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, 1996
------------------------------------
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 0-13161
First-Knox Banc Corp.
- ------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1121049
- ------------------------------ (IRS Employer
(State or other jurisdiction of incorporation Identification No.)
or organization)
One South Main Street, Mount Vernon, Ohio 43050
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(614) 399-5500
-------------------
(Registrant's telephone number including area code)
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
- --- ---
Number of shares of Common Stock, Par Value $3.125 per share at August 1, 1995
Authorized 6,000,000
Issued 3,650,221
Outstanding 3,567,148
Page 1 of 19
Exhibit Index at Page 17
2
FIRST-KNOX BANC CORP.
FORM 10-Q
QUARTER ENDED June 30, 1996
Part I - Financial Information
Interim Financial Information required by Rule 10-01 of Regulation S-X and
Item 303 of Regulation S-K is included in this Form 10-Q as referenced below:
Page
Number
------
Item 1. Unaudited Financial Statements:
Consolidated Balance Sheet ...................................3
Consolidated Statement of Income .............................4
Condensed Consolidated Statement
of Changes in Shareholders' Equity .........................5
Condensed Consolidated Statement of Cash Flows ...............6
Notes to the Consolidated Financial Statements ...............7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............12
Part II - Other Information
Item 1. Legal Proceedings ..............................................N/A
Item 2. Changes in Securities ..........................................N/A
Item 3. Defaults Upon Senior Securities ................................N/A
Item 4. Submission of Matters to Vote of Security Holders ..............N/A
Item 5. Other Information ..............................................N/A
Item 6. Exhibits and Reports on Form 8-K ............................... 17
Signatures ..................................................... 19
Page 2
3
FIRST-KNOX BANC CORP
Consolidated Balance Sheet
($ Amounts in thousands except per share data)
(Unaudited)
June 30, December 31,
1996 1995
----------- ------------
ASSETS
Cash and non-interest bearing deposits with banks $ 15,169 $ 17,012
Federal funds sold 3,400 3,400
----------- -----------
Total cash and cash equivalents 18,569 20,412
Investment securities available for sale, at fair value (Note 2) 97,870 94,694
Mortgage-backed securities available for sale, at fair value (Note 2) 34,955 37,294
----------- -----------
Total securities 132,825 131,988
Loans & lease financing (Note 3) 340,105 330,641
Allowance for loans and lease losses (Note 4) (4,293) (4,166)
----------- -----------
Net loans and leases 335,812 326,475
Premises and equipment, net 10,871 10,993
Accrued interest receivable and other assets 7,650 7,031
----------- -----------
TOTAL ASSETS $505,727 $496,899
=========== ===========
LIABILITIES
Deposits
Non-interest bearing demand $ 46,006 $ 54,706
Interest-bearing demand 44,274 39,882
Savings 102,538 99,133
Time 221,981 210,346
----------- -----------
Total deposits 414,799 404,067
Short-term borrowings 7,471 7,986
Long-term debt (Note 5) 32,908 33,415
Accrued interest payable and other liabilities 4,029 4,772
----------- -----------
TOTAL LIABILITIES 459,207 450,240
----------- -----------
SHAREHOLDERS' EQUITY (Note 1)
Common Stock, par value $3.125 per share;
6,000,000 shares authorized; 3,650,221 issued
in 1996 and 3,650,225 shares issued in 1995 11,407 11,407
Paid-in-capital 24,003 24,042
Retained earnings 13,302 11,187
Net unrealized holding gains (losses) on securities
available for sale (427) 1,912
Common stock in treasury - 84,093 shares at cost
(89,965 shares in 1995) (1,765) (1,889)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 46,520 46,659
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $505,727 $496,899
=========== ===========
The accompanying notes are an integral part of the financial statements
Page 3
4
FIRST-KNOX BANC CORP.
Consolidated Statement of Income (Unaudited)
($ Amounts in thousands except per share data)
Three Months Ending Six Months Ending
June 30, June 30,
1996 1995 1996 1995
--------- --------- ----------- -----------
Interest income:
Loans and Leases, including fees .............................. $7,580 $7,158 $15,061 $13,876
Investment and mortgage-backed securities .....................
