<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 22, 2000.
REGISTRATION STATEMENT NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
FARMERS NATIONAL BANC CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
OHIO 6022 34-1371693
(STATE OR OTHER JURISDICTION OF (PRIMARY INDUSTRIAL CLASSIFICATION (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CODE NUMBER)
</TABLE>
<TABLE>
<S> <C>
20 SOUTH BROAD STREET FRANK L. PADEN
P.O. BOX 555 PRESIDENT AND SECRETARY
CANFIELD, OHIO 44406 FARMERS NATIONAL BANC CORP.
(330) 533-3341 20 SOUTH BROAD STREET, PO BOX 555
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, CANFIELD, OHIO 44406
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE (330) 533-3341
OFFICES) (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
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Copies to:
<TABLE>
<S> <C>
CHARLES D. NIEHAUS, ESQ. MARTIN D. WERNER, ESQ.
BISCHOFF KENNEY & NIEHAUS WERNER & BLANK
5630 N. MAIN STREET 7205 W. CENTRAL AVENUE
SYLVANIA, OHIO 43560 TOLEDO, OHIO 43617
(419) 882-0594 (419) 841-8051
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a Holding Company and there is compliance with
general Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE (3)
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<S> <C> <C> <C> <C>
Common Stock, no par value..... 3,530,968 N/A $14,352,978 $3,789.18
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</TABLE>
(1) This Registration Statement relates to 3,530,968 shares of common stock, no
par value, of the Registrant, the maximum number of such shares issuable in
exchange for shares of common stock, no par value, of Security Financial
Corp., the maximum number of shares of Security Financial Corp. common stock
to be converted pursuant to the merger described in the enclosed joint proxy
statement/prospectus.
(2) Calculated pursuant to Rule 457(f)(2) under the Securities Act based on the
book value on August 18, 2000 of Security Financial Corp. common stock
expected to be cancelled in connection with the merger.
(3) The registration fee of $3,789.18 was calculated pursuant to Rule 457(f).
If this form is filed to Register additional Securities for an Offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration Statement number of the earlier effective
Registration Statement for the same Offering. [ ]
If this Form is a Post-Effective Amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier Effective Registration Statement
for the same Offering. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
MERGER PROPOSED
[FARMERS NATIONAL BANCORPLOGO][SECURITY FINANCIAL CORP. LOGO]
The Boards of Directors of Farmers National Banc Corp. and Security
Financial Corp. have agreed on a merger of Security with and into Farmers. After
the merger, Farmers will have total assets of approximately $613,650,000,
stockholders' equity of approximately $67,531,000 and deposits of approximately
$470,488,000. We believe that this merger will position the combined company to
grow and flourish as the financial services business evolves and consolidates.
In the merger, Security will be merged with and into Farmers. As a result
of the merger, each share of Security common stock outstanding at the effective
time of the merger, other than shares with respect to which dissenters' rights
are perfected, will be converted into a number of shares of Farmers common stock
equal to $90.00 divided by the average closing price of Farmers common stock for
the thirty (30) trading days immediately preceding the day prior to the
effective date of the merger, provided however that the number of shares of
Farmers exchanged for each share of Security shall not be less than 7.200 nor
more than 9.742, subject to certain potential adjustments described in the
Agreement and Plan of Merger (sometimes referred to as the "merger agreement")
and the accompanying joint proxy statement/prospectus. There are currently
362,448 shares of Security outstanding. Assuming an exchange rate of 8.621
(calculated in accordance with the terms of the merger agreement) and assuming
there are no dissenting shareholders of Security, Farmers will issue 3,162,778
shares of its common stock in the merger. No fractional shares of Farmers common
stock will be issued to holders of shares of Security common stock, and in lieu
of such fractional shares, cash will be paid to Security shareholders in
accordance with the merger agreement.
Farmers and Security common stock are not traded on a national securities
exchange; they are however traded on the NASD over the counter market. Farmers
trades under the symbol FMNB; Security does not have a trading symbol.
We cannot complete the merger unless the stockholders of Security and
Farmers approve the merger. Each of us will hold a meeting of our stockholders
to vote on these merger related proposals. YOUR VOTE IS VERY IMPORTANT. Whether
or not you plan to attend your stockholder meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. If you sign, date and
mail your proxy card without indicating how you want to vote, your proxy will be
counted as a vote in favor of the merger. If you are a Farmers or Security
shareholder and you do not return your card or do not instruct your broker how
to vote any shares held for you in "street name," the effect will be a vote
against the merger.
This joint proxy statement/prospectus provides you with detailed
information about these meetings and the proposed merger, and includes the
merger agreement as Annex A. You can also get information about our companies
from documents we have filed with the Securities and Exchange Commission. We
encourage you to read this entire document carefully.
We strongly support the merger of our companies and join with all of the
other members of our Boards of Directors in enthusiastically recommending that
you vote in favor of the merger.
<TABLE>
<S> <C>
/s/ FRANK L. PADEN /s/ CHRISTOPHER J. SHAKER
Frank L. Paden Christopher J. Shaker
President and Secretary Chairman of the Board
Farmers National Banc Corp. Security Financial Corp.
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE SECURITIES TO BE ISSUED UNDER THE JOINT PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF ANY
BANK OR NON-BANK SUBSIDIARY OF ANY OF THE PARTIES, AND THEY ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR ANY OTHER
GOVERNMENTAL AGENCY.
JOINT PROXY STATEMENT/PROSPECTUS DATED , 2000, AND FIRST
MAILED TO STOCKHOLDERS ON OR ABOUT , 2000.
