1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18840
BancFirst Ohio Corp.
(Exact name of registrant as specified in its charter)
Ohio 31-1294136
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
422 Main Street
Zanesville, Ohio 43701
(Address of principal executive offices)
(Zip Code)
(740) 452-8444
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding as of August 10, 2001
----- ---------------------------------
Common Stock, No Par Value 8,742,000
1
2
INDEX
BANCFIRST OHIO CORP.
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheet...................................................... 3
Consolidated Statement of Income................................................ 4
Consolidated Statement of Cash Flows............................................ 5
Notes to Consolidated Financial Statements...................................... 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 8-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 23
PART II. OTHER INFORMATION
Other Information ....................................................................... 24
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
(b) Exhibit 27: Financial Data Schedule
(c) Reports on Form 8-K
Signatures............................................................................... 25
2
3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BANCFIRST OHIO CORP.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS: JUNE 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------------ -------------
Cash and due from banks $ 32,100 $ 32,511
Federal Funds sold 1,708 30,159
Securities held-to-maturity, at amortized cost
(approximate fair value of $12,029 and
$13,496 in 2001 and 2000, respectively) 11,808 13,453
Securities available-for-sale, at fair value 312,805 316,793
----------- -----------
Total securities 324,613 330,246
----------- -----------
Loans, net of unearned income 1,085,848 1,089,651
Allowance for possible loan losses (10,263) (10,150)
----------- -----------
Net loans 1,075,585 1,079,501
----------- -----------
Bank premises and equipment, net 18,313 18,385
Accrued interest receivable 9,309 10,503
Goodwill 18,893 19,453
Other identified intangible assets 1,997 2,436
Other assets 38,442 36,407
----------- -----------
Total assets $ 1,520,960 $ 1,559,601
=========== ===========
LIABILITIES:
Deposits:
Non-interest-bearing deposits $ 70,975 $ 76,833
Interest-bearing deposits 1,060,391 1,036,722
----------- -----------
Total deposits 1,131,366 1,113,555
----------- -----------
Federal funds purchased -- --
Federal Home Loan Bank advances and other borrowings 264,770 325,368
Accrued interest payable 4,377 6,343
Other liabilities 8,407 7,193
----------- -----------
Total liabilities 1,408,920 1,452,459
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par or stated value, 20,000,000 shares
authorized, 9,534,261 and 9,517,612 shares issued in
2001 and 2000, respectively 87,051 86,855
Retained earnings 44,159 38,898
Accumulated other comprehensive income (1,195) (1,782)
Treasury stock, 793,436 and 734,629 shares, at cost, in 2001
and 2000, respectively (17,975) (16,829)
----------- -----------
Total shareholders' equity 112,040 107,142
----------- -----------
Total liabilities and shareholders' equity $ 1,520,960 $ 1,559,601
=========== ===========
The accompanying notes are an integral part of the financial statements.
3
4
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
------- ------ -------- -------
Interest Income:
Interest and fees on loans $23,416 $19,557 $47,100 $37,582
Interest and dividends on securities:
Taxable 5,374 5,935 11,102 11,541
Tax-exempt 337 422 673 843
Other interest income 547 5 1,083 8
------- ------- ------- -------
Total interest income 29,674 25,919 59,958 49,974
------- ------- ------- -------
Interest expense:
Deposits 13,590 9,474 27,834 17,730
Borrowings 4,613 6,852 9,580 13,040
------- ------- ------- -------
Total interest expense 18,203 16,326 37,414 30,770
------- ------- ------- -------
Net interest income 11,471 9,593 22,544 19,204
Provision for possible loan losses 495 450 960 900
------- ------- ------- -------
Net interest income after provision for
possible loan losses 10,976 9,143 21,584 18,304
------- ------- ------- -------
Other income:
Trust and custodian fees 546 707 1,138 1,357
Financial planning fees 258 409 557 756
Customer service fees 626 543 1,230 1,071
Gain on sale of loans 888 523 1,596 1,138
Other 1,010 815 2,120 1,648
Investment securities gains, net 92 -- 195 --
------- ------- ------- -------
Total other income 3,420 2,997 6,836 5,970
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 4,559 4,243 9,029 8,660
Net occupancy expense 531 481 1,090 1,008
Amortization of goodwill 281 170 562 279
Amortization of other identified intangibles 220 241 440 483
Other 2,886 2,427 5,665 4,817
------- ------- ------- -------
Total non-interest expense 8,477 7,562 16,786 15,247
------- ------- ------- -------
Income before income taxes 5,919 4,578 11,634 9,027
Provision for Federal income taxes 1,957 1,431 3,824 2,806
------- ------- ------- -------
Net income $ 3,962 $ 3,147 $ 7,810 $ 6,221
======= ======= ======= =======
Basic and diluted earnings per share $ 0.45 $ 0.40 $ 0.89 $ 0.78
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 8,769 7,935 8,779 7,936
======= ======= ======= =======
Diluted 8,823 7,950 8,822 7,951
======= ======= ======= =======
Cash dividends per common share $ 0.145 $ 0.138 $ 0.290 $ 0.276
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
4
5
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 7,810 $ 6,221
Adjustment to reconcile net income to net cash
provided by operations:
Depreciation and amortization 2,338 2,802
Provision for possible loan losses 960 900
Gain on sale of assets (1,800) (1,216)
Decrease (increase) in interest receivable 1,194 (881)
Increase in other assets (3,221) (4,565)
Decrease in interest payable (1,966) (669)
Decrease in other liabilities (10) (1,353)
FHLB stock dividend (779) (648)
--------- ---------
Net cash provided by operating activities 4,526 591
--------- ---------
Cash flows from investing activities:
Decrease in federal funds sold and short term investments 28,451 22
Proceeds from maturities of securities held-to-maturity 1,627 1,439
Proceeds from maturities and sales of securities available-for-sale 34,974 13,805
Purchase of securities available-for-sale (27,926) (24,067)
Increase in loans, net (34,699) (87,612)
Purchases of equipment and other assets (996) (830)
Proceeds from sale of loans 39,918 19,682
Acquisition of Milton Federal Financial Corp., net of cash acquired -- (24,124)
--------- ---------
Net cash provided by (used in) investing activities 41,349 (101,685)
--------- ---------
Cash flows from financing activities:
Decrease in federal funds purchased -- (24,100)
(Decrease) increase in Federal Home Loan Bank advances and
other borrowings (60,598) 47,470
Net increase in deposits 17,811 76,456
Cash dividends paid (2,550) (2,152)
Issuance (purchase) of stock, net (949) 11,358
--------- ---------
Net cash provided by (used in) financing activities (46,286) 109,032
--------- ---------
Net increase (decrease) in cash and due from banks (411) 7,938
Cash and due from banks, beginning of period 32,511 32,191
--------- ---------
Cash and due from banks, end of period $ 32,100 $ 40,129
========= =========
The accompanying notes are an integral part of the financial statements
5
6
BANCFIRST OHIO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The consolidated financial statements for interim periods are unaudited;
however, in the opinion of management of BancFirst Ohio Corp. ("Company"), the
accompanying consolidated financial statements contain all material adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position and results of operations and cash flows for the periods
presented. The unaudited financial statements are presented in accordance with
the requirements of Form 10-Q and do not include all disclosures normally
required by generally accepted accounting principles. Reference should be made
to the Company's consolidated financial statements and notes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 2000
for additional disclosures, including a summary of the Company's accounting
policies. The results of operations for the three month and six month periods
ended June 30, 2001 are not necessarily indicative of the results to be expected
for the full year.
1) BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
2) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards (SFAS) No.
133 (as amended by SFAS No. 138), "Accounting for Derivative
Instruments and Hedging Activities" was issued. These statements
establish accounting and reporting standards for derivative instruments
and for hedging activities. The provisions of these statements were
implemented in the first quarter of 2001 and impacted the accounting
for the Company's interest rate swap transactions that had a total
notional amount of $63,125 and $64,375 at June 30, 2001 and December
31, 2000, respectively. The impact on the Company's consolidated
financial statements as of June 30, 2001 and for the six month period
then ended was to decrease net income by $14, decrease accumulated
other comprehensive income by $796, increase other liabilities by
$1,246 and increase other assets by $436.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral,
requires certain disclosures, but carries over most of the provisions
of SFAS No. 125 without reconsideration. This statement provides
consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140
is effective for transfers occurring after March 31, 2001. This
statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions
and collateral for fiscal years ending after December 15, 2000. This
statement has had no effect on the Company's earnings or financial
condition.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires that all business combinations be accounted for using the
purchase method. This statement applies to business combinations
initiated after June 30, 2001. SFAS No. 142, which is effective January
1, 2002, requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles such as
goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously
reported goodwill and the identification of reporting units for
purposes of assessing potential future impairment of goodwill. SFAS No.
142 also requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company
estimates that the elimination of goodwill amortization expense will
positively impact net income in 2002 by approximately $1,100. The
Company has not yet determined what impact, if any, the goodwill
impairment provisions may have on the Company's financial
6
7
statements.
3) ACQUISITION
On June 20, 2000, the Company completed the acquisition of Milton
Federal Financial Corporation ("Milton"). In connection with the
acquisition, the Company issued 965 common shares having a total value
of approximately $14,243 and paid cash of $14,073 to the Milton
shareholders. The acquisition is being accounted for as a purchase.
Accordingly, Milton's results of operations have been included from the
date of acquisition. Total assets added from this acquisition
approximated $259,194. The following summarizes the pro-forma results
of operations for the six months ended June 30, 2000 as if Milton had
been acquired as of the beginning of such period:
Net interest income $ 22,442
Net income 6,865
Basic earnings per share .78
Diluted earnings per share .77
4) COMPUTATION OF EARNINGS PER SHARE
The computation of earnings per share is as follows. All share and per
share amounts for the three month and six month periods ended June 30,
2001 have been adjusted to give retroactive effect to the 5% stock
dividend paid October 31, 2000:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Actual weighted average common shares outstanding 8,769 7,935 8,779 7,936
Dilutive common stock equivalents:
Stock options 34 -- 23 --
Bonus shares - Company match 20 15 20 15
------------- ------------- ------------- -------------
Weighted average common shares outstanding
adjusted for dilutive common stock equivalents 8,823 7,950 8,822 7,951
============= ============= ============= =============
Net income $ 3,962 $ 3,147 $ 7,810 $ 6,221
============= ============= ============= =============
Basic earnings per share $ 0.45 $ 0.40 $ 0.89 $ 0.78
============= ============= ============= =============
Diluted earnings per share $ 0.45 $ 0.40 $ 0.89 $ 0.78
============= ============= ============= =============
5) COMPREHENSIVE INCOME
The Company's comprehensive income, determined in accordance with SFAS
No. 130, was $4,139 and $2,819 for the three months ended June 30, 2001
and 2000, respectively, and $8,397 and $5,761 for the six months ended
June 30, 2001 and 2000, respectively.
7
8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BANCFIRST OHIO CORP.
For a comprehensive understanding of the Company's financial condition and
performance, this discussion should be considered in conjunction with the
Company's Consolidated Financial Statements, accompanying notes, and other
information contained elsewhere herein.
This discussion contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involves risks and uncertainties. Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. Factors that could cause
actual results to differ from the results discussed in the forward-looking
statements include, but are not limited to: economic conditions (both generally
and more specifically in the markets in which the Company and its bank
subsidiary operate); competition for the Company's customers from other
providers of financial services; government legislation and regulation (which
changes from time to time and over which the Company has no control); changes in
interest rates; prepayments of loans and securities; material unforeseen changes
in the liquidity, results of operations, or other financial position of the
Company's customers; and other risks detailed in the Company's Form 10-K for the
year ended December 31, 2000 and its other filings with the Securities and
Exchange Commission, all of which are difficult to predict and many of which are
beyond the control of the Company.
8
9
BANCFIRST OHIO CORP.
SELECTED FINANCIAL DATA:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AT OR FOR THE THREE MONTHS AT OR FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001 2000
-------------- -- -------------- ------------- --- --------------
STATEMENT OF INCOME DATA:
Interest income $ 29,674 $ 25,919 $ 59,958 $ 49,974
Interest expense 18,203 16,326 37,414 30,770
-------------- -------------- ------------- --------------
Net interest income 11,471 9,593 22,544 19,204
Provision for possible loan losses 495 450 960 900
Non-interest income 3,420 2,997 6,836 5,970
Non-interest expense 8,477 7,562 16,786 15,247
-------------- -------------- ------------- --------------
Income before income taxes 5,919 4,578 11,634 9,027
Provision for Federal income taxes 1,957 1,431 3,824 2,806
-------------- -------------- ------------- --------------
Net income $ 3,962 $ 3,147 $ 7,810 $ 6,221
============== ============== ============= ==============
PER SHARE DATA:
Basic earnings per share $ 0.45 $ 0.40 $ 0.89 $ 0.78
Diluted earnings per share 0.45 0.40 0.89 0.78
Dividends 0.145 0.138 0.290 0.276
Book value 12.82 10.81 N/A N/A
Tangible book value 10.43 8.12 N/A N/A
BALANCE SHEET DATA:
Total assets $ 1,520,960 $ 1,622,928 N/A N/A
Loans 1,085,848 1,103,821 N/A N/A
Allowance for possible loan losses 10,263 9,908 N/A N/A
Securities 324,613 393,626 N/A N/A
Deposits 1,131,366 1,038,427 N/A N/A
Borrowings 264,770 473,800 N/A N/A
Shareholders' equity 112,040 95,075 N/A N/A
PERFORMANCE RATIOS (1):
Return on average assets 1.01% 0.93% 1.01% 0.95%
Return on average equity 14.35 15.65 14.30 15.58
Tangible return on average tangible equity 19.72 21.38 19.75 20.82
Net interest margin 3.19 3.12 3.16 3.21
Interest rate spread 2.83 2.83 2.80 2.92
Non-interest income to average assets 0.88 0.89 0.88 0.91
Non interest expense to average assets (2) 2.04 2.11 2.03 2.20
Efficiency ratio (3) 53.20 55.72 53.37 56.46
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.87% 0.62% N/A N/A
Non-performing assets to total assets 0.74 0.45 N/A N/A
Allowance for possible loan losses to total loans 0.95 0.90 N/A N/A
Allowance for possible loan losses to non-performing 108.49 144.54 N/A N/A
loans
Net charge-offs to average loans (1) 0.15 0.03 0.16% 0.04%
CAPITAL RATIOS:
Shareholders' equity to total assets 7.37% 5.86% N/A N/A
Tier 1 capital to average total assets 7.24 7.48 N/A N/A
Tier 1 capital to risk-weighted assets 10.46 9.51 N/A N/A
(1) Ratios are stated on an annualized basis.
