1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18840
BancFirst Ohio Corp.
(Exact name of registrant as specified in its charter)
Ohio 31-1294136
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
422 Main Street Zanesville, Ohio 43701
(Address of principal executive offices)
(Zip Code)
(740) 452-8444
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding as of August 10, 1999
- ----- ---------------------------------
Common Stock, No Par Value 7,706,709
2
INDEX
BANCFIRST OHIO CORP.
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Balance Sheet..................................... 3
Consolidated Statement of Income............................... 4
Consolidated Statement of Cash Flows........................... 5
Notes to Consolidated Financial Statements..................... 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 8-21
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
2
3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BANCFIRST OHIO CORP.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS: JUNE 30, 1999 DEC. 31, 1998
------------- -------------
Cash and due from banks $ 23,775 $ 28,731
Federal Funds sold 251 469
Securities held-to-maturity, at amortized cost
(approximate fair value of $22,956 and
$26,809 in 1999 and 1998, respectively) 23,002 26,518
Securities available-for-sale, at fair value 298,007 301,097
----------- -----------
Total securities 321,009 327,615
----------- -----------
Loans, net of unearned income 804,398 777,063
Allowance for possible loan losses (6,873) (6,643)
----------- -----------
Net loans 797,525 770,420
----------- -----------
Bank premises and equipment, net 14,422 12,863
Accrued interest receivable 7,378 7,278
Intangible assets 13,284 11,898
Other assets 23,773 21,737
----------- -----------
Total assets $ 1,201,417 $ 1,181,011
=========== ===========
LIABILITIES:
Deposits:
Non-interest-bearing deposits $ 58,492 $ 65,588
Interest-bearing deposits 742,646 724,034
----------- -----------
Total deposits 801,138 789,622
----------- -----------
Federal funds purchased -- --
Federal Home Loan Bank advances and other borrowings 307,250 296,750
Accrued interest payable 2,391 2,510
Other liabilities 4,838 4,594
----------- -----------
Total liabilities 1,115,617 1,093,476
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par or stated value, 20,000,000 shares
authorized, 8,162,467 and 8,076,488 shares issued in 1999
and 1998, respectively 66,280 64,096
Retained earnings 31,627 27,892
Accumulated other comprehensive income - unrealized
holding losses on securities available for sale, net (3,713) (440)
Treasury stock, 348,905 and 180,458 shares, at cost, in 1999
and 1998, respectively (8,394) (4,013)
----------- -----------
Total shareholders' equity 85,800 87,535
----------- -----------
Total liabilities and shareholders' equity $ 1,201,417 $ 1,181,011
=========== ===========
The accompanying notes are an integral part of the financial statements.
3
4
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
Interest Income:
Interest and fees on loans $16,425 $16,690 $32,617 $33,182
Interest and dividends on securities:
Taxable 4,864 4,347 9,608 8,778
Tax-exempt 451 327 863 633
Other interest income 4 65 27 71
------- ------- ------- -------
Total interest income 21,744 21,429 43,115 42,664
------- ------- ------- -------
Interest expense:
Deposits 7,879 8,603 15,930 17,083
Borrowings 4,126 3,802 8,045 7,422
------- ------- ------- -------
Total interest expense 12,005 12,405 23,975 24,505
------- ------- ------- -------
Net interest income 9,739 9,024 19,140 18,159
Provision for possible loan losses 375 318 725 625
------- ------- ------- -------
Net interest income after provision for
possible loan losses 9,364 8,706 18,415 17,534
------- ------- ------- -------
Other income:
Trust and custodian fees 610 566 1,176 1,019
Customer service fees 549 511 1,079 994
Gain on sale of loans 653 1,023 1,257 2,137
Other 767 623 1,226 883
Investment securities gains, net 172 -- 296 24
------- ------- ------- -------
Total other income 2,751 2,723 5,034 5,057
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 4,206 4,239 8,260 8,073
Net occupancy expense 388 384 798 769
Amortization of intangibles 363 354 702 708
Other 2,627 3,272 5,001 5,693
------- ------- ------- -------
Total non-interest expense 7,584 8,249 14,761 15,243
------- ------- ------- -------
Income before income taxes 4,531 3,180 8,688 7,348
Provision for Federal income taxes 1,440 953 2,756 2,313
------- ------- ------- -------
Net income $ 3,091 $ 2,227 $ 5,932 $ 5,035
======= ======= ======= =======
Basic and diluted earnings per share $ 0.39 $ 0.28 $ 0.75 $ 0.63
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 7,888 7,974 7,884 7,969
======= ======= ======= =======
Diluted 7,896 7,984 7,894 7,977
======= ======= ======= =======
Cash dividends per common share $ 0.140 $ 0.135 $ 0.280 $ 0.270
======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
4
5
BANCFIRST OHIO CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30
--------------------------
1999 1998
--------- ---------
Cash flows from operating activities:
Net income $ 5,932 $ 5,035
Adjustment to reconcile net income to net cash
provided by operations:
Depreciation and amortization 2,968 2,482
Provision for possible loan losses 725 625
Gain on sale of assets (1,553) (2,161)
Increase in interest receivable (100) (171)
Decrease (increase) in other assets (2,728) (952)
Increase (decrease) in interest payable (119) 294
Decrease in other liabilities 1,942 (4,972)
FHLB stock dividend (514) (566)
--------- ---------
Net cash provided by (used in) operating activities 6,553 (386)
--------- ---------
Cash flows from investing activities:
Increase (decrease) in federal funds sold and short term investments 218 (4,434)
Proceeds from maturities of securities held-to-maturity 3,597 6,489
Proceeds from maturities and sales of securities available-for-sale 68,759 37,601
Purchase of securities available-for-sale (70,611) (102,138)
Increase in loans, net (70,027) (51,631)
Purchase of loans -- (18,837)
Purchases of equipment and other assets (2,353) (2,448)
Proceeds from sale of loans 43,336 68,076
Acquisition of Chornyak and Associates, Inc. (2,050) --
Purchase of bank owned life insurance -- (15,000)
--------- ---------
Net cash used in investing activities (29,131) (82,322)
--------- ---------
Cash flows from financing activities:
Decrease in federal funds purchased -- (12,300)
Increase in Federal Home Loan Bank advances and other borrowings 10,500 80,252
Net increase in deposits 11,516 25,634
Cash dividends paid (2,197) (2,156)
Issuance (purchase) of stock, net (2,197) 60
--------- ---------
Net cash provided by financing activities 17,622 91,490
--------- ---------
Net increase (decrease) in cash and due from banks (4,956) 8,782
Cash and due from banks, beginning of period 28,731 21,650
--------- ---------
Cash and due from banks, end of period $ 23,775 $ 30,432
========= =========
The accompanying notes are an integral part of the financial statements
5
6
BANCFIRST OHIO CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (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, 1998
for additional disclosures, including a summary of the Company's accounting
policies. The results of operations for the three month and six month periods
ended June 30, 1999 are not necessarily indicative of the results to be expected
for the full year.
1) BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, The First National Bank of
Zanesville ("FNB"). All significant intercompany transactions and
accounts have been eliminated in consolidation.
2) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities" was
issued. SFAS No. 133 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
$50.6 million at June 30, 1999. The effective date of this statement
has been delayed to fiscal years beginning after June 15, 2000. The
Company has not determined what impact this standard will have on its
financial statements.
3) ACQUISITION
On April 5, 1999, the Company acquired Chornyak & Associates, Inc.,
("Chornyak") a full service financial planning company. In connection
with this acquisition the Company issued 82,000 common shares having a
total value of approximately $2.1 million in exchange for all of the
outstanding shares of Chornyak. This acquisition is being accounted for
as a purchase transaction. Joseph A. Chornyak has entered into an
employment agreement whereby he will continue to serve as president of
Chornyak. The employment agreement will expire in 2004. In connection
with his employment, the Company granted Mr. Chornyak options to
purchase an aggregate of 30,000 shares of the Company's common stock at
exercise prices ranging from $25.00 to $31.00, subject to a four year
vesting schedule.
6
7
4) COMPUTATION OF EARNINGS PER SHARE
The computation of earnings per share is as follows.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
(In thousands, except per share amounts)
Actual weighted average common shares outstanding 7,888 7,974 7,884 7,969
Dilutive common stock equivalents:
Stock options 2 6 4 4
Bonus shares - Company match 6 4 6 4
------ ------ ------ ------
Weighted average common shares outstanding
adjusted for dilutive common stock equivalents 7,896 7,984 7,894 7,977
------ ------ ------ ------
Net income $3,091 $2,227 $5,932 $5,035
------ ------ ------ ------
Basic earnings per share $ 0.39 $ 0.28 $ 0.75 $ 0.63
------ ------ ------ ------
Diluted earnings per share $ 0.39 $ 0.28 $ 0.75 $ 0.63
------ ------ ------ ------
5) COMPREHENSIVE INCOME
The Company's comprehensive income (loss), determined in accordance
with SFAS No. 130, was $(173,000) and $2,040,000 for the three months
ended June 30, 1999 and 1998, respectively, and $2,659,000 and
$4,636,000 for the six months ended June 30, 1999 and 1998,
respectively.
7
8
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BANCFIRST OHIO CORP.
For a comprehensive understanding of the Company's financial condition and
performance, this discussion should be considered in conjunction with the
Company's Consolidated Financial Statements, accompanying notes, and other
information contained elsewhere herein.
This discussion contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involves risks and uncertainties. Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. Factors that could cause
actual results to differ from the results discussed in the forward-looking
statements include, but are not limited to: economic conditions (both generally
and more specifically in the markets in which the Company and its bank
subsidiary operate); competition for the Company's customers from other
providers of financial services; government legislation and regulation (which
changes from time to time and over which the Company has no control); changes in
interest rates; prepayments of loans and securities; material unforeseen changes
in the liquidity, results of operations, or other financial position of the
Company's customers; and other risks detailed in the Company's filings with the
Securities and Exchange Commission, all of which are difficult to predict and
many of which are beyond the control of the Company.
8
9
BANCFIRST OHIO CORP.
SELECTED FINANCIAL DATA:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
AT OR FOR THE THREE MONTHS AT OR FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
------------- ------------- ---------- ----------
STATEMENT OF INCOME DATA:
Interest Income $ 21,744 $ 21,429 $ 43,115 $ 42,664
Interest expense 12,005 12,405 23,975 24,505
------------- ------------- ---------- ----------
Net interest income 9,739 9,024 19,140 18,159
Provision for possible loan losses 375 318 725 625
Non-interest income 2,751 2,723 5,034 5,057
Non-interest expense 7,584 8,249 14,761 15,243
------------- ------------- ---------- ----------
Income before income taxes 4,531 3,180 8,688 7,348
Provision for Federal Income taxes 1,440 953 2,756 2,313
------------- ------------- ---------- ----------
Net income $ 3,091 $ 2,227 $ 5,932 $ 5,035
============= ============= ========== ==========
PER SHARE DATA:
Basic earnings per share $ 0.39 $ 0.28 $ 0.75 $ 0.63
Diluted earnings per share 0.39 0.28 0.75 0.63
Dividends 0.14 0.14 0.28 0.27
Book value 10.98 11.03 N/A N/A
Tangible book value 9.28 9.52 N/A N/A
BALANCE SHEET DATA:
Total assets $ 1,201,417 $ 1,173,066 N/A N/A
Loans 804,398 764,564 N/A N/A
Allowance for possible loan losses 6,873 6,662 N/A N/A
Securities 321,009 329,341 N/A N/A
Deposits 801,138 772,681 N/A N/A
Borrowings 307,250 307,401 N/A N/A
Shareholders' equity 85,800 87,873 N/A N/A
PERFORMANCE RATIOS (1):
Return on average assets 1.03% 0.81% 1.00% 0.92%
Return on average equity 13.86 10.17 13.45 11.67
Tangible return on average tangible equity 17.81 13.40 17.18 15.24
Net interest margin 3.54 3.54 3.53 3.59
Interest rate spread 3.18 3.12 3.16 3.16
Non-interest income to average assets 0.92 0.99 0.85 0.93
Non interest expense to average assets (1) 2.41 2.43 2.38 2.44
Efficiency Ratio (2) 57.41 55.93 57.67 56.52
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.39% 0.37% N/A N/A
Non-performing assets to total assets 0.36 0.28 N/A N/A
Allowance for possible loan losses to total loans 0.85 0.87 N/A N/A
Allowance for possible loan losses to
non-performing loans 218.1 237.6 N/A N/A
Net charge-offs to average loans 0.10 0.20 0.13% 0.15%
CAPITAL RATIOS:
Shareholders' equity to total assets 7.14% 7.49% N/A N/A
Tier 1 capital to average total assets 6.40 6.88 N/A N/A
Tier 1 capital to risk-weighted assets 9.49 10.44 N/A N/A
(1) Excludes non-recurring expenses totaling $1,222 in the three month and
six month periods ended June 30, 1998 and amortization expense.
