10-Q 1 l89427ae10-q.txt BANCFIRST OHIO CORP. FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-18840 BancFirst Ohio Corp. (Exact name of registrant as specified in its charter) Ohio 31-1294136 ---- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 422 Main Street Zanesville, Ohio 43701 (Address of principal executive offices) (Zip Code) (740) 452-8444 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Class Outstanding as of August 10, 2001 ----- --------------------------------- Common Stock, No Par Value 8,742,000 1 2 INDEX BANCFIRST OHIO CORP.

2 3 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS BANCFIRST OHIO CORP. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of the financial statements. 3 4 BANCFIRST OHIO CORP. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

The accompanying notes are an integral part of the financial statements. 4 5 BANCFIRST OHIO CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

The accompanying notes are an integral part of the financial statements 5 6 BANCFIRST OHIO CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) The consolidated financial statements for interim periods are unaudited; however, in the opinion of management of BancFirst Ohio Corp. ("Company"), the accompanying consolidated financial statements contain all material adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position and results of operations and cash flows for the periods presented. The unaudited financial statements are presented in accordance with the requirements of Form 10-Q and do not include all disclosures normally required by generally accepted accounting principles. Reference should be made to the Company's consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000 for additional disclosures, including a summary of the Company's accounting policies. The results of operations for the three month and six month periods ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year. 1) BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. 2) NEW ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133 (as amended by SFAS No. 138), "Accounting for Derivative Instruments and Hedging Activities" was issued. These statements establish accounting and reporting standards for derivative instruments and for hedging activities. The provisions of these statements were implemented in the first quarter of 2001 and impacted the accounting for the Company's interest rate swap transactions that had a total notional amount of $63,125 and $64,375 at June 30, 2001 and December 31, 2000, respectively. The impact on the Company's consolidated financial statements as of June 30, 2001 and for the six month period then ended was to decrease net income by $14, decrease accumulated other comprehensive income by $796, increase other liabilities by $1,246 and increase other assets by $436. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral, requires certain disclosures, but carries over most of the provisions of SFAS No. 125 without reconsideration. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 140 is effective for transfers occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This statement has had no effect on the Company's earnings or financial condition. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations be accounted for using the purchase method. This statement applies to business combinations initiated after June 30, 2001. SFAS No. 142, which is effective January 1, 2002, requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles such as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairment of goodwill. SFAS No. 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company estimates that the elimination of goodwill amortization expense will positively impact net income in 2002 by approximately $1,100. The Company has not yet determined what impact, if any, the goodwill impairment provisions may have on the Company's financial 6 7 statements. 3) ACQUISITION On June 20, 2000, the Company completed the acquisition of Milton Federal Financial Corporation ("Milton"). In connection with the acquisition, the Company issued 965 common shares having a total value of approximately $14,243 and paid cash of $14,073 to the Milton shareholders. The acquisition is being accounted for as a purchase. Accordingly, Milton's results of operations have been included from the date of acquisition. Total assets added from this acquisition approximated $259,194. The following summarizes the pro-forma results of operations for the six months ended June 30, 2000 as if Milton had been acquired as of the beginning of such period: Net interest income $ 22,442 Net income 6,865 Basic earnings per share .78 Diluted earnings per share .77 4) COMPUTATION OF EARNINGS PER SHARE The computation of earnings per share is as follows. All share and per share amounts for the three month and six month periods ended June 30, 2001 have been adjusted to give retroactive effect to the 5% stock dividend paid October 31, 2000:

5) COMPREHENSIVE INCOME The Company's comprehensive income, determined in accordance with SFAS No. 130, was $4,139 and $2,819 for the three months ended June 30, 2001 and 2000, respectively, and $8,397 and $5,761 for the six months ended June 30, 2001 and 2000, respectively. 7 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BANCFIRST OHIO CORP. For a comprehensive understanding of the Company's financial condition and performance, this discussion should be considered in conjunction with the Company's Consolidated Financial Statements, accompanying notes, and other information contained elsewhere herein. This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involves risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its bank subsidiary operate); competition for the Company's customers from other providers of financial services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates; prepayments of loans and securities; material unforeseen changes in the liquidity, results of operations, or other financial position of the Company's customers; and other risks detailed in the Company's Form 10-K for the year ended December 31, 2000 and its other filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. 