and
surplus (as defined and interpreted by regulation) and, with respect to covered
transactions by a banking subsidiary with any one of its affiliates is limited
in amount to 10% of the banking subsidiary's capital and surplus (as defined and
interpreted by regulation) and, with respect to covered transactions with all
affiliates, in the aggregate, to 20% of that banking subsidiary's capital and
surplus. Furthermore, loans and extensions of credit to affiliates generally are
required to be secured in specified amounts.
LIABILITY OF COMMONLY CONTROLLED INSTITUTIONS. Under the FDI Act, an
insured depository institution that is under common control with another insured
depository institution is generally liable for any loss incurred, or reasonably
anticipated to be incurred, by the FDIC in connection with the default of such
commonly controlled institution, or any assistance provided by the FDIC to any
such commonly controlled institution that is in danger of default. The term
"default" is defined generally to mean the appointment of a conservator or
receiver and the term "in danger of default" is defined generally as the
existence of certain conditions indicating that a "default" is likely to occur
in the absence of regulatory assistance. The effect of this provision is to
diminish the protection previously available to holding companies through
operation of separate depository institution subsidiaries.
SOURCE OF STRENGTH DOCTRINE. Under a policy asserted by the FRB, a bank
holding company is expected to serve as a source of financial and managerial
strength to each of its subsidiary banks and, under appropriate circumstances,
to commit resources to support each such subsidiary bank. This support may be
sought by the FRB at times when a bank holding company may not have the
resources to provide it or, for other reasons, would not otherwise be inclined
to provide it.
REGULATORY CAPITAL STANDARDS AND RELATED MATTERS. The FRB, the OCC, and
the FDIC have adopted substantially similar risk-based and leverage capital
guidelines for United States banking organizations. The guidelines establish a
systematic, analytical framework that makes regulatory capital requirements
sensitive to differences in risk profiles among depository institutions, takes
off-balance sheet exposure into account in assessing capital adequacy and
reduces disincentives to holding liquid, low-risk assets. Risk-based capital
ratios are determined by classifying assets and specified off-balance sheet
financial instruments into weighted categories with higher levels of capital
being required for categories perceived as representing greater risk. FRB policy
also provides that banking organizations generally, and, in particular, those
that are experiencing internal growth or actively making acquisitions, are
expected to maintain capital positions that are substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
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, 1999, the Company's Tier 1 and
total capital to risk-adjusted assets ratios were 11.4% and 12.3%, 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
9
<PAGE> 10
of 3% for bank holding companies that have the highest supervisory rating. All
other bank holding companies must maintain a minimum Leverage Ratio of at least
4% to 5%. Neither the Company nor FNB has been advised by the appropriate
federal banking regulator of any specific Leverage Ratio applicable to it. As of
December 31, 1999, the Company's Leverage Ratio was 7.8%.
The OCC has established capital requirements for banks under its
jurisdiction that are substantially similar to those imposed by the FRB on bank
holding companies. As of December 31, 1999, FNB had capital in excess of such
minimum regulatory capital requirements.
PROMPT CORRECTIVE ACTION. The FDI Act requires the federal bank
regulatory agencies to take "prompt corrective action" in respect of
FDIC-insured depository institutions that do not meet minimum capital
requirements. A depository institution's treatment for purposes of the prompt
corrective action provisions will depend upon how its capital levels compare to
various relevant capital measures and certain other factors, as established by
regulation.
The federal financial institution regulatory agencies have adopted
regulations establishing relevant capital measures and relevant capital levels.
The relevant capital measures are the total capital ratio, Tier 1 capital ratio
and the Leverage Ratio. Under the regulations, a national bank will be: (i)
"well capitalized" if it has a total capital ratio of 10% or greater, a Tier 1
capital ratio of 6% or greater and a Leverage Ratio of 5% or greater and is not
subject to any order or written directive by any such regulatory authority to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total capital ratio of 8% or greater, a
Tier 1 capital ratio of 4% or greater and a Leverage Ratio of 4% or greater (3%
in certain circumstances) and is not "well capitalized," (iii)
"undercapitalized" if it has a total capital ratio of less than 8%, a Tier 1
capital ratio of less than 4% or a Leverage Ratio of less than 4% (3% in certain
circumstances); (iv) "significantly undercapitalized" if it has a total capital
ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a Leverage
Ratio of less than 3%; and (v) "critically undercapitalized" if its tangible
equity is equal to or less than 2% of average quarterly tangible assets. In
addition, a depository institution's primary federal regulatory agency is
authorized to downgrade the depository institution's capital category to the
next lower category upon a determination that the depository institution is an
unsafe or unsound condition or is engaged in an unsafe or unsound practice. An
unsafe or unsound practice can include receipt by the institution of a less than
satisfactory rating on its most recent examination with respect to its asset
quality, management, earnings, or liquidity. As of December 31, 1999, FNB had
capital levels that met "well capitalized" standards under such regulations.
The banking agencies are permitted to establish, on an institution by
institution basis, individualized minimum capital requirements exceeding the
general requirements described above. Failure to meet the capital guidelines
described above could subject an insured bank to a variety of sanctions,
including asset growth restrictions and termination of deposit insurance by the
FDIC.
The FDI Act generally prohibits a depository institution from making
any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be "undercapitalized." "Undercapitalized" depository institutions are
subject to limitations on, among other things, asset growth; acquisition;
branching; new business lines; acceptance of brokered deposits; and borrowings
from the Federal Reserve 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.
10
<PAGE> 11
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,
------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Residential mortgage $ 327,294 $ 353,635 $ 363,333 $ 337,911 $ 105,604
Construction mortgage 9,484 10,203 9,215 7,716 2,859
Commercial, financial and industrial 411,489 323,544 302,098 299,630 107,015
Consumer 101,500 89,681 86,381 76,598 53,340
--------------- --------------- --------------- --------------- ---------------
Total loans 849,767 777,063 761,027 721,855 268,818
Allowance for possible loan losses (7,431) (6,643) (6,617) (6,599) (3,307)
--------------- --------------- --------------- --------------- ---------------
Net loans $ 842,336 $ 770,420 $ 754,410 $ 715,256 $ 265,511
=============== =============== =============== =============== ===============
</TABLE>
The Company's loan portfolio totaled $842.3 million at December 31,
1999, representing 66.1% of total assets. At December 31, 1998, 1997 and 1996,
the Company's loan portfolio represented 65.2%, 69.8% and 67.7% of total assets,
respectively.
Residential mortgage. At December 31, 1999, residential mortgages
outstanding represented 38.5% of total loans. The Company originates loans
secured by first lien mortgages on single-family residences located mainly in
its market areas. The Company originates adjustable and fixed-rate products with
a maturity of up to 30 years, although these loans may be repaid over a shorter
period due to prepayments and other factors. These loans generally have a
maximum loan to value ratio of 80%, although this ratio could go to 100% under
certain circumstances. The Company primarily retains adjustable-rate loans, and
the associated servicing, in its portfolio.
The adjustable-rate mortgages currently offered by the Company have
interest rates which generally adjust on the applicable one, three, five or
seven year anniversary date of the loan, subject to annual and term limitations.
Rates are generally based upon an index tied to the weekly average yield on U.S.
Treasury securities (adjusted to a constant maturity), as made available by the
FRB, plus a margin.
Fixed-rate mortgage products offered by the Company are generally sold
in the secondary market, thus limiting the interest rate risk inherent in
maintaining a large portfolio of long-term, fixed-rate assets. The Company sells
such loans on both a servicing-retained and servicing-released basis.
Construction mortgage. At December 31, 1999, construction mortgages
outstanding represented 1.1% of total loans. The Company originates loans to
construct commercial real estate properties and to construct single-family
residences. For owner occupied commercial construction properties, the maximum
loan to value ratio is generally 75%. For non-owner occupied commercial
construction properties, the maximum loan to value ratio is generally 70%. For
residential construction properties, the guidelines for residential mortgages
apply. All construction loans are secured by first lien mortgages. These
construction lending activities generally are limited to the Company's primary
market area.
Commercial. At December 31, 1999, commercial loans outstanding
represented 48.4% of total loans. 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
11
<PAGE> 12
that the ratio of the loan amount to the value of the collateral cannot exceed
75%. At December 31, 1999, the Company's largest commercial loan had a principal
balance of $5.2 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, 1999, the guaranteed portion of loans that were
held-for-sale totaled $3.6 million, while the unguaranteed portion of loans held
by the Company in its portfolio totaled $28.1 million.
Management continues to seek growth opportunities in small business
lending. To date, the Company has established small business lending centers in
the Columbus, Cleveland, Cincinnati and Dayton Ohio and Indianapolis, Indiana,
Louisville, Kentucky and Detroit, Michigan market areas. The Columbus location
is the center for the Company's small business lending operations. In
determining future activities in this area, management continually assesses the
uncertainties that exist surrounding government programs, including the SBA, due
to scrutiny by the United States Congress.
Consumer. At December 31, 1999, consumer loans outstanding represented
12.0% of total loans. The Company originates consumer loans which are primarily
for personal, family or household purposes, in order to offer a full range of
financial services to its customers. The underwriting standards employed by the
Company for consumer loans include a determination of the applicant's payment
history on other debts and an assessment of the applicant's ability to meet
existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. Home equity loans are secured by first or
second lien mortgages. Home equity loans generally have loan to value ratios of
80% to 90%, but could go as high as 100% under certain circumstances. At
December 31, 1999, 43% of the Company's consumer loans consisted of home equity
loans.
At December 31, 1999, 50% 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 maturities and repricing periods of the loan portfolio at December
31, 1999 were as follows:
<TABLE>
<CAPTION>
WITHIN ONE ONE TO FIVE AFTER FIVE
YEAR YEARS YEARS TOTAL
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Commercial $ 152,278 $ 188,878 $ 70,333 $ 411,489
Real estate mortgage 134,165 148,962 44,167 327,294
Real estate - construction 5,485 3,351 648 9,484
Consumer 47,005 42,694 11,801 101,500
-------------- -------------- -------------- --------------
$ 338,933 $ 383,885 $ 126,949 $ 849,767
============== ============== ============== ==============
Loans due after one year with:
Floating rates $ 343,348
Predetermined rates 167,486
</TABLE>
12
<PAGE> 13
INVESTMENT SECURITIES
The Company's investment strategy is to manage the portfolio to include
interest rate sensitive assets to reduce interest rate risk against interest
rate sensitive liabilities. The portfolio is also structured to generate cash
flows and, coupled with the readily marketable nature of such assets, it serves
as a secondary source of liquidity to accommodate heavy loan demand, as well as
deposit withdrawals. Subject to various government regulatory restrictions,
banks may own direct obligations of the U.S. Treasury, federal agency
securities, bank-qualified tax-exempt securities (including those issued by
states and municipalities), certificates of deposit and time deposits, bankers'
acceptances, commercial paper, corporate bonds, and mortgage-backed and
asset-backed securities and related products.
13
<PAGE> 14
The following table sets forth certain information relating to the
Company's investment securities portfolio.
<TABLE>
<CAPTION>
OBLIGATIONS
OF STATE
OTHER U.S. AND MORTGAGE- CORPORATE
U.S. GOVERNMENT POLITICAL BACKED OBLIGATIONS
TREASURY AGENCIES SUBDIVISIONS SECURITIES AND OTHER
------------ ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
- ----------------------------
SECURITIES
AVAILABLE-FOR-SALE:
Maturity/Repricing
Within one year $ -- $ -- $ -- $ 14,212 $ --
After one through five years 252 -- 813 96,322 12,335
After five through ten years -- 1,408 8,046 83,562 18,212
After ten years -- 3,871 14,156 18,046 39,214
------------ ----------- ------------ ----------- ------------
Total carrying value $ 252 $ 5,279 $ 23,015 $ 212,142 $ 69,761
============ =========== ============ =========== ============
Amortized cost $ 250 $ 5,592 $ 25,771 $ 217,916 $ 73,740
Yield (FTE) 6.55 % 7.09 % 7.67 % 6.73 % 7.60 %
Average maturity (in years) 2.3 12.3 16.6 5.9 18.1
SECURITIES HELD-TO-MATURITY
Maturity/Repricing
Within one year $ -- $ -- $ 899 $ 250 $ --
After one through five years -- -- 3,338 13,568 1,722
After five through ten years -- -- 549 -- 460
After ten years -- -- -- -- --
------------ ----------- ------------ ----------- ------------
Total carrying value $ -- $ -- $ 4,786 $ 13,818 $ 2,182
============ =========== ============ =========== ============
Fair value $ -- $ -- $ 4,839 $ 13,580 $ 2,182
Yield (FTE) -- -- 7.55 % 7.52 % 10.64 %
Average maturity (in years) -- -- 2.9 3.4 3.2
DECEMBER 31, 1998
- ----------------------------
SECURITIES
AVAILABLE-FOR-SALE:
Maturity/Repricing
Within one year $ -- $ 173 $ 1,264 $ 15,268 $ 50
After one through five years 265 -- 3,308 94,130 3,907
After five through ten years -- 2,503 8,278 83,733 22,592
After ten years -- 2,162 9,496 28,657 25,311
------------ ----------- ------------ ----------- ------------
Total carrying value $ 265 $ 4,838 $ 22,346 $ 221,788 $ 51,860
============ =========== ============ =========== ============
Amortized cost $ 251 $ 4,759 $ 21,724 $ 222,537 $ 52,503
Yield (FTE) 6.55 % 6.81 % 7.69 % 6.62 % 6.32 %
Average maturity (in years) 3.3 10.7 12.1 6.1 18.2
SECURITIES HELD-TO-MATURITY:
Maturity/Repricing
Within one year $ -- $ -- $ 396 $ 2 $ --
After one through five years -- -- 3,520 12,139 1,849
After five through ten years -- -- 1,280 6,839 493
After ten years -- -- -- -- --
------------ ----------- ------------ ----------- ------------
Total carrying value $ -- $ -- $ 5,196 $ 18,980 $ 2,342
============ =========== ============ =========== ============
Fair value $ -- $ -- $ 5,413 $ 19,054 $ 2,342
Yield (FTE) -- -- 7.53 % 7.53 % 10.64 %
Average maturity (in years) -- -- 3.7 4.4 3.2
DECEMBER 31, 1997
- ----------------------------
SECURITIES
AVAILABLE-FOR-SALE:
Maturity/Repricing
Within one year $ 2,310 $ -- $ 1,688 $ 64,165 $ 9,670
After one through five years 258 -- 5,979 91,006 4,264
After five through ten years -- 7,145 7,163 12,628 6,096
After ten years -- 5,609 2,130 15,170 1,017
------------ ----------- ------------ ----------- ------------
Total carrying value $ 2,568 $ 12,754 $ 16,960 $ 182,969 $ 21,047
============ =========== ============ =========== ============
Amortized cost $ 2,558 $ 12,619 $ 16,627 $ 181,750 $ 21,017
Yield (FTE) 5.92 % 7.14 % 7.65 % 6.86 % 6.82 %
Average maturity (in years) .61 9.81 6.03 6.44 11.78
SECURITIES HELD-TO-MATURITY:
Maturity/Repricing
Within one year $ -- $ -- $ 585 $ 3,692 $ 1,879
After one through five years -- -- 3,313 10,554 743
After five through ten years -- -- 1,895 6,947 --
After ten years -- -- -- 5,609 6
------------ ----------- ------------ ----------- ------------
Total carrying value $ -- $ -- $ 5,793 $ 26,802 $ 2,628
============ =========== ============ =========== ============
Fair value $ -- $ -- $ 5,967 $ 28,048 $ 2,630
Yield (FTE) -- -- 7.15 % 8.20 % 9.96 %
Average maturity (in years) -- -- 4.29 6.19 3.42
</TABLE>
<TABLE>
<CAPTION>
YIELD
TOTAL (FTE)
------------ -----------
<S> <C> <C>
DECEMBER 31, 1999
- ----------------------------
SECURITIES
AVAILABLE-FOR-SALE:
Maturity/Repricing
Within one year $ 14,212 6.35 %
After one through five years 109,722 6.86 %
After five through ten years 111,228 6.69 %
After ten years 75,287 7.80 %
------------
Total carrying value $ 310,449
============
Amortized cost $ 323,269
Yield (FTE) 7.00 %
Average maturity (in years) 6.0
SECURITIES HELD-TO-MATURITY
Maturity/Repricing
Within one year $ 1,149 6.90 %
After one through five years 18,628 7.85 %
After five through ten years 1,009 8.96 %
After ten years --
------------
Total carrying value $ 20,786
============
Fair value $ 20,601
Yield (FTE) 7.85 %
Average maturity (in years) 3.3
DECEMBER 31, 1998
- ----------------------------
SECURITIES
AVAILABLE-FOR-SALE:
Maturity/Repricing
Within one year $ 16,755 6.63 %
After one through five years 101,610 6.80 %
After five through ten years 117,106 6.35 %
After ten years 65,626 6.95 %
------------
Total carrying value $ 301,097
============
Amortized cost $ 301,774
Yield (FTE) 6.65 %
Average maturity (in years) 8.7
SECURITIES HELD-TO-MATURITY:
Maturity/Repricing
Within one year $ 398 7.27 %
After one through five years 17,508 7.81 %
After five through ten years 8,612 7.82 %
After ten years -- -- %
------------
Total carrying value $ 26,518
============
Fair value $ 26,809
Yield (FTE) 7.80 %
Average maturity (in years) 4.1
DECEMBER 31, 1997
- ----------------------------
SECURITIES
AVAILABLE-FOR-SALE:
Maturity/Repricing
Within one year $ 77,833 6.77 %
After one through five years 101,507 6.95 %
After five through ten years 33,032 7.07 %
After ten years 23,926 7.06 %
------------
Total carrying value $ 236,298
============
Amortized cost $ 234,571
Yield (FTE) 6.92 %
Average maturity (in years) 7.01
SECURITIES HELD-TO-MATURITY:
Maturity/Repricing
Within one year $ 6,156 8.57 %
After one through five years 14,610 8.02 %
After five through ten years 8,842 8.08 %
After ten years 5,615 8.19 %
------------
Total carrying value $ 35,223
============
Fair value $ 36,645
Yield (FTE) 8.16 %
Average maturity (in years) 5.68
</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.
