-----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, ITbBujddcpB+BiZfcpsII4MlSggmDsyiuqh31LQn1GrTozt5efsak0d9v4/ZHMuk 0EFXAPwoZDRpEyQ/MqxUQw== 0000950152-97-002392.txt : 19970329 0000950152-97-002392.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950152-97-002392 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13161 FILM NUMBER: 97567324 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-K 1 FIRST-KNOX BANC CORP. 10-K 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, 1996 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 [ ]. The aggregate market value (determined by closing Nasdaq price) of the voting stock held by non-affiliates of the registrant as of March 21, 1997: $101,439,084 Common Stock Par Value: $3.125 per share Common shares outstanding at March 21, 1997: 3,756,976 shares DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1996, and Joint Proxy Statement/Prospectus dated March 20, 1997, are incorporated by reference into Parts I, II and III. Page 1 of 58 Pages Exhibit Index Appears on Page 15 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 70.0% in 1996, 71.7% in 1995 and 71.4% in 1994 of total consolidated revenues. Revenues from investments and mortgage-backed securities accounted for 21.5% in 1996, 19.9% in 1995 and 20.6% in 1994 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. On October 28, 1996 the Corporation entered into an Agreement and Plan of Merger ("Agreement") with Park National Corporation ("Park National"), a bank holding company headquartered in Newark, Ohio, whereby Park National will acquire First-Knox Banc Corp. Under the terms of the Agreement, Park National will exchange approximately 0.5914 shares of Park National common stock for each share of First-Knox Banc Corp. outstanding in a tax-free exchange. Park National expects to issue an aggregate of 2,345,000 shares of common stock to complete the merger, which is expected to be accounted for as a pooling-of-interests. The exact exchange ratio will be determined by a formula that is based upon, among other things, the market price of Park National common stock and the number of shares of First-Knox Banc Corp. common stock outstanding or subject to options prior to closing. The transaction is subject to certain conditions including regulatory approval and the approval of the shareholders of First-Knox Banc Corp. and Park National. 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, 1996, First-Knox had assets of $516.0 million, loans of $318.4 million, and deposits of $378.5 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 Danville, and one branch is located in Centerburg, each providing walk-in, drive-through and automated teller machine facilities. 2 3 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, 1996, First-Knox had 180 full-time and 62 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 90% 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, 1996, Farmers had assets of $60.4 million, loans of $43.5 million, and deposits of $54.7 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 offices 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, 1996, Farmers had 27 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 10% 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 25) of the Annual Report to Shareholders for the fiscal year ended December 31, 1996 ("1996 Annual Report") included as Exhibit 13 hereto and incorporated herein by reference. 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 adverse 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 3 4 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. 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, 1996, as disclosed in Note 14 (page 20) of the Corporations's 1996 Annual Report (See Exhibit 13). At least half of the total required 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 and certain other intangible assets ("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 4 5 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 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, 1996 Annual Report page 1, Comparative Stock Data and page 20, Note 14 and Item 5., which are herein incorporated by reference. DEPOSIT INSURANCE ASSESSMENTS AND RECENT LEGISLATION The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). First-Knox and Farmers are members of the BIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable period of time and may decrease such rates if such target rates if such target level has been met. The FDIC has established a risk-based assessment system for both BIF and SAIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Because BIF became fully funded, BIF assessments for healthy commercial banks were reduced to, in effect, $2,000 per year during 1996. Federal legislation, which became effective September 30, 1996, provides, among other things, for the costs of prior thrift 5 6 failures to be shared by both the SAIF and the BIF. As a result of such cost sharing, BIF assessments for healthy banks during 1997 will be $.013 per $100 in deposits. 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. 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 1996 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, 1996, 1995 and 1994, as required is included in Table II "Average Balances and Analysis of Net Interest Income" on page 27 of the Corporation's 1996 Annual Report (See Exhibit 13) which is herein incorporated by reference. The analysis of the changes in interest income and expense from 1995 to 1996 and from 1994 to 1995 is included in Table III "Rate and Volume Analysis of Changes in Interest Income and Interest Expense" on page 28 of the Corporation's 1996 Annual Report (See Exhibit 13) which is herein incorporated by reference. II. Investment Portfolio A schedule of the carrying value of securities available for sale and related information on fair values, maturities and average yields is included in Table IV "Securities Available for Sale" on page 29 of the Corporation's 1996 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, 1996. 6 7 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, 1996, 1995 and 1994, as required, are included in Table I "Financial Ratios For Five Years" on page 25 of the Corporation's 1996 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. Item III, Loan Portfolio; Item IV, Summary of Loan Loss Experience; and Item V, Deposits, are incorporated by reference to Appendix D of the Park National Corporation and First-Knox Banc Corp. Joint Proxy Statement/Prospectus dated March 20, 1997 (exhibit 99). 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 34 of the Corporation's 1996 Annual Report (Exhibit 13), which is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS The Corporation's subsidiaries had various claims and lawsuits pending at December 31, 1996, arising out of the ordinary course of their 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. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS See: 1996 Annual Report, page 1 - Comparative Stock Data, and page 20 - Note 14, which are incorporated herein by reference (See Exhibit 13). 7 8 ITEM 6. SELECTED FINANCIAL DATA See: 1996 Annual Report, page 25 Table I, "Financial Ratios for Five Years," and page 32 Table VI, "Ten Years of Progress Statement Summary," which are incorporated herein by reference (See Exhibit 13). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See: 1996 Annual Report, pages 25 through 32, "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 1996 Annual Report to Shareholders for the fiscal year ended December 31, 1996 (pages 7-23), and the report of Crowe, Chizek and Company LLP (page 24) 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 included in Note 18 (page 23) of the Annual Report. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Information regarding directors and executive officers also serving as directors is set forth in the Park National Corporation and First-Knox Banc Corp. Joint Proxy Statement/Prospectus dated March 20, 1997, (pages 66-68), 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 except for Mr. Parrish, who was late in filing one (1) Form to report ten (10) transactions. The Form subsequently was filed and the Corporation believes all officers, directors, and greater than ten percent shareholders are current regarding their Section 16(a) filings. 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 49 Vice Pres. Vice President and & Treasurer Chief Financial Officer Ian Watson 46 Vice Pres. Vice President of & Secretary Operations, Deposits and Investments
Both Mr. Yance and Mr. Watson have held these positions for more than five years. 8 9 ITEM 11. EXECUTIVE COMPENSATION Information regarding compensation of directors and executive officers including change of control arrangements is set forth in the Park National Corporation and First-Knox Banc Corp. Joint Proxy Statement/Prospectus dated March 20, 1997, (pages 68-69), which is included as Exhibit 99 hereto and incorporated herein by reference. EXECUTIVE COMPENSATION The following table sets forth, for the three (3) fiscal years ended December 31, 1996, 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 bonuses in excess of $100,000. SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------- Long-Term Annual Compensation Compensation - ------------------------------------------------------------------------------------------------- Awards Name and All Other Principal Position Year Salary Bonus(1) Option/SARs(#) Compensation - ------------------------------------------------------------------------------------------------- Carlos E. Watkins, 1996 $163,598 $42,000 4,800 $2,850 (2) President and CEO 1995 156,465 39,000 2,772 (2) of the Corporation 1994 149,264 7,500 8,167(3) 2,772 (2) 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 $2,850, $2,772 and $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 1996, 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 in October, 1994, a one hundred percent (100%) stock dividend paid to all shareholders of the Corporation in September, 1995 and a five percent (5%) stock dividend paid to all shareholders of the corporation in September, 1996. GRANT OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS During 1996 4,000 stock options and 800 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, 1996 of unexercised options and SARs held by Mr. Watkins. Mr. Watkins did not exercise any options or SARs during 1996. 9 10 AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of FY-End Value at $28.25 Shares Underlying Value of Unexercised Unexercised In-The-Money Options/SARs Options/SARs At FY-End (#) at FY-End ($) Shares Acquired on Value Name Exercise (#) Realized ($) Exerciseable Unexerciseable Exerciseable Unexerciseable - --------------------------------------------------------------------------------------------------------------- Carlos E. Watkins -0- -0- 29,329 17,831 $521,756 $181,124
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 -- -- -- -- ---------- $225,000 $ 45,535 $ 60,234 $ 63,682 $ 67,131 $ 70,579 200,000 45,535 60,234 63,682 67,131 70,579 175,000 45,535 60,234 63,682 67,131 70,579 150,000 45,535 60,234 63,682 67,131 70,579 125,000 37,768 49,877 52,611 55,345 58,079 100,000 30,000 39,520 41,539 43,559 45,579
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 benefits 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 reduced proportionately if the employee has less than 35 years of service at normal retirement. Certain limitations are imposed on the maximum benefits payable as a 5 year certain of 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 nine (9) 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. 10 11 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. Watkin's 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 rights or interest. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See: The Park National Corporation and First-Knox Banc Corp Joint Proxy Statement/Prospectus dated March 20, 1997 (pages 31 - 33), which is included as Exhibit 99 hereto and incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See: The Corporation's 1996 Annual Report (Exhibit 13) page 21, Note 15, which is incorporated herein by reference and the Park National Corporation and First-Knox Banc Corp Joint Proxy Statement/Prospectus dated March 20, 1997 (page 69), which is included as Exhibit 99 hereto and incorporated herein by reference. 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, 1996 ------------ (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 24 Consolidated balance sheets - December 31, 1996 & 1995 Page 7 Consolidated statements of income for the years ended December 31, 1996, 1995, and 1994. Page 8 Consolidated statements of changes in shareholders' equity for the years ended December 31, 1996, 1995 and 1994. Page 9 Consolidated statements of cash flows for the years ended December 31, 1996, 1995 and 1994. Page 10 Notes to the consolidated financial statements Pages 11-23 First-Knox Banc Corp: Holding company only financial statements Page 22
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. 11 12 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 herein by Plan dated December 9, 1983. 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 herein by January 1, 1984 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 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 Corporation's Form 10-K for the period ending December 31, 1989 (File No. 0-13161) (1989 Form 10-K)
12 13 10(e) First-Knox Banc Corp. Savings Incorporated herein by Retirement Plan 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 herein by And Stock Appreciation Rights Plan reference to exhibit 10(g) to the March 31, 1995 Form 10-Q 10(h) Amendment to the 1990 Page 55 First-Knox Banc Corp. Stock Option And Stock Appreciation Rights Plan dated May 14, 1996 10(i) Employment Security Agreement, Incorporated herein by dated July 12, 1996, between the reference to exhibit 10(j) First-Knox National Bank of Mount to Park National Corporation Vernon, Ohio and Carlos E. Watkins Form S-4 filed January 24, 1997 (identical agreements were entered (Registration No. 333-2417). into with Gordon E. Yance and Ian Watson) (b) A report on Form 8-K, dated October 28, 1996 was filed regarding the Corporation's entering into an Agreement and Plan of Merger with Park National Corporation of Newark, Ohio. (c) Exhibit List and Index. Page 15
13 14 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, 1997 - -------------------- Carlos E. Watkins, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 28, 1997, by the following persons on behalf of the Registrant and in the capacities indicated. - -s- Philip H. Jordan, Jr. Chairman of the Board of Directors, and Director - -s- Carlos E. Watkins -s- Maureen Buchwald President & Director Director - -s- Robert S. Gregg -s- Noel C. Parrish Director Director - -s- James J. Cullers -s- Kenneth W. Stevenson Director Director -s- Gordon E. Yance Vice President, Treasurer (chief financial officer and chief accounting officer) 14 15 EXHIBIT LIST AND INDEX FIRST-KNOX BANC CORP. FORM 10-K for the Year Ended December 31, 1996 Exhibit
Number Description Location - ------ ----------- -------- 2(a) Agreement and Plan of Merger, dated Incorporated by reference October 28, 1996, between Park to Exhibit 2(a) to Park National Corporation and First-Knox National Corporation's Banc Corp. Registration Statement on Form S-4 filed January 24, 1997 (File No. 333- 20417) 2(b) Amendment to Agreement and Plan of Merger, Incorporated by reference dated October 28, 1996, between Park to Exhibit 2(b) to Park National Corporation and First-Knox National Corporation's Banc Corp. Registration Statement on Form S-4 filed January 24, 1997 (File No. 333-20417) 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
15 16 EXHIBIT LIST AND INDEX FIRST-KNOX BANC CORP. FORM 10-K For the Year Ended December 31, 1996 (Continued) 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 4(b) First-Knox Banc Corp. Dividend Incorporated herein by Reinvestment Plan reference to 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
16 17 EXHIBIT LIST AND INDEX FIRST-KNOX BANC CORP. FORM 10-K For the Year Ended December 31, 1996 (Continued) 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 Sverdrup Building Corporation 10(f)to the 1993 Form 10-K 10(g) First-Knox Banc Corp. Stock Option Incorporated herein by And Stock Appreciation Rights Plan reference to exhibit 10(g) to the March 31, 1995 Form 10-Q 10(h) Amendment to the 1990 Page 55 First-Knox Banc Corp. Stock Option And Stock Appreciation Rights Plan dated May 14, 1996 10(i) Employment Security Agreement, Incorporated herein by dated July 12, 1996, between the reference to First-Knox National Bank of Mount exhibit 10(j) to Vernon, Ohio and Park National (identical agreements were entered Corporation's Registration into with Gordon E. Yance and Ian Statement on Form S-4 filed January 24, 1997 (Registration No. 333-20417).
