Farmers National Bank 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 2006
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
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(I.R.S. Employer Identification No) |
incorporation or organization) |
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20 South Broad Street |
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Canfield, OH 44406
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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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Securities Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer 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, 2006 |
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Common Stock, No Par Value
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13,031,963 shares |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Included in Part I of this report:
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Page |
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Number |
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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4-8 |
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8-15 |
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15 |
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15 |
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16 |
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16 |
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16 |
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16 |
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16 |
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17 |
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17 |
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18 |
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10-Q Certifications |
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19-20 |
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Section 906 Certifications |
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21-22 |
EX-31.A |
EX-31.B |
EX-32.A |
EX-32.B |
CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(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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2006 |
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2005 |
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ASSETS |
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Cash and due from banks |
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$ |
25,962 |
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$ |
31,614 |
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Federal funds sold |
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8,290 |
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0 |
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TOTAL CASH AND CASH EQUIVALENTS |
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34,252 |
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31,614 |
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Securities available for sale |
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249,837 |
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259,485 |
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Loans |
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510,650 |
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511,914 |
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Less allowance for loan losses |
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5,848 |
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5,860 |
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NET LOANS |
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504,802 |
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506,054 |
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Premises and equipment, net |
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14,950 |
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15,143 |
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Other assets |
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16,365 |
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14,773 |
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TOTAL ASSETS |
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$ |
820,206 |
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$ |
827,069 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Deposits: |
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Noninterest-bearing |
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$ |
62,535 |
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$ |
61,896 |
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Interest-bearing |
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556,060 |
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568,904 |
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TOTAL DEPOSITS |
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618,595 |
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630,800 |
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Federal funds purchased and repurchase agreements |
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77,996 |
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76,152 |
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Federal Home Loan Bank advances |
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45,452 |
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39,077 |
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Other borrowings |
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471 |
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1,242 |
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Other liabilities |
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4,336 |
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3,934 |
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TOTAL LIABILITIES |
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746,850 |
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751,205 |
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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
14,394,450 in 2006 and 14,227,538 in 2005 |
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86,506 |
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84,595 |
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Retained earnings |
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10,416 |
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10,709 |
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Accumulated other comprehensive income (loss) |
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(4,705 |
) |
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(2,536 |
) |
Treasury stock, at cost; 1,349,487 shares in 2006 and 1,184,315 in 2005 |
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(18,861 |
) |
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(16,904 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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73,356 |
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75,864 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
820,206 |
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$ |
827,069 |
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See accompanying notes
1
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(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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2006 |
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2005 |
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2006 |
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2005 |
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INTEREST AND DIVIDEND INCOME |
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Loans, including fees |
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$ |
8,197 |
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$ |
7,767 |
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$ |
16,220 |
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$ |
15,244 |
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Taxable securities |
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1,884 |
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2,095 |
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3,758 |
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4,259 |
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Tax exempt securities |
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612 |
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523 |
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1,199 |
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984 |
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Dividends |
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168 |
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96 |
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278 |
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211 |
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Federal funds sold |
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165 |
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70 |
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207 |
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119 |
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TOTAL INTEREST AND DIVIDEND INCOME |
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11,026 |
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10,551 |
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21,662 |
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20,817 |
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INTEREST EXPENSE |
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Deposits |
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3,791 |
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2,826 |
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7,219 |
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5,479 |
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Short-term borrowings |
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668 |
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408 |
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1,191 |
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704 |
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Long-term borrowings |
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528 |
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421 |
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1,059 |
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827 |
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TOTAL INTEREST EXPENSE |
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4,987 |
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3,655 |
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9,469 |
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7,010 |
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NET INTEREST INCOME |
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6,039 |
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6,896 |
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12,193 |
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13,807 |
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Provision for loan losses |
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60 |
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0 |
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170 |
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269 |
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NET INTEREST INCOME AFTER |
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PROVISION FOR LOAN LOSSES |
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5,979 |