Maturities of the Company's time certificates of deposit of $100,000 or
more outstanding at December 31, 1999 are summarized as follows:
AMOUNT
--------------
(IN THOUSANDS)
3 months or less $ 69,988
3 through 6 months 48,565
6 through 12 months 11,664
Over 12 months 27,624
-------------
Total $ 157,841
=============
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 have been
utilized by management to grow the Company in its efforts to leverage its
capital base. Additionally, the Company has used such funding sources to manage
its interest rate risk by match funding and maintaining certain assets on its
balance sheet and structuring various other funding sources which traditionally
are not available to the Company in the retail market.
FNB is a member of the Federal Home Loan Bank ("FHLB") system. This
membership is maintained to enhance shareholder value through the utilization of
FHLB advances to aid in the management of the Company's cost of funds by
providing alternative funding sources. FHLB advances provide flexibility in the
management of interest rate risk through the wide range of available products
with characteristics not necessarily present in the existing deposit base, as
well as the ability to manage liquidity.
EMPLOYEES
At December 31, 1999, the Company had 410 employees, 344 of whom were
full-time and 66 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 are 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
contains approximately 34,000 square feet and is used exclusively by the Company
and FNB. The Company also owns, free and clear of any encumbrances, 17 other
buildings with square footage ranging from approximately 800 to 15,000 that are
used as full service banking locations. Three additional full service branch
locations are
15
<PAGE> 16
located in buildings owned by the Company on land that is being purchased on a
land contract or is being leased on an extended basis under favorable terms. One
full service branch is located in a 15,000 square foot facility that is leased
by the Company. This facility is also used by the Company for business lending,
private banking, administrative and various operational activities. The Company
also leases space ranging from approximately 600 square feet to 26,000 square
feet in twelve additional locations. This lease spaced is used primarily for
business lending and operational activities. The aggregate annual rentals paid
by the Company during its last fiscal year did not exceed five percent of its
operating expenses. Management of the Company believes that its properties are
adequately insured.
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 adverse effect on the financial position of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted for a vote of security holders of the Company
during the fourth quarter of 1999.
16
<PAGE> 17
PART II
-------
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- ------------------------------------------------------------------------------
MATTERS
-------
QUARTERLY MARKET AND DIVIDEND INFORMATION
PER SHARE DATA
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ ------------------------------------------
MARKET PRICE CASH MARKET PRICE CASH
--------------------------- ---------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
--------------------------- -------------- --------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 30.00 $ 24.75 $ .140 $ 26.25 $ 23.38 $ .135
2nd Quarter 27.25 23.13 .140 35.00 23.75 .135
3rd Quarter 25.31 21.00 .140 35.50 25.00 .135
4th Quarter 25.25 19.13 .145 31.50 27.00 .140
</TABLE>
QUARTERLY MARKET AND DIVIDEND INFORMATION
On April 30 1993, the Company's common stock commenced trading on the
National Association of Securities Dealers Automated Quotation System (NASDAQ)
National Market System under the symbol BFOH. The high and low market prices
represent high and low sales prices for the Company's common stock as furnished
to the Company by NASDAQ. There were 1,138 and 1,143 shareholders of record of
the Company's common stock at December 31, 1999 and 1998, respectively. The
Company plans to continue to pay quarterly cash dividends. The ability of the
Company to pay cash dividends is based upon receiving dividends from FNB, as
well as existing cash balances. As discussed in Note 18 to the consolidated
financial statements, certain restrictions exist regarding the ability of FNB to
pay cash dividends.
17
<PAGE> 18
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
- ------------------------------------------------------------
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
1999 1998 1997 1996(5) 1995
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest income $ 88,114 $ 86,657 $ 84,692 $ 53,177 $ 34,063
Interest expense 49,647 50,150 48,256 28,630 16,357
------------- ------------- ------------- ------------- -------------
Net interest income 38,467 36,507 36,436 24,547 17,706
Provision for possible loan losses 1,580 1,225 1,221 1,257 967
Non-interest income 10,753 9,948 7,768 6,258 4,984
Non-interest expense 29,651 29,827 26,677 21,235 12,805
------------- ------------- ------------- ------------- -------------
Income before income taxes
and extraordinary item 17,989 15,403 16,306 8,313 8,918
Provision for federal income tax 5,685 4,835 5,536 2,354 2,706
------------- ------------- ------------- ------------- -------------
Income before extraordinary item 12,304 10,568 10,770 5,959 6,212
Extraordinary item-prepayment
charges on early repayment of
Federal Home Loan Bank Advances, -- 400 -- -- --
net of tax
------------- ------------- ------------- ------------- -------------
Net income $ 12,304 $ 10,168 $ 10,770 $ 5,959 $ 6,212
============= ============= ============= ============= =============
PER SHARE DATA: (1)
Income before extraordinary item $ 1.58 $ 1.33 $ 1.35 $ .89 $ 1.04
Net income 1.58 1.28 1.35 .89 1.04
Dividends .57 .55 .53 .51 .47
Book value 10.55 11.09 10.72 9.79 8.42
Tangible book value 8.89 9.58 9.13 8.01 8.40
BALANCE SHEET DATA:
Total assets $1,274,206 $ 1,181,011 $ 1,081,618 $ 1,056,920 $ 476,429
Loans 849,767 777,063 761,027 721,855 268,818
Allowance for possible loan losses 7,431 6,643 6,617 6,599 3,307
Securities 331,235 327,615 271,521 284,576 178,252
Deposits 799,176 789,622 747,047 732,689 348,545
Borrowings 385,498 296,750 239,449 236,609 74,135
Shareholders' equity 80,108 87,535 85,333 77,894 50,010
PERFORMANCE RATIOS:
Return on average assets 1.02% 0.89% 0.98% 0.85% 1.38%
Return on average equity 14.29 11.55 13.20 10.05 13.05
Net interest margin 3.47 3.48 3.55 3.78 4.27
Interest rate spread 3.12 3.05 3.08 3.22 3.55
Non-interest income to average assets 0.89 0.88 0.71 0.90 1.11
Non-interest expense to average assets(2) 2.33 2.36 2.30 2.59 2.84
Efficiency ratio(3) 56.56 56.81 56.67 57.33 56.63
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.42% 0.48% 0.29% 0.35% 0.38%
Non-performing assets to total assets 0.30 0.37 0.28 0.29 0.22
Allowance for possible loan losses to
total losses 0.87 0.85 0.87 0.91 1.23
Allowance for possible loan losses to
nonperforming loans 209.0 178.3 298.3 258.0 322.9
Net charge-offs to average loans 0.10 0.16 0.16 0.19 0.29
CAPITAL RATIOS:(4)
Shareholders' equity to total assets 6.29% 7.41% 7.89% 7.37% 10.50%
Tier 1 capital to average total assets 7.77 6.52 6.52 6.06 10.49
Tier 1 capital to risk-weighted assets 11.37 10.34 10.37 10.08 17.70
</TABLE>
(1) Per share data has been restated to reflect all stock dividends and stock
splits.
(2) Excludes amortization of intangibles and non-recurring charges totaling
$1,629 in 1998 for merger, restructuring and branch closing costs and
$2,632 in 1996 related to the special one-time SAIF assessment and
restructuring costs.
(3) The efficiency ratio is equal to non-interest expense (excluding
non-recurring charges) less amortization of intangible assets divided by
net interest income determined on a fully tax equivalent basis plus
non-interest income less gains or losses on securities transactions and
non-recurring income.
(4) For definitions and further information relating to the Company's
regulatory capital requirements, see "Supervision and Regulation."
(5) The Company's acquisition of County in August 1996 significantly affects
the comparability of the Company's results of operations for prior years.
18
<PAGE> 19
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS OF THE COMPANY
----------------------------
For a comprehensive understanding of the Company's financial condition
and performance, this discussion should be considered in conjunction with the
Company's Consolidated Financial Statements, accompanying notes, and other
information contained elsewhere herein.
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included herein will prove to be accurate.
Factors that could cause actual results to differ from the results discussed in
the forward-looking statements include, but are not limited to: economic
conditions (both generally and more specifically in the markets in which the
Company and FNB operate); competition for the Company's customers from other
providers of financial services; government legislation and regulation (which
changes from time to time and over which the Company has no control); changes in
interest rates; material unforeseen changes in the liquidity, results of
operations, or financial condition of the Company's customers; and other risks
detailed in "Item 1: Business - Risk Factors" and the Company's filings with the
Securities and Exchange Commission, all of which are difficult to predict and
many of which are beyond the control of the Company.
OVERVIEW
The reported results of the Company primarily reflect the operations of
the Company's bank subsidiary. The Company's results of operations are dependent
on a variety of factors, including the general interest rate environment,
competitive conditions in the industry, governmental policies and regulations
and conditions in the markets for financial assets. Like most financial
institutions, the Company's primary source of income is net interest income. Net
interest income is defined as the difference between the interest the Company
earns on interest-earning assets, such as loans and securities, and the interest
the Company pays on interest-bearing liabilities, such as deposits and
borrowings. The Company's operations are also affected by non-interest income,
such as checking account and trust fees and gains from sales of loans. The
Company's principal operating expenses, aside from interest expense, consist of
salaries and employee benefits, occupancy costs and other general and
administrative expenses.
On April 5, 1999, the Company acquired Chornyak, a full service
financial planning company. Chornyak provides comprehensive financial planning
services to its clients and receives fees for these services either directly
from, or in the form of commissions earned from handling and processing
investment transactions for, its clients. This acquisition was accounted for as
a purchase transaction and, accordingly, the results of Chornyak are included in
the Company's results of operations from the date of acquisition.
In October 1999, BFOH Capital Trust I (the "Trust"), a wholly-owned
subsidiary of the Company, was formed for the purpose of issuing $20.0 million
aggregate liquidation amount of 9.875% Capital Securities. The Trust's
obligations under the Capital Securities are fully and unconditionally
guaranteed by the Company. The Capital Securities are included with borrowings
and presented as a separate line item in the Company's consolidated balance
sheet. Distributions on the Capital Securities are recorded as interest expense
in the Company's consolidated statement of operations.
Average Balances and Yields. The following tables present, for each of
the periods indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
percentage rates, and the net interest margin. Net interest margin is calculated
by dividing net interest income on a fully tax equivalent basis ("FTE") by total
interest-earning assets. The net interest margin is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities. FTE
income includes tax exempt income, restated to a pre-tax equivalent amount based
on the statutory federal income tax rate. All average balances are daily average
balances. Non-accruing loans are included in average loan balances.
19
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE INTEREST COST BALANCE EXPENSE COST
----------- ----------- ------------------------ ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Taxable $ 292,510 $ 19,601 6.70% $ 272,760 $ 18,514 6.79%
Non-taxable (2) 33,997 2,751 8.09 27,246 2,130 7.82
---------- ----------- ---------- ---------
Total securities 326,507 22,352 6.85 300,006 20,644 6.88
Loans:
Commercial 375,834 33,944 9.03 315,242 29,776 9.45
Real estate 337,967 24,987 7.39 362,580 28,599 7.89
Consumer 96,981 7,821 8.06 91,865 8,275 9.01
---------- ----------- ---------- ---------
Total loans(1) 810,782 66,752 8.23 769,687 66,650 8.66
Federal funds sold 704 39 5.54 2,907 154 5.30
---------- ----------- ---------- ---------
Total earning assets(2) 1,137,993 $ 89,143 7.83% 1,072,600 $ 87,448 8.15%
----------- ---------
Non interest-earning assets 72,084 63,978
---------- ----------
Total assets $1,210,077 $1,136,578
========== ==========
Interest Bearing Deposits:
Demand and savings $ 234,288 $ 5,973 2.55% $ 215,358 $ 6,251 2.90%
Time deposits 495,747 26,026 5.25 489,265 27,648 5.65
---------- ----------- ---------- ---------
Total 730,035 31,999 4.38 704,623 33,899 4.81
Borrowings 324,282 17,648 5.44 279,004 16,251 5.82
---------- ----------- ---------- ---------
Total interest-bearing 1,054,317 49,647 4.71 983,627 50,150 5.10%
liabilities ----------- ---------- ---------
Non interest-bearing deposits 62,431 56,845
---------- ----------
Subtotal 1,116,748 1,040,472
Other liabilities 7,238 8,108
---------- ----------
Total liabilities 1,123,986 1,048,580
Shareholders' equity 86,091 87,998
---------- ----------
Total liabilities and $1,210,077 $1,136,578
shareholders' equity ========== ==========
Net interest income and $ 39,496 3.12% $ 37,298 3.05%
interest rate spread(3) ======== ===== ========= =====
Net interest margin(4) 3.47% 3.48%
===== =====
Average interest-earning
assets to average 107.9% 109.0%
interest-bearing
liabilities
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997
---------------------------------------
AVERAGE INCOME/ YIELD/
BALANCE EXPENSES COST
---------------------------------------
<S> <C> <C> <C>
Securities:
Taxable $ 265,450 $ 18,184 6.85%
Non-taxable (2) 25,357 2,007 7.91
----------- ---------
Total securities 290,807 20,191 6.94
Loans:
Commercial 312,385 29,654 9.49
Real estate 361,709 28,187 7.79
Consumer 77,705 7,062 9.09
----------- ---------
Total loans(1) 751,799 64,903 8.63
Federal funds sold 6,794 364 5.36
----------- ---------
Total earning assets(2) 1,049,400 $ 85,458 8.14%
---------
Non interest-earning assets 46,541
------------
Total assets $1,095,941
============
Interest Bearing Deposits:
Demand and savings $ 205,556 $ 5,455 2.65%
Time deposits 496,975 27,907 5.62
----------- ---------
Total 702,531 33,362 4.75
Borrowings 250,852 14,894 5.94
----------- ---------
Total interest-bearing 953,383 48,256 5.06%
liabilities ---------
Non interest-bearing deposits 48,933
-----------
Subtotal 1,002,316
Other liabilities 12,040
-----------
Total liabilities 1,014,356
Shareholders' equity 81,585
-----------
Total liabilities and $1,095,941
shareholders' equity ============
Net interest income and $ 37,202 3.08%
interest rate spread(3) ========= ====
Net interest margin(4) 3.55%
====
Average interest-earning
assets to average
interest-bearing
liabilities 110.1%
</TABLE>
(1) Non-accrual loans are included in the average loan balances,
(2) Computed on an FTE basis utilizing a 35% tax rate in 1999 and 1998 and 34%
tax rate in 1997. The applicable adjustments were $1,029, $790 and $766 for
the years ended December 31, 1999, 1998, and 1997, respectively.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
20
<PAGE> 21
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,
1999 VS. 1998 1998 VS. 1997
INCREASE (DECREASE) INCREASE (DECREASE)
--------------------------------------------------------------------------------------
(IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL
----------- ------------ ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans:
Commercial $ 5,519 $ (1,351) $ 4,168 $ 270 $ (148) $ 122
Real estate (1,878) (1,734) (3,612) 68 344 412
Consumer 444 (898) (454) 1,276 (63) 1,213
---------- ----------- ---------- ---------- --------- ----------
Total loans 4,085 (3,983) 102 1,614 133 1,747
Securities
Taxable 1,326 (239) 1,087 497 (167) 330
Non-taxable 544 77 621 148 (25) 123
---------- ----------- ---------- ---------- --------- ----------
Total securities 1,870 (162) 1,708 645 (192) 453
Fed funds sold (122) 7 (115) (206) (4) (210)
---------- ----------- ---------- ---------- --------- ----------
Total interest-earning assets 5,833 (4,138) 1,695 2,053 (63) 1,990
---------- ----------- ---------- ---------- --------- ----------
Interest-bearing liabilities:
Deposits:
Demand and savings deposits 521 (799) (278) 268 528 796
Time deposits 361 (1,983) (1,622) (435) 176 (259)
---------- ----------- ---------- ---------- --------- ----------
Total interest-bearing deposits 882 (2,782) (1,900) (167) 704 537
Borrowings 2,512 (1,115) 1,397 1,644 (286) 1,358
---------- ----------- ---------- ---------- --------- ----------
Total interest-bearing liabilities 3,394 (3,897) (503) 1,477 418 1,895
---------- ----------- ---------- ---------- --------- ----------
Net interest income $ 2,439 $ (241) $ 2,198 $ 576 $ (481) $ 95
========== =========== ========== ========== ========= ==========
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Income. The Company's net income totaled $12.3 million for the year
ended December 31, 1999, an increase of $2.1 million, or 21.0% from 1998. Basic
and diluted earnings per share (hereinafter referred to as "earnings per share")
in 1999 equaled $1.58, compared to $1.28 in 1998, a 23.4% increase. Income
before extraordinary item also totaled $12.3 million, or $1.58 per share, in
1999 compared to $10.6 million, or $1.33 per share, in 1998. During 1998, the
Company repaid various fixed rate Federal Home Loan Bank (FHLB) advances that
had interest rates in excess of current market rates and incurred prepayment
charges of $613,000 which were recorded, net of taxes of $213,000, as an
extraordinary item. Operating results in 1998 also included the after tax
effects of charges totaling $1.1 million recorded as a result of merger,
restructuring and planned branch closing activities. Earnings in 1998 adjusted
to exclude the effects of non-recurring charges were $11.6 million, or $1.46 per
share. Net interest income and non-interest income increased 5.4% and 8.1%,
respectively, in 1999 as compared to 1998 while non-interest expense, excluding
non-recurring charges in 1998, increased 5.2%. The provision for possible loan
losses was $1.6 million in 1999 compared to $1.2 million in 1998. The Company's
net interest margin decreased to 3.47% in 1999 as compared to 3.48% in 1998. The
Company's return on average assets and return on average equity were 1.02% and
14.29%, respectively, in 1999, compared to .89% and 11.55%, respectively, in
1998. Excluding the non-recurring charges noted above, the Company's return on
average assets and return on average equity in 1998 were 1.02% and 13.21%,
respectively.