17 18 EXHIBIT LIST AND INDEX FIRST-KNOX BANC CORP. FORM 10-K For the Year Ended December 31, 1996 (Continued) 11 Statement regarding computation Page 31 - Note 1 to of per share earnings. consolidated financial statements 13 First-Knox Banc Corp. Annual Report Page 19 to Shareholders for the Year Ended December 31, 1996. 21 Subsidiaries of First-Knox Banc Corp. Page 56 23 Consent of Independent Accountants Page 57 27 Financial Data Schedule Page 58 99 Park National Corporation and First- Incorporated herein by Knox Banc Corp. Joint Proxy reference to the Proxy Statement/Prospectus dated March 20, 1997 Statement of First-Knox which is included on pages 1-97 of the Park National Corporation Registration Statement on Form S-4 filed on March 20, 1997 (File No. 333-20417)
EX-10.H 2 EXHIBIT 10.H 1 EXHIBIT 10(h) RESOLUTION REGARDING AMENDMENT TO 1990 NON-QUALIFIED STOCK OPTION AND --------------------------------------------------------------------- STOCK APPRECIATION RIGHTS PLAN ON MAY 14, 1996 ---------------------------------------------- WHEREAS, the Corporation adopted the First-Knox Banc Corp. 1990 Non-Qualified Stock Option and Stock Appreciation Rights Plan ("1990 Option Plan") which was approved by both the Directors and the shareholders of the Corporation; and WHEREAS, the Corporation adopted, in 1995, the First-Knox Banc Corp. Stock Option and Stock Appreciation Rights Plan ("1995 Option Plan"), which was approved by the shareholders of the Corporation at the 1995 Annual Meeting of Shareholders; and WHEREAS, the Directors believe it is appropriate to make the definition of "change in control" consistent between the 1990 Option Plan and the 1995 Option Plan and the definition of change in control as defined in the 1995 Option Plan has been most recently approved by the shareholders of the Corporation, NOW, THEREFORE, BE IT RESOLVED, that the 1990 Option Plan is hereby amended by the elimination of the definition of the term "Change in Control" set forth in section 12(b) of the 1990 Option Plan and by the substitution therefor of the following definition of "Change in Control": "Change in Control" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Exchange Act as in effect on the effective date of the First-Knox Banc Corp. Stock Option and Stock Appreciation Rights Plan (approved by the shareholders of the Corporation on March 28, 1995), or, if Item 6(e) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the Exchange Act which serve similar purposes; provided that, without limitation, such a Change in Control shall be deemed to have occurred upon the happening of any one of the following events: (i) the shareholders of the Company approve a definitive agreement (A) to merge or consolidate the Company with or into another corporation, pursuant to which the Company is not the continuing or surviving corporation or pursuant to which any Common Shares would be converted into cash, securities or other property of another corporation or entity, other than a merger of the Company in which holders of Common Shares immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger as immediately before, or (B) to sell or otherwise dispose of substantially all of the assets of the Company or (ii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than any person who on the date hereof is a director, officer or employee benefit plan of the Company or a Subsidiary, is or becomes a beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities or (iii) there shall have occurred a change in a majority of the Board within a twelve month period, unless the nomination for election by the Company's shareholders of each new director was approved by the vote of at least two-thirds of the directors then still in office who were in office at the beginning of the twelve month period or (iv) any person makes a tender offer for, or at request for invitations for the tender of, Common Shares. FURTHER RESOLVED, that each agreement evidencing options and stock appreciation rights granted under the 1990 Option Plan shall be amended to reflect the foregoing change. 55 EX-13 3 EXHIBIT 13 1 EXHIBIT 13 1996 ANNUAL REPORT FIRST-KNOX BANC CORP. TABLE OF CONTENTS Financial Highlights .................. 1 Letter to Shareholders ................ 3 Consolidated Financial Statements ..... 7 Financial Review ...................... 25 Directors/Officers/Office Locations ... 33 Shareholder Information ............... 35 19 2
FINANCIAL HIGHLIGHTS COMPARATIVE BALANCES (In thousands of dollars) Percent 1996 1995 Change - ----------------------------------------------------------------------------------------------------------------------- ASSETS............................................................................ $ 573,763 $ 496,899 15.5% Deposits.......................................................................... 430,763 404,067 6.6% Loans............................................................................. 361,840 330,641 9.4% Securities........................................................................ 177,426 131,988 34.4% Borrowings........................................................................ 87,262 41,401 110.8% Shareholders' Equity.............................................................. 49,975 46,659 7.1% Net Income........................................................................ 6,036 5,709 5.7% Cash Dividends Declared........................................................... 2,536 1,751 44.8% Trust Department Assets........................................................... 87,761 82,696 6.1% FACILITIES AND STAFF Banking Offices................................................................. 12 12 Total Staff..................................................................... 250 256
COMPARATIVE STOCK DATA (Per share data) 1996 1995 ------------------------------------ ------------------------------------ CASH CASH MARKET MARKET DIVIDENDS MARKET MARKET DIVIDENDS HIGH LOW DECLARED HIGH LOW DECLARED ------------------------------------ ------------------------------------ First Quarter............................ $ 25.24 $ 22.86 $ .133 $ 20.71 $ 19.52 $ .105 Second Quarter........................... 24.29 22.86 .133 20.84 19.91 .105 Third Quarter............................ 25.00 21.19 .170 23.81 20.00 .114 Fourth Quarter........................... 29.75 23.50 .240 25.24 22.86 .143 Percent 1996 1995 Change - ----------------------------------------------------------------------------------------------------------------------- Year-End Market Price............................................................. $ 28.25 $ 23.81 18.6% Year-End Book Value............................................................... 13.31 12.49 6.6% Fully-Diluted Earnings Per Share.................................................. 1.59 1.50 6.0% Price Earnings Ratio.............................................................. 17.8x 15.9x Cash Dividend Payout Ratio........................................................ 42.0% 30.7% Number of Shareholders............................................................ 1,479 1,404 5.3% Average Shares Outstanding Primary................................................ 3,801,519 3,818,759 Average Shares Outstanding Fully Diluted.......................................... 3,802,449 3,821,589 Stock/Split Dividend.............................................................. 5% 100% The Stock of First-Knox Banc Corp. is listed on the Nasdaq National market under the symbol "FKBC", The market prices represent quotations between dealers withoout adjustment for retail markups, markdowns, or commissions and may not necessarily represent actual transactions. The brokerage firms of McDonald & Company Securities, Inc., The Ohio Company, and Sweney Cartwright & Company make a market in the Corporation's stock. All per share data has been restated to give retoactive effect to the 5% stock dividend in 1996 and the two for one stock split in the form of a 100% stock dividend in 1995. 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.
20 1 1996 Annual Report 3 CASH DIVIDENDS NET INCOME TOTAL ASSETS (In thousands of dollars) (In millions of dollars) (In millions of dollars) 1992 1,051 1992 3.95 1992 409.6 1993 1,302 1993 4.67 1993 439.4 1994 1,527 1994 5.16 1994 467.2 1995 1,751 1995 5.71 1995 496.9 1996 2,536 1996 6.04 1996 573.8 FULLY-DILLUTED SHAREHOLDERS' BOOK VALUE PER SHARE EARNINGS PER SHARE EQUITY (In dollars) (In dollars) (In millions of dollars) 1992 9.20 1992 1.12 1992 30.12 1993 10.14 1993 1.27 1993 38.42 1994 10.70 1994 1.34 1994 40.83 1995 12.49 1995 1.50 1995 46.66 1996 13.31 1996 1.59 1996 49.98 21 First-Knox Banc Corp. 2 4 LETTER TO SHAREHOLDERS To say that 1996 was an exciting year would be an understatement. Profits reached an all-time high. Total assets exceeded the half billion dollar mark. Net income, before merger-related expenses, reflected an increase of 15.68%. Assets for the Corporation increased 15.5%, and shareholders' equity increased 7.1% over 1995. Public awareness of our agreement with Park National Corporation, also reached record levels of interest. Our success can be attributed directly to the ability of our employees to maintain their focus on our customers, while providing enhanced services in a time of both uncertainty and opportunity. We are justifiably proud of their performance. [GRAPHIC] Net income for 1996 exceeded six million dollars for the first time in corporate history. We also maintained a consecutive string of increased net income, total assets, earnings per share, and cash dividends, since the formation of First-Knox Banc Corp in 1985. Loans increased 9.4% while deposits increased 6.6%. Non-interest income reached a new level of $3.43 million, an increase of 9.6% as compared to 1995. Non-interest expense rose $720,000, including $595,000 in professional expenses, attributable mainly to merger-related matters. Income taxes exceeded two million dollars, another corporate record. Shareholders received a 5% stock dividend in September, marking the thirty-first consecutive year that a stock dividend or split has been issued. Additional analysis of our financial performance can be found starting on page twenty-five of this report. Beyond the quantifiable accomplishments of the past year, a number of other events deserve recognition, especially the proposed merger between First-Knox and Park. Public announcement was made in October following the signing of a definitive merger agreement, details and analysis of which are described in the Joint Proxy Statement Prospectus being sent to all shareholders. We urge each shareholder to review the proxy materials and vote at the upcoming special shareholder meeting. While separate companies in separate markets, our two organizations share many of the philosophies, values, and commitments associated with the successful conduct of community banking. We both believe that exceptional customer service delivered by dedicated employees is essential. We both acknowledge responsibility for the viability of the communities in which we live and work. We both recognize that bigger is not always better, but optimum size must be achieved to afford competitive efficiencies. Perhaps most importantly, we both believe in the opportunities that such a merger affords our customers, employees, and shareholders. The heritage and accomplishments of each organization have been recognized by the other for many years, but rather than spending time on mutual admiration, we will continue to build on the fundamentals that have served us well. Numbers alone do not tell all of our story. Once again, First-Knox was a leader in introducing new products, all of which met with open customer acceptance. For our retail customers, a bi-weekly mortgage was introduced, the first such product in our market area. Over a period of years, bi-weekly payment benefits the homeowner with significant savings in cumulative interest cost. Also introduced was a 100% home equity loan allowing customers to take full advantage of their home equity and tax deductibility of interest. For our business customers, a new software package, DirectPay, was marketed allowing a seamless interface with programs using the Automated Clearing House. Additionally, new programs were developed and implemented for those desiring to have their funds swept automatically into trust accounts or repurchase agreements. Improvements to our physical facilities continued in 1996. The Operations Center was upgraded and space utilization improved as a continuation of the Main Office building expansion. New safe deposit boxes were added at the Centerburg and Main Office locations. The Mount Gilead office was renovated extensively as part of a downtown revitalization program. Technology has always played an important role in providing our customers with more responsive 22 3 1996 Annual Report 5 financial products and increased internal efficiencies. Utilization of the very latest technology continued to benefit the Corporation in 1996. Automated software in the retail loan area provided increased efficiencies in controlling delinquencies and enabled early identification of changing customer needs. In the area of check processing, character recognition equipment was installed resulting in almost 40% of our document processing taking place without human intervention. To take advantage of the savings afforded by the post office in pre-sorting, bar coding was implemented for all statements. The most visible use of technology from the public's perception was the unveiling of our Web site on the Internet at www.firstknox.com. Even though our customers and physical facilities are convenient to one another, we believe existing and potential customers should be able to access all information regarding our financial services, at their leisure and convenience, twenty-four hours a day. Until we are more comfortable with the security of transactions and sensitive customer data, our Web site will offer information such as locations, hours, services, loan and deposit rates, ATM locations, E-mail, our stock performance, and a community bulletin board. The community bulletin board is a new and unique public service that will list various events in each of the communities served by First-Knox. While our branch facilities are convenient in the marketplace, the Web site gives us an excellent vehicle to reach current and potential customers without the constraints of time and geography. We believe our Web site is just the beginning of a new way to provide service to our customers. In time, the Internet will be an important addition to our existing delivery systems which now include the mail, branches, telephone, courier, automated clearing house, and automated teller machines. Although a very progressive year, 1996 was also a year marked with sadness. Two of our directors, Russell E. Ramser, Jr. and George T. Culbertson, Jr. passed away following prolonged illnesses. Mr. Ramser was Chairman of the Board, and Mr. Culbertson was a founding director of the Corporation. Additionally, William A. Stroud and Stephen P. Upham, Jr. retired from the Board as required by the retirement schedule. Mr. Stroud served as President and Chairman of the Board of FULLY-DILUTED EARNINGS PER SHARE (in dollars)
1992 1993 1994 1995 1996 Fully-diluted earnings per share 1.12 1.27 1.34 1.5 1.59 Impact of merger related legal and professional fees 0 0 0 0 0.15
NET INCOME (in millions of dollars)
1992 1993 1994 1995 1996 Net Income 3.95 4.67 5.16 5.71 6.04 Impact of merger related legal and professional fees 0 0 0 0 0.57
