<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18840
BancFirst Ohio Corp.
(Exact name of registrant as specified in its charter)
Ohio 31-1294136
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
422 Main Street
Zanesville, Ohio 43701
(Address of principal executive offices)
(Zip Code)
(740) 452-8444
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding as of August 10, 2000
----- ---------------------------------
Common Stock, No Par Value 8,380,888
1
<PAGE> 2
<TABLE>
INDEX
BANCFIRST OHIO CORP.
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet .............................................. 3
Consolidated Statement of Income ........................................ 4
Consolidated Statement of Cash Flows .................................... 5
Notes to Consolidated Financial Statements .............................. 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 8-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............. 22
PART II. OTHER INFORMATION
Other Information ............................................................... 23-24
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits on Item 601 of Regulation S-K
(b) Exhibit 27: Financial Data Schedule
(c) Reports on Form 8-K
Signatures ...................................................................... 25
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BANCFIRST OHIO CORP.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS: 2000 1999
---------- ----------
<S> <C> <C>
Cash and due from banks $ 40,129 $ 32,191
Federal Funds sold 161 183
Securities held-to-maturity, at amortized cost
(approximate fair value of $19,182 and
$20,601 in 2000 and 1999, respectively) 19,358 20,786
Securities available-for-sale, at fair value 374,268 310,449
---------- ----------
Total securities 393,626 331,235
---------- ----------
Loans, net of unearned income 1,103,821 849,767
Allowance for possible loan losses (9,908) (7,431)
---------- ----------
Net loans 1,093,913 842,336
---------- ----------
Bank premises and equipment, net 18,331 14,789
Accrued interest receivable 10,248 8,260
Intangible assets 23,642 12,606
Other assets 42,878 32,606
---------- ----------
Total assets $1,622,928 $1,274,206
========== ==========
LIABILITIES:
Deposits:
Non-interest-bearing deposits $ 74,354 $ 65,086
Interest-bearing deposits 964,073 734,090
---------- ----------
Total deposits 1,038,427 799,176
---------- ----------
Federal funds purchased -- 24,100
Federal Home Loan Bank advances and other borrowings 473,800 361,398
Accrued interest payable 4,324 3,618
Other liabilities 11,302 5,806
---------- ----------
Total liabilities 1,527,853 1,194,098
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, No par or stated value, 20,000,000 shares
authorized, 9,098,918 and 8,164,807 shares issued in
2000 and 1999, respectively 80,798 66,318
Retained earnings 39,864 35,795
Accumulated other comprehensive income - unrealized
holding losses on securities available for sale, net (8,794) (8,334)
Treasury stock, 724,324 and 569,628 shares, at cost,
in 2000 and 1999, respectively (16,793) (13,671)
---------- ----------
Total shareholders' equity 95,075 80,108
---------- ----------
Total liabilities and shareholders' equity $1,622,928 $1,274,206
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------- -------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $19,557 $16,425 $37,582 $32,617
Interest and dividends on securities:
Taxable 5,935 4,864 11,541 9,608
Tax-exempt 422 451 843 863
Other interest income 5 4 8 27
------- ------- ------- -------
Total interest income 25,919 21,744 49,974 43,115
------- ------- ------- -------
Interest expense:
Deposits 9,474 7,879 17,730 15,930
Borrowings 6,852 4,126 13,040 8,045
------- ------- ------- -------
Total interest expense 16,326 12,005 30,770 23,975
------- ------- ------- -------
Net interest income 9,593 9,739 19,204 19,140
Provision for possible loan losses 450 375 900 725
------- ------- ------- -------
Net interest income after provision for
possible loan losses 9,143 9,364 18,304 18,415
------- ------- ------- -------
Other income:
Trust and custodian fees 707 610 1,357 1,176
Customer service fees 543 549 1,071 1,079
Gain on sale of loans 523 653 1,138 1,257
Other 1,224 767 2,404 1,226
Investment securities gains, net -- 172 -- 296
------- ------- ------- -------
Total other income 2,997 2,751 5,970 5,034
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 4,243 4,206 8,660 8,260
Net occupancy expense 481 388 1,008 798
Amortization of intangibles 411 363 762 702
Other 2,427 2,627 4,817 5,001
------- ------- ------- -------
Total non-interest expense 7,562 7,584 15,247 14,761
------- ------- ------- -------
Income before income taxes 4,578 4,531 9,027 8,688
Provision for Federal income taxes 1,431 1,440 2,806 2,756
------- ------- ------- -------
Net income $ 3,147 $ 3,091 $ 6,221 $ 5,932
======= ======= ======= =======
Basic and diluted earnings per share $ 0.42 $ 0.39 $ 0.82 $ 0.75
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 7,557 7,888 7,558 7,884
======= ======= ======= =======
Diluted 7,571 7,896 7,572 7,894
======= ======= ======= =======
Cash dividends per common share $ 0.145 $ 0.140 $ 0.290 $ 0.280
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,221 $ 5,932
Adjustment to reconcile net income to net cash
provided by operations:
Depreciation and amortization 2,802 2,968
Provision for possible loan losses 900 725
Gain on sale of assets (1,216) (1,553)
Increase in interest receivable (881) (100)
Increase in other assets (4,565) (2,728)
Decrease in interest payable (669) (119)
(Decrease) Increase in other liabilities (1,353) 1,942
FHLB stock dividend (648) (514)
--------- --------
Net cash provided by operating activities 591 6,553
--------- --------
Cash flows from investing activities:
Decrease in federal funds sold and short term investments 22 218
Proceeds from maturities of securities held-to-maturity 1,439 3,597
Proceeds from maturities and sales of securities available-for-sale 13,805 68,759
Purchase of securities available-for-sale (24,067) (70,611)
Increase in loans, net (87,612) (70,027)
Purchases of equipment and other assets (830) (2,353)
Proceeds from sale of loans 19,682 43,336
Acquisition of Chornyak and Associates, Inc. -- (2,050)
Acquisition of Milton Federal Financial Corp., net of cash acquired (24,124) --
--------- --------
Net cash used in investing activities (101,685) (29,131)
--------- --------
Cash flows from financing activities:
Decrease in federal funds purchased (24,100) --
Increase in Federal Home Loan Bank advances and other borrowings 47,470 10,500
Net increase in deposits 76,456 11,516
Cash dividends paid (2,152) (2,197)
Issuance (purchase) of stock, net 11,358 (2,197)
--------- --------
Net cash provided by financing activities 109,032 17,622
--------- --------
Net increase (decrease) in cash and due from banks 7,938 (4,956)
Cash and due from banks, beginning of period 32,191 28,731
--------- --------
Cash and due from banks, end of period $ 40,129 $ 23,775
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE> 6
BANCFIRST OHIO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
The consolidated financial statements for interim periods are unaudited;
however, in the opinion of management of BancFirst Ohio Corp. ("Company"), the
accompanying consolidated financial statements contain all material adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position and results of operations and cash flows for the periods
presented. The unaudited financial statements are presented in accordance with
the requirements of Form 10-Q and do not include all disclosures normally
required by generally accepted accounting principles. Reference should be made
to the Company's consolidated financial statements and notes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1999
for additional disclosures, including a summary of the Company's accounting
policies. The results of operations for the three month and six month periods
ended June 30, 2000 are not necessarily indicative of the results to be expected
for the full year.
1) BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
2) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities" was
issued. SFAS No. 133 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
$54.4 million at June 30, 2000. The Company does not anticipate that
this standard will have a significant impact on its financial
statements.
3) ACQUISITION
On June 20, 2000, the Company completed the acquisition of Milton
Federal Financial Corporation ("Milton"). In connection with the
acquisition, the Company issued 918,885 common shares having a total
value of approximately $14.2 million and paid cash of $14.1 million to
the Milton shareholders. The acquisition is being accounted for as a
purchase. Accordingly, Milton's results of operations have been
included from the date of acquisition and had a minimal impact on the
Company's results for the periods ended June 30, 2000. Total assets
added from this acquisition approximated $259.4 million.
The following summarizes the pro-forma results of operations for the
six-month periods ended June 30, 2000 and 1999 as if Milton had been
acquired at the beginning of each period presented:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
------- -------
(In thousands, except per share amounts)
<S> <C> <C>
Net interest income $22,442 $22,700
Net income 6,850 6,633
Basic and diluted earnings per share $ 0.82 $ 0.75
</TABLE>
6
<PAGE> 7
4) COMPUTATION OF EARNINGS PER SHARE
The computation of earnings per share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
------ ------ ------ ------
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Actual weighted average common shares outstanding 7,557 7,888 7,558 7,884
Dilutive common stock equivalents:
Stock options -- 2 -- 4
Bonus shares - Company match 14 6 14 6
------ ------ ------ ------
Weighted average common shares outstanding
adjusted for dilutive common stock equivalents 7,571 7,896 7,572 7,894
------ ------ ------ ------
Net income $3,147 $3,091 $6,221 $5,932
------ ------ ------ ------
Basic earnings per share $ 0.42 $ 0.39 $ 0.82 $ 0.75
------ ------ ------ ------
Diluted earnings per share $ 0.42 $ 0.39 $ 0.82 $ 0.75
------ ------ ------ ------
</TABLE>
5) COMPREHENSIVE INCOME
The Company's comprehensive income (loss), determined in accordance
with SFAS No. 130, was $2,819 and $(173) for the three months ended
June 30, 2000 and 1999, respectively, and $5,761 and $2,659 for the six
months ended June 30, 2000 and 1999, respectively.
7
<PAGE> 8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BANCFIRST OHIO CORP.
For a comprehensive understanding of the Company's financial condition and
performance, this discussion should be considered in conjunction with the
Company's Consolidated Financial Statements, accompanying notes, and other
information contained elsewhere herein.
This discussion contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involves risks and uncertainties. Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. Factors that could cause
actual results to differ from the results discussed in the forward-looking
statements include, but are not limited to: economic conditions (both generally
and more specifically in the markets in which the Company and its bank
subsidiary operate); competition for the Company's customers from other
providers of financial services; government legislation and regulation (which
changes from time to time and over which the Company has no control); changes in
interest rates; prepayments of loans and securities; material unforeseen changes
in the liquidity, results of operations, or other financial position of the
Company's customers; the integration of Milton Federal Financial Corporation
into the Company's operations; and other risks detailed in the Company's Form
10-K for the year ended December 31, 1999 and its other filings with the
Securities and Exchange Commission, all of which are difficult to predict and
many of which are beyond the control of the Company.
8
<PAGE> 9
<TABLE>
BANCFIRST OHIO CORP.
SELECTED FINANCIAL DATA:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
AT OR FOR THE THREE MONTHS AT OR FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest Income $ 25,919 $ 21,744 $49,974 $43,115
Interest expense 16,326 12,005 30,770 23,975
---------- ---------- ------- -------
Net interest income 9,593 9,739 19,204 19,140
Provision for possible loan losses 450 375 900 725
Non-interest income 2,997 2,751 5,970 5,034
Non-interest expense 7,562 7,584 15,247 14,761
---------- ---------- ------- -------
Income before income taxes 4,578 4,531 9,027 8,688
Provision for Federal income taxes 1,431 1,440 2,806 2,756
---------- ---------- ------- -------
Net income $ 3,147 $ 3,091 $ 6,221 $ 5,932
========== ========== ======= =======
PER SHARE DATA:
Basic earnings per share $ 0.42 $ 0.39 $ 0.82 $ 0.75
Diluted earnings per share 0.42 0.39 0.82 0.75
Dividends 0.145 0.140 0.290 0.280
Book value 11.35 10.98 N/A N/A
Tangible book value 8.53 9.28 N/A N/A
BALANCE SHEET DATA:
Total assets $1,622,928 $1,201,417 N/A N/A
Loans 1,103,821 804,398 N/A N/A
Allowance for possible loan losses 9,908 6,873 N/A N/A
Securities 393,626 321,009 N/A N/A
Deposits 1,038,427 801,138 N/A N/A
Borrowings 473,800 307,250 N/A N/A
Shareholders' equity 95,075 85,800 N/A N/A
PERFORMANCE RATIOS (1):
Return on average assets 0.93% 1.03% 0.95% 1.00%
Return on average equity 15.65 13.86 15.58 13.45
Tangible return on average tangible equity 21.38 17.81 20.82 17.18
Net interest margin 3.12 3.54 3.21 3.53
Interest rate spread 2.83 3.18 2.92 3.16
Non-interest income to average assets 0.89 0.92 0.91 0.85
Non interest expense to average assets 2.11 2.41 2.20 2.38
Efficiency Ratio (2) 55.72 57.41 56.46 57.67
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.62% 0.39% N/A N/A
Non-performing assets to total assets 0.45 0.36 N/A N/A
Allowance for possible loan losses to total loans 0.90 0.85 N/A N/A
Allowance for possible loan losses to non-performing
loans 144.5 218.1 N/A N/A
Net charge-offs to average loans (1) 0.03 0.10 0.04% 0.13%
CAPITAL RATIOS:
Shareholders' equity to total assets 5.86% 7.14% N/A N/A
Tier 1 capital to average total assets 7.48 6.40 N/A N/A
Tier 1 capital to risk-weighted assets 9.51 9.49 N/A N/A
</TABLE>
(1) Ratios are stated on an annualized basis.