21
<PAGE> 22
Interest Income. Total interest income increased 1.7% to $88.1 million
for 1999, compared to $86.7 million for 1998. This increase resulted from a
$65.4 million, or 6.1%, increase in average interest-earning assets in 1999. The
average balance of loans increased $41.1 million, or 5.3%, while the average
balance of securities increased $26.5 million, or 8.8%.
The weighted average yield on interest-earning assets was 7.83% in
1999, a decrease of 32 basis point from 1998. The Company's yield on average
loans decreased from 8.66% in 1998 to 8.23% in 1999. Yields on the investment
portfolio decreased from 6.88% in 1998 to 6.85% in 1999.
Interest Expense. Total interest expense decreased 1.0% to $49.6
million for 1999 as compared to $50.2 million for 1998. Interest expense
decreased due to a lower cost of funds during 1999 as compared to 1998, offset
in part by a higher average balance of interest-bearing liabilities. The average
balance of interest-bearing deposit accounts increased $25.4 million, or 3.6%,
during 1999 as compared to 1998 while the average balance of borrowings
increased 16.2% from $279.0 million in 1998 to $324.3 million in 1999.
The Company's cost of funds decreased to 4.71% in 1999 as compared to
5.10% in 1998. The lower cost of funds in 1999 was primarily a result of the
repricing of maturing certificates of deposit at lower rates, interest rate
reductions on demand and savings accounts and the repayment and refinancing of
higher rate FHLB advances in December 1998.
Provision for Possible Loan Losses. The provision for possible loan
losses was $1.6 million in 1999 compared to $1.2 million in 1998. The provision
for possible loan losses was considered sufficient by management for maintaining
an adequate allowance for possible loan losses. The increased provision in 1999
resulted primarily from increases in, as well as a change in the mix of, the
loan portfolio.
Non-Interest Income. Total non-interest income increased 8.1% to $10.8
million in 1999 as compared to $9.9 million in 1998. The following table sets
forth the Company's non-interest income for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
--------------------- ---------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Trust and custodian fees $ 2,508 $ 2,121 $ 1,807
Customer service fees 2,245 2,129 2,040
Investment securities gains 318 34 88
Gain on sale of loans 2,449 3,677 2,202
Other 3,233 1,987 1,631
--------------------- ---------------------- ----------------------
Total $ 10,753 $ 9,948 $ 7,768
===================== ====================== ======================
</TABLE>
Trust and custodian fees increased 18.2% to $2.5 million in 1999 from
$2.1 million in 1998. Growth in trust income continued to result primarily from
the expansion of the customer base, higher asset values and changes in fee
structure.
Customer service fees, representing service charges on deposits and
fees for other banking services, increased $116,000, or 5.4% in 1999. This
increase resulted from the Company's continued emphasis on increasing fee income
on fee-based accounts.
Gains on sales of loans decreased $1.3 million to $2.4 million for 1999
compared to $3.7 million for 1998. During 1998, the Company sold $27.8 million
of the guaranteed portion of its SBA and other government guarantee loan
originations in the secondary market compared to $26.7 million during 1998,
realizing gains of $1.8 million in 1999 compared to gains of $2.1 million in
1998. Also, the Company recorded gains of $627,000 from the sales of residential
loans during 1999 compared to $1.6 million in 1998. Residential loan origination
and sale activity during 1999 declined particularly in the later half of the
year due to increasing interest rates.
The Company continues to emphasize its small business lending
activities, including the evaluation of expansion into new markets. The nature
of the political climate in Washington, D.C. may subject existing government
programs to much
22
<PAGE> 23
scrutiny and possible cutbacks. It is not currently known whether the SBA
program will ultimately be impacted. Management believes that any such cutbacks
could negatively affect the Company's activities in the SBA lending programs as
well as the planned expansion of such activities.
Other income increased $1.2 million to $3.2 million in 1999 compared to
$2.0 million in 1998 primarily as a result of financial planning fee income of
Chornyak which totaled $695,000 in 1999 compared to no such amount in 1998.
Also, electronic banking fee income increased $253,000 and earnings from
bank-owned life insurance increased $148,000 in 1999 compared to 1998.
Non-Interest Expense. Excluding non-recurring merger, integration and
restructuring charges of $1.6 million in 1998, total non-interest expense
increased $1.5 million to $29.7 million in 1999, compared to $28.2 million in
1998. This increase generally resulted from expansion of the Company's operating
and loan production activities, offset in part by efficiencies achieved from the
May 1998 merger of the Company's banking subsidiaries. The following table sets
forth the Company's non-interest expense for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
----------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits $ 16,791 $15,764 $14,720
Net occupancy expense 1,699 1,540 1,630
Furniture and equipment expense 922 898 789
Data processing expense 1,214 1,095 1,086
Taxes other than income taxes 921 850 986
Federal deposit insurance 279 263 249
Amortization of intangibles 1,411 1,376 1,525
Other 6,414 8,041 5,692
----------------- ----------------- -----------------
Total $ 29,651 $ 29,827 $ 26,677
================= ================= =================
</TABLE>
Salaries and employee benefits accounted for approximately 59.5% of
total operating expenses (non-interest expense less amortization of intangibles
and non-recurring charges) in 1999 compared to 58.8% in 1998. The average full
time equivalent staff level decreased to 383 in 1999 compared to 392 in 1998.
Excluding non-recurring salary and employee benefits expense of $378,000 in
1998, salaries and employee benefits increased 9.1%, from $15.4 million in 1998
to $16.8 million in 1999. In general, higher salaries and employee benefits
costs resulted from the addition of loan production personnel, expansion of
operating activities and the acquisition of Chornyak in April 1999.
Net occupancy expense increased 10.3% to $1.7 million in 1999 from $1.5
million in 1998. This increase resulted primarily from higher costs associated
with new branch facilities facilities opened and acquired in the fourth quarter
of 1998 and second quarter of 1999.
Furniture and equipment expense increased $24,000, or 2.7% in 1999.
This increase was due principally to higher depreciation costs.
Data processing expense was $1.2 million in 1999 compared to $1.1
million in 1998. Higher costs in 1999 resulted from equipment and software
enhancements due to technological advancements.
Taxes other than income taxes increased $71,000, or 8.4%, in 1999
compared to 1998. This increase resulted primarily from higher capital levels.
Also, the expense recorded for 1998 benefited from refunds received for taxes
paid in prior years.
Federal deposit insurance expense increased $16,000 to $279,000 in 1999
from $263,000 in 1998, as a result of higher deposit levels.
23
<PAGE> 24
Amortization of goodwill and other intangibles totaled $1.4 million
during both 1999 and 1998.
Excluding non-recurring charges of $1.3 million in 1998, other
non-interest expenses decreased $376,000, or 5.6%. This decrease resulted
primarily from efficiencies achieved from the May 1998 merger of the Company's
banking subsidiaries and cost control initiatives.
The efficiency ratio is one method used in the banking industry to
assess profitability. It is defined as non-interest expense less amortization
expense and non-recurring charges divided by the net revenue stream. The net
revenue stream is the sum of net interest income on a FTE basis and non-interest
income excluding net investment securities gains or losses and non-recurring
income. The Company's efficiency ratio was 56.6% for 1999, as compared to 56.8%
for 1998 and 56.7% for 1997. 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 $850,000 to $5.7 million in 1999, for an effective tax rate of 31.6%.
This compared to Federal income tax expense of $4.8 million in 1998 which
represented an effective tax rate of 31.4%.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Income. The Company's net income totaled $10.2 million for the year
ended December 31, 1998, a decrease of $602,000, or 5.6% from 1997. Basic and
diluted earnings per share (hereinafter referred to as "earnings per share") in
1998 equaled $1.28, compared to $1.35 in 1997, a 5.2% decrease. Income before
extraordinary item totaled $10.6 million, or $1.33 per share, in 1998. During
1998, the Company repaid various fixed rate Federal Home Loan Bank (FHLB)
advances that had interest rates in excess of current market rates. In
connection with this early extinguishment of debt, the Company paid prepayment
charges of $613,000 which were recorded, net of taxes of $213,000, as an
extraordinary item. Operating results in 1998 also include the after tax effects
of charges totaling $1.1 million recorded as a result of merger, restructuring
and planned branch closing activities. Earnings in 1998 adjusted to exclude the
effects of non-recurring charges were $11.6 million, or $1.46 per share. Net
interest income and non-interest income increased .2% and 28.1%, respectively,
in 1998 as compared to 1997 while non-interest expense, excluding non-recurring
charges, increased 5.7%. The provision for possible loan losses was $1.2 million
in both 1998 and 1997. The Company's net interest margin decreased to 3.48% in
1998 as compared to 3.55% in 1997, primarily reflecting the effects of the
Company's purchase in January 1998 of bank-owned life insurance, which is
included in the Company's balance sheet as a non-interest earning asset. In
addition, lower interest rates and a flattening of the yield curve adversely
affected the net interest margin throughout 1998. Increases in non-interest
income resulted primarily from higher gains on sales of loans and earnings on
bank-owned life insurance. The increase in non-interest expense primarily
resulted from costs associated with additional loan production activities. The
Company's return on average assets and return on average equity were .89% and
11.55%, respectively, in 1998, compared to .98% and 13.20%, respectively, in
1997. Excluding the non-recurring charges noted above, the Company's return on
average assets and return on average equity in 1998 were 1.02% and 13.21%,
respectively.
Interest Income. Total interest income increased 2.3% to $86.7 million
for 1998, compared to $84.7 million for 1997. This increase resulted from a
$23.2 million, or 2.2%, increase in average interest-earning assets in 1998. The
average balance of loans increased $17.9 million, or 2.4%, while the average
balance of securities increased $9.2 million, or 3.2%.
The weighted average yield on interest-earning assets was 8.15% in
1998, an increase of 1 basis point from 1997. The Company's yield on average
loans increased from 8.63% in 1997 to 8.66% in 1998. Yields on the investment
portfolio decreased from 6.94% in 1997 to 6.88% in 1998.
Interest Expense. Total interest expense increased 3.9% to $50.2
million for 1998 as compared to $48.3 million for 1997. Interest expense
increased due to a higher average balance of interest-bearing liabilities
outstanding and due to a higher cost of funds during 1998 as compared to 1997.
The average balance of interest-bearing deposit accounts increased $2.1 million,
or .3%, to $704.6 million in 1998 as compared to $702.5 million in 1997. Average
interest-bearing liabilities increased 3.2%, from $953.4 million to $983.6
million.
24
<PAGE> 25
The Company's cost of funds increased to 5.10% in 1998 as compared to
5.06% in 1997. The higher cost of funds in 1998 was primarily a result of the
continued shift by customers into higher yielding certificates of deposit and
money market accounts as well as higher borrowing levels relative to total
interest-bearing liabilities.
Provision for Possible Loan Losses. The provision for possible loan
losses was $1.2 million in 1998 and 1997. The provision for possible loan losses
was considered sufficient by management for maintaining an adequate allowance
for possible loan losses. Total non-performing loans increased to $3.7 million
at December 31, 1998, from $2.2 million at December 31, 1997. Net charge-offs
totaled $1.2 million, or .16% of average loans, in both 1998 and 1997. The
allowance for possible loan losses at December 31, 1998 was $6.6 million, or
.85% of total loans and 178.3% of non-performing loans compared to $6.6 million,
or .87% of total loans and 298.3% of non-performing loans at December 31, 1997.
Management's estimate of the adequacy of its allowance for possible loan losses
is based upon its continuing review of prevailing national and local economic
conditions, changes in the size and composition of the portfolio and individual
problem credits. Growth of the loan portfolio, loss experience, economic
conditions, delinquency levels, nature and adequacy of underlying collateral,
credit mix and selected credits are factors that affect judgments concerning the
adequacy of the allowance.
Non-Interest Income. Total non-interest income increased 28.1% to $9.9
million in 1998 as compared to $7.8 million in 1997.
Trust and custodian fees increased 17.4% to $2.1 million in 1998 from
$1.8 million in 1997. Growth in trust income continued to result primarily from
the expansion of the customer base as well as higher asset values.
Customer service fees, representing service charges on deposits and
fees for other banking services, increased 4.4% in 1998 to $2.1 million from
$2.0 million in 1997. This increase resulted from the Company's continued
emphasis on increasing fee income on fee-based accounts.
Gains on sales of loans increased $1.5 million to $3.7 million for 1998
compared to $2.2 million for 1997. During 1998, the Company sold $26.7 million
of the guaranteed portion of its SBA and other government guarantee loan
originations in the secondary market compared to $19.7 million during 1997,
realizing gains of $1.6 million in 1998 compared to gains of $1.5 million in
1997. Also, the Company recorded gains of $1.6 million from the sales of
residential loans during 1998 compared to $689,000 in 1997. Loan origination and
sale activity during 1998 continued to benefit from the favorable interest rate
environment.
The Company intends to continue to place emphasis on its small business
lending activities, including the evaluation of expansion into new markets. The
nature of the political climate in Washington, D.C. may subject existing
government programs to much scrutiny and possible cutbacks. One component of the
Clinton Administration's current budget proposal is to reduce by approximately
5% funding available for the SBA 7(a) program as well to reduce lender and
borrower fees. It is not currently known whether the SBA program will ultimately
be impacted. Management believes that any such cutbacks could negatively affect
the Company's activities in the SBA lending programs as well as the planned
expansion of such activities.
Other income increased $356,000 to $2.0 million in 1998 compared to
$1.6 million in 1997 primarily as a result of earnings on bank-owned life
insurance which totaled $794,000 in 1998 compared to no such amount in 1997.
This increase was offset in part by a $500,000 gain recognized in 1997 in
connection with the curtailment of post retirement benefits provided to certain
Company employees.
Non-Interest Expense. Total non-interest expense increased $3.2
million to $29.8 million in 1998, compared to $26.7 million in 1997. Excluding
non-recurring charges totaling $1.6 million recorded in 1998 in connection with
two planned branch closings and merger, integration and restructuring
activities, total non-interest expenses were $28.2 million in 1998 compared to
$26.7 million in 1997, representing an increase of $1.5 million, or 5.7%. This
increase generally resulted from expansion of the Company's loan production
activities.
Salaries and employee benefits accounted for approximately 58.8% of
total operating expenses (non-interest expense less amortization of intangibles
and non-recurring charges) in 1998 compared to 58.5% in 1997. The average full
time equivalent staff
25
<PAGE> 26
level increased 8.0% to 392 in 1998 compared to 363 in 1997. Excluding
non-recurring salary and employee benefits expense of $378,000 in 1998, salaries
and employee benefits increased 4.5%, from $14.7 million in 1997 to $15.4
million in 1998. In general, higher salaries and employee benefits costs
resulted from the addition of loan production personnel.
Net occupancy expense decreased 5.5% to $1.5 million in 1998 from $1.6
million in 1997. This decrease resulted primarily from lower rent and
depreciation expenses.