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6,896 |
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12,023 |
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13,538 |
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NONINTEREST INCOME |
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Service charges on deposit accounts |
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759 |
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676 |
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1,442 |
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1,284 |
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Security gains (losses) |
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138 |
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(83 |
) |
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395 |
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185 |
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Other operating income |
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434 |
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336 |
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787 |
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666 |
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TOTAL NONINTEREST INCOME |
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1,331 |
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929 |
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2,624 |
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2,135 |
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NONINTEREST EXPENSES |
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Salaries and employee benefits |
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2,875 |
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3,074 |
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5,667 |
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5,838 |
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Occupancy and equipment |
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595 |
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658 |
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1,241 |
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1,365 |
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State and local taxes |
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225 |
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231 |
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450 |
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462 |
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Loan expenses |
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104 |
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100 |
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199 |
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|
188 |
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Other operating expenses |
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1,090 |
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1,102 |
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2,095 |
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2,192 |
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TOTAL NONINTEREST EXPENSES |
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4,889 |
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5,165 |
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9,652 |
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10,045 |
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INCOME BEFORE INCOME TAXES |
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2,421 |
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2,660 |
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4,995 |
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5,628 |
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INCOME TAXES |
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533 |
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|
665 |
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1,145 |
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1,459 |
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NET INCOME |
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$ |
1,888 |
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$ |
1,995 |
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$ |
3,850 |
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$ |
4,169 |
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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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(2,165 |
) |
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1,335 |
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(2,169 |
) |
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(920 |
) |
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COMPREHENSIVE INCOME (LOSS) |
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|
($277 |
) |
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$ |
3,330 |
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$ |
1,681 |
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$ |
3,249 |
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NET INCOME PER SHARE basic and diluted |
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$ |
0.15 |
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$ |
0.15 |
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$ |
0.30 |
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$ |
0.32 |
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DIVIDENDS PER SHARE |
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$ |
0.16 |
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$ |
0.16 |
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$ |
0.32 |
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$ |
0.32 |
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See accompanying notes
2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(Unaudited)
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(In Thousands of Dollars) |
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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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NET CASH FROM OPERATING ACTIVITIES |
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$ |
5,203 |
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$ |
5,345 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Proceeds from maturities and repayments of securities available for sale |
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24,840 |
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|
28,870 |
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Proceeds from sales of securities available for sale |
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|
8,459 |
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|
14,705 |
|
Purchases of securities available for sale |
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(27,234 |
) |
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|
(50,520 |
) |
Loan originations and payments, net |
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|
556 |
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|
(12,938 |
) |
Additions to premises and equipment |
|
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(273 |
) |
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|
(191 |
) |
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NET CASH FROM INVESTING ACTIVITIES |
|
|
6,348 |
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(20,074 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Net change in deposits |
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(12,205 |
) |
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|
(45 |
) |
Net change in short-term borrowings |
|
|
1,094 |
|
|
|
11,705 |
|
Proceeds from Federal Home Loan Bank borrowings and other debt |
|
|
10,000 |
|
|
|
9,694 |
|
Repayment of Federal Home Loan Bank borrowings and other debt |
|
|
(3,646 |
) |
|
|
(7,159 |
) |
Repurchase of Treasury Stock |
|
|
(1,957 |
) |
|
|
(901 |
) |
Cash dividends paid |
|
|
(4,096 |
) |
|
|
(4,112 |
) |
Proceeds from dividend reinvestment |
|
|
1,897 |
|
|
|
2,284 |
|
|
|
|
NET CASH FROM FINANCING ACTIVITIES |
|
|
(8,913 |
) |
|
|
11,466 |
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
2,638 |
|
|
|
(3,263 |
) |
|
|
|
|
|
|
|
|
|
Beginning cash and cash equivalents |
|
|
31,614 |
|
|
|
33,570 |
|
|
|
|
Ending cash and cash equivalents |
|
$ |
34,252 |
|
|
$ |
30,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
|
(8,990 |
) |
|
|
(6,839 |
) |
Income taxes paid |
|
|
(1,085 |
) |
|
|
(1,680 |
) |
See accompanying notes
3
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation:
The consolidated financial statements include the accounts of the company and its wholly-owned
subsidiary, The Farmers National Bank of Canfield. All significant intercompany balances and
transactions have been eliminated.
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 2005 Annual
Report to Shareholders included in the Companys 2005 Annual Report on Form 10-K. The interim
condensed 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. 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. While the Companys chief decision makers monitor the revenue streams of the
various products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Accordingly, all the Companys banking operations are considered by management
to be aggregated in one reportable operating segment.
Stock Options:
Prior to January 1, 2006, the Company accounted for stock-based compensation expense using the
intrinsic value method set forth in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and as permitted by Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation. No compensation cost for stock options was
reflected in net income for 2005, as all options granted had an exercise price equal to the market
price of the underlying common stock at date of grant.
On January 1, 2006, the Company adopted SFAS No. 123(R) (revised version of SFAS No. 123) which
requires measurement of compensation cost for all stock-based awards be based on the grant-date
fair value and recognition of compensation cost over the requisite service period of stock-based
awards, which is usually the same as the period over which the options vest. The fair value of
stock options is
determined using the Black-Scholes valuation model, which is consistent with the
4
Companys
valuation methodology previously utilized for options in footnote disclosures required under SFAS
No. 123. The fair value of future stock grants will also be determined using the Black-Scholes
valuation model. The Company has adopted SFAS No. 123(R) using the modified prospective method,
which provides for no retroactive application to prior periods and no cumulative adjustment to
equity accounts. It also provides for expense recognition, for both new and existing stock-based
awards, as the required services are rendered. SFAS No. 123(R) also amends SFAS No. 95, Statement
of Cash Flows, and requires tax benefits relating to excess stock-based compensation deductions be
presented in the statement of cash flows as financing cash inflows.
On March 29, 2005, the Securities and Exchange Commission (SEC) published Staff Accounting Bulletin
No. 107 (SAB 107), which expressed the views of the Staff regarding the interaction between SFAS
No. 123(R) and certain SEC rules and regulations and provided the Staffs views regarding the
valuation of stock-based payment arrangements for public companies. SAB 107 requires that
stock-based compensation be classified in the same expense category as cash compensation.
Accordingly, the Company has included stock-based compensation expense in salaries and employee
benefits in the condensed consolidated statements of income.
