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 September 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 October 28, 2001
----- ----------------------------------
Common Stock, No Par Value 8,739,670
1
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.............................................................. 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................................... 9-22
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) Reports on Form 8-K
Signatures .............................................................................................................. 25
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BANCFIRST OHIO CORP.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS: SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
----------- -----------
Cash and due from banks $ 29,428 $ 32,511
Federal Funds sold 39 30,159
Securities held-to-maturity, at amortized cost
(approximate fair value of $10,806 and
$13,496 in 2001 and 2000, respectively) 10,468 13,453
Securities available-for-sale, at fair value 303,561 316,793
----------- -----------
Total securities 314,029 330,246
----------- -----------
Loans, net of unearned income 1,076,703 1,089,651
Allowance for possible loan losses (10,279) (10,150)
----------- -----------
Net loans 1,066,424 1,079,501
----------- -----------
Bank premises and equipment, net 18,011 18,385
Accrued interest receivable 9,711 10,503
Goodwill 18,612 19,453
Other identified intangible assets 1,830 2,436
Other assets 38,747 36,407
----------- -----------
Total assets $ 1,496,831 $ 1,559,601
=========== ===========
LIABILITIES:
Deposits:
Non-interest-bearing deposits $ 76,113 $ 76,833
Interest-bearing deposits 1,022,547 1,036,722
----------- -----------
Total deposits 1,098,660 1,113,555
----------- -----------
Federal Home Loan Bank advances and other borrowings 266,668 325,368
Accrued interest payable 4,553 6,343
Other liabilities 11,596 7,193
----------- -----------
Total liabilities $ 1,381,477 $ 1,452,459
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par or stated value, 20,000,000 shares
authorized, 9,534,261and 9,517,612 shares issued in 2001
and 2000, respectively 87,050 86,855
Retained earnings 46,940 38,898
Accumulated other comprehensive income (626) (1,782)
Treasury stock, 795,427 and 734,629 shares, at cost, in 2001
and 2000, respectively (18,010) (16,829)
----------- -----------
Total shareholders' equity 115,354 107,142
----------- -----------
Total liabilities and shareholders' equity $ 1,496,831 $ 1,559,601
=========== ===========
The accompanying notes are an integral part of the financial statements.
3
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------- ------- ------- -------
Interest Income:
Interest and fees on loans $22,489 $23,853 $69,589 $61,435
Interest and dividends on securities:
Taxable 5,097 6,504 16,199 18,045
Tax-exempt 344 420 1,017 1,263
Other interest income 42 17 1,125 25
------- ------- ------- -------
Total interest income 27,972 30,794 87,930 80,768
------- ------- ------- -------
Interest expense:
Deposits 12,101 13,310 39,935 31,040
Borrowings 4,248 6,660 13,828 19,700
------- ------- ------- -------
Total interest expense 16,349 19,970 53,763 50,740
------- ------- ------- -------
Net interest income 11,623 10,824 34,167 30,028
Provision for possible loan losses 510 450 1,470 1,350
------- ------- ------- -------
Net interest income after provision for
possible loan losses 11,113 10,374 32,697 28,678
------- ------- ------- -------
Other income:
Trust and custodian fees 694 645 1,832 2,002
Financial planning fees 193 403 750 1,159
Customer service fees 660 668 1,890 1,739
Gain on sales of loans 873 769 2,469 1,907
Other 989 919 3,109 2,567
Investment securities gains, net 67 256 262 256
------- ------- ------- -------
Total other income 3,476 3,660 10,312 9,630
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 4,564 4,480 13,593 13,140
Net occupancy expense 545 545 1,635 1,553
Amortization of goodwill 278 278 840 557
Amortization of other identified intangibles 167 234 607 717
Other 3,014 2,768 8,679 7,585
------- ------- ------- -------
Total non-interest expense 8,568 8,305 25,354 23,552
------- ------- ------- -------
Income before income taxes 6,021 5,729 17,655 14,756
Provision for Federal income taxes 1,971 1,887 5,795 4,693
------- ------- ------- -------
Net income $ 4,050 $ 3,842 $11,860 $10,063
======= ======= ======= =======
Basic earnings per share $ 0.46 $ 0.44 $ 1.35 $ 1.22
======= ======= ======= =======
Diluted earnings per share $ 0.46 $ 0.44 $ 1.34 $ 1.22
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 8,742 8,789 8,766 8,223
======= ======= ======= =======
Diluted 8,818 8,804 8,821 8,238
======= ======= ======= =======
Cash dividends per common share $ 0.145 $ 0.138 $ 0.435 $ 0.414
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
4
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 11,860 $ 10,063
Adjustment to reconcile net income to net cash
provided by operations:
Depreciation and amortization 3,462 4,095
Provision for possible loan losses 1,470 1,350
Gain on sales of assets (2,742) (2,274)
Decrease (increase) in interest receivable 792 (783)
Increase in other assets (4,280) (2,798)
Increase (decrease) in interest payable (1,790) 711
Increase (decrease) in other liabilities 1,756 (5,383)
FHLB stock dividend (1,171) (1,038)
--------- ---------
Net cash provided by operating activities 9,357 3,943
--------- ---------
Cash flows from investing activities:
(Increase) decrease in federal funds sold and short term investments 30,120 (14)
Proceeds from maturities of securities held-to-maturity 2,958 4,479
Proceeds from maturities and sales of securities available-for-sale 58,633 88,804
Purchase of securities available-for-sale (39,631) (28,398)
Increase in loans, net (47,961) (134,213)
Purchases of equipment and other assets (1,160) (1,504)
Proceeds from sales of loans 63,000 37,405
Acquisition of Milton Federal Financial Corp., net of cash acquired -- (23,241)
--------- ---------
Net cash provided by (used in) investing activities 65,959 (56,682)
--------- ---------
Cash flows from financing activities:
Decrease in federal funds purchased -- (24,100)
Decrease in Federal Home Loan Bank advances and other borrowings (58,700) (69,570)
Net increase (decrease) in deposits (14,895) 136,770
Cash dividends paid (3,818) (3,366)
Issuance (purchase) of stock, net (986) 11,200
---------
---------
Net cash provided by (used in) financing activities (78,399) 50,934
--------- ---------
Net decrease in cash and due from banks (3,083) (1,805)
Cash and due from banks, beginning of period 32,511 32,191
--------- ---------
Cash and due from banks, end of period $ 29,428 $ 30,386
========= =========
The accompanying notes are an integral part of the financial statements
5
BANCFIRST OHIO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine month periods
ended September 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 $60,000 and $64,375 at September 30, 2001 and
December 31, 2000, respectively. The impact on the Company's
consolidated financial statements as of September 30, 2001 and for the
nine month period then ended was to decrease net income by $31,
decrease accumulated other comprehensive income by $1,720, increase
other liabilities by $2,694 and increase other assets by $943.