23 First-Knox Banc Corp. 4 6 both the First-Knox National Bank and the Corporation. Mr. Upham was a founding director of the Corporation and a First-Knox National Bank director since 1959. The guidance provided by these four gentlemen has been an immeasurable contribution to our Corporation's success. In March of 1996, William B. Levering and R. Dan Snyder joined the Board of Directors of First-Knox National Bank. Their new perspectives have been an asset to the Board. In December, Philip H. Jordan, Jr. was elected to replace Mr. Ramser as Chairman of the First-Knox Banc Corp. Board. Also at that time, James E. McClure, Chairman of the Farmers and Savings Bank, was appointed to the First-Knox Banc Corp. Board, and Mark R. Ramser was elected to the Board of First-Knox National Bank. Each year, in this letter, we discuss items which affect the banking industry in general and our future in particular. Two major issues exist: one impacting our ability to serve our customers, and the other affecting our ability to compete effectively. The issue of serving our customers revolves around the ability of banks or bank organizations to offer a broad range of financial products including brokerage services and insurance. Our non-bank financial service competitors are able to offer bank-type services without the regulations or geographic constraints placed on commercial banks. We perceive that the regulatory climate is changing to accommodate a wider range of products and services. However, we do not see any immediate intention on the part of congress to address these matters. The second issue involves fairness and taxation. Today, credit unions are not subject to taxation, an advantage that impacts both relative profitability and pricing of services. We understand the role of the credit union and its "common bond" foundation. It is when the "common bond" definition is stretched beyond its original intent, and the marketplace broadens beyond reasonable boundaries that the exemption from sharing the burden of taxation appears to be unreasonable. Like any operating expense, taxes impact the structure of rates paid/charged to our customers and the amount of income available for shareholder dividend payments. The banking industry takes no exception to honoring its tax obligations, but cannot accept the logic of its customers and shareholders bearing the cost of a competitor's subsidy. As we approach the beginning of a new century, it is important that we retain our focus on those traditional values that have served us so well for the past century and a half...values that improve the quality of life for our customers, our employees, our shareholders, and our communities. An overview of the past 150 years of First-Knox is provided in a timeline of major activities on the next page. We have undergone changes in name, structure, locations, size, products, and delivery mechanisms. Yet, during this time we consistently focused on providing our communities and customers with viable financial services, our employees with worthwhile careers, and our shareholders with increased investment value. In reviewing the timeline of activities, change has been an ever present component. In the future, that component will continue, but we will experience it at an accelerated pace. Communications, international trade, artificial intelligence, cyberspace, and longer lives will place great demands upon the financial community and its resources. The challenge for management will be to balance future demands with historic values to benefit our shareholders, employees, and customers. Our success has been predicated on the foresight and hard work of the directors, officers, and, in particular, the employees of the affiliates of First-Knox. Future accomplishments of even greater proportions will be possible through this empowerment. With the trust and support of our shareholders and customers, we look forward to unlimited opportunities beyond our most optimistic visions. /s/ Philip H. Jordan, Jr. /s/ Carlos E. Watkins Chairman of the Board President and Chief Executive Officer 24 5 1996 Annual Report 7 1847 August 23, 1847, "Knox County Bank" 1865 Received national charter "The Knox County National Bank of Mount Vernon" 1885 Reorganized as "The Knox National Bank" 1905 Reorganized as "The New Knox National Bank," located at One South Main Street 1939 Merger between "The New Knox National Bank" and "The First National Bank" to form "The First-Knox National Bank of Mount Vernon" 1953 Establishment of the Centerburg Office 1954 Fredricktown Office established through merger with "Dan Struble and Son Bank" 1955 Construction of new Main Office building completed at One South Main Street 1961 Purchase of Danville bank 1965 Coshocton Avenue Office opened 1966 Drive-in and walk-up window opened on West Vine Street 1967 BankAmericard introduced in Knox County 1968 Purchase of Century 100 Series computer 1978 Bank reached $100 million in assets 1980 Wizard of Knox automated teller machine opened at Coshocton Avenue 1983 Introduced Visa Checking, a debit card service 1985 "First-Knox Banc Corp." formed 1986 Acquired Millersburg Office *"Farmers and Saving Bank" in Loudonville and Perrysville joined First-Knox Banc Corp. * Market value of Corporate stock over $16.5 million 1988 Established de-novo office in Lexington 1989 Acquired branches in Mount Gilead, Edison, and Bellville * Remote automated teller machines installed at Apple Valley and Gambier 1994 Farmers and Saving Bank reached $50 million in assets 1995 Grand opening of new five-level, 40,000 square foot Main Office facility at One South Main Street * Voice response system implemented 1996 Bank reached $500 million in assets * Market value of Corporate stock exceeded $110 million * First-Knox Web site introduced on the Internet * First-Knox Banc Corp signed definitive agreement to merge with Park National Corporation [LOGO] 25 First-Knox Banc Corp. 6 8 CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995 (In thousands of dollars except per share data) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and deposits with banks (Note 9) .............................................. $ 20,308 $ 16,701 Interest-bearing deposits with banks ............................................... 539 311 Federal funds sold ................................................................. 3,400 --------- --------- Total cash and cash equivalents ................................................... 20,847 20,412 Securities available for sale (Notes 2 and 8) ...................................... 177,426 131,988 Loans (Notes 3 and 8) .............................................................. 361,840 330,641 Less allowance for loan losses (Note 4) ............................................ (4,545) (4,166) --------- --------- Loans, net of allowance for loan losses ........................................... 357,295 326,475 Premises and equipment, net (Note 5) ............................................... 10,791 10,993 Accrued interest receivable and other assets ....................................... 7,404 7,031 --------- --------- TOTAL ASSETS ...................................................................... $ 573,763 $ 496,899 ========= ========= LIABILITIES Deposits (Note 6) .................................................................. $ 430,763 $ 404,067 Short-term borrowings (Note 7) ..................................................... 24,887 7,986 Long-term debt (Note 8) ............................................................ 62,375 33,415 Accrued interest payable and other liabilities ..................................... 5,763 4,772 --------- --------- TOTAL LIABILITIES ................................................................. 523,788 450,240 Commitments and Contingencies (Note 9) SHAREHOLDERS' EQUITY Common stock, par value $3.125 per share; 6,000,000 shares authorized; 3,755,926 shares issued and outstanding in 1996 and 3,650,225 shares issued in 1995 11,737 11,407 Paid-in capital .................................................................... 26,017 24,042 Retained earnings .................................................................. 10,830 11,187 Net unrealized holding gains on securities available for sale (Note 1) ............. 1,391 1,912 Common stock in treasury, 89,965 shares at cost in 1995 ............................ (1,889) --------- --------- TOTAL SHAREHOLDERS' EQUITY ........................................................ 49,975 46,659 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................................ $ 573,763 $ 496,899 ========= =========
The accompanying notes are an integral part of these financial statements. 26 7 1996 Annual Report 9 CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, (In thousands of dollars except per share data) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Loans............................................................................ $ 30,945 $ 28,854 $ 25,238 Taxable securities............................................................... 6,606 5,214 4,477 Tax exempt securities............................................................ 2,897 2,792 2,800 Federal funds sold and interest-bearing deposits with banks...................... 331 228 79 --------- --------- --------- TOTAL INTEREST INCOME ......................................................... 40,779 37,088 32,594 INTEREST EXPENSE Deposits......................................................................... 16,426 15,158 11,800 Short-term borrowings............................................................ 585 390 349 Long-term debt................................................................... 2,800 1,951 1,478 --------- --------- --------- TOTAL INTEREST EXPENSE ........................................................ 19,811 17,499 13,627 --------- --------- --------- NET INTEREST INCOME .......................................................... 20,968 19,589 18,967 PROVISION FOR LOAN LOSSES (Note 4) ............................................. 774 584 638 --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ......................... 20,194 19,005 18,329 OTHER INCOME Trust department income.......................................................... 774 702 588 Customer service fees and commissions............................................ 2,423 2,315 1,926 Loan sale gains.................................................................. 27 29 Securities gains (losses), net................................................... 171 (20) 11 Other operating income........................................................... 60 103 193 --------- --------- --------- TOTAL OTHER INCOME ............................................................ 3,428 3,127 2,747 OTHER EXPENSES Salaries and benefits (Notes 10 and 11) ......................................... 7,226 7,081 6,756 Occupancy expenses............................................................... 2,370 2,121 1,825 Professional fees related to pending merger (Note 20)............................ 595 Other operating expenses (Note 12) .............................................. 5,387 5,656 6,064 --------- --------- --------- TOTAL OTHER EXPENSES .......................................................... 15,578 14,858 14,645 --------- --------- --------- INCOME BEFORE INCOME TAXES .................................................... 8,044 7,274 6,431 INCOME TAXES (Note 13) ........................................................ 2,008 1,565 1,267 --------- --------- --------- NET INCOME ................................................................... $ 6,036 $ 5,709 $ 5,164 ========= ========= ========= EARNINGS PER COMMON SHARE (Note 1) PRIMARY ...................................................................... $ 1.59 $ 1.50 $ 1.34 ========= ========= ========= FULLY DILUTED ................................................................ $ 1.59 $ 1.50 $ 1.34 ========= ========= ========= WEIGHTED AVERAGE SHARES (Note 1) PRIMARY ....................................................................... 3,801,519 3,818,759 3,852,941 ========= ========= ========= FULLY DILUTED ................................................................. 3,802,449 3,821,589 3,856,009 ========= ========= =========
The accompanying notes are an integral part of these financial statements. 27 First-Knox Banc Corp. 8 10 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NET UNREALIZED HOLDING GAIN NUMBER OF (LOSS) ON TOTAL For each of the three years COMMON SECURITIES SHARE- ended December 31, 1996 SHARES COMMON PAID-IN RETAINED AVAILABLE TREASURY HOLDERS' (In thousands of dollars except per share data) OUTSTANDING STOCK CAPITAL EARNINGS FOR SALE STOCK EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ 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, $.40 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 DECEMBER 31, 1994 ............... 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, $.47 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 Net income................................... 6,036 6,036 Issuance of shares under the dividend reinvestment plan .......................... 7,903 24 166 190 Issuance of shares for stock options exercised................................... 9,355 5 (24) 166 147 Cash dividends declared, $.68 per share...... (2,536) (2,536) Change in net unrealized holding gain on securities available for sale............ (521) (521) 5% stock dividend............................ 178,408 301 1,833 (3,857) 1,723 --------- ------- -------- -------- ------- -------- ------- BALANCES AT DECEMBER 31, 1996 3,755,926 $11,737 $ 26,017 $ 10,830 $ 1,391 $ -0- $ 49,975 ========= ======= ======== ======== ======= ======== ========
The accompanying notes are an integral part of these financial statements. 28 9 1996 Annual Report 11 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, (In thousands of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income....................................................................... $ 6,036 $ 5,709 $ 5,164 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan and lease losses............................................. 774 584 638 Depreciation, accretion, and amortization....................................... 978 1,004 1,199 Market loss on loans held for sale.............................................. 59 121 Securities (gains) losses....................................................... (171) 20 (11) Loan sale gains................................................................. (27) (29) Deferred income tax expense (benefit)........................................... (43) 5 Increase in interest receivable................................................. (643) (354) (398) Increase in interest payable.................................................... 490 704 234 Increase in net deferred loan costs............................................. (62) (37) (55) Change in other assets and liabilities, net..................................... 482 (239) (1,092) --------- --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 7,900 7,369 5,771 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities held to maturity......................................... (1,351) (17,135) Purchases of securities available for sale....................................... (78,826) (27,617) (26,112) Proceeds from sales of securities available for sale............................. 14,362 17,560 Proceeds from calls, payments, and maturities of securities held to maturity..... 3,109 4,321 Proceeds from calls, payments, and maturities of securities available for sale... 18,740 13,099 15,959 Net increase in loans............................................................ (31,594) (28,318) (16,824) Proceeds from sale of loans...................................................... 1,578 3,113 Expenditures for premises and equipment.......................................... (873) (1,944) (4,551) Proceeds from sales of other real estate owned................................... 52 --------- --------- -------- NET CASH APPLIED TO INVESTING ACTIVITIES ...................................... (78,191) (23,832) (41,229) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposit accounts...................................... 26,696 26,887 (997) Net increase (decrease) in short-term borrowings................................. 16,901 (3,466) (2,053) Proceeds from long-term debt..................................................... 30,000 5,000 30,110 Payment of long-term debt........................................................ (1,040) (6,305) (1,290) Issuance of common stock......................................................... 337 247 408 Purchase of treasury shares...................................................... (1,926) Cash dividends paid.............................................................. (2,168) (1,672) (1,468) --------- --------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 70,726 18,765 24,710 --------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... 435 2,302 (10,748) CASH AND CASH EQUIVALENTS AT JANUARY 1 ....................................... 20,412 18,110 28,858 --------- --------- -------- CASH AND CASH EQUIVALENTS AT DECEMBER 31 ...................................... $ 20,847 $ 20,412 $ 18,110 ========= ========= ========
