FARMERS NATIONAL BANC CORP. 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, 2007
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, 2007 |
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Common Stock, No Par Value
|
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13,009,147 shares |
PART I FINANCIAL INFORMATION
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Page Number |
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Item 1 Financial Statements |
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Included in Part I of this report: |
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Farmers National Banc Corp. and Subsidiary |
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1 |
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2 |
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3 |
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4-7 |
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7-14 |
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14 |
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14 |
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15 |
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15 |
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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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17 |
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10-Q Certifications |
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18-19 |
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Section 906 Certifications |
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20-21 |
|
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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|
|
|
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|
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(In Thousands of Dollars) |
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|
June 30, |
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December 31, |
|
|
2007 |
|
2006 |
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
20,454 |
|
|
$ |
24,447 |
|
Federal funds sold |
|
|
1,030 |
|
|
|
9,591 |
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|
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|
TOTAL CASH AND CASH EQUIVALENTS |
|
|
21,484 |
|
|
|
34,038 |
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|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
237,959 |
|
|
|
255,799 |
|
|
|
|
|
|
|
|
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Loans |
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|
512,226 |
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|
508,188 |
|
Less allowance for loan losses |
|
|
5,593 |
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|
|
5,594 |
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NET LOANS |
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|
506,633 |
|
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|
502,594 |
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|
|
|
|
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|
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Premises and equipment, net |
|
|
14,632 |
|
|
|
14,744 |
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Other assets |
|
|
15,148 |
|
|
|
14,409 |
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|
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|
TOTAL ASSETS |
|
$ |
795,856 |
|
|
$ |
821,584 |
|
|
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|
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|
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Deposits: |
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|
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|
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|
Noninterest-bearing |
|
$ |
61,486 |
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|
$ |
66,003 |
|
Interest-bearing |
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|
526,840 |
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|
553,744 |
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TOTAL DEPOSITS |
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588,326 |
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619,747 |
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Short-term borrowings |
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73,525 |
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|
77,792 |
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Long-term borrowings |
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|
55,766 |
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|
41,601 |
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Other liabilities |
|
|
4,497 |
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|
|
6,221 |
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TOTAL LIABILITIES |
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|
722,114 |
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745,361 |
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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
14,736,615 in 2007 and 14,567,280 in 2006 |
|
|
90,149 |
|
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|
88,366 |
|
Retained earnings |
|
|
8,777 |
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|
9,617 |
|
Accumulated other comprehensive income (loss) |
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|
(2,714 |
) |
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|
(1,345 |
) |
Treasury stock, at cost; 1,690,968 shares in 2007
and 1,494,525 in 2006 |
|
|
(22,470 |
) |
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|
(20,415 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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|
73,742 |
|
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|
76,223 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
795,856 |
|
|
$ |
821,584 |
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|
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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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2007 |
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2006 |
|
2007 |
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2006 |
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INTEREST AND DIVIDEND INCOME |
|
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Loans, including fees |
|
$ |
8,665 |
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|
$ |
8,197 |
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|
$ |
17,030 |
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|
$ |
16,220 |
|
Taxable securities |
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|
1,774 |
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|
1,884 |
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|