(2) The efficiency ratio is equal to non-interest expense (excluding
amortization and non-recurring expenses) divided by net interest income on
a fully tax equivalent basis plus non-interest income excluding gains on
sales of securities.
9
<PAGE> 10
OVERVIEW
The reported results of the Company primarily reflect the operations of the
Company's bank subsidiary. The Company's results of operations are dependent on
a variety of factors, including the general interest rate environment,
competitive conditions in the industry, governmental policies and regulations
and conditions in the markets for financial assets. Like most financial
institutions, the primary contributor to the Company's income is net interest
income, which is defined as the difference between the interest the Company
earns on interest-earning assets, such as loans and securities, and the interest
the Company pays on interest-bearing liabilities, such as deposits and
borrowings. The Company's operations are also affected by non-interest income,
such as checking account and trust fees and gains from sales of loans. The
Company's principal operating expenses, aside from interest expense, consist of
salaries and employee benefits, occupancy costs, federal deposit insurance
assessments, and other general and administrative expenses.
AVERAGE BALANCES AND YIELDS
The following tables present, for each of the periods indicated, the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and percentage rates, and the net
interest margin. Net interest margin is calculated 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, based on the statutory
federal income tax rate. All average balances are daily average balances.
Non-accruing loans are included in average loan balances.
10
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
---------------------------- ---------------------------- ---------------------------- ----------------------------
(Dollars in Thousands) (Dollars in Thousands)
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate(1) Balance Expense Rate(1) Balance Expense Rate(1) Balance Expense Rate(1)
---------- ------- ------- ---------- ------- ------- ---------- ------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Taxable $ 319,935 $ 5,935 7.46% $ 298,315 $ 4,864 6.54% $ 311,892 $11,540 7.44% $ 296,524 $ 9,608 6.53%
Tax exempt 30,233 651 8.66 34,392 695 8.11 30,051 1,298 8.69 33,537 1,328 7.99
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total
securities 350,168 6,586 7.56 332,707 5,559 6.70 341,943 12,838 7.55 330,061 10,936 6.68
Loans (2):
Commercial 439,630 9,911 9.07 369,404 8,223 8.93 432,493 19,377 9.01 354,706 16,025 9.11
Real Estate 367,514 7,198 7.88 335,252 6,339 7.58 351,836 13,560 7.75 343,830 12,874 7.55
Consumer 112,170 2,462 8.83 95,286 1,880 7.91 108,236 4,674 8.68 93,687 3,753 8.08
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total loans 919,314 19,571 8.56 799,942 16,442 8.24 892,565 37,611 8.47 792,223 32,652 8.31
Federal funds
sold 323 5 6.23 285 4 5.63 243 8 6.62 1,170 27 4.65
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total
earning
assets (3) 1,269,805 $26,162 8.29% 1,132,934 $22,005 7.79% 1,234,751 $50,457 8.22% 1,123,454 43,615 7.83%
------- ------- ------- -------
Non-interest
earning
assets 90,099 68,595 87,552 68,635
---------- ---------- ---------- ----------
Total assets $1,359,904 $1,201,529 $1,322,303 $1,192,089
========== ========== ========== ==========
Interest-bearing
deposits:
Demand and
savings
deposits $ 224,780 $ 1,629 2.91% $ 225,473 $ 1,322 2.35% $ 227,462 $ 3,243 2.87% $ 228,661 $ 2,786 2.46%
Time deposits 553,038 7,845 5.71 503,919 6,557 5.22 522,870 14,487 5.57 501,536 13,144 5.28
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total deposits 777,818 9,474 4.90 729,392 7,879 4.33 750,332 17,730 4.75 730,197 15,930 4.40
Borrowings 423,762 6,852 6.50 314,864 4,126 5.26 416,655 13,040 6.29 304,809 8,045 5.32
---------- ------- ---------- ------- ---------- ------- ---------- -------
Total
interest-
bearing
liabilities 1,201,580 16,326 5.46% 1,044,256 12,005 4.61% 1,166,987 30,770 5.30% 1,035,006 23,975 4.67%
------- ------- ------- -------
Non-interest-
bearing
deposits 65,645 60,771 64,694 61,072
---------- ---------- ---------- ----------
Subtotal 1,267,225 1,105,027 1,231,681 1,096,078
Accrued expenses
and other
liabilities 11,815 7,074 10,348 7,045
---------- ---------- ---------- ----------
Total
liabilities 1,279,040 1,112,101 1,242,029 1,103,123
Shareholders'
Equity 80,864 89,428 80,274 88,966
---------- ---------- ---------- ----------
Total
liabilities and
shareholders'
equity $1,359,904 $1,201,529 $1,322,303 $1,192,089
========== ========== ========== ==========
Net interest
income and
interest rate
spread (4) $ 9,836 2.83% $10,000 3.18% $19,687 2.92% $19,640 3.16%
======= ===== ======= ===== ======= ===== ======= =====
Net interest
margin (5) 3.12% 3.54% 3.21% 3.53%
===== ===== ===== =====
Average
interest-
earning assets
to average
interest-
bearing
liabilities 105.7% 108.5% 105.8% 108.5%
</TABLE>
(1) Calculated on an annualized basis.
(2) Non-accrual loans are included in the average loan balances.
(3) Interest income is computed on a fully tax equivalent (FTE) basis, using a
tax rate of 35%.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) The net interest margin represents net interest income as a percentage of
average interest earning assets.