<PAGE> 3
FARMERS NATIONAL BANC CORP.
20 South Broad Street
Canfield, Ohio 44406
NOTICE OF SPECIAL MEETING OF FARMERS SHAREHOLDERS
To Be Held on , 2000
Dear Shareholder:
You are cordially invited to attend a Special Meeting of the Shareholders of
Farmers National Banc Corp. ("Farmers") to be held at , at
9:00 a.m., local time, on , 2000.
At the meeting, Farmers shareholders will be asked to consider and vote upon a
proposal to approve the principal terms of the Agreement and Plan of Merger
dated as of May 26, 2000, by and between Farmers and Security Financial Corp.
("Security"), as more fully described in the accompanying joint proxy
statement/prospectus. The merger agreement is attached to this document as Annex
A. No other business will be transacted at the meeting other than matters
incidental to the conduct of the meeting.
In the merger, Security will be merged with and into Farmers. As a result of the
merger, each share of Security common stock outstanding at the effective time of
the merger, other than shares with respect to which appraisal rights are
perfected, will be converted into a number of shares of Farmers common stock
equal to $90.00 divided by the average closing price of Farmers common stock for
the thirty (30) trading days immediately preceding the day prior to the
effective date of the merger, provided however that the number of shares of
Farmers exchanged for each share of Security shall not be less than 7.200 nor
more than 9.742, subject to certain potential adjustments described in the
merger agreement and the accompanying joint proxy statement/prospectus. No
fractional shares of Farmers common stock will be issued to holders of shares of
Security common stock, and, in lieu of such fractional shares, cash will be paid
to Security shareholders in accordance with the merger agreement.
Under the Ohio General Corporation Law, the approval of the merger requires the
affirmative vote of the holders of two-thirds (2/3) of the outstanding shares of
Farmers common stock. Shareholders of record at the close of business on
, 2000 are entitled to notice of the special meeting and to
vote at the special meeting or any adjournment or postponement of the special
meeting. The consummation of the proposed merger also requires that certain
regulatory approvals be received and that the conditions contained in the merger
agreement be satisfied.
THE FARMERS BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE MERGER, AND
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE MERGER, AT
THE MEETING.
This notice and joint proxy statement/prospectus describe the matters to be
acted upon at the meeting. Shareholders are urged to review carefully the
attached document, including its annexes. Such documents contain a detailed
description of the merger, its terms and conditions and the transactions which
are proposed.
Your continuing interest in the business of Farmers is appreciated, and we hope
you will attend the meeting in person. It is important that your shares be
represented at the meeting. Accordingly, whether or not you plan to attend the
meeting, please sign, date and return the enclosed proxy promptly in the
postage-paid envelope that has been provided to you for your convenience.
Sincerely,
/s/ Frank L. Paden
Frank L. Paden,
President and Secretary
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THIS TRANSACTION OR THE SHARES OF FARMERS COMMON STOCK
TO BE ISSUED UNDER THIS JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS
JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF FARMERS COMMON STOCK OFFERED BY THIS JOINT PROXY STATEMENT/
PROSPECTUS ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK
OR NONBANK SUBSIDIARY OF ANY OF THE PARTIES AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
For a discussion of certain risk factors which you should consider in evaluating
the merger, see "Risk Factors" beginning on page 17.
The date of this joint proxy statement/prospectus is , 2000,
and is first being mailed to Farmers shareholders on or about
, 2000.
<PAGE> 4
SECURITY FINANCIAL CORP.
One South Main Street
Niles, Ohio 44446
NOTICE OF SPECIAL MEETING OF SECURITY SHAREHOLDERS
To Be Held on , 2000
Dear Shareholder:
You are cordially invited to attend a Special Meeting of the Shareholders of
Security Financial Corp. ("Security") to be held at :00
p.m., local time, on , 2000.
At the meeting, Security shareholders will be asked to consider and vote upon a
proposal to approve the principal terms of the Agreement and Plan of Merger
dated as of May 26, 2000, by and between Security and Farmers National Banc
Corp. ("Farmers"), as more fully described in the accompanying joint proxy
statement/prospectus. The merger agreement is attached to this document as Annex
A. No other business will be transacted at the meeting other than matters
incidental to the conduct of the meeting.
In the merger, Security will be merged with and into Farmers. As a result of the
merger, each share of Security common stock outstanding at the effective time of
the merger, other than shares with respect to which appraisal rights are
perfected, will be converted into a number of shares of Farmers common stock
equal to $90.00 divided by the average closing price of Farmers common stock for
the thirty (30) trading days immediately preceding the day prior to the
effective date of the merger, provided however that the number of shares of
Farmers exchanged for each share of Security shall not be less than 7.200 nor
more than 9.742, subject to certain potential adjustments described in the
merger agreement and the accompanying joint proxy statement/prospectus. No
fractional shares of Farmers common stock will be issued to holders of shares of
Security common stock, and, in lieu of such fractional shares, cash will be paid
to Security shareholders in accordance with the merger agreement.
Under the Delaware General Corporation Law, the approval of the merger agreement
and the merger requires the affirmative vote of the holders of a majority of the
outstanding shares of Security common stock. Shareholders of record at the close
of business on , 2000, are entitled to notice of the special meeting and to vote
at the special meeting or any adjournment or postponement of the special
meeting. The consummation of the proposed merger also requires that certain
regulatory approvals be received and that the conditions contained in the merger
agreement be satisfied.