Taxable .................................................... 1,350 1,292 2,643 2,527
Non-taxable ................................................ 728 698 1,427 1,400
Federal funds sold ............................................ 70 66 200 87
--------- --------- ---------- -----------
TOTAL INTEREST INCOME ...................................... 9,728 9,214 19,331 17,890
--------- --------- ---------- -----------
Interest expense:
Deposits ...................................................... 3,977 3,740 8,006 7,133
Short- term borrowings ........................................ 79 88 178 200
Long-term debt ................................................ 478 499 963 1,000
--------- --------- ---------- -----------
TOTAL INTEREST EXPENSE ..................................... 4,534 4,327 9,147 8,333
--------- --------- ---------- -----------
NET INTEREST INCOME ........................................ 5,194 4,887 10,184 9,557
Provision for loan &
lease losses (Note 4) ......................................... 251 158 332 236
--------- --------- ---------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES .............. 4,943 4,729 9,852 9,321
--------- --------- ---------- -----------
Other income:
Income from fiduciary activities .............................. 195 162 375 324
Service charges, commissions and fees ......................... 534 527 1,189 1,194
Securities gains (losses), net ................................ 54 (20)
Other ......................................................... 7 24 25 49
--------- --------- ---------- -----------
TOTAL OTHER INCOME ......................................... 736 767 1,589 1,547
--------- --------- ---------- -----------
Other expense:
Salaries & employee benefits .................................. 1,533 1,762 3,368 3,497
Occupancy and equipment ....................................... 644 509 1,211 1,042
FDIC Insurance ................................................ 1 213 2 426
Other ......................................................... 1,388 1,264 2,799 2,571
--------- --------- ---------- -----------
TOTAL OTHER EXPENSE ........................................ 3,566 3,748 7,380 7,536
--------- --------- ---------- -----------
Income before federal income taxes ............................... 2,113 1,748 4,061 3,332
Federal income tax expense ....................................... 495 358 949 674
--------- --------- ---------- -----------
NET INCOME ....................................................... $1,618 $1,390 $3,112 $2,658
Earnings per common share (Note 1):
========= ========== ========== ===========
Primary .................. $0.45 $0.38 $0.86 $0.72
Fully Diluted ............ $0.45 $0.38 $0.86 $0.72
========= ========== ========== ===========
Weighted average common shares
outstanding (Note 1): Primary .................. 3,612,844 3,655,982 3,612,909 3,669,966
Fully Diluted ............ 3,614,111 3,657,582 3,613,543 3,671,952
The accompanying notes are an integral part of the financial statements
Page 4
5
FIRST-KNOX BANC CORP.
Condensed Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
($ Amounts in thousands except per share data)
Three Months Ending Six Months Ending
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
Balance, beginning of period ....................................... $ 46,986 $ 42,720 $ 46,659 $ 40,832
Net income ......................................................... 1,618 1,390 3,112 2,658
Issuance of 5,890 treasury shares in 1996 and 3,240 new shares in
1995 for stock options exercised ................................ 85 35 85 35
Treasury stock purchased - 91,736 common shares .................... (1,926) (1,926)
Cash dividends, declared at a
per share rate of $.14 and $.28 in 1996
and $.11 and $.22 in 1995 ....................................... (499) (391) (997) (791)
Change in net unrealized holding gain (loss) on securities
available for sale ............................................. (1,670) 993 (2,339) 2,013
-------- -------- -------- --------
Balance, end of period ............................................. $ 46,520 $ 42,821 $ 46,520 $ 42,821
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements
Page 5
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FIRST-KNOX BANC CORP.
