(Inside Front Cover)
Annual Report on Form 10-KSB
NOTE: A copy of the annual report filed with
the Securities and Exchange Commission on
form 10-KSB will be available April 1, 1998
without charge upon written request to:
G.W. Holden, President
105 Washington Square
Bucyrus, Ohio 44820
(419)562-7040
FC BancCorp Annual Meeting
The annual meeting of the FC BancCorp will be
held at 1:30 p.m., March 25, 1998, at the offices of
Farmers Citizens Bank, 105 Washington Square,
Bucyrus, Ohio.
Table of Contents
Financial Highlights...............................1
Message to Shareholders............................2
Operational Review.................................3
Consolidated Balance Sheets........................5
Notes to the Consolidated Financial Statements.....9
Report of Independent Auditors....................26
Selected Financial Data...........................27
Financial Review..................................29
Directors, Officers and Employees.................48
Banking Locations.................................48
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Dollars in thousands, except per share data.
For the year: 1997 1996 Increase / (Decrease)
<S> <C> <C> <C> <C>
Net income $ 902 $ 681 $ 221 32.5%
Dividends on common stock 385 390 (5) (1.3)
Average shares outstanding 322,367 325,797
Per Common share:
Net income $ 2.80 $ 2.09 $ .71 34.0%
Dividends declared 1.20 1.20 .00 0.0
Book value at year-end 34.85 32.74 2.11 6.4
At year-end:
Total assets $ 78,628 $ 81,445 $(2,817) (3.5)%
Deposits 66,092 70,074 (3,982) (5.7)
Net loans 38,549 39,780 (1,231) (3.1)
Investment and mortgage-backed
securities available-for-sale 32,460 32,194 266 0.8
Shareholders' equity 11,195 10,667 528 4.9
Average for the year:
Total assets $ 77,603 $ 81,411 $(3,808) (4.7)%
Deposits 65,783 69,743 (3,960) (5.7)
Net loans 38,543 37,715 828 2.2
Shareholders' equity 10,974 10,609 365 3.4
Performance Ratios:
Return on average assets 1.16% 0.84%
Return on average shareholders' equity 8.22% 6.42%
Average loans as a percent of
average deposits 58.59% 54.07%
Average shareholders' equity
to average assets 14.14% 13.03%
</TABLE>
1
<PAGE>
To our Shareholders and Friends
January 7, 1998
Dear Shareholder:
FC Banc Corp is please to report that its 1997 net income increased 32.4
percent from $681,000 in 1996 to $902,000 in 1997. Earnings per share
increased 35.5 percent from $2.09 per share in 1995 to $2.80 in 1997. Two
commonly used measurements in the banking industry are Return on Equity (ROE)
and Return on Assets (ROA). ROE increased from 6.42 percent in 1996 to 8.22
percent in 1997. ROA increased from .84 percent in 1996 to 1.16% in 1997. It
is our objective to always remain above 1percent.
An area of focus in 1997 was on the quality of our assets. Asset quality
improved dramatically as at December 31, 1996 non-performing loans were at
$1,119,000 and at December 31, 1997 they were at $23,000. Our loans 30 days
and more past due were 3.8 percent at December 31, 1996 and .2 percent at
December 31, 1997. Our focus in 1998 will be on the training of our people so
we can continue to improve the quality of our service. We will also work on
improving our physical locations and our products.
Our Cardington banking center opened on January 26, 1998 and we are excited
about the growth opportunities in Morrow County. Under experienced local
leadership we expect to serve that community well. As we formulate plans for
future growth your comments and suggestions are appreciated.
You have probably heard much about the Year 2000 and the potential computer
problems that could occur. We are working diligently to ensure that the
millennium change will be a non-event at our company.
Farmers Citizens Bank has enjoyed a 5 Star rating from Bauer Financial
Reports, Inc. for eleven consecutive quarters. This is the highest rating
Bauer gives and demonstrates the financial strength of your bank. We are
proud of this recognition.
As noted elsewhere in this annual report and proxy our Annual Meeting will be
on March 25, 1998 and I want to encourage your attendance. We have planned a
meeting that you will enjoy.
Finally, on behalf of the Directors, I want to thank our shareholders,
customer, and employees for their support in 1997.
Sincerely,
/s/ Robert D. Hord /s/ G. W. Holden
Robert D. Hord G. W. "Bill" Holden
Chairman President & CEO
2
<PAGE>
OPERATIONAL REVIEW
During the past several years FC Banc Corp has faced a number of
challenges. Competition has continued to increase from all sources for
deposit dollars, qualified borrowers, and experienced employees. A day
doesn't seem to go by without hearing an announcement that another service
station or grocery store is installing a new automated cash dispensing machine
or the local insurance agent is offering a new investment service. In order
to stay competitive and to retain their proportionate share of the market the
traditional financial institution must identify its own strengths and
capitalize on them. That is what management at Farmers Citizens Bank and FC
Banc Corp has done. As a result the 1997 basic earnings per share have
climbed to $2.80 up from $2.09 in 1996, an increase of almost 34%. This
compares very favorably to the almost 30% growth experienced in 1996. This
is also reflected in the increase in the return on average equity during the
same periods. It has risen from 5.08% in 1995, to 6.42% in 1996, and to 8.22%
at December 31, 1997.
EARNINGS PER SHARE
(Earnings Per Share chart appears here. Plot points appear below.)
1993 1994 1995 1996 1997
$3.22 $1.01 $ 1.61 $ 2.09 $ 2.80
During the past three years FC Banc Corp has been able to maintain and
even strengthen its capital to asset ratio. A strong equity position enables
a corporation to "weather" adverse economic conditions when earnings
traditionally decrease which may make a normal shareholder dividend payment
difficult. At December 31, 1997, FC Banc Corp's ratio of average equity to
average assets was 14.14%, compared to 13.03% and 12.84% at December 31, 1996
and 1995, respectively.
EQUITY TO ASSET RATIO
(Equity to Asset Ratio chart appears here. Plot points appear below.)
1993 1994 1995 1996 1997
12.91% 12.93% 12.84% 13.03% 14.14%
(Percent of Average Equity to Average Assets.)
Dividends paid to common shareholders has also increased since 1994.
Cash dividends declared in 1995 were $1.17 and in both 1996 and 1997 they were
$1.20. The book value per share has also increased steadily since 1994. At
December 31, 1997 it was $34.85, compared to $32.74 at December 31, 1996 and
$32.33 at December 31, 1995.
DIVIDENDS PER SHARE
(Dividends Per Share chart appears here. Plot points appear below.)
1993 1994 1995 1996 1997
$1.15 $1.15 $1.17 $1.20 $1.20
3
<PAGE>
Total gross loans outstanding are up from the December 31, 1994 levels by
approximately 12%, or $4.1 million. A net increase in gross loans outstanding
was experienced in both 1995 and 1996. Total gross outstanding loans
increased by $2.3 million in 1995 then by $3.9 million in 1996. These
increases were partially offset by a net decrease in 1997 of $1.0 million.
During the same three year period total deposits have also experienced some
fluctuations. Total deposits at December 31, 1997 were $66.1 million compared
to $71.8 million at December 31, 1994. Deposits decreased by $0.9 million and
$0.8 million in 1995 and 1996. A more significant decrease of $4.0 million
occurred during 1997. These decreases are attributed to primarily to
competitive pricing strategies coupled with the maturing higher rate time
deposits and the availability of lower cost alternative sources of funds.
The maturing investment securities were the primary source of funds to
satisfy the declines in deposits. As a result the average balance of
investment securities has declined from $35.6 million at December, 1995 to
$29.7 million at December, 1997. Although the average investment portfolio
decrease there was only a slight fluctuation in the yields on the portfolio as
a whole. The average investment yield realized during 1995 was 6.12% , 6.02%
in 1996, and 6.14% in 1997.
RETURN OF INVESTMENTS
(Return on Investments chart appears here. Plot points appear below.)
1993 1994 1995 1996 1997
6.13% 5.77% 6.12% 6.02% 6.14%
(Average investment yield.)
RETURN ON AVERAGE ASSETS
(Return on Average Assets chart appears here. Plot points appear below.)
1993 1994 1995 1996 1997
1.13% 0.41% 0.65% 0.84% 1.16%
FC Banc Corp has expanded it availability of banking services through the
Farmers Citizens Bank by opening a new branch bank office in Cardington, Ohio
in January, 1997. As competition grows stronger and more and more
traditional "banking services" are available from non-traditional financial
service providers, FC Banc Corp will continue to focus on the needs of its
customers and community.
FC Banc Corp and its banking subsidiary, Farmers Citizens Bank, are
dedicated to providing the local community with a variety of quality financial
services in an efficient and economical manner. It is FC Banc Corp's
philosophy that its success is dependent upon the economic well-being of the
community which it serves. Management believes that the success of the
community is a key factor to the success of FC Banc Corp.
1997 has proven to be a success for FC Banc Corp, its customers and
shareholders. Our performance ratios have continued to improve and we looking
forward to many more successful years as we approach the new millennium.
4
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
At December 31,
1997 1996
____ ____
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 3,567 $ 3,957
Federal funds sold 0 1,100
_______ _______
Total cash and cash equivalents 3,567 5,057
Investment securities, available-for-sale 32,460 32,194
Loans 40,029 41,043
Allowance for loan losses (1,480) (1,263)
_______ _______
Net loans 38,549 39,780
Premises and equipment, net 1,416 1,476
Accrued interest receivable 733 837
Cash surrender value of life insurance 1,470 1,397
Deferred income taxes 285 521
Other assets 148 183
_______ _______
TOTAL ASSETS $78,628 $81,445
_______ _______
LIABILITIES
Deposits
Noninterest-bearing $ 9,708 $11,296
Interest-bearing 56,384 58,778
_______ _______
Total deposits 66,092 70,074
Borrowed funds 641 119
Accrued interest payable 182 186
Other liabilities 518 399
_______ _______
TOTAL LIABILITIES 67,433 70,778
SHAREHOLDERS' EQUITY
Preferred stock of $25 par value; 750 shares
authorized, no shares issued and outstanding 0 0
Common stock of no par value;
1,000,000 shares authorized, 332,816 shares issued 832 832
Additional paid-in capital 1,377 1,377
Retained earnings 9,461 8,944
Treasury stock, at cost; 11,628 and 7,796 shares (491) (322)
Unrealized gain (loss) on securities available-for-sale,
net of applicable deferred income taxes 16 (164)
_______ _______
TOTAL SHAREHOLDERS' EQUITY 11,195 10,667
_______ _______
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $78,628 $81,445
_______ _______
</TABLE>
_______________________
See accompanying notes.
5
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended December 31,
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans $3,756 $3,500 $3,354
Interest and dividends on investment securities 1,742 2,009 2,022
Interest on federal funds sold 75 108 179
Interest on time deposits 0 2 9
______ ______ ______
TOTAL INTEREST INCOME 5,573 5,619 5,564
______ ______ ______
INTEREST EXPENSE
Interest on deposits 2,157 2,256 2,403
Interest on borrowed funds 7 21 39
______ ______ ______
TOTAL INTEREST EXPENSE 2,164 2,277 2,442
______ ______ ______
NET INTEREST INCOME 3,409 3,342 3,122
Provision for loan losses 27 0 204
______ ______ ______
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,382 3,342 2,918
OTHER INCOME
Service charges 368 336 323
Gains from sales of investment securities, net 3 (13) 3
Other 112 146 102
______ ______ ______
TOTAL OTHER INCOME 483 469 428
OTHER EXPENSES
Salaries and employee benefits 1,070 1,468 1,367
Net occupancy and equipment expenses 498 505 440
Advertising and public relations 84 91 88
FDIC insurance 18 21 91
Directors fees 70 84 53
Legal and professional 283 217 162
State taxes 116 158 164
Supplies 113 99 99
Other 407 347 383
______ ______ ______
TOTAL OTHER EXPENSES 2,659 2,990 2,847
______ ______ ______
INCOME BEFORE FEDERAL INCOME
TAX EXPENSE 1,206 821 499
Federal income tax expense 304 140 (34)
______ ______ ______
NET INCOME $ 902 $ 681 $ 533
______ ______ ______
EARNINGS PER SHARE:
Basic $ 2.80 $ 2.09 $ 1.61
Fully diluted $ 2.80 $ 2.09 $ 1.61
</TABLE>
______________________
See accompanying notes.
