-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JexrhBJ5B7hPaiJw5XAMpaQmFYS5U4uWOGH12um+s+nx0SnjHCguGezEX8zwti7q 6TECbc7A+YML5cAaXLM8ug== 0000950152-96-001219.txt : 19960329 0000950152-96-001219.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950152-96-001219 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST KNOX BANC CORP CENTRAL INDEX KEY: 0000756899 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 311121049 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-13161 FILM NUMBER: 96540191 BUSINESS ADDRESS: STREET 1: ONE SO MAIN ST CITY: MOUNT VERNON STATE: OH ZIP: 43050 BUSINESS PHONE: 6143935500 MAIL ADDRESS: STREET 2: ONE S MAIN STREET CITY: MOUNT VERNON STATE: OH ZIP: 43050 10-K405 1 FRIST KNOX NATIONAL BANK 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _________ to ________ Commission file number: 0-13161 FIRST-KNOX BANC CORP. Incorporated - Ohio I.R.S. Identification Number-31-1121049 One South Main Street P. O. Box 871 Mount Vernon, Ohio 43050 Telephone: (614) 393-5500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $3.125 Per Share 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 13, 1996: $71,876,973 Common Stock Par Value: $3.125 per share Common shares outstanding at March 13, 1996: 3,560,262 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1995, and Definitive Proxy Statement dated March 1, 1996, are incorporated by reference into Parts I, II and III. Page 1 of 96 Pages Exhibit Index Appears on Page 20 2 PART I ITEM 1. BUSINESS Introduction First-Knox Banc Corp. (the "Corporation") was incorporated under the laws of the State of Ohio on July 27, 1984. Its principal business is to act as a bank holding company for its wholly-owned subsidiaries, The First-Knox National Bank of Mount Vernon ("First-Knox") and The Farmers & Savings Bank, Loudonville, Ohio ("Farmers" and collectively with First-Knox, the "Banks"). Reference is made to the Statistical Disclosures included elsewhere herein and Item 8., of this Form 10-K for financial information about the Corporation's banking business. Revenues from loans accounted for 71.7% in 1995, 71.4% in 1994 and 73.9% in 1993 of total consolidated revenues. Revenues from investments and mortgage-backed securities accounted for 19.9% in 1995, 20.6% in 1994 and 18.1% in 1993 of total consolidated revenues. The business of the Corporation and its subsidiaries is not seasonal to any significant degree, nor is it dependent upon a single or small group of customers. The Corporation and its subsidiaries do not have any banking offices located in a foreign country nor do they have any foreign assets, liabilities or income. In the opinion of management, the Corporation does not have exposure to material costs associated with environmental hazardous waste clean-up. First-Knox Business The First-Knox National Bank of Mount Vernon, a successor by various reorganizations to Knox County Bank, which was chartered in Ohio in 1847, has been a national banking association under its present name in Mount Vernon, Ohio, since 1939. In terms of total assets, loans and deposits within its primary market area of Knox, Morrow, Richland and Holmes counties in Ohio, First-Knox is the largest of fifteen banks and bank offices and six savings associations and credit unions. At December 31, 1995, First-Knox had assets of $441.8 million, loans and leases of $291.4 million, and deposits of $356.3 million. First-Knox is a full service commercial bank providing checking accounts, savings accounts, certificates of deposit, commercial loans, installment loans, credit card loans, commercial and residential real estate mortgage loans, vehicle and equipment leasing, corporate and personal trust services, discount brokerage services, and safe deposit rental facilities. Services are provided through walk-in offices, automated teller machines, and automobile drive-in facilities. Five of First-Knox's ten offices are located in Knox County, Ohio. First- Knox's Main Office and one full service branch office are located in Mount Vernon, one branch is located in Fredericktown, one branch is located in Page 2 3 Danville, and one branch is located in Centerburg, each providing walk-in, drive-through and automated teller machine facilities. Full service branches providing walk-in, drive-through and automated teller machine facilities are located in Millersburg (Holmes County), as well as the Richland County communities of Lexington and Bellville. Two branches are located in Mount Gilead (Morrow County), Ohio, one a full service branch providing walk-in services and one a full service branch providing walk-in, drive-through and automated teller machine facilities. First-Knox faces strong competition from other banks, savings associations, credit unions, insurance companies, securities brokers, and retailers offering financial services. At December 31, 1995, First-Knox had 182 full-time and 58 part-time employees. First-Knox is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be good. First-Knox accounts for approximately 89% of the Corporation's consolidated assets. Farmers Business The Farmers & Savings Bank, Loudonville, Ohio, was chartered as an Ohio corporation in 1905 and has operated under its present name in Loudonville, Ohio, since 1930. At December 31, 1995, Farmers had assets of $54.9 million, loans of $39.2 million, and deposits of $49.7 million. Within the Loudonville banking market, Farmers faces competition from one commercial bank branch and one savings and loan branch. Farmers is the largest of the three institutions in terms of deposits. Farmers is a full service commercial bank providing checking accounts, savings accounts, certificates of deposit, commercial loans, installment loans, commercial and residential mortgage loans, and safe deposit rental facilities. Services are provided through walk-in offices, automobile drive through facilities, and an automated teller machine. At December 31, 1995, Farmers had 29 full-time and 15 part-time employees. Farmers is not a party to any collective bargaining agreement. Management considers its relationship with its employees to be good. Farmers accounts for approximately 11% of the Corporation's assets. In addition to the above information, a further description of First-Knox and Farmers is contained in the Financial Review section (page 35) of the Annual Report to Shareholders for the fiscal year ended December 31, 1995 ("the 1995 Annual Report") included as Exhibit 13 hereto and incorporated herein by reference. Page 3 4 Supervision and Regulation The following is a summary of certain statutes and regulations affecting the Corporation and its subsidiaries. The summary is qualified in its entirety by reference to the statutes and regulations. Management is not aware of any current recommendations by regulatory authorities which, if they were implemented, would have a material effect on the Corporation. The Corporation The Corporation is a bank holding company under the Bank Holding Company Act of 1956, as amended, which restricts the activities of the Corporation and the acquisition by the Corporation of voting stock or assets of any bank, savings association or other company. The Corporation is also subject to the reporting requirements of, and examination and regulation by, the Board of Governors of the Federal Reserve system ("Federal Reserve Board"). Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the bank holding company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the bank holding company and other subsidiaries. A bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with extensions of credit or provision of property or services. Bank holding companies are prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. In addition, acquisitions across state lines are limited to acquiring banks in those states specifically authorizing such interstate acquisitions. However, since September 1995, federal law has permitted interstate acquisitions of banks, if the bank acquired retains its separate charter. Banks As a national bank, First-Knox is supervised and regulated by the Comptroller of the Currency ("Comptroller"). As an Ohio chartered bank, Farmers is supervised and regulated by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation ("FDIC"). The deposits of First- Knox and Farmers are insured by the FDIC and both entities are subject to the applicable provisions of the Federal Deposit Insurance Act. A subsidiary of a bank holding company can be liable to reimburse the FDIC if the FDIC incurs or anticipates a loss because of a default of another FDIC-insured subsidiary of the bank holding company or in conjunction with FDIC assistance provided to such subsidiary in danger of default. In addition, the holding company of any insured financial institution that submits a capital plan under the federal banking agencies' regulations on prompt corrective action guarantees a portion of the institution's capital shortfall, as discussed below. Page 4 5 Various requirements and restrictions under the laws of the United States and the State of Ohio affect the operations of the Banks, including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest which may be charged thereon, restrictions relating to investments and other activities, limitation on credit exposure to correspondent banks, limitations based on capital and surplus, limitations on payment of dividends, and limitations on branching. Under current law, the Banks may establish branch offices throughout the State of Ohio. Pursuant to recent federal legislation, First-Knox may branch across state lines, if permitted by the law of the other state. In addition, effective June 1997, such interstate branching will be authorized, unless the law of the other state specifically prohibits the interstate branching authority granted by federal law. The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies and for state member banks. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories. The required minimum ratio of capital to risk-weighted assets (including certain off-balance sheet items, such as stand-by letters of credit) was 8.0% at December 31, 1995, as disclosed in Note 14 (page 30) of the Corporations's 1995 Annual Report (See Exhibit 13). At least half of the total regulatory capital is to be comprised of common stockholders' equity, including retained earnings, non-cumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries less goodwill ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of, among other things, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock and a limited amount of allowance for loan and lease losses. The Federal Reserve Board has also imposed a minimum leverage ratio (Tier 1 capital to total assets) of 4% for bank holding companies and state member banks that meet certain specified conditions, including no operational, financial or supervisory deficiencies, and including those having the highest regulatory (CAMEL) rating. The minimum leverage ratio is 1.0-2.0% higher for other holding companies and state member banks based on their particular circumstances and risk profiles and those experiencing or anticipating significant growth. National banks are subject to similar capital requirements adopted by the Comptroller and state non-member banks are subject to similar capital requirements adopted by the FDIC and the Ohio Division of Financial Institutions. The Corporation and its subsidiaries currently satisfy all regulatory capital requirements. Failure to meet the capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including dividend restrictions and the termination of deposit insurance by the FDIC. Under an outstanding proposal of the Comptroller and the FDIC, the subsidiaries may be required to have additional capital if their interest rate risk exposure exceeds acceptable levels provided for in the regulation when adopted. In addition, the federal banking regulators have established regulations governing prompt corrective action to resolve capital deficient Page 5 6 banks. Under these regulations, banks which become undercapitalized become subject to mandatory regulatory scrutiny and limitations, which increase as capital continues to decrease. Such banks are also required to file capital plans with their primary federal regulator, and their holding companies must guarantee the capital shortfall up to 5% of the assets of the capital deficient bank at the time it becomes undercapitalized. Dividend Regulation The ability of the Corporation to obtain funds for the payment of dividends and for other cash requirements is largely dependent on the amount of dividends which may be declared by its subsidiary banks. However, the Federal Reserve Board expects the Corporation to serve as a source of strength to the subsidiaries, which may require it to retain capital for further investment in the subsidiaries, rather than for dividends for shareholders of the Corporation. Generally, First-Knox and Farmers must have the approval of their respective regulatory authorities if a dividend in any year would cause the total dividends for that year to exceed the sum of the current year's net profits and the retained net profits for the preceding two years, less required transfers to surplus. A national bank may not pay a dividend in an amount greater than its net profits then on hand, after deducting its losses and bad debts. In addition, if the surplus fund of the national bank is less than or equal to its common capital, no dividends may be declared unless there has been carried to the surplus fund not less than one-tenth part of the national bank's net profits of the preceding half-year in the case of quarterly or semiannual dividends, or not less than one-tenth part of its net profits of the preceding two consecutive half-year periods in the case of an annual dividend. The Banks may not pay dividends to the Corporation if, after such payment, they would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. Payment of dividends by the Banks may be restricted at any time at the discretion of the regulatory authorities, if they deem such dividends to constitute an unsafe and/or unsound banking practice or if necessary to maintain adequate capital for the Banks. See Exhibit 13, 1995 Annual Report page 2, Comparative Stock Data and page 30, Note 14 and Item 5., which are herein incorporated by reference. Monetary Policy and Economic Conditions The commercial banking business is affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities and, in particular, the Federal Reserve Board. It regulates money and credit conditions and interest rates in order to influence general economic conditions primarily through open market operations in U.S. Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against bank deposits. These policies and regulations significantly affect the overall growth and distribution of bank loans, investments and deposits, and the interest rates charged on loans, as well as interest rates paid on deposits and accounts. The monetary policies of the Federal Reserve Board are expected to continue their substantial influence on the operating results of commercial banks. Coupled with the changing conditions in the economy and the money market, the impacts on the performance of the Corporation and the Banks are difficult to predict. Page 6 7 Growth Strategy The Corporation's Board of Directors and management have identified various corporate, business and financial objectives. One such objective is growth of the organization through the acquisition of community banks and savings and loan associations located within the State of Ohio. Benefits of this strategy include increasing the opportunities for earning asset and core deposit growth, enhancement of fee based income, and realization of operating economies of scale. The Corporation intends to seek and pursue acquisition opportunities which fit these strategic objectives. STATISTICAL DISCLOSURES The following section contains financial disclosures as required under Industry Guide 3, "Statistical Disclosure by Bank Holding Companies." The information provided should be read in conjunction with the narrative analysis presented in the Financial Review and Consolidated Financial Statements of the Corporation and its subsidiaries contained in the 1995 Annual Report. I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential The average balance sheet information and the related analysis of net interest income for the years ended December 31, 1995, 1994 and 1993, as required is included in Table II "Average Balances and Analysis of Net Interest Income" on page 37 of the Corporation's 1995 Annual Report (See Exhibit 13) which is herein incorporated by reference. The analysis of the changes in interest income and expense from 1994 to 1995 and from 1993 to 1994 is included in Table III "Rate and Volume Analysis of Changes in Interest Income and Interest Expense" on page 38 of the Corporation's 1995 Annual Report (See Exhibit 13) which is herein incorporated by reference. II. Investment Portfolio A schedule of the carrying value of investment and mortgage-backed securities and related information on fair values, maturities and average yields is included in Table IV "Investment and Mortgage-backed Securities" on page 47 of the Corporation's 1995 Annual Report (See Exhibit 13) which is herein incorporated by reference. Excluding obligations of the U.S. Treasury and other agencies and corporations of the U.S. government, there were no investment or mortgage-backed securities of any one issuer which exceeded 10% of consolidated shareholders' equity at December 31, 1995. Page 7 8 VI. Return on Equity and Assets The return on assets, return on equity, dividend payout ratio and equity to assets ratio, for the years ended December 31, 1995, 1994 and 1993, as required, are included in Table I "Financial Ratios For Five Years" on page 35 of the Corporation's 1995 Annual Report (See Exhibit 13) which is herein incorporated by reference. VII. Short Term Borrowings The information in item VII is not required to be given because the average balance for any category of short-term borrowings for 1995, 1994 and 1993 did not exceed 30% of stockholders' equity at the end of those respective years. See the following pages for Item III, Loan Portfolio; Item IV, Summary of Loan Loss Experience; and Item V, Deposits. Page 8 9 III Loan Portfolio, December 31,
(in thousands) 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- % of % of % of % of % of Year End Balances: Balance Total Balance Total Balance Total Balance Total Balance Total - ------------------ -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Commercial and Other $ 95,009 28.7% $ 85,971 28.3% $ 93,474 32.1% $ 90,189 32.6% $ 84,875 32.5% Real Estate (1) 162,495 49.2% 149,018 49.0% 135,287 46.5% 116,861 42.3% 105,234 40.2% Consumer and Credit Cards 73,137 22.1% 69,179 22.7% 62,147 21.4% 69,387 25.1% 71,445 27.3% -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total Loans & Leases $330,641 100.0% $304,168 100.0% $290,908 100.0% $276,437 100.0% $261,554 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Non-Performing Loans at December 31: (2),(3) 1995 1994 1993 1992 1991 - ----------------------- -------- -------- -------- -------- -------- Non-Accrual $ 197 $ 805 $ 474 $ 913 $ 1,542 90 Day and Over Past Due 862 457 1,214 884 974 Restructured 1,122 885 934 -------- -------- -------- -------- -------- Total $ 2,181 $ 2,147 $ 2,622 $ 1,797 $ 2,516 ======== ======== ======== ======== ========
Maturity Schedule: Within 1 to 5 5 Years December 31, 1995 1 year Years & Over Total - ----------------- ------ ------- -------- ----- Commercial & Other- Fixed Rate $ 5,368 $ 5,324 $ 1,773 $12,465 Adjustable Rate 27,445 16,708 38,391 $82,544 ------ ------ ------ ------- Total $32,813 $22,032 $40,164 $95,009 ======= ======= ======= =======
Predetermined Adjustable Commercial & Other Loans Fixed Rates Rates - ------------------------ ------------- ---------- Maturing After One Year $7,097 $55,099 ====== =======
See page 11 for footnote explanations. Page 9 10 IV Summary of Loan Loss Experience
Loan Loss Experience: 1995 1994 1993 1992 1991 - --------------------- -------- -------- -------- -------- -------- Average Loans $314,259 $298,161 $283,550 $271,345 $254,812 ======== ======== ======== ======== ======== Allowance for Loan Losses, Jan. 1 $ 3,876 $ 3,597 $ 3,162 $ 2,905 $ 2,715 Losses Charged Off: Commercial and Other 160 182 448 521 312 Real Estate (1) 12 62 53 69 Consumer and Credit Cards 379 447 372 744 593 -------- -------- -------- -------- -------- Total 539 641 882 1,318 974 -------- -------- -------- -------- -------- Recoveries: Commercial and Other 31 64 38 26 20 Real Estate (1) 6 1 1 Consumer and Credit Cards 214 218 149 154 77 -------- -------- -------- -------- -------- Total 245 282 193 181 98 -------- -------- -------- -------- -------- Net Loan Charge-Offs 294 359 689 1,137 876 Additions Charged to Operations 584 638 1,124 1,394 1,066 -------- -------- -------- -------- -------- Allowance for Loan Losses at December 31: $ 4,166 $ 3,876 $ 3,597 $ 3,162 $ 2,905 ======== ======== ======== ======== ======== Ratio of Net Charge-Offs to Average Loan Balances 0.09% 0.12% 0.24% 0.42% 0.34% ======== ======== ======== ======== ========
See page 11 for footnote explanations. Page 10 11
IV Loan Portfolio - Continued (in thousands) 1995 1994 1993 1992 1991 ------------------ ----------------- ----------------- ------------------ ------------------ % of % of % of % of % of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category Category Category Category Category Allocation of Allowance for To Total To Total To Total To Total To Total Loan Losses as of Dec. 31: Balance Loans Balance Loans Balance Loans Balance Loans Balance Loans - -------------------------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- Commercial and Other $ 591 28.7% $ 667 28.3% $ 903 32.1% $1,287 32.6% $1,368 32.5% Real Estate (1) 151 49.2% 156 49.0% 178 46.5% 261 42.3% 326 40.2% Consumer and Credit Cards 393 22.1% 472 22.7% 711 21.4% 676 25.1% 773 27.3% Unallocated 3,031 N/A 2,581 N/A 1,805 N/A 938 N/A 438 N/A ------ ----- ------ ----- ------ ----- ----- ----- ------ ----- Total $4,166 100.0% $3,876 100.0% $3,597 100.0% $3,162 100.0% $2,905 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
(1) Real estate construction loans are included in this amount and represent less than 5% of total real estate loans and less than 3% of total loans and leases for all years presented. These loans are principally to construct residential housing. (2) The accrual of interest on loans and leases is suspended when in management's opinion, the collection of all or a portion of the interest has become doubtful. When a loan is placed on nonaccrual status, accrued and unpaid interest is charged against income. The accrual of interest on loans 90 days past due will continue until it is determined that collection of all or a portion of the interest has become doubtful. If all loans were current and interest had been earned on non-accrual loans, interest income would have increased approximately $20,000 in 1995. (3) Restructured loans were less than one percent of non-performing loans at December 31, 1992 and December 31, 1991. (4) Potential Problem Loans - At December 31, 1995 there are approximately $8 million of loans which management doubts the borrowers' ability to completely comply with the present payment terms which are not on non-accrual status as described in note (2) above. These loans and their potential loss exposure have been considered in management's analysis of the adequacy of the allowance for loan losses. Also refer to Note 1 of the consolidated financial statements regarding the allowance for loan and lease losses on page 16 of the Corporation's 1995 Annual Report, (See Exhibit 13), which is herein incorporated by reference. (5) There were no foreign loans in any period presented. (6) As of December 31, 1995, there are no concentrations of loans greater than 10% of total loans which are not otherwise disclosed as a category of loans in the above analysis. Also refer to Note 1 of the consolidated financial statements regarding concentrations of credit risk on page 16 of the Corporation's 1995 Annual Report, (Exhibit 13), which is herein incorporated by reference. (7) No material amount of loans that have been classified by the regulatory examiners as loss, substandard, doubtful, or special mention have been excluded from the amounts disclosed as non-accrual, past due 90 days or more, restructured or potential problem loans. (8) For the periods presented, there were no interest bearing assets other than loans, that were restructured, past-due, placed on non-accrual status or which management had doubts as to repayment. (9) Impaired loans were not material at December 31, 1995. Also refer to Note 1 of the consolidated financial statements regarding allowance for loan and lease losses on pages 16-17 of the Corporation's 1995 Annual Report (Exhibit 13), which is herein incorporated by reference. Page 11 12 V Deposits Time Deposit Maturity Distribution as of December 31, 1995: (In thousands) - -------------------------------------------------------------------------------
Under 3 - 6 6 - 12 Over 12 3 Mo. Months Months Months Total ------- ------ ------ ------ ------- Time Deposits of $100,000 or More $13,781 $5,387 $7,550 $9,699 $36,417 ======= ====== ====== ====== =======
Average Deposits and Interest Expense Analysis: (In thousands) - ----------------------------------------------------------------------
1995 1994 1993 ------------------------- ------------------------- ------------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------- ------- ------- ------- -------- ------- Non-Interest Bearing Demand $ 47,023 $ 44,722 $ 39,877 Interest Bearing Demand 42,216 1.97% 43,249 1.98% 41,677 2.31% Savings 107,879 2.97% 118,563 2.71% 116,875 2.86% Time 193,554 5.75% 172,148 4.49% 167,420 4.61% -------- ------- ------- ------- -------- -------- Total $390,672 $378,682 $365,849 ======== ======== ========
There were no material foreign deposits in any period presented. Page 12 13 ITEM 2. PROPERTIES First-Knox owns and occupies its headquarters in Mount Vernon, Ohio. Farmers owns and occupies its headquarters in Loudonville, Ohio. First-Knox owns a free-standing operations center in Mount Vernon, Ohio. All branch office locations for both Banks are owned with the exception of the Millersburg branch of First-Knox where a portion is leased. The Corporation considers its properties to be satisfactory for current operations. See information under the heading "First-Knox National Bank Offices" and "Farmers and Savings Bank Offices" on page 52 of the Corporation's 1995 Annual Report (Exhibit 13), which is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS The Corporation had various claims and lawsuits pending at December 31, 1995, arising out of the ordinary course of its business. It is the opinion of management that such litigation will not materially affect the Corporation's financial position or earnings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Page 13 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS See: 1995 Annual Report, page 2 - Comparative Stock Data, and page 30 - Note 14, which are incorporated herein by reference (See Exhibit 13). ITEM 6. SELECTED FINANCIAL DATA See: 1995 Annual Report, page 35 Table I, "Financial Ratios for Five Years," and page 49 Table VI, "Ten Years of Progress Statement Summary," which is incorporated herein by reference (See Exhibit 13). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See: 1995 Annual Report, pages 35 through 49, "Financial Review," which are incorporated herein by reference (See Exhibit 13). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements included in the Corporation's 1995 Annual Report to Shareholders for the fiscal year ended December 31, 1995, and the report of Crowe, Chizek and Company LLP contained therein are incorporated herein by reference. See Item 14, index to financial statements and schedules. The supplementary financial information specified by item 302 of Regulation S-K is not applicable. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None Page 14 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Information regarding directors and executive officers also serving as directors is set forth in the Corporation's Definitive Proxy Statement dated March 1, 1996, pages 3 - 6, which is included as Exhibit 99 hereto and incorporated herein by reference. No facts exist which would require disclosure under Item 405 for Regulation S-K. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to executive officers who do not serve as directors:
Position ------------------------------- First-Knox First-Knox Name Age Banc Corp. National Bank ---- --- ---------- ------------- Gordon Yance 48 Vice Pres. Vice President and & Treasurer Chief Financial Officer Ian Watson 45 Vice Pres. Vice President of & Secretary Operations, Deposits and Investments
Mr. Yance has held these positions for more than five years. Mr. Watson has held his position with First-Knox National Bank for more than five years. He was elected Vice President and Secretary of the Corporation in 1991. ITEM 11. EXECUTIVE COMPENSATION See: The Corporation's Definitive Proxy Statement dated March 1, 1996, pages 7 - 12, which is included as Exhibit 99 hereto and incorporated herein by reference. Neither the "Report of Stock Option Committee and Personnel Committee on Executive Compensation" nor "Comparison of Five Year Cumulative Total Return Among First-Knox Banc Corp., S&P 500 Index and KBW 50 Index," on pages 10 - 13, in the Corporation's Definitive Proxy Statement dated March 1, 1996, shall be deemed to be incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See: The Corporation's Definitive Proxy Statement dated March 1, 1996, pages 2 - 5, which is included as Exhibit 99 hereto and incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See: The Corporation's 1995 Annual Report (Exhibit 13) page 30, Note 15, which is incorporated herein by reference and the Corporation's Definitive Proxy Statement (Exhibit 99) dated March 1, 1996, pages 10 & 14, which is incorporated herein by reference. Page 15 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K First-Knox Banc Corp. Index to Financial Statements and Schedules For the Three Years Ended December 31, 1995 ------------ (a) The following financial statements are incorporated herein by reference from the Annual Report to Shareholders filed as Exhibit 13 to this filing:
Annual Report First-Knox Banc Corp. and Subsidiaries: Reference - --------------------------------------- ------------- Report of Independent Auditors Page 34 Consolidated balance sheets - December 31, 1995 & 1994 Page 11 Consolidated statements of income for the years ended December 31, 1995, 1994, and 1993. Page 12 Consolidated statements of changes in shareholders' equity for the years ended December 31, 1995, 1994 and 1993. Page 13 Consolidated statements of cash flows for the years ended December 31, 1995, 1994 and 1993. Page 14 Notes to the consolidated financial statements Pages 15-33 First-Knox Banc Corp: - --------------------- Holding company only financial statements Pages 32-33
Schedules have been omitted since they are either not required or not applicable, or since the required information is shown in the financial statements or related notes. Page 16 17 The following table provides certain information concerning the executive compensation plans and arrangements required to be filed as exhibits to this report:
Exhibit Number Description Location - ------- ----------- -------- 10(a) Summary of Incentive Compensation Incorporated Plan dated December 9, 1983. herein by reference to Exhibit 10(a) to the Corporation's Annual Report on Form 10-K For the period ending December 31, 1992 (File No. 0-13161) ("1992 Form 10-K") 10(b) Employees Retirement Plan dated Incorporated January 1, 1984 herein by reference to Exhibit 10(a) to the Corporation's Annual Report on Form 10-K for the period ending December 31, 1986 (File No. 0-13161) ("1986 Form 10-K") 10(c) Supplemental Retirement Agreement Incorporated dated August 11, 1987 herein by Reference to Exhibit 10(c) to the 1992 Form 10-K 10(d) Non-qualified Stock Option and Incorporated Stock Appreciation Rights Plan herein by reference to Exhibit 23 to the Corporation's Form 10-K for the period ending December 31, 1989 (File No. 0-13161) (1989 Form 10-K)
Page 17 18 10(e) First-Knox Banc Corp. Savings Incorporated Retirement Plan herein by reference to Exhibit 10(e) to the Corporation's Annual Report on Form 10-K for the period ending December 31, 1993 (File No. 0-13161) ("1993 Form 10-K") 10(g) First-Knox Banc Corp. Stock Option Incorporated And Stock Appreciation Rights Plan herein by reference to exhibit 10(g) to the March 31, 1995 Form 10-Q
(b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. (c) Exhibit List and Index. Page 20 Page 18 19 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. First-Knox Banc Corp. (Registrant) By Carlos E. Watkins March 28, 1996 --------------------------------- Carlos E. Watkins, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 28, 1996, by the following persons on behalf of the Registrant and in the capacities indicated. - -s- Russell E. Ramser, Jr. -s- John B. Minor Chairman of the Board of Director Directors, and Director - -s- Carlos E. Watkins -s- James A. McElroy President & Director Director - -s- Robert S. Gregg -s- Noel C. Parrish Director Director - -s- James J. Cullers -s- George T. Culbertson, Jr. Director Director - -s- Kenneth W. Stevenson -s- Maureen Buchwald Director Director - -s- Alan E. Riedel -s- Philip H. Jordan, Jr. Director Director -s- Gordon E. Yance Vice President, Treasurer (chief financial officer and chief accounting officer) Page 19 20 EXHIBIT LIST AND INDEX FIRST-KNOX BANC CORP. FORM 10-K for the Year Ended December 31, 1995
Exhibit Number Description Location - ------- ----------- -------- 3(a)(1) Articles of Incorporation, as amended Incorporated herein by on March 15, 1988. reference to Exhibit 3 to the Corporation's Annual Report on Form 10-K for the period ending December 31, 1988 (File No. 0-13161) ("1988 Form 10-K") 3(a)(2) Amendment to Articles of Incorpora- Incorporated herein by tion, April 10, 1990. reference to Exhibit 3 to the Corporation's Form 10-K for the period ending December 31, 1990 (File No. 0-13161) ("1990 Form 10-K") 3(a)(3) Amendment to Articles of Incorpora- Incorporated herein by tion, March 25, 1992. reference to Exhibit 3 to the Corporation's Form 10-K for the period ending December 31, 1991 ("1991 Form 10-K") 3(a)(4) Amendment to Articles of Incorpora- Incorporated herein by tion, March 29, 1994. reference to Exhibit 3 to the Corporation's Form 10-Q for the period ending March 31, 1994 3(a)(5) Amendment to the Articles of Incorpora- Incorporated herein by tion, March 28, 1995. reference to Exhibit 3 to the Corporation's Form 10-Q for the period ending March 31, 1995 3(b)(1) Amendment to Code of Regulations Incorporated herein by March 15, 1988 reference to Exhibit 3 to the 1987 Form 10-K 3(b)(2) Amendment to Code of Regulations Incorporated herein by March 26, 1991 reference to Exhibit 3 to the 1990 Form 10-K 3(b)(3) Amendment to Code of Regulations Incorporated herein March 23, 1993 reference to Exhibit 3 to the 1992 Form 10-K
Page 20 21 EXHIBIT LIST AND INDEX FIRST-KNOX BANC CORP. FORM 10-K For the Year Ended December 31, 1995 (Continued) 4(b) First-Knox Banc Corp. Dividend Incorporated herein by Reinvestment Plan the Corporation's Registration Statement on Form S-3 (Registration No. 33-52590) 4(b)1 Amendment to the First-Knox Banc Incorporated herein by Corp. Dividend Reinvestment Plan reference to exhibit 4(b)1 to the March 31, 1995 Form 10-Q 10(a) Summary of Incentive Compensation Incorporated herein by Plan dated December 9, 1983. reference to Exhibit 10(a) to the 1992 Form 10-K 10(b) Employees Retirement Plan dated Incorporated herein by January 1, 1984. reference to Exhibit 10(a) to the 1986 Form 10-K 10(c) Supplemental Retirement Agreement Incorporated herein by dated August 11, 1987. reference to Exhibit 10(C) to the 1992 Form 10-K 10(d) Non-qualified Stock Option and Incorporated herein by Stock Appreciation Rights Plan. reference to Exhibit 23 to the 1989 Form 10-K 10(e) First-Knox Banc Corp. Savings Incorporated herein by Retirement Plan reference to Exhibit 10(e) to the 1993 Form 10-K 10(f) Project Services Agreement between Incorporated herein by First-Knox National Bank and reference to Exhibit 10(f) Sverdrup Building Corporation to the 1993 Form 10-K 11 Statement regarding computation Page 40 - Note 1 to of per share earnings. consolidated financial statements 13 First-Knox Banc Corp. Annual Report Page 23 to Shareholders for the Year Ended December 31, 1995. 21 Subsidiaries of First-Knox Banc Corp. Page 94
Page 21 22 EXHIBIT LIST AND INDEX FIRST-KNOX BANC CORP. FORM 10-K For the Year Ended December 31, 1995 (Continued) 23 Consent of Independent Accountants Page 95 27 Financial Data Schedule Page 96 99 First-Knox Banc Corp. Definitive Proxy Page 77 Statement dated March 1, 1996.
Page 22 EX-13 2 EXHIBIT 13 1 Exhibit 13 1995 ANNUAL REPORT [LOGO] FIRST-KNOX BANC CORP. Page 23 2 [PICTURE 1]
Table of Contents ============================================================ Financial Highlights 2 Letter to Shareholders 3 Highlights of 1995 6 Consolidated Financial Statements 11 Financial Review 35 Directors/Officers 50 Shareholder Information/Offices 52
Page 24 3 First-Knox Banc Corp. 1995 Annual Report FINANCIAL HIGHLIGHTS COMPARATIVE BALANCES
Percent (in thousands of dollars) 1995 1994 Change - ---------------------------------------------------------------------------------------- Assets........................................ $496,899 $467,191 6.4% Deposits...................................... 404,067 377,180 7.1% Loans and Leases.............................. 330,641 304,168 8.7% Investments................................... 131,988 131,211 0.6% Borrowings.................................... 41,401 46,172 (10.3)% Shareholders' Equity.......................... 46,659 40,832 14.3% Net Income.................................... 5,709 5,164 10.6% Cash Dividends................................ 1,751 1,527 14.7% Trust Department Assets....................... 82,696 78,157 5.8% FACILITIES AND STAFF Banking Offices............................... 12 12 Total Staff................................... 256 264
COMPARATIVE STOCK DATA
Per Share Data ------------------------------------------------------------------ 1995 1994 ---------------------------- ------------------------------- Market Price Cash Market Price Cash High Low Dividends High Low Dividends ------ ------ --------- ------ ------ --------- First Quarter $21.75 $20.50 $.11 $16.91 $15.48 $.10 Second Quarter 21.88 20.91 .11 21.67 16.67 .10 Third Quarter 25.00 21.00 .12 22.86 20.50 .10 Fourth Quarter 26.50 24.00 .15 23.00 20.50 .12
Percent 1995 1994 Change - ---------------------------------------------------------------------------------------- Year-End Market Price......................... $25.00 $21.00 19.0% Year-End Book Value........................... 13.11 11.23 16.7% Fully-Diluted Earnings Per Share.............. 1.57 1.41 11.3% Price Earnings Ratio.......................... 15.9x 15.0x Cash Dividend Payout Ratio.................... 30.7% 29.6% Number of Shareholders........................ 1,404 1,327 5.8% Average Shares Outstanding Primary..................................... 3,636,914 3,669,468 Fully Diluted............................... 3,639,609 3,672,390 Stock Split/Stock Dividend.................... 100% 5%
The stock of First-Knox Banc Corp. was traded locally over-the-counter through registered brokers McDonald & Company and The Ohio Company until March 29, 1994. The range of market price through that date was compiled from data provided by the brokers based on limited trading. On March 30, 1994, the stock began trading on the NASDAQ National Market under the symbol "FKBC." The market prices represent quotations between dealers without adjustment for retail markups, markdowns, or commissions and may not necessarily represent actual transactions. All per share data has been restated to give retroactive effect to the two for one stock split in the form of a 100% stock dividend in 1995 and a 5% stock dividend in 1994. The ability of the Corporation to pay cash dividends is based upon receiving dividends from its bank subsidiaries. See Note 14 to the consolidated financial statements regarding regulatory restrictions. 2 Page 25 4 First-Knox Banc Corp. 1995 Annual Report LETTER TO SHAREHOLDERS As we approach our 150th anniversary in 1997, we are proud of the accomplishments of First-Knox Banc Corp. and the individuals who made it happen. The past year economically can be described as one of decreasing interest rates and margins with uncertain government fiscal responsibility. First-Knox, however, continued its goal of consistency in performance by posting net earnings 10.6% higher than the previous year. Assets of the Corporation increased 6.4% and shareholders' equity increased 14.3% over last year. Shareholders received a two-for-one stock split in the form of a 100% stock dividend in 1995, marking the thirtieth consecutive year in which a stock dividend or split has been issued. The market price of the Corporation's stock appreciated approximately 19% in 1995, following an increase of 35.7% in 1994. Cash dividends paid by the Corporation increased 14.7%. A review of our earnings performance is provided in greater detail beginning on page thirty-five, and the following graphs are provided for a quick overview of performance in the last five years. [PHOTO] Carlos E. Watkins, President and Chief Executive Officer (left), and Willam A. Stroud, Chairman of the Board. Many initiatives started earlier in the nineties came to fruition in 1995. The new and renovated main office in Mount Vernon was completed with June open houses conducted for employee families, shareholders, customers, and the community. The new facilities not only provide for better customer access and enhanced service environment, but also encouragement for other businesses to invest in the downtown area of Mount Vernon. Five years ago, a major investment was made in computer technology, and today we are continuing to see the benefits of that investment. During the past year, many "firsts" were recorded by First-Knox Banc Corp. In January, an open house at our Danville Office celebrated the opening of the new drive-in facility and the first MAC(R) machine in the community. For the first time, our Annual Shareholders meeting was held in the auditorium of the R. R. Hodges 3 Page 26 5 First-Knox Banc Corp. 1995 Annual Report Chapel/Fine Arts Center at the Mount Vernon Nazarene College. In late spring, a voice response system was implemented providing our customers with another 24-hour service delivery mechanism. The centralization of loan operations for First-Knox National Bank began during the summer and late fall, and a portion of the operations from the Farmers and Savings Bank was consolidated allowing them to offer check imaging to their customers. The Corporation filed its first electronic Form 10-Q with the SEC in November. Just as we began the year with a construction project, we ended the year with the installation of a new drive-in and ATM at our Edison Office. NET INCOME (in millions of dollars) [CHART 1] On the cover of the 1995 annual report are photographs depicting the interface of individuals and the computer chip. Technology and the Internet were at the forefront of the news in 1995, dominating share and fund performance in the stock market and changing corporate strategic plan directions. The ability to collect and distribute information without geographic boundaries or time limitations changes the way we all do business, and forces us to consider the implications of cyberspace. It does not help that electronic technology is not foolproof, more expensive than anticipated, and changes faster than a speeding bullet. However, we must stay abreast and be involved in new developments. Many people believe the developments in electronic banking are more significant to the industry than the current wave of mergers, interstate banking, federal deposit insurance, or Glass-Steagall reform. FULLY-DILUTED EARNINGS PER SHARE (in dollars) [CHART 2] First-Knox has always been an innovator and has used technology as an active ingredient in the process. However, individual to individual service remains the cornerstone to our success. Technology is a resource to provide customers with higher quality, lower cost, products and services. Our past belief in "high tech, high touch" service is still a valid objective in a world where values change daily. Our customers have indicated that the two most critical factors in providing service to them are responsiveness and competence. Upgrading our organization through technological advancements will enable us to continue providing the convenient and quality service that they have come to expect. 4 Page 27 6 First-Knox Banc Corp. 1995 Annual Report Today, banks are losing customers to non-bank competitors. To thrive in the future, we must find ways to enhance current revenues and create new sources of revenue, as well as to control costs. In addition, we must provide value in product and quality to our customers. The affiliate banks of First-Knox continually look for new ways to serve our markets and to encourage growth within the communities we serve. An example of this would be the participation of James McClure, Chairman of Farmers and Savings Bank, in assisting local development efforts in attracting a corporation to the Perrysville industrial park. Knowing our communities and customers well and providing them with the financial services they need are the primary keys to providing our shareholders with the greatest potential for continued future earnings growth. CASH DIVIDENDS (in thousands of dollars) [CHART 3] During 1995, Mr. J. Robert Purdy retired from the Board of First-Knox Banc Corp. Mr. Purdy was one of the charter Board members of the Corporation and served both the holding company and First-Knox National Bank for a period spanning thirty-plus years. We will miss Mr. Purdy's wise counsel and support. Our success in the past has been a result of the foresight and hard work of the directors, officers, and staff of First-Knox and its affiliates. Our future success also lies in their hands and their ability to provide customers with superior service and shareholders with continued investment value. With your continued support in the future, the opportunities for First-Knox Banc Corp. remain unlimited. /s/ Willam A. Stroud /s/ Carlos E. Watkins Chairman of the Board President and Chief Executive Officer 5 Page 28 7 First-Knox Banc Corp. 1995 Annual Report HIGHLIGHTS OF 1995 It is seemingly paradoxical, but to get a glimpse of our future, we need to look at our past, see where we have been, and then view our recent accomplishments as a midpoint in a time line. Only then can we appreciate the ever-increasing pace of change and create methodologies that will serve us well into the future. Even back in 1850, when the bank was just beginning to be recognized as a financial leader, the simple agrarian life was undergoing a transformation. Population grew, railroads compressed time and distance, governments grew, and the economy evolved. News of events that influence our economy that used to take days to receive now travels in time measured in nanoseconds. As improved technologies fuel the fires of change, they also provide the means to create innovative responses to changing needs. [PHOTO] Stephen M. Franko and Michelle R. Winings, LifeLink Investment Representatives, reviewing product alternatives with James E. McLaughlin, Manager of the Bellville Office. Express-Line was introduced to First-Knox and Farmers customers to meet mounting demands for account information and other routine inquiries by telephone. Express-Line, a fully automated, computer response system, provides answers, permits funds transfers, and functions as a message center . . . all in a confidential manner, anytime of the day or night. In addition to providing the customer with timely information delivery, Express-Line has allowed our service representatives to utilize their time more productively. Response to this new service went beyond our expectations as Express-Line now handles an average of 200 inquiries daily. TOTAL ASSETS (in millions of dollars) [CHART 4] Another new technology-based service was the offering of the MAC(R) prepaid long-distance telephone card. This enables individuals and businesses to control their long distance costs, while enjoying a guaranteed single low rate for all long distance calls anywhere within the continental USA. It is simple to use, ends the confusion over rates and conditions, does not require changing carriers, and can be replenished by telephone. A variety of new investment opportunities were created in 1995. Timed to capitalize on market uncertainties, the 9-Month 6 Page 29 8 First-Knox Banc Corp. 1995 Annual Report Advantage, the 18-Month Market Plus, and the Super 6 certificates were received with enthusiasm. First offered in August, the Super 6 certificate generated deposits of $8 million, of which over $3 million was new money. Making housing affordable to all, a long term bank objective, came closer to realization late in the year with approval to offer VA and FHA mortgage loans. These two federally-guaranteed programs allow us to provide mortgage loans with no or minimal down payments to the homebuyers in the communities we serve. Mortgage loan service also was expanded for commercial borrowers with the development of a Personal Reserve Account for businesses. We are one of a very few institutions to create such a program. Similar to our consumer PRA, the business PRA will allow the business person to borrow up to 70% of the equity in their commercial real estate. [PHOTO] Cuddles, the First-Knox bear mascot. The "Business Manager," a new service for business and industry, was first offered in the third quarter of the year. It provides complete management of accounts receivable, including billing and collections. This enables a company to improve cash flow for reinvestment, debt reduction, inventory expansion, and other such purposes. Initial reaction, particularly from small businesses, has been very positive. Around the time of the Civil War, a busy day at the bank saw as many as 15 transactions being recorded...all in pen and ink. Today our thirteen MAC(R)automated teller machines execute almost 1,500 transactions daily. The volume of information that must be recorded and reported has increased, and will continue to increase, at a tremendous rate. This is attributable to the expansion of product offerings, the proliferation of regulatory demands, and customer desire for "no waiting" service, as well as normal growth. 7 Page 30 9 First-Knox Banc Corp. 1995 Annual Report Increased productivity, capacity enlargement, and cost effectiveness were the main objectives of our information system upgrades in 1995. Our facilities are now linked with fiber optics which enables the movement of more information at a faster pace. Check processing has become more efficient with the addition of enlarged optical storage, amount recognition readers, and the conversion of Farmers and Savings Bank to check imaging. Our computerized audit program was enhanced and account coding software added to fulfill regulatory requirements. All offices now have central computer connections to standardize and facilitate commercial loan applications. Laptop computers also are being used to expedite off-site mortgage applications. [PHOTO] Ian Watson, Vice President, and Rebecca K. Rodeniser, Operations Officer, reviewing a research item on one of the high resolution VGA monitors in the proof department. The Securities and Exchange Commission has developed an electronic filing system called EDGAR (Electronic Data Gathering Analysis and Retrieval). Implementation of the system began with the filing of our first electronic report in November. EDGAR filings ultimately will result in simultaneous filing with the SEC, state securities commissions, and self-regulatory organizations, such as NASDAQ. Once fully implemented, investors will be able to access a complete database of financial information. Starting with the creation of the Federal Reserve System in 1915, the need for greater financial knowledge has increased. Today, with the expansion of traditional and non-traditional services and legal complexities, the need for staff education and training has become of paramount importance. Our "lunch and learn" program presented a variety of topics, including trusts, pension plans, alternative investments, and stress management. More formal training sessions were conducted regarding IRA's, the MAC(R) Phone Card, ramifications of the Bank Secrecy Act, and Fair Lending compliance. 8 Page 31 10 First-Knox Banc Corp. 1995 Annual Report American Institute of Banking classes on "Principles of Banking," "Consumer Lending," and "Check Cashing Guidelines," were offered to all employees. Seven employees were sent to Ohio Banking Association schools, while numerous others attended various job-related seminars. W. Douglas Leonard, Vickie A. Sant, and Kimberly S. Miller who qualified for tuition reimbursement by the bank, completed their bachelors degree under the Mount Vernon Nazarene College EXCEL program. SHAREHOLDERS' EQUITY (in millions of dollars) [CHART 6] With the advent of Windows 95 and other associated software, personal computer training was accelerated. Also, a number of employees participated in our 10% reimbursement program for the purchase of personal computer hardware and software. Industry leadership and community involvement always have been part of our founder's vision of the future. Henry B. Curtis, our first president, was very instrumental in the formation of the Ohio Bankers Association and served as its first vice president 135 years ago. It was appropriate to our tradition when our current president, Carlos Watkins, took office as president of that organization in October. William A. Stroud, Chairman, served as president of the Ohio Bankers Association in 1977. Earlier in the year, Mr. Watkins was honored by his appointment to the Fourth District Community Bank Advisory Council of the Federal Reserve Board. Cheri L. Butcher, Assistant Vice President, was a graduate of the first class of the Ohio Bankers Association Leadership School, and was further honored by being named as Employee of the Year at First-Knox National Bank. Community outreach efforts took on new dimensions in 1995. LifeLink investment seminars were held in branch communities. William C. Brunka, Vice President, Retail Loan and Compliance Officer, was co-chairman of family budget education sponsored by the Knox County Resource Group. First-Knox National Bank subsequently became the lead bank in an affordable housing grant application submitted by the same organization. [PHOTO] The 1995-96 Ohio Bankers Association President Carlos E. Watkins and his wife Bunny on the cover of the Ohio Banker magazine. 