3,626 |
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3,758 |
|
Tax exempt securities |
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|
682 |
|
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|
612 |
|
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|
1,364 |
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|
1,199 |
|
Dividends |
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|
141 |
|
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|
168 |
|
|
|
285 |
|
|
|
278 |
|
Federal funds sold |
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|
70 |
|
|
|
165 |
|
|
|
98 |
|
|
|
207 |
|
|
|
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TOTAL INTEREST AND DIVIDEND INCOME |
|
|
11,332 |
|
|
|
11,026 |
|
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|
22,403 |
|
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|
21,662 |
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INTEREST EXPENSE |
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Deposits |
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|
4,060 |
|
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|
3,791 |
|
|
|
8,189 |
|
|
|
7,219 |
|
Short-term borrowings |
|
|
706 |
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|
|
668 |
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|
1,353 |
|
|
|
1,191 |
|
Long-term borrowings |
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|
592 |
|
|
|
528 |
|
|
|
1,170 |
|
|
|
1,059 |
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|
|
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TOTAL INTEREST EXPENSE |
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|
5,358 |
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|
4,987 |
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|
|
10,712 |
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|
|
9,469 |
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|
|
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NET INTEREST INCOME |
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|
5,974 |
|
|
|
6,039 |
|
|
|
11,691 |
|
|
|
12,193 |
|
Provision for loan losses |
|
|
55 |
|
|
|
60 |
|
|
|
115 |
|
|
|
170 |
|
|
|
|
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|
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES |
|
|
5,919 |
|
|
|
5,979 |
|
|
|
11,576 |
|
|
|
12,023 |
|
|
|
|
|
|
|
|
|
|
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|
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|
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NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
721 |
|
|
|
759 |
|
|
|
1,401 |
|
|
|
1,442 |
|
Security gains |
|
|
0 |
|
|
|
138 |
|
|
|
552 |
|
|
|
395 |
|
Other operating income |
|
|
419 |
|
|
|
434 |
|
|
|
784 |
|
|
|
787 |
|
|
|
|
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TOTAL NONINTEREST INCOME |
|
|
1,140 |
|
|
|
1,331 |
|
|
|
2,737 |
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|
2,624 |
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NONINTEREST EXPENSES |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Salaries and employee benefits |
|
|
3,049 |
|
|
|
2,875 |
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|
|
5,987 |
|
|
|
5,667 |
|
Occupancy and equipment |
|
|
651 |
|
|
|
595 |
|
|
|
1,328 |
|
|
|
1,241 |
|
State and local taxes |
|
|
226 |
|
|
|
225 |
|
|
|
453 |
|
|
|
450 |
|
Professional fees |
|
|
146 |
|
|
|
113 |
|
|
|
293 |
|
|
|
260 |
|
Loan expenses |
|
|
100 |
|
|
|
104 |
|
|
|
177 |
|
|
|
199 |
|
Other operating expenses |
|
|
999 |
|
|
|
977 |
|
|
|
2,051 |
|
|
|
1,835 |
|
|
|
|
|
|
TOTAL NONINTEREST EXPENSES |
|
|
5,171 |
|
|
|
4,889 |
|
|
|
10,289 |
|
|
|
9,652 |
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES |
|
|
1,888 |
|
|
|
2,421 |
|
|
|
4,024 |
|
|
|
4,995 |
|
INCOME TAXES |
|
|
368 |
|
|
|
533 |
|
|
|
695 |
|
|
|
1,145 |
|
|
|
|
|
|
NET INCOME |
|
$ |
1,520 |
|
|
$ |
1,888 |
|
|
$ |
3,329 |
|
|
$ |
3,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities,
net of reclassifications |
|
|
(1,527 |
) |
|
|
(2,165 |
) |
|
|
(1,369 |
) |
|
|
(2,169 |
) |
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
|
($ |
7 |
) |
|
($ |
277 |
) |
|
$ |
1,960 |
|
|
$ |
1,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER SHARE basic and diluted |
|
$ |
0.12 |
|
|
$ |
0.15 |
|
|
$ |
0.26 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER SHARE |
|
$ |
0.16 |
|
|
$ |
0.16 |
|
|
$ |
0.32 |
|
|
$ |
0.32 |
|
|
|
|
|
|
See accompanying notes
2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(In Thousands except Per Share Data) |
|
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,329 |
|
|
$ |
3,850 |
|
Adjustments to reconcile net income
to net cash from operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
115 |
|
|
|
170 |
|
Depreciation and amortization |
|
|
537 |
|
|
|
514 |
|
Net amortization of securities |
|
|
198 |
|
|
|
641 |
|
Security gains |
|
|
(552 |
) |
|
|
(395 |
) |
Federal Home Loan Bank dividends |
|
|
0 |
|
|
|
(117 |
) |
Net change in other assets and liabilities |
|
|
(1,849 |
) |
|
|
540 |
|
|
|
|
NET CASH FROM OPERATING ACTIVITIES |
|
|
1,778 |
|
|
|
5,203 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from maturities and repayments of securities available for sale |
|
|
20,436 |
|
|
|
24,840 |
|
Proceeds from sales of securities available for sale |
|
|
2,712 |
|
|
|
8,459 |
|
Purchases of securities available for sale |
|
|
(7,060 |
) |
|
|
(27,234 |
) |
Loan originations and payments, net |
|
|
(4,154 |
) |
|
|
556 |
) |
Additions to premises and equipment |
|
|
(302 |
) |
|
|
(273 |
) |
|
|
|
NET CASH FROM INVESTING ACTIVITIES |
|
|
11,632 |
|
|
|
6,348 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net change in deposits |
|
|
(31,421 |
) |
|
|
(12,205 |
) |
Net change in short-term borrowings |
|
|
(4,267 |
) |
|
|
1,094 |
|
Proceeds from Federal Home Loan Bank borrowings and other debt |
|
|
20,000 |
|
|
|
10,000 |
|
Repayment of Federal Home Loan Bank borrowings and other debt |
|
|
(5,835 |
) |
|
|
(3,646 |
) |
Repurchase of common stock |
|
|
(2,055 |
) |
|
|
(1,957 |
) |
Cash dividends paid |
|
|
(4,169 |
) |
|
|
(4,096 |
) |
Proceeds from dividend reinvestment |
|
|
1,783 |
|
|
|
1,897 |
|
|
|
|
NET CASH FROM FINANCING ACTIVITIES |
|
|
(25,964 |
) |
|
|
(8,913 |
) |
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
(12,554 |
) |
|
|
2,638 |
|
|
|
|
|
|
|
|
|
|
Beginning cash and cash equivalents |
|
|
34,038 |
|
|
|
31,614 |
|
|
|
|
Ending cash and cash equivalents |
|
$ |
21,484 |
|
|
$ |
34,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
($ |
10,865 |
) |
|
($ |
8,990 |
) |
Income taxes paid |
|
|
(310 |
) |
|
|
(1,085 |
) |
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 2006 Annual
Report to Shareholders included in the Companys 2006 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.