11
<PAGE> 12
RATE AND VOLUME VARIANCES
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table
discloses the dollar changes in the Company's net interest income attributable
to changes in levels of interest-earning assets or interest-bearing liabilities
(volume), changes in average yields on interest-earning assets and average rates
on interest-bearing liabilities (rate) and the combined volume and rate effects
(total). For the purposes of this table, the change in interest due to both rate
and volume has been allocated to volume and rate change in proportion to the
relationship of the dollar amounts of the change in each. In general, this table
provides an analysis of the effect on income of balance sheet changes which
occurred during the periods and the changes in interest rate levels.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 VS. 1999 2000 VS. 1999
INCREASE (DECREASE) INCREASE (DECREASE)
------------------- -------------------
(IN THOUSANDS) (IN THOUSANDS)
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities:
Taxable $ 364 $ 707 $1,071 $ 525 $1,407 $1,932
Non-taxable (89) 45 (44) (143) 113 (30)
------ ------ ------ ------ ------ ------
Total securities 275 752 1,027 382 1,520 1,902
------ ------ ------ ------ ------ ------
Loans:
Commercial 1,561 127 1,688 3,530 (178) 3,352
Real estate 613 246 859 321 365 686
Consumer 352 230 582 621 300 921
------ ------ ------ ------ ------ ------
Total loans 2,526 603 3,129 4,472 487 4,959
Fed funds sold 1 -- 1 (27) 8 (19)
------ ------ ------ ------ ------ ------
Total interest-earning assets (1) 2,802 1,355 4,157 4,827 2,015 6,842
------ ------ ------ ------ ------ ------
Interest-bearing liabilities:
Deposits:
Demand and savings deposits (4) 311 307 (15) 472 457
Time deposits 659 629 1,288 589 754 1,343
------ ------ ------ ------ ------ ------
Total interest-bearing deposits 655 940 1,595 574 1,226 1,800
Borrowings 1,617 1,109 2,726 3,333 1,662 4,995
------ ------ ------ ------ ------ ------
Total interest-bearing liabilities 2,272 2,049 4,321 3,907 2,888 6,795
------ ------ ------ ------ ------ ------
Net interest income $ 530 $ (694) $ (164) $ 920 $ (873) $ 47
====== ====== ====== ====== ====== ======
</TABLE>
(1) Computed on a fully tax equivalent basis, assuming a tax rate of 35%.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND
1999
Net Income. Net income for the three months ended June 30, 2000 increased 1.8%
to $3.1 million. Basic and diluted earnings per share in the second quarter of
2000 equaled $0.42, compared to $0.39 for the same period in 1999. Net interest
income decreased 1.5% to $9.6 million from $9.7 million while non-interest
income increased 8.9% to $3.0 million from $2.8 million in the three months
ended June 30, 2000, as compared to the same period in 1999 and non-interest
expense decreased less than 0.1% to $7.6 million in the three months ended June
30, 2000. The provision for possible loan losses was $450,000 in 2000 compared
to $375,000 in the prior year period. The Company's net interest margin was
3.12% for the three months ended June 30, 2000 and 3.54% for the three months
ended June 30, 1999. The decrease in net interest income resulted from a higher
costs of funds, partially offset by higher levels of average earning assets and
an increase in the average yield on earning assets. Non-interest income
increased primarily due to higher levels of trust and
12
<PAGE> 13
custodian fees, financial planning fees and SBA loan servicing income. The
Company's return on average assets and return on average equity were 0.93% and
15.65%, respectively, in the second quarter of 2000, compared to 1.03% and
13.86%, respectively, in the second quarter of 1999.
Interest Income. Total interest income increased 19.2% to $25.9 million for the
three months ended June 30, 2000, compared to $21.7 million for the second
quarter of 1999. This increase resulted from a $136.9 million increase in
average earning assets, and a 50 basis point increase in the average yield on
earning assets. The increase in the average balance of loans of $119.4 million,
or 14.9%, was consistent with the Company's emphasis on increasing the loan
portfolio and the average balance contributed by the Milton acquisition which
approximated $27.2 million.
The weighted average yield on interest-earning assets increased to 8.29% during
the three months ended June 30, 2000, compared to 7.79% during the comparative
three month period in 1999. The Company's yield on average loans increased from
8.24% during the three months ended June 30, 1999 to 8.56% during the three
months ended June 30, 2000 primarily as a result of increases in yields
resulting from higher market interest rates. Yields on the investment portfolio
increased from 6.70% during the second quarter of 1999 to 7.56% during the
second quarter of 2000, also benefiting from increased market interest rates.
Interest Expense. Total interest expense increased 36.0% to $16.3 million for
the three months ended June 30, 2000, compared to $12.0 million for the three
months ended June 30, 1999. Interest expense increased due to a $157.3 million
increase in the average balance of interest bearing liabilities as well as an 85
basis point increase in the Company's cost of funds. The average balance of
interest-bearing deposit accounts increased $48.4 million, or 6.6%, from the
second quarter in 1999 to the second quarter in 2000 while average borrowings
increased $108.9 million, or 34.6%.
The Company's cost of funds increased to 5.46% in the three months ended June
30, 2000 compared to 4.61% in the same period of 1999. The increase in cost of
funds resulted primarily from increased market interest rates.
Provision for Possible Loan Losses. The provision for possible loan losses was
$450,000 for the three months ended June 30, 2000, compared to $375,000 in the
second quarter of 1999. Total non-performing loans increased to $6.9 million, or
.62% of total loans at June 30, 2000, from $3.2 million, or .39% of total loans
at June 30, 1999. The allowance for possible loan losses at June 30, 2000 was
$9.9 million, or .90% of total loans and 144.5% of non-performing loans compared
to $6.9 million, or .85% of total loans and 218.1% of non-performing loans at
June 30, 1999. Management's estimate of the adequacy of its allowance for
possible loan losses is based upon its continuing review of prevailing national
and local economic conditions, changes in the size and composition of the
portfolio and individual problem credits. Growth of the loan portfolio, loss
experience, economic conditions, delinquency levels, credit mix and selected
credits are factors that affect judgments concerning the adequacy of the
allowance.
Non-Interest Income. Total non-interest income was $3.0 million for the three
months ended June 30, 2000, compared to $2.8 million for the three months ended
June 30, 1999. The following table sets forth the Company's non-interest income
for the periods indicated:
13
<PAGE> 14
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Trust and custodian fees $ 707 $ 610 $1,357 $1,176
Customer service fees 543 549 1,071 1,079
Investment securities gains -- 172 -- 296
Gains on sales of loans 523 653 1,138 1,257
Other 1,224 767 2,404 1,226
------ ------ ------ ------
TOTAL $2,997 $2,751 $5,970 $5,034
====== ====== ====== ======
</TABLE>
Trust and custodian fees increased 15.9% to $707,000 in the second quarter of
2000 from $610,000 in the second quarter of 1999. Growth in trust income
continued to result primarily from the expansion of the customer base, higher
asset values and increased sales of retail investment products.
Customer service fees, representing service charges on deposits and fees for
other banking services, decreased 1.1% in the second quarter of 2000 to $543,000
from $549,000 in the second quarter of 1999. Decreased fee income related
primarily to a decrease in overdraft and non sufficient funds charges.
The Company had no sales of securities during the second quarter of 2000. During
the second quarter of 1999, the Company sold approximately $17.2 million of
investment securities, realizing gains of $172,000. Proceeds from these sales
were used to fund increases in the loan portfolio.