9 Page 32 11 First-Knox Banc Corp. 1995 Annual Report First-Knox also became the lead bank in financing community projects, including the Dan Emmett House Hotel and Conference Center in Mount Vernon, and the Hamilton Hills housing development in Bellville. Participation in local community events was at an all-time high with the addition of sponsoring "Business After Hours" for the Mount Vernon/Knox County Chamber of Commerce. Once again, the First-Knox Classic world-class cycling event was a highlight of the summer. First-Knox closed out the year with a public outreach in cyberspace with its own home page on the Internet through the Knox Net! From our beginnings in the Curtis home, the bank has grown, both in size and in the number of services provided. The new Main Office addition, which officially opened in June, is a reflection of that progress. [PHOTO] Carlos E. Watkins, President (right), and David R. Irvin, Vice President (left), in the trust department's new location on the first floor of the new Main Office. Opening celebrations at this five-level, 40,000 square foot facility attracted crowds of more than 1,500. This tangible representation of our commitment to customer convenience and service was also reflected in the complete remodeling of our Fredericktown Office. BOOK VALUE PER SHARE (in dollars) [CHART 7] Customer convenience was a major consideration at our drive-in facilities in Danville. The entrance way was relocated to South Market Street to alleviate traffic congestion, a second window was added, and a MAC(R) teller machine was installed. Successful utilization of all of our resources, human and technological, anticipating the needs of our community, and fulfilling those needs in a productive, effective, and profitable manner made 1995 a very eventful year. 10 Page 33 12 First-Knox Banc Corp. 1995 Annual Report CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994 (In thousands of dollars except per share data) 1995 1994 - ------------------------------------------------------------------------------------- ASSETS Cash and deposits with banks (Note 9) ..................... $ 17,012 $ 18,110 Federal funds sold ........................................ 3,400 --------- --------- Total cash and cash equivalents ............... 20,412 18,110 Investment securities available for sale, at fair value (Notes 2 and 8) ....................... 94,694 33,804 Mortgage-backed securities available for sale, at fair value (Notes 2 and 8) ................. 37,294 42,657 Investment securities held to maturity (fair value approximates $51,847) (Note 2) .......... 54,750 --------- --------- Total investment and mortgage-backed securities .............. 131,988 131,211 Loans and lease financing (Notes 3 and 8) ................. 330,641 304,168 Less allowance for loan and lease losses (Note 4) ............................... (4,166) (3,876) --------- --------- Net loans and lease financing ................. 326,475 300,292 Premises and equipment, net (Note 5) ...................... 10,993 10,035 Accrued interest receivable and other assets .............. 7,031 7,543 --------- --------- TOTAL ASSETS .................................. $ 496,899 $ 467,191 ========= ========= LIABILITIES Deposits (Note 6) ......................................... $ 404,067 $ 377,180 Short-term borrowings (Note 7) ............................ 7,986 11,452 Long-term debt (Note 8) ................................... 33,415 34,720 Accrued interest payable and other liabilities ............ 4,772 3,007 --------- --------- TOTAL LIABILITIES ............................. 450,240 426,359 --------- --------- Commitments and Contingencies (Note 9) SHAREHOLDERS' EQUITY Common stock, par value $3.125 per share; 6,000,000 shares authorized; 3,650,225 shares issued in 1995 and 1,818,250 shares issued and outstanding in 1994 ..... 11,407 5,682 Paid-in capital ........................................... 24,042 23,864 Retained earnings ......................................... 11,187 12,922 Net unrealized holding gains (losses) on securities available for sale (Note 1) .............. 1,912 (1,636) Common stock in treasury, 89,965 shares at cost ........... (1,889) --------- --------- TOTAL SHAREHOLDERS' EQUITY .................... 46,659 40,832 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................ $ 496,899 $ 467,191 ========= =========
The accompanying notes are an integral part of these financial statements. 11 Page 34 13 First-Knox Banc Corp. 1995 Annual Report CONSOLIDATED STATEMENTS OF INCOME
For the three years ended December 31, 1995 (In thousands of dollars except per share data) 1995 1994 1993 - ------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans and leases . $ 28,854 $ 25,238 $ 24,960 Interest on investment and mortgage-backed securities Taxable ................... 5,214 4,477 4,293 Tax exempt ................ 2,792 2,800 1,831 Interest on federal funds sold ........ 228 79 208 ----------- ---------- ---------- Total interest income ..... 37,088 32,594 31,292 ----------- ---------- ---------- INTEREST EXPENSE Interest on deposits (Note 6) ......... 15,158 11,800 12,023 Interest on short-term borrowings ..... 390 349 347 Interest on long-term debt ............ 1,951 1,478 327 ----------- ---------- ---------- Total interest expense .... 17,499 13,627 12,697 ----------- ---------- ---------- NET INTEREST INCOME . 19,589 18,967 18,595 PROVISION FOR LOAN AND LEASE LOSSES (NOTE 4) ........... 584 638 1,124 ----------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES ....... 19,005 18,329 17,471 ----------- ---------- ---------- OTHER INCOME Trust department income ............... 702 588 521 Customer service fees and commissions . 2,315 1,926 1,758 Loan sale gains ....................... 27 29 70 Securities gains (losses), net ........ (20) 11 15 Other operating income ................ 103 193 101 ----------- ---------- ---------- Total other income ........ 3,127 2,747 2,465 ----------- ---------- ---------- OTHER EXPENSES Salaries and benefits (Notes 10 and 11) 7,081 6,756 6,378 Occupancy expenses .................... 2,121 1,825 1,636 Other operating expenses (Note 12) .... 5,656 6,064 5,813 ----------- ---------- ---------- Total other expenses ...... 14,858 14,645 13,827 ----------- ---------- ---------- INCOME BEFORE INCOME TAXES 7,274 6,431 6,109 INCOME TAXES (Note 13) ................ 1,565 1,267 1,443 ----------- ---------- ---------- NET INCOME ................ $ 5,709 $ 5,164 $ 4,666 =========== ========== ========== EARNINGS PER COMMON SHARE (Note 1) Primary ................... $ 1.57 $ 1.41 $ 1.37 =========== ========== ========== Fully diluted ............. $ 1.57 $ 1.41 $ 1.33 =========== ========== ========== WEIGHTED AVERAGE SHARES (Note 1) Primary ................... 3,636,914 3,669,468 3,397,196 =========== ========== ========== Fully diluted ............. 3,639,609 3,672,390 3,604,154 =========== ========== ==========
The accompanying notes are an integral part of these financial statements. 12 Page 35 14 First-Knox Banc Corp. 1995 Annual Report CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Net Unrealized Holding Gain Number Of (Loss) On Total For the three years ended Common Securities Share- December 31, 1995 (In thousands Shares Common Paid-In Retained Available Treasury holders' of dollars except per share data) Outstanding Stock Capital Earnings For Sale Stock Equity - ------------------------------------------------------------------------------------------------------------------------------ BALANCES AT JANUARY 1, 1993 ............ 1,413,703 $ 4,418 $ 13,659 $ 12,038 $ 30,115 Net income ............................. 4,666 4,666 Issuance of shares under the dividend reinvestment plan ....... 11,888 37 315 352 Issuance of shares upon conversion of 8.5% subordinated debentures .. 209,881 656 3,879 4,535 Issuance of shares under the employee retirement savings plan .......... 1,734 6 51 57 Cash dividends declared, $.37 per share ................... (1,302) (1,302) 5% stock dividend ...................... 81,773 255 2,260 (2,515) --------- -------- -------- -------- ------- ------- -------- BALANCES AT JANUARY 1, 1994 ............ 1,718,979 5,372 20,164 12,887 38,423 Net income ............................. 5,164 5,164 Issuance of shares under the dividend reinvestment plan ....... 6,797 21 218 239 Issuance of shares under the employee retirement savings plan .......... 3,423 11 103 114 Issuance of shares for stock options exercised ................ 2,499 8 47 55 Cash dividends declared, $.42 per share ................... (1,527) (1,527) Net unrealized holding gain (loss) on securities available for sale At January 1, 1994 ......... $ 706 706 Change during 1994 ......... (2,342) (2,342) 5% stock dividend ...................... 86,552 270 3,332 (3,602) --------- -------- -------- -------- ------- ------- -------- BALANCES AT JANUARY 1, 1995 ............ 1,818,250 5,682 23,864 12,922 (1,636) 40,832 Net income ............................. 5,709 5,709 Treasury stock purchased ............... (45,868) $(1,926) (1,926) Issuance of shares under the dividend reinvestment plan ....... 5,147 16 110 126 Issuance of shares under the employee retirement savings plan .......... 475 2 10 12 Issuance of shares for stock options exercised ................ 6,400 16 66 27 109 Cash dividends declared, $.49 per share ................... (1,751) (1,751) Change in unrealized holding gain (loss) on securities available for sale . 3,548 3,548 Two-for-one stock split in the form of a 100% stock dividend .... 1,775,856 5,693 (5,693) --------- -------- -------- -------- ------- ------ -------- BALANCES AT DECEMBER 31, 1995 .......... 3,560,260 $ 11,407 $ 24,042 $ 11,187 $ 1,912 $(1,889) $ 46,659 ========= ======== ======== ======== ======= ======= ========
The accompanying notes are an integral part of these financial statements. 13 Page 36 15 First-Knox Banc Corp. 1995 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three years ended December 31, 1995 (In thousands of dollars) 1995 1994 1993 - ---------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................ $ 5,709 $ 5,164 $ 4,666 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan and lease losses ........... 584 638 1,124 Depreciation, accretion, and amortization ..... 1,004 1,199 1,401 Market loss on loans held for sale ............ 121 Securities (gains) losses ..................... 20 (11) (15) Loan sale gains ............................... (27) (29) (70) Deferred income tax expense (benefit) ......... 5 (160) (Increase) decrease in interest receivable .... (354) (398) 259 Increase (decrease) in interest payable ....... 704 234 (133) Increase in net deferred loan costs ........... (37) (55) (201) Change in other assets and liabilities, net ... (239) (1,092) (142) -------- -------- -------- Net cash provided by operating activities 7,369 5,771 6,729 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investment and mortgage-backed securities held to maturity ......... (1,351) (17,135) (37,313) Purchases of investment and mortgage-backed securities available for sale ....................... (27,617) (26,112) Proceeds from sales of investment and mortgage-backed securities available for sale ....... 17,560 Proceeds from calls, payments, and maturities of investment and mortgage-backed securities held to maturity ......................... 3,109 4,321 32,147 Proceeds from calls, payments, and maturities of investment and mortgage- backed securities available for sale ................ 13,099 15,959 Net increase in loans and leases .......................... (28,318) (16,824) (22,156) Proceeds from sale of loans ............................... 1,578 3,113 7,046 Expenditures for premises and equipment ................... (1,944) (4,551) (1,904) Proceeds from sales of other real estate owned ............ 52 217 -------- -------- -------- Net cash applied to investing activities (23,832) (41,229) (21,963) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposit accounts ............... 26,887 (997) 15,883 Net increase (decrease) in short-term borrowings .......... (3,466) (2,053) 4,980 Proceeds from long-term debt .............................. 5,000 30,110 6,000 Payments on long-term debt ................................ (6,305) (1,290) (499) Issuance of common stock .................................. 247 408 409 Purchase of treasury shares ............................... (1,926) Cash dividends paid ....................................... (1,672) (1,468) (1,218) -------- -------- -------- Net cash provided by financing activities 18,765 24,710 25,555 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ 2,302 (10,748) 10,321 CASH AND CASH EQUIVALENTS AT JANUARY 1 .................... 18,110 28,858 18,537 -------- -------- -------- CASH AND CASH EQUIVALENTS AT DECEMBER 31 .................. $ 20,412 $ 18,110 $ 28,858 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 14 Page 37 16 First-Knox Banc Corp. 1995 Annual Report NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES First-Knox Banc Corp. (the Corporation), a two-bank holding company, provides a broad range of banking, financial, and fiduciary services. Its principal subsidiaries, The First-Knox National Bank (First-Knox) and The Farmers and Savings Bank (Farmers), operate predominantly in the central Ohio counties of Knox, Morrow, Holmes, Ashland, and Richland. The banks' primary services include accepting demand, savings, and time deposits; making commercial, industrial, real estate, and consumer loans; and providing trust services. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of the significant accounting policies followed in the preparation of the consolidated financial statements. CONSOLIDATION POLICY The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, First-Knox and Farmers. All significant intercompany transactions and balances have been eliminated. INDUSTRY SEGMENT INFORMATION The Corporation is engaged in the business of banking, which accounts for substantially all of its revenues and assets. INVESTMENT SECURITIES Effective January 1, 1994, the Corporation adopted Statement of Financial Accounting Standards 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 requires corporations to classify certain debt and equity securities as held to maturity, trading or available for sale. The initial effect of adopting SFAS 115 on January 1, 1994 was an increase in shareholders' equity of $706,000, representing the net unrealized gains on securities classified as available for sale, net of the related tax effect. Securities classified as available for sale are carried at fair value. Net unrealized gains and losses are reflected as a separate component of shareholders' equity, net of tax effects. Securities classified as available for sale are those that management intends to sell or that could be sold for liquidity, investment management, or similar reasons, even if there is not a present intention of such a sale. Equity securities that have a readily determinable fair value are also classified as available for sale. Securities classified as held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Securities classified as held to maturity are those management has the positive intent and ability to hold to maturity. Trading securities are those purchased principally to sell in the near term and are carried at fair value,with unrealized holding gains and losses reflected in earnings. The Corporation does not have trading securities. (Continued) 15 Page 38 17 First-Knox Banc Corp. 1995 Annual Report Prior to the adoption of SFAS 115, the Corporation recorded investment securities at amortized cost. Marketable equity securities were carried at the lower of cost or estimated market value in the aggregate. Realized gains and losses on disposition are based on net proceeds and the adjusted carrying amount of the security sold, using the specific identification method. INTEREST AND FEES ON LOANS AND LEASES Interest on loans and leases is recognized on the interest method. The accrual of interest on loans is suspended when, in management's opinion, the collection of all or a portion of the interest has become doubtful. When a loan is placed on non-accrual status, accrued and unpaid interest at risk is charged against income. Payments received on non-accrual loans are applied against principal until recovery of the remaining balance is reasonably assured. Loan fees and direct costs associated with originating or acquiring loans and leases are deferred and recognized over the life of the related loan or lease, as an adjustment of the yield. CONCENTRATIONS OF CREDIT RISK The Corporation, through its subsidiary banks, grants residential, consumer, and commercial loans to customers located primarily in the central Ohio counties of Knox, Morrow, Holmes, Ashland, and Richland. In addition, the Corporation is in the business of commercial and consumer leasing. Commercial loans, residential real estate loans, consumer loans, and leases comprise 31.1%, 46.3%, 22.1%, and 0.5% of total loans and leases, respectively, at December 31, 1995. The Corporation, in the normal course of business, makes commitments to extend credit which are not reflected in the financial statements. A summary of these commitments is discussed in Note 9. LOANS HELD FOR SALE Real estate loans held for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. ALLOWANCE FOR LOAN AND LEASE LOSSES Because some loans and leases may not be repaid in full, an allowance for loan and lease losses is recorded. Increases to the allowance are recorded by a provision charged to expense. Estimating the risk of loss and the amount of loss on any loan or lease is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial positions and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem situations, the entire allowance is available for any charge-offs that occur. A loan or lease is charged-off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. Statements of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" became effective January 1, 1995, and require (Continued) 16 Page 39 18 First-Knox Banc Corp. 1995 Annual Report recognition of loan impairment. Loans are considered impaired if full principal or interest payments are not anticipated. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. Changes in the carrying value of impaired loans due to changes in estimates of future payments or the passage of time are reported as increases or decreases in the provision for loan losses. The effect of adopting these standards in 1995 was not material. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity, and second mortgages. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The nature of disclosures for impaired loans is considered generally comparable to prior nonaccrual and renegotiated loans and non-performing and past-due asset disclosures. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful life of the asset. Maintenance and repairs are charged to expense as incurred, and major improvements are capitalized. OTHER REAL ESTATE Real estate acquired through foreclosure or deed in lieu of foreclosure is included in other assets at the lower of cost or fair value, less estimated costs to sell. Any reduction from carrying value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in fair value is reflected in a valuation allowance account through a charge to income. Costs incurred to carry other real estate are charged to expense. Other real estate owned totaled $92,000 and $144,000 at December 31, 1995, and 1994, respectively. INTANGIBLES Intangible assets arising from branch and bank acquisitions, and included with other assets in the accompanying consolidated balance sheet, are summarized as follows at December 31, 1995, net of accumulated amortization: Goodwill $ 416,000 Core deposit intangibles 653,000
Goodwill is being amortized using the straight-line method over periods of up to fifteen years. Core deposit intangibles are being amortized using various methods over periods of up to fifteen years for intangibles arising from acquisitions prior to 1989, and over ten years for branch acquisitions in 1989. Amortization of goodwill and core deposit intangibles totaled $240,000, $248,000, and $256,000 in 1995, 1994, and 1993, respectively. (Continued) 17 Page 40 19 First-Knox Banc Corp. 1995 Annual Report INCOME TAXES Beginning in 1993, the Corporation adopted SFAS 109, "Accounting for Income Taxes." The Corporation records income tax expense based upon the amount of tax due on its tax return plus deferred taxes computed based upon the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. The cumulative effect of the adoption of SFAS 109 as of January 1, 1993, was not material. STATEMENT OF CASH FLOWS For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold, all of which have original maturities of 90 days or less. The Corporation paid interest of $16,795,000, $13,393,000, and $12,830,000 for the years ended December 31, 1995, 1994, and 1993, respectively. Cash paid for income taxes was $1,477,000, $1,378,000, and $1,958,000 for the years ended December 31, 1995, 1994, and 1993, respectively. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS The Corporation adopted stock option and stock appreciation rights plans in 1995 and 1990. Stock options and stock appreciation rights may be granted at a price not less than the fair market value of the stock at the date of the grant. Stock options are reflected as common stock and paid-in capital when exercised, in an amount equal to the option price received. Any benefit associated with the tax deduction received for the difference between the fair market value at the date of exercise and the option price is recorded as paid-in capital. Compensation expense associated with stock appreciation rights granted is accrued based on the increase in the value of the underlying common shares. EARNINGS AND DIVIDENDS DECLARED PER SHARE Primary earnings per share is computed based on the weighted average shares outstanding during the year plus common equivalent shares arising from dilutive stock options, using the treasury method. Fully-diluted earnings per share reflects additional dilution related to stock options due to the use of the market price at the end of the period when higher than the average price for the period. For 1993, the computation of fully-diluted earnings per share further assumes adding the after-tax interest cost of the convertible, subordinated debentures to net income and dividing the result by the fully-diluted weighted average shares outstanding during the year. Fully-diluted shares related to the debentures are calculated assuming the conversion of each $1,000 of debentures outstanding for 97.24 shares of common stock at the beginning of 1993. All of the outstanding debentures were redeemed or converted as of June 17, 1993. The calculation of fully-diluted weighted average shares outstanding is adjusted for the actual debentures converted. In July, 1995, the Corporation declared a two-for-one stock split in the form of a 100% stock dividend. The related shares were distributed September 1, 1995, to shareholders of record on August 18, 1995. This was recorded by transferring the par value of the shares issued from retained earnings to common stock. The Corporation declared 5% stock dividends in 1994 and 1993. These stock dividends were recorded by transferring the fair market value of the shares issued from retained earnings to common stock and paid-in capital. All per share data has been retroactively adjusted for the stock split and stock dividends declared. FINANCIAL STATEMENT PRESENTATION Certain items in the 1994 and 1993 financial statements have been reclassified to correspond with the 1995 presentation. 18 Page 41 20 First-Knox Banc Corp. 1995 Annual Report NOTE 2 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES The amortized cost and estimated fair values of investment and mortgage-backed securities available for sale are summarized as follows at December 31, 1995:
INVESTMENT SECURITIES GROSS GROSS ESTIMATED AVAILABLE FOR SALE AMORTIZED UNREALIZED UNREALIZED FAIR (IN THOUSANDS OF DOLLARS) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------- U.S. Treasury securities .......... $27,955 $ 312 $ (51) $28,216 Obligations of states and political subdivisions ................ 53,407 1,867 (77) 55,197 Obligations of U.S. government corporations and agencies ... 6,932 59 6,991 Other securities .................. 4,041 249 4,290 ------- ------ ------- ------- TOTAL ................. $92,335 $2,487 $ (128) $94,694 ======= ====== ======= =======
MORTGAGE-BACKED SECURITIES GROSS GROSS ESTIMATED AVAILABLE FOR SALE AMORTIZED UNREALIZED UNREALIZED FAIR (IN THOUSANDS OF DOLLARS) COST GAINS LOSSES VALUE - --------------------------------------------------------------------------------------------- GNMA certificates ............................... $ 9,357 $ 385 $ 9,742 FHLMC certificates .............................. 12,658 199 $ (23) 12,834 FNMA certificates ............................... 13,320 51 (46) 13,325 Collateralized mortgage obligations ............. 1,421 1 (29) 1,393 ------- ------- ------ ------- TOTAL ............................... $36,756 $ 636 $ (98) $37,294 ======= ======= ====== =======
The amortized cost and estimated fair values of investment and mortgage-backed securities available for sale and held to maturity are summarized as follows at December 31, 1994:
INVESTMENT SECURITIES GROSS GROSS ESTIMATED AVAILABLE FOR SALE AMORTIZED UNREALIZED UNREALIZED FAIR (IN THOUSANDS OF DOLLARS) COST GAINS LOSSES VALUE - --------------------------------------------------------------------------- U.S. Treasury securities ...... $28,300 $ 1 $ (881) $27,420 Obligations of U.S. government corporations and agencies 2,497 (104) 2,393 Other securities .............. 3,864 127 3,991 ------- ----- ------- ------- TOTAL ............. $34,661 $ 128 $ (985) $33,804 ======= ===== ======= =======
MORTGAGE-BACKED SECURITIES GROSS GROSS ESTIMATED AVAILABLE FOR SALE AMORTIZED UNREALIZED UNREALIZED FAIR (IN THOUSANDS OF DOLLARS) COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------------- GNMA certificates .................................. $ 2,946 $ (182) $ 2,764 FHLMC certificates ................................. 15,663 $ 54 (548) 15,169 FNMA certificates .................................. 22,710 17 (922) 21,805 Collateralized mortgage obligations ................ 2,961 1 (43) 2,919 ------- -------- -------- ------- TOTAL $44,280 $ 72 $ (1,695) $42,657 ======= ======== ======== =======
(Continued) 19 Page 42 21 First-Knox Banc Corp. 1995 Annual Report
INVESTMENT SECURITIES GROSS GROSS ESTIMATED HELD TO MATURITY AMORTIZED UNREALIZED UNREALIZED FAIR (IN THOUSANDS OF DOLLARS) COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------- OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS ...... $54,750 $555 $(3,458) $51,847 ======= ==== ======= =======
The amortized cost and estimated fair value of investments in debt securities available for sale at December 31, 1995, by contractual maturity, are shown below. Expected maturities will likely differ from contractual maturities because some issuers have the right to call or prepay obligations with or without penalty.