8 9 BANCFIRST OHIO CORP. SELECTED FINANCIAL DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) Ratios are stated on an annualized basis. (2) Excludes amortization of goodwill and other identified intangibles. (3) The efficiency ratio is equal to non-interest expense (excluding amortization and non-recurring expenses) divided by net interest income on a fully tax equivalent basis plus non-interest income excluding gains on sales of securities. 9 10 OVERVIEW The reported results of the Company primarily reflect the operations of the Company's bank subsidiary. The Company's results of operations are dependent on a variety of factors, including the general interest rate environment, competitive conditions in the industry, governmental policies and regulations and conditions in the markets for financial assets. Like most financial institutions, the primary contributor to the Company's income is net interest income, which is defined as the difference between the interest the Company earns on interest-earning assets, such as loans and securities, and the interest the Company pays on interest-bearing liabilities, such as deposits and borrowings. The Company's operations are also affected by non-interest income, such as checking account and trust fees and gains from sales of loans. The Company's principal operating expenses, aside from interest expense, consist of salaries and employee benefits, occupancy costs, federal deposit insurance assessments, and other general and administrative expenses. AVERAGE BALANCES AND YIELDS The following tables present, for each of the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and percentage rates, and the net interest margin. Net interest margin is calculated by dividing net interest income on a fully tax equivalent basis ("FTE"), by total interest-earning assets. The net interest margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. FTE income includes tax-exempt income, restated to a pre-tax equivalent, based on the statutory federal income tax rate. All average balances are daily average balances. Non-accruing loans are included in average loan balances. 10 11

(1) Calculated on an annualized basis. (2) Non-accrual loans are included in the average loan balances. (3) Interest income is computed on a fully tax equivalent (FTE) basis, using a tax rate of 35%. (4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) The net interest margin represents net interest income as a percentage of average interest-earning assets. 11 12 RATE AND VOLUME VARIANCES Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table discloses the dollar changes in the Company's net interest income attributable to changes in levels of interest-earning assets or interest-bearing liabilities (volume), changes in average yields on interest-earning assets and average rates on interest-bearing liabilities (rate) and the combined volume and rate effects (total). For the purposes of this table, the change in interest due to both rate and volume has been allocated to volume and rate change in proportion to the relationship of the dollar amounts of the change in each. In general, this table provides an analysis of the effect on income of balance sheet changes, which occurred during the periods, and the changes in interest rate levels.

(1) Computed on a fully tax equivalent basis, assuming a tax rate of 35%. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 Net Income. Net income for the three months ended June 30, 2001 increased 25.9% to $4.0 million. Basic and diluted earnings per share in the second quarter of 2001 equaled $0.45, compared to $0.40 for the same period in 2000. Net interest income increased 19.6% to $11.5 million from $9.6 million while non-interest income increased 14.1% to $3.4 million from $3.0 million in the three months ended June 30, 2001, as compared to the same period in 2000. Non-interest expense increased 12.1% to $8.5 million in the three months ended June 30, 2001. The provision for possible loan losses was $495,000 in 2001 compared to $450,000 in the prior year period. The Company's net interest margin was 3.19% for the three months ended June 30, 2001 and 3.12% for the three months ended June 30, 2000. The net interest margin continued to benefit from declines in market interest rates during the first six months of 2001 combined with the maturity of higher costing certificates of deposit. Non-interest income increased primarily due to higher levels of gains on sales of loans and other fee income offset by lower levels of trust and custodian fees and financial planning fees. Non-interest 12 13 expense increased primarily from expenses added by Milton, increased levels of advertising expenses associated with deposit generating activities and additional costs associated with fee income generating activities. The Company's return on average assets and return on average equity were 1.01% and 14.35%, respectively, in the second quarter of 2001, compared to .93% and 15.65%, respectively, in the second quarter of 2000. Interest Income. Total interest income increased 14.5% to $29.7 million for the three months ended June 30, 2001, compared to $25.9 million for the second quarter of 2000. This increase resulted from a $196.0 million increase in average earning assets offset by a 12 basis point decrease in the average yield on earning assets. The increase in average earning assets was due primarily to assets added from the Milton acquisition. The weighted average yield on interest-earning assets decreased to 8.17% during the three months ended June 30, 2001, compared to 8.29% during the comparative three month period in 2000. The Company's yield on average loans increased from 8.56% during the three months ended June 30, 2000 to 8.63% during the three months ended June 30, 2001. This increase resulted