6
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands)
Unrealized
Gain (Loss) Total
Additional On Securities Share-
Common Paid-in Retained Treasury Available holders'
Stock Capital Earnings Stock For-sale Equity
_____ _______ ________ _____ ________ ______
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ 832 $1,370 $8,509 $ 0 $ (893) $ 9,818
Net income 533 533
Cash dividends declared
($1.17 per share) (389) (389)
Change in unrealized
gain (loss) on securities
available-for-sale 798 798
Purchase 56,658 shares
of treasury stock (57) (57)
Sale of 56,658 shares of
treasury stock 57 57
______ ______ ______ ______ ______ _______
Balances at December 31, 1995 832 1,370 8,653 0 (95) 10,760
Net income 681 681
Cash dividends declared
($1.20 per share) (390) (390)
Change in unrealized
gain (loss) on securities
available-for-sale (69) (69)
Purchase 10,105 shares
of treasury stock (416) (416)
Sale of 2,309 shares of
treasury stock 7 94 101
______ ______ ______ ______ ______ _______
Balances at December 31, 1996 832 1,377 8,944 (322) (164) 10,667
Net income 902 902
Cash dividends declared
($1.20 per share) (385) (385)
Purchase 3,832, shares of
treasury stock (169) (169)
Change in unrealized
gain (loss) on securities
available-for-sale 180 180
______ ______ ______ ______ ______ _______
Balances at December 31, 1997 $ 832 $1,377 $9,461 $ (491) $ 16 $11,195
______ ______ ______ ______ ______ _______
</TABLE>
_______________________
See accompanying notes.
7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended December 31,
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 902 $ 681 $ 533
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 27 0 204
(Gain) loss on sales of available-for-sale securities, net (3) 13 (3)
Gain from sale of loans 0 (23) 0
Income accrued on life insurance contracts (73) (71) (46)
Depreciation 268 273 247
Deferred income taxes 147 (20) (30)
Investment securities amortization (accretion), net 77 114 53
Net change in:
Accrued interest receivable 104 (68) 46
Accrued interest payable (4) (26) 19
Other assets 35 231 (274)
Other liabilities 119 89 91
_______ ______ ______
Net cash provided by operating activities 1,599 1,193 840
_______ ______ ______
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in time certificates of deposit 0 0 200
Purchase of held-to-maturity securities 0 0 (499)
Proceeds from maturities of held-to maturity securities 0 0 4,655
Proceeds from sales of held-to-maturity securities 0 0 600
Purchases of available-for-sale securities (10,835) (9,256) (5,705)
Proceeds from sales of available-for-sale securities 3,363 2,420 3,442
Proceeds from maturities of available-for-sale securities 7,402 8,280 2,194
Proceeds from sale of loans 0 1,097 0
Purchase of loans 0 (2,889) 0
Net (increase) decrease in loans 1,203 (2,046) (2,768)
Purchase of premises and equipment (208) (343) (141)
_______ ______ ______
Net cash provided by (used in) investing activities 925 (2,737) 1,978
_______ ______ ______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Noninterest-bearing, interest bearing, demand, and savings
deposits (5,140) (2,015) (1,995)
Certificates of deposit 1,158 1,198 1,102
Net increase (decrease) in borrowed funds 522 (1,406) 275
Purchase of treasury stock (169) (416) (57)
Sale of treasury stock 0 101 57
Dividends paid (385) (390) (389)
_______ ______ ______
Net cash used in financing activities (4,014) (2,928) (1,007)
_______ ______ ______
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,490) (4,472) 1,811
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,057 9,529 7,718
_______ ______ ______
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,567 $5,057 $9,529
_______ ______ ______
</TABLE>
_______________________
See accompanying notes.
8
<PAGE>
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
FC Banc Corp (the Bancorp) is a bank holding company whose principal activity
is the ownership and management of its wholly-owned subsidiary, The Farmers
Citizens Bank, (the Bank). The Bank generates commercial (including
agricultural), mortgage and consumer loans and receives deposits from
customers located primarily in Crawford County, Ohio and the surrounding
areas. The Bank operates under a state bank charter and provides full banking
services. As a state bank, the Bank is subject to regulations by the State of
Ohio Division of Financial Institutions and the Federal Reserve System,
through the Federal Reserve Bank of Cleveland (FRB).
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of FC Banc Corp,
and its wholly-owned subsidiary, The Farmers Citizens Bank, after elimination
of all material intercompany transactions and balances.
USE OF ESTIMATES
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.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the
determination of the estimated losses on loans, management obtains independent
appraisals for significant collateral.
The Bank's loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although the
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on local economic conditions in
the agricultural industry.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgments about information available to them at the
time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in the near
term. However the amount of the change that is reasonably possible cannot be
estimated.
INVESTMENT SECURITIES
All debt securities are classified as available-for-sale. Securities
available-for-sale are carried at fair value with unrealized gains and losses
reported separately net of tax, through a separate component of shareholders'
equity. Gains and losses on the sale of securities are determined using the
specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses.
LOANS
Loans are stated at unpaid principal balances, less the allowance for loan
losses.
9
<PAGE>
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest
income on other nonaccrual loans is not recognized until all principal
payments have been made in full.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions and other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values, and future cash
flows on impaired loans, it is reasonably possible that a material change
could occur in the allowance for loan losses in the near term. However, the
amount of the change that is reasonable possible cannot be estimated. The
allowance is increased by a provision for loan losses, which is charged to
expense, and reduced by charge-offs, net of recoveries. Changes in the
allowance related to impaired loans are charged or credited to the provision
for loan losses.
PREMISES AND EQUIPMENT
Land is carried at cost. Other premises and equipment are recorded at cost
net of accumulated depreciation. Depreciation is computed using the
straight-line method based principally on the estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred while major
additions and improvements are capitalized.
OTHER REAL ESTATE OWNED
Real estate properties acquired through or in lieu of loan foreclosure are
initially recorded at the lower of the Bank's carrying amount or fair value
less estimated selling cost at the date of foreclosure. Any write-downs based
on the asset's fair value at the date of acquisition are charged to the
allowance for loan losses. After foreclosure, these assets are carried at the
lower of their new cost basis or fair value less cost to sell. Costs of
significant property improvements are capitalized, whereas costs relating to
holding property are expensed. The portion of interest costs related to
development of real estate is capitalized. Valuations are periodically
performed by management, and any subsequent write-downs are recorded as a
charge to operations, if necessary, to reduce the carrying value of a property
to the lower of its cost or fair value less cost to sell.
POSTRETIREMENT BENEFITS
Postretirement health care and life insurance benefits are charged to salaries
and employee benefits expense when paid. In December, 1990, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions. Under SFAS No.106, beginning in 1995, postretirement benefits other
than pensions were accounted for in a manner similar to current standards for
accounting for pensions. SFAS No. 106 requires that the accumulated
postretirement benefit obligation be either charged in the income statement as
a cumulative effect of a change in accounting in the period of adoption or
delayed and amortized over future periods as part of future postretiremnt
benefits costs.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Bank has entered into off balance sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.
ADVERTISING
Advertising cost are charged to operations when incurred.
10
<PAGE>
INCOME TAXES
Income taxes are provided for the tax effects reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of available-for-sale securities,
allowance for loan losses, accumulated depreciation, income on nonaccrual
loans, deferred compensation, and accretion income. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets and liabilities are
reflected at income tax rates applicable to the period in which the deferred
tax assets and liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. The Bancorp files
consolidated income tax returns with its subsidiary.
STATEMENTS OF CASH FLOWS
The Bancorp considers all cash and amounts due from depository institutions,
interest-bearing deposits in other Banks, and federal funds sold to be cash
equivalents for purposes of the statements of cash flows.
(Dollars in thousands)
1997 1996 1995
____ ____ ____
Cash paid during the year for interest $2,168 $2,304 $2,423
Cash paid during the year for income taxes 181 (106) 165
RECLASSIFICATIONS
Certain amounts in 1996 and 1995 have been reclassified to conform with the
1997 presentation.
NOTE B - RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash or on deposit with the
Federal Reserve Bank. The required reserve at December 31, 1997 and 1996, was
$382,000 and $641,000, respectively.
11
<PAGE>
NOTE C - INVESTMENT SECURITIES
The amortized cost of securities and their approximate fair values are as
follows:
<TABLE>
<CAPTION>
Available-for-sale
__________________ (Dollars in thousands)
December 31, 1997 December 31, 1996
_______________________________________ _______________________________________
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
____ _____ ______ _____ ____ _____ ______ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
government $ 3,085 $ 14 $ 0 $ 3,099 $ 4,185 $ 11 $ 0 $ 4,196
Federal
agencies 11,037 33 (66) 11,004 8,889 16 (151) 8,754
State &
municipal
securities 6,349 104 (25) 6,428 6,887 88 (25) 6,950
Mortgage-backed
securities 11,170 46 (81) 11,135 11,165 12 (198) 10,979
Corporate
debt securities 492 0 (2) 490 1,239 1 0 1,240
Equity
securities 304 0 0 304 75 0 0 75
_______ _____ _____ _______ _______ _____ _____ _______
Total $32,437 $ 197 $(174) $32,460 $32,440 $ 128 $(374) $32,194
_______ _____ _____ _______ _______ _____ _____ _______
</TABLE>
The amortized cost and estimated fair value of securities available-for-sale
at December 31, 1997, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Amounts maturing in : Amortized Fair
Cost Value
____ _____
<S> <C> <C>
One year or less $ 4,586 $ 4,593
After one year through five years 7,792 7,880
After five years through ten years 4,799 4,752
After ten years 3,786 3,796
Mortgage-backed securities 11,170 11,135
Equity securities 304 304
_______ _______
Total $32,437 $32,460
_______ _______
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
During 1997, the Bank sold securities available-for-sale for total proceeds of
approximately $3,363,000 resulting in gross realized gains of approximately
$7,000 and gross realized losses of approximately $4,000. During 1996, the
12
<PAGE>
Bank sold securities available-for-sale for total proceeds of approximately
$2,420,000, resulting in gross realized gains of approximately $2,000 and
gross realized loses of approximately $15,000.
During 1995 the Bank sold securities available-for-sale for total proceeds of
approximately $4,042,000, resulting in gross realized gains of approximately
$15,000 and gross realized losses of approximately $12,000.
Investment securities with a carrying value of approximately $6,150,000 and
$6,900,000 were pledged at December 31, 1997 and 1996 to secure certain
deposits. During 1997 and 1996, the Bancorp did not sell any securities.
NOTE D - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Loans secured by real estate:
Construction $ 210 $ 1,168
Farmland 5,407 5,127
1-4 family residential properties 9,211 8,875
Nonfarm nonresidential properties 8,978 7,440
Agricultural production 4,596 5,856
Commercial and industrial 6,025 6,893
Consumer 5,310 5,356
Municipal 281 315
Other 11 13
_______ _______
Total $40,029 $41,043
_______ _______
</TABLE>
Allowance for loans losses:
<TABLE>
<CAPTION>
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Balance, beginning of year $1,263 $1,297 $1,600
Loans charged off (418) (116) (574)
Recoveries 608 82 67
Provision for losses 27 0 204
______ ______ ______
Balance, end of year $1,480 $1,263 $1,297
______ ______ ______
</TABLE>
At December 31, 1997 and 1996, the total recorded investment in impaired
loans, all of which had allowances determined in accordance with SFAS No. 114
and No. 118, amounted to approximately $360,000 and $1,340,000, respectively.