(2) Excludes amortization of goodwill and other identified intangibles.
(3) The efficiency ratio is equal to non-interest expense (excluding
amortization and non-recurring expenses) divided by net interest income on
a fully tax equivalent basis plus non-interest income excluding gains on
sales of securities.
9
10
OVERVIEW
The reported results of the Company primarily reflect the operations of the
Company's bank subsidiary. The Company's results of operations are dependent on
a variety of factors, including the general interest rate environment,
competitive conditions in the industry, governmental policies and regulations
and conditions in the markets for financial assets. Like most financial
institutions, the primary contributor to the Company's income is net interest
income, which is defined as the difference between the interest the Company
earns on interest-earning assets, such as loans and securities, and the interest
the Company pays on interest-bearing liabilities, such as deposits and
borrowings. The Company's operations are also affected by non-interest income,
such as checking account and trust fees and gains from sales of loans. The
Company's principal operating expenses, aside from interest expense, consist of
salaries and employee benefits, occupancy costs, federal deposit insurance
assessments, and other general and administrative expenses.
AVERAGE BALANCES AND YIELDS
The following tables present, for each of the periods indicated, the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and percentage rates, and the net
interest margin. Net interest margin is calculated by dividing net interest
income on a fully tax equivalent basis ("FTE"), by total interest-earning
assets. The net interest margin is influenced by the level and relative mix of
interest-earning assets and interest-bearing liabilities. FTE income includes
tax-exempt income, restated to a pre-tax equivalent, based on the statutory
federal income tax rate. All average balances are daily average balances.
Non-accruing loans are included in average loan balances.
10
11
THREE MONTHS ENDED JUNE 30,
2001 2000
----------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate(1) Balance Expense Rate(1)
---------------------------- -----------------------------
(Dollars in Thousands)
Securities:
Taxable $ 300,836 $ 5,373 7.16% $ 319,935 $ 5,935 7.46%
Tax exempt 25,822 519 8.06 30,233 651 8.66
--------- ------- --------- -------
Total
securities 326,658 5,892 7.23 350,168 6,586 7.56
Loans (2):
Commercial 511,002 11,394 8.94 439,630 9,911 9.07
Real Estate 447,290 9,131 8.19 367,514 7,198 7.88
Consumer 130,530 2,904 8.92 112,170 2,462 8.83
--------- ------- --------- -------
Total loans 1,088,822 23,429 8.63 919,314 19,571 8.56
Federal funds sold 50,298 547 4.36 323 5 6.23
--------- ------- --------- -------
Total earning
assets (3) 1,465,778 $29,868 8.17% 1,269,805 $26,162 8.29%
------- -------
Non-interest
earning
assets 101,220 90,099
---------- ----------
Total assets $1,566,998 $1,359,904
========== ==========
Interest-bearing
deposits:
Demand and
savings
deposits $ 293,624 $ 2,170 2.96% $ 224,780 $ 1,629 2.91%
Time deposits 776,360 11,420 5.90 553,038 7,845 5.71
--------- ------- --------- -------
Total deposits 1,069,984 13,590 5.09 777,818 9,474 4.90
Borrowings 296,389 4,613 6.24 423,762 6,852 6.50
--------- ------- --------- -------
Total
interest-
bearing
liabilities 1,366,373 $ 18,203 5.34% 1,201,580 $ 16,326 5.46%
-------- --------
Non-interest-
bearing
deposits 72,456 65,645
--------- ---------
Subtotal 1,438,829 1,267,225
Accrued expenses
and other
liabilities 17,407 11,815
--------- ---------
Total liabilities 1,456,236 1,279,040
Shareholders'
Equity 110,762 80,864
--------- ---------
Total liabilities
and shareholders'
equity $1,566,998 $1,359,904
========== ==========
Net interest
income and
interest rate
spread (4) $ 11,665 2.83% $ 9,836 2.83%
======== ==== ======= ====
Net interest
margin (5) 3.19% 3.12%
==== ====
Average interest-
earning assets
to average
interest-
bearing
liabilities 107.3% 105.7%
SIX MONTHS ENDED JUNE 30,
2001 2000
----------------------------- ----------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate(1) Balance Expense Rate(1)
----------------------------- ----------------------------
(Dollars in Thousands)
Securities:
Taxable $ 302,350 $ 11,101 7.40% $ 311,892 $11,540 7.44%
Tax exempt 26,059 1,038 8.03 30,051 1,298 8.69
--------- -------- --------- -------
Total
securities 328,409 12,139 7.45 341,943 12,838 7.55
Loans (2):
Commercial 501,299 22,538 9.07 432,493 19,377 9.01
Real Estate 459,167 18,679 8.20 351,836 13,560 7.75
Consumer 129,782 5,908 9.18 108,236 4,674 8.68
--------- -------- --------- -------
Total loans 1,090,248 47,125 8.72 892,565 37,611 8.47
Federal funds sold 44,349 1,083 4.92 243 8 6.62
--------- -------- --------- -------
Total earning
assets (3) 1,463,006 $ 60,347 8.32% 1,234,751 $50,457 8.22%
-------- -------
Non-interest
earning
assets 101,176 87,552
---------- ----------
Total assets $1,564,182 $1,322,303
========== ==========
Interest-bearing
deposits:
Demand and
savings
deposits $ 273,450 $ 4,091 3.02% $ 227,462 $ 3,243 2.87%
Time deposit 787,396 23,743 6.08 522,870 14,487 5.57
--------- ------- --------- -------
Total deposits 1,060,846 27,834 5.29 750,332 17,730 4.75
Borrowings 305,001 9,580 6.33 416,655 13,040 6.29
--------- ------- --------- -------
Total
interest-
bearing
liabilities 1,365,847 $ 37,414 5.52% 1,166,987 $30,770 5.30%
-------- -------
Non-interest
bearing
deposits 72,285 64,694
--------- ---------
Subtotal 1,438,132 1,231,681
Accrued expenses
and other
liabilities 15,882 10,348
--------- ---------
Total liabilities 1,454,014 1,242,029
Shareholders
Equity 110,168 80,274
--------- ---------
Total liabilities
and shareholders'
equity $1,564,182 $1,322,303
========== ==========
Net interest
income and
interest rate
rate spread (4) $ 22,933 2.80% $19,687 2.92%
======== ==== ======= ====
Net interest
margin (5) 3.16% 3,21%
==== ====
Average interest-
earning assets
to average
interest-
bearing
liabilities 107.1% 105.8%
(1) Calculated on an annualized basis.
(2) Non-accrual loans are included in the average loan balances.
(3) Interest income is computed on a fully tax equivalent (FTE) basis, using a
tax rate of 35%.
