1
Exhibit 13
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
From time to time, the Corporation may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, new banking and financial service products and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, Corporation notes that a variety of factors could cause its actual
results and experiences to differ materially from the anticipated results or
other expectations expressed in its forward-looking statements. These risks and
uncertainties include, without limitation, changes in interest rates,
developments in the economies served by the Corporation, changes in anticipated
credit quality trends and changes in accounting, tax or regulatory practices or
requirements.
In the following pages, the analysis of the financial condition and results
of operations in 1998 compared to prior years is discussed by Management. The
data presented in this discussion should be read in conjunction with the 1998
audited financial statements of the report. Management is committed to the
improvement of return on average assets, return on average equity and the
efficiency ratio. 1998 brought about many changes which will allow management to
continue to achieve above average ratios for the industry.
The Corporation continues to develop the acquired software for Product
Profitability which in the near future will assist us in the types of products
and the cost of those products that are provided to our customers. It is the
intention of the Corporation to provide these costs obtained from the Product
Profitability Software with the marketing Central Information System which was
acquired in 1996. These two systems will provide better product offerings to our
customers and in turn allow the Corporation to have a full understanding of the
actual cost to offer and service a product.
Security Banc Corporation continues to perform very well when compared to
our banking peers.
RESULTS OF OPERATIONS SUMMARY
Net income advanced in 1998 to $15,620,000. Net income has steadily
increased in each of the previous five (5) years. Net income in 1998 was
$15,620,000 compared to net income in 1997 of $14,488,000 and in 1996 of
$13,387,000. Net income for 1998 increased $1,132,000 or eight percent (8%) over
1997. Basic Earnings per share was $1.29 in 1998, $1.20 in 1997, and $1.11 in
1996, whereas Diluted Earnings per share was $1.28, $1.19, and $1.10,
respectively.
Total assets grew five percent (5%) in 1998 to $883,500,000. Security Banc
Corporation continued its record performance with a 1998 return on average
assets of one point eighty-five percent (1.85%) and a return on average
shareholder equity of thirteen point sixty-nine percent (13.69%). The
Corporation has continued to increase cash dividends paid to our shareholders.
Cash dividends paid in 1998 were $.495 per share, compared to $.445 per share in
1997. Market price per share at December 31, 1998 was $46.00 compared to $27.25
at December 31, 1997. Financial summary (Table 1) recaps these measures.
Table 1: Financial Summary
Five Years Ended December 31
(000's, except per share and ratio data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Interest and Fee Income ..................... $ 64,034 $ 62,778 $ 51,891 $ 49,706 $ 44,288
Interest Expense ............................ 24,195 24,903 19,311 18,003 14,540
-------- -------- -------- -------- --------
Net Interest Income ......................... 39,839 37,875 32,580 31,703 29,748
Provision for Loan Losses ................... 1,540 1,300 1,875 950 844
Investment Securities Gains ................. 430 217 362 10 316
All Other Operating Income .................. 8,059 6,887 5,531 5,200 5,039
Operating Expense ........................... 22,974 22,729 18,021 18,079 17,880
-------- -------- -------- -------- --------
Income Before Income Taxes .................. 23,814 20,950 18,577 17,884 16,379
Provision for Income Tax .................... 8,194 6,462 5,190 5,177 4,603
-------- -------- -------- -------- --------
Net Income .................................. $ 15,620 $ 14,488 $ 13,387 $ 12,707 $ 11,776
Per Share
Basic Earnings .............................. $ 1.29 $ 1.20 $ 1.11 $ 1.06 $ 0.98
Diluted Earnings ............................ $ 1.28 $ 1.19 $ 1.10 $ 1.05 $ 0.98
Cash Dividends Declared and Paid ............ $ 0.495 $ 0.445 $ 0.405 $ 0.365 $ 0.33
Year-end Book Value ......................... $ 9.71 $ 8.96 $ 8.33 $ 7.50 $ 6.62
Year-end Market Price ....................... $ 46.00 $ 27.25 $ 19.00 $ 14.25 $ 12.00
Selected Year-ended Information
Total Assets ................................ $883,500 $839,605 $816,334 $676,106 $647,712
Investment Securities ....................... 167,324 149,179 190,983 183,861 198,037
Loans, Net .................................. 610,059 555,751 533,941 391,234 389,897
Deposits .................................... 708,853 677,391 667,035 555,844 535,898
Non-interest-bearing Demand Deposits ........ 131,285 119,373 107,913 112,002 101,959
Interest-bearing Demand Deposits ............ 148,462 129,351 122,996 97,422 102,171
Time Deposits ............................... 274,230 277,548 281,973 219,057 191,164
Savings ..................................... 154,876 151,119 154,153 127,363 140,604
Shareholders' Equity ........................ 118,129 108,736 100,794 90,237 79,502
Cash Dividends Paid ......................... 6,013 5,394 4,545 3,740 3,376
Net Income .................................. $ 15,620 $ 14,488 $ 13,387 $ 12,707 $ 11,776
Weighted Average Common Shares
Outstanding ................................. 12,144 12,118 12,058 12,026 11,994
Ratios
Return on Average Assets .................... 1.85% 1.75% 1.92% 1.95% 1.85%
Return on Average Equity .................... 13.69% 13.92% 14.18% 14.91% 15.30%
Total Capital to Total Risk Based Assets .... 19.63% 20.04% 19.74% 20.98% 20.91%
Net Interest Margin (Tax Equivalent Basis) .. 5.18% 5.07% 5.21% 5.46% 5.29%
2
NET INTEREST INCOME
A major share of the Corporation's income results from the spread between
income on interest earning assets, such as loans and securities, and the
interest expense on liabilities used to fund those assets. The difference
between interest earned and interest expensed is referred to as net interest
income in the Consolidated Statement of Income. Net interest income is affected
by changes in both interest rates and the amount of interest earning assets and
interest-bearing liabilities outstanding. Net interest margin on interest
earning assets is the amount earned on assets, on a taxable equivalent basis,
divided by the average earning assets outstanding.
Table II, entitled Average Balance Sheets and Analysis of Net Interest
Income, compares the changes in revenue and interest earning assets outstanding,
and interest cost and liabilities outstanding for the years ended December 31,
1998, 1997, and 1996.
The Corporation's net interest income on a taxable equivalent basis was
$40,241,000, $38,730,000 and $33,920,000 in 1998, 1997, and 1996, respectively.
Total average earning assets increased to $777,336,000 in 1998, compared to
$763,438,000 in 1997, and $650,922,000 in 1996. Earning assets are total loans,
total securities, interest-bearing deposits with other banks and federal funds
sold. Average total loans increased to $586,524,000. Average securities,
interest-bearing deposits with other banks, and federal funds sold decreased a
combined total of $22,694,000.
Total average interest-bearing liabilities were $604,858,000 in 1998.
Average time deposits decreased $1,109,000. Average purchased funds decreased
$2,252,000. Average combined NOW, Money Fund and savings increased $1,887,000.
Average earning assets of $777,336,000 in 1998 contributed a tax equivalent
interest income of $64,436,000 with a yield of eight point twenty-nine percent
(8.29%). Average earning assets for 1997 contributed a tax equivalent interest
yield of eight point thirty-four percent (8.34%). Principally the decreased
yield on average earning assets was attributed to decreased rates in the
commercial portfolio, as well as decreasing yields in the investment portfolio.
Average interest-bearing liabilities of $604,858,000 in 1998 contributed
interest expense of $24,195,000 with an average rate of 4.00% compared to the
prior year of 4.11%. Generally deposit rates declined in all deposit products.
Table III, entitled Analysis of Net Interest Income Changes, translates the
dollar changes in taxable equivalent net interest margin into (1) changes due to
volume or (2) changes due to average yields on interest earning assets and
average rates for sources of funds on which interest expense is incurred. Net
interest income increased on a tax equivalent basis from $38,730,000 to
$40,241,000 or an increase of $1,511,000. The majority of this increase was
largely due to an increase in volume when compared to 1997. The increase in
volume of average earning assets from $763,438,000 to $777,336,000 when coupled
with the general interest rates from 8.34% to 8.29% increased total interest
income to $64,436,000. Additional volume was required with declining rates to
achieve the increase in interest income.
Rates for interest expense decreased from 4.11% to 4.00% and when coupled
with the decreased volume of interest-bearing liabilities from $606,632,000 to
$604,858,000, this decreased total interest expense for the Corporation to
$24,195,000. Comparing current year volumes and rates with previous year volume
and rates, the Corporation experienced an increase in net interest income of
$1,511,000.
OTHER OPERATING INCOME
Other operating income is comprised of trust income, service charges on
deposit accounts, security gains, and other items of income not directly
resulting from interest earning assets. These items comprise safe deposit box
fees, exchange and collection fees, investor service fees, gain (loss) on the
sale of loans and miscellaneous other income.