Furniture and equipment expense increased $109,000, or 13.8% in 1998.
This increase was due principally to higher depreciation costs.
Data processing expense was $1.1 million in 1998 and 1997. Costs
associated with the conversion of County's and Bellbrook's data processing
systems during 1998 were offset by ongoing cost savings achieved as a result of
these systems conversions.
Taxes other than income taxes decreased $136,000, or 13.8%, in 1998
compared to 1997. This decrease resulted primarily from changes in tax laws that
had a favorable impact on the Company's franchise tax liability in 1998.
Federal deposit insurance expense increased $14,000 to $263,000 in 1998
from $249,000 in 1997, primarily as a result of higher deposit levels.
Amortization of goodwill and other intangibles resulting from the
application of purchase accounting in connection with the County acquisition
totaled $1.4 million during 1998 compared to $1.5 million in 1997.
Excluding non-recurring charges of $1.3 million in 1998, other
non-interest expenses increased $1.1 million, or 19.3%, primarily as a result of
the expanded volume of business activities.
Provision for Income Taxes. The provision for Federal income taxes
decreased $701,000 to $4.8 million in 1998, for an effective tax rate of 31.4%.
This compared to Federal income tax expense of $5.5 million in 1997 which
represented an effective tax rate of 34.0%. The decrease in expense as a
percentage of pre-tax income in 1998 resulted from an increase in the amount of
earnings exempt from taxes.
ASSET QUALITY
Non-Performing Assets. To maintain the level of credit risk of the loan
portfolio at an appropriate level, management sets underwriting standards and
internal lending limits and provides for proper diversification of the portfolio
by placing constraints on the concentration of credits within the portfolio. In
monitoring the level of credit risk within the loan portfolio, management
utilizes a formal loan review process to monitor, review, and consider relevant
factors in evaluating specific credits in determining the adequacy of the
allowance for possible loan losses. FNB formally documents its evaluation of the
adequacy of the allowance for possible loan losses on a quarterly basis and the
evaluations are reviewed and discussed with its boards of directors.
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 $222,000 of such property at
December 31, 1999 and $607,000 at December 31, 1998.
Non-performing loans totaled $3.6 million, or 0.42% of total loans, at
December 31, 1999, compared to $3.7 million, or 0.48% of total loans, at
year-end 1998. Non-performing assets totaled $3.8 million, or 0.30% of total
assets at December 31, 1999, compared to $4.3 million, or 0.37% of total assets,
at December 31, 1998. Management of the Company is not aware of any material
amounts of loans outstanding, not disclosed in the table below, for which there
is significant uncertainty as to the ability of the borrower to comply with
present payment terms. The following is an analysis of the composition of
non-performing assets:
26
<PAGE> 27
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,312 $1,294 $ 832 $ 991 $ 440
Accruing loans 90 days or more past due 2,244 2,432 1,386 1,567 584
---------- ---------- ---------- ---------- ----------
Total non-performing loans 3,556 3,726 2,218 2,558 1,024
Other real estate owned 222 607 785 539 24
---------- ---------- ---------- ---------- ----------
Total non-performing assets $3,778 $4,333 $3,003 $3,097 $1,048
========== ========== ========== ========== ==========
Restructured loans $2,986 $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
Non-performing loans to total loans 0.42 % 0.48 % 0.29 % 0.35 % 0.38 %
Non-performing assets to total assets 0.30 % 0.37 % 0.28 % 0.29 % 0.22 %
Non-performing loans plus restructured
loans to total loans 0.77 % 0.48 % 0.29 % 0.35 % 0.38 %
</TABLE>
Restructured loans consist of one loan that was restructured in May
1999. At December 31, 1999, this loan was performing in accordance with its
restructured terms.
OCC regulations require that banks classify their assets on a regular
basis. Problem assets are classified as "substandard", "doubtful" or "loss".
"Substandard" assets have one or more defined weaknesses and are characterized
by the distinct possibility that some loss will be sustained if deficiencies are
not corrected. "Doubtful" assets have the same weaknesses as "substandard"
assets, with the additional characteristics that (1) the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable and (2) there is a high possibility of loss.
An asset classified "loss" is considered uncollectible and of such little value
that continuance of recording as an asset is not warranted. The regulations also
contain a "special mention" category which consists of assets which do not
expose an insured institution to a sufficient degree of risk to warrant
classification but which possess credit deficiencies or potential weaknesses
deserving management's close attention.
The aggregate amounts of the Company's classified assets as of the
dates indicated were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ------------ ------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Substandard $ 8,277 $ 9,512 $ 5,353 $ 6,346 $ 507
Doubtful -- 21 423 626 --
Loss -- -- 456 847 --
--------------- ------------ ------------ ------------ ------------
Total classified assets $ 8,277 $ 9,533 $ 6,232 $ 7,819 $ 507
=============== ============ ============ ============ ============
</TABLE>
The largest classified loan at December 31, 1999 was the restructured
loan discussed above which was classified as "substandard". This loan was also
included in the "substandard" classification at December 31, 1998, 1997 and
1996. The increase in classified assets from December 31, 1995 to December 31,
1996 resulted primarily from the acquisition of County which added $4.8 million
to the 1996 total.
Allowance for Possible Loan Losses. The Company records a provision
necessary to maintain the allowance for possible loan losses at a level
sufficient to provide for potential future credit losses. The allowance for loan
losses is increased by the provision for loan losses and recoveries and is
decreased by charged-off loans. The evaluation process to determine potential
losses includes consideration of the industry, the general economic environment,
historical losses by loan type, changes in the size and composition of the
portfolio, delinquency trends and specific conditions of the individual
borrower. While analytical techniques are used to identify potential losses on
loans, future additions may be necessary based on loan growth and changes in
economic conditions.
27
<PAGE> 28
The following table summarizes the Company's loan loss experience, and
provides a breakdown of the charge-off, recovery and other activity for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 6,643 $ 6,617 $ 6,599 $ 3,307 $ 3,095
Charge-offs:
Residential mortgage (179) (87) (32) (12) (10)
Construction mortgage -- -- -- -- --
Commercial (408) (890) (666) (67) (373)
Consumer (983) (825) (1,074) (1,020) (479)
----------- ----------- ----------- ----------- -----------
Total charge-offs (1,570) (1,802) (1,772) (1,099) (862)
----------- ----------- ----------- ----------- -----------
Recoveries:
Residential mortgage 93 46 8 5 2
Construction mortgage -- -- -- -- --
Commercial 214 267 91 41 12
Consumer 471 290 470 227 93
----------- ----------- ----------- ----------- -----------
Total recoveries 778 603 569 273 107
----------- ----------- ----------- ----------- -----------
Net charge-offs (792) (1,199) (1,203) (826) (755)
Provision charged to operations 1,580 1,225 1,221 1,257 967
County's allowance for possible
loan losses at time of acquisition -- -- -- 2,861 --
----------- ----------- ----------- ----------- -----------
Balance at end of period $ 7,431 $ 6,643 $ 6,617 $ 6,599 $ 3,307
=========== =========== =========== =========== ===========
Loans outstanding at end of period
$849,767 $ 777,063 $ 761,027 $ 721,855 $ 268,818
Average loans outstanding $810,782 $ 769,687 $ 751,799 $ 445,514 $ 261,706
Allowance as a percent of loans
outstanding 0.87 % 0.85 % 0.87 % 0.91 % 1.23 %
Net charge-offs to average loans 0.10 % 0.16 % 0.16 % 0.19 % 0.29 %
Allowance for possible loan
losses to non-performing loans 209.0 % 178.3 % 298.3 % 258.0 % 322.9 %
</TABLE>
The allowance for possible loan losses totaled $7.4 million, or .87% of
total loans, at December 31, 1999 compared to $6.6 million, or .85% of total
loans, at December 31, 1998. 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, 1999 were $792,000 compared to $1.2 million for
the year ended December 31, 1998. Net charge-offs as a percentage of average
loans in 1998 were .10% compared to .16% in 1998. Charge-offs have been made in
accordance with the Company's standard policy and have occurred primarily in the
commercial and consumer loan portfolios.
The allowance for possible loan losses as a percentage of
non-performing loans ("coverage ratio") was 209.0% at December 31, 1999,
compared to 178.3% at the end of 1998. Although used as a general indicator, the
coverage ratio is not a primary factor in the determination of the adequacy of
the allowance by management. Total non-performing loans as a percentage of total
loans remained a relatively low 0.42% of total loans at December 31, 1999
compared to .48% at December 31, 1998.
The allowance for loan losses is allocated according to the amount
systematically estimated as necessary to provide for the inherent losses within
the various categories of loans. General allocations of the allowance are based
primarily on previous charge-off experience adjusted for changes in the risk
characteristics of each category. In addition, classified and non-performing
loans are evaluated separately and specific reserves are allocated based on
expected losses on each individual classified or non-performing loans.
The following table sets forth the allocation of the Company's
allowance for possible loan losses for each of the periods presented:
28
<PAGE> 29
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
-------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT
LOANS TO LOANS TO OF LOANS
ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TO TOTAL
--------- --------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage $ 1,646 38.5 % $ 946 45.5 % $ 1,120 47.7 %
Construction 55 1.1 25 1.3 24 1.2
Commercial 3,440 48.4 2,947 41.6 2,830 39.7
Consumer 2,290 12.0 2,725 11.6 2,643 11.4
-------- --------- --------- ---------- --------- ----------
TOTAL $ 7,431 100.0 % $ 6,643 100.0 % $ 6,617 100.0 %
======== ========= ========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
(DOLLARS IN THOUSANDS) 1996 1995
--------------------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
----------- -------- --------- --------
<S> <C> <C> <C> <C>
Residential mortgage $ 1,392 46.8 % $ 117 39.3 %
Construction 24 1.1 -- 1.1
Commercial 2,704 41.5 3,164 39.8
Consumer 2,479 10.6 26 19.8
----------- -------- --------- ----------
TOTAL $ 6,599(1) 100.0 % $ 3,307 100.0 %
=========== ======== ========= ==========
</TABLE>
(1) The increase in the allowance for possible loan losses at December 31,
1996, compared to 1995, resulted primarily from the addition of County's
allowance at the time the Company acquired County.
COMPARISON OF DECEMBER 31, 1999 AND DECEMBER 31, 1998 FINANCIAL CONDITION
Total assets increased $93.2 million, or 7.9%, to $1.27 billion at
December 31, 1999, as compared to $1.18 billion at December 31, 1998. Total
investment securities increased by $3.6 million to $331.2 million. 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, 1999, 93.7% of the total
investment portfolio was classified as available-for-sale, while those
securities which the Company intends to hold to maturity represented the
remaining 6.3%. This compares to 91.9% and 8.1% classified as available-for-sale
and held to maturity, respectively, at December 31, 1998.
Total loans increased $72.7 million, or 9.4%, to $849.8 million at
December 31, 1999. Growth in the loan portfolio, as well as a change in the loan
portfolio mix, have been important elements of the Company's balance sheet
transition following the 1996 acquisition of County. The increase in loans was
attributed to an $87.9 million increase in commercial and commercial real estate
loans and an $11.8 million increase in consumer loans. These increases were
offset in part by a $26.3 million decrease in residential real estate loans and
a $719,000 decrease in construction mortgage loans.
Premises and equipment increased $1.9 million to $14.8 million at
December 31, 1999. This increase resulted primarily from the completion of
construction of a new branch in New Albany, Ohio which opened in May 1999. Also,
data processing equipment and software purchases associated with enhancement of
technology throughout the Company contributed to the increase.
Other assets increased from $21.7 million at December 31, 1998 to $32.6
million at December 31, 1999. This increase was attributed to the Company's
purchase of an additional $5.0 million of bank-owned life insurance and deferred
tax assets of $4.5 million related to unrealized holding losses on
available-for-sale securities.
Deposits totaled $799.2 million at December 31, 1999, an increase of
$9.6 million over total deposits at December 31, 1998. The Company continues to
emphasize growth in its existing retail deposit base provided that deposit
growth is cost effective compared to alternative funding sources. Total
interest-bearing deposits accounted for 91.9% of total deposits at December 31,
1999 as compared to 91.7% at December 31, 1998.
Total borrowings, including federal funds purchased, increased $88.7
million to $385.5 million at December 31, 1999, as compared to $296.8 million at
December 31, 1998. This increase resulted from funding needs associated with
increases in the loan portfolio. Also contributing to the increase was the
issuance of $20.0 million aggregate liquidation amount of 9.875% Capital
Securities, Series A due 2029 (included as borrowings in the Company's balance
sheet) that were issued by the Trust in October 1999.
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
29
<PAGE> 30
accomplished principally by maintaining sufficient cash flows and liquid assets
along with consistent stable core deposits and the capacity to maintain
immediate access to funds. These immediately accessible funds may include
federal funds sold, unpledged marketable securities, reverse repurchase
agreement or available lines of credit from the FRB, FHLB, or other financial
institutions. An important factor in the preservation of liquidity is the
maintenance of public confidence, as this facilitates the retention and growth
of a large, stable supply of core deposits in funds.
The Company's principal source of funds to satisfy short-term liquidity
needs comes from cash, due from banks and federal funds sold. The investment
portfolio serves as an additional source of liquidity for the Company. At
December 31, 1999, securities with a market value of $310.4 million were
classified as available-for-sale, representing 93.7% 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 $14.0 million and $5.0 million
for 1999 and 1998, respectively.
FNB is a member of the FHLB. Membership provides an opportunity to
control the bank's cost of funds by providing alternative funding sources, to
provide flexibility in the management of interest rate risk through the wide
range of available funding sources, to manage liquidity via immediate access to
such funds, and to provide flexibility through utilization of customized funding
products to fund various loan and investment product and strategies.
The Company obtained a $15 million term loan with a financial
institution in order to partially fund the 1996 acquisition of County. This loan
had an outstanding balance of $6.3 million at December 31, 1999. Under terms of
the loan agreement, the Company is required to make quarterly interest payments
and annual principal payments based upon a 10-year amortization. Principal
payments commenced in February 1998. Also, in February 1999, the Company prepaid
$5.0 million of the outstanding principal balance. The unpaid loan balance is
due in full in September 2003. At December 31, 1999, the Company has pledged 67%
of the stock of FNB as security for the loan. The loan agreement contains
certain financial covenants which requires that (i) the Company maintain a
minimum ratio of total capital to risk-weighted assets of 10%; (ii) each of the
Company's banking subsidiaries, which represent greater than 10% of the
Company's consolidated capital, maintain a minimum ratio of Tier 1 capital to
risk-weighted assets of 6.0%, Tier 1 capital to average assets of 5.0% and total
capital to risk-weighted assets of 10.0%; (iii) the Company maintain, on a
consolidated basis, a minimum annualized return on average assets of not less
than 0.75% ; and (iv) the Company maintain, on a consolidated basis, a ratio of
non-performing loans to equity capital of less than 25.0% and a minimum ratio of
allowance for possible loan losses to non-performing loans of 75.0%. At December
31, 1999, the Company was in compliance with each of these financial covenants.
The loan agreement also restricts the Company's ability to sell assets, grant
security interests in the stock of its banking subsidiaries, merge or
consolidate, and engage in business activity unrelated to banking.
Shareholders' equity at December 31, 1999 was $80.1 million, compared
to $87.5 million at December 31, 1998, a decrease of $7.4 million, or 8.5%. This
decrease resulted primarily from purchases of treasury stock (net) of $9.7
million and a $7.9 million increase in unrealized holding losses on
available-for-sale securities, offset in part by the retention of earnings (net
of dividends paid).
Under the risk-based capital guidelines, a minimum capital to
risk-weighted assets ratio of 8.0% is required, of which, at least 4.0% must
consist of Tier 1 capital (equity capital net of goodwill). Additionally, a
minimum leverage ratio (Tier 1 capital to total assets) of 4.0% must be
maintained. At December 31, 1999, the Company had a total risk-based capital
ratio of 12.3%, of which 11.4% consisted of Tier 1 capital. The leverage ratio
of the Company at December 31, 1999 was 7.8%.
Cash dividends declared to shareholders of the Company totaled $4.4
million, or $.565 per share, during 1999. This compared to dividends of $4.3
million, or $.545 per share, for 1998. Cash dividends paid as a percentage of
net income amounted to 35.8% and 42.6% for the years ended December 31, 1999 and
1998, respectively.
On October 18, 1999, the Company completed an offering of $20.0 million
aggregate liquidation amount of 9.875% Capital Securities, Series A, due 2029.
These securities represent preferred beneficial interests in BFOH Capital Trust
I, a special purpose trust formed for the purpose of the offering. The proceeds
from the offering were used by the Trust to purchase Junior Subordinated
Deferrable Interest Debentures ("Debentures") from the Company. Under Federal
Reserve Board regulations, these Capital Securities may represent up to 25% of a
bank holding company's Tier 1 capital. The holders of the Capital Securities are
entitled to receive cumulative cash distributions at the annual rate of 9.875%
of the liquidation amount. Distributions are payable semi-annually on April 15
and October 15 of each year, beginning on April 15, 2000. The Company has fully
and unconditionally guaranteed the payment of the Capital Securities, and
payment of distributions on the Capital Securities. The Trust is required to
redeem the Capital
30
<PAGE> 31
Securities on or, in certain circumstances, prior to October 15, 2029. There are
no significant covenants or limitations with respect to the business of the
Company that are contained in the instruments which govern the Capital
Securities and the Debentures.