THE SECURITY BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE MERGER,
AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE MERGER,
AT THE MEETING.
This notice and joint proxy statement/prospectus describe the matters to be
acted upon at the meeting. Shareholders are urged to review carefully the
attached document, including its annexes. Such documents contain a detailed
description of the merger, its terms and conditions and the transactions which
are proposed.
Your continuing interest in the business of Security is appreciated, and we hope
you will attend the meeting in person. It is important that your shares be
represented at the meeting. Accordingly, whether or not you plan to attend the
meeting, please sign, date and return the enclosed proxy promptly in the
postage-paid envelope that has been provided to you for your convenience.
Sincerely,
/s/ Christopher J. Shaker
Christopher J. Shaker,
Chairman
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THIS TRANSACTION OR THE SHARES OF FARMERS COMMON STOCK
TO BE ISSUED UNDER THIS JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS
JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF FARMERS COMMON STOCK OFFERED BY THIS JOINT PROXY STATEMENT/
PROSPECTUS ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK
OR NONBANK SUBSIDIARY OF ANY OF THE PARTIES AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
For a discussion of certain risk factors which you should consider in evaluating
the merger, see "Risk Factors" beginning on page 17.
The date of this joint proxy statement/prospectus is , 2000, and is
first being mailed to Security shareholders on or about , 2000.
<PAGE> 5
REFERENCES TO ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important business and
financial information about Farmers National Banc Corp. and Security Financial
Corp. from documents that are not included in or delivered with this document.
This information is available to you without charge upon your written or oral
request. You can obtain documents incorporated by reference in this joint proxy
statement/prospectus, other than certain exhibits to those documents, by
requesting them in writing or by telephone from Farmers and Security at the
following addresses:
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<S> <C>
Farmers National Banc Corp. Security Financial Corp.
20 South Broad Street One South Main Street
Canfield, Ohio 44406 Niles, Ohio 44446
Attn: Frank L. Paden Attn: Stephen K. Miller
(330) 533-3341 (330) 544-7400
</TABLE>
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY ,
2000 IN ORDER TO RECEIVE THEM BEFORE THE SPECIAL MEETING.
See "Where You Can Find More Information," on page 79 for further
information.
2
<PAGE> 6
TABLE OF CONTENTS
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 6
SUMMARY..................................................... 8
The Special Meetings........................................ 8
Information Regarding Farmers and Security.................. 8
Reasons for the Merger; Recommendations of the Boards of
Directors................................................. 9
Recommendations to Shareholders............................. 9
Opinion of Security's Financial Advisor..................... 9
Opinion of Farmers' Financial Advisor....................... 9
What Security Shareholders will Receive..................... 9
Conditions to the Merger.................................... 9
Termination of the Merger Agreement......................... 10
Termination Fees............................................ 10
Required Regulatory Approvals............................... 10
Fees and Expenses of the Merger............................. 10
Income Tax Consequences of the Merger....................... 11
Accounting Treatment........................................ 11
Dissenters' Rights of Appraisal............................. 11
Share Ownership of Management............................... 11
Comparative Per Share Price Information..................... 11
Comparison of Shareholder Rights............................ 12
Description of Farmers Capital Stock........................ 12
Selected Historical and Pro Forma Financial Data............ 12
Unaudited Pro Forma Combined Selected Financial Data........ 14
Historical and Pro Forma Per Share Data for Farmers and
Security.................................................. 16
RISK FACTORS
Merger Risk Factors:
The Financial Condition of Farmers and Security May Be
Negatively Impacted by Worsening Economic Conditions,
Rising Interest Rates or Acts of Nature................... 17
Customers and Employees of Security Dollar Bank May Not Be
Retained.................................................. 17
The Price of Farmers Common Stock May Decline............... 17
Farmers Common Stock is Traded on the Over-the-Counter
Market, but an Active Trading Market May Not Develop...... 17
The Combined Companies Will Be Impacted By Competition From
Many Others............................................... 18
Additional Shares of Farmers Common Stock Could Be Issued
Which Could Result in a Decline in the Market Price of
Such Stock................................................ 18
Banking Industry Risk Factors:
Any Changes in Interest Rates or the Cost of Funds May
Adversely Affect the Combined Companies' Earnings and
Financial Condition....................................... 18
If Borrowers Do Not Repay Loans it Will Adversely Affect the
Combined Companies........................................ 19
The Business of the Combined Companies Will Be Subject to
Significant Government Regulation......................... 19
Significant Costs May Be Incurred if the Combined Companies
Foreclose on Environmentally Contaminated Real Estate..... 20
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Introduction
The Special Meetings: Dates, Times and Places............... 22
Matters to be Considered at the Special Meetings............ 22
Record Date; Stock Entitled to Vote; Quorum................. 22
Votes Required.............................................. 22
Share Ownership of Management............................... 23
</TABLE>
3
<PAGE> 7
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Voting of Proxies........................................... 24
Submitting Proxies........................................ 24
Revoking Proxies.......................................... 24
Abstentions and Broker Non-Votes.......................... 25
Recommendation of the Farmers Board of Directors and
Security Board of Directors............................ 25
FARMERS NATIONAL BANC CORP.