(4) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
11
12
RATE AND VOLUME VARIANCES
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table
discloses the dollar changes in the Company's net interest income attributable
to changes in levels of interest-earning assets or interest-bearing liabilities
(volume), changes in average yields on interest-earning assets and average rates
on interest-bearing liabilities (rate) and the combined volume and rate effects
(total). For the purposes of this table, the change in interest due to both rate
and volume has been allocated to volume and rate change in proportion to the
relationship of the dollar amounts of the change in each. In general, this table
provides an analysis of the effect on income of balance sheet changes, which
occurred during the periods, and the changes in interest rate levels.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 VS. 2000 2001 VS. 2000
INCREASE (DECREASE) INCREASE (DECREASE)
------------------- -------------------
(IN THOUSANDS) (IN THOUSANDS)
VOLUME RATE TOTAL VOLUME RATE TOTAL
----------- ------------ ------------ ----------- ----------- ----------
Interest-earning assets:
Securities:
Taxable $ (337) $ (225) $ (562) $ (378) $ (61) $ (439)
Non-taxable (90) (42) (132) (166) (94) (260)
-------- -------- -------- -------- -------- --------
Total securities (427) (267) (694) (544) (155) (699)
-------- -------- -------- -------- -------- --------
Loans:
Commercial 1,618 (135) 1,483 3,041 120 3,161
Real estate 1,636 297 1,933 4,296 823 5,119
Consumer 415 27 442 959 275 1,234
-------- -------- -------- -------- -------- --------
Total loans 3,669 189 3,858 8,296 1,218 9,514
Fed funds sold 544 (2) 542 1,078 (3) 1,075
-------- -------- -------- -------- -------- --------
Total interest-earning assets (1) 3,786 (80) 3,706 8,830 1,060 9,890
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
Demand and savings deposits 513 28 541 673 175 848
Time deposits 3,296 279 3,575 7,837 1,419 9,256
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 3,809 307 4,116 8,510 1,594 10,104
Borrowings (1,976) (263) (2,239) (3,542) 82 (3,460)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 1,833 44 1,877 4,968 1,676 6,644
-------- -------- -------- -------- -------- --------
Net interest income $ 1,953 $ (124) $ 1,829 $ 3,862 $ (616) $ 3,246
======== ======== ======== ======== ======== ========
(1) Computed on a fully tax equivalent basis, assuming a tax rate of 35%.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND
2000
Net Income. Net income for the three months ended June 30, 2001 increased 25.9%
to $4.0 million. Basic and diluted earnings per share in the second quarter of
2001 equaled $0.45, compared to $0.40 for the same period in 2000. Net interest
income increased 19.6% to $11.5 million from $9.6 million while non-interest
income increased 14.1% to $3.4 million from $3.0 million in the three months
ended June 30, 2001, as compared to the same period in 2000. Non-interest
expense increased 12.1% to $8.5 million in the three months ended June 30, 2001.
The provision for possible loan losses was $495,000 in 2001 compared to $450,000
in the prior year period. The Company's net interest margin was 3.19% for the
three months ended June 30, 2001 and 3.12% for the three months ended June 30,
2000. The net interest margin continued to benefit from declines in market
interest rates during the first six months of 2001 combined with the maturity of
higher costing certificates of deposit. Non-interest income increased primarily
due to higher levels of gains on sales of loans and other fee income offset by
lower levels of trust and custodian fees and financial planning fees.
Non-interest
12
13
expense increased primarily from expenses added by Milton, increased levels of
advertising expenses associated with deposit generating activities and
additional costs associated with fee income generating activities. The Company's
return on average assets and return on average equity were 1.01% and 14.35%,
respectively, in the second quarter of 2001, compared to .93% and 15.65%,
respectively, in the second quarter of 2000.
Interest Income. Total interest income increased 14.5% to $29.7 million for the
three months ended June 30, 2001, compared to $25.9 million for the second
quarter of 2000. This increase resulted from a $196.0 million increase in
average earning assets offset by a 12 basis point decrease in the average yield
on earning assets. The increase in average earning assets was due primarily to
assets added from the Milton acquisition.
The weighted average yield on interest-earning assets decreased to 8.17% during
the three months ended June 30, 2001, compared to 8.29% during the comparative
three month period in 2000. The Company's yield on average loans increased from
8.56% during the three months ended June 30, 2000 to 8.63% during the three
months ended June 30, 2001. This increase resulted primarily from higher market
rates throughout 2000, while decreases in market rates thus far in 2001 have not
fully impacted loan yields. Yields on the investment portfolio decreased from
7.56% during the second quarter of 2000 to 7.23% during the second quarter of
2001, reflecting lower market interest rates in 2001.
Interest Expense. Total interest expense increased 11.5% to $18.2 million for
the three months ended June 30, 2001, compared to $16.3 million for the three
months ended June 30, 2000. Interest expense increased due to a $164.8 million
increase in the average balance of interest-bearing liabilities, offset in part
by a 12 basis point decrease in the Company's cost of funds. The increase in
average interest-bearing liabilities was also attributed primarily to
interest-bearing deposits added by Milton. The average balance of
interest-bearing deposit accounts increased $292.2 million, or 37.6%, from the
second quarter in 2000 to the second quarter in 2001 while average borrowings
decreased $127.4 million, or 30.1%.
The Company's cost of funds decreased to 5.34% in the three months ended June
30, 2001 compared to 5.46% in the same period of 2000. The decrease in cost of
funds resulted primarily from decreased market interest rates combined with the
maturity of higher costing certificates of deposit that are being renewed at
lower current rates.
Provision for Possible Loan Losses. The provision for possible loan losses was
$495,000 for the three months ended June 30, 2001, compared to $450,000 in the
second quarter of 2000. The provision for possible loan losses was considered
sufficient by management for maintaining an adequate allowance for loan losses.
The increased provision in 2001 resulted primarily from increased loan levels as
well as a change in the mix of the loan portfolio.
Non-Interest Income. Total non-interest income was $3.4 million for the three
months ended June 30, 2001, compared to $3.0 million for the three months ended
June 30, 2000. The following table sets forth the Company's non-interest income
for the periods indicated:
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14
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
------- -------- ------- ------
(In thousands)
Trust and custodian fees $ 546 $ 707 $1,138 $1,357
Financial planning fees 258 409 557 756
Customer service fees 626 543 1,230 1,071
Gains on sales of loans 888 523 1,596 1,138
Other 1,010 815 2,120 1,648
Investment securities gains 92 -- 195 --
------ ------ ------ ------
TOTAL $3,420 $2,997 6,836 $5,970
====== ====== ====== ======
Trust and custodian fees decreased 22.8% to $546,000 in the second quarter of
2001 from $707,000 in the second quarter of 2000 while financial planning fees
decreased 36.9% to $258,000 in the second quarter of 2001 from $409,000 in the
second quarter 2000. These decreases are primarily due to market conditions that
have adversely affected sales of retail investment products and the market value
of assets under management.
Customer service fees, representing service charges on deposits and fees for
other banking services, increased 15.3% in the second quarter of 2001 to
$626,000 from $543,000 in the second quarter of 2000. Milton contributed $58,000
to the 2001 results.