In April 1999 the Company issued 82,000 common shares in connection
with the acquisition of Chornyak, a full service financial planning company. The
Company also entered into a five year employment agreement with the sole
shareholder of Chornyak. Under the terms of this agreement, the Company granted
this individual an option to purchase up to 30,000 common shares, subject to a
four year vesting schedule.
At its April 1998 meeting, the Company's board of directors authorized
a two-for-one stock split in the form of a 100% stock dividend, payable May 19,
1998 to shareholders of record on April 28, 1998. This stock split had no effect
on the total capital of the Company.
Following receipt of shareholder approval on April 17, 1997, the
Company amended its Articles of Incorporation to increase the number of
authorized shares of common stock from 7,500,000 to 20,000,000 and to eliminate
par value per share of common stock. Management believes that these amendments
will provide the Company with greater financial flexibility and enable it to
more effectively utilize and manage its equity capital. These changes to the
Company's Articles of Incorporation had no effect on the total capital of the
Company.
The Company's Board of Directors and management intend to seek
continued controlled growth of the organization through selective acquisitions
which fit the Company's strategic objectives of growth, diversification and
market expansion and which provide the potential for enhanced shareholder value.
At the present time, the Company does not have any understandings or agreements
for any acquisitions or combination except for the acquisition of Milton Federal
Financial Corporation as discussed in "Item 1. Business - Recent Developments."
Considering the Company's capital adequacy, profitability, available
liquidity sources and funding sources, the Company's liquidity is considered by
management to be adequate to meet current and projected needs.
INTEREST RATE RISK MANAGEMENT
The Company's principal market risk exposure is interest rates. The
objectives of the Company's interest rate risk management are to minimize the
adverse effects of changing interest rates on the earnings of the Company while
maintaining adequate liquidity and optimizing net interest margin. Interest rate
risk is managed by maintaining an acceptable matching of the Company's asset and
liability maturity and repricing periods, thus controlling and limiting the
level of earnings volatility arising from rate movements. Modeling simulations
to project the potential effect of various rate scenarios on net interest income
are the primary tools utilized by management to measure and manage interest rate
exposure within established policy limits. The Company's Asset/Liability
Management Committee ("ALCO") monitors rate sensitive assets and liabilities and
develops appropriate strategies and pricing policies. Interest rate sensitivity
measures the exposure of net interest income to changes in interest rates. In
its simulations, management estimates the effect on net interest income of
changes in the overall level of interest rates. ALCO policy guidelines provide
that a 200 basis point increase or decrease over a 12-month period should not
result in more than a 12.5% negative impact on net interest income. The
following table summarizes results of simulations as of December 31, 1999.
<TABLE>
<CAPTION>
PROJECTED NET INCREASE
CHANGE IN INTEREST RATES INCOME INTEREST (DECREASE) % CHANGE
- ------------------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C>
200 basis point increase $ 39,754 (1,756) (4.23) %
No Change 41,509 n/a n/a
200 basis point decrease 43,011 1,502 3.62 %
</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
31
<PAGE> 32
following table presents the Company's projected change in NPV for various
levels of interest rates as of December 31, 1999. 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.
<TABLE>
<CAPTION>
ESTIMATED PERCENT
CHANGE IN INTEREST RATES NPV CHANGE CHANGE
- ------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
200 basis point increase $ 60,310 $ (26,049) (30.2) %
100 basis point increase 72,997 (13,362) (15.5)
Base scenario 86,359 -- --
100 basis point decrease 92,375 6,016 7.0
200 basis point decrease 93,335 6,976 8.1
</TABLE>
The preceding table indicates that at December 31, 1999, in the event
of a sudden and sustained increase in prevailing market interest rates, the
Company's NPV would be expected to decrease while in the event of a sudden and
sustained decrease in prevailing market interest rates, the Company's NPV would
be expected to increase.
Computations of forecasted effects of hypothetical interest rate
changes are based on numerous assumptions. These assumptions include levels of
market interest rates, loan prepayments ranging from 6% to 50% for adjustable
rate loans and 10% to 50% for fixed rate loans and deposit decay rates. The
computed forecasted effects should not be relied upon as indicative of actual
future results. Further, the computations do not contemplate any actions the
ALCO could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented
in the computation of NPV. Actual results may differ from those projections
presented should market conditions vary from assumptions used in the
calculations of NPV. Certain assets, such as adjustable rate loans, which
represent one of the Company's primary loan products, have features which
restrict changes in interest rates on a short term basis and over the life of
the assets. In addition, the proportion of adjustable rate loans in the
Company's loan portfolio could decrease in future periods if market interest
rates remain at or decrease below current levels due to refinance activity.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in NPV
calculations. Finally, the ability of many borrowers to repay their adjustable
rate mortgage loans could decrease in the event of interest rate increases.
Interest rate sensitivity gap ("gap") analysis measures the difference
between assets and liabilities repricing or maturing within specified time
periods. Although a useful tool, gap analysis has several limitations. Gap
analysis assumes a consistent reaction in the rates of all rate-sensitive assets
and liabilities to changes in overall rates. Additionally, it does not consider
changes to the overall slope of the yield curve or other factors which affect
the timing and pricing of the balance sheet. A positive gap, or asset sensitive
position, indicates a higher level of rate-sensitive assets than rate-sensitive
liabilities repricing or maturing within specified time horizons and would
generally imply a favorable effect on net interest income in periods of rising
interest rates. Conversely, a negative gap, or liability sensitive position,
results when rate-sensitive liabilities exceed the amount of rate-sensitive
assets repricing or maturing within applicable time frames and would generally
imply a favorable impact on net interest income in periods of declining interest
rates.
The following table reflects the Company's gap position at December 31,
1999. 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.
32
<PAGE> 33
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 1 YEAR OR LESS 1 TO 3 YEARS 3 TO 5 YEARS OVER 5 YEARS TOTAL
------------------- --------------- -------------- ---------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 183 $ -- $ -- $ -- $ 183
Loans 452,921 167,187 150,782 78,877 849,767
Investment securities 86,858 48,924 37,469 157,984 331,235
----------------- -------------- ------------- --------------- ------------
Total 539,962 216,111 188,251 236,861 1,181,185
----------------- -------------- ------------- --------------- ------------
INTEREST-BEARING LIABILITIES:
Demand, interest-bearing 110,763 -- -- -- 110,763
Savings 116,334 -- -- -- 116,334
Time 334,351 165,110 6,492 1,041 506,994
Borrowings 281,350 10,000 14,000 80,148 385,498
----------------- -------------- ------------- --------------- ------------
Total 842,798 175,110 20,492 81,189 1,119,589
Off balance sheet items
interest rate swaps (34,375) 34,375 -- -- --
----------------- -------------- ------------- --------------- ------------
Total gap $ (268,461) $ 6,626 $ 167,759 $ 155,672 $ 61,596
================= ============== ============= =============== ============
Cumulative gap $ (268,461) $ (261,835) $ (94,076) $ 61,596
=================== =============== ============== ================
Cumulative gap as a percentage of (21.07) % (20.55) % (7.38) % 4.83 %
total assets =================== =============== ============== ================
</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 counter-party 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, 1999 and 1998, the Company had $40.6 million and $51.9
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 $500,000, $344,000 and $147,000 during 1999, 1998 and 1997,
respectively, and is included with interest on borrowings. The following
summarizes information with respect to swap contracts outstanding at December
31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE RECEIVE WEIGHTED-AVERAGE PAY
MATURITY NOTIONAL AMOUNT RATE RATE
- ---------------------------- -------------------------- -------------------------- ------------------------------
<S> <C> <C> <C>
2000 $ 6,250 6.19 % 6.32 %
2001 14,375 6.10 6.36
2002 20,000 6.15 6.29
-------------------------- -------------------------- -------------------------
Total $ 40,625 6.14 % 6.32 %
========================== ========================== =========================
</TABLE>
CONTINGENCIES AND UNCERTAINTIES - YEAR 2000 COMPLIANCE MATTERS
During the periods leading up to January 1, 2000, the Company addressed
the potential problems associated with the possibility that the computers tha
control or operate the Company's information technology system and
infrastructure may not have been programmed to read four-digit date codes and,
upon arrival of the year 2000, may have recognized the two-digit code "00" as
the year 1900, causing systems to fail to function or generate erroneous data.
33
<PAGE> 34
The Company expended approximately $300,000 through the periods ended
December 31, 1999 in connection with its Year 2000 compliance program. The
Company experienced no significant problems related to its information
technology systems upon arrival of the Year 2000, nor was there any interruption
in service to its customers of any kind.
The company could incur losses if Year 2000 issues adversely affect its
depositors or borrowers. Such problems could include delayed loan payments due
to Year 2000 problems affecting any significant borrowers or impairing the
payroll systems of large employers in the Company's primary market areas.
Because the company's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses, the Company does not expect, and
to date has not realized, any significant or prolonged difficulties that will
affect net earnings or cash flow.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or magnitude as the prices of goods and services.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
For information regarding the market risk of the Company's financial
instruments, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company - Interest Rate Risk Management".
ITEM 8: REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
- ----------------------------------------------------------------------------
ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------
34
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF BANCFIRST OHIO CORP.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and of changes in shareholders' equity and
cash flows present fairly, in all material respects, the financial position of
BancFirst Ohio Corp. and Subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
period then ended, in conformity with accounting principles which, as described
in Note 1, are generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
January 21, 2000
35
<PAGE> 36
BANCFIRST OHIO CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---------------- ----------------
ASSETS:
<S> <C> <C>
Cash and due from banks (Note 3) $ 32,191 $ 28,731
Federal funds sold 183 469
Securities held-to-maturity (approximate fair value of $20,601 and
$26,809 at December 31, 1999 and 1998, respectively, (Note 4) 20,786 26,518
Securities available-for-sale, at fair value 310,449 301,097
---------------- ----------------
Total investment securities 331,235 327,615
---------------- ----------------
Loans (Notes 5 and 6) 849,767 777,063
Allowance for possible loan losses (7,431) (6,643)
---------------- ----------------
Net loans 842,336 770,420
---------------- ----------------
Premises and equipment, net (Note 7) 14,789 12,863
Accrued interest receivable 8,260 7,278
Goodwill and other intangibles 12,606 11,898
Other assets 32,606 21,737
---------------- ----------------
Total assets $ 1,274,206 $ 1,181,011
================ ================
LIABILITIES:
Deposits (Note 8):
Non-interest-bearing deposits $ 65,086 $ 65,588
Interest-bearing deposits 734,090 724,034
---------------- ----------------
Total deposits 799,176 789,622
Federal funds purchased (Note 9) 24,100 --
Federal Home Loan Bank advances and other borrowings (Note 10) 341,398 296,750
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated deferrable interest debentures of
the parent (Note 11) 20,000 --
Accrued interest payable 3,618 2,510
Other liabilities 5,806 4,594
---------------- ----------------
Total liabilities 1,194,098 1,093,476
---------------- ----------------
Commitments and contingencies (Notes 16, 17 and 20)
SHAREHOLDERS' EQUITY (NOTE 18):
Common stock, no par value 20,000,000 shares authorized:
shares issued - 8,164,807 in 1999; 8,076,488 in 1998 66,318 64,096
Retained earnings 35,795 27,892
Accumulated other comprehensive income (Note 22) (8,334) (440)
Less: 569,628 and 180,458 shares of common stock in treasury, at cost,
at December 31, 1999 and 1998, respectively (13,671) (4,013)
---------------- ----------------
Total shareholders' equity 80,108 87,535
---------------- ----------------
Total liabilities and shareholders' equity $ 1,274,206 $ 1,181,011
================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE> 37
BANCFIRST OHIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998 1997
------------- ------------- -------------
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 66,685 $ 66,529 $ 64,820
Interest and dividends on securities:
Taxable 19,601 18,566 18,184
Tax exempt 1,789 1,408 1,324
Other interest income 39 154 364
------------- ------------- -------------
Total interest income 88,114 86,657 84,692
------------- ------------- -------------
Interest expense:
Time deposits, $100 and over 7,872 5,988 6,209
Other deposits 24,127 27,911 27,153
Borrowings 17,648 16,251 14,894
------------- ------------- -------------
Total interest expense 49,647 50,150 48,256
------------- ------------- -------------
Net interest income 38,467 36,507 36,436
Provision for possible loan losses (Note 6) 1,580 1,225 1,221
------------- ------------- -------------
Net interest income after provision for possible loan losses 36,887 35,282 35,215
------------- ------------- -------------
Other income:
Trust and custodian fees 2,508 2,121 1,807
Customer service fees 2,245 2,129 2,040
Investment securities gains, net 318 34 88
Gains on sale of loans 2,449 3,677 2,202
Other 3,233 1,987 1,631
------------- ------------- -------------
Total other income 10,753 9,948 7,768
------------- ------------- -------------
Other expenses:
Salaries and employee benefits 16,791 15,764 14,720
Net occupancy expense 1,699 1,540 1,630
Furniture and equipment expense 922 898 789
Data processing expense 1,214 1,095 1,086
Taxes other than income taxes 921 850 986
Federal deposit insurance 279 263 249
Amortization of intangibles 1,411 1,376 1,525
Other 6,414 8,041 5,692
------------- ------------- -------------
Total other expenses 29,651 29,827 26,677
------------- ------------- -------------
Income before income taxes and extraordinary item 17,989 15,403 16,306
Provision for federal income taxes (Note 14) 5,685 4,835 5,536
------------- ------------- -------------
Income before extraordinary item 12,304 10,568 10,770
Extraordinary item - prepayment charges on early repayment of
Federal Home Loan Bank advances, net of tax of $213 - 400 -
------------- ------------- -------------
Net income $ 12,304 $ 10,168 $ 10,770
============= ============= =============
Basic and diluted earnings per share:
Before extraordinary item $ 1.58 $ 1.33 $ 1.35
Extraordinary item -- (0.05) --
------------- ------------- -------------
After extraordinary item $ 1.58 $ 1.28 $ 1.35
============= ============= =============
Weighted average number of shares outstanding 7,794,202 7,959,362 7,960,996
============= ============= =============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
37
<PAGE> 38
BANCFIRST OHIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL IN ACCUMULATED
COMMON STOCK EXCESS OTHER
--------------------- OF PAR RETAINED COMPREHENSIVE
SHARES AMOUNT VALUE EARNINGS INCOME
---------------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 8,067,838 $ 40,340 $ 22,807 $ 15,466 $ 304
Net income -- -- -- 10,770 --
Other comprehensive income, net
of tax - unrealized gains on
available-for-sale securities,
net of reclassification
adjustment -- -- -- -- 836
Comprehensive income
Elimination of par value -- 22,807 (22,807) -- --
Purchase of 23,308 shares
common stock as cost -- -- -- -- --
Treasury stock, 24,488 shares
issued -- 196 -- -- --
Cash dividend -- -- -- (4,179) --
--------- -------- ------------ ---------- --------------
Balance at December 31, 1997 8,067,838 63,343 -- 22,057 1,140
--------- -------- ------------ ---------- --------------
Net income -- -- -- 10,168 --
Other comprehensive income, net
of tax - unrealized losses on
available for-sale securities
net of reclassification
adjustment -- -- -- -- (1,580)
Comprehensive income -- -- -- -- --
Issuance of common shares 8,650 203 -- -- --
Purchase of 116,000 shares of
common stock at cost
Treasury stock, 43,202 shares
issued -- 550 -- -- --
Cash dividend -- -- -- (4,333) --
--------- -------- ------------ ---------- --------------
Balance at December 31, 1998 8,076,488 64,096 -- 27,892 (440)
--------- -------- ------------ ---------- --------------
Net income 12,304
Other comprehensive income, net
of tax - unrealized losses on
available for sale securities
net of Reclassification
adjustment (7,894)
Comprehensive income
Issuance of common shares 88,319 2,220
Purchase of 403,752 shares of
common stock at cost 18
Treasury stock, 14,582 shares
issued 2
Cash dividend -- -- -- (4,419) --
--------- -------- ------------ ---------- --------------
Balance at December 31, 1999 8,164,807 $ 66,318 $ -- $ 35,795 $ (8,334)
========= ======== ============ ========== ==============
</TABLE>
<TABLE>
<CAPTION>
TOTAL
TREASURY COMPREHENSIVE SHAREHOLDERS'
STOCK INCOME EQUITY
----------- ------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ (1,023) $ 77,894
Net income -- $ 10,770 10,770
Other comprehensive income, net
of tax - unrealized gains on
available-for-sale securities,
net of reclassification
adjustment -- 836 836
========
Comprehensive income $ 11,606
========
Elimination of par value -- --
Purchase of 23,308 shares
common stock as cost (433) (433)
Treasury stock, 24,488 shares
issued 249 445
Cash dividend -- (4,179)
---------- ------------- -------------
Balance at December 31, 1997 (1,207) -- 85,333
---------- ------------- -------------
Net income -- $ 10,168 10,168
Other comprehensive income, net
of tax - unrealized losses on
available for-sale securities
net of reclassification
adjustment -- (1,580) (1,580)
=======
Comprehensive income -- $ 8,588 --
Issuance of common shares -- ======== 203
Purchase of 116,000 shares of
common stock at cost (3,394) (3,394)
Treasury stock, 43,202 shares
issued 588 1,138
Cash dividend -- (4,333)
---------- -------------
Balance at December 31, 1998 (4,013) 87,535
---------- -------------
Net income $ 12,304 12,304
Other comprehensive income, net
of tax - unrealized losses on
available for sale securities
net of Reclassification
adjustment (7,894) (7,894)
-------
Comprehensive income $ 4,410 --
=======
Issuance of common shares 2,220
Purchase of 403,752 shares of
common stock at cost (9,942) (9,924)
Treasury stock, 14,582 shares
issued 284 286
Cash dividend -- (4,419)
---------- -------------
Balance at December 31, 1999 $ (13,671) $ 80,108
========== =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
38
<PAGE> 39
BANCFIRST OHIO CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 12,304 $ 10,168 $ 10,770
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 5,762 2,813 3,943
Provision for possible loan losses 1,580 1,225 1,221
Deferred taxes payable (179) (104) 1,083
Gains on sale of assets (3,027) (3,711) (2,290)
Increase in interest receivable (982) (332) (250)
Decrease (increase) in other assets (2,902) (2,335) 191
Increase in interest payable 1,108 84 171
Increase (decrease) in other liabilities 1,327 (1,841) 300
FHLB stock dividend (1,002) (992) (1,079)
----------- ----------- ------------
Net cash provided by operating activities 13,989 4,975 14,060
----------- ----------- ------------
Cash flows from investing activities:
Decrease (increase) in federal funds sold 286 (420) 2,144
Proceeds from maturities of securities held-to-maturity 5,906 9,030 11,412
Proceeds from maturities and sales of securities available-for-sale 95,721 99,592 95,102
Purchase of securities held-to-maturity -- -- (14)
Purchase of securities available-for-sale (117,143) (166,985) (91,697)
Purchase of loans -- (61,573) (75,710)
Increase in loans, net (136,375) (71,669) (41,060)
Acquisition of County Savings Bank, net of cash acquired -- -- (1,500)
Acquisition of Chornyak (2,050) -- --
Purchase of equipment and other assets (3,308) (4,007) (2,028)
Purchase of bank-owned life insurance (5,000) (15,000) --
Proceeds from sale of assets 64,969 120,235 78,592
----------- ----------- ------------
Net cash used in investing activities (96,994) (90,797) (24,759)
----------- ----------- ------------
Cash flows from financing activities:
Purchase of deposits -- 8,002 --
Net increase in deposits, excluding purchase of deposits 9,554 33,986 14,820
Increase (decrease) in federal funds purchased 24,100 (12,300) 650
Net increase in Federal Home Loan Bank advances and other borrowings 44,648 69,601 2,190
Issuance of Company obligated manditorily redeemable preferred 20,000 -- --
Cash dividends paid (4,419) (4,333) (4,179)
Purchase of treasury stock (9,924) (3,394) (433)
Reissuance of treasury stock and other 2,506 1,341 445
----------- ----------- ------------
Net cash provided by financing activities 86,465 92,903 13,493
----------- ----------- ------------
Net increase in cash and due from banks 3,460 7,081 2,794
Cash and due from banks, beginning of period 28,731 21,650 18,856
----------- ----------- ------------
Cash and due from banks, end of period $ 32,191 $ 28,731 $ 21,650
=========== =========== ============
Supplemental cash flow disclosures:
Income taxes paid $ 5,700 $ 6,100 $ 3,300
Interest paid $ 48,539 $ 50,066 $ 48,547
Non cash transfers:
Transfer of capital in excess of par to common stock $ -- $ -- $ 22,807
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
39
<PAGE> 40
BANCFIRST OHIO CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
The following is a summary of the significant accounting policies
followed in the preparation of the consolidated financial statements.