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, changes financial accounting and reporting of acquired
goodwill and other intangibles. 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 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
6
assets added from this acquisition approximated $259,194. The following
summarizes the pro-forma results of operations for the nine months
ended September 30, 2000 as if Milton had been acquired as of the
beginning of such period:
Net interest income $ 33,266
Net income 10,692
Basic earnings per share 1.21
Diluted earnings per share 1.21
4) COMPUTATION OF EARNINGS PER SHARE
The computation of earnings per share is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------- ------- ------- -------
Actual weighted average common shares outstanding 8,742 8,789 8,766 8,223
Dilutive common stock equivalents:
Stock options 56 -- 35 --
Bonus shares - Company match 20 15 20 15
------- ------- ------- -------
Weighted average common shares outstanding
adjusted for dilutive common stock equivalents 8,818 8,804 8,821 8,238
======= ======= ======= =======
Net income $ 4,050 $ 3,842 $11,860 $10,063
======= ======= ======= =======
Basic earnings per share $ 0.46 $ 0.44 $ 1.35 $ 1.22
======= ======= ======= =======
Diluted earnings per share $ 0.46 $ 0.44 $ 1.34 $ 1.22
======= ======= ======= =======
5) COMPREHENSIVE INCOME
The Company's comprehensive income, determined in accordance with SFAS
No. 130, was $4,619 and $5,533 for the three months ended September 30,
2001 and 2000, respectively, and $13,016 and $11,291 for the nine
months ended September 30, 2001 and 2000, respectively.
6) PENDING MERGER
On September 5, 2001, the Company and UNB Corp. ("UNB") agreed to a
combination structured as a merger of equals pursuant to the terms of
an Agreement of Merger and Plan of Reorganization ("Agreement"). If
consummated, the Company will merge into UNB and UNB will issue 1.325
shares of common stock in exchange for each share of the Company's
common stock. Cash will be paid for any fractional shares. This merger
is subject to the approval of the shareholders of both companies,
regulatory approvals and other customary conditions of closing. The
Company and UNB also entered into stock option agreements (the "Stock
Option Agreements") pursuant to one of which UNB granted the Company
the right, upon the terms and subject to the conditions set forth
therein, to purchase up to 1,561,064 shares of UNB common stock at a
price of $18.50 per share, and pursuant to the other of which the
Company granted UNB the right, upon the terms and subject to the
conditions set forth therein, to purchase up to 1,302,533 shares of the
Company's common stock at a price of $20.95 per share. The number of
shares subject to each of the Stock Option Agreements represents
7
approximately 14.9% of the voting power of the holders of securities of
each party in the election of directors of that party.
The merger will be accounted for under the purchase method of
accounting. For accounting purposes, the Company has been determined to
be the acquiror and will record the fair market value of UNB's assets
and liabilities in its financial statements. The difference between the
purchase price of approximately $175.1 million and the fair market
value of the identified net assets will be recorded as goodwill.
At September 30, 2001, UNB had total assets of $1.1 billion, loans of
$906.5 million, deposits of $823.9 million and shareholders equity of
$83.6 million. For the nine months ended September 30, 2001, UNB
reported net income of $11.6 million.
For further information, see the Company's Current Report on Form 8-K
dated September 6, 2001, which is incorporated herein by reference.
8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BANCFIRST OHIO CORP.
For a comprehensive understanding of the Company's financial condition and
performance, this discussion should be considered in conjunction with the
Company's Consolidated Financial Statements, accompanying notes, and other
information contained elsewhere herein.
This discussion contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involves risks and uncertainties. Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. Factors that could cause
actual results to differ from the results discussed in the forward-looking
statements include, but are not limited to: economic conditions (both generally
and more specifically in the markets in which the Company and its bank
subsidiary operate); competition for the Company's customers from other
providers of financial services; government legislation and regulation (which
changes from time to time and over which the Company has no control); changes in
interest rates; prepayments of loans and securities; material unforeseen changes
in the liquidity, results of operations, or other financial position of the
Company's customers; the pending merger with UNB Corp.; 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.