(2) The efficiency ratio is equal to non-interest expense (excluding
amortization and non-recurring expenses) divided by net interest income
on a fully tax equivalent basis plus non-interest income excluding
gains on sales of securities.
9
10
OVERVIEW
The reported results of the Company primarily reflect the operations of the
Company's bank subsidiary. The Company's results of operations are dependent on
a variety of factors, including the general interest rate environment,
competitive conditions in the industry, governmental policies and regulations
and conditions in the markets for financial assets. Like most financial
institutions, the primary contributor to the Company's income is net interest
income, which is defined as the difference between the interest the Company
earns on interest-earning assets, such as loans and securities, and the interest
the Company pays on interest-bearing liabilities, such as deposits and
borrowings. The Company's operations are also affected by non-interest income,
such as checking account and trust fees and gains from sales of loans. The
Company's principal operating expenses, aside from interest expense, consist of
salaries and employee benefits, occupancy costs, federal deposit insurance
assessments, and other general and administrative expenses.
On April 5, 1999 the Company acquired Chornyak, a full service financial
planning company. Chornyak provides comprehensive financial planning services to
its clients and receives fees for these services either directly from, or in the
form of commissions earned from handling and processing investment transactions
for, its clients. This acquistion was accounted for as a purchase transaction
and, accordingly, the results of Chornyak are included in the Company's results
of operations from the date of acquisition.
AVERAGE BALANCES AND YIELDS
The following tables present, for each of the periods indicated, the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and percentage rates, and the net
interest margin. Net interest margin is calculated by dividing net interest
income on a fully tax equivalent basis ("FTE"), by total interest-earning
assets. The net interest margin is influenced by the level and relative mix of
interest-earning assets and interest-bearing liabilities. FTE income includes
tax exempt income, restated to a pre-tax equivalent, based on the statutory
federal income tax rate. All average balances are daily average balances.
Non-accruing loans are included in average loan balances.
10
11
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------------------------------------------------------- ----------------------------------------
(Dollars in Thousands) (Dollars in Thousands)
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average
Balance Expense Rate(1) Balance Expense Rate(1) Balance Expense Rate(1) Balance
---------------------------------------------------------- ----------------------------------------
Securities:
Taxable $ 298,315 $ 4,864 6.54% $ 249,787 $ 4,347 6.98% $ 296,524 $ 9,608 6.53% $ 247,499
Tax exempt 34,392 695 8.11 25,800 496 7.71 33,537 1,328 7.99 24,540
---------- ------- ---------- ------- ---------- ------- ----------
Total securities 332,707 5,559 6.70 275,587 4,843 7.05 330,061 10,936 6.68 272,039
Loans (2):
Commercial 369,404 8,223 8.93 311,700 7,395 9.52 354,706 16,025 9.11 312,034
Real Estate 335,252 6,339 7.58 354,795 7,011 7.93 343,830 12,874 7.55 363,018
Consumer 95,286 1,880 7.91 96,665 2,301 9.55 93,687 3,753 8.08 90,962
---------- ------- ---------- ------- ---------- ------- ----------
Total loans 799,942 16,442 8.24 763,160 16,707 8.78 792,223 32,652 8.31 766,014
Federal funds sold 285 4 5.63 5,070 63 4.98 1,170 27 4.65 2,830
---------- ------- ---------- ------- ----------
Total earning
assets (3) 1,132,934 22,005 7.79% 1,043,817 21,613 8.31% 1,123,454 43,615 7.83 1,040,883
---------- ------- ---------- ------- ---------- ------- ----------
Non-interest
earning assets 68,595 58,749 68,635 58,132
---------- ---------- ---------- ----------
Total assets $1,201,529 $1,102,566 $1,192,089 $1,099,015
========== ========== ========== ==========
Interest-bearing
deposits:
Demand and
savings deposits $ 225,473 $ 1,322 2.35% $ 209,434 $ 1,538 2.95% $ 228,661 $ 2,786 2.46% $ 209,553
Time deposits 503,919 6,557 5.22 491,465 7,065 5.77 501,536 13,144 5.28 492,755
---------- ------- ---------- ------- ---------- ------- ----------
Total deposits 729,392 7,879 4.33 700,899 8,603 4.92 730,197 15,930 4.40 702,308
Borrowings 314,864 4,126 5.26 257,336 3,801 5.92 304,809 8,045 5.32 251,023
---------- ------- ---------- ------- ---------- ------- ----------
Total interest-
bearing liabilities 1,044,256 12,005 4.61% 958,235 12,404 5.19% 1,035,006 23,975 4.67% 953,331
------- ------- -------
Non-interest-
bearing deposits 60,771 53,868 61,072 51,550
---------- ---------- ---------- ----------
Subtotal 1,105,027 1,012,103 1,096,078 1,004,881
Accrued expenses
and other liabilities 7,074 2,615 7,045 7,154
---------- ---------- ---------- ----------
Total liabilities 1,112,101 1,014,718 1,103,123 1,012,035
Shareholders' equity 89,428 87,847 88,966 86,980
---------- ---------- ---------- ----------
Total liabilities
and shareholders'
equity $1,201,529 $1,102,566 $1,192,089 $1,099,015
========== ========== ========== ==========
Net interest income
and interest rate
spread (4) $10,000 3.18% $ 9,209 3.12% $19,640 3.16%
======= ===== ======= ===== ======= =====
Net interest margin (5) 3.54% 3.54% 3.53%
===== ===== =====
Average interest-
earning assets to
average interest-
bearing liabilities 108.5% 108.9% 108.5%
SIX MONTHS ENDED JUNE 30,
1998
------------------------
(Dollars in Thousands)
Income/ Yield/
Expense Rate(1)
------------------------
Securities:
Taxable $ 8,778 7.15%
Tax exempt 959 7.88
-------
Total securities 9,737 7.22
Loans (2):
Commercial 14,530 9.39
Real Estate 14,356 7.97
Consumer 4,332 9.60
-------
Total loans 33,218 8.74
Federal funds sold 71 5.06
-------
Total earning
assets (3) 43,026 8.34%
-------
Non-interest
earning assets
Total assets
Interest-bearing
deposits:
Demand and
savings deposits $ 3,053 2.94%
Time deposits 14,031 5.74
-------
Total deposits 17,084 4.91
Borrowings 7,422 5.96
-------
Total interest-
bearing liabilities 24,506 5.18%
-------
Non-interest-
bearing deposits
Subtotal
Accrued expenses
and other liabilities
Total liabilities
Shareholders' equity
Total liabilities
and shareholders'
equity
Net interest income
and interest rate
spread (4) $18,520 3.16%
======= =====
Net interest margin (5) 3.59%
=====
Average interest-
earning assets to
average interest-
bearing liabilities 109.2%
(1) Calculated on an annualized basis.
