Form 10-Q/A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 2009
Commission file number 0-12055
FARMERS NATIONAL BANC CORP.
(Exact name of registrant as specified in its charter)
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OHIO
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34-1371693 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No) |
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20 South Broad Street
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Canfield, OH
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44406 |
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(Address of principal executive offices)
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(Zip Code) |
(330) 533-3341
(Registrants telephone number, including area code)
Not applicable
(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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class
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Outstanding at July 31, 2009 |
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Common Stock, No Par Value
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13,415,384 shares |
Farmers National Banc Corp
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A amends our Form 10-Q for the quarter ended June 30, 2009, filed with the Securities
and Exchange Commission on August 10, 2009. This Form 10-Q/A amends PART I FINANCIAL INFORMATION, Item 4 Controls
and Procedures to now include technical language that was inadvertently excluded. Information that appeared in the
original Form 10-Q filed on August 10, 2009 PART I FINANCIAL INFORMATION, Item 4 Controls and Procedures now
correctly appears in PART II OTHER INFORMATION, Item 4 Submission of Matters to a Vote of Security Holders.
This Form 10-Q/A only amends PART I FINANCIAL INFORMATION, Item 4 Controls and Procedures and PART II OTHER
INFORMATION, Item 4 Submission of Matters to a Vote of Security Holders. No other Items in the Form 10-Q filed on
August 10, 2009 are amended, modified or updated hereby. Pursuant to Rule 12b 15 under the Securities Exchange Act
of 1934, new certifications of our principal executive officer and principal financial officer are being filed as
exhibits to this Amendment No. 1 on Form 10 Q/A.
This amendment No. 1 on Form 10-Q/A does not reflect events occurring after the filing of the original 10-Q or modify
or update those disclosures affected by subsequent events.
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Page |
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Number |
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PART I FINANCIAL INFORMATION |
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Item 1 Financial Statements (Unaudited) |
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Included in Part I of this report: |
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Farmers National Banc Corp. and Subsidiary |
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1 |
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2 |
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3 |
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4-14 |
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15-21 |
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21-22 |
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22 |
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22 |
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22-23 |
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23 |
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23 |
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23 |
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23 |
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24 |
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25 |
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CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES
(Unaudited)
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(In Thousands of Dollars) |
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June 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Cash and due from banks |
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$ |
22,655 |
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$ |
23,803 |
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Federal funds sold |
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18,632 |
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246 |
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TOTAL CASH AND CASH EQUIVALENTS |
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41,287 |
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24,049 |
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Securities available for sale |
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281,837 |
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271,605 |
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Loans |
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593,396 |
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552,005 |
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Less allowance for loan losses |
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6,640 |
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5,553 |
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NET LOANS |
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586,756 |
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546,452 |
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Premises and equipment, net |
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14,105 |
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14,139 |
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Bank owned life insurance |
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11,278 |
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11,021 |
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Goodwill |
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3,679 |
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0 |
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Other intangibles |
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4,092 |
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0 |
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Other assets |
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14,814 |
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13,104 |
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TOTAL ASSETS |
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$ |
957,848 |
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$ |
880,370 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Deposits: |
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Noninterest-bearing |
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$ |
63,055 |
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$ |
61,499 |
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Interest-bearing |
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650,561 |
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586,511 |
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TOTAL DEPOSITS |
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713,616 |
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648,010 |
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Short-term borrowings |
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117,838 |
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105,435 |
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Long-term borrowings |
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44,055 |
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46,464 |
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Other liabilities |
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4,290 |
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3,359 |
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TOTAL LIABILITIES |
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879,799 |
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803,268 |
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Commitments and contingent liabilities |
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Stockholders Equity: |
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Common Stock Authorized 25,000,000 shares; issued
15,468,459 in 2009 and 15,283,520 in 2008 |
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95,163 |
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94,217 |
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Retained earnings |
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6,249 |
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6,096 |
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Accumulated other comprehensive income (loss) |
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2,140 |
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2,292 |
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Treasury stock, at cost; 2,053,075 shares in 2009
and 2,053,058 in 2008 |
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(25,503 |
) |
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(25,503 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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78,049 |
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77,102 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
957,848 |
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$ |
880,370 |
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See accompanying notes
1
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES
(Unaudited)
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(In Thousands except Per Share Data) |
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, |
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June 30, |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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INTEREST AND DIVIDEND INCOME |
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Loans, including fees |
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$ |
9,357 |
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$ |
8,524 |
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$ |
18,393 |
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$ |
17,142 |
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Taxable securities |
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2,284 |
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1,955 |
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4,580 |
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3,532 |
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Tax exempt securities |
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613 |
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705 |
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1,199 |
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1,403 |
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Dividends |
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67 |
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86 |
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137 |
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229 |
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Federal funds sold |
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8 |
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77 |
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14 |
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239 |
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TOTAL INTEREST AND DIVIDEND INCOME |
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12,329 |
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11,347 |
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24,323 |
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22,545 |
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INTEREST EXPENSE |
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Deposits |
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3,133 |
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3,995 |
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6,422 |
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8,167 |
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Short-term borrowings |
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467 |
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390 |
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972 |
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|
985 |
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Long-term borrowings |
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501 |
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569 |
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1,018 |
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1,166 |
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TOTAL INTEREST EXPENSE |
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4,101 |
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4,954 |
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8,412 |
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10,318 |
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NET INTEREST INCOME |
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8,228 |
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6,393 |
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15,911 |
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12,227 |
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Provision for loan losses |
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1,050 |
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100 |
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1,500 |
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210 |
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES |
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7,178 |
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6,293 |
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14,411 |
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12,017 |
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NONINTEREST INCOME |
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Service charges on deposit accounts |
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653 |
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643 |
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1,252 |
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1,287 |
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Bank owned life insurance income |
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126 |
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133 |
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|
257 |
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|
265 |
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Trust income |
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1,003 |
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0 |
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|
1,003 |
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0 |
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Security gains |
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|
509 |
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0 |
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|
509 |
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|
194 |
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Impairment of equity securities |
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(74 |
) |
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(551 |
) |
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(74 |
) |
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(551 |
) |
Other operating income |
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|
426 |
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|
419 |
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|
814 |
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|
844 |
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TOTAL NONINTEREST INCOME |
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2,643 |
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|
644 |
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3,761 |
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2,039 |
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NONINTEREST EXPENSES |
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Salaries and employee benefits |
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4,078 |
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2,802 |
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7,098 |
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|
5,613 |
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Occupancy and equipment |
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|
817 |
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|
733 |
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1,667 |
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|
1,454 |
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State and local taxes |
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|
238 |
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|
205 |
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|
451 |
|
|
|
416 |
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Professional fees |
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|
228 |
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|
|
143 |
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|
443 |
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|
287 |
|
Advertising |
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|
155 |
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|
102 |
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|
255 |
|
|
|
223 |
|
FDIC insurance |
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|
697 |
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|
17 |
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|
928 |
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|
34 |
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Merger related costs |
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0 |
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0 |
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|
453 |
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|
0 |
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Intangible amortization |
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|
148 |
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0 |
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|
148 |
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|
0 |
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Other operating expenses |
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|
1,442 |
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|
1,093 |
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|
2,616 |
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|
2,074 |
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TOTAL NONINTEREST EXPENSES |
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7,803 |
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|
5,095 |
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|
14,059 |
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|
10,101 |
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INCOME BEFORE INCOME TAXES |
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2,018 |
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|
1,842 |
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|
4,113 |
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|
3,955 |
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INCOME TAXES |
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|
361 |
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|
|
308 |
|
|
|
772 |
|
|
|
697 |
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|
|
|
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|
|
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NET INCOME |
|
$ |
1,657 |
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|
$ |
1,534 |
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|
$ |
3,341 |
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|
$ |
3,258 |
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: |
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Change in net unrealized gains (losses) on securities,
net of reclassifications |
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(944 |
) |
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(2,889 |
) |
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|
(152 |
) |
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(1,165 |
) |
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COMPREHENSIVE INCOME (LOSS) |
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$ |
713 |
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($1,355 |
) |
|
$ |
3,189 |
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|
$ |
2,093 |
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NET INCOME PER SHARE basic and diluted |
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$ |
0.12 |
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$ |
0.12 |
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$ |
0.25 |
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$ |
0.25 |
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DIVIDENDS PER SHARE |
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$ |
0.12 |
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$ |
0.12 |
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$ |
0.24 |
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$ |
0.28 |
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See accompanying notes
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES
(Unaudited)
|
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|
|
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|
(In Thousands except Per Share Data) |
|
|
|
Six Months Ended |
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|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,341 |
|
|
$ |
3,258 |
|
Adjustments to reconcile net income
to net cash from operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
1,500 |
|
|
|
210 |
|
Depreciation and amortization |
|
|
671 |
|
|
|
522 |
|
Net amortization of securities |
|
|
170 |
|
|
|
126 |
|
Security gains |
|
|
(509 |
) |
|
|
(194 |
) |
Impairment of securities |
|
|
74 |
|
|
|
551 |
|
Federal Home Loan Bank dividends |
|
|
0 |
|
|
|
(115 |
) |
Increase in bank owned life insurance |
|
|
(257 |
) |
|
|
(265 |
) |
Net change in other assets and liabilities |
|
|
22 |
|
|
|
(1,003 |
) |
|
|
|
|
|
|
|
NET CASH FROM OPERATING ACTIVITIES |
|
|
5,012 |
|
|
|
3,090 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from maturities and repayments of securities available for sale |
|
|
37,874 |
|
|
|
31,868 |
|
Proceeds from sales of securities available for sale |
|
|
9,530 |
|
|
|
6,417 |
|
Purchases of securities available for sale |
|
|
(55,535 |
) |
|
|
(73,941 |
) |
Purchase of trust entity, net |
|
|
(10,511 |
) |
|
|
0 |
|
Loan originations and payments, net |
|
|
(42,240 |
) |
|
|
4,297 |
|
Proceeds from sale of other real estate owned |
|
|
146 |
|
|
|
43 |
|
Additions to premises and equipment |
|
|
(395 |
) |
|
|
(311 |
) |
|
|
|
|
|
|
|
NET CASH FROM INVESTING ACTIVITIES |
|
|
(61,131 |
) |
|
|
(31,627 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net change in deposits |
|
|
65,606 |
|
|
|
40,418 |
|
Net change in short-term borrowings |
|
|
12,403 |
|
|
|
(10,373 |
) |
Proceeds from Federal Home Loan Bank borrowings and other debt |
|
|
0 |
|
|
|
5,000 |
|
Repayment of Federal Home Loan Bank borrowings and other debt |
|
|
(2,409 |
) |
|
|
(7,828 |
) |
Repurchase of common stock |
|
|
0 |
|
|
|
(493 |
) |
Cash dividends paid |
|
|
(3,189 |
) |
|
|
(3,648 |
) |
Proceeds from dividend reinvestment |
|
|
946 |
|
|
|
1,415 |
|
|
|
|
|
|
|
|
NET CASH FROM FINANCING ACTIVITIES |
|
|
73,357 |
|
|
|
24,491 |
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
17,238 |
|
|
|
(4,046 |
) |
|
|
|
|
|
|
|
|
|
Beginning cash and cash equivalents |
|
|
24,049 |
|
|
|
31,105 |
|
|
|
|
|
|
|
|
Ending cash and cash equivalents |
|
$ |
41,287 |
|
|
$ |
27,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
8,473 |
|
|
$ |
10,482 |
|
Income taxes paid |
|
$ |
1,165 |
|
|
$ |
640 |
|
|
|
|
|
|
|
|
|
|
Supplemental noncash disclosures: |
|
|
|
|
|
|
|
|
Transfer of loans to other real estate |
|
$ |
436 |
|
|
$ |
113 |
|
Farmers National Banc Corp acquired all of the stock of Butler Wick Trust Company for $12.13
million on March 31, 2009.
