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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 2000 Commission file number 2-80339
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FARMERS NATIONAL BANC CORP.
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(Exact name of registrant as specified in its charter)
OHIO 34-1371693
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
20 South Broad Street
Canfield, OH 44406 44406
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(Address of principal executive offices) (Zip Code)
(330) 533-3341
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2000
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Common Stock, No Par Value 7,689,807 shares
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements Page
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Included in Part I of this report:
Farmers National Banc Corp. and Subsidiary
Consolidated Balance Sheets 1
Consolidated Statements of Income and
Comprehensive Income 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
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Condition and Results of Operations 5-9
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Item 3. Quantitative and Qualitative Disclosures About
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Market Risk 10
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PART II - OTHER INFORMATION
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Other Information and Signatures 10-12
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CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(In Thousands of Dollars)
JUNE 30, DECEMBER 31,
2000 1999
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ASSETS
Cash and due from banks $ 17,205 $ 19,846
Federal funds sold 227 3,821
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TOTAL CASH AND CASH EQUIVALENTS 17,432 23,667
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Securities available for sale 87,516 73,659
Other securities 2,651 2,618
Loans 331,480 322,635
Less allowance for credit losses 4,397 4,128
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NET LOANS 327,083 318,507
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Premises and equipment, net 7,998 8,103
Other assets 5,161 4,576
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$ 447,841 $ 431,130
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LIABILITIES AND STOCKHOLDERS EQUITY
Deposits (all domestic):
Noninterest-bearing $ 30,013 $ 29,343
Interest-bearing 300,181 302,120
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TOTAL DEPOSITS 330,194 331,463
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U. S. Treasury interest-bearing demand note 776 800
Securities sold under repurchase agreements 31,161 28,011
Federal Home Loan Bank advances 26,206 15,936
Federal funds purchased 3,400 0
Other liabilities and deferred credits 2,871 3,026
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TOTAL LIABILITIES 394,608 379,236
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Stockholders Equity:
Common Stock - Authorized 12,500,000 shares; issued and
outstanding 7,689,807 in 2000 and 3,695,797 in 1999 38,764 37,294
Retained earnings 16,521 15,584
Accumulated other comprehensive loss (877) (892)
Treasury stock, at cost; 84,253 shares in 2000 and 4,976 in 1999 (1,175) (92)
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TOTAL STOCKHOLDERS EQUITY 53,233 51,894
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$ 447,841 $ 431,130
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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(In Thousands except Per Share Data)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 6,986 $ 6,294 $ 13,746 $ 12,358
Interest and dividends on securities:
Taxable interest 1,018 917 1,913 1,890
Nontaxable interest 192 183 380 339
Dividends 97 41 141 82
Interest on federal funds sold 85 89 216 154
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TOTAL INTEREST INCOME 8,378 7,524 16,396 14,823
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INTEREST EXPENSE
Deposits 2,882 2,666 5,765 5,349
Borrowings 823 385 1,454 735
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TOTAL INTEREST EXPENSE 3,705 3,051 7,219 6,084
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NET INTEREST INCOME 4,673 4,473 9,177 8,739
Provision for credit losses 210 210 420 420
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NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 4,463 4,263 8,757 8,319
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OTHER INCOME
Service charges on deposit accounts 350 283 627 563
Investment security gains 0 0 0 3
Other operating income 159 120 289 237
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TOTAL OTHER INCOME 509 403 916 803
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OTHER EXPENSES
Salaries and employee benefits 1,501 1,413 3,009 2,789
Net occupancy expense of premises 145 143 300 287
Furniture and equipment expense,
including depreciation 147 159 320 312
Intangible and other taxes 135 149 289 297
Other operating expenses 869 821 1,664 1,610
-------- -------- -------- --------
TOTAL OTHER EXPENSES 2,797 2,685 5,582 5,295
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INCOME BEFORE FEDERAL INCOME TAXES 2,175 1,981 4,091 3,827
FEDERAL INCOME TAXES 652 624 1,247 1,210
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NET INCOME $ 1,523 $ 1,357 $ 2,844 $ 2,617
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains (losses) on securities 136 (576) 15 (786)
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COMPREHENSIVE INCOME $ 1,659 $ 781 $ 2,859 $ 1,831
======== ======== ======== ========
* NET INCOME PER SHARE $ 0.20 $ 0.18 $ 0.37 $ 0.35
======== ======== ======== ========
*Adjusted to reflect weighted average shares outstanding, 2-for-1 stock split
and 2% stock dividend, without audit and before adjustments.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars)
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999
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CASH FLOW FROM OPERATING ACTIVITIES
Interest received $ 17,135 $ 15,691