AMORTIZED ESTIMATED (IN THOUSANDS OF DOLLARS) COST FAIR VALUE - ------------------------------------------------------------------------------------ Due in one year or less ........................ $ 13,807 $ 13,816 Due after one year through five years .......... 31,000 31,785 Due after five years through ten years ......... 22,824 23,743 Due after 10 years ............................. 24,704 25,350 -------- -------- 92,335 94,694 Mortgage-backed and related securities ......... 36,756 37,294 -------- -------- TOTAL INVESTMENTS IN DEBT SECURITIES ..... $129,091 $131,988 ======== ========
Proceeds from the sales of investment and mortgage-backed securities during 1995 were $17,580,000, resulting in gross gains of $50,000 and gross losses of $93,000. There were no sales in 1994 and 1993. Gross gains from calls of investment securities were $23,000, $11,000, and $15,000 in 1995, 1994, and 1993, respectively. As of December 31,1995 and 1994, securities having estimated fair values of $60,297,000 and $56,093,000, respectively, were pledged to collateralize governmental and trust department deposits and repurchase agreements (See Note 7) in accordance with federal and state requirements. To provide additional flexibility to meet liquidity and asset/liability management needs, the Corporation reclassified its obligations of states and political subdivisions from held to maturity to available for sale. The securities, with an amortized cost of $53,407,000, were transferred on December 31, 1995, as allowed by the SFAS 115 implementation guide issued by the Financial Accounting Standards Board. The related unrealized gain of $1.8 million is reflected, net of tax as an increase to shareholders' equity. 20 Page 43 22 First-Knox Banc Corp. 1995 Annual Report NOTE 3 - LOANS AND LEASE FINANCING Loans and leases are comprised of the following at December 31:
(IN THOUSANDS OF DOLLARS) 1995 1994 - -------------------------------------------------------------------------------- Residential real estate loans held for sale .......... $ 5,020 Residential real estate loans ........................ 147,927 $142,785 Commercial real estate loans ......................... 9,548 6,233 Commercial and industrial loans ...................... 88,632 79,453 Consumer and credit card loans ....................... 73,137 69,286 Obligations of states and political subdivisions ..... 4,678 5,291 Lease financing, net ................................. 1,699 1,120 -------- -------- TOTAL LOANS AND LEASE FINANCING ................ $330,641 $304,168 ======== ========
Loans and leases over 90 days past due and still accruing interest approximated $862,000 and $457,000 at December 31, 1995 and 1994, respectively. Loans on non-accrual status at December 31, 1995 and 1994 approximated $197,000 and $805,000, respectively. Impaired loans were not material at December 31, 1995, or during 1995. Components of the investment in direct financing leases at December 31, 1995 and 1994, were as follows:
(IN THOUSANDS OF DOLLARS) 1995 1994 - -------------------------------------------------------------------------------- Total minimum lease payments to be received ........ $ 2,012 $ 1,323 Less unearned income on leases ..................... (313) (203) ------- ------- TOTAL LEASE FINANCING, NET ............. $ 1,699 $ 1,120 ======= =======
Future minimum annual rentals under the direct-financing leases are as follows in thousands of dollars: 1996................... $ 421 1997................... 534 1998................... 411 1999................... 452 2000................... 194 ------ $2,012 ======
21 Page 44 23 First-Knox Banc Corp. 1995 Annual Report NOTE 4 - ALLOWANCE FOR LOAN AND LEASE LOSSES Activity in the allowance for loan and lease losses is summarized as follows:
(IN THOUSANDS OF DOLLARS) 1995 1994 1993 - -------------------------------------------------------------------------------- Balance, beginning of year .............. $ 3,876 $ 3,597 $ 3,162 Provision for loan and lease losses ..... 584 638 1,124 Losses charged to the allowance ......... (539) (641) (862) Recoveries .............................. 245 282 173 ------- ------- ------- BALANCE, END OF YEAR .............. $ 4,166 $ 3,876 $ 3,597 ======= ======= =======
NOTE 5 - PREMISES AND EQUIPMENT Premises and equipment at December 31, are summarized as follows:
(IN THOUSANDS OF DOLLARS) 1995 1994 - -------------------------------------------------------------------------------- Land ....................................................... $ 1,701 $ 1,629 Construction in progress.................................... 279 Buildings .................................................. 9,229 7,798 Equipment .................................................. 7,713 7,074 ------- ------- Total premises and equipment................................ 18,643 16,780 Less accumulated depreciation............................... (7,650) (6,745) ------- ------- PREMISES AND EQUIPMENT, NET .......................... $10,993 $10,035 ======= =======
Total depreciation expense was $1,018,000 in 1995, $716,000 in 1994, and $643,000 in 1993. The Corporation has annual renewable leases for certain office and business equipment. Total rental expense for renewable and noncancelable operating leases was $211,000, $202,000, and $169,000 in 1995, 1994, and 1993, respectively. Future lease commitments are not material. NOTE 6 - DEPOSITS Deposits are comprised of the following categories at December 31:
(IN THOUSANDS OF DOLLARS) 1995 1994 - -------------------------------------------------------------------------------- Non interest-bearing demand ....................... $ 54,706 $ 51,184 Interest-bearing demand ........................... 39,882 42,525 Savings ........................................... 99,133 109,675 Time .............................................. 210,346 173,796 -------- -------- TOTAL DEPOSITS .............................. $404,067 $377,180 ======== ========
Time deposits of $100,000 or more included above were $36,417,000 in 1995 and $32,658,000 in 1994. 22 Page 45 24 First-Knox Banc Corp. 1995 Annual Report NOTE 7 - SHORT-TERM BORROWINGS The outstanding balances for short-term borrowings as of December 31, are as follows:
(IN THOUSANDS OF DOLLARS) 1995 1994 - -------------------------------------------------------------------------------- Securities sold under repurchase agreements ............ $7,453 $ 5,700 Demand note due to the U. S. Treasury .................. 533 1,852 Federal funds purchased ................................ 3,900 ------ ------- TOTAL SHORT-TERM BORROWINGS ...................... $7,986 $11,452 ====== =======
Securities sold under repurchase agreements represent borrowings with maturities from 1 to 89 days, and are collateralized by selected Corporation securities as discussed in Note 2. NOTE 8 - LONG-TERM DEBT Long-term borrowings as of December 31, are as follows:
(IN THOUSANDS OF DOLLARS) 1995 1994 - -------------------------------------------------------------------------------- Fixed rate Federal Home Loan Bank advances with monthly principal and interest payments: 5.60% Advance due August 1, 2003 ................. $ 2,442 $ 2,690 6.35% Advance due August 1, 2013 ................. 2,812 2,896 5.95% Advance due March 1, 2004 .................. 649 708 5.70% Advance due May 1, 2004 .................... 5,262 5,736 5.85% Advance due January 1, 2016 ................ 5,000 Fixed rate Federal Home Loan Bank advances with monthly interest payments: 5.35% Advance due February 1, 1999 ............... 5,000 5,000 6.60% Advance due April 1, 1999 .................. 5,000 5,000 5.70% Advance due June 1, 1999 ................... 7,000 7,000 6.35% Advance due March 1, 2004 .................. 250 250 Variable rate Federal Home Loan Bank advances with monthly interest payments: 6.11% Advance due May 1, 2004 .................... 4,400 5.68% Advance due June 1, 2004 ................... 1,040 ------- ------- TOTAL LONG-TERM DEBT ....................... $33,415 $34,720 ======= =======
At December 31, 1995, Federal Home Loan Bank (FHLB) advances were collateralized by all shares of FHLB stock owned by the Corporation, with a carrying value of $3,546,000, and by 100% of the Corporation's qualified real estate-backed investments and qualified mortgage loan portfolio totaling approximately $195,000,000. Based on the carrying amount of FHLB stock owned by the Corporation, total FHLB advances were limited to approximately $40,400,000 at December 31, 1995. Future advances to be received by the Corporation above this limit would require additional purchases of FHLB stock. The aggregate future minimum annual principal payments on borrowings are $1,540,000 in 1996, $1,527,000 in 1997, $1,524,000 in 1998, $18,530,000 in 1999, $1,546,000 in 2000, and $8,748,000 thereafter. 23 Page 46 25 First-Knox Banc Corp. 1995 Annual Report NOTE 9 - COMMITMENTS AND CONTINGENCIES The subsidiary banks have various commitments and contingencies arising in the normal course of business, such as standby letters of credit and commitments to extend credit, which are not reflected in the consolidated financial statements. The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans is represented by the contractual amount of those instruments. The subsidiary banks follow the same credit policy in making such commitments as is followed for loans recorded in the financial statements. As of December 31, 1995 and 1994, unused credit lines amounted to approximately $56,334,000 and $56,954,000, respectively. As of December 31, 1995 and 1994, commitments under outstanding letters of credit amounted to approximately $364,000 and $320,000, respectively. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained related to the commitments is determined using management's credit evaluation of the borrower and may include real estate, vehicles, business assets, deposits, and other items. In management's opinion, these commitments represent normal banking transactions, and no material losses are expected to result therefrom. The Corporation's subsidiary banks are required to maintain cash on hand and in reserve balances at the Federal Reserve Bank. This requirement as of December 31, 1995, was $4,692,000. These balances do not earn interest. The Corporation and its subsidiaries have various claims and lawsuits pending at December 31, 1995, arising in the ordinary course of their business. It is the opinion of management and legal counsel that such disputes will not materially affect the Corporation's financial position or earnings. In January, 1991, a facilities management agreement was entered into with AT&T Corporation regarding on-site data processing services for First-Knox Banc Corp. and its subsidiaries. The agreement covers the period through January 31, 1998, during which time AT&T is responsible for upgrading computer hardware and software, as well as managing the data processing function. All operating expenses related to the function, including personnel salaries and benefits, equipment and software maintenance, and depreciation, are the responsibility of AT&T. The agreement calls for payments with limits defined by inflation and customer account volumes. Payments under this agreement amounted to $1.27 million in 1995, $1.21 million in 1994, and $1.16 million in 1993. The annual amount of anticipated payments is expected to range from $1.33 million in 1996 to $1.39 million in 1997 with a final payment of $107,000 in January 1998. 24 Page 47 26 First-Knox Banc Corp. 1995 Annual Report NOTE 10 - EMPLOYEE BENEFIT PLANS PENSION PLAN: The Corporation has a noncontributory defined benefit pension plan covering substantially all of its employees. The plan provides benefits based on an employee's years of service and compensation. The Corporation's funding policy is to contribute annually an amount that can be deducted for federal income tax purposes using a different actuarial cost method and different assumptions from those used for financial reporting. For financial reporting purposes, pension expense is calculated using the projected unit cost method. Net pension expense for 1995, 1994, and 1993 is comprised of the following components:
(IN THOUSANDS OF DOLLARS) 1995 1994 1993 - -------------------------------------------------------------------------------- Service cost benefits earned during the year .......................... $ 224 $ 262 $ 233 Interest cost on projected benefit obligation ....................... 351 315 303 Actual return on plan assets ................... (460) (413) (381) Net amortization and deferral of initial transition credit and subsequent (gains) and losses ............ (43) (32) (40) ----- ----- ----- NET PENSION EXPENSE .................. $ 72 $ 132 $ 115 ===== ===== =====
The funded status of the plan and the prepaid pension cost recognized at December 31, are as follows:
(IN THOUSANDS OF DOLLARS) 1995 1994 1993 - --------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits ............................... $ 3,798 $ 3,121 $ 3,218 Non-vested benefits ........................... 117 79 378 ------- ------- ------- ACCUMULATED BENEFIT OBLIGATION .......... $ 3,915 $ 3,200 $ 3,596 ======= ======= ======= Projected benefit obligation ........................ $ 5,042 $ 4,182 $ 4,522 Plan assets at fair value (primarily U. S. government obligations, listed stocks, and corporate bonds) .................. 5,620 4,646 4,481 ------- ------- ------- Plan assets in excess of (less than) projected benefit obligation ...... 578 464 (41) Items not yet recognized in income: Unrecognized prior service adjustment ......... 90 96 136 Unrecognized net loss ......................... 474 205 566 Initial transition credit which is being amortized over 15 years ....................... (242) (291) (339) ------- ------- ------- PREPAID PENSION COST INCLUDED IN OTHER ASSETS ................... $ 900 $ 474 $ 322 ======= ======= ======= Assumptions used at December 31: Discount rate ................................. 7.50% 8.50% 7.00% Rate of increase in compensation level ........ 4.75% 5.50% 5.00% Long-term rate of return on assets ............ 9.00% 9.00% 9.00%
To better reflect the pension obligation at December 31, 1995, the Corporation changed the assumptions from those used at December 31, 1994. These changes were the primary factors in the change in the unrecognized net loss reflected in the prepaid pension cost analysis at December 31, 1995. 25 Page 48 27 First-Knox Banc Corp. 1995 Annual Report POSTRETIREMENT HEALTHCARE PLAN: SFAS 106, "Employers Accounting for Postretirement Benefits Other Than Pensions," was adopted by the Corporation in 1993. This pronouncement requires employers to accrue the cost of retirees' health and other postretirement benefits during the working career of active employees. The Corporation sponsors a postretirement healthcare plan which covers former employees who retired prior to January 1, 1993. The following table sets forth the plan's funded status reconciled with the amount recorded in the Corporation's balance sheet at December 31:
(IN THOUSANDS OF DOLLARS) 1995 1994 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation ................................... $ 821 $ 732 Unrecognized transition asset, net of amortization ......... (808) (855) Unrecognized net gain ...................................... 174 258 ----- ----- ACCRUED POSTRETIREMENT BENEFIT COST INCLUDED IN OTHER LIABILITIES ................... $ 187 $ 135 ===== =====
Postretirement benefit cost includes the following components:
(IN THOUSANDS OF DOLLARS) 1995 1994 - -------------------------------------------------------------------------------- Interest cost on accumulated postretirement benefit obligation ... $ 63 $ 56 Amortization of transition obligation over 20 years .............. 37 48 ---- ---- POSTRETIREMENT BENEFIT COST ...................................... $100 $104 ==== ====
For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995. The rate was assumed to decrease gradually to 5% in 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated benefit obligation as of December 31, 1995, by $81,000. The weighted average discount rate used in determining expense, and accumulated postretirement benefit obligation was 7.50%. EMPLOYEE RETIREMENT SAVINGS PLAN: On January 1, 1993, the Corporation adopted a 401(k) plan which covers all employees who are at least 21 years of age and who have completed one year of service. The Corporation contributes a matching 30% of employee contributions up to a maximum of 6% of the employee's annual salary. All matching contributions vest immediately. The Corporation's expense related to the matching provisions of this plan was $78,000 for 1995 and $76,000 for 1994. 26 Page 49 28 First-Knox Banc Corp. 1995 Annual Report NOTE 11 - STOCK OPTION PLAN The Corporation was authorized in 1990 to grant options on 175,032 shares of common stock and 87,516 stock appreciation rights (adjusted for stock splits and stock dividends) to key management employees of the Corporation and its subsidiaries. This plan authorized the issuance of options and stock appreciation rights at fair market value at the date of the grant and for terms not exceeding ten years from the date of the grant. No consideration was paid by the employees to exercise the stock appreciation rights. This plan expired on March 27, 1995. The Corporation was authorized in 1995 to grant options on 180,000 shares of common stock and 60,000 stock appreciation rights to key management employees and directors of the Corporation and subsidiaries under a new plan. This plan authorizes the issuance of stock options and stock appreciation rights at fair market value at the date of the grant and for terms not exceeding ten years from the date of the grant. No consideration is paid by employees to exercise stock appreciation rights. Common shares related to cancelled stock options and stock appreciation rights become available for subsequent grant under terms of the plan. Stock options and stock appreciation rights may not be granted under this plan after March 28, 2005.
STOCK OPTIONS ------------------------- OUTSTANDING ---------------------------- RANGES OF NUMBER EXERCISE AVAILABLE PRICE PER FOR GRANT NUMBER SHARE - -------------------------------------------------------------------------------- January 1, 1993 .................. 55,614 119,418 $10.54 - 12.47 Granted .......................... (35,500) 35,500 13.27 - 13.27 ------- ------- December 31, 1993 ................ 20,114 154,918 10.54 - 13.27 Granted .......................... (19,950) 19,950 20.89 - 20.89 Exercised ........................ (5,184) 10.54 - 10.59 ------- ------- December 31, 1994 ................ 164 169,684 10.54 - 20.89 Authorized ....................... 180,000 Canceled ......................... (1,296) 11.88 - 11.88 Expired .......................... (164) Granted .......................... (16,000) 16,000 21.53 - 21.53 Exercised ........................ (9,884) 10.54 - 11.88 ------- ------- DECEMBER 31, 1995 ................ 164,000 174,504 10.54 - 21.53 ======= =======
27 Page 50 29 First-Knox Banc Corp. 1995 Annual Report
STOCK APPRECIATION RIGHTS ------------------------------- OUTSTANDING --------------------------- RANGE OF NUMBER EXERCISE AVAILABLE PRICE PER FOR GRANT NUMBER SHARE - -------------------------------------------------------------------------------- January 1, 1993 .................. 55,854 23,884 $10.54 - 12.47 Granted .......................... (7,100) 7,100 13.27 - 13.27 ------- ------ December 31, 1993 ................ 48,754 30,984 10.54 - 13.27 Granted .......................... (11,768) 11,768 20.89 - 20.89 Exercised ........................ (1,034) 10.54 - 10.59 ------- ------ December 31, 1994 ................ 36,986 41,718 10.54 - 20.89 Authorized ....................... 60,000 Canceled ......................... (260) 11.88 - 11.88 Expired .......................... (36,986) Exercised ........................ (1,970) 10.54 - 11.88 ------- ------ DECEMBER 31, 1995 ................ 60,000 39,488 10.54 - 20.89 ====== ======
Compensation related to stock appreciation rights was $150,000 in 1995, $139,000 in 1994, $68,000 in 1993. NOTE 12 - OTHER OPERATING EXPENSES Other operating expenses consist of the following major items:
(IN THOUSANDS OF DOLLARS) 1995 1994 1993 - ------------------------------------------------------------------------ Data processing (Note 9) ................... $1,764 $1,611 $1,551 Franchise taxes ............................ 559 542 446 FDIC insurance ............................. 580 980 809 Advertising ................................ 387 357 292 Stationery and office supplies ............. 423 358 369 Professional fees .......................... 358 411 291 Other ...................................... 1,585 1,805 2,055 ------ ------ ------ TOTAL OTHER OPERATING EXPENSES .... $5,656 $6,064 $5,813 ====== ====== ======
28 Page 51 30 First-Knox Banc Corp. 1995 Annual Report NOTE 13 - INCOME TAXES Income taxes consist of the following for the years ended December 31, 1995, 1994, and 1993:
(IN THOUSANDS OF DOLLARS) 1995 1994 1993 - --------------------------------------------------------------------- Current tax expense .................. $1,560 $1,267 $1,603 Deferred tax expense (benefit) ........ 5 (160) ------ ------- ------ TOTAL INCOME TAXES .............. $1,565 $ 1,267 $1,443 ====== ======= ======
The difference between the provision for income taxes and amounts computed by applying the statutory income tax rate of 34% to income before taxes is as follows:
(IN THOUSANDS OF DOLLARS) 1995 1994 1993 - -------------------------------------------------------------------------- Income taxes computed at the statutory tax rate on pre-tax income ......... $ 2,473 $ 2,187 $ 2,077 Add/(subtract) tax effect of: Tax exempt income .................. (906) (932) (659) Other .............................. (2) 12 25 ------- ------- ------- TOTAL INCOME TAXES ......... $ 1,565 $ 1,267 $ 1,443 ======= ======= =======
The income tax expense (benefit) attributable to securities transactions approximated $(7,000) in 1995, $4,000 in 1994, and $5,000 in 1993. The tax effects of principal temporary differences and the resulting deferred tax assets and liabilities that comprise the net deferred tax asset (liability) included in the balance sheet are as follows at December 31, 1995 and 1994:
(IN THOUSANDS OF DOLLARS) 1995 1994 - ------------------------------------------------------------------------------- Allowance for loan losses ............................. $ 1,040 $ 942 Unrealized loss on securities available for sale ...... 843 Other ................................................. 279 220 ------- ------- Deferred tax asset ........................... 1,319 2,005 ------- ------- Pension ............................................... (299) (154) Depreciation .......................................... (306) (353) Direct financing and leveraged leases ................. (185) (206) Unrealized gains on securities available for sale ..... (985) Other ................................................. (405) (320) ------- ------- Deferred tax liability ....................... (2,180) (1,033) ------- ------- NET DEFERRED TAX ASSET (LIABILITY) ........... $ (861) $ 972 ======= =======
The Corporation has paid sufficient taxes in the current and prior years to warrant recording full deferred tax assets without a valuation allowance. 29 Page 52 31 First-Knox Banc Corp. 1995 Annual Report NOTE 14 - REGULATORY MATTERS The payment of dividends to the Corporation by its banking subsidiaries is subject to restriction by various regulatory authorities. These restrictions generally limit dividends to earnings retained in the current and prior two years, as defined by regulation. In addition, dividend payments may not reduce capital levels below minimum regulatory guidelines. As of December 31, 1995, $4.4 million was available for dividend payments under the more restrictive of the two limitations. The Corporation complies with the capital requirements established by the Federal Reserve System, which are summarized as follows:
CAPITAL POSITION AS OF REGULATORY DECEMBER 31, MINIMUM 1995 1994 - -------------------------------------------------------------------------------- Tier I risk-based capital 4.00% 14.29% 14.45% Total risk-based capital 8.00% 15.45% 15.63% Tier I leverage 3.00-5.00% 8.84% 8.80%
Under "Prompt Corrective Action" regulations, the FDIC has defined five categories of capitalization (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized). The Corporation meets the "well capitalized" definition which requires a total risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least 6%, a leverage ratio of at least 5%, and the absence of any written agreement, order, or directive from any regulatory agency. "Well capitalized" status affords the Corporation the ability to operate with the greatest flexibility under current laws and regulations. NOTE 15 - RELATED PARTY TRANSACTIONS In the course of their business, the subsidiary banks have granted loans to executive officers, directors, and their related business interests. The following is an analysis of activity of related party loans aggregating $60,000 or more to any one related party for the year ended December 31, 1995:
(IN THOUSANDS OF DOLLARS) 1995 - ---------------------------------------------------------------------------- Balance at January 1, 1995 $10,657 New loans and advances 2,686 Repayment (1,972) ------- BALANCE AT DECEMBER 31, 1995 $11,371 =======
Total loans to executive officers included above were $1,359,000 and $1,262,000 at December 31, 1995 and 1994, respectively. 30 Page 53 32 First-Knox Banc Corp. 1995 Annual Report NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table shows the estimated fair value of the Corporation's financial instruments and the related carrying values at December 31, 1995 and 1994. Items which are not financial instruments are not included.
