Liquidity

The Corporation’s primary source of liquidity is its core deposit base, raised through its retail branch system, along with unused wholesale sources of liquidity and its capital base. These funds, along with investment securities, provide the ability to meet the needs of depositors while funding new loan demand and existing commitments.

The banking subsidiary maintains sufficient liquidity in the form of short-term marketable investments with a short-term maturity structure, Federal Home Loan Bank of Cincinnati borrowing capacity, a brokered certificate of deposit program, unused federal funds sold capacity, and cash flow from loan repayment. In addition, the banking subsidiary is able to raise significant liquidity in the form of deposits raised through deposit gathering campaigns. From June 1999 through September 1999, in anticipation of rising interest rates, the Corporation raised approximately $480 million from two CD special promotions priced at approximately 6.00%.

In July 1999, the banking subsidiary entered into agreements to issue short-and medium-term senior notes and long-term subordinated notes. It is anticipated that the banking subsidiary will issue subordinated notes totaling approximately $150 million prior to March 31, 2000. The maturity range on the subordinated notes is five years or longer and the aggregate principal amount outstanding at any one time may not exceed $1 billion. These notes will be offered only to institutional investors.

Reliance on borrowed funds increased during the year as average earning assets rose more than average deposits. In short, strong loan growth required more dependence on borrowed funds. During the year, the Corporation sold, for liquidity purposes, approximately $176 million of fixed and adjustable rate residential real estate loans. The loan sales improved liquidity while restructuring the balance sheet to higher yielding assets.

The liquidity needs of the Parent Company, primarily cash dividends, the stock repurchase programs and other corporate purposes, are met through cash, short-term investments, dividends from the banking subsidiary, and revolving lines of credit. The lines of credit are repaid with earnings from the banking subsidiary.

The two line of credit facilities have the following terms:
(1) the total line of credit is $150 million; the amount outstanding at year-end 1999 was $130 million; the interest rate at year-end 1999 was 6.64%; and the interest rate structure is variable based on one-month LIBOR plus 45 basis points; and (2) the total line of credit is $30 million; the amount outstanding at year-end 1999 was $22.million; the interest rate at year-end 1999 was 6.08%; and the variable interest rate structure is based on one-month LIBOR plus 25 basis points.

Management is not aware of any trend or event, other than noted in this section or in other sections within this report, which would result in, or is reasonably likely to result in, a material increase or decrease in the Corporation’s liquidity.

Regulation and Supervision

A strict uniform system of capital-based regulation of financial institutions became effective on December 19, 1992. Under this system, there are five different categories of capitalization, with “prompt corrective actions” and significant operational restrictions imposed on institutions that are capital deficient under the categories. The five categories are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

To be considered well capitalized an institution must have a total risk-based capital ratio of at least 10%, a Tier I capital ratio of at least 6%, a leverage capital ratio of 5%, and must not be subject to any order or directive requiring the institution to improve its capital level. An adequately capitalized institution has a total risk-based capital ratio of at least 8%, a Tier I capital ratio of at least 3% and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual capital levels. The appropriate federal regulatory agency may also downgrade an institution to the next lower capital category upon a determination that the institution is in an unsafe or unsound practice. Institutions are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category. At year-end 1998, the Parent Company and its subsidiaries all exceeded the minimum capital levels of the well capitalized category.