Total other operating income for the Corporation is $8,489,000 for 1998
compared to $7,104,000 for 1997.
Trust income increased $220,000 to $1,836,000. Services charges on deposit
accounts increased to $3,149,000 from $2,958,000 while other income increased to
$3,074,000 from $2,313,000.
The Corporation realizes the importance of increasing other operating
income which will compliment the improvement of the overall efficiency ratio.
As discussed earlier, it's important for the Corporation to continue to
work on improving its efficiency ratio which will lead to the improved ratio for
return on average assets and return on average equity.
NET INCOME
(Thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
$15,620 $14,488 $13,387 $12,707 $11,776
RETURN ON AVERAGE ASSETS
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
1.85% 1.75% 1.92% 1.95% 1.85%
TOTAL CAPITAL
(Thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
$118,129 $108,736 $100,794 $90,237 $79,502
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MANAGEMENT'S DISCUSSION AND ANALYSIS STATISTICAL INFORMATION
Table II: Average Balance Sheets and Analysis of Net Interest Income for the
Years Ended December 31. (Tax equivalent basis)
1998 1997 1996
-------------------------- -------------------------- --------------------------
(000's) Balance Interest Yield Balance Interest Yield Balance Interest Yield
===============================================================================================================================
ASSETS
Earning Assets
Loans (1)
Commercial 2).............. $268,687 $24,303 9.05% $234,195 $21,422 9.15% $182,300 $16,484 9.04%
Real Estate 3)............. 225,609 19,395 8.60% 214,612 18,329 8.54% 146,063 12,169 8.33%
Consumer 3)................ 92,228 9,474 10.27% 101,125 10,533 10.42% 96,881 10,329 10.66%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Loans................ 586,524 53,172 9.07% 549,932 50,284 9.14% 425,244 38,982 9.17%
Investment Securities
Taxable.................... 133,188 7,739 5.81% 160,144 9,350 5.84% 164,548 9,003 5.47%
Tax-exempt................. 11,313 923 8.16% 19,056 2,109 11.07% 29,311 3,529 12.04%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total securities........... 144,501 8,662 5.99% 179,200 11,459 6.39% 193,859 12,532 6.46%
Federal funds sold and
interest-bearing deposits
with other banks........... 46,311 2,602 5.62% 34,306 1,890 5.51% 31,819 1,717 5.40%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total earning assets.......... 777,336 64,436 8.29% 763,438 63,633 8.34% 650,922 53,231 8.18%
Nonearning assets
Allowance for loan losses.. (6,887) (6,712) (5,771)
Cash and due from banks.... 30,686 29,297 27,223
Premises, equipment
and other assets........... 45,337 43,282 25,880
-------- -------- --------
Total asset..................... $846,472 $829,305 $698,254
======== ======== ========
LIABILITIES
Interest-bearing liabilities
Deposits
NOW........................ $ 81,793 $ 1,479 1.81% $ 76,854 $ 1,425 1.85% $ 73,911 $ 1,437 1.94%
Money Fund................. 56,825 2,336 4.11% 59,874 2,545 4.25% 26,244 748 2.85%
Savings.................... 153,541 3,897 2.54% 153,544 3,956 2.58% 132,769 3,322 2.50%
Time Deposits
CD's more than 100,000..... 44,146 2,362 5.35% 40,772 2,214 5.43% 42,953 2,187 5.09%
CD's less than 100,000..... 230,815 12,394 5.37% 235,298 12,763 5.42% 186,016 10,206 5.49%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
deposits................ 567,120 22,468 3.96% 566,342 22,903 4.04% 461,893 17,900 3.88%
Purchased funds
Federal funds purchased and
securities sold under
agreements to
repurchase.............. 37,738 1,727 4.58% 40,290 2,000 4.96% 33,187 1,411 4.25%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities................ 604,858 24,195 4.00% 606,632 24,903 4.11% 495,080 19,311 3.90%
Non-interest-bearing
demand deposits............ 121,441 111,391 103,989
Other liabilities............. 6,085 7,222 4,807
Shareholders' equity.......... 114,088 104,060 94,378
-------- -------- --------
Total liabilities and
Shareholders' equity.......... $846,472 $829,305 $698,254
======== ======== ========
Net interest income and....... 40,241 38,730 33,920
Interest rate spread....... 4.29% 4.23% 4.28%
----- ----- -----
Net interest margin
(tax equivalent basis)..... 5.18% 5.07% 5.21%
----- ----- -----
Footnote:
1) Nonaccrual loans are included in average loan balances and loan fees are
included in interest income.
2) Interest income on tax-exempt investments and on certain tax-exempt
commercial loans has been adjusted to a taxable equivalent basis using a
marginal federal income tax rate of thirty-five percent (35%).
3) For Management Discussion and Analysis, a portion of home equity loan
averages are included in the consumer loan portfolio as opposed to the real
estate loan portfolio.
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MANAGEMENT'S DISCUSSION AND ANALYSIS STATISTICAL INFORMATION
Table III: Analysis of Net Interest Income Changes
(Tax equivalent basis)
1998 Compared to 1997 1997 Compared to 1996
----------------------------------- ------------------------------------
Yield/ Yield/
(000's) Volume Rate Mix Total Volume Rate Mix Total
===========================================================================================================================
Increase(Decrease) in Interest Income
Loans
Commercial ............................ $ 3,155 $(239) $(35) $ 2,881 $ 4,693 $ 191 $ 54 $ 4,938
Real Estate ........................... 939 121 6 1,066 5,711 306 143 6,160
Consumer .............................. (927) (145) 13 (1,059) 452 (238) (10) 204
------- ----- ---- ------- ------- ----- ----- -------
Total loans ............................. 3,167 (263) (16) 2,888 10,856 259 187 11,302
Investment Securities
Taxable................................ (1,574) (45) 8 (1,611) (241) 604 (16) 347
Tax-exempt ............................ (857) (554) 225 (1,186) (1,235) (285) 100 (1,420)
------- ----- ---- ------- ------- ----- ----- -------
Total securities......................... (2,431) (599) 233 (2,797) (1,476) 319 84 (1,073)
Federal funds sold and interest-bearing..
deposits with other banks ........... 661 37 13 711 134 36 3 173
------- ----- ---- ------- ------- ----- ----- -------
Total Interest Income Change ................ 1,397 (825) 230 802 9,514 614 274 10,402
Increase (Decrease) In Interest Expense
Interest-bearing liabilities
NOW ................................... 92 (35) (2) 55 58 (67) (3) (12)
Money Fund ............................ (130) (84) 4 (210) 958 368 471 1,797
Savings ............................... 0 (59) 0 (59) 520 99 15 634
Time Deposits
CD's more than 100,000 .............. 183 (33) (3) 147 (111) 145 (7) 27
CD's less than 100,000 .............. (243) (128) 2 (369) 2,704 (116) (31) 2,557
------- ----- ---- ------- ------- ----- ----- -------
Total interest-bearing deposits ......... (98) (339) 1 (436) 4,129 429 445 5,003
Federal Funds purchased and
securities sold under agreements
to repurchase ......................... (127) (156) 10 (273) 302 236 51 589
------- ----- ---- ------- ------- ----- ----- -------
Total Interest Expense Change ............... (225) (495) 11 (709) 4,431 665 496 5,592
Increase(decrease) in net interest
Income on a Taxable Equivalent Basis .... $ 1,622 $(330) $219 $ 1,511 $ 5,083 $ (51) $(222) $ 4,810
Decrease in Taxable Equivalent Basis .... 453 485
------- -------
Net Interest Income Change............. $ 1,964 $ 5,295
OPERATING EXPENSES
The Corporation recognizes the importance of a low efficiency ratio. Low
efficiency ratios indicate the success of the Corporation in controlling
operating expenses; such as salaries, equipment expenses, and other operating
expenses. These expenses are generally measured using the term "Efficiency
Ratio" which is operating expenses divided by the sum of net interest income
plus other operating income. The Corporation's efficiency ratio as of December
31, 1998 was 47% as compared to December 31, 1997 of 49%. This indicates that it
costs the Corporation 47 cents for each dollar of revenue earned before taxes.
The Corporation continues to implement cost saving procedures such as
centralized purchasing by each affiliate, expanding the use of technology such
as networking and on-line teller systems. The Corporation is currently reviewing
methods to consolidate the proof and transit function to one location.