DECEMBER 31, 1995 DECEMBER 31, 1994 CARRYING ESTIMATED CARRYING ESTIMATED (IN THOUSANDS OF DOLLARS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE - -------------------------------------------------------------------------------------- Cash and equivalents ............... $ 20,412 $ 20,412 $ 18,110 $ 18,110 Investment and mortgage-backed securities available for sale 131,988 131,988 76,461 76,461 Investment and mortgage-backed securities held to maturity .. 54,750 51,847 Loans, net of allowance for loan losses .................. 324,776 327,296 299,172 295,337 Accrued interest receivable ........ 3,702 3,702 3,348 3,348 Demand and savings deposits ........ (193,721) (193,721) (203,384) (203,384) Time deposits ...................... (210,346) (214,737) (173,796) (170,488) Short-term borrowings .............. (7,986) (7,986) (11,452) (11,452) Long-term debt ..................... (33,415) (29,218) (34,720) (24,468) Accrued interest payable ........... (2,272) (2,272) (1,568) (1,568)
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 1995 and 1994. The estimated fair value for cash and cash equivalents is considered to approximate cost. The estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. Carrying value is considered to approximate fair value for loans that contractually reprice at intervals of less than six months, for short-term borrowings, and for deposit liabilities subject to immediate withdrawal. The fair values of fixed-rate loans, loans that reprice less frequently than each six months, time deposits, and long-term debt are approximated by a discount rate value technique utilizing estimated market interest rates as of December 31, 1995 and 1994. The fair values of unrecorded commitments at December 31, 1995 and 1994 are not material. While these estimates are based on management's judgment of the appropriate valuation factors, there is no assurance that were the Corporation to have liquidated such items the estimated fair values would necessarily have been realized. The estimated fair values should not be considered to apply at subsequent dates. Other assets and liabilities of the Corporation that are not defined as financial instruments are not included in the above disclosures. These would include, among others, such items as property and equipment, financing leases, and the intangible value of the Corporation's customer base and profit potential. 31 Page 54 33 First-Knox Banc Corp. 1995 Annual Report NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION CONDENSED BALANCE SHEETS
DECEMBER 31, (IN THOUSANDS OF DOLLARS) 1995 1994 - ------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents ............................. $ 6,654 $ 6,517 Interest-bearing deposit in subsidiary bank ........... 57 105 Investment security ................................... 364 295 Debenture receivable from subsidiary bank ............. 2,000 2,000 Investment in subsidiaries ............................ 38,152 32,374 Other assets .......................................... 14 14 -------- -------- TOTAL ASSETS .................................... $ 47,241 $ 41,305 ======== ======== LIABILITIES Dividends payable ..................................... $ 534 $ 455 Other liabilities ..................................... 48 18 -------- -------- TOTAL LIABILITIES ............................... 582 473 -------- -------- EQUITY Common stock .......................................... 11,407 5,682 Paid-in capital ....................................... 24,042 23,864 Retained earnings ..................................... 11,187 12,922 Common stock in treasury .............................. (1,889) Unrealized gain (loss) on securities available for sale 1,912 (1,636) -------- -------- TOTAL EQUITY .................................... 46,659 40,832 -------- -------- TOTAL LIABILITIES AND EQUITY .............. $ 47,241 $ 41,305 ======== ========
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS OF DOLLARS) 1995 1994 1993 - ---------------------------------------------------------------------------- Dividends from subsidiaries ................. $ 3,401 $ 6,933 $ 1,048 Interest and dividend income ................ 193 196 198 Total expenses .............................. (150) (125) (277) ------- ------- ------- Income before taxes and equity in undistributed earnings of subsidiaries 3,444 7,004 969 Income tax expense (benefit) ................ 9 20 (31) Equity in undistributed earnings of subsidiaries ....................... 2,274 (1,820) 3,666 ------- ------- ------- NET INCOME ......................... $ 5,709 $ 5,164 $ 4,666 ======= ======= =======
32 Page 55 34 First-Knox Banc Corp. 1995 Annual Report CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS OF DOLLARS) 1995 1994 1993 - ------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................... $ 5,709 $ 5,164 $ 4,666 Adjustments to reconcile net income to cash provided by operations Amortization ..................... 14 Equity in undistributed earnings of subsidiaries .............. (2,274) 1,820 (3,666) Changes in other, net ........................ 5 8 (38) ------- ------- ------- Net cash provided by operating activities .... 3,440 6,992 976 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in interest-bearing deposit in subsidiary bank ..................... 48 142 90 ------- ------- ------- Net cash provided by investing activities .... 48 142 90 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid .......................... (1,672) (1,468) (1,218) Issuance of common stock ..................... 247 408 409 Purchase of treasury shares .................. (1,926) Debentures redeemed for cash ................. (169) ------- ------- ------- Net cash used in financing activities ........ (3,351) (1,060) (978) ------- ------- ------- Net change in cash ................................. 137 6,074 88 Beginning cash ..................................... 6,517 443 355 ------- ------- ------- ENDING CASH ........................................ $ 6,654 $ 6,517 $ 443 ======= ======= =======
NOTE 18 - QUARTERLY INFORMATION (UNAUDITED) The following is a summary of consolidated quarterly financial data:
QUARTER ENDED: (IN THOUSANDS OF ------------------------------------------------------ DOLLARS EXCEPT PER SHARE DATA) DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 - --------------------------------------------------------------------------------------------------- 1995 Interest income..................... $ 9,733 $ 9,465 $ 9,214 $ 8,676 Net interest income ................ 5,108 4,924 4,887 4,670 Provision for loan losses........... 182 166 158 78 Net income.......................... 1,563 1,488 1,390 1,268 Fully-diluted earnings per share.... 0.44 0.41 0.38 0.34 1994 Interest income..................... $ 8,553 $ 8,314 $ 8,096 $ 7,631 Net interest income................. 4,772 4,759 4,822 4,614 Provision for loan losses........... 129 154 178 177 Net income.......................... 1,326 1,303 1,355 1,180 Fully-diluted earnings per share.... 0.37 0.35 0.37 0.32
Fully-diluted earnings per share have been restated to reflect the two-for-one stock split in the form of a 100% stock dividend distributed in September, 1995. 33 Page 56 35 First-Knox Banc Corp. 1995 Annual Report REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders First-Knox Banc Corp. Mount Vernon, Ohio We have audited the accompanying consolidated balance sheets of FIRST-KNOX BANC CORP. as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company'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 audits 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FIRST-KNOX BANC CORP. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 10 to the financial statements, the Corporation changed its methods of accounting for impaired loans in 1995, for certain investment and mortgage-backed securities in 1994 and for income taxes and postretirement benefits in 1993 to conform with new accounting guidance. /s/ CROWE, CHIZEK AND COMPANY LLP --------------------------------- CROWE, CHIZEK AND COMPANY LLP Columbus, Ohio January 18, 1996 34 Page 57 36 First-Knox Banc Corp. 1995 Annual Report FINANCIAL REVIEW INTRODUCTION The following discussion and financial information are presented to aid in understanding the consolidated financial condition and results of operations of First-Knox Banc Corp. and its bank subsidiaries, The First-Knox National Bank (First-Knox) and the Farmers and Savings Bank (Farmers). Both banks are insured by the Federal Deposit Insurance Corporation (FDIC) and provide banking services to individual and commercial customers in the Central Ohio area. The Corporation is subject to supervision, examination, and regulation by the Federal Reserve System. First-Knox is a member of the Federal Reserve System and is subject to supervision, examination, and regulation by the Comptroller of the Currency and the FDIC. Farmers is chartered by the State of Ohio and is subject to supervision, examination, and regulation by the FDIC and the Ohio Division of Banks. Emphasis in this analysis is placed on comparisons of the years 1995 to 1994 and 1994 to 1993, with further discussion of historic data where appropriate. This review should be read in conjunction with the audited consolidated financial statements and footnotes and with the ratios, statistics, and discussions. TABLE I FINANCIAL RATIOS FOR FIVE YEARS
1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------ PROFITABILITY Rate of return on: Average assets ............................. 1.20% 1.13% 1.12% .99% .91% Average equity ............................. 13.16 12.94 13.50 13.84 13.67 Beginning equity ........................... 13.98 13.44 15.49 14.56 14.36 As a percent of average assets Net interest income (fully-taxable equivalent basis) ........... 4.45% 4.51% 4.74% 4.40% 4.17% Non-interest income ........................ .66 .60 .59 .61 .62 Provision for loan and lease losses ........ .12 .14 .27 .35 .28 Non-interest expense ....................... 3.12 3.21 3.33 3.14 3.11 Cash dividends per share (1) ................. $.49 $.42 $.37 $.34 $.31 Cash dividends as a percentage of net income .............................. 30.7% 29.6% 27.9% 26.6% 27.6% OTHER Average loans and leases to average deposits ........................... 80.4% 78.7% 77.5% 75.9% 73.6% Net loan and lease charge-offs to average loans and leases ................ .09 .12 .24 .42 .34 Allowance to year-end loans and leases ....... 1.26 1.27 1.24 1.14 1.11 Average shareholders' equity to average assets .......................... 9.10 8.75 8.32 7.12 6.67 Changes in average balances: Total assets ............................... 4.5% 9.8% 3.7% 3.6% 6.6% Shareholders' equity ....................... 8.7 15.4 21.1 10.5 10.4 Loans and leases ........................... 5.4 5.2 4.5 6.5 8.0 Deposits ................................... 3.2 3.5 2.3 3.3 6.2
(1) Restated for stock dividends and stock splits. 35 Page 58 37 First-Knox Banc Corp. 1995 Annual Report RESULTS OF OPERATIONS Net income of $5,709,000 for 1995 represented a 10.6% increase over 1994. 1994's net income of $5,164,000 represented a 10.7% increase over 1993. The return on average assets was 1.20% for 1995 compared to 1.13% for 1994 and 1.12% for 1993. The return on average shareholders' equity was 13.16% for 1995, compared to 12.94% in 1994 and 13.50% in 1993. As discussed in more detail below, the increase in net income for 1995 resulted primarily from higher net interest income, higher non-interest income, and a reduced provision for loan losses. The net income increase was partially offset by a $213,000 or 1.5% increase in non-interest expenses. Non-interest income recorded growth of $380,000 or 13.8% compared to 1994. Compared to 1993, 1994 non-interest income and non-interest expense increased 11.4% and 5.9%, respectively. NET INTEREST INCOME Net interest income, the amount by which interest and fees from earning assets exceed the interest cost of liabilities, is the most important component of consolidated earnings. Net interest income is affected by the volumes, interest rates, and composition of earning assets and interest-bearing liabilities, as well as by the levels of non-interest bearing demand deposits and shareholders' equity. The accompanying tables contain a ten-year comparison of net interest income as well as detailed ratios regarding its components during the past three years. On a fully-taxable equivalent (FTE) basis (tax exempt income restated to a pre-tax equivalent based on the statutory federal income tax rate), net interest income was $21.21 million in 1995, $20.58 million in 1994, and $19.72 million in 1993. The 1995 net interest spread declined 21 basis points while average earning assets increased 4.3% and average interest-bearing liabilities increased 3.5% over 1994. The 1994 net interest spread declined 24 basis points while average earning assets increased 9.5% and average interest-bearing liabilities increased 9.1% over 1993. A rate and volume analysis of interest income and interest expense changes for 1995 and 1994 is provided in Table III. As noted in Table II, average earning asset yields (FTE) were 8.59% in 1995, 7.91% in 1994, and 8.21% in 1993. Average interest-bearing liability costs were 4.57% in 1995, 3.68% in 1994, and 3.74% in 1993. The net interest margin (FTE net interest income divided by average earning assets) was 4.71%, 4.76%, and 4.99% for the same respective years. The decline in net interest margin during 1995 resulted primarily from earning asset rates increasing slower than interest rates paid on interest-bearing liabilities. A shift in the composition of customer deposits during 1995 contributed to the margin decline over 1994, as average balances for savings and interest-bearing demand deposits declined by 7.2% or $11.7 million while higher cost time deposits increased by 12.4% or $21.4 million. New lower yielding non-taxable securities were added during the first quarter of 1994 contributing to the margin decline in 1994 compared to 1993. The 36 Page 59 38 First-Knox Banc Corp. 1995 Annual Report TABLE II AVERAGE BALANCES AND ANALYSIS OF NET INTEREST INCOME (In thousands of dollars)
1995 1994 1993 ------------------------------- ----------------------------- ------------------------------ Average Average Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------------------------------- ----------------------------- ------------------------------ Securities: Taxable .......................... $ 82,390 $ 5,214 6.33% $ 81,549 $ 4,477 5.49% $ 74,730 $ 4,293 5.74% Non-taxable (1) .................. 49,889 4,288 8.60 50,024 4,242 8.48 29,497 2,800 9.49 --------- ------- ----- -------- -------- ----- -------- ------- ----- TOTAL .................... 132,279 9,502 7.18 131,573 8,719 6.63 104,227 7,093 6.81 --------- ------- ----- -------- -------- ----- -------- ------- ----- Loans and leases (2): Commercial (1) ................... 95,629 9,411 9.84 94,468 8,021 8.49 92,719 7,499 8.09 Real estate ...................... 146,803 11,941 8.13 137,409 10,947 7.97 124,475 10,708 8.60 Consumer (3) ..................... 70,468 7,470 10.60 65,354 6,345 9.71 65,366 6,773 10.36 Leases ........................... 1,359 155 11.41 930 99 10.65 990 135 13.64 --------- ------- ----- -------- -------- ----- -------- ------- ----- TOTAL .................... 314,259 28,977 9.22 298,161 25,412 8.52 283,550 25,115 8.86 --------- ------- ----- -------- -------- ----- -------- ------- ----- Money market investments: Federal funds sold ............... 4,068 228 5.60 2,376 79 3.32 6,973 208 2.98 --------- ------- ----- -------- -------- ----- -------- ------- ----- TOTAL .................... 4,068 228 5.60 2,376 79 3.32 6,973 208 2.98 --------- ------- ----- -------- -------- ----- -------- ------- ----- TOTAL EARNING ASSETS ........................... 450,606 38,707 8.59 432,110 34,210 7.91 394,750 32,416 8.21 ------- -------- ------- Loan and lease allowance ......... (3,983) (3,784) (3,552) Other assets ..................... 30,154 27,902 24,432 --------- --------- -------- TOTAL ASSETS ..................... $ 476,777 $ 456,228 $415,630 ========= ========= ======== Interest-bearing deposits: Savings and interest-bearing demand deposits .......... $ 150,095 4,029 2.68% $161,812 4,072 2.52% $158,552 4,309 2.72% Time deposits .................... 193,554 11,129 5.75 172,148 7,728 4.49 167,420 7,714 4.61 --------- ------- ----- -------- -------- ----- -------- ------- ----- TOTAL .................... 343,649 15,158 4.41 333,960 11,800 3.53 325,972 12,023 3.69 --------- ------- ----- -------- -------- ----- -------- ------- ----- Borrowed funds: Short-term ....................... 6,196 390 6.29 9,153 349 3.81 8,669 346 3.99 Long-term ........................ 33,413 1,951 5.84 27,246 1,478 5.42 4,773 328 6.87 --------- ------- ----- -------- -------- ----- -------- ------- ----- TOTAL .................... 39,609 2,341 5.91 36,399 1,827 5.02 13,442 674 5.01 --------- ------- ----- -------- -------- ----- -------- ------- ----- TOTAL INTEREST- BEARING LIABILITIES ...... 383,258 17,499 4.57 370,359 13,627 3.68 339,414 12,697 3.74 ------- -------- ------- Non-interest bearing demand deposits .......... 47,023 44,722 39,877 --------- -------- -------- TOTAL INTEREST-BEARING LIABILITIES AND DEMAND DEPOSITS .......... 430,281 17,499 4.07 415,081 13,627 3.28 379,291 12,697 3.35 ------- -------- ------- Other liabilities ................ 3,106 1,248 1,778 --------- -------- -------- TOTAL LIABILITIES ........ 433,387 416,329 381,069 Shareholders' equity ............. 43,390 39,899 34,561 --------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $ 476,777 $ 456,228 $415,630 ========= ========= ======== Interest spread .................. $21,208 4.02% $ 20,583 4.23% $19,719 4.47% ======= ======== ======= As a percentage of earning assets: Interest income .......... 8.59% 7.91% 8.21% Interest expense ......... 3.88 3.15 3.22 ----- ----- ----- Net interest income....... 4.71% 4.76% 4.99% ===== ===== =====
(1) Income is computed on a fully-taxable equivalent basis utilizing a 34% tax rate. The amount of such adjustment was:
1995 1994 1993 ---- ---- ---- Non-taxable securities.. $1,496 $1,442 $ 969 Commercial loans ....... 123 174 155 $1,619 $1,616 $1,124
(2) Non-accruing loans are included in the average balances presented. (3) Includes balances outstanding under home equity lines of credit. 37 Page 60 39 First-Knox Banc Corp. 1995 Annual Report TABLE III RATE AND VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1995-1994 1994-1993 ------------------------------ --------------------------------- Change In Change In Income/ Rate Volume Income/ Rate Volume (In thousands of dollars) Expense Effect Effect Expense Effect Effect - -------------------------------------------------------------------------------------------------- Change in interest income Securities: Taxable .............. $ 737 $ 688 $ 49 $ 184 $ (168) $ 352 Non-taxable (1) ...... 46 58 (12) 1,442 (260) 1,702 ------- ------ ------- ------- ------- ------- Total ............. 783 746 37 1,626 (428) 2,054 ------- ------ ------- ------- ------- ------- Loans and leases: Commercial (1) ....... 1,390 1,295 95 522 378 144 Real estate (2) ...... 994 213 781 239 (571) 810 Consumer ............. 1,125 589 536 (428) (426) (2) Leases ............... 56 6 50 (36) (28) (8) ------- ------ ------- ------- ------- ------- Total ............. 3,565 2,103 1,462 297 (647) 944 ------- ------ ------- ------- ------- ------- Money market investments (3).. 149 77 72 (129) 27 (156) ------- ------ ------- ------- ------- ------- Total interest income .. 4,497 2,926 1,571 1,794 (1,048) 2,842 ------- ------ ------- ------- ------- ------- Change in interest expense Savings and interest- bearing demand deposits .... (43) 186 (229) (237) (329) 92 Time deposits ................ 3,401 2,338 1,063 14 (165) 179 ------- ------ ------- ------- ------- ------- Total deposits ......... 3,358 2,524 834 (223) (494) 271 Short-term borrowings ........ 41 85 (44) 3 (13) 16 Long-term borrowings ......... 473 101 372 1,150 (54) 1,204 ------- ------ ------- ------- ------- ------- Total interest expense.. 3,872 2,710 1,162 930 (561) 1,491 ------- ------ ------- ------- ------- ------- Net interest income .... $ 625 $ 216 $ 409 $ 864 $ (487) $ 1,351 ======= ====== ======= ======= ======= =======
(1) Non-taxable income is adjusted to a fully-taxable equivalent basis utilizing a 34% tax rate. The effect of this adjustment is disclosed in Table II. (2) Real-estate construction loans are included in this amount and represent less than 5% of total real estate loans and less than 2% of total loans and leases for the periods presented. These are principally loans to construct one-to-four family residential housing. (3) Primarily related to federal funds sold balances. For purposes of this table, changes attributable to both rate and volume which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate. Non-accruing loan balances are included for purposes of computing the rate and volume effects although interest on these balances has been excluded. Table II contains the average balances and related interest amounts. 38 Page 61 40 First-Knox Banc Corp. 1995 Annual Report portfolio yield on non-taxable securities declined during 1994 by 101 basis points. The principal effort to maintain interest spreads, and to offset the anticipated effect of increased dependence on interest-bearing liabilities, has been to focus on opportunities to enhance earning asset yields. The Corporation will face competitive pressure to maintain higher deposit rates in 1996 which could further compress the net interest margin. The difference between a financial institution's interest-sensitive assets (i.e., assets which will mature or reprice within a specific time period) and interest-sensitive liabilities (i.e., liabilities which will mature or reprice within the same time period) is commonly referred to as its "gap" or "interest rate sensitivity gap." An institution having more interest rate sensitive liabilities than interest rate sensitive assets repricing within a given time period is said to have a "negative gap." At December 31, 1995, the Corporation's gap position was negative within one year with $39.2 million of interest-bearing liabilities repricing in excess of earnings assets. This represents 8.42% of total earning assets. Approximately 53.4% of earning assets and 73.7% of interest-bearing liabilities reprice within one year of December 31, 1995. Generally, this gap position will improve net interest income in a declining interest rate environment. Management committees of the subsidiary banks regularly monitor the maturity structures of interest-sensitive assets and liabilities to stabilize net interest earnings during periods of changing interest rates. Based on the current structure, net interest income is projected to decline approximately 7% over a twelve month period if interest rates were to immediately rise 2%. Conversely, net interest income is projected to improve by approximately 7% over a twelve month period if interest rates were to immediately fall by 2%. The current goal of these committees is to limit fluctuations in net interest earnings over a twelve month period to plus or minus 10% for an immediate 2% change in interest rates. Expectations are for stable to modestly falling interest rates during 1996. Management intends to maintain a negative one year gap position as it believes this is an optimum structure to attain the Corporation's long-term profit goals. An analysis of interest rate sensitive assets and liabilities at December 31, 1995 can be found in Table V. PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES The provision for loan and lease losses is an operating expense recorded to maintain the related balance sheet allowance at a level adequate to provide for credit losses. Economic conditions, loss experience, levels of non-performing assets, credit portfolio mix, delinquency statistics, and analysis of selected loans are factors affecting management's evaluation of the adequacy of the allowance. The expense provision for 1995 was 8.5% lower than in 1994, principally as a result of reduced loan delinquencies and decreased loan charge-offs. As percentages of average loans and leases, the expense provisions were .19%, .21%, and .40% in 1995, 1994, and 1993, respectively. Net loan and lease charge-offs represented .09%, .12%, and .24% of the average outstanding balances during 1995, 1994, and 1993, respectively. Approximately 43.7% of 39 Page 62 41 First-Knox Banc Corp. 1995 Annual Report net charge-offs in 1995 resulted from commercial related loans and leases, with consumer loans accounting for 56.3% of the balance. Over the past five years, consumer related loans and leases accounted for approximately 51.4% of net charge-offs, commercial loans approximately 43.0%, and mortgage loans approximately 5.6%. As a percentage of year-end loan and lease balances, the allowance for possible losses was 1.26% in 1995, 1.27% in 1994, and 1.24% in 1993. During 1995, the allowance was increased through expense provisions that exceeded the net losses charged against the allowance. At the end of 1995, approximately 70% of the allowance is unallocated; i.e., not allocated to specific loans or portfolios based on historical portfolio losses, compared to 67% at the previous year end. Management anticipates that, as a percentage of loan and lease balances, 1996 net loan and lease charge-offs should approximate 1995 levels. Declines in nonperforming loans (loans on non-accrual status or past due 90 days or more) and improvements in overall delinquency statistics are the primary reasons for this expectation. Non-performing loans and leases of $1.06 million represented .32% of 1995 year-end balances compared to $1.26 million and .41% at December 31, 1994. NON-INTEREST INCOME This income represents non-interest sources of revenue such as customer service fees, trust income, and other income. Total non-interest income of $3.13 million was $380,000 or 13.8% higher than in 1994. Customer service fees and commissions increased $353,000 compared to 1994. Trust department income increased $114,000 or 19.4%. Realized security gains and losses were minimal in each of the past three years. Gains and losses recognized in 1993 and 1994 were principally the result of calls of municipal securities. In 1995, the Corporation sold $17.6 million of mortgage-backed securities from its available-for-sale portfolio as part of an asset/liability strategy to improve long-term returns in a period of declining interest rates. Loan sale gains of $27,000 in 1995 were down 6.9% or $2,000 from similar gains in 1994. During 1995 loan sale gains were the result of selling in the secondary market $1.6 million of the mortgage loans originated during that year. The gains during 1994 were the results of sales of student loans. Total non-interest income of $2.75 million in 1994 was 11.4% higher than 1993 as customer service fees and trust department income increases were offset by reduced securities gains. Customer service fees increased $168,000 compared to 1993 and trust department income increased 12.9% compared to 1993. Non-interest income was enhanced in 1995 as a result of deposit service charge pricing changes made during the third quarter of 1994, and as a result of mutual fund and annuity products which were introduced during the fourth quarter of 1994. 