The
assets acquired and liabilities assumed are itemized in the Acquisition footnote on page 9 of
this report.
See accompanying notes
3
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation:
The consolidated financial statements include the accounts of the Corporation and its wholly-owned
subsidiaries, The Farmers National Bank of Canfield and Farmers Trust Company. All significant
intercompany balances and transactions have been eliminated in the consolidation.
Basis of Presentation:
The unaudited condensed consolidated financial statements have been prepared in conformity with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by U.S. generally accepted accounting principles (U.S.
GAAP) for complete financial statements. The financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the Companys 2008 Annual
Report to Shareholders included in the Companys 2008 Annual Report on Form 10-K. The interim
consolidated financial statements include all adjustments (consisting of only normal recurring
items) that, in the opinion of management, are necessary for a fair presentation of the financial
position and results of operations for the periods presented. Management has evaluated events
occurring subsequent to the balance sheet date through August 10, 2009 (the final statement
issuance date), determining no events require adjustment to or additional disclosure in the
consolidated financial statements. The results of operations for the interim periods disclosed
herein are not necessarily indicative of the results that may be expected for a full year.
Estimates:
To prepare financial statements in conformity with U.S. GAAP, management makes estimates and
assumptions based on available information. These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future results could differ.
The allowance for loan losses is particularly subject to change.
Segments:
The Company provides a broad range of financial services to individuals and companies in
northeastern Ohio. The Corporations chief decision makers monitor the revenue streams of the
various products and services, which are all financial in nature.
Quantitative thresholds of SFAS 131, Disclosures about Segments of an Enterprise and Related
Information are monitored. For the quarter ended June 30, 2009, the reported revenue for Farmers
Trust Company was 9.23% of total revenue for Farmers National Banc Corp. Total revenue includes
net interest income (before provision for loan losses) plus non-interest income. Net income for
Farmers Trust Company for the quarter and year to date period ended June 30, 2009 was 1.23% and .61%
of consolidated net income. Total assets of Farmers Trust Company at June 30, 2009 were 1.30%
of total assets. Farmers Trust Company does not meet any of the quantitative thresholds of SFAS
131. Accordingly, all the Corporations banking and trust operations are considered by management
to be aggregated in one reportable operating segment.
4
Securities:
The following table summarizes the amortized cost and fair value of the available-for-sale
investment securities portfolio at June 30, 2009 and December 31, 2008 and the corresponding
amounts of unrealized gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(In Thousands of Dollars) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored entities |
|
$ |
73,106 |
|
|
$ |
952 |
|
|
$ |
(711 |
) |
|
$ |
73,347 |
|
States and political subdivisions |
|
|
65,531 |
|
|
|
562 |
|
|
|
(1,124 |
) |
|
|
64,969 |
|
Mortgage-backed securities residential |
|
|
139,102 |
|
|
|
3,525 |
|
|
|
(46 |
) |
|
|
142,581 |
|
Collateralized mortgage obligations |
|
|
408 |
|
|
|
11 |
|
|
|
0 |
|
|
|
419 |
|
Equity securities |
|
|
149 |
|
|
|
126 |
|
|
|
(14 |
) |
|
|
261 |
|
Other securities |
|
|
250 |
|
|
|
10 |
|
|
|
0 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
278,546 |
|
|
$ |
5,186 |
|
|
$ |
(1,895 |
) |
|
$ |
281,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands of Dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored entities |
|
$ |
42,611 |
|
|
$ |
2,089 |
|
|
$ |
(19 |
) |
|
$ |
44,681 |
|
States and political subdivisions |
|
|
61,749 |
|
|
|
536 |
|
|
|
(1,379 |
) |
|
|
60,906 |
|
Mortgage-backed securities |
|
|
163,497 |
|
|
|
2,722 |
|
|
|
(397 |
) |
|
|
165,822 |
|
Equity securities |
|
|
222 |
|
|
|
34 |
|
|
|
(60 |
) |
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
268,079 |
|
|
$ |
5,381 |
|
|
$ |
(1,855 |
) |
|
$ |
271,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of the debt securities portfolio are shown by contractual
maturity. Mortgage-backed and CMO securities are not due at a single maturity date and are shown
separately.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
Amortized |
|
|
Fair |
|
(In Thousands of Dollars) |
|
Cost |
|
|
Value |
|
Maturity |
|
|
|
|
|
|
|
|
Within one year |
|
$ |
2,600 |
|
|
$ |
2,634 |
|
One to five years |
|
|
62,741 |
|
|
|
63,301 |
|
Five to ten years |
|
|
40,938 |
|
|
|
40,729 |
|
Beyond ten years |
|
|
32,608 |
|
|
|
31,912 |
|
Mortgage-backed and CMO securities |
|
|
139,510 |
|
|
|
143,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
278,397 |
|
|
$ |
281,576 |
|
|
|
|
|
|
|
|
5
The following table summarizes the investment securities with unrealized losses at June 30, 2009 by
aggregated major security type and length of time in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
(In Thousands of Dollars) |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
U.S. government-
sponsored entities |
|
$ |
34,832 |
|
|
$ |
(694 |
) |
|
$ |
502 |
|
|
$ |
(17 |
) |
|
$ |
35,334 |
|
|
$ |
(711 |
) |
States and political |
|
|
23,831 |
|
|
|
(600 |
) |
|
|
4,864 |
|
|
|
(524 |
) |
|
|
28,695 |
|
|
|
(1,124 |
) |
Mortgage-backed
securities residential |
|
|
274 |
|
|
|
(28 |
) |
|
|
2,194 |
|
|
|
(18 |
) |
|
|
2,468 |
|
|
|
(46 |
) |
Equity securities |
|
|
0 |
|
|
|
0 |
|
|
|
9 |
|
|
|
(14 |
) |
|
|
9 |
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58,937 |
|
|
$ |
(1,322 |
) |
|
$ |
7,569 |
|
|
$ |
(573 |
) |
|
$ |
66,506 |
|
|
$ |
(1,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities were $9.53 million and $6.42 million for the six months ended
June 30, 2009 and 2008, respectively. Gross gains of $509 thousand and $194 thousand were realized
on these sales during 2009 and 2008, respectively.
Proceeds from sales of securities were $9.53 million for the three months ended June 30, 2009.
Gross gains of $509 thousand were realized on these sales during 2009. There were no security
sales during the three-month period ended June 30, 2008.