Gains on sales of loans totaled $888,000 for the three months ended June 30,
2001 compared to $523,000 for the three months ended June 30, 2000. During the
second quarter of 2001, the Company sold $9.5 million of the guaranteed portion
of its SBA and other government guarantee loan originations in the secondary
market compared to $6.9 million during the second quarter of 2000, realizing
gains of $637,000 in 2001 compared to gains of $492,000 in 2000. Also, the
Company recorded gains of $251,000 from sales of residential loans during the
second quarter of 2001 compared to $31,000 in 2000. The increase in gains on
sales of residential loans has resulted from decreases in market interest rates
which has caused an increase in fixed rate loan origination activity.
The Company continues to place emphasis on its small business lending
activities, including the evaluation of expansion into new markets. The nature
of the political climate in Washington, D.C. may periodically subject many
existing government programs to much scrutiny and possible cutbacks. It is not
currently known whether the SBA program will be impacted. Management believes
that any such cutbacks could negatively affect the Company's activities in the
SBA lending programs as well as the planned expansion of such activities.
Other income increased $195,000 to $1.0 million in the second quarter of 2001
compared to $815,000 in the second quarter of 2000 primarily as a result of
higher levels of residential servicing income, earnings on bank owned life
insurance and electronic banking fees.
During the second quarter of 2001, the Company sold approximately $5.3 million
of investment securities, realizing gains of $92,000. Proceeds from these sales
were used to reduce borrowing levels. The Company had no sales of securities
during the second quarter of 2000.
14
15
Non-Interest Expense. Total non-interest expense increased $915,000 to $8.5
million in the three months ended June 30, 2001, compared to $7.6 million in the
three months ended June 30, 2000. Excluding non-interest expense attributed to
Milton, total non-interest expense increased $422,000 or 5.6%. The following
table sets forth the Company's non-interest expense for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
-------- --------- --------- ---------
(In thousands)
Salaries and employee benefits $ 4,559 $ 4,243 $ 9,029 $ 8,660
Net occupancy expense 531 481 1,090 1,008
Furniture, fixtures and equipment 294 228 585 470
Data processing 386 333 785 647
Taxes other than income taxes 254 193 497 431
Federal deposit insurance 54 42 108 84
Amortization of goodwill 281 170 562 279
Amortization of other identified intangibles 220 241 440 483
Other 1,898 1,631 3,690 3,185
------- ------- ------- -------
TOTAL $ 8,477 $ 7,562 $16,786 $15,247
======= ======= ======= =======
Salary and employee benefits expense increased $316,000, or 7.4% and accounted
for approximately 53.8% of total non-interest expense in the three months ended
June 30, 2001 compared to 56.1% in the second quarter of 2000. The average full
time equivalent staff was 403 in 2001 compared to 394 in 2000.
Net occupancy expense increased 10.4% to $531,000 for the second quarter of 2001
from $481,000 for the second quarter of 2000 primarily due to additional
expenses attributed to Milton.
Furniture, fixtures and equipment expense increased $66,000, or 28.9% in the
second quarter of 2001. This increase is primarily due to depreciation expense
attributed to fixed assets added by Milton.
Data processing expense increased $53,000, or 15.9%, in the second quarter of
2001. Increased costs in 2001 resulted from higher software and maintenance
costs related to continued technological enhancements to the Company's data
processing systems.
Taxes other than income taxes increased $61,000, or 31.6%, in the second quarter
of 2001 compared to the second quarter of 2000. This increase resulted primarily
from higher equity levels at December 31, 2000 (on which the 2001 tax is based)
compared to December 31, 1999 (on which the 2000 tax was based).
Federal deposit insurance expense increased $12,000 to $54,000 in 2001 from
$42,000 in the second quarter of 2000, reflecting higher levels of deposits in
2001.
Amortization of goodwill and other identified intangible assets in total
increased $90,000 in the second quarter of 2001 compared to the second quarter
of 2000 primarily due to additional amortization related to goodwill resulting
from the Milton acquisition.
Other non-interest expenses increased $267,000, or 16.4%, to $1.9 million for
the second quarter of 2001, primarily reflecting increased costs associated with
deposit and fee income generating 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
divided by the net revenue stream, which is the sum of net interest income on a
tax-equivalent basis and non-interest income excluding net investment securities
gains or losses. The Company's efficiency ratio was
15
16
53.2% for the second quarter of 2001, compared to 55.7% for the comparable
period in 2000. 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 Company's provision for Federal income taxes was
$2.0 million, or 33.1% of pretax income, for the three months ended June 30,
2001 compared to $1.4 million, or 31.3% of pretax income, for the three months
ended June 30, 2000. The effective tax rate for each period differed from the
federal statutory rate principally as a result of tax-exempt income from
obligations of states and political subdivisions and non-taxable loans, earnings
on bank-owned life insurance, and the non-deductibility, for tax purposes, of
goodwill and core deposit intangible amortization expense.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000.
Net Income. Net income for the six months ended June 30, 2001 increased 25.5% to
$7.8 million, or $.89 per basic and diluted share, compared to net income of
$6.2 million, or $.78 per share, for the six months ended June 30, 2000. Net
interest income increased 17.4% to $22.5 million from $19.2 million and
non-interest income increased 14.5% to $6.8 million from $6.0 million in the six
months ended June 30, 2001, as compared to the same period in 2000. Non-interest
expense increased 10.1% to $16.8 million in the six months ended June 30, 2001.
The Company's net interest margin decreased to 3.16% for the six months ended
June 30, 2001 compared to 3.21% for the same period in 2000. The Company's
return on average assets and return on average equity were 1.01% and 14.30%,
respectively, for the six months ended June 30, 2001, compared to .95% and
15.58%, respectively, for the six months ended June 30, 2000.
Interest Income. Total interest income increased 20.0% to $60.0 million for the
six months ended June 30, 2001, compared to $50.0 million for the comparable
period in 2000. This increase resulted from higher levels of earning assets, and
a 10 basis point increase in the average yield on interest-earning assets.
Average earning assets increased $228.3 million to $1.46 billion for the six
months ended June 30, 2001 from $1.23 billion in 2000. This increase was
primarily attributed to assets added by Milton.
The weighted average yield on interest-earning assets increased to 8.32% during
the six months ended June 30, 2001, compared to 8.22% during the same six month
period in 2000. The Company's yield on average loans increased from 8.47% during
the six months ended June 30, 2000 to 8.72% during the six months ended June 30,
2001. The increase in yield has resulted primarily from increases in market
interest rates throughout 2000, while decreases in market rates thus far in 2001
have not fully impacted loan yields. Yields on the investment portfolio
decreased from 7.55% during 2000 to 7.45% during 2001, due primarily to
decreases in market interest rates.
Interest Expense. Total interest expense increased 21.6% to $37.4 million for
the six months ended June 30, 2001, compared to $30.8 million for the six months
ended June 30, 2000. Interest expense increased due to a higher average balance
of interest-bearing liabilities during the first six months of 2001, as compared
to the same period in 2000. The average balance of interest-bearing liabilities
increased 17.0%, from $1.17 billion during the six months ended June 30, 2000 to
$1.37 billion during the six months ended June 30, 2001.