40 Page 63 42 First-Knox Banc Corp. 1995 Annual Report NON-INTEREST EXPENSE Non-interest expenses include employee salaries and benefits as well as occupancy, FDIC insurance, advertising, state franchise taxes, and other operating expenses. Total non-interest expenses increased by $213,000 or 1.5% in 1995 after increasing $818,000 or 5.9% in 1994. A reduction in FDIC insurance expense of $400,000 in 1995 contributed significantly to the small increase. The FDIC reduced deposit insurance premiums from $.23 to $.04 per $100 of deposits as of June 1, 1995. No deposit insurance expense is expected for the Corporation in 1996, because the FDIC suspended deposit insurance premiums as of January 1, 1996. Occupancy expenses increased in 1995 by $296,000 or 16.22% principally related to the Main Office expansion of First-Knox National Bank. Salaries and employee benefits were higher in 1995 by $325,000 or 4.81%, while on a net basis, other expenses were down $8,000 or 0.16%. Approximately 46% of 1994's increase in non-interest expenses related to increases in salaries and benefits of $378,000 or 5.9% compared to 1993. Legal and professional fees increased by $120,000 or 41.2% during 1994. This increase was primarily driven by a consulting study to enhance non-interest income in 1995 and thereafter. The Corporation also recognized an expense of $121,000 during 1994 relating to a write-down of loans held for sale to the lower of cost or market. INCOME TAXES Income tax expenses of $1,565,000, $1,267,000, and $1,443,000, were recorded in 1995, 1994, and 1993, respectively, representing 21.5%, 19.7%, and 23.6% of income before income taxes for each of the respective years. These effective tax rates are all lower than the statutory rate of 34%. Tax-exempt income from obligations of states and political subdivisions and non-taxable loans are the primary cause of these deviations from statutory rates. The Corporation does not plan to significantly increase its holdings of tax-exempt obligations during 1996. Tax-exempt income from investment securities and loans represented 41.7%, 48.7%, and 35.7% of income before federal income taxes in 1995, 1994, and 1993, respectively. As a percentage of average earning assets, average non-taxable balances were approximately 12.0% in 1995, 12.9% in 1994, and 8.0% in 1993. FINANCIAL CONDITION Total assets grew by $29.7 million or 6.4% in 1995 compared to growth of $27.8 million or 6.3% in 1994. The growth in 1995 was the result of increased retail customer time deposits. Total deposits grew by $26.8 million or 7.1% in 1995. The growth in 1994 was primarily funded by Federal Home Loan Bank advances. Total deposits declined by $1.0 million or 0.3% during 1994. 41 Page 64 43 First-Knox Banc Corp. 1995 Annual Report INVESTMENT AND MORTGAGE-BACKED SECURITIES The consolidated investment and mortgage-backed securities portfolio increased by $0.8 million or 0.6% during 1995. U.S. Treasury securities increased from 20.9% of investments at the end of 1994 to 21.4% at the end of 1995. Mortgage-backed securities represented 28.3% and 32.5% of the total investment portfolio at year-end 1995 and 1994, respectively. As a percentage of the total investment and mortgage-backed security portfolio, municipal securities represented 41.8% at year-end 1995 and 41.7% at year-end 1994. To provide additional flexibility to meet liquidity and asset/liability management needs, the Corporation reclassified its municipal securities from held to maturity to available for sale. These securities, with an amortized cost of $53,407,000, were transferred on December 31, 1995, as allowed by the SFAS 115 implementation guide issued by the Financial Accounting Standards Board. The related unrealized gain of $1.8 million is reflected net of tax as an increase to shareholders' equity. The average investment portfolio, including federal funds sold, represented 30.3% of average earning assets in 1995, 31.0% in 1994, and 28.2% in 1993. At the end of 1995, the estimated fair value of all investment and mortgage-backed securities exceeded amortized cost by $2.90 million or 2.2%. At the end of 1994, the amortized cost of investment and mortgage-backed securities exceeded estimated fair value by $5.38 million or 4.2%. This rise in market value during 1995 resulted from lower market interest rates at December 31, 1995. Approximately 16.0% of the total portfolio at the end of 1995 will mature in 1996. The average maturity of the investment portfolio was 4.8 years at the end of 1993, compared to 5.5 years in both 1994 and 1995. The Corporation's investment portfolio contained no derivative securities during any period covered by this report. Additional detail regarding investment securities is included in Table IV. LOANS AND LEASES Loans and lease financing represented 69.7% of average earning assets in 1995, 69.0% in 1994, and 71.8% in 1993. In terms of full year average balances, loans and leases have grown by 5.4%, 5.2%, and 4.5% in 1995, 1994, and 1993, respectively. Residential real estate loans grew by $10.2 million, or 7.1% in 1995, while commercial loan balances increased by $11.9 million, or 13.1%. Consumer loan balances increased $3.9 million, or 5.6% during 1995. While the loan and lease portfolios are the highest yielding corporate assets, they also contain the most risk of loss. The real estate loan portfolio is principally residential mortgages in the north central Ohio area. Real estate construction loans are not a material component of this portfolio. The commercial loan portfolio represents loans to business interests in the north central Ohio area with no significant industry concentration. The consumer loan and lease portfolio is composed principally of financing to individuals for vehicles and consumer assets. All of these loan and lease portfolios could be negatively impacted by an economic downturn in this north central Ohio market area. To mitigate 42 Page 65 44 First-Knox Banc Corp. 1995 Annual Report risks associated with changes in the borrowers' future ability to repay, the Corporation generally requires collateral on loans. To reduce the risk of fluctuating collateral values, the Corporation generally requests down payments on its real estate and consumer loans and scheduled periodic payments on most types of financing. As of December 31, 1995, only 6.1% of total loans and leases were unsecured. DEPOSITS Customer deposits from local markets are the Corporation's primary source of funds. Deposits totaled $404.1 million at the end of 1995, 7.1% higher than a year ago. Based on full year average balances, deposits grew by 3.2% in 1995, 3.5% in 1994, and 2.3% in 1993. The Corporation experienced a shift in the composition of its deposits during 1995. Non-interest bearing demand deposits increased by $3.5 million or 6.9% during 1995 and represented 13.5% of all deposits at year end. Interest-bearing demand deposits declined by $2.6 million or 6.2% during 1995 and represented 9.9% of all deposits compared to 11.3% in 1994. Savings deposits declined by $10.5 million or 9.6% during 1995 and represented 24.5% of all deposits compared to 29.1% in 1994. Time deposits increased by $36.6 million or 21.0% during 1995 and represented 52.1% of all deposits compared to 46.1% in 1994. BORROWINGS The Corporation and its subsidiaries incur short-term borrowings through customer related repurchase agreements and daily amounts due to the U.S. Treasury. These amounts are subject to rapid balance and rate fluctuations and, as described in Note 7, are collateralized by the pledge of selected securities. Short-term borrowings averaged $6.2 million, $9.2 million, and $8.7 million for 1995, 1994, and 1993, respectively. Long-term borrowings at the end of 1995 are comprised of FHLB advances, a source of loan funding made available as a result of both subsidiary banks becoming members of the FHLB of Cincinnati during 1993. The amounts and terms of these advances are disclosed in Note 8, along with the collateral required, and limitations imposed, by the FHLB. Such advances are viewed as an alternative to deposits for funding certain types of loan growth. These advances declined $1.3 million or 3.9% during 1995. FHLB advances entirely funded the growth in assets during 1994. These long-term borrowings increased by $28.8 million or 488.5% over 1993. SHAREHOLDERS' EQUITY Shareholders' equity totaled $46.7 million at December 31, 1995, compared to $40.8 million at December 31, 1994. At December 31, 1995 and December 31, 1994, the ratio of shareholders' equity to assets was 9.39% and 8.74%, respectively. The Corporation complied with the capital requirements established by the Federal Reserve System at each of those dates. 43 Page 66 45 First-Knox Banc Corp. 1995 Annual Report Under "Prompt Corrective Action" regulations, the FDIC has defined five categories of capitalization (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized). The Corporation meets the "well capitalized" definition which requires a total risk-based capital ratio of at least 10%, a Tier 1 risk-based ratio of at least 6%, and a leverage ratio of at least 5%, and the absence of any written agreement, order, or directive from a regulatory agency. "Well-capitalized" status affords the Corporation the ability to operate with the greatest flexibility under current laws and regulations. As discussed in Note 1 to the consolidated financial statements, the Corporation adopted SFAS 115 on January 1, 1994. The impact of adopting this pronouncement for the Corporation is to subject shareholders' equity to fluctuations depending upon the impact of market interest rate changes on the valuation of securities available for sale. Under the pronouncement, an upward movement of interest rates will tend to decrease shareholders' equity while a downward movement will tend to increase shareholders' equity for the Corporation. The impact of SFAS 115 is disregarded by banking regulators in determining compliance with capital requirements. Under a current regulatory proposal, interest rate risk would become an additional element in measuring risk-based capital. This proposed change is not expected to significantly impact the Corporation's compliance with capital guidelines. Cash dividends declared to shareholders of the Corporation in 1995 totaled $1,751,000, representing an increase of 14.7% over 1994 and 30.7% of 1995 net income. Over the past five years, the payout ratio has consistently been between 26% and 31% of net income. Dividends paid to the Corporation by the subsidiary banks are the primary source of funds for payment of dividends to the Corporation's shareholders. Regulatory restrictions on the dividends from the subsidiary banks are described in Note 14 of the consolidated financial statements. Shareholders' equity could be enhanced during 1996 through the issuance of common stock under the stock option, dividend reinvestment, and employee retirement savings plans. LIQUIDITY Liquidity refers to the ability to meet cash flow needs which, in the banking industry, refers to the ability to fund customer borrowing needs as well as deposit withdrawals. Assets such as cash and non-interest bearing deposits with banks, federal funds sold, maturing securities, and loan repayments are the Corporation's principal sources of liquidity. Access to FHLB advances, described elsewhere in this report, is a supplemental source of cash to meet liquidity needs. Operating activities provided cash of $7.4 million, $5.8 million, and $6.7 million in 1995, 1994, and 1993, respectively. Cash and cash equivalents increased from $18.1 million at December 31, 1994 to $20.4 million at December 31, 1995. Refer to the consolidated statement of cash flows for a summary of the sources and uses of cash in 1995, 1994, and 1993. 44 Page 67 46 First-Knox Banc Corp. 1995 Annual Report Taking into account the capital adequacy, profitability, and reputation maintained by the Corporation, the available liquidity sources are considered adequate to meet current and projected needs. FAIR VALUES OF FINANCIAL INSTRUMENTS The Corporation disclosed the estimated fair values and related carrying values of its financial instruments at December 31, 1995 and 1994 in Note 16 of the consolidated financial statements. The estimated fair value of loans, net of the allowance for loan losses, increased from 98.7% of the carrying value at December 31, 1994 to 100.8% at December 31, 1995. This relative increase in value resulted primarily from lower market rates at December 31, 1995. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that, were the Corporation to have liquidated such items, the estimated fair values would necessarily have been realized. The methodologies utilized in evaluating the estimated fair values at December 31, 1995 and 1994 were consistently applied. The estimated fair values at December 31, 1995 and 1994, should not be considered to apply at subsequent dates. Other assets and liabilities of the Corporation that are not defined as financial instruments under SFAS 107, "Fair Values of Financial Instruments," are not included in this disclosure. These would include, among others, such items as property and equipment, financing leases, and the intangible value of the Corporation's customer base and profit potential. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related notes presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results primarily in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Corporation's operations. Nearly all the assets and liabilities of the Corporation are financial, unlike most industrial companies. As a result, the Corporation's performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations. The Corporation's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its financial liabilities in its asset/liability management may tend to minimize the effect of change in interest rates on the Corporation's performance. Changes in interest rates do not necessarily fluctuate in the same manner and to the same extent as changes in the price of goods and services. 45 Page 68 47 First-Knox Banc Corp. 1995 Annual Report NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 122, "Accounting for Mortgage Servicing Rights" requires companies to recognize, as separate assets, rights to service mortgage loans for others, however those servicing rights are acquired. A company that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained should allocate the total cost of the mortgage loans to mortgage servicing rights and to loans (without the mortgage servicing rights) based on their relative fair values. Mortgage servicing rights recorded as a separate asset will be amortized in proportion to, and over the period of, estimated net servicing income. This statement becomes effective for the Corporation in 1996. While the exact impact of this pronouncement depends on market conditions and loan volume, management does not anticipate that it will have a material impact on the Corporation's net income based on historic sales volume. In 1996, the Corporation is required to adopt SFAS No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123 encourages but does not require entities to use a fair value based method to account for stock-based compensation plans such as the Corporation's stock option plans. If the fair value accounting encouraged by SFAS No. 123 is not adopted, entities must disclose the pro forma effect on net income and earnings per share had the accounting been adopted. Fair value of a stock option is to be estimated using an option-pricing model that considers exercise price, expected life of the option, current price of the stock, expected price volatility, expected dividends on the stock, and the risk-free interest rate. The Corporation will disclose the pro forma impact of this pronouncement in 1996. 46 Page 69 48 First-Knox Banc Corp. 1995 Annual Report TABLE IV INVESTMENT AND MORTGAGE-BACKED SECURITIES (In thousands of dollars)
State Tax U.S. Federal and Mortgage- Equivalent Treasury Agencies Political Backed (2) Other Total Yield (1) - ------------------------------------------------------------------------------------------------------------------ December 31, 1995 (At fair value) Maturity: Within one year ......... $10,554 $ 999 $ 2,263 $ 7,341 $ 21,157 5.88% After one year through five years ......... 17,662 2,754 11,369 27,948 59,733 7.35% After five years through ten years ........... 3,238 20,505 2,005 25,748 8.00% After ten years ......... 21,060 $4,290 25,350 8.90% ------- ------ ------- ------- ------ -------- ----- Total carrying value ............ $28,216 $6,991 $55,197 $37,294 $4,290 $131,988 Taxable equivalent purchase yield (1) .......... 5.70% 6.66% 8.58% 7.03% 6.95% 7.36% Average maturity (in years) ..... 1.3 5.3 8.2 3.0 20.0 5.5
State U.S. Federal and Mortgage- Treasury Agencies Political Backed (2) Other Total - ----------------------------------------------------------------------------------------------------- December 31, 1994 Total carrying value .......... $27,420 $2,393 $54,750 $42,657 $3,991 $131,211 Estimated fair value .......... $27,420 $2,393 $51,847 $42,657 $3,991 $128,308 Taxable equivalent purchase yield (1) ........ 5.19% 6.89% 8.64% 6.00% 6.42% 6.94% Average maturity (in years) ... 1.7 1.1 7.4 2.8 20.0 5.5
State U.S. Federal and Mortgage- Treasury Agencies Political Backed (2) Other Total - ----------------------------------------------------------------------------------------------------- December 31, 1993 Total carrying value .......... $23,974 $500 $41,584 $42,664 $2,225 $110,947 Estimated fair value .......... $24,351 $503 $44,337 $43,173 $2,406 $114,770 Taxable equivalent purchase yield (1) ........ 5.14% 8.03% 9.02% 5.55% 4.97% 6.76% Average maturity (in years) ... 2.4 0.7 7.6 2.8 20.0 4.8
(1) Yields are based on historical cost and computed on a fully tax-equivalent basis assuming a rate of 34%. (2) Mortgage-backed securities are reported by expected average maturities. Actual maturities will differ due to scheduled payments and the rights of borrowers to prepay. 47 Page 70 49 First-Knox Banc Corp. 1995 Annual Report TABLE V INTEREST RATE SENSITIVITY ANALYSIS Interest rate sensitivity measures the exposure of net interest income to possible changes in interest rates. The following interest rate sensitivity table presents the traditional static gap position of First-Knox Banc Corp. at December 31, 1995. The table depicts the time periods in which certain interest-earning assets and certain interest-bearing liabilities will mature or reprice in accordance with their contractual terms. This table does not, however, necessarily indicate the impact of general interest rate movements on the Corporation's net interest yield because the repricing of various categories of assets and liabilities is subject to competitive factors and customer preferences. As a result, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate levels.
After 1 After 3 After 6 Month Months Months Within But But But Total Total One Within Within Within Within After (In thousands of dollars) Month 3 Months 6 Months 1 Year 1 Year 1 Year Total - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SENSITIVE ASSETS Loans and leases ............ $ 124,126 $ 15,872 $ 23,347 $ 49,670 $ 213,015 $ 117,626 $330,641 Investment securities and federal funds sold .. 3,748 2,452 2,554 9,236 17,990 80,104 98,094 Mortgage-backed securities (1) ...... 13,390 295 830 3,335 17,850 19,444 37,294 --------- -------- -------- -------- --------- --------- -------- TOTAL ....................... 141,264 18,619 26,731 62,241 248,855 217,174 466,029 --------- -------- -------- -------- --------- --------- -------- INTEREST RATE SENSITIVE LIABILITIES Interest-bearing deposits (2) 187,443 25,337 27,596 38,678 279,054 70,307 349,361 Borrowings .................. 8,072 172 260 532 9,036 32,365 41,401 --------- -------- -------- -------- --------- --------- -------- TOTAL ....................... 195,515 25,509 27,856 39,210 288,090 102,672 390,762 --------- -------- -------- -------- --------- --------- -------- INTEREST RATE SENSITIVITY GAP ............. $ (54,251) $ (6,890) $ (1,125) $ 23,031 $ (39,235) $ 114,502 $ 75,267 ========= ======== ======== ======== ========= ========= ======== CUMULATIVE INTEREST RATE SENSITIVITY GAP ............. $ (54,251) $(61,141) $(62,266) $(39,235) $ (39,235) $ 75,267 ========= ======== ======== ======== ========= ========= INTEREST RATE SENSITIVITY GAP RATIO ....... 0.72x 0.73x 0.96x 1.59x 0.86x 2.12x 1.19x ========= ======== ======== ======== ========= ========= ======== CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL INTEREST-EARNING ASSETS...... (11.64)% (13.12)% (13.36)% (8.42)% (8.42)% 16.15% 16.15% ========= ======== ======== ======== ========= ========= ========
(1) Mortgage-backed securities are included at the earlier date of repricing or average maturity, such maturity giving effect to prepayment estimates. (2) Interest-bearing demand deposits and savings accounts are included in the amount to be repriced within one month since the Corporation has the ability to reprice these accounts at any time. 48 Page 71 50 First-Knox Banc Corp. 1995 Annual Report TABLE VI TEN YEARS OF PROGRESS STATEMENT SUMMARY
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 - -------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity ($000) ... $46,659 $40,832 $38,423 $30,115 $27,144 $24,586 $22,290 $20,198 $18,298 $16,615 Book Value Per Share .......... 13.11 11.23 10.65 9.66 8.73 7.91 7.17 6.50 5.88 5.35 Fully-Diluted Earnings Per Share ............. 1.57 1.41 1.33 1.18 1.06 .98 .92 .86 .77 .69 Cash Dividends ($000) ......... 1,751 1,527 1,302 1,051 973 927 856 786 721 667 Stock Dividend/Split .......... 100% 5% 5% 5% 5% 60% 5% 5% 5% 5% Banking Offices ............... 12 12 12 12 12 12 12 9 8 8 Total Staff ................... 256 264 251 245 239 250 243 230 210 197
CONSOLIDATED BALANCE SHEET SUMMARY
(In thousands of dollars) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and Due from Banks ....... $ 17,012 $ 18,110 $ 16,158 $ 14,687 $ 11,824 $ 12,628 $ 13,538 $ 11,389 $ 8,489 $ 8,489 Investments ................... 131,988 131,211 110,947 106,268 100,953 94,434 100,020 86,747 86,494 86,542 Federal Funds Sold ............ 3,400 12,700 3,850 7,800 8,050 4,950 1,900 2,400 9,200 Total Loans and Lease Financing .............. 330,641 304,168 290,908 276,437 261,554 248,110 223,076 195,182 166,276 142,992 Less Allowance for Loan and Lease Losses .................. (4,166) (3,876) (3,597) (3,162) (2,905) (2,715) (2,338) (1,980) (1,748) (1,625) Net Loans and Lease Financing . 326,475 300,292 287,311 273,275 258,649 245,395 220,738 193,202 164,528 141,367 Bank Premises and Equipment ... 10,993 10,035 6,200 4,939 5,073 5,300 5,387 4,351 3,807 3,443 Other Assets .................. 7,031 7,543 6,098 6,586 7,445 8,264 9,084 7,084 7,208 6,963 TOTAL ......................... $496,899 $467,191 $439,414 $409,605 $391,744 $374,071 $353,717 $304,673 $272,926 $256,004 LIABILITIES Demand Deposits ............... $ 94,588 $ 93,709 $ 91,384 $ 86,394 $ 68,162 $ 66,222 $ 64,169 $ 58,170 $ 53,930 $ 52,239 Savings Deposits .............. 99,133 109,675 115,587 112,619 100,093 80,285 80,430 68,838 69,419 67,923 Other Time Deposits ........... 210,346 173,796 171,206 163,281 178,665 186,122 172,258 144,160 119,321 108,225 Total Deposits ................ 404,067 377,180 378,177 362,294 346,920 332,629 316,857 271,168 242,670 228,387 Long-Term Debt ................ 33,415 34,720 5,900 5,159 5,300 5,370 5,440 2,510 2,580 2,650 Other Liabilities ............. 12,758 14,459 16,914 12,037 12,380 11,486 9,130 10,797 9,378 8,352 Total Deposits and Other Liabilities ...... 450,240 426,359 400,991 379,490 364,600 349,485 331,427 284,475 254,628 239,389 Shareholders' Equity .......... 46,659 40,832 38,423 30,115 27,144 24,586 22,290 20,198 18,298 16,615 TOTAL ......................... $496,899 $467,191 $439,414 $409,605 $391,744 $374,071 $353,717 $304,673 $272,926 $256,004