The adoption of SFAS No. 123(R) had the following effect on reported amounts compared with amounts
that would have been reported using the intrinsic value method under previous accounting.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, 2006 |
|
June 30, 2006 |
|
|
Using |
|
SFAS |
|
|
|
|
|
Using |
|
SFAS |
|
|
|
|
Previous |
|
123(R) |
|
As |
|
Previous |
|
123(R) |
|
As |
|
|
Accounting |
|
Adjustment |
|
Reported |
|
Accounting |
|
Adjustment |
|
Reported |
|
|
|
|
|
Income before taxes |
|
$ |
2,428 |
|
|
$ |
(7 |
) |
|
$ |
2,421 |
|
|
$ |
5,009 |
|
|
$ |
(14 |
) |
|
$ |
4,995 |
|
Income taxes |
|
|
533 |
|
|
|
0 |
|
|
|
533 |
|
|
|
1,145 |
|
|
|
0 |
|
|
|
1,145 |
|
|
|
|
|
|
Net Income |
|
$ |
1,895 |
|
|
$ |
(7 |
) |
|
$ |
1,888 |
|
|
$ |
3,864 |
|
|
$ |
(14 |
) |
|
$ |
3,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
.15 |
|
|
$ |
0 |
|
|
$ |
.15 |
|
|
$ |
.30 |
|
|
$ |
0 |
|
|
$ |
.30 |
|
Diluted earnings per share |
|
|
.15 |
|
|
|
0 |
|
|
|
.15 |
|
|
|
.30 |
|
|
|
0 |
|
|
|
.30 |
|
The following table illustrates the effect on the prior year comparable periods net income and
earnings per share if expense had been measured using the fair value
recognition provision of SFAS No. 123(R).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
|
|
|
|
|
|
SFAS |
|
|
If Under |
|
|
|
|
|
|
SFAS |
|
|
If Under |
|
|
|
As |
|
|
123(R) |
|
|
SFAS |
|
|
As |
|
|
123(R) |
|
|
SFAS |
|
|
|
Reported |
|
|
Adjustment |
|
|
123(R) |
|
|
Reported |
|
|
Adjustment |
|
|
123(R) |
|
|
|
|
|
|
Income before taxes |
|
$ |
2,660 |
|
|
$ |
(7 |
) |
|
$ |
2,653 |
|
|
$ |
5,628 |
|
|
$ |
(14 |
) |
|
$ |
5,614 |
|
Income taxes |
|
|
665 |
|
|
|
0 |
|
|
|
665 |
|
|
|
1,459 |
|
|
|
0 |
|
|
|
1,459 |
|
|
|
|
|
|
Net Income |
|
$ |
1,995 |
|
|
$ |
(7 |
) |
|
$ |
1,988 |
|
|
$ |
4,169 |
|
|
$ |
(14 |
) |
|
$ |
4,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
.15 |
|
|
|
|
|
|
$ |
.15 |
|
|
$ |
.32 |
|
|
|
|
|
|
$ |
.32 |
|
Diluted earnings per share |
|
|
.15 |
|
|
|
|
|
|
|
.15 |
|
|
|
.32 |
|
|
|
|
|
|
|
.32 |
|
5
Options to buy stock are granted to directors, officers and employees under the Companys Stock
Option Plan, which provides for issue of up to 375,000 options. Exercise price is the market price
at the date of grant. The maximum option term is ten years, and options vest over a five year
period. All options outstanding were granted in 2001 and will become fully vested in 2006. Shares
with respect to which options may be granted may be either authorized and unissued shares or shares
issued and thereafter acquired by the Company.
A summary of the activity in the plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2006 |
|
|
|
Total options outstanding |
|
|
Total options outstanding |
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
Fair |
|
|
|
|
|
|
Exercise |
|
|
Fair |
|
|
|
Shares |
|
|
Price |
|
|
Value |
|
|
Shares |
|
|
Price |
|
|
Value |
|
|
|
|
|
|
Outstanding, beginning of period |
|
|
49,500 |
|
|
$ |
11 |
|
|
$ |
2.71 |
|
|
|
49,500 |
|
|
$ |
11 |
|
|
$ |
2.71 |
|
Forfeited |
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
48,000 |
|
|
$ |
11 |
|
|
$ |
2.71 |
|
|
|
48,000 |
|
|
$ |
11 |
|
|
$ |
2.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period |
|
|
38,400 |
|
|
$ |
11 |
|
|
$ |
2.71 |
|
|
|
38,400 |
|
|
$ |
11 |
|
|
$ |
2.71 |
|
The aggregate intrinsic value of all options outstanding at June 30, 2006 was $2 thousand. The
aggregate intrinsic value of all options that were exercisable at June 30, 2006 was $2 thousand.
The remaining compensation cost yet to be recognized for stock-based awards that have been awarded
but not vested is $10 thousand. This cost will be recognized in its entirety in 2006.