The average recorded investment in impaired loans amounted to approximately
$531,000 and $1,245,000 for the years ended December 31, 1997 and 1996,
respectively. The allowance for loan losses related to impaired loans
amounted to approximately $180,000 and $372,000 at December 31, 1997 and 1996,
respectively. Interest income on impaired loans of $14,000 and $139,000 was
recognized for cash payments received in 1997 and 1996, respectively. The
bank has no commitments to loan additional funds to borrowers whose loans have
been classified as impaired.
13
<PAGE>
The Bank has entered into transactions with certain directors, executive
officers, significant shareholders, and their affiliates. Such transactions
were on substantially the same terms, including interest rates and collateral,
as those prevailing at the time of comparable transactions with other
customers, and did not, in the opinion of management, involve more than a
normal credit risk or present any other unfavorable features. The aggregate
amount of loans to such related parties at December 31, 1997 was $2,677,000.
During 1997, new loans made to such related parties amounted to $494,000 and
payments amounted to $1,563,000.
NOTE E - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Land $ 221 $ 221
Buildings 1,250 1,116
Equipment 1,701 1,628
Construction in process 22 21
_______ _______
3,194 2,986
Accumulated depreciation (1,778) (1,510)
_______ _______
Total $ 1,416 $ 1,476
_______ _______
</TABLE>
NOTE F - CASH SURRENDER VALUE OF LIFE INSURANCE
The Bank is the beneficiary of insurance on the lives of four of its past and
present officers. At December 31, 1997 and 1996, there were no notes payable
to the insurance company
NOTE G - DEPOSITS
Deposit account balances at December 31, 1997 and 1996, are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Noninterest bearing $ 9,708 $11,296
Interest-bearing demand 10,972 12,397
Savings accounts 18,063 20,208
Time deposits 27,349 26,173
_______ _______
Total $66,092 $70,074
_______ _______
</TABLE>
14
<PAGE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $5,297,000 and $4,469,000 at December 31, 1997 and
1996.
Certificates maturing in years ending December 31, as of December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1998 $21,690
1999 3,788
2000 1,859
2001 10
2002 and thereafter 2
_______
Total $27,349
_______
</TABLE>
The Bank held related party deposits of approximately $206,000 and $688,000 at
December 31, 1997 and 1996, respectively.
Overdrawn demand deposits reclassified as loans totaled $11,000 and $13,000 at
December 31, 1997 and 1996, respectively.
NOTE H - BORROWED FUNDS
Borrowed funds balances at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Federal funds purchased $600 $ 0
Note payable 41 119
____ ____
$641 $119
____ ____
</TABLE>
Federal funds purchased have overnight maturities.
The note payable has a weighted average interest rate of 4.72% at December 31,
1997. The future annual principal payments on the note payable are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1998 $38
1999 3
___
$41
___
</TABLE>
15
<PAGE>
NOTE I - FEDERAL INCOME TAXES
The consolidated provision for income taxes for 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Income tax expense
Current tax expense $157 $160 $ (4)
Deferred tax expense 147 (20) (30)
____ ____ ____
Total $304 $140 $(34)
____ ____ ____
</TABLE>
The consolidated provision for federal income taxes differs from that computed
by applying federal statutory rates to income before federal income tax
expenses, as indicated in the following analysis:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
____ ____ ____
<S> <C> <C> <C> <C> <C> <C>
Federal statutory income tax at 34% $ 410 34.0% $ 279 34.0% $ 170 34.0%
Tax exempt interest (104) (8.6%) (142) (17.3%) (165) (33.1%)
Life insurance income (25) (2.1%) (25) (3.0%) (16) (3.2%)
Interest and other non-deductible expenses 20 1.7% 19 2.3% 22 4.4%
Other 3 0.2% 9 1.0% (45) (8.9%)
_____ _____ _____ _____ _____ _____
$ 304 25.2% $ 140 17.0% $ (34) (6.8%)
_____ _____ _____ _____ _____ _____
</TABLE>
A cumulative net deferred tax asset is included in other assets. The
components of the asset are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Differences in available-for-sale securities $ (7) $ 82
Differences in depreciation methods (83) (79)
Differences in accounting for loan losses 297 288
Differences in nonaccrual loan interest 4 60
Differences in deferred compensation and benefits and benefits 82 89
Differences in securities accretion (22) (9)
Alternate minimum tax credit 0 90
Other 14 0
_____ _____
$ 285 $ 521
_____ _____
Deferred tax assets $ 397 $ 609
Deferred tax liabilities (112) (88)
_____ _____
Net deferred tax assets $ 285 $ 521
_____ _____
</TABLE>
16
<PAGE>
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank has outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying consolidated
financial statements. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the
contractual or notional amount of those instruments. The Bank uses the same
credit policies in making such commitments as it does for instruments that are
included in the consolidated balance sheets.
Financial instruments whose contract amount represents credit risk were as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Home equity lines of credit $ 410 $ 557
Credit card lines 935 1,045
Other commitments to extend credit 1,902 2,253
Standby letters of credit 608 761
______ ______
$3,855 $4,616
______ ______
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount and type of
collateral obtained, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation. Collateral held varies but may
include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities
to customers. The Bank's policy for obtaining collateral, and the nature of
such collateral, is essentially the same as that involved in making
commitments to extend credit.
The Bank has not been required to perform on any financial guarantees during
the past three years. The Bank has not incurred any losses on its commitments
in either 1997, 1996, or 1995.
The Bank has had due from bank balances in excess of $100,000 with the
following banks as of December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Federal Reserve Bank $1,606
Independent State Bank of Ohio 161
</TABLE>
17
<PAGE>
NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES
The Bancorp and Bank periodically are subject to claims and lawsuits which
arise in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will
not have a material adverse effect on the consolidated financial position of
the Bancorp.
NOTE L - RESTRICTION ON DIVIDENDS
The Bank is subject to certain restrictions on the amount of dividends that it
may pay without prior regulatory approval. The Bank normally restricts
dividends to a lesser amount. At December 31, 1997, retained earnings of
approximately $846,000 was available for the payment of dividends without
prior regulatory approval.
NOTE M - PENSION PLAN
In 1989, the Bank initiated a 401K retirement savings plan, with all employees
eligible for inclusion in the plan. Participants may make salary savings
contributions up to 15% of the compensation, a portion of which will be
matched by the Company. Contributions by the Farmers Citizens Bank charged to
operations were $14,000, $20,000 and $20,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
The Bank also has a profit sharing plan that covers employees who have one
year of service and have attained the age of 21. Contributions to the plan
are at the discretion of the Board of Directors. During 1997, 1996 and 1995,
contributions to the plan charged to operations were $23,000, $0 and $95,000,
respectively.
NOTE N - POSTRETIREMENT BENEFITS
The Bank sponsors two defined benefit postretirement plans. One plan provides
health care coverage and the other provides life insurance benefits. Both
plans are noncontributory. The Bank's funding policy is to contribute as
billed with their normal health care plan. For 1997 and 1996, the aggregate
contributions were $23,000 and $1,000, respectively.
The following table sets forth the plan's funded status reconciled with the
amount shown in the Bank's balance sheet at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $269 $258
Other active plan participants 31 69
____ ____
300 327
Plan assets at fair value 0 0
____ ____
Accumulated postretirement benefit obligation in excess of plan assets 300 327
Unrecognized net loss from past experience different from that
assumed and effects of any changes in assumptions (8) (42)
Unrecognized transition obligation, net of amortization (148) (157)
____ ____
Accrued postretirement cost in the balance sheet $144 $128
____ ____
</TABLE>
18
<PAGE>
Postretirement expense for 1997, 1996 and 1995 includes the following
components:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Service cost $ 7 $31 $18
Interest cost on accumulated benefit obligation 23 37 32
Amortization of transition obligation over 20 years 9 23 21
___ ___ ___
Total $39 $91 $71
___ ___ ___
</TABLE>
The health care cost trend rate assumption has a small effect on the amounts
reported. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $1,000 and the aggregate of the
service and interest cost components of postretirement expense for the years
then ended by $1,000.
For measurement purposes a 12.0% and 8.0% annual rate of increase in the per
capita of covered health care benefits for those under and over 65,
respectively, was assumed for 1998. The rate was assumed to decrease
gradually to 6.0% at 2012 and remain at that level thereafter.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%.
NOTE O - STOCK OPTION PLAN AND INCENTIVE PLAN
The Bank has a fixed director and employee stock-based compensation plan.
Under the plan, the company may grant options for up to 32,502 shares of
common stock. The exercise price for the purchase of shares subject to a
stock option may not be less than 100% of the fair market value of the shares
covered by the option on the date of the grant. The term of stock options
will not exceed 10 years from the date of grant.
The Company applies APB Opinion 25 in accounting for its stock compensation
plan. Accordingly, no compensation cost has been recognized for the plan in
1997, 1996 and 1995. Had compensation cost been determined on the basis of
fair value pursuant to SFAS No. 123, net income would have been reduced as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Net income
__________
As reported $902 $681 $533
Pro forma 897 681 533
</TABLE>
19
<PAGE>
The following is a summary of the status of the plan during 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
Weighted
Average
Number of Exercise Price
Shares per share
______ _________
<S> <C> <C>
Outstanding at 1/1/97 0 $ 0.00
Granted 8,575 44.00
_______
Outstanding at 12/31/97 8,575 44.00
Options exercisable at 12/31/97 0 0.00
Weighted-average fair value of options granted during 1997 $59,000
</TABLE>
The following is a summary of the status of fixed options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Exercise Contractual Exercise
Price Number Life Price
_____ ______ ____ _____
<S> <C> <C> <C>
$44.00 8,575 4.8 years $44.00
</TABLE>
NOTE P - SHAREHOLDERS' EQUITY
At the Bancorp's 1997 annual meeting, the shareholders approved increasing the
aggregate number of authorized shares from 500,000 shares to 1,000,000 shares,
and to eliminate the shares' par value.
NOTE Q - EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share and
the effects on income and the weighted average number of dilutive potential
common stock.
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Net income $ 902
Stock options 0
________
Income available to common shareholders
after assumed conversions of dilutive
securities $ 902
________
Weighted average number of common
shares used in basic EPS 322,367
Effect of dilutive securities:
Stock options 0
________
Weighted number of common shares and dilutive
potential common stock used in diluted EPS 322,367
________
</TABLE>
20
<PAGE>
NOTE R - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Reserve System. Failure to meet
minimum capital requirements can initiate certain mandatory, and possible
additional discretionary actions by regulators that, if undertaken, could have
a direct material affect on the Bancorp and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification under the prompt corrective action guidelines are also subject
to qualitative judgements by the regulators about components, risk weightings,
and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to average assets (as defined). Management
believes, as of December 31, 1997, that the Bank meets all of the capital
adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FRB, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as well capitalized, the Bank will
have to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in the table below. There are no conditions or
events since the most recent notification that management believes have
changed the Bank's prompt corrective action category.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
____________________ ____________________ __________________
Amount Ratio Amount Ratio Amount Ratio
______ _____ ______ _____ ______ _____
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Risk-Based Capital
(to Risk Weighted Assets) $11,698 25.4% $ 3,683 8.0% $ 4,604 10.3%
Tier I Capital
(to Risk Weighted Assets) 11,111 24.1 1,841 4.0 2,762 6.0
Tier I Capital
(to Average Assets) 11,111 14.1 3,142 4.0 3,928 5.0
As of December 31, 1996:
Total Risk-Based Capital
(to Risk Weighted Assets) $11,228 23.1% 3,882 8.0% $ 4,852 10.0%
Tier I Capital
(to Risk Weighted Assets) 10,613 21.9 1,941 4.0 2,912 6.0
Tier I Capital
(to Average Assets) 10,613 13.1 3,239 4.0 4,049 5.0
</TABLE>
21
<PAGE>
NOTE S - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or
not recognized in the consolidated balance sheets. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS No. 107 excluded certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents approximate those assets' fair
values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate commercial real
estate and rental property mortgage loans and commercial and industrial loans)
are estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. Fair values for impaired
loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable.