SELECTED CONSOLIDATED FINANCIAL INFORMATION................. 26
SECURITY FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL INFORMATION................. 27
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 28
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements................................................ 36
SUPERVISION AND REGULATION.................................. 36
GOVERNMENT REGULATION
General..................................................... 36
Holding Company Structure................................... 37
Dividend Restrictions....................................... 38
Capital Requirements........................................ 38
Federal Deposit Insurance Corporation Improvement Act of
1991...................................................... 40
Interstate Branching and Consolidations..................... 41
Gramm-Leach-Bliley Act of 1999.............................. 41
BANK REGULATION............................................. 43
INFORMATION ABOUT FARMERS AND ITS AFFILIATES................ 44
INFORMATION ABOUT SECURITY AND ITS AFFILIATES............... 44
Legal Proceedings........................................... 46
Description of Security's Common Stock...................... 46
Selection of Auditors....................................... 46
THE MERGER
Overview.................................................... 47
Background of the Merger.................................... 47
Reasons of Security for the Merger.......................... 48
Opinion of Security's Financial Advisor..................... 49
Reasons of Farmers for the Merger........................... 55
Opinion of Farmers' Financial Advisor....................... 56
Effective Date and Time of the Merger....................... 58
Purchase Price and Potential Adjustments.................... 59
Conversion of Shares of Security Common Stock............... 59
Exchange of Security Stock Certificates; Fractional
Interests................................................. 59
Treatment of Stock Options.................................. 60
Conditions to the Completion of the Merger.................. 60
Regulatory Approvals........................................ 61
Amendment, Waiver and Termination........................... 61
Conduct of Business Pending the Merger...................... 62
Fees and Expenses........................................... 63
Amendment................................................... 63
Extension; Waiver........................................... 63
Management and Operations Following the Merger.............. 63
Certain Federal Income Tax Consequences..................... 63
Accounting Treatment........................................ 65
Trading Markets for Stock................................... 65
</TABLE>
4
<PAGE> 8
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Resales of Farmers Common Stock............................. 66
DISSENTERS' RIGHTS OF APPRAISAL
Dissenters' Rights of Farmers Shareholders.................. 67
Appraisal Rights of Security Shareholders................... 68
MARKET PRICE AND DIVIDEND INFORMATION
Market Price Data........................................... 71
Dividends and Dividend Policy............................... 71
COMPARISON OF SHAREHOLDER RIGHTS
General..................................................... 72
Certain Anti-Takeover Measures.............................. 73
Quorum Requirements......................................... 74
Indemnification of Directors and Executive Officers......... 74
Overview of Ohio Law...................................... 74
Overview of Delaware Law.................................. 75
Overview of Federal Law................................... 76
Shareholder Meetings and Action by Written Consent.......... 77
Amendment of Bylaws; Number of Directors.................... 77
Filling Vacancies on the Board of Directors................. 77
Call of Special Meeting of Shareholders..................... 78
Classified Board Provisions................................. 78
DESCRIPTION OF FARMERS CAPITAL STOCK........................ 78
DESCRIPTION OF SECURITY CAPITAL STOCK....................... 78
EXPERTS..................................................... 79
LEGAL MATTERS............................................... 79
SOLICITATION OF PROXIES..................................... 79
WHERE YOU CAN FIND MORE INFORMATION......................... 79
ANNEXES
Agreement and Plan of Merger................................ Annex A
Fairness Opinion of Austin Associates, Inc.................. Annex B
Fairness Opinion of Austin Financial Services, Inc.......... Annex C
1999 Form 10-KSB of Security Financial Corp................. Annex D
June 30, 2000 Form 10-QSB of Security Financial Corp........ Annex E
Ohio Dissenters' Rights Statutes............................ Annex F
Delaware Appraisal Rights Statute........................... Annex G
</TABLE>
5
<PAGE> 9
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS THIS MERGER PROPOSED?
A: Each of the Boards of Directors of Farmers and Security believes the
merger to be in the best interests of their respective institutions,
shareholders, communities and customers. Each Board expects that the combined
companies will be stronger in terms of growth opportunities and profitability
than either institution is at present. Furthermore, it is believed that the
combined companies, as a stronger independent financial institution with a
primary market area covering a greater geographic area, will be better able to
compete with major banks and financial services companies in the communities now
served by each company.
Q: WHAT WILL I RECEIVE IN THIS MERGER?
A: Under the merger agreement, Security shareholders will have the right to
receive a number of shares of Farmers common stock equal to $90.00 divided by
the average closing price of Farmers common stock for the thirty (30) trading
days immediately preceding the day prior to the effective date of the merger,
provided however that the number of shares of Farmers exchanged for each share
of Security shall not be less than 7.200 nor more than 9.742. Farmers'
shareholders will continue to own their existing shares.
Q: WHAT WILL HAPPEN TO SECURITY IN THIS MERGER?
A: Following the merger, Security will be merged with and into Farmers.
Q: WILL THE MERGER BE TAX FREE TO ME?
A: The merger is intended to be a tax-free reorganization for federal
income tax purposes for the companies and their shareholders. In general,
Security shareholders will not recognize gain or loss on the exchange of their
stock, other than on account of cash received for a fractional share or
dissenting shares. Farmers' shareholders will not recognize any gain or loss in
connection with the merger. To review the tax consequences to Farmers and
Security shareholders in greater detail, see "The Merger--Certain Federal Income
Tax Consequences," on page 63.
Q: HOW DO I VOTE?