4
Securities:
Securities available for sale at June 30, 2007 and December 31, 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
(In Thousands of Dollars) |
|
|
|
|
|
Unrealized |
|
Unrealized |
June 30, 2007 |
|
Fair Value |
|
Gains |
|
Losses |
|
|
|
U.S. Treasury and U.S. Government sponsored
enterprises |
|
$ |
71,747 |
|
|
$ |
15 |
|
|
$ |
(820 |
) |
Mortgage-backed securities |
|
|
92,880 |
|
|
|
50 |
|
|
|
(2,836 |
) |
Obligations of states and political subdivisions |
|
|
68,416 |
|
|
|
33 |
|
|
|
(1,630 |
) |
|
|
|
Total debt securities |
|
|
233,043 |
|
|
|
98 |
|
|
|
(5,286 |
) |
Equity securities |
|
|
4,916 |
|
|
|
1,013 |
|
|
|
0 |
|
|
|
|
TOTALS |
|
$ |
237,959 |
|
|
$ |
1,111 |
|
|
$ |
(5,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
(In Thousands of Dollars) |
|
|
|
|
|
Unrealized |
|
Unrealized |
December 31, 2006 |
|
Fair Value |
|
Gains |
|
Losses |
|
|
|
U.S. Treasury and U.S. Government sponsored
enterprises |
|
$ |
75,931 |
|
|
$ |
105 |
|
|
$ |
(843 |
) |
Corporate debt securities |
|
|
1,000 |
|
|
|
0 |
|
|
|
(1 |
) |
Mortgage-backed securities |
|
|
102,586 |
|
|
|
72 |
|
|
|
(2,610 |
) |
Obligations of states and political subdivisions |
|
|
68,967 |
|
|
|
296 |
|
|
|
(345 |
) |
|
|
|
Total debt securities |
|
|
248,484 |
|
|
|
473 |
|
|
|
(3,799 |
) |
Equity securities |
|
|
7,315 |
|
|
|
1,257 |
|
|
|
0 |
|
|
|
|
TOTALS |
|
$ |
255,799 |
|
|
$ |
1,730 |
|
|
$ |
(3,799 |
) |
|
|
|
Unrealized losses on debt securities issued by the U.S. Treasury, U.S. Government agencies, 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 these securities are backed by performing assets, timely
repayment of principal and interest on these securities is guaranteed by the issuer, 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.
5
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) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Basic EPS computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Net income |
|
$ |
1,520 |
|
|
$ |
1,888 |
|
|
$ |
3,329 |
|
|
$ |
3,850 |
|
Denominator Weighted average
shares outstanding |
|
|
13,039,436 |
|
|
|
12,974,678 |
|
|
|
13,044,026 |
|
|
|
12,979,980 |
|
Basic earnings per share |
|
$ |
.12 |
|
|
$ |
.15 |
|
|
$ |
.26 |
|
|
$ |
.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS computation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Net income |
|
$ |
1,520 |
|
|
$ |
1,888 |
|
|
$ |
3,329 |
|
|
$ |
3,850 |
|
Denominator Weighted average
shares outstanding for basic
earnings per share |
|
|
13,039,436 |
|
|
|
12,974,678 |
|
|
|
13,044,026 |
|
|
|
12,979,980 |
|
Effect of Stock Options |
|
|
0 |
|
|
|
219 |
|
|
|
0 |
|
|
|
3,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted averages shares for
diluted earnings per share |
|
|
13,039,436 |
|
|
|
12,974,897 |
|
|
|
13,044,026 |
|
|
|
12,983,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
.12 |
|
|
$ |
.15 |
|
|
$ |
.26 |
|
|
$ |
.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month and six-month periods ended June 30, 2007, 48,000 potential common shares were
not considered in the dilutive earnings per share calculation because they were not dilutive.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income consists solely of the change in unrealized gains and losses on securities available for
sale, net of reclassification for gains recognized in income.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition
threshold and measurement attribute for a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The Company is no longer subject to
examination by taxing authorities for years before 2002. The Company does not expect the total
amount of unrecognized tax benefits to significantly increase in the next twelve months. The
Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The Company did not have any amounts accrued for interest and penalties at June 30, 2007.
In September 2006, the FASB EITF finalized Issue No. 06-5, Accounting for Purchases of Life
Insurance Determining the Amount That Could be Realized in Accordance with FASB Technical
Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). EITF Issue No. 06-5 requires that
a policyholder consider contractual terms of a life insurance policy in determining the amount that
could be realized under the insurance contract. It also requires that if the contract provides for
a greater surrender value if all individual policies in a group are surrendered at the same time, that the
surrender value be determined based on the assumption that policies will be surrendered on an
individual basis. Lastly, EITF Issue No. 06-5 discusses whether the cash surrender value should be
6
discounted when the policyholder is contractually limited in its ability to surrender a policy.
