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 September 30, 1998
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 November 12, 1998
----- -----------------------------------
Common Stock, No Par Value 7,925,018
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INDEX
BANCFIRST OHIO CORP.
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheet ....................... 3
Consolidated Statement of Income ................. 4
Consolidated Statement of Cash Flows ............. 5
Notes to Consolidated Financial Statements ....... 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................... 8-21
PART II. OTHER INFORMATION
Other Information ......................................... 22
Item 1. Legal Proceedings
Item 2. Changes in Securities
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 on Item 601 of Regulation S-K
(b) Exhibit 27: Financial Data Schedule
(c) Reports on Form 8-K
Signatures ......................................................... 23
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3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BANCFIRST OHIO CORP.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPT. 30, DEC. 31,
1998 1997
---------- ----------
ASSETS:
Cash and due from banks $ 25,996 $ 21,650
Federal funds sold 5,028 49
Securities held-to-maturity, at amortized cost (approximate
fair value of $27,262 and $36,645 in 1998 and 1997,
respectively) 26,790 35,223
Securities available-for-sale, at fair value 300,700 236,298
---------- ----------
Total securities 327,490 271,521
---------- ----------
Loans, net of unearned income 776,658 761,027
Allowance for possible loan losses (6,603) (6,617)
---------- ----------
Net loans 770,055 754,410
---------- ----------
Bank premises and equipment, net 11,374 8,856
Accrued interest receivable 7,593 6,946
Intangible assets 11,669 12,687
Other assets 21,517 5,499
---------- ----------
Total assets $1,180,722 $1,081,618
========== ==========
LIABILITIES:
Deposits:
Non-interest-bearing deposits $ 59,088 $ 63,846
Interest-bearing deposits 706,963 683,201
---------- ----------
Total deposits 766,051 747,047
---------- ----------
Federal funds purchased -- 12,300
Federal Home Loan Bank advances and other borrowings 316,287 227,149
Accrued interest payable 2,959 2,426
Other liabilities 6,015 7,363
---------- ----------
Total liabilities 1,091,312 996,285
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, no par or stated value, 20,000,000 shares authorized,
8,076,488 and 8,067,838 shares issued in 1998 and 1997 respectively 64,070 63,343
Retained earnings 26,846 22,057
Accumulated other comprehensive income - unrealized holding
gains on securities available for sale, net 964 1,140
Treasury stock, 128,816 and 107,660 shares, at cost, in 1998
and 1997, respectively (2,470) (1,207)
---------- ----------
Total shareholders' equity 89,410 85,333
---------- ----------
Total liabilities and shareholders' equity $1,180,722 $1,081,618
========== ==========
The accompanying notes are an integral part of the financial statements.
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4
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---------------- ---------------
Interest income:
Interest and fees on loans $16,759 $16,441 $49,941 $48,231
Interest and dividends on securities:
Taxable 5,155 4,586 14,004 14,153
Tax-exempt 381 331 1,014 1,000
------- ------- ------- -------
Total interest income 22,295 21,358 64,959 63,384
------- ------- ------- -------
Interest expense:
Deposits 8,446 8,542 25,529 24,726
Borrowings 4,583 3,763 12,005 11,152
------- ------- ------- -------
Total interest expense 13,029 12,305 37,534 35,878
------- ------- ------- -------
Net interest income 9,266 9,053 27,425 27,506
Provision for possible loan losses 300 304 925 919
------- ------- ------- -------
Net interest income after
provision for possible loan losses 8,966 8,749 26,500 26,587
------- ------- ------- -------
Other income:
Trust and custodian fees 542 483 1,561 1,337
Customer service fees 543 510 1,537 1,478
Gain on sale of loans 868 872 3,005 1,817
Other 552 258 1,435 741
Investment securities gains, net -- 3 24 103
------- ------- ------- -------
Total other income 2,505 2,126 7,562 5,476
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 3,841 3,715 11,914 10,991
Net occupancy expense 390 404 1,159 1,224
Amortization of intangibles 344 381 1,052 1,173
Other 2,519 2,243 8,212 6,541
------- ------- ------- -------
Total non-interest expense 7,094 6,743 22,337 19,929
------- ------- ------- -------
Income before income taxes 4,377 4,132 11,725 12,134
Provision for Federal income taxes 1,387 1,408 3,700 4,100
------- ------- ------- -------
Net income $ 2,990 $ 2,724 $ 8,025 $ 8,034
======= ======= ======= =======
Basic earnings per share $ 0.38 $ 0.34 $ 1.01 $ 1.01
======= ======= ======= =======
Diluted earnings per share $ 0.37 $ 0.34 $ 1.01 $ 1.01
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 7,970 7,961 7,970 7,962
======= ======= ======= =======
Diluted 7,987 7,961 7,980 7,962
======= ======= ======= =======
Cash dividends per common share $ .135 $ 0.13 $ 0.405 $ 0.39
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
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BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
------------
1998 1997
------------------
Cash flows from operating activities:
Net income $ 8,025 $ 8,034
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization 2,480 3,022
Provision for possible loan losses 925 919
Gain on sale of assets (3,029) (1,920)
Increase in interest receivable (647) (683)
Decrease (increase) in other assets (1,754) 241
Increase in interest payable 533 613
Decrease in other liabilities (1,348) (83)
FHLB stock dividend (880) (792)
--------- --------
Net cash provided by operating activities 4,305 9,351
--------- --------
Cash flows from investing activities:
Increase in federal funds sold and short term investments (4,979) (23,209)
Proceeds from maturities of securities held-to-maturity 8,362 4,952
Proceeds from maturities and sales of securities available-for-sale 59,886 73,608
Purchase of securities held-to-maturity -- (14)
Purchase of securities available-for-sale (124,438) (64,820)
Increase in loans, net (56,719) (36,313)
Purchase of loans (51,466) (71,116)
Purchases of equipment and other assets (3,429) (1,357)
Proceeds from sale of loans 95,754 58,496
Purchase of bank owned life insurance (15,000) --
Decrease in payable related to acquisition of County Savings Bank -- (1,500)
--------- --------
Net cash used in investing activities (92,029) (61,273)
--------- --------
Cash flows from financing activities:
Decrease in federal funds purchased (12,300) (11,650)
Increase in Federal Home Loan Bank advances and other borrowings 89,138 26,376
Net increase in deposits 19,004 43,782
Cash dividends paid (3,236) (3,105)
Purchase of treasury stock, net (536) (107)
--------- ---------
Net cash provided by financing activities 92,070 55,296
--------- ---------
Net increase in cash and due from banks 4,346 3,374
Cash and due from banks, beginning of period 21,650 18,856
--------- ---------
Cash and due from banks, end of period $ 25,996 $ 22,230
========= =========
The accompanying notes are an integral part of the financial statements
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BANCFIRST OHIO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
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, 1997
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, 1998 are not necessarily indicative of the results to be
expected for the full year. Certain reclassifications have been made to the 1997
consolidated financial statements to conform to the 1998 presentation.
1) BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, The First National Bank of
Zanesville (FNB). On May 16, 1998, County Savings Bank (County) and the
Bellbrook Community Bank were merged under the national bank charter of
FNB. All significant intercompany transactions and accounts have been
eliminated in consolidation.
2) NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The Company's comprehensive
income, which includes unrealized holding gains on securities available
for sale, determined in accordance with the provisions of the
statement, was $3,213 and $4,154 for the three months ended September
30,1998 and 1997, respectively, and $7,849 and $8,794 for the nine
months ended September 30, 1998 and 1997, respectively.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and establishes accounting and
reporting standards for derivative instruments and for hedging
activities. The provisions of this statement will primarily impact the
accounting for the Company's interest rate swap transactions which had
a total notional amount of $51.9 million at September 30, 1998. The
Company has not determined what impact this standard will have on its
financial statements.
3) COMMON STOCK
On April 7, 1998, the Company's Board of Directors declared a
two-for-one stock split in the form of a 100% stock dividend which was
paid May 19, 1998 to shareholders of record as of April 28, 1998. All
per share information has been retroactively adjusted for the effect of
this stock split.
On April 23, 1998, the Company's shareholders approved the 1997 Omnibus
Stock Incentive Plan which provides for the granting of stock options
and other stock related awards to key employees.
4) COMPUTATION OF EARNINGS PER SHARE
The computation of earnings per share is as follows. All share amounts
are adjusted to give retroactive effect to the stock split discussed in
Note 3 above:
6
7
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except per share amounts)
Actual weighted average common
shares outstanding 7,970 7,961 7,970 7,962
Dilutive common stock equivalents:
Stock options 13 -- 6 --
Bonus shares - Company match 4 -- 4 --
------ ------ ------ ------
Weighted average common shares outstanding
adjusted for dilutive common stock equivalents 7,987 7,961 7,980 7,962
------ ------ ------ ------
Net Income $2,990 $2,724 $8,025 $8,034
------ ------ ------ ------
Basic earnings per share $ 0.38 $ 0.34 $ 1.01 $ 1.01
------ ------ ------ ------
Diluted earnings per share $ 0.37 $ 0.34 $ 1.01 $ 1.01
------ ------ ------ ------
5) BRANCH ACQUISITION
On August 14, 1998, FNB entered into a Branch Purchase and Assumption
Agreement for the purchase of certain assets (principally office
premises and equipment) totaling approximately $600 and assumption of
certain deposit and other liabilities totaling approximately $10,000 of
a branch office located in Granville, Ohio. On October 21, 1998, FNB
received regulatory approval for this transaction which is expected to
be consummated on December 4, 1998.
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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; customers' reactions to and other unforeseen complications
with respect to the merger of the Company's banking subsidiaries; uncertainties
concerning the Company's or its major customers' Year 2000 compliance; and other
risks detailed in the Company's filings with the Securities and Exchange
Commission, all of which are difficult to predict and many of which are beyond
the control of the Company.