The accompanying notes are an integral part of these financial statements. 29 First-Knox Banc Corp. 10 12 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 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; investing in securities 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 collectibility of loans, fair values of financial instruments and status of contingencies are particularly subject to change. 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. SECURITIES Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately in shareholders' equity, net of tax. Securities are classified as trading when held for short-term periods in anticipation of market gains, and are carried at fair value. Securities are written down to fair value when a decline in fair value is not temporary. Statement of Financial Accounting Standards (SFAS) No. 115 was adopted on January 1, 1994. Accordingly, securities were classified into the categories discussed above. Prior to this date, securities were reported at amortized cost except for securities held for sale, which were reported at the lower of cost or market. This reclassification increased equity by $706,000 at January 1, 1994, which is the after-tax effect of the adjustment from amortized cost to fair value for securities available for sale at that date. Gains and losses on sales are determined using the amortized cost of the specific security sold. Interest income includes amortization of purchase premiums and discounts. INTEREST AND FEES ON LOANS Interest on loans 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 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. Commercial loans, residential real estate loans, and consumer loans comprise 29.9%, 47.1%, and 23.0% of total loans, respectively, at December 31, 1996. 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 LOSSES The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Under SFAS Nos. 114 and 118, "Accounting by Creditors for Impairment of a Loan," which were adopted January 1, 1995, loan impairment is reported when full payment under the loan terms is not expected. The adoption of this statement did not materially impact the financial statements. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. 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 mortgage loans. 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 non-accrual 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 non-accrual 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. The assets are reviewed for impairment under SFAS No. 121 when events indicate the carrying amount may not be recoverable. 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 30 11 1996 Annual Report 13 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 at December 31, 1996 and 1995. SERVICING RIGHTS Prior to adopting SFAS No. 122 at the start of 1996, servicing right assets were recorded only for purchased rights to service mortgage loans. Subsequent to adopting this standard, servicing rights represent both purchased rights and the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Adopting this pronouncement did not materially impact the Corporation's financial condition or net income. Excess servicing receivable is reported when a loan sale results in servicing in excess of normal amounts, and is expensed over the life of the servicing on the interest method. INTANGIBLES Intangible assets arising from branch and bank acquisitions, and included with other assets in the consolidated balance sheet, are summarized as follows at December 31, 1996, net of accumulated amortization: Goodwill $ 335,000 Core deposit intangibles $ 499,000
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. Goodwill and identified intangibles are assessed for impairment based on estimated undiscounted cash flow and written down if necessary. Amortization of goodwill and core deposit intangibles totaled $235,000, $240,000, and $248,000 in 1996, 1995, and 1994. INCOME TAXES Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. 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 $19,321,000, $16,795,000, and $13,393,000 for the years ended December 31, 1996, 1995, and 1994, respectively. Cash paid for income taxes was $2,008,000, $1,477,000, and $1,378,000 for the years ended December 31, 1996, 1995, and 1994, 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. Expense for employee compensation for stock options granted is based on Opinion 25, with expense reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are provided as if the fair value method of SFAS No. 123 were used for stock-based compensation. EMPLOYEE BENEFITS A defined-benefit pension plan covers substantially all employees, with benefits based on years of service and compensation prior to retirement. Contributions to the plan are based on the maximum amount deductible for income tax purposes. A retirement savings plan with 401(k) features cover substantially all employees who are at least age 21 and have completed one year of serA defined-benefit pension plan covers substantially all employees, with benefits based on years of service and compensation prior to retirement. Contributions to the plan are based on the maximum amount deductible for income tax purposes. A retirement savings plan with 401(k) features cover substantially all employees who are at least age 21 and have completed one year of service. The plan allows employee contributions, with contributions up to 6% of employee compensation matched at 30%. The expense of the defined-benefit plan is reported by spreading the expected contributions to the plan less long-term earnings on The expense of the defined-benefit plan is reported by spreading the expected contributions to the plan less long-term earnings on plan assets over the employee's service period. Expense of the retirement savings plan is based on annual contributions. Health benefits to retirees are provided under a plan. The estimated cost is recorded during the period of employee service. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off balance sheet financial instruments do not include the value of anticipated future business or the values of assets and liaFair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off balance sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. STOCK DIVIDENDS Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock and additional paid-in capital. Stock splits in the form of stock dividends are reported by transferring the par value of the Dividends issued in stock are reported by transferring the market value of the stock issued from retained earnings to common stock and additional paid-in capital. Stock splits in the form of stock dividends are reported by transferring the par value of the stock issued from retained earnings to common stock. 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. The Corporation distributed 5% stock dividends in September, 1996 and October, 1994. In September, 1995, the Corporation distributed a two-for-one stock split in the form of a 100% stock dividend. All per share data has been retroactively adjusted for the stock split and stock dividends. FINANCIAL STATEMENT PRESENTATION Certain items in the 1995 and 1994 financial statements have been reclassified to correspond with the 1996 presentation. 31 First-Knox Banc Corp. 12 14 ] NOTE 2 - SECURITIES AVAILABLE FOR SALE The amortized cost and estimated fair values of securities available for sale are summarized as follows at:
GROSS GROSS ESTIMATED (In thousands of dollars) AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1996 COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------------------- U.S. Treasury securities ............................... $ 30,621 $ 230 $ (81) $ 30,770 Obligations of states and political subdivisions ....... 56,493 1,337 (257) 57,573 Obligations of U.S. government corporations and agencies 26,777 258 (46) 26,989 Other securities ....................................... 6,866 199 7,065 Mortgage pools ......................................... 53,267 608 (125) 53,750 Collateralized mortgage obligations .................... 1,295 (16) 1,279 -------- -------- -------- -------- TOTAL ................................................. $175,319 $ 2,632 $ (525) $177,426 ======== ======== ======== ======== GROSS GROSS ESTIMATED (In thousands of dollars) AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1995 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 Mortgage pools ......................................... 35,335 635 (69) 35,901 Collateralized mortgage obligations .................... 1,421 1 (29) 1,393 -------- -------- -------- -------- TOTAL ................................................. $129,091 $ 3,123 $ (226) $131,988 ======== ======== ======== ========
The amortized cost and estimated fair values of investments in debt securities available for sale at December 31, 1996, 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.
ESTIMATED AMORTIZED FAIR (In thousands of dollars) COST VALUE - -------------------------------------------------------------------------------------------------------------- Due in one year or less ....................................................... $ 13,465 $ 13,532 Due after one year through five years ......................................... 43,214 43,796 Due after five years through ten years ........................................ 34,613 35,334 Due after 10 years ............................................................ 29,465 29,735 -------- -------- 120,757 122,397 Mortgage-backed and related securities ........................................ 54,562 55,029 -------- -------- TOTAL INVESTMENTS IN DEBT SECURITIES ......................................... $175,319 $177,426 ======== ========
Proceeds from the sales of investment and mortgage-backed securities during 1996 were $14,362,000, resulting in gross gains of $234,000 and gross losses of $63,000. Proceeds from the sales of investment and mortgage-backed securities during 1995 were $17,560,000 resulting in gross gains of $50,000 and gross losses of $93,000. There were no sales in 1994. Gross gains from calls of investment securities were $23,000 in 1995 and $11,000 in 1994. As of December 31,1996 and 1995, securities having estimated fair values of $80,586,000 and $60,297,000, 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 was reflected, net of tax, as an increase to shareholders' equity. 32 13 1996 Annual Report 15 NOTE 3 - LOANS
Loans are comprised of the following at December 31: (In thousands of dollars) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Residential real estate loans held for sale................................................... $ 5,020 Residential real estate loans................................................................. $ 170,449 147,927 Commercial real estate loans.................................................................. 12,349 9,548 Commercial and industrial loans............................................................... 90,739 88,632 Consumer and credit card loans................................................................ 83,399 74,836 Obligations of states and political subdivisions.............................................. 4,904 4,678 --------- -------- TOTAL LOANS ............................................................................... $ 361,840 $330,641 ========= ========
Loans over 90 days past due and still accruing interest approximated $1,904,000 and $862,000 at December 31, 1996 and 1995, respectively. Loans on non-accrual status at December 31, 1996 and 1995 approximated $317,000 and $197,000, respectively. Impaired loans were not material at December 31, 1996, or in any period presented. NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows: (In thousands of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of year....................................................... $ 4,166 $ 3,876 $ 3,597 Provision for loan losses........................................................ 774 584 638 Losses charged to the allowance.................................................. (579) (539) (641) Recoveries ...................................................................... 184 245 282 --------- --------- -------- BALANCE, END OF YEAR .......................................................... $ 4,545 $ 4,166 $ 3,876 ========= ========= ========
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, are summarized as follows: (In thousands of dollars) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Land.......................................................................................... $ 1,708 $ 1,701 Buildings..................................................................................... 9,614 9,229 Equipment..................................................................................... 8,173 7,713 --------- -------- Total premises and equipment.................................................................. 19,495 18,643 Less accumulated depreciation................................................................. (8,704) (7,650) --------- -------- PREMISES AND EQUIPMENT, NET ................................................................ $ 10,791 $ 10,993 ========= ========
Total depreciation expense was $1,075,000 in 1996, $1,018,000 in 1995, and $716,000 in 1994. The Corporation has annual renewable leases for certain office and business equipment. Total rental expense for renewable and noncancelable operating leases was $198,000, $211,000, and $202,000 in 1996, 1995, and 1994. Future lease commitments are not material. 33 First-Knox Banc Corp. 14 16 NOTE 6 - DEPOSITS
Deposits are comprised of the following categories at December 31: (In thousands of dollars) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Non interest-bearing demand................................................................... $ 55,317 $ 54,706 Interest-bearing demand....................................................................... 49,386 39,882 Savings....................................................................................... 88,258 99,133 Time.......................................................................................... 237,802 210,346 --------- --------- TOTAL DEPOSITS .............................................................................. $ 430,763 $ 404,067 ========= =========
Time deposits of $100,000 or more included above were $50,516,000 in 1996 and $36,417,000 in 1995.
At year-end 1996, stated maturities of all time deposits were: 1997................. $ 192,107 1998................. 30,777 1999................. 7,567 2000................. 4,517 2001................. 953 Thereafter........... 1,881 ---------- $ 237,802 ==========
NOTE 7 - SHORT-TERM BORROWINGS
The outstanding balances for short-term borrowings as of December 31, are as follows: (In thousands of dollars) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Securities sold under repurchase agreements................................................... $ 9,972 $ 7,453 Demand note due to the U. S. Treasury......................................................... 2,215 533 Federal funds purchased....................................................................... 2,700 Federal Home Loan Bank advances............................................................... 10,000 --------- --------- TOTAL SHORT-TERM BORROWINGS ................................................................ $ 24,887 $ 7,986 ========= =========
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. Physical control is maintained for all securities sold under repurchase agreements. Information concerning securities sold under agreements to repurchase is summarized as follows:
1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Average daily balance during the year........................................................ $ 6,619 $ 5,260 Average interest rate during the year........................................................ 4.62% 5.13% Maximum month-end balance during the year.................................................... $ 9,972 $ 7,453
34 15 1996 Annual Report 17 NOTE 8 - LONG-TERM DEBT
Long-term borrowings as of December 31, are as follows: (In thousands of dollars) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Fixed rate Federal Home Loan Bank advances with monthly principal and interest payments: 5.60% Advance due August 1, 2003............................................................. $ 2,179 $ 2,442 6.35% Advance due August 1, 2013............................................................. 2,724 2,812 5.95% Advance due March 1, 2004.............................................................. 586 649 5.70% Advance due May 1, 2004................................................................ 4,760 5,262 5.85% Advance due January 1, 2016............................................................ 4,876 5,000 Fixed rate Federal Home Loan Bank advances with monthly interest payments: 5.35% Advance due February 1, 1999........................................................... 5,000 5,000 5.60% Advance due April 1, 1999.............................................................. 5,000 5,000 5.70% Advance due June 1, 1999............................................................... 7,000 7,000 6.35% Advance due March 1, 2004.............................................................. 250 250 6.15% Advance due July 21, 1997.............................................................. 10,000 6.60% Advance due July 21, 1999.............................................................. 10,000 6.90% Advance due July 21, 2001.............................................................. 10,000 --------- -------- TOTAL LONG-TERM DEBT ....................................................................... $ 62,375 $ 33,415 ========= ========
At December 31, 1996, Federal Home Loan Bank (FHLB) advances were collateralized by all shares of FHLB stock owned by the Corporation, with a carrying value of $6,618,000, and by 100% of the Corporation's qualified real estate-backed investments and qualified mortgage loan portfolio totaling approximately $219,000,000. Based on the carrying amount of FHLB stock owned by the Corporation, total FHLB advances were limited to approximately $73,985,000 at December 31, 1996. 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 $11,587,000 in 1997, $1,576,000 in 1998, $28,576,000 in 1999, $1,587,000 in 2000, $11,606,000 in 2001, and $7,443,000 thereafter. 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, 1996, the Corporation had commitments to make loans and unused lines of credit approximating $62,175,000, of which $3,046,000 carried fixed rates ranging from 6.88% to 11.00% and $59,129,000 carried adjustable rates. At December 31, 1995, the Corporation's commitments and unused lines of credit totaled approximately $56,334,000, of which $3,320,000 carried fixed rates ranging from 7.00% to 11.00% and $53,014,000 carried adjustable rates. As of December 31, 1996 and 1995, commitments under outstanding letters of credit amounted to approximately $546,000 and $364,000, 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, 1996, was $5,479,000. These balances do not earn interest. The Corporation and its subsidiaries have various claims and lawsuits pending at December 31, 1996, arising in the ordinary course of their business. It is the opinion of management, after consultation with 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 NCR 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 NCR 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 NCR. The agreement calls for payments with limits defined by inflation and customer account volumes. Payments under this agreement amounted to $1.33 million in 1996, $1.27 million in 1995, and $1.21 million in 1994. The annual amount of anticipated payments is expected to be $1.39 million in 1997 with a final payment of $117,000 in January 1998. The Corporation is party to a merger agreement (See Note 20). 35 First-Knox Banc Corp. 16 18 NOTE 10 - EMPLOYEE BENEFIT PLANS PENSION PLAN:
Net pension expense is comprised of the following components: (In thousands of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Service cost benefits earned during the year..................................... $ 272 $ 224 $ 262 Interest cost on projected benefit obligation.................................... 371 351 315 Actual return on plan assets..................................................... (505) (460) (413) Net amortization and deferral of initial transition credit and subsequent (gains) and losses................................................... (35) (43) (32) --------- --------- -------- NET PENSION EXPENSE............................................................. $ 103 $ 72 $ 132 ========= ========= ======== The funded status of the plan and the prepaid pension cost recognized at December 31, are as follows: (In thousands of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested benefits................................................................. $ 3,925 $ 3,798 $ 3,121 Non-vested benefits............................................................. 184 117 79 --------- --------- -------- ACCUMULATED BENEFIT OBLIGATION ............................................... $ 4,109 $ 3,915 $ 3,200 ========= ========= ======== Projected benefit obligation..................................................... $ 5,113 $ 5,042 $ 4,182 Plan assets at fair value (primarily U. S. government obligations, listed stocks, and corporate bonds).................................................... 5,706 5,620 4,646 --------- --------- -------- Plan assets in excess of projected benefit obligation............................ 593 578 464 Items not yet recognized in income: Unrecognized prior service adjustment........................................... 179 90 96 Unrecognized net loss .......................................................... 219 474 205 Initial transition credit which is being amortized over 15 years................. (194) (242) (291) --------- --------- -------- PREPAID PENSION COST INCLUDED IN OTHER ASSETS .................................. $ 797 $ 900 $ 474 ========= ========= ======== Assumptions used at December 31: Discount rate................................................................... 8.00% 7.50% 8.50% Rate of increase in compensation level.......................................... 4.75% 4.75% 5.50% Long-term rate of return on assets.............................................. 9.00% 9.00% 9.00% To better reflect the pension obligation at December 31, 1996, the Corporation changed certain assumptions from those used at December 31, 1995. These changes were the primary factors in the difference in the unrecognized net loss reflected in the prepaid pension cost analysis at December 31, 1996. POSTRETIREMENT HEALTHCARE PLAN: The following table sets forth the plan's funded status reconciled with the amount recorded in the Corporation's balance sheet at year-end. (In thousands of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated postretirement benefit obligation.................................... $ 773 $ 821 $ 732 Unrecognized transition asset, net of amortization............................... (760) (808) (855) Unrecognized net gain............................................................ 216 174 258 --------- --------- -------- ACCRUED POSTRETIREMENT BENEFIT COST INCLUDED IN OTHER LIABILITIES .............. $ 229 $ 187 $ 135 ========= ========= ======== Postretirement benefit cost includes the following components: (In thousands of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Interest cost on accumulated postretirement benefit obligation................... $ 57 $ 63 $ 56 Amortization of transition obligation over 20 years.............................. 39 37 48 --------- --------- -------- POSTRETIREMENT BENEFIT COST ................................................... $ 96 $ 100 $ 104 ========= ========= ========
For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1996. The rate was assumed to decrease gradually to 5% in 2001 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, 1996, by $70,000. The weighted average discount rate used in determining expense, and accumulated postretirement benefit obligation was 8.0%. 36 17 1996 Annual Report 19 NOTE 11 - STOCK OPTION PLAN The Corporation was authorized in 1995 to grant options on 189,000 shares of common stock and 63,000 stock appreciation rights to key management employees and directors. Under a plan that expired on March 27, 1995, the Corporation was authorized to grant options on 183,783 common shares and 91,891 stock appreciation rights to key management employees. The plans authorize the issuance of stock options and stock appreciation rights for terms not exceeding ten years from the date of the grant at a price generally no less than fair market value at the date of grant. No consideration is paid by participants to exercise stock appreciation rights. Common shares related to canceled, forfeited or terminated stock options become available for subsequent grant under the terms of the 1995 plan. All stock options and stock appreciation rights will become immediately exercisable upon shareholder approval of the merger discussed in Note 20. SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective for 1996, encourages the use of a fair value-based method to account for stock-based compensation plans such as the Corporation's stock option plan. As allowed by SFAS No. 123, however, the Corporation has elected to continue following prior accounting standards under which no compensation expense is recognized if the exercise price of the Corporation's stock options is equal to or greater than the market price of the underlying stock on the date of grant. If compensation expense is not recorded, pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Corporation had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using an option pricing model with the following assumptions: risk-free interest rates of 6.30% and 6.50% in 1996 and 7.40% in 1995; dividend yields of 3.82% in 1996 and 2.44% in 1995; volatility factors of the expected market price of the Corporation's common stock of 5.44%; and a weighted average expected life of the option of 6.5 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period of 5 years for non-director employees. Options granted to directors vest immediately. Using these assumptions, the weighted average fair value of options granted during the year was $3.21 in 1996 and $4.83 in 1995. The Corporation's pro forma information follows:
(In thousands of dollars except per share data) 1996 1995 - ------------------------------------------------------------- Net income as reported.......... $ 6,036 $ 5,709 Pro forma net income............ $ 6,006 $ 5,650 Primary earnings per share as reported.................... $ 1.59 $ 1.50 Pro forma primary earnings per share...................... $ 1.58 $ 1.48 Fully diluted earnings per share as reported.............. $ 1.59 $ 1.50 Pro forma fully diluted earnings per share............. $ 1.58 $ 1.48
In future years, the pro forma effect could increase if additional options would be granted.
STOCK OPTIONS STOCK APPRECIATION RIGHTS ----------------------------------- ----------------------------------- OUTSTANDING OUTSTANDING ---------------------- -------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE AVAILABLE PRICE PER AVAILABLE PRICE PER FOR GRANT NUMBER SHARE FOR GRANT NUMBER SHARE - ------------------------------------------------------------------------------------------------------------------------------------ January 1, 1994....................... 21,120 162,652 $ 11.05 51,191 32,533 $ 11.05 Granted............................... (20,948) 20,948 19.90 (12,356) 12,356 19.90 Exercised............................. (5,443) 10.05 (1,085) 10.05 ------- ----------- -------- ----------- December 31, 1994..................... 172 178,157 12.12 38,835 43,804 13.57 Authorized............................ 189,000 83,000 Canceled.............................. (1,361) 11.31 (273) 11.31 Expired............................... (172) (38,835) Granted............................... (16,800) 16,800 20.51 Exercised............................. (10,378) 10.50 (2,068) 10.50 ------- ----------- -------- ----------- December 31, 1995..................... 172,200 183,218 12.99 63,000 41,463 13.74 Granted............................... (35,550) 35,550 22.31 (4,400) 4,400 21.89 Exercised............................. (9,749) 15.04 (1,109) 10.91 ------- ----------- -------- ----------- DECEMBER 31, 1996 ................... 136,650 209,019 14.48 58,600 44,754 14.61 ======= =========== ======== =========== Range of exercise prices.............. $10.04 - 23.18 $10.04 - 21.89 Weighted average remaining contractual life..................... 6.3 years 6.2 years Exercisable at year-end............... 125,102 19,784 Weighted average exercise price of exercisable options.................. $ 13.03 $ 10.72
Compensation related to stock appreciation rights was $212,000 in 1996, $150,000 in 1995, and $139,000 in 1994. 37 First-Knox Banc Corp. 18 20 NOTE 12 - OTHER OPERATING EXPENSES
Other operating expenses consist of the following major items: (In thousands of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Data processing (Note 9) ........................................................ $ 1,753 $ 1,764 $ 1,611 Franchise taxes.................................................................. 696 559 542 FDIC insurance................................................................... 4 443 846 Advertising...................................................................... 399 387 357 Stationery and office supplies................................................... 313 423 358 Professional fees................................................................ 331 358 411 Other............................................................................ 1,891 1,722 1,939 --------- --------- -------- TOTAL OTHER OPERATING EXPENSES ................................................ $ 5,387 $ 5,656 $ 6,064 ========= ========= ========
NOTE 13 - INCOME TAXES
Income taxes consist of the following: (In thousands of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Current tax expense............................................................. $ 2,051 $ 1,560 $ 1,267 Deferred tax expense (benefit)................................................... (43) 5 --------- --------- -------- TOTAL INCOME TAXES ............................................................ $ 2,008 $ 1,565 $ 1,267 ========= ========= ========
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) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Income taxes computed at the statutory tax rate on pre-tax income................ $ 2,735 $ 2,473 $ 2,187 Add/(subtract) tax effect of: Tax exempt income............................................................... (917) (906) (932) Other .......................................................................... 190 (2) 12 --------- --------- -------- TOTAL INCOME TAXES ............................................................. $ 2,008 $ 1,565 $ 1,267 ========= ========= ========
The income tax expense (benefit) attributable to securities transactions approximated $58,000 in 1996, $(7,000) in 1995, and $4,000 in 1994. 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, 1996 and 1995:
(In thousands of dollars) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses..................................................................... $ 1,206 $ 1,040 Other......................................................................................... 366 279 --------- -------- Deferred tax asset........................................................................... 1,572 1,319 --------- -------- Pension....................................................................................... (265) (299) Depreciation.................................................................................. (296) (306) Direct financing and leveraged leases......................................................... (307) (185) Unrealized gains on securities available for sale............................................. (717) (985) Other......................................................................................... (537) (405) --------- -------- Deferred tax liability....................................................................... (2,122) (2,180) --------- -------- NET DEFERRED TAX LIABILITY ................................................................. $ (550) $ (861) ========= ========
The Corporation has paid sufficient taxes in the current and prior years to warrant recording full deferred tax assets without a valuation allowance. 38 19 1996 Annual Report 21 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, 1996, $4.9 million was available for dividend payments under the more restrictive of the two limitations. The Corporation and subsidiary banks are subject to regulatory capital requirements administered by governmental banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classification in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
CAPITAL TO RISK-WEIGHTED ASSETS TIER 1 ------------------------------- CAPITAL TO TOTAL TIER 1 AVERAGE ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ Well capitalized..................................................... 10% 6% 5% Adequately capitalized............................................... 8% 4% 4% Undercapitalized..................................................... 6% 3% 3%
At year-end, actual capital levels (in thousands) and minimum required levels for the Corporation and its significant subsidiary bank were:
MINIMUM REQUIRED MINIMUM REQUIRED TO BE WELL-CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS ---------------------- ----------------------- ----------------------- (In thousands of dollars) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------------------------------ 1996 Total capital (to risk-weighted assets) Consolidated................................ $ 52,138 15.69% $ 26,583 8.00% $ 33,228 10.00% First-Knox National Bank.................... $ 40,265 14.07% $ 22,888 8.00% $ 28,610 10.00% Tier 1 capital (to risk-weighted assets) Consolidated................................ $ 48,249 14.52% $ 13,291 4.00% $ 19,937 6.00% First-Knox National Bank.................... $ 34,954 12.22% $ 11,444 4.00% $ 17,166 6.00% Tier 1 leverage (to average assets) Consolidated................................ $ 48,249 8.54% $ 22,597 4.00% $ 28,247 5.00% First-Knox National Bank.................... $ 34,954 6.91% $ 20,221 4.00% $ 25,276 5.00% 1995 Total capital (to risk-weighted assets) Consolidated................................ $ 47,231 15.45% $ 24,459 8.00% $ 30,574 10.00% First-Knox National Bank.................... $ 36,114 13.60% $ 21,249 8.00% $ 26,562 10.00% Tier 1 capital (to risk-weighted assets) Consolidated................................ $ 43,678 14.29% $ 12,230 4.00% $ 18,344 6.00% First-Knox National Bank.................... $ 31,059 11.69% $ 10,625 4.00% $ 15,937 6.00% Tier 1 leverage (to average assets) Consolidated................................ $ 43,678 8.84% $ 19,876 4.00% $ 24,845 5.00% First-Knox National Bank.................... $ 31,059 7.13% $ 17,436 4.00% $ 21,794 5.00%
At year-end 1996, the Corporation and both subsidiary banks are categorized as well capitalized. 39 First-Knox Banc Corp. 20 22 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, 1996:
(In thousands of dollars) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1996................................................................................. $ 11,241 New loans and advances..................................................................................... 3,867 Repayment.................................................................................................. (3,223) --------- Balance at December 31, 1996.............................................................................. $ 11,885 =========
Total loans to executive officers included above were $1,518,000 and $1,359,000 at December 31, 1996 and 1995, respectively. 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, 1996 and 1995. Items which are not financial instruments are not included.
DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------- --------------------- CARRYING ESTIMATED CARRYING ESTIMATED (In thousands of dollars) AMOUNT FAIR VALUE AMOUNT FAIR VALUE - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents........................................... $ 20,847 $ 20,847 $ 20,412 $ 20,412 Securities available for sale....................................... 177,426 177,426 131,988 131,988 Loans, net of allowance for loan losses............................. 357,295 357,262 326,475 327,296 Accrued interest receivable......................................... 4,345 4,345 3,702 3,702 Demand and savings deposits......................................... (192,961) (192,961) (193,721) (193,721) Time deposits....................................................... (237,802) (237,915) (210,346) (214,737) Short-term borrowings............................................... (24,887) (24,887) (7,986) (7,986) Long-term debt...................................................... (62,375) (62,036) (33,415) (29,218) Accrued interest payable............................................ (2,762) (2,762) (2,272) (2,272)
For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 1996 and 1995. 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, 1996 and 1995. The fair values of unrecorded commitments at December 31, 1996 and 1995 are not material. 40 21 1996 Annual Report 23 NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS (In thousands of dollars) Years ended December 31, 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents..................................................................... $ 7,117 $ 6,654 Interest-bearing deposit in subsidiary bank................................................... 58 57 Securities available for sale................................................................. 364 Debenture receivable from subsidiary bank..................................................... 2,000 2,000 Investment in subsidiaries.................................................................... 41,757 38,152 Other assets.................................................................................. 14 14 --------- -------- TOTAL ASSETS ............................................................................... $ 50,946 $ 47,241 ========= ======== LIABILITIES Dividends payable............................................................................. $ 902 $ 534 Other liabilities............................................................................. 69 48 --------- -------- TOTAL LIABILITIES ........................................................................... 971 582 --------- -------- EQUITY Common stock.................................................................................. 11,737 11,407 Paid-in capital............................................................................... 26,017 24,042 Retained earnings............................................................................. 10,830 11,187 Common stock in treasury...................................................................... (1,889) Unrealized gain on securities available for sale.............................................. 1,391 1,912 --------- -------- TOTAL EQUITY ............................................................................... 49,975 46,659 --------- -------- TOTAL LIABILITIES AND EQUITY .............................................................. $ 50,946 $ 47,241 ========= ======== CONDENSED STATEMENTS OF INCOME (In thousands of dollars) Years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Dividends from subsidiaries...................................................... $ 2,365 $ 3,401 $ 6,933 Interest and dividend income..................................................... 185 193 196 Security gains, net.............................................................. 181 Total expenses .................................................................. (721) (150) (125) --------- --------- -------- Income before taxes and equity in undistributed earnings of subsidiaries......... 2,010 3,444 7,004 Income tax expense............................................................... (26) (9) (20) Equity in undistributed earnings of subsidiaries................................. 4,052 2,274 (1,820) --------- --------- -------- NET INCOME ..................................................................... $ 6,036 $ 5,709 $ 5,164 ========= ========= ======== CONDENSED STATEMENTS OF CASH FLOWS (In thousands of dollars) Years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income....................................................................... $ 6,036 $ 5,709 $ 5,164 Adjustments to reconcile net income to cash provided by operations Equity in undistributed earnings of subsidiaries................................ (4,052) (2,274) 1,820 Gain on sale of securities available for sale................................... (181) Changes in other, net........................................................... 61 5 8 --------- --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 1,864 3,440 6,992 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in interest-bearing deposit in subsidiary bank ....................... (1) 48 142 Proceeds from sale of securities available for sale.............................. 431 --------- --------- -------- NET CASH PROVIDED BY INVESTING ACTIVITIES ..................................... 430 48 142 --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid.............................................................. (2,168) (1,672) (1,468) Issuance of common stock......................................................... 337 247 408 Purchase of treasury shares..................................................... (1,926) --------- --------- -------- NET CASH USED IN FINANCING ACTIVITIES ......................................... (1,831) (3,351) (1,060) --------- --------- -------- Net change in cash.............................................................. 463 137 6,074 Beginning cash.................................................................. 6,654 6,517 443 --------- --------- -------- ENDING CASH .................................................................. $ 7,117 $ 6,654 $ 6,517 ========= ========= ========
41 First-Knox Banc Corp. 22 24 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) DEC. 31 SEPT. 30 JUNE 30 MARCH 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 Interest income..................................................... $ 11,009 $ 10,439 $ 9,728 $ 9,603 Net interest income................................................. 5,535 5,249 5,194 4,990 Provision for loan losses........................................... 231 211 251 81 Net income.......................................................... 1,320 1,604 1,618 1,494 Fully-diluted earnings per share.................................... 0.35 0.42 0.43 0.39 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.................................... 0.42 0.40 0.36 0.32
Fully-diluted earnings per share have been restated to reflect the 5% stock dividend distributed in September, 1996. NOTE 19 - PENDING ACCOUNTING CHANGES SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," was issued by the Financial Accounting Standards Board in 1996. It revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective for some transactions in 1997 and others in 1998. The effect on the financial statements is not expected to be material. NOTE 20 - PENDING MERGER AGREEMENT On October 28, 1996 the Corporation entered into an Agreement and Plan of Merger ("Agreement") with Park National Corporation ("Park National"), a bank holding company headquartered in Newark, Ohio, whereby Park National will acquire First-Knox Banc Corp. Under the terms of the Agreement, Park National will exchange approximately 0.5914 shares of Park National common stock for each share of First-Knox Banc Corp. outstanding in a tax-free exchange. Park National expects to issue an aggregate of 2,345,000 shares of common stock to complete the merger, which is expected to be accounted for as a pooling-of-interests. The exact exchange ratio will be determined by a formula that is based upon, among other things, the market price of Park National common stock and the number of shares of First-Knox Banc Corp. common stock outstanding or subject to options prior to closing. The transaction is subject to certain conditions including regulatory approval and the approval of the shareholders of First-Knox Banc Corp. and Park National. 42 23 1996 Annual Report 25 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, 1996 and 1995, 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, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Corporation changed its methods of accounting for impaired loans in 1995 and for certain investment and mortgage-backed securities in 1994 to conform with new accounting guidance. /s/ CROWE, CHIZEK AND COMPANY LLP CROWE, CHIZEK AND COMPANY LLP Columbus, Ohio January 22, 1997 43 First-Knox Banc Corp. 24 26 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 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 Financial Institutions. Emphasis in this analysis is placed on comparisons of the years 1996 to 1995 and 1995 to 1994, with further discussion of historical data where appropriate. The purpose of this discussion is to provide a better understanding of the consolidated financial statements. This discussion should be read in conjunction with the audited consolidated financial statements and footnotes and with the ratios, statistics, and discussions. Forward looking statements contained in this review involve risks and uncertainties and are subject to change based on various important factors. The factors discussed in these forward looking statements, as well as other factors, could cause actual results to differ materially from those expressed or implied. Market or institutional trends, events or uncertainties are not expected to have a material effect on liquidity, capital resources or operations except as discussed herein. Other than as discussed herein, there are no current recommendations by regulatory authorities which would have such effect if implemented. RESULTS OF OPERATIONS Net income of $6,036,000 for 1996 represented a 5.7% increase over 1995. 1995's net income represented a 10.6% increase over 1994. The return on average assets was 1.14% for 1996, compared to 1.20% for 1995 and 1.13% for 1994. The return on average shareholders' equity was 12.67% for 1996, compared to 13.16% for 1995 and 12.94% for 1994. As discussed in more detail below, the increase in net income for 1996 resulted primarily from higher net interest income offset by a 4.8% increase in non-interest expenses. Non-interest income recorded growth of $301,000 or 9.6% compared to 1995. 1995 non-interest income and non-interest expense increased 13.8% and 1.5%, respectively, over 1994. NET INTEREST INCOME Net interest income, the amount by which interest and fees from earning assets exceeds the interest cost of liabilities, is the most important component of consolidated earnings. Net interest income is affected by volumes, interest rates, and composition of earning assets and interest bearing liabilities, as well as by 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), Table II shows net interest income was $22.65 million in 1996, $21.21 million in 1995 and $20.58 million in 1994. The net interest spread declined 13 basis points while average earning assets increased 10.4% and average interest bearing liabilities increased 11.7% over 1995. The 1995 net interest spread declined 21 basis points while average earning assets increased TABLE I - FINANCIAL RATIOS FOR FIVE YEARS
1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ PROFITABILITY Rate of return on: Average assets....................................... 1.14% 1.20% 1.13% 1.12% .99% Average equity....................................... 12.67 13.16 12.94 13.50 13.84 Beginning equity..................................... 12.94 13.98 13.44 15.49 14.56 As a percent of average assets: Net interest income (fully-taxable equivalent basis). 4.29% 4.45% 4.51% 4.74% 4.40% Non-interest income.................................. .65 .66 .60 .59 .61 Provision for loan losses............................ .15 .12 .14 .27 .35 Non-interest expense................................. 2.95 3.12 3.21 3.33 3.14 Cash dividends per share (1).......................... $.68 $.47 $.40 $.35 $.32 Cash dividends as a percentage of net income.......... 42.0% 30.7% 29.6% 27.9% 26.6% OTHER Average loans to average deposits..................... 81.5% 80.4% 78.7% 77.5% 75.9% Net loan charge-offs to average loans................. .12 .09 .12 .24 .42 Allowance to year-end loans........................... 1.26 1.26 1.27 1.24 1.14 Average shareholders' equity to average assets........ 9.03 9.10 8.75 8.32 7.12 Changes in average balances: Total assets......................................... 10.7% 4.5% 9.8% 3.7% 3.6% Shareholders' equity................................. 9.8 8.7 15.4 21.1 10.5 Loans................................................ 8.0 5.4 5.2 4.5 6.5 Deposits ............................................ 6.6 3.2 3.5 2.3 3.3 (1) Restated for stock dividends and stock splits.
44 25 1996 Annual Report 27 4.3% and average interest bearing liabilities increased 3.5% over 1994. A rate and volume analysis of interest income and interest expense changes for 1996 and 1995 is provided in Table III. As noted in Table II , average earning assets yields (FTE) were 8.52% in 1996, 8.59% in 1995 and 7.91% in 1994. Average interest bearing liability costs were 4.63% in 1996, 4.57% in 1995 and 3.68% in 1994. The net interest margin (FTE net interest income divided by average earning assets) was 4.54%, 4.71% and 4.76% for the same respective years. The decline in 1996 resulted primarily from earning asset rates declining and interest rates paid on interest bearing liabilities increasing. A shift in the composition of customer deposits during 1996 contributed to the margin decline over 1995, as average balances for savings and interest-bearing demand deposits declined by 4.2% or $6.27 million while higher cost time deposits increased by 16.01% or $31.0 million. This shift continued a trend from the previous year. The addition of FHLB advances during the third quarter of 1996 to fund securities purchases, also contributed to the margin decline. A total of $40.0 million was added to both borrowed funds and the security portfolio which raised the total cost of funds and lowered the earning asset yield for 1996. This investment program produced approximately $200,000 during 1996, although it did lower the net interest margin. This program was initiated to leverage existing capital. The decline in net interest margin during 1995 was largely due to earning asset rates increasing slower than interest rates paid on interest-bearing liabilities. 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 through loan growth. The difference between a financial institution's interest-sensitive assets (i.e., assets which will mature or reprice within a specified 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, 1996, the Corporation's gap position was negative within one year with $119.2 million of interest bearing liabilities repricing in excess of earning assets. This represents 22.1% of total earning assets. Approximately 45.9% of earning assets and 79.2% of interest-bearing liabilities reprice within one year of December 31, 1996. 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 2.6% over a twelve month period if interest rates were to immediately rise 2%. Conversely, net interest income is projected to improve by approximately 2.1% 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 interest rates for 1997. Management intends to maintain a negative one year gap position because it believes this is an optimum structure to attain long-term profit. An analysis of interest rate sensitive assets and liabilities at December 31, 1996 can be found in Table V. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan 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 1996 was 32.5% higher than 1995 as a result of higher net loan charge-offs and loan growth. As percentages of loans, the expense provisions were .23%, .19% and .21% in 1996, 1995 and 1994, respectively. Net loan charge-offs represented .12%, .09% and .12% of average outstanding loans during 1996, 1995 and 1994, respectively. Approximately 33.7% of net charge-offs in 1996 resulted from commercial related loans, with consumer loans accounting for 66.3% of the balance. Over the past five years consumer related loans accounted for approximately 52.1% of net charge-offs, commercial loans approximately 46.7% and mortgage loans approximately 1.2%. As a percentage of year-end loan balances, the allowance for possible losses was 1.26% in 1996, 1.26% in 1995 and 1.27% in 1994. At the end of 1996, approximately 60% of the allowance is unallocated; i.e., not allocated to specific loans or portfolios based on historical portfolio losses, compared to 70% at the previous year end. Management anticipates that as a percentage of loan balances, 1997 net loan charge-offs should approximate 1996 levels. Non-performing loans of $2.22 million represented .61% of 1996 year-end balances compared to $1.06 million and .32% at December 31, 1995. 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 $3.43 million was $301,000 or 9.6% higher than 1995. Customer service fees and commissions increased $108,000 compared to 1995. Trust department income increased $72,000 or 10.3%. Net security gains were $171,000 in 1996. The Corporation had minimal net gains and losses in 1995 and 1994. The majority of the gain in 1996 was the result of the sale of an equity security by the Corporation which resulted in a gain of $180,000. Total non-interest income of $3.13 million in 1995 was $380,000 or 13.8% higher than 1994. Customer service fees and commissions increased $389,000 compared to 1994. Trust department income increased $114,000 or 19.4% compared to 1994. 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. 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 $720,000 or 4.8% in 1996 after increasing $213,000 or 1.5% in 1995. A reduction in FDIC expense in 1996 of $439,000 contributed significantly to minimizing the 1996 increase. The Corporation incurred legal and professional expenses totaling $595,000 related to the pending merger with Park National Corporation as discussed in Note 20. Occupancy expenses increased in 1996 by $249,000 or 11.7%, attributed largely to increased occupancy costs at the Main Office branch of First-Knox. Salaries and employee benefits were higher in 1996 by $145,000 or 2.0%, while on a net basis, all other expenses were down $269,000 or 4.8%. A reduction in FDIC insurance expense of $403,000 in 1995 contributed significantly to the small total increase in non-interest expenses over 1994. Occupancy expenses increased in 1995 by $296,000 or 16.22% principally related to the Main Office expan- 45 First-Knox Banc Corp. 26 28 TABLE II - AVERAGE BALANCES AND ANALYSIS OF NET INTEREST INCOME
1996 1995 1994 ---------------------------- ----------------------------- ---------------------------- AVERAGE AVERAGE AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (In thousands of dollars) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE - -------------------------------- ---------------------------- ----------------------------- ---------------------------- SECURITIES: Taxable....................... $ 99,143 $ 6,606 6.66% $ 82,390 $ 5,214 6.33% $ 81,549 $ 4,477 5.49% Non-taxable (1)............... 51,782 4,390 8.48 49,889 4,288 8.60 50,024 4,242 8.48 -------- -------- ---- -------- -------- ---- -------- -------- ---- Total ....................... 150,925 10,996 7.29 132,279 9,502 7.18 131,573 8,719 6.63 -------- -------- ---- -------- -------- ---- -------- -------- ---- LOANS (2): Commercial (1)................ 103,486 10,031 9.69 95,629 9,411 9.84 94,468 8,021 8.49 Real estate................... 161,505 13,201 8.17 146,803 11,941 8.13 137,409 10,947 7.97 Consumer (3).................. 74,560 7,814 10.48 71,827 7,625 10.62 66,284 6,444 9.72 -------- -------- ---- -------- -------- ---- -------- -------- ---- Total ....................... 339,551 31,046 9.14 314,259 28,977 9.22 298,161 25,412 8.52 -------- -------- ---- -------- -------- ---- -------- -------- ---- MONEY MARKET INVESTMENTS: Federal funds sold............ 5,625 265 4.71 3,911 220 5.63 2,316 77 3.32 Interest-bearing deposits with banks................... 1,336 66 4.94 157 8 5.10 60 2 3.33 -------- -------- ---- -------- -------- ---- -------- -------- ---- Total ....................... 6,961 331 4.76 4,068 228 5.60 2,376 79 3.31 -------- -------- ---- -------- -------- ---- -------- -------- ---- TOTAL EARNING ASSETS ........ 497,437 42,373 8.52% 450,606 38,707 8.59% 432,110 34,210 7.91% -------- -------- -------- Loan allowance .............. (4,298) (3,983) (3,784) Other assets.................. 34,590 30,154 27,902 -------- -------- -------- TOTAL ASSETS .............. $527,729 $476,777 $456,228 ======== ======== ======== INTEREST-BEARING DEPOSITS: Savings and interest-bearing demand deposits............... $143,825 3,502 2.43% $150,095 4,029 2.68% $161,812 4,072 2.52% Time deposits................. 224,541 12,924 5.76 193,554 11,129 5.75 172,148 7,728 4.49 -------- -------- ---- -------- -------- ---- -------- -------- ---- Total ....................... 368,366 16,426 4.46 343,649 15,158 4.41 333,960 11,800 3.53 -------- -------- ---- -------- -------- ---- -------- -------- ---- BORROWED FUNDS: Short-term.................... 13,043 585 4.49 6,196 390 6.29 9,153 349 3.81 Long-term..................... 46,497 2,800 6.02 33,413 1,951 5.84 27,246 1,478 5.42 -------- -------- ---- -------- -------- ---- -------- -------- ---- Total ....................... 59,540 3,385 5.69 39,609 2,341 5.91 36,399 1,827 5.02 -------- -------- ---- -------- -------- ---- -------- -------- ---- TOTAL INTEREST-BEARING LIABILITIES ............... 427,906 19,811 4.63 383,258 17,499 4.57 370,359 13,627 3.68 -------- -------- -------- Non-interest bearing demand deposits.............. 48,041 47,023 44,722 -------- -------- -------- Total Interest-Bearing Liabilities and Demand Deposits .................... 475,947 19,811 4.16 430,281 17,499 4.07 415,081 13,627 3.28 -------- -------- -------- Other liabilities............. 4,146 3,106 1,248 -------- -------- -------- Total Liabilities ........... 480,093 433,387 416,329 Shareholders' equity.......... 47,636 43,390 39,899 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........ $527,729 $476,777 $456,228 ======== ======== ======== INTEREST SPREAD ............. $ 22,562 3.89% $ 21,208 4.02% $ 20,583 4.23% ======== ======== ======== AS A PERCENTAGE OF EARNING ASSETS: INTEREST INCOME ............. 8.52% 8.59% 7.91% INTEREST EXPENSE ............ 3.98 3.88 3.15 ---- ---- ---- NET INTEREST INCOME ......... 4.54% 4.71% 4.76% ==== ==== ==== (1) Income is computed on a fully-taxable equivalent basis utilizing a 34% tax rate. The amount of such adjustment was:
1996 1995 1994 ------ ------ ------ Non-taxable securities..... $1,493 $1,496 $1,442 Commercial loans........... 101 123 174 ------ ------ ------ $1,594 $1,619 $1,616 ====== ====== ====== (2) Non-accruing loans are included in the average balances presented. (3) Includes balances outstanding under home equity lines of credit.