Fees and commissions received 904 790
Interest paid (7,198) (6,137)
Cash paid to suppliers and employees (5,448) (5,323)
Income taxes paid (1,346) (1,244)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 4,047 3,777
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 9,386 11,850
Proceeds from sales of investment securities available for sale 0 138
Purchases of other securities and securities available for sale (23,643) (12,460)
Net increase in loans made to customers (9,189) (18,915)
Purchases of premises and equipment (157) (461)
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NET CASH USED IN INVESTING ACTIVITIES (23,603) (19,848)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits,
NOW accounts and savings accounts 6,004 3,999
Net decrease in time deposits and repurchase agreements (4,886) (5,314)
Net increase in Federal Home Loan Bank borrowings 10,271 2,510
Net increase in federal funds purchased 3,400 5,600
Purchase of Treasury Stock (1,083) (91)
Dividends paid (1,855) (1,644)
Proceeds from sale of common stock 1,470 1,652
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NET CASH PROVIDED BY FINANCING ACTIVITIES 13,321 6,712
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NET DECREASE IN CASH AND CASH EQUIVALENTS (6,235) (9,359)
CASH AND CASH EQUIVALENTS
Beginning of period 23,667 22,680
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End of period $ 17,432 $ 13,321
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RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
Net income $ 2,844 $ 2,617
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 237 230
Amortization and accretion 996 904
Provision for credit losses 420 420
Gain on sale of investment securities 0 (3)
Increase in prepaid expenses (398) (434)
Other (52) 43
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,047 $ 3,777
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FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management Representation:
The financial statements for June 30, 2000 and 1999 have been prepared by
management without audit and, therefore, have not been certified by our
Independent Certified Public Accountants.
In the opinion of the management of the registrant, the accompanying
consolidated financial statements for the six month period ending June 30, 2000
and 1999 include all adjustments, consisting of only normal recurring
adjustments necessary for a fair statement of the results for the periods.
(In Thousands of Dollars)
Stockholders Equity Six Months Ended
June 30, 2000
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COMMON STOCK
Balance 1/1/00 37,294
110,229 shares sold 1,470
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Balance 6/30/00 38,764
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RETAINED EARNINGS
Balance 1/1/00 15,584
Net Income 2,844
Dividends Declared: $.25 Cash dividends on common
stock (1,907)
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Balance 6/30/00 16,521
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ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance 1/1/00 (892)
Net change in unrealized depreciation on debt
securities, net of income taxes 15
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Balance 6/30/00 (877)
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TREASURY STOCK, AT COST
Balance 1/1/00 (92)
Shares Purchased (1,083)
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Balance 6/30/00 (1,175)
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TOTAL STOCKHOLDERS EQUITY AT 6/30/00 53,233
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Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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The following financial review presents an analysis of the assets and liability
structure of the Corporation and a discussion of the results of operations for
each of the periods presented in this quarterly report, liquidity, capital and
credit quality. Certain statements in this report that relate to Farmers
National Banc Corp.'s plans, objectives, or future performance may be deemed to
be forward-looking statements within the Private Securities Litigation Reform
Act of 1995. Such statements are based on management's current expectations.
Actual strategies and results in future periods may differ materially from those
currently expected because of various risks and uncertainties.
Results of Operations
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The Corporation's net income for the first six months of 2000 was $2.844
million, or $.37 per share, which is a 8.67% increase compared with the $2.617
million, or $.35 per share earned during the same period last year. Return on
average assets and return on average equity for the first six months of 2000
were 1.30% and 11.00% respectively, compared to 1.30% and 10.91% for the same
period in 1999.
The increase in net income for the first six months of 2000 was primarily
the result of an increase in net interest income. The Corporation's net interest
income increased $438 thousand, or 5.01% from $8.739 million for 1999 to $9.177
million for the same period in 2000. Interest income on loans and investment
securities is up 10.61% compared to the first six months of last year. Most of
this increase is a result of the growth in loans outstanding. Increasing demand
in the Corporation's commercial real estate and installment loan products has
increased average balances in the total loan portfolio by 11.88% over the past
twelve months. This growth has contributed to the increase in loan income of
$1.388 million or 11.23%. Although the Corporation's average balance of federal
funds sold and investment securities has decreased .70% from June, 1999 to June,
2000, investment income increased 7.51% during the same time period. This
increase in income is due to the increase in the rates paid on federal funds
sold and investment securities. Interest expense on deposits and borrowings is
18.66% higher for the first six months of 2000 compared to the first six months
of 1999. This is primarily the result of an increase of $719 thousand in
interest expense on borrowings, as well as an increase in the rates paid on time
deposits.