A: Simply indicate on your proxy card how you want to vote and then sign
and mail your proxy card in the enclosed return envelope as soon as possible so
that your shares may be represented at your special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: Your broker will not vote your shares for you unless you provide
instructions to your broker on how to vote. It is important that you follow the
directions provided by your broker regarding how to instruct your broker to vote
your shares. Your failure to instruct your broker on how to vote your shares
will have the same effect as a vote against the merger. Broker non-votes will
not have the effect of establishing appraisal rights of Security or dissenters'
rights of Farmers shareholders. See "Introduction -- Voting of Proxies --
Abstentions and Broker Non-Votes" on page 25.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You may change your vote at any time before your proxy is voted at
the special meeting. If your shares are held in your name, you may do this in
one of three ways. First, you may send a written notice stating that you would
like to revoke your proxy. Second, you may complete and submit a new proxy card.
If you choose either of these two methods, you must submit your notice of
revocation or your new proxy card to the address at the top of the notice of the
special meeting for Security or Farmers and it must be received prior to the
special meeting. Third, you may attend the meeting and vote in person if you
tell the Secretary that you want to cancel your proxy and vote in person. Simply
attending the special meeting, however, will not revoke your proxy. If you have
instructed a broker to vote your shares, you must follow directions received
from your broker to change your vote or to vote in person at the special
meeting.
6
<PAGE> 10
Q: SHOULD I SEND IN MY SECURITY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, Farmers will send you written
instructions for exchanging your Security stock certificates.
Q: WHEN DO YOU EXPECT THIS MERGER TO BE COMPLETED?
A: We are working toward completing this merger as quickly as possible. We
currently expect to complete this merger in , 2000.
Q: WHY HAVE YOU SENT ME THIS DOCUMENT?
A: This joint proxy statement/prospectus contains important information
regarding the proposed merger, as well as information about Farmers and
Security. It also contains important information about what the Farmers and
Security Boards of Directors and management considered in evaluating this
proposed merger. We urge you to read this document carefully, including its
annexes. You may also want to review the documents listed under "Where You Can
Find More Information" on page 79.
Q: WHOM SHOULD I CONTACT WITH QUESTIONS OR TO OBTAIN ADDITIONAL COPIES OF
THIS JOINT PROXY STATEMENT/PROSPECTUS?
A: You may contact either:
Farmers National Banc Corp.
20 South Broad Street
Canfield, Ohio 44406
Attention: Frank L. Paden
(330) 533-3341
or
Security Financial Corp.
One South Main Street
Niles, Ohio 44446
Attention: Stephen K. Miller
(330) 544-7400
This joint proxy statement/prospectus incorporates by reference important
business and financial information about Farmers that is not included in or
delivered with this document. The information incorporated by reference is
available without charge to shareholders upon written or oral request to the
persons identified above.
In order to ensure timely delivery of the information incorporated by
reference, shareholder requests should be received by , 2000.
7
<PAGE> 11
SUMMARY
This summary highlights certain information in this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the proposed merger fully and for a more
complete description of the terms of the proposed merger, you should carefully
read this entire document and the other documents to which we have referred you.
See "Where You Can Find More Information" (page 79). The merger agreement is
attached as Annex A to this document. We encourage you to read the merger
agreement. It is the legal document that governs the proposed merger.
THE SPECIAL MEETINGS (PAGE 22)
FARMERS SHAREHOLDERS. You can vote at the meeting of Farmers shareholders
if you owned Farmers common stock at the close of business on ,
2000. You can cast one vote for each share of Farmers common stock that you
owned at that time. In order to approve the merger of Security with Farmers, the
holders of two-thirds ( 2/3) of all of the shares of Farmers common stock must
vote in its favor. You can vote your shares by attending the Farmers meeting and
voting in person, or you can mark the enclosed proxy card with your vote, sign
it and mail it in the enclosed return envelope. You can revoke your proxy as
late as the date of the special meeting by submitting a written revocation,
sending in a new proxy or by attending the meeting and voting in person.
SECURITY SHAREHOLDERS. You can vote at the meeting of Security shareholders
if you owned Security common stock at the close of business on ,
2000. You can cast one vote for each share of Security common stock that you
owned at that time. In order to approve the merger of Security with Farmers, the
holders of at least a majority of the outstanding shares of Security common
stock must vote in its favor. You can vote your shares by attending the Security
meeting and voting in person, or you can mark the enclosed proxy card with your
vote, sign it and mail it in the enclosed return envelope. You can revoke your
proxy as late as the date of the special meeting by submitting a written
revocation, sending in a new proxy or by attending the meeting and voting in
person.
INFORMATION REGARDING FARMERS AND SECURITY (PAGE 44)
Farmers National Banc Corp.
20 South Broad Street
Canfield, Ohio 44406
Attention: Frank L. Paden
(330) 533-3341
Farmers is a bank holding company incorporated under the laws of the State
of Ohio. Farmers' principal banking subsidiary, Farmers National Bank of
Canfield ("FNBC"), is a National Banking Association organized under the laws of
the United States. Farmers National Banc Corp presently operates eleven (11)
banking offices in Mahoning and Columbiana counties, Ohio. Farmers conducts a
commercial and retail banking business, which includes accepting demand, savings
and time deposits and making commercial, real estate and consumer loans, and
provides a variety of banking services to businesses and individuals.
Security Financial Corp.
One South Main Street
Niles, Ohio 44446
Attention: Stephen K. Miller
(330) 544-7400
Security is a bank holding company incorporated under the laws of the State
of Delaware. Security's principal banking subsidiary, Security Dollar Bank, is a
commercial bank chartered under the laws of the State of Ohio. Security Dollar
Bank opened for business in November, 1904, and presently operates five banking
offices and one drive-thru branch. Its main office is in Niles, Ohio and it has
branch offices in Niles, Girard, Mineral Ridge and Warren, Ohio. Security Dollar
Bank conducts a commercial and retail banking business, which includes accepting
demand, savings and time deposits and making commercial, real estate and
consumer loans, and provides a variety of banking services to businesses and
individuals.