(2) Non-accrual loans are included in the average loan balances.
(3) Interest income is computed on a fully tax equivalent (FTE) basis,
using a tax rate of 35%.
(4) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percentage
of average interest earning assets.
11
12
RATE AND VOLUME VARIANCES
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table
discloses the dollar changes in the Company's net interest income attributable
to changes in levels of interest-earning assets or interest-bearing liabilities
(volume), changes in average yields on interest-earning assets and average rates
on interest-bearing liabilities (rate) and the combined volume and rate effects
(total). For the purposes of this table, the change in interest due to both rate
and volume has been allocated to volume and rate change in proportion to the
relationship of the dollar amounts of the change in each. In general, this table
provides an analysis of the effect on income of balance sheet changes which
occurred during the periods and the changes in interest rate levels.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 VS. 1998 1999 VS. 1998
INCREASE (DECREASE) INCREASE (DECREASE)
----------------------------- -----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------- ------- -------
Interest-earning assets:
Securities:
Taxable $ 804 $ (287) $ 517 $ 1,634 $ (804) $ 830
Non-taxable 172 27 199 356 13 369
------- ------- ------- ------- ------- -------
Total securities 976 (260) 716 1,990 (791) 1,199
------- ------- ------- ------- ------- -------
Loans:
Commercial 1,306 (478) 828 1,938 (443) 1,495
Real estate (377) (295) (672) (739) (743) (1,482)
Consumer (32) (389) (421) 127 (706) (579)
------- ------- ------- ------- ------- -------
Total loans 897 (1,162) (265) 1,326 (1,892) (566)
Fed funds sold (66) 7 (59) (39) (5) (44)
------- ------- ------- ------- ------- -------
Total interest earning assets (1) 1,807 (1,415) 392 3,277 (2,688) 589
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Demand and savings deposits 111 (327) (216) 262 (529) (267)
Time deposits 175 (683) (508) 246 (1,133) (887)
------- ------- ------- ------- ------- -------
Total interest-bearing deposits 286 (1,010) (724) 508 (1,662) (1,154)
Borrowings 786 (461) 325 1,475 (852) 623
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 1,072 (1,471) (399) 1,983 (2,514) (531)
------- ------- ------- ------- ------- -------
Net interest income $ 735 $ 56 $ 791 $ 1,294 $ (174) $ 1,120
======= ======= ======= ======= ======= =======
(1) Computed on a fully tax equivalent basis, assuming a tax rate of 35%.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND
1998
Net Income. Net income for the three months ended June 30, 1999 increased 38.8%
to $3.1 million, compared to net income of $2.2 million for the three months
ended June 30, 1998. Basic and diluted earnings per share in the second quarter
of 1999 equaled $0.39, compared to $0.28 for the same period in 1998. The
results for the 1998 period include the after tax financial effects of merger,
integration and restructuring charges totaling $794,000, or $.10 per share. Net
interest income increased 7.9% while non-interest income increased 1.0% in the
three months ended June 30, 1999, as compared to the same period in 1998, while
non-interest expense decreased 8.1%. Excluding non-recurring charges of $1.2
million in 1998, non-interest expense increased 7.9%. The provision for possible
loan losses was $375,000 in 1999 compared to $318,000 in the prior year period.
The Company's net interest margin was 3.54% for both periods. The increase in
net interest income resulted from higher levels of average earning assets and a
lower cost of funds, offset in part by lower yields on earning assets.
Non-interest expense increased primarily due to increased personnel costs
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resulting from staff additions that occurred over the latter part of 1998. The
Company's return on average assets and return on average equity were 1.03% and
13.86%, respectively, in the second quarter of 1999, compared to .81% and
10.17%, respectively, in the second quarter of 1998. Adjusted for the effects of
non-recurring charges in 1998, the Company's returns on average assets and
return on average equity were 1.10% and 13.79%, respectively.
Interest Income. Total interest income increased 1.5% to $21.7 million for the
three months ended June 30, 1999, compared to $21.4 million for the second
quarter of 1998. This increase resulted from an $89.1 million increase in
average earning assets, offset in part by a 52 basis point decrease in the
average yield on earning assets. The increase in the average balance of loans of
$36.8 million, or 4.8%, was consistent with the Company's emphasis on increasing
the loan portfolio.
The weighted average yield on interest-earning assets decreased to 7.79% during
the three months ended June 30, 1999, compared to 8.31% during the same three
month period in 1998. The Company's yield on average loans decreased from 8.78%
during the three months ended June 30, 1998 to 8.24% during the three months
ended June 30, 1999 primarily as a result of refinancing activity and
competitive pressures on market interest rates. Yields on the investment
portfolio decreased from 7.05% during the second quarter of 1998 to 6.70% during
the second quarter of 1999. Older, higher yielding securities have been maturing
as well as prepaying and have been replaced with lower yielding securities
originated in the current interest rate environment.
Interest Expense. Total interest expense decreased 3.2% to $12.0 million for the
three months ended June 30, 1999, compared to $12.4 million for the three months
ended June 30, 1998. Interest expense decreased due to a lower cost of funds
during the second quarter of 1999, as compared to the same period in 1998,
offset in part by higher levels of interest-bearing liabilities. The average
balance of interest-bearing deposit accounts increased $28.5 million, or 4.1%,
from the second quarter in 1998 to the second quarter in 1999 while average
interest-bearing liabilities increased 9.0%, from $958.2 million to $1.04
billion.
