1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1999 0-18840 ----------------- ------- BancFirst Ohio Corp. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-1294136 - --------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. employer identification No.) incorporation or organization) 422 Main Street Zanesville, Ohio 43701 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (740) 452-8444. -------------- Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange Title of each class on which registered - ------------------------------------ ------------------------------------ None None - ------------------------------------ ------------------------------------ Securities registered pursuant to Section 12 (g) of the Act: Title of each class - --------------------------------------------- Common Stock, no par value - --------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No. --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 1 2 As of March 1, 2000 the approximate aggregate market value of the voting stock beneficially owned by non-affiliates of the registrant was $166,791,000 computed on the basis of $20.375 per share, the closing sales price on the NASDAQ - National Market on March 1, 2000. On that date, 7,551,576 shares of Common Stock, no par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year, pursuant to Regulation 14A, are incorporated by reference into Items 10, 11, 12 and 13 of Part III of this annual report. 2 3 TABLE OF CONTENTS ----------------- PART I Page(s) Item 1 - Business.............................................. 4 Item 2 - Properties............................................ 15 Item 3 - Legal Proceedings..................................... 16 Item 4 - Submission of Matters to a Vote of Security Holders.................................... 16 PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters......................... 17 Item 6 - Selected Financial Data............................... 18 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 19 Item 8 - Financial Statements and Supplementary Data........... 34 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 61 PART III Item 10 - Directors and Executive Officers of the Registrant.......................................... 61 Item 11 - Executive Compensation................................ 61 Item 12 - Security Ownership of Certain Beneficial Owners and Management............................... 61 Item 13 - Certain Relationships and Related Transactions........................................ 61 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 62 Signatures.......................................................... 63 3 4 ITEM 1: BUSINESS - ----------------- GENERAL The Company was organized as a bank holding company under the laws of the State of Ohio. It conducts a full-service commercial and retail banking business through its wholly-owned subsidiary, The First National Bank of Zanesville ("FNB"). Effective May 16, 1998, the Company merged its two other banking subsidiaries, Bellbrook Community Bank ("Bellbrook") and County Savings Bank ("County") with FNB under the national bank charter of FNB. The Company also owns 100% of the outstanding common shares of BFOH Capital Trust I, a special purpose trust that was formed in October 1999 for the purpose of issuing capital securities. FNB owns a full service financial planning company that conducts business under the name Chornyak & Associates, Inc. ("Chornyak"). Chornyak was acquired in April 1999. The Company is headquartered in Zanesville, Ohio, the county seat of Muskingum County. Through FNB, the Company operates 22 full-service banking facilities which serve Muskingum, Licking, Franklin, Greene and Montgomery Counties, Ohio. Its primary market extends along Interstate 70 in central Ohio and includes the markets of Zanesville, Newark, Columbus, and Dayton. The Company primarily focuses on providing personalized, high quality and comprehensive banking services in order to develop and maintain long-term relationships with customers. FNB offers a wide range of banking services, including: - commercial and commercial real estate loans; - Small Business Administration loans; - residential real estate loans; - consumer loans; - personal and business checking accounts; - savings accounts; - demand and time deposits; - safe deposit services; and - trust, private banking, financial planning and investment services. COMPANY STRATEGY The Company believes its profitability in recent years is in part attributable to a growth strategy that it began implementing in 1992. At December 31, 1991, the Company had nine branch offices with assets of $298.2 million (as originally reported), an equity to assets ratio of 11.82% (as originally reported), and operations heavily concentrated in Muskingum County. Management believed that increased size would allow the Company to: - take advantage of increased operating efficiencies associated with the attendant economies of scale; - achieve greater diversification of its markets and products; - enhance shareholder value by more effectively leveraging its equity capital; and - more effectively position itself to take advantage of acquisition opportunities in the rapidly changing financial services industry. Given its significant market share in its primary market area, the Company recognized that its desired growth would have to come primarily from expansion into new markets. In recognition of these factors, management undertook a growth strategy which emphasized: - acquiring existing branch locations from competing institutions as well as de novo branching; - increasing lending to small businesses through the formation of small business lending centers outside Muskingum County; - acquiring bank and thrift holding companies; - expanding trust, private banking and investment services; and - improving technology to enhance services and manage the cost of operations. 4 5 The Company believes that it has been successful in implementing its strategy. In 1992, FNB acquired a $30.6 million branch of a savings and loan association in Dresden, Ohio. Later in 1992, FNB opened the first of four small business lending centers to serve small businesses and specialize in loans guaranteed by the U.S. Department of Commerce, Small Business Administration ("SBA"). During 1997, 1998 and 1999, FNB was the largest originator of SBA 7(a) loans in Ohio. FNB has also been awarded the designation of Preferred Lender by the SBA. Currently, FNB has small business lending centers located in Cleveland, Columbus, Cincinnati and Dayton, Ohio, Indianapolis, Indiana, Louisville, Kentucky and Detroit, Michigan. The 1995 acquisition of Bellbrook provided access to the Dayton metropolitan market. In August 1996, the Company acquired County which had total assets of approximately $554 million. In October 1998, FNB opened a new branch location in Washington Township, Ohio, located in the Dayton metropolitan market. In April 1999 the Company acquired Chornyak, a full service financial planning company. An additional branch location was opened in May 1999 in New Albany, Ohio, a rapidly growing suburb of Columbus, Ohio. As a result of this growth strategy, the Company's assets have increased by more than $800 million since December 31, 1991. The Company's Board of Directors and management intend to seek continued controlled growth of the organization through selective acquisitions of banks and/or savings and loan associations. The objectives of such acquisitions will be to: - - increase the opportunity for quality earning asset growth, deposit generation and fee-based income opportunities; - - diversify the earning assets portfolio and core deposit base through expansion into new geographic markets; - - improve the potential profits from its combined operations through economies of scale; and - - enhance shareholder value. In furtherance of such objectives, the Company intends to continue its pursuit of business combinations which fit its strategic objectives of growth, diversification and market expansion and which provide the potential for enhanced shareholder value. At the present time, the Company does not have any understanding or agreements for any acquisition or combination, except for the acquisition of Milton Federal Financial Corporation as discussed under "Recent Developments". RECENT DEVELOPMENTS On January 13, 2000 the Company entered into an agreement to acquire Milton Federal Financial Corporation ("Milton") whereby Milton would be merged into the Company. Under the terms of the agreement, the Company will exchange .444 shares of its common stock and $6.80 for each of the issued and outstanding shares of Milton. It will also redeem Milton's outstanding stock options for cash equal to the acquisition price per share less the exercise price of the options prior to closing. Based on the Company's closing price of $20.375 per share on January 12, 2000, the transaction would be valued at approximately $33 million. The Company will account for the merger as a purchase and expects to consummate the merger in the second quarter of 2000, pending approval by Milton's shareholders, regulatory approvals and other customary conditions of closing. Milton has granted the Company an option to purchase up to 19.9% of Milton's outstanding shares upon the occurrence of certain events. At December 31, 1999, Milton had total assets of $260.0 million, deposits of $166.3 million and shareholders' equity of $25.3 million. For its fiscal year ended September 30, 1999 and the quarter ended December 31, 1999, Milton reported net income of $1.6 million and $449,000, respectively. RISK FACTORS THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY MANAGE ITS GROWTH. The Company's general strategy for growth has been to acquire banks and related businesses that it believes are compatible with its business. The Company completed the acquisition of County in 1996. At that time, County had total assets approximately equal to the Company's total assets. Since the completion of the acquisition, the Company has worked to integrate County's operations and personnel with FNB. Because the Company did not have systems and infrastructure in 5 6 place at the time of the acquisition to accommodate the resulting doubling of its size, a greater amount of time than initially anticipated has been spent developing systems to accommodate the growth that resulted from this acquisition. At present, the Company believes its infrastructure is now in place to accommodate additional growth from acquisitions. To the extent that the Company continues to grow, it cannot give assurance that it will be able to adequately and efficiently manage such growth. Moreover, it may not be able to obtain regulatory approval for any acquisition it may want to make. Acquiring other banks and businesses will involve risks, including: - potential exposure to liabilities of banks and businesses it acquires; - difficulty and expense of integrating the operations and personnel of banks and businesses; - potential disruption of its businesses; - inability to hire and train a sufficient number of skilled employees; - impairment of relationships with customers of the bank and businesses it acquires; and - incurrence of amortization expense for any acquisition accounted for as a purchase. If the Company fails to manage its growth effectively, its business, financial condition and results of operations could be materially and adversely affected. CHANGING ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION IN ONE MARKET MAY UNFAVORABLY IMPACT THE COMPANY The operations of the Company are concentrated in the State of Ohio. As a result of this geographic concentration, the Company's results depend largely upon economic conditions in this area. A deterioration in economic conditions in this markets could: - increase loan delinquencies; - increase problem assets and foreclosures; - increase claims and lawsuits; - decrease demand for the Company's products and services; and - decrease the value of collateral for loans, especially real estate, in turn reducing customers' borrowing power, the value of assets associated with problem loans and collateral coverage. THE COMPANY MAY BE UNABLE TO INTEGRATE SUCCESSFULLY OPERATIONS OR TO ACHIEVE EXPECTED COST SAVINGS ASSOCIATED WITH THE MILTON ACQUISITION The earnings, financial condition and prospects of the Company following the proposed merger with Milton will depend in part on the Company's ability to integrate successfully Milton's operations and to continue to implement its own business plan. Among the issues which the Company could face are: - unexpected problems with risks, operations, personnel, technology or credit; - loss of customers and employees of Milton; - difficulty in working with Milton's employees and customers; - the assimilation of new operations, sites and personnel could divert resources from regular banking and operations; - operations acquired by the Company may not generate enough revenue to offset acquisition costs; and - instituting and maintaining uniform standards, controls, procedures and policies. Further, although the Company's Board of Directors anticipates cost savings as a result of the merger to be meaningful, the Company may be unable to fully realize any of the potential cost savings expected. Finally, any cost savings which are realized may be offset by losses in revenues or other charges to earnings. THE COMPANY MAY BE UNABLE TO MANAGE INTEREST RATE RISKS, WHICH COULD REDUCE ITS NET INTEREST INCOME. The Company's results of operations are affected principally by net interest income, which is the difference between interest earned on loans and investments and interest expense paid on deposits and other borrowings. The Company cannot predict or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, affect interest income and interest 6 7 expense. The Company takes measures intended to manage the risks from changes in market interest rates. However, changes in interest rates can still have a material adverse effect on the Company's profitability. In addition, certain assets and liabilities may react in different degrees to changes in market interest rates. For example, interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while interest rates on other types may lag behind. Some of the Company's assets, such as adjustable rate mortgages, have features including rate caps, which restrict changes in their interest rates. Interest rates are highly sensitive to many factors that are beyond the Company's control. Some of these factors include: - inflation; - recession; - unemployment; - money supply; - international disorders; and - instability in domestic and foreign financial markets. Changes in interest rates may affect: - the level of voluntary prepayments on loans; and - the receipt of payment on mortgage-backed securities resulting in the receipt of proceeds that may be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. Although the Company pursues an asset-liability management strategy designed to control its risk from changes in market interest rates, changes in interest rates can still have a material adverse effect on its profitability. CHANGES IN THE SBA PROGRAM OR INCREASED COMPETITION FOR SUCH LOANS COULD ADVERSELY AFFECT THE COMPANY'S PROFITABILITY The SBA lending program is a federal government program. The U.S. Congress continues to scrutinize government programs, including the SBA lending program. The Company cannot provide assurance that its participation in the SBA lending program will continue in its present manner. The company's strategic plan includes an emphasis on continued growth of its SBA lending program. Loans generated through this program contain portions (typically 75%) which are guaranteed by the government. The Company has typically sold these guaranteed portions in the secondary market. The non-interest income the Company generates from these sales has been an important source of revenue for the Company, and continues to play a significant role in earnings. Future non-interest income from these activities depends on the Company's ability to originate and sell loans under the SBA lending program. If the U.S. Congress changes the SBA lending program, or if the Company has increased competition for such loans, its operating results could be adversely affected. MARKET AREA AND COMPETITION The financial services industry in the Company's primary market area is highly competitive. FNB competes actively with regional and super-regional bank holding companies, community banks, savings institutions, mortgage bankers, brokerage firms, insurance companies and loan production offices in each of its primary market areas. The primary means of competition are through interest rates, pricing and service. Changes in the financial services industry resulting from fluctuating interest rates, technological changes and deregulation have resulted in an increase in competition, cost of funds, merger activity and customer awareness of product and service differences among competitors. Management believes that the deposit mix coupled with the legal lending limit regulations that FNB is subjected to is such that no material portion of FNB's deposits or loans have been obtained from a single customer. Consequently, the loss 7 8 of any one customer would not have a materially adverse effect on its business. The business of the Company and FNB is not seasonal to any material degree. REGULATION AND SUPERVISION As a bank holding company, the Company is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System ("FRB") under the Bank Holding Company Act ("BHCA"). Under the BHCA, bank holding companies may not, in general, directly or indirectly acquire ownership or control of more than 5% of the voting shares of any company, including a bank or bank holding company, without the prior approval of the FRB. In addition, bank holding companies are generally prohibited from engaging in nonbanking (i.e., commercial or industrial) activities, subject to certain exceptions under the BHCA. FNB is also subject to regulation, supervision, and examination by the Office of the Comptroller of Currency ("OCC"). Depository institutions are also affected by various state and federal laws, including those relating to consumer protection and similar matters, as well as by the fiscal and monetary policies of the federal government and its agencies, including the FRB. An important purpose of these policies is to curb inflation and control recessions through control of the supply of money and credit. The FRB uses its powers to establish reserve requirements of depository institutions and to conduct open market operations in United States government securities so as to influence the supply of money and credit. These policies have a direct effect on the availability of loans and deposits and on interest rates charged on loans and paid on deposits, with the result that federal policies have a material effect on the earnings of depository institutions, and hence, the Company. ACQUISITIONS OF CONTROL. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the FRB has been given 60 days' prior written notice of such proposed acquisition and within that time period the FRB has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued, or unless the acquisition is subject to FRB approval under the BHCA. An acquisition may be made prior to the expiration of the disapproval period if the FRB issues written notice of its intent not to disapprove the action. Under a rebuttable presumption established by the FRB, the acquisition of more than 10% of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as the Company, would constitute the acquisition of control of such bank holding company. In addition, any "company" would be required to obtain the approval of the FRB under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding shares of any class of voting stock of the Company, or otherwise obtaining "control" over the Company. Under the BHCA, "control" generally means (i) the ownership or control of 25% or more of any class of voting securities of the bank holding company, (ii) the ability to elect a majority of the bank holding company's directors, or (iii) the ability otherwise to exercise a controlling influence over the management and policies of the bank holding company. REGULATORY DIVIDEND RESTRICTIONS. The Company is a legal entity separate and distinct from its subsidiaries. The principal source of cash flow of the Company, including cash flow to pay dividends on the Company's common stock and debt service on its debt (including distributions to the Trust for payment of distributions on the Trust Preferred Capital Securities), is dividends from its subsidiaries. Various federal regulations limit the amount of dividends that may be paid to the Company by FNB without regulatory approval. These regulatory limitations on dividends, coupled with other regulatory provisions discussed below, may have the effect of exacerbating any future financial difficulties by further reducing the availability of funding sources. The approval of the OCC is required for the payment of any dividend by a national bank if the total of all dividends declared by the board of directors of such bank in any calendar year would exceed the total of (i) the bank's retained net profits (as defined and interpreted by regulation) for the current year plus (ii) the retained net profits (as defined and interpreted by regulation) for the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. In addition, a national bank can pay dividends only to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined and interpreted by regulation). 