CONSOLIDATED STATEMENT OF INCOME SUMMARY
(In thousands of dollars) 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans and Leases .... $ 28,699 $ 25,139 $ 24,825 $ 25,276 $ 26,968 $ 26,214 $ 23,390 $ 19,030 $ 16,143 $ 12,270 Interest and Dividends Earned on Total Securities .... 8,006 7,277 6,124 6,960 8,021 8,012 7,295 6,400 6,363 5,907 Federal Funds Sold ............ 228 79 208 301 646 860 550 326 363 477 Lease Financing ............... 155 99 135 172 246 200 385 392 493 247 TOTAL INTEREST INCOME ......... 37,088 32,594 31,292 32,709 35,881 35,286 31,620 26,148 23,362 18,901 INTEREST EXPENSE Interest on Deposits .......... 15,158 11,800 12,023 15,157 19,720 20,735 18,539 14,651 12,959 11,379 Interest on Borrowed Money .... 2,341 1,827 674 904 1,016 914 973 715 657 377 TOTAL INTEREST EXPENSE ........ 17,499 13,627 12,697 16,061 20,736 21,649 19,512 15,366 13,616 11,756 Net Interest Income ........... 19,589 18,967 16,648 15,145 18,595 13,637 12,108 10,782 9,746 7,145 Provision for Credit Losses ... (584) (638) (1,124) (1,394) (1,066) (957) (911) (785) (400) (580) Other Income .................. 3,127 2,747 2,465 2,452 2,389 2,005 1,716 1,685 1,777 1,848 Other Expenses ................ (14,858) (14,645) (13,827) (12,584) (12,022) (10,649) (9,427) (8,379) (8,268) (6,376) INCOME BEFORE FEDERAL INCOME TAXES ........... 7,274 6,431 6,109 5,122 4,446 4,036 3,486 3,303 2,855 2,037 Federal Income Taxes .......... (1,565) (1,267) (1,443) (1,171) (915) (813) (537) (616) (451) 102 NET INCOME .................... $ 5,709 $ 5,164 $ 4,666 $ 3,951 $ 3,531 $ 3,223 $ 2,949 $ 2,687 $ 2,404 $ 2,139
49 Page 72 51 First-Knox Banc Corp. 1995 Annual Report
FIRST-KNOX DIRECTORS [PHOTO] [PHOTO] [PHOTO] [PHOTO] Maureen Buchwald George T. Culbertson, Jr. James J. Cullers Robert S. Gregg [PHOTO] [PHOTO] [PHOTO] [PHOTO] Philip H. Jordan James A. McElroy John B. Minor Noel C. Parrish [PHOTO] [PHOTO] [PHOTO] Russell E. Ramser, Jr. Alan E. Riedel Kenneth W. Stevenson [PHOTO] [PHOTO] [PHOTO] William A. Stroud Stephen P. Upham, Jr. Carlos E. Watkins FARMERS AND SAVINGS BANK DIRECTORS [PHOTO] [PHOTO] [PHOTO] [PHOTO] Patricia A. Byerly L. Eugene Byers Dwight D. Mathias James E. McClure [PHOTO] [PHOTO] [PHOTO] Roger E. Stitzlein Chris D. Tuttle Gordon E. Yance
FIRST-KNOX BANC CORP. DIRECTORS William A. Stroud, Chairman of the Board, Retired President Russell E. Ramser, Jr., Vice-Chairman of the Board, President, Maram Energy Company George T. Culbertson, Jr., Retired Newspaper Publisher James J. Cullers, Lawyer, Zelkowitz, Barry & Cullers Robert S. Gregg, President, Phoenix Holding Company Philip H. Jordan, Jr., Retired President, Kenyon College James A. McElroy, Chairman of the Board, AMG Industries John B. Minor, Consultant Noel C. Parrish, President, NOE, Inc. Alan E. Riedel, Retired Vice Chairman, Cooper Industries Stephen P. Upham, Jr., Entrepreneur Carlos E. Watkins, President and Chief Executive Officer, First-Knox National Bank, President and Chief Executive Officer FIRST-KNOX NATIONAL BANK DIRECTORS Philip H. Jordan, Jr., Chairman of the Board, Retired President, Kenyon College Maureen Buchwald, Vice President, Ariel Corporation George T. Culbertson, Jr., Retired Newspaper Publisher James J. Cullers, Lawyer, Zelkowitz, Barry & Cullers Robert S. Gregg, President, Phoenix Holding Company James A. McElroy, Chairman of the Board, AMG Industries John B. Minor, Consultant Noel C. Parrish, President, NOE, Inc. Russell E. Ramser, Jr., President, Maram Energy Company Kenneth W. Stevenson, Retired President, Cooper Energy Services Carlos E. Watkins, President and Chief Executive Officer, First-Knox National Bank DIRECTORS EMERITI Robert B. Lantz J. Robert Purdy William A. Stroud Stephen P. Upham, Jr. 50 Page 73 52 First-Knox Banc Corp. 1995 Annual Report FARMERS AND SAVINGS BANK DIRECTORS James E. McClure, Chairman of the Board, Retired President, McClure Motors, Inc. Patricia A. Byerly, Vice President and Secretary, Byerly Funeral Home, Inc. L. Eugene Byers, DVM, Owner, Byland Animal Hospital and Farms Dwight D. Mathias, President and Chief Executive Officer, Farmers and Savings Bank Roger E. Stitzlein, General Manager, Loudonville Farmers Equity Chris D. Tuttle, President, Amish Oak Furniture Company, Inc. Gordon E. Yance, Vice President and Treasurer, First-Knox Banc Corp. FIRST-KNOX BANC CORP. OFFICERS Carlos E. Watkins, President and Chief Executive Officer Gordon E. Yance, Vice President and Treasurer Ian Watson, Vice President and Secretary Vickie A. Sant, Auditor OFFICERS Carlos E. Watkins, President and Chief Executive Officer FINANCE, HUMAN RESOURCES, AND BRANCH ADMINISTRATION Gordon E. Yance, Vice President and Chief Financial Officer Kathy K. Blackburn, Vice President, Human Resources Vickie A. Sant, Auditor Lynn B. Fawcett, Comptroller Emily P. Snyder, Assistant Vice President Rebecca A. Brownfield, Administrative Officer OPERATIONS, DEPOSITS AND INVESTMENTS Ian Watson, Vice President and Secretary Bruce B. Hite, Assistant Vice President and Security Officer Cheri L. Butcher, Assistant Vice President Diana L. Doerr, Administrative Officer Rebecca K. Rodeniser, Operations Officer Betty L. Mossholder, Administrative Officer CREDIT ADMINISTRATION Lawrence A. Dailey, Vice President, Senior Credit Policy and Control Officer W. Douglas Leonard, Vice President and Senior Retail Loan Officer Louis G. Petros, Vice President and Senior Commercial Loan Officer James E. Brinker, Vice President, and Commercial Loan Officer William C. Brunka,Vice President, Retail Loan and Compliance Officer Mark P. Leonard, Vice President and Commercial Loan Officer David R. Ewart, Assistant Vice President and Commercial Loan Officer Charlene V. Beckley, Assistant Vice President, Card Services Eritt A. Coon, Administrative Loan Officer Joan M. Stout, Mortgage Loan Officer Christopher D. Anderson, Administrative Officer Jeanette A. Carpenter, Mortgage Loan Officer Kimberly J. Peck, Mortgage Loan Officer Anita K. Earlywine, Administrative Officer Valerie J. Smith, Administrative Officer TRUST David R. Irvin, Vice President and Trust Officer Mark B. Iverson, Trust Officer Mary T. Collins, Trust Officer MARKETING J. Curtis Cree, Vice President and CRA Officer Barbara A. Barry, Assistant Vice President BRANCH OFFICE DIVISION MAIN OFFICE Frederick T. Baldeschwiler, Assistant Vice President and Manager Patti J. Frazee, Assistant Manager COSHOCTON AVENUE Deborah K. Steinhauser, Assistant Vice President and Manager Nancy L. Rice, Assistant Manager BELLVILLE James E. McLaughlin, Manager Julie A. Cline, Assistant Manager CENTERBURG Sharon A. Cline, Assistant Vice President and Manager Ella E. Altizer, Assistant Manager DANVILLE Cynthia L. Rhodes, Manager Patty S. Durbin, Assistant Manager EDISON J. Blair Strain, Manager FREDERICKTOWN Ronald L. McMillan, Assistant Vice President and Manager Marilyn L. Reed, Assistant Manager LEXINGTON Debra E. Holiday, Manager Jennifer S. Mack, Assistant Manager MILLERSBURG William J. Mohr, Assistant Vice President and Manager Rea D. Wirt, Assistant Manager MOUNT GILEAD R. Edward Kline, Assistant Vice President and Manager William F. Wieland, Assistant Manager FARMERS AND SAVINGS BANK OFFICERS Dwight D. Mathias, President and Chief Executive Officer Stanley D. Young, Senior Vice President and Cashier James S. Lingenfelter, Vice President Wayne D. Young, Vice President Karen S. Burgess, Assistant Vice President Gregory A. Henley, Assistant Vice President Barbara J. Young, Assistant Vice President Janeen R. Lackey, Assistant Cashier and Manager, Perrysville Office 51 Page 74 53 First-Knox Banc Corp. 1995 Annual Report SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS The Corporation's headquarters are located at: One South Main Street, Mount Vernon, Ohio 43050, phone: 614/399-5500, 800/837-5266. ANNUAL MEETING The Annual Shareholders' Meeting of First-Knox Banc Corp. will be held on Tuesday, March 26, 1996, at 3:00 p.m. at Thorne Performance Hall in the R. R. Hodges Chapel/Auditorium and Fine Arts Center at the Mount Vernon Nazarene College, 800 Martinsburg Road, Mount Vernon, Ohio. TRANSFER AGENT AND REGISTRAR First-Knox National Bank, P.O. Box 871, One South Main Street, Mount Vernon, Ohio 43050 INDEPENDENT AUDITORS Crowe, Chizek and Company LLP, Columbus, Ohio CORPORATE COUNSEL Vorys, Sater, Seymour and Pease, Columbus, Ohio FORM 10-K AND OTHER FINANCIAL INFORMATION A copy of First-Knox Banc Corp.'s Annual Report Form 10-K for the period ending December 31, 1995, may be obtained by shareholders without charge upon written request to Ian Watson, Vice President and Secretary, First-Knox Banc Corp., P. O. Box 871, One South Main Street, Mount Vernon, Ohio 43050. DIVIDEND REINVESTMENT PLAN The Corporation offers a Dividend Reinvestment Plan which generally allows shareholders to reinvest their First-Knox Banc Corp. dividends in additional Corporate stock at the prevailing market price. Participation in the Plan is offered only by means of a prospectus which describes the Plan in detail. Plan information and a Plan prospectus may be obtained by calling the Trust Department of First-Knox National Bank at 614-399-5505, 800-837-5266, or by writing: First-Knox National Bank, Attn: Dividend Reinvestment Plan, P. O. Box 871, One South Main Mount Vernon, Ohio 43050. COMMON STOCK LISTING The common shares of First-Knox Banc Corp. are traded on the NASDAQ National Market under the symbol FKBC. MARKET MAKERS McDonald & Company Securities, Inc., Cleveland, Ohio The Ohio Company, Columbus, Ohio Sweney Cartwright & Co., Columbus, Ohio FIRST-KNOX NATIONAL BANK OFFICES Main Office One South Main Street Mount Vernon 43050 614/399-5500 Coshocton Avenue Office 810 Coshocton Avenue Mount Vernon 43050 614/397-5551 Bellville Office 154 Main Street Bellville 44813 419/886-3711 Centerburg Office 35 West Main Street Centerburg 43011 614/625-6136 Danville Office Public Square Danville 43014 614/599-6686 Edison Office 504 West High Street Mount Gilead 43338 419/947-4686 Fredericktown Office 137 North Main Street Fredericktown 43019 614/694-2015 Lexington Office 10 Plymouth Street Lexington 44904 419/884-3005 Millersburg Office 60 West Jackson Street Millersburg 44654 330/674-2610 Mount Gilead Office 17 West High Street Mount Gilead 43338 419/946-9010 FARMERS AND SAVINGS BANK OFFICES Loudonville Office 120 North Water Street Loudonville 44842 419/994-4115 Perrysville Office 112 North Bridge Street Perrysville 44864 419/938-5622 Page 75 54 [LOGO] First-Knox Banc Corp. P.O. - One South Main Street - Mount Vernon, Ohio 43050 An Equal Opportunity Employer Page 76 EX-21 3 EXHIBIT 21 1 EXHIBIT 21. SUBSIDIARIES OF FIRST-KNOX BANC CORP. The First-Knox National Bank of Mount Vernon One South Main Street P.O. Box 871 Mount Vernon, Ohio 43050 State of Incorporation - Ohio A Wholly-Owned Subsidiary of First-Knox Banc Corp. First-Knox, Inc. One South Main Street P.O. Box 871 Mount Vernon, Ohio 43050 State of Incorporation - Ohio A Wholly-Owned Subsidiary of The First-Knox National Bank of Mount Vernon The Farmers & Savings Bank 120 North Water Street P.O. Box 179 Loudonville, Ohio 44842 State of Incorporation - Ohio A Wholly-Owned Subsidiary of First-Knox Banc Corp. Page 94 EX-23 4 EXHIBIT 23 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-8(No. 33-40042), Form S-3(No. 33-52590) and Form S-8(No. 33-72414) of First-Knox Banc Corp. Of our report dated January 18, 1996 on the 1995 consolidated financial statements of First-Knox Banc Corp., which report is incorporated by reference in this Form 10-K. Crowe, Chizek and Company LLP Columbus, Ohio March 26, 1996 Page 95 EX-27 5 EXHIBIT 27
9 0000756899 FIRST-KNOX BANC CORP 1,000 YEAR DEC-31-1995 DEC-31-1995 17,012 0 3,400 0 131,988 0 0 330,641 4,166 496,899 404,067 7,986 4,772 33,415 11,407 0 0 35,252 496,899 28,854 8,234 0 37,088 15,158 17,499 19,589 584 (20) 14,858 7,274 5,709 0 0 5,709 1.57 1.57 4.71 197 862 1,122 7,840 3,876 539 245 4,166 1,135 0 3,031
EX-99 6 EXHIBIT 99 1 Exhibit 99 FIRST-KNOX BANC CORP. ONE SOUTH MAIN STREET MOUNT VERNON, OHIO 43050 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD TUESDAY, MARCH 26, 1996 TO THE HOLDERS OF COMMON SHARES: Notice is hereby given that, pursuant to call of its Directors, the regular Annual Meeting of Shareholders of First-Knox Banc Corp. (the "Corporation") will be held at Mount Vernon Nazarene College, 800 Martinsburg Road, Mount Vernon, Ohio 43050, Tuesday, March 26, 1996, at 3:00 p.m., for the purpose of considering and voting upon the following matters: 1. To elect to the Board of Directors five (5) persons, four (4) of whom shall serve for a three-year term until the Annual Meeting of Shareholders in 1999 and one (1) who will serve a two-year term until the Annual Meeting of Shareholders in 1998, all five (5) Directors to serve until his respective successor is elected and qualified. 2. Whatever other business may properly be brought before the meeting or any adjournment thereof. Only shareholders of record at the close of business on February 16, 1996, shall be entitled to notice of the meeting and to vote at the meeting or at any adjournment thereof. By Order of the Board of Directors, /s/ Ian Watson Ian Watson Secretary WE URGE YOU TO MARK, DATE, SIGN, AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE AS PROMPTLY AS POSSIBLE WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. IF YOU DO ATTEND THE MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND VOTE IN PERSON. March 1, 1996 Page 77 2 FIRST-KNOX BANC CORP. ONE SOUTH MAIN STREET BOX 871 MOUNT VERNON, OHIO 43050 MARCH 1, 1996 PROXY STATEMENT GENERAL This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of First-Knox Banc Corp. ("the Corporation") of Proxies in the accompanying form to be voted at the Annual Meeting of Shareholders (the "Annual Meeting") of the Corporation to be held on March 26, 1996, at 3:00 p.m., at Mount Vernon Nazarene College, 800 Martinsburg Road, Mount Vernon, Ohio 43050, and at any adjournments thereof. Only those shareholders of record at the close of business on February 16, 1996, will be entitled to vote at the Annual Meeting. This Proxy Statement and Proxy are first being sent to shareholders on or about March 1, 1996. All costs of solicitation of the Proxies will be borne by the Corporation. Solicitation will be made by mail. Proxies may be further solicited by officers, directors, or employees of the Corporation by telephone, written communication or in person. Any such officers, directors, or employees of the Corporation soliciting proxies shall receive no compensation beyond their normal compensation for performing such services. The Corporation will reimburse banks, brokerage firms, and other custodians, nominees, and fiduciaries for expenses reasonably incurred by them in sending proxy materials to the beneficial owners of common shares of the Corporation ("Common Shares"). No solicitation is to be made by specially engaged employees or other paid solicitors. VOTING The holder of each Common Share is entitled to one vote on all matters including the election of Directors. A shareholder, without affecting any vote previously taken, may revoke the shareholder's Proxy by giving notice to the Corporation in writing or in open meeting. Presence at the Annual Meeting does not in and of itself revoke a Proxy. In the election of Directors each shareholder may cumulate the shareholder's votes if notice in writing has been given by any shareholder to the Corporation before 3:00 p.m. on March 24, 1996, of the shareholder's desire that the election shall be by cumulative voting and if an announcement of such notice is made upon the convening of the meeting. If cumulative voting is demanded, each shareholder will be entitled to multiply the shareholder's total number of shares held by the number of Directors being elected and then allocate these votes among the nominees as the shareholder sees fit. Also, if cumulative voting is involved, the enclosed Proxy would grant discretionary authority to the proxies named therein to cumulate votes and to distribute such votes to any one or more candidates as they see fit. In the case of either cumulative or non-cumulative voting, the persons receiving the largest number of votes in each class of Directors being elected will be elected. Common Shares as to which the authority to vote is withheld and broker non-votes would not be counted toward the election of the individual nominees specified in the Proxy. 1 Page 78 3 CERTAIN BENEFICIAL OWNERS The following table sets forth, as of January 1, 1996, certain information with respect to the only persons known to the Corporation to be the beneficial owners of more than five percent (5%) of the outstanding Common Shares of the Corporation.
Percent of Name and Address of Number of Shares Common Beneficial Owner Beneficially Owned (1) Shares (2) - --------------------- ---------------------- ---------- Russell E. Ramser, Jr. 227,371 (3) 6.38 20718 Danville-Amity Road Mount Vernon, Ohio 43050 The First-Knox National Bank 190,023 (4) 5.33 (the "Bank") Trust Department, Trustee One South Main Street Mount Vernon, Ohio 43050 (1) Unless otherwise noted, represents sole voting and investment power. (2) The percent of Common Shares is based upon the sum of (i) 3,560,260 Common Shares outstanding as of January 1, 1996 and (ii) the number of Common Shares as to which the named person has the right to acquire beneficial ownership upon exercise of presently-exercisable stock options. (3) Includes 11,854 Common Shares owned by Mr. Ramser's wife and 1,000 Common Shares which Mr. Ramser has the right to acquire beneficial ownership upon exercise of presently-exercisable stock options. (4) Includes 71,601 Common Shares, 94,809 Common Shares, 16,438 Common Shares, and 7,175 Common Shares as to which the trust department has sole voting and investment power, sole voting and shared investment power, sole voting and no investment power, and shared voting and investment power, respectively.
2 Page 79 4 ELECTION OF DIRECTORS The Board of Directors consists of twelve (12) directors divided into three (3) classes. The terms of office of five (5) directors of one class expire at the Annual Meeting. The Code of Regulations of the Corporation (the "Regulations") provides that the Board of Directors shall be divided into three (3) classes and that each class consist of an equal number of directors. In order to equalize the number of directors in each class, Mr. George T. Culbertson, Jr. has been nominated to stand for election for a two (2) year term until the Annual Meeting of Shareholders in 1998, and until his successor is elected and qualified. The other four (4) Directors whose terms expire at the Annual Meeting have been nominated to serve three (3) year terms until the Annual Meeting of Shareholders in 1999, and until their respective successors are elected and qualified. It is the intention of the persons named in the Proxy to vote for the election of the five (5) nominees named below unless the Proxy otherwise directs. All nominees are presently members of the Board of Directors. All of the nominees have stated their willingness to serve and no reason is presently known why any of the nominees would be unable to serve as a Director. There are no family relationships among the executive officers and/or Directors of the Corporation. Each of the nominees and Directors listed below has furnished to the Corporation the information set forth with respect to his principal occupation or employment and his beneficial ownership of securities.
Common Shares Beneficially Percent of Principal Occupation Owned Common Director Name and Age Since 1991 1/1/96 (1) Shares (2) Since - ------------ -------------------- ------------ ---------- -------- NOMINEE FOR ELECTION FOR TERM EXPIRING IN 1998 George T. Culbertson, Jr. Retired. Until 12/92, 9,337 (3) * 1985 Age 71 Chairman of the Board, Progressive Communica- tions Corp. (publisher of Mount Vernon News) NOMINEES FOR ELECTION FOR TERM EXPIRING IN 1999 James J. Cullers Senior Partner, Zelkowitz, 40,033 (4) 1.12 1985 Age 65 Barry & Cullers (attorneys & general legal counsel for the Bank) Philip H. Jordan, Jr. Chairman of the Board of 3,446 * 1985 Age 64 the Bank. Retired. Prior to 6/95, President, Kenyon College
3 Page 80 5
Common Shares Beneficially Percent of Principal Occupation Owned Common Director Name and Age Since 1991 1/1/96 (1) Shares (2) Since - ------------ -------------------- ------------ ---------- -------- Noel C. Parrish President, NOE, Inc. 27,274 (5) * 1985 Age 58 (aircraft insurance financing). Until 1991, President, Parrish-O'Neill & Assoc., Inc. Carlos E. Watkins President and CEO of the 60,341 (6) 1.69 1987 Age 59 Corporation and Bank DIRECTORS WHOSE TERMS EXPIRE IN 1998 John B. Minor Retired. Pesident Coca- 60,179 (7) 1.69 1985 Age 72 Cola bottling Company of Mount Vernon prior to 1986 Russell E. Ramser, Jr. Vice Chairman of the 227,371 (8) 6.38 1992 Age 67 Board of the Corporation, President, Maram Energy (oil/gas exploration and production) Alan E. Riedel Retired. Prior to 3/94, 7,699 (9) * 1994 Age 65 Vice Chairman, Cooper Industries. Prior to 1992, a Director and Senior Vice President, Administration, Cooper Industries DIRECTORS WHOSE TERMS EXPIRE IN 1997 Robert S. Gregg President, Phoenix 31,441 (10) * 1985 Age 72 Holding Company. Prior to 1995, President, Gregg Manufacturing Co. (manufacturer of lighting fixtures) James A. McElroy Chairman of the Board, 52,289 (11) 1.47 1985 Age 63 AMG Industries. Until 1991, President, AMG Industries
4 Page 81 6
Common Shares Beneficially Percent of Principal Occupation Owned Common Director Name and Age Since 1991 1/1/96 (1) Shares (2) Since - ------------ -------------------- ------------ ---------- -------- William A. Stroud Chairman of the Board 69,400 (12) 1.95 1985 Age 75 of the Corporation. CEO of the Corporation until 3/21/89 Stephen P. Upham, Jr. Entrepreneur (real 39,936 (13) 1.12 1985 Age 74 estate development and management of Essup Park, an industrial park) Executive Officers and Directors As a Group (14 persons) 684,086 (14) 19.04 * Represents less than 1% of class. (1) Represents sole voting and investment power except as otherwise indicated. For each Director except Mr. Watkins, includes 1,000 Common Shares which each Director has the right to acquire beneficial ownership upon exercise of presently-exercisable stock options. (2) The percent of Common Shares is based upon the sum of (i) 3,560,260 Common Shares outstanding as of January 1, 1996 and (ii) the number of Common Shares as to which the named person has the right to acquire beneficial ownership upon conversion of presently-exercisable stock options. (3) Includes 478 Common Shares owned by Mr. Culbertson's wife and 6,000 Common Shares held in a trust of which Mr. Culbertson is the beneficiary. (4) Includes 824 Common Shares owned by Mr. Cullers' wife and 6,290 Common Shares held in a trust of which Mr. Cullers is the beneficiary. Includes 29,635 Common Shares held in trusts in which Mr. Cullers has voting and investment power. (5) Includes 14,233 Common Shares owned by Mr. Parrish's wife. (6) Includes 3,385 Common Shares owned by Mr. Watkins' wife. Includes 19,418 Common Shares which Mr. Watkins has the right to acquire beneficial ownership upon exercise of presently-exercisable stock options and 850 Common Shares held in an account for Mr. Watkins' benefit under the Corporation's Savings Retirement Plan. (7) Includes 13,309 Common Shares held in a trust of which Mr. Minor is the beneficiary. (8) Includes 11,854 Common Shares owned by Mr. Ramser's wife. (9) Includes 413 Common Shares owned by Mr. Riedel's wife as to which Mr. Riedel disclaims beneficial ownership. (10) Includes 7,716 Common Shares owned by Mr. Gregg's wife and 939 Common Shares held by Mr. Gregg as custodian for his children. (11) Includes 30,389 Common Shares held in a trust of which Mr. McElroy is the beneficiary and 17,177 Common Shares owned by AMG Industries, Inc., a corporation controlled by Mr. McElroy, and 907 Common Shares owned by Mr. McElroy's wife. (12) Includes 30,580 Common Shares owned by Mr. Stroud's wife. (13) Includes 33,776 Common Shares held in a trust of which Mr. Upham is the beneficiary, and 5,160 Common Shares owned by Mr. Upham's wife. (14) See notes (1) through (13). Includes 33,034 Common Shares which the executive officers of the Corporation as a group have the right to acquire upon exercise of presently-exercisable stock options.