The Company's cost of funds decreased to 4.61% in the three months ended June
30, 1999 compared to 5.19% in the same period of 1998. The cost of funds
benefited from the repricing of maturing certificates of deposit at lower rates,
interest rate reductions on demand and savings deposits and the repayment and
refinancing of higher rate FHLB advances in December 1998.
Provision for Possible Loan Losses. The provision for possible loan losses was
$375,000 for the three months ended June 30, 1999, compared to $318,000 in the
second quarter of 1998. Total non-performing loans increased to $3.2 million, or
.39% of total loans at June 30, 1999, from $2.8 million, or .37% of total loans
at June 30, 1998. The allowance for possible loan losses at June 30, 1999 was
$6.9 million, or .85% of total loans and 218.1% of non-performing loans compared
to $6.7 million, or .87% of total loans and 237.6% of non-performing loans at
June 30, 1998. 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 $2.8 million for the three
months ended June 30,1999, compared to $2.7 million for the three months ended
June 30, 1998. The following table sets forth the Company's non-interest income
for the periods indicated:
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
(In thousands)
Trust and custodian fees $ 610 $ 566 $1,176 $1,019
Customer service fees 549 511 1,079 994
Investment securities gains 172 -- 296 24
Gains on sales of loans 653 1,023 1,257 2,137
Other 767 623 1,226 883
------ ------ ------ ------
TOTAL $2,751 $2,723 $5,034 $5,057
====== ====== ====== ======
Trust and custodian fees increased 7.8% to $610,000 in the second quarter of
1999 from $566,000 in the second quarter of 1998. 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 7.4% in the second quarter of 1999 to $549,000
from $511,000 in the second quarter of 1998. Increased fee income related
primarily to NSF charges and ATM surcharge and interchange income.
During the second quarter of 1999, the Company sold approximately $17.2 million
of investment securities, realizing gains of $172,000. Proceeds from these sales
were used to fund increases in the loan portfolio. The Company had no sales of
securities during the second quarter of 1998.
Gains on sales of loans totaled $653,000 for the three months ended June 30,
1999 compared to $1.0 million for the three months ended June 30, 1998. During
the second quarter of 1999, the Company sold $8.4 million of the guaranteed
portion of its SBA and other government guarantee loan originations in the
secondary market compared to $6.9 million during the second quarter of 1998,
realizing gains of $438,000 in 1999 compared to gains of $655,000 in 1998. The
ratio of gains relative to the principal balance of loans sold has declined
partially as a result of increased market prepayment expectations. Also, the
Company recorded gains of $215,000 from the sales of residential loans during
the second quarter of 1999 compared to $368,000 in 1998. The decrease in gains
on sales of residential loans has resulted from increases in market interest
rates, thus causing a decline in origination activity.
The Company continues to place emphasis on its small business lending
activities, including the evaluation of expansion into new markets. The nature
of the political climate in Washington, D.C. may periodically subject many
existing government programs to much scrutiny and possible cutbacks. It is not
currently known whether the SBA program will be impacted. Management believes
that any such cutbacks could negatively affect the Company's activities in the
SBA lending programs as well as the planned expansion of such activities.
Other income increased $144,000 to $767,000 in the second quarter of 1999
compared to $623,000 in the second quarter of 1998 primarily as a result of
financial planning fee income of Chornyak & Associates, Inc. which totaled
$244,000 in 1999 with no comparable amount in 1998. Chornyak was acquired by the
Company on April 5, 1999 in a purchase transaction.
Non-Interest Expense. The following table sets forth the Company's non-interest
expense for the periods indicated:
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
(In thousands)
Salaries and employee benefits $ 4,206 $ 4,239 $ 8,260 $ 8,073
Occupancy expense 388 384 798 769
Furniture, fixtures and equipment 253 205 476 412
Data processing 310 236 622 577
Taxes other than income taxes 267 235 511 452
Federal deposit insurance 69 75 138 146
Amortization of goodwill and other intangibles 363 354 702 708
Other 1,728 2,521 3,254 4,106
------- ------- ------- -------
TOTAL $ 7,584 $ 8,249 $14,761 $15,243
======= ======= ======= =======
Excluding non-recurring merger, integration and restructuring charges of $1.2
million in 1998, total non-interest expense increased $557,000 to $7.6 million
for the three months ended June 30, 1999, compared to $7.0 million for the three
months ended June 30, 1998. This increase generally resulted from expansion of
the Company's operating activities and addition of loan production personnel,
which was partially offset by efficiencies achieved from the merger of the
Company's banking subsidiaries under a single bank charter in May 1998.
Excluding non-recurring salary and employee benefits expense of $378,000 in
1998, such expenses increased $345,000, or 8.9% and accounted for approximately
55.5% of total non-interest expense in the three months ended June 30, 1999
compared to 54.9% in the second quarter of 1998. The average full time
equivalent staff was 382 in 1999 compared to 386 in 1998.
Net occupancy expense was $388,000 for the second quarter of 1999 compared to
$384,000 for the second quarter of 1998.
Furniture, fixtures and equipment expense increased $48,000, or 23.4% in the
second quarter of 1999. The increase in furniture and equipment expense was due
principally to higher depreciation and maintenance costs.
Data processing expense increased $74,000, or 31.4%, in the second quarter of
1999. Increased costs in 1999 resulted from higher software and maintenance
costs related to technological enhancements to the Company's data processing
systems.
Taxes other than income taxes increased $32,000, or 13.6%, in the second quarter
of 1999 compared to the second quarter of 1998. This increase resulted from the
recognition in 1998 of credits for overpayment of taxes in prior years.
Federal deposit insurance expense decreased $6,000 to $69,000 in 1999 from
$75,000 in the second quarter of 1998.
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 $318,000 during the second quarter of 1999 compared
to $348,000 in the second quarter of 1998. Also, the second quarter 1999 results
include $26,000 of amortization of goodwill resulting from the Chornyak
acquisition with no comparable amount in 1998.