8 9 Under the Federal Deposit Insurance Act (the "FDI Act"), an insured depository institution may not pay any dividend if it is undercapitalized or if said payment would cause it to become undercapitalized. Also, the federal bank regulatory agencies have issued policy statements providing that depository institutions and their holding companies should generally pay dividends only out of current operating earnings. TRANSACTIONS INVOLVING BANKING SUBSIDIARIES. FNB is subject to Federal Reserve Act restrictions that limit the transfer of funds or other items of value from FNB to the Company in "covered transactions." In general, covered transactions include loans and other extensions of credit, investments and asset purchases, as well as other transactions involving the transfer of value from a banking subsidiary to an affiliate or for the benefit of an affiliate. Unless an exemption applies, covered transactions by a banking subsidiary with any of its affiliates is limited in amount to 10% of that banking subsidiary's capital and surplus (as defined and interpreted by regulation) and, with respect to covered transactions by a banking subsidiary with any one of its affiliates is limited in amount to 10% of the banking subsidiary's capital and surplus (as defined and interpreted by regulation) and, with respect to covered transactions with all affiliates, in the aggregate, to 20% of that banking subsidiary's capital and surplus. Furthermore, loans and extensions of credit to affiliates generally are required to be secured in specified amounts. LIABILITY OF COMMONLY CONTROLLED INSTITUTIONS. Under the FDI Act, an insured depository institution that is under common control with another insured depository institution is generally liable for any loss incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of such commonly controlled institution, or any assistance provided by the FDIC to any such commonly controlled institution that is in danger of default. The term "default" is defined generally to mean the appointment of a conservator or receiver and the term "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. The effect of this provision is to diminish the protection previously available to holding companies through operation of separate depository institution subsidiaries. SOURCE OF STRENGTH DOCTRINE. Under a policy asserted by the FRB, a bank holding company is expected to serve as a source of financial and managerial strength to each of its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank. This support may be sought by the FRB at times when a bank holding company may not have the resources to provide it or, for other reasons, would not otherwise be inclined to provide it. REGULATORY CAPITAL STANDARDS AND RELATED MATTERS. The FRB, the OCC, and the FDIC have adopted substantially similar risk-based and leverage capital guidelines for United States banking organizations. The guidelines establish a systematic, analytical framework that makes regulatory capital requirements sensitive to differences in risk profiles among depository institutions, takes off-balance sheet exposure into account in assessing capital adequacy and reduces disincentives to holding liquid, low-risk assets. Risk-based capital ratios are determined by classifying assets and specified off-balance sheet financial instruments into weighted categories with higher levels of capital being required for categories perceived as representing greater risk. FRB policy also provides that banking organizations generally, and, in particular, those that are experiencing internal growth or actively making acquisitions, are expected to maintain capital positions that are substantially above the minimum supervisory levels, without significant reliance on intangible assets. Under the risk-based capital standard, the minimum consolidated ratio or total capital to risk-adjusted assets (including certain off-balance sheet items, such as standby letters of credit) required by the FRB for bank holding companies, such as the Company, is currently 8%. At least one-half of the total capital must be composed of common equity, retained earnings, qualifying noncumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain items such as goodwill and certain other intangible assets ("Tier 1 capital"). The remainder may consist of qualifying hybrid capital instruments, perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, preferred stock that does not qualify as Tier 1 capital and a limited amount of loan and lease loss reserves ("Tier 2 capital"). As of December 31, 1999, the Company's Tier 1 and total capital to risk-adjusted assets ratios were 11.4% and 12.3%, respectively. In addition to the risk-based standard, the Company is subject to minimum leverage ratio guidelines. The leverage ratio is defined to be the ratio of a bank holding company's Tier 1 capital to its total consolidated quarterly average assets less goodwill and certain other intangible assets (the "Leverage Ratio"). These guidelines provide for a minimum Leverage Ratio 9 10 of 3% for bank holding companies that have the highest supervisory rating. All other bank holding companies must maintain a minimum Leverage Ratio of at least 4% to 5%. Neither the Company nor FNB has been advised by the appropriate federal banking regulator of any specific Leverage Ratio applicable to it. As of December 31, 1999, the Company's Leverage Ratio was 7.8%. The OCC has established capital requirements for banks under its jurisdiction that are substantially similar to those imposed by the FRB on bank holding companies. As of December 31, 1999, FNB had capital in excess of such minimum regulatory capital requirements. PROMPT CORRECTIVE ACTION. The FDI Act requires the federal bank regulatory agencies to take "prompt corrective action" in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution's treatment for purposes of the prompt corrective action provisions will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. The federal financial institution regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels. The relevant capital measures are the total capital ratio, Tier 1 capital ratio and the Leverage Ratio. Under the regulations, a national bank will be: (i) "well capitalized" if it has a total capital ratio of 10% or greater, a Tier 1 capital ratio of 6% or greater and a Leverage Ratio of 5% or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total capital ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater and a Leverage Ratio of 4% or greater (3% in certain circumstances) and is not "well capitalized," (iii) "undercapitalized" if it has a total capital ratio of less than 8%, a Tier 1 capital ratio of less than 4% or a Leverage Ratio of less than 4% (3% in certain circumstances); (iv) "significantly undercapitalized" if it has a total capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a Leverage Ratio of less than 3%; and (v) "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. In addition, a depository institution's primary federal regulatory agency is authorized to downgrade the depository institution's capital category to the next lower category upon a determination that the depository institution is an unsafe or unsound condition or is engaged in an unsafe or unsound practice. An unsafe or unsound practice can include receipt by the institution of a less than satisfactory rating on its most recent examination with respect to its asset quality, management, earnings, or liquidity. As of December 31, 1999, FNB had capital levels that met "well capitalized" standards under such regulations. The banking agencies are permitted to establish, on an institution by institution basis, individualized minimum capital requirements exceeding the general requirements described above. Failure to meet the capital guidelines described above could subject an insured bank to a variety of sanctions, including asset growth restrictions and termination of deposit insurance by the FDIC. The FDI Act generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be "undercapitalized." "Undercapitalized" depository institutions are subject to limitations on, among other things, asset growth; acquisition; branching; new business lines; acceptance of brokered deposits; and borrowings from the Federal Reserve System and are required to submit a capital restoration plan. The federal bank regulatory agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lessor of (i) an amount equal to 5% of the depository institution's total assets at the time it became "undercapitalized," and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. 10 11 LENDING PRACTICES Loan Portfolio Composition. In accordance with its lending policies, the Company strives to maintain a diversified loan portfolio. The following table sets forth in dollar amounts the composition of the Company's loan portfolio for the past five years: DECEMBER 31, ------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 --------------- --------------- --------------- --------------- --------------- (IN THOUSANDS) Residential mortgage $ 327,294 $ 353,635 $ 363,333 $ 337,911 $ 105,604 Construction mortgage 9,484 10,203 9,215 7,716 2,859 Commercial, financial and industrial 411,489 323,544 302,098 299,630 107,015 Consumer 101,500 89,681 86,381 76,598 53,340 --------------- --------------- --------------- --------------- --------------- Total loans 849,767 777,063 761,027 721,855 268,818 Allowance for possible loan losses (7,431) (6,643) (6,617) (6,599) (3,307) --------------- --------------- --------------- --------------- --------------- Net loans $ 842,336 $ 770,420 $ 754,410 $ 715,256 $ 265,511 =============== =============== =============== =============== =============== The Company's loan portfolio totaled $842.3 million at December 31, 1999, representing 66.1% of total assets. At December 31, 1998, 1997 and 1996, the Company's loan portfolio represented 65.2%, 69.8% and 67.7% of total assets, respectively. Residential mortgage. At December 31, 1999, residential mortgages outstanding represented 38.5% of total loans. The Company originates loans secured by first lien mortgages on single-family residences located mainly in its market areas. The Company originates adjustable and fixed-rate products with a maturity of up to 30 years, although these loans may be repaid over a shorter period due to prepayments and other factors. These loans generally have a maximum loan to value ratio of 80%, although this ratio could go to 100% under certain circumstances. The Company primarily retains adjustable-rate loans, and the associated servicing, in its portfolio. The adjustable-rate mortgages currently offered by the Company have interest rates which generally adjust on the applicable one, three, five or seven year anniversary date of the loan, subject to annual and term limitations. Rates are generally based upon an index tied to the weekly average yield on U.S. Treasury securities (adjusted to a constant maturity), as made available by the FRB, plus a margin. Fixed-rate mortgage products offered by the Company are generally sold in the secondary market, thus limiting the interest rate risk inherent in maintaining a large portfolio of long-term, fixed-rate assets. The Company sells such loans on both a servicing-retained and servicing-released basis. Construction mortgage. At December 31, 1999, construction mortgages outstanding represented 1.1% of total loans. The Company originates loans to construct commercial real estate properties and to construct single-family residences. For owner occupied commercial construction properties, the maximum loan to value ratio is generally 75%. For non-owner occupied commercial construction properties, the maximum loan to value ratio is generally 70%. For residential construction properties, the guidelines for residential mortgages apply. All construction loans are secured by first lien mortgages. These construction lending activities generally are limited to the Company's primary market area. Commercial. At December 31, 1999, commercial loans outstanding represented 48.4% of total loans. The Company originates commercial loans for various business purposes including the acquisition and refinancing of commercial real estate. Such loans are originated for commercial purposes or secured by commercial real estate. The majority of the Company's commercial real estate loans are secured by first liens on owner-occupied properties, a majority of which is located in the Company's primary market areas. The Company's underwriting policy for commercial real estate loans generally requires 11 12 that the ratio of the loan amount to the value of the collateral cannot exceed 75%. At December 31, 1999, the Company's largest commercial loan had a principal balance of $5.2 million. The Company is active in the SBA Section 7(a) lending program. Under this program, a portion of qualifying loans (typically 75%) is guaranteed by the SBA. The SBA guaranteed loans are adjustable-rate loans made at prime rate plus a margin. The Company also originates loans under the Farmer's Home Administration Business and Industry (Farmer's B&I) and other government guarantee programs. The Company generally sells the guaranteed portions of originated loans through these programs while retaining the rights to service these loans. At December 31, 1999, the guaranteed portion of loans that were held-for-sale totaled $3.6 million, while the unguaranteed portion of loans held by the Company in its portfolio totaled $28.1 million. Management continues to seek growth opportunities in small business lending. To date, the Company has established small business lending centers in the Columbus, Cleveland, Cincinnati and Dayton Ohio and Indianapolis, Indiana, Louisville, Kentucky and Detroit, Michigan market areas. The Columbus location is the center for the Company's small business lending operations. In determining future activities in this area, management continually assesses the uncertainties that exist surrounding government programs, including the SBA, due to scrutiny by the United States Congress. Consumer. At December 31, 1999, consumer loans outstanding represented 12.0% of total loans. The Company originates consumer loans which are primarily for personal, family or household purposes, in order to offer a full range of financial services to its customers. The underwriting standards employed by the Company for consumer loans include a determination of the applicant's payment history on other debts and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Home equity loans are secured by first or second lien mortgages. Home equity loans generally have loan to value ratios of 80% to 90%, but could go as high as 100% under certain circumstances. At December 31, 1999, 43% of the Company's consumer loans consisted of home equity loans. At December 31, 1999, 50% of the Company's consumer loans consisted of direct and indirect loans to finance the purchase of new and used automobiles and the remainder of the consumer loans consisted of loans for various other individual purposes. The targeted loan to value ratio for loans secured by new and used automobiles is 80%. Depending on market conditions and customer credit ratings, the Company may lend up to a 100% loan to value ratio. Loan maturities and repricing periods of the loan portfolio at December 31, 1999 were as follows: WITHIN ONE ONE TO FIVE AFTER FIVE YEAR YEARS YEARS TOTAL -------------- -------------- -------------- -------------- Commercial $ 152,278 $ 188,878 $ 70,333 $ 411,489 Real estate mortgage 134,165 148,962 44,167 327,294 Real estate - construction 5,485 3,351 648 9,484 Consumer 47,005 42,694 11,801 101,500 -------------- -------------- -------------- -------------- $ 338,933 $ 383,885 $ 126,949 $ 849,767 ============== ============== ============== ============== Loans due after one year with: Floating rates $ 343,348 Predetermined rates 167,486 12 13 INVESTMENT SECURITIES The Company's investment strategy is to manage the portfolio to include interest rate sensitive assets to reduce interest rate risk against interest rate sensitive liabilities. The portfolio is also structured to generate cash flows and, coupled with the readily marketable nature of such assets, it serves as a secondary source of liquidity to accommodate heavy loan demand, as well as deposit withdrawals. Subject to various government regulatory restrictions, banks may own direct obligations of the U.S. Treasury, federal agency securities, bank-qualified tax-exempt securities (including those issued by states and municipalities), certificates of deposit and time deposits, bankers' acceptances, commercial paper, corporate bonds, and mortgage-backed and asset-backed securities and related products. 13 14 The following table sets forth certain information relating to the Company's investment securities portfolio. OBLIGATIONS OF STATE OTHER U.S. AND MORTGAGE- CORPORATE U.S. GOVERNMENT POLITICAL BACKED OBLIGATIONS TREASURY AGENCIES SUBDIVISIONS SECURITIES AND OTHER ------------ ----------- ------------ ----------- ------------ (DOLLARS IN THOUSANDS) DECEMBER 31, 1999 - ---------------------------- SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing Within one year $ -- $ -- $ -- $ 14,212 $ -- After one through five years 252 -- 813 96,322 12,335 After five through ten years -- 1,408 8,046 83,562 18,212 After ten years -- 3,871 14,156 18,046 39,214 ------------ ----------- ------------ ----------- ------------ Total carrying value $ 252 $ 5,279 $ 23,015 $ 212,142 $ 69,761 ============ =========== ============ =========== ============ Amortized cost $ 250 $ 5,592 $ 25,771 $ 217,916 $ 73,740 Yield (FTE) 6.55 % 7.09 % 7.67 % 6.73 % 7.60 % Average maturity (in years) 2.3 12.3 16.6 5.9 18.1 SECURITIES HELD-TO-MATURITY Maturity/Repricing Within one year $ -- $ -- $ 899 $ 250 $ -- After one through five years -- -- 3,338 13,568 1,722 After five through ten years -- -- 549 -- 460 After ten years -- -- -- -- -- ------------ ----------- ------------ ----------- ------------ Total carrying value $ -- $ -- $ 4,786 $ 13,818 $ 2,182 ============ =========== ============ =========== ============ Fair value $ -- $ -- $ 4,839 $ 13,580 $ 2,182 Yield (FTE) -- -- 7.55 % 7.52 % 10.64 % Average maturity (in years) -- -- 2.9 3.4 3.2 DECEMBER 31, 1998 - ---------------------------- SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing Within one year $ -- $ 173 $ 1,264 $ 15,268 $ 50 After one through five years 265 -- 3,308 94,130 3,907 After five through ten years -- 2,503 8,278 83,733 22,592 After ten years -- 2,162 9,496 28,657 25,311 ------------ ----------- ------------ ----------- ------------ Total carrying value $ 265 $ 4,838 $ 22,346 $ 221,788 $ 51,860 ============ =========== ============ =========== ============ Amortized cost $ 251 $ 4,759 $ 21,724 $ 222,537 $ 52,503 Yield (FTE) 6.55 % 6.81 % 7.69 % 6.62 % 6.32 % Average maturity (in years) 3.3 10.7 12.1 6.1 18.2 SECURITIES HELD-TO-MATURITY: Maturity/Repricing Within one year $ -- $ -- $ 396 $ 2 $ -- After one through five years -- -- 3,520 12,139 1,849 After five through ten years -- -- 1,280 6,839 493 After ten years -- -- -- -- -- ------------ ----------- ------------ ----------- ------------ Total carrying value $ -- $ -- $ 5,196 $ 18,980 $ 2,342 ============ =========== ============ =========== ============ Fair value $ -- $ -- $ 5,413 $ 19,054 $ 2,342 Yield (FTE) -- -- 7.53 % 7.53 % 10.64 % Average maturity (in years) -- -- 3.7 4.4 3.2 DECEMBER 31, 1997 - ---------------------------- SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing Within one year $ 2,310 $ -- $ 1,688 $ 64,165 $ 9,670 After one through five years 258 -- 5,979 91,006 4,264 After five through ten years -- 7,145 7,163 12,628 6,096 After ten years -- 5,609 2,130 15,170 1,017 ------------ ----------- ------------ ----------- ------------ Total carrying value $ 2,568 $ 12,754 $ 16,960 $ 182,969 $ 21,047 ============ =========== ============ =========== ============ Amortized cost $ 2,558 $ 12,619 $ 16,627 $ 181,750 $ 21,017 Yield (FTE) 5.92 % 7.14 % 7.65 % 6.86 % 6.82 % Average maturity (in years) .61 9.81 6.03 6.44 11.78 SECURITIES HELD-TO-MATURITY: Maturity/Repricing Within one year $ -- $ -- $ 585 $ 3,692 $ 1,879 After one through five years -- -- 3,313 10,554 743 After five through ten years -- -- 1,895 6,947 -- After ten years -- -- -- 5,609 6 ------------ ----------- ------------ ----------- ------------ Total carrying value $ -- $ -- $ 5,793 $ 26,802 $ 2,628 ============ =========== ============ =========== ============ Fair value $ -- $ -- $ 5,967 $ 28,048 $ 2,630 Yield (FTE) -- -- 7.15 % 8.20 % 9.96 % Average maturity (in years) -- -- 4.29 6.19 3.42 YIELD TOTAL (FTE) ------------ ----------- DECEMBER 31, 1999 - ---------------------------- SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing Within one year $ 14,212 6.35 % After one through five years 109,722 6.86 % After five through ten years 111,228 6.69 % After ten years 75,287 7.80 % ------------ Total carrying value $ 310,449 ============ Amortized cost $ 323,269 Yield (FTE) 7.00 % Average maturity (in years) 6.0 SECURITIES HELD-TO-MATURITY Maturity/Repricing Within one year $ 1,149 6.90 % After one through five years 18,628 7.85 % After five through ten years 1,009 8.96 % After ten years -- ------------ Total carrying value $ 20,786 ============ Fair value $ 20,601 Yield (FTE) 7.85 % Average maturity (in years) 3.3 DECEMBER 31, 1998 - ---------------------------- SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing Within one year $ 16,755 6.63 % After one through five years 101,610 6.80 % After five through ten years 117,106 6.35 % After ten years 65,626 6.95 % ------------ Total carrying value $ 301,097 ============ Amortized cost $ 301,774 Yield (FTE) 6.65 % Average maturity (in years) 8.7 SECURITIES HELD-TO-MATURITY: Maturity/Repricing Within one year $ 398 7.27 % After one through five years 17,508 7.81 % After five through ten years 8,612 7.82 % After ten years -- -- % ------------ Total carrying value $ 26,518 ============ Fair value $ 26,809 Yield (FTE) 7.80 % Average maturity (in years) 4.1 DECEMBER 31, 1997 - ---------------------------- SECURITIES AVAILABLE-FOR-SALE: Maturity/Repricing Within one year $ 77,833 6.77 % After one through five years 101,507 6.95 % After five through ten years 33,032 7.07 % After ten years 23,926 7.06 % ------------ Total carrying value $ 236,298 ============ Amortized cost $ 234,571 Yield (FTE) 6.92 % Average maturity (in years) 7.01 SECURITIES HELD-TO-MATURITY: Maturity/Repricing Within one year $ 6,156 8.57 % After one through five years 14,610 8.02 % After five through ten years 8,842 8.08 % After ten years 5,615 8.19 % ------------ Total carrying value $ 35,223 ============ Fair value $ 36,645 Yield (FTE) 8.16 % Average maturity (in years) 5.68 14 15 DEPOSITS Deposits from local markets serve as the Company's major source of funds for investments and lending. The Company offers a wide variety of retail and commercial deposit accounts designed to attract both short-term and long-term funds. Certificates of deposit, regular savings, money market deposits, and NOW checking accounts have been the primary sources of new funds for the Company. Maturities of the Company's time certificates of deposit of $100,000 or more outstanding at December 31, 1999 are summarized as follows: AMOUNT -------------- (IN THOUSANDS) 3 months or less $ 69,988 3 through 6 months 48,565 6 through 12 months 11,664 Over 12 months 27,624 ------------- Total $ 157,841 ============= BORROWINGS The Company has historically funded its earning assets principally through customer deposits within its primary market area. In its attempt to manage its cost of funding sources, management has pursued a strategy which includes a mix of the traditional retail funding sources, combined with the utilization of wholesale funding sources. These funding sources have been utilized by management to grow the Company in its efforts to leverage its capital base. Additionally, the Company has used such funding sources to manage its interest rate risk by match funding and maintaining certain assets on its balance sheet and structuring various other funding sources which traditionally are not available to the Company in the retail market. FNB is a member of the Federal Home Loan Bank ("FHLB") system. This membership is maintained to enhance shareholder value through the utilization of FHLB advances to aid in the management of the Company's cost of funds by providing alternative funding sources. FHLB advances provide flexibility in the management of interest rate risk through the wide range of available products with characteristics not necessarily present in the existing deposit base, as well as the ability to manage liquidity. EMPLOYEES At December 31, 1999, the Company had 410 employees, 344 of whom were full-time and 66 of whom were part-time. Full-time employees receive a comprehensive range of employee benefit programs and salaries that management considers to be generally competitive with those provided by other major employers in its market areas. None of the Company's employees are represented by any union or other labor organization, and management believes that its employee relations are good. The Company has never experienced a work stoppage. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Company does not have any banking offices located in a foreign country and has no foreign assets, liabilities, or related income and expense for the years presented. ITEM 2: PROPERTIES The Company's headquarters and FNB's main office are located in The First National Bank Building, 422 Main Street, Zanesville, Ohio. The building contains approximately 34,000 square feet and is used exclusively by the Company and FNB. The Company also owns, free and clear of any encumbrances, 17 other buildings with square footage ranging from approximately 800 to 15,000 that are used as full service banking locations. Three additional full service branch locations are 15 16 located in buildings owned by the Company on land that is being purchased on a land contract or is being leased on an extended basis under favorable terms. One full service branch is located in a 15,000 square foot facility that is leased by the Company. This facility is also used by the Company for business lending, private banking, administrative and various operational activities. The Company also leases space ranging from approximately 600 square feet to 26,000 square feet in twelve additional locations. This lease spaced is used primarily for business lending and operational activities. The aggregate annual rentals paid by the Company during its last fiscal year did not exceed five percent of its operating expenses. Management of the Company believes that its properties are adequately insured. ITEM 3: LEGAL PROCEEDINGS - -------------------------- There are no material pending legal proceedings against the Company, other than ordinary litigation incidental to its business. In the opinion of management, the ultimate resolution of these proceedings will not have a material adverse effect on the financial position of the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted for a vote of security holders of the Company during the fourth quarter of 1999. 16 17 PART II ------- ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER - ------------------------------------------------------------------------------ MATTERS ------- QUARTERLY MARKET AND DIVIDEND INFORMATION PER SHARE DATA 1999 1998 ------------------------------------------ ------------------------------------------ MARKET PRICE CASH MARKET PRICE CASH --------------------------- --------------------------- HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS --------------------------- -------------- --------------------------- -------------- 1st Quarter $ 30.00 $ 24.75 $ .140 $ 26.25 $ 23.38 $ .135 2nd Quarter 27.25 23.13 .140 35.00 23.75 .135 3rd Quarter 25.31 21.00 .140 35.50 25.00 .135 4th Quarter 25.25 19.13 .145 31.50 27.00 .140 QUARTERLY MARKET AND DIVIDEND INFORMATION On April 30 1993, the Company's common stock commenced trading on the National Association of Securities Dealers Automated Quotation System (NASDAQ) National Market System under the symbol BFOH. The high and low market prices represent high and low sales prices for the Company's common stock as furnished to the Company by NASDAQ. There were 1,138 and 1,143 shareholders of record of the Company's common stock at December 31, 1999 and 1998, respectively. The Company plans to continue to pay quarterly cash dividends. The ability of the Company to pay cash dividends is based upon receiving dividends from FNB, as well as existing cash balances. As discussed in Note 18 to the consolidated financial statements, certain restrictions exist regarding the ability of FNB to pay cash dividends. 17 18 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY - ------------------------------------------------------------ AT OR FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 1996(5) 1995 ------------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Interest income $ 88,114 $ 86,657 $ 84,692 $ 53,177 $ 34,063 Interest expense 49,647 50,150 48,256 28,630 16,357 ------------- ------------- ------------- ------------- ------------- Net interest income 38,467 36,507 36,436 24,547 17,706 Provision for possible loan losses 1,580 1,225 1,221 1,257 967 Non-interest income 10,753 9,948 7,768 6,258 4,984 Non-interest expense 29,651 29,827 26,677 21,235 12,805 ------------- ------------- ------------- ------------- ------------- Income before income taxes and extraordinary item 17,989 15,403 16,306 8,313 8,918 Provision for federal income tax 5,685 4,835 5,536 2,354 2,706 ------------- ------------- ------------- ------------- ------------- Income before extraordinary item 12,304 10,568 10,770 5,959 6,212 Extraordinary item-prepayment charges on early repayment of Federal Home Loan Bank Advances, -- 400 -- -- -- net of tax ------------- ------------- ------------- ------------- ------------- Net income $ 12,304 $ 10,168 $ 10,770 $ 5,959 $ 6,212 ============= ============= ============= ============= ============= PER SHARE DATA: (1) Income before extraordinary item $ 1.58 $ 1.33 $ 1.35 $ .89 $ 1.04 Net income 1.58 1.28 1.35 .89 1.04 Dividends .57 .55 .53 .51 .47 Book value 10.55 11.09 10.72 9.79 8.42 Tangible book value 8.89 9.58 9.13 8.01 8.40 BALANCE SHEET DATA: Total assets $1,274,206 $ 1,181,011 $ 1,081,618 $ 1,056,920 $ 476,429 Loans 849,767 777,063 761,027 721,855 268,818 Allowance for possible loan losses 7,431 6,643 6,617 6,599 3,307 Securities 331,235 327,615 271,521 284,576 178,252 Deposits 799,176 789,622 747,047 732,689 348,545 Borrowings 385,498 296,750 239,449 236,609 74,135 Shareholders' equity 80,108 87,535 85,333 77,894 50,010 PERFORMANCE RATIOS: Return on average assets 1.02% 0.89% 0.98% 0.85% 1.38% Return on average equity 14.29 11.55 13.20 10.05 13.05 Net interest margin 3.47 3.48 3.55 3.78 4.27 Interest rate spread 3.12 3.05 3.08 3.22 3.55 Non-interest income to average assets 0.89 0.88 0.71 0.90 1.11 Non-interest expense to average assets(2) 2.33 2.36 2.30 2.59 2.84 Efficiency ratio(3) 56.56 56.81 56.67 57.33 56.63 ASSET QUALITY RATIOS: Non-performing loans to total loans 0.42% 0.48% 0.29% 0.35% 0.38% Non-performing assets to total assets 0.30 0.37 0.28 0.29 0.22 Allowance for possible loan losses to total losses 0.87 0.85 0.87 0.91 1.23 Allowance for possible loan losses to nonperforming loans 209.0 178.3 298.3 258.0 322.9 Net charge-offs to average loans 0.10 0.16 0.16 0.19 0.29 CAPITAL RATIOS:(4) Shareholders' equity to total assets 6.29% 7.41% 7.89% 7.37% 10.50% Tier 1 capital to average total assets 7.77 6.52 6.52 6.06 10.49 Tier 1 capital to risk-weighted assets 11.37 10.34 10.37 10.08 17.70 (1) Per share data has been restated to reflect all stock dividends and stock splits. (2) Excludes amortization of intangibles and non-recurring charges totaling $1,629 in 1998 for merger, restructuring and branch closing costs and $2,632 in 1996 related to the special one-time SAIF assessment and restructuring costs. (3) The efficiency ratio is equal to non-interest expense (excluding non-recurring charges) less amortization of intangible assets divided by net interest income determined on a fully tax equivalent basis plus non-interest income less gains or losses on securities transactions and non-recurring income. (4) For definitions and further information relating to the Company's regulatory capital requirements, see "Supervision and Regulation." (5) The Company's acquisition of County in August 1996 significantly affects the comparability of the Company's results of operations for prior years. 18 19 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS OF THE COMPANY ---------------------------- For a comprehensive understanding of the Company's financial condition and performance, this discussion should be considered in conjunction with the Company's Consolidated Financial Statements, accompanying notes, and other information contained elsewhere herein. This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and FNB operate); competition for the Company's customers from other providers of financial services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; and other risks detailed in "Item 1: Business - Risk Factors" and the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. OVERVIEW The reported results of the Company primarily reflect the operations of the Company's bank subsidiary. The Company's results of operations are dependent on a variety of factors, including the general interest rate environment, competitive conditions in the industry, governmental policies and regulations and conditions in the markets for financial assets. Like most financial institutions, the Company's primary source of income is net interest income. Net interest income is defined as the difference between the interest the Company earns on interest-earning assets, such as loans and securities, and the interest the Company pays on interest-bearing liabilities, such as deposits and borrowings. The Company's operations are also affected by non-interest income, such as checking account and trust fees and gains from sales of loans. The Company's principal operating expenses, aside from interest expense, consist of salaries and employee benefits, occupancy costs and other general and administrative expenses. On April 5, 1999, the Company acquired Chornyak, a full service financial planning company. Chornyak provides comprehensive financial planning services to its clients and receives fees for these services either directly from, or in the form of commissions earned from handling and processing investment transactions for, its clients. This acquisition was accounted for as a purchase transaction and, accordingly, the results of Chornyak are included in the Company's results of operations from the date of acquisition. In October 1999, BFOH Capital Trust I (the "Trust"), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing $20.0 million aggregate liquidation amount of 9.875% Capital Securities. The Trust's obligations under the Capital Securities are fully and unconditionally guaranteed by the Company. The Capital Securities are included with borrowings and presented as a separate line item in the Company's consolidated balance sheet. Distributions on the Capital Securities are recorded as interest expense in the Company's consolidated statement of operations. Average Balances and Yields. The following tables present, for each of the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and percentage rates, and the net interest margin. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis ("FTE") by total interest-earning assets. The net interest margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. FTE income includes tax exempt income, restated to a pre-tax equivalent amount based on the statutory federal income tax rate. All average balances are daily average balances. Non-accruing loans are included in average loan balances. 19 20 YEAR ENDED DECEMBER 31, 1999 1998 ---------------------------------------------------------------------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE INTEREST COST BALANCE EXPENSE COST ----------- ----------- ------------------------ ----------- --------- (Dollars in thousands) Securities: Taxable $ 292,510 $ 19,601 6.70% $ 272,760 $ 18,514 6.79% Non-taxable (2) 33,997 2,751 8.09 27,246 2,130 7.82 ---------- ----------- ---------- --------- Total securities 326,507 22,352 6.85 300,006 20,644 6.88 Loans: Commercial 375,834 33,944 9.03 315,242 29,776 9.45 Real estate 337,967 24,987 7.39 362,580 28,599 7.89 Consumer 96,981 7,821 8.06 91,865 8,275 9.01 ---------- ----------- ---------- --------- Total loans(1) 810,782 66,752 8.23 769,687 66,650 8.66 Federal funds sold 704 39 5.54 2,907 154 5.30 ---------- ----------- ---------- --------- Total earning assets(2) 1,137,993 $ 89,143 7.83% 1,072,600 $ 87,448 8.15% ----------- --------- Non interest-earning assets 72,084 63,978 ---------- ---------- Total assets $1,210,077 $1,136,578 ========== ========== Interest Bearing Deposits: Demand and savings $ 234,288 $ 5,973 2.55% $ 215,358 $ 6,251 2.90% Time deposits 495,747 26,026 5.25 489,265 27,648 5.65 ---------- ----------- ---------- --------- Total 730,035 31,999 4.38 704,623 33,899 4.81 Borrowings 324,282 17,648 5.44 279,004 16,251 5.82 ---------- ----------- ---------- --------- Total interest-bearing 1,054,317 49,647 4.71 983,627 50,150 5.10% liabilities ----------- ---------- --------- Non interest-bearing deposits 62,431 56,845 ---------- ---------- Subtotal 1,116,748 1,040,472 Other liabilities 7,238 8,108 ---------- ---------- Total liabilities 1,123,986 1,048,580 Shareholders' equity 86,091 87,998 ---------- ---------- Total liabilities and $1,210,077 $1,136,578 shareholders' equity ========== ========== Net interest income and $ 39,496 3.12% $ 37,298 3.05% interest rate spread(3) ======== ===== ========= ===== Net interest margin(4) 3.47% 3.48% ===== ===== Average interest-earning assets to average 107.9% 109.0% interest-bearing liabilities YEAR ENDED DECEMBER 31, 1997 --------------------------------------- AVERAGE INCOME/ YIELD/ BALANCE EXPENSES COST --------------------------------------- Securities: Taxable $ 265,450 $ 18,184 6.85% Non-taxable (2) 25,357 2,007 7.91 ----------- --------- Total securities 290,807 20,191 6.94 Loans: Commercial 312,385 29,654 9.49 Real estate 361,709 28,187 7.79 Consumer 77,705 7,062 9.09 ----------- --------- Total loans(1) 751,799 64,903 8.63 Federal funds sold 6,794 364 5.36 ----------- --------- Total earning assets(2) 1,049,400 $ 85,458 8.14% --------- Non interest-earning assets 46,541 ------------ Total assets $1,095,941 ============ Interest Bearing Deposits: Demand and savings $ 205,556 $ 5,455 2.65% Time deposits 496,975 27,907 5.62 ----------- --------- Total 702,531 33,362 4.75 Borrowings 250,852 14,894 5.94 ----------- --------- Total interest-bearing 953,383 48,256 5.06% liabilities --------- Non interest-bearing deposits 48,933 ----------- Subtotal 1,002,316 Other liabilities 12,040 ----------- Total liabilities 1,014,356 Shareholders' equity 81,585 ----------- Total liabilities and $1,095,941 shareholders' equity ============ Net interest income and $ 37,202 3.08% interest rate spread(3) ========= ==== Net interest margin(4) 3.55% ==== Average interest-earning assets to average interest-bearing liabilities 110.1% (1) Non-accrual loans are included in the average loan balances, (2) Computed on an FTE basis utilizing a 35% tax rate in 1999 and 1998 and 34% tax rate in 1997. The applicable adjustments were $1,029, $790 and $766 for the years ended December 31, 1999, 1998, and 1997, respectively. (3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) The net interest margin represents net interest income as a percentage of average interest-earning assets. 20 21 Rate and Volume Variances. Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table discloses the dollar changes in the Company's net interest income attributable to changes in levels of interest-earning assets or interest-bearing liabilities (volume), changes in average yields on interest-earning assets and average rates on interest-bearing liabilities (rate) and the combined volume and rate effects (total). For the purposes of this table, the change in interest due to both rate and volume has been allocated to volume and rate change in proportion to the relationship of the dollar amounts of the change in each. In general, this table provides an analysis of the effect on income of balance sheet changes which occurred during the periods and the changes in interest rate levels. DECEMBER 31, 1999 VS. 1998 1998 VS. 1997 INCREASE (DECREASE) INCREASE (DECREASE) -------------------------------------------------------------------------------------- (IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL ----------- ------------ ------------ ----------- ----------- ---------- Interest-earning assets: Loans: Commercial $ 5,519 $ (1,351) $ 4,168 $ 270 $ (148) $ 122 Real estate (1,878) (1,734) (3,612) 68 344 412 Consumer 444 (898) (454) 1,276 (63) 1,213 ---------- ----------- ---------- ---------- --------- ---------- Total loans 4,085 (3,983) 102 1,614 133 1,747 Securities Taxable 1,326 (239) 1,087 497 (167) 330 Non-taxable 544 77 621 148 (25) 123 ---------- ----------- ---------- ---------- --------- ---------- Total securities 1,870 (162) 1,708 645 (192) 453 Fed funds sold (122) 7 (115) (206) (4) (210) ---------- ----------- ---------- ---------- --------- ---------- Total interest-earning assets 5,833 (4,138) 1,695 2,053 (63) 1,990 ---------- ----------- ---------- ---------- --------- ---------- Interest-bearing liabilities: Deposits: Demand and savings deposits 521 (799) (278) 268 528 796 Time deposits 361 (1,983) (1,622) (435) 176 (259) ---------- ----------- ---------- ---------- --------- ---------- Total interest-bearing deposits 882 (2,782) (1,900) (167) 704 537 Borrowings 2,512 (1,115) 1,397 1,644 (286) 1,358 ---------- ----------- ---------- ---------- --------- ---------- Total interest-bearing liabilities 3,394 (3,897) (503) 1,477 418 1,895 ---------- ----------- ---------- ---------- --------- ---------- Net interest income $ 2,439 $ (241) $ 2,198 $ 576 $ (481) $ 95 ========== =========== ========== ========== ========= ========== COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 Net Income. The Company's net income totaled $12.3 million for the year ended December 31, 1999, an increase of $2.1 million, or 21.0% from 1998. Basic and diluted earnings per share (hereinafter referred to as "earnings per share") in 1999 equaled $1.58, compared to $1.28 in 1998, a 23.4% increase. Income before extraordinary item also totaled $12.3 million, or $1.58 per share, in 1999 compared to $10.6 million, or $1.33 per share, in 1998. During 1998, the Company repaid various fixed rate Federal Home Loan Bank (FHLB) advances that had interest rates in excess of current market rates and incurred prepayment charges of $613,000 which were recorded, net of taxes of $213,000, as an extraordinary item. Operating results in 1998 also included the after tax effects of charges totaling $1.1 million recorded as a result of merger, restructuring and planned branch closing activities. Earnings in 1998 adjusted to exclude the effects of non-recurring charges were $11.6 million, or $1.46 per share. Net interest income and non-interest income increased 5.4% and 8.1%, respectively, in 1999 as compared to 1998 while non-interest expense, excluding non-recurring charges in 1998, increased 5.2%. The provision for possible loan losses was $1.6 million in 1999 compared to $1.2 million in 1998. The Company's net interest margin decreased to 3.47% in 1999 as compared to 3.48% in 1998. The Company's return on average assets and return on average equity were 1.02% and 14.29%, respectively, in 1999, compared to .89% and 11.55%, respectively, in 1998. Excluding the non-recurring charges noted above, the Company's return on average assets and return on average equity in 1998 were 1.02% and 13.21%, respectively. 21 22 Interest Income. Total interest income increased 1.7% to $88.1 million for 1999, compared to $86.7 million for 1998. This increase resulted from a $65.4 million, or 6.1%, increase in average interest-earning assets in 1999. The average balance of loans increased $41.1 million, or 5.3%, while the average balance of securities increased $26.5 million, or 8.8%. The weighted average yield on interest-earning assets was 7.83% in 1999, a decrease of 32 basis point from 1998. The Company's yield on average loans decreased from 8.66% in 1998 to 8.23% in 1999. Yields on the investment portfolio decreased from 6.88% in 1998 to 6.85% in 1999. Interest Expense. Total interest expense decreased 1.0% to $49.6 million for 1999 as compared to $50.2 million for 1998. Interest expense decreased due to a lower cost of funds during 1999 as compared to 1998, offset in part by a higher average balance of interest-bearing liabilities. The average balance of interest-bearing deposit accounts increased $25.4 million, or 3.6%, during 1999 as compared to 1998 while the average balance of borrowings increased 16.2% from $279.0 million in 1998 to $324.3 million in 1999. The Company's cost of funds decreased to 4.71% in 1999 as compared to 5.10% in 1998. The lower cost of funds in 1999 was primarily a result of the repricing of maturing certificates of deposit at lower rates, interest rate reductions on demand and savings accounts and the repayment and refinancing of higher rate FHLB advances in December 1998. Provision for Possible Loan Losses. The provision for possible loan losses was $1.6 million in 1999 compared to $1.2 million in 1998. The provision for possible loan losses was considered sufficient by management for maintaining an adequate allowance for possible loan losses. The increased provision in 1999 resulted primarily from increases in, as well as a change in the mix of, the loan portfolio. Non-Interest Income. Total non-interest income increased 8.1% to $10.8 million in 1999 as compared to $9.9 million in 1998. The following table sets forth the Company's non-interest income for the periods indicated: YEAR ENDED DECEMBER 31, 1999 1998 1997 --------------------- ---------------------- ---------------------- (IN THOUSANDS) Trust and custodian fees $ 2,508 $ 2,121 $ 1,807 Customer service fees 2,245 2,129 2,040 Investment securities gains 318 34 88 Gain on sale of loans 2,449 3,677 2,202 Other 3,233 1,987 1,631 --------------------- ---------------------- ---------------------- Total $ 10,753 $ 9,948 $ 7,768 ===================== ====================== ====================== Trust and custodian fees increased 18.2% to $2.5 million in 1999 from $2.1 million in 1998. Growth in trust income continued to result primarily from the expansion of the customer base, higher asset values and changes in fee structure. Customer service fees, representing service charges on deposits and fees for other banking services, increased $116,000, or 5.4% in 1999. This increase resulted from the Company's continued emphasis on increasing fee income on fee-based accounts. Gains on sales of loans decreased $1.3 million to $2.4 million for 1999 compared to $3.7 million for 1998. During 1998, the Company sold $27.8 million of the guaranteed portion of its SBA and other government guarantee loan originations in the secondary market compared to $26.7 million during 1998, realizing gains of $1.8 million in 1999 compared to gains of $2.1 million in 1998. Also, the Company recorded gains of $627,000 from the sales of residential loans during 1999 compared to $1.6 million in 1998. Residential loan origination and sale activity during 1999 declined particularly in the later half of the year due to increasing interest rates. The Company continues to emphasize its small business