Principles of Consolidation:
The consolidated financial statements include the accounts of BancFirst
Ohio Corp. (Company) and its wholly-owned subsidiaries, The First National Bank
of Zanesville (FNB) and BFOH Capital Trust I (the Trust). The Trust is a special
purpose subsidiary that was formed in October 1999 for the purpose of issuing
$20,000 aggregate liquidation amount of capital securities (see Note 11).
Effective May 16, 1998, Bellbrook Community Bank (Bellbrook) and County Savings
Bank (County) were merged under the national bank charter of FNB. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
Investment Securities:
Investment securities are classified upon acquisition into one of three
categories: held-to-maturity, available-for-sale, or trading. Held-to-maturity
securities are those securities that the Company has the positive intent and
ability to hold to maturity and are recorded at amortized cost.
Available-for-sale securities are those securities that would be available to be
sold in the future in response to the Company's liquidity needs, changes in
market interest rates, and asset-liability management strategies, among others.
Available-for-sale securities are reported at fair value, with unrealized
holding gains and losses excluded from earnings and reported as a separate
component of other comprehensive income, net of applicable income taxes. At
December 31, 1999 and 1998, the Company did not hold any trading securities.
Gains and losses on the disposition of investment securities are
accounted for on the completed transaction basis using the specific
identification method.
Income Recognition:
Income earned by the Company and its subsidiaries is recognized on the
accrual basis of accounting. The Company suspends the accrual of interest on
loans when, in management's opinion, the collection of all or a portion of the
interest has become doubtful. When a loan is placed on non-accrual, all
previously accrued and unpaid interest deemed uncollectible is charged against
either the loan loss reserve or the current period interest income depending on
the period the interest was recorded. In future periods, interest will be
included in income to the extent received only if complete principal recovery is
reasonably assured.
Loans Held for Sale:
Loans held for sale are carried at the lower of aggregate cost or
market value and are included with loans on the balance sheet.
Loan Servicing Rights:
The total cost of loans originated and sold or purchased is allocated
between loans and servicing rights based on the relative fair values of each.
The servicing rights are capitalized and amortized over the estimated servicing
lives of the underlying loans. Amortization is calculated based on the estimated
net servicing revenue, considering various factors including prepayment
experience and market rates. Impairment of the carrying value of capitalized
loan servicing rights is periodically evaluated by management in relation to the
estimated fair value of those rights.
40
<PAGE> 41
Provision for Possible Loan Losses:
The provision for possible loan losses charged to operating expense is
based upon management's evaluation of potential losses in the current loan
portfolio and past loss experience. In management's opinion, the provision is
sufficient to maintain the allowance for possible loan losses at a level that
adequately provides for potential loan losses.
Loans considered to be impaired are reduced to the present value of
expected future cash flows, and secured loans that are in foreclosure are
recorded at the fair value of the underlying collateral securing the loan. The
difference between the recorded investment in the loan and the impaired
valuation is the amount of impairment. A specific allocation of the allowance
for possible loan losses is assigned to such loans. If these allocations require
an increase to the allowance, the increase is reported as bad debt expense.
Interest Rate Swap Contracts
The Company has entered into certain interest rate swap contracts as
part of its asset-liability management program to assist in managing the
Company's interest rate risk and not for speculative reasons. The notional
principal amount of these instruments reflect the extent of the Company's
involvement in this type of financial instrument and do not represent the
Company's risk of loss due to counterparty nonperformance or due to declines in
market value of the swap contracts from changing interest rates. Such swaps are
accounted for as hedges on an accrual basis since the swaps were entered into
principally to manage the timing differences in repricing characteristics of
various outstanding variable rate borrowings. The related swap income or expense
is recognized currently, and recorded in the same category as the interest
income or expense on the hedged item.
Goodwill and Other Identified Intangibles:
Intangible assets are amortized using straight-line and accelerated
methods over the estimated remaining benefit periods which approximate 20 to 25
years for goodwill, 10 to 15 years for core deposit intangibles and 5 years for
covenants not to compete.
Premises and Equipment:
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation expense is computed principally on
the straight-line method over the estimated useful lives of the assets generally
ranging from 3 to 35 years. Upon the sale or other disposition of assets, cost
and related accumulated depreciation are removed from the accounts, and the
resultant gain or loss is recognized. Maintenance and repairs are charged to
operating expense while additions and betterments are capitalized.
Other Real Estate Owned:
Other real estate owned represents properties acquired through
customers' loan defaults. Other real estate owned is stated at an amount equal
to the loan balance prior to foreclosure plus cost incurred for improvements to
the property, but not more than fair market value of the property. As of
December 31, 1999 and 1998, other real estate owned was $222 and $607,
respectively, and is included on the balance sheet in other assets.
Investment in Subsidiaries (Parent Company Only):
The Company's investment in subsidiaries represents the total equity of
the Parent Company's wholly-owned subsidiaries, using the equity method of
accounting for investments.
41
<PAGE> 42
Common Stock:
At its April 1998 meeting, the Company's board of directors authorized
a two-for-one stock split in the form of a 100% stock dividend, payable May 19,
1998, to shareholders of record on April 28, 1998. All share and per share
amounts have been restated to reflect this split.
During 1997, the Company's shareholders approved amendments to the
Articles of Incorporation to increase the number of authorized shares of common
stock to 20,000,000 from 7,500,000 and to eliminate par value per share of
common stock. These changes to the Articles of Incorporation had no effect on
the total capital of the Company.
Earnings Per Common Share:
Basic earnings per common share is computed on the basis of the
weighted average number of shares outstanding during the period. Diluted
earnings per common share is computed on the basis of the weighted average
number of common shares adjusted for the dilutive effect of outstanding stock
options or other common stock equivalents utilizing the treasury stock method.
The weighted average number of shares outstanding for all periods has been
adjusted to reflect the two-for-one stock split discussed above.
Stock Incentive Plans
The Company has adopted SFAS No. 123 "Accounting for Stock-Based
Compensation" which encourages but does not require adoption of a fair value
based accounting method for employee stock-based compensation arrangements. As
permitted by the statement, the Company has elected to account for its stock
incentive plan under APB Opinion No. 25 pursuant to which no compensation cost
has been recognized related to stock options that have been granted.
Statement of Cash Flows:
For the purposes of presenting the statement of cash flows, the Company
has defined cash and cash equivalents as those amounts included in the balance
sheet caption "cash and due from banks."
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
used in the preparation of the financial statements are based on various factors
including the current interest rate environment and the general strength of the
local economy. Changes in the overall interest rate environment can
significantly affect the Company's net interest income and the value of its
recorded assets and liabilities.
Comprehensive Income
Effective January 1, 1998 the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" which establishes standards for reporting comprehensive
income and its components in the financial statements. Comprehensive income is
the total of net income and all other nonowner changes in equity. The only
component of comprehensive income that the Company is required to report is
unrealized holding gains (losses) on available-for-sale securities.
Reclassification:
Certain reclassifications have been made to prior period amounts to
conform to the 1999 presentation.
42
<PAGE> 43
2. MERGERS AND ACQUISITIONS:
On April 5, 1999, the Company acquired Chornyak & Associates, Inc.
("Chornyak"), a full service financial planning company, 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 Chornyak from the date of acquisition. In connection with
this acquisition the Company issued 82,000 common shares having a total market
value of $2,050 in exchange for all of the outstanding shares of Chornyak. The
Company also recorded goodwill and other intangible assets of $2,114 as a result
of the application of purchase accounting.
On January 13, 2000 the Company entered into an agreement to acquire
Milton Federal Financial Corporation ("Milton") whereby Milton would be merged
into the Company. Under the terms of the agreement, the Company will exchange
.444 shares of its common stock and $6.80 for each of the issued and outstanding
shares of Milton. It will also redeem Milton's outstanding stock options for
cash equal to the acquisition price per share less the exercise price of the
options prior to closing. Based on the Company's closing price of $20.375 per
share on January 12, 2000, the transaction would be valued at approximately
$33,000. The Company will account for the merger as a purchase and expects to
consummate the merger in the second quarter of 2000, pending approval by
Milton's shareholders, regulatory approvals and other customary conditions of
closing. Milton has granted the Company an option to purchase up to 19.9% of
Milton's outstanding shares upon the occurrence of certain events.
At September 30, 1999, Milton had total assets of $256,677, deposits of
$168,471 and shareholders' equity of $25,028. For its fiscal year ended
September 30, 1999, Milton reported net income of $1,603.
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 $2,500 and $5,084
at December 31, 1999 and 1998, respectively.
4. INVESTMENT SECURITIES:
The amortized cost and estimated fair value of investment securities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities $ 250 $ 2 $ - $ 252
Securities of other government agencies 5,592 - (313) 5,279
Obligations of states and political subdivisions 25,771 1 (2,757) 23,015
Corporate obligations 58,460 20 (3,999) 54,481
Mortgage-backed and related securities 217,916 246 (6,020) 212,142
Other securities 15,280 -- -- 15,280
-------------- -------------- -------------- --------------
$ 323,269 $ 269 $ (13,089) $ 310,449
============== ============== ============== ==============
Securities Held-to-Maturity:
Obligations of states and political subdivisions $ 4,786 $ 63 $ (10) $ 4,839
Industrial revenue bonds and other 2,182 -- -- 2,182
Mortgage-backed securities 13,818 30 (268) 13,580
-------------- -------------- -------------- --------------
$ 20,786 $ 93 $ (278) $ 20,601
============== ============== ============== ==============
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities Available-for-Sale:
U.S. Treasury securities $ 251 $ 14 $ -- $ 265
Securities of other government agencies 4,759 82 3 4,838
Obligations of states and political subdivisions 21,724 674 52 22,346
Corporate obligations and other securities 52,503 319 962 51,860
Mortgage-backed and related securities 222,537 974 1,723 221,788
---------- ---------- ---------- ---------
$ 301,774 $ 2,063 $ 2,740 301,097
========== ========== ========== =========
Securities Held-to-Maturity:
Obligations of states and political subdivisions $ 5,196 $ 218 $ 1 $ 5,413
Industrial revenue bonds and other 2,342 -- -- 2,342
Mortgage-backed securities 18,980 303 229 19,054
---------- ---------- ---------- ---------
$ 26,518 $ 521 $ 230 $ 26,809
========== ========== ========== =========
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999, 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, 1999
--------------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------------- -----------------
<S> <C> <C>
Securities Available-for Sale
After one through five years $ 16,623 $ 13,466
After five through ten years 29,110 27,666
After ten years 59,620 57,175
---------------- -----------------
105,353 98,307
Mortgage-backed and related securities 217,916 212,142
---------------- -----------------
$ 323,269 $ 310,449
================ =================
Securities Held-to-Maturity
Within one year $ 898 $ 902
After one through five years 5,520 5,569
After five through ten years 550 550
After ten years --
---------------- -----------------
6,968 7,021
Mortgage-backed and related securities 13,818 13,580
---------------- -----------------
$ 20,786 $ 20,601
================ =================
</TABLE>
Proceeds from sales of securities available-for-sale during 1999, 1998
and 1997 were $33,003, $8,777 and $22,195, respectively. Gross gains of $376,
$48 and $125 and gross losses of $58, $14 and $37 were realized on sales in
1999, 1998 and 1997, respectively.
Investment securities with a fair value of $214,588 at December 31,
1999 were pledged to secure public deposits and Federal Home Loan Bank advances
and for other purposes required by law.
44
<PAGE> 45
5. LOANS:
The composition of the loan portfolio is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------------- ----------------
<S> <C> <C>
Commercial, financial and industrial $ 411,489 $ 323,544
Real estate--mortgage 327,294 353,635
Real estate--construction 9,484 10,203
Consumer 101,500 89,681
---------------- ---------------
$ 849,767 $ 777,063
================ ===============
</TABLE>
Loans held for sale totaling $3,911 and $6,375 at December 31, 1999 and
1998, respectively, are included in the above totals. Also, at December 31,
1999, 1998 and 1997, loans serviced for others totaled $251,096, $253,323 and
$229,310, respectively.
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, 1999 activity with respect to these related party loans is as
follows:
Beginning balance $ 2,127
New loans 839
Repayments (455)
Loans no longer classified as related
party loans (49)
---------------
Ending balance $ 2,462
===============
At December 31, 1999 and 1998, and for the years then ended, the
recorded investment in loans considered to be impaired and interest income
recognized related thereto was not material. Also, at December 31, 1999,
restructured loans consisted of one loan with an outstanding principal balance
of $2,986 that was restructured in May 1999. This loan was performing in
accordance with its restructured terms.