Other-Than-Temporary-Impairment
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
Investment securities are generally evaluated for OTTI under Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Consideration is given to the length of time and the extent to which the fair value has been less
than cost, the financial condition and near-term prospects of the issuer, and the intent and
ability of the Corporation to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. In analyzing an issuers financial condition,
the Corporation may consider whether the securities are issued by the federal government or its
agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have
occurred, and the results of reviews of the issuers financial condition. The assessment of
whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment
and is based on the information available to management at a point in time.
When OTTI occurs the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell the security or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis. If an entity intends to sell or it is more likely
than not it will be required to sell the security before recovery of its amortized cost basis, the
OTTI shall be recognized in earnings equal to the entire difference between the investments
amortized cost basis and its fair value at the balance sheet date. The previous amortized cost
basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
The Corporation recorded an other-than-temporary pre-tax charge for
impairment against local and regional bank holdings in the amount of $74 thousand, with a related tax benefit of $26 thousand during the three months
ended June 30, 2009.
The Corporation also recorded an other-than-temporary impairment
charge against the holdings of Fannie Mae Preferred Stock in the
amount of $551
thousand with a related tax benefit of $188 thousand during the quarter ended June 30, 2008.
6
As of June 30, 2009, the Companys security portfolio consisted of 438 securities, 127 of which
were in an unrealized loss position. The majority of the unrealized losses on the Corporations
securities are related to its holdings of U.S. Government-sponsored entities and obligations of
states and political subdivisions, as discussed below.
Unrealized losses on debt securities issued by the U.S. Government-sponsored entities have not been
recognized into income because the securities are of high credit quality, management has the intent
and ability to hold these securities for the foreseeable future and the decline in fair value is
largely due to fluctuations in market interest rates. The fair value is expected to recover as the
securities approach their maturity date.
Unrealized losses on debt securities at June 30, 2009 on the Corporations obligations of states
and political subdivisions have not been recognized into income because the securities are of high
credit quality and management has the intent and ability to hold these until they recover their
underlying value which may be at maturity.
Loans:
Individually impaired loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In Thousands of Dollars) |
|
2009 |
|
|
2008 |
|
Loans with no allocated allowance for loan losses |
|
$ |
701 |
|
|
$ |
213 |
|
Loans with allocated allowance for loan losses |
|
|
7,599 |
|
|
|
2,425 |
|
|
|
|
|
|
|
|
|
|
$ |
8,300 |
|
|
$ |
2,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of the allowance for loan losses allocated |
|
$ |
2,263 |
|
|
$ |
555 |
|
Interest income recognized during impairment for the periods was immaterial.
Nonperforming loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In Thousands of Dollars) |
|
2009 |
|
|
2008 |
|
Nonaccrual loans: |
|
|
|
|
|
|
|
|
Residential real estate |
|
$ |
1,721 |
|
|
$ |
1,484 |
|
Commercial real estate |
|
|
7,955 |
|
|
|
2,821 |
|
Consumer |
|
|
216 |
|
|
|
129 |
|
Commercial |
|
|
971 |
|
|
|
341 |
|
Restructured loans |
|
|
0 |
|
|
|
0 |
|
Loans past due over 90 days still on accrual |
|
|
315 |
|
|
|
562 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
11,178 |
|
|
$ |
5,337 |
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
355 |
|
|
|
65 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
11,533 |
|
|
$ |
5,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of nonperforming loans to loans |
|
|
1.88 |
% |
|
|
.97 |
% |
Percentage of nonperforming assets to loans |
|
|
1.94 |
% |
|
|
.98 |
% |
Percentage of nonperforming assets to total assets |
|
|
1.20 |
% |
|
|
.61 |
% |
7
The identification of loans as impaired and the valuation of collateral dependent impaired loans is
a challenging component of our financial reporting process due to the timing of when a loan is
identified as impaired and the need to timely close the Companys books for a given period.
Typically, non-homogeneous loans are identified as impaired when they become ninety days past due,
or earlier if management believes it is probable that the Company will not collect all amounts due
under the terms
of the loan agreement. Because the circumstances surrounding loan collection are commonly fluid,
we often conclude a loan is impaired relatively late in the financial reporting process. Given
this, when we identify a loan as impaired and also conclude that the loan is collateral dependent,
we typically perform an internal collateral valuation as an interim measure to facilitate the
closing of the Company books. We typically obtain an external appraisal to validate our internal
collateral valuation as soon as is practical. To the extent that an external appraisal returns a
value estimate that is materially different from our internally generated estimate before the
release of our interim or annual financial statements, we would adjust the associated specific loss
reserve and, if necessary, the Companys consolidated financial statements for the difference.
Earnings Per Share:
The computation of basic and diluted earnings per share is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
(Dollars in Thousands, except |
|
June 30, |
|
|
June 30, |
|
Per Share Data) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Basic EPS computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Net income |
|
$ |
1,657 |
|
|
$ |
1,534 |
|
|
$ |
3,341 |
|
|
$ |
3,258 |
|
Denominator Weighted
average shares
outstanding |
|
|
13,339,289 |
|
|
|
13,088,891 |
|
|
|
13,285,768 |
|
|
|
13,053,483 |
|
Basic earnings per share |
|
$ |
.12 |
|
|
$ |
.12 |
|
|
$ |
.25 |
|
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Net income |
|
$ |
1,657 |
|
|
$ |
1,534 |
|
|
$ |
3,341 |
|
|
$ |
3,258 |
|
Denominator Weighted
average shares
outstanding for basic
earnings per share |
|
|
13,339,289 |
|
|
|
13,088,891 |
|
|
|
13,285,768 |
|
|
|
13,053,483 |
|
Effect of Stock Options |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted averages shares
for diluted earnings per
share |
|
|
13,339,289 |
|
|
|
13,088,891 |
|
|
|
13,285,768 |
|
|
|
13,053,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
.12 |
|
|
$ |
.12 |
|
|
$ |
.25 |
|
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options for 39,500 and 42,500 shares were not considered in the computing of diluted earnings
per share for 2009 and 2008 respectively because they were antidilutive.
8
Stock Based Compensation:
The Corporations Stock Option Plan, which is shareholder-approved, permits the grant of share
options to its directors, officers and employees for up to 375,000 shares of common stock. Option
awards are generally granted with an exercise price equal to the market price of the Corporations
common stock at the date of grant, those option awards have vesting periods of 5 years and have
10-year contractual terms. At June 30, 2009 there were 39,500 outstanding options of which 34,500
are fully vested and exercisable.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
model. Total compensation cost charged against income for the stock option plan for the quarter
ended June 30, 2009 was not material. No related income tax benefit was recorded.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income consists solely of the change in unrealized gains and losses on securities available for
sale, net of reclassification for gains recognized in income.
Acquisition:
On March 31, 2009, the Corporation completed its acquisition of Butler Wick Trust Company, a wholly
owned subsidiary of Butler Wick Corp. Farmers National Banc Corp acquired the capital stock of
Butler Trust for cash in the amount of $12.125 million, subject to certain adjustments contained in
the stock purchase agreement.
The following table summarizes the estimated fair value of assets acquired and liabilities assumed
at the date of the acquisition:
|
|
|
|
|
Cash and due from banks |
|
$ |
1,614 |
|
Securities available for sale |
|
|
2,071 |
|
Premises and equipment |
|
|
44 |
|
Goodwill |
|
|
3,679 |
|
Other intangible assets |
|
|
4,240 |
|
Other assets |
|
|
746 |
|
|
|
|
|
Total assets acquired |
|
|
12,394 |
|
|
|
|
|
|
Liabilities assumed |
|
|
(269 |
) |
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
12,125 |
|
|
|
|
|
Recent Accounting Pronouncements
In April 2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining
whether impairment is other-than-temporary (OTTI) for debt securities. The FSP requires an entity
to assess whether it intends to sell, or it is more likely than not that it will be required to
sell a security in an unrealized loss position before recovery of its amortized cost basis. If
either of these criteria is met, the entire difference between amortized cost and fair value is
recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of
impairment recognized in earnings is limited to the amount related to credit losses, while
impairment related to other factors is recognized in other comprehensive income. Additionally, the
FSP expands and increases the frequency of existing disclosures about other-than-temporary
impairments for debt and equity securities. This FSP is effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for periods ending after March
15, 2009. Through the period ended March 31, 2009, the Corporation had not recognized any
other-than-temporary impairment charges on debt securities. The adoption of this FSP on April 1,
2009 did not have a material impact on the results of operations or financial position.
9
In April 2009, the FASB issued Staff Position (FSP) No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. This FSP emphasizes that even if there has been a
significant decrease in the volume and level of activity, the objective of a fair value measurement
remains the same. Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed
sale) between market participants.
The FSP provides a number of factors to consider when evaluating whether there has been a
significant decrease in the volume and level of activity for an asset or liability in relation to
normal market activity. In addition, when transactions or quoted prices are not considered
orderly, adjustments to those prices based on the weight of available information may be needed to
determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is
effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied
prospectively. Early adoption is permitted for periods ending after March 15, 2009. The adoption
of this FSP at June 30, 2009 did not have a material impact on the results of operations or
financial position.
In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments , to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies that were previously only required in annual
financial statements. This FSP is effective for interim reporting periods ending after June 15,
2009. The adoption of this FSP at June 30, 2009 did not have a material impact on the results of
operations or financial position as it only required disclosures which are included in the Fair
Value Note.