The Company's cost of funds increased to 5.52% for the six months ended June 30,
2001 compared to 5.30% for the same period of 2000. As with loan yields
discussed above, the increase in the cost of funds compared to the year ago
period has resulted from increases in short-term rates during 2000. With the
decline in short-term market interest rates during the first six months of 2001,
the Company has experienced a reduction in its average cost of funds from 5.81%
in the fourth quarter of 2000 and 5.71% in the first quarter of 2001 as a result
of the maturity of higher costing certificates of deposit that are being renewed
at lower current rates.
Provision for Possible Loan Losses. The provision for possible loan losses was
$960,000 for the six months ended June 30, 2001, compared to $900,000 for the
six months ended June 30, 2000 and was considered sufficient to maintain the
Company's allowance for possible loan losses at an adequate level. The increased
provision in 2001 resulted primarily from increases in loan levels, as well as a
change in the mix of the loan portfolio.
Non-Interest Income. Total non-interest income was $6.8 million for the six
months ended June 30, 2001, compared to $6.0 million for the six months ended
June 30, 2000.
16
17
Trust and custodian fees decreased 16.1% to $1.1 million for the six months
ended June 30, 2001 compared to $1.4 million for the year ago period while
financial planning fees decreased $199,000 to $557,000 for the year to date 2001
period compared to $756,000 in 2000. As noted previously, market conditions have
adversely affected sales of retail investment products and the market value of
assets under management.
Customer service fees increased $159,000, or 14.8%, for the six months ended
June 30, 2001 to $1.2 million. Milton contributed $114,000 to the 2001 results.
Gains on sales of loans increased from $1.1 million for the six months ended
June 30, 2000 to $1.6 million for the comparable period in 2001. In 2001, the
Company sold $15.1 million of the guaranteed portion of its SBA and other
government guaranteed loan originations in the secondary market compared to
$15.5 million in 2000, realizing gains of $1.2 million in 2001 compared to gains
of $1.1 million in 2000. In addition, the Company sold $23.2 million of
residential real estate loans realizing gains of $360,000 in the first six
months of 2001 compared to $46,000 of gains on sales of loans totaling $3.0
million in 2000. Residential real estate loan sale volume in 2001 benefited from
the lower interest rate environment compared to 2000.
Other income increased $472,000 to $2.1 million for the first six months of 2001
compared to $1.6 million for the year ago period primarily as a result of higher
levels of loan servicing income attributed to higher serviced loan balances,
earnings on bank-owned life insurance and electronic banking fees.
Non-Interest Expense. Total non-interest expense increased $1.5 million, or
10.1%, to $16.8 million for the six months ended June 30, 2001, compared to
$15.2 million for the six months ended June 30, 2000. Excluding non-interest
expense attributed to Milton, total non-interest expense increased $477,000, or
3.1%. For the six months ended June 30, 2000, the Company's efficiency ratio was
53.4%, compared to 56.5% for the six months ended June 30, 2000.
Salary and employee benefits expense increased $369,000, or 4.3% primarily due
to employees added by Milton. Salaries and employee benefits accounted for
approximately 53.8% of total non-interest expense for the six months ended June
30, 2001 compared to 56.8% in 2000. The average full time equivalent staff was
405 in 2001 compared to 389 in 2000.
Net occupancy expense increased 8.1% to $1.1 million for the first six months of
2001 from $1.0 million for the first six months of 2000. Milton added $137,000
to the year to date 2001 results.
Furniture, fixtures and equipment expense increased $115,000, or 24.5%,
primarily due to depreciation expense attributed to Milton's fixed assets.
Data processing expense increased $138,000, or 21.3%, for the six months ended
June 30, 2001. Higher costs in 2001 resulted primarily from higher depreciation
and amortization of equipment and software enhancements due to technological
advancements.
Taxes other than income taxes increased $66,000, or 15.3%, for the first six
months 2001 compared to the same period in 2000. This increase resulted
primarily from higher equity levels, previously discussed.
Federal deposit insurance expense increased $24,000 to $108,000 in 2001 from
$84,000 in 2000, reflecting higher levels of deposits in 2001.
Amortization of goodwill and other identified intangible assets in total
increased $240,000 to $1.0 million during the first six months of 2001 compared
to $762,000 in 2000. This increase was primarily due to amortization related to
goodwill resulting from the Milton acquisition.
Other non-interest expenses increased $505,000, or 15.9%, for the six months
ended June 30, 2001 compared to the same period in 2000, reflecting higher costs
associated with deposit and fee income generating initiatives and higher levels
of legal expense associated with loan collection activities.
Provision for Income Taxes. The Company's provision for Federal income taxes was
$3.8 million, or 32.9% of pretax income, for the six months ended June 30, 2001
compared to $2.8 million, or 31.1% of pretax income, for the six months
17
18
ended June 30, 2000. The effective tax rate for each period differed from the
federal statutory rate principally as a result of tax-exempt income from
obligations of states and political subdivisions and non-taxable loans, earnings
on bank-owned life insurance, and the non-deductibility, for tax purposes, of
goodwill and core deposit intangible amortization expense.
ASSET QUALITY
Non-performing Assets. To maintain the level of credit risk of the loan
portfolio at an appropriate level, management sets underwriting standards and
internal lending limits and provides for proper diversification of the portfolio
by placing constraints on the concentration of credits within the portfolio. In
monitoring the level of credit risk within the loan portfolio, management
utilizes a formal loan review process to monitor, review, and consider relevant
factors in evaluating specific credits in determining the adequacy of the
allowance for possible loan losses. The Company's banking subsidiary formally
documents its evaluation of the adequacy of the allowance for possible loan
losses on a quarterly basis and the evaluation is reviewed and discussed with
its board of directors.
Failure to receive principal and interest payments when due on any loan results
in efforts to restore such loan to current status. Loans are classified as
non-accrual when, in the opinion of management, full collection of principal and
accrued interest is in doubt. Continued unsuccessful collection efforts
generally lead to initiation of foreclosure or other legal proceedings. Property
acquired by the Company as a result of foreclosure or by deed in lieu of
foreclosure is classified as "other real estate owned" until such time as it is
sold or otherwise disposed of. The Company owned $1.8 million of such property
at June 30, 2001 and $529,000 at June 30, 2000. Other real estate owned at June
30, 2001 consisted of $1.3 million of single-family residential property,
$296,000 of commercial real estate and $156,000 of land.
Non-performing assets totaled $11.2 million, or .74% of total assets at June 30,
2001, compared to $7.4 million, or .45% of total assets at June 30, 2000.
Non-performing loans totaled $9.5 million, or .87% of total loans, at June 30,
2001, compared to $6.9 million, or .62% of total loans, at June 30, 2000.
Residential mortgage loans represented $5.9 million, or 62.5%, of total
non-performing loans at June 30, 2001. The largest non-performing loan at June
30, 2001 had an outstanding principle balance of $768,000. The increase in
non-performing loans from June 30, 2000 resulted equally from increases in
non-performing single-family residential mortgage loans and commercial loans.