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,
---------------------------------------------------------
1999 1998 1997
---------------- ----------------- -----------------
<S> <C> <C> <C>
Balance at beginning of period $ 6,643 $ 6,617 $ 6,599
Provision charged to operations 1,580 1,225 1,221
Loans charged off (1,570) (1,802) (1,772)
Loan recoveries 778 603 569
---------------- ----------------- -----------------
Net charge-offs (792) (1,199) (1,203)
---------------- ----------------- -----------------
Balance at end of period $ 7,431 $ 6,643 $ 6,617
================ ================= =================
</TABLE>
45
<PAGE> 46
7. PREMISES AND EQUIPMENT:
Premises and equipment are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Land $ 2,619 $ 2,643
Buildings and improvements 12,656 10,372
Furniture, fixture and equipment 10,393 8,831
Construction in progress 2 628
---------------- -----------------
25,670 22,474
Less accumulated depreciation and amortization 10,881 9,611
---------------- -----------------
Premises and equipment, net $ 14,789 $ 12,863
================ =================
</TABLE>
Total depreciation expense was $1,589, $1,329 and $1,134 for the years
ended December 31, 1999, 1998 and 1997, respectively.
8. DEPOSITS:
A summary of deposits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Demand, noninterest-bearing $ 65,086 $ 65,588
Demand, interest bearing 110,659 124,972
Savings 116,438 102,463
Time, $100 and over 157,841 141,161
Time, other 349,152 355,438
---------------- -----------------
$ 799,176 $ 789,622
================ =================
</TABLE>
9. FEDERAL FUNDS PURCHASED:
Federal funds purchased generally have one- to four-day maturities. The
following table reflects the maximum month-end outstanding balance, average
daily outstanding balances, average rates paid during the year, and the average
rates paid at year-end for federal funds purchased:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997
---------------- ----------------- -----------------
<S> <C> <C> <C>
Federal funds purchased:
Average balance $ 7,341 $ 3,204 $ 1,605
Average rate 5.48 % 6.17 % 6.29 %
Maximum month-end balance $ 28,000 $ 13,800 $ 12,300
Balance at year-end $ 24,100 $ -- $ 12,300
Average rate on balance at year-end 5.41 % -- % 6.07 %
</TABLE>
46
<PAGE> 47
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,
--------------------------
1999 1998
----------- ---------
<S> <C> <C>
Term reverse repurchase agreements (average rate 5.48% in 1999; 5.54% in 1998) $ 50,000 $ 55,000
FHLB advances (average rate 5.76% in 1999; 5.16% in 1998) 285,148 228,000
Term debt with a financial institution (7.47% in 1999; 6.63% in 1998), due 2003 6,250 13,750
---------- ---------
$ 341,398 $ 296,750
========== =========
</TABLE>
Minimum annual retirements on borrowings for the next five years
consisted of the following at December 31, 1999:
<TABLE>
<CAPTION>
MATURITY WEIGHTED AVERAGE PRINCIPAL
(PERIOD ENDING) INTEREST RATE REPAYMENT
--------------- ------------- ---------
<S> <C> <C>
2000 5.72 % $ 188,500
2001 6.31 52,500
2002 7.47 1,250
2003 4.98 14,000
2004 -- --
2005 and thereafter 5.58 85,148
---- ---------
Total 5.75 % $ 341,398
==== ==========
</TABLE>
In December 1998, the Company prepaid $34,465 of FHLB advances that had
a weighted average interest rate of 6.19%. In connection with this early
repayment of debt, the Company paid prepayment penalties totaling $613 which
have been recorded, net of taxes of $213, as an extraordinary item in the 1998
consolidated statement of income.
FHLB advances must be secured by eligible collateral as specified by
the FHLB. Accordingly, the Company has a blanket pledge of its first mortgage
loan portfolio as collateral for the advances outstanding at December 31, 1999
with a required minimum ratio of collateral to advances of 150%. Also, the
Company's investment in FHLB stock of $14,258 at December 31, 1999 is pledged as
collateral for outstanding advances.
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 $54,544 and
$62,137 and accrued interest of $332 and $367 at December 31, 1999 and 1998,
respectively. The reverse repurchase agreements have a weighted average maturity
of 7.7 years at December 31, 1999 and 7.9 years at December 31, 1998. Also,
$24,000 of such reverse repurchase agreements at December 31, 1999 are callable
in 2000 and $21,000 are callable in 2001.
The term debt with a financial institution was obtained by the Company
to partially fund the acquisition of County. Under terms of the loan agreement,
the Company is required to make quarterly interest payments. Annual principal
payments commenced February 1998. The unpaid loan balance is due in full
September 1, 2003. The loan agreement contains certain financial covenants, all
of which the Company was in compliance with at December 31, 1999. Also, 67% of
the stock of FNB collateralizes this borrowing at December 31, 1999.
11. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF
THE PARENT
On October 18, 1999, the Trust, a statutory business trust created
under Delaware law, issued $20,000 of 9.875% Capital Securities, Series A
("Capital Securities") with a stated value and liquidation preference of $1 per
share. The Trust's obligations under the Capital Securities issued are fully and
unconditionally guaranteed by the Company. The proceeds from the sale of the
Capital Securities of the Trust, as well as the proceeds from the issuance of
common securities to the Company, were utilized by the Trust to invest in
$20,619 of 9.875% Junior Subordinated Debentures (the "Debentures") of
47
<PAGE> 48
the Company. The Debentures are unsecured obligations and rank subordinate and
junior to the right of payment to all indebtedness, liabilities and obligations
of the Company. The Debentures represent the sole assets of the Trust. Interest
on the Capital Securities is cumulative and payable semi-annually in arrears.
The Company has the right to optionally redeem the Debentures prior to the
maturity date of October 15, 2029, on or after October 15, 2009 at 104.938%
(declining annually thereafter to 100% after October 15, 2019) of the stated
liquidation amount, plus accrued and unpaid distributions, if any, to the
redemption date. Under the occurrence of certain events, specifically a Tax
Event, Investment Company Event or Capital Treatment Event as more fully defined
in the BFOH Capital Trust I Prospectus dated October 13, 1999, the Company may
redeem in whole, but not in part, the Debentures prior to October 15, 2009.
Proceeds from any redemption of the Debentures would cause a mandatory
redemption of the Capital Securities and the common securities having an
aggregate liquidation amount equal to the principal amount of the Debentures
redeemed.
The Trust is a wholly-owned subsidiary of the Company, has no
independent operations and has issued securities that contain a full and
unconditional guarantee of its parent, the Company. The Trust is exempt from the
reporting requirements of the Securities Exchange Act of 1934.
12. 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, 1999, 1998 and 1997 were approximately $174, $128 and $275,
respectively.
The Company also has a 401(k) Retirement Plan which covers
substantially all employees with more than one year of service. The Company
makes contributions to the plan pursuant to salary savings elections and
discretionary contributions as set forth by the provisions of the plan.
Employees direct the investment of account balances from plan alternatives.
Operations have been charged $561, $499 and $396 for contributions to the plan
for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company maintains an employee stock purchase plan whereby eligible
employees and directors, through their plan contributions, may purchase shares
of the Company's stock. Such shares are purchased from treasury stock at fair
market value. Minimal expenses were incurred by the Company for the years ended
December 31, 1999 and 1998, and 1997, in connection with the plan.
The Company currently provides certain health care benefits for
eligible retirees, using the accrual method of accounting for the projected
costs of providing post retirement benefits during the period of employee
service. During 1997, the Company changed its employee benefit program to no
longer provide post retirement benefits to employees who were not eligible to
retire as of December 31, 1997. As a result of this plan curtailment, a gain of
$500 was recognized and is included in other income in 1997. At December 31,
1999 and 1998, the recorded liability for post retirement benefits was $501. For
the years ended December 31, 1999, 1998, and 1997, health care benefit costs for
eligible retirees was $34, $43 and $143, respectively.
48
<PAGE> 49
13. STOCK INCENTIVE PLAN
The Company has adopted the 1997 Omnibus Stock Incentive Plan (the
Plan) which provides for the granting of stock options and other stock related
awards to key employees. Under the Plan, 800,000 authorized but unissued or
reacquired common shares are reserved for issuance. All options granted were at
a price that equaled or exceeded the market value of the Company's common stock
at the date of grant. The options vest ratably over four years and expire 20
years from the date of grant. No compensation expense was recognized in 1999,
1998 or 1997 related to the Plan. The summary of stock option activity is as
follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
OPTIONS AVERAGE EXERCISE OPTIONS AVERAGE EXERCISE
OUTSTANDING PRICE EXERCISABLE PRICE
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
December 31, 1996 -- -- -- --
Options granted 92,120 $ 25.75
------------- -------------------
December 31, 1997 92,120 25.75 -- $ --
============== ===================
Options granted 85,000 33.00
Less:
Stock Options cancelled 2,880 25.75
------------- -------------------
December 31, 1998 174,240 29.29 22,310 $ 23.50
============== ===================
Options granted 121,100 26.12
Less:
Stock options exercised 2,340 23.50
Stock options cancelled 20,714 29.17
------------- -------------------
December 31, 1999 272,286 $ 27.94 56,607 $ 26.18
============= =================== ============== ===================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
AVERAGE
REMAINING
CONTRACTUAL AVERAGE EXERCISE AVERAGE EXERCISE
OPTIONS LIFE PRICE - OPTIONS OPTIONS PRICE - OPTIONS
EXERCISE PRICE RANGE OUTSTANDING (YEARS) OUTSTANDING EXERCISABLE EXERCISABLE
- ---------------------------- ---------------- ------------------- ---------------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
$23.50 to $25.00 90,670 19.1 $ 24.44 37,620 $ 24.25
$25.01 to $30.00 117,157 19.1 27.50 18,987 30.00
$30.01 to $35.00 45,472 19.0 32.67 -- --
$35.01 to $40.00 18,987 19.0 36.00 -- --
---------------- ------------------- ---------------------- -------------- ---------------------
Total 272,286 19.1 $ 27.94 56,607 $ 26.18
================ =================== ====================== ============== =====================
</TABLE>
49
<PAGE> 50
For purposes of providing the pro forma disclosures required under SFAS
No. 123, the fair value of the stock options granted in 1999, 1998 and 1997 was
estimated at the date of grant using a Black-Scholes option pricing model. The
weighted average assumptions used in the option pricing model were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Risk-free interest rate 5.33% to 6.18% 4.75% 5.75%
Expected dividend yield 3.09% 2.00% 2.25%
Expected option life (years) 7.0 7.0 7.0
Expected volatility 30.39% 31.37% 21.61%
</TABLE>
For purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. Had
compensation cost for the Company been determined consistent with SFAS No. 123,
income before extraordinary items, net income and basic and diluted earnings per
share for the years ended December 31, 1999, 1998 and 1997 would have been as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
Net income, as reported $ 12,304 $ 10,168 $ 10,770
Pro forma net income 11,927 9,974 10,759
Earnings per share, as reported:
Basic 1.58 1.28 1.35
Diluted 1.58 1.28 1.35
Pro forma earnings per share:
Basic 1.53 1.25 1.35
Diluted 1.53 1.25 1.35
</TABLE>
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 $287, $115 and $203 of
their 1999, 1998 and 1997 bonuses, respectively, in bonus shares which resulted
in the issuance of 15,227 shares in 2000, 3,979 shares in 1999 and 8,650 shares
in 1998.
50
<PAGE> 51
14. INCOME TAXES:
The provision for income taxes is summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Current $ 5,825 $ 4,939 $ 4,453
Deferred (140) (104) 1,083
------- -------- -------
Provision for income taxes $ 5,685 $ 4,835 $ 5,536
======= ======== =======
</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,
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate 35% 35% 35%
Permanent differences:
Tax-exempt interest, net of allowed interest expense (3) (3) (3)
Increase in cash surrender value of life insurance (2) (2) --
Amortization of intangibles and other 2 1 2
--- --- ---
Effective tax rate 32% 31% 34%
=== === ===
</TABLE>
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,
-------------------------------------------
1999 1998
-------------------------------------------
<S> <C> <C>
Deferred tax assets arising from:
Allowance for possible loan losses $ 2,645 $2,341
Reserve for health insurance 246 212
Amortization of intangibles 505 353
Service loan interest 39 78
Unrealized holding losses on securities 4,486 235
Other 263 467
------- ------
Total deferred tax assets 8,184 3,686
------- ------
Deferred tax liabilities arising from:
Gain on sale of loans 1,514 1,423
Deferred loan fees and costs 271 379
FHLB stock dividends 1,286 1,369
Purchase accounting adjustments 241 157
Depreciation 180 93
Other, net 454 418
------- ------
Total deferred tax liabilities 3,946 3,839
------- ------
Net deferred tax asset (liability) $4,238 $(153)
======= ======
</TABLE>
The Company did not record a valuation allowance at December 31, 1999
as the net deferred tax asset was considered to be realizable based on the level
of historical and 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.
51
<PAGE> 52
15. EARNINGS PER SHARE
The computation of earnings per share for the years ended December 31,
1999, 1998 and 1997 is as follows. All share amounts have been adjusted to give
retroactive effect to the two for one stock split in 1998:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Income before extraordinary item $12,304 $10,568 $10,770
Extraordinary item -- (400) --
---------------- ---------------- ----------------
Net income $12,304 $10,168 $10,770
================ ================ ================
Weighted average shares outstanding 7,794,202 7,959,362 7,960,996
Basic earnings per share:
Before extraordinary item $ 1.58 $ 1.33 $ 1.35
Extraordinary item -- (0.05) --
---------------- ---------------- ----------------
After extraordinary item $ 1.58 $ 1.28 $ 1.35
================ ================ ================
Weighted average shares outstanding 7,794,202 7,959,362 7,960,996
Diluted effect due to stock incentive plans 8,058 11,222 --
---------------- ---------------- ----------------
Weighted average shares outstanding, as adjusted 7,802,260 7,970,584 7,960,996
Diluted earnings per share:
Before extraordinary item $ 1.58 $ 1.33 $ 1.35
Extraordinary item -- (0.05) --
---------------- ---------------- ----------------
After extraordinary item $ 1.58 $ 1.28 $ 1.35
================ ================ ================
</TABLE>
16. 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 non-cancelable future operating lease commitments at December
31, 1998 follows:
2000 $ 723
2001 601
2002 546
2003 518
2004 364
2005 and thereafter 367
----------
$ 3,119
==========
Rent expense under all lease obligations, including month-to-month
agreements, aggregated approximately $539, $573 and $512 for the years ended
December 31, 1999, 1998 and 1997, respectively.
17. 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.
52
<PAGE> 53
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. The total amounts of
financial instruments with off-balance-sheet risk are as follows:
DECEMBER 31,
1999 1998
----------------- ----------------
Financial instruments whose contract
amounts represent credit risk:
Loan commitments $ 119,789 $ 96,337
Standby letters of credit 643 551
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 and are used by the Company to manage its interest rate risk. 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 counter-party 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 $40,625 and $51,875, respectively, of notional swap principal contracts
outstanding at December 31, 1999 and 1998 related to asset-liability management
activities. These swap contracts have maturity dates ranging from February 2000
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, 1999, 1998 and 1997, interest expense on swap contracts was $500,
$344 and $147, respectively, and is included with interest expense on
borrowings.
The Company offers credit cards in an agency capacity for another
institution. Under certain circumstances, the credit cards are issued with
recourse to the Company. The total of these credit lines with recourse to the
Company was not material at December 31, 1999.
In addition to the financial instruments with off-balance sheet risks,
the Company has commitments to lend money which have been approved by the Small
Business Administration's (SBA) 7(a) program. Such commitments carry SBA
guarantees on individual credits ranging from 29% to 80% of principal balances.
The total of such commitments at December 31, 1999 and 1998, were $14,192 and
$15,657, respectively, with guaranteed principal by the SBA totaling $8,910 and
$10,496, 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.
18. SHAREHOLDERS' EQUITY:
The payment of dividends by FNB is subject to regulatory restrictions
by regulatory authorities. These restrictions for national banks provide that
dividends in any calendar year generally shall not exceed the total net profits
of that year plus the retained net profits of the preceding two years. In
addition, dividend payments may not reduce capital levels below
53
<PAGE> 54
minimum regulatory guidelines. At December 31, 1999, $1,997 of the retained
earnings of FNB is available for the payment of dividends to the Company without
regulatory agency approval.
19. REGULATORY CAPITAL REQUIREMENTS:
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by the regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and its subsidiary must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities and certain
off balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulators to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the applicable
regulations) to risk-weighted assets (as defined) and Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999, that the Company meets all capital adequacy requirements to which it is
subject.
As of December 31, 1999, the most recent notifications from the various
primary regulators of the Company and its subsidiary categorized each entity as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, an institution must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
table below. There are no conditions or events since that notification that
management believes have changed the institution's category.