Efficiency ratios for peer Banks with asset size distribution from $100 million
to $1 billion had an efficiency ratio of 60.5%, whereas, the efficiency ratio
for all banks located in the Central Region had an efficiency ratio 57.7%. The
Central Region is defined as Wisconsin, Michigan, Illinois, Indiana, Ohio, and
Kentucky. The average efficiency ratio for all banks within the state of Ohio
was 58%. As the Corporation continues to improve its measure of cost control,
this ratio will continue to decrease. The efficiency ratios for Security
National, Citizens National, and Third Savings and Loan were 45%, 58% and 50%,
respectively. Overall employment was 327 employees with total salary and
benefits of $11,224,000. Amortization of intangibles was $673,000 as a result of
the Corporation's previous acquisitions. Equipment and occupancy for 24 banking
offices totaled $2,656,000 while other operating expenses were $8,421,000. Other
operating expenses are detailed in the following table:
OTHER OPERATING EXPENSES
000's
- ------------------------------------------------------
Percent of Total
----------------
Marketing $ 479 5.7%
Community Donations 148 1.8%
FDIC Insurance 185 2.2%
Appraisals 284 3.4%
Loan and Credit Information 358 4.3%
Exam Fees 314 3.7%
Insurance Premiums 190 2.3%
Legal Fees 231 2.7%
State of Ohio Franchise Tax 1,163 13.8%
Computer Services 1,325 15.7%
Forms and Supplies 605 7.2%
Postage and Delivery 563 6.7%
Telephone 322 3.8%
Aggregate Other Expense 2,254 26.7%
------ -----
$8,421 100.0%
LOANS
Total average commercial loans increased fourteen point seven percent
(14.7%) to $268,687,000 in 1998 yielding an average rate of nine point zero five
percent (9.05%). Average real estate loans increased five point one percent
(5.1%) to $225,609,000, yielding an average rate of eight
5
point six zero percent (8.60%). Average consumer loans decreased eight point
eight percent (8.8%) to $92,228,000, yielding an average rate of ten point
twenty-seven percent (10.27%).
Total average loans increased to $586,524,000 from $549,992,000 or 6.7%.
This increase reflected loan growth primarily in commercial loans and real
estate loans partially offset by the decrease in the consumer portfolio. Loans
secured by real estate represented 41% or $252,609,000 of total loans
outstanding, whereas, commercial loans represented 46% or $285,958,000 as of
December 31, 1998.
The Corporation provides, as expense, an amount which reflects expected
loan losses. This provision is based on the growth of the loan portfolio, local
economic conditions, and on recent loan loss experience and is called the
provision for loan losses in the Consolidated Statement of Income. Actual losses
on loans are charged against the reserve built up on the Consolidated Statement
of Condition through the allowance for loan losses. The amount of loans actually
removed as assets from the Consolidated Statement of Condition is referred to as
charge-offs. Netting out recoveries on previously charged-off assets with
current year charge-offs provides net charge-offs.
Net charge-offs in 1998 decreased to $911,000 from $1,873,000 in 1997. The
provision for loan losses was $1,540,000 in 1998 and $1,300,000 in 1997. The
allowance for loan losses at December 31, 1998 was equivalent to one point
eleven percent (1.11%) of loans outstanding.
The following table presents loan loss data for the most recent five (5)
year period.
RESERVE FOR LOAN LOSSES FIVE YEAR HISTORY
(000's) 1998 1997 1996 1995 1994
======================================================================================
Balance at Jan. 1 ............. $ 6,254 $ 6,827 $ 5,336 $ 5,101 $ 4,364
Acquired allowance ............ 0 0 1,285 0 0
Provision for loan losses ..... 1,540 1,300 1,875 950 844
Loans charged off ............. (2,106) (2,188) (1,963) (1,077) (732)
Recoveries of loans
previously charged off ...... 1,195 315 294 362 625
-------- -------- -------- -------- --------
Balance at Dec. 31 ............ $ 6,883 $ 6,254 $ 6,827 $ 5,336 $ 5,101
Loans outstanding
at Dec. 31 .................. $616,942 $562,005 $540,768 $396,570 $394,998
Reserve as a
percent of loans ............ 1.11% 1.11% 1.26% 1.35% 1.29%
Net loan losses to
average loans ............... 0.16% 0.34% 0.39% 0.18% 0.03%
INTEREST RATE RISK AND LIQUIDITY MANAGEMENT
INTEREST RATE RISK MANAGEMENT
The Company seeks to achieve consistent growth in net interest income and
net income while managing volatility arising from shifts in interest rates. The
Asset and Liability Management Committee (ALCO) oversees financial risk
management, establishing broad policies and specific operating limits that
govern a variety of financial risks inherent in the Company's operations,
including interest rate, liquidity, and market risks. Balance sheet strategies
are reviewed and monitored regularly by ALCO to ensure consistency with approved
risk tolerances.
Interest rate risk management is a dynamic process, encompassing both the
business flows onto the balance sheet and the changing market and business
environment. Interest rate risk by definition is the risk of decreased net
interest income whenever there are movements in market interest rates. Effective
management of interest rate risk begins with investments and funding sources.
Measurement and monitoring of interest rate risk is an ongoing process. A
key element in this process is the Company's estimation of the amount that net
interest income will change over a twelve to twenty-four month period given a
directional shift in interest rates. The income simulation model used by the
Company captures all assets and liabilities, accounting for significant
variables which are believed to be affected by interest rates. These include
prepayment speeds on real estate mortgages and consumer installment loans,
principal amortization and maturities on other financial instruments. The model
captures embedded options, e.g. interest rate caps/floors or call options, and
accounts for changes in rate relationships, as various rate indices lead or lag
changes in market rates. While these assumptions are inherently uncertain,
management utilizes probabilities and, therefore, believes that the model
provides an accurate estimate of the interest rate risk exposure. Management
reporting of this information is shared with the Board of Directors.
At December 31, 1998, the results of the Company's interest sensitivity
analysis indicated that net interest income would be relatively unchanged by a
100 basis points increase or decrease in rate (assuming the change occurs evenly
over the next year and that corresponding changes in other market rates occur as
forecasted). Net interest income would be expected to decrease 4.3% if rates
were to fall 200 basis.
LIQUIDITY MANAGEMENT
Liquidity Management is also a significant responsibility of ALCO. The
objective of ALCO in this regard is to maintain an optimum balance of maturities
among assets and liabilities such that sufficient cash, or access to cash, is
available at all times to meet the needs of borrowers, depositors, and
creditors, as well as to fund corporate expansion and other activities without
incurring unacceptable losses.
A chief source of liquidity is derived from the retail deposit base
accessible by its network of branches. Currently each affiliate is a member of
the Federal Home Loan Bank, thereby creating a source of funds for liquidity
purposes.
While liability sources are many, significant liquidity is available from
the Company's investment and loan portfolios. ALCO regularly monitors the
overall liquidity position of the business and ensures that various alternative
strategies exist to cover unanticipated events. At December 31, 1998, sufficient
liquidity was available to meet estimated short-term and long term funding
needs.
MARKET INFORMATION
Security Banc Corporation stock (symbol STYB) is traded in the
over-the-counter market. The following table sets forth the sales prices for the
common stock during the periods indicated.
1998 1997
---- ----
Quarter Ended High Bid Low Bid High Bid Low Bid
==========================================================
March 31........ $28.63 $27.25 $21.75 $19.00
June 30......... $30.50 $28.63 $23.00 $21.75
September 30.... $38.50 $30.50 $25.25 $23.00
December 31..... $46.00 $38.50 $27.25 $25.25
As of December 31, 1998, the Corporation had 1,879 shareholder accounts of
record. Cash dividends paid per share were $0.495.
6
QUARTERLY INFORMATION
First Second Third Fourth
(000's) except per share data Quarter Quarter Quarter Quarter
==========================================================================
1998
- ----
Interest and fee income ...... $15,693 $16,029 $16,172 $16,140
Interest expense ............. 5,982 6,052 6,107 6,054
------- ------- ------- -------
Net interest income .......... 9,711 9,977 10,065 10,086
Provision for loan losses .... 200 200 870 270
Other operating income
Investment securities
gains (losses) ............. 44 42 247 97
All other income ............. 1,830 1,990 1,997 2,242
Operating expense ............ 5,744 5,720 5,770 5,740
------- ------- ------- -------
Income before income taxes ... 5,641 6,089 5,669 6,415
Provision for income tax ..... 1,924 2,086 1,971 2,213
------- ------- ------- -------
Net Income ................... 3,717 4,003 3,698 4,202
Per Share
Basic Earnings Per Share ..... 0.305 0.33 0.30 0.35
Diluted Earnings Per Share ... 0.305 0.33 0.30 0.34
Cash Dividends Paid .......... 0.105 0.12 0.12 0.15
Market Price ................. 28.63 30.50 38.50 46.00
1997
- ----
Interest and fee income ...... $15,063 $15,927 $15,830 $15,958
Interest expense ............. 6,095 6,398 6,235 6,175
------- ------- ------- -------
Net interest income .......... 8,968 9,529 9,595 9,783
Provision for loan losses .... 200 200 700 200
Investment securities
gains (losses) ............. 56 50 108 4
All other income ............. 1,583 1,511 1,872 1,921
Operating expense ............ 5,537 5,677 5,827 5,688
------- ------- ------- -------
Income before income taxes ... 4,870 5,213 5,048 5,820
Provision for income tax ..... 1,486 1,597 1,554 1,825
------- ------- ------- -------
Net income ................... 3,384 3,616 3,494 3,995
Per Share
Basic Earnings Per Share ..... 0.28 0.30 0.29 0.33
Diluted Earnings Per Share ... 0.28 0.30 0.29 0.33
Cash Dividends Paid .......... 0.105 0.105 0.105 0.13
Market Price ................. 21.75 23.00 25.25 27.25
YEAR 2000 COMPLIANCE
Management formed, in July 1997, a "Year 2000 Committee" to initiate the
process of preparing its computer systems and applications for the Year 2000.