EITF Issue No. 06-5 was effective January 1, 2007 and the adoption of this standard did not have a
material impact on the financial statements.
Newly Issued But Not Yet Effective Accounting Standards
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. This Statement establishes a fair value hierarchy about the assumptions
used to measure fair value and clarifies assumptions about risk and the effect of a restriction on
the sale or use of an asset. The standard is effective for fiscal years beginning after November
15, 2007. The Company has not completed its evaluation of the impact of the adoption of this
standard.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. This issue requires that a liability be recorded during the service period when a
split-dollar life insurance agreement continues after participants employment or retirement. The
required accrued liability will be based on either the post-employment benefit cost for the
continuing life insurance or based on the future death benefit depending on the contractual terms
of the underlying agreement. This issue is effective for fiscal years beginning after December 15,
2007. The Company has not completed its evaluation of the impact of adoption of EITF 06-4.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 gives entities the option to measure eligible financial assets
and financial liabilities at fair value on an instrument by instrument basis, that are otherwise
not permitted to be accounted for at fair value under other accounting standards. The election to
use the fair value option is available when an entity first recognizes a financial asset or
financial liability. Subsequent changes in fair value must be reported in earnings. SFAS No. 159
is effective for financial statements issued for fiscal years beginning after November 15, 2007.
Management does not expect that the adoption of this standard on January 1, 2008 will have a
material impact on the Corporations 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 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
7
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
Overview:
Comparison of selected financial ratios and other results for the three-month and six-month periods
ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(Dollars in Thousands, except Per Share Data) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Total Assets |
|
$ |
795,856 |
|
|
$ |
820,206 |
|
|
$ |
795,856 |
|
|
$ |
820,206 |
|
Net Income |
|
$ |
1,520 |
|
|
$ |
1,888 |
|
|
$ |
3,329 |
|
|
$ |
3,850 |
|
Basic and Diluted Earnings per share |
|
$ |
.12 |
|
|
$ |
.15 |
|
|
$ |
.26 |
|
|
$ |
.30 |
|
Return on Average Assets (annualized) |
|
|
.76 |
% |
|
|
.92 |
% |
|
|
.83 |
% |
|
|
.94 |
% |
Return on Average Equity (annualized) |
|
|
8.12 |
% |
|
|
10.22 |
% |
|
|
8.91 |
% |
|
|
10.33 |
% |
Efficiency Ratio (tax equivalent basis) |
|
|
68.40 |
% |
|
|
63.58 |
% |
|
|
69.64 |
% |
|
|
63.10 |
% |
Capital to Asset Ratio |
|
|
9.27 |
% |
|
|
8.94 |
% |
|
|
9.27 |
% |
|
|
8.94 |
% |
Dividends to Net Income |
|
|
137.04 |
% |
|
|
109.85 |
% |
|
|
125.23 |
% |
|
|
107.66 |
% |
Loans to Assets |
|
|
64.36 |
% |
|
|
62.26 |
% |
|
|
64.36 |
% |
|
|
62.26 |
% |
Net Loans to Deposits |
|
|
86.11 |
% |
|
|
81.60 |
% |
|
|
86.11 |
% |
|
|
81.60 |
% |
The Corporations earnings performance in the second quarter remains slightly below projections for
2007. Earlier this year, some strategic decisions were made to monitor growth and net margin
issues relative to performance. Given the modest loan demand and the keen competition for time
deposits, efforts have been concentrated to better manage the margin rather than grow the balance
sheet in the current interest rate environment. Taking into consideration that there was a slight
movement in the shape of the yield curve and internal pricing adjustments on our deposit products,
the Corporation has seen favorable movement in the net interest margin during the past ninety days.
In addition, the Corporation is focused on improving operating processes to be more efficient in
order to improve the non-interest income stream and control non-interest expenses.
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.