In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (FAS 141(R)),
which establishes principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or
after December 15, 2008. During March 2009, the Corporation acquired Butler Wick Trust Company,
and the principals and requirements of FAS 141(R) were used to account for the combination.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in Consolidated Financial
Statements, an amendment of ARB No. 51 (SFAS No. 160), which will change the accounting and
reporting for minority interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity within the consolidated balance sheets. FAS No. 160 is
effective as of the beginning of the first fiscal year beginning on or after December 15, 2008.
The impact of adoption was not material.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of SFAS No. 133. FAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133 for derivative instruments and hedging activities. FAS No. 161
requires qualitative disclosure about objectives and strategies for using derivative and hedging
instruments, quantitative disclosures about fair value amounts of the instruments and gains and
losses on such instruments, as well as disclosures about credit-risk features in derivative
agreements. FAS No. 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The adoption of this standard did not have a material
effect on the Corporations results of operations or financial position.
10
Recently Issued but not yet Effective Accounting Pronouncements:
Accounting for Transfers of Financial Assets: In June 2009, FASB issued SFAS No. 166 Accounting
for Transfers of Financial Assetsan amendment of FASB Statement No. 140. The objective of SFAS
No. 166 is to improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial performance, and
cash flows; and a
transferors continuing involvement in transferred financial assets. SFAS No. 166 shall be
effective as of the beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Management is still evaluating the impact of this
accounting standard.
Amendments to FASB Interpretation No. 46(R): In June 2009, FASB issued SFAS No. 167 Amendments to
FASB Interpretation No. 46(R). The objective of SFAS No. 167 is to amend
certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, to improve financial reporting by enterprises involved with variable
interest entities and to provide more relevant and reliable information to users of financial
statements. SFAS
No. 167 shall be effective as of the beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier application is
prohibited. Management is still evaluating the impact of this accounting standard.
Fair Value
SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid
to transfer a liability (exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. SFAS No.
157 also establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entitys own assumptions
about the assumptions that market participants would use in pricing and asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of
each type of financial instrument:
Investment Securities : The fair values for investment securities are determined by quoted
market prices, if available (Level 1). For securities where quoted prices are not available, fair
values are calculated based on market prices of similar securities (Level 2). For securities where
quoted prices or market prices of similar securities are not available, fair values are calculated
using discounted cash flows or other market indicators (Level 3). Discounted cash flows are
calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities,
volatility, credit spread and optionality. During times when trading is more liquid, broker quotes
are used (if available) to validate the model. Rating agency and industry research reports as well
as defaults and deferrals on individual securities are reviewed and incorporated into the
calculations.
11
Impaired Loans : The fair value of impaired loans with specific allocations of the
allowance for loan losses is generally based on recent real estate appraisals. These appraisals
may utilize a single valuation approach or a combination of approaches including comparable sales
and the income approach. Adjustments are routinely made in the appraisal process by the appraisers
to adjust for differences between the comparable sales and income data available. Such adjustments
are typically significant and result in a Level 3 classification of the inputs for determining fair
value.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
June 30, 2009 Using: |
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
Carrying |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
(In Thousands of Dollars) |
|
Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored entities
and agencies |
|
$ |
73,347 |
|
|
$ |
0 |
|
|
$ |
73,347 |
|
|
$ |
0 |
|
States and political subdivisions |
|
|
64,969 |
|
|
|
0 |
|
|
|
64,969 |
|
|
|
0 |
|
Mortgage-backed securities-residential |
|
|
142,581 |
|
|
|
0 |
|
|
|
142,565 |
|
|
|
16 |
|
Collateralized mortgage obligations |
|
|
419 |
|
|
|
0 |
|
|
|
419 |
|
|
|
0 |
|
Equity securities |
|
|
261 |
|
|
|
261 |
|
|
|
0 |
|
|
|
0 |
|
Other securities |
|
|
260 |
|
|
|
0 |
|
|
|
260 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
281,837 |
|
|
$ |
261 |
|
|
$ |
281,560 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2008 Using: |
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
Carrying |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
(In Thousands of Dollars) |
|
Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for sale |
|
$ |
271,605 |
|
|
$ |
196 |
|
|
$ |
262,432 |
|
|
$ |
8,977 |
|
12
The table below presents a reconciliation of all assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the three month and six month periods ended
June 30, 2009:
|
|
|
|
|
|
|
Investment |
|
|
|
Securities |
|
|
|
Available-for-sale |
|
Three months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
Balance of recurring Level 3 assets at April 1, 2009 |
|
$ |
8,598 |
|
Total unrealized gains or losses: |
|
|
|
|
Included in other comprehensive income |
|
|
0 |
|
Purchases, sales, issuances and settlements, net |
|
|
(1,610 |
) |
Transfers in and/or out of Level 3 |
|
|
(6,972 |
) |
|
|
|
|
|
|
|
|
|
Balance of recurring Level 3 assets at June 30, 2009 |
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
Securities |
|
|
|
Available-for-sale |
|
Six months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
Balance of recurring Level 3 assets at January 1, 2009 |
|
$ |
8,977 |
|
Total unrealized gains or losses: |
|
|
|
|
Included in other comprehensive income |
|
|
(379 |
) |
Purchases, sales, issuances and settlements, net |
|
|
(1,610 |
) |
Transfers in and/or out of Level 3 |
|
|
(6,972 |
) |
|
|
|
|
Balance of recurring Level 3 assets at June 30, 2009 |
|
$ |
16 |
|
|
|
|
|
Assets measured at fair value on a non-recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
June 30, 2009 Using: |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
(In Thousands of Dollars) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
|
0 |
|
|
|
0 |
|
|
$ |
5,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
December 31, 2008 Using: |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
(In Thousands of Dollars) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
|
0 |
|
|
|
0 |
|
|
$ |
1,870 |
|
Impaired loans, which are measured for impairment using the fair value of the collateral for
collateral dependent loans, had a recorded investment amount of $7.60 million, with a valuation
allowance of $2.26 million, resulting in an additional provision for loan losses of $1.16 million
for the three month period ended June 30, 2009 and $1.71 million for the six month period ended
June 30, 2009.
13
In accordance with FSP FAS 107-1, the carrying amounts and estimated fair values of financial
instruments, at June 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
(In Thousands of Dollars) |
|
Carrying |
|
|
Fair |
|
June 30, 2009 |
|
Amount |
|
|
Value |
|
Financial assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
41,287 |
|
|
$ |
41,287 |
|
Securities available-for-sale |
|
|
281,837 |
|
|
|
281,837 |
|
Restricted stock |
|
|
5,317 |
|
|
|
n/a |
|
Loans, net |
|
|
586,756 |
|
|
|
599,682 |
|
Accrued interest receivable |
|
|
4,091 |
|
|
|
4,091 |
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
|
713,616 |
|
|
|
718,972 |
|
Short-term borrowings |
|
|
117,838 |
|
|
|
117,838 |
|
Long-term borrowings |
|
|
44,055 |
|
|
|
46,173 |
|
Accrued interest payable |
|
|
1,260 |
|
|
|
1,260 |
|
The methods and assumptions used to estimate fair value are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing
deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable
rate loans or deposits that reprice frequently and fully. The methods for determining the fair
values for securities were described previously. For fixed rate loans or deposits and for variable
rate loans or deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated life and credit risk.
Fair value of debt is based on current rates for similar financing. It was not practicable to
determine the fair value of restricted stock due to restrictions placed on its transferability.
The fair value of off-balance-sheet items is not considered material (or is based on the current
fees or cost that would be charged to enter into or terminate such arrangements).
14
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and
Results of Operations |
Forward Looking Statements
When used in this Form 10-Q, or in future filings with the Securities and Exchange Commission, in
press releases or other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases will likely result, are
expected to, will continue, is anticipated, estimate, project,
or similar expressions are
intended to identify
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks, uncertainties and other
factors, which may cause the Corporations actual results to be materially different from those
indicated. Such statements are subject to certain risks and uncertainties including changes in
economic conditions in the market areas the Corporation conducts business, which could materially
impact credit quality trends, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the market areas the Corporation conducts business, and competition,
that could cause actual results to differ materially from historical earnings and those presently
anticipated or projected. The Corporation wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The Corporation
undertakes no obligation to publicly release the result of any revisions that may be made to any
forward-looking
statements to reflect events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Overview
The Corporations strategies are to continue our growth initiatives and increase earnings; maintain
the appropriate levels of capital that are essential so that we remain a well-capitalized
institution under all regulatory guidelines; continue to deal with the number of issues the banking
industry has been facing; closely monitor our efficiency ratio; and strategically manage interest
rate risk and credit risk, specifically, the non-performing assets.