lending activities, including the evaluation of expansion into new markets. The nature of the political climate in Washington, D.C. may subject existing government programs to much 22 23 scrutiny and possible cutbacks. It is not currently known whether the SBA program will ultimately be impacted. Management believes that any such cutbacks could negatively affect the Company's activities in the SBA lending programs as well as the planned expansion of such activities. Other income increased $1.2 million to $3.2 million in 1999 compared to $2.0 million in 1998 primarily as a result of financial planning fee income of Chornyak which totaled $695,000 in 1999 compared to no such amount in 1998. Also, electronic banking fee income increased $253,000 and earnings from bank-owned life insurance increased $148,000 in 1999 compared to 1998. Non-Interest Expense. Excluding non-recurring merger, integration and restructuring charges of $1.6 million in 1998, total non-interest expense increased $1.5 million to $29.7 million in 1999, compared to $28.2 million in 1998. This increase generally resulted from expansion of the Company's operating and loan production activities, offset in part by efficiencies achieved from the May 1998 merger of the Company's banking subsidiaries. The following table sets forth the Company's non-interest expense for the periods indicated: YEAR ENDED DECEMBER 31, 1999 1998 1997 ----------------- ----------------- ----------------- (IN THOUSANDS) Salaries and employee benefits $ 16,791 $15,764 $14,720 Net occupancy expense 1,699 1,540 1,630 Furniture and equipment expense 922 898 789 Data processing expense 1,214 1,095 1,086 Taxes other than income taxes 921 850 986 Federal deposit insurance 279 263 249 Amortization of intangibles 1,411 1,376 1,525 Other 6,414 8,041 5,692 ----------------- ----------------- ----------------- Total $ 29,651 $ 29,827 $ 26,677 ================= ================= ================= Salaries and employee benefits accounted for approximately 59.5% of total operating expenses (non-interest expense less amortization of intangibles and non-recurring charges) in 1999 compared to 58.8% in 1998. The average full time equivalent staff level decreased to 383 in 1999 compared to 392 in 1998. Excluding non-recurring salary and employee benefits expense of $378,000 in 1998, salaries and employee benefits increased 9.1%, from $15.4 million in 1998 to $16.8 million in 1999. In general, higher salaries and employee benefits costs resulted from the addition of loan production personnel, expansion of operating activities and the acquisition of Chornyak in April 1999. Net occupancy expense increased 10.3% to $1.7 million in 1999 from $1.5 million in 1998. This increase resulted primarily from higher costs associated with new branch facilities facilities opened and acquired in the fourth quarter of 1998 and second quarter of 1999. Furniture and equipment expense increased $24,000, or 2.7% in 1999. This increase was due principally to higher depreciation costs. Data processing expense was $1.2 million in 1999 compared to $1.1 million in 1998. Higher costs in 1999 resulted from equipment and software enhancements due to technological advancements. Taxes other than income taxes increased $71,000, or 8.4%, in 1999 compared to 1998. This increase resulted primarily from higher capital levels. Also, the expense recorded for 1998 benefited from refunds received for taxes paid in prior years. Federal deposit insurance expense increased $16,000 to $279,000 in 1999 from $263,000 in 1998, as a result of higher deposit levels. 23 24 Amortization of goodwill and other intangibles totaled $1.4 million during both 1999 and 1998. Excluding non-recurring charges of $1.3 million in 1998, other non-interest expenses decreased $376,000, or 5.6%. This decrease resulted primarily from efficiencies achieved from the May 1998 merger of the Company's banking subsidiaries and cost control initiatives. The efficiency ratio is one method used in the banking industry to assess profitability. It is defined as non-interest expense less amortization expense and non-recurring charges divided by the net revenue stream. The net revenue stream is the sum of net interest income on a FTE basis and non-interest income excluding net investment securities gains or losses and non-recurring income. The Company's efficiency ratio was 56.6% for 1999, as compared to 56.8% for 1998 and 56.7% for 1997. Controlling costs and improving productivity, as measured by the efficiency ratio, is considered by management a primary factor in enhancing performance. Provision for Income Taxes. The provision for Federal income taxes increased $850,000 to $5.7 million in 1999, for an effective tax rate of 31.6%. This compared to Federal income tax expense of $4.8 million in 1998 which represented an effective tax rate of 31.4%. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Net Income. The Company's net income totaled $10.2 million for the year ended December 31, 1998, a decrease of $602,000, or 5.6% from 1997. Basic and diluted earnings per share (hereinafter referred to as "earnings per share") in 1998 equaled $1.28, compared to $1.35 in 1997, a 5.2% decrease. Income before extraordinary item totaled $10.6 million, or $1.33 per share, in 1998. During 1998, the Company repaid various fixed rate Federal Home Loan Bank (FHLB) advances that had interest rates in excess of current market rates. In connection with this early extinguishment of debt, the Company paid prepayment charges of $613,000 which were recorded, net of taxes of $213,000, as an extraordinary item. Operating results in 1998 also include the after tax effects of charges totaling $1.1 million recorded as a result of merger, restructuring and planned branch closing activities. Earnings in 1998 adjusted to exclude the effects of non-recurring charges were $11.6 million, or $1.46 per share. Net interest income and non-interest income increased .2% and 28.1%, respectively, in 1998 as compared to 1997 while non-interest expense, excluding non-recurring charges, increased 5.7%. The provision for possible loan losses was $1.2 million in both 1998 and 1997. The Company's net interest margin decreased to 3.48% in 1998 as compared to 3.55% in 1997, primarily reflecting the effects of the Company's purchase in January 1998 of bank-owned life insurance, which is included in the Company's balance sheet as a non-interest earning asset. In addition, lower interest rates and a flattening of the yield curve adversely affected the net interest margin throughout 1998. Increases in non-interest income resulted primarily from higher gains on sales of loans and earnings on bank-owned life insurance. The increase in non-interest expense primarily resulted from costs associated with additional loan production activities. The Company's return on average assets and return on average equity were .89% and 11.55%, respectively, in 1998, compared to .98% and 13.20%, respectively, in 1997. Excluding the non-recurring charges noted above, the Company's return on average assets and return on average equity in 1998 were 1.02% and 13.21%, respectively. Interest Income. Total interest income increased 2.3% to $86.7 million for 1998, compared to $84.7 million for 1997. This increase resulted from a $23.2 million, or 2.2%, increase in average interest-earning assets in 1998. The average balance of loans increased $17.9 million, or 2.4%, while the average balance of securities increased $9.2 million, or 3.2%. The weighted average yield on interest-earning assets was 8.15% in 1998, an increase of 1 basis point from 1997. The Company's yield on average loans increased from 8.63% in 1997 to 8.66% in 1998. Yields on the investment portfolio decreased from 6.94% in 1997 to 6.88% in 1998. Interest Expense. Total interest expense increased 3.9% to $50.2 million for 1998 as compared to $48.3 million for 1997. Interest expense increased due to a higher average balance of interest-bearing liabilities outstanding and due to a higher cost of funds during 1998 as compared to 1997. The average balance of interest-bearing deposit accounts increased $2.1 million, or .3%, to $704.6 million in 1998 as compared to $702.5 million in 1997. Average interest-bearing liabilities increased 3.2%, from $953.4 million to $983.6 million. 24 25 The Company's cost of funds increased to 5.10% in 1998 as compared to 5.06% in 1997. The higher cost of funds in 1998 was primarily a result of the continued shift by customers into higher yielding certificates of deposit and money market accounts as well as higher borrowing levels relative to total interest-bearing liabilities. Provision for Possible Loan Losses. The provision for possible loan losses was $1.2 million in 1998 and 1997. The provision for possible loan losses was considered sufficient by management for maintaining an adequate allowance for possible loan losses. Total non-performing loans increased to $3.7 million at December 31, 1998, from $2.2 million at December 31, 1997. Net charge-offs totaled $1.2 million, or .16% of average loans, in both 1998 and 1997. The allowance for possible loan losses at December 31, 1998 was $6.6 million, or .85% of total loans and 178.3% of non-performing loans compared to $6.6 million, or .87% of total loans and 298.3% of non-performing loans at December 31, 1997. Management's estimate of the adequacy of its allowance for possible loan losses is based upon its continuing review of prevailing national and local economic conditions, changes in the size and composition of the portfolio and individual problem credits. Growth of the loan portfolio, loss experience, economic conditions, delinquency levels, nature and adequacy of underlying collateral, credit mix and selected credits are factors that affect judgments concerning the adequacy of the allowance. Non-Interest Income. Total non-interest income increased 28.1% to $9.9 million in 1998 as compared to $7.8 million in 1997. Trust and custodian fees increased 17.4% to $2.1 million in 1998 from $1.8 million in 1997. Growth in trust income continued to result primarily from the expansion of the customer base as well as higher asset values. Customer service fees, representing service charges on deposits and fees for other banking services, increased 4.4% in 1998 to $2.1 million from $2.0 million in 1997. This increase resulted from the Company's continued emphasis on increasing fee income on fee-based accounts. Gains on sales of loans increased $1.5 million to $3.7 million for 1998 compared to $2.2 million for 1997. During 1998, the Company sold $26.7 million of the guaranteed portion of its SBA and other government guarantee loan originations in the secondary market compared to $19.7 million during 1997, realizing gains of $1.6 million in 1998 compared to gains of $1.5 million in 1997. Also, the Company recorded gains of $1.6 million from the sales of residential loans during 1998 compared to $689,000 in 1997. Loan origination and sale activity during 1998 continued to benefit from the favorable interest rate environment. The Company intends to continue to place emphasis on its small business lending activities, including the evaluation of expansion into new markets. The nature of the political climate in Washington, D.C. may subject existing government programs to much scrutiny and possible cutbacks. One component of the Clinton Administration's current budget proposal is to reduce by approximately 5% funding available for the SBA 7(a) program as well to reduce lender and borrower fees. It is not currently known whether the SBA program will ultimately be impacted. Management believes that any such cutbacks could negatively affect the Company's activities in the SBA lending programs as well as the planned expansion of such activities. Other income increased $356,000 to $2.0 million in 1998 compared to $1.6 million in 1997 primarily as a result of earnings on bank-owned life insurance which totaled $794,000 in 1998 compared to no such amount in 1997. This increase was offset in part by a $500,000 gain recognized in 1997 in connection with the curtailment of post retirement benefits provided to certain Company employees. Non-Interest Expense. Total non-interest expense increased $3.2 million to $29.8 million in 1998, compared to $26.7 million in 1997. Excluding non-recurring charges totaling $1.6 million recorded in 1998 in connection with two planned branch closings and merger, integration and restructuring activities, total non-interest expenses were $28.2 million in 1998 compared to $26.7 million in 1997, representing an increase of $1.5 million, or 5.7%. This increase generally resulted from expansion of the Company's loan production activities. Salaries and employee benefits accounted for approximately 58.8% of total operating expenses (non-interest expense less amortization of intangibles and non-recurring charges) in 1998 compared to 58.5% in 1997. The average full time equivalent staff 25 26 level increased 8.0% to 392 in 1998 compared to 363 in 1997. Excluding non-recurring salary and employee benefits expense of $378,000 in 1998, salaries and employee benefits increased 4.5%, from $14.7 million in 1997 to $15.4 million in 1998. In general, higher salaries and employee benefits costs resulted from the addition of loan production personnel. Net occupancy expense decreased 5.5% to $1.5 million in 1998 from $1.6 million in 1997. This decrease resulted primarily from lower rent and depreciation expenses. Furniture and equipment expense increased $109,000, or 13.8% in 1998. This increase was due principally to higher depreciation costs. Data processing expense was $1.1 million in 1998 and 1997. Costs associated with the conversion of County's and Bellbrook's data processing systems during 1998 were offset by ongoing cost savings achieved as a result of these systems conversions. Taxes other than income taxes decreased $136,000, or 13.8%, in 1998 compared to 1997. This decrease resulted primarily from changes in tax laws that had a favorable impact on the Company's franchise tax liability in 1998. Federal deposit insurance expense increased $14,000 to $263,000 in 1998 from $249,000 in 1997, primarily as a result of higher deposit levels. Amortization of goodwill and other intangibles resulting from the application of purchase accounting in connection with the County acquisition totaled $1.4 million during 1998 compared to $1.5 million in 1997. Excluding non-recurring charges of $1.3 million in 1998, other non-interest expenses increased $1.1 million, or 19.3%, primarily as a result of the expanded volume of business activities. Provision for Income Taxes. The provision for Federal income taxes decreased $701,000 to $4.8 million in 1998, for an effective tax rate of 31.4%. This compared to Federal income tax expense of $5.5 million in 1997 which represented an effective tax rate of 34.0%. The decrease in expense as a percentage of pre-tax income in 1998 resulted from an increase in the amount of earnings exempt from taxes. ASSET QUALITY Non-Performing Assets. To maintain the level of credit risk of the loan portfolio at an appropriate level, management sets underwriting standards and internal lending limits and provides for proper diversification of the portfolio by placing constraints on the concentration of credits within the portfolio. In monitoring the level of credit risk within the loan portfolio, management utilizes a formal loan review process to monitor, review, and consider relevant factors in evaluating specific credits in determining the adequacy of the allowance for possible loan losses. FNB formally documents its evaluation of the adequacy of the allowance for possible loan losses on a quarterly basis and the evaluations are reviewed and discussed with its boards of directors. Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is in doubt. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings. Property acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is classified as "other real estate owned" until such time as it is sold or otherwise disposed of. The Company owned $222,000 of such property at December 31, 1999 and $607,000 at December 31, 1998. Non-performing loans totaled $3.6 million, or 0.42% of total loans, at December 31, 1999, compared to $3.7 million, or 0.48% of total loans, at year-end 1998. Non-performing assets totaled $3.8 million, or 0.30% of total assets at December 31, 1999, compared to $4.3 million, or 0.37% of total assets, at December 31, 1998. Management of the Company is not aware of any material amounts of loans outstanding, not disclosed in the table below, for which there is significant uncertainty as to the ability of the borrower to comply with present payment terms. The following is an analysis of the composition of non-performing assets: 26 27 DECEMBER 31, ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Non-accrual loans $1,312 $1,294 $ 832 $ 991 $ 440 Accruing loans 90 days or more past due 2,244 2,432 1,386 1,567 584 ---------- ---------- ---------- ---------- ---------- Total non-performing loans 3,556 3,726 2,218 2,558 1,024 Other real estate owned 222 607 785 539 24 ---------- ---------- ---------- ---------- ---------- Total non-performing assets $3,778 $4,333 $3,003 $3,097 $1,048 ========== ========== ========== ========== ========== Restructured loans $2,986 $ -- $ -- $ -- $ -- ========== ========== ========== ========== ========== Non-performing loans to total loans 0.42 % 0.48 % 0.29 % 0.35 % 0.38 % Non-performing assets to total assets 0.30 % 0.37 % 0.28 % 0.29 % 0.22 % Non-performing loans plus restructured loans to total loans 0.77 % 0.48 % 0.29 % 0.35 % 0.38 % Restructured loans consist of one loan that was restructured in May 1999. At December 31, 1999, this loan was performing in accordance with its restructured terms. OCC regulations require that banks classify their assets on a regular basis. Problem assets are classified as "substandard", "doubtful" or "loss". "Substandard" assets have one or more defined weaknesses and are characterized by the distinct possibility that some loss will be sustained if deficiencies are not corrected. "Doubtful" assets have the same weaknesses as "substandard" assets, with the additional characteristics that (1) the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable and (2) there is a high possibility of loss. An asset classified "loss" is considered uncollectible and of such little value that continuance of recording as an asset is not warranted. The regulations also contain a "special mention" category which consists of assets which do not expose an insured institution to a sufficient degree of risk to warrant classification but which possess credit deficiencies or potential weaknesses deserving management's close attention. The aggregate amounts of the Company's classified assets as of the dates indicated were as follows: DECEMBER 31, -------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------- ------------ ------------ ------------- ------------ (IN THOUSANDS) Substandard $ 8,277 $ 9,512 $ 5,353 $ 6,346 $ 507 Doubtful -- 21 423 626 -- Loss -- -- 456 847 -- --------------- ------------ ------------ ------------ ------------ Total classified assets $ 8,277 $ 9,533 $ 6,232 $ 7,819 $ 507 =============== ============ ============ ============ ============ The largest classified loan at December 31, 1999 was the restructured loan discussed above which was classified as "substandard". This loan was also included in the "substandard" classification at December 31, 1998, 1997 and 1996. The increase in classified assets from December 31, 1995 to December 31, 1996 resulted primarily from the acquisition of County which added $4.8 million to the 1996 total. Allowance for Possible Loan Losses. The Company records a provision necessary to maintain the allowance for possible loan losses at a level sufficient to provide for potential future credit losses. The allowance for loan losses is increased by the provision for loan losses and recoveries and is decreased by charged-off loans. The evaluation process to determine potential losses includes consideration of the industry, the general economic environment, historical losses by loan type, changes in the size and composition of the portfolio, delinquency trends and specific conditions of the individual borrower. While analytical techniques are used to identify potential losses on loans, future additions may be necessary based on loan growth and changes in economic conditions. 