Condensed Consolidated Statement of Cash Flows (Unaudited)
($ Amounts in thousands)
Six Months Ending
June 30
1996 1995
-------- --------
Net cash provided by operating activities ........................ $ 3,852 $ 2,594
Cash Flows from Investing Activities:
Purchases of investment securities
held to maturity ........................................... (1,279)
Proceeds from calls, payments and maturities of investment
securities held to maturity ................................ 1,533
Purchases of investment and mortgage-backed securities
available for sale ......................................... (15,823) (16,724)
Proceeds from calls, payments and maturities of investment and
mortgage-backed securities available for sale .............. 11,422 7,028
Proceeds from sales of investment and mortgage-backed
securities available for sale .............................. 13,419
Net increase in loans and leases ............................. (9,669) (13,264)
Expenditures for premises and equipment ...................... (388) (1,294)
-------- --------
Net cash provided by (applied to) investing activities ..... (14,458) (10,581)
-------- --------
Cash Flows from Financing Activities:
Net increase in deposit accounts ............................. 10,732 17,492
Net decrease in short-term borrowings ........................ (515) (4,609)
Payments on long-term debt ................................... (507) (1,026)
Cash dividends paid .......................................... (1,032) (800)
Issuance of common stock ..................................... 85 35
Purchase of treasury shares .................................. (1,926)
-------- --------
Net cash provided by financing activities .................. 8,763 9,166
-------- --------
Net increase (decrease) in cash and cash equivalents ............. (1,843) 1,179
Cash and cash equivalents at beginning of period ............. 20,412 18,110
-------- --------
Cash and cash equivalents at end of period ....................... $ 18,569 $ 19,289
======== ========
Supplemental cash flow information:
Interest paid ................................................ $ 9,258 $ 7,885
======== ========
Income taxes paid ............................................ $ 650 $ 687
======== ========
The accompanying notes are an integral part of the financial statements
Page 6
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FIRST-KNOX BANC CORP.
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1 - SUMMARY OF ACCOUNTING POLICIES:
The consolidated financial statements include the accounts of the
First-Knox Banc Corp. (the Corporation), and its wholly-owned
subsidiaries; The First-Knox National Bank (First-Knox), and The
Farmers and Savings Bank (Farmers). All significant intercompany
transactions have been eliminated.
These interim financial statements are prepared without audit and
reflect all adjustments of a normal and recurring nature which, in
the opinion of management, are necessary to present fairly the
consolidated financial position of First-Knox Banc Corp. at June 30,
1996 and its results of operations and cash flows for the periods pre-
sented. The accompanying consolidated financial statements do not
purport to contain all the necessary financial disclosures required by
generally accepted accounting principles that might otherwise be
necessary in the circumstances. Accordingly, these financial
statements should be read in conjunction with the 1995 consolidated
financial statements and notes thereto of First-Knox Banc Corp.
included in its Annual Report on Form 10-K for the year ended December
31, 1995.
The provision for income taxes is based upon the effective tax rate
expected to be applicable for the entire year.
Primary earnings per share is computed based on the weighted average
shares outstanding during the year plus common equivalent shares
arising from dilutive stock options, using the treasury stock method.
Fully diluted earnings per share reflects additional dilution related
to stock options due to the use of market price at the end of the
period when higher than average price for the period. All share and
per share data has been adjusted for a 100% stock dividend distributed
in September, 1995.
During the first six months of 1996, options on 11,000 shares were
granted. During the first six months of 1996 options for 5,890 common
shares and 778 stock appreciation rights were exercised. There was no
material compensation recognized during the six months of 1996 or the
first six months of 1995 related to stock appreciation rights. At June
30, 1996, exercisable options and stock appreciation rights were
106,710 and 16,542, respectively. At June 30, 1996, there were
outstanding options for 179,614 common shares and outstanding stock
appreciation rights for 38,710 common shares.
The Corporation, through its subsidiary banks, grants residential,
consumer, and commercial loans to customers in the central Ohio
counties of Knox, Morrow, Holmes, Ashland and Richland. In addition
the Corporation is in the business of commercial and consumer leasing.
Commercial loans, residential real estate loans, consumer loans and
leases were 30.8%, 47.3%, 21.3%, and 0.6% of total loans and leases
respectively, at June 30, 1996.
Page 7
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Note 1 - SUMMARY OF ACCOUNTING POLICIES (Continued):
On January 1, 1996, the Corporation adopted SFAS 122 "Accounting for
Mortgage Servicing Rights." This pronouncement requires companies to
recognize, as separate assets, rights to service mortgage loans for
others, however those loans are acquired. A company that acquires
mortgage servicing rights through either the purchase or origination
of mortgage loans and sells or securitizes those loans with servicing
rights retained should allocate the total cost of the mortgage loans
to mortgage servicing rights and to loans (without the mortgage
servicing rights) based on their relative fair values. Mortgage
servicing rights recorded as a separate asset will be amortized in
proportion to, and over the period, of estimated net servicing income.