Securities:
Securities available for sale at June 30, 2006 and December 31, 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
(In Thousands of Dollars) |
|
|
|
|
|
Unrealized |
|
Unrealized |
June 30, 2006 |
|
Fair Value |
|
Gains |
|
Losses |
|
|
|
U.S. Treasury and U.S. Government sponsored
enterprises |
|
$ |
78,860 |
|
|
$ |
1 |
|
|
$ |
(1,892 |
) |
Corporate debt securities |
|
|
2,254 |
|
|
|
0 |
|
|
|
(5 |
) |
Mortgage-backed securities |
|
|
102,053 |
|
|
|
6 |
|
|
|
(5,079 |
) |
Obligations of states and political subdivisions |
|
|
59,523 |
|
|
|
68 |
|
|
|
(1,394 |
) |
|
|
|
Total debt securities |
|
|
242,690 |
|
|
|
75 |
|
|
|
(8,370 |
) |
Equity securities |
|
|
7,147 |
|
|
|
1,048 |
|
|
|
0 |
|
|
|
|
TOTALS |
|
$ |
249,837 |
|
|
$ |
1,123 |
|
|
$ |
(8,370 |
) |
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
(In Thousands of Dollars) |
|
|
|
|
|
Unrealized |
|
Unrealized |
December 31, 2005 |
|
Fair Value |
|
Gains |
|
Losses |
|
|
|
U.S. Treasury and U.S. Government sponsored
enterprises |
|
$ |
78,299 |
|
|
$ |
20 |
|
|
$ |
(1,144 |
) |
Corporate debt securities |
|
|
2,270 |
|
|
|
14 |
|
|
|
0 |
|
Mortgage-backed securities |
|
|
110,725 |
|
|
|
13 |
|
|
|
(3,660 |
) |
Obligations of states and political subdivisions |
|
|
59,710 |
|
|
|
555 |
|
|
|
(647 |
) |
|
|
|
Total debt securities |
|
|
251,004 |
|
|
|
602 |
|
|
|
(5,451 |
) |
Equity securities |
|
|
8,481 |
|
|
|
947 |
|
|
|
0 |
|
|
|
|
TOTALS |
|
$ |
259,485 |
|
|
$ |
1,549 |
|
|
$ |
(5,451 |
) |
|
|
|
Unrealized losses on debt securities issued by the U.S. Treasury or U.S. Government sponsored
enterprises and obligations of state and political subdivisions 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
increases in market interest rates. The fair value is expected to recover as the securities
approach their maturity date. Unrealized losses on mortgage-backed securities have not been
recognized into income because timely repayment of principal and interest on these securities is
guaranteed by the issuer, these securities are backed by performing assets, and because management
has the intent and ability to hold these securities for the foreseeable future. The fair value of
these securities is expected to recover as principal payments are received.
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) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic EPS computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
Net income |
|
$ |
1,888 |
|
|
$ |
1,995 |
|
|
$ |
3,850 |
|
|
$ |
4,169 |
|
Denominator
Weighted
average shares
outstanding |
|
|
12,974,678 |
|
|
|
13,013,301 |
|
|
|
12,979,980 |
|
|
|
12,985,212 |
|
Basic earnings per share |
|
$ |
.15 |
|
|
$ |
.15 |
|
|
$ |
.30 |
|
|
$ |
.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
Net income |
|
$ |
1,888 |
|
|
$ |
1,995 |
|
|
$ |
3,850 |
|
|
$ |
4,169 |
|
Denominator
Weighted
average shares
outstanding for basic
earnings per share |
|
|
12,974,678 |
|
|
|
13,013,301 |
|
|
|
12,979,980 |
|
|
|
12,985,212 |
|
Effect of Stock Options |
|
|
219 |
|
|
|
11,396 |
|
|
|
3,967 |
|
|
|
13,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted averages shares
for diluted earnings per
share |
|
|
12,974,897 |
|
|
|
13,024,697 |
|
|
|
12,983,947 |
|
|
|
12,998,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
.15 |
|
|
$ |
.15 |
|
|
$ |
.30 |
|
|
$ |
.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income consists solely of unrealized gains and losses on securities available for sale.
Reclassifications:
Certain items in the prior year financial statements were reclassified to conform to the current
presentation.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error Corrections. This statement changes the
requirements for the accounting for and reporting of a change in accounting principle. It is
effective for fiscal years beginning after December 15, 2005 and applies to the Company effective
January 1, 2006. The adoption of this pronouncement has not had an impact on the Companys
consolidated financial statements.
The FASB also issued FAS 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of
FASB Statements No. 133 and 140. This Statement changes the accounting for various derivatives and
securitized financial assets. This Statement will be effective for all financial instruments
acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning in
2007. Management does not expect the adoption of this standard to have a material impact on the
Companys financial statements.
In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140, which changes the accounting for all loan servicing rights
which are recorded as the result of selling a loan where the seller undertakes an obligation to
service the loan, usually in exchange for compensation. FAS 156 amends current accounting guidance
by permitting the servicing right to be recorded initially at fair value and also permits the
subsequent reporting of these assets at fair value. FAS 156 is effective beginning January 1,
2007. Because the Company has no obligation to service loans for others, management does not
expect the adoption of this standard to have a material impact on the Companys financial
statements.
In July 2006, the FASB issued Financial Accounting Standards Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attributable for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December
15, 2006. Management does not expect that the adoption of this standard will have a material impact
on the Companys financial statements.
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
8
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.