Gains on sales of loans totaled $523,000 for the three months ended June 30,
2000 compared to $653,000 for the three months ended June 30, 1999. During the
second quarter of 2000, the Company sold $6.9 million of the guaranteed portion
of its SBA and other government guarantee loan originations in the secondary
market compared to $8.4 million during the second quarter of 1999, realizing
gains of $492,000 in 2000 compared to gains of $438,000 in 1999. The increase in
the ratio of gains relative to the principal balance of loans sold is attributed
primarily to increases in interest rates which have resulted in lower prepayment
expectations. Also, the Company recorded gains of $31,000 from the sales of
residential loans during the second quarter of 2000 compared to $215,000 in
1999. The decrease in gains on sales of residential loans has resulted from
increases in market interest rates, thus causing a decline in fixed rate loan
origination activity.
The Company continues 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 periodically subject many
existing government programs to much scrutiny and possible cutbacks. It is not
currently known whether the SBA program will be impacted. Management believes
that any such cutbacks could negatively affect the Company's activities in the
SBA lending programs as well as the planned expansion of such activities.
Other income increased $457,000 to $1.2 million in the second quarter of 2000
compared to $767,000 in the second quarter of 1999 primarily as a result of
financial planning fee income of Chornyak & Associates, Inc. which increased
$165,000 in 2000 compared to 1999 and SBA loan servicing income which increased
$145,000 due to lower levels of amortization of servicing assets.
14
<PAGE> 15
Non-Interest Expense. The following table sets forth the Company's non-interest
expense for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2000 1999 2000 1999
------ ------ ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits $4,243 $4,206 $ 8,660 $ 8,260
Occupancy expense 481 388 1,008 798
Furniture, fixtures and equipment 228 253 470 476
Data processing 333 310 647 622
Taxes other than income taxes 193 267 431 511
Federal deposit insurance 42 69 84 138
Amortization of goodwill and other intangibles 411 363 762 702
Other 1,631 1,728 3,185 3,254
------ ------ ------- -------
TOTAL $7,562 $7,584 $15,247 $14,761
====== ====== ======= =======
</TABLE>
Salary and employee benefits expense increased $37,000, or .9% and accounted for
approximately 56.1% of total non-interest expense in the three months ended June
30, 2000 compared to 55.5% in the second quarter of 1999. The average full time
equivalent staff was 394 in 2000 compared to 382 in 1999.
Net occupancy expense increased 24.0% to $481,000 for the second quarter of 2000
from to $388,000 for the second quarter of 1999. This increase resulted
primarily from rent expense associated with the Company's training and
technology center which commenced operations in November 1999.
Furniture, fixtures and equipment expense decreased $25,000, or 9.9% in the
second quarter of 2000. This decrease is primarily attributed to lower
depreciation costs.
Data processing expense increased $23,000, or 7.4%, in the second quarter of
2000. Increased costs in 2000 resulted from higher software and maintenance
costs related to continued technological enhancements to the Company's data
processing systems.
Taxes other than income taxes decreased $74,000, or 27.7%, in the second quarter
of 2000 compared to the second quarter of 1999. This decrease resulted primarily
from lower tax rates.
Federal deposit insurance expense decreased $27,000 to $42,000 in 2000 from
$69,000 in the second quarter of 1999, reflecting lower premium rates in effect
for 2000.
Amortization of goodwill and other intangible assets increased $48,000 in the
second quarter of 2000 compared to the second quarter of 1999 primarily due to
additional amortization related to goodwill resulting from the Milton
acquisition.
Other non-interest expenses decreased $97,000, or 5.6%, to $1.6 million for the
second quarter of 2000, reflecting management's continued emphasis on
controlling costs.
The efficiency ratio is one method used in the banking industry to assess
profitability. It is defined as non-interest expense less amortization expense
divided by the net revenue stream, which is the sum of net interest income on a
tax-equivalent basis and non-interest income excluding net investment securities
gains or losses. The Company's efficiency ratio was 55.7% for the second quarter
of 2000, compared to 57.4% for the comparable period in 1999. Controlling costs
and improving productivity, as measured by the efficiency ratio, is considered
by management a primary factor in enhancing performance.
15
<PAGE> 16
Provision for Income Taxes. The Company's provision for Federal income taxes was
$1.4 million, or 31.3% of pretax income, for the three months ended June 30,
2000 compared to $1.4 million, or 31.8% of pretax income, for the three months
ended June 30, 1999. The effective tax rate for each period differed from the
federal statutory rate principally as a result of tax-exempt income from
obligations of states and political subdivisions and non-taxable loans, earnings
on bank-owned life insurance, and the non-deductibility, for tax purposes, of
goodwill and core deposit intangible amortization expense.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999.
Net Income. Net income for the six months ended June 30, 2000 increased 4.9% to
$6.2 million, or $.82 per basic and diluted share, compared to net income of
$5.9 million, or $.75 per share, for the six months ended June 30, 1999. Net
interest income increased .3% to $19.2 million from $19.1 million and
non-interest income increased 18.6% to $6.0 million from $5.0 million in the six
months ended June 30, 2000, as compared to the same period in 1999, and
non-interest expense increased 3.3% to $15.2 million in the six months ended
June 30, 2000. The Company's net interest margin decreased to 3.21% for the six
months ended June 30, 2000 compared to 3.53% for the same period in 1999. The
Company's return on average assets and return on average equity were .95% and
15.58%, respectively, for the six months ended June 30, 2000, compared to 1.00%
and 13.45%, respectively, for the six months ended June 30, 1999.
Interest Income. Total interest income increased 15.9% to $50.0 million for the
six months ended June 30, 2000, compared to $43.1 million for the comparable
period in 1999. This increase resulted from higher levels of earning assets, and
a 39 basis point increase in the average yield on interest-earning assets.
Average earning assets increased $111.3 million to $1.23 billion for the six
months ended June 30, 2000 from $1.12 billion in 1999. This increase was
primarily attributed to the average balance of loans which increased $100.3
million, or 12.7%. The increase in loan balances was consistent with the
Company's emphasis on loan growth to increase overall yields on earning assets.
The weighted average yield on interest-earning assets increased to 8.22% during
the six months ended June 30, 2000, compared to 7.83% during the same six month
period in 1999. The Company's yield on average loans increased from 8.31% during
the six months ended June 30, 1999 to 8.47% during the six months ended June 30,
2000. The increase in yield has resulted primarily from increases in market
interest rates. Yields on the investment portfolio increased from 6.68% during
1999 to 7.55% during 2000, also due primarily to increases in market interest
rates.