The following is an analysis of the composition of non-performing assets:
JUNE 30,
2001 2000
-------- --------
(DOLLARS IN THOUSANDS)
Non-accrual loans $ 6,082 $ 3,931
Accruing loans 90 days or more past due 3,378 2,924
------- -------
Total non-performing loans 9,460 6,855
Other real estate owned 1,762 529
------- -------
Total non-performing assets $11,222 $ 7,384
======= =======
Restructured loans $ 3,241 $ 2,977
======= =======
Non-performing loans to total loans 0.87% 0.62%
Non-performing assets to total assets 0.74% 0.45%
Non-performing loans plus restructured loans to total loans 1.17% 0.89%
Non-performing assets plus restructured loans to total assets 0.95% 0.64%
Restructured loans at June 30, 2001 includes one loan with an outstanding
balance of $2.9 million that was restructured in May 1999 and has been
performing in accordance with its restructured terms since such time. The
remainder of the balance at June 30, 2001 represents various loans
collateralized by single family residential properties that are performing in
accordance with modified payment terms approved by the bankruptcy courts.
The aggregate amounts of the Company's classified assets as of June 30, 2001 and
2000 were as follows:
18
19
JUNE 30,
2001 2000
-------------- --------------
(IN THOUSANDS)
Substandard $20,669 $12,051
Doubtful 56 280
------- -------
Total $20,725 $12,331
======= =======
The increase in classified assets at June 30, 2001 compared to June 30, 2000 was
attributed to a $1.2 million increase in residential real estate mortgage loans
past due greater than 90 days that are classified as substandard, a $1.8 million
increase in commercial real estate loans, a $2.3 million increase in commercial
loans (principally SBA loans) and the classification of a $1.1 million corporate
debt security and a $2.0 million bank-issued trust preferred security. The
largest classified asset at June 30, 2001 was the $2.9 million restructured
loan, discussed previously.
Allowance for Possible Loan Losses. The Company records a provision necessary to
maintain the allowance for possible loan losses at a level sufficient to provide
for potential future credit losses. The provision is charged against earnings
when it is established. An allowance for possible loan losses is established
based on management's best judgment, which involves a continuing review of
prevailing national and local economic conditions, changes in the size and
composition of the portfolio and review of individual problem credits. Growth of
the loan portfolio, loss experience, economic conditions, delinquency levels,
credit mix, and selected credits are factors that affect judgments concerning
the adequacy of the allowance. Actual losses on loans are charged against the
allowance.
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20
The following table summarizes the Company's loan loss experience, and provides
a breakdown of the allowance for possible loan losses at the dates indicated.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
--------------- --------------- --------------- --------------
(IN THOUSANDS)
Balance at beginning of period $ 10,169 $ 7,761 $ 10,150 $ 7,431
Provision charged to expense 495 450 960 900
Loans charged-off (519) (235) (1,023) (488)
Recoveries of loans previously charged off 118 159 176 292
Acquired allowance for loan loss -- 1,773 -- 1,773
----------- ----------- ----------- -----------
Balance at end of period $ 10,263 $ 9,908 $ 10,263 $ 9,908
=========== =========== =========== ===========
Loans outstanding at end of period $ 1,085,848 $ 1,103,821 N/A N/A
Average loans outstanding $ 1,088,822 $ 919,314 $ 1,090,248 $ 892,565
Allowance as a percentage of loans outstanding 0.95% 0.90% N/A N/A
Net charge-offs to average loans (annualized) 0.15% 0.03% 0.16% 0.04%
Allowance for possible loan losses to non-performing
loans 108.49% 144.54% N/A N/A
The allowance for possible loan losses totaled $10.3 million at June 30, 2001,
representing .95% of total loans, compared to $9.9 million at June 30, 2000, or
.90% of total loans. Charge-offs represent the amount of loans actually removed
as earning assets from the balance sheet due to uncollectibility. Amounts
recovered on previously charged-off assets are netted against charge-offs,
resulting in net charge-offs for the period. Net loan charge-offs for the three
months and six months ended June 30, 2001 were $401,000 and $847,000,
respectively, compared to net charge-offs of $76,000 and $196,000, respectively,
for the same periods in 2000. The increase in net charge-offs in 2001 compared
to 2000 is primarily attributed to the historically low levels of charge-offs in
2000 as well as to increases in delinquency trends in general. 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 108.5% at June 30, 2001, compared to 144.5% at June 30,
2000. 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,
particularly given the extent to which the Company's non-performing loans
consist of single-family residential mortgage loans.
COMPARISON OF JUNE 30, 2001 AND DECEMBER 31, 2000 FINANCIAL CONDITION
Total assets amounted to $1.52 billion at June 30, 2001, compared to $1.56
billion at December 31, 2000, a decrease of $38.6 million, or 2.5% from December
31, 2000. Total investment securities decreased by $5.6 million to $324.6
million, primarily as a result of sales of securities during the first six
months of 2001. The Company's general investment strategy is to manage the
portfolio to include rate sensitive assets, matched against interest sensitive
liabilities to reduce interest rate risk. In recognition of this strategy, as
well as to provide a secondary source of liquidity to accommodate loan demand
and possible deposit withdrawals, the Company has chosen to classify the
majority of its investment securities as available-for-sale. At June 30, 2001,
96.4% 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 3.6%. This compares to 95.9% and 4.1% classified as
available-for-sale and held to maturity, respectively, at December 31, 2000.
Total loans decreased $3.8 million to $1.09 billion at June 30, 2001. This
decrease consists of a $37.1 million decrease in residential loans and a $4.5
million decrease in consumer loans offset in part by a $37.8 million increase in
commercial and commercial real estate loans. Management continues to emphasize
increasing earning assets and improving earning asset yields by increasing and
changing the mix of the loan portfolio. The decrease in residential loans has
resulted
20
21
primarily from the lower interest rate environment during the first six months
of 2001 which has led to increased refinancing and loan sale activity.
Other assets increased $2.0 million from $36.4 million at December 31, 2000 to
$38.4 million at June 30, 2001 primarily as a result of increases in other real
estate owned and prepaid expenses.
Total deposits increased $17.8 million to $1.13 billion at June 30, 2001 from
$1.11 billion at December 31, 2000. The Company continues to emphasize growth in
its existing retail deposit base provided incremental deposit growth is cost
effective compared to alternative funding sources. Total interest-bearing
deposits accounted for 93.7% of total deposits at June 30, 2001, compared to
93.1% at December 31, 2000.
Total borrowings, including federal funds purchased, decreased $60.6 million to
$264.8 million at June 30, 2001, compared to $325.4 million at December 31,
2000. This decrease resulted primarily from the use of federal funds sold and
other liquidity generated by increases in deposits and decreases in the loan and
securities portfolios to reduce borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The objective of liquidity management is to ensure the availability of funds to
accommodate customer loan demand, as well as deposit withdrawals while
continuously seeking higher yields from longer term lending and investing
opportunities. This is accomplished principally by maintaining sufficient cash
flows and liquid assets along with consistent stable core deposits and the
capacity to maintain immediate access to funds. These immediately accessible
funds may include federal funds sold, unpledged marketable securities, reverse
repurchase agreements or available lines of credit from the Federal Reserve
Bank, Federal Home Loan Bank (FHLB), or other financial institutions. An
important factor in the preservation of liquidity is the maintenance of public
confidence, as this facilitates the retention and growth of a large, stable
supply of core deposits in funds.