primarily from higher market rates throughout 2000, while decreases in market rates thus far in 2001 have not fully impacted loan yields. Yields on the investment portfolio decreased from 7.56% during the second quarter of 2000 to 7.23% during the second quarter of 2001, reflecting lower market interest rates in 2001. Interest Expense. Total interest expense increased 11.5% to $18.2 million for the three months ended June 30, 2001, compared to $16.3 million for the three months ended June 30, 2000. Interest expense increased due to a $164.8 million increase in the average balance of interest-bearing liabilities, offset in part by a 12 basis point decrease in the Company's cost of funds. The increase in average interest-bearing liabilities was also attributed primarily to interest-bearing deposits added by Milton. The average balance of interest-bearing deposit accounts increased $292.2 million, or 37.6%, from the second quarter in 2000 to the second quarter in 2001 while average borrowings decreased $127.4 million, or 30.1%. The Company's cost of funds decreased to 5.34% in the three months ended June 30, 2001 compared to 5.46% in the same period of 2000. The decrease in cost of funds resulted primarily from decreased market interest rates combined with the maturity of higher costing certificates of deposit that are being renewed at lower current rates. Provision for Possible Loan Losses. The provision for possible loan losses was $495,000 for the three months ended June 30, 2001, compared to $450,000 in the second quarter of 2000. The provision for possible loan losses was considered sufficient by management for maintaining an adequate allowance for loan losses. The increased provision in 2001 resulted primarily from increased loan levels as well as a change in the mix of the loan portfolio. Non-Interest Income. Total non-interest income was $3.4 million for the three months ended June 30, 2001, compared to $3.0 million for the three months ended June 30, 2000. The following table sets forth the Company's non-interest income for the periods indicated: 13 14 THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------- -------- ------- ------ (In thousands) Trust and custodian fees $ 546 $ 707 $1,138 $1,357 Financial planning fees 258 409 557 756 Customer service fees 626 543 1,230 1,071 Gains on sales of loans 888 523 1,596 1,138 Other 1,010 815 2,120 1,648 Investment securities gains 92 -- 195 -- ------ ------ ------ ------ TOTAL $3,420 $2,997 6,836 $5,970 ====== ====== ====== ====== Trust and custodian fees decreased 22.8% to $546,000 in the second quarter of 2001 from $707,000 in the second quarter of 2000 while financial planning fees decreased 36.9% to $258,000 in the second quarter of 2001 from $409,000 in the second quarter 2000. These decreases are primarily due to market conditions that have adversely affected sales of retail investment products and the market value of assets under management. Customer service fees, representing service charges on deposits and fees for other banking services, increased 15.3% in the second quarter of 2001 to $626,000 from $543,000 in the second quarter of 2000. Milton contributed $58,000 to the 2001 results. Gains on sales of loans totaled $888,000 for the three months ended June 30, 2001 compared to $523,000 for the three months ended June 30, 2000. During the second quarter of 2001, the Company sold $9.5 million of the guaranteed portion of its SBA and other government guarantee loan originations in the secondary market compared to $6.9 million during the second quarter of 2000, realizing gains of $637,000 in 2001 compared to gains of $492,000 in 2000. Also, the Company recorded gains of $251,000 from sales of residential loans during the second quarter of 2001 compared to $31,000 in 2000. The increase in gains on sales of residential loans has resulted from decreases in market interest rates which has caused an increase in fixed rate loan origination activity. The Company continues to place emphasis on its small business lending activities, including the evaluation of expansion into new markets. The nature of the political climate in Washington, D.C. may periodically subject many existing government programs to much scrutiny and possible cutbacks. It is not currently known whether the SBA program will be impacted. Management believes that any such cutbacks could negatively affect the Company's activities in the SBA lending programs as well as the planned expansion of such activities. Other income increased $195,000 to $1.0 million in the second quarter of 2001 compared to $815,000 in the second quarter of 2000 primarily as a result of higher levels of residential servicing income, earnings on bank owned life insurance and electronic banking fees. During the second quarter of 2001, the Company sold approximately $5.3 million of investment securities, realizing gains of $92,000. Proceeds from these sales were used to reduce borrowing levels. The Company had no sales of securities during the second quarter of 2000. 14 15 Non-Interest Expense. Total non-interest expense increased $915,000 to $8.5 million in the three months ended June 30, 2001, compared to $7.6 million in the three months ended June 30, 2000. Excluding non-interest expense attributed to Milton, total non-interest expense increased $422,000 or 5.6%. The following table sets forth the Company's non-interest expense for the periods indicated:

Salary and employee benefits expense increased $316,000, or 7.4% and accounted for approximately 53.8% of total non-interest expense in the three months ended June 30, 2001 compared to 56.1% in the second quarter of 2000. The average full time equivalent staff was 403 in 2001 compared to 394 in 2000. Net occupancy expense increased 10.4% to $531,000 for the second quarter of 2001 from $481,000 for the second quarter of 2000 primarily due to additional expenses attributed to Milton. Furniture, fixtures and equipment expense increased $66,000, or 28.9% in the second quarter of 2001. This increase is primarily due to depreciation expense attributed to fixed assets added by Milton. Data processing expense increased $53,000, or 15.9%, in the second quarter of 2001. Increased costs in 2001 resulted from higher software and maintenance costs related to continued technological enhancements to the Company's data processing systems. Taxes other than income taxes increased $61,000, or 31.6%, in the second quarter of 2001 compared to the second quarter of 2000. This increase resulted primarily from higher equity levels at December 31, 2000 (on which the 2001 tax is based) compared to December 31, 1999 (on which the 2000 tax was based). Federal deposit insurance expense increased $12,000 to $54,000 in 2001 from $42,000 in the second quarter of 2000, reflecting higher levels of deposits in 2001. Amortization of goodwill and other identified intangible assets in total increased $90,000 in the second quarter of 2001 compared to the second quarter of 2000 primarily due to additional amortization related to goodwill resulting from the Milton acquisition. Other non-interest expenses increased $267,000, or 16.4%, to $1.9 million for the second quarter of 2001, primarily reflecting increased costs associated with deposit and fee income generating initiatives. The efficiency ratio is one method used in the banking industry to assess profitability. It is defined as non-interest expense less amortization expense divided by the net revenue stream, which is the sum of net interest income on a tax-equivalent basis and non-interest income excluding net investment securities gains or losses. The Company's efficiency ratio was 15 16 53.2% for the second quarter of 2001, compared to 55.7% for the comparable period in 2000. Controlling costs and improving productivity, as measured by the efficiency ratio, is considered by management a primary factor in enhancing performance. Provision for Income Taxes. The Company's provision for Federal income taxes was $2.0 million, or 33.1% of pretax income, for the three months ended June 30, 2001 compared to $1.4 million, or 31.3% of pretax income, for the three months ended June 30, 2000. The effective tax rate for each period differed from the federal statutory rate principally as a result of tax-exempt income from obligations of states and political subdivisions and non-taxable loans, earnings on bank-owned life insurance, and the non-deductibility, for tax purposes, of goodwill and core deposit intangible amortization expense. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000. Net Income. Net income for the six months ended June 30, 2001 increased 25.5% to $7.8 million, or $.89 per basic and diluted share, compared to net income of $6.2 million, or $.78 per share, for the six months ended June 30, 2000. Net interest income increased 17.4% to $22.5 million from $19.2 million and non-interest income increased 14.5% to $6.8 million from $6.0 million in the six months ended June 30, 2001, as compared to the same period in 2000. Non-interest expense increased 10.1% to $16.8 million in the six months ended June 30, 2001. The Company's net interest margin decreased to 3.16% for the six months ended June 30, 2001 compared to 3.21% for the same period in 2000. The Company's return on average assets and return on average equity were 1.01% and 14.30%, respectively, for the six months ended June 30, 2001, compared to .95% and 15.58%, respectively, for the six months ended June 30, 2000. Interest Income. Total interest income increased 20.0% to $60.0 million for the six months ended June 30, 2001, compared to $50.0 million for the comparable period in 2000. This increase resulted from higher levels of earning assets, and a 10 basis point increase in the average yield on interest-earning assets. Average earning assets increased $228.3 million to $1.46 billion for the six months ended June 30, 2001 from $1.23 billion in 2000. This increase was primarily attributed to assets added by Milton. The weighted average yield on interest-earning assets increased to 8.32% during the six months ended June 30, 2001, compared to 8.22% during the same six month period in 2000. The Company's yield on average loans increased from 8.47% during the six months ended June 30, 2000 to 8.72% during the six months ended June 30, 2001. The increase in yield has resulted primarily from increases in market interest rates throughout 2000, while decreases in market rates thus far in 2001 have not fully impacted loan yields. Yields on the investment portfolio decreased from 7.55% during 2000 to 7.45% during 2001, due primarily to decreases in market interest rates. Interest Expense. Total interest expense increased 21.6% to $37.4 million for the six months ended June 30, 2001, compared to $30.8 million for the six months ended June 30, 2000. Interest expense increased due to a higher average balance of interest-bearing liabilities during the first six months of 2001, as compared to the same period in 2000. The average balance of interest-bearing liabilities increased 17.0%, from $1.17 billion during the six months ended June 30, 2000 to $1.37 billion during the six months ended June 30, 2001. The Company's cost of funds increased to 5.52% for the six months ended June 30, 2001 compared to 5.30% for the same period of 2000. As with loan yields discussed above, the increase in the cost of funds compared to the year ago period has resulted from increases in short-term rates during 2000. With the decline in short-term market interest rates during the first six months of 2001, the Company has experienced a reduction in its average cost of funds from 5.81% in the fourth quarter of 2000 and 5.71% in the first quarter of 2001 as a result of the maturity of higher costing certificates of deposit that are being renewed at lower current rates. Provision for Possible Loan Losses. The provision for possible loan losses was $960,000 for the six months ended June 30, 2001, compared to $900,000 for the six months ended June 30, 2000 and was considered sufficient to maintain the Company's allowance for possible loan losses at an adequate level. The increased provision in 2001 resulted primarily from increases in loan levels, as well as a change in the mix of the loan portfolio. Non-Interest Income. Total non-interest income was $6.8 million for the six months ended June 30, 2001, compared to $6.0 million for the six months ended June 30, 2000. 