9
BANCFIRST OHIO CORP.
SELECTED FINANCIAL DATA:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AT OR FOR THE THREE MONTHS AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
STATEMENT OF INCOME DATA:
Interest income $ 27,972 $ 30,794 $ 87,930 $ 80,768
Interest expense 16,349 19,970 53,763 50,740
-------------- -------------- -------------- --------------
Net interest income 11,623 10,824 34,167 30,028
Provision for possible loan losses 510 450 1,470 1,350
Non-interest income 3,476 3,660 10,312 9,630
Non-interest expense 8,568 8,305 25,354 23,552
-------------- -------------- -------------- --------------
Income before income taxes 6,021 5,729 17,655 14,756
Provision for Federal income taxes 1,971 1,887 5,795 4,693
-------------- -------------- -------------- --------------
Net income $ 4,050 $ 3,842 $ 11,860 $ 10,063
============== ============== ============== ==============
PER SHARE DATA:
Basic earnings per share $ 0.46 $ 0.44 $ 1.35 $ 1.22
Diluted earnings per share 0.46 0.44 1.34 1.22
Dividends 0.145 0.138 0.435 0.414
Book value 13.20 11.30 N/A N/A
Tangible book value 10.86 8.77 N/A N/A
BALANCE SHEET DATA:
Total assets $ 1,496,831 $ 1,567,710 N/A N/A
Loans 1,076,703 1,067,971 N/A N/A
Allowance for possible loan losses 10,279 10,197 N/A N/A
Securities 314,029 388,619 N/A N/A
Deposits 1,098,660 1,098,741 N/A N/A
Borrowings 266,668 356,760 N/A N/A
Shareholders' equity 115,354 99,233 N/A N/A
PERFORMANCE RATIOS (1):
Return on average assets 1.07% 0.97% 1.03% 0.95%
Return on average equity 13.99 15.59 14.19 15.59
Tangible return on average tangible equity 18.78 22.75 19.41 21.43
Net interest margin 3.33 3.00 3.22 3.13
Interest rate spread 2.98 2.73 2.86 2.84
Non-interest income to average assets 0.92 0.92 0.89 0.91
Non interest expense to average assets (2) 2.14 1.96 2.07 2.11
Efficiency ratio (3) 53.33 53.86 53.36 55.52
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.97% 0.75% N/A N/A
Non-performing assets to total assets 0.83 0.53 N/A N/A
Allowance for possible loan losses to total loans 0.95 0.95 N/A N/A
Allowance for possible loan losses to non-performing loans 98.9 126.9 N/A N/A
Net charge-offs to average loans (1) 0.18 0.06 0.17% 0.05%
CAPITAL RATIOS:
Shareholders' equity to total assets 7.71% 6.33% N/A N/A
Tier 1 capital to average total assets 7.75 6.67 N/A N/A
Tier 1 capital to risk-weighted assets 10.66 9.95 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.
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.
11
Three Months Ended September 30,
2001 2000
------------------------------------------ --------------------------------------
Average Balance Income/ Yield/ Average Income/ Yield/
Expense Rate(1) Balance Expense Rate(1)
---------------------------------------- --------------------------------------
(Dollars in Thousands)
Securities:
Taxable $ 299,662 $ 5,097 6.75% $ 339,265 $ 6,503 7.63%
Tax exempt 27,323 529 7.68 30,492 646 8.43
---------------- ------------ -------------- -----------
Total securities 326,985 5,626 6.83 369,757 7,149 7.69
Loans (2):
Commercial 522,668 11,313 8.59 459,634 10,727 9.28
Real Estate 416,012 8,370 7.98 510,032 10,252 8.00
Consumer 136,108 2,820 8.22 125,307 2,890 9.18
---------------- ------------ -------------- -----------
Total loans 1,074,788 22,503 8.31 1,094,973 23,869 8.67
Federal funds sold 4,633 42 3.60 1,110 17 6.09
---------------- ------------ -------------- -----------
Total earning
assets (3) 1,406,406 $ 28,171 7.95% 1,465,840 $ 31,035 8.42%
------------ -----------
Non-interest
earning assets 100,161 113,722
----------------- --------------
Total assets $1,506,567 $1,579,562
================= ==============
Interest-bearing
deposits:
Demand and
savings deposits $ 319,801 $ 2,201 2.73% $ 260,137 $ 2,006 3.07%
Time deposits 721,211 9,900 5.45 733,772 11,304 6.13
---------------- ------------ -------------- -----------
Total deposits 1,041,012 12,101 4.61 993,909 13,310 5.33
Borrowings 263,680 4,248 6.39 403,324 6,660 6.57
---------------- ------------ -------------- -----------
Total interest-
bearing liabilities 1,304,692 16,349 4.97% 1,397,233 $ 19,970 5.69%
------------ ----------
Non-interest-
bearing deposits 71,914 72,417
----------------- ---------------
Subtotal 1,376,606 1,469,650
Accrued expenses
and other liabilities 15,096 11,873
----------------- ---------------
Total liabilities 1,391,702 1,481,523
Shareholders'
Equity 114,865 98,039
----------------- ---------------
Total liabilities and
shareholders' equity $1,506,567 $1,579,562
================= ===============
Net interest income
and interest rate
spread (4) $ 11,822 2.98% $ 11,065 2.73%
========== ========= ========== ======
Net interest margin
(5) 3.33% 3.00%
========= ======
Average interest-
earning assets to
average interest-
bearing liabilities 107.8% 104.9%
Nine Months Ended September 30,
2001 2000
----------------------------------------- -----------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate(1) Balance Expense Rate(1)