The process involves identifying and remediating data recognition problems in
computer systems and software and other operating equipment that could be caused
by the date change from December 31, 1999 to January 1, 2000.
The Corporation depends on various third-party vendors, suppliers, and
service providers. The Corporation will be dependent on the continued service by
its vendors, suppliers, service providers, and ultimately its customers'
continued operations in order to avoid business interruptions. Any interruption
in a third party's ability to provide goods and services, such as issues with
telecommunication links, power and transportation, could present problems. The
Year 2000 Committee has identified material third-party relationships with a
focus on those considered "Mission Critical." The Corporation is presently
working with each of these parties to test transactions and/or interfaces
between its processors, obtain appropriate information from each party, or
assess each party's ability to be prepared for the Year 2000.
The Year 2000 Committee has identified "Mission Critical" components for
Information Technology systems, Non-information Technology systems, and business
processes. Information Technology includes, for example, systems that service
loan and deposit customers. Non-information Technology systems include security
systems, elevators, utilities, and voice/data communications. An application,
system, or process is Mission Critical if it is vital to the successful
continuance of a core business activity.
The Corporation's progress towards meeting the Plan's goals for both
Information Technology systems and Non-information Technology systems, which
follows a five phase approach recommended by federal bank regulators, is as
follows:
PHASE COMPLETE DATE**
----- -------- ----
MISSION CRITICAL
Awareness 100% October, 1997
Assessment 100% February, 1998
Renovation 100% December, 1998
Testing/Validation 90%* March 31, 1999
Implementation 50%* June 30, 1999
The definition of each phase is as follows:
Awareness Phase - Define the Y2K problem and gain executive level support
for the resources necessary to perform compliance work. Establish a Y2K
program team and develop an overall strategy that encompasses in house
systems, service bureaus for systems that are outsourced, vendors,
auditors, and suppliers.
Assessment Phase - Assess the size and complexity of the problem and detail
the magnitude of the effort necessary to address the Y2K issues. This phase
must identify all hardware, software, networks, automated teller machines,
other various processing platforms, and customer and vendor
interdependencies affected by the Y2K date change. The assessment must go
beyond information systems and include environmental systems that are
dependent on embedded microchips, such as security systems, elevators, and
vaults.
Renovation Phase - This phase includes code enhancements, hardware and
software upgrades, system replacements, vendor certification, and other
associated changes. Work should be prioritized based on information
gathered during the assessment phase. For institutions relying on outside
servicers or third party software providers, ongoing discussions and
monitoring of vendor progress are necessary.
Validation Phase - Testing is a multifaceted process that is critical to
the Y2K project and inherent in each phase of the project management plan.
This process includes the testing of incremental changes to hardware and
software components. In addition to testing upgraded components,
connections with other systems must be verified, and internal and external
users should accept all changes.
Implementation Phase - In this phase, systems should be certified as Y2K
compliant and be accepted by the business users. This phase must ensure
that any new systems or subsequent changes to verified systems are
compliant with Y2K requirements.
The Year 2000 Committee is working with significant customers, vendors, and
business counterparties to monitor the progress of their Year 2000 efforts.
Management believes it has an effective plan in place to resolve the Year 2000
issue in a timely manner and, thus far, activities have tracked in accordance
with the original plan. Management is in the process of modifying its existing
business continuity plans and is also developing contingency plans to address
potential risks in the event of Year 2000 failures, including non-compliance by
third parties.
Management does not expect the Year 2000 compliance expenses to be material to
the Company's future earnings. The Company expects its Year 2000 date conversion
project to be completed on a timely basis.
** Date completed or estimated date of completion.
* Status as of March 1, 1999
7
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Security Banc Corporation
We have audited the accompanying consolidated statement of condition of
Security Banc Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of Security Banc Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Security Banc
Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Columbus, Ohio
January 10, 1999
8
CONSOLIDATED STATEMENT OF CONDITION
As of December 31, 1998 and 1997 (000's)
1998 1997
---- ----
ASSETS
Cash and due from banks .................................. $ 34,052 $ 33,043
Federal funds sold ....................................... 21,350 52,655
-------- --------
Total cash and cash equivalents ................. 55,402 85,698
Interest-bearing deposits with other banks ............... 2,700 2,700
Investments (Market value $167,365 in 1998) .............. 167,324 149,179
(Market value $149,531 in 1997)
LOANS:
Commercial and agriculture ............................ 285,958 252,053
Real Estate ........................................... 252,609 225,791
Consumer .............................................. 78,375 84,161
-------- --------
Total Loans ..................................... 616,942 562,005
Less allowance for loan losses .................. 6,883 6,254
-------- --------
Net Loans .................................... 610,059 555,751
Premises and equipment ................................... 9,224 8,658
Other Assets ............................................. 38,791 37,619
-------- --------
TOTAL ASSETS ............................................. $883,500 $839,605
======== ========
LIABILITIES
Non-interest-bearing deposits ............................ $131,285 $119,373
Interest-bearing demand deposits ......................... 148,462 129,351
Savings deposits ......................................... 154,876 151,119
Time deposits, $100,000 and over ......................... 44,794 41,745
Other time deposits ...................................... 229,436 235,803
-------- --------
Total Deposits .................................. 708,853 677,391
Federal funds purchased and securities
sold under agreement to repurchase .................... 28,993 30,746
Federal Home Loan Bank term advances ..................... 22,816 16,333
Other liabilities ........................................ 4,709 6,399
-------- --------
TOTAL LIABILITIES ........................................ 765,371 730,869
SHAREHOLDERS' EQUITY
Common Stock ($1.5625 Par Value) ......................... 19,768 19,707
authorized 18,000,000 shares
issued 12,651,812 shares, 1998
issued 12,612,372 shares, 1997
Surplus .................................................. 22,084 21,831
Retained Earnings ........................................ 79,756 70,149
Accumulated Other Comprehensive Income ................... (121) 242
Less: Treasury Stock ..................................... 3,358 3,193
-------- --------
485,387 shares, 1998 and 481,200 shares, 1997
TOTAL SHAREHOLDERS' EQUITY .................................. 118,129 108,736
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $883,500 $839,605
======== ========
See Notes to Consolidated Financial Statements.
9
CONSOLIDATED STATEMENT OF INCOME
1998 1997 1996
---- ---- ----
INTEREST AND FEE INCOME
Loans .................................................. $ 53,093 $ 50,168 $ 38,877
Interest-bearing deposits with other banks ............. 227 182 110
Federal funds sold ..................................... 2,375 1,707 1,607
Investments-taxable ....................................... 7,739 9,350 9,003
Investments-tax exempt ................................. 600 1,371 2,294
----------- ----------- -----------
Total Interest and Fee Income ....................... 64,034 62,778 51,891
INTEREST EXPENSE
Deposits of $100,000 and over .......................... 2,362 2,214 2,187
Other Deposits ......................................... 20,106 20,689 15,713
Federal funds purchased and securities
sold under agreement to repurchase .................. 1,151 1,124 1,213
Federal Home Loan Bank term advances ................... 522 820 143
Demand notes to U. S. Treasury ......................... 54 56 55
----------- ----------- -----------
Total Interest Expense .............................. 24,195 24,903 19,311
----------- ----------- -----------
NET INTEREST INCOME ....................................... 39,839 37,875 32,580
Provision for loan losses .............................. 1,540 1,300 1,875
----------- ----------- -----------
Net interest income after provision for loan losses .... 38,299 36,575 30,705
OTHER OPERATING INCOME
Trust income ........................................... 1,836 1,616 1,516
Service charges on deposit accounts .................... 3,149 2,958 2,660
Securities gains ....................................... 430 217 362
Other income ........................................... 3,074 2,313 1,355
----------- ----------- -----------
Total Other Operating Income ........................ 8,489 7,104 5,893
OPERATING EXPENSE
Salaries and employee benefits ......................... 11,224 11,005 9,224
Equipment and occupancy, net ........................... 2,656 2,785 2,354
Amortization of intangibles ............................ 673 752 53
Other operating expense ................................ 8,421 8,187 6,390
----------- ----------- -----------
Total Operating Expense ............................. 22,974 22,729 18,021
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ................................ 23,814 20,950 18,577
Provision for income tax ............................... 8,194 6,462 5,190
----------- ----------- -----------
NET INCOME .......................................... $ 15,620 $ 14,488 $ 13,387
PER SHARE DATA (WHOLE DOLLARS)
Basic earnings ......................................... $ 1.290 $ 1.200 $ 1.110
Diluted earnings ....................................... $ 1.280 $ 1.190 $ 1.100
Cash dividends ......................................... $ 0.495 $ 0.445 $ 0.405
Weighted average shares outstanding ....................... 12,143,743 12,117,526 12,057,694
See Notes to Consolidated Financial Statements.