27 28 The following table summarizes the Company's loan loss experience, and provides a breakdown of the charge-off, recovery and other activity for the periods indicated: YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) BALANCE AT BEGINNING OF PERIOD $ 6,643 $ 6,617 $ 6,599 $ 3,307 $ 3,095 Charge-offs: Residential mortgage (179) (87) (32) (12) (10) Construction mortgage -- -- -- -- -- Commercial (408) (890) (666) (67) (373) Consumer (983) (825) (1,074) (1,020) (479) ----------- ----------- ----------- ----------- ----------- Total charge-offs (1,570) (1,802) (1,772) (1,099) (862) ----------- ----------- ----------- ----------- ----------- Recoveries: Residential mortgage 93 46 8 5 2 Construction mortgage -- -- -- -- -- Commercial 214 267 91 41 12 Consumer 471 290 470 227 93 ----------- ----------- ----------- ----------- ----------- Total recoveries 778 603 569 273 107 ----------- ----------- ----------- ----------- ----------- Net charge-offs (792) (1,199) (1,203) (826) (755) Provision charged to operations 1,580 1,225 1,221 1,257 967 County's allowance for possible loan losses at time of acquisition -- -- -- 2,861 -- ----------- ----------- ----------- ----------- ----------- Balance at end of period $ 7,431 $ 6,643 $ 6,617 $ 6,599 $ 3,307 =========== =========== =========== =========== =========== Loans outstanding at end of period $849,767 $ 777,063 $ 761,027 $ 721,855 $ 268,818 Average loans outstanding $810,782 $ 769,687 $ 751,799 $ 445,514 $ 261,706 Allowance as a percent of loans outstanding 0.87 % 0.85 % 0.87 % 0.91 % 1.23 % Net charge-offs to average loans 0.10 % 0.16 % 0.16 % 0.19 % 0.29 % Allowance for possible loan losses to non-performing loans 209.0 % 178.3 % 298.3 % 258.0 % 322.9 % The allowance for possible loan losses totaled $7.4 million, or .87% of total loans, at December 31, 1999 compared to $6.6 million, or .85% of total loans, at December 31, 1998. Charge-offs represent the amount of loans actually removed as earning assets from the balance sheet due to uncollectibility. Amounts recovered on previously charged-off assets are netted against charge-offs, resulting in net charge-offs for the period. Net loan charge-offs for the year ended December 31, 1999 were $792,000 compared to $1.2 million for the year ended December 31, 1998. Net charge-offs as a percentage of average loans in 1998 were .10% compared to .16% in 1998. Charge-offs have been made in accordance with the Company's standard policy and have occurred primarily in the commercial and consumer loan portfolios. The allowance for possible loan losses as a percentage of non-performing loans ("coverage ratio") was 209.0% at December 31, 1999, compared to 178.3% at the end of 1998. Although used as a general indicator, the coverage ratio is not a primary factor in the determination of the adequacy of the allowance by management. Total non-performing loans as a percentage of total loans remained a relatively low 0.42% of total loans at December 31, 1999 compared to .48% at December 31, 1998. The allowance for loan losses is allocated according to the amount systematically estimated as necessary to provide for the inherent losses within the various categories of loans. General allocations of the allowance are based primarily on previous charge-off experience adjusted for changes in the risk characteristics of each category. In addition, classified and non-performing loans are evaluated separately and specific reserves are allocated based on expected losses on each individual classified or non-performing loans. The following table sets forth the allocation of the Company's allowance for possible loan losses for each of the periods presented: 28 29 DECEMBER 31, ------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1999 1998 1997 ------------------------------------------------------------------------- PERCENT OF PERCENT OF PERCENT LOANS TO LOANS TO OF LOANS ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE TO TOTAL --------- --------- --------- ---------- --------- -------- Residential mortgage $ 1,646 38.5 % $ 946 45.5 % $ 1,120 47.7 % Construction 55 1.1 25 1.3 24 1.2 Commercial 3,440 48.4 2,947 41.6 2,830 39.7 Consumer 2,290 12.0 2,725 11.6 2,643 11.4 -------- --------- --------- ---------- --------- ---------- TOTAL $ 7,431 100.0 % $ 6,643 100.0 % $ 6,617 100.0 % ======== ========= ========= ========== ========= ========== DECEMBER 31, -------------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1995 -------------------------------------------------- PERCENT PERCENT OF LOANS OF LOANS ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ----------- -------- --------- -------- Residential mortgage $ 1,392 46.8 % $ 117 39.3 % Construction 24 1.1 -- 1.1 Commercial 2,704 41.5 3,164 39.8 Consumer 2,479 10.6 26 19.8 ----------- -------- --------- ---------- TOTAL $ 6,599(1) 100.0 % $ 3,307 100.0 % =========== ======== ========= ========== (1) The increase in the allowance for possible loan losses at December 31, 1996, compared to 1995, resulted primarily from the addition of County's allowance at the time the Company acquired County. COMPARISON OF DECEMBER 31, 1999 AND DECEMBER 31, 1998 FINANCIAL CONDITION Total assets increased $93.2 million, or 7.9%, to $1.27 billion at December 31, 1999, as compared to $1.18 billion at December 31, 1998. Total investment securities increased by $3.6 million to $331.2 million. The Company's general investment strategy is to manage the investment portfolio to include rate sensitive assets, matched against interest sensitive liabilities to reduce interest rate risk. In recognition of this strategy, as well as to provide a secondary source of liquidity to accommodate loan demand and possible deposit withdrawals, the Company has chosen to classify the majority of its investment securities as available-for-sale. At December 31, 1999, 93.7% of the total investment portfolio was classified as available-for-sale, while those securities which the Company intends to hold to maturity represented the remaining 6.3%. This compares to 91.9% and 8.1% classified as available-for-sale and held to maturity, respectively, at December 31, 1998. Total loans increased $72.7 million, or 9.4%, to $849.8 million at December 31, 1999. Growth in the loan portfolio, as well as a change in the loan portfolio mix, have been important elements of the Company's balance sheet transition following the 1996 acquisition of County. The increase in loans was attributed to an $87.9 million increase in commercial and commercial real estate loans and an $11.8 million increase in consumer loans. These increases were offset in part by a $26.3 million decrease in residential real estate loans and a $719,000 decrease in construction mortgage loans. Premises and equipment increased $1.9 million to $14.8 million at December 31, 1999. This increase resulted primarily from the completion of construction of a new branch in New Albany, Ohio which opened in May 1999. Also, data processing equipment and software purchases associated with enhancement of technology throughout the Company contributed to the increase. Other assets increased from $21.7 million at December 31, 1998 to $32.6 million at December 31, 1999. This increase was attributed to the Company's purchase of an additional $5.0 million of bank-owned life insurance and deferred tax assets of $4.5 million related to unrealized holding losses on available-for-sale securities. Deposits totaled $799.2 million at December 31, 1999, an increase of $9.6 million over total deposits at December 31, 1998. The Company continues to emphasize growth in its existing retail deposit base provided that deposit growth is cost effective compared to alternative funding sources. Total interest-bearing deposits accounted for 91.9% of total deposits at December 31, 1999 as compared to 91.7% at December 31, 1998. Total borrowings, including federal funds purchased, increased $88.7 million to $385.5 million at December 31, 1999, as compared to $296.8 million at December 31, 1998. This increase resulted from funding needs associated with increases in the loan portfolio. Also contributing to the increase was the issuance of $20.0 million aggregate liquidation amount of 9.875% Capital Securities, Series A due 2029 (included as borrowings in the Company's balance sheet) that were issued by the Trust in October 1999. LIQUIDITY AND CAPITAL RESOURCES The objective of liquidity management is to ensure the availability of funds to accommodate customer loan demand as well as deposit withdrawals while continuously seeking higher yields from longer term lending and investing opportunities. This is 29 30 accomplished principally by maintaining sufficient cash flows and liquid assets along with consistent stable core deposits and the capacity to maintain immediate access to funds. These immediately accessible funds may include federal funds sold, unpledged marketable securities, reverse repurchase agreement or available lines of credit from the FRB, FHLB, or other financial institutions. An important factor in the preservation of liquidity is the maintenance of public confidence, as this facilitates the retention and growth of a large, stable supply of core deposits in funds. The Company's principal source of funds to satisfy short-term liquidity needs comes from cash, due from banks and federal funds sold. The investment portfolio serves as an additional source of liquidity for the Company. At December 31, 1999, securities with a market value of $310.4 million were classified as available-for-sale, representing 93.7% of the total investment portfolio. Classification of securities as available-for-sale provides for flexibility in managing net interest margin, interest rate risk, and liquidity. Cash flows from operating activities amounted to $14.0 million and $5.0 million for 1999 and 1998, respectively. FNB is a member of the FHLB. Membership provides an opportunity to control the bank's cost of funds by providing alternative funding sources, to provide flexibility in the management of interest rate risk through the wide range of available funding sources, to manage liquidity via immediate access to such funds, and to provide flexibility through utilization of customized funding products to fund various loan and investment product and strategies. The Company obtained a $15 million term loan with a financial institution in order to partially fund the 1996 acquisition of County. This loan had an outstanding balance of $6.3 million at December 31, 1999. Under terms of the loan agreement, the Company is required to make quarterly interest payments and annual principal payments based upon a 10-year amortization. Principal payments commenced in February 1998. Also, in February 1999, the Company prepaid $5.0 million of the outstanding principal balance. The unpaid loan balance is due in full in September 2003. At December 31, 1999, the Company has pledged 67% of the stock of FNB as security for the loan. The loan agreement contains certain financial covenants which requires that (i) the Company maintain a minimum ratio of total capital to risk-weighted assets of 10%; (ii) each of the Company's banking subsidiaries, which represent greater than 10% of the Company's consolidated capital, maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, Tier 1 capital to average assets of 5.0% and total capital to risk-weighted assets of 10.0%; (iii) the Company maintain, on a consolidated basis, a minimum annualized return on average assets of not less than 0.75% ; and (iv) the Company maintain, on a consolidated basis, a ratio of non-performing loans to equity capital of less than 25.0% and a minimum ratio of allowance for possible loan losses to non-performing loans of 75.0%. At December 31, 1999, the Company was in compliance with each of these financial covenants. The loan agreement also restricts the Company's ability to sell assets, grant security interests in the stock of its banking subsidiaries, merge or consolidate, and engage in business activity unrelated to banking. Shareholders' equity at December 31, 1999 was $80.1 million, compared to $87.5 million at December 31, 1998, a decrease of $7.4 million, or 8.5%. This decrease resulted primarily from purchases of treasury stock (net) of $9.7 million and a $7.9 million increase in unrealized holding losses on available-for-sale securities, offset in part by the retention of earnings (net of dividends paid). Under the risk-based capital guidelines, a minimum capital to risk-weighted assets ratio of 8.0% is required, of which, at least 4.0% must consist of Tier 1 capital (equity capital net of goodwill). Additionally, a minimum leverage ratio (Tier 1 capital to total assets) of 4.0% must be maintained. At December 31, 1999, the Company had a total risk-based capital ratio of 12.3%, of which 11.4% consisted of Tier 1 capital. The leverage ratio of the Company at December 31, 1999 was 7.8%. Cash dividends declared to shareholders of the Company totaled $4.4 million, or $.565 per share, during 1999. This compared to dividends of $4.3 million, or $.545 per share, for 1998. Cash dividends paid as a percentage of net income amounted to 35.8% and 42.6% for the years ended December 31, 1999 and 1998, respectively. On October 18, 1999, the Company completed an offering of $20.0 million aggregate liquidation amount of 9.875% Capital Securities, Series A, due 2029. These securities represent preferred beneficial interests in BFOH Capital Trust I, a special purpose trust formed for the purpose of the offering. The proceeds from the offering were used by the Trust to purchase Junior Subordinated Deferrable Interest Debentures ("Debentures") from the Company. Under Federal Reserve Board regulations, these Capital Securities may represent up to 25% of a bank holding company's Tier 1 capital. The holders of the Capital Securities are entitled to receive cumulative cash distributions at the annual rate of 9.875% of the liquidation amount. Distributions are payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2000. The Company has fully and unconditionally guaranteed the payment of the Capital Securities, and payment of distributions on the Capital Securities. The Trust is required to redeem the Capital 30 31 Securities on or, in certain circumstances, prior to October 15, 2029. There are no significant covenants or limitations with respect to the business of the Company that are contained in the instruments which govern the Capital Securities and the Debentures. In April 1999 the Company issued 82,000 common shares in connection with the acquisition of Chornyak, a full service financial planning company. The Company also entered into a five year employment agreement with the sole shareholder of Chornyak. Under the terms of this agreement, the Company granted this individual an option to purchase up to 30,000 common shares, subject to a four year vesting schedule. At its April 1998 meeting, the Company's board of directors authorized a two-for-one stock split in the form of a 100% stock dividend, payable May 19, 1998 to shareholders of record on April 28, 1998. This stock split had no effect on the total capital of the Company. Following receipt of shareholder approval on April 17, 1997, the Company amended its Articles of Incorporation to increase the number of authorized shares of common stock from 7,500,000 to 20,000,000 and to eliminate par value per share of common stock. Management believes that these amendments will provide the Company with greater financial flexibility and enable it to more effectively utilize and manage its equity capital. These changes to the Company's Articles of Incorporation had no effect on the total capital of the Company. The Company's Board of Directors and management intend to seek continued controlled growth of the organization through selective acquisitions which fit the Company's strategic objectives of growth, diversification and market expansion and which provide the potential for enhanced shareholder value. At the present time, the Company does not have any understandings or agreements for any acquisitions or combination except for the acquisition of Milton Federal Financial Corporation as discussed in "Item 1. Business - Recent Developments." Considering the Company's capital adequacy, profitability, available liquidity sources and funding sources, the Company's liquidity is considered by management to be adequate to meet current and projected needs. INTEREST RATE RISK MANAGEMENT The Company's principal market risk exposure is interest rates. The objectives of the Company's interest rate risk management are to minimize the adverse effects of changing interest rates on the earnings of the Company while maintaining adequate liquidity and optimizing net interest margin. Interest rate risk is managed by maintaining an acceptable matching of the Company's asset and liability maturity and repricing periods, thus controlling and limiting the level of earnings volatility arising from rate movements. Modeling simulations to project the potential effect of various rate scenarios on net interest income are the primary tools utilized by management to measure and manage interest rate exposure within established policy limits. The Company's Asset/Liability Management Committee ("ALCO") monitors rate sensitive assets and liabilities and develops appropriate strategies and pricing policies. Interest rate sensitivity measures the exposure of net interest income to changes in interest rates. In its simulations, management estimates the effect on net interest income of changes in the overall level of interest rates. ALCO policy guidelines provide that a 200 basis point increase or decrease over a 12-month period should not result in more than a 12.5% negative impact on net interest income. The following table summarizes results of simulations as of December 31, 1999. PROJECTED NET INCREASE CHANGE IN INTEREST RATES INCOME INTEREST (DECREASE) % CHANGE - ------------------------------ ------------------- ------------------ ------------------ 200 basis point increase $ 39,754 (1,756) (4.23) % No Change 41,509 n/a n/a 200 basis point decrease 43,011 1,502 3.62 % Management also measures the Company's exposure to interest rate risk by computing estimated changes in the net present value (NPV) of cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market rate sensitive instruments in the event of sudden and sustained increases in market interest rates. The 31 32 following table presents the Company's projected change in NPV for various levels of interest rates as of December 31, 1999. All market rate sensitive instruments included in these computations are classified as either held-to-maturity or available-for-sale. The Company holds no trading securities. ESTIMATED PERCENT CHANGE IN INTEREST RATES NPV CHANGE CHANGE - ------------------------------- ---------------- ---------------- ---------------- 200 basis point increase $ 60,310 $ (26,049) (30.2) % 100 basis point increase 72,997 (13,362) (15.5) Base scenario 86,359 -- -- 100 basis point decrease 92,375 6,016 7.0 200 basis point decrease 93,335 6,976 8.1 The preceding table indicates that at December 31, 1999, in the event of a sudden and sustained increase in prevailing market interest rates, the Company's NPV would be expected to decrease while in the event of a sudden and sustained decrease in prevailing market interest rates, the Company's NPV would be expected to increase. Computations of forecasted effects of hypothetical interest rate changes are based on numerous assumptions. These assumptions include levels of market interest rates, loan prepayments ranging from 6% to 50% for adjustable rate loans and 10% to 50% for fixed rate loans and deposit decay rates. The computed forecasted effects should not be relied upon as indicative of actual future results. Further, the computations do not contemplate any actions the ALCO could undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual results may differ from those projections presented should market conditions vary from assumptions used in the calculations of NPV. Certain assets, such as adjustable rate loans, which represent one of the Company's primary loan products, have features which restrict changes in interest rates on a short term basis and over the life of the assets. In addition, the proportion of adjustable rate loans in the Company's loan portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in NPV calculations. Finally, the ability of many borrowers to repay their adjustable rate mortgage loans could decrease in the event of interest rate increases. Interest rate sensitivity gap ("gap") analysis measures the difference between assets and liabilities repricing or maturing within specified time periods. Although a useful tool, gap analysis has several limitations. Gap analysis assumes a consistent reaction in the rates of all rate-sensitive assets and liabilities to changes in overall rates. Additionally, it does not consider changes to the overall slope of the yield curve or other factors which affect the timing and pricing of the balance sheet. A positive gap, or asset sensitive position, indicates a higher level of rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specified time horizons and would generally imply a favorable effect on net interest income in periods of rising interest rates. Conversely, a negative gap, or liability sensitive position, results when rate-sensitive liabilities exceed the amount of rate-sensitive assets repricing or maturing within applicable time frames and would generally imply a favorable impact on net interest income in periods of declining interest rates. The following table reflects the Company's gap position at December 31, 1999. Savings and interest-bearing demand deposits are essentially subject to immediate withdrawal and rate change and, accordingly, are classified in the one year or less time period. However, historical experience indicates, and it is expected, that a portion of these deposits represent long-term core deposits and, accordingly, are less than 100% rate sensitive. Mortgage-backed securities included in investments are included at the earlier of repricing or maturity. As a result of these assumptions, management believes that the gap analysis overstates the liability-sensitive nature of the Company's balance sheet. 32 33 AS OF DECEMBER 31, 1999 1 YEAR OR LESS 1 TO 3 YEARS 3 TO 5 YEARS OVER 5 YEARS TOTAL ------------------- --------------- -------------- ---------------- ------------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Federal funds sold $ 183 $ -- $ -- $ -- $ 183 Loans 452,921 167,187 150,782 78,877 849,767 Investment securities 86,858 48,924 37,469 157,984 331,235 ----------------- -------------- ------------- --------------- ------------ Total 539,962 216,111 188,251 236,861 1,181,185 ----------------- -------------- ------------- --------------- ------------ INTEREST-BEARING LIABILITIES: Demand, interest-bearing 110,763 -- -- -- 110,763 Savings 116,334 -- -- -- 116,334 Time 334,351 165,110 6,492 1,041 506,994 Borrowings 281,350 10,000 14,000 80,148 385,498 ----------------- -------------- ------------- --------------- ------------ Total 842,798 175,110 20,492 81,189 1,119,589 Off balance sheet items interest rate swaps (34,375) 34,375 -- -- -- ----------------- -------------- ------------- --------------- ------------ Total gap $ (268,461) $ 6,626 $ 167,759 $ 155,672 $ 61,596 ================= ============== ============= =============== ============ Cumulative gap $ (268,461) $ (261,835) $ (94,076) $ 61,596 =================== =============== ============== ================ Cumulative gap as a percentage of (21.07) % (20.55) % (7.38) % 4.83 % total assets =================== =============== ============== ================ The Company has entered into certain interest rate swap contracts as part of its asset-liability management program to assist in managing the Company's interest rate risk and not for speculative reasons. The notional principal amount of these instruments reflect the extent of the Company's involvement in this type of financial instrument and do not represent the Company's risk of loss due to counter-party nonperformance or due to declines in market value of the swap contracts from changing interest rates. Such swaps are accounted for as hedges on a historical cost basis, with the related swap income or expense recognized currently. At December 31, 1999 and 1998, the Company had $40.6 million and $51.9 million, respectively, of notional swap principal contracts outstanding related to asset-liability management activities These swaps were entered into principally to manage the timing differences in repricing characteristics of various variable rate borrowings. All swap contracts require the Company to pay a fixed rate of interest in return for receiving a variable rate of interest based on the three month LIBOR. The net expense associated with interest rate swap contracts was $500,000, $344,000 and $147,000 during 1999, 1998 and 1997, respectively, and is included with interest on borrowings. The following summarizes information with respect to swap contracts outstanding at December 31, 1999: WEIGHTED-AVERAGE RECEIVE WEIGHTED-AVERAGE PAY MATURITY NOTIONAL AMOUNT RATE RATE - ---------------------------- -------------------------- -------------------------- ------------------------------ 2000 $ 6,250 6.19 % 6.32 % 2001 14,375 6.10 6.36 2002 20,000 6.15 6.29 -------------------------- -------------------------- ------------------------- Total $ 40,625 6.14 % 6.32 % ========================== ========================== ========================= CONTINGENCIES AND UNCERTAINTIES - YEAR 2000 COMPLIANCE MATTERS During the periods leading up to January 1, 2000, the Company addressed the potential problems associated with the possibility that the computers tha control or operate the Company's information technology system and infrastructure may not have been programmed to read four-digit date codes and, upon arrival of the year 2000, may have recognized the two-digit code "00" as the year 1900, causing systems to fail to function or generate erroneous data. 33 34 The Company expended approximately $300,000 through the periods ended December 31, 1999 in connection with its Year 2000 compliance program. The Company experienced no significant problems related to its information technology systems upon arrival of the Year 2000, nor was there any interruption in service to its customers of any kind. The company could incur losses if Year 2000 issues adversely affect its depositors or borrowers. Such problems could include delayed loan payments due to Year 2000 problems affecting any significant borrowers or impairing the payroll systems of large employers in the Company's primary market areas. Because the company's loan portfolio is highly diversified with regard to individual borrowers and types of businesses, the Company does not expect, and to date has not realized, any significant or prolonged difficulties that will affect net earnings or cash flow. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary assets and liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- For information regarding the market risk of the Company's financial instruments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Interest Rate Risk Management". ITEM 8: REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS - ---------------------------------------------------------------------------- ENDED DECEMBER 31, 1999, 1998 AND 1997 -------------------------------------- 34 35 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF BANCFIRST OHIO CORP. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and of changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of BancFirst Ohio Corp. and Subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in period then ended, in conformity with accounting principles which, as described in Note 1, are generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP January 21, 2000 35 36 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS) DECEMBER 31, 1999 1998 ---------------- ---------------- ASSETS: Cash and due from banks (Note 3) $ 32,191 $ 28,731 Federal funds sold 183 469 Securities held-to-maturity (approximate fair value of $20,601 and $26,809 at December 31, 1999 and 1998, respectively, (Note 4) 20,786 26,518 Securities available-for-sale, at fair value 310,449 301,097 ---------------- ---------------- Total investment securities 331,235 327,615 ---------------- ---------------- Loans (Notes 5 and 6) 849,767 777,063 Allowance for possible loan losses (7,431) (6,643) ---------------- ---------------- Net loans 842,336 770,420 ---------------- ---------------- Premises and equipment, net (Note 7) 14,789 12,863 Accrued interest receivable 8,260 7,278 Goodwill and other intangibles 12,606 11,898 Other assets 32,606 21,737 ---------------- ---------------- Total assets $ 1,274,206 $ 1,181,011 ================ ================ LIABILITIES: Deposits (Note 8): Non-interest-bearing deposits $ 65,086 $ 65,588 Interest-bearing deposits 734,090 724,034 ---------------- ---------------- Total deposits 799,176 789,622 Federal funds purchased (Note 9) 24,100 -- Federal Home Loan Bank advances and other borrowings (Note 10) 341,398 296,750 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures of the parent (Note 11) 20,000 -- Accrued interest payable 3,618 2,510 Other liabilities 5,806 4,594 ---------------- ---------------- Total liabilities 1,194,098 1,093,476 ---------------- ---------------- Commitments and contingencies (Notes 16, 17 and 20) SHAREHOLDERS' EQUITY (NOTE 18): Common stock, no par value 20,000,000 shares authorized: shares issued - 8,164,807 in 1999; 8,076,488 in 1998 66,318 64,096 Retained earnings 35,795 27,892 Accumulated other comprehensive income (Note 22) (8,334) (440) Less: 569,628 and 180,458 shares of common stock in treasury, at cost, at December 31, 1999 and 1998, respectively (13,671) (4,013) ---------------- ---------------- Total shareholders' equity 80,108 87,535 ---------------- ---------------- Total liabilities and shareholders' equity $ 1,274,206 $ 1,181,011 ================ ================ The accompanying notes are an integral part of the consolidated financial statements. 36 37 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1999 1998 1997 ------------- ------------- ------------- Interest income: Interest and fees on loans $ 66,685 $ 66,529 $ 64,820 Interest and dividends on securities: Taxable 19,601 18,566 18,184 Tax exempt 1,789 1,408 1,324 Other interest income 39 154 364 ------------- ------------- ------------- Total interest income 88,114 86,657 84,692 ------------- ------------- ------------- Interest expense: Time deposits, $100 and over 7,872 5,988 6,209 Other deposits 24,127 27,911 27,153 Borrowings 17,648 16,251 14,894 ------------- ------------- ------------- Total interest expense 49,647 50,150 48,256 ------------- ------------- ------------- Net interest income 38,467 36,507 36,436 Provision for possible loan losses (Note 6) 1,580 1,225 1,221 ------------- ------------- ------------- Net interest income after provision for possible loan losses 36,887 35,282 35,215 ------------- ------------- ------------- Other income: Trust and custodian fees 2,508 2,121 1,807 Customer service fees 2,245 2,129 2,040 Investment securities gains, net 318 34 88 Gains on sale of loans 2,449 3,677 2,202 Other 3,233 1,987 1,631 ------------- ------------- ------------- Total other income 10,753 9,948 7,768 ------------- ------------- ------------- Other expenses: Salaries and employee benefits 16,791 15,764 14,720 Net occupancy expense 1,699 1,540 1,630 Furniture and equipment expense 922 898 789 Data processing expense 1,214 1,095 1,086 Taxes other than income taxes 921 850 986 Federal deposit insurance 279 263 249 Amortization of intangibles 1,411 1,376 1,525 Other 6,414 8,041 5,692 ------------- ------------- ------------- Total other expenses 29,651 29,827 26,677 ------------- ------------- ------------- Income before income taxes and extraordinary item 17,989 15,403 16,306 Provision for federal income taxes (Note 14) 5,685 4,835 5,536 ------------- ------------- ------------- Income before extraordinary item 12,304 10,568 10,770 Extraordinary item - prepayment charges on early repayment of Federal Home Loan Bank advances, net of tax of $213 - 400 - ------------- ------------- ------------- Net income $ 12,304 $ 10,168 $ 10,770 ============= ============= ============= Basic and diluted earnings per share: Before extraordinary item $ 1.58 $ 1.33 $ 1.35 Extraordinary item -- (0.05) -- ------------- ------------- ------------- After extraordinary item $ 1.58 $ 1.28 $ 1.35 ============= ============= ============= Weighted average number of shares outstanding 7,794,202 7,959,362 7,960,996 ============= ============= ============= The accompanying notes are an integral part of the consolidated financial statements. 37 38 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS) CAPITAL IN ACCUMULATED COMMON STOCK EXCESS OTHER --------------------- OF PAR RETAINED COMPREHENSIVE SHARES AMOUNT VALUE EARNINGS INCOME ---------------------- ------------- ----------- --------------- Balance at December 31, 1996 8,067,838 $ 40,340 $ 22,807 $ 15,466 $ 304 Net income -- -- -- 10,770 -- Other comprehensive income, net of tax - unrealized gains on available-for-sale securities, net of reclassification adjustment -- -- -- -- 836 Comprehensive income Elimination of par value -- 22,807 (22,807) -- -- Purchase of 23,308 shares common stock as cost -- -- -- -- -- Treasury stock, 24,488 shares issued -- 196 -- -- -- Cash dividend -- -- -- (4,179) -- --------- -------- ------------ ---------- -------------- Balance at December 31, 1997 8,067,838 63,343 -- 22,057 1,140 --------- -------- ------------ ---------- -------------- Net income -- -- -- 10,168 -- Other comprehensive income, net of tax - unrealized losses on available for-sale securities net of reclassification adjustment -- -- -- -- (1,580) Comprehensive income -- -- -- -- -- Issuance of common shares 8,650 203 -- -- -- Purchase of 116,000 shares of common stock at cost Treasury stock, 43,202 shares issued -- 550 -- -- -- Cash dividend -- -- -- (4,333) -- --------- -------- ------------ ---------- -------------- Balance at December 31, 1998 8,076,488 64,096 -- 27,892 (440) --------- -------- ------------ ---------- -------------- Net income 12,304 Other comprehensive income, net of tax - unrealized losses on available for sale securities net of Reclassification adjustment (7,894) Comprehensive income Issuance of common shares 88,319 2,220 Purchase of 403,752 shares of common stock at cost 18 Treasury stock, 14,582 shares issued 2 Cash dividend -- -- -- (4,419) -- --------- -------- ------------ ---------- -------------- Balance at December 31, 1999 8,164,807 $ 66,318 $ -- $ 35,795 $ (8,334) ========= ======== ============ ========== ============== TOTAL TREASURY COMPREHENSIVE SHAREHOLDERS' STOCK INCOME EQUITY ----------- ------------- ------------- Balance at December 31, 1996 $ (1,023) $ 77,894 Net income -- $ 10,770 10,770 Other comprehensive income, net of tax - unrealized gains on available-for-sale securities, net of reclassification adjustment -- 836 836 ======== Comprehensive income $ 11,606 ======== Elimination of par value -- -- Purchase of 23,308 shares common stock as cost (433) (433) Treasury stock, 24,488 shares issued 249 445 Cash dividend -- (4,179) ---------- ------------- ------------- Balance at December 31, 1997 (1,207) -- 85,333 ---------- ------------- ------------- Net income -- $ 10,168 10,168 Other comprehensive income, net of tax - unrealized losses on available for-sale securities net of reclassification adjustment -- (1,580) (1,580) ======= Comprehensive income -- $ 8,588 -- Issuance of common shares -- ======== 203 Purchase of 116,000 shares of common stock at cost (3,394) (3,394) Treasury stock, 43,202 shares issued 588 1,138 Cash dividend -- (4,333) ---------- ------------- Balance at December 31, 1998 (4,013) 87,535 ---------- ------------- Net income $ 12,304 12,304 Other comprehensive income, net of tax - unrealized losses on available for sale securities net of Reclassification adjustment (7,894) (7,894) ------- Comprehensive income $ 4,410 -- ======= Issuance of common shares 2,220 Purchase of 403,752 shares of common stock at cost (9,942) (9,924) Treasury stock, 14,582 shares issued 284 286 Cash dividend -- (4,419) ---------- ------------- Balance at December 31, 1999 $ (13,671) $ 80,108 ========== ============= The accompanying notes are an integral part of the consolidated financial statements. 38 39 BANCFIRST OHIO CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS) DECEMBER 31, 1999 1998 1997 ----------- ----------- ------------ Cash flow from operating activities: Net income $ 12,304 $ 10,168 $ 10,770 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 5,762 2,813 3,943 Provision for possible loan losses 1,580 1,225 1,221 Deferred taxes payable (179) (104) 1,083 Gains on sale of assets (3,027) (3,711) (2,290) Increase in interest receivable (982) (332) (250) Decrease (increase) in other assets (2,902) (2,335) 191 Increase in interest payable 1,108 84 171 Increase (decrease) in other liabilities 1,327 (1,841) 300 FHLB stock dividend (1,002) (992) (1,079) ----------- ----------- ------------ Net cash provided by operating activities 13,989 4,975 14,060 ----------- ----------- ------------ Cash flows from investing activities: Decrease (increase) in federal funds sold 286 (420) 2,144 Proceeds from maturities of securities held-to-maturity 5,906 9,030 11,412 Proceeds from maturities and sales of securities available-for-sale 95,721 99,592 95,102 Purchase of securities held-to-maturity -- -- (14) Purchase of securities available-for-sale (117,143) (166,985) (91,697) Purchase of loans -- (61,573) (75,710) Increase in loans, net (136,375) (71,669) (41,060) Acquisition of County Savings Bank, net of cash acquired -- -- (1,500) Acquisition of Chornyak (2,050) -- -- Purchase of equipment and other assets (3,308) (4,007) (2,028) Purchase of bank-owned life insurance (5,000) (15,000) -- Proceeds from sale of assets 64,969 120,235 78,592 ----------- ----------- ------------ Net cash used in investing activities (96,994) (90,797) (24,759) ----------- ----------- ------------ Cash flows from financing activities: Purchase of deposits -- 8,002 -- Net increase in deposits, excluding purchase of deposits 9,554 33,986 14,820 Increase (decrease) in federal funds purchased 24,100 (12,300) 650 Net increase in Federal Home Loan Bank advances and other borrowings 44,648 69,601 2,190 Issuance of Company obligated manditorily redeemable preferred 20,000 -- -- Cash dividends paid (4,419) (4,333) (4,179) Purchase of treasury stock (9,924) (3,394) (433) Reissuance of treasury stock and other 2,506 1,341 445 ----------- ----------- ------------ Net cash provided by financing activities 86,465 92,903 13,493 ----------- ----------- ------------ Net increase in cash and due from banks 3,460 7,081 2,794 Cash and due from banks, beginning of period 28,731 21,650 18,856 ----------- ----------- ------------ Cash and due from banks, end of period $ 32,191 $ 28,731 $ 21,650 =========== =========== ============ Supplemental cash flow disclosures: Income taxes paid $ 5,700 $ 6,100 $ 3,300 Interest paid $ 48,539 $ 50,066 $ 48,547 Non cash transfers: Transfer of capital in excess of par to common stock $ -- $ -- $ 22,807 The accompanying notes are an integral part of the consolidated financial statements. 39 40 BANCFIRST OHIO CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES: The following is a summary of the significant accounting policies followed in the preparation of the consolidated financial statements. Principles of Consolidation: The consolidated financial statements include the accounts of BancFirst Ohio Corp. (Company) and its wholly-owned subsidiaries, The First National Bank of Zanesville (FNB) and BFOH Capital Trust I (the Trust). The Trust is a special purpose subsidiary that was formed in October 1999 for the purpose of issuing $20,000 aggregate liquidation amount of capital securities (see Note 11). Effective May 16, 1998, Bellbrook Community Bank (Bellbrook) and County Savings Bank (County) were merged under the national bank charter of FNB. All significant inter-company accounts and transactions have been eliminated in consolidation. Investment Securities: Investment securities are classified upon acquisition into one of three categories: held-to-maturity, available-for-sale, or trading. Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold to maturity and are recorded at amortized cost. Available-for-sale securities are those securities that would be available to be sold in the future in response to the Company's liquidity needs, changes in market interest rates, and asset-liability management strategies, among others. Available-for-sale securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of other comprehensive income, net of applicable income taxes. At December 31, 1999 and 1998, the Company did not hold any trading securities. Gains and losses on the disposition of investment securities are accounted for on the completed transaction basis using the specific identification method. Income Recognition: Income earned by the Company and its subsidiaries is recognized on the accrual basis of accounting. The Company suspends the accrual of interest on loans when, in management's opinion, the collection of all or a portion of the interest has become doubtful. When a loan is placed on non-accrual, all previously accrued and unpaid interest deemed uncollectible is charged against either the loan loss reserve or the current period interest income depending on the period the interest was recorded. In future periods, interest will be included in income to the extent received only if complete principal recovery is reasonably assured. Loans Held for Sale: Loans held for sale are carried at the lower of aggregate cost or market value and are included with loans on the balance sheet. Loan Servicing Rights: The total cost of loans originated and sold or purchased is allocated between loans and servicing rights based on the relative fair values of each. The servicing rights are capitalized and amortized over the estimated servicing lives of the underlying loans. Amortization is calculated based on the estimated net servicing revenue, considering various factors including prepayment experience and market rates. Impairment of the carrying value of capitalized loan servicing rights is periodically evaluated by management in relation to the estimated fair value of those rights. 40 41 Provision for Possible Loan Losses: The provision for possible loan losses charged to operating expense is based upon management's evaluation of potential losses in the current loan portfolio and past loss experience. In management's opinion, the provision is sufficient to maintain the allowance for possible loan losses at a level that adequately provides for potential loan losses. Loans considered to be impaired are reduced to the present value of expected future cash flows, and secured loans that are in foreclosure are recorded at the fair value of the underlying collateral securing the loan. The difference between the recorded investment in the loan and the impaired valuation is the amount of impairment. A specific allocation of the allowance for possible loan losses is assigned to such loans. If these allocations require an increase to the allowance, the increase is reported as bad debt expense. Interest Rate Swap Contracts The Company has entered into certain interest rate swap contracts as part of its asset-liability management program to assist in managing the Company's interest rate risk and not for speculative reasons. The notional principal amount of these instruments reflect the extent of the Company's involvement in this type of financial instrument and do not represent the Company's risk of loss due to counterparty nonperformance or due to declines in market value of the swap contracts from changing interest rates. Such swaps are accounted for as hedges on an accrual basis since the swaps were entered into principally to manage the timing differences in repricing characteristics of various outstanding variable rate borrowings. The related swap income or expense is recognized currently, and recorded in the same category as the interest income or expense on the hedged item. Goodwill and Other Identified Intangibles: Intangible assets are amortized using straight-line and accelerated methods over the estimated remaining benefit periods which approximate 20 to 25 years for goodwill, 10 to 15 years for core deposit intangibles and 5 years for covenants not to compete. Premises and Equipment: Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation expense is computed principally on the straight-line method over the estimated useful lives of the assets generally ranging from 3 to 35 years. Upon the sale or other disposition of assets, cost and related accumulated depreciation are removed from the accounts, and the resultant gain or loss is recognized. Maintenance and repairs are charged to operating expense while additions and betterments are capitalized. Other Real Estate Owned: Other real estate owned represents properties acquired through customers' loan defaults. Other real estate owned is stated at an amount equal to the loan balance prior to foreclosure plus cost incurred for improvements to the property, but not more than fair market value of the property. As of December 31, 1999 and 1998, other real estate owned was $222 and $607, respectively, and is included on the balance sheet in other assets. Investment in Subsidiaries (Parent Company Only): The Company's investment in subsidiaries represents the total equity of the Parent Company's wholly-owned subsidiaries, using the equity method of accounting for investments. 41 42 Common Stock: At its April 1998 meeting, the Company's board of directors authorized a two-for-one stock split in the form of a 100% stock dividend, payable May 19, 1998, to shareholders of record on April 28, 1998. All share and per share amounts have been restated to reflect this split. During 1997, the Company's shareholders approved amendments to the Articles of Incorporation to increase the number of authorized shares of common stock to 20,000,000 from 7,500,000 and to eliminate par value per share of common stock. These changes to the Articles of Incorporation had no effect on the total capital of the Company. Earnings Per Common Share: Basic earnings per common share is computed on the basis of the weighted average number of shares outstanding during the period. Diluted earnings per common share is computed on the basis of the weighted average number of common shares adjusted for the dilutive effect of outstanding stock options or other common stock equivalents utilizing the treasury stock method. The weighted average number of shares outstanding for all periods has been adjusted to reflect the two-for-one stock split discussed above. Stock Incentive Plans The Company has adopted SFAS No. 123 "Accounting for Stock-Based Compensation" which encourages but does not require adoption of a fair value based accounting method for employee stock-based compensation arrangements. As permitted by the statement, the Company has elected to account for its stock incentive plan under APB Opinion No. 25 pursuant to which no compensation cost has been recognized related to stock options that have been granted. Statement of Cash Flows: For the purposes of presenting the statement of cash flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet caption "cash and due from banks." Use of Estimates in Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company's net interest income and the value of its recorded assets and liabilities. Comprehensive Income Effective January 1, 1998 the Company adopted SFAS No. 130 "Reporting Comprehensive Income" which establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all other nonowner changes in equity. The only component of comprehensive income that the Company is required to report is unrealized holding gains (losses) on available-for-sale securities. Reclassification: Certain reclassifications have been made to prior period amounts to conform to the 1999 presentation. 