8
<PAGE> 12
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (PAGES 48,
55)
Each of the Boards of Directors of Farmers and Security believes the merger
to be in the best interests of their respective institutions, shareholders,
communities and customers. Each Board expects that the combined companies will
be stronger in terms of growth opportunities and profitability than is either
institution at present. Furthermore, it is believed that the combined companies,
as a stronger independent financial institution with a primary market area
covering a greater geographic area, will be better able to compete with major
banks and financial services companies in the communities now served by each
company.
RECOMMENDATIONS TO SHAREHOLDERS (PAGES 49 AND 56)
FARMERS SHAREHOLDERS. The Board of Directors of Farmers believes that the
merger is fair to you and in your best interest and unanimously recommends that
you vote "FOR" the proposal to approve the merger.
SECURITY SHAREHOLDERS. The Board of Directors of Security believes that the
merger is fair to you and in your best interest and unanimously recommends that
you vote "FOR" the proposal to approve the merger.
In evaluating the recommendations of the Boards of Directors summarized
above, shareholders should carefully consider the matters described under "Risk
Factors" and "The Merger -- Background of the Merger" and "The Merger -- Reasons
for the Merger; Recommendations of the Boards of Directors."
OPINION OF SECURITY'S FINANCIAL ADVISOR (PAGE 49)
Austin & Associates, Inc. ("AA") has delivered an opinion, dated May 26,
2000, to the Security Board of Directors that the merger is fair, from a
financial point of view, to the shareholders of Security, as of the date of such
opinion. Austin & Associates has also delivered an updated opinion that, as of
, 2000, the merger is fair from a financial point of view, to the
shareholders of Security, as of the date of such opinion. The Austin &
Associates fairness opinion, which sets forth certain assumptions made, matters
considered and limits of review undertaken, by Austin & Associates, is attached
to this joint proxy statement/prospectus as Annex B. Security shareholders are
urged to read this fairness opinion in its entirety. See "The Merger -- Opinion
of Security's Financial Advisor," which also contains a discussion of the fees
to be paid to Austin & Associates. Security has agreed to pay Austin &
Associates a customary fee for its services as its financial advisor.
OPINION OF FARMERS' FINANCIAL ADVISOR (PAGE 56)
Austin Financial Services, Inc. ("AFSI") has delivered its opinion to the
Farmers Board of Directors that, as of May 26, 2000, the exchange ratio is fair
to the holders of shares of Farmers common stock from a financial point of view.
AFSI's opinion is attached to this joint proxy statement/prospectus as Annex C.
We encourage you to read the opinion carefully and the description under "The
Merger -- Opinion of Farmers Financial Advisor" to understand the matters
considered, assumptions made and qualifications and limitations on the review
undertaken by AFSI in rendering the opinion. Farmers has agreed to pay AFSI a
fee of $12,500 for rendering its opinion.
WHAT SECURITY SHAREHOLDERS WILL RECEIVE (PAGE 59)
When the merger is completed, Security shareholders will receive a number
of shares of Farmers common stock equal to $90.00 for each share of Security
common stock held subject to adjustments if the number of shares of Farmers
stock is less than 7.200 or more than 9.742. Cash will be paid instead of
fractional shares of Farmers common stock.
CONDITIONS TO THE MERGER (PAGE 60)
We will not complete the merger unless a number of conditions are
satisfied. These include:
- approval of the principal terms of the merger agreement by both Farmers
and Security shareholders;
- receipt of all required regulatory approvals;
- absence of any restraining order, injunction or other court order
prohibiting the merger;
9
<PAGE> 13
- receipt of tax opinions to the effect that the merger will be treated as
a tax-free reorganization under the Internal Revenue Code;
- absence of any orders suspending the effectiveness of the registration
statement filed by Farmers to register the shares to be issued to
Security shareholders;
- other customary conditions.
TERMINATION OF THE MERGER AGREEMENT (PAGE 61)
Security and Farmers can mutually agree in writing to terminate the merger
agreement at any time before the merger is completed, even if the shareholders
of Security or Farmers have approved the merger agreement. In addition, either
Security or Farmers can terminate the merger agreement under the circumstances
described in this joint proxy statement/prospectus. See "The
Merger -- Amendment, Waiver and Termination."
TERMINATION FEES (PAGE 63)
Security is required to pay Farmers a $2 million fee, if Security elects to
enter into an agreement with a third party relating to a takeover proposal where
10% or more of the shares of common stock of Security or a significant
subsidiary or 10% or more of the consolidated assets of Security or a
significant subsidiary are transferred or disposed of through tender or exchange
offer, sale, merger, consolidation, business combination or similar transaction.
REQUIRED REGULATORY APPROVALS (PAGE 61)
The merger must be approved by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") pursuant to the provisions of the
Bank Holding Company Act (the "BHC Act") or be exempt under the BHC Act. A
transaction approved by the Federal Reserve Board may not be consummated for at
least 30 days (in some circumstances a 15-day waiting period is allowed) after
such approval. During such period, the Department of Justice may commence a
legal action challenging the transaction under federal antitrust laws. If the
Department of Justice does not commence a legal action during such 30-day period
(in some circumstances a 15-day waiting period is allowed), it may not
thereafter challenge the transaction except in an action commenced under the
anti-monopoly provisions of Section 2 of the Sherman Antitrust Act.