46 27 1996 Annual Report 29 sion of First-Knox. Salaries and employee benefits were higher in 1995 compared to 1994 by $325,000 or 4.81%, while on a net basis all other expenses were down $8,000 or 0.16%. INCOME TAXES Income tax expenses of $2,008,000, $1,565,000 and $1,267,000 were recorded in 1996, 1995 and 1994, respectively, representing 25.0%, 21.5% and 19.7% of income before taxes for each of the respective years. The 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 is the primary cause of these deviations from statutory rates. The Corporation does not plan to significantly increase its holdings of tax-exempt obligations during 1997. Tax exempt income from securities and loans represented 39.6%, 41.7% and 48.7% of income before income taxes in 1996, 1995 and 1994, respectively. As a percentage of average earning assets, average non-taxable balances were approximately 11.3%, in 1996, 12.9% in 1995, and 8.0% in 1994. FINANCIAL CONDITION Consolidated total assets were $573.8 million at the end of 1996 after recording growth of $76.9 million or 15.5% during 1996. This growth was funded primarily by FHLB advances which increased by $39.3 million and deposits which grew by $26.7 million. These new FHLB advances were used to purchase securities during the third quarter of 1996. Loans increased by $31.2 million, and securities increased by $45.4 million during 1996. Short-term borrowings increased by $16.9 million which included the addition of a $10 million FHLB advance. SECURITIES The consolidated securities portfolio increased by $45.4 million or 34.4% during 1996. Most of this growth was fueled by an investment program initiated during the third quarter of 1996 which utilized $40 million of FHLB advances as a funding source for purchasing mortgage-backed securities. Mortgage-backed securities represented 31.0% and 28.3% of the total securities portfolio at year end 1996 and 1995, respectively. Treasury securities decreased from 21.4% of total securities at the end of 1995 to 17.3% at the end of 1996. TABLE III - RATE AND VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1996-1995 1995-1994 ----------------------------- ------------------------------ 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................................................ $ 1,392 $ 284 $ 1,108 $ 737 $ 688 $ 49 Non-taxable (1)........................................ 102 (59) 161 46 58 (12) -------- ------- ------- ------- -------- ------- Total................................................. 1,494 225 1,269 783 746 37 -------- ------- ------- ------- -------- ------- LOANS: Commercial (1)......................................... 620 (141) 761 1,390 1,295 95 Real estate (2)........................................ 1,260 59 1,201 994 213 781 Consumer............................................... 189 (100) 289 1,181 595 586 -------- ------- ------- ------- -------- ------- Total................................................. 2,069 (182) 2,251 3,565 2,103 1,462 -------- ------- ------- ------- -------- ------- Money market investments (3)............................ 103 (28) 131 149 77 72 -------- ------- ------- ------- -------- ------- Total interest income................................. 3,666 15 3,651 4,497 2,926 1,571 -------- ------- ------- ------- -------- ------- CHANGE IN INTEREST EXPENSE Savings and interest-bearing demand deposits............ (527) (364) (163) (43) 186 (229) Time deposits........................................... 1,795 19 1,776 3,401 2,338 1,063 -------- ------- ------- ------- -------- ------- Total deposits......................................... 1,268 (345) 1,613 3,358 2,524 834 Short-term borrowings................................... 195 (68) 263 41 85 (44) Long-term borrowings.................................... 849 62 787 473 101 372 -------- ------- ------- ------- -------- ------- Total interest expense................................. 2,312 (351) 2,663 3,872 2,710 1,162 -------- ------- ------- ------- -------- ------- NET INTEREST INCOME ................................. $ 1,354 $ 366 $ 988 $ 625 $ 216 $ 409 ======== ======= ======= ======= ======== ======= (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 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.
47 First-Knox Banc Corp. 28 30 As a percentage of the total securities portfolio, municipal securities represented 32.4% at year end 1996 and 41.8% at year end 1995. 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 was reflected net of tax as an increase to shareholders' equity. The average balances of securities represented 30.3% of average earning assets in 1996, 30.3% in 1995 and 31.0% in 1994. At the end of 1996, the estimated fair value of all securities exceeded amortized cost by $2.1 million or 1.2%. At the end of 1995, the estimated fair value of all securities exceeded amortized cost by $2.9 million or 2.2%. Approximately 9.0% of the total portfolio will mature in 1997. The average maturity of the security portfolio was 5.5 years in both 1994 and 1995 compared to 6.2 years in 1996. The Corporation's security portfolio contained no derivatives during any period covered by this report. Additional detail regarding securities is included in Table IV. LOANS Loans represented 68.3% of average earning assets in 1996, 69.7% in 1995, and 69.0% in 1994. In terms of full year average balances, loans have grown by 8.0%, 5.4% and 5.2% in 1996, 1995 and 1994, respectively. Residential real estate loans grew by $17.5 million, or 11.4% in 1996, while commercial loans increased by $5.1 million, or 5.0%. Consumer loan balances increased $8.6 million, or 11.4% during 1996. While the loan portfolio is the Corporation's highest yielding asset, it also contains the highest risk of loss. The real estate loan portfolio is primarily residential 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. There is no significant industry concentration with these loans. The consumer loans are composed principally of financing to individuals for vehicles and consumer assets. All of these portfolios could be negatively impacted by an economic downturn in this north central Ohio market area. To mitigate risks associated with the borrower's ability to repay, the Corporation generally requires collateral on loans. To reduce the risk of fluctuating collateral values, the Corporation generally requires down payments on its real estate and consumer loans and scheduled periodic payments on most types of financing. As of December 31, 1996, only 2.2% of total loans were unsecured. DEPOSITS Customer deposits from local markets are the Corporation's primary source of funds. Deposits totaled $430.8 million at the end of 1996, 6.6% higher than a year ago. Based on full year average balances, deposits grew by 6.6% in 1996, 3.2% in 1995 and 3.5% in 1994. TABLE IV - SECURITIES AVAILABLE FOR SALE
TAX U.S. FEDERAL STATE AND MORTGAGE- EQUIVALENT (In thousands of dollars) TREASURY AGENCIES POLITICAL BACKED (2) OTHER TOTAL YIELD (1) - ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1996 (At fair value) Maturity: Within one year.................... $ 9,028 $ 4,504 $ 2,393 $ 15,925 7.15% After one year through five years.. 21,742 $11,060 10,995 19,830 63,627 7.27% After five years through ten years. 15,929 19,405 32,806 68,140 7.94% After ten years.................... 22,669 $ 7,065 29,734 7.83% -------- ------- ------- ------- -------- --------- ----- Total carrying value.................. $ 30,770 $26,989 $57,573 $55,029 $ 7,065 $ 177,426 Taxable equivalent purchase yield (1). 6.13% 7.57% 8.46% 7.65% 7.00% 7.61% Average maturity (in years)........... 1.7 6.5 7.7 5.3 20.0 6.2 U.S. FEDERAL STATE AND MORTGAGE- (In thousands of dollars) TREASURY AGENCIES POLITICAL BACKED (2) OTHER TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1995 (At fair value) 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 U.S. FEDERAL STATE AND MORTGAGE- (In thousands of dollars) 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 (1) Yields are based on historical cost and computed on a fully tax-equivalent basis assuming a tax 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.
48 29 1996 Annual Report 31 The Corporation experienced a shift in the composition of its deposits during 1996. Non-interest bearing demand deposits increased by $0.6 million or 1.1% during 1996 and represented 12.8% of all deposits at year end. Interest bearing demand deposits increased by $9.5 million or 23.8% during 1996 and represented 11.4% of all deposits compared to 9.9% in 1995. Savings deposits declined by $10.9 million or 11.00% during 1996 and represented 20.5% of all deposits compared to 24.5% in 1995. Time deposits increased by $27.5 million or 13.1% during 1996 and represented 55.2% of all deposits compared to 52.1% of deposits in 1995. BORROWINGS The Corporation and its subsidiaries incur short-term borrowings through customer related repurchase agreements, amounts due to the U.S. Treasury and through correspondent banks including the FHLB. These amounts are subject to rapid rate fluctuation and, as described in Note 7, are collateralized by selected securities. Short-term advances with FHLB are collateralized under the same terms, collateral and limitations as the long-term advances which are disclosed in Note 8. Short-term borrowings averaged $13.0 million, $6.2 million, and $9.2 million for 1996, 1995 and 1994, respectively. Long-term borrowings at the end of 1996 are comprised of FHLB advances. The amounts and terms of these advances are disclosed in Note 8, along with the collateral required and limitations imposed by the FHLB. These long-term advances increased by $29.3 million in 1996 largely as a part of funding the investment program initiated during the third quarter of 1996 which was designed to leverage more of the Corporation's capital. These long-term advances declined $1.3 million or 3.9% during 1995. SHAREHOLDERS' EQUITY Shareholders' equity totaled $50.0 million at December 31, 1996, compared to $46.7 million at December 31, 1995. At December 31, 1996 and December 31, 1995 the ratio of shareholders' equity to assets was 8.71% and 9.39%, respectively. The Corporation complied with the capital requirements established by the Federal Reserve System at each of those dates. Under the "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. Cash dividends declared to shareholders of the Corporation in 1996 amounted to $2,536,000, representing an increase of 44.8% 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, 1996. 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 ....................................... $ 128,944 $ 17,861 $ 27,629 $ 48,628 $223,062 $138,778 $ 361,840 Investment securities and federal funds sold. 823 1,836 2,075 9,154 13,888 108,509 122,397 Mortgage-backed securities (1)............... 8,509 241 96 1,605 10,451 44,578 55,029 --------- --------- --------- --------- --------- -------- --------- TOTAL ...................................... 138,276 19,938 29,800 59,387 247,401 291,865 539,266 --------- --------- --------- --------- --------- -------- --------- INTEREST RATE SENSITIVE LIABILITIES Interest-bearing deposits (2)................ 62,094 64,173 75,136 128,348 329,751 45,695 375,446 Borrowings................................... 25,869 180 272 10,558 36,879 50,383 87,262 --------- --------- --------- --------- --------- -------- --------- TOTAL ..................................... 87,963 64,353 75,408 138,906 366,630 96,078 462,708 --------- --------- --------- --------- --------- -------- --------- INTEREST RATE SENSITIVITY GAP ................. $ 50,313 $ (44,415) $ (45,608) $ (79,519) $(119,229) $195,787 $ 76,558 ========= ========= ========= ========= ========= ======== ========= CUMULATIVE INTEREST RATE SENSITIVITY GAP ..... $ 50,313 $ 5,898 $ (39,710) $(119,229) $(119,229) $ 76,558 ========= ========= ========= ========= ========= ======== INTEREST RATE SENSITIVITY GAP RATIO ........... 1.57x .31x .40x .43x .67x 3.04x 1.17x ========= ========= ========= ========= ========= ======== ========= CUMULATIVE INTEREST RATE SENSITIVITY GAP AS A PERCENTAGE OF TOTAL INTEREST-EARNING ASSETS ............... 9.33% 1.09% (7.36)% (22.11)% (22.11)% 14.20% 14.20% ========= ========= ========= ========= ========= ======== ========= (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 total amount to be repriced within one year.