Results of Operations
Comparison of selected financial ratios and other results at or for the three-month and six-month
periods ending June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for Three months |
|
|
At or for Six months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
(Dollars in Thousands, except Per Share Data) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Total Assets |
|
$ |
957,848 |
|
|
$ |
824,513 |
|
|
$ |
957,848 |
|
|
$ |
824,513 |
|
Net Income |
|
$ |
1,657 |
|
|
$ |
1,534 |
|
|
$ |
3,341 |
|
|
$ |
3,258 |
|
Basic and Diluted Earnings per share |
|
$ |
.12 |
|
|
$ |
.12 |
|
|
$ |
.25 |
|
|
$ |
.25 |
|
Return on Average Assets (Annualized) |
|
|
.70 |
% |
|
|
.74 |
% |
|
|
.73 |
% |
|
|
.80 |
% |
Return on Average Equity (Annualized) |
|
|
8.43 |
% |
|
|
8.16 |
% |
|
|
8.54 |
% |
|
|
8.73 |
% |
Efficiency Ratio (tax equivalent basis) |
|
|
70.11 |
% |
|
|
62.94 |
% |
|
|
68.90 |
% |
|
|
64.55 |
% |
Equity to Asset Ratio |
|
|
8.15 |
% |
|
|
8.89 |
% |
|
|
8.15 |
% |
|
|
8.89 |
% |
Dividends to Net Income |
|
|
96.62 |
% |
|
|
102.35 |
% |
|
|
95.45 |
% |
|
|
111.97 |
% |
Net Loans to Assets |
|
|
61.26 |
% |
|
|
61.13 |
% |
|
|
61.26 |
% |
|
|
61.13 |
% |
Loans to Deposits |
|
|
83.15 |
% |
|
|
80.38 |
% |
|
|
83.15 |
% |
|
|
80.38 |
% |
Despite the challenging economic environment, the Corporation was able to achieve favorable success
in key areas and the business model continues to gain momentum with another period of strong
organic growth. The net earnings were impacted negatively during the first six months of the year
by the extraordinary FDIC insurance premium expense that all FDIC insured banks incurred this year
along with the ongoing challenge towards credit quality and loan losses. Commercial lenders and
personal bankers have given lift to the business model during the first six-month period of 2009,
as they continue to originate new loans and attract new core deposit relationships. The net
interest income, which is the primary source of revenue for the Corporation increased 30.1% over
the same six-month period in 2008. The Corporation will focus on continued growth through organic
means as well as manage interest rate risk and credit risk.
The acquisition of Butler Wick Trust Company (Farmers Trust Company) gives the Corporation the
ability to provide investment, trust, and estate services to private individuals and small
corporate clients with a high level of attention and confidentiality. The combination of Farmers
and Butler Wick Trust Company represents a win-win for the respective organizations. The addition
to Farmers National Bank significantly complements core retail banking and asset management.
Net Interest Income. The following schedules detail the various components of net interest
income for the periods indicated. All asset yields are calculated on a tax-equivalent basis where
applicable. Security yields are based on amortized cost.
15
Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (3) (5) (6) |
|
$ |
570,214 |
|
|
$ |
9,490 |
|
|
|
6.68 |
% |
|
$ |
503,042 |
|
|
$ |
8,605 |
|
|
|
6.88 |
% |
Taxable securities (4) |
|
|
213,060 |
|
|
|
2,284 |
|
|
|
4.30 |
|
|
|
177,804 |
|
|
|
1,955 |
|
|
|
4.42 |
|
Tax-exempt securities (4) (6) |
|
|
61,002 |
|
|
|
917 |
|
|
|
6.03 |
|
|
|
71,900 |
|
|
|
1,055 |
|
|
|
5.90 |
|
Equity Securities (2) (6) |
|
|
5,539 |
|
|
|
67 |
|
|
|
4.85 |
|
|
|
8,235 |
|
|
|
92 |
|
|
|
4.49 |
|
Federal funds sold |
|
|
30,097 |
|
|
|
8 |
|
|
|
0.11 |
|
|
|
15,301 |
|
|
|
77 |
|
|
|
2.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
879,912 |
|
|
|
12,766 |
|
|
|
5.82 |
|
|
|
776,282 |
|
|
|
11,784 |
|
|
|
6.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONEARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
22,948 |
|
|
|
|
|
|
|
|
|
|
|
22,680 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
14,122 |
|
|
|
|
|
|
|
|
|
|
|
14,436 |
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
(5,992 |
) |
|
|
|
|
|
|
|
|
|
|
(5,492 |
) |
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities |
|
|
6,119 |
|
|
|
|
|
|
|
|
|
|
|
912 |
|
|
|
|
|
|
|
|
|
Other assets (3) |
|
|
36,304 |
|
|
|
|
|
|
|
|
|
|
|
20,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
953,413 |
|
|
|
|
|
|
|
|
|
|
$ |
829,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
302,435 |
|
|
$ |
2,386 |
|
|
|
3.16 |
% |
|
$ |
293,525 |
|
|
$ |
3,194 |
|
|
|
4.38 |
% |
Savings deposits |
|
|
233,097 |
|
|
|
668 |
|
|
|
1.15 |
|
|
|
180,446 |
|
|
|
688 |
|
|
|
1.53 |
|
Demand deposits |
|
|
102,026 |
|
|
|
79 |
|
|
|
0.31 |
|
|
|
98,167 |
|
|
|
113 |
|
|
|
0.46 |
|
Short term borrowings |
|
|
126,773 |
|
|
|
467 |
|
|
|
1.48 |
|
|
|
65,642 |
|
|
|
390 |
|
|
|
2.39 |
|
Long term borrowings |
|
|
44,292 |
|
|
|
501 |
|
|
|
4.54 |
|
|
|
49,957 |
|
|
|
569 |
|
|
|
4.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing Liabilities |
|
|
808,623 |
|
|
|
4,101 |
|
|
|
2.03 |
|
|
|
687,737 |
|
|
|
4,954 |
|
|
|
2.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING LIABILITIES
AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
61,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,650 |
|
|
|
|
|
Other Liabilities |
|
|
4,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,813 |
|
|
|
|
|
Stockholders equity |
|
|
78,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,421 |
|
|
|
|
|
Total Liabilities and
Stockholders Equity |
|
$ |
953,413 |
|
|
|
|
|
|
|
|
|
|
$ |
829,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread |
|
|
|
|
|
$ |
8,665 |
|
|
|
3.79 |
% |
|
|
|
|
|
$ |
6,830 |
|
|
|
3.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.95 |
% |
|
|
|
|
|
|
|
|
|
|
3.54 |
% |
|
|
|
(1) |
|
Rates are calculated on an annualized basis. |
|
(2) |
|
Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets. |
|
(3) |
|
Non-accrual loans and overdraft deposits are included in other assets. |
|
(4) |
|
Includes unamortized discounts and premiums. Average balance and yield are computed using the average historical amortized cost. |
|
(5) |
|
Interest on loans includes fee income of $670 thousand and $459 thousand for 2009 and 2008 respectively and is reduced by
amortization of $363 thousand and $265 thousand for 2009 and 2008 respectively. |
|
(6) |
|
For 2009, adjustments of $133 thousand and $304 thousand respectively are made to tax equate income on tax exempt loans
and tax exempt securities. For 2008, adjustments of $81 thousand, $350 thousand, and $6 thousand respectively
are made to tax equate income on tax exempt loans, tax exempt securities and to reflect a dividends received deduction
on equity securities. These adjustments are based on a marginal federal income tax rate of 35%, less disallowances. |
16
Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (3) (5) (6) |
|
$ |
562,376 |
|
|
$ |
18,618 |
|
|
|
6.68 |
% |
|
$ |
505,455 |
|
|
$ |
17,305 |
|
|
|
6.88 |
% |
Taxable securities (4) |
|
|
209,681 |
|
|
|
4,580 |
|
|
|
4.44 |
|
|
|
163,605 |
|
|
|
3,532 |
|
|
|
4.34 |
|
Tax-exempt securities (4) (6) |
|
|
60,012 |
|
|
|
1,795 |
|
|
|
6.03 |
|
|
|
71,637 |
|
|
|
2,101 |
|
|
|
5.90 |
|
Equity Securities (2) (6) |
|
|
5,540 |
|
|
|
137 |
|
|
|
4.99 |
|
|
|
8,207 |
|
|
|
256 |
|
|
|
6.27 |
|
Federal funds sold |
|
|
23,882 |
|
|
|
14 |
|
|
|
0.12 |
|
|
|
18,647 |
|
|
|
239 |
|
|
|
2.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
861,491 |
|
|
|
25,144 |
|
|
|
5.89 |
|
|
|
767,551 |
|
|
|
23,433 |
|
|
|
6.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONEARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
22,696 |
|
|
|
|
|
|
|
|
|
|
|
22,755 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
14,128 |
|
|
|
|
|
|
|
|
|
|
|
14,445 |
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
(5,844 |
) |
|
|
|
|
|
|
|
|
|
|
(5,489 |
) |
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities |
|
|
5,305 |
|
|
|
|
|
|
|
|
|
|
|
696 |
|
|
|
|
|
|
|
|
|
Other assets (3) |
|
|
30,993 |
|
|
|
|
|
|
|
|
|
|
|
20,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
928,769 |
|
|
|
|
|
|
|
|
|
|
$ |
820,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
295,817 |
|
|
$ |
4,855 |
|
|
|
3.31 |
% |
|
$ |
289,677 |
|
|
$ |
6,518 |
|
|
|
4.53 |
% |
Savings deposits |
|
|
224,768 |
|
|
|
1,385 |
|
|
|
1.24 |
|
|
|
171,855 |
|
|
|
1,413 |
|
|
|
1.65 |
|
Demand deposits |
|
|
100,325 |
|
|
|
182 |
|
|
|
0.37 |
|
|
|
97,216 |
|
|
|
236 |
|
|
|
0.49 |
|
Short term borrowings |
|
|
113,360 |
|
|
|
972 |
|
|
|
1.73 |
|
|
|
70,021 |
|
|
|
985 |
|
|
|
2.83 |
|
Long term borrowings |
|
|
48,755 |
|
|
|
1,018 |
|
|
|
4.21 |
|
|
|
51,048 |
|
|
|
1,166 |
|
|
|
4.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing Liabilities |
|
|
783,025 |
|
|
|
8,412 |
|
|
|
2.17 |
|
|
|
679,817 |
|
|
|
10,318 |
|
|
|
3.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING LIABILITIES
AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
62,250 |
|
|
|
|
|
|
|
|
|
|
|
60,996 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
4,584 |
|
|
|
|
|
|
|
|
|
|
|
4,855 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
78,910 |
|
|
|
|
|
|
|
|
|
|
|
75,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity |
|