5 Page 82 7 NOMINATION OF DIRECTORS Article III of the Regulations prescribes the method for a shareholder to nominate a candidate for election to the Board of Directors. Nominations, other than those made by or on behalf of the existing Board of Directors of the Corporation, must be made in writing and must be delivered or mailed to the President of the Corporation and to the Chairman, Federal Reserve Board, Washington, D. C., not less than 14 days, nor more than 50 days, prior to any meeting of shareholders called for the election of Directors. Such notification must contain the following information: a. Name and address of each proposed nominee. b. Principal occupation of each proposed nominee. c. Total number of shares of capital stock of the Corporation that will be voted for each proposed nominee. d. Name and residence address of the notifying shareholder. e. Number of shares of capital stock of the Corporation owned by the notifying shareholder. As of the date of this Proxy Statement, no persons have been so nominated for election at this Annual Meeting. THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD The Board of Directors meets quarterly and on other occasions when required by special circumstances. The Board of Directors of the Corporation held eight (8) meetings during the fiscal year ended December 31, 1995. Each director attended at least 75% of the aggregate of the number of Board of Directors meetings and the number of meetings of all committees on which he served during the year, except for Messrs. Culbertson, Gregg and McElroy. Messrs. Ramser, Culbertson, Gregg and Upham serve on the Audit Committee of the Corporation, which met three (3) times in 1995. The Audit Committee makes recommendations to the Board of Directors concerning the selection and engagement of the Corporation's independent auditors. It meets with the independent auditors to discuss and review the annual audit. It also reviews reports by the internal auditor to the Audit Committees of subsidiaries on departmental and branch operations. The Corporation also has a Planning and Budget Committee, a Stock Option Committee, and a Personnel Committee. The Personnel Committee and Stock Option Committee each play a role in reviewing and recommending compensation policies and plans for the Corporation and its affiliates. The Stock Option Committee, comprised of Messrs. Cullers, Stroud, Ramser and Riedel, met two (2) times during 1995. The Personnel Committee, the members of which are Messrs. Cullers, Ramser, Stroud and Jordan, met eleven (11) times during 1995. The Corporation does not have a standing nominating committee. 6 Page 83 8 REMUNERATION OF DIRECTORS AND OFFICERS EXECUTIVE COMPENSATION The following table sets forth, for the three (3) fiscal years ended December 31, 1995, cash and non-cash compensation paid by the Bank to Carlos E. Watkins, President and CEO of the Corporation and the Bank and the only executive officer of the Corporation to earn salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE - -------------------------------------------------------------------------------------------- Long-Term Annual Compensation Compensation - -------------------------------------------------------------------------------------------- Awards Name and ------- All Other Principal Position Year Salary Bonus (1) Options/SARs (#) Compensation - -------------------------------------------------------------------------------------------- Carlos E. Watkins, 1995 $156,465 $39,000 -- $2,772 (2) President and CEO 1994 149,264 7,500 7,778 (3) 2,772 (2) of the Corporation 1993 144,264 36,041 -- 3,033 (4) and Bank (1) All bonuses reported were earned by Mr. Watkins pursuant to the incentive compensation plan of the Corporation and its affiliate banks (the "Incentive Compensation Plan"). Bonus amounts are determined and paid in the year following the year in which they are earned. Such bonus amounts are reported in the Summary Compensation Table in the year in which they were earned. (2) Includes contributions of $2,772 to the Company's Savings Retirement Plan (the "Savings Retirement Plan") made on behalf of Mr.Watkins to match pre-tax elective deferral contributions in 1995 and 1994, respectively. (3) The award was originally granted in regard to 3,704 Common Shares. That number subsequently was adjusted to reflect a distribution in the nature of a five percent (5%) stock dividend paid to all shareholders of the Corporation on October 24, 1994 and a one hundred percent (100%) stock dividend paid to all shareholders of the Corporation on September 1, 1995. (4) Includes contributions of $2,698 to the Savings Retirement Plan made on behalf of Mr. Watkins to match 1993 pre-tax elective deferral contributions and a contribution of $335 to the Savings Retirement Plan made on behalf of Mr. Watkins pursuant to a one-time discretionary contribution of 10 Common Shares to each participant of the Savings Retirement Plan.
7 Page 84 9 GRANT OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS During 1995, no stock options or stock appreciation rights were granted to Mr. Watkins. STOCK OPTION AND STOCK APPRECIATION RIGHTS AND EXERCISES AND HOLDINGS The following table sets forth certain information concerning the value at December 31, 1995 of unexercised options and SARs held by Mr. Watkins pursuant to the First-Knox Banc Corp. 1990 Non-Qualified Stock Option and Stock Appreciation Rights Plan. Mr. Watkins did not exercise any options or SARs during 1995.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES FY-End Value $25.00 Number of Value of Shares Underlying Unexercised Unexercised In-The-Money Options/SARs Options/SARs At FY-End (#) at FY-End ($) Shares Acquired on Value Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------ Carlos E. Watkins - 0 - - 0 - 23,301 17,041 $330,748 $153,498
DIRECTOR COMPENSATION Directors who are not employees of the Corporation or its subsidiaries receive a fee of $3,000 per year plus $300 for each Board meeting and each Board committee meeting attended. Directors traveling from out of state to attend Board meetings and each Board committee meeting are reimbursed for reasonable travel expenses incurred. Under the First Knox Banc Corp. 1995 Stock Option and Stock Appreciation Rights Plan, Directors, other than those employed by the Corporation (the "Non-Employee Directors"), are entitled to receive an annual grant on the first business day following the date of each annual meeting of shareholders of an option (the "Company Director Option") to purchase 1,000 Common Shares at an exercise price equal to the fair market value of the underlying Common Shares on the date of grant. Company Director Options granted to Non-Employee Directors become exercisable immediately upon grant and remain exercisable until the earlier to occur of the following two (2) dates (i) the tenth anniversary of the date of grant of such Company Director Option or (ii) three (3) months (twelve months in the case of a Non-Employee Director who becomes disabled, as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), or who dies) after the date the Non-Employee Director ceases to be a member of the Board, except that if the Non-Employee Director ceases to be a member of the Board after having been convicted of, or pled guilty or nolo contendere to, a felony, his Company Director Option would be canceled on the date he ceases to be a member of the Board. 8 Page 85 10 EMPLOYEES' RETIREMENT PLAN The following table shows the estimated annual benefits payable under The First-Knox National Bank Employees Retirement Plan (the "Pension Plan") upon retirement for specified periods of service and levels of remuneration. The calculations assume that the person elects the annuity basis providing the maximum monthly payments without benefits to a surviving spouse.
PENSION PLAN TABLE Remuneration Years of Service - --------------------------------------------------------------------------------------------- 15 20 25 30 35 or More --- -- --- --- ---------- $250,000 $45,683 $60,431 $63,929 $67,427 $70,925 225,000 45,683 60,431 63,929 67,427 70,925 200,000 45,683 60,431 63,929 67,427 70,925 175,000 45,683 60,431 63,929 67,427 70,925 150,000 45,683 60,431 63,929 67,427 70,925 125,000 37,916 50,074 52,858 55,641 58,425 100,000 30,148 39,717 41,786 43,856 45,925
The Pension Plan provides for defined benefits upon retirement based on years of service, attaining the age of 65 and salary level. The Pension Plan also provides early retirement benefits and surviving spouses' benefits after satisfying certain requirements. No reduction in benefits is made as a result of Social Security benefits received. The monthly retirement benefit is equal to 30% of average monthly compensation reduced proportionately, if the employee has less than 20 years of service at normal retirement, plus 20% of average monthly compensation greater than the Social Security covered compensation level. The monthly retirement benefit is further reduced proportionately if the employee has less than 35 years of service at normal retirement. Certain limitations are imposed on the maximum benefit payable under the Pension Plan pursuant to Section 415 of the Code. The benefit is payable as a 5 year certain or life annuity. Average monthly compensation is defined as the average of the highest five consecutive years of compensation out of the last ten years worked. Mr. Watkins has eight (8) years of service credited to him under the Pension Plan. He will be eligible to retire and receive benefits under the Pension Plan when he attains age 65. Compensation utilized for pension formula purposes includes only the salary and annual bonus reported in the Salary and Bonus columns of the Summary Compensation Table. The Bank has purchased a life insurance policy on the life of Mr. Watkins. Under such policy, and a related agreement, Mr. Watkins or his beneficiary will receive an annual payment of $25,000 for ten years beginning the month following Mr. Watkins' 65th birthday if he is employed by the Bank at such time. If Mr. Watkins dies prior to age 65 or he is no longer an employee of the Bank on his 65th birthday, the Bank is entitled to the proceeds of the policy. The insurance policy is maintained as a supplemental retirement benefit to Mr. Watkins. The total cash surrender value of the policy is an asset of the Corporation to which Mr. Watkins has no right or interest. 9 Page 86 11 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Corporation does not have a Compensation Committee, but does have a Personnel Committee. The members of the Personnel Committee are Messrs. Cullers, Ramser, Stroud and Jordan, each of whom is an outside Director. The function of the Personnel Committee is to review officer compensation and corporate benefit plans, and to forecast future personnel needs of the Corporation and its affiliates. The Corporation also has a Stock Option Committee, which administers the First-Knox Banc Corp. 1990 Non-Qualified Stock Option and Stock Appreciation Rights Plan (this plan expired on March 27, 1995) and the First-Knox Banc Corp. 1995 Stock Option and Stock Appreciation Rights Plan (collectively, the "Stock Option Plans"). The members of the Stock Option Committee are Messrs. Cullers, Ramser, Stroud and Riedel, each of whom is an outside Director. Mr. Cullers is a senior partner in the law firm of Zelkowitz, Barry & Cullers which serves as general legal counsel for the Bank. The Bank paid $47,415 to Zelkowitz, Barry & Cullers for its legal services in fiscal year 1995. Zelkowitz, Barry & Cullers has served as legal counsel for the Bank for the past several years and will be retained in that capacity in the future. Mr. Stroud is a former officer of the Corporation and the Bank. REPORT OF STOCK OPTION COMMITTEE AND PERSONNEL COMMITTEE ON EXECUTIVE COMPENSATION Notwithstanding anything to the contrary set forth in any of the Corporation's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings, including this Proxy Statement, in whole or in part, this Report and the graph set forth on page 13 shall not be incorporated by reference into any such filings. DECISION-MAKING PROCESS. The executive officers of the Corporation receive no compensation from the Corporation. Instead, they are paid by the Bank for services rendered in their capacity as executive officers of the Corporation and the Bank. The Board of Directors of the Corporation has a four-member Personnel Committee, all of whom are outside Directors, which reviews and recommends officer compensation and corporate benefit plans and forecasts future personnel needs of the Corporation and its affiliates. The Board of the Corporation also has a Stock Option Committee, all of the members of which are outside Directors, which administers the Stock Option Plans. The Board of Directors of the Bank has a Personnel Committee, two of the four members of which are members of the Personnel Committee of the Corporation and all of the members of which are outside Directors of the Bank. Executive officer compensation levels, including that of the CEO, are compared annually with independent surveys of the banking industry. The surveys utilized include banks of comparable size, market and geographic characteristics to the Corporation and the Bank. The surveys do not include the banks included in the KBW 50 Index referenced at page 13 hereof inasmuch as the banks in the KBW 50 Index are larger than the Corporation and the Bank. Based upon the median values indicated by these surveys, as well as the particular executive officer's individual contribution to the Corporation and the Bank, the skills and experiences required by the job, and the potential of the executive officer, recommenda- 10 Page 87 12 tions are made by the Personnel Committees of the Corporation and the Bank, which recommendations are reviewed and approved by the Board of Directors of the Bank. During 1995, no decisions of the Committees were modified in any material way or rejected by the Bank Board. PHILOSOPHY AND CEO COMPENSATION. The compensation philosophy of the Corporation and its affiliate banks reflects a commitment to reward executive officers for performance through cash compensation and stock options. The cash compensation program for executive officers consists of two elements, a base salary component and an incentive component payable under the Incentive Compensation Plan. The combination of base salary and incentive compensation is designed to relate total compensation levels to the performance of the Corporation, its affiliates and the individual executive officer. The stock option program is designed to encourage and create ownership and retention of the Corporation's stock by key employees, thereby aligning the long-range interests of key employees with those of the Corporation's shareholders. The objectives of the Incentive Compensation Plan are to motivate officers and reward the accomplishment of annual objectives of the Corporation and its affiliates; reinforce a strong performance orientation with differentiation and variability in individual awards based on contribution to annual and long-range business results; and provide a fully competitive compensation package which will attract, reward, and retain individuals of the highest quality. For executive officers of the Corporation, including the CEO, incentive awards are determined as a percentage of annual base salary, which percentage ranges from zero to fifty percent and are calculated utilizing a corporate goals factor and a performance factor. The corporate goals factor is based one-third upon the achievement of increased earnings and two-thirds upon return on beginning equity of the Corporation and the Bank. The components of this factor must exceed predetermined threshold levels before any executive incentive compensation is considered. The determination of the performance factor entails both an objective and subjective analysis of the executive officer's performance during the year. Once the threshold for the corporate goals factor has been attained, the corporate goals factor and the performance factor are equally weighted. The Incentive Compensation Plan awards for 1995 were paid in 1996. The decision-making process and compensation philosophy of the Corporation and the Bank were applied by the Personnel and Stock Option Committees when determining 1995 compensation for Mr. Watkins. The Committees believe that the base salary earned by Mr. Watkins in 1995 was fair and reasonable based upon the performance of the Corporation and the Bank (for example, increased profitability over the previous fiscal year and strong return on equity, return on assets and loan quality as compared to comparable banks and bank holding companies) and when compared with executive compensation levels in the banking industry as reported by the independent surveys referenced above. Mr. Watkins' base salary for 1995 approximated the median of the base salaries reported in those surveys. The base salary earned by Mr. Watkins in 1995 also reflects the significant management and leadership responsibilities required of Mr. Watkins in his position as CEO and the effective manner in which Mr. Watkins fulfilled such responsibilities. 11 Page 88 13 Mr. Watkins is rewarded through the Incentive Compensation Plan for his contribution to the Corporation's and the Bank's performance and operating results in the same manner as other executive officers. (See discussion above.) Incentive compensation earned by Mr. Watkins in 1995 was determined as a percentage of his annual base salary based upon the amount by which the corporate goals factor criteria were exceeded and the achievement of the performance factor criteria established for Mr. Watkins. In determining Mr. Watkins' 1995 incentive compensation, the Committees took into consideration the following factors: (1) the Corporation's and the Bank's threshold corporate goals factor criteria for increased earnings and return on equity were surpassed; (2) the market price of the Common Shares increased during 1995; and (3) a positive evaluation by the Committees of Mr. Watkins' performance with respect to performance factors during 1995. The combination of these factors enabled the Committees to award Mr. Watkins with incentive compensation of approximately one-half of the total amount of maximum compensation available to the CEO under the Incentive Compensation Plan. The Incentive Compensation Plan award earned by Mr. Watkins in 1995 was paid in 1996. THE STOCK OPTION COMMITTEE THE PERSONNEL COMMITTEE OF THE CORPORATION OF THE CORPORATION James J. Cullers James J. Cullers Russell E. Ramser, Jr. Philip H. Jordan, Jr. Alan E. Riedel Russell E. Ramser, Jr. William A. Stroud William A. Stroud 12 Page 89 14 COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG FIRST-KNOX BANC CORP., S&P 500 INDEX AND KBW 50 INDEX The following graph sets forth a comparison of five year cumulative total return among the Common Shares, the S&P 500 Index and the Keefe, Bruyette & Woods, Inc. KBW 50 Index (the "KBW 50 Index") for the fiscal years indicated. Information reflected on the graph assumes an investment of $100 on December 31, 1990 in each of the Common Shares, the S&P 500 Index and KBW 50 Index. Cumulative total return assumes reinvestment of dividends. The KBW 50 Index represents stock price performance of fifty of the nation's large banks, as selected by Keefe, Bruyette & Woods, Inc. The Corporation is not among the fifty banking companies included in the KBW 50. The Corporation has not identified any published index of stock performance which includes the Corporation or banking companies comparable to it.
FIRST-KNOX PERFORMANCE CALCULATION DATE INDEX VALUE KBW INDEX VALUE S & P IN 1995 1995 1995 12/31/90 100.00 100.00 100.00 06/30/91 101.42 134.26 114.28 12/31/91 109.34 158.27 130.48 06/30/92 116.19 179.45 129.60 12/31/92 128.58 201.68 140.41 06/30/93 136.10 216.35 147.26 12/31/93 161.09 212.85 154.56 06/30/94 222.81 224.77 149.88 12/31/94 223.47 201.99 158.80 06/30/95 231.15 261.79 186.26 12/31/95 277.19 323.52 215.45
13 Page 90 15 INDEBTEDNESS OF AND TRANSACTIONS WITH MANAGEMENT During 1995 and up to the present date, some of the directors and officers of the Corporation and its subsidiaries were customers of and had banking transactions with the Bank and The Farmers and Savings Bank, both of which are subsidiaries of the Corporation. All of these transactions were in the ordinary course of each bank's business. All loans and commitments to loan included in such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and, in the opinion of the management of the Corporation, do not involve more than a normal risk of collectibility or present other unfavorable features. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Corporation's officers and directors, and persons who own more than ten percent (10%) of the Common Shares to file reports of ownership and changes in ownership on Forms with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than ten percent (10%) shareholders are required by SEC regulation to furnish the Corporation with copies of all such Forms. Based on the Corporation's review of the copies of such Forms, the Corporation believes that all its officers, directors and greater than ten percent (10%) shareholders complied with all filing requirements applicable to them with respect to transactions during 1995 and through the present date. AUDITING MATTERS Pursuant to the recommendation of its Audit Committee, the Board of Directors of the Corporation has retained Crowe, Chizek and Company, LLP, as independent auditors for the Corporation and its subsidiaries for the year ending December 31, 1996. In addition to services rendered in connection with their audit function, Crowe, Chizek and Company reviews and assists with the filing of the Corporation's federal income tax returns. It is anticipated that a representative of Crowe, Chizek and Company will be present at the Annual Meeting and have the opportunity to make a statement if desired and will be available to respond to appropriate questions. OTHER MATTERS The Board of Directors is not aware of any other matters which may come before the Annual Meeting. However, if any other matters requiring a vote of shareholders are properly presented to the meeting, it is intended that proxies in the accompanying form will be voted on such other matters in accordance with the recommendations of the Board of Directors or in accordance with the best judgment of the proxy holders on such matters. 14 Page 91 16 ANNUAL REPORT The 1995 Annual Report, including the required audited financial statements of the Corporation and related financial information, is enclosed with this proxy soliciting material. A COPY OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K INCLUDING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST BY A SHAREHOLDER. PLEASE ADDRESS YOUR REQUEST TO IAN WATSON, SECRETARY, FIRST-KNOX BANC CORP., BOX 871, MOUNT VERNON, OHIO 43050, TELEPHONE 614/399-5500 OR 800/837-5266. PROPOSALS BY SHAREHOLDERS FOR 1997 MEETING If any shareholder of the Corporation wishes to submit a proposal to be included in next year's Proxy Statement and acted upon at the annual meeting of the Corporation to be held in 1997, the proposal must be received by the Corporation prior to the close of business on November 4, 1996. MISCELLANEOUS You are urged to mark, date, sign, and return your proxy promptly. For your convenience, a self-addressed envelope is enclosed on which no postage is required if mailed in the United States. By Order of the Board of Directors, /s/ Ian Watson Ian Watson Secretary March 1, 1996 15 Page 92 17 PLEASE MARK, DATE, SIGN, AND RETURN IMMEDIATELY FIRST-KNOX BANC CORP. PROXY FOR ANNUAL MEETING OF SHAREHOLDERS - MARCH 26, 1996 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS Know all men by these presents, that I, the undersigned shareholder of First-Knox Banc Corp. (the "Corporation") do hereby nominate, constitute, and appoint L. Bruce Levering, Wendell W. McCoy, and Richard B. Murray, and each of them (with full power to act alone) my true and lawful proxy with full power of substitution, for me and in my name, place and stead to vote all the common shares of the Corporation standing in my name on its books on February 16, 1996, at the Annual Meeting of its Shareholders to be held at Mount Vernon Nazarene College, 800 Martinsburg Road, Mount Vernon, Ohio, on March 26, 1996, at 3:00 p.m. or any adjournment thereof, with all powers the undersigned would possess if personally present, as follows: 1A. To elect four (4) directors, each to hold office for a term of three (3) years until the Annual Meeting of Shareholders in 1999, and until their respective successors are elected and qualified. [ ] FOR ALL NOMINEES LISTED BELOW (except as indicated below)* [ ] WITHHOLD AUTHORITY to vote for all nominees listed below James J. Cullers, Philip H. Jordan, Jr., Noel C. Parrish, Carlos E. Watkins *(INSTRUCTIONS: TO WITHHOLD AUTHORITY FOR ANY NOMINEE, WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.) - -------------------------------------------------------------------------------- 1B. To elect one (1) director to hold office for a term or two (2) years until the 1998 Annual Meeting of Shareholders in 1998, and until his respective successor is elected and qualified. [ ] FOR THE NOMINEE LISTED BELOW [ ] WITHHOLD AUTHORITY to vote for the nominee listed below George T. Culbertson, Jr. (Continued, and to be signed on reverse side) 18 2. In their discretion, the proxies are authorized to vote upon such other business as may properly be brought before the meeting or any adjournment thereof. The Board of Directors at present knows of no other business to be presented by or on behalf of the Corporation or its Board of Directors at the meeting. This proxy will be voted as specified. UNLESS SPECIFIED, THE PROXY WILL BE VOTED FOR ALL NOMINEES NAMED IN PROPOSAL NUMBER 1A AND 1B, IF ANY OTHER BUSINESS IS PRESENTED AT SAID MEETING, THIS PROXY SHALL BE VOTED IN ACCORDANCE WITH THE DIRECTIONS OF THE BOARD OF DIRECTORS. The Board of Dirctors recommends a vote "FOR" each of the nominees listed. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS and may be revoked prior to its exercise. All previous proxies given by the undersigned are hereby revoked. DATE__________________ ______________________________ Signature ______________________________ Signature All joint owners must sign. When signing as attorney, executor, administrator, trustee, or guardian, please give full title. If more than one trustee, all should sign. Please sign, date, and return your Proxy promptly in the enclosed envelope. [ ] I PLAN TO ATTEND THE ANNUAL MEETING. Page 93 -----END PRIVACY-ENHANCED MESSAGE-----