------------------------------------ --------------------------------------
(Dollars in Thousands)
Securities:
Taxable $ 301,444 $ 16,198 7.18% $ 321,083 $ 18,043 7.51%
Tax exempt 26,485 1,567 7.91 30,199 1,944 8.60
------------- ---------- --------------- --------- ---------
Total securities 327,929 17,765 7.24 351,282 19,987 7.60
Loans (2):
Commercial 508,500 33,851 8.90 441,606 30,104 9.11
Real Estate 444,624 27,049 8.13 404,953 23,812 7.85
Consumer 131,914 8,728 8.85 113,968 7,564 8.87
------------- ---------- --------------- --------- ---------
Total loans 1,085,038 69,628 8.58 960,527 61,480 8.55
Federal funds sold 30,965 1,125 4.86 534 25 6.25
------------- ---------- --------------- --------- ---------
Total earning
assets (3) 1,443,932 $ 88,518 8.20% 1,312,343 $ 81,492 8.29 %
----------
Non-interest
earning assets 100,834 96,339
------------- ---------------
Total assets $1,544,766 $1,408,682
============= ===============
Interest-bearing
deposits:
Demand and
savings deposits $ 289,070 $ 6,292 2.91% $ 238,433 $ 5,249 2.94%
Time deposits 765,092 33,643 5.88 593,684 25,791 5.80
------------- ---------- --------------- --------- ---------
Total deposits 1,054,162 39,935 5.06 832,117 31,040 4.98
Borrowings 291,076 13,828 6.35 412,179 19,700 6.38
------------- ---------- --------------- --------- ---------
Total interest-
bearing liabilities 1,345,238 53,763 5.34% 1,244,296 $ 50,740 5.45%
---------- ---------
Non-interest-
bearing deposits 72,160 67,287
------------- ----------------
Subtotal 1,417,398 1,311,583
Accrued expenses
and other liabilities 15,617 10,860
------------- ----------------
Total liabilities 1,433,015 1,322,443
Shareholders'
Equity 111,751 86,239
------------- ---------------
Total liabilities and
shareholders' equity $1,544,766 $1,408,682
============= ===============
Net interest income
and interest rate
spread (4) $ 34,755 2.86% $ 30,752 2.84%
========== ====== ========= ========
Net interest margin
(5) 3.22% 3.13%
====== ========
Average interest-
earning assets to
average interest-
bearing liabilities 107.3% 105.5 %
(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.
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 SEPT 30, NINE MONTHS ENDED SEPT 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 $ (708) $ (698) $(1,406) $(1,085) $ (760) $(1,845)
Non-taxable (63) (54) (117) (228) (149) (377)
------- ------- ------- ------- ------- -------
Total securities (771) (752) (1,523) (1,313) (909) (2,222)
------- ------- ------- ------- ------- -------
Loans:
Commercial 1,423 (837) 586 4,442 (695) 3,747
Real estate (1,864) (18) (1,882) 2,375 862 3,237
Consumer 242 (312) (70) 1,181 (17) 1,164
------- ------- ------- ------- ------- -------
Total loans (199) (1,167) (1,366) 7,998 150 8,148
Fed funds sold 35 (10) 25 1,107 (7) 1,100
------- ------- ------- ------- ------- -------
Total interest-earning assets (1) (935) (1,929) (2,864) 7,792 (766) 7,026
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Demand and savings deposits 431 (236) 195 1,098 (55) 1,043
Time deposits (187) (1,217) (1,404) 7,509 343 7,852
------- ------- ------- ------- ------- -------
Total interest-bearing deposits 244 (1,453) (1,209) 8,607 288 8,895
Borrowings (2,237) (175) (2,412) (5,771) (101) (5,872)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities (1,993) (1,628) (3,621) 2,836 187 3,023
------- ------- ------- ------- ------- -------
Net interest income $ 1,058 $ (301) $ 757 $ 4,956 $ (953) $ 4,003
======= ======= ======= ======= ======= =======
(1) Computed on a fully tax equivalent basis, assuming a tax rate of 35%.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
AND 2000
Net Income. Net income for the three months ended September 30, 2001 increased
5.4% to $4.1 million. Basic and diluted earnings per share in the third quarter
of 2001 equaled $0.46, compared to $0.44 for the same period in 2000. Net
interest income increased 7.4% to $11.6 million from $10.8 million while
non-interest income decreased 5.0% to $3.5 million from $3.7 million in the
three months ended September 30, 2001, as compared to the same period in 2000.
Non-interest expense increased 3.2% to $8.6 million in the three months ended
September 30, 2001. The provision for possible loan losses was $510,000 in 2001
compared to $450,000 in the prior year period. The Company's net interest margin
was 3.33% for the three months ended September 30, 2001 and 3.00% for the three
months ended September 30, 2000. The net interest margin throughout 2001 has
benefited 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
13
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. Non-interest income decreased primarily due to lower levels of
financial planning fees. Non-interest expense increased primarily from increased
levels of costs associated with lending and fee income generating activities.