8
Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
|
|
|
|
|
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (3) (4) (5) |
|
$ |
506,202 |
|
|
$ |
8,755 |
|
|
|
6.94 |
% |
|
$ |
507,840 |
|
|
$ |
8,293 |
|
|
|
6.55 |
% |
Taxable securities |
|
|
171,710 |
|
|
|
1,774 |
|
|
|
4.14 |
|
|
|
190,622 |
|
|
|
1,884 |
|
|
|
3.96 |
|
Tax-exempt securities (5) |
|
|
69,944 |
|
|
|
1,016 |
|
|
|
5.83 |
|
|
|
61,319 |
|
|
|
942 |
|
|
|
6.16 |
|
Equity Securities (2) (5) |
|
|
9,046 |
|
|
|
163 |
|
|
|
7.23 |
|
|
|
11,058 |
|
|
|
201 |
|
|
|
7.29 |
|
Federal funds sold |
|
|
5,330 |
|
|
|
70 |
|
|
|
5.27 |
|
|
|
13,471 |
|
|
|
165 |
|
|
|
4.91 |
|
Total earning assets |
|
|
762,232 |
|
|
|
11,778 |
|
|
|
6.20 |
|
|
|
784,310 |
|
|
|
11,485 |
|
|
|
5.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONEARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
22,035 |
|
|
|
|
|
|
|
|
|
|
|
24,941 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
14,667 |
|
|
|
|
|
|
|
|
|
|
|
14,914 |
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
(5,596 |
) |
|
|
|
|
|
|
|
|
|
|
(5,890 |
) |
|
|
|
|
|
|
|
|
Other assets (3) |
|
|
9,516 |
|
|
|
|
|
|
|
|
|
|
|
7,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
802,853 |
|
|
|
|
|
|
|
|
|
|
$ |
825,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
266,744 |
|
|
$ |
3,102 |
|
|
|
4.66 |
% |
|
$ |
277,883 |
|
|
$ |
2,807 |
|
|
|
4.05 |
% |
Savings deposits |
|
|
168,075 |
|
|
|
815 |
|
|
|
1.94 |
|
|
|
167,353 |
|
|
|
754 |
|
|
|
1.81 |
|
Demand deposits |
|
|
98,325 |
|
|
|
143 |
|
|
|
0.58 |
|
|
|
115,963 |
|
|
|
230 |
|
|
|
0.80 |
|
Repurchase agreements |
|
|
78,714 |
|
|
|
698 |
|
|
|
3.56 |
|
|
|
80,464 |
|
|
|
661 |
|
|
|
3.29 |
|
Borrowings |
|
|
51,036 |
|
|
|
600 |
|
|
|
4.72 |
|
|
|
47,138 |
|
|
|
536 |
|
|
|
4.56 |
|
|
|
|
|
|
Total Interest-Bearing Liabilities |
|
|
662,894 |
|
|
|
5,358 |
|
|
|
3.24 |
|
|
|
688,801 |
|
|
|
4,988 |
|
|
|
2.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING LIABILITIES
AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
59,192 |
|
|
|
|
|
|
|
|
|
|
|
57,719 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
5,649 |
|
|
|
|
|
|
|
|
|
|
|
5,359 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
75,118 |
|
|
|
|
|
|
|
|
|
|
|
74,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders Equity |
|
$ |
802,853 |
|
|
|
|
|
|
|
|
|
|
$ |
825,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread |
|
|
|
|
|
$ |
6,420 |
|
|
|
2.96 |
% |
|
|
|
|
|
$ |
6,497 |
|
|
|
2.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.38 |
% |
|
|
|
|
|
|
|
|
|
|
3.32 |
% |
|
|
|
(1) |
|
Rates are calculated on an annualized basis. |
|
(2) |
|
Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets. |
|
(3) |
|
Non-accrual loans and overdraft deposits are included in other assets. |
|
(4) |
|
Interest on loans includes fee income of $463 and $420 for 2007 and 2006 respectively. |
|
(5) |
|
For 2007, adjustments of $89 thousand, $335 thousand, and $21 thousand respectively are made to tax equate income on tax exempt
loans, tax exempt securities and to reflect a dividends received deduction on equity securities. For 2006, adjustments of $84 thousand,
$288 thousand, and $33 thousand respectively are made to tax equate income on tax exempt loans, tax exempt securities and to
reflect a dividends received deduction on equity securities. These adjustments are based on a marginal federal income tax rate
of 35%, less disallowances. |
9
Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 30, 2007 |
|
June 30, 2006 |
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
BALANCE |
|
INTEREST |
|
RATE (1) |
|
BALANCE |
|
INTEREST |
|
RATE (1) |
|
|
|
|
|
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (3) (4) (5) |
|
$ |
505,321 |
|
|
$ |
17,209 |
|
|
|
6.87 |
% |
|
$ |
508,985 |
|
|
$ |
16,404 |
|
|
|
6.50 |
% |
Taxable securities |
|
|
174,854 |
|
|
|
3,626 |
|
|
|
4.18 |
|
|
|
190,977 |
|
|
|
3,758 |
|
|
|
3.97 |
|
Tax-exempt securities (5) |
|
|
69,962 |
|
|
|
2,042 |
|
|
|
5.89 |
|
|
|
60,367 |
|
|
|
1,845 |
|
|
|
6.16 |
|
Equity Securities (2) (5) |
|
|
9,677 |
|
|
|
327 |
|
|
|
6.81 |
|
|
|
11,712 |
|
|
|
323 |
|
|
|
5.56 |
|
Federal funds sold |
|
|
3,737 |
|
|
|
98 |
|
|
|
5.29 |
|
|
|
8,658 |
|
|
|
207 |
|
|
|
4.82 |
|
|
|
|
|
|
Total earning assets |
|
|
763,551 |
|
|
|
23,302 |
|
|
|
6.15 |
|
|
|
780,699 |
|
|
|
22,537 |
|
|
|
5.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONEARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
22,224 |
|
|
|
|
|
|
|
|
|
|
|
25,206 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
14,689 |
|
|
|
|
|
|
|
|
|
|
|
14,990 |