Deposits: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit approximate their fair
values. Fair values for fixed -rate certificates of deposit are estimates
using a discounted cash flow calculation that applies interest rates currently
offered on certificates to a schedule of aggregated contractual expected
monthly maturities on time deposits.
Accrued interest: The carrying amounts of accrued interest approximate the
fair values.
Borrowed funds: The carrying amounts of short-term borrowings and notes
payable approximate their fair values.
22
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996
_____________________ _____________________
Carrying Fair Carrying Fair
Amount Value Amount Value
______ _____ ______ _____
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,567 $ 3,567 $ 5,057 $ 5,057
Investment securities 32,460 32,460 32,194 32,194
Loans 38,549 38,856 39,780 39,728
Accrued interest receivable 733 733 837 837
Financial liabilities:
Deposits 66,092 66,076 70,074 70,110
Borrowed funds 641 641 119 119
Accrued interest payable 182 182 186 186
</TABLE>
NOTE T - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<TABLE>
<CAPTION>
Condensed balance sheets
________________________
(Dollars in thousands)
1997 1996
____ ____
<S> <C> <C>
Assets
Cash and due from banks $ 36 $ 48
Investments in subsidiary 11,127 10,449
Other assets 32 170
_______ _______
Total assets $11,195 $10,667
_______ _______
Shareholders' equity $11,195 $10,667
_______ _______
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Condensed statements of income
______________________________
(Dollars in thousands)
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Income
Dividends from subsidiary $445 $726 $604
Expenses
State taxes 1 1 0
Legal and professional 39 22 41
Supplies 4 5 5
Other 19 22 18
____ ____ ____
Total expenses 63 50 64
____ ____ ____
Income before income tax benefit and equity
in undistributed net income of subsidiary 382 676 540
Income tax benefit 21 17 21
____ ____ ____
403 693 561
Equity in undistributed net income of subsidiary 499 (12) (28)
____ ____ ____
Net income $902 $681 $533
____ ____ ____
<CAPTION>
Condensed statements of cash flows
__________________________________
(Dollars in thousands)
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Operating activities
Net income $902 $681 $533
Adjustments to reconcile net income to
net cash provided by operating activities:
Change in other assets 139 51 (166)
Equity in undistributed income of subsidiary (499) 12 28
____ ____ ____
Net cash provided by operating activities 542 744 395
____ ____ ____
Financing activities
Purchase of treasury stock (169) (416) (57)
Sale of treasury stock 0 101 57
Cash dividends paid (385) (390) (389)
____ ____ ____
Net cash used in financing activities (554) (705) (389)
____ ____ ____
Net increase (decrease) in cash and due from banks (12) 39 6
Cash and due from banks at beginning of year 48 9 3
____ ____ ____
Cash and due from banks at end of year $ 36 $ 48 $ 9
____ ____ ____
</TABLE>
24
<PAGE>
NOTE U - SELECTED QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
1997
_______________________________________
4th 3rd 2nd 1st
<S> <C> <C> <C> <C>
Interest income $1,465 $1,351 $1,358 $1,399
Interest expense 572 522 531 539
Net interest income 893 829 827 860
Provision for loan loss 0 20 7 0
Security gains, net 1 0 0 2
Net income 269 184 214 235
Earnings per share - basic 0.84 0.57 0.66 0.73
<CAPTION>
1996
_______________________________________
4th 3rd 2nd 1st
<S> <C> <C> <C> <C>
Interest income $1,490 $1,401 $1,368 $1,360
Interest expense 556 561 573 587
Net interest income 934 840 795 773
Provision for loan loss 0 0 0 0
Security gains, net 1 0 (14) 0
Net income 218 238 801 45
Earnings per share 0.68 0.73 0.24 0.44
</TABLE>
25
<PAGE>
Report of Independent Auditors
(Robb, Dixon, Francis, Davis, Oneson & Company logo)
Robb, Dixon
Francis, Davis, Oneson & Company
CERTIFIED PUBLIC ACCOUNTANTS
1205 WEAVER DRIVE - GRANVILLE, OHIO 43023 - 614-321-1000
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
FC Banc Corp
Bucyrus
We have audited the consolidated balance sheets of FC Banc Corp and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FC
Banc Corp and subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ROBB, DIXON,
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
January 22, 1998
ACCOUNTANTS, AUDITORS, & CONSULTANTS TO FINANCIAL INSTITUTIONS
MEMBERS: THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS - OHIO SOCIETY
OF CERTIFIED PUBLIC ACCOUNTANTS
FAX - 740-321-1100
26
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Five Year Comparative Financial Information
(Dollars in thousands, except per share data)
DECEMBER 31
Summary of Operations 1997 1996 1995 1994 1993
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,756 $ 3,500 $ 3,354 $ 3,286 $ 3,405
Interest on investment securities:
Taxable 1,447 1,611 1,554 1,462 1,617
Tax-exempt and equity 295 398 468 552 559
Interest on federal funds sold 75 108 179 131 100
Interest on deposits at other banks 0 2 9 17 30
_______ _______ _______ _______ _______
Total interest income 5,573 5,619 5,564 5,448 5,711
_______ _______ _______ _______ _______
Interest expense:
Interest on deposits 2,157 2,256 2,403 2,253 2,384
Interest on borrowed funds 7 21 39 28 14
_______ _______ _______ _______ _______
Total interest expense 2,164 2,277 2,442 2,281 2,398
_______ _______ _______ _______ _______
Net interest income 3,409 3,342 3,122 3,167 3,313
Provision for loan losses 27 0 204 1,015 250
_______ _______ _______ _______ _______
Net interest income after provision
for loan losses 3,382 3,342 2,918 2,152 3,063
Other income <F1> 483 469 428 525 577
Other expense (2,659) (2,990) (2,847) (2,458) (2,321)
Applicable income taxes (304) (140) 34 116 (263)
Cumulative effect of accounting
change <F2> 0 0 0 0 15
_______ _______ _______ _______ _______
Net income $ 902 $ 681 $ 533 $ 335 $ 1,071
_______ _______ _______ _______
Per share data: <F3>
Net income $ 2.80 $ 2.09 $ 1.61 $ 1.01 $ 3.22
Dividends declared 1.20 1.20 1.17 1.15 1.15
Shareholders' equity, end of year 34.85 32.74 32.33 29.50 32.33
Financial Highlights:
Total assets $78,628 $81,445 $83,698 $83,264 $83,141
Total deposits $66,092 $70,074 $70,891 $71,784 $70,643
Total shareholders' equity $11,195 $10,667 $10,760 $ 9,818 $10,759
Return on average assets 1.16% 0.84% 0.65% 0.41% 1.13%
Return on average shareholders' equity 8.22% 6.42% 5.08% 3.15% 10.16%
Dividend payment ratio on common stock 42.68% 57.33% 72.98% 114.33% 35.76%
Average equity to average assets ratio 14.14% 13.03% 12.84% 12.93% 12.91%
<FN>
<F1> - Includes gains (losses) from securities transactions of $3 in 1997,
$(13) in 1996, $3 in 1995, $38 in 1994, and $113 in 1993.
<F2> - To adopt SFAS No. 109 for income tax purposes.
<F3> - Per share data was calculated using weighted average of 332,367 in
1997, 325,797 in 1996, 331,756 in 1995, 332,816 in 1994, and
332,816 in 1993. Year was restated to reflect the corporate
reorganization in 1994 resulting in a four for one stock exchange.
</FN>
</TABLE>
27
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Quarterly Earnings Summary
The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996:
(Dollars in thousands, except per share amounts)
March 31, June 30, September 30, December 31,
1997 1996 1997 1996 1997 1996 1997 1996
____ ____ ____ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 896 $ 802 $ 910 $ 820 $ 965 $ 877 $ 985 $1,001
Interest on investment
securities:
Taxable 370 392 369 415 341 421 367 385
Tax-exempt 75 109 73 110 72 92 75 87
Interest on federal funds sold 10 57 6 23 21 11 38 17
Interest on deposits in other
banks 0 0 0 0 0 0 0 0
______ ______ ______ ______ ______ ______ ______ ______
Total interest income 1,351 1,360 1,358 1,368 1,399 1,401 1,465 1,490
Interest Expense:
Interest on deposits 520 571 527 572 539 558 571 555
Interest on borrowed funds 2 16 4 1 0 3 1 1
______ ______ ______ ______ ______ ______ ______ ______
Total interest expense 522 587 531 573 539 561 572 556
______ ______ ______ ______ ______ ______ ______ ______
Net interest income 829 773 827 795 860 840 893 934
Provision for loan losses 20 0 7 0 0 0 0 0
______ ______ ______ ______ ______ ______ ______ ______
Net interest income after
provision for loan losses 809 773 820 795 860 840 893 934
Net gain/loss on investment
securities 0 0 0 (14) 2 0 1 1
Other income 120 130 131 127 124 161 105 64
Other expense 693 741 667 825 669 690 630 734
______ ______ ______ ______ ______ ______ ______ ______
Income before income taxes 236 162 284 83 317 311 369 265
Applicable income tax 52 17 70 3 82 73 100 47
______ ______ ______ ______ ______ ______ ______ ______
Net income $ 184 $ 145 $ 214 $ 80 $ 235 $ 238 $ 269 $ 218
______ ______ ______ ______ ______ ______ ______ ______
Per share:
Net income $ 0.57 $ 0.44 $ 0.66 $ 0.24 $ 0.73 $ 0.73 $ 0.84 $ 0.68
Dividends declared 0.00 0.00 0.00 0.00 0.00 0.00 1.20 1.20
</TABLE>
28
<PAGE>
FINANCIAL REVIEW: MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is presented to facilitate the
understanding of the financial position and results of operations of FC Banc
Corp. It identifies trends and material changes that occurred during the
reporting periods and should be read in conjunction with the consolidated
financial statements and accompanying notes.
FC Banc Corp. (the "Holding Company") was organized as an Ohio
corporation and incorporated by the board of directors of The Farmers Citizens
Bank (the "Bank") under Ohio law on August 20, 1992, for the purpose of
becoming a bank holding company owning all the outstanding shares of the
Bank. The Holding Company acquired the Bank on January 31, 1994, and as of
December 31, 1997 has combined assets of $78,628,000, total shareholders'
equity of $11,195,000, and total deposits of $67,433,000. The Bank is subject
to supervision, examination and regulation by the State of Ohio Division of
Financial Institutions. The deposit accounts of the Bank are insured by the
Federal Deposit Insurance Corporation (FDIC), and the Bank is a member of the
Federal Reserve System. Both the Bank and the Holding Company are subject to
regulation of the Federal Reserve System through the Federal Reserve Bank of
Cleveland, Cleveland, Ohio. Selected financial data on the Holding Company's
condition and operations is filed with the United States Securities and
Exchange Commission (Form 10-KSB and Form 10-QSB) and the Board of Governors
of the Federal Reserve System (Form FR Y-9SP). Selected financial data on the
subsidiary Bank's condition and operations is filed quarterly with the State
of Ohio Division of Financial Institutions, FDIC and the Federal Reserve
System.
FC Banc Corp. is a bank holding company engaged in the business of
commercial and retail banking through its subsidiary The Farmers Citizens
Bank, which accounts for substantially all of its revenues, operating income,
and assets. The following discussion is intended to focus on and highlight
certain financial information regarding FC Banc Corp. and should be read in
conjunction with the financial statements and related notes which have been
prepared by the management of FC Banc Corp. in conformity with generally
accepted accounting principles. The Audit Committee of the Board of Directors
engaged Robb, Dixon, Francis, Davis, Oneson and Company, independent auditors,
to audit the financial statements. The auditors' report is included as a part
of the 1997 Annual Report. To assist in understanding and evaluating major
changes in the Holding Company's financial position and results of operations,
two, three and five year comparisons are provided in tabular form for ease of
comparison.