42 43 2. MERGERS AND ACQUISITIONS: On April 5, 1999, the Company acquired Chornyak & Associates, Inc. ("Chornyak"), a full service financial planning company, in a transaction accounted for under the purchase method of accounting for business combinations. Accordingly, the Company's consolidated financial statements include the operating results of Chornyak from the date of acquisition. In connection with this acquisition the Company issued 82,000 common shares having a total market value of $2,050 in exchange for all of the outstanding shares of Chornyak. The Company also recorded goodwill and other intangible assets of $2,114 as a result of the application of purchase accounting. On January 13, 2000 the Company entered into an agreement to acquire Milton Federal Financial Corporation ("Milton") whereby Milton would be merged into the Company. Under the terms of the agreement, the Company will exchange .444 shares of its common stock and $6.80 for each of the issued and outstanding shares of Milton. It will also redeem Milton's outstanding stock options for cash equal to the acquisition price per share less the exercise price of the options prior to closing. Based on the Company's closing price of $20.375 per share on January 12, 2000, the transaction would be valued at approximately $33,000. The Company will account for the merger as a purchase and expects to consummate the merger in the second quarter of 2000, pending approval by Milton's shareholders, regulatory approvals and other customary conditions of closing. Milton has granted the Company an option to purchase up to 19.9% of Milton's outstanding shares upon the occurrence of certain events. At September 30, 1999, Milton had total assets of $256,677, deposits of $168,471 and shareholders' equity of $25,028. For its fiscal year ended September 30, 1999, Milton reported net income of $1,603. 3. CASH AND DUE FROM BANKS: The Company is required to maintain average reserve balances with the Federal Reserve Bank. The average required reserve amounted to $2,500 and $5,084 at December 31, 1999 and 1998, respectively. 4. INVESTMENT SECURITIES: The amortized cost and estimated fair value of investment securities are as follows: DECEMBER 31, 1999 -------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- SECURITIES AVAILABLE-FOR-SALE: U.S. Treasury securities $ 250 $ 2 $ - $ 252 Securities of other government agencies 5,592 - (313) 5,279 Obligations of states and political subdivisions 25,771 1 (2,757) 23,015 Corporate obligations 58,460 20 (3,999) 54,481 Mortgage-backed and related securities 217,916 246 (6,020) 212,142 Other securities 15,280 -- -- 15,280 -------------- -------------- -------------- -------------- $ 323,269 $ 269 $ (13,089) $ 310,449 ============== ============== ============== ============== Securities Held-to-Maturity: Obligations of states and political subdivisions $ 4,786 $ 63 $ (10) $ 4,839 Industrial revenue bonds and other 2,182 -- -- 2,182 Mortgage-backed securities 13,818 30 (268) 13,580 -------------- -------------- -------------- -------------- $ 20,786 $ 93 $ (278) $ 20,601 ============== ============== ============== ============== 43 44 DECEMBER 31, 1998 --------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- Securities Available-for-Sale: U.S. Treasury securities $ 251 $ 14 $ -- $ 265 Securities of other government agencies 4,759 82 3 4,838 Obligations of states and political subdivisions 21,724 674 52 22,346 Corporate obligations and other securities 52,503 319 962 51,860 Mortgage-backed and related securities 222,537 974 1,723 221,788 ---------- ---------- ---------- --------- $ 301,774 $ 2,063 $ 2,740 301,097 ========== ========== ========== ========= Securities Held-to-Maturity: Obligations of states and political subdivisions $ 5,196 $ 218 $ 1 $ 5,413 Industrial revenue bonds and other 2,342 -- -- 2,342 Mortgage-backed securities 18,980 303 229 19,054 ---------- ---------- ---------- --------- $ 26,518 $ 521 $ 230 $ 26,809 ========== ========== ========== ========= The amortized cost and estimated fair value of debt securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. DECEMBER 31, 1999 -------------------------------------- AMORTIZED ESTIMATED COST FAIR VALUE ---------------- ----------------- Securities Available-for Sale After one through five years $ 16,623 $ 13,466 After five through ten years 29,110 27,666 After ten years 59,620 57,175 ---------------- ----------------- 105,353 98,307 Mortgage-backed and related securities 217,916 212,142 ---------------- ----------------- $ 323,269 $ 310,449 ================ ================= Securities Held-to-Maturity Within one year $ 898 $ 902 After one through five years 5,520 5,569 After five through ten years 550 550 After ten years -- ---------------- ----------------- 6,968 7,021 Mortgage-backed and related securities 13,818 13,580 ---------------- ----------------- $ 20,786 $ 20,601 ================ ================= Proceeds from sales of securities available-for-sale during 1999, 1998 and 1997 were $33,003, $8,777 and $22,195, respectively. Gross gains of $376, $48 and $125 and gross losses of $58, $14 and $37 were realized on sales in 1999, 1998 and 1997, respectively. Investment securities with a fair value of $214,588 at December 31, 1999 were pledged to secure public deposits and Federal Home Loan Bank advances and for other purposes required by law. 44 45 5. LOANS: The composition of the loan portfolio is as follows: DECEMBER 31, 1999 1998 ----------------- ---------------- Commercial, financial and industrial $ 411,489 $ 323,544 Real estate--mortgage 327,294 353,635 Real estate--construction 9,484 10,203 Consumer 101,500 89,681 ---------------- --------------- $ 849,767 $ 777,063 ================ =============== Loans held for sale totaling $3,911 and $6,375 at December 31, 1999 and 1998, respectively, are included in the above totals. Also, at December 31, 1999, 1998 and 1997, loans serviced for others totaled $251,096, $253,323 and $229,310, respectively. The Company has made loans to certain directors, executive officers, and their affiliates in the ordinary course of business. An analysis of the year ended December 31, 1999 activity with respect to these related party loans is as follows: Beginning balance $ 2,127 New loans 839 Repayments (455) Loans no longer classified as related party loans (49) --------------- Ending balance $ 2,462 =============== At December 31, 1999 and 1998, and for the years then ended, the recorded investment in loans considered to be impaired and interest income recognized related thereto was not material. Also, at December 31, 1999, restructured loans consisted of one loan with an outstanding principal balance of $2,986 that was restructured in May 1999. This loan was performing in accordance with its restructured terms. 6. ALLOWANCE FOR POSSIBLE LOAN LOSSES: An analysis of activity in the allowance for possible loan losses is as follows: YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1999 1998 1997 ---------------- ----------------- ----------------- Balance at beginning of period $ 6,643 $ 6,617 $ 6,599 Provision charged to operations 1,580 1,225 1,221 Loans charged off (1,570) (1,802) (1,772) Loan recoveries 778 603 569 ---------------- ----------------- ----------------- Net charge-offs (792) (1,199) (1,203) ---------------- ----------------- ----------------- Balance at end of period $ 7,431 $ 6,643 $ 6,617 ================ ================= ================= 45 46 7. PREMISES AND EQUIPMENT: Premises and equipment are summarized below: DECEMBER 31, ------------------------------------- 1999 1998 ---------------- ----------------- Land $ 2,619 $ 2,643 Buildings and improvements 12,656 10,372 Furniture, fixture and equipment 10,393 8,831 Construction in progress 2 628 ---------------- ----------------- 25,670 22,474 Less accumulated depreciation and amortization 10,881 9,611 ---------------- ----------------- Premises and equipment, net $ 14,789 $ 12,863 ================ ================= Total depreciation expense was $1,589, $1,329 and $1,134 for the years ended December 31, 1999, 1998 and 1997, respectively. 8. DEPOSITS: A summary of deposits is as follows: DECEMBER 31, ------------------------------------- 1999 1998 ---------------- ----------------- Demand, noninterest-bearing $ 65,086 $ 65,588 Demand, interest bearing 110,659 124,972 Savings 116,438 102,463 Time, $100 and over 157,841 141,161 Time, other 349,152 355,438 ---------------- ----------------- $ 799,176 $ 789,622 ================ ================= 9. FEDERAL FUNDS PURCHASED: Federal funds purchased generally have one- to four-day maturities. The following table reflects the maximum month-end outstanding balance, average daily outstanding balances, average rates paid during the year, and the average rates paid at year-end for federal funds purchased: YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1999 1998 1997 ---------------- ----------------- ----------------- Federal funds purchased: Average balance $ 7,341 $ 3,204 $ 1,605 Average rate 5.48 % 6.17 % 6.29 % Maximum month-end balance $ 28,000 $ 13,800 $ 12,300 Balance at year-end $ 24,100 $ -- $ 12,300 Average rate on balance at year-end 5.41 % -- % 6.07 % 46 47 10. FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS Federal Home Loan Bank (FHLB) advances and other borrowings are as follows: DECEMBER 31, -------------------------- 1999 1998 ----------- --------- Term reverse repurchase agreements (average rate 5.48% in 1999; 5.54% in 1998) $ 50,000 $ 55,000 FHLB advances (average rate 5.76% in 1999; 5.16% in 1998) 285,148 228,000 Term debt with a financial institution (7.47% in 1999; 6.63% in 1998), due 2003 6,250 13,750 ---------- --------- $ 341,398 $ 296,750 ========== ========= Minimum annual retirements on borrowings for the next five years consisted of the following at December 31, 1999: MATURITY WEIGHTED AVERAGE PRINCIPAL (PERIOD ENDING) INTEREST RATE REPAYMENT --------------- ------------- --------- 2000 5.72 % $ 188,500 2001 6.31 52,500 2002 7.47 1,250 2003 4.98 14,000 2004 -- -- 2005 and thereafter 5.58 85,148 ---- --------- Total 5.75 % $ 341,398 ==== ========== In December 1998, the Company prepaid $34,465 of FHLB advances that had a weighted average interest rate of 6.19%. In connection with this early repayment of debt, the Company paid prepayment penalties totaling $613 which have been recorded, net of taxes of $213, as an extraordinary item in the 1998 consolidated statement of income. FHLB advances must be secured by eligible collateral as specified by the FHLB. Accordingly, the Company has a blanket pledge of its first mortgage loan portfolio as collateral for the advances outstanding at December 31, 1999 with a required minimum ratio of collateral to advances of 150%. Also, the Company's investment in FHLB stock of $14,258 at December 31, 1999 is pledged as collateral for outstanding advances. The term reverse repurchase agreements are with Salomon Brothers, Inc. under which the Company sold mortgage-backed securities classified as available-for-sale and with a current carrying and fair value of $54,544 and $62,137 and accrued interest of $332 and $367 at December 31, 1999 and 1998, respectively. The reverse repurchase agreements have a weighted average maturity of 7.7 years at December 31, 1999 and 7.9 years at December 31, 1998. Also, $24,000 of such reverse repurchase agreements at December 31, 1999 are callable in 2000 and $21,000 are callable in 2001. The term debt with a financial institution was obtained by the Company to partially fund the acquisition of County. Under terms of the loan agreement, the Company is required to make quarterly interest payments. Annual principal payments commenced February 1998. The unpaid loan balance is due in full September 1, 2003. The loan agreement contains certain financial covenants, all of which the Company was in compliance with at December 31, 1999. Also, 67% of the stock of FNB collateralizes this borrowing at December 31, 1999. 11. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF THE PARENT On October 18, 1999, the Trust, a statutory business trust created under Delaware law, issued $20,000 of 9.875% Capital Securities, Series A ("Capital Securities") with a stated value and liquidation preference of $1 per share. The Trust's obligations under the Capital Securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the Capital Securities of the Trust, as well as the proceeds from the issuance of common securities to the Company, were utilized by the Trust to invest in $20,619 of 9.875% Junior Subordinated Debentures (the "Debentures") of 47 48 the Company. The Debentures are unsecured obligations and rank subordinate and junior to the right of payment to all indebtedness, liabilities and obligations of the Company. The Debentures represent the sole assets of the Trust. Interest on the Capital Securities is cumulative and payable semi-annually in arrears. The Company has the right to optionally redeem the Debentures prior to the maturity date of October 15, 2029, on or after October 15, 2009 at 104.938% (declining annually thereafter to 100% after October 15, 2019) of the stated liquidation amount, plus accrued and unpaid distributions, if any, to the redemption date. Under the occurrence of certain events, specifically a Tax Event, Investment Company Event or Capital Treatment Event as more fully defined in the BFOH Capital Trust I Prospectus dated October 13, 1999, the Company may redeem in whole, but not in part, the Debentures prior to October 15, 2009. Proceeds from any redemption of the Debentures would cause a mandatory redemption of the Capital Securities and the common securities having an aggregate liquidation amount equal to the principal amount of the Debentures redeemed. The Trust is a wholly-owned subsidiary of the Company, has no independent operations and has issued securities that contain a full and unconditional guarantee of its parent, the Company. The Trust is exempt from the reporting requirements of the Securities Exchange Act of 1934. 12. RETIREMENT PLANS: The Company has a defined contribution plan which covers substantially all full-time employees. Contributions to the plan are based upon a predetermined percentage of the employees' base compensation. Expenses related to the plan for the years ended December 31, 1999, 1998 and 1997 were approximately $174, $128 and $275, respectively. The Company also has a 401(k) Retirement Plan which covers substantially all employees with more than one year of service. The Company makes contributions to the plan pursuant to salary savings elections and discretionary contributions as set forth by the provisions of the plan. Employees direct the investment of account balances from plan alternatives. Operations have been charged $561, $499 and $396 for contributions to the plan for the years ended December 31, 1999, 1998 and 1997, respectively. The Company maintains an employee stock purchase plan whereby eligible employees and directors, through their plan contributions, may purchase shares of the Company's stock. Such shares are purchased from treasury stock at fair market value. Minimal expenses were incurred by the Company for the years ended December 31, 1999 and 1998, and 1997, in connection with the plan. The Company currently provides certain health care benefits for eligible retirees, using the accrual method of accounting for the projected costs of providing post retirement benefits during the period of employee service. During 1997, the Company changed its employee benefit program to no longer provide post retirement benefits to employees who were not eligible to retire as of December 31, 1997. As a result of this plan curtailment, a gain of $500 was recognized and is included in other income in 1997. At December 31, 1999 and 1998, the recorded liability for post retirement benefits was $501. For the years ended December 31, 1999, 1998, and 1997, health care benefit costs for eligible retirees was $34, $43 and $143, respectively. 48 49 13. STOCK INCENTIVE PLAN The Company has adopted the 1997 Omnibus Stock Incentive Plan (the Plan) which provides for the granting of stock options and other stock related awards to key employees. Under the Plan, 800,000 authorized but unissued or reacquired common shares are reserved for issuance. All options granted were at a price that equaled or exceeded the market value of the Company's common stock at the date of grant. The options vest ratably over four years and expire 20 years from the date of grant. No compensation expense was recognized in 1999, 1998 or 1997 related to the Plan. The summary of stock option activity is as follows: WEIGHTED WEIGHTED OPTIONS AVERAGE EXERCISE OPTIONS AVERAGE EXERCISE OUTSTANDING PRICE EXERCISABLE PRICE ----------- ----- ----------- ----- December 31, 1996 -- -- -- -- Options granted 92,120 $ 25.75 ------------- ------------------- December 31, 1997 92,120 25.75 -- $ -- ============== =================== Options granted 85,000 33.00 Less: Stock Options cancelled 2,880 25.75 ------------- ------------------- December 31, 1998 174,240 29.29 22,310 $ 23.50 ============== =================== Options granted 121,100 26.12 Less: Stock options exercised 2,340 23.50 Stock options cancelled 20,714 29.17 ------------- ------------------- December 31, 1999 272,286 $ 27.94 56,607 $ 26.18 ============= =================== ============== =================== The following table summarizes information about stock options outstanding at December 31, 1999: AVERAGE REMAINING CONTRACTUAL AVERAGE EXERCISE AVERAGE EXERCISE OPTIONS LIFE PRICE - OPTIONS OPTIONS PRICE - OPTIONS EXERCISE PRICE RANGE OUTSTANDING (YEARS) OUTSTANDING EXERCISABLE EXERCISABLE - ---------------------------- ---------------- ------------------- ---------------------- -------------- --------------------- $23.50 to $25.00 90,670 19.1 $ 24.44 37,620 $ 24.25 $25.01 to $30.00 117,157 19.1 27.50 18,987 30.00 $30.01 to $35.00 45,472 19.0 32.67 -- -- $35.01 to $40.00 18,987 19.0 36.00 -- -- ---------------- ------------------- ---------------------- -------------- --------------------- Total 272,286 19.1 $ 27.94 56,607 $ 26.18 ================ =================== ====================== ============== ===================== 49 50 For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of the stock options granted in 1999, 1998 and 1997 was estimated at the date of grant using a Black-Scholes option pricing model. The weighted average assumptions used in the option pricing model were as follows: 1999 1998 1997 -------------------- ----------------- ----------------- Risk-free interest rate 5.33% to 6.18% 4.75% 5.75% Expected dividend yield 3.09% 2.00% 2.25% Expected option life (years) 7.0 7.0 7.0 Expected volatility 30.39% 31.37% 21.61% For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Had compensation cost for the Company been determined consistent with SFAS No. 123, income before extraordinary items, net income and basic and diluted earnings per share for the years ended December 31, 1999, 1998 and 1997 would have been as follows: 1999 1998 1997 ----------------- ---------------- ----------------- Net income, as reported $ 12,304 $ 10,168 $ 10,770 Pro forma net income 11,927 9,974 10,759 Earnings per share, as reported: Basic 1.58 1.28 1.35 Diluted 1.58 1.28 1.35 Pro forma earnings per share: Basic 1.53 1.25 1.35 Diluted 1.53 1.25 1.35 Also under the Plan, the Company adopted the 1997 Bonus Shares Program whereby eligible employees receiving annual bonus awards may elect to receive up to 50% of such awards in common shares of the Company ("bonus shares"). Employees who elect to receive bonus shares in lieu of cash will receive additional matching shares from the Company equal to 50% of the bonus shares, provided that the employee is continuously employed by the Company and continuously owns the bonus shares for five years from the date of issuance of the bonus shares. Eligible employees elected to receive $287, $115 and $203 of their 1999, 1998 and 1997 bonuses, respectively, in bonus shares which resulted in the issuance of 15,227 shares in 2000, 3,979 shares in 1999 and 8,650 shares in 1998. 50 51 14. INCOME TAXES: The provision for income taxes is summarized below: YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1999 1998 1997 --------------------- ---------------------- ---------------------- Current $ 5,825 $ 4,939 $ 4,453 Deferred (140) (104) 1,083 ------- -------- ------- Provision for income taxes $ 5,685 $ 4,835 $ 5,536 ======= ======== ======= The following is a reconciliation of income tax at the federal statutory rate to the effective rate of tax on the financial statements: YEAR ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 ----------------------------------------------- Tax at federal statutory rate 35% 35% 35% Permanent differences: Tax-exempt interest, net of allowed interest expense (3) (3) (3) Increase in cash surrender value of life insurance (2) (2) -- Amortization of intangibles and other 2 1 2 --- --- --- Effective tax rate 32% 31% 34% === === === Deferred income taxes are recognized at prevailing income tax rates for temporary differences between financial statement and income tax bases of assets and liabilities. The components of the net deferred tax asset (liability) were as follows: DECEMBER 31, ------------------------------------------- 1999 1998 ------------------------------------------- Deferred tax assets arising from: Allowance for possible loan losses $ 2,645 $2,341 Reserve for health insurance 246 212 Amortization of intangibles 505 353 Service loan interest 39 78 Unrealized holding losses on securities 4,486 235 Other 263 467 ------- ------ Total deferred tax assets 8,184 3,686 ------- ------ Deferred tax liabilities arising from: Gain on sale of loans 1,514 1,423 Deferred loan fees and costs 271 379 FHLB stock dividends 1,286 1,369 Purchase accounting adjustments 241 157 Depreciation 180 93 Other, net 454 418 ------- ------ Total deferred tax liabilities 3,946 3,839 ------- ------ Net deferred tax asset (liability) $4,238 $(153) ======= ====== The Company did not record a valuation allowance at December 31, 1999 as the net deferred tax asset was considered to be realizable based on the level of historical and anticipated future taxable income. Net deferred tax assets and liabilities and federal income tax expense in future years can be significantly affected by changes in enacted tax rates. 51 52 15. EARNINGS PER SHARE The computation of earnings per share for the years ended December 31, 1999, 1998 and 1997 is as follows. All share amounts have been adjusted to give retroactive effect to the two for one stock split in 1998: 1999 1998 1997 ---------------- ---------------- ---------------- Income before extraordinary item $12,304 $10,568 $10,770 Extraordinary item -- (400) -- ---------------- ---------------- ---------------- Net income $12,304 $10,168 $10,770 ================ ================ ================ Weighted average shares outstanding 7,794,202 7,959,362 7,960,996 Basic earnings per share: Before extraordinary item $ 1.58 $ 1.33 $ 1.35 Extraordinary item -- (0.05) -- ---------------- ---------------- ---------------- After extraordinary item $ 1.58 $ 1.28 $ 1.35 ================ ================ ================ Weighted average shares outstanding 7,794,202 7,959,362 7,960,996 Diluted effect due to stock incentive plans 8,058 11,222 -- ---------------- ---------------- ---------------- Weighted average shares outstanding, as adjusted 7,802,260 7,970,584 7,960,996 Diluted earnings per share: Before extraordinary item $ 1.58 $ 1.33 $ 1.35 Extraordinary item -- (0.05) -- ---------------- ---------------- ---------------- After extraordinary item $ 1.58 $ 1.28 $ 1.35 ================ ================ ================ 16. LEASE COMMITMENTS: The Company leases equipment, land at two branch locations, and certain office space. One land lease has five renewal options for five years each and the other has a lease term until 2073. A summary of non-cancelable future operating lease commitments at December 31, 1998 follows: 2000 $ 723 2001 601 2002 546 2003 518 2004 364 2005 and thereafter 367 ---------- $ 3,119 ========== Rent expense under all lease obligations, including month-to-month agreements, aggregated approximately $539, $573 and $512 for the years ended December 31, 1999, 1998 and 1997, respectively. 