$ |
928,769 |
|
|
|
|
|
|
|
|
|
|
$ |
820,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate
spread |
|
|
|
|
|
$ |
16,732 |
|
|
|
3.72 |
% |
|
|
|
|
|
$ |
13,115 |
|
|
|
3.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.93 |
% |
|
|
|
|
|
|
|
|
|
|
3.44 |
% |
|
|
|
(1) |
|
Rates are calculated on an annualized basis. |
|
(2) |
|
Equity securities include restricted stock, which is included in other assets on the
consolidated balance sheets. |
|
(3) |
|
Non-accrual loans and overdraft deposits are included in other assets. |
|
(4) |
|
Includes unamortized discounts and premiums. Average balance and yield are computed using the
average historical amortized cost. |
|
(5) |
|
Interest on loans includes fee income of $1.290 million and $799 thousand for 2009 and 2008
respectively and is reduced by
amortization of $698 thousand and $532 thousand for 2009 and 2008 respectively. |
|
(6) |
|
For 2009, adjustments of $225 thousand and $596 thousand respectively are made to tax equate
income on tax exempt loans
and tax exempt securities. For 2008, adjustments of $163 thousand, $698 thousand, and $27
thousand respectively
are made to tax equate income on tax exempt loans, tax exempt securities and to reflect a
dividends received deduction
on equity securities. These adjustments are based on a marginal federal income tax rate of 35%,
less disallowances. |
17
Taxable
equivalent net interest income. Taxable equivalent net interest income for the
first six months ended June 30, 2009 totaled $16.73 million, an increase of $3.62 million or 27.58%
compared to the first six months of 2008. Although the yield on earning assets decreased by 25
basis points over the past 12 months, the net interest margin benefited from a 88 basis point
decrease in the cost of interest-bearing liabilities, resulting in an overall 49 basis point
increase in the net interest margin. Average savings deposits increased by $52.91 million or
30.79% over the prior year six-month period as customers continue to move investment dollars from
the equity markets seeking liquidity and security. Short term borrowings increased $43.34 million
over the same period in the prior year as a result of repurchase agreements increasing $54.03
million. Although these average savings deposits and short term borrowings increased, interest
expense related to these items actually decreased by $41 thousand or 1.71% over that same period.
Taxable equivalent net interest income for the quarter ended June 30, 2009 totaled $8.67 million,
an increase of $1.84 million or 26.87% compared to the quarter ended June 30, 2008. The yield on
earning assets decreased by 29 basis points and the cost of interest-bearing liabilities decreased
by 87 basis points over the past 12 months to positively impact the net interest margin. The net
interest margin has made improvement over the prior period as management has made an increased
effort to control the cost of funds. The Corporations balance sheet is liability sensitive and in
the current market of lower interest rates the liabilities are repricing faster than assets. This
trend is expected to slow and reverse once interest rates begin to move upward.
Noninterest
Income. Total noninterest income for the six-month period ended June 30, 2009
increased by $1.72 million or 84.45% compared to the same period in 2008. This increase is due to
an increase of $315 thousand in security gains, a reduction of $477 thousand in impairment charges,
and $1.00 million of trust income from the newly acquired entity. Excluding these three items the
non-interest income was $2.32 million during the first six months of 2009 compared to $2.40 million
in 2008, a decrease of 3.05%.
Total noninterest income for the three-month period ended June 30, 2009 increased by $2.00 million
or 310.40% compared to the same period in 2008. This increase is due to the same items that caused
the increase over the six-month period. Impairment charges were down $477 thousand, security gains
were up $509 thousand, and the newly acquired trust company supplied $1.00 million to bolster the
noninterest income. Excluding these items, noninterest income was up $10 thousand for the second
quarter of 2009 compared to the same quarter in 2008.
Noninterest Expense. Noninterest expense was $14.06 million for the first six months of
2009 compared to $10.10 million for the same period in 2008. This amounts to an increase of $3.96
million or 39.18% and was mainly the result of an increase of $1.49 million in salaries and
employee benefits, $894 thousand in FDIC insurance, $453 thousand in merger costs and $148 thousand
in amortization associated with the Trust Company acquisition. Of the $1.49 million increase in
salaries and employee benefits $489 thousand can be attributed to salary and temporary wages and
$215 thousand to employee health insurance.
Noninterest expense was $7.80 million for the quarter ended June 30, 2009 compared to $5.10 million
for the same period in 2008. This is an increase of $2.71 million or 53.15%. For the second
quarter of 2009, the Corporation experienced a $1.28 million increase in salary and employee
benefits and a $680 thousand increase in FDIC insurance costs.
18
Below is a detail of non-interest expense line items classified between the total Corporation, the
Corporation without Trust and the Trust for the three month period ending June 30, 2009. The
Corporation purchased the Trust Company on March 31, 2009; therefore, information is not presented
for the six month period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2009 |
|
|
|
Total |
|
|
Corporation |
|
|
|
|
(In Thousands of Dollars) |
|
Corporation |
|
|
without Trust |
|
|
Trust |
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
$ |
4,078 |
|
|
$ |
3,452 |
|
|
$ |
626 |
|
Occupancy and equipment |
|
|
817 |
|
|
|
768 |
|
|
|
49 |
|
State and local taxes |
|
|
238 |
|
|
|
223 |
|
|
|
15 |
|
Professional fees |
|
|
228 |
|
|
|
213 |
|
|
|
15 |
|
Advertising |
|
|
155 |
|
|
|
151 |
|
|
|
4 |
|
FDIC insurance |
|
|
697 |
|
|
|
697 |
|
|
|
0 |
|
Merger related costs |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Intangible amortization |
|
|
148 |
|
|
|
0 |
|
|
|
148 |
|
Other operating expenses |
|
|
1,442 |
|
|
|
1,276 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
7,803 |
|
|
$ |
6,780 |
|
|
$ |
1,023 |
|
|
|
|
|
|
|
|
|
|
|
The efficiency ratio increased to 68.90% for the first six months of 2009 compared to 64.55% for
the first six months of 2008. The ratio was negatively impacted by the merger expenses and FDIC
insurance expenses mentioned above. The efficiency ratio is calculated as follows: non-interest
expense, excluding intangible amortization, divided by the sum of fully taxable equivalent net
interest income plus non-interest income, excluding security gains. This ratio is a measure of the
expense
incurred to generate a dollar of revenue. Management will continue to closely monitor the
efficiency ratio.
Income Taxes. Income tax expense totaled $772 thousand for the first six months of 2009
and $697 thousand for the first six months of 2008. The effective tax rate for the first six
months of 2009 was 18.77% compared to 17.62% for the same time period in 2008. The effective tax
rate is higher for the current six month period due to the $11.63 million reduction in the average
balance of tax exempt securities compared to June 30, 2008.
Income tax expense totaled $361 thousand for the quarter ended June 30, 2009 and $308 thousand for
the quarter ended June 30, 2008, an increase of 17.21%. The increase can be attributed to the
reduction in tax exempt municipal securities and the increase in income before taxes.
Other
Comprehensive Income. For the first six months of 2009, the change in net unrealized
gains on securities, net of reclassifications, resulted in an unrealized loss, net of tax of $152
thousand compared to an unrealized loss of $1.17 million for the same period in 2008. The quarter
ended June 30, 2009 had an unrealized loss on securities of $944 thousand compared to an unrealized
loss of $2.89 million for the same six month period in 2008. With an unrealized gain recorded at
June 30, 2009 of $2.14 million, management believes the decrease in fair value during the first six
months and second quarter periods of 2009 is largely due to recognition of security gains through
the income statement and normal market changes.
19
Financial Condition
Total assets increased $77.48 million or 8.80% since December 31, 2008, as the Corporation also
experienced an increase in deposit balances. Capital ratios remain strong, as shown by the ratio
of equity to total assets at June 30, 2009 of 8.15%.
Securities. Securities available-for-sale increased by $10.23 million. Security purchases
of $55.5 million were funded by maturing securities of $37.87 million and the $65.61 million
increase in deposits. The Corporation sold $9.53 million in market value of available-for-sale
securities, resulting in a gain of $509 thousand during the second quarter of 2009. There was a
$235 thousand decrease in the net unrealized gains on securities during the first six months of
2009.