Interest Expense. Total interest expense increased 28.3% to $30.8 million for
the six months ended June 30, 2000, compared to $24.0 million for the six months
ended June 30, 1999. Interest expense increased due to a higher cost of funds,
and a higher average balance of interest-bearing liabilities during the first
six months of 2000, as compared to the same period in 1999. The average balance
of interest-bearing liabilities increased 12.8%, from $1.04 billion during the
six months ended June 30, 1999 to $1.17 billion during the six months ended June
30, 2000.
The Company's cost of funds increased to 5.30% for the six months ended June 30,
2000 compared to 4.67% for the same period of 1999, primarily due to increases
in market interest rates which have resulted in higher rates being paid on short
term repricing borrowings as well as renewals of maturing certificates of
deposit.
Provision for Possible Loan Losses. The provision for possible loan losses was
$900,000 for the six months ended June 30, 2000, compared to $725,000 for the
six months ended June 30, 1999 and was considered sufficient to maintain the
Company's allowance for possible loan losses at an adequate level. The increased
provision in 2000 resulted primarily from increases in, as well as a change in
the mix of, the loan portfolio.
Non-Interest Income. Total non-interest income was $6.0 million for the six
months ended June 30, 2000, compared to $5.0 million for the six months ended
June 30, 1999. This increase was primarily attributed to increases in fee income
offset in part by lower gains on sales of loans and investment securities.
Customer service fees, representing service charges on deposits and fees from
other banking services, decreased $8,000, or .7%, for the six months ended June
30, 2000 to $1.1 million. Trust income increased 15.4% to $1.4 million in 2000,
from $1.2 million in 1999. Growth in trust and custodian fees resulted primarily
from the expansion of the customer base, higher asset values and increased sales
of retail investment products. The $1.2 million increase in other income to $2.4
million in 2000 compared to $1.2 million in 1999 resulted primarily from
financial planning fees which increased
16
<PAGE> 17
$512,000 and higher SBA loan servicing fee income which increased $265,000 due
to increased levels of serviced loans as well as a lower level of amortization
of capitalized servicing assets.
Gains on sales of loans decreased from $1.3 million for the six months ended
June 30, 1999 to $1.1 million for the comparable period in 2000. In 2000, the
Company sold $15.5 million of the guaranteed portion of its SBA and other
government guaranteed loan originations in the secondary market compared to
$12.8 million in 1999, realizing gains of $1.1 million in 2000 compared to gains
of $779,000 in 1999. The increased level of gains relative to the principal
balance of loans sold is primarily attributed to increased market interest rates
which have resulted in lower prepayment expectations. In addition, the Company
sold $3.0 million of residential real estate loans realizing gains of $46,000 in
the first six months of 2000 compared to $478,000 of gains on sales of loans
totaling $29.3 million in 1999. Residential real estate loan sale volume in 1999
benefited from the lower interest rate environment compared to 2000.
Non-Interest Expense. Total non-interest expense increased $486,000, or 3.3%, to
$15.2 million for the six months ended June 30, 2000, compared to $14.8 million
for the six months ended June 30, 1999. For the six months ended June 30, 2000,
the Company's efficiency ratio was 56.5%, compared to 57.7% for the six months
ended June 30, 1999.
Salary and employee benefits expense increased $400,000, or 4.8% primarily as a
result of staff additions associated with increased loan production and other
fee income generating activities. Salaries and employee benefits accounted for
approximately 56.8% of total non-interest expense for the six months ended June
30, 2000 compared to 56.0% in 1999. The average full time equivalent staff was
389 in 2000 compared to 386 in 1999.
Net occupancy expense increased 26.3% to $1.0 million for the first six months
of 2000 from $798,000 for the first six months of 1999. This increase resulted
from rent associated with the Company's training and technology facility which
opened in the fourth quarter of 1999 as well as from expenses associated with
the New Albany branch which opened in May 1999.
Data processing expense increased $25,000, or 4.0%, for the six months ended
June 30, 2000. Higher costs in 2000 resulted primarily from higher depreciation
and amortization of equipment and software enhancements due to technological
advancements.
Taxes other than income taxes decreased $80,000, or 15.7%, for the first six
months 2000 compared to the same period in 1999. This decrease resulted
primarily from lower tax rates.
Federal deposit insurance expense decreased $54,000 to $84,000 in 2000 from
$138,000 in 1999, reflecting lower premium rates in effect for 2000.
Amortization of goodwill and other intangible assets increased $60,000 to
$762,000 during the first six months of 2000 compared to $702,000 in 1999. This
increase was primarily due to amortization related to goodwill resulting from
the Milton acquisition.
Other non-interest expenses decreased $69,000, or 2.1%, for the six months ended
June 30, 2000 compared to the same period in 1999, reflecting management's
continued emphasis on controlling costs.
Provision for Income Taxes. The Company's provision for Federal income taxes was
$2.8 million, or 31.1% of pretax income, for the six months ended June 30, 2000
compared to $2.8 million, or 31.7% of pretax income, for the six months ended
June 30, 1999. The effective tax rate for each period differed from the federal
statutory rate principally as a result of tax-exempt income from obligations of
states and political subdivisions and non-taxable loans, earnings on bank-owned
life insurance, and the non-deductibility, for tax purposes, of goodwill and
core deposit intangible amortization expense.
ASSET QUALITY
Non-performing Assets. To maintain the level of credit risk of the loan
portfolio at an appropriate level, management sets underwriting standards and
internal lending limits and provides for proper diversification of the portfolio
by placing constraints on the concentration of credits within the portfolio. In
monitoring the level of credit risk within the loan portfolio, management
utilizes a formal loan review process to monitor, review, and consider relevant
factors in evaluating specific
17
<PAGE> 18
credits in determining the adequacy of the allowance for possible loan losses.
The Company's banking subsidiary formally documents its evaluation of the
adequacy of the allowance for possible loan losses on a quarterly basis and the
evaluation is reviewed and discussed with its board of directors.
Failure to receive principal and interest payments when due on any loan results
in efforts to restore such loan to current status. Loans are classified as
non-accrual when, in the opinion of management, full collection of principal and
accrued interest is in doubt. Continued unsuccessful collection efforts
generally lead to initiation of foreclosure or other legal proceedings. Property
acquired by the Company as a result of foreclosure or by deed in lieu of
foreclosure is classified as "other real estate owned" until such time as it is
sold or otherwise disposed of. The Company owned $529,000 of such property at
June 30, 2000 and $1.1 million at June 30, 1999.
Non-performing loans totaled $6.9 million, or .62% of total loans, at June 30,
2000, compared to $3.2 million, or 0.39% of total loans, at June 30, 1999.