The Company's principal source of funds to satisfy short-term liquidity needs
comes from cash, due from banks, federal funds sold and borrowing capabilities
through the FHLB as well as other sources. Changes in the balance of cash and
due from banks are due to changes in volumes of federal funds sold and the float
and reserves related to deposit accounts, which may fluctuate significantly on a
day-to-day basis. The investment portfolio serves as an additional source of
liquidity for the Company. Securities with a market value of $312,805 million
were classified as available-for-sale as of June 30, 2001, representing 96.4% of
the total investment portfolio. Classification of securities as
available-for-sale provides for flexibility in managing net interest margin,
interest rate risk, and liquidity.
The Company's bank subsidiary is a member of FHLB. Membership provides an
opportunity to control the bank's cost of funds by providing alternative funding
sources, to provide flexibility in the management of interest rate risk through
the wide range of available funding sources, to manage liquidity via immediate
access to such funds, and to provide flexibility through utilization of
customized funding products to fund various loan and investment products and
strategies.
On June 20, 2000, the Company completed the acquisition of Milton. In connection
with the acquisition, the Company issued 965 common shares having a total value
of approximately $14.2 million and paid cash of $14.1 million to the Milton
shareholders. The acquisition was accounted for as a purchase. Accordingly,
Milton's results of operations have been included from the date of acquisition.
On October 18, 1999, the Company completed an offering of $20.0 million
aggregate liquidation amount of 9.875% Capital Securities, Series A, due 2029.
These securities represent preferred beneficial interests in BFOH Capital Trust
I, a special purpose trust formed for the purpose of the offering. The proceeds
from the offering were used by the Trust to purchase Junior Subordinated
Deferrable Interest Debentures ("Debentures") from the Company. Under Federal
Reserve Board regulations, these Capital Securities may represent up to 25% of a
bank holding company's Tier 1 capital. The holders of the Capital Securities are
entitled to receive cumulative cash distributions at the annual rate of 9.875%
of the liquidation amount. Distributions are payable semi-annually on April 15
and October 15 of each year, beginning on April 15, 2000. The Company has fully
and unconditionally guaranteed the payment of the Capital Securities, and
payment of distributions on the Capital Securities. The Trust is required to
redeem the Capital Securities on or, in certain
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circumstances, prior to October 15, 2029. There are no significant covenants or
limitations with respect to the business of the Company that is contained in the
instruments which govern the Capital Securities and the Debentures.
The Company obtained a $15 million term loan with a financial institution in
order to partially fund the 1996 acquisition of County Savings Bank. This loan,
which was amended September 29, 2000, had an outstanding balance of $8.0 million
at June 30, 2001. Under the terms of the loan agreement, the Company is required
to make quarterly interest payments and annual principal payments of $1.0
million commencing September 30, 2001. The unpaid loan balance is due in full
September 1, 2007. Also, the Company has pledged 67% of the stock of FNB as
security for the loan. The loan agreement contains certain financial covenants
which require 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 June 30, 2001, 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 June 30, 2001 was $112.0 million, compared to
shareholders' equity at December 31, 2001 of $107.1 million, an increase of $4.9
million. This increase resulted primarily from the retention of earnings, net of
dividends paid. The Company's board of directors had authorized a 350,000 common
share repurchase program which was completed during the second quarter of 2001.
Additional repurchase authorizations are expected to be evaluated on an ongoing
basis as an effective capital management tool.
Under the risk-based capital guidelines, a minimum capital to risk-weighted
assets ratio of 8.0% is required, of which, at least 4.0% must consist of Tier 1
capital (equity capital net of goodwill). Additionally, a minimum leverage ratio
Tier 1 capital to total assets) of 3.0% must be maintained. At June 30, 2000,
the Company had a total risk-based capital ratio of 11.4%, of which 10.5%
consisted of Tier 1 capital. The leverage ratio for the Company at June 30,
2001, was 7.2%.
Cash dividends declared to shareholders of the Company totaled $2.6 million, or
$0.29 per share, during the first six months of 2001. This compares to dividends
of $2.2 million, or $0.28 per share, for the same period in 2000. Cash dividends
paid as a percentage of net income amounted to 32.6% and 35.4% for the six
months ended June 30, 2001 and 2000, respectively.
The Company's net interest margin during the first half of 2001 continued to
benefit from declines in market interest rates combined with the maturity of
higher costing certificates of deposit. The Company anticipates that further
improvement in its net interest margin in future quarters may be minimal as
continued declines in the Company's cost of funds in the current interest rate
environment are likely to be substantially offset by the impact of prepayments
and re-pricing of higher yielding assets.
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 understanding or agreements for any
acquisition or combination.
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.
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ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of their Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio equity, see "Management's Discussion and Analysis -
Interest Rate Risk Management" in the Company's Form 10-K for the year ended
December 31, 2000. The following summarizes the Company's simulations of net
interest income and net present value (NPV) as of March 31, 2001, the most
recent period for which this information is available:
PROJECTED CHANGE % CHANGE FROM
CHANGE IN INTEREST RATES AMOUNT FROM BASE BASE
------------------------ ------ --------- ----
(In thousands)
Net Interest Income:
200 Basis point increase $ 46,261 $ (448) (0.96)%
Base scenario - no change 46,709 N/A N/A
200 Basis point decrease 46,652 (57) (0.12)%
Net Present Value (NPV):
200 Basis point increase 91,222 (12,055) (11.67)%
Base scenario - no change 103,277 N/A N/A
200 Basis point decrease 91,357 (11,920) (11.54)%
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 19, 2001, the Company held its Annual Meeting of Shareholders,
the results of which follows:
1. To approve and ratify the appointment of Pricewaterhouse
Coopers, L.L.P. as independent auditors for the year ended
December 31, 2001:
Abstaining/
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
6,781,082 15,652 18,712
2. Election of Class II directors:
Votes Against/
Votes For Withheld
--------- --------------
Philip E. Burke 6,781,528 33,918
Gary N. Fields 6,472,333 343,113
James L. Nichols 6,778,249 37,197
ITEM 5. OTHER INFORMATION
The proxy holders for the 2002 annual meeting of shareholders will use
their discretion in voting on any and all matters brought before the
2002 annual meeting which were not provided to the Company in an advance
notice on or prior to February 19, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-K
Exhibit 3(a) - Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to Company's Form 10-K for year ended December
31, 1991, Exhibit 3.3 to the Company's Form 10-K for the year ended
December 31, 1992 and Exhibit 3.6 to the Company's Form 10-K for the
year ended December 31, 1994).
Exhibit 3(b) - Code of Regulations, as amended (incorporated by
reference to Exhibit 3.2 to the Company's Form 10-K for the year ended
December 31, 1991, Exhibit 3.4 to the Company's Form 10-K for the year
ended December 31, 1992 and Exhibit 3.5 to the Company's Form 10-K for
the year ended December 31, 1993).
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BancFirst Ohio Corp.
(Registrant)
Date: August 10, 2001 (Signed) /s/ GARY N. FIELDS
----------------------------------------
Gary N. Fields
President and
Chief Executive Officer
Date: August 10, 2001 (Signed) /s/ KIM M. TAYLOR
----------------------------------------
Kim M. Taylor
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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