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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,
1998 1997 1998 1997
-------------------- -----------------
STATEMENT OF INCOME DATA:
Interest income $ 22,295 $ 21,358 $64,959 $63,384
Interest expense 13,029 12,305 37,534 35,878
---------- ---------- ------- -------
Net interest income 9,266 9,053 27,425 27,506
Provision for possible loan losses 300 304 925 919
Non-interest income 2,505 2,126 7,562 5,476
Non-interest expense 7,094 6,743 22,337 19,929
---------- ---------- ------- -------
Income before income taxes 4,377 4,132 11,725 12,134
Provision for Federal income taxes 1,387 1,408 3,700 4,100
---------- ---------- ------- -------
Net income $ 2,990 $ 2,724 $ 8,025 $ 8,034
========== ========== ======= =======
PER SHARE DATA(1):
Basic earnings per share $ 0.38 $ 0.34 $ 1.01 $ 1.01
Diluted earnings per share 0.37 0.34 1.01 1.01
Dividends 0.14 0.13 0.41 0.39
Book value 11.25 10.50 N/A N/A
Tangible book value 9.78 8.86 N/A N/A
BALANCE SHEET DATA:
Total assets $1,180,722 $1,119,616 N/A N/A
Loans 776,658 772,280 N/A N/A
Allowance for possible loan losses 6,603 7,136 N/A N/A
Securities 327,490 272,402 N/A N/A
Deposits 766,051 776,047 N/A N/A
Borrowings 316,287 251,335 N/A N/A
Shareholders' equity 89,410 83,476 N/A N/A
PERFORMANCE RATIOS (2):
Return on average assets 1.02% 0.98% 0.96% 0.98%
Return on average equity 13.50 13.07 12.25 13.34
Tangible return on average tangible equity 16.90 17.42 17.22 18.10
Net interest margin 3.42 3.46 3.53 3.59
Interest rate spread 3.01 3.00 3.10 3.14
Non-interest income to average assets 0.85 0.76 0.90 0.67
Non-interest expense to average assets (2) 2.29 2.28 2.39 2.30
Efficiency ratio (3) 56.33 55.96 56.46 56.03
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.38% 0.37% N/A N/A
Non-performing assets to total assets 0.29 0.31 N/A N/A
Allowance for possible loan losses to total loans 0.85 0.92 N/A N/A
Allowance for possible loan losses to non-performing loans 226.6 248.9 N/A N/A
Net charge-offs to average loans (4) 0.18 0.05 0.16% 0.07%
CAPITAL RATIOS:
Shareholders' equity to total assets 7.57% 7.46% N/A N/A
Tier 1 capital to average total assets 6.59 6.33 N/A N/A
Tier 1 capital to risk-weighted assets 10.40% 10.14 N/A N/A
(1) Adjusted to give retroactive effect to the two-for-one stock split paid
May 19, 1998 to shareholders of record as of April 28, 1998.
(2) Excludes amortization expense and non-recurring expenses totaling
$1,222 in the nine month period ended September 30, 1998.
(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.
(4) Ratios are stated on an annualized basis.
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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 table presents, 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 on a fully tax
equivalent basis ("FTE"), and refers to net interest income divided by total
interest-earning assets and 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.
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Three Months Ended September 30, Nine Months Ended September 30,
...........1998............ ...........1997......... ..........1998........... ..........1997............
(Dollars in Thousands) (Dollars in Thousands)
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield /
Balance Expense Rate(1) Balance Expense Rate(1) Balance Expense Rate(1) Balance Expense Rate (1)
--------------------------------------------------------------------------------------------------------------
Securities:
Taxable $ 294,802 $ 5,050 6.80% $ 261,233 $ 4,465 6.78% $ 263,440 $13,828 7.02% $ 269,587 $13,970 6.93%
Tax-exempt 29,920 576 7.64 25,067 502 7.95 26,353 1,535 7.79 25,262 1,515 8.02
---------- ------- ----- ---------- ------- ---------- ------- ----- ---------- ------- -----
Total securities 324,722 5,626 6.87 286,300 4,967 6.88 289,793 15,363 7.09 294,849 15,485 7.02
Loans: (2)
Commercial 314,987 7,520 9.47 318,651 7,477 9.31 313,029 22,050 9.42 314,854 22,317 9.48
Real estate 363,617 7,284 7.95 367,192 7,182 7.76 363,220 21,640 7.97 356,029 20,731 7.79
Consumer 92,288 2,023 8.70 78,402 1,802 9.12 91,409 6,355 9.30 75,838 5,262 9.28
---------- ------- ----- ---------- ------- ----- ---------- ------- ----- ---------- ------- -----
Total loans 770,892 16,827 8.66 764,245 16,461 8.55 767,658 50,045 8.72 746,721 48,310 8.65
Federal funds sold 3,658 53 5.75 8,952 123 5.45 3,109 124 5.33 4,718 183 5.19
---------- ------- ----- ---------- ------- ----- ---------- ------- ----- ---------- ------- -----
Total earning
assets(3) 1,099,272 22,506 8.12% 1,059,497 21,551 8.07% 1,060,560 65,532 8.26% 1,046,288 63,978 8.18%
---------- ------- ----- ---------- ------- ----- ---------- ------- ----- ---------- ------- -----
Non-interest-
earning assets 71,088 47,893 62,498 46,170
---------- ---------- ---------- ----------
Total assets $1,170,360 $1,107,390 $1,123,058 $1,092,458
========== ========== ========== ==========
Interest-bearing
deposits:
Demand and
savings deposits $ 217,651 $ 1,633 2.98% $ 205,310 $ 1,386 2.68% $ 212,282 $ 4,686 2.95% $ 204,287 $ 4,086 2.67%
Time deposits 480,378 6,811 5.63 506,018 7,154 5.61 488,584 20,842 5.70 495,343 20,641 5.57
---------- ------- ----- ---------- ------- ----- ---------- ------- ----- ---------- ------- -----
Total deposits 698,029 8,444 4.80 711,328 8,540 4.76 700,866 25,528 4.87 699,630 24,727 4.73
Borrowings 314,291 4,583 5.79 252,295 3,765 5.92 272,344 12,005 5.89 253,074 11,152 5.89
---------- ------- ----- ---------- ------- ----- ---------- ------- ----- ---------- ------- -----
Total interest-
bearing
liabilities 1,012,320 13,027 5.11% 963,623 12,305 5.07% 973,210 37,533 5.16% 952,704 35,879 5.04%
------- ----- ------- ----- ------- ----- ---------- ------- -----
Non-interest-
bearing deposits 59,968 49,676 54,387 48,759
---------- ---------- ---------- ----------
Subtotal 1,072,288 1,013,299 1,027,597 1,001,463
Accrued expenses and
other liabilities 9,208 11,381 7,846 10,500
---------- ---------- ---------- ----------
Total liabilities 1,081,496 1,024,680 1,035,443 1,011,963
Shareholders'
equity 88,864 82,710 87,615 80,495
---------- ---------- ---------- ----------
Total liabilities and
shareholders'
equity $1,170,360 $1,107,390 $1,123,058 $1,092,458
========== ========== ========== ==========
Net interest income
and interest rate
spread(4) $ 9,479 3.01% $ 9,246 3.00% $27,999 3.10% $28,099 3.14%
======= ===== ======= ===== ======= ======= =====
Net interest margin(5) 3.42% 3.46% 3.53% 3.59%
===== ===== ===== =====
Average interest-
earning assets to
average interest-
bearing liabilities 108.6% 109.0% 109.9% 109.8%
(1) Calculated on an annualized basis.