The Company's return on average assets and return on average equity were 1.07%
and 13.99%, respectively, in the third quarter of 2001, compared to .97% and
15.59%, respectively, in the third quarter of 2000.
Interest Income. Total interest income decreased 9.2% to $28.0 million for the
three months ended September 30, 2001, compared to $30.8 million for the third
quarter of 2000. This decrease resulted from a $59.4 million decrease in average
earning assets and a 47 basis point decrease in the average yield on earning
assets. The decrease in average earning assets was due primarily to lower
average securities balances that resulted from sales of securities in the fourth
quarter of 2000 and lower average loan balances resulting from refinancing and
loan sale activity. The weighted average yield on interest-earning assets
decreased to 7.95% during the three months ended September 30, 2001, compared to
8.42% during the comparative three month period in 2000. The Company's yield on
average loans decreased from 8.67% during the three months ended September 30,
2000 to 8.31% during the three months ended September 30, 2001. This decrease
resulted primarily from lower market rates throughout 2001. Yields on the
investment portfolio decreased from 7.69% during the third quarter of 2000 to
6.83% during the third quarter of 2001, also reflecting lower market interest
rates in 2001.
Interest Expense. Total interest expense decreased 18.1% to $16.3 million for
the three months ended September 30, 2001, compared to $20.0 million for the
three months ended September 30, 2000. Interest expense decreased due to a $92.5
million decrease in the average balance of interest-bearing liabilities and a 72
basis point decrease in the Company's cost of funds. The decrease in average
interest-bearing liabilities was attributed to lower borrowing levels, offset in
part by a $47.1 million, or 4.7%, increase in the average balance of
interest-bearing deposit accounts. The Company's cost of funds decreased to
4.97% in the three months ended September 30, 2001 compared to 5.69% 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
$510,000 for the three months ended September 30, 2001, compared to $450,000 in
the third 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 $3.5 million for the three
months ended September 30, 2001, compared to $3.7 million for the three months
ended September 30, 2000. The following table sets forth the Company's
non-interest income for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------- ------- ------- -------
(In thousands)
Trust and custodian fees $ 694 $ 645 $ 1,832 $ 2,002
Financial planning fees 193 403 750 1,159
Customer service fees 660 668 1,890 1,739
Gain on sales of loans 873 769 2,469 1,907
Other 989 919 3,109 2,567
Investment securities gains 67 256 262 256
------- ------- ------- -------
TOTAL $ 3,476 $ 3,660 $10,312 $ 9,630
======= ======= ======= =======
Trust and custodian fees increased 7.6% to $694,000 in the third
quarter of 2001 from $645,000 in the third quarter of 2000 while financial
planning fees decreased 52.1% to $193,000 in the third quarter of 2001 from
$403,000 in the third quarter 2000. The increase in trust and custodian fees
primarily resulted from a $76,000 increase in fees from the sale of
14
retail investment products. The decrease in financial planning fees was
primarily due to market conditions that have adversely affected the level of new
investment activity and the market value of assets under management.
Customer service fees, representing service charges on deposits and fees for
other banking services, decreased 1.2% in the third quarter of 2001 to $660,000
from $668,000 in the third quarter of 2000.
Gains on sales of loans totaled $873,000 for the three months ended September
30, 2001 compared to $769,000 for the three months ended September 30, 2000.
During the third quarter of 2001, the Company sold $9.7 million of the
guaranteed portion of its SBA and other government guarantee loan originations
in the secondary market compared to $6.2 million during the third quarter of
2000, realizing gains of $612,000 in 2001 compared to gains of $441,000 in 2000.
Also, the Company recorded gains of $261,000 from sales of residential loans
during the third quarter of 2001 compared to $328,000 in 2000.
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 $70,000 to $989,000 in the third quarter of 2001 compared
to $919,000 in the third quarter of 2000 primarily as a result of higher levels
of loan servicing income, earnings on bank owned life insurance and electronic
banking fees.
During the third quarter of 2001, the Company sold approximately $6.9 million of
investment securities, realizing gains of $67,000. Sales in the third quarter of
2000 consisted of approximately $70.9 million of investment securities, which
included $46.8 million of securities acquired in the Milton acquisition, on
which the Company realized gains of $256,000.
Non-Interest Expense. Total non-interest expense increased $263,000 to $8.6
million in the three months ended September 30, 2001, compared to $8.3 million
in the three months ended September 30, 2000. The following table sets forth the
Company's non-interest expense for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------- ------- ------- -------
(In thousands)
Salaries and employee benefits $ 4,564 $ 4,480 $13,593 $13,140
Net occupancy expense 545 545 1,635 1,553
Furniture, fixtures and equipment 265 291 850 761
Data processing 363 369 1,148 1,016
Taxes other than income taxes 262 211 759 642
Federal deposit insurance 54 63 162 147
Amortization of goodwill 278 278 840 557
Amortization of other identified intangibles 167 234 607 717
Other 2,070 1,834 5,760 5,019
------- ------- ------- -------
TOTAL $ 8,568 $ 8,305 $25,354 $23,552
======= ======= ======= =======
Salary and employee benefits expense increased $84,000, or 1.9% and accounted
for approximately 53.3% of total non-interest expense in the three months ended
September 30, 2001 compared to 53.9% in the third quarter of 2000. The average
full time equivalent staff was 407 in 2001 compared to 404 in 2000.