Actual capital amounts and ratios of the Company and FNB are as follows:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------ -------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk-Weighted Assets):
Consolidated $103,106 12.25 % $67,322 8.00 % $84,152 10.00 %
FNB 91,490 10.83 67,584 8.00 84,480 10.00
Tier 1 Capital (to Risk-Weighted Assets):
Consolidated $95,675 11.37 % $33,661 4.00 % $50,491 6.00 %
FNB 76,085 9.01 33,792 4.00 50,688 6.00
Tier 1 Capital (to Average Assets):
Consolidated $95,675 7.77 % $49,267 4.00 % $61,584 5.00 %
FNB 76,085 6.20 49,062 4.00 61,327 5.00
</TABLE>
20. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The amounts provided below represent estimates of fair values at a
particular point in time. Significant estimates regarding economic conditions,
loss experience, risk characteristics associated with particular financial
instruments and other factors were used for the purposes of this disclosure.
These estimates are subjective in nature and involve matters of
54
<PAGE> 55
judgment. Therefore, they cannot be determined with precision. Changes in the
assumptions could have a material impact on the estimates shown.
While the estimated fair value amounts are designed to represent estimates
of the amounts at which these instruments could be exchanged in a current
transaction between willing parties, many of the Company's financial instruments
lack an available trading market as characterized by willing parties engaging in
an exchange transaction. In addition, with the exception of its
available-for-sale securities portfolio, it is the Company's intent to hold its
financial instruments to maturity and, therefore, it is not probable that the
fair values shown will be realized.
The value of long-term relationships with depositors (core deposit
intangible) and other customers are not reflected in the estimated fair values.
In addition, the estimated fair values disclosed do not reflect the value of
assets and liabilities that are not considered financial instruments.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practical to make that
value:
Cash and Due From Banks, Federal Funds Sold and
Federal Funds Purchased --The carrying amount approximates fair value.
Investment Securities--Estimated fair values are
based on quoted market prices, when available. If a quoted market price
is not available, fair value is estimated using quoted market prices
for similar securities.
Loans--In order to determine the fair values for
loans, the loan portfolio was segmented based on loan type, credit
quality and repricing characteristics. For residential mortgages, fair
value is estimated using the quoted market prices for securities backed
by similar loans, adjusted for differences in loan characteristics. For
certain variable rate loans with no significant credit concerns and
frequent repricings, estimated fair values are based on the carrying
values. The fair values of other loans are estimated using discounted
cash flow analyses. The discount rates used in these analyses are based
on origination rates for similar loans. Where appropriate, adjustments
have been made for credit and other costs so as to more accurately
reflect market rates. The estimate of maturity is based on historical
experience with repayments and current economic and lending conditions.
Deposits--The fair value of demand deposits, savings
accounts and certain money market deposits with no stated maturity is
equal to the amount payable on demand. The estimated fair value of
fixed maturity certificates of deposit is based on discounted cash flow
analyses using market rates currently offered for deposits of similar
remaining maturities.
Federal Home Loan Bank advances and other borrowings
-- The estimated fair value of Federal Home Loan Bank advances and
other borrowings are based on discounted cash flow analyses using
current rates for the same advances.
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior Subordinated
Deferrable Interest Debentures of the Parent -- The estimated fair
value is based on discounted cash flow analyses using current rates for
similar borrowings.
Interest Rate Swaps -- Estimated fair values are
based on quoted market prices.
Commitments to Extend Credit and Stand-by Letters of
Credit -- The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present credit worthiness
of the counter-parties. The fair value of letters of credit is based on
fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with
counter-parties at the reporting date.
55
<PAGE> 56
The fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash and due from banks $ 32,191 $ 32,191 $ 28,731 $ 28,731
Federal funds sold 183 183 469 469
Securities available-for-sale 310,449 310,449 301,097 301,097
Securities held-to-maturity 20,786 20,601 26,518 26,809
Loans, net of allowance for loan losses 842,336 842,635 770,420 777,604
Demand and savings deposits 292,183 292,183 293,023 293,023
Time deposits 506,993 505,195 496,599 500,518
Federal funds purchased 24,100 24,100 -- --
Federal Home Loan Bank advances and
other borrowings 341,298 340,183 296,750 298,014
Company obligated manditorily
redeemable preferred securities of
subsidiary trust holding solely junior
subordinated deferrable interest
debentures of the parent 20,000 19,541 -- --
Interest rate swaps -- 336 -- (1,495)
</TABLE>
21. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION:
Parent Company only condensed financial information is as follows:
CONDENSED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998
----------------- -----------------
<S> <C> <C>
Assets:
Cash $ 14,260 $ 663
Investment in subordinated debt and repurchase
agreement with subsidiary 10,000 14,000
Investment in subsidiaries 80,141 84,554
Intangible assets 1,000 1,600
Other assets 2,132 529
----------------- -----------------
Total assets $107,533 $101,346
================= =================
Liabilities and equity:
Long-term borrowings $ 6,250 $ 13,750
Junior subordinated debentures due subsidiary 20,619 --
Other liabilities 556 61
----------------- -----------------
Total liabilities 27,425 13,811
Shareholders' equity 80,108 87,535
----------------- -----------------
Total liabilities and equity $ 107,533 $101,346
================= =================
</TABLE>
56
<PAGE> 57
CONDENSED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Dividends from subsidiaries $ 13,000 $ 14,750 $9,000
Interest income 133 3 3
Interest expense (981) (1,044) (1,138)
Operating expenses (1,477) (1,695) (2,121)
------------ ------------ -----------
Income before income tax and equity in
earnings of subsidiaries 10,675 12,014 5,744
Federal income tax benefit 817 959 1,029
------------ ------------ -----------
Income before equity in earnings of subsidiaries 11,492 12,973 6,773
Earnings of subsidiaries in excess of (less than) dividends 812 (2,805) 3,997
------------ ------------ -----------
Net income $ 12,304 $ 10,168 $ 10,770
============ ============ ===========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $12,304 $10,168 $10,770
Adjustments to reconcile net income to net cash provided by operations:
Amortization and depreciation 633 621 628
(Increase) decrease in other assets (1,636) 1,009 (1,086)
Increase (decrease) in other liabilities 495 (304) 548
Earnings less than (in excess of) dividends (812) 2,805 (3,997)
------------ ------------ ------------
Net cash provided by operating activities 10,984 14,299 6,863
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of County -- -- (1,500)
Investment in subsidiaries (2,669) -- (500)
Purchase of equipment and other assets -- -- (2)
Decrease (increase) in subordinated debt and repurchase
agreement with subsidiary 4,000 (6,000) (1,000)
------------ ------------ ------------
Net cash provided by (used for) investing activities 1,331 (6,000) (3,002)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of common stock 2,220 203 --
Decrease in long-term debt (7,500) (1,250) --
Issuance of junior subordinated debentures to subsidiary 20,619 -- --
Cash dividends paid (4,419) (4,333) (4,179)
Purchase of treasury stock (9,924) (3,394) (433)
Treasury shares issued and other 286 1,138 445
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,282 (7,636) (4,167)
------------ ------------ ------------
Net increase (decrease) in cash 13,597 663 (306)
Cash, beginning of period 663 --
------------ ------------ ------------
Cash, end of period $ 14,260 $ 663 $ --
============ ============ ============
</TABLE>
57
<PAGE> 58
The Parent Company paid $5,700, $6,100 and $3,300 for income taxes in
1999, 1998 and 1997, respectively, and $623, $1,064 and $1,133 for interest in
1999, 1998 and 1997, respectively.
22. COMPREHENSIVE INCOME:
Other comprehensive income for the years ended December 31, 1999, 1998
and 1997 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) on available-
for-sale securities arising during period $ (11,826) $ (2,370) $ 1,356
Tax (expense) or benefit 4,139 812 (462)
------------------ ------------------ ------------------
Net of tax amount (7,687) (1,558) 894
------------------ ------------------ ------------------
Less: Reclassification adjustment for gains
included in net income (318) (34) (88)
Tax expense 111 12 30
------------------ ------------------ ------------------
Net of tax amount (207) (22) (58)
------------------ ------------------ ------------------
Net unrealized gains (losses) on available-for-
sale securities $ (7,894) $ (1,580) $ 836
================== ================== ==================
</TABLE>
23. SEGMENT REPORTING
The Company manages and operates two major lines of businesses:
community banking and investment and funds management. Community banking
includes lending and related services to businesses and consumers, mortgage
banking, and deposit gathering. Investment and funds management includes trust
services, financial planning services and retail sales of investment products.
These business lines are identified by the entities through which the product or
service is delivered.
The reported line of business results reflect the underlying core
operating performance within the business units. Parent and Other is comprised
of the parent company and its special purpose trust subsidiary. It also includes
inter-company eliminations and significant non-recurring items of income and
expense company-wide. Substantially all of the Company's assets are part of the
community banking line of business. Selected segment information is included in
the following table:
58
<PAGE> 59
<TABLE>
<CAPTION>
INVESTMENT
COMMUNITY AND FUNDS PARENT AND
BANKING MANAGEMENT OTHER TOTAL
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1999:
Net interest income $ 39,293 $ 11 $ (837) $ 38,467
Provision for possible loan losses 1,580 -- -- 1,580
----------------- ----------------- ---------------- ----------------
Net interest income after provision for
possible loan losses 37,713 11 (837) 36,887
Non-interest income 7,550 3,203 -- 10,753
Non-interest expense 25,728 2,446 1,477 29,651
----------------- ----------------- ---------------- ----------------
Income (loss) before income taxes 19,535 768 (2,314) 17,989
Income tax expense (benefit) 6,201 298 (814) 5,685
----------------- ----------------- ---------------- ----------------
Net income (loss) $ 13,334 $ 470 $ (1,500) $ 12,304
================= ================= ================ ================
1998:
Net interest income $ 37,520 $ 28 $ (1,041) $ 36,507
Provision for possible loan losses 1,225 -- -- 1,225
----------------- ----------------- ---------------- ----------------
Net interest income after provision for
possible loan losses 36,295 28 (1,041) 35,282
Non-interest income 7,807 2,121 20 9,948
Non-interest expense 24,844 1,639 3,344 29,827
----------------- ----------------- ---------------- ----------------
Income (loss) before income taxes and
extraordinary item 19,258 510 (4,365) 15,403
Income tax expense (benefit) 6,182 182 (1,529) 4,835
----------------- ----------------- ---------------- ----------------
Income (loss) before extraordinary
item 13,076 328 (2,836) 10,568
Extraordinary item -- -- 400 400
----------------- ----------------- ---------------- ----------------
Net income (loss) $ 13,076 $ 328 $ (3,236) $ 10,168
================= ================= ================ ================
</TABLE>
24. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000 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 $40,625 at December 31,
1999 (see Note 17). The Company does not anticipate that this standard will have
a significant impact on its financial statements.
59
<PAGE> 60
25. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(Dollars in thousands, except per
share amounts)
1999:
Interest Income $ 21,371 $ 21,744 $ 22,045 $ 22,954
Net interest income 9,401 9,739 9,591 9,736
Provision for possible loan losses 350 375 405 450
Income before income taxes 4,157 4,531 4,555 4,746
Net income 2,841 3,091 3,152 3,220
Basic and diluted earnings per share $ .36 $ .39 $ .41 $ .42
1998:
Interest Income $ 21,235 $ 21,429 $ 22,295 $ 21,698
Net interest income 9,135 9,024 9,266 9,082
Provision for possible loan losses 307 318 300 300
Income before income taxes and extraordinary item 4,168 3,180 4,377 3,678
Income before extraordinary item 2,808 2,227 2,990 2,543
Net income 2,808 2,227 2,990 2,143
Basic earnings per share before extraordinary
item $ 0.35 $ 0.28 $ 0.38 $ 0.32
Diluted earnings per share before extraordinary
item $ 0.35 $ 0.28 $ 0.37 $ 0.32
Basic earnings per share $ 0.35 $ 0.28 $ 0.38 $ 0.27
Diluted earnings per share $ 0.35 $ 0.28 $ 0.37 $ 0.27
</TABLE>
See Note 10 concerning the extraordinary item recorded in the fourth
quarter of 1998 related to the prepayment of FHLB advances. Also, the after tax
effects of non-recurring merger, restructuring and branch closing charges
totaled $794 in the second quarter of 1998 and $263 in the fourth quarter of
1998.
60
<PAGE> 61
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 20, 2000, which is
incorporated by this reference into this annual report.
61
<PAGE> 62
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, 1999 and 1998
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997
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 64.
(b) None
(c) The exhibits required by Item 601 of Regulation S-K are filed as a
separate part of this report.
62
<PAGE> 63
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: (Signed)/s/William F. Randles
------------------------------
William F. Randles
Director and Chairman of the Board
Dated: Zanesville, Ohio
March 6, 2000
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/Philip E. Burke Director March 6, 2000
- ------------------------------------
Philip E. Burke
(Signed)/s/Gary N. Fields Director and Chief March 6, 2000
- ------------------------------------ Executive Officer
Gary N. Fields
(Signed)/s/Milman H. Linn, III Director March 6, 2000
- ------------------------------------
Milman H. Linn, III
(Signed)/s/James L. Nichols Director March 6, 2000
- ------------------------------------
James L. Nichols
(Signed)/s/James H. Nicholson Director March 6, 2000
- ------------------------------------
James H. Nicholson
(Signed)/s/Karl C. Saunders Director March 6, 2000
- ------------------------------------
Karl C. Saunders
(Signed)/s/William T. Stewart Director March 6, 2000
- ------------------------------------
William T. Stewart
(Signed)/s/J.W. Straker, Jr.. Director March 6, 2000
- ------------------------------------
J. W. Straker, Jr.
(Signed)/s/William F. Randles Director and Chairman March 6, 2000
- ------------------------------------ of the Board
William F. Randles
(Signed)/s/Kim M. Taylor Chief Financial Officer and March 6, 2000
- ------------------------------------ Chief Accounting Officer
Kim M. Taylor
</TABLE>
63
<PAGE> 64
<TABLE>
Exhibit List and Index
BancFirst Ohio Corp. Form 10-K
for the year ended December 31, 1999
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
- ----------- ----------- -------------
<S> <C> <C>
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).
10.1 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). ---
10.2 Indenture of the Company relating to the Junior Subordinated
Debentures (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4,
Registration Statement No. 333-30570).
10.3 Amended and Restated Trust Agreement of BFOH Capital Trust I
(incorporated by reference to the Company's Registration
Statement on Form S-4, Registration Statement No.
333-30570).
10.4 Agreement and Plan of Reorganization dated January 13, 2000
by and among the Company, FNB, Milton Federal Financial
Corporation and Milton Federal Savings Bank (incorporated by
reference to the exhibit to the Company's Current Report on
Form 8-K filed January 21, 2000).
*21.1 Subsidiaries of the Company 65
*23.1 Consent of PricewaterhouseCoopers LLP 66
*27.1 Financial Data Schedule 67
</TABLE>
- -------------------
*Filed herewith.
64
<PAGE> 1
EXHIBIT NO. 21.1
SUBSIDIARIES OF THE CORPORATION
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
The First National Bank of Zanesville National banking association
422 Main Street under the laws of the
Zanesville, OH 43701 United States
BFOH Capital Trust I Statutory business trust
422 Main Street under the laws of the
Zanesville, OH 43701 State of Delaware
The First National Bank of Zanesville operates under the name of First National
Bank in Muskingum County, Ohio and under the divisional name of Bank First
National outside of Muskingum County.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-64288 and 33-64436) of BancFirst Ohio
Corp. of our report dated January 21, 2000 on our audits of the consolidated
financial statements of BancFirst Ohio Corp. and Subsidiaries as of December
31, 1999 and 1998, and for the years ended December 31, 1999, 1998, and 1997,
which report is included in this Annual Report on Form 10K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
March 3, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 32,191
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 183
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 310,449
<INVESTMENTS-CARRYING> 20,786
<INVESTMENTS-MARKET> 20,601
<LOANS> 849,767
<ALLOWANCE> (7,431)
<TOTAL-ASSETS> 1,274,206
<DEPOSITS> 799,176
<SHORT-TERM> 188,500
<LIABILITIES-OTHER> 9,424
<LONG-TERM> 152,898
0
0
<COMMON> 66,318
<OTHER-SE> 13,790
<TOTAL-LIABILITIES-AND-EQUITY> 1,274,206
<INTEREST-LOAN> 66,685
<INTEREST-INVEST> 21,390
<INTEREST-OTHER> 39
<INTEREST-TOTAL> 88,114
<INTEREST-DEPOSIT> 31,999
<INTEREST-EXPENSE> 49,647
<INTEREST-INCOME-NET> 38,467
<LOAN-LOSSES> 1,580
<SECURITIES-GAINS> 318
<EXPENSE-OTHER> 29,651
<INCOME-PRETAX> 17,989
<INCOME-PRE-EXTRAORDINARY> 12,304
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,304
<EPS-BASIC> 1.58
<EPS-DILUTED> 1.58
<YIELD-ACTUAL> 7.83
<LOANS-NON> 1,312
<LOANS-PAST> 2,244
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,643
<CHARGE-OFFS> (1,570)
<RECOVERIES> 778
<ALLOWANCE-CLOSE> 7,431
<ALLOWANCE-DOMESTIC> 7,431
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