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses |
|
|
(5,590 |
) |
|
|
|
|
|
|
|
|
|
|
(5,887 |
) |
|
|
|
|
|
|
|
|
Other assets (3) |
|
|
9,615 |
|
|
|
|
|
|
|
|
|
|
|
7,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
804,489 |
|
|
|
|
|
|
|
|
|
|
$ |
822,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
269,902 |
|
|
$ |
6,177 |
|
|
|
4.62 |
% |
|
$ |
281,977 |
|
|
$ |
5,448 |
|
|
|
3.90 |
% |
Savings deposits |
|
|
171,643 |
|
|
|
1,730 |
|
|
|
2.03 |
|
|
|
160,844 |
|
|
|
1,273 |
|
|
|
1.60 |
|
Demand deposits |
|
|
98,140 |
|
|
|
282 |
|
|
|
0.58 |
|
|
|
120,121 |
|
|
|
498 |
|
|
|
0.84 |
|
Repurchase agreements |
|
|
74,443 |
|
|
|
1,323 |
|
|
|
3.58 |
|
|
|
74,626 |
|
|
|
1,168 |
|
|
|
3.16 |
|
Borrowings |
|
|
50,570 |
|
|
|
1,200 |
|
|
|
4.79 |
|
|
|
47,977 |
|
|
|
1,083 |
|
|
|
4.55 |
|
|
|
|
|
|
Total Interest-Bearing Liabilities |
|
|
664,698 |
|
|
|
10,712 |
|
|
|
3.25 |
|
|
|
685,545 |
|
|
|
9,470 |
|
|
|
2.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING LIABILITIES
AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
58,929 |
|
|
|
|
|
|
|
|
|
|
|
57,003 |
|
|
|
|
|
|
|
|
|
Other Liabilities |
|
|
5,486 |
|
|
|
|
|
|
|
|
|
|
|
5,247 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
75,376 |
|
|
|
|
|
|
|
|
|
|
|
75,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity |
|
$ |
804,489 |
|
|
|
|
|
|
|
|
|
|
$ |
822,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread |
|
|
|
|
|
$ |
12,590 |
|
|
|
2.90 |
% |
|
|
|
|
|
$ |
13,067 |
|
|
|
3.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.33 |
% |
|
|
|
|
|
|
|
|
|
|
3.38 |
% |
|
|
|
(1) |
|
Rates are calculated on an annualized basis. |
|
(2) |
|
Equity securities include restricted stock, which is included in other assets on the
consolidated balance sheets. |
|
(3) |
|
Non-accrual loans and overdraft deposits are included in other assets. |
|
(4) |
|
Interest on loans includes fee income of $867 and $843 for 2007 and 2006 respectively. |
|
(5) |
|
For 2007, adjustments of $178 thousand, $679 thousand, and $41 thousand respectively are made
to tax equate income on tax exempt loans, tax exempt securities and to reflect a dividends received
deduction on equity securities. For 2006, adjustments of $172 thousand, $604 thousand, and $45
thousand respectively are made to tax equate income on tax exempt loans, tax exempt securities and
to reflect a dividends received deduction on equity securities. These adjustments are based on a
marginal federal income tax rate of 35%, less disallowances. |
10
Taxable equivalent net interest income. Taxable equivalent net interest income for the
first six-months ended June 30, 2007 totaled $12.59 million, a decrease of $477 thousand or 3.65%
compared to the first six-months of 2006. Although the yield on earning assets increased by 33
basis points over the past 12 months, this benefit was offset by a 46 basis point increase in the
cost of interest-bearing liabilities. The decline in the net interest margin and net interest
income continues to be affected by the shape of the yield curve and aggressive competitive pricing
in our market areas, which has caused the yield on average earning assets to lag behind the
increasing cost of interest-bearing liabilities. Average savings deposits increased by $10.80
million or 6.71% over the prior year six month period, which along with the increased interest rate
paid on deposits, helped drive up interest expense on savings deposits by $457 thousand. The
interest expense related to time deposits and repurchase agreements increased 13.38% over the prior
year comparable period, which is consistent with the market increase in short-term interest rates.
Taxable equivalent net interest income for the quarter ended June 30, 2007 totaled $6.42 million, a
slight decrease of $77 thousand or 1.19% compared to the quarter ended June 30, 2006. The increase
in interest expense is attributable to the 34 basis point increase in the cost of interest-bearing
liabilities. Average interest-bearing demand deposits decreased by $17.64 million or 15.21% over
the prior year comparable quarter which helped lower interest expense on demand deposits by $87
thousand.
Noninterest Income. Total noninterest income for the six-month period ended June 30, 2007
increased by $113 thousand or 4.31% compared to the same period in 2006. This increase is due to a
$157 thousand increase in gains on the sale of investment securities.
Total noninterest income for the quarter ended June 30, 2007 decreased by $191 thousand from the
prior year comparable quarter. This decrease is mainly due to a $138 thousand decrease in gains on
the sale of investment securities.