Net occupancy expense was $545,000 for both the third quarter of 2001 and 2000.
15
Furniture, fixtures and equipment expense decreased $26,000, or 8.9% in the
third quarter of 2001. This decrease was attributed to lower depreciation costs.
Data processing expense decreased $6,000, or 1.6%, in the third quarter of 2001
to $363,000 from $369,000 for the third quarter of 2000.
Taxes other than income taxes increased $51,000, or 24.2%, in the third quarter
of 2001 compared to the third 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 decreased $9,000 to $54,000 in 2001 from
$63,000 in the third quarter of 2000, reflecting lower deposit premium rates in
2001.
Amortization of goodwill and other identified intangible assets was $445,000 in
the third quarter of 2001 compared to $512,000 for the third quarter of 2000.
This decrease was primarily attributed to a recorded intangible for covenants
not to compete becoming fully amortized at the end of August 2001. This
intangible asset was being amortized at the rate of $50,000 per month.
Other non-interest expenses increased $236,000, or 12.9%, to $2.1 million for
the third quarter of 2001, primarily reflecting higher levels of legal expense,
professional fees and electronic banking expenses.
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 53.3% for the third quarter
of 2001, compared to 53.9% 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 32.7% of pretax income, for the three months ended September
30, 2001 compared to $1.9 million, or 32.9% of pretax income, for the three
months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND
2000.
Net Income. Net income for the nine months ended September 30, 2001 increased
17.9% to $11.9 million, or $1.35 per basic share and $1.34 per diluted share,
compared to net income of $10.1 million, or $1.22 per basic and diluted share,
for the nine months ended September 30, 2000. Net interest income increased
13.8% to $34.2 million from $30.0 million and non-interest income increased 7.1%
to $10.3 million from $9.6 million in the nine months ended September 30, 2001,
as compared to the same period in 2000. Non-interest expense increased 7.7% to
$25.4 million in the nine months ended September 30, 2001. The Company's net
interest margin increased to 3.22% for the nine months ended September 30, 2001
compared to 3.13% for the same period in 2000. The Company's return on average
assets and return on average equity were 1.03% and 14.19%, respectively, for the
nine months ended September 30, 2001, compared to .95% and 15.59%, respectively,
for the nine months ended September 30, 2000.
Interest Income. Total interest income increased 8.9% to $87.9 million for the
nine months ended September 30, 2001, compared to $80.8 million for the
comparable period in 2000. This increase resulted from higher levels of earning
assets, offset by a 9 basis point decrease in the average yield on
interest-earning assets. Average earning assets increased $131.6 million to
$1.44 billion for the nine months ended September 30, 2001 from $1.31 billion in
2000. This increase was primarily attributed to assets added by the Milton
acquisition which occurred in June 2000.
The weighted average yield on interest-earning assets decreased to 8.20% during
the nine months ended September 30, 2001, compared to 8.29% during the same nine
month period in 2000. The Company's yield on average loans increased
16
from 8.55% during the nine months ended September 30, 2000 to 8.58% during the
nine months ended September 30, 2001. The increase in yield has resulted
partially from a change in the mix of the loan portfolio. For the nine months
ended September 30, 2001, 59.0% of the loan portfolio consisted of higher
yielding commercial and consumer loans as compared to 57.8% for the year ago
period. Also, the yield during 2001 has benefited from the acceleration of the
recognition of deferred and other fees that has resulted from increased
prepayment activity. Yields on the investment portfolio decreased from 7.60%
during 2000 to 7.24% during 2001, due primarily to decreases in market interest
rates.
Interest Expense. Total interest expense increased 6.0% to $53.8 million for the
nine months ended September 30, 2001, compared to $50.7 million for the nine
months ended September 30, 2000. Interest expense increased due to a higher
average balance of interest-bearing liabilities during the first nine months of
2001, as compared to the same period in 2000. The average balance of
interest-bearing liabilities increased 8.1%, from $1.24 billion during the nine
months ended September 30, 2000 to $1.35 billion during the nine months ended
September 30, 2001. The increase in interest expense that resulted from higher
balances of interest-bearing liabilities was offset in part by a decrease in the
Company's cost of funds to 5.34% for the nine months ended September 30, 2001
from 5.45% for the same period of 2000 which resulted primarily from decreases
in short term interest rates throughout 2001.
Provision for Possible Loan Losses. The provision for possible loan losses was
$1.5 million for the nine months ended September 30, 2001, compared to $1.4
million for the nine months ended September 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 increased 7.1% to $10.3 million
for the nine months ended September 30, 2001, compared to $9.6 million for the
nine months ended September 30, 2000.
Trust and custodian fees decreased 8.5% to $1.8 million for the nine months
ended September 30, 2001 compared to $2.0 million for the year ago period while
financial planning fees decreased $409,000 to $750,000 for the year to date 2001
period compared to $1.2 million in 2000. As noted previously, market conditions
have adversely affected the level of new investment activity and the market
value of assets under management.
Customer service fees increased $151,000, or 8.7%, for the nine months ended
September 30, 2001 to $1.9 million. Milton contributed $156,000 to the 2001
results compared to $85,000 in 2000.