(2) Non-accrual loans are included in the average loan balances.
(3) Interest income is computed on a fully tax equivalent (FTE) basis,
using a tax rate of 35% in 1998 and 34% in 1997.
(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.
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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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 VS. 1997 1998 VS. 1997
INCREASE (DECREASE) INCREASE (DECREASE)
------------------- -------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(IN THOUSANDS)
Interest-earning assets:
Securities:
Taxable $ 574 $ 11 $ 585 $ (320) $ 178 $ (142)
Non-taxable 96 (22) 74 65 (45) 20
----- ----- ----- ------ ----- ------
Total securities 670 (11) 659 (255) 133 (122)
----- ----- ----- ------ ----- ------
Loans:
Commercial (87) 130 43 (129) (138) (267)
Real estate (71) 173 102 424 485 909
Consumer 316 (95) 221 1,080 13 1,093
----- ----- ----- ------ ----- ------
Total loans 158 208 366 1,375 360 1,735
----- ----- ----- ------ ----- ------
Federal funds sold (73) 3 (70) (62) 3 (59)
----- ----- ----- ------ ----- ------
Total interest-
earning assets (1) 755 200 955 1,058 496 1,554
Interest-bearing liabilities:
Deposits:
Demand and savings deposits 89 158 247 172 428 600
Time deposits (362) 19 (343) (286) 487 201
----- ----- ----- ------ ----- ------
Total interest-bearing
deposits (273) 177 (96) (114) 915 801
Borrowings 923 (105) 818 849 4 853
----- ----- ----- ------ ----- ------
Total interest-bearing
liabilities 650 72 722 735 919 1,654
----- ----- ----- ------ ----- ------
Net interest income $ 105 $ 128 $ 233 $ 323 $(423) $ (100)
===== ===== ===== ====== ===== ======
(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, 1998
AND 1997
Net Income. Net income for the three months ended September 30, 1998
increased 9.8% to $3.0 million, compared to net income of $2.7 million for the
three months ended September 30, 1997. Basic and diluted earnings per share in
the third quarter of 1998 equaled $0.38 and $0.37, respectively, compared to
$0.34 and $0.34, respectively, for the same period in 1997. Net interest income
increased 2.4% while non-interest income increased 17.8% in the three months
ended September 30, 1998, as compared to the same period in 1997, and
non-interest expense increased 5.2%. The provision for possible loan losses was
comparable to the prior year period. The Company's net interest margin decreased
to 3.42% for the third quarter of 1998, compared to 3.46% for the same period in
1997. Increases in non-interest income resulted primarily from earnings on
bank-owned life insurance as well as from higher levels of fee income.
Non-interest expense increased primarily due to costs associated with additional
loan production activities. The
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Company's return on average assets and return on average equity were 1.02% and
13.50%, respectively, in the third quarter of 1998, compared to .98% and 13.07%,
respectively, in the third quarter of 1997. The Company's tangible earnings (net
income excluding amortization of intangibles) for the three months ended
September 30, 1998 were $3.3 million, or $0.41 per diluted share, representing
an annualized return on tangible equity of 16.90%.
Interest Income. Total interest income increased 4.4% to $22.3 million
for the three months ended September 30, 1998, compared to $21.4 million for the
third quarter of 1997. This increase resulted from a 5 basis point increase in
the average yield on earning assets as well as a $39.8 million increase in
average earning assets. The increase in the average balance of loans of $6.6
million, or .9% was consistent with the Company's emphasis on increasing the
loan portfolio.
The weighted average yield on interest-earning assets increased
slightly to 8.12% during the three months ended September 30, 1998, compared to
8.07% during the same three month period in 1997. The Company's yield on average
loans increased from 8.55% during the three months ended September 30, 1997 to
8.66% during the three months ended September 30, 1998 partially as a result of
a change in mix of the loan portfolio. The average balance of lower yielding
residential loans decreased $3.6 million while higher yielding consumer loans
increased $13.9 million. Yields on the investment portfolio decreased slightly
from 6.88% during the third quarter of 1997 to 6.87% during the third quarter of
1998. Continued reductions in market interest rates as well as further
prepayments of loans and securities in the future could have an adverse affect
on the Company's average yield on earning assets as well as the Company's net
interest margin as a result of the prepayment of higher yielding assets that are
replaced with lower yielding assets originated in the current interest rate
environment.
Interest Expense. Total interest expense increased 5.9% to $13.0
million for the three months ended September 30, 1998, compared to $12.3 million
for the three months ended September 30, 1997. Interest expense increased due to
a higher average balance of interest-bearing liabilities outstanding and due to
a higher cost of funds during the third quarter of 1998, as compared to the same
period in 1997. The average balance of interest-bearing liabilities increased
$48.7 million, or 5.1%, from the third quarter of 1997 to the third quarter of
1998.
The Company's cost of funds increased to 5.11% in the three months
ended September 30, 1998 compared to 5.07% in the same period of 1997. The cost
of funds was affected primarily by higher borrowing levels relative to total
interest-bearing liabilities. Average borrowings represented 31.0% of total
interest-bearing liabilities in the third quarter of 1998 compared to 26.2% in
1997. The Company's cost of funds was also affected by costs associated with
interest rate swap transactions that have been utilized to extend the repricing
terms of a portion of the Company's borrowings that reprice on a short term
basis. At September 30, 1998 the Company had interest rate swap transactions
outstanding with a total notional amount of $51.9 million compared to $42.5
million at September 30, 1997. All swap contracts require the Company to pay a
fixed rate of interest in return for receiving a variable rate of interest.