Based on current precedents, the respective managements of Farmers and
Security believe that the merger and other exemptions, consents and approvals
will be obtained from the Federal Reserve Board and the merger will not be
subject to challenge by the Department of Justice under federal antitrust laws.
However, no assurance can be provided that the Federal Reserve Board or the
Department of Justice will concur in this assessment or that any exemption or
approval granted will not contain conditions or requirements which so materially
and adversely affect the anticipated economic and business benefits of the
merger as further described in the merger agreement. If such a material and
adverse condition or requirement is imposed in connection with a governmental
approval, a condition to Farmers' obligation to consummate the merger will be
deemed not to have occurred and Farmers will have the right to terminate the
merger agreement.
The regulatory approval applications to the Federal Reserve Board and the
Department of Justice have been filed concurrently with the filing of the
registration statement filed by Farmers to register the shares to be issued to
Security shareholders.
FEES AND EXPENSES OF THE MERGER (PAGE 63)
Other than in the situations described in the following paragraphs and in
"Termination Fees" above, whether or not the merger is completed in accordance
with the merger agreement, all costs and expenses incurred in connection with
the merger agreement and the transactions covered by the merger agreement will
be paid by the party incurring those expenses.
10
<PAGE> 14
INCOME TAX CONSEQUENCES OF THE MERGER (PAGE 63)
We have structured the merger so that, in general, Farmers, Security and
the shareholders of Farmers and Security will not recognize gain or loss for
federal income tax purposes in the merger, except for taxes payable because of
cash received by Security shareholders instead of fractional shares or
dissenting shares. Each party may elect to terminate the merger if it has not
received an opinion from its counsel to the effect, among other matters, that
the merger should qualify as a tax-free reorganization.
Tax matters are very complicated. The tax consequences of the merger to you
will depend on the facts of your own situation. We urge you to consult your own
tax advisors as to the specific tax consequences of the merger, including the
applicable federal, state, local and foreign tax laws.
ACCOUNTING TREATMENT (PAGE 65)
Farmers expects to account for the merger as a "pooling-of-interests."
Under the pooling-of-interests accounting method, Farmers will carry forward on
its books the assets and liabilities of Security at their historical recorded
values.
DISSENTERS' RIGHTS OF APPRAISAL (PAGE 67)
FARMERS. No holder of Farmers common stock will be entitled to dissenters'
rights unless the holder has perfected his or her dissenter's rights in
accordance with Section 1701.85 of Ohio General Corporation Law which is
included with this joint proxy statement/prospectus as Annex F.
SECURITY. No holder of Security common stock will be entitled to appraisal
rights unless the holder has perfected his or her appraisal rights in accordance
with Section 262 of the Delaware General Corporation Law which is included with
this joint proxy statement/prospectus as Annex G.
SHARE OWNERSHIP OF MANAGEMENT (PAGE 23)
At the close of business on the record date, directors and executive
officers of Farmers and their affiliates beneficially owned and were entitled to
vote approximately 331,536 shares of Farmers common stock, which represented
approximately 4.08% of the shares of Farmers common stock outstanding on that
date. The approval of the merger agreement and the issuance of the shares of
Farmers common stock to Security's shareholders requires the affirmative vote of
a two-thirds majority of the shares of Farmers at Farmers' special meeting. An
abstention or a broker non-vote will be included in determining the number of
shares present at the meeting for the purpose of determining the presence of a
quorum. Abstentions and broker non-votes will not, however, be counted in
determining the vote to approve the merger agreement.
At the close of business on the record date, directors and executive
officers of Security and their affiliates beneficially owned and were entitled
to vote approximately 35,410 shares of Security common stock, which represented
approximately 9.79% of the shares of Security common stock outstanding on that
date. The approval of the merger agreement requires the affirmative vote of the
holders of record of at least a majority of the shares of Security common stock
outstanding on the record date for Security's special meeting. An abstention or
a broker non-vote will be included in determining the number of shares present
and voting at a meeting for the purpose of determining the presence of a quorum.
Such abstentions and broker non-votes will have the same effect as votes against
the merger agreement and consummation of the merger.
COMPARATIVE PER SHARE PRICE INFORMATION (PAGE 71)
Neither the common stock of Farmers nor Security is listed or traded on an
exchange or in any established public trading market. Farmers is aware of
periodic trading activity in its stock which is reported to Nasdaq, though there
may be transactions from time to time at prices that are not known to Farmers.
The following table sets forth the most recent sale prices known to Farmers
and Security, respectively, of Farmers common stock and Security common stock on
May 26, 2000 (the most recent day before announcement of the merger) and
, 2000 (the most recent day prior to the date of this joint proxy
state-
11
<PAGE> 15
ment/prospectus). The table also shows the number of Farmers' shares which would
have been received by Security shareholders in exchange for each share of
Security, as determined by the $90.00 per share price under the merger.
HISTORICAL SALE PRICE
<TABLE>
<CAPTION>
NUMBER OF FARMERS SHARES
FARMERS SECURITY RECEIVED FOR EACH SECURITY SHARE
------- -------- --------------------------------
<S> <C> <C> <C>
May 26, 2000................................ $10.75 $74.00 8.372
August 8, 2000.............................. $10.13 $78.00 8.621
</TABLE>
COMPARISON OF SHAREHOLDER RIGHTS (PAGE 61)
Your rights as a shareholder of Security are currently governed by Delaware
law and the Certificate of Incorporation and Bylaws of Security. If the merger
is completed, your rights as a Farmers shareholder will be governed by Ohio law
and by Farmers' Articles of Incorporation and Code of Regulations, which differ
in certain respects from Security's articles of incorporation and bylaws.