Gains on sales of loans increased from $1.9 million for the nine months ended
September 30, 2000 to $2.5 million for the comparable period in 2001. In 2001,
the Company sold $24.8 million of the guaranteed portion of its SBA and other
government guaranteed loan originations in the secondary market compared to
$21.7 million in 2000, realizing gains of $1.8 million in 2001 compared to gains
of $1.5 million in 2000. In addition, the Company sold $35.7 million of
residential real estate loans realizing gains of $621,000 in the first nine
months of 2001 compared to $374,000 of gains on sales of loans totaling $13.7
million in 2000. Residential real estate loan sale volume in 2001 has benefited
from the lower interest rate environment compared to 2000.
Other income increased $542,000 to $3.1 million for the first nine months of
2001 compared to $2.6 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 $1.8 million, or
7.7%, to $25.4 million for the nine months ended September 30, 2001, compared to
$23.6 million for the nine months ended September 30, 2000. Excluding
non-interest expense attributed to Milton, total non-interest expense increased
$949,000, or 4.2%. For the nine months ended September 30, 2000, the Company's
efficiency ratio was 53.4%, compared to 55.5% for the nine months ended
September 30, 2000.
Salary and employee benefits expense increased $453,000, or 3.4% primarily due
to employees added by Milton. Salaries and employee benefits accounted for
approximately 53.6% of total non-interest expense for the nine months ended
September 30, 2001 compared to 55.8% in 2000. The average full time equivalent
staff was 405 in 2001 compared to 391 in 2000.
17
Net occupancy expense increased 5.3% to $1.6 million for the first nine months
of 2001. Milton added $174,000 to the year to date 2001 results compared to
$75,000 in 2000.
Furniture, fixtures and equipment expense increased $89,000, or 11.7%, primarily
due to depreciation expense attributed to Milton's fixed assets.
Data processing expense increased $132,000, or 13.0%, for the nine months ended
September 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 $117,000, or 18.2%, for the first nine
months 2001 compared to the same period in 2000. This increase resulted
primarily from higher equity levels, previously discussed.
Federal deposit insurance expense increased $15,000 to $162,000 in 2001 from
$147,000 in 2000, reflecting higher levels of deposits throughout 2001.
Amortization of goodwill and other identified intangible assets in total
increased $173,000 to $1.4 million during the first nine months of 2001 compared
to $1.3 million in 2000. This increase was primarily due to amortization related
to goodwill resulting from the Milton acquisition.
Other non-interest expenses increased $741,000, or 14.8%, for the nine months
ended September 30, 2001 compared to the same period in 2000, reflecting higher
costs associated with deposit and fee income generating initiatives, higher
levels of legal expense associated with loan collection activities and the
inclusion of Milton's results for nine months in 2001 compared to just over
three months in 2000.
Provision for Income Taxes. The Company's provision for Federal income taxes was
$5.8 million, or 32.8% of pretax income, for the nine months ended September 30,
2001 compared to $4.7 million, or 31.8% of pretax income, for the nine months
ended September 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 $1.0 million of such property
at September 30, 2001 and $349,000 at September 30, 2000. Other real estate
owned at September 30, 2001 consisted of $529,000 of single-family residential
property, $171,000 of commercial real estate and $329,000 of land.
Non-performing assets totaled $12.4 million, or .83% of total assets at
September 30, 2001, compared to $8.4 million, or .53% of total assets at
September 30, 2000. Non-performing loans totaled $10.4 million, or .97% of total
loans, at September 30, 2001, compared to $8.0 million, or .75% of total loans,
at September 30, 2000. Residential mortgage loans represented $5.8 million, or
55.5%, of total non-performing loans at September 30, 2001. The largest
non-performing loan at September 30, 2001 had an outstanding principle balance
of $768,000. The increase in non-performing loans
18
from September 30, 2000 resulted primarily from increases in non-performing
single-family residential mortgage loans. The following is an analysis of the
composition of non-performing assets:
SEPTEMBER 30,
2001 2000
------- -------
(DOLLARS IN THOUSANDS)
Non-accrual loans $ 6,384 $ 4,107
Accruing loans 90 days or more past due 4,011 3,931
------- -------
Total non-performing loans 10,395 8,038
Other real estate owned and other non-performing assets 2,029 349
------- -------
Total non-performing assets $12,424 $ 8,387
======= =======
Restructured loans $ 2,843 $ 2,952
======= =======
Non-performing loans to total loans 0.97% 0.75%
Non-performing assets to total assets 0.83% 0.53%
Non-performing loans plus restructured loans to total loans 1.23% 1.03%
Non-performing assets plus restructured loans to total assets 1.02% 0.72%
Restructured loans at September 30, 2001 includes one loan with an outstanding
balance of $2.8 million that was restructured in May 1999 and has been
performing in accordance with its restructured terms since such time.
The aggregate amounts of the Company's classified assets as of September 30,
2001 and 2000 were as follows:
SEPTEMBER 30,
2001 2000
------- -------
(IN THOUSANDS)
Substandard $22,904 $15,192
Doubtful 55 279
------- -------
Total $22,959 $15,471
======= =======
The increase in classified assets at September 30, 2001 compared to September
30, 2000 was attributed to a $724,000 increase in residential real estate
mortgage loans past due greater than 90 days that are classified as substandard,
a $3.9 million increase in commercial real estate loans and the classification
of a $1.1 million corporate debt security and a $2.0 million bank-issued trust
preferred security. The bank-issued trust preferred security, which has an
estimated fair value of $1.0 million, was on non-accrual status at September 30,
2001. The largest classified asset at September 30, 2001 was the $2.8 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.