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk, necessary to meet the financing needs of its customers. These financial instruments include loan commitments, and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. 52 53 The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The total amounts of financial instruments with off-balance-sheet risk are as follows: DECEMBER 31, 1999 1998 ----------------- ---------------- Financial instruments whose contract amounts represent credit risk: Loan commitments $ 119,789 $ 96,337 Standby letters of credit 643 551 Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers. Interest rate swaps generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount and are used by the Company to manage its interest rate risk. Notional amounts represent agreed upon amounts on which calculations of interest payments to be exchanged are based. Notional amounts do not represent direct credit exposures. The actual market or credit exposure of this type of financial instrument is significantly less than the notional amount. Direct credit exposure is limited to the net difference between the calculated pay and receive amounts on each transaction, which is generally netted and paid or received monthly, and the inability of the counter-party to meet the terms of the contract. This risk is normally a small percentage of the notional amount and fluctuates as interest rates move up and down. Market risk is more directly measured by the fair values of the interest rate swap agreements. The Company had $40,625 and $51,875, respectively, of notional swap principal contracts outstanding at December 31, 1999 and 1998 related to asset-liability management activities. These swap contracts have maturity dates ranging from February 2000 to October 2002 and require the Company to pay a fixed rate of interest ranging from 6.09% to 6.58% in return for receiving a variable rate of interest based on the three month London Inter Bank Offered Rate (LIBOR). For the years ended December 31, 1999, 1998 and 1997, interest expense on swap contracts was $500, $344 and $147, respectively, and is included with interest expense on borrowings. The Company offers credit cards in an agency capacity for another institution. Under certain circumstances, the credit cards are issued with recourse to the Company. The total of these credit lines with recourse to the Company was not material at December 31, 1999. In addition to the financial instruments with off-balance sheet risks, the Company has commitments to lend money which have been approved by the Small Business Administration's (SBA) 7(a) program. Such commitments carry SBA guarantees on individual credits ranging from 29% to 80% of principal balances. The total of such commitments at December 31, 1999 and 1998, were $14,192 and $15,657, respectively, with guaranteed principal by the SBA totaling $8,910 and $10,496, respectively. The Company has no significant concentrations of credit risk with any individual counter-party. The Company's lending is concentrated primarily in the State of Ohio market area. 18. SHAREHOLDERS' EQUITY: The payment of dividends by FNB is subject to regulatory restrictions by regulatory authorities. These restrictions for national banks provide that dividends in any calendar year generally shall not exceed the total net profits of that year plus the retained net profits of the preceding two years. In addition, dividend payments may not reduce capital levels below 53 54 minimum regulatory guidelines. At December 31, 1999, $1,997 of the retained earnings of FNB is available for the payment of dividends to the Company without regulatory agency approval. 19. REGULATORY CAPITAL REQUIREMENTS: The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulators to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the applicable regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1999, the most recent notifications from the various primary regulators of the Company and its subsidiary categorized each entity as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. Actual capital amounts and ratios of the Company and FNB are as follows: TO BE WELL CAPITALIZED FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS ------ -------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- As of December 31, 1999: Total Capital (to Risk-Weighted Assets): Consolidated $103,106 12.25 % $67,322 8.00 % $84,152 10.00 % FNB 91,490 10.83 67,584 8.00 84,480 10.00 Tier 1 Capital (to Risk-Weighted Assets): Consolidated $95,675 11.37 % $33,661 4.00 % $50,491 6.00 % FNB 76,085 9.01 33,792 4.00 50,688 6.00 Tier 1 Capital (to Average Assets): Consolidated $95,675 7.77 % $49,267 4.00 % $61,584 5.00 % FNB 76,085 6.20 49,062 4.00 61,327 5.00 20. FAIR VALUE OF FINANCIAL INSTRUMENTS: The amounts provided below represent estimates of fair values at a particular point in time. Significant estimates regarding economic conditions, loss experience, risk characteristics associated with particular financial instruments and other factors were used for the purposes of this disclosure. These estimates are subjective in nature and involve matters of 54 55 judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could have a material impact on the estimates shown. While the estimated fair value amounts are designed to represent estimates of the amounts at which these instruments could be exchanged in a current transaction between willing parties, many of the Company's financial instruments lack an available trading market as characterized by willing parties engaging in an exchange transaction. In addition, with the exception of its available-for-sale securities portfolio, it is the Company's intent to hold its financial instruments to maturity and, therefore, it is not probable that the fair values shown will be realized. The value of long-term relationships with depositors (core deposit intangible) and other customers are not reflected in the estimated fair values. In addition, the estimated fair values disclosed do not reflect the value of assets and liabilities that are not considered financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to make that value: Cash and Due From Banks, Federal Funds Sold and Federal Funds Purchased --The carrying amount approximates fair value. Investment Securities--Estimated fair values are based on quoted market prices, when available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans--In order to determine the fair values for loans, the loan portfolio was segmented based on loan type, credit quality and repricing characteristics. For residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. For certain variable rate loans with no significant credit concerns and frequent repricings, estimated fair values are based on the carrying values. The fair values of other loans are estimated using discounted cash flow analyses. The discount rates used in these analyses are based on origination rates for similar loans. Where appropriate, adjustments have been made for credit and other costs so as to more accurately reflect market rates. The estimate of maturity is based on historical experience with repayments and current economic and lending conditions. Deposits--The fair value of demand deposits, savings accounts and certain money market deposits with no stated maturity is equal to the amount payable on demand. The estimated fair value of fixed maturity certificates of deposit is based on discounted cash flow analyses using market rates currently offered for deposits of similar remaining maturities. Federal Home Loan Bank advances and other borrowings -- The estimated fair value of Federal Home Loan Bank advances and other borrowings are based on discounted cash flow analyses using current rates for the same advances. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of the Parent -- The estimated fair value is based on discounted cash flow analyses using current rates for similar borrowings. Interest Rate Swaps -- Estimated fair values are based on quoted market prices. Commitments to Extend Credit and Stand-by Letters of Credit -- The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter-parties. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with counter-parties at the reporting date. 55 56 The fair values of financial instruments were as follows: DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- Cash and due from banks $ 32,191 $ 32,191 $ 28,731 $ 28,731 Federal funds sold 183 183 469 469 Securities available-for-sale 310,449 310,449 301,097 301,097 Securities held-to-maturity 20,786 20,601 26,518 26,809 Loans, net of allowance for loan losses 842,336 842,635 770,420 777,604 Demand and savings deposits 292,183 292,183 293,023 293,023 Time deposits 506,993 505,195 496,599 500,518 Federal funds purchased 24,100 24,100 -- -- Federal Home Loan Bank advances and other borrowings 341,298 340,183 296,750 298,014 Company obligated manditorily redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures of the parent 20,000 19,541 -- -- Interest rate swaps -- 336 -- (1,495) 21. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION: Parent Company only condensed financial information is as follows: CONDENSED BALANCE SHEET DECEMBER 31, 1999 AND 1998 DECEMBER 31, ------------ 1999 1998 ----------------- ----------------- Assets: Cash $ 14,260 $ 663 Investment in subordinated debt and repurchase agreement with subsidiary 10,000 14,000 Investment in subsidiaries 80,141 84,554 Intangible assets 1,000 1,600 Other assets 2,132 529 ----------------- ----------------- Total assets $107,533 $101,346 ================= ================= Liabilities and equity: Long-term borrowings $ 6,250 $ 13,750 Junior subordinated debentures due subsidiary 20,619 -- Other liabilities 556 61 ----------------- ----------------- Total liabilities 27,425 13,811 Shareholders' equity 80,108 87,535 ----------------- ----------------- Total liabilities and equity $ 107,533 $101,346 ================= ================= 56 57 CONDENSED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997 YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ------------ ------------ ----------- Dividends from subsidiaries $ 13,000 $ 14,750 $9,000 Interest income 133 3 3 Interest expense (981) (1,044) (1,138) Operating expenses (1,477) (1,695) (2,121) ------------ ------------ ----------- Income before income tax and equity in earnings of subsidiaries 10,675 12,014 5,744 Federal income tax benefit 817 959 1,029 ------------ ------------ ----------- Income before equity in earnings of subsidiaries 11,492 12,973 6,773 Earnings of subsidiaries in excess of (less than) dividends 812 (2,805) 3,997 ------------ ------------ ----------- Net income $ 12,304 $ 10,168 $ 10,770 ============ ============ =========== CONDENSED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND 1997 YEAR ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income $12,304 $10,168 $10,770 Adjustments to reconcile net income to net cash provided by operations: Amortization and depreciation 633 621 628 (Increase) decrease in other assets (1,636) 1,009 (1,086) Increase (decrease) in other liabilities 495 (304) 548 Earnings less than (in excess of) dividends (812) 2,805 (3,997) ------------ ------------ ------------ Net cash provided by operating activities 10,984 14,299 6,863 ------------ ------------ ------------ Cash flows from investing activities: Acquisition of County -- -- (1,500) Investment in subsidiaries (2,669) -- (500) Purchase of equipment and other assets -- -- (2) Decrease (increase) in subordinated debt and repurchase agreement with subsidiary 4,000 (6,000) (1,000) ------------ ------------ ------------ Net cash provided by (used for) investing activities 1,331 (6,000) (3,002) ------------ ------------ ------------ Cash flows from financing activities: Issuance of common stock 2,220 203 -- Decrease in long-term debt (7,500) (1,250) -- Issuance of junior subordinated debentures to subsidiary 20,619 -- -- Cash dividends paid (4,419) (4,333) (4,179) Purchase of treasury stock (9,924) (3,394) (433) Treasury shares issued and other 286 1,138 445 ------------ ------------ ------------ Net cash provided by (used in) financing activities 1,282 (7,636) (4,167) ------------ ------------ ------------ Net increase (decrease) in cash 13,597 663 (306) Cash, beginning of period 663 -- ------------ ------------ ------------ Cash, end of period $ 14,260 $ 663 $ -- ============ ============ ============ 57 58 The Parent Company paid $5,700, $6,100 and $3,300 for income taxes in 1999, 1998 and 1997, respectively, and $623, $1,064 and $1,133 for interest in 1999, 1998 and 1997, respectively. 22. COMPREHENSIVE INCOME: Other comprehensive income for the years ended December 31, 1999, 1998 and 1997 consists of the following: 1999 1998 1997 ------------------ ------------------ ------------------ Unrealized holding gains (losses) on available- for-sale securities arising during period $ (11,826) $ (2,370) $ 1,356 Tax (expense) or benefit 4,139 812 (462) ------------------ ------------------ ------------------ Net of tax amount (7,687) (1,558) 894 ------------------ ------------------ ------------------ Less: Reclassification adjustment for gains included in net income (318) (34) (88) Tax expense 111 12 30 ------------------ ------------------ ------------------ Net of tax amount (207) (22) (58) ------------------ ------------------ ------------------ Net unrealized gains (losses) on available-for- sale securities $ (7,894) $ (1,580) $ 836 ================== ================== ================== 23. SEGMENT REPORTING The Company manages and operates two major lines of businesses: community banking and investment and funds management. Community banking includes lending and related services to businesses and consumers, mortgage banking, and deposit gathering. Investment and funds management includes trust services, financial planning services and retail sales of investment products. These business lines are identified by the entities through which the product or service is delivered. The reported line of business results reflect the underlying core operating performance within the business units. Parent and Other is comprised of the parent company and its special purpose trust subsidiary. It also includes inter-company eliminations and significant non-recurring items of income and expense company-wide. Substantially all of the Company's assets are part of the community banking line of business. Selected segment information is included in the following table: 58 59 INVESTMENT COMMUNITY AND FUNDS PARENT AND BANKING MANAGEMENT OTHER TOTAL ----------------- ----------------- ---------------- ---------------- 1999: Net interest income $ 39,293 $ 11 $ (837) $ 38,467 Provision for possible loan losses 1,580 -- -- 1,580 ----------------- ----------------- ---------------- ---------------- Net interest income after provision for possible loan losses 37,713 11 (837) 36,887 Non-interest income 7,550 3,203 -- 10,753 Non-interest expense 25,728 2,446 1,477 29,651 ----------------- ----------------- ---------------- ---------------- Income (loss) before income taxes 19,535 768 (2,314) 17,989 Income tax expense (benefit) 6,201 298 (814) 5,685 ----------------- ----------------- ---------------- ---------------- Net income (loss) $ 13,334 $ 470 $ (1,500) $ 12,304 ================= ================= ================ ================ 1998: Net interest income $ 37,520 $ 28 $ (1,041) $ 36,507 Provision for possible loan losses 1,225 -- -- 1,225 ----------------- ----------------- ---------------- ---------------- Net interest income after provision for possible loan losses 36,295 28 (1,041) 35,282 Non-interest income 7,807 2,121 20 9,948 Non-interest expense 24,844 1,639 3,344 29,827 ----------------- ----------------- ---------------- ---------------- Income (loss) before income taxes and extraordinary item 19,258 510 (4,365) 15,403 Income tax expense (benefit) 6,182 182 (1,529) 4,835 ----------------- ----------------- ---------------- ---------------- Income (loss) before extraordinary item 13,076 328 (2,836) 10,568 Extraordinary item -- -- 400 400 ----------------- ----------------- ---------------- ---------------- Net income (loss) $ 13,076 $ 328 $ (3,236) $ 10,168 ================= ================= ================ ================ 24. NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000 and establishes accounting and reporting standards for derivative instruments and for hedging activities. The provisions of this statement will primarily impact the accounting for the Company's interest rate swap transactions which had a total notional amount of $40,625 at December 31, 1999 (see Note 17). The Company does not anticipate that this standard will have a significant impact on its financial statements. 59 60 25. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of unaudited quarterly results of operations for the years ended December 31, 1999 and 1998: FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------------- ----------------- ---------------- ---------------- (Dollars in thousands, except per share amounts) 1999: Interest Income $ 21,371 $ 21,744 $ 22,045 $ 22,954 Net interest income 9,401 9,739 9,591 9,736 Provision for possible loan losses 350 375 405 450 Income before income taxes 4,157 4,531 4,555 4,746 Net income 2,841 3,091 3,152 3,220 Basic and diluted earnings per share $ .36 $ .39 $ .41 $ .42 1998: Interest Income $ 21,235 $ 21,429 $ 22,295 $ 21,698 Net interest income 9,135 9,024 9,266 9,082 Provision for possible loan losses 307 318 300 300 Income before income taxes and extraordinary item 4,168 3,180 4,377 3,678 Income before extraordinary item 2,808 2,227 2,990 2,543 Net income 2,808 2,227 2,990 2,143 Basic earnings per share before extraordinary item $ 0.35 $ 0.28 $ 0.38 $ 0.32 Diluted earnings per share before extraordinary item $ 0.35 $ 0.28 $ 0.37 $ 0.32 Basic earnings per share $ 0.35 $ 0.28 $ 0.38 $ 0.27 Diluted earnings per share $ 0.35 $ 0.28 $ 0.37 $ 0.27 See Note 10 concerning the extraordinary item recorded in the fourth quarter of 1998 related to the prepayment of FHLB advances. Also, the after tax effects of non-recurring merger, restructuring and branch closing charges totaled $794 in the second quarter of 1998 and $263 in the fourth quarter of 1998. 60 61 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE -------------------- There have been no disagreements between the Company and its independent auditors on accounting and financial disclosure matters during the periods covered by this report. PART III -------- ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- * ITEM 11: EXECUTIVE COMPENSATION - ------------------------------- * ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- * ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- * * Reference is made to the information under the captions "Election of Directors," "Executive Officers," "Executive Compensation, "Security Ownership of Certain Beneficial Owners and Management," and "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held April 20, 2000, which is incorporated by this reference into this annual report. 61 62 ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ----------------------------------------------------------------------------- (a) (1) Financial Statements BancFirst Ohio Corp. and Subsidiaries: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (a) (2) Financial Statement Schedules Other schedules to the financial statements for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a) (3) Exhibits List and Index on page 64. (b) None (c) The exhibits required by Item 601 of Regulation S-K are filed as a separate part of this report. 62 63 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BANCFIRST OHIO CORP. By: (Signed)/s/William F. Randles ------------------------------ William F. Randles Director and Chairman of the Board Dated: Zanesville, Ohio March 6, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date - ---------- ----- ---- (Signed)/s/Philip E. Burke Director March 6, 2000 - ------------------------------------ Philip E. Burke (Signed)/s/Gary N. Fields Director and Chief March 6, 2000 - ------------------------------------ Executive Officer Gary N. Fields (Signed)/s/Milman H. Linn, III Director March 6, 2000 - ------------------------------------ Milman H. Linn, III (Signed)/s/James L. Nichols Director March 6, 2000 - ------------------------------------ James L. Nichols (Signed)/s/James H. Nicholson Director March 6, 2000 - ------------------------------------ James H. Nicholson (Signed)/s/Karl C. Saunders Director March 6, 2000 - ------------------------------------ Karl C. Saunders (Signed)/s/William T. Stewart Director March 6, 2000 - ------------------------------------ William T. Stewart (Signed)/s/J.W. Straker, Jr.. Director March 6, 2000 - ------------------------------------ J. W. Straker, Jr. (Signed)/s/William F. Randles Director and Chairman March 6, 2000 - ------------------------------------ of the Board William F. Randles (Signed)/s/Kim M. Taylor Chief Financial Officer and March 6, 2000 - ------------------------------------ Chief Accounting Officer Kim M. Taylor 63 64 Exhibit List and Index BancFirst Ohio Corp. Form 10-K for the year ended December 31, 1999 SEQUENTIALLY EXHIBIT NO. DESCRIPTION NUMBERED PAGE - ----------- ----------- ------------- 3.1 Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Form 10-K for the year ended December 31, 1991, Exhibit 3.3 --- to the Company's form 10-K for the year ended December 31, 1992 and Exhibit 3.6 to the Company's Form 10-K for the year ended December 31, 1994). 3.2 Code of Regulations of the Company, as amended (incorporated by reference to Exhibit 3.2 to the Company's form 10-K for the year ended December 31, 1991, Exhibit 3.4 to the --- Company's Form 10-K for the year ended December 31, 1992 an Exhibit 3.5 to the Company's Form 10-K for the ended December 31, 1993). 10.1 Loan Agreement by and between the Company and LaSalle National Bank dated August 14, 1996 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-3, Registration No. 333-06707). --- 10.2 Indenture of the Company relating to the Junior Subordinated Debentures (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4, Registration Statement No. 333-30570). 10.3 Amended and Restated Trust Agreement of BFOH Capital Trust I (incorporated by reference to the Company's Registration Statement on Form S-4, Registration Statement No. 333-30570). 10.4 Agreement and Plan of Reorganization dated January 13, 2000 by and among the Company, FNB, Milton Federal Financial Corporation and Milton Federal Savings Bank (incorporated by reference to the exhibit to the Company's Current Report on Form 8-K filed January 21, 2000). *21.1 Subsidiaries of the Company 65 *23.1 Consent of PricewaterhouseCoopers LLP 66 *27.1 Financial Data Schedule 67 - ------------------- *Filed herewith. 64