DESCRIPTION OF FARMERS CAPITAL STOCK (PAGE 65)
The authorized capital stock of Farmers consists of 12,500,000 shares of
common stock, without par value. As of March 31, 2000, 7,642,959 shares of
Farmers common stock were outstanding and an additional 375,000 shares of the
authorized Farmers common stock were available for future grant and reserved for
issuance to holders of outstanding stock options under Farmers' stock option
plan. Holders of Farmers common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. Shareholders
of Farmers are not entitled to cumulate their votes with respect to election of
directors. Shareholders are entitled to receive ratably such dividends as may be
legally declared by Farmers' Board of Directors. In the event of a liquidation,
common shareholders are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preference for securities with a priority
over the Farmers common stock. Shareholders of Farmers common stock have
pre-emptive rights. Farmers' common stock is not subject to calls or
assessments. Farmers common stock may be redeemed by a vote of the shareholders
at a regularly or specially called meeting for said purpose.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA (PAGE 17)
We are providing the following information to aid you in your analysis of
the financial effects of the merger. The following tables show financial results
actually achieved by each of Farmers and Security (the "historical" figures).
The tables also show results as if the companies had been combined for the
periods presented (the "pro forma combined" figures). Pro forma combined figures
are simply arithmetical combinations of Farmers' and Security's separate
financial results; you should not assume that Farmers and Security would have
achieved the pro forma combined results if they had actually been combined
during the periods presented. These pro forma presentations treat our companies
as if they had always been combined for accounting and financial reporting
purposes, a method known as pooling of interests accounting, which is how we
plan to account for the merger. When you read this information, you should also
read the information under the heading "Unaudited Pro Forma Condensed Combined
Financial Information." For purposes of illustration, the pro forma combined
earnings per share figures have been calculated using the exchange ratio of
8.621 Farmers share for each share of Security. This exchange ratio was
calculated in accordance with the terms of the merger agreement.
Annual historical figures are derived from consolidated financial
statements of Farmers and Security. The annual historical information presented
below should be read together with the consolidated audited financial statements
of Farmers, incorporated in this document by reference, and of Security,
appearing elsewhere in this joint proxy statement/prospectus. To find this
information, see "Where You Can Find More Information" (page 66).
12
<PAGE> 16
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FARMERS SECURITY ADJUSTMENTS 12/31/99
------- -------- ----------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans...................... $25,763 $ 9,342 $35,105
Interest and dividends on securities:
Taxable interest.............................. 3,616 1,864 5,480
Nontaxable interest........................... 712 417 1,129
Dividends..................................... 168 95 263
Interest-bearing deposits in other banks........ 0 51 51
Interest on federal funds sold.................. 252 351 603
------- ------- -- -------
TOTAL INTEREST INCOME.................... 30,511 12,120 $0 42,631
------- ------- -- -------
INTEREST EXPENSE
Deposits........................................ 10,786 5,655 16,441
Borrowings...................................... 1,788 424 2,212
------- ------- -- -------
TOTAL INTEREST EXPENSE................... 12,574 6,079 0 18,653
------- ------- -- -------
NET INTEREST INCOME...................... 17,937 6,041 0 23,978
Provision for credit losses..................... 840 970 1,810
------- ------- -- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES.............. 17,097 5,071 0 22,168
------- ------- -- -------
OTHER INCOME
Service charges on deposit accounts............. 1,163 626 1,789
Investment security gains (losses).............. (11) 7 (4)
Gain on sale of mortgage loans, net............. 0 12 12
Brokerage income................................ 0 148 148
Other operating income.......................... 482 123 605
------- ------- -- -------
TOTAL OTHER INCOME....................... 1,634 916 0 2,550
------- ------- -- -------
18,731 5,987 0 24,718
------- ------- -- -------
OTHER EXPENSES
Salaries and employee benefits.................. 5,616 2,629 8,245
Net occupancy expense of premises............... 572 381 953
Furniture/equipment expense, including
depreciation.................................. 664 438 1,102
State and local taxes........................... 593 190 783
Other operating expenses........................ 3,218 1,563 4,781
------- ------- -- -------
TOTAL OTHER EXPENSES..................... 10,663 5,201 0 15,864
------- ------- -- -------
INCOME BEFORE FEDERAL INCOME TAXES....... 8,068 786 0 8,854
FEDERAL INCOME TAXES............................ 2,544 151 2,695
------- ------- -- -------
NET INCOME............................... 5,524 635 0 6,159
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized losses on securities................. (1,168) (899) (2,067)
------- ------- -- -------
COMPREHENSIVE INCOME..................... $ 4,356 ($ 264) $0 $ 4,092
======= ======= == =======
Earnings Per Share:
Basic......................................... $ 0.73 $ 1.77 $ 0.58
Diluted....................................... $ 0.73 $ 1.77 $ 0.58
</TABLE>
13
<PAGE> 17
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA
The following table sets forth unaudited pro forma combined selected
financial data for Farmers for the six-month periods ended June 30, 2000 and
1999, and for each year in the three year period ended December 31, 1999, giving
effect to the merger, accounted for as a pooling-of-interests. The
pooling-of-interests method of accounting combines assets and liabilities at
their historical costs and restates the results of operations as if Farmers and
Security had been combined at the beginning of all reported periods. The pro
forma combined selected financial data is based on historical consolidated
financial