Results of Operations
Comparison of June 30, 2006 and 2005 and the Six Months Then Ended
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
(Dollars in Thousands, except Per Share Data) |
|
2006 |
|
2005 |
Total Assets |
|
$ |
820,206 |
|
|
$ |
832,464 |
|
Net Income |
|
$ |
3,850 |
|
|
$ |
4,169 |
|
Basic and Diluted Earnings Per Share |
|
$ |
.30 |
|
|
$ |
.32 |
|
Return on Average Assets (Annualized) |
|
|
.94 |
% |
|
|
1.02 |
% |
Return on Average Equity (Annualized) |
|
|
10.33 |
% |
|
|
10.77 |
% |
Efficiency Ratio (Year-to-date) |
|
|
66.93 |
% |
|
|
63.75 |
% |
Capital to Asset Ratio |
|
|
8.94 |
% |
|
|
9.51 |
% |
Dividends to Net Income (Year-to-date) |
|
|
107.66 |
% |
|
|
99.59 |
% |
Loans to Assets |
|
|
62.26 |
% |
|
|
59.81 |
% |
Net Loans to Deposits |
|
|
81.60 |
% |
|
|
79.04 |
% |
The Corporations net income for the first six months of 2006 was $3.850 million, or $.30 per
diluted share, which is a 7.65% decrease compared with the $4.169 million, or $.32 per diluted
share earned during the same period last year. The Corporations annualized return on average
assets and return on average equity for the six month period ended June 30, 2006 was .94% and
10.33% respectively, compared to 1.02% and 10.77% for the same period in 2005.
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.
9
Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
507,840 |
|
|
$ |
8,291 |
|
|
|
6.55 |
% |
|
$ |
491,098 |
|
|
$ |
7,848 |
|
|
|
6.41 |
% |
Taxable securities |
|
|
190,622 |
|
|
|
1,884 |
|
|
|
3.96 |
|
|
|
221,482 |
|
|
|
2,094 |
|
|
|
3.79 |
|
Tax-exempt securities |
|
|
61,319 |
|
|
|
942 |
|
|
|
6.16 |
|
|
|
51,239 |
|
|
|
816 |
|
|
|
6.39 |
|
Equity Securities (2) |
|
|
11,058 |
|
|
|
201 |
|
|
|
7.29 |
|
|
|
12,400 |
|
|
|
107 |
|
|
|
3.46 |
|
Federal funds sold |
|
|
13,471 |
|
|
|
165 |
|
|
|
4.91 |
|
|
|
8,477 |
|
|
|
70 |
|
|
|
3.31 |
|
|
|
|
|
|
Total earning assets |
|
|
784,310 |
|
|
|
11,483 |
|
|
|
5.87 |
|
|
|
784,696 |
|
|
|
10,935 |
|
|
|
5.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONEARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
24,941 |
|
|
|
|
|
|
|
|
|
|
|
27,745 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
14,914 |
|
|
|
|
|
|
|
|
|
|
|
15,422 |
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
(5,890 |
) |
|
|
|
|
|
|
|
|
|
|
(6,230 |
) |
|
|
|
|
|
|
|
|
Other assets |
|
|
7,696 |
|
|
|
|
|
|
|
|
|
|
|
8,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
825,970 |
|
|
|
|
|
|
|
|
|
|
$ |
830,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
277,883 |
|
|
$ |
2,807 |
|
|
|
4.05 |
% |
|
$ |
266,038 |
|
|
$ |
2,143 |
|
|
|
3.23 |
% |
Savings deposits |
|
|
167,353 |
|
|
|
754 |
|
|
|
1.81 |
|
|
|
176,119 |
|
|
|
388 |
|
|
|
0.88 |
|
Demand deposits |
|
|
115,963 |
|
|
|
230 |
|
|
|
0.80 |
|
|
|
134,631 |
|
|
|
295 |
|
|
|
0.88 |
|
Repurchase agreements |
|
|
80,464 |
|
|
|
660 |
|
|
|
3.29 |
|
|
|
77,426 |
|
|
|
401 |
|
|
|
2.08 |
|
Borrowings |
|
|
47,138 |
|
|
|
536 |
|
|
|
4.56 |
|
|
|
39,136 |
|
|
|
428 |
|
|
|
4.39 |
|
|
|
|
|
|
Total Interest-Bearing Liabilities |
|
|
688,800 |
|
|
|
4,987 |
|
|
|
2.90 |
|
|
|
693,350 |
|
|
|
3,655 |
|
|
|
2.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING LIABILITIES
AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
57,719 |
|
|
|
|
|
|
|
|
|
|
|
55,606 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
5,359 |
|
|
|
|
|
|
|
|
|
|
|
3,654 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
74,091 |
|
|
|
|
|
|
|
|
|
|
|
77,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity |
|
$ |
825,970 |
|
|
|
|
|
|
|
|
|
|
$ |
830,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
6,496 |
|
|
|
|
|
|
|
|
|
|
$ |
7,280 |
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.32 |
% |
|
|
|
|
|
|
|
|
|
|
3.72 |
% |
|
|
|
(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. |
10
Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
508,985 |
|
|
$ |
16,403 |
|
|
|
6.50 |
% |
|
$ |
486,437 |
|
|
$ |
15,387 |
|
|
|
6.38 |
% |
Taxable securities |
|
|
190,977 |
|
|
|
3,758 |
|
|
|
3.97 |
|
|
|
220,960 |
|
|
|
4,259 |
|
|
|
3.89 |
|
Tax-exempt securities |
|
|
60,367 |
|
|
|
1,845 |
|
|
|
6.16 |
|
|
|
47,924 |
|
|
|
1,515 |
|
|
|
6.37 |
|
Equity Securities (2) |
|
|
11,712 |
|
|
|
323 |