Non-performing assets totaled $7.4 million, or 0.45% of total assets at June 30,
2000, compared to $4.3 million, or .36% of total assets at June 30, 1999. The
increase in non-performing loans from June 30, 1999 resulted equally from
increases in non-performing single-family residential mortgage loans and
commercial loans. The following is an analysis of the composition of
non-performing assets:
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans $3,931 $2,560
Accruing loans 90 days or more past due 2,924 592
------ ------
Total non-performing loans 6,855 3,152
Other real estate owned 529 1,143
------ ------
Total non-performing assets $7,384 $4,295
====== ======
Restructured loans $2,977 $2,986
====== ======
Non-performing loans to total loans 0.62% 0.39%
Non-performing assets to total assets 0.45% 0.36%
Non-performing loans plus restructured loans to total loans 0.89% 0.76%
Non-performing assets plus restructured loans to total assets 0.64% 0.61%
</TABLE>
Restructured loans consist of one loan that was restructured in May 1999 and has
been performing in accordance with its restructured terms since such time.
Allowance for Possible Loan Losses. The Company records a provision necessary to
maintain the allowance for possible loan losses at a level sufficient to provide
for potential future credit losses. The provision is charged against earnings
when it is established. An allowance for possible loan losses is established
based on management's best judgment, which involves a continuing review of
prevailing national and local economic conditions, changes in the size and
composition of the portfolio and review of individual problem credits. Growth of
the loan portfolio, loss experience, economic conditions, delinquency levels,
credit mix, and selected credits are factors that affect judgments concerning
the adequacy of the allowance. Actual losses on loans are charged against the
allowance.
18
<PAGE> 19
The following table summarizes the Company's loan loss experience, and provides
a breakdown of the allowance for possible loan losses at the dates indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
2000 1999 2000 1999
---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 7,761 $ 6,701 $ 7,431 $ 6,643
Provision charged to expense 450 375 900 725
Loans charged-off (235) (343) (488) (784)
Recoveries of loans previously charged off 159 140 292 289
Acquired allowance for loan loss 1,773 -- 1,773 --
---------- -------- -------- --------
Balance at end of period $ 9,908 $ 6,873 $ 9,908 $ 6,873
========== ======== ======== ========
Loans outstanding at end of period $1,103,821 $804,398 N/A N/A
Average loans outstanding $ 919,314 $799,942 $892,565 $792,223
Allowance as a percentage of loans outstanding 0.90% 0.85% N/A N/A
Net charge-offs to average loans (annualized) 0.03% 0.10% 0.04% 0.13%
Allowance for possible loan losses to non-performing loans 144.5% 218.1% N/A N/A
</TABLE>
The allowance for possible loan losses totaled $9.9 million at June 30, 2000,
representing .90% of total loans, compared to $6.9 million at June 30, 1999, or
.85% of total loans. Charge-offs represent the amount of loans actually removed
as earning assets from the balance sheet due to uncollectibility. Amounts
recovered on previously charged-off assets are netted against charge-offs,
resulting in net charge-offs for the period. Net loan charge-offs for the three
months and six months ended June 30, 2000 were $76,000 and $196,000,
respectively, compared to net charge-offs of $203,000 and $495,000,
respectively, for the same periods in 1999. 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 144.5% at June 30, 2000, compared to 218.1% at June 30,
1999. 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 .62% of total loans at June 30, 2000.
COMPARISON OF JUNE 30, 2000 AND DECEMBER 31, 1999 FINANCIAL CONDITION
Total assets amounted to $1.62 billion at June 30, 2000, compared to $1.27
billion at December 31, 1999, an increase of $348.7 million, or 27.4%. Total
assets added from the Milton acquisition on June 20, 2000 approximated $259.4
million.
Total investment securities increased by $62.4 million to $393.6 million, with
$47.1 million of this increase attributed to the Milton acquisition. The
Company's general investment strategy is to manage the portfolio to include rate
sensitive assets, matched against interest sensitive liabilities to reduce
interest rate risk. In recognition of this strategy, as well as to provide a
secondary source of liquidity to accommodate loan demand and possible deposit
withdrawals, the Company has chosen to classify the majority of its investment
securities as available-for-sale. At June 30, 2000, 95.1% 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 4.9%. This compares to 93.7% and 6.3% classified as available-for-sale
and held to maturity, respectively, at December 31, 1999.
Total loans increased $254.1 million to $1.11 billion at June 30, 2000 from
December 31, 1999, with $192.2 million of this increase attributed to the Milton
acquisition. Excluding the effects of the acquired Milton loan portfolio,
commercial loans have increased $35.4 million, residential loans have increased
$10.2 million and consumer loans have increased $16.3 million since year end
1999. Management continues to emphasize increasing earning assets and improving
earning asset yields by increasing and changing the mix of the loan portfolio.
19
<PAGE> 20
Premises and equipment increased from $14.8 million at December 31, 1999 to
$18.3 million at June 30, 2000. This increase primarily resulted from $3.5
million of fixed assets added by the Milton acquisition.
Other assets increased from $32.6 million at December 31, 1999 to $42.9 million
at June 30, 2000 primarily as a result of the Milton acquisition which
contributed $6.2 million to the June 30, 2000 total.
Total deposits increased $239.3 million to $1.04 billion at June 30, 2000 from
$799.2 million at December 31, 1999, with $162.8 million of this increase
attributed to the Milton acquisition. The Company continues to emphasize growth
in its existing retail deposit base provided incremental deposit growth is cost
effective compared to alternative funding sources. Excluding deposits added by
Milton, total deposits increased $76.5 million, of which $48.9 million related
to additional brokered deposits and $27.6 million related to retail and other
deposits. Total interest-bearing deposits accounted for 92.8% of total deposits
at June 30, 2000, compared to 91.9% at December 31, 1999.
Total borrowings, including federal funds purchased, increased $88.3 million to
$473.8 million at June 30, 2000, compared to $385.5 million at December 31,
1999. This increase resulted primarily from $64.9 million of borrowings added by
Milton as well as from funding needs associated with increases in the loan
portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure the availability of funds to
accommodate customer loan demand as well as deposit withdrawals while
continuously seeking higher yields from longer term lending and investing
opportunities. This is accomplished principally by maintaining sufficient cash
flows and liquid assets along with consistent stable core deposits and the
capacity to maintain immediate access to funds. These immediately accessible
funds may include federal funds sold, unpledged marketable securities, reverse
repurchase agreements or available lines of credit from the Federal Reserve
Bank, Federal Home Loan Bank (FHLB), or other financial institutions. An
important factor in the preservation of liquidity is the maintenance of public
confidence, as this facilitates the retention and growth of a large, stable
supply of core deposits in funds.