Excluding $844,000 of non-recurring merger, integration and restructuring
charges in 1998, other non-interest expenses increased $51,000, or 3.0%, to $1.7
million for the second quarter of 1999.
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 57.4% for the second quarter
of 1999, compared to 55.9% for the comparable period in 1998. Controlling costs
and improving productivity, as measured by the efficiency ratio, is considered
by management a primary factor in enhancing performance.
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Provision for Income Taxes. The Company's provision for Federal income taxes was
$1.4 million, or 31.8% of pretax income, for the three months ended June 30,
1999 compared to $953,000, or 30.0% of pretax income, for the three months ended
June 30, 1998. The effective tax rate for each period differed from the federal
statutory rate principally as a result of tax-exempt income from obligations of
states and political subdivisions and non-taxable loans, earnings on bank-owned
life insurance, and the non-deductibility, for tax purposes, of goodwill and
core deposit intangible amortization expense.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998.
Net Income. Net income for the six months ended June 30, 1999 increased 17.8% to
$5.9 million, or $.75 per basic and diluted share, compared to net income of
$5.0 million, or $.63 per basic and diluted share, for the six months ended June
30, 1998. Net interest income increased 5.4% and non-interest income decreased
.5% in the six months ended June 30, 1999, as compared to the same period in
1998 while non-interest expense decreased 3.2%. Excluding the effects of
non-recurring charges in 1998, non-interest expense increased 5.3%. The
Company's net interest margin decreased to 3.53% for the six months ended June
30, 1999 compared to 3.59% for the same period in 1998. The increase in
net-interest income resulted from higher levels earning assets and a lower cost
of funds, offset in part by a lower yield on earning assets. 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 1.00% and 13.45%, respectively, for the six months ended
June 30, 1999, compared to .92% and 11.67%, respectively, for the six months
ended June 30, 1998. Adjusted for the effects of non-recurring charges, the
Company's return on average assets and return on average equity in 1998 were
1.07% and 13.51%, respectively.
Interest Income. Total interest income increased 1.1% to $43.1 million for the
six months ended June 30, 1999, compared to $42.7 million for the comparable
period in 1998. This increase resulted from higher levels of earning assets,
offset in part by a 51 basis point decrease in the average yield on
interest-earning assets. Average earning assets totaled $1.12 billion for the
six months ended June 30, 1999 compared to $1.04 billion in 1998 while the
average balance of loans increased $26.2 million, or 3.4%. 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 decreased to 7.83% during
the six months ended June 30, 1999, compared to 8.34% during the same six month
period in 1998. The Company's yield on average loans decreased from 8.74% during
the six months ended June 30, 1998 to 8.31% during the six months ended June 30,
1999. The decrease in yield has resulted primarily from refinancing activity and
competitive pressures on market rates. Yields on the investment portfolio
decreased from 7.22% during 1998 to 6.68% during 1999. Investment yields during
1998 benefited from additional accretion of discounts on securities resulting
from prepayments. Also, higher yielding securities have been maturing as well as
prepaying and have been replaced with lower yielding securities originated in
the current interest rate environment.
Interest Expense. Total interest expense decreased 2.2% to $24.0 million for the
six months ended June 30, 1999, compared to $24.5 million for the six months
ended June 30, 1998. Interest expense decreased due to a lower cost of funds,
offset in part by a higher average balance of interest-bearing liabilities
during the first six months of 1999, as compared to the same period in 1998. The
average balance of interest-bearing liabilities increased 8.6%, from $953.3
million during the six months ended June 30, 1998 to $1.04 billion during the
six months ended June 30, 1999.
The Company's cost of funds decreased to 4.67% for the six months ended June 30,
1999 compared to 5.18% for the same period of 1998, primarily due to the
repricing of maturing certificates of deposit at lower rates, interest rate
reductions on demand and savings deposits and the repayment and refinancing of
higher rate FHLB advances in December 1998.
Provision for Possible Loan Losses. The provision for possible loan losses was
$725,000 for the six months ended June 30, 1999, compared to $625,000 for the
six months ended June 30, 1998 and was considered sufficient to maintain the
Company's allowance for possible loan losses at an adequate level. The increased
provision in 1999 resulted primarily from increases in as well as a change in
the mix of the loan portfolio.
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Non-Interest Income. Total non-interest income was $5.0 million for the six
months ended June 30, 1999, compared to $5.1 million for the six months ended
June 30, 1998. This increase was primarily attributable to increases in fee
income offset in part by lower gains on sales of loans.
Customer service fees, representing service charges on deposits and fees from
other banking services, increased 8.6% for the six months ended June 30, 1999 to
$1.1 million, from $994,000 for the comparable period of 1998. Trust income
increased 15.4% to $1.2 million in 1999, from $1.0 million in 1998. Growth in
trust and custodian fees resulted primarily from the expansion of the customer
base and higher asset values. The $343,000 increase in other income to $1.2
million in 1999 compared to $883,000 in 1998 resulted primarily from financial
planning fees (discussed previously) and higher servicing fee income due to
increased levels of serviced loans as well as a lower level of amortization of
servicing assets.
Gains on sales of loans decreased from $2.1 million for the six months ended
June 30, 1998 to $1.3 million for the comparable period in 1999. In 1999, the
Company sold $12.8 million of the guaranteed portion of its SBA and other
government guaranteed loan originations in the secondary market compared to
$13.5 million in 1998, realizing gains of $779,000 in 1999 compared to gains of
$1.3 million in 1998. In addition, the Company sold $29.3 million of residential
real estate loans realizing gains of $478,000 in the first six months of 1999
compared to $867,000 of gains on sales of loans totaling $52.4 million in 1998.
Residential real estate loan sale volume in 1998 benefited from the lower
interest rate environment compared to 1999.
Non-Interest Expense. Excluding non-recurring merger, integration and
restructuring charges of $1.2 million in 1998, total non-interest expense
increased $740,000 to $14.8 million for the six months ended June 30, 1999,
compared to $14.0 million for the six months ended June 30, 1998. This increase
generally resulted from expansion of the Company's operating activities and
addition of loan production personnel over the later part of 1998, offset in
part by efficiencies achieved from the merger of the Company's banking
subsidiaries. For the six months ended June 30, 1999, the Company's efficiency
ratio was 57.7%, compared to 56.5% for the six months ended June 30, 1998.