The impact of adopting this pronouncement in 1996 was not material.
On January 1, 1996, the Corporation adopted SFAS 123 "Accounting for
Stock-Based Compensation." SFAS encourages but does not require
entities to use a fair value based method to account for stock-based
compensation plans such as the Corporation's stock options plans. If
the fair value accounting encouraged by SFAS No. 123 is not adopted,
entities must disclose the pro forma effect on net income and earnings
per share had the accounting been adopted. Fair value of a stock
option is to be estimated using an option-pricing model that considers
exercise price, expected life of the option, current price of the
stock, expected price volatility, expected dividends on the stock, and
the risk-free interest rate. The Corporation elected not to expense
the fair value of options granted and will disclose the pro forma
effect on net income and earnings per share in the annual financial
statements.
The Corporation in its normal course of business, makes commitments to
extend credit which are not reflected in the financial statements. At
June 30, 1996, unused credit lines amounted to approximately
$54,184,000 and commitments under outstanding letters of credit
amounted to approximately $363,000. Since many commitments to make
loans expire without being used, the amount does not necessarily
represent future cash commitments. Collateral obtained related to the
commitments is determined using management's credit evaluation of the
borrower and may include real estate, vehicles, business assets,
deposits, and other items. In management's opinion these commitments
represent normal banking transactions, and no material losses are
expected to result therefrom.
Residential real estate loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market
in the aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income.
Certain items in the 1995 financial statements have been reclassified
to correspond with the 1996 presentation.
Page 8
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Note 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES AVAILABLE
FOR SALE:
The amortized costs and estimated fair values are as follows at June
30, 1996 and December 31, 1995:
June 30, 1996
GROSS GROSS ESTIMATED
($ amounts in thousands): AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ------- ------ --------
U.S. Treasury securities $ 30,964 $ 112 (244) $ 30,832
Obligations of states and
political subdivisions 56,465 812 (1,312) $ 55,965
Obligations of U.S. government
corporations and agencies 6,820 (180) 6,640
Other securities 4,128 305 4,433
-------- ------- ------ --------
Total investment securities 98,377 1,229 (1,736) 97,870
Mortgage-backed securities 35,095 386 (526) 34,955
-------- ------- ------ --------
TOTAL $133,472 $ 1,615 ($2,262) $132,825
======== ======= ====== ========
December 31, 1995
GROSS GROSS ESTIMATED
($ amounts in thousands): AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------ --------
U.S. Treasury securities $ 27,955 $312 ($51) $ 28,216
Obligations of states and
political subdivisions 53,407 $1,867 (77) 55,197
Obligations of U.S. government
corporations and agencies 6,932 59 6,991
Other securities 4,041 249 4,290
-------- ------ ------- --------
Total investment securities 92,335 2,487 (128) 94,694
Mortgage-backed securities 36,756 636 (98) 37,294
-------- ------ ------- --------
TOTAL $129,091 $3,123 ($226) $131,988
======== ====== ======= ========
At June 30, 1996, the percentages of the portfolio maturing in various
time frames had not changed significantly from December 31, 1995.
Proceeds from the sales of investment and mortgage-backed securities
available-for-sale were $13,149,000 during the first six months of
1995. These sales resulted in gross gains of $67,000 and gross losses
of $87,000 in 1995.
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Note 3 - LOANS AND LEASE FINANCING:
Loans and leases are comprised of the following ($ amounts in thousands):
June 30, 1996 December 31, 1995
------------- -----------------
Residential real estate loans held for sale $ 4,906 $ 5,020
Residential real estate loans ............. 156,100 147,927
Commercial real estate loans .............. 10,950 9,548
Commercial and industrial loans ........... 89,215 88,632
Consumer and credit card loans ............ 72,527 73,137
Obligations of states and
political subdivisions .................. 4,447 4,678
Lease financing, net ...................... 1,960 1,699
------- --------
$340,105 $330,641
======== ========
Note 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES:
Activity in the allowance for possible loan and lease losses is summarized
as follows for the six months ended June 30 ($ amounts in thousands):
1996 1995
------- -------
Balance, beginning of period ...... $ 4,166 $ 3,876
Provision for loan and lease losses 332 236
Losses charged to the allowance ... (306) (232)
Recoveries ........................ 101 100
------- -------
Balance, end of period ............ $ 4,293 $ 3,980
======= =======
Loans and leases over 90 days past due and still accruing interest
approximated $1,386,000 at June 30, 1996 and $862,000 at December 31, 1995.