|
|
|
5.56 |
|
|
|
13,120 |
|
|
|
241 |
|
|
|
3.70 |
|
Federal funds sold |
|
|
8,658 |
|
|
|
207 |
|
|
|
4.82 |
|
|
|
8,881 |
|
|
|
119 |
|
|
|
2.70 |
|
|
|
|
|
|
Total earning assets |
|
|
780,699 |
|
|
|
22,536 |
|
|
|
5.82 |
|
|
|
777,322 |
|
|
|
21,521 |
|
|
|
5.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONEARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
25,206 |
|
|
|
|
|
|
|
|
|
|
|
27,203 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
14,990 |
|
|
|
|
|
|
|
|
|
|
|
15,502 |
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
(5,887 |
) |
|
|
|
|
|
|
|
|
|
|
(6,172 |
) |
|
|
|
|
|
|
|
|
Other assets |
|
|
7,954 |
|
|
|
|
|
|
|
|
|
|
|
9,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
822,962 |
|
|
|
|
|
|
|
|
|
|
$ |
823,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
281,977 |
|
|
$ |
5,448 |
|
|
|
3.90 |
% |
|
$ |
256,622 |
|
|
$ |
4,081 |
|
|
|
3.21 |
% |
Savings deposits |
|
|
160,844 |
|
|
|
1,273 |
|
|
|
1.60 |
|
|
|
187,136 |
|
|
|
854 |
|
|
|
0.92 |
|
Demand deposits |
|
|
120,121 |
|
|
|
498 |
|
|
|
0.84 |
|
|
|
130,202 |
|
|
|
544 |
|
|
|
0.84 |
|
Repurchase agreements |
|
|
74,626 |
|
|
|
1,167 |
|
|
|
3.15 |
|
|
|
73,467 |
|
|
|
693 |
|
|
|
1.90 |
|
Borrowings |
|
|
47,977 |
|
|
|
1,083 |
|
|
|
4.55 |
|
|
|
38,528 |
|
|
|
838 |
|
|
|
4.39 |
|
|
|
|
|
|
Total Interest-Bearing Liabilities |
|
|
685,545 |
|
|
|
9,469 |
|
|
|
2.79 |
|
|
|
685,955 |
|
|
|
7,010 |
|
|
|
2.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING LIABILITIES
AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
57,003 |
|
|
|
|
|
|
|
|
|
|
|
55,194 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
5,247 |
|
|
|
|
|
|
|
|
|
|
|
3,800 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
75,167 |
|
|
|
|
|
|
|
|
|
|
|
78,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity |
|
$ |
822,962 |
|
|
|
|
|
|
|
|
|
|
$ |
823,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
13,067 |
|
|
|
|
|
|
|
|
|
|
$ |
14,511 |
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.38 |
% |
|
|
|
|
|
|
|
|
|
|
3.76 |
% |
|
|
|
(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. |
11
Taxable equivalent net interest income. Taxable equivalent net interest income for
the first six months of June 30, 2006 totaled $13.067 million, a decrease of $1.445 million or
9.96% compared to the first six months of 2005. This decline is due to an increase in interest
expense of $2.46 million or 35.08%. Interest expense increased as deposits shifted out of the
lower costing savings deposits and into the higher costing time deposits. Interest expense on
time deposits increased $1.367 million as average balances grew $25.355 million or 9.88%. Interest
income increased $1.015 million or 4.72% during the same period. The Corporations tax equated
annualized net interest margin decreased from 3.76% for the period ending June 30, 2005 to 3.38%
for the period ending June 30, 2006. This decline was primarily due to the shift in deposit mix to
higher costing time deposits. Management will continue to evaluate future interest rate changes so
that assets and liabilities may be priced accordingly to minimize the impact on the net interest
margin.
Taxable equivalent net interest income for the quarter ended June 30, 2006 totaled $6.496 million,
a decrease of $784 thousand or 10.77% compared to the quarter ended June 30, 2005. The increase in
interest expense is attributable to the 79 basis point increase in the cost of interest-bearing
liabilities. Average time deposits increased by $11.85 million or 4.45% over the prior year
comparable quarter which drove up interest expense on time deposits by $664 thousand. The cost of
time deposits and repurchase agreements are up 82 basis points and 121 basis points respectively
over the prior year comparable quarter as the Federal Reserve Bank continues to increase the target
for the federal funds sold interest rate.
Noninterest Income. Total noninterest income for the six month period ended June 30, 2006
increased by $489 thousand or 22.90% compared to the same period in 2005. This increase is mainly
due to a $210 thousand increase in gains on the sale of investment securities. Fees from
overdrafts and return check charges also increased $168 thousand or 17.73%.