Noninterest Expense. Noninterest expense was $10.29 million for the first six months of
2007 compared to $9.65 million for the same period in 2006. This amounts to an increase of 6.60%.
Most of this increase is the result of a $320 thousand increase in salaries and employee benefits
mainly attributable to higher health insurance costs.
Noninterest expense was $5.17 million for the quarter ended June 30, 2007 compared to $4.89 million
for the same quarter in 2006. Again, this increase is due to the $174 thousand increase in
salaries and employee benefits which can be attributed to higher health insurance costs.
The efficiency ratio increased to 69.64% for the first six months of 2007 compared to 63.10% for
the first six months of 2006. The efficiency ratio was adversely impacted by the $502 thousand
decline in net interest income. The efficiency ratio is calculated as follows: non-interest
expense divided by the sum of fully taxable equivalent net interest income plus non-interest
income, excluding security gains. This ratio is a measure of the expense incurred to generate a
dollar of revenue. Management will continue to closely monitor the efficiency ratio.
Income Taxes. Income tax expense totaled $695 thousand for the first six months of 2007
and $1.15 million for the first six months of 2006, a decrease of $450 thousand or 39.30%. The
effective tax rate for the first six months of 2007 was 17.27% compared to 22.92% for the same time
in 2006. Income tax expense totaled $368 thousand for the quarter ended June 30, 2007 and $533
thousand for the quarter ended June 30, 2006, a decrease of 30.96%. The current periods expense
was impacted by the Corporations increased purchases of tax-exempt municipal securities and a
decrease in pretax income resulted in the lower tax rate.
11
Other Comprehensive Income. For the first six months of 2007, the change in net unrealized
gains on securities, net of reclassifications, resulted in an unrealized loss of $1.37 million
compared to an unrealized loss of $2.17 million for the same period in 2006. The second quarter
also had an unrealized loss of $1.53 million compared to an unrealized loss of $2.17 million for
the same quarter in 2006. The fair value of these securities is expected to recover as principal
payments are received and they approach their maturity date. 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.
Financial Condition
Total assets decreased $25.73 million or 3.13% since December 31, 2006, as the Corporation also saw
a decline in deposit balances. Capital ratios remain solid, as shown by the ratio of equity to
total assets at June 30, 2007 of 9.27%.
Securities. Securities available for sale decreased $17.84 million. Matured securities
were used to partially fund the decrease of $31.42 million in deposits. The Corporation sold $2.7
million in market value of FNMA preferred stock, resulting in a gain of $552 thousand. In
addition, there was a $2.11 million decrease in the net unrealized gains (losses) on securities.
Loans. Gross loans increased $4.04 million since December 31, 2006. Commercial Real
Estate loans grew $10.57 million or 5.84% since December 31, 2006. The growth in commercial real
estate loans offset the decline in balance in indirect installment loans, which decreased $6.59
million or 6.48%. 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. On a fully tax equivalent basis, loans
contributed 73.85% of total interest income for the six months ended June 30, 2007 and 72.79% for
the six months ended June 30, 2006.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/07 |
|
3/31/07 |
|
12/31/06 |
|
9/30/06 |
|
6/30/06 |
Nonperforming loans |
|
$ |
2,567 |
|
|
$ |
2,458 |
|
|
$ |
1,722 |
|
|
$ |
1,853 |
|
|
$ |
1,884 |
|
|
Nonperforming loans as a % of total
loans |
|
|
.50 |
% |
|
|
.48 |
% |
|
|
.34 |
% |
|
|
.36 |
% |
|
|
.37 |
% |
|
Allowance for loan losses |
|
$ |
5,593 |
|
|
$ |
5,556 |
|
|
$ |
5,594 |
|
|
$ |
5,845 |
|
|
$ |
5,848 |
|
|
Allowance for loan losses as a % of
loans |
|
|
1.09 |
% |
|
|
1.10 |
% |
|
|
1.10 |
% |
|
|
1.14 |
% |
|
|
1.15 |
% |
|
Allowance for loan losses as a % of
nonperforming loans |
|
|
217.88 |
% |
|
|
226.04 |
% |
|
|
324.85 |
% |
|
|
315.39 |
% |
|
|
310.33 |
% |
The allowance for loan losses as a percentage of loans at June 30, 2007 was slightly down from the
December 31, 2006 amount of 1.10%. The provision for loan losses for the first six months of 2007
and 2006 was $115 thousand and $170 thousand, respectively. Net charge-offs totaled $116 thousand
for the first six months of 2007 down from $182 thousand for the first six months of 2006. The
provision closely tracks net charge-offs. During 2007 approximately 64% of gross charge-offs have
occurred in the indirect loan portfolio compared to 84% in 2006. Non-performing loans to total
12
loans have increased from .34% as of December 31, 2006 to .50% as of June 30, 2007. The ratio of
the allowance for loan losses (ALLL) to non-performing loans was 218%.