Loans on non-accrual status were $215,000 at June 30, 1996 and $197,000 at
December 31, 1995. Impaired loans were not material at any date or during
any period presented.
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Note 5 - LONG-TERM DEBT:
($ amounts in thousands):
June 30, December 31,
Description 1996 1995
---------------- -------- ------------
Fixed rate Federal Home Loan Bank
advances with monthly principal and
interest payments:
5.60% Advance due August 1, 2003 ....................................... $ 2,312 $ 2,442
6.35% Advance due August 1, 2013 ....................................... 2,769 2,812
5.95% Advance due March 1, 2004 ........................................ 618 649
5.70% Advance due May 1, 2004 .......................................... 5,015 5,262
5.85% Advance due January 1, 2016 ...................................... 4,944 5,000
Fixed rate Federal Home Loan Bank
advances with monthly interest payments:
5.35% Advance due February 1, 1999 ..................................... 5,000 5,000
5.60% Advance due April 1, 1999 ........................................ 5,000 5,000
5.70% Advance due June 1, 1999 ......................................... 7,000 7,000
6.35% Advance due March 1, 2004 ........................................ 250 250
------- -------
$32,908 $33,415
======= =======
At June 30, 1996, Federal Home Loan Bank (FHLB) advances are
collateralized by all shares of FHLB stock owned by the Corporation
(totaling $3,731,000) and by 100% of the Corporation's qualified
real estate-backed investments and mortgage loan portfolio
(totaling approximately $192,433,000). Based on the carrying amount
of FHLB stock owned by the Corporation, total FHLB advances are
limited to approximately $43,435,000 at June 30, 1996. Future
advances to be received by the Corporation, above this limit,
require additional purchases of FHLB stock.
The aggregate minimum future principal payments on borrowings are
$531,000 in 1996, $1,584,000 in 1997, $1,574,000 in 1998,
$18,573,000 in 1999, $1,584,000 in 2000 and $9,062,000 thereafter.
Note 6 - SUBSEQUENT EVENT:
The Corporation received additional advances from the FHLB on July
19, 1996 totaling $30,000,000. These advances were received after
additional FHLB stock of $2,775,000 was purchased. These advances
will finance investments to be purchased during the third quarter
of 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The following discussion focuses on the consolidated financial condition of
First-Knox Banc Corp. at June 30, 1996, compared to December 31, 1995, and the
results of operations for the three and six months periods ended June 30, 1996,
compared to the same period in 1995. The purpose of this discussion is to
provide a better understanding of the consolidated financial statements. This
discussion should be read in conjunction with the financial statements, notes
and tables included elsewhere in this report and the First-Knox Banc Corp. 1995
Annual Report on Form 10-K. The Registrant cautions that any forward looking
statements contained in this report, in a report incorporated by reference to
this report or made by management of the company involve risks and uncertainties
and are subject to change based on various important factors. The forward
looking statements could cause actual results to differ materially from those
expressed or implied. The Registrant is not aware of any market or institutional
trends, events or uncertainties that will have or are reasonably likely to have
a material effect on liquidity, capital resources or operations except as
discussed herein. Other than as discussed herein, the Registrant is not aware of
any current recommendations by regulatory authorities which would have such
effect if implemented.
Financial Condition
- -------------------
Liquidity
- ---------
Liquidity relates to the Corporation's ability to meet cash demands of its
customers and their credit needs. Liquidity is provided by the Corporation's
ability to readily convert assets to cash and raise funds in the marketplace.
Traditional asset liquidity is provided by cash and readily marketable,
short-term assets such as federal funds sold and deposits in other banks.
Cash, amounts due from banks and federal funds sold totaled $18.57 million at
June 30, 1996. Investment and mortgage-backed securities available for sale were
$132.8 million at June 30, 1996. This amount increased by $.84 million from
December 31, 1995 balances. These assets, as well as anticipated deposit growth
and scheduled loan payments, provide the Corporation with an adequate source of
funds for expected future demand for loans and for fluctuations in deposit
volume. They also provide management with the flexibility to change the
composition of interest earning assets as market conditions change in the
future.