16 17 Trust and custodian fees decreased 16.1% to $1.1 million for the six months ended June 30, 2001 compared to $1.4 million for the year ago period while financial planning fees decreased $199,000 to $557,000 for the year to date 2001 period compared to $756,000 in 2000. As noted previously, market conditions have adversely affected sales of retail investment products and the market value of assets under management. Customer service fees increased $159,000, or 14.8%, for the six months ended June 30, 2001 to $1.2 million. Milton contributed $114,000 to the 2001 results. Gains on sales of loans increased from $1.1 million for the six months ended June 30, 2000 to $1.6 million for the comparable period in 2001. In 2001, the Company sold $15.1 million of the guaranteed portion of its SBA and other government guaranteed loan originations in the secondary market compared to $15.5 million in 2000, realizing gains of $1.2 million in 2001 compared to gains of $1.1 million in 2000. In addition, the Company sold $23.2 million of residential real estate loans realizing gains of $360,000 in the first six months of 2001 compared to $46,000 of gains on sales of loans totaling $3.0 million in 2000. Residential real estate loan sale volume in 2001 benefited from the lower interest rate environment compared to 2000. Other income increased $472,000 to $2.1 million for the first six months of 2001 compared to $1.6 million for the year ago period primarily as a result of higher levels of loan servicing income attributed to higher serviced loan balances, earnings on bank-owned life insurance and electronic banking fees. Non-Interest Expense. Total non-interest expense increased $1.5 million, or 10.1%, to $16.8 million for the six months ended June 30, 2001, compared to $15.2 million for the six months ended June 30, 2000. Excluding non-interest expense attributed to Milton, total non-interest expense increased $477,000, or 3.1%. For the six months ended June 30, 2000, the Company's efficiency ratio was 53.4%, compared to 56.5% for the six months ended June 30, 2000. Salary and employee benefits expense increased $369,000, or 4.3% primarily due to employees added by Milton. Salaries and employee benefits accounted for approximately 53.8% of total non-interest expense for the six months ended June 30, 2001 compared to 56.8% in 2000. The average full time equivalent staff was 405 in 2001 compared to 389 in 2000. Net occupancy expense increased 8.1% to $1.1 million for the first six months of 2001 from $1.0 million for the first six months of 2000. Milton added $137,000 to the year to date 2001 results. Furniture, fixtures and equipment expense increased $115,000, or 24.5%, primarily due to depreciation expense attributed to Milton's fixed assets. Data processing expense increased $138,000, or 21.3%, for the six months ended June 30, 2001. Higher costs in 2001 resulted primarily from higher depreciation and amortization of equipment and software enhancements due to technological advancements. Taxes other than income taxes increased $66,000, or 15.3%, for the first six months 2001 compared to the same period in 2000. This increase resulted primarily from higher equity levels, previously discussed. Federal deposit insurance expense increased $24,000 to $108,000 in 2001 from $84,000 in 2000, reflecting higher levels of deposits in 2001. Amortization of goodwill and other identified intangible assets in total increased $240,000 to $1.0 million during the first six months of 2001 compared to $762,000 in 2000. This increase was primarily due to amortization related to goodwill resulting from the Milton acquisition. Other non-interest expenses increased $505,000, or 15.9%, for the six months ended June 30, 2001 compared to the same period in 2000, reflecting higher costs associated with deposit and fee income generating initiatives and higher levels of legal expense associated with loan collection activities. Provision for Income Taxes. The Company's provision for Federal income taxes was $3.8 million, or 32.9% of pretax income, for the six months ended June 30, 2001 compared to $2.8 million, or 31.1% of pretax income, for the six months 17 18 ended June 30, 2000. The effective tax rate for each period differed from the federal statutory rate principally as a result of tax-exempt income from obligations of states and political subdivisions and non-taxable loans, earnings on bank-owned life insurance, and the non-deductibility, for tax purposes, of goodwill and core deposit intangible amortization expense. ASSET QUALITY Non-performing Assets. To maintain the level of credit risk of the loan portfolio at an appropriate level, management sets underwriting standards and internal lending limits and provides for proper diversification of the portfolio by placing constraints on the concentration of credits within the portfolio. In monitoring the level of credit risk within the loan portfolio, management utilizes a formal loan review process to monitor, review, and consider relevant factors in evaluating specific credits in determining the adequacy of the allowance for possible loan losses. The Company's banking subsidiary formally documents its evaluation of the adequacy of the allowance for possible loan losses on a quarterly basis and the evaluation is reviewed and discussed with its board of directors. Failure to receive principal and interest payments when due on any loan results in efforts to restore such loan to current status. Loans are classified as non-accrual when, in the opinion of management, full collection of principal and accrued interest is in doubt. Continued unsuccessful collection efforts generally