Total noninterest income for the quarter ended June 30, 2006 increased by $402 thousand from the
prior year comparable quarter. Security gains resulting from the previously mentioned sales
amounted to $138 thousand for the quarter ended June 30, 2006 compared to security losses of $83
thousand for the same period in 2005. Other operating income from various sources also increased
$98 thousand or 29.17%.
Noninterest Expense. Noninterest expense was $9.65 million for the first six months of
2006 compared to $10.05 million for the same period in 2005. This amounts to a decrease of 3.91%.
Most of this decrease is the result of a $171 thousand decline in salaries and employee benefits,
resulting mainly from a 23.95% decline in health insurance costs, and a $124 thousand decrease in
occupancy and equipment expense.
Noninterest expense was $4.89 million for the quarter ended June 30, 2006 compared to $5.17 million
for the same quarter in 2005. This decrease of 5.34% again occurred mainly in salaries and
employee benefits and occupancy and equipment expense.
The efficiency ratio increased to 66.93% for the first six months of 2006 compared to 63.75% for
the first six months of 2005. The efficiency ratio was adversely impacted by the $1.61 million
decline in net interest income, despite a $393 thousand decrease in noninterest expenses. The
efficiency ratio is calculated as follows: non-interest expense divided by the sum of 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 $1.145 million for the first six months of 2006
and $1.459 million for the first six months of 2005, a decrease of $314 thousand or 21.52%. The
effective tax rate for the first six months of 2006 was 22.92% compared to 25.92% for the same time
in 2005. Income tax expense totaled $533 thousand for the quarter ended June 30, 2006 and $665
thousand for the quarter ended June 30, 2005, a decrease of 19.85%. This decrease is a result of
the Corporations increased purchases of tax-exempt municipal securities combined with a decrease
in pretax income.
12
Other Comprehensive Income. For the first six months of 2006, the change in net unrealized
gains on securities, net of reclassifications, resulted in a loss of $2.17 million compared to a
loss of $920 thousand for the same period in 2005. The losses were due to interest rate increases
affecting the market values of the entire investment portfolio.
Financial Condition
Total assets decreased $6.863 million or .83% since December 31, 2005, as the Corporation saw a
decline in deposit balances. Capital ratios remain solid, as shown by the ratio of equity to total
assets at June 30, 2006 of 8.94%.
Securities. Securities available for sale decreased $9.65 million, mainly resulting from a
decrease of $12.205 million in deposits. The Corporation sold $2 million in par value of Fannie
Mae preferred equity securities and $6.7 million in market value of State and Municipal Securities,
resulting in a gain of $395 thousand. In addition, there was a $3.345 million decrease in the net
unrealized gains (losses) on securities, resulting from an increase in market interest rates.
Loans. Gross loans decreased slightly since December 31, 2005. Commercial Real Estate
loans grew $9.919 million or 6.01% since December 31, 2005. The growth in commercial real estate
loans offset the decline in balance in indirect installment loans, which decreased $13.481 million
or 10.67%. Commercial Real Estate loans have grown as the Corporation has used a combination of
experienced personnel and marketing strategies to build this section of the portfolio as the local
economy continues to recover. Loans contributed 74.88% of total interest income for the six months
ended June 30, 2006 and 73.23% for the six months ended June 30, 2005.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/06 |
|
3/31/06 |
|
12/31/05 |
|
9/30/05 |
|
6/30/05 |
|
|
|
Nonperforming loans |
|
$ |
1,884 |
|
|
$ |
2,609 |
|
|
$ |
2,017 |
|
|
$ |
1,593 |
|
|
$ |
1,908 |
|
Nonperforming loans as a % of total
loans |
|
|
.37 |
% |
|
|
.51 |
% |
|
|
.39 |
% |
|
|
.31 |
% |
|
|
.38 |
% |
Allowance for loan losses |
|
$ |
5,848 |
|
|
$ |
5,870 |
|
|
$ |
5,860 |
|
|
$ |
6,144 |
|
|
$ |
6,151 |
|
Allowance for loan losses as a % of
loans |
|
|
1.15 |
% |
|
|
1.15 |
% |
|
|
1.14 |
% |
|
|
1.20 |
% |
|
|
1.24 |
% |
Allowance for loan losses as a % of
nonperforming loans |
|
|
310.33 |
% |
|
|
224.99 |
% |
|
|
290.53 |
% |
|
|
385.69 |
% |
|
|
322.38 |
% |
The allowance for loan losses as a percentage of loans increased slightly from 1.14% at December
31, 2005 to 1.15% at June 30, 2006. The provision for loan losses for the first six months of 2006
and 2005 was $170 thousand and $269 thousand, respectively. Net charge-offs totaled $182 thousand
for the first six months of 2006 down from $260 thousand for the first six months of 2005. The
provision for loan losses was $60 thousand for the quarter ended June 30, 2006 compared to $0 for
the same time in 2005. The provision closely tracks net charge-offs. During 2006, approximately
84% of gross charge-offs have occurred in the indirect loan portfolio compared to 86% in 2005.
Non-performing loans to total loans have decreased slightly from .39% as of December 31, 2005 to .37% as of June 30, 2006. The ratio of the allowance for loan losses (ALLL) to non-performing
loans remains solid at 310%.