Excluding non-recurring salary and employee benefits expense of $378,000 in
1998, such expenses increased $565,000, or 7.3% primarily as a result of staff
additions associated with increased loan production activities. Adjusted for
non-recurring expenses in 1998, salaries and employee benefits accounted for
approximately 56.0% of total non-interest expense for the six months ended June
30, 1999 compared to 54.9% in 1998. The average full time equivalent staff was
386 in 1999 compared to 382 in 1998.
Net occupancy expense increased 3.8% to $798,000 for the first six months of
1999 from $769,000 for the first six months of 1998. This increase resulted from
higher costs associated with new branch facilities opened and acquired in the
fourth quarter of 1998.
Furniture, fixtures and equipment expense increased $64,000, or 15.5% for the
six months ended June 30, 1999. The increase in furniture and equipment expense
was due principally to higher depreciation and maintenance costs.
Data processing expense increased $45,000, or 7.8%, for the six months ended
June 30, 1999. Higher costs in 1999 resulted from equipment enhancements due to
technological advancements.
Taxes other than income taxes increased $59,000, or 13.1%, for the first six
months 1999 compared to the same period in 1998. This increase resulted from the
recognition in 1998 of credits for overpayment of prior years' taxes.
Federal deposit insurance expense decreased $8,000 to $138,000 in 1999 from
$146,000 in 1998.
Amortization of goodwill and other intangible assets was $702,000 during the
first six months of 1999 compared to $708,000 in 1998.
Excluding $844,000 of non-recurring merger, integration and restructuring
charges in 1998, other non-interest expenses decreased $8,000, or .2%, for the
six months ended June 30, 1999 compared to the same period in 1998. This
decrease resulted primarily from efficiencies achieved from the May 1998 merger
of the company's banking subsidiaries.
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Provision for Income Taxes. The Company's provision for Federal income taxes was
$2.8 million, or 31.7% of pretax income, for the six months ended June 30, 1999
compared to $2.3 million, or 31.5% of pretax income, for the six months ended
June 30, 1998. The effective tax rate for each period differed from the federal
statutory rate principally as a result of tax-exempt income from obligations of
states and political subdivisions and non-taxable loans, earnings on bank-owned
life insurance, and the non-deductibility, for tax purposes, of goodwill and
core deposit intangible amortization expense.
ASSET QUALITY
Non-performing Assets. To maintain the level of credit risk of the loan
portfolio at an appropriate level, management sets underwriting standards and
internal lending limits and provides for proper diversification of the portfolio
by placing constraints on the concentration of credits within the portfolio. In
monitoring the level of credit risk within the loan portfolio, management
utilizes a formal loan review process to monitor, review, and consider relevant
factors in evaluating specific credits in determining the adequacy of the
allowance for possible loan losses. The Company's banking subsidiary formally
documents its evaluation of the adequacy of the allowance for possible loan
losses on a quarterly basis and the evaluation is reviewed and discussed with
its board of directors.
Failure to receive principal and interest payments when due on any loan results
in efforts to restore such loan to current status. Loans are classified as
non-accrual when, in the opinion of management, full collection of principal and
accrued interest is in doubt. Continued unsuccessful collection efforts
generally lead to initiation of foreclosure or other legal proceedings. Property
acquired by the Company as a result of foreclosure or by deed in lieu of
foreclosure is classified as "other real estate owned" until such time as it is
sold or otherwise disposed of. The Company owned $1.1 million of such property
at June 30, 1999 and $532,000 at June 30, 1998.
Non-performing loans totaled $3.2 million, or .39% of total loans, at June 30,
1999, compared to $2.8 million, or 0.37% of total loans, at June 30, 1998.
Non-performing assets totaled $4.3 million, or 0.36% of total assets at June 30,
1999, compared to $3.3 million, or .28% of total assets at June 30, 1998. The
increase in non-performing loans from June 30, 1998 resulted equally from
increases in non-performing single family residence mortgage loans and
commercial loans. The following is an analysis of the composition of
non-performing assets:
JUNE 30,
1999 1998
------ ------
(DOLLARS IN THOUSANDS)
Non-accrual loans $2,560 $ 242
Accruing loans 90 days or more past due 592 2,562
------ ------
Total non-performing loans 3,152 2,804
Other real estate owned 1,143 532
------ ------
Total non-performing assets $4,295 $3,336
====== ======
Non-performing loans to total loans 0.39% 0.37%
Non-performing assets to total assets 0.36% 0.28%
One loan with an outstanding balance of $3.0 million at June 30, 1999 and
collateralized by a first mortgage on a nursing home facility is not included in
the totals in the table above. This loan was restructured in May 1999 with a new
borrower who is currently operating the facility. At the time of restructuring,
this loan was considered impaired in accordance with SFAS No. 114. An impairment
loss of approximately $325,000 is included in the Company's allowance for
possible loan losses at June 30, 1999. The impairment loss resulted from the
terms of the restructured loan providing for an interest rate that was less than
the effective yield of this loan prior to its restructuring. At June 30, 1999,
this loan was current in accordance with its restructured terms.
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,
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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.
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS)
Balance at beginning of period $ 6,701 $ 6,719 $ 6,643 $ 6,617
Provision charged to expense 375 318 725 625
Loans charged-off (343) (517) (784) (901)
Recoveries of loans previously charged off 140 142 289 321
--------- --------- --------- ---------
Balance at end of period $ 6,873 $ 6,662 $ 6,873 $ 6,662
========= ========= ========= =========
Loans outstanding at end of period $ 804,398 $ 764,564 N/A N/A
Average loans outstanding $ 799,942 $ 763,160 $ 792,223 $ 766,014
Allowance as a percentage of loans outstanding 0.85% 0.87% N/A N/A
Net charge-offs to average loans (annualized) 0.10% 0.20% 0.13% 0.15%
Allowance for possible loan losses to non-performing loans 218.1 237.6 N/A N/A
The allowance for possible loan losses totaled $6.9 million at June 30, 1999,
representing .85% of total loans, compared to $6.7 million at June 30, 1998, or
.87% of total loans. Charge-offs represent the amount of loans actually removed
as earning assets from the balance sheet due to uncollectibility. Amounts
recovered on previously charged-off assets are netted against charge-offs,
resulting in net charge-offs for the period. Net loan charge-offs for the three
months and six months ended June 30, 1999 were $203,000 and $495,000,
respectively, compared to net charge-offs of $375,000 and $580,000,
respectively, for the same periods in 1998. 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 218.1% at June 30, 1999, compared to 237.6% at June 30,
1998. 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 .39% of total loans at June 30, 1999.