49 First-Knox Banc Corp. 30 32 over 1995 and 42.0% of 1996 net income. This payout ratio in 1996 was higher than the average payout ratio during the previous five years which ranged from 26% to 31%. 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. 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 to meet liquidity needs. Operating activities provided cash of $7.9 million, $7.4 million and $5.8 million in 1996, 1995 and 1994, respectively. Cash and cash equivalents increased from $20.4 million at December 31, 1995 to $20.8 million at December 31, 1996. Refer to the consolidated statements of cash flows for a summary of the sources and uses of cash in 1996, 1995 and 1994. Taking into account the capital adequacy, profitability, and reputation maintained by the Corporation, the available liquidity sources are considered adequate to meet the current and projected needs. FAIR VALUES OF FINANCIAL INSTRUMENTS The Corporation disclosed the estimated fair value and related carrying values of its financial instruments at December 31, 1996 and 1995 in Note 16 of the consolidated financial statements. 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, 1996 and 1995 were consistently applied. The estimated fair values at December 31, 1996 and 1995, 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 changes 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. NEW ACCOUNTING PRONOUNCEMENT SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," was issued by the Financial Accounting Standards Board in 1996. It revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective for some transactions in 1997 and others in 1998. The effect on the financial statements has not yet been determined. PENDING MERGER As discussed in Note 20, on October 28, 1996, the Corporation entered into an Agreement and Plan of Merger ("Agreement") with Park National Corporation ("Park National"), a bank holding company headquartered in Newark, Ohio, whereby Park National will acquire First-Knox Banc Corp. Under the terms of the Agreement, Park National will exchange approximately 0.5914 shares of Park National common stock for each outstanding share of First-Knox Banc Corp. in a tax free exchange. Park National expects to issue an aggregate of 2,345,000 shares of common stock to complete the merger which is expected to be accounted for as a pooling-of-interests. The exact exchange ratio will be determined by a formula that is based upon, among other things, the market price of Park National common stock and the number of shares of First-Knox Banc Corp. common stock outstanding or subject to options prior to closing. The transaction is valued at approximately $31.34 per share of First-Knox Banc. Corp common stock, or approximately $124.3 million based on the $53.00 closing price of Park National common stock on December 31, 1996. The transaction is subject to certain conditions including regulatory approval and the approval of the shareholders of First-Knox Banc Corp. and Park National. 50 31 1996 Annual Report 33 TABLE VI - TEN YEARS OF PROGRESS STATEMENT SUMMARY
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' Equity ($000)....... $ 49,975 $ 46,659 $ 40,832 $ 38,423 $ 30,115 $ 27,144 $ 24,586 $ 22,290 $ 20,198 $ 18,298 Book Value Per Share.............. 13.31 12.49 10.70 10.14 9.20 8.31 7.53 6.83 6.19 5.60 Fully-Diluted Earnings Per Share . 1.59 1.50 1.34 1.27 1.12 1.01 .93 .88 .82 .73 Cash Dividends ($000)............. 2,536 1,751 1,527 1,302 1,051 973 927 856 786 721 Stock Dividend/Split.............. 5% 100% 5% 5% 5% 5% 60% 5% 5% 5% Banking Offices................... 12 12 12 12 12 12 12 12 9 8 Total Staff....................... 250 256 264 251 245 239 250 243 230 210 CONSOLIDATED BALANCE SHEET SUMMARY (In thousands of dollars) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash & Due from Banks............. $ 20,847 $ 17,012 $ 18,110 $ 16,158 $ 14,687 $ 11,824 $ 12,628 $ 13,538 $ 11,389 $ 8,489 Investments....................... 177,426 131,988 131,211 110,947 106,268 100,953 94,434 100,020 86,747 86,494 Federal Funds Sold................ 3,400 12,700 3,850 7,800 8,050 4,950 1,900 2,400 Total Loans....................... 361,840 330,641 304,168 290,908 276,437 261,554 248,110 223,076 195,182 166,276 Less Allowance for Loan Losses.... (4,545) (4,166) (3,876) (3,597) (3,162) (2,905) (2,715) (2,338) (1,980) (1,748) Net Loans......................... 357,295 326,475 300,292 287,311 273,275 258,649 245,395 220,738 193,202 164,528 Bank Premises and Equipment....... 10,791 10,993 10,035 6,200 4,939 5,073 5,300 5,387 4,351 3,807 Other Assets...................... 7,404 7,031 7,543 6,098 6,586 7,445 8,264 9,084 7,084 7,208 TOTAL ........................... $573,763 $496,899 $467,191 $439,414 $409,605 $391,744 $374,071 $353,717 $304,673 $272,926 LIABILITIES Demand Deposits................... $104,703 $ 94,588 $ 93,709 $ 91,384 $ 86,394 $ 68,162 $ 66,222 $ 64,169 $ 58,170 $ 53,930 Savings Deposits.................. 88,258 99,133 109,675 115,587 112,619 100,093 80,285 80,430 68,838 69,419 Other Time Deposits............... 237,802 210,346 173,796 171,206 163,281 178,665 186,122 172,258 144,160 119,321 Total Deposits.................... 430,763 404,067 377,180 378,177 362,294 346,920 332,629 316,857 271,168 242,670 Long-Term Debt.................... 62,375 33,415 34,720 5,900 5,159 5,300 5,370 5,440 2,510 2,580 Other Liabilities................. 30,650 12,758 14,459 16,914 12,037 12,380 11,486 9,130 10,797 9,378 Total Deposits and Other Liabilities....................... 523,788 450,240 426,359 400,991 379,490 364,600 349,485 331,427 284,475 254,628 Shareholders' Equity.............. 49,975 46,659 40,832 38,423 30,115 27,144 24,586 22,290 20,198 18,298 TOTAL ........................... $573,763 $496,899 $467,191 $439,414 $409,605 $391,744 $374,071 $353,717 $304,673 $272,926 CONSOLIDATED STATEMENT OF INCOME SUMMARY (In thousands of dollars) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and Fees on Loans........ $ 30,945 $ 28,854 $ 25,238 $ 24,960 $ 25,448 $ 27,214 $ 26,414 $ 23,775 $ 19,422 $ 16,636 Interest and Dividends Earned on Total Securities.............. 9,503 8,006 7,277 6,124 6,960 8,021 8,012 7,295 6,400 6,363 Federal Funds Sold................ 331 228 79 208 301 646 860 550 326 363 TOTAL INTEREST INCOME ........... 40,779 37,088 32,594 31,292 32,709 35,881 35,286 31,620 26,148 23,362 INTEREST EXPENSE Interest on Deposits.............. 16,426 15,158 11,800 12,023 15,157 19,720 20,735 18,539 14,651 12,959 Interest on Borrowed Money........ 3,385 2,341 1,827 674 904 1,016 914 973 715 657 TOTAL INTEREST EXPENSE .......... 19,811 17,499 13,627 12,697 16,061 20,736 21,649 19,512 15,366 13,616 NET INTEREST INCOME .............. 20,968 19,589 18,967 18,595 16,648 15,145 13,637 12,108 10,782 9,746 Provision for Credit Losses....... (774) (584) (638) (1,124) (1,394) (1,066) (957) (911) (785) (400) Other Income...................... 3,428 3,127 2,747 2,465 2,452 2,389 2,005 1,716 1,685 1,777 Other Expenses.................... (15,578) (14,858) (14,645) (13,827) (12,584) (12,022) (10,649) (9,427) (8,379) (8,268) INCOME BEFORE FEDERAL INCOME TAXES 8,044 7,274 6,431 6,109 5,122 4,446 4,036 3,486 3,303 2,855 Federal Income Taxes.............. (2,008) (1,565) (1,267) ( 1,443) (1,171) (915) (813) (537) (616) (451) NET INCOME ...................... $ 6,036 $ 5,709 $ 5,164 $ 4,666 $ 3,951 $ 3,531 $ 3,223 $ 2,949 $ 2,687 $ 2,404
Per share data is restated for stock dividends and stock splits. 51 First-Knox Banc Corp. 32 34 1996 DIRECTORS FIRST-KNOX BANC CORP, DIRECTORS Philip H. Jordan, Jr., Chairman of the Board, Retired President, Kenyon College Maureen Buchwaid, Vice-President, Ariel Corporation James J, Cullers, Lawyer, Zelkowitz, Barry & Cullers Robert S. Gregg, President, Phoenix Holding Company James E. McClure, Retired President, McClure Motors, Inc. James A. McElroy, Chairman of The Board, AMG Industries John D. Minor, Consultant Noel C. Parrish, President, NOE, Inc. Alan Riedel, Retired Vice Chairman, Cooper Industries Kenneth W. Stevenson, Retired President, Cooper Energy Services 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 Buchwaid, Vice-President, Ariel Corporation James J, Cullers, Lawyer, Zelkowitz, Barry & Cullers William B. Levering, Secretary and Treasurer Inc., Levering Management, Inc. James A. McElroy, Chairman of the Board, AMG Industries Noel C. Parrish, President, NOE, Inc. Mark R. Ramser, President, Ohio Cumberland Gas Co. R. Dan Snyder, Director, Snyder Funeral Homes, Inc. Kenneth W. Stevenson, Retired President, Cooper Energy Services Carlos E. Watkins, President and Chief Executive Officer, First-Knox National Bank DIRECTORS EMERITI Robert S. Gregg Robert B. Lantz John B. Minor J. Robert Purdy William A. Stroud Stephen P. Upham Jr. 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. 52 33 1996 Annual Report 35 OFFICERS AND OFFICE LOCATIONS 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 FIRST-KNOX NATIONAL BANK 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. Shaffer, Assistant Vice President Rebecca A. Brownfield, Administrative Officer OPERATIONS, DEPOSITS AND INVESTMENTS Ian Watson, Vice President and Secretary Cheri L. Butcher, Assistant Vice President Bruce B. Hite, Assistant Vice President and Security Officer 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, Senior Mortgage Underwriter Christopher D. Anderson, Administrative Officer Julie A. Cline, 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 Debra E. Holiday, Manager Diana R. Wagner, Assistant Manager CENTERBURG Sharon A. Dailey, 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 Jennifer S. Mack, 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 FIRST-KNOX NATIONAL BANK OFFICES MAIN OFFICE One South Main Street Mount Vernon 43050 614/399-5500 COSHOCTON AVENUE 810 Coshocton Avenue Mount Vernon 43050 614/397-5551 BELLVILLE 154 Main Street Bellville 44813 419/886-3711 CENTERBURG 35 West Main Street Centerburg 43011 614/625-6136 DANVILLE Public Square Danville 43014 614/599-6686 EDISON 504 West High Street Mount Gilead 43338 419/947-4686 FREDERICKTOWN 137 North Main Street Fredericktown 43019 614/694-2015 LEXINGTON 10 Plymouth Street Lexington 44904 419/884-3005 MILLERSBURG 60 West Jackson Street Millersburg 44654 330/674-2610 MOUNT GILEAD 17 West High Street Mount Gilead 43338 419/946-9010 FARMERS AND SAVINGS BANK OFFICES LOUDONVILLE 120 North Water Street Loudonville 44842 419/994-4115 PERRYSVILLE 112 North Bridge Street Perrysville 44864 419/938-5622 53 First-Knox Banc Corp. 34 36 SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS The Corporation's headquarters are located at: P.O. Box 871, One South Main Street, Mount Vernon, Ohio 43050, phone: 614/399-5500, 800/837-5266. SPECIAL SHAREHOLDERS' MEETING The Special Shareholders' Meeting of First-Knox Banc Corp. will be held on Wednesday, April 23, 1997, at 3:30 p.m. local time, at the Dan Emmett Conference Center, 150 Howard Street, 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, 1996, 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. 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 WEB SITE For up-to-date information, visit our Web site at www.firstknox.com [FIRST-KNOX BANC CORP. LOGO] 54 35 1996 Annual Report EX-21 4 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. 56 EX-23 5 EXHIBIT 23 1 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 22, 1997 related to the consolidated balance sheets of First-Knox Banc Corp. as of December 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ending December 31, 1996, which report is incorporated by reference in this Form 10-K. Crowe, Chizek and Company LLP Columbus, Ohio March 25, 1997 57 EX-27 6 EXHIBIT 27
9 0000756899 FIRST-KNOX BANC CORP. 1,000 YEAR DEC-31-1996 DEC-31-1996 20,308 539 0 0 177,426 0 0 361,840 4,545 573,763 430,763 24,887 5,763 62,375 0 0 11,737 38,238 573,763 30,945 9,834 0 40,779 16,426 19,811 20,968 774 171 15,578 8,044 6,036 0 0 6,036 1.59 1.59 4.54 317 1,904 476 11,591 4,166 579 184 4,545 1,539 0 3,006
-----END PRIVACY-ENHANCED MESSAGE-----