10
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997, and 1996 (000's)
Accumulated
Other
Common Retained Treasury Comprehensive Comprehensive
Stock Surplus Earnings Stock Income Total Income
----- ------- -------- ----- ------ ----- ------
Balance at January 1, 1996 ...................... $18,673 $20,937 $53,613 $(3,287) $ 301 $ 90,237
Net income ................................... 0 0 13,387 0 0 13,387 $13,387
Cash Dividends ............................... 0 0 (4,545) 0 0 (4,545)
Exercise of stock options .................... 111 263 0 0 0 374
Purchase of treasury stock ................... 0 0 0 (18) 0 (18)
Tax benefits of options exercised and sold ... 0 0 102 0 0 102
Other ........................................ 874 470 0 112 0 1,456
Change in unrealized losses on securities
available for sale net of income
taxes of $107 .............................. 0 0 0 0 (199) (199) $ (199)
-------
Total comprehensive income ................ $13,188
------- ------- ------- ------- ----- -------- =======
Balance at December 31, 1996 .................... $19,658 $21,670 $62,557 $(3,193) $ 102 $100,794
Net income ................................... 0 0 14,488 0 0 14,488 $14,488
Dividend distributions ....................... 0 0 (6,896) 0 0 (6,896)
Exercise of stock options .................... 49 161 0 0 0 210
Change in unrealized gains on securities
available for sale net of income
taxes of $75 ............................... 0 0 0 0 140 140 $ 140
-------
Total comprehensive income $14,628
------- ------- ------- ------- ----- -------- =======
Balance at December 31, 1997 .................... $19,707 $21,831 $70,149 $(3,193) $ 242 $108,736
Net income ................................... 0 0 15,620 0 0 15,620 $15,620
Cash Dividends ............................... 0 0 (6,013) 0 0 (6,013)
Exercise of stock options .................... 61 253 0 0 0 314
Purchase of treasury stock ................... 0 0 0 (165) 0 (165)
Change in unrealized losses on securities
available for sale net income
taxes of $195 .............................. 0 0 0 0 (363) (363) $ (363)
-------
Total comprehensive income $15,257
------- ------- ------- ------- ----- -------- =======
Balance at December 31, 1998 .................... $19,768 $22,084 $79,756 $(3,358) $(121) $118,129
======= ======= ======= ======= ===== ========
See Notes to Consolidated Financial Statements.
11
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996 (000's)
1998 1997 1996
---- ---- ----
Cash Flows from Operating Activities
Net Income ............................................. $ 15,620 $ 14,488 $ 13,387
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ..................................... 1,091 1,049 903
(Gain)/Loss on sale of the following:
Investment securities available for sale ...... (430) (217) (362)
Other assets .................................. (74) (119) (32)
Provision for loan losses ........................ 1,540 1,300 1,875
Amortization and accretion, net .................. (306) (97) 829
Amortization and core deposit intangible ......... 676 752 53
Change in other operating assets and
liabilities, net .............................. (22,948) (14,918) 2,118
Total Adjustments ........................... (20,451) (12,250) 5,384
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES .... (4,831) 2,238 18,771
Cash Flows From Investing Activities:
Net decrease (increase) in interest-bearing deposits
with other banks .................................... 0 3,902 (2,380)
Proceeds from maturities and sales of investment
securities available for sale ....................... 142,045 192,329 147,536
Proceeds from maturities of investments held to
maturity ............................................ 9,606 15,414 7,732
Purchase of:
Investment securities available for sale ............ (147,681) (166,286) (148,238)
Investment securities held to maturity .............. (22,129) (722) (3,084)
Increase in loans ...................................... (55,374) (23,611) (17,212)
Proceeds from sale of other assets ..................... 21,602 9,614 1,818
Capital expenditures ................................... (1,654) (1,163) (440)
Net cash used in acquisition ........................... 0 (1,502) (38,190)
Purchase of life insurance policies .................... (2,212) (3,054) (2,831)
Proceeds from surrender of life insurance policies ..... 4 239 783
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES .... (55,793) 25,160 (54,506)
Cash Flows from Financing Activities:
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts ................................ 34,780 14,784 (4,104)
Net decrease in certificates of deposit ................ (3,318) (4,468) (1,506)
Net increase in short-term borrowed funds .............. 4,730 3,341 1,440
Net purchase and sale of treasury stock ................ (165) 0 (18)
Dividends paid ......................................... (6,013) (5,394) (4,545)
Proceeds from exercise of stock options ................ 314 210 475
Cash provided from acquisition ......................... 0 0 17,062
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............. 30,328 8,473 8,804
Net (decrease) increase in cash and cash equivalents ..... (30,296) 35,871 (26,931)
Cash and cash equivalents at beginning of year ............ 85,698 49,827 76,758
--------- --------- ---------
Cash and Cash Equivalents at End of Year .................. $ 55,402 $ 85,698 $ 49,827
========= ========= =========
See Notes to Consolidated Financial Statements
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. ORGANIZATION
Security Banc Corporation ("Security" or "the Company") is a bank holding
company headquartered in Springfield, Ohio. The Company's principal
subsidiaries, Security National Bank and Trust Company, Citizens National
Bank, and Third Savings and Loan Company are located in Central Ohio and are
engaged in general commercial banking and trust business and are operated as
one segment.
SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
The accounting and reporting policies of Security are based on generally
accepted accounting principles and conform to general practices within the
banking industry. The following is a description of the significant
accounting policies followed by Security.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVESTMENT SECURITIES
Securities held to maturity and available for sale: Management determines
the appropriate classification of debt securities at the time of purchase
and reevaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when Security Banc Corporation
has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities not classified as trading are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over
the estimated life of the security. Such amortization is included in
interest income from investments. Interest and dividends are included in
interest income from investments. Realized gains and losses, and declines in
value judged to be other-than-temporary are included in net securities gains
(losses). The cost of securities sold is based on the specific
identification method.
LOANS
Interest income on loans is accrued using the simple interest method based
on the principal amounts outstanding. Loan fees received in excess of direct
costs involved in origination of a loan are amortized over the estimated
loan term. Accrual of interest is discontinued when circumstances indicate
that collection of loan principal is questionable or when loans meet
regulatory non accrual standards.
The company accounts for impaired loans in accordance with Financial
Accounting Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan". Certain large commercial loans are considered
impaired loans and are reported at the present value of expected future cash
flows using the loan's effective interest rate, or as a practical expedient,
at the loan's observable market price or the fair value of the collateral if
the loan is collateral dependent.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is available for loan charge-offs.
The adequacy of the allowance is based on Management's continuous evaluation
of key factors in the loan portfolio with consideration given to current
economic conditions and past charge-off experience.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of premises and equipment is determined using the
straight-line method over the estimated lives of the respective assets.
Maintenance and repairs are charged to expense as incurred while renewals
and betterments are capitalized.
INCOME TAXES
Certain income and expense items are accounted for in different time periods
for financial reporting purposes than for income tax purposes. Appropriate
provisions are made in the financial statements for deferred taxes in
recognition of these temporary differences.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Federal funds are
purchased for one-day periods.
Interest paid by Security in 1998, 1997, and 1996 was $24,269,000,
$25,447,000 and $19,035,000, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents and interest-bearing deposits with other banks:
The carrying amounts reported in the balance sheet for cash and short term
instruments approximate those assets' fair values.
Investment Securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for mortgage loans are based on quoted market prices
of similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. The fair values for other
loans (e.g., commercial, agricultural and consumer) are estimated using
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest approximates its fair value.
Off balance sheet instruments: The carrying amounts reported for Security
Banc Corporation's off balance sheet (letters of credit and lending
commitments) approximate those assets' fair value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate and fixed term money market accounts approximate
their fair values at the reporting date. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Short term borrowings: The carrying amounts of federal funds purchased and
securities sold under agreement to repurchase approximate their fair values.