COMPARISON OF JUNE 30, 1999 AND DECEMBER 31, 1998 FINANCIAL CONDITION
Total assets amounted to $1.20 billion at June 30, 1999, compared to $1.18
billion at December 31, 1998, an increase of $20.4 million, or 1.7%.
Total investment securities decreased by $6.6 million to $321.0 million as a
result of repayments and sales. Funds provided by the decrease in investment
securities were used to partially fund growth in the loan portfolio. The
Company's general investment strategy is to manage the portfolio to include rate
sensitive assets, matched against interest sensitive liabilities to reduce
interest rate risk. In recognition of this strategy, as well as to provide a
secondary source of liquidity to accommodate loan demand and possible deposit
withdrawals, the Company has chosen to classify the majority of its investment
securities as available-for-sale. At June 30, 1999, 92.8% 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 7.2%. This compares to 91.9% and 8.1% classified as available-for-sale
and held to maturity, respectively, at December 31, 1998.
Total loans increased $27.3 million to $804.4 million at June 30, 1999 from
December 31, 1998. Commercial loans increased $53.0 million and consumer loans
increased $4.1 million while residential mortgage loans decreased $29.8 million.
Management continues to emphasize increasing earning assets and improving
earning asset yields by increasing and changing the mix of the loan portfolio.
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Premises and equipment increased from $12.9 million at December 31, 1998 to
$14.4 million at June 30, 1999. This increase primarily resulted from the
construction of a new branch facility located in New Albany, Ohio which opened
in May 1999.
Other assets increased from $21.7 million at December 31, 1998 to $23.8 million
at June 30, 1999 primarily as a result of increases in the cash surrender value
of bank-owned life insurance, prepaid expenses and accounts receivable
associated with lending activities.
Total deposits increased to $801.1 million at June 30, 1999 from $789.6 million
at December 31, 1998. 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 92.7% of total deposits at June 30, 1999, compared to 91.7% at
December 31, 1998.
Total borrowings, including federal funds purchased, increased $10.5 million to
$307.3 million at June 30, 1999, compared to $296.8 million at December 31,
1998. This increase resulted primarily from funding needs associated with
increases in the loan 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 $298.0 million were classified as available-for-sale as of June 30, 1999,
representing 92.8% 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 had an outstanding
balance of $6.3 million at June 30, 1999. 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 June 30, 1999.
Shareholders' equity at June 30, 1999 was $85.8 million, compared to prior
year-end shareholders' equity of $87.5 million, a decrease of $1.7 million. This
decrease resulted primarily from purchases of treasury stock (net) totaling $4.4
million and the change in unrealized holding losses on available for sale
securities, offset in part by the retention of earnings (net of dividends paid).
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Under the risk-based capital guidelines, a minimum capital to risk-weighted
assets ratio of 8.0% is required, of which, at least 4.0% must consist of Tier 1
capital (equity capital net of goodwill). Additionally, a minimum leverage ratio
Tier 1 capital to total assets) of 3.0% must be maintained. At June 30, 1999,
the Company had a total risk-based capital ratio of 10.35%, of which 9.49%
consisted of Tier 1 capital. The leverage ratio for the Company at June 30,
1999, was 6.40%.
Cash dividends declared to shareholders of the Company totaled $2.2 million, or
$0.28 per share, during the first six months of 1999. This compares to dividends
of $2.2 million, or $0.27 per share, for the same period in 1998. Cash dividends
paid as a percentage of net income amounted to 37.0% and 42.8% for the six
months ended June 30, 1999 and 1998, respectively.
In April 1999 the Company issued 82,000 common shares in connection with the
acquisition of Chornyak, a full service financial planning company. The Company
also entered into a five year employment agreement with the sole shareholder of
Chornyak. Under the terms of such agreement, the Company granted this individual
an option to purchase up to 30,000 common shares, subject to a four year vesting
schedule.
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 UNCERTAINTIES - YEAR 2000
The Year 2000 Issue concerns the potential inability of information systems to
properly recognize and process data-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. This concern includes both the
impact such failure might have on the Company as well as its customers.
All of the Company's banking operations have been converted to a core data
processing system that the Company acquired and began utilizing in 1996.
Substantially all of the software utilized by the Company is purchased or
licensed from external providers. One of the acquisition requirements was that
the systems be full date expanded and thus ready for the millennium change.
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 and perform a testing plan to
independently verify certifications; 5) determine the impact of a system not
being in compliance; 6) correct non compliance situations; and 7) develop a
contingency plan. Testing of all critical systems has been completed and
contingency plans have been developed. Based on its assessment at this time,
management does not anticipate any significant 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 customers may experience. This identification
process considered exposures to credit quality should borrowers experience
difficulties and exposures to liquidity due to difficulties experienced by
depositors. A process for monitoring customer trends has been developed to
address any pressure on liquidity. 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 approximated $300,000 and primarily represent equipment and
software purchases. The Company estimates that it will incur additional costs of
approximately $100,000 primarily for additional 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
On April 22, 1999, the Company held its Annual Meeting of Shareholders,
the results of which are as follows:
1. To approve and ratify the appointment of Pricewaterhouse
Coopers, L.L.P. as independent auditors for the year ended
December 31, 1999:
Abstaining/
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
5,943,625 5,849 20,479
2. Election of Class III directors:
Votes Against/
Votes For Withheld
--------- --------------
Milman H. Lynn, III 5,960,401 9,553
John W. Straker, Jr. 5,963,513 6,441
ITEM 5. OTHER INFORMATION
The proxy holders for the 2000 annual meeting of shareholders will use
their discretion in voting on any and all matters brought before the
2000 annual meeting which were not provided to the Company in an
advance notice on or prior to February 3, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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: August 12, 1999 (Signed) /s/ Gary N. Fields
-------------------------------------
Gary N. Fields
President and
Chief Executive Officer
Date: August 12, 1999 (Signed) /s/ Kim M. Taylor
-------------------------------------
Kim M. Taylor
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
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