Provision for Possible Loan Losses. The provision for possible loan
losses was $300,000 for the three months ended September 30, 1998, compared to
$304,000 for the third quarter of 1997. Total non-performing loans were $2.9
million at September 30, 1998 and 1997. The allowance for possible loan losses
at September 30, 1998 was $6.6 million, or .85% of total loans and 226.6% of
non-performing loans compared to $7.1 million, or .92% of total loans and 248.9%
of non-performing loans at September 30, 1997. Management's estimate of the
adequacy of its allowance for possible loan losses is based upon its continuing
review of prevailing national and local economic conditions, changes in the size
and composition of the portfolio and individual problem credits. Growth of the
loan portfolio, loss experience, economic conditions, delinquency levels, credit
mix and selected credits are factors that affect judgments concerning the
adequacy of the allowance.
Non-Interest Income. Total non-interest income was $2.5 million for the
three months ended September 30,1998, compared to $2.1 million for the three
months ended September 30, 1997. The following table sets forth the Company's
non-interest income for the periods indicated:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Trust and custodian fees $ 542 $ 483 $1,561 $1,337
Customer service fees 543 510 1,537 1,478
Investment securities gains -- 3 24 103
Gains on sales of loans 868 872 3,005 1,817
Other 552 258 1,435 741
------ ------ ------ ------
TOTAL $2,505 $2,126 $7,562 $5,476
====== ====== ====== ======
Trust and custodian fees increased 12.2% to $542,000 in the third
quarter of 1998 from $483,000 in the third quarter of 1997. Growth in trust
income continued to result primarily from the expansion of the customer base as
well as higher asset values.
Customer service fees, representing service charges on deposits and
fees for other banking services, increased 6.5% in the third quarter of 1998 to
$543,000 from $510,000 in the third quarter of 1997.
Gains on sales of loans totaled $868,000 for the three months ended
September 30, 1998 compared to $872,000 for the three months ended September 30,
1997. During the third quarter of 1998, the Company sold $5.3 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
1997, realizing gains of $444,000 in 1998 compared to gains of $489,000 in 1997.
Also, the Company recorded gains of $426,000 from the sales of residential loans
during the third quarter of 1998 compared to $383,000 in 1997. Loan origination
and sale activity during 1998 continued to benefit from the favorable interest
rate environment.
The Company intends to continue to place emphasis on its small business
lending activities, including the evaluation of expansion into new markets. The
nature of the political climate in Washington, D.C. may subject existing
government programs to much scrutiny and possible cutbacks. 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 $294,000 to $552,000 in the third quarter of
1998 compared to $258,000 in the third quarter of 1997 primarily as a result of
earnings on bank-owned life insurance which totaled $216,000 in 1998 compared to
no such amounts in 1997.
Non-Interest Expense. Total non-interest expense increased $351,000 to
$7.1 million for the three months ended September 30, 1998, compared to $6.7
million for the three months ended September 30, 1997. This increase generally
resulted from expansion of the Company's loan production activities over the
past year, offset in part by cost savings achieved as a result of the merger of
the Company's banking subsidiaries. The following table sets forth the Company's
non-interest expense for the periods indicated:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Salaries and employee benefits $3,841 $3,715 $11,914 $10,991
Occupancy expense 390 404 1,159 1,224
Furniture, fixtures and equipment 219 184 631 569
Data processing 221 263 798 796
Taxes other than income taxes 268 237 720 761
Federal deposit insurance 48 77 194 189
Amortization of goodwill and other intangibles 344 381 1,052 1,173
Other 1,763 1,482 5,869 4,226
------ ------ ------- -------
TOTAL $7,094 $6,743 $22,337 $19,929
====== ====== ======= =======
Salaries and employee benefits accounted for approximately 54.1% of
total non-interest expense in the three months ended September 30, 1998 compared
to 55.1% in the third quarter of 1997. The average full time equivalent staff
was 387 in 1998 compared to 362 in 1997.
Net occupancy expense decreased 3.4% to $390,000 in the third quarter
of 1998 from $404,000 in the third quarter of 1997. This decrease resulted from
lower rent and depreciation expenses.
Furniture, fixtures and equipment expense increased $35,000, or 19.0%
in the third quarter of 1998. The increase in furniture and equipment expense
was due principally to higher depreciation costs.
Data processing expense decreased $42,000, or 16.0%, in the third
quarter of 1998. Lower costs in 1998 resulted from the conversion of County's
data processing systems during the first quarter of 1998, which has resulted in
cost savings in subsequent periods.
Taxes other than income taxes increased $31,000, or 13.1%, in the third
quarter of 1998 compared to the third quarter of 1997. This increase resulted
from higher net worth levels (on which such taxes are based) in 1998 compared to
1997.
Federal deposit insurance expense decreased $29,000 to $48,000 in 1998
from $77,000 in the third quarter of 1997.
Amortization of goodwill and other intangible assets resulting from the
application of purchase accounting in connection with the County acquisition
totaled $338,000 during the third quarter of 1998 compared to $375,000 in the
third quarter of 1997.
Other non-interest expenses were $1.8 million during the third quarter
of 1998 compared to $1.5 million in the third quarter of 1997, resulting
primarily from expansion of activities.
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 56.3%
for the third quarter of 1998, compared to 56.0% for the comparable period in
1997. Controlling costs and improving productivity, as measured by the
efficiency ratio, is considered by management a primary factor in enhancing
performance.