19
The following table summarizes the Company's loan loss experience, and provides
a breakdown of the allowance for possible loan losses at the dates indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(IN THOUSANDS)
Balance at beginning of period $ 10,263 $ 9,908 $ 10,150 $ 7,431
Provision charged to expense 510 450 1,470 1,350
Loans charged-off (591) (248) (1,614) (736)
Recoveries of loans previously charged off 97 87 273 379
Acquired allowance for loan loss -- -- 1,773
----------- ----------- ----------- -----------
Balance at end of period $ 10,279 $ 10,197 $ 10,279 $ 10,197
=========== =========== =========== ===========
Loans outstanding at end of period $ 1,076,703 $ 1,067,971 N/A N/A
Average loans outstanding $ 1,074,788 $ 1,094,973 $ 1,085,038 $ 960,527
Allowance as a percentage of loans outstanding 0.95% 0.95% N/A N/A
Net charge-offs to average loans (annualized) 0.18% 0.06% 0.17% 0.05%
Allowance for possible loan losses to non-performing loans 98.9% 126.9% N/A N/A
The allowance for possible loan losses totaled $10.3 million at September 30,
2001, representing .95% of total loans, compared to $10.2 million at September
30, 2000, or .95% 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 nine months ended September 30, 2001 were
$494,000 and $1.3 million, respectively, compared to net charge-offs of $161,000
and $357,000, 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 98.9% at September 30, 2001, compared to 126.9% at
September 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 SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 FINANCIAL CONDITION
Total assets amounted to $1.50 billion at September 30, 2001, compared to $1.56
billion at December 31, 2000, a decrease of $62.8 million, or 4.0% from December
31, 2000. Total investment securities decreased by $16.2 million to $314.0
million, primarily as a result of sales of securities during the first nine
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 September 30,
2001, 96.7% 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 3.3%. 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 $12.9 million to $1.08 billion at September 30, 2001. This
decrease consists of a $69.7 million decrease in residential mortgage loans
offset in part by a $7.9 million increase in consumer loans and a $48.9 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
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residential loans has resulted primarily from the lower interest rate
environment during the first nine months of 2001, which has led to increased
refinancing and loan sale activity.
Other assets increased $2.3 million from $36.4 million at December 31, 2000 to
$38.7 million at September 30, 2001 primarily as a result of increases in other
real estate owned and prepaid expenses.
Total deposits decreased $14.9 million to $1.10 billion at September 30, 2001
from $1.11 billion at December 31, 2000. The Company continues to emphasize
growth in its existing retail deposit base as a means for funding growth in the
loan portfolio, provided that such incremental deposit growth is cost effective
compared to alternative funding sources.
Total borrowings decreased $58.7 million to $266.7 million at September 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
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 $303.6 million were
classified as available-for-sale as of September 30, 2001, representing 96.7% 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.
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 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.
21
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 $7.0 million
at September 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. 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 September 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 September 30, 2001 was $115.4 million, compared to
shareholders' equity at December 31, 2001 of $107.1 million, an increase of $8.2
million. This increase resulted primarily from the retention of earnings, net of
dividends paid. The Company considers common share repurchases to be an
effective capital management tool and continues to evaluate such repurchases on
an ongoing basis. As of September 30, 2001, the Company's board of directors has
authorized a 300,000 common share repurchase program, of which 3,000 shares have
been repurchased.
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 September 30,
2001, the Company had a total risk-based capital ratio of 11.61%, of which
10.66% consisted of Tier 1 capital. The leverage ratio for the Company at
September 30, 2001, was 7.75%.
Cash dividends declared to shareholders of the Company totaled $3.8 million, or
$0.44 per share, during the first nine months of 2001. This compares to
dividends of $3.4 million, or $0.41 per share, for the same period in 2000. Cash
dividends paid as a percentage of net income amounted to 32.2% and 33.9% for the
nine months ended September 30, 2001 and 2000, respectively.
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, except for the merger with UNB, previously
discussed.
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.
22
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 June 30, 2001, the most recent
period for which this information is available:
PROJECTED CHANGE % CHANGE
CHANGE IN INTEREST RATES AMOUNT FROM BASE FROM BASE
------------------------ ------ --------- ---------
(In thousands)
Net Interest Income:
200 Basis point increase $46,355 $441 0.96%
Base scenario - no change 45,894 N/A N/A
200 Basis point decrease 44,582 (1,312) (2.86)%
Net Present Value (NPV):
200 Basis point increase 104,537 (12,095) (10.37)%
Base scenario - no change 116,632 N/A N/A
200 Basis point decrease 105,420 (11,212) (9.61)%
23
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
None.
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).
(b) Reports on Form 8-K
Report on Form 8-K dated September 6, 2001 regarding the Company
entering into an Agreement of Merger and Plan of Reorganization pursuant
to which the Company will be merged with and into UNB Corp., an Ohio
corporation, and Stock Option Agreements pursuant to which each of the
Company and UNB Corp. granted the other the right, under certain
circumstances, to purchase shares of common stock representing
approximately 14.9% of the voting power of such party.
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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: November 5, 2001 (Signed) /s/ GARY N. FIELDS
--------------------------------------------
Gary N. Fields
President and
Chief Executive Officer
Date: November 5, 2001 (Signed) /s/ KIM M. TAYLOR
--------------------------------------------
Kim M. Taylor
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
25