13
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 decreased $12.205 million since December 31, 2005. Balances in
the Corporations money market index accounts increased $27.988 million since December 31, 2005, as
management made a concerted effort to aggressively price this variable rate account. The growth in
money market index accounts was offset by a decrease of $16.840 million in time deposits. The
Company prices deposit rates to remain competitive within the market and to attract and retain
customers.
Borrowings. Total borrowings increased $7.448 million or 6.39% since December 31, 2005.
The Corporation offset the overall drop in deposits with Federal Home Loan Bank advances, which
increased $6.375 million during the six month period.
Capital Resources. Total stockholders equity decreased from $75.864 million at December
31, 2005 to $73.356 million at June 30, 2006. During the first six months of 2006, the mark to
market adjustment of securities decreased accumulated other comprehensive income by $2.169 million
and the repurchase of treasury stock decreased stockholders equity by $1.957 million.
The capital management function is a regular process which consists of providing capital for both
the current financial position and the anticipated future growth of the Corporation. As of June
30, 2006 the Corporations total risk-based capital ratio stood at 15.75%, and the Tier I
risk-based capital ratio and Tier I leverage ratio were at 14.57% and 9.39%, 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%.
Critical Accounting Policies
The Company 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 2005 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 Company 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 2005 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.
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
14
overall financial condition. The Companys 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 Company 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 Company are originating loans and purchasing securities.
During the first six months of 2006, net cash from investing activities amounted to $6.35 million
compared to $20.07 million used in investing activities for the same period in 2005. Purchase of
securities available for sale amounted to $27.234 million in 2006 compared to $50.520 million in
2005.
The primary financing activities of the Company are obtaining deposits, repurchase agreements and
other borrowings. Net cash used by financing activities amounted to $8.91 million for the first
six months of 2006 compared to $11.47 million provided by financing activities for the same period
in 2005. Most of this change is a result of the net decrease in deposits. Deposits decreased
$12.20 million for the six-month period ended June 30, 2006 compared to a $45 thousand decrease for
the same period in 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Companys 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 Company 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 Company.
The Company monitors its exposure to interest rate risk on a quarterly basis through simulation
analysis which measures the impact changes in interest rates can have on net income. The simulation
technique analyzes the effect of a presumed 100 and 200 basis points shift in interest rates and
takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes
and rates, non-maturity deposit assumptions and capital requirements. 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, 2006 amounts as a base case, the Companys change in
net interest income would be within the board mandated limits.
The information required by Item 3 has been disclosed in Item 7A of the Companys Annual Report to
Shareholders on Form 10-K for the year ended December 31, 2005. There has been no material change
in the disclosure regarding market risk due to the stability of the balance sheet.
Item 4. Controls and Procedures
Based on their evaluation, as of the end of the period covered by this quarterly report, the
Companys Chief Executive Officer and Chief Financial Officer have concluded the Companys
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 have been no significant changes in internal controls or
in other factors that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses. The Companys Chief Executive Officer and Chief Financial Officer have also concluded
there have been no changes over the Companys internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
15
PART II OTHER INFORMATION
Item 1. Legal Proceedings
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 1A. Risk Factors
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, 2005. See also, Forward-Looking Statements
included in Part 1, Item 2 of this Quarterly Report on Form 10-Q. There have been no material
changes in risk factors since December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of equity securities by the issuer.
On June 13, 2006, the Corporation announced the adoption of a stock repurchase program that
authorizes the repurchase of up to 4.9% or approximately 635,117 shares of its outstanding common
stock in the open market or in privately negotiated transactions. This program expires in June
2007.
The following table summarizes the treasury stock purchased by the issuer during the second quarter
of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Shares that May Yet |
|
|
Total Number of |
|
Average Price |
|
Part of Publicly |
|
Be Purchased Under |
Period |
|
Shares Purchased |
|
Paid Per Share |
|
Announced Program |
|
the Program |
April 1-30 |
|
|
15,032 |
|
|
|
$11.55 |
|
|
|
15,032 |
|
|
|
288,446 |
|
May 1-31 |
|
|
19,000 |
|
|
|
$10.78 |
|
|
|
19,000 |
|
|
|
269,446 |
|
June 1-30 |
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
635,117 |
|
TOTAL |
|
|
34,032 |
|
|
|
$11.12 |
|
|
|
34,032 |
|
|
|
|
|
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
16
Item 6. Exhibits
(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). |
|
4. |
|
Incorporated by reference to initial filing. |
|
10. |
|
Not applicable. |
|
11. |
|
Refer to notes to unaudited consolidated financial statements. |
|
15. |
|
Not applicable. |
|
18. |
|
Not applicable. |
|
19. |
|
Not applicable. |
|
22. |
|
Not applicable. |
|
23. |
|
Not applicable. |
|
24. |
|
Not applicable. |
|
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) |
17
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.
FARMERS NATIONAL BANC CORP.
Dated: August 8, 2006
/s/ Frank L. Paden
Frank L. Paden
President and Secretary
Dated: August 8, 2006
/s/ Carl D. Culp
Carl D. Culp
Executive Vice President
and Treasurer
18