lead to initiation of foreclosure or other legal proceedings. Property acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is classified as "other real estate owned" until such time as it is sold or otherwise disposed of. The Company owned $1.8 million of such property at June 30, 2001 and $529,000 at June 30, 2000. Other real estate owned at June 30, 2001 consisted of $1.3 million of single-family residential property, $296,000 of commercial real estate and $156,000 of land. Non-performing assets totaled $11.2 million, or .74% of total assets at June 30, 2001, compared to $7.4 million, or .45% of total assets at June 30, 2000. Non-performing loans totaled $9.5 million, or .87% of total loans, at June 30, 2001, compared to $6.9 million, or .62% of total loans, at June 30, 2000. Residential mortgage loans represented $5.9 million, or 62.5%, of total non-performing loans at June 30, 2001. The largest non-performing loan at June 30, 2001 had an outstanding principle balance of $768,000. The increase in non-performing loans from June 30, 2000 resulted equally from increases in non-performing single-family residential mortgage loans and commercial loans. The following is an analysis of the composition of non-performing assets:

Restructured loans at June 30, 2001 includes one loan with an outstanding balance of $2.9 million that was restructured in May 1999 and has been performing in accordance with its restructured terms since such time. The remainder of the balance at June 30, 2001 represents various loans collateralized by single family residential properties that are performing in accordance with modified payment terms approved by the bankruptcy courts. The aggregate amounts of the Company's classified assets as of June 30, 2001 and 2000 were as follows: 18 19 JUNE 30, 2001 2000 -------------- -------------- (IN THOUSANDS) Substandard $20,669 $12,051 Doubtful 56 280 ------- ------- Total $20,725 $12,331 ======= ======= The increase in classified assets at June 30, 2001 compared to June 30, 2000 was attributed to a $1.2 million increase in residential real estate mortgage loans past due greater than 90 days that are classified as substandard, a $1.8 million increase in commercial real estate loans, a $2.3 million increase in commercial loans (principally SBA loans) and the classification of a $1.1 million corporate debt security and a $2.0 million bank-issued trust preferred security. The largest classified asset at June 30, 2001 was the $2.9 million restructured loan, discussed previously. Allowance for Possible Loan Losses. The Company records a provision necessary to maintain the allowance for possible loan losses at a level sufficient to provide for potential future credit losses. The provision is charged against earnings when it is established. An allowance for possible loan losses is established based on management's best judgment, which involves a continuing review of prevailing national and local economic conditions, changes in the size and composition of the portfolio and review of individual problem credits. Growth of the loan portfolio, loss experience, economic conditions, delinquency levels, credit mix, and selected credits are factors that affect judgments concerning the adequacy of the allowance. Actual losses on loans are charged against the allowance. 19 20 The following table summarizes the Company's loan loss experience, and provides a breakdown of the allowance for possible loan losses at the dates indicated.

The allowance for possible loan losses totaled $10.3 million at June 30, 2001, representing .95% of total loans, compared to $9.9 million at June 30, 2000, or .90% of total loans. Charge-offs represent the amount of loans actually removed as earning assets from the balance sheet due to uncollectibility. Amounts recovered on previously charged-off assets are netted against charge-offs, resulting in net charge-offs for the period. Net loan charge-offs for the three months and six months ended June 30, 2001 were $401,000 and $847,000, respectively, compared to net charge-offs of $76,000 and $196,000, respectively, for the same periods in 2000. The increase in net charge-offs in 2001 compared to 2000 is primarily attributed to the historically low levels of charge-offs in 2000 as well as to increases in delinquency trends in general. Charge-offs have been made in accordance with the Company's standard policy and have occurred primarily in the commercial and consumer loan portfolios. The allowance for possible loan losses as a percentage of non-performing loans ("coverage ratio"), was 108.5% at June 30, 2001, compared to 144.5% at June 30, 2000. Although used as a general indicator, the coverage ratio is not a primary factor in the determination of the adequacy of the allowance by management, particularly given the extent to which the Company's non-performing loans consist of single-family residential mortgage loans. COMPARISON OF JUNE 30, 2001 AND DECEMBER 31, 2000 FINANCIAL CONDITION Total assets amounted to $1.52 billion at June 30, 2001, compared to $1.56 billion at December 31, 2000, a decrease of $38.6 million, or 2.5% from December 31, 2000. Total investment securities decreased by $5.6 million to $324.6 million, primarily as a result of sales of securities during the first six months of 2001. The Company's general investment strategy is to manage the portfolio to include rate sensitive assets, matched against interest sensitive liabilities to reduce interest rate risk. In recognition of this strategy, as well as to provide a secondary source of liquidity to accommodate loan demand and possible deposit withdrawals, the Company has chosen to classify the majority of its investment securities as available-for-sale. At June 30, 2001, 96.4% of the total investment portfolio was classified as available-for-sale, while those securities which the Company intends to hold to maturity represented the remaining 3.6%. This compares to 95.9% and 4.1% classified as available-for-sale and held to maturity, respectively, at December 31, 2000. Total loans decreased $3.8 million to $1.09 billion at June 30, 2001. This decrease consists of a $37.1 million decrease in residential loans and a $4.5 million decrease in consumer loans offset in part by a $37.8 million increase in commercial and commercial real estate loans. Management continues to emphasize increasing earning assets and improving earning asset yields by increasing and changing the mix of the loan portfolio. The decrease in residential loans has resulted 20 21 primarily from the lower interest rate environment during the first six months of 2001 which has led to increased refinancing and loan sale activity. Other assets increased $2.0 million from $36.4 million at December 31, 2000 to $38.4 million at June 30, 2001 primarily as a result of increases in other real estate owned and prepaid expenses. Total deposits increased $17.8 million to $1.13 billion at June 30, 2001 from $1.11 billion at December 31, 2000. The Company continues to emphasize growth in its existing retail deposit base provided incremental deposit growth is cost effective compared to alternative funding sources. Total interest-bearing deposits accounted for 93.7% of total deposits at June 30, 2001, compared to 93.1% at December 31, 2000. Total borrowings, including federal funds purchased, decreased $60.6 million to $264.8 million at June 30, 2001, compared to $325.4 million at December 31, 2000. This decrease resulted primarily from the use of federal funds sold and other liquidity generated by increases in deposits and decreases in the loan and securities portfolios to reduce borrowings. LIQUIDITY AND CAPITAL RESOURCES The objective of liquidity management is to ensure the availability of funds to accommodate customer loan demand, as well as deposit withdrawals while continuously seeking higher yields from longer term lending and investing opportunities. This is accomplished principally by maintaining sufficient cash flows and liquid assets along with consistent stable core deposits and the capacity to maintain immediate access to funds. These immediately accessible funds may include federal funds sold, unpledged marketable securities, reverse repurchase agreements or available lines of credit from the Federal Reserve Bank, Federal Home Loan Bank (FHLB), or other financial institutions. An important factor in the preservation of liquidity is the maintenance of public confidence, as this facilitates the retention and growth of a large, stable supply of core deposits in funds. The Company's principal source of funds to satisfy short-term liquidity needs comes from cash, due from banks, federal funds sold and borrowing capabilities through the FHLB as well as other sources. Changes in the balance of cash and due from banks are due to changes in volumes of federal funds sold and the float and reserves related to deposit accounts, which may fluctuate significantly on a day-to-day basis. The investment portfolio serves as an additional source of liquidity for the Company. Securities with a market value of $312,805 million were classified as available-for-sale as of June 30, 2001, representing 96.4% of the total investment portfolio. Classification of securities as available-for-sale provides for flexibility in managing net interest margin, interest rate risk, and liquidity. The Company's bank subsidiary is a member of FHLB. Membership provides an opportunity to control the bank's cost of funds by providing alternative funding sources, to provide flexibility in the management of interest rate risk through the wide range of available funding sources, to manage liquidity via immediate access to such funds, and to provide flexibility through utilization of customized funding products to fund various loan and investment products and strategies. On June 20, 2000, the Company completed the acquisition of Milton. In connection with the acquisition, the Company issued 965 common shares having a total value of approximately $14.2 million and paid cash of $14.1 million to the Milton shareholders. The acquisition was accounted for as a purchase. Accordingly, Milton's results of operations have been included from the date of acquisition. On October 18, 1999, the Company completed an offering of $20.0 million aggregate liquidation amount of 9.875% Capital Securities, Series A, due 2029. These securities represent preferred beneficial interests in BFOH Capital Trust I, a special purpose trust formed for the purpose of the offering. The proceeds from the offering were used by the Trust to purchase Junior Subordinated Deferrable Interest Debentures ("Debentures") from the Company. Under Federal Reserve Board regulations, these Capital Securities may represent up to 25% of a bank holding company's Tier 1 capital. The holders of the Capital Securities are entitled to receive cumulative cash distributions at the annual rate of 9.875% of the liquidation amount. Distributions are payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2000. The Company has fully and unconditionally guaranteed the payment of the Capital Securities, and payment of distributions on the Capital Securities. The Trust is required to redeem the Capital Securities on or, in certain 21 22 circumstances, prior to October 15, 2029. There are no significant covenants or limitations with respect to the business of the Company that is contained in the instruments which govern the Capital Securities and the Debentures. The Company obtained a $15 million term loan with a financial institution in order to partially fund the 1996 acquisition of County Savings Bank. This loan, which was amended September 29, 2000, had an outstanding balance of $8.0 million at June 30, 2001. Under the terms of the loan agreement, the Company is required to make quarterly interest payments and annual principal payments of $1.0 million commencing September 30, 2001. The unpaid loan balance is due in full September 1, 2007. Also, the Company has pledged 67% of the stock of FNB as security for the loan. The loan agreement contains certain financial covenants which require that (i) the Company maintain a minimum ratio of total capital to risk-weighted assets of 10%; (ii) each of the Company's banking subsidiaries, which represent greater than 10% of the Company's consolidated capital, maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, Tier 1 capital to average assets of 5.0% and total capital to risk-weighted assets of 10.0%; (iii) the Company maintain, on a consolidated basis, a minimum annualized return on average assets of not less than 0.75%; and (iv) the Company maintain, on a consolidated basis, a ratio of non-performing loans to equity capital of less than 25.0% and a minimum ratio of allowance for possible loan losses to non-performing loans of 75.0%. At June 30, 2001, the Company was in compliance with each of these financial covenants. The loan agreement also restricts the Company's ability to sell assets, grant security interests in the stock of its banking subsidiaries, merge or consolidate, and engage in business activity unrelated to banking. Shareholders' equity at June 30, 2001 was $112.0 million, compared to shareholders' equity at December 31, 2001 of $107.1 million, an increase of $4.9 million. This increase resulted primarily from the retention of earnings, net of dividends paid. The Company's board of directors had authorized a 350,000 common share repurchase program which was completed during the second quarter of 2001. Additional repurchase authorizations are expected to be evaluated on an ongoing basis as an effective capital management tool. Under the risk-based capital guidelines, a minimum capital to risk-weighted assets ratio of 8.0% is required, of which, at least 4.0% must consist of Tier 1 capital (equity capital net of goodwill). Additionally, a minimum leverage ratio Tier 1 capital to total assets) of 3.0% must be maintained. At June 30, 2000, the Company had a total risk-based capital ratio of 11.4%, of which 10.5% consisted of Tier 1 capital. The leverage ratio for the Company at June 30, 2001, was 7.2%. Cash dividends declared to shareholders of the Company totaled $2.6 million, or $0.29 per share, during the first six months of 2001. This compares to dividends of $2.2 million, or $0.28 per share, for the same period in 2000. Cash dividends paid as a percentage of net income amounted to 32.6% and 35.4% for the six months ended June 30, 2001 and 2000, respectively. The Company's net interest margin during the first half of 2001 continued to benefit from declines in market interest rates combined with the maturity of higher costing certificates of deposit. The Company anticipates that further improvement in its net interest margin in future quarters may be minimal as continued declines in the Company's cost of funds in the current interest rate environment are likely to be substantially offset by the impact of prepayments and re-pricing of higher yielding assets. The Company's Board of Directors and management intend to seek continued controlled growth of the organization through selective acquisitions which fit the Company's strategic objectives of growth, diversification and market expansion and which provide the potential for enhanced shareholder value. At the present time, the Company does not have any understanding or agreements for any acquisition or combination. Considering the Company's capital adequacy, profitability, available liquidity sources and funding sources, the Company's liquidity is considered by management to be adequate to meet current and projected needs. 22 23 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of their Company's asset and liability management policies as well as the potential impact of interest rate changes upon the market value of the Company's portfolio equity, see "Management's Discussion and Analysis - Interest Rate Risk Management" in the Company's Form 10-K for the year ended December 31, 2000. The following summarizes the Company's simulations of net interest income and net present value (NPV) as of March 31, 2001, the most recent period for which this information is available:

23 24 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 19, 2001, the Company held its Annual Meeting of Shareholders, the results of which follows: 1. To approve and ratify the appointment of Pricewaterhouse Coopers, L.L.P. as independent auditors for the year ended December 31, 2001: Abstaining/ Votes For Votes Against Broker Non-Votes --------- ------------- ---------------- 6,781,082 15,652 18,712 2. Election of Class II directors: Votes Against/ Votes For Withheld --------- -------------- Philip E. Burke 6,781,528 33,918 Gary N. Fields 6,472,333 343,113 James L. Nichols 6,778,249 37,197 ITEM 5. OTHER INFORMATION The proxy holders for the 2002 annual meeting of shareholders will use their discretion in voting on any and all matters brought before the 2002 annual meeting which were not provided to the Company in an advance notice on or prior to February 19, 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Required by Item 601 of Regulation S-K Exhibit 3(a) - Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to Company's Form 10-K for year ended December 31, 1991, Exhibit 3.3 to the Company's Form 10-K for the year ended December 31, 1992 and Exhibit 3.6 to the Company's Form 10-K for the year ended December 31, 1994). Exhibit 3(b) - Code of Regulations, as amended (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1991, Exhibit 3.4 to the Company's Form 10-K for the year ended December 31, 1992 and Exhibit 3.5 to the Company's Form 10-K for the year ended December 31, 1993). 24 25 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BancFirst Ohio Corp. (Registrant) Date: August 10, 2001 (Signed) /s/ GARY N. FIELDS ---------------------------------------- Gary N. Fields President and Chief Executive Officer Date: August 10, 2001 (Signed) /s/ KIM M. TAYLOR ---------------------------------------- Kim M. Taylor Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 25

BANCFIRST OHIO CORP 10-Q