Liability liquidity relates to the Corporation's ability to retain existing
deposits, obtain new deposits and borrow in the marketplace. Total deposits
increased $10.73 million for the six months ended June 30, 1996. While demand
deposits experienced a $4.31 million or 4.55% decline, savings and time deposits
increased $15.04 million or 4.86% during the first six months of 1996.
Management anticipates core deposits to experience moderate growth or remain
stable during the rest of the year.
Access to advances from the Federal Home Loan Bank (FHLB) described in Note 5 is
a supplemental source of cash to meet liquidity needs. The FHLB allows these
borrowings to be utilized for any purpose.
Page 12
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Capital Resources
- -----------------
Shareholders' equity totaled $46.52 million at June 30, 1996, compared to $46.66
million at December 31, 1995. This decrease was due primarily to a decrease in
the net unrealized holding gain on securities available for sale offset by
earnings retention. The ratio of shareholders' equity to assets was 9.20% at
June 30, 1996 and 9.39% at December 31, 1995.
Cash dividends declared during the six months ended June 30, 1996 were $997,000
or $.28 per share representing 32.04% of net income and an increase of 26.04%
over the first six months of 1995.
Regulatory Capital Requirements
- -------------------------------
The Corporation complies with the capital requirements established by the
Federal Reserve System, which are summarized as follows:
Capital Position
as of
Regulatory
Minimum June 30, 1996 December 31, 1995
- ---------------------------------------------------------------------------
Tier I risk-based
capital....... 4.00% 15.44% 14.29%
Total risk-based
capital....... 8.00% 16.61% 15.45%
Tier I leverage 3.00% - 5.00% 9.45% 8.84%
Under "Prompt Corrective Action" regulations adopted in September 1992, the FDIC
has defined five categories of capitalization (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized). The Corporation meets the "well capitalized" definition,
which requires a total risk-based capital ratio of at least 10%, a leverage
ratio of at least 5%, and the absence of any written agreement, order, or
directive from a regulatory agency. "Well capitalized" status affords the
Corporation the ability to operate with the greatest flexibility under the
current laws and regulations. Under a current regulatory proposal, interest rate
risk would become an additional element in measuring risk-based capital. This
proposed change is not expected to significantly impact the Corporation's
compliance with capital guidelines.
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Changes in Financial Condition
- ------------------------------
Consolidated total assets were $505.73 million at the end of the current period
after recording growth of $8.83 million or 1.78% during the first six months of
1996. This growth was funded primarily by deposits which grew $10.73 million.
Loans and leases increased by $9.46 million, and investments and mortgage-backed
securities increased by $.84 million during the first six months of 1996. The
residential real estate loan portfolio increased by $8.06 million or 5.27%,
while commercial and other loans increased $1.75 million or 1.71%. Consumer and
credit card loans decreased by $.61 million or .83%, while lease financing
balances increased by $.26 million or 15.36%. Short-term borrowings decreased by
$515,000 or 6.44% during the first six months of 1996, primarily from lower
repurchase agreement balances.
The allowance for loan and lease losses as a percentage of loans and leases was
1.26% at the end of the current period and 1.26% at the end of 1995. Net loan
and lease charge-offs were $205,000 for the first six months of 1996,
representing an annualized rate of .12% of the average loan and lease balances.
This represented an increase of $73,000 in net charge-offs compared to the first
half of 1995. Commercial loans had net charge offs of $42,000 compared to net
charge-offs of $90,000 during the first six months of 1995. Net charge-offs for
consumer and credit card loans were $116,000 higher than 1995. Loans past due
more than 90 days plus loans placed in non-accrual status were $1.60 million or
.47% of outstanding balances at June 30, 1996 compared to $1.06 million or .32%
of outstanding balances at the end of 1995.
The interest rate sensitivity of the Corporation has not changed significantly
from that of December 31, 1995 as disclosed in the Corporation's 1995 annual
report on Form 10-K.
Results of Operations-Second Quarter 1996 vs. Second Quarter 1995
- -----------------------------------------------------------------
Consolidated net income of $1,618,000 for the second quarter of 1996 was 16.40%
over the $1,390,000 recorded for the second quarter of 1995. Expressed as
annualized returns on average assets and average shareholders' equity, net
income for 1996 was 1.30% and 13.97% compared to 1.19% and 13.13% for 1995.