Provision for Income Taxes. The Company's provision for Federal income
taxes was $1.4 million, or 31.7% of pretax income, for the three months ended
September 30, 1998 compared to $1.4 million, or 34.1% of pretax income, for the
three months ended September 30, 1997. 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
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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, 1998 AND
1997.
Net Income. Net income for the nine months ended September 30, 1998 of
$8.0 million, or $1.01 per basic and diluted share, compared to net income of
$8.0 million, or $1.01 per basic and diluted share, for the nine months ended
September 30, 1997. Net interest income decreased .3% and non-interest income
increased 38.1% in the nine months ended September 30, 1998, as compared to the
same period in 1997 while non-interest expense increased 12.1%. Excluding the
effects of non-recurring merger, integration and restructuring charges totaling
$1.2 million that were recorded in the second quarter of 1998, non-interest
expense increased 6.0%. The provision for possible loan losses was unchanged
from the comparative period. The Company's net interest margin decreased to
3.53% for the nine months ended September 30, 1998, compared to 3.59% for the
same period in 1997, primarily reflecting the effect of the Company's purchase
of bank-owned life insurance in January 1998. Increases in non-interest income
resulting from higher levels of fee income and gains on sales of loans were
offset by lower net interest income and higher expense levels. Excluding the
affects of non-recurring charges, non-interest expense increased primarily due
to costs associated with additional loan production activities. The Company's
return on average assets and return on average equity were .96% and 12.25%,
respectively, for the nine months ended September 30, 1998, compared to .98% and
13.34%, respectively, for the nine months ended September 30, 1997. Adjusted for
the effects of non-recurring charges in 1998, the Company's return on average
assets and return on average equity were 1.05% and 13.46%, respectively.
Interest Income. Total interest income increased 2.5% to $65.0 million
for the nine months ended September 30, 1998, compared to $63.4 million for the
comparable period in 1997. This increase resulted from an 8 basis point increase
in the average yield on interest-earning assets and a $14.3 million increase in
average earning assets for the nine months ended September 30, 1998 compared to
1997. The average balance of loans increased $20.9 million, or 2.8%. The
increase in loan balances was consistent with the Company's emphasis on loan
growth to increase overall yields on earning assets.
The weighted average yield on interest-earning assets increased to
8.26% during the nine months ended September 30, 1998, compared to 8.18% during
the comparable nine month period in 1997. The Company's yield on average loans
increased from 8.65% during the nine months ended September 30, 1997 to 8.72%
during the nine months ended September 30, 1998. The average yield in both
periods benefited from approximately $254,000 in 1998 and $312,000 in 1997 of
additional accretion of discounts on SBA loans as a result of prepayments.
Yields on the investment portfolio increased from 7.02% during 1997 to 7.09%
during 1998. Investment yields during 1998 have also benefited from additional
accretion of discounts on securities resulting from prepayments.
Interest Expense. Total interest expense increased 4.6% to $37.5
million for the nine months ended September 30, 1998, compared to $35.9 million
for the nine months ended September 30, 1997. Interest expense increased due to
a higher average balance of interest-bearing liabilities outstanding and due to
a higher cost of funds during the first nine months of 1998, as compared to the
same period in 1997. The average balance of interest-bearing deposit accounts
increased $1.2 million, or .2%, during the nine months ended September 30, 1998
compared to 1997 while the average balance of borrowings increased 7.6%, from
$253.1 million to $272.3 million.
The Company's cost of funds increased to 5.16% for the nine months
ended September 30, 1998 compared to 5.04% for the same period of 1997,
primarily due to the continued shift by customers out of traditional savings
accounts into higher yielding certificates of deposit and money market accounts.
Also, a larger portion of the Company's average interest-bearing liabilities
consisted of higher cost borrowings during the nine months ended September 30,
1998 as compared to 1997.
Provision for Possible Loan Losses. The provision for possible loan
losses was $925,000 for the nine months ended September 30, 1998, compared to
$919,000 for the nine months ended September 30, 1997 and was considered by
management as sufficient to maintain the Company's allowance for possible loan
losses at an adequate level.
Non-Interest Income. Total non-interest income was $7.6 million for the
nine months ended September 30, 1998, compared to $5.5 million for the nine
months ended September 30, 1997. This increase was primarily attributed to
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17
increases in gains on sales of loans. During the nine months ended September 30,
1998, the Company sold approximately $18.6 million of the guaranteed portion of
its SBA and other government guaranteed loan originations in the secondary
market compared to $17.9 million in the first nine months of 1997, realizing
gains of $1.7 million in 1998, compared to gains of $1.4 million in 1997. In
addition, the Company sold $74.1 million of residential real estate loans
realizing gains of $1.3 million in the first nine months of 1998, compared to
$474,000 of gains on sales of loans totaling $38.8 million in 1997.
Customer service fees, representing service charges on deposits and
fees from other banking services, increased 4.0% for the nine months ended
September 30, 1998 to $1.5 million. Trust income increased 16.8% to $1.6 million
in 1998, from $1.3 million in 1997. Growth in trust and custodian fees resulted
primarily from the expansion of the customer base and higher asset values. The
$694,000 increase in other income to $1.4 million in 1998 compared to $741,000
in 1997 resulted primarily from earnings on bank-owned life insurance which
totaled $580,000 in 1998 with no comparable amount in 1997. Also, net servicing
fee income on SBA loans increased approximately $262,000 partially as a result
of a reduction in amortization of capitalized servicing assets due to
prepayments (see also Interest Income above regarding additional accretion of
related discounts). At September 30, 1998, unamortized capitalized servicing
assets related to SBA loans totaled $2.0 million while discounts associated with
the retained portion of SBA loans totaled $1.9 million.