Three major areas of discussion that follow are an analysis of (a) assets
and liabilities including liquidity and interest rate sensitivity, (b)
shareholders' equity including dividends and risk-based capital, and (c) 1997
results of operations.
FINANCIAL CONDITION
LOAN PORTFOLIO
Loans, as a component of earning assets, represent a significant portion
of earning assets at December 31, 1997. At December 31, 1997, the Bank's real
estate loans secured by farmland and loans to finance agricultural production
and other loans to farmers were $10,003,000. As noted in Note D, of the Notes
to Consolidated Financial Statements, the Bank also was a creditor for
$2,677,000 of loans from related parties.
29
<PAGE>
FINANCIAL REVIEW
<TABLE>
<CAPTION>
Funding Uses and Sources
(Dollars in thousands)
1997 1996 1995
____ ____ _____
Increase Increase
Average (Decrease) Average (Decrease) Average
Balance Amount Percent Balance Amount Percent Balance
_______ ______ _______ _______ ______ _______ _______
<S> <C> <C> <C> <C> <C> <C> <C>
Funding uses:
Loans $39,815 $ 2,100 5.6% $37,715 $ 1,584 4.4% $36,131
Taxable investments securities 23,308 (3,090) (11.7) 26,398 1,105 4.4 25,293
Nontaxable investment securities 6,324 (2,855) (31.1) 9,179 (1,100) (10.7) 10,279
Equity securities 96 21 28.0 75 0 0.0 75
Federal funds sold 1,375 (612) (30.8) 1,987 (1,151) (36.7) 3,138
Interest bearing deposits 0 0 0.0 0 (110) (100.0) 110
Other 6,685 628 10.4 6,057 (659) (9.8) 6,716
_______ ________ _____ _______ _______ ______ _______
Total uses $77,603 $ (3,808) (4.7)% $81,411 $ (331) (0.4)% $81,742
_______ ________ _____ _______ _______ ______ _______
Funding sources:
Demand deposits $ 9,791 $ 226 2.5% $ 9,565 $ (910) (8.7)% $10,475
Savings deposits 29,906 (3,656) (10.9) 33,562 (1,098) (3.2) 34,660
Time deposits 26,086 (530) (2.0) 26,616 1,666 6.7 24,950
Borrowed funds 104 (301) (74.3) 405 (354) (46.6) 759
Other 11,716 453 4.0 11,263 365 3.3 10,898
_______ ________ _____ _______ _______ ______ _______
Total sources $77,603 $ (3,080) (4.7)% $81,411 $ (331) (0.4)% $81,742
_______ _______ _____ _______ _______ ______ _______
</TABLE>
Average loans increased 5.57% in 1997 to represent 56.14% of average
earning assets compared to 50.05% in 1996 and 48.16% in 1995. Year-end total
real estate loans of $23,806,000 represent approximately 59.47% of the total
loans outstanding compared to 55.09% for the previous year-end. As the total
dollars outstanding of loans fluctuated, decreasing from 1992 through 1994 and
then increasing through 1997, real estate loans had remained relatively
constant at 33.01% of the loans outstanding until 1994, when they increased to
42.67% and 43.05% at year-end 1995. Installment loans to individuals have
continued to decline steadily since 1990 from 18.77% of loans outstanding to
13.27% at December 31, 1997. The dollar amounts of commercial loans have
decreased from 45.27% of loans outstanding in 1993 to 26.53% of loans
outstanding at December 31, 1997. The "Loan Portfolio" table provides a five
year loan history.
<TABLE>
<CAPTION>
Loan Portfolio
(Dollars in thousands)
December 31,
1997 1996 1995 1994 1993
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Commercial $10,621 $12,749 $14,449 $14,902 $16,073
Installment loans to individuals 5,310 5,356 6,345 6,630 6,663
Residential/commercial
real estate mortgages 23,806 22,610 16,007 13,051 11,795
All other 292 328 379 338 970
_______ _______ _______ _______ _______
Total gross loans $40,029 $41,043 $37,180 $34,921 $35,501
_______ _______ _______ _______ _______
The following table shows the schedule repricing of principal categorized by
type of loan. All variable rate loans are included in the within one year
category.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Repricing
After One
Within But Within After
One Year Five Years Five Years Total
________ __________ __________ _____
<S> <C> <C> <C> <C>
Fixed rate:
Commercial $ 2,920 $ 1,679 $ 0 $ 4,599
Installment loans to individuals 2,367 2,943 0 5,310
Residential/commercial real estate mortgages 1,457 7,147 15,202 23,806
All other 292 0 0 292
_______ _______ _______ _______
Total fixed rate $ 7,036 $11,769 $15,202 $34,007
_______ _______ _______ _______
Variable rate:
Commercial 6,022 0 0 6,022
_______ _______ _______ _______
Total loans $13,058 $11,769 $15,202 $40,029
_______ _______ _______ _______
</TABLE>
During 1997 the Bank was able to increase its yield on earnings assets
from 7.64% to 7.97%, with yields increasing in all earning-asset categories
while the yield on interest-bearing liabilities increased from 3.76% to
3.86%. The interest rates on deposits were relatively constant primarily due
to competitive market conditions. Total deposits at year-end 1997 compared to
year-end 1996 were down $3,982,000, while the average deposit base decreased
by an almost equal amount, approximately $3,960,000. The Bank has the ability
to obtain funds through Repurchase Agreements, the sale of securities under
agreement to repurchase at a later date. At December 31, 1997 there were no
open and active repurchase agreements. Total borrowed funds increased from
$119,000 at December 31, 1996 to $641,000 at December 31, 1997. The average
amount of borrowed funds was $104,000 in 1997 compared to $405,000 in 1996.
These factors, combined with the aforementioned changes in the
composition of the loan portfolio, contributed to the increase in the net
interest margin in 1996 (the difference between the yield on interest-earning
assets and the yield on interest-bearing liabilities). The yield on
interest-earning assets of 7.97% compared to the yield on interest-bearing
liabilities of 3.86% produced an interest spread of 4.11% for 1997 as compared
to an interest spread of 3.88% for 1996 and 3.58% for 1995. The net interest
margin or net yield on interest-earning assets increased to 4.92% for 1997
compared to 4.61% and 4.37% for 1996 and 1995 respectively. Refer to the
"Average Balances and Interest Rates" table for three year summary, 1997,
1996, and 1995. The "Rate/Volume Analysis" table summarizes the results of
changes in both interest rates and dollar volumes for the years ended December
31, 1997 and 1996.
In addition to the loans reported in the "Loan Portfolio" table, there
are certain off-balance sheet products such as letters of credit and loan
commitments which are offered under the same credit standards as the loan
portfolio. Since the possibility of a liability exists, generally accepted
accounting principles require that these financial instruments be disclosed
but treated as contingent liabilities and thus, not reflected in the
accompanying financial statements. Management closely monitors the financial
condition of potential creditors throughout the term of the instruments to
assure that they maintain credit standards. Refer to Note J and K for
additional information on off-balance sheet financial instruments.
NON-PERFORMING ASSETS
While the Bank has experienced a decrease in non-performing assets, loans
accounted for as non-accrual and accruing loans which are contractually past
due 90 days more, Management believes that the Allowance for Loan Losses is
adequate to cover any potential losses in the loan portfolio at December 31,
1997. Refer to the section entitled "Analysis of the Allowance/Provision for
Loan Loss" for additional detail.
31
<PAGE>
The "Non-performing Assets" table provides a five year summary of
non-performing assets which are defined as: loans accounted for on a
non-accrual basis, accruing loans that are contractually past due 90 days or
more as to principal or interest payments, renegotiated troubled debt, and
other real estate obtained through loan foreclosure.
<TABLE>
<CAPTION>
Non-performing Assets
The following table shows information regarding past-due, non-accrual, and renegotiated troubled debt.
(Dollars in thousands)
1997 1996 1995 1994 1993
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis 23 692 327 285 697
Accruing loans which are contractually past
due 90 days or more as to principal or
interest payments 0 427 13 97 158
Renegotiated troubled debt 0 0 0 0 0
Other real estate 0 0 0 0 0
Non-performing assets to:
Total assets .03% 1.37% 0.41% 0.46% 1.03%
Total loans and other real estate .06% 2.73% 0.95% 1.15% 2.41%
</TABLE>
A loan is placed on non-accrual when payment terms have been seriously
violated (principal and/or interest payments are 90 days or more past due,
deterioration of the borrower's ability to repay, or significant decrease in
value of the underlying loan collateral) and stays on non-accrual until the
loan is brought current as to principal and interest. The classification of a
loan or other asset as non- accruing does not indicate that loan principal and
interest will not be collectible. The Bank adheres to the policy of the
Federal Reserve that banks may not accrue interest on any loan when the
principal or interest is due and has remained unpaid for 90 days or more
unless the loan is both well secured and in the process of collection.
A loan is considered restructured or renegotiated when either the rate is
reduced below current market rate for that type of risk, principal or interest
is forgiven, or the term is extended beyond that which the Bank would accept
for loans with comparable risk. Property obtained from foreclosing on loans
secured by real estate are adjusted to market value prior to being capitalized
in an "Other Real Estate" account for possible resale. Regulatory provisions
on other real estate are such that after five years, or ten years under
special circumstances, property must be charged-off. This period gives the
Bank adequate time to make provisions for disposing of any real estate
property.
Loans accounted for on a non-accrual basis decreased $669,000 as of
year-end 1997. Non-performing assets at December 31, 1997 totaled $23,000 or
0.06% of total assets. This represents a decrease of $1,096,000 or 97.94%
from December 31, 1996. Refer to the "Non-performing Assets" table for a five
year summary.
This decrease is attributable to both the amount of loans charged-off in
1997, 1996 and 1995, of $418,000, $116,000 and $574,000, respectively, coupled
with the amount of recoveries on charged-off loans which amounted to $608,000,
$82,000 and $67,000 in 1997, 1996 and 1995, respectively. Please refer to the
following section entitled "Analysis of the Allowance/Provision for Loan Loss"
for additional explanation.
32
<PAGE>
ANALYSIS OF THE ALLOWANCE/PROVISION FOR LOAN LOSSSES
The allowance for loan losses was established and is maintained by
periodic charges to the provision for loan loss, an operating expense, in
order to provide for losses inherent in the Bank's loan portfolio. Loan losses
and recoveries are charged or credited respectively to the allowance for loan
losses as they occur.
The allowance/provision for loan losses is determined by management by
considering such factors as the size and character of the loan portfolio, loan
loss experience, problem loans, and economic conditions in the Bank's market
area. The risk associated with the lending operation can be minimized by
evaluating each loan independently based on criteria which includes, but is
not limited to, (a) the purpose of the loan, (b) the credit history of the
borrower, (c) the borrower's financial standing and trends, (d) the market
value of the collateral involved, and (e) the down payment received.
Management utilizes an internal loan review procedure to provide for
analysis of operating data, tax returns and financial statement performance
ratios for all significant commercial loans, regulatory classified loans, past
due loans and internally identified "watch" loans. The Bank's examiners and
independent auditors will periodically perform independent credit reviews of
the Bank's borrowers and evaluate the adequacy of the allowance for loan
losses account based upon the results of their review and other factors.
The results of the quarterly credit reviews in conjunction with
independent collateral evaluations are used by management and the board of
directors in determining the adequacy of the allowance for loan loss account
on a quarterly basis.
There was a provision for possible loan losses during 1997 of $27,000 as
compared to no provision recorded in 1996 and the $204,000 provision recorded
in 1995. The amount of provision was based upon the results of the
management's quarterly reviews of the loan portfolio to identify problem loans
and to determine appropriate courses of action on a loan by loan basis.
Collection procedures are being activated when a loan becomes past due.
The entire allowance for loan losses is available to absorb any
particular loan loss. However, for analytical purposes, the allowance could
be allocated based upon net historical charge-offs of each type of loan for
the last five years. The losses experienced combined with the type and market
value of the collateral securing the loan portfolio and the financial standing
of certain borrowers due to economic trends in their related businesses or
farming operations is the primary criteria used to determine the percentage
allocation.