Loans. Gross loans increased $41.39 million since December 31, 2008. Indirect installment
loans accounted for $25.83 million of the increase in gross loans as management continues to target
the automobile dealers network as a means to diversify the loan portfolio. On a fully tax
equivalent basis, loans contributed 74.05% of total interest income for the six months ended June
30, 2009 and 73.85% for the same period in 2008.
Allowance for Loan Losses. The following table indicates key asset quality ratios that
management evaluates on an ongoing basis.
Asset Quality History
(In Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/09 |
|
|
3/31/09 |
|
|
12/31/08 |
|
|
9/30/08 |
|
|
6/30/08 |
|
Nonperforming loans |
|
$ |
11,178 |
|
|
$ |
9,593 |
|
|
$ |
5,337 |
|
|
$ |
3,088 |
|
|
$ |
2,879 |
|
Nonperforming loans as a % of total loans |
|
|
1.88 |
% |
|
|
1.68 |
% |
|
|
.97 |
% |
|
|
.58 |
% |
|
|
.57 |
% |
Allowance for loan losses |
|
$ |
6,640 |
|
|
$ |
5,835 |
|
|
$ |
5,553 |
|
|
$ |
5,433 |
|
|
$ |
5,487 |
|
Allowance for loan losses as a % of loans |
|
|
1.12 |
% |
|
|
1.02 |
% |
|
|
1.01 |
% |
|
|
1.03 |
% |
|
|
1.08 |
% |
Allowance for loan losses as a % of
nonperforming loans |
|
|
59.40 |
% |
|
|
60.83 |
% |
|
|
104.05 |
% |
|
|
175.94 |
% |
|
|
190.59 |
% |
For the six months ended June 30, 2009, management provided $1.50 million to the allowance for loan
losses, an increase of $1.29 million over the same period in 2008. The allowance for loan losses
as a percentage of loans increased from 1.01% at December 31, 2008 to 1.12% at June 30, 2009. Net
charge-offs totaled $413 thousand for the first six months of 2009 up from $183 thousand for the
first six months of 2008. During 2009, approximately 53.34% of gross charge-offs have occurred in
the indirect loan portfolio compared to 65.58% in 2008.
The ratio of nonperforming loans to total loans increased from .97% at December 31, 2008 to 1.88%
at June 30, 2009. As of June 30, 2009, total non-performing loans were $11.18 million, compared to
$5.34 million at the end of 2008. The ratio of the allowance for loan losses (ALLL) to
non-performing loans at June 30, 2009 was 59.40%, compared to 104.05% at December 31, 2008. The
increase in non-performing loans is primarily due to the classification of certain commercial real
estate and land development loans that are in default according to the terms of the contract. A
significant allocation in our allowance for loan losses is for performing commercial and commercial
real estate loans classified by our internal loan review as substandard. Substandard loans are
those that exhibit one or more structural weaknesses and there is a distinct possibility that the
Bank will suffer a loss on the loan unless the weakness is corrected. The allocation for these
loans was $1.83 million at June 30, 2009 and $2.16 million at December 31, 2008. The allocation
decreased due to a reduction in the balance of these loans. Our actual loss experience may be
more or less than the amount allocated. Additionally, our allowance for loan losses includes an
allocation for loans specifically identified as impaired under Statement of Financial Accounting
Standards No. 114. At June 30, 2009, loans considered to be impaired totaled $8.30 million with an
allowance allocation of $2.26 million. At the end of 2008, loans considered to be impaired were
$2.64 million with an allowance allocation of $555 thousand. The allowance allocation for these
loans is generally based on managements estimate of the fair value of the collateral securing
these loans. The amount ultimately charged-off for this relationship may be different from the
loss allocation as collateral may be liquidated for amounts different from managements estimates.
As always, management is working to address weaknesses in each of these specific loans that may
result in loss.
20
Based on the evaluation of the adequacy of the allowance for loan losses, management believes that
the allowance for loan losses at June 30, 2009 to be adequate and reflects probable incurred losses
in the portfolio. The provision for loan losses is based on managements judgment after taking
into consideration all factors connected with the collectibility of the existing loan portfolio.
Management evaluates the loan portfolio in light of economic conditions, changes in the nature and
volume of the loan portfolio, industry standards and other relevant factors. Specific factors
considered by management in determining the amounts charged to operating expenses include previous
credit loss experience, the status of past due interest and principal payments, the quality of
financial information supplied by loan customers and the general condition of the industries in the
community to which loans have been made.
Deposits. Total deposits increased $65.61 million since December 31, 2008. Balances in
the Corporations time deposits increased $33.34 million or 11.79% between December 31, 2008 and
June 30, 2009. The majority of the increase in the time deposits was in certificates of deposit
which increased $24.18 million or 10.70% between December 31, 2008 and June 30, 2009. Money market
accounts increased $20.14 million or 15.41% since December 31, 2008 as customers continue to move
investment dollars from the equity markets seeking liquidity and security. The Company continues
to price deposit rates to remain competitive within the market and to retain customers.
Borrowings. Total borrowings increased $9.99 million or 6.58% since December 31, 2008.
The increase in borrowings is due to the increase in securities sold under repurchase agreements,
which increased $33.16 million, offset by a decrease in Federal Home Loan Bank Advances of $22.38
million during the first six months of 2009. The large increase in repurchase agreements is the
result of an increase in local public funds deposits.
Capital
Resources. Total stockholders equity increased from $77.10 million at December
31, 2008 to $78.05 million at June 30, 2009. During the first six months of 2009, the mark to
market adjustment of securities decreased accumulated other comprehensive income by $152 thousand
and overall retained earnings increased by $153 thousand.
The capital management function is a regular process that consists of providing capital for both
the current financial position and the anticipated future growth of the Corporation. As of June
30, 2009 the Corporations total risk-based capital ratio stood
at 12.04%, and the Tier I
risk-based capital ratio and Tier I leverage ratio were at 10.96% and
7.40%, respectively.
Management believes that the Corporation and Bank meet all capital adequacy requirements to which
they are subject, as of June 30, 2009.
Critical Accounting Policies
The Corporation follows financial accounting and reporting policies that are in accordance with
U.S. GAAP. These policies are presented in Note A to the consolidated audited financial statements
in Farmers National Banc Corp.s 2008 Annual Report to Shareholders included in Farmers National
Banc Corp.s Annual Report on Form 10-K. Critical accounting policies are those policies that
require managements most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain. The Corporation has
identified two accounting policies that are critical accounting policies and an understanding of
these policies is necessary to understand our financial statements. These policies relate to
determining the adequacy of the allowance for loan losses and other-than-temporary impairment of
securities. Additional information regarding these policies is included in the notes to the
aforementioned 2008 consolidated financial statements, Note A (Summary of Significant Accounting
Policies), Note B (Securities), Note C (Loans), and the sections captioned Loan Portfolio and
Investment Securities.
21
Liquidity
The Corporation maintains, in the opinion of management, liquidity sufficient to satisfy
depositors requirements and meet the credit needs of customers. The Corporation depends on its
ability to maintain its market share of deposits as well as acquiring new funds. The Corporations
ability to attract deposits and borrow funds depends in large measure on its profitability,
capitalization and overall financial condition. The Corporations objective in liquidity
management is to maintain the ability to meet loan commitments, purchase securities or to repay
deposits and other liabilities in accordance with their terms without an adverse impact on current
or future earnings. Principal sources of liquidity for the Corporation include assets considered
relatively liquid, such as federal funds sold, cash and due from banks, as well as cash flows from
maturities and repayments of loans, and securities.
The primary investing activities of the Corporation are originating loans and purchasing
securities. During the first six months of 2009, net cash used in investing activities amounted to
$61.13 million compared to $31.63 million used in investing activities for the same period in 2008.
The purchase of the new trust entity amounted to $10.51 million in 2009. Net loans increased by
$42.24 million during this years first six-month period and decreased $4.30 million during the
same period in 2008. The increases in net loans during 2009 can be attributed to the increased
portfolio of indirect installment loans.
The primary financing activities of the Corporation are obtaining deposits, repurchase agreements
and other borrowings. Net cash provided by financing activities amounted to $73.36 million for the
first six months of 2009 compared to $24.49 million provided by financing activities for the same
period in 2008. Most of this change is a result of the net increase in deposits, which provided
$65.61 million compared to $40.42 million provided in financing activities in the first six-month
period of 2008.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
The Corporations ability to maximize net income is dependent, in part, on managements ability to
plan and control net interest income through management of the pricing and mix of assets and
liabilities. Because a large portion of assets and liabilities of the Corporation are monetary in
nature, changes in interest rates and monetary or fiscal policy affect its financial condition and
can have significant impact on the net income of the Corporation. Additionally, the Corporations
balance sheet is currently liability sensitive and in the low interest rate environment that exists
today, the Corporations net interest margin should maintain current levels throughout the near
future.