13
EARNINGS PER COMMON SHARE
SFAS No. 128 requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the corresponding
amounts of the diluted earnings per share computation. The computation of
earnings per Common Share is as follows:
Years ended December 31,
1998 1997 1996
---- ---- ----
EARNINGS APPLICABLE TO COMMON SHARE ........... $15,620,000 $14,488,000 $13,387,000
BASIC EARNNGS PER SHARE
Weighted Average Common Shares Outstanding .... 12,143,743 12,117,526 12,057,694
Earnings Applicable to Common Shares .......... $15,620,000 $14,488,000 $13,387,000
Basic Earnings per Share ...................... $ 1.29 $ 1.20 $ 1.11
DILUTED EARNINGS PER SHARE
Weighted average Common Shares Outstanding .... 12,143,743 12,117,526 12,057,694
Dilutive Common Stock Options ................. 83,549 77,366 79,204
=========== =========== ===========
Weighted Average Common Shares and Common
Share Equivalents Outstanding .............. 12,227,292 12,194,892 12,136,898
Earnings Applicable to Common Shares .......... $15,620,000 $14,488,000 $13,387,000
Diluted Earnings per Share .................... $ 1.28 $ 1.19 $ 1.10
2. ACQUISITIONS
THIRD FINANCIAL CORPORATION
On October 21, 1996, the Company acquired all of the outstanding shares of
Third Financial Corporation for $41 million. The acquisition was funded with
existing cash. The results of Third Financial Corporation's operations have
been combined with those of the Company since the date of acquisition.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to the net assets
acquired based on their estimated fair values. The fair value of tangible
assets acquired and liabilities/equity assumed was $162 million and $150
million, respectively. The balance of the purchase price, $12 million, was
recorded as excess of cost over net assets acquired (goodwill) and other
identified intangibles and is being amortized over approximately twenty-five
years on a straight line basis.
CITNAT BANCORP, INC.
On September 30, 1996, the Company merged with CitNat Bancorp, Inc., a $140
million bank holding company headquartered in Ohio, in a transaction
accounted for as a pooling of interest. Security Banc Corporation issued
907,893 shares of common stock to the shareholders of CitNat Bancorp, Inc.
based upon an exchange ratio of 2.1842437 shares of Security Banc
Corporation common stock for each outstanding share of CitNat common stock.
JEFFERSONVILLE BRANCH
On November 6, 1997, Security National Bank and Trust Co. purchased certain
assets and assumed approximately $11,700,000 in deposit liabilities of the
Jeffersonville Branch from a Bank competitor.
This acquisition allowed Security National to expand its services to Fayette
County. The premium for the above transaction was $944,000 which will be
amortized over a period of 25 years for the portion allocated to goodwill
and 10 years for the portion allocated to Core Deposit Intangible.
3. RESERVE BALANCE REQUIREMENTS
The Company's subsidiaries are required to maintain certain daily cash and
due from banks reserve balances in accordance with regulatory requirements.
The balances maintained under such requirements were $11,585,000 at December
31, 1998 and $10,745,000 at December 31, 1997.
4. INVESTMENT SECURITIES
The following table lists the book value and market value of debt securities
and other investments as of December 31,
1998
(000's) ----
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Available for Sale Investments
Debt Securities
U. S. Treasury ............................... $ 7,464 $ 43 $ (1) $ 7,506
U. S. Government Agencies and Corporations ... 59,697 42 (89) 59,650
Mortgage Backed Securities ................... 67,687 36 (298) 67,425
-------- ---- ----- --------
Total Debt Securities ......................... 134,848 121 (388) 134,581
Equity Securities ............................. 150 79 0 229
-------- ---- ----- --------
Total Available for Sale Investments .......... $134,998 $200 $(388) $134,810
======== ==== ===== ========
Held to Maturity Investments
Debt Securities
State and Political Subdivisions ............. $ 26,859 $307 $(257) $ 26,909
Mortgage Backed Securities ................... 2,332 14 (23) 2,323
-------- ---- ----- --------
Total Debt Securities ......................... 29,191 321 (280) 29,232
Federal Reserve Stock and Other ............... 3,323 0 0 3,323
-------- ---- ----- --------
Total Held to Maturity Investments ............ $ 32,514 $321 $(280) $ 32,555
======== ==== ===== ========
The market value of the available for sale investments ($134,810,000) plus
the cost of the held to maturity investments ($32,514,000) is the total
investments carrying value of $167,324,000.
1997
(000's) ----
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Available for Sale Investments
Debt Securities
U. S. Treasury ............................... $115,847 $188 $(24) $116,011
U. S. Government Agencies and Corporations ... 12,886 23 (22) 12,887
Corporate Bonds .............................. 250 0 (0) 250
Mortgage Backed Securities ................... 136 0 (1) 135
-------- ---- ----- --------
Total Debt Securities ......................... 129,119 211 (47) 129,283
Equity Investments ............................ 151 205 0 356
-------- ---- ----- --------
Total Investment Securities ................... $129,270 $416 $(47) $129,639
======== ==== ==== ========
Held to Maturity Investments
Debt Securities
State and Political Subdivisions ............. $ 13,262 $328 $ (4) $ 13,586
Mortgage Backed Securities ................... 3,484 56 (28) 3,512
-------- ---- ----- --------
Total Debt Securities ......................... 16,746 384 (32) 17,098
Federal Reserve Stock and Other ............... 2,794 0 0 2,794
-------- ---- ----- --------
Total Held to Maturity Investments ............ $ 19,540 $384 $(32) $ 19,892
======== ==== ==== ========
The market value of the available for sale investments ($129,639,000) plus
the cost of the held to maturity investments ($19,540,000) is the total
investments carrying value of $149,179,000.
The following tables summarizes the cost and market value of debt securities
at December 31, 1998 and 1997 by contractual maturity. Expected maturities
will differ from contractual maturities because borrowers may have the right
to call or prepay obligations.
(000's) 1998 1997
Market Market
Cost Value Cost Value
---- ----- ---- -----
Available for Sale Investments
Due in one year or less ...................... $ 5,967 $ 5,990 $ 16,498 $ 16,479
Due after one year and through five years .... 40,694 40,716 111,485 111,671
Due after five years and through ten years ... 20,500 20,450 1,000 998
-------- -------- -------- --------
67,161 67,156 128,983 129,148
Mortgage Backed Securities ................... 67,687 67,425 136 135
-------- -------- -------- --------
Total available for sale investments ............ $134,848 $134,581 $129,119 $129,283
======== ======== ======== ========
Held to Maturity Investments
Due in one year or less ...................... $ 2,295 $ 2,303 $ 7,734 $ 7,802
Due after one year and through five years .... 1,543 1,592 3,769 3,821
Due after five years and through ten years ... 2,398 2,631 1,699 1,905
Due after ten years .......................... 20,623 20,383 60 58
-------- -------- -------- --------
26,859 26,909 13,262 13,586
Mortgage backed securities ................... 2,332 2,323 3,484 3,512
-------- -------- -------- --------
Total Held to Maturity Investments .............. $ 29,191 $ 29,232 $ 16,746 $ 17,098
======== ======== ======== ========
14
Proceeds from sales of investments available for sale in 1998 were
$100,443,000. Gross gains on investments available for sale in 1998 were
$430,000. Proceeds from sales of investments available for sale in 1997 were
$168,732,000. Gross gains on investments available for sale in 1997 were
$243,000. Gross losses recognized on investments available for sale in 1997
were $30,000. Proceeds from sales of investments available for sale were
$120,682,000 in 1996. Proceeds from sale of investments held to maturity in
1996 were $1,399,000. Gross gains on investments available for sale were
$372,000 in 1996.
The following table summarizes investment income for the years ended
December 31,
(000's) 1998 1997 1996
---- ---- ----
U. S. Treasury Available for sale ............ $4,873 $ 7,965 $ 7,715
U. S. Treasury Held to Maturity .............. 0 0 17
U. S. Government Agencies and Corporations ... 2,662 1,204 981
States and Political Subdivisions ............ 600 1,371 2,294
Federal Reserve stock and other .............. 204 181 290
------ ------- -------
Total ..................................... $8,339 $10,721 $11,297
====== ======= =======
Securities with a carrying value of $112,963,000 at December 31, 1998, and
$114,423,000 at December 31, 1997, were pledged to secure deposits and
repurchase agreements.