Approximately 90% of the Bank's total loans are secured by deeds of trust
on real property, security agreements on personal property, or through full
faith and credit of government agencies.
Management believes significant factors affecting the allowance are being
reviewed regularly and that the allowance is adequate to cover potentially
uncollectible loans as of December 31, 1997. The Bank has no exposure from
troubled debt to lesser developed countries.
The average allowance to average loans outstanding ratio decreased to
3.19% in 1997 from 3.46% and 4.60% in 1996 and 1995, respectively. This
decrease was due primarily to the increase in the loan portfolio coupled with
the relatively small provision in 1997 and the absence of additional
provisions in 1996.
The bank recorded net recoveries in 1997 of $190,000 and net charge-offs
of $34,000 in 1996 and $507,000 in 1995. Net charge-offs in 1995 increased
$474,000 from $33,000 in 1994. The net charge-offs in 1996 of $34,000
represent 2.80% of the total net charge-offs for the five years presented.
The yearly average net charge-offs for the same five year period were
$207,000. The Analysis of the "Analysis of the Allowance for Loan Losses"
table contains a five year summary of activity.
33
<PAGE>
<TABLE>
<CAPTION>
Analysis of the Allowance for Loan Losses
(Dollars in thousands)
Year ended December 31,
1997 1996 1995 1994 1993
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year $1,263 $1,297 $1,600 $ 618 $ 657
Loans charged off:
Real estate loans 0 0 0 0 0
Installment loans 1 11 23 9 3
Credit card loans 12 7 13 5 0
Commercial and all other loans 405 98 538 125 306
______ ______ ______ ______ ______
Total charge-offs 418 116 574 139 309
______ ______ ______ ______ ______
Recovery of loans charged off:
Real estate loans 0 0 7 0 1
Installment loans 6 6 3 7 8
Credit card loans 4 3 2 1 1
Commercial and all other loans 598 73 55 98 10
______ ______ ______ ______ ______
Total recoveries 608 82 67 106 20
______ ______ ______ ______ ______
Net (charge-offs) recoveries 190 (34) (507) (33) (289)
Provisions charged to operations 27 0 204 1,015 250
______ ______ ______ ______ ______
Balance at end of year $1,480 $1,263 $1,297 $1,600 $ 618
______ ______ ______ ______ ______
Ratio of net (charge-offs) recoveries
during the period to average loans
outstanding during the period 0.48% (0.09)% (1.04)% (0.10)% (0.81)%
Average allowance to average loans outstanding 3.19% 3.46% 4.60% 2.54% 1.86%
</TABLE>
INVESTMENTS
Investments represent the second largest use of financial resources. The
investment portfolio includes United States securities, state and municipal
obligations, other equity securities, and equity securities of the Federal
Reserve Bank.
Investment debt securities are those securities which the Bank has the
ability and intent to hold to maturity. These securities are stated at cost
adjusted for amortization of premium and accretion of discount, and computed
by the interest method. The investment marketable equity securities are
carried at the lower of cost or market value. In May 1993 the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Under SFAS No. 115, beginning in 1994 debt and equity securities
not classified as either held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of shareholders' equity.
34
<PAGE>
On January 1, 1994 the Bank adopted SFAS No. 115. The effect of adopting
SFAS No. 115 was to increase shareholders' equity $189,000 at January 1, 1994
and decrease shareholders' equity $893,000 at December 31, 1994. Effective
November 15, 1995, the FASB permitted a one-time opportunity for institutions
to reassess the appropriateness of the designations of all securities held
upon initial application of the Special Report. Any resulting redesignations
had to be made in conjunction with the implementation of the FASB's
supplemental guidance (FASB Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities,") and had to occur no later than December 31, 1995. After a
detailed assessment of the Bank's investment portfolio management concluded
that it was in the best interest to the institution to designate (i.e.
reclassify) the entire portfolio as "Available-For-Sale". The effect of
designating securities as "Available-For-Sale" was to decrease shareholders'
equity by $95,000 at December 31, 1995.
The net increase in shareholders' equity of $798,000 at December 31, 1995
is a direct result of the redesignation of securities as "Available-For-Sale"
and the change in the market value of those securities held as
"Available-For-Sale" in the Bank's investment portfolio. In general, the
replacement of older higher yielding maturing securities with those at current
interest rates, the increase in market value (as a result of changing market
rates) of those investments classified as "Available-For-Sale", and the
designation of the securities as "Available-For-Sale" are the several of the
underlying reasons for the increase in shareholders' equity.
Average investments decreased by $5,924,000 during 1997 from an average
of $35,652,000 during 1996 to $29,728,000 during 1997, or a decrease of
16.62%. During the same period, the average balance of the Federal funds sold
decreased by 30.80% from $1,987,000 in 1996 to $1,375,000 in 1997. Federal
funds sold are consistently maintained at levels that will cover the
short-term liquidity needs of the Bank. Because of decreasing interest rates,
the related decrease in local loan demand, the purchase of loans on the open
market, and the relative stability of deposit liabilities, the excess
available funds were invested primarily in federal funds. Average cash and
due from bank balances increased by $943,000 during 1997.
Securities categorized as "Available-For-Sale" can and will be sold prior
to maturity to meet liquidity or other funding needs. It is management's
intent to hold those securities categorized as "Held-To-Maturity" until their
maturity unless they are subject to an earlier redemption via a "call
feature". At December 31, 1997, 1996 and 1995 the Bank's entire investment
portfolio was classified as Available-For-Sale.
The Bank utilizes a number of outside sources to analyze, evaluate, and
obtain advice relative to the management of its investment portfolio. The
Bank does not invest in any one type of security over another. Funds
allocated to the investment portfolio are constantly monitored by management
to ensure that a proper ratio of liquidity and earnings is maintained.
The Bank's investment portfolio includes approximately $2.5 million of
agency structured notes (step-ups, dual-indexed bonds, and a P.S.A. indexed
bond) which represent cash flows dependent on one or more indices in ways that
create risk characteristics similar to forwards or options. The risks
inherent in these types of securities include secondary liquidity risk (that
is, inability to resell the securities if needed for liquidity), price
volatility due to the uncertainty and unpredictability of the cash flow from
the investment, and interest rate risk. Specific goals and objectives for
investments of this type, have been included in the investment policy of the
Bank.
35
<PAGE>
<TABLE>
<CAPTION<
Agency Structured Notes
(Dollars in thousand)
December 31, 1997
Gross Gross Net
Market Unrealized Unrealized Unrealized
Cost % Value % Gains Losses Gains/Losses %
____ ______ _____ ______ _____ ______ ____________ ______
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMO's $ 4,432 13.7% $ 4,387 13.5% $ 7 $ (52) $ (45) (45.0)%
Dual Indexed Bonds 2,000 6.2 1,958 6.0 0 (42) (42) (42.0)
PSA Indexed Bonds 500 1.5 495 1.5 0 (5) (5) (5.0)
_______ _____ _______ _____ _______ _______ _______ _____
Sub Total $ 6,932 21.4% $ 6,840 21.0% $ 7 $ (99) $ (92) (92.0)%
All other 25,505 78.6 25,620 79.0 190 (75) 115 115.0
_______ _____ _______ _____ _______ _______ _______ _____
Total $32,437 100.0% $32,460 100.0% $ 197 $ (174) $ 23 100.0%
_______ _____ _______ _____ _______ _______ _______ _____
<CAPTION>
December 31, 1996
Gross Gross Net
Market Unrealized Unrealized Unrealized
Cost % Value % Gains Losses Gains/Losses %
____ ______ _____ ______ _____ ______ ____________ ______
CMO's $ 5,697 17.6% $ 5,594 17.4% $ 5 $ (108) $ (103) 41.9%
Dual Indexed Bonds 2,000 6.2 1,937 6.0 0 (63) (63) 25.6
PSA Indexed Bonds 500 1.5 488 1.5 0 (12) (12) 4.9
Step-Up Bonds 250 0.8 249 0.8 0 (1) (1) 0.4
_______ _____ _______ _____ _______ _______ _______ _____
Sub Total $ 8,447 26.1% $ 8,268 25.7% $ 5 $ (184) $ (179) 72.8%
All other 23,993 73.9 23,926 74.3 123 (190) (67) 27.2
_______ _____ _______ _____ _______ _______ _______ _____
Total $32,440 100.0% $32,194 100.0% $ 128 $ (374) $ (246) 100.0%
_______ _____ _______ _____ _______ _______ _______ _____
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Agency Structured Notes Maturity
(Dollars in thousands)
December 31, 1997
Due in Due in Due in Due in
One Year One to Five Five to Ten Over
or Less Years Years Ten Years
_______ _____ _____ _________
<S> <C> <C> <C> <C>
CMO's $ 0 $1,771 $ 783 $1,878
Dual Indexed Bonds 0 0 2,000 0
PSA Indexed Bonds 0 0 500 0
______ ______ ______ ______
Total $ 0 $1,771 $3,283 $1,878
______ ______ ______ ______
Weighted average lives used to determine maturities of CMO's.
<CAPTION>
December 31, 1996
Due in Due in Due in Due in
One Year One to Five Five to Ten Over
or Less Years Years Ten Years
_______ _____ _____ _________
<C> <C> <C> <C>
CMO's $ 0 $2,197 $1,159 $2,341
Dual Indexed Bonds 0 0 2,000 0
PSA Indexed Bonds 0 0 500 0
Step-Up Bonds 0 250 0 0
______ ______ ______ ______
Total $ 0 $2,447 $3,659 $2,341
______ ______ ______ ______
Weighted average lives used to determine maturities of CMO's.
</TABLE>
DEPOSITS
The "Deposits" table highlights average deposits and interest rates
during the last three years. Average deposits in 1997 have decreased by
approximately $3,960,000, or 5.68% from 1996 averages which had decreased
$342,000, or 0.49% compared to 1995. The average cost of deposits for the
bank was approximately 3.28% for the year ended December 31, 1997 compared to
3.23% and 3.43% for 1996 and 1995, respectively.
37
<PAGE>
<TABLE>
<CAPTION>
Deposits
(Dollars in thousands)
The monthly average amount of deposits are summarized below:
Year ended December 31,
1997 1996 1995
____ ____ ____
Cost of Cost of Cost of
Amount Funds Amount Funds Amount Funds
______ _____ ______ _____ ______ _____
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 9,791 0.00% $ 9,565 0.00% $10,475 0.00%
NOW deposits 9,681 2.49 10,826 2.52 10,719 2.93
Money market deposits 1,480 2.77 2,193 2.51 2,914 2.99
Savings deposits 18,745 2.90 20,543 2.78 21,027 3.39
Time deposits 26,086 5.11 26,616 5.10 24,950 5.17
_______ ____ _______ ____ _______ ____
Total deposits $65,783 3.28% $69,743 3.23% $70,085 3.43%
_______ ____ _______ ____ _______ ____
<CAPTION>
Maturities of time deposits of $100,000 or more (in thousands) outstanding are
summarized as follows:
December 31, 1997
<S> <C>
3 months or less $ 2,133
Over 3 through 12 months 2,137
Over one year through 3 years 1,027
________
Total $ 5,297
________
</TABLE>
SHAREHOLDERS' EQUITY
Maintaining a strong capital position in order to absorb inherent risk is
one of management's top priorities. Selected capital ratios for the last
three years, presented in the "Capital Resources" table, reveals that the Bank
has been able to maintain an average equity to average asset ratio of greater
than 12% for the past three years. It should be noted that this ratio has
increased by 111 basis points in 1997 to 14.14% and increased by 19 basis
points in 1996. It should also be noted that the return on average assets
increased in 1997 and 1996. This is due primarily to the decrease in salaries
and employee benefits in 1997 and provision for possible loan losses in 1996,
and the increase in interest margin in both 1997 and 1996.