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 $31.42 million since December 31, 2006. Balances in
the Corporations time deposits decreased $15.26 million or 5.44% between December 31, 2006 and
June 30, 2007. Money market accounts decreased $8.07 million since December 31, 2006. Given the
modest loan demand and the keen competition for time deposits, efforts have been concentrated to
better manage the margin rather than grow the balance sheet in the current interest rate
environment. The Company prices deposit rates to remain competitive within the market and to
retain customers.
Borrowings. Total borrowings increased $9.90 million or 8.29% since December 31, 2006.
The Corporation partially offset the drop in deposits with an increase in securities sold under
repurchase agreements, which grew $5.81 million during the six-month period.
Capital Resources. Total stockholders equity decreased from $76.22 million at December
31, 2006 to $73.74 million at June 30, 2007. During the first six months of 2007, the mark to
market adjustment of securities decreased accumulated other comprehensive income by $1.37 million
and the repurchase of treasury stock decreased stockholders equity by $2.06 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, 2007 the Corporations total risk-based capital ratio stood at 15.26%, and the Tier I
risk-based capital ratio and Tier I leverage ratio were at 14.12% and 9.26%, respectively.
Management believes, as of June 30, 2007, that the Corporation and Bank meet all capital adequacy requirements to which they are
subject.
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 2006 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 2006
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
13
The Corporation maintains, in the opinion of management, liquidity sufficient to satisfy
depositors requirements and meet the credit needs of customers. The Corporation depends on its
ability to maintain its market share of deposits as well as acquiring new funds. The Corporations
ability to attract deposits and borrow funds depends in large measure on its profitability,
capitalization and overall financial condition. The 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 2007, net cash from investing activities amounted to $11.63 million
compared to $6.35 million provided by investing activities for the same period in 2006. Purchases
of securities available for sale amounted to $7.06 million in 2007 compared to $27.23 million in
2006. Net loans increased by $4.15 million during this years first six-month period and decreased $556
thousand over the same six-month period in 2006.
The primary financing activities of the Company are obtaining deposits, repurchase agreements and
other borrowings. Net cash used by financing activities amounted to $25.96 million for the first
six months of 2007 compared to $8.91 million used by financing activities for the same period in
2006. Most of this change is a result of the net decrease in deposits. Deposits decreased $31.42
million for the six-month period ended June 30, 2007 compared to a $12.21 million decrease for the
same period in 2006. The variability in deposits is a result of normal customer deposit activity.
Proceeds from Federal Home Loan Bank borrowings amounted to $20 million in 2007 compared to $10
million in 2006.
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, 2007 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, 2006. 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
14
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, Farmers National Bank was named a defendant in a lawsuit filed
in September 2005, at which time, the Plaintiff alleges that the Bank is indebted to the Plaintiff
for allowing the Plaintiffs former agent to make withdrawals from the Plaintiffs account. The
Plaintiff is seeking damages in excess of $423,000 to be determined by a jury trial. While there
is no way to determine the ultimate success of defense of the lawsuit at this time, the Bank is
defending this matter vigorously.
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, 2006. 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, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of equity securities by the issuer.
On June 12, 2007, the Corporation announced the adoption of a stock repurchase program that
authorizes the repurchase of up to 4.9% or approximately 638 thousand shares of its outstanding
common stock in the open market or in privately negotiated transactions. This program expires in
June 2008.
The following table summarizes the treasury stock purchased by the issuer during the second quarter
of 2007:
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Total Number of |
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Maximum Number of |
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|
|
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Shares Purchased as |
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Shares that May Yet |
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Total Number of |
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Average Price |
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Part of Publicly |
|
Be Purchased Under |
Period |
|
Shares Purchased |
|
Paid Per Share |
|
Announced Program |
|
the Program |
April 1-30 |
|
|
7,525 |
|
|
$ |
10.62 |
|
|
|
7,525 |
|
|
|
397,034 |
|
May 1-31 |
|
|
47,104 |
|
|
$ |
10.15 |
|
|
|
47,104 |
|
|
|
349,930 |
|
June 1-30 |
|
|
56,294 |
|
|
$ |
10.53 |
|
|
|
56,294 |
|
|
|
581,706 |
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TOTAL |
|
|
110,923 |
|
|
$ |
10.38 |
|
|
|
110,923 |
|
|
|
581,706 |
|
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
15
Not applicable.
Item 5. Other Information
Not applicable.
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. |
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Incorporated by reference to initial filing. |
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10. |
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Not applicable. |
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11. |
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Refer to notes to unaudited consolidated financial statements. |
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15. |
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Not applicable. |
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18. |
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Not applicable. |
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19. |
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Not applicable. |
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22. |
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Not applicable. |
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23. |
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Not applicable. |
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24. |
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Not applicable. |
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)
16
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, 2007
/s/Frank L. Paden
Frank L. Paden
President and Secretary
Dated: August 8, 2007
/s/Carl D. Culp
Carl D. Culp
Executive Vice President
and Treasurer
17