5. LOANS
Loans as of December 31, by various categories are as follows:
(000's) 1998 1997
---- ----
Loans secured by real estate:
Construction and land development ................... $ 22,128 $ 20,157
Secured by farmland ................................. 8,760 6,908
Secured by residential properties ................... 268,850 246,781
Secured by nonresidential properties ................ 86,076 65,454
Loans to finance agricultural production ............... 19,619 20,058
Commercial and industrial loans ........................ 122,244 107,679
Loans to individuals for household, family and other ... 85,812 89,644
Tax exempt obligations ................................. 1,790 3,139
Other loans ............................................ 1,493 1,943
Lease financing ........................................ 170 242
-------- --------
TOTAL LOANS ............................................ $616,942 $562,005
======== ========
Nonperforming loans totaled $3,525,000 and $4,954,000 at December 31, 1998
and 1997, respectively. Nonaccrual loans included in these amounts totaled
$2,154,000 and $3,417,000 at December 31, 1998 and 1997, respectively.
Interest income not recorded on these loans was $180,000 in 1998 and
$300,000 in 1997.
The following table presents the aggregate amount of loans outstanding to
directors and executive officers (including their related interests) as of
December 31, 1998 and December 31, 1997, and an analysis of activity in such
loans during 1998. All such loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other persons. These loans do not
involve more than normal risk of collectability or any other unfavorable
features.
(000's)
Balance, December 31, 1997 .......................................... $ 5,952
New loans ......................................................... 14,372
Repayments ........................................................ 11,817
Net increase due to change in director/executive officer status ... 571
-------
Balance, December 31, 1998 ........................................... $ 9,078
=======
6. ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses is shown in the
following table.
(000's) 1998 1997 1996
---- ---- ----
Balance - beginning of year...........$ 6,254 $ 6,827 $ 5,336
Acquired allowance.................... 0 0 1,285
Charge-offs........................ (2,106) (2,188) (1,963)
Recoveries......................... 1,195 315 294
------- ------- -------
Net charge-offs....................... (911) (1,873) (1,669)
Provision for loan losses............. 1,540 1,300 1,875
------- ------- -------
Balance - end of year.................$ 6,883 $ 6,254 $ 6,827
======= ======= =======
7. PREMISES AND EQUIPMENT
Premises and Equipment as of December 31, are summarized in the following
table.
(000's) 1998 1997
---- ----
Land............................................... $ 1,508 $ 1,508
Buildings.......................................... 10,468 10,048
Equipment.......................................... 9,844 8,838
------- -------
Construction in process............................ 150 0
Total premises and equipment....................... 21,970 20,394
Less: Accumulated depreciation and amortization... 12,746 11,736
------- -------
Net premises and equipment......................... $ 9,224 $ 8,658
======= =======
8. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
The following table is a summary of short-term borrowings at December 31:
(000's) 1998 1997
---- ----
Securities sold under agreement to repurchase... $28,787 $29,296
Demand note due U. S. Treasury.................. 206 1,450
------- -------
Total........................................ $28,993 $30,746
======= =======
The following table is a summary of securities pledged against the
securities sold under agreement to repurchase contracts as of December 31:
(000's) 1998 1997
---- ----
Book Market Book Market
---- ------ ---- ------
U. S. Government Securities ... $36,713 $36,694 $37,018 $37,069
9. ADVANCES FROM FHLB
The Company's affiliates are members of the Federal Home Loan Bank ("FHLB").
Federal Home Loan Bank advances to the Third Savings and Loan affiliate of
the Company were $22,816,325 as of December 31, 1998 and $16,333,000 as of
December 31, 1997. Advances from the FHLB are used for loan funding and
interest rate matching purposes. Advances are due on various maturity dates
through 2008 with adjustable and fixed rates ranging from 4.25% to 7.40%.
FHLB advances are collateralized by each respective affiliate real estate
loan portfolio. As of December 31, 1998, Security National Bank and Citizens
National Bank did not have any FHLB advances.
10. COMMITMENTS AND CONTINGENT LIABILITIES
Security Banc Corporation has various commitments and contingent liabilities
outstanding, such as letters of credit and loan commitments, that are not
reflected in the consolidated financial statements. Letters of credit commit
the Corporation to make payments on behalf of customers when certain
specified future events occur. Loan commitments are made to accommodate the
financial needs of Security Banc Corporation's customers. These arrangements
have credit risk essentially the same as that involved in extending loans to
customers and are subject to Security Banc Corporation's normal credit
policies. Collateral is obtained based on Management's credit assessment of
the customer.
Unfunded loan commitments and unused lines of credit as of December 31, 1998
were $141,993,000. The aggregate amount of outstanding letters of credit was
$2,602,000 at December 31, 1998. No significant losses are anticipated as a
result of these commitments.
11. INCOME TAX
The components of income tax expense are:
(000s) 1998 1997 1996
------ ---- ---- ----
Federal income taxes currently payable ... $8,436 $6,727 $5,297
Deferred tax provision ................... (242) (265) (107)
------ ------ ------
Total income tax expense ................. $8,194 $6,462 $5,190
====== ====== ======
15
A reconciliation of income tax expense at the statutory rate to income tax
expense at the company's effective rate is as follows:
(000s) 1998 1997 1996
------ ---- ---- ----
Computed tax at the statutory rate ...... $8,335 $7,332 $6,316
Tax effect of tax free income and
non-deducible interest expense ....... (288) (711) (921)
Other ................................... 147 (159) (205)
------ ------ ------
Income Tax Expense ...................... $8,194 $6,462 $5,190
====== ====== ======
Income taxes paid were $8,249,000, $6,987,000 and $5,285,000 in 1998, 1997,
and 1996, respectively. Income tax expense associated with security gains
was $150,000 in 1998, $74,000 in 1997, and $123,000 in 1996.
Significant components of the Corporation's deferred tax assets and
liabilities exclusive of securities mark to market adjustments at December
1998 and 1997 are as follows:
1998 1997
---- ----
Deferred Assets
Allowance for loan losses.............. $2,194 $2,078
Other.................................. 790 282
------ ------
Total deferred assets.................. $2,984 $2,360
Deferred Liabilities
Employee benefits...................... 195 160
Depreciation........................... 435 303
Other.................................. 670 455
------ ------
Total deferred liabilities............. 1,300 918
------ ------
Net deferred assets....................... $1,684 $1,442
====== ======
12. STOCK OPTIONS
The Corporation sponsors non-qualified and incentive stock option plans.
Approximately 600,000 shares have been authorized under the plans, 24,275
shares of which were available at December 31, 1998 for future grants. All
options granted have a maximum term of 10 years. Options granted vest
ratably over five years.
The Corporation has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation", requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of Security employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Corporation stock option activity and related information for the
periods ended December 31, 1998, 1997, and 1996 is summarized below:
1998 1997 1996
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding at beginning
of period ................ 162,960 $13.23 193,912 $12.43 167,532 $ 6.36
Granted ..................... 108,485 36.60 7,200 21.25 116,000 16.50
Exercised ................... (39,440) 7.96 (31,152) 6.74 (70,980) 5.26
Forfeited/Expired ........... (5,440) 29.88 (7,000) 16.50 (18,640) 5.08
------- ------ ------- ------ ------- ------
Outstanding at end of
period ................... 226,565 21.94 162,960 13.23 193,912 12.43
------- ------ ------- ------ ------- ------
Exercisable end of period ... 52,360 $13.95 66,880 $ 9.52 73,592 $12.43
Weighted average fair
value of options ......... $ 7.38 $ 6.99 $ 4.28
Exercise prices for options outstanding as of December 31, 1998, ranged from
$6.00 to $44.50.
The weighted average fair value of the options presented above was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for 1998, 1997, and 1996,
respectively; risk free interest rates of 4.90% in 1998, 5.00% in 1997, and
5.25% in 1996; dividend yields of 1.50% in 1998, 1.98% in 1997, and 2.67% in
1996; volatility factors of the expected market price of Security common
stock of .092 in 1998,.059 in 1997, and .037 in 1996 and a weighted average
expected option life of seven (7) years. Because the effect of applying
Statement 123's fair value method to stock options results in net income and
earnings per share that are not materially different from amounts reported
in the consolidated statements of income, pro forma information has not been
provided.
13. RETIREMENT PLANS
Security Banc Corporation has a non-contributory defined benefit pension
plan that covers all employees who have reached the age of twenty-one (21)
and have one thousand (1,000) hours of service during their anniversary
year. The amount of the benefit is determined pursuant to a formula
contained in the retirement plan which, among other things, takes into
account the employee's average earnings in the highest sixty (60)
consecutive calendar months. Accrued benefits are fully vested after five
(5) years of service. Security Banc Corporation's funding policy is to make
annual contributions to the plan which at least equals the minimum required
contributions.