The Company's principal source of funds to satisfy short-term liquidity needs
comes from cash, due from banks, federal funds sold and borrowing capabilities
through the FHLB as well as other sources. Changes in the balance of cash and
due from banks are due to changes in volumes of federal funds sold, and the
float and reserves related to deposit accounts, which may fluctuate
significantly on a day-to-day basis. The investment portfolio serves as an
additional source of liquidity for the Company. Securities with a market value
of $374.3 million were classified as available-for-sale as of June 30, 2000,
representing 95.1% of the total investment portfolio. Classification of
securities as available-for-sale provides for flexibility in managing net
interest margin, interest rate risk, and liquidity.
The Company's bank subsidiary is a member of FHLB. Membership provides an
opportunity to control the bank's cost of funds by providing alternative funding
sources, to provide flexibility in the management of interest rate risk through
the wide range of available funding sources, to manage liquidity via immediate
access to such funds, and to provide flexibility through utilization of
customized funding products to fund various loan and investment products and
strategies.
On June 20, 2000, the Company completed the acquisition of Milton Federal
Financial Corporation ("Milton"). In connection with the acquisition, the
Company issued 918,885 common shares having a total value of approximately $14.2
million and paid cash of $14.1 million to the Milton shareholders. The
acquisition is being accounted for as a purchase. Accordingly, Milton's results
of operations have been included from the date of acquisition and had a minimal
impact on the Company's results for the periods ended June 30, 2000. Total
assets added from this acquisition approximated $259.4 million.
The Company obtained a $15 million term loan with a financial institution in
order to partially fund the acquisition of County in August 1996. This loan had
an outstanding balance of $3.8 million at June 30, 2000. Under the terms of the
loan agreement, the Company is required to make quarterly interest payments and
annual principal payments, based on a ten-year amortization, which commenced in
February 1998. The unpaid loan balance is due in full September 1, 2003.
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The loan agreement also contains certain financial covenants, all of which the
Company was in compliance with at June 30, 2000.
Shareholders' equity at June 30, 2000 was $95.1 million, compared to prior
year-end shareholders' equity of $80.1 million, an increase of $15.0 million.
This increase resulted primarily from the issuance of common shares in
connection with the Milton acquisition, discussed above.
Under the risk-based capital guidelines, a minimum capital to risk-weighted
assets ratio of 8.0% is required, of which, at least 4.0% must consist of Tier 1
capital (equity capital net of goodwill). Additionally, a minimum leverage ratio
Tier 1 capital to total assets) of 3.0% must be maintained. At June 30, 2000,
the Company had a total risk-based capital ratio of 10.4%, of which 9.5%
consisted of Tier 1 capital. The leverage ratio for the Company at June 30,
2000, was 7.5%.
Cash dividends declared to shareholders of the Company totaled $2.2 million, or
$0.29 per share, during the first six months of 2000. This compares to dividends
of $2.2 million, or $0.28 per share, for the same period in 1999. Cash dividends
paid as a percentage of net income amounted to 35.4% and 37.3% for the six
months ended June 30, 2000 and 1999, 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 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 is contained in the instruments which govern the
Capital Securities and the Debentures.
Considering the Company's capital adequacy, profitability, available liquidity
sources and funding sources, the Company's liquidity is considered by management
to be adequate to meet current and projected needs.
CONTINGENCIES AND UNCERTAINTIES - YEAR 2000
During the periods leading up to January 1, 2000, the Company addressed the
potential problems associated with the possibility that the computers that
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.
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.
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<PAGE> 22
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of ther Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio equity, see "Management's Discussion and Analysis -
Interest Rate Risk Management" in the Company's Form 10-K for the year ended
December 31, 1999. The following summarizes the Company's simulations of net
interest income and net present value (NPV) as of June 30, 2000:
<TABLE>
<CAPTION>
PROJECTED CHANGE % CHANGE
CHANGE IN INTEREST RATES AMOUNT FROM BASE FROM BASE
------------------------ ------ --------- ---------
<S> <C> <C> <C>
Net Interest Income:
200 Basis point increase $42,008 $ (1,005) (2.34)%
Base scenario - no change 43,013 N/A N/A
200 Basis point decrease 44,615 1,602 3.72%
Net Present Value (NPV):
200 Basis point increase 67,089 (26,815) (28.56)%
Base scenario - no change 93,904 N/A N/A
200 Basis point decrease 92,914 (990) (1.05)%
</TABLE>
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<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 20, 2000, the Company held its Annual Meeting of Shareholders,
the results of which follows:
1. To approve and ratify the appointment of Pricewaterhouse Coopers,
L.L.P. as independent auditors for the year ended December 31, 2000:
Abstaining/
-----------
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
5,426,721 5,281 4,340
2. Election of Class I directors:
Votes Against/
--------------
Votes For Withheld
--------- --------
James H. Nicholson 5,151,191 285,149
William F. Randles 5,423,725 11,840
Karl C. Saunders 5,424,843 11,497
3. Election of Class III director:
William T. Stewart 5,423,919 12,421
ITEM 5. OTHER INFORMATION
The proxy holders for the 2001 annual meeting of shareholders will use
their discretion in voting on any and all matters brought before the
2001 annual meeting which were not provided to the Company in an advance
notice on or prior to February 3, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits on Item 601 of Regulation S-K
Exhibit 3(a) - Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Company's Form 10-K for year ended
December 31, 1991, Exhibit 3.3 to the Company's Form 10-K for the year
ended December 31, 1992 and Exhibit 3.6 to the Company's Form 10-K for
the year ended December 31, 1994).
Exhibit 3(b) - Code of Regulations, as amended (incorporated by
reference to Exhibit 3.2 to the Company's Form 10-K for the year ended
December 31, 1991, Exhibit 3.4 to the Company's Form 10-K for the year
ended December 31, 1992 and Exhibit 3.5 to the Company's Form 10-K for
the year ended December 31, 1993).
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(b) Exhibit 27: Financial Data Schedule
(c) Reports on Form 8-K
Report on Form 8-K dated June 21, 2000 regarding the completion of the
acquisition of Milton Federal Financial Corporation effective June 20,
2000.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BancFirst Ohio Corp.
(Registrant)
Date: August 11, 2000 (Signed) /s/ Gary N. Fields
--------------------------------------------
Gary N. Fields
President and
Chief Executive Officer
Date: August 11, 2000 (Signed) /s/ Kim M. Taylor
--------------------------------------------
Kim M. Taylor
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
25