Other income increased 14.07% from $803 thousand in 1999 to $916 thousand
in 2000. Most of this growth is the result of an increase in service charges and
fees related to deposit accounts. The Corporation's total other expenses for the
first six months of 2000 increased 5.42% from $5.295 million in 1999 to $5.582
million in 2000. The increase in other operating expenses is due primarily to
asset growth and the increased volume of the operations of the bank. Management
will continue to closely monitor and keep the increases in noninterest expenses
to a minimum.
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Liquidity
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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 Corporation's ability to attract
deposits and borrow funds depends in large measure on its profitability,
capitalization and overall financial condition.
Principal sources of liquidity for the Corporation include assets
considered relatively liquid such as short-term investment securities, federal
funds sold and cash and due from banks.
Cash flows generated from operating activities increased to $4.047 million
compared to $3.777 million for the same period in 1999. This increase of $270
thousand is primarily the result of an increase in net interest received and
fees and commissions received. Net cash flows used in investing activities
amounted to $23.603 million. Security purchases, net of maturities, amounted to
$14.257 million since December 31, 1999. Loans made to customers increased
$9.189 million in 2000.
Net cash flows provided by financing activities were $13.321 million in
2000 compared to $6.712 million in 1999. In 2000, $10.271 million of these funds
were generated from increases in Federal Home Loan Bank borrowings. The
Corporation continues to utilize advance products from Federal Home Loan Bank to
fund some of its' growth in real estate loans. During the first six months of
2000, $1.083 million was used to purchase treasury stock.
Capital Resources
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The capital management function is a continuous process which consists of
providing capital for both the current financial position and the anticipated
future growth of the Corporation. As of June 30, 2000, the corporation's total
risk-based capital ratio stood at 17.85%, and the Tier I risk-based capital
ratio and Tier I leverage ratio were at 16.60% and 12.08%, respectively.
Regulations established by the Federal Deposit Insurance Corporation Improvement
Act require that for a bank to be considered well capitalized, it must have a
total risk-based capital ratio of 10%, a Tier I risk-based capital ratio of 6%
and a Tier I leverage ratio of 5%.
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Loan Portfolio
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The following shows the composition of loans at the dates indicated:
(In Thousands of Dollars)
June 30, Dec. 31,
2000 1999
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Commercial, financial and agricultural 11,955 11,650
Real Estate - mortgage 180,863 172,926
Installment loans to individuals 138,662 138,059
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Total loans 331,480 322,635
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The following table sets forth aggregate loans in each of the following
categories for the dates indicated:
(In Thousands of Dollars)
June 30, Dec. 31,
2000 1999
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Loans accounted for on a nonaccrual basis 504 310
Loans contractually past due 90 days or
more as to interest or principal payments
(not included in nonaccrual loans above) 520 439
Loans considered troubled debt restructurings
(not included in nonaccrual or contractually
past due above) 0 0
Management knows of no loans not included in the table above where serious doubt
exists as to the ability of the borrower to comply with the current loan
repayment terms.
The following shows the amounts of contracted interest income and interest
income reflected in income on loans accounted for on a nonaccrual basis and
loans considered troubled debt restructuring for the periods indicated:
(In Thousands of Dollars)
June 30, Dec. 31,
2000 1999
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Gross interest that would have been recorded
if the loans had been current in accordance
with their original terms 15 13
Interest income included in income on the loans 7 3
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Risk Elements (Continued)
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A loan is placed on a nonaccrual basis whenever sufficient information is
received to question the collectibility of the loan. Generally, once a loan is
placed on a nonaccrual basis, interest that may be accrued and not collected on
the loan is charged against earnings.
As of June 30, 2000, there were no concentrations of loans exceeding 10% of
total loans which are not disclosed as a category of loans. As of that date
also, there are no other interest-earning assets that are either nonaccrual,
past due or restructured.
Summary of Credit Loss Experience
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The following is an analysis of the allowance for credit losses for the periods
indicated:
(In Thousands of Dollars)
Six Months Year
Ended Ended
June 30, Dec. 31,
2000 1999
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Balance at beginning of period 4,128 3,689
Loan losses:
Commercial, financial & agricultural (23) (27)
Real estate - mortgage (15) (75)
Installment loans to individuals (248) (614)
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(286) (716)
Recoveries on previous loan losses:
Commercial, financial & agricultural 1 12
Real estate - mortgage 4 32
Installment loans to individuals 130 271
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135 315
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Net loan losses (151) (401)
Provision charged to operations (1) 420 840
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Balance at end of period 4,397 4,128
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Ratio of net credit losses to average net
loans outstanding .09% .13%
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Summary of Credit Loss Experience (cont'd)
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(1) The provision for possible credit losses charged to operating expense is
based on management's 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.
The allowance for possible credit losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the following categories of loans as of the dates
indicated.
(In Thousands of Dollars)
June 30, Dec. 31,
Types of Loans 2000 1999
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Commercial, financial & agricultural 983 875
Real estate - mortgage 1,316 1,179
Installment 2,098 2,074
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Total 4,397 4,128
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The allocation of the allowance as shown above should not be interpreted as an
indication that charge-offs in 2000 will occur in the same proportions or that
the allocation indicates future charge-off trends. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories since the total allowance is a
general allowance applicable to the entire portfolio.
The percentage of loans in each category to total loans is summarized as
follows:
June 30, Dec. 31,
Types of Loans 2000 1999
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Commercial, financial & agricultural 3.6% 3.6%
Real Estate - mortgage 54.6% 53.6%
Installment loans to individuals 41.8% 42.8%
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100.0% 100.0%
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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There are no material changes from the end of the preceding fiscal year
that would cause additional disclosure of the bank's exposure to market risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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There are no material pending legal proceedings to which the registrant or
its subsidiary is a party, or of which any of their property is the subject,
except proceedings which arise in the ordinary course of business. In the
opinion of management, pending legal proceedings will not have a material effect
on the consolidated financial position of the registrant and its subsidiary.
Item 2. Changes in Securities
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Not applicable.
Item 3. Defaults Upon Senior Securities
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Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
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Not applicable.
Item 5. Other Information
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Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are filed or incorporated by references as part of
this report:
2. Not applicable.
3(i). Not applicable.
3(ii). Not applicable.
4. The registrant agrees to furnish to the Commission upon request copies
of all instruments not filed herewith defining the rights of holders of
long-term debt of the registrant and its subsidiaries.
10. Not applicable.
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11. Not applicable.
15. Not applicable.
18. Not applicable.
19. Not applicable.
22. Not applicable.
23. Not applicable.
24. Not applicable.
27. Financial Data Schedule (filed herewith)
99. Not applicable.
(b) - Reports on Form 8-K
-------------------
A Form 8-K was filed by the Corporation on June 2, 2000. The item reported
was classified as Item 2, Acquisition or disposition of assets, and read as
follows:
MERGER AGREEMENT WITH SECURITY FINANCIAL CORP.
On May 26, 2000, Farmers National Banc Corp. ("Farmers"), an Ohio
corporation, and Security Financial Corp. ("Security"), a Delaware corporation,
entered into an Agreement and Plan of Merger ("Agreement"), pursuant to which
Security will merge with and into Farmers through a tax-free, stock-for-stock
exchange, with Farmers as the surviving corporation ("Merger"). Under the terms
of the Agreement, upon the consummation of the Merger all shares of Security
common stock issued and outstanding immediately prior to the Effective Time (as
defined in the Agreement) of the Merger shall be converted into the right to
receive that number of shares of Farmers common stock equal to a number (rounded
to the nearest thousandth) obtained by dividing $90.00 by the Farmers Common
Stock Average Closing Price (as defined in the Agreement); provided however,
that the Exchange Ratio (as defined in the Agreement) shall not be less than
7.200, nor greater than 9.742, shares of Farmers common stock for each one share
of Security common stock. As of May 30, 2000, the value of the transaction was
approximately $32.6 million.
The Merger, which would be accounted for as a pooling of
interests, is expected to close in the fourth quarter of 2000.
The Agreement has been approved by the boards of directors of both
companies. Consummation of the Merger is subject to certain customary
conditions, including, among others, the adoption of the Agreement by the
Farmers and Security shareholders and receipt of regulatory approvals.
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SIGNATURES
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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.
FARMERS NATIONAL BANC CORP.
Dated: 8-8-00
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/s/ Frank L. Paden
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Frank L. Paden
President and Secretary
Dated: 8-8-00
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/s/ Carl D. Culp
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Carl D. Culp
Executive Vice President
and Treasurer
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