Fully diluted earnings per share increased $.07 to $.45 per share for the first
quarter 1996 compared to the same period in 1995. These per share amounts were
restated to reflect the 100% stock dividend distributed in September, 1995.
The increased level of net income for the first quarter of 1996 compared to the
first quarter of 1995, resulted primarily from higher net interest income,
reduced FDIC insurance expense, and lower personnel expense. These items are
discussed more fully below.
Increased net interest income resulted from a $28.22 million or 6.33% increase
in average earning assets. The annualized net interest margin rate (net interest
income adjusted for tax-exempt income restated to a pre-tax equivalent based on
the statutory federal tax rate [FTE] divided by average earning assets) was
4.74% in both the second quarter of 1996 and the same period in 1995.
Page 14
15
The net interest spread percentage (the FTE average earning assets yield minus
the average cost of funds) improved by 5 basis points to 4.10% for the second
quarter 1996 compared to the same period of a year ago. Management expects the
net interest margin rate for 1996 to finish at lower levels than those
experienced in 1995.
The provision for loan and lease losses increased by $93,000 or 58.86% during
the second quarter of 1996 compared to the same period last year. Net loan and
lease charge-offs were up $68,000 or 112.50% compared to the same period a year
ago. Net loan and lease charge-offs for the second quarter of 1996 and 1995 were
at an annualized rate of .12% and .03%, respectively. Management anticipates
loan and lease charge-offs and the provision for loan and lease losses for 1996
to approximate the full year levels experienced in 1995.
Non-interest income of $736,000 during the second quarter of 1996 represented an
annualized .58% of average assets compared to $767,000 or .65% of average assets
for the same period in 1995. Net security gains were lower by $54,000 compared
to the same period in 1995 which contributed significantly to the decrease.
There were no loan sales in either the second quarter of 1996 or second
quarter of 1995.
Non-interest expenses decreased $182,000 or 4.86% from the second quarter 1995.
A reduction in FDIC insurance expense of $212,000 was a significant contributor
to this decrease. Employee salaries and benefits decreased by $229,000 or 13.00%
over the same period in 1995. This decline was largely due to a one time
adjustment which significantly lowered employee group health insurance costs.
All other non-interest expenses including occupancy expense, advertising, and
franchise taxes were higher by $259,000 or 14.61% over 1995.
As a percentage of income before federal income taxes, federal income tax
expense was 23.43% in 1996 and 20.48% in 1995. These effective tax rates are
lower than the statutory tax rate of 34% due primarily to tax exempt income from
obligations of states and political subdivisions and non-taxable loans. This
increase in 1996 was due to the reduction of non-taxable income as a percentage
of total pre-tax income for the 1996 period compared to the same period in 1995.
Results of Operations-Six Months 1996 vs. Six Months 1995
- ---------------------------------------------------------
Consolidated net income of $3,112,000 for the first half of 1996 was 17.08% over
the $2,658,000 recorded for the same period in 1995. Expressed as annualized
returns on average assets and average shareholders' equity, net income for 1996
was 1.25% and 13.40% compared to 1.15% and 12.72% for 1995. Fully diluted
earnings per share increased $.14 to $.86 per share for the six months of 1996
compared to the same period in 1995. These per share amounts were restated to
reflect the 100% stock dividend distributed in September, 1995.
The increased level of net income for the half of 1996 compared to the first
half of 1995, resulted primarily from higher net interest income, reduced FDIC
insurance expense, and lower personnel expense. These items are discussed more
fully below.
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Increased net interest income resulted from a $29.80 million or 6.75% increase
in average earning assets. The annualized net interest margin rate (net interest
income adjusted for tax-exempt income restated to a pre-tax equivalent based on
the statutory federal tax rate [FTE] divided by average earning assets) was
4.67% in 1996 and 4.73% during the same period in 1995.
The net interest spread percentage (the FTE average earning assets yield minus
the average cost of funds) declined by 7 basis points to 4.01% for the first
half of 1996 compared to the same period of a year ago. Management expects the
net interest margin rate for 1996 to remain at lower levels than those
experienced in 1995.