38
<PAGE>
<TABLE>
<CAPTION>
Capital Resources
Year ended December 31,
1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Return on average assets 1.16% 0.84% 0.65%
Dividend payout ratio 42.68% 57.33% 72.98%
Average equity to average assets ratio 14.14% 13.03% 12.84%
Return on average equity 8.22% 6.42% 5.08%
Times
Earnings retained 57.32% 42.67% 27.02%
Equals
Internal capital growth 4.71% 2.74% 1.37%
</TABLE>
The yield (interest income) on interest earning assets increased more
rapidly than the yield (interest expense) on interest earning liabilities,
resulting in an improvement in the bank's interest margin in 1997, continuing
the trend begun in 1996. As indicated earlier, the average allowance to
average loans outstanding decreased to 3.19% in 1997 compared to 3.46% and
4.60% in 1996 and 1995, respectively. Management believes that the overall
quality of the loan portfolio has continued to improve in 1997 as it did
significantly in 1996.
<TABLE>
<CAPTION>
Risk Based Capital
(Dollars in thousands)
December 31,
1997 1996
____ ____
<S> <C> <C>
Tier I Capital:
Shareholders' equity $11,127 $10,449
Less unrealized (gains) losses on securities
available-for-sale (16) 164
_______ _______
Total Tier I Capital 11,111 10,613
Eligible amount of the allowance for loan losses 587 615
_______ _______
Total Tier II Capital $11,698 $11,228
_______ _______
Risk adjusted assets 46,036 48,524
Average assets 78,557 80,972
Risk-based capital ratios:
Tier I 24.14% 21.87%
Tier II 25.41% 23.14%
Tier I leverage ratio 14.14% 13.11%
</TABLE>
Banking regulations in 1989 established minimum capital ratios for
banks. The primary purpose of these requirements is to assess the riskiness
of a financial institution's balance sheet and off balance sheet financial
instruments in relation to adjusted capital. A minimum total qualifying
capital ratio of at least 8% with at least 4% of capital composed of Tier I
39
<PAGE>
(core) capital had to be maintained. Tier I capital includes common equity,
non-cumulative perpetual preferred stock, and minority interest less goodwill
and other disallowed intangibles. Tier II (supplementary) capital includes
subordinate debt, intermediate term preferred stock, the allowance for loan
losses and preferred stock not qualifying for Tier I capital. Tier II capital
is limited to 100% of Tier I capital. At December 31, 1997 the Bank's
risk-based capital ratio for Tier I and Tier II capital is 24.14% and 25.41%,
respectively, thus meeting the required 4% and 8% for Tier I and Tier II
capital. The "Risk Based Capital" table summarizes both the Bank's risk-based
capital, leverage components and ratios.
<TABLE>
<CAPTION>
Stock Prices
1997 1996
____ ____
High Low High Low
____ ___ ____ ___
<S> <C> <C> <C> <C>
First Quarter $44.00 $44.00 $44.00 $40.50
Second Quarter 44.00 44.00 44.00 44.00
Third Quarter 44.00 44.00 44.00 44.00
Fourth Quarter 44.00 44.00 44.00 44.00
<CAPTION>
Dividend Declared and Paid
1997 1996
____ ____
Declared Paid Declared Paid
________ ____ ________ ____
<S> <C> <C> <C> <C>
First Quarter $ 0.00 $ 0.00 $ 0.00 $ 0.00
Second Quarter 0.00 0.00 0.00 0.00
Third Quarter 0.00 0.00 0.00 0.00
Fourth Quarter 1.20 1.20 1.20 1.20
The weighted average number of shares outstanding was 322,367 in 1997 and
325,797 in 1996.
</TABLE>
RESULTS OF OPERATIONS
Consolidated net income was $902,000 or $2.80 per share, for the year
ended December 31, 1997 as compared to $681,000 or $2.09 per share for 1996
and $533,000 or $1.61 per share for 1995. Return on average assets (ROA) was
1.16%, 0.84% and 0.65% in 1997, 1996, and 1995, respectively.
NET INTEREST INCOME
Net interest income, the income received on investments in loans,
securities, due from banks, and federal funds less interest paid to depositors
and short-term creditors to fund these investments is the Bank's primary
source of revenue. The following discussion and analysis of the Bank's net
interest income is based primarily on the following tables; "Average Balances
and Interest Rates", "Net Interest Income", "Rate/Volume Analysis", and
"Interest Sensitive Assets and Liabilities" for all years presented using the
Federal statutory rate of 34%. These tables have been prepared on a
tax-equivalent basis. The stated (pre-tax) yield on tax-exempt loans and
securities is lower than yield on taxable assets of similar risk and maturity.
The average balances were calculated on a monthly basis.
40
<PAGE>
<TABLE>
<CAPTION>
Average Balances and Interest Rateson a Fully Taxable-Equivalent Basis
(Dollars in thousands)
1997 1996 1995
_____________________________ _____________________________ _____________________________
Balance Interest Yield Balance Interest Yield Balance Interest Yield
_______ ________ _____ _______ ________ _____ _______ ________ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Loans, net of unearned income $39,815 $ 3,756 9.43% $37,715 $ 3,500 9.28% $36,131 $ 3,354 9.28%
Investment securities:
U.S. Treasury & Government
agency securities 23,308 1,431 6.14 26,398 1,609 6.10 25,293 1,550 6.13
State and municipal
obligations 6,324 387 6.12 9,179 533 5.81 10,279 627 6.10
Equity securities 96 6 6.25 75 4 5.33 75 4 5.33
Federal funds sold 1,375 75 5.46 1,987 108 5.44 3,138 179 5.70
Due from banks 0 0 0.00 2 0 0.00 110 9 8.18
_______ _______ ____ _______ _______ ____ _______ _______ ____
Total Interest-Earning Assets $70,918 $ 5,655 7.97% $75,354 $ 5,754 7.64% $75,026 $ 5,723 7.63%
Non-interest-earning assets:
Cash and due from banks 3,751 2,808 3,852
Bank premises and equipment,
net 1,407 1,491 1,465
Other assets 2,799 3,062 3,062
Less allowance for loan losses (1,272) (1,304) (1,663)
_______ _______ _______
Total Assets $77,603 $81,411 $81,742
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings/NOW accounts/
Insured earnings $29,906 $ 826 2.76% $33,562 $ 899 2.68% $34,660 $ 1,112 3.21%
Time deposits 26,086 1,331 5.10 26,616 1,357 5.10 24,950 1,291 5.17
Borrowed funds 104 7 6.73 405 21 5.19 759 39 5.14
_______ _______ ____ _______ _______ ____ _______ _______ ____
Total Interest-Bearing $56,096 $ 2,164 3.86% $60,583 $ 2,277 3.76% $60,369 $ 2,442 4.05%
Liabilities
Non-interest-bearing liabilities:
Demand deposits 9,791 9,565 10,475
Other 742 654 402
Shareholders' equity 10,974 10,609 10,496
_______ _______ _______
Total Liabilities and
Shareholders' Equity $77,603 $81,411 $81,742
Net interest earnings $ 3,491 $ 3,477 $ 3,281
_______ _______ _______
Net yield on interest
earning assets <F1> 4.92% 4.61% 4.37%
____ ____ ____
<FN>
<F1> Net yield is calculated by dividing net interest earnings by total
interest-earning assets. The table above includes non-performing loans in
average amounts outstanding.
</FN>
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income (Taxable-Equivalent Basis)
(Dollars in thousands)
Year ended December 31,
1997 1996 1995 1994 1993
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Interest income per statements of
income $ 5,573 $ 5,619 $ 5,564 $ 5,448 $ 5,711
Adjustment to fully taxable basis 82 135 159 150 152
_______ _______ _______ _______ _______
Adjusted interest income 5,655 5,754 5,723 5,598 5,863
Interest expense 2,164 2,277 2,442 2,281 2,398
_______ _______ _______ _______ _______
Net interest income adjusted to a
fully taxable-equivalent basis* $ 3,491 $ 3,477 $ 3,281 $ 3,317 $ 3,465
_______ _______ _______ _______ _______
* The adjustment to fully taxable basis for income on tax-exempt obligations
has been computed assuming a federal tax rate of 34% for the years 1993
through 1997.
</TABLE>
<TABLE>
<CAPTION>
Rate/Volume Analysis of Changes in Interest Income and
Interest Expense on a Fully Taxable-Equivalent Basis
(Dollars in thousands)
1997 Compared to 1996 1996 Compared to 1995
__________________________ ___________________________
Volume Rate Net Volume Rate Net
______ ____ ___ ______ ____ ___
<S> <C> <C> <C> <C> <C> <C>
Income earned on:
Loans $ 195 $ 61 $ 256 $ 147 $ (1) $ 146
Investment securities:
Taxable (186) 10 (176) 66 (9) 57
Tax-exempt and equity (165) 21 (144) (67) (27) (94)
Federal funds sold (33) 0 (33) (66) (5) (71)
Interest bearing deposits with
other banks (2) 0 (2) (7) 0 (7)
_____ _____ _____ _____ _____ _____
Total Interest-Earning Assets (191) 92 (99) 73 (42) 31
_____ _____ _____ _____ _____ _____
Interest paid on:
Savings and NOW accounts (99) 25 (74) (35) (178) (213)
Time deposits (27) 2 (25) 86 (20) 66
Borrowed funds (18) 4 (14) (18) 0 (18)
_____ _____ _____ _____ _____ _____
Total Interest-Bearing Liabilities (144) 31 (113) 33 (198) (165)
_____ _____ _____ _____ _____ _____
Changes in Net Interest Income $ (47) $ 61 $ 14 $ 40 $ 156 $ 196
_____ _____ _____ _____ _____
The analysis of year-to-year changes in net interest income is segregated into
amounts attributable to both volume and rate variances. In calculating the
variances, the changes are first segregated into (1) changes in volume (change
in volume times old rate), (2) changes in rate (change in rate times new
volume) and (3) changes in rate/volume (change in rate times the change in
volume). The latter change in rate/volume has been allocated 100% to the
change in rate variances.
</TABLE>
42
<PAGE>
The net yield on interest-earning assets has increased to 4.92% in 1997
from 4.61% and 4.37% in 1996 and 1995, respectively. Net interest earnings
(on a fully tax equivalent basis) increased $14,000 or 0.40% in 1997 while net
income increased $221,000 or 32.45% in 1997 (See "Net Interest Income" table)
and $148,000 or 27.77% in 1996 from $533,000 in 1995. The "Rate/Volume
Analysis" table analyzes the reason for the changes in interest income by
applying either volume or rate changes to interest sensitive assets and
liabilities. The volume of both assets and liabilities decreased in 1997 and
resulted in decreased net interest income of $47,000. Rates increased
moderately in all categories of assets and liabilities which resulted in a net
increase of $61,000 in net interest income due to a change in rates.
Net loan income increased $256,000 or 7.31% over the prior year primarily
as a result of the increased volume resulting from the increased credit
demand, competition from financial and non-financial sources, and management's
continued strengthening of loan underwriting standards. Average loan yields
have increased slightly as compared to 1996, 15 basis points to 9.43%. As of
year-end 1997 approximately $13,058,000 or 32.62% of the loan portfolio was
maturing or repricing in the next year. Variable rates and short-term
maturities are two tools management is using to achieve greater flexibility in
the interest rate environment.
Weighted average interest rates on investments and interest-bearing
balances with banks have increased 11 basis points in 1997 resulting in a
$31,000 increase in taxable-equivalent income due to rates. An additional
$351,000 decrease in income due to the decreased volume accounts for the
$320,000 total decrease in investment income. Approximately $7,402,000 of
securities matured in 1997. Reinvestment yields on approximately $4,654,000
of maturing securities in 1998 will be used to determine appropriate
maturities or alternative investments.