Disclosure of net periodic Pension cost for 1998, 1997, and 1996 is as
follows:
(000's) 1998 1997 1996
------- ---- ---- ----
Service cost........................... $530 $511 $277
Interest cost.......................... 553 527 479
Expected return on plan assets......... (653) (625) (537)
Amortization of transition amount...... (43) (43) (43)
Amortization of prior service cost..... (1) (1) (1)
---- ---- ----
Net periodic pension cost.............. $386 $369 $175
==== ==== ====
The following table sets forth the plan's funded status and amount
recognized in Security Banc Corporation's consolidated statement of
condition as of December 31, 1998 and 1997.
(000's) 1998 1997
---- ----
Change in benefit obligation:
Benefit Obligation at the beginning of the year ... $ 7,176 $ 7,152
Service Cost ...................................... 530 511
Interest Cost ..................................... 553 527
Actuarial loss (gain) ............................. 305 (30)
Benefits paid during year ......................... (749) (984)
------- -------
Benefit Obligation at the end of the year ......... 7,815 7,176
Change in plan assets:
Fair value of plan assets at beginning of year .... 8,286 7,938
Actual return on assets ........................... 1,689 969
Employer contributions ............................ 485 489
Benefits paid ..................................... (749) (1,110)
------- -------
Fair value of plan assets at end of year .......... 9,711 8,286
Funded status of the plan ......................... 1,896 1,236
Unrecognized transition amount .................... (128) (171)
Unrecognized prior service cost ................... (14) (16)
Unrecognized net (gain) or loss ................... (1,195) (590)
------- -------
Prepaid (accrued) benefit cost .................... $ 559 $ 459
======= =======
Assumptions used in accounting for the Plan were:
(000's) 1998 1997 1996
---- ---- ----
Discount rate............................. 7.5% 7.5% 7.5%
Expected return on plan assets............ 8.0% 8.0% 8.0%
Salary rate of compensation increase...... 4.5% 4.5% 4.5%
Plan assets consist of U. S. Treasury notes and bonds and common stock
equities.
14. PROFIT SHARING PLAN
All employees of Security Banc Corporation and its affiliates become
eligible participants in the plan when they have completed one (1) year of
eligibility service; have worked at least five hundred (500) hours and are
at least age twenty-one (21). Eligible participants may make contributions
to the plan by deferring up to fifteen percent (15%) of their annual
earnings.
16
The Board of Directors of the Corporation annually determines the bank's
matching contribution to the plan. For the plan year ended December 31, 1998
and December 31, 1997, the matching contribution was fifty percent (50%) of
the employee's contribution up to the first six percent (6%) of annual
earnings contributed by the participant.
Employee contributions are one hundred percent (100%) vested immediately.
The bank's matching contributions are vested at twenty percent (20%) for
each year of eligibility service, based on five (5) year vesting schedule.
The contribution by the Corporation for 1998, 1997, and 1996 was $193,000,
$190,000, and $208,000, respectively.
15. SECURITY BANC CORPORATION (PARENT ONLY)
AND REGULATORY RESTRICTIONS
Dividends paid by the Company's subsidiaries are subject to various legal
and regulatory restrictions. In 1998, the subsidiaries paid $6,013,000 in
dividends to the parent company.
The subsidiaries can initiate dividend payments in 1999 equal to their net
profits, as defined by statute, up to the date of any such dividend
declared.
SECURITY BANC CORPORATION
Statement Of Condition for the Years Ended December 31,
(000's) 1998 1997
---- ----
Assets
Cash ...................................... $ 1,383 $ 110
Investments in Subsidiaries ............... 116,752 108,521
Other Assets .............................. 158 215
-------- --------
Total Assets ................................. $118,293 $108,846
======== ========
Liabilities ............................... $ 164 $ 110
-------- --------
Total Liabilities ............................ 164 110
Stockholders' equity
Common Stock .............................. $ 19,768 $ 19,707
Surplus ................................... 22,084 21,831
Retained Earnings ......................... 79,756 70,149
Unrealized gains and (losses) ............. (121) 242
Less: Treasury Stock ..................... (3,358) (3,193)
-------- --------
Total Shareholders' Equity ................... 118,129 108,736
-------- --------
Total Liabilities And Shareholders' Equity ... $118,293 $108,846
======== ========
SECURITY BANC CORPORATION
Statement Of Income for the Years Ended December 31,
(000's) 1998 1997 1996
---- ---- ----
Income from subsidiaries ..................... $ 7,812 $ 37,022 $ 27,121
Other Income .............................. 0 0 180
------- -------- --------
Total Income .............................. $ 7,812 $ 37,022 $ 27,301
Operating Expenses ........................ 248 163 179
------- -------- --------
Total Expenses ............................... $ 248 $ 163 $ 179
Income before taxes and undistributed
income ................................. $ 7,564 $ 36,859 $ 27,122
Income taxes .............................. 538 0 31
Equity in undistributed income ............ 8,594 (22,371) (13,704)
------- -------- --------
Total Income ................................. $15,620 $ 14,488 $ 13,387
======= ======== ========
SECURITY BANC CORPORATION
Statement Of Cash Flows for the Years Ended December 31,
(000's) 1998 1997 1996
---- ---- ----
Cash flows from operating activities
Net Income .................................. $15,620 $14,488 $ 13,387
Adjustment to reconcile net income to Net
Cash (Gain) or loss on sales of assets .... 0 0 (5)
Equity in undistributed (earnings)
losses .................................. (8,594) 22,371 13,704
Net change in liabilities ................. 54 110 (9)
Net change in other assets ................ 57 37 (224)
Other, net ................................ 0 0 (7)
------- ------- --------
Total adjustments ......................... (8,483) 22,518 13,459
------- ------- --------
Net cash provided by operating activities ... 7,137 37,006 26,846
------- ------- --------
Cash flows from investing activities
Purchase of securities .................... 0 0 0
Sales and maturities of securities ........ 0 0 2,791
Payments for investments in and advances
to subsidiaries ........................ 0 (30,210) (475)
Other, net ................................ 0 0 581
------- ------- --------
Net cash provided (used) by investing
activities ............................. 0 (30,210) 2,897
------- ------- --------
Cash flows from financing activities
Proceeds from issuance of common stock .... 314 210 475
Payment to repurchase common stock ........ (165) 0 (18)
Dividends paid ............................ (6,013) (5,394) (4,545)
Other, net ................................ 0 (1,502) (27,227)
------- ------- --------
Net cash provided (used) by financing
activities ............................. $(5,864) $(6,686) $(31,315)
------- ------- --------
Cash and cash equivalents
Net increase (decrease) in cash and cash
equivalents ............................ 1,273 110 (1,572)
Cash and cash equivalents at beginning of
year ................................... 110 0 1,572
------- ------- --------
Cash and cash equivalents at end of year ....... $ 1,383 $ 110 $ 0
======= ======= ========
16. CAPITAL RATIOS
The following table reflects various measures of capital at December 31,
1998 and December 31, 1997.
1998 1997
---- ----
(000's) Amount Ratio Amount Ratio
------ ----- ------ -----
Total equity (1) ............... $118,129 19.63% $108,736 20.04%
Tier 1 capital (2) ............. 106,260 17.66% 94,508 17.42%
Total risk-based capital (3) ... 113,143 18.80% 100,762 18.57%
Leverage (4) ................... 106,260 12.45% 94,508 11.55%
(1) Computed in accordance with generally accepted accounting
principles, including unrealized market value adjustment of securities
available-for-sale.
(2) Shareholders' equity less certain intangibles and the unrealized
market value adjustment of securities available-for-sale; computed as a
ratio to risk-adjusted assets as defined.
(3) Tier 1 capital plus qualifying loan loss allowance, computed as a
ratio to risk-adjusted assets, as defined.
(4) Tier 1 capital computed as a ratio to average total assets less
certain intangibles.
The Corporation's Tier 1, total risk-based capital and leverage ratios are
well above both the required minimum levels of 4.00%, 8.00%, and 4.00%,
respectively, and the well-capitalized levels of 6.00%, 10.00%, and 5.00%,
respectively.
At December 31, 1998, all of the Corporation's subsidiary financial
institutions met the well-capitalized levels under the capital definitions
prescribed in the FDIC Improvement Act of 1991.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of condition, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates
of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of the
17
instrument. Statement 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the bank.
The estimated fair values of the bank's financial instruments not disclosed
elsewhere are as follows:
(000s) 1998 1997
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
================================================================================
LOANS
Commercial and Agriculture ......... $285,958 $287,302 $252,053 $250,768
Real Estate ........................ 252,609 254,529 225,791 224,956
Consumer ........................... 78,375 80,993 84,161 85,474
DEPOSITS
Non-Interest-Bearing Deposits ...... 131,285 131,285 119,373 119,373
Interest-Bearing Demand Deposits ... 148,462 148,462 129,351 129,351
Savings Deposits ................... 154,876 154,876 151,119 151,119
Time Deposits ...................... 274,230 275,656 277,548 278,269