The provision for loan and lease losses increased by $96,000 or 40.68% during
the first half of 1996 compared to the same period last year. Net loan and lease
charge-offs were up $73,000 or 55.30% compared to the same period a year ago.
Net loan and lease charge-offs for the first six months of 1996 and 1995 were at
an annualized rate of .12% and .13%, respectively. Management anticipates loan
and lease charge-offs and the provision for loan and lease losses for 1996 to
approximate the full year levels experienced in 1995.
Non-interest income of $1,589,000 during the first half of 1996 represented an
annualized .63% of average assets compared to $1,547,000 or .66% of average
assets for the same period in 1995. There were no loan sales in either 1996 and
1995 periods.
Non-interest expenses decreased $156,000 or 2.07% over the same period in 1995.
A reduction in FDIC insurance expense of $424,000 was a significant contributor
to this decrease. Employee salaries and benefits decreased by $129,000 or 3.69%
over the same period in 1995. This decline was largely due to a one time
adjustment which significantly lowered employee group health insurance costs.
All other non-interest expenses including occupancy expense, advertising, and
franchise taxes were higher by $397,000 or 10.99% over 1995.
As a percentage of income before federal income taxes, federal income tax
expense was 23.37% in 1996 and 20.23% in 1995. These effective tax rates are
lower than the statutory tax rate of 34% due primarily to tax exempt income from
obligations of states and political subdivisions and non-taxable loans. This
increase in 1996 was due to the reduction of non-taxable income as a percentage
of total pre-tax income for the 1996 period compared to the same period in 1995.
SUBSEQUENT EVENT:
The Corporation received $30 million in additional advances from the FHLB on
July 19, 1996. The Corporation will receive another $10 million advance during
the third quarter as part of a $40 million investment program designed to
enhance net income and more effectively leverage existing capital of the
Corporation. While this investment program involves interest rate risk, such
risk is deemed within the parameters of Corporate policy.
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PART II - OTHER INFORMATION
(Items which are not applicable have been omitted)
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Description Location
------------------------------------ -----------------------
4(b) First-Knox Banc Corp. Dividend Incorporated herein
Reinvestment Plan by reference to the
Corporation's Registration
Statement on Form S-3
(Registration No. 33-52590)
4(b)1 Amendment to the First-Knox Banc Corp. Incorporated herein
Dividend Reinvestment Plan by reference to exhibit
4(b)1 to the March 31, 1995
Form 10-Q
10(a) Summary of Incentive Compensation Plan Incorporated herein
dated December 9, 1983 by reference to exhibit
10(a) to the 1992 Form 10-K
10(b) Employees Retirement Plan dated January 1, 1984 Incorporated herein
by reference to exhibit
10(a) to the 1986 Form 10-K
10(c) Supplemental Retirement Agreement dated Incorporated herein
August 11, 1987 by reference to exhibit
10(c) to the 1992 Form 10-K
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18
10(d) Non-qualified Stock Option and Incorporated herein
Stock Appreciation Rights Plan by reference to exhibit 23
to the 1989 Form 10-K
10(e) First-Knox Banc Corp. Savings Retirement Incorporated herein
Plan by reference to exhibit 10(e)
to the 1993 Form 10-K
10(f) Project Services Agreement between First-Knox Incorporated herein
National Bank and Sverdrup Building Corporation by reference to exhibit 10(f)
to the 1993 Form 10-K
10(g) First-Knox Banc Corp. Stock Option and Incorporated herein
Stock Appreciation Rights Plan by reference to exhibit
10(g) to the March 31, 1995
Form 10-Q
11 Statement regarding computation of Page 7 - Note 1 to consolidated
per share earnings financial statements
23 Consent of Independent Accountants Incorporated herein
by reference to exhibit 23
to the 1995 Form 10-K
(b) No reports on Form 8-K were filed during the fiscal quarter covered by this
report.
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Signatures
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.
First-Knox Banc Corp.
(Registrant)
Date_______August 7, 1996
/s/ Carlos E. Watkins
------------------------------------
By Carlos E. Watkins
President and Chief Executive Officer
Date_______August 7, 1996
/s/ Gordon E. Yance
------------------------------------
By Gordon E. Yance
Vice President & Treasurer
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