<TABLE>
<CAPTION>
Security Maturities and Yields
(Dollars in thousands)
Maturity Schedule
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
_______________ _______________ ________________ _______________
Par Par Par Par
Value Yield Value Yield Value Yield Value Yield
_____ _____ _____ _____ _____ _____ _____ _____
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government agencies $ 1,608 5.63% $ 2,850 6.30% $ 4,250 5.98% $ 596 6.90%
U.S. treasury 1,600 6.01% 1,000 6.46% 0 0.00% 0 0.00%
State and municipal
obligations 895 4.84% 3,170 5.16% 560 6.16% 1,340 4.99%
Mortgage-backed securities 60 5.46% 2,356 6.46% 1,976 6.20% 6,655 6.27%
Equity investments 0 0.00% 0 0.00% 0 0.00% 304 6.25%
Corporate securities 0 0.00% 495 6.11% 0 0.00% 0 0.00%
_______ ____ _______ ____ _______ ____ _______ _____
Total $ 4,652 5.60% $ 9,871 5.98% $ 6,786 6.06% $ 8,895 6.12%
_______ ____ _______ ____ _______ ____ _______ ____
</TABLE>
Federal funds sold income decreased $33,000 or 30.56% in 1997 after a
$71,000 or 39.66% decrease in 1996. The decrease in volume accounted for the
decreased earnings of $33,000. Federal funds are primarily used as an
investment mechanism for short-term liquidity purposes.
43
<PAGE>
Interest-bearing deposit expense declined $99,000 or approximately 4.39%
in 1997 after a $147,000 or 6.12% decrease in 1996. The volume decrease
caused interest expense to decrease $126,000 while increasing rates caused a
$27,000 increase in interest expense in 1997. Rates paid on Savings / NOW /
insured earnings deposits increased 8 basis points while the rates paid on
time deposits remained constant in 1997 which had decreased 53 and 7 basis
points respectively, in 1996. The decrease in average deposit accounts has
occurred as a result of the restructuring of interest rates in an effort to
improve the bank's interest margins. Also, competition from non-financial
institutions has resulted in a shifting of depositors' resources.
Short-term borrowing expense, consisting primarily of federal funds
purchased expense, decreased in 1997 by $14,000. This decrease is
attributable to the decline in average volume of $301,000.
In summary, the "Rate/Volume Analysis" table discloses the reasons for
changes in interest income and interest expense. It should be noted that the
changes, or restructuring, in the Bank's interest earning assets (loans and
investments) and the interest-bearing liabilities (deposits and borrowed
funds) combined with the repricing of each resulted in an increase in interest
margins.
The decrease in interest-earning asset volumes and the decrease in
interest-bearing liability volumes in 1997, coupled with repricing of both
interest-earning assets and interest-bearing liabilities, resulted in a net
increase of $14,000 in net interest income. Changes in volume accounted for a
$47,000 decrease in net interest income while changes in rates increased net
interest income $61,000.
The increase in asset volume in 1996 had more of an effect on the net
interest margin ($73,000 increase) than the increase in liability interest
volume ($33,000 increase). The decrease in liability rates had more of an
effect ($198,000) on the net interest margin than the decrease in asset rates
($42,000) in 1996.
OTHER INCOME AND OTHER EXPENSE
Total other income is comprised of operating income attributed to
providing deposit accounts for bank customers, the disposition of investment
securities prior to their maturity (which are classified as available for
sale), and fees from banking services.
Total other expense is comprised of operating expense attributed to
staffing (personnel costs), operation and maintenance of bank buildings and
equipment, banking service promotion, taxes and assessments, and other
operating expenses. The "Other Income and Other Expenses" table, contains a
summary of these items for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
The major sources of basic per share earnings increases and decreases are
shown below:
Changes in: 1997/1996 1996/1995
_________ _________
<S> <C> <C>
Net interest income $ 0.21 $ 0.68
Provision for loan losses (0.08) 0.63
Investment security gains 0.05 (0.05)
Other income (0.01) 0.17
Salaries and benefits 1.23 (0.29)
Occupancy and equipment 0.02 (0.20)
Other expense (0.20) 0.07
Applicable income tax (0.51) (0.53)
______ ______
Net Income $ 0.71 $ 0.48
______ ______
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Other Income and Other Expenses
(Dollars in thousands)
A summary of items included in other income and other expenses is listed below:
Other income: 1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Service charges on deposit accounts $ 368 $ 336 $ 323
Net gains on investment securities 3 (13) 3
Other income 112 146 102
______ ______ ______
Total other income $ 483 $ 469 $ 428
______ ______ ______
<CAPTION>
Other expenses: 1997 1996 1995
____ ____ ____
<S> <C> <C> <C>
Salaries and employee benefits $1,070 $1,468 $1,367
Net occupancy and equipment 498 505 440
Advertising and public relations 84 91 88
Directors' fees 70 84 53
FDIC assessments 18 21 91
Legal and professional 283 217 162
Franchise and other taxes 116 158 164
Supplies 113 99 99
Other expense 407 347 383
(each less than 1% of total income)
______ ______ ______
Total other expense $2,659 $2,990 $2,847
______ ______ ______
</TABLE>
INCOME TAXES
Applicable income taxes of $304,000 in 1997 consist of federal taxes
only. For the previous two years the federal tax rate was 34%.
Impacting the tax provisions for the three years covered in this report
is the level of the provision for possible loan losses ($ 27,000 in 1997, $0
in 1996, and $204,000 in 1995) and the level of tax-exempt income on
securities which was $305,000, $398,000 and $468,000 for the years 1997, 1996,
and 1995, respectively. Due to the general decline in values of collateral
securing the loan portfolio and less favorable financial standing of certain
borrowers due to economic trends in their related businesses or farming
operations, management chose to increase significantly the Bank's provision
for possible loan losses during the first quarter in fiscal year 1995.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes", which
requires a liability approach to accounting for income taxes as opposed to a
deferred approach. The liability approach places emphasis on the accuracy of
the balance sheet while the deferred approach emphasizes the income
statement. Under the liability approach, deferred taxes are computed based on
the tax rates in effect for the periods in which temporary differences are
expected to reverse. An annual adjustment of the deferred tax liability or
asset is made for any subsequent change in tax rates.
45
<PAGE>
<TABLE>
<CAPTION>
Interest Sensitive Assets and Liabilities
(Dollars in thousands)
December 31, 1997
Over Three
Within Through Over Over
Three Twelve One Five
Months Months Year Years Total
______ ______ ____ _____ _____
<S> <C> <C> <C> <C> <C>
Interest-earning assets
Loans $ 6,443 $ 5,553 $12,148 $15,885 $40,029
Investment securities
Taxable 1,159 2,590 6,983 15,662 26,394
Non-taxable 402 501 3,273 1,586 5,762
Equity 0 0 0 304 304
_______ _______ _______ _______ _______
Total interest-earning assets $ 8,004 $ 8,644 $22,404 $33,437 $72,489
_______ _______ _______ _______ _______
Interest-bearing liabilities
Interest-bearing demand deposits $10,972 $ 0 $ 0 $ 0 $10,972
Savings deposits 18,063 0 0 0 18,063
Time deposits 12,285 9,405 5,659 0 27,349
Borrowed funds 638 0 3 0 641
_______ _______ _______ _______ _______
Total interest-bearing liabilities $41,958 $ 9,405 $ 5,662 $ 0 $57,025
_______ _______ _______ _______ _______
Interest Sensitivity Gap (33,954) (761) 16,742 33,437 15,464
Cumulative Interest Sensitivity Gap (33,954) (34,715) (17,973) 15,464
Cumulative Gap Ratio 0.19 0.32 0.68 1.27
</TABLE>
46
<PAGE>
EFFECTS OF INFLATION/CHANGING PRICES
The effects of inflation on operations of the Bank occur through
increased operating costs which can be recovered through increased prices for
services. Virtually all of the Bank's assets and liabilities are monetary in
nature and can be repriced on a more frequent basis than in other industries.
Every effort is being made through interest sensitivity management to monitor
products and interest rates and their impact on future earnings.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
Management utilizes several tools currently available to monitor and
ensure that liquid funds are available to satisfy the normal loan and deposit
needs of its customers while taking advantage of investment opportunities as
they arise in order to maintain consistent growth and interest income. Cash
and due from banks, marketable investment securities with maximum one year
maturities, and federal funds sold are the principal components of asset
liquidity. The "Interest Sensitive Asset and Liabilities" table, indicates
that the Bank is in a liability sensitive position up to one year which is
more beneficial in a period of declining interest rates since liabilities can
be repriced at lower rates. In periods of rising interest rates, interest
sensitive assets are more favorable since they allow adjustment of interest
sensitive assets prior to maturing interest sensitive liabilities. The three
month category of interest sensitive liabilities includes approximately
$29,035,000 consisting of Savings, NOW accounts, and Insured Earnings which
can be adjusted in any one category at any time to offset any positive gap in
a declining rate environment.
Management utilizes variable rate loans (on a limited basis) and
adjustable rate deposits to maintain desired net interest margins. A
procedural process has been developed to monitor changes in market rates on
interest sensitive assets and liabilities with appropriate action being taken
when warranted.
47
<PAGE>
Directors, Officers and Employees
<TABLE>
<CAPTION>
DIRECTORS HONORARY DIRECTORS
<S> <C>
Robert D. Hord, Chairman Fred Christman
President Hord Livestock Co., Inc. Richard O. Kime
G.W. Holden, President & CEO William D. Foulk
Terry Gernert, Secretary & Treasurer John O. Spreng
Attorney at Law James Stemen
David Dostal, President Auck-Dostal Insurance Agency, Inc
Jerry Harrer, Agri-Business, Spring Creek Farms
Charles W. Kimerline, President Bucyrus Road Materials, Inc.
James Pigman, President Pigman, Walter & Associates PLL
James A. Spreng, Jr, Vice President Long Acre Farms, Inc.
Joan C. Stemen, Retired
<CAPTION>
OFFICERS AND EMPLOYEES-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
G.W. Holden Wilma Poorman Amanda Rex
President & CEO New Accounts Representative Customer Service Representative
Don Denney Jennifer Massie Daria Hadsell
Vice President & Chief Lending Officer New Accounts Representative Accounting Clerk
Daniel Detwiler Jennifer Gingery Vicki Allen
Vice President & Retail Banking Manager Executive Secretary Customer Service Representative (PT)
Jeffrey Wise Lisa Hedrick Beth Kahle
Assistant Vice President/CFO & Cashier Card Services Manager Customer Service Representative (PT)
Brad Murtiff Laurie Meade Angela McGary
Assistant Vice President & Customer Service Representative Customer Service Representative
Mortgage Division Manager Wanda Schnabel Sheraton Richardson
Becky Landis Head Teller Customer Service Representative
Assistant Vice President & Amy Cauvel Angela Keith
Cardington City President Assistant Data Processing Manager Customer Service Representative (PT)
Robin Davis Kristie Surina Holly Gottfried
Branch Administrator & New Accounts Representative Customer Service Representative
Human Resources Manager Merri Jacobs Melissa Scott
Kelly LaRue Loan Administration Customer Service Representative
Auditor & Compliance Officer Molly Stamp Virginia Hammontree
Eric Bogan Loan Documentation Customer Service Representative (PT)
Assistant Vice President & Consumer Jennifer Eckert Kimberly McGowan
Loan Officer New Accounts Representative Centralized Data Input (PT)
Susan Sutherland Mary Chance Robert Poorman
Loan Administration Manager Head Teller New Accounts Representative
Kelly Rinehart Annette Lester Carol Mosher
Data Processing Manager Customer Service Representative Head Teller
Nancy Kalb Dawn Cooper Teri Gray
Operations Supervisor Assistant Operations Supervisor Customer Service Representative
Michelle Bacon Sharon Sanders Deittra Minturn
Consumer Loan Officer Account Service Customer Service Representative (PT)
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48
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(INSIDE BACK COVER)
<TABLE>
<CAPTION>
BANKING LOCATIONS----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Main Office North Office South Office Cardington Office
105 Washington Square 233 North Sandusky Ave. 1605 Marion Road 103 East Main Street
Bucyrus, OH 44820 Bucyrus, OH 44820 Bucyrus, OH 44820 Cardington, OH 43315
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