Non-Interest Expense. Total non-interest expense increased $2.4 million
to $22.3 million for the nine months ended September 30, 1998, compared to $19.9
million for the nine months ended September 30, 1997. Excluding non-recurring
merger, integration and restructuring charges of $1.2 million, non-interest
expenses increased $1.2 million, or 6.0%, during the first nine months of 1998
compared to the same period in 1997. This increase generally resulted from
expansion of the Company's operating and loan production activities over the
past year. For the nine months ended September 30, 1998, the Company's
efficiency ratio was 56.5%, compared to 56.0% for the nine months ended
September 30, 1997.
Salaries and employee benefits accounted for approximately 53.3% of
total non-interest expense for the nine months ended September 30, 1998 compared
to 55.1% in 1997. The average full time equivalent staff was 383 in 1998
compared to 360 in 1997. Excluding non-recurring merger, integration and
restructuring salary and employee benefits expense of $378,000 in 1998, such
expenses increased $545,000, or 5.0% primarily as a result of staff additions
associated with increased loan production activities.
Net occupancy expense decreased 5.3%, or $65,000 for the first nine
months of 1998 compared to the first nine months of 1997. This decrease resulted
primarily from lower rent and depreciation expenses.
Furniture, fixtures and equipment expense increased $62,000, or 10.9%
for the nine months ended September 30, 1998. The increase in furniture and
equipment expense was due principally to higher depreciation costs.
Data processing expense totaled $798,000 for the nine months ended
September 30, 1998, virtually unchanged from 1997. Costs associated with the
conversion of County's data processing systems during the first quarter of 1998
have been offset by ongoing cost savings achieved as a result of such systems
conversion.
Taxes other than income taxes decreased $41,000, or 5.4%, for the first
nine months 1998 compared to the same period in 1997. This decrease resulted
from credits for overpayment of taxes in prior years.
Federal deposit insurance expense increased $5,000 to $194,000 in 1998
from $189,000 in 1997.
Amortization of goodwill and other intangible assets resulting from the
application of purchase accounting in connection with the acquisition of County
Savings Bank in 1996 totaled $1.0 million during the first nine months of 1998
compared to $1.2 million in 1997.
Excluding $844,000 of non-recurring merger, integration and
restructuring charges, other non-interest expenses increased to $5.0 million
during the nine months ended September 30, 1998 from $4.2 million during the
same period in 1997, primarily as a result of expanded activities.
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Provision for Income Taxes. The Company's provision for Federal income
taxes was $3.7 million, or 31.6% of pretax income, for the nine months ended
September 30, 1998 compared to $4.1 million, or 33.8% of pretax income, for the
nine months ended September 30, 1997. 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 $512,000 of such property at
September 30, 1998 and $640,000 at September 30, 1997.
Non-performing loans totaled $2.9 million, or 0.38% of total loans, at
September 30, 1998, compared to $2.9 million, or 0.37% of total loans, at
September 30, 1997. Non-performing assets totaled $3.4 million, or 0.29% of
total assets at September 30, 1998, compared to $3.5 million, or .31% of total
assets at September 30, 1997. Management of the Company is not aware of any
material amounts of loans outstanding, not disclosed in the table below, for
which there is significant uncertainty as to the ability of the borrower to
comply with present payment terms. The following is an analysis of the
composition of non-performing assets:
SEPTEMBER 30,
1998 1997
------------------
(DOLLARS IN THOUSANDS)
Non-accrual loans $ 298 $1,208
Accruing loans 90 days or more past due 2,616 1,659
------ ------
Total non-performing loans 2,914 2,867
Other real estate owned 512 640
------ ------
Total non-performing assets $3,426 $3,507
====== ======
Non-performing loans to total loans 0.38% 0.37%
Non-performing assets to total assets 0.29% 0.31%
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.
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.
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
Balance at beginning of period $ 6,662 $ 6,937 $ 6,617 $ 6,599
Provision charged to expense 300 304 925 919
Loans charged-off (544) (271) (1,445) (853)
Recoveries of loans previously
charged off 185 166 506 471
-------- -------- -------- --------
Balance at end of period $ 6,603 $ 7,136 $ 6,603 $ 7,136
======== ======== ======== ========
Loans outstanding at end of period $776,658 $772,280 N/A N/A
Average loans outstanding $770,892 $764,245 $767,658 $746,721
Allowance as a percentage of loans outstanding 0.85% 0.92% N/A N/A
Net charge-offs to average loans (annualized) 0.18% 0.05% 0.16% 0.07%
Allowance for possible loan losses to
non-performing loans 226.6% 248.9% N/A N/A
The allowance for possible loan losses totaled $6.6 million at
September 30, 1998, representing .85% of total loans, compared to $7.1 million
at September 30, 1997, or .92% 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, 1998 were
$359,000 and $939,000, respectively, compared to net charge-offs of $105,000 and
$382,000, respectively, for the same periods in 1997. 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 226.6% at September 30, 1998,
compared to 248.9% at September 30, 1997. Although used as a general indicator,
the coverage ratio is not a primary factor in the determination of the adequacy
of the allowance by management. Total non-performing loans as a percentage of
total loans remained a relatively low 0.38% of total loans at September 30,
1998.
COMPARISON OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 FINANCIAL CONDITION
Total assets amounted to $1.18 billion at September 30, 1998, compared
to $1.08 billion at December 31, 1997, an increase of $99.1 million, or 9.2%.
Total investment securities increased by $56.0 million to $327.5
million as a result of the purchase of securities to achieve asset growth
supported by the Company's increasing capital levels. 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, 1998, 91.8% 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 8.2%. This
compares to 87.0% and 13.0% classified as available-for-sale and held to
maturity, respectively, at December 31, 1997.