The Corporation considers the primary market exposure to be interest rate risk. Simulation
analysis is used to monitor the Corporations exposure to changes in interest rates, and the effect
of the change to net interest income. The following table shows the effect on net interest income
and the net present value of equity in the event of a sudden and sustained 200 basis point increase
or decrease in market interest rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
Changes In Interest Rate |
|
2009 |
|
|
2008 |
|
|
ALCO |
|
(basis points) |
|
Result |
|
|
Result |
|
|
Guidelines |
|
Net Interest Income Change |
|
|
|
|
|
|
|
|
|
|
|
|
+200 |
|
|
-4.30 |
% |
|
|
-5.66 |
% |
|
|
15.00 |
% |
-200 |
|
|
-2.90 |
% |
|
|
2.11 |
% |
|
|
15.00 |
% |
Net Present Value
Of Equity Change |
|
|
|
|
|
|
|
|
|
|
|
|
+200 |
|
|
-8.16 |
% |
|
|
-7.41 |
% |
|
|
20.00 |
% |
-200 |
|
|
-15.47 |
% |
|
|
-7.35 |
% |
|
|
20.00 |
% |
22
The results of the simulation indicate that in an environment where interest rates rise or fall 100
and 200 basis points over a 12 month period, using June 30, 2009 amounts as a base case, and
considering the increase in deposit liabilities, and the volatile financial markets, the
Corporations change in net interest income would still be within the board mandated limits.
The analysis of the change in the net present value of equity in the event of a 200 basis point
decrease in market rates shows a 15.47% decline at June 30, 2009 compared to a 7.35% decline at
December 31, 2008. Management does not feel that a 200 basis point decline in the current interest
rate environment is likely to occur, and the Corporation would not risk a change to its well
capitalized classification.
Item 4. Controls and Procedures
Based on their evaluation, as of the end of the period covered by this quarterly report, the Corporations Chief
Executive Officer and Chief Financial Officer have concluded the Corporations disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective. There were no changes
in the Corporations internal controls over financial reporting (as defined in Rule 13a 15(f) under the Exchange Act)
that occurred during the fiscal quarter ended June 30, 2009, that have materially affected, or are reasonably likely to
materially affect, the Corporations internal control over financial reporting.
PART II OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
In the opinion of management there are no outstanding legal actions that will have a material
adverse effect on the Corporations financial condition or results of operations.
For information regarding factors that could affect the Corporations results of operations,
financial condition and liquidity, see the risk factors discussion provided under Part 1, Item 1A
on Form 10-K for the fiscal year ended December 31, 2008. See also, Forward-Looking Statements
included in Part 1, Item 2 of this Quarterly Report on Form 10-Q. In addition to the risk factors
identified in the Form 10-K at December 31, 2008 the following risk factor is presented at March
31, 2009:
Increases in FDIC insurance premiums may have a material adverse affect on our earnings.
During 2008, there were higher levels of bank failures which dramatically increased resolution
costs of the Federal Deposit Insurance Corporation (FDIC) and depleted the deposit insurance
fund. In order to maintain a strong funding position and restore reserve ratios of the deposit
insurance fund, the FDIC voted on December 16, 2008 to increase assessment rates of insured
institutions uniformly by 7 basis points (7 cents for every $100 of deposits), beginning with the
first quarter of 2009. Additional changes beginning April 1, 2009, were to require riskier
institutions to pay a larger share of premiums by factoring in rate adjustments based on secured
liabilities and unsecured debt levels.
23
As part of the 2008 changes, the FDIC instituted two temporary programs effective through December
31, 2009 to further insure customer deposits at FDIC-member banks: deposit accounts are now insured
up to $250,000 per customer (up from $100,000) and non-interest bearing transactional accounts are
fully insured (unlimited coverage).
During 2009, the FDIC imposed a special assessment of 10 additional basis points (10 cents for
every $100 of deposits) on insured institutions on June 30, 2009, to be collected on September 30,
2009. The interim rule would also permit the FDIC to impose an additional emergency special
assessment between June 30, 2009 and December 31, 2009. We are generally unable to control the
amount of premiums that we are required to pay for FDIC insurance. If there is additional bank or
financial institution failures, we may be required to pay even higher FDIC premiums than the
recently increased levels. These announced increases and any future increases in FDIC insurance
premiums may materially adversely affect our results of operations.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
Purchases of equity securities by the issuer.
On July 14, 2009, the Corporation announced the adoption of a stock repurchase program that
authorizes the repurchase of up to 4.9% or approximately 657 thousand shares of its outstanding
common stock in the open market or in privately negotiated transactions. This program expires in
July 2010.
There was no treasury stock purchased by the issuer during the second quarter of 2009.
|
|
|
Item 3. |
|
Defaults Upon Senior Securities |
Not applicable.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
(a) Farmers National Banc Corps annual meeting of shareholders was held on
April 23, 2009.
(b & c) Proxies were solicited by Farmers National Banc Corps management pursuant
to Regulation
14 under the Securities Exchange Act of 1934.
Elected to serve as director for a three year term were the Board of Directors nominees:
|
|
|
|
|
|
|
|
|
Elected Director |
|
Votes For |
|
|
Votes Against |
|
Benjamin R. Brown |
|
|
8,833,375 |
|
|
|
257,847 |
|
Anne F. Crawford |
|
|
8,827,193 |
|
|
|
264,579 |
|
James R. Fisher |
|
|
8,798,990 |
|
|
|
280,737 |
|
|
|
|
Continuing Director |
|
Term Expiring |
Ralph D. Macali
|
|
April 2010 |
Frank L. Paden
|
|
April 2010 |
Earl R. Scott
|
|
April 2010 |
Joseph D. Lane
|
|
April 2011 |
Ronald V. Wertz
|
|
April 2011 |
Item 5. Other Information
Not applicable.
24
(a) The following exhibits are filed or incorporated by reference as part of this report:
|
|
|
|
|
|
2. |
|
|
Not applicable. |
|
|
|
|
|
|
3(i). |
|
|
The Articles of Incorporation, including amendments thereto for the Registrant.
Incorporated by reference to Exhibit 4.1 to Farmers National Banc Corps Form S-3 Registration
Statement dated October 3, 2001. (File No. 0-12055). |
|
|
|
|
|
|
3(ii). |
|
|
The Code of Regulations, including amendments thereto for the Registrant. Incorporated by
reference to Exhibit 4.2 to Farmers National Banc Corps Form S-3 Registration Statement dated
October 3, 2001. (File No. 0-12055). |
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|
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4. |
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Incorporated by reference to initial filing. |
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10.1 |
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Letter Agreement, dated July 22, 2008, between Farmers National Bank of Canfield (the
Bank), and John S. Gulas (Incorporated herein by reference to Exhibit 10.1 to the Banks
July 22, 2008 Form 8-K). |
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|
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10.2 |
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Letter Agreement, dated December 23, 2008, between Farmers National Bank of Canfield (the
Bank), and Kevin J. Helmick (Incorporated herein by reference to Exhibit 10.2 to the Banks
December 23, 2008 Form 8-K). |
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|
|
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10.3 |
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Letter Agreement, dated December 23, 2008, between Farmers National Bank of Canfield (the
Bank), and Mark L. Graham (Incorporated herein by reference to Exhibit 10.3 to the Banks
December 23, 2008 Form 8-K). |
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|
|
|
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10.4 |
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Letter Agreement, dated December 23, 2008, between Farmers National Bank of Canfield (the
Bank), and Frank L. Paden (Incorporated herein by reference to Exhibit 10.4 to the Banks
December 23, 2008 Form 8-K). |
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|
|
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10.5 |
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Letter Agreement, dated December 23, 2008, between Farmers National Bank of Canfield (the
Bank), and Carl D. Culp (Incorporated herein by reference to Exhibit 10.5 to the Banks
December 23, 2008 Form 8-K). |
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10.6 |
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Certified Resolution regarding Adoption of Farmers National Banc Corp 1999 Stock Option Plan,
(Incorporated herein by reference to Exhibit 10.6 to Farmers National Banc Corps Proxy dated
February 24, 1999). |
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11. |
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Refer to notes to unaudited consolidated financial statements. |
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15. |
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Not applicable. |
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18. |
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Not applicable. |
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19. |
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Not applicable. |
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22. |
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Not applicable. |
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23. |
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Not applicable. |
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24. |
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Not applicable. |
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|
|
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31.a |
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Certification of Chief Executive Officer (Filed herewith) |
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|
|
|
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31.b |
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Certification of Chief Financial Officer (Filed herewith) |
|
|
|
|
|
|
32.a |
|
|
906 Certification of Chief Executive Officer (Filed herewith) |
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|
|
|
|
|
32.b |
|
|
906 Certification of Chief Financial Officer (Filed herewith) |
25
SIGNATURES
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.
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FARMERS NATIONAL BANC CORP. |
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Dated:
August 28, 2009 |
|
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/s/ Frank L. Paden
Frank L. Paden
|
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|
President and Secretary |
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Dated:
August 28, 2009 |
|
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|
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/s/ Carl D. Culp
Carl D. Culp
|
|
|
Executive Vice President and Treasurer |
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|
26
EXHIBIT INDEX
|
|
|
31.a
|
|
Certification of Chief Executive Officer (Filed herewith) |
|
|
|
31.b
|
|
Certification of Chief Financial Officer (Filed herewith) |
|
|
|
32.a
|
|
906 Certification of Chief Executive Officer (Filed herewith) |
|
|
|
32.b
|
|
906 Certification of Chief Financial Officer (Filed herewith) |
27