Total loans increased $15.6 million to $776.7 million at September 30,
1998. Management continues to emphasize increasing earning assets and earning
asset yields with the loan portfolio. Growth in the loan portfolio during 1998
has been slowed as a result of the early prepayment of loans in the portfolio.
Premises and equipment increased from $8.9 million at December 31, 1997
to $11.4 million at September 30, 1998. This increase has resulted from data
processing equipment and software purchases associated with the conversion of
County's data processing systems and enhancement of technology throughout the
Company. Also, the
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20
Company has commenced construction of a new branch in Centerville, Ohio and
purchased the land for another planned branch in New Albany, Ohio.
Other assets increased from $5.5 million at December 31, 1997 to $21.5
million at September 30, 1998 primarily as a result of the Company's purchase of
$15.0 million of bank-owned life insurance. The book value of this asset is
$15.6 million at September 30, 1998.
Total deposits increased to $766.1 million at September 30, 1998 from
$747.0 million at December 31, 1997. The Company continues to emphasize growth
in its existing retail deposit base provided incremental deposit growth is cost
effective compared to alternative funding sources. Total interest-bearing
deposits accounted for 92.3% of total deposits at September 30, 1998, compared
to 91.5% at December 31, 1997.
Total borrowings, including federal funds purchased, increased $76.8
million to $316.3 million at September 30, 1998, compared to $239.4 million at
December 31, 1997. This increase resulted primarily from funding needs
associated with increases in the securities portfolio.
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 $300.7 million were classified as available-for-sale as of September 30,
1998, representing 91.8% 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.
The Company obtained a $15 million term loan with a financial
institution in order to partially fund the acquisition of County. This loan has
an outstanding balance of $13.8 million at September 30, 1998. Under the terms
of the loan agreement, the Company is required to make quarterly interest
payments and annual principal payments, based on a ten year amortization, which
commenced in February 1998. The unpaid loan balance is due in full September 1,
2003. The loan agreement also contains certain financial covenants, all of which
the Company was in compliance with at September 30, 1998.
Shareholders' equity at September 30, 1998 was $89.4 million, compared
to prior year-end shareholders' equity of $85.3 million, an increase of $4.1
million. This increase resulted from the retention of earnings, net of dividends
paid of $3.2 million, offset by the change in unrealized gains on
available-for-sale securities from a net gain of $1.1 million at December 31,
1997 to a net gain of $964,000 at September 30, 1998.
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, 1998, the Company had a total risk-based
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capital ratio of 11.3%, of which 10.4% consisted of Tier 1 capital. The leverage
ratio for the Company at September 30, 1998, was 6.6%.
Cash dividends paid to shareholders of the Company totaled $3.2
million, or $0.405 per share, during the first nine months of 1998. This
compares to dividends of $3.1 million, or $0.39 per share, for the same period
in 1997. Cash dividends paid as a percentage of net income amounted to 40.3% and
38.6% for the nine months ended September 30, 1998 and 1997, respectively.
The Company has received regulatory approval for the purchase of
certain assets and assumption of certain deposit and other liabilities of a
branch office located in Granville, Ohio. This transaction is expected to be
consumated on December 4, 1998, at which time the Company will receive cash
totaling approximately $9 million.
The Company's Board of Directors and management intend to seek
continued controlled growth of the organization through selective acquisitions
which fit the Company's strategic objectives of growth, diversification and
market expansion and which provide the potential for enhanced shareholder value.
At the present time, the Company does not have any understanding or agreements
for any acquisition or combination.
Considering the Company's capital adequacy, profitability, available
liquidity sources and funding sources, the Company's liquidity is considered by
management to be adequate to meet current and projected needs.
CONTINGENCIES AND UNCERTAINITIES - YEAR 2000
The Year 2000 Issue concerns the inability of information systems to
properly recognize and process date-sensitive information beyond December 31,
1999. This could cause a system failure or other computer errors, leading to a
disruption in the operation of such systems. All of the Company's banking
operations have been converted to a core data processing system that the Company
began utilizing in 1996. Substantially all of the software utilized by the
Company is purchased or licensed from external providers.
The Company has conducted a review of its data processing systems to
ensure that all data processing applications are Year 2000 compliant. This
review project has seven phases: 1) identify applications, 2) assign primary
responsibility, 3) contact vendors for certification, 4) determine impact of non
compliance, 5) develop contingency plan, 6) correct non compliance situations,
and 7) determine testing plan and perform test procedures. The first six phases
of this project have been completed and testing of all critical systems is
currently in process. Based on it's assessment at this time, management does not
anticipate any disruption in the Company's operations as a result of the Year
2000 Issue.
In addition, the Company has implemented procedures for identifying
potential problems that the Company's borrowers may experience. The Company has
also held seminars for borrowers and other customers to assist them in
addressing the Year 2000 Issue.
To date, costs associated with required modifications necessary to
become Year 2000 compliant have not been significant. The Company estimates that
it will incur additional costs of approximately $250,000 primarily for equipment
and software purchases relating to Year 2000 compliance. These cost estimates
are based on currently available information and may change as the Company
continues its Year 2000 project.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
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 1999 annual meeting of shareholders will use
their discretion in voting on any and all matters brought before the
1999 annual meeting which were not provided to the Company in an
advance notice on or prior to February 4, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits on 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 3,1, 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) Exhibit 27: Financial Data Schedule
(c) Reports on Form 8-K - None -
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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 13, 1998 (SIGNED) /s/ GARY N. FIELDS
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Gary N. Fields
President and
Chief Executive Officer
Date: November 13, 1998 (Signed) /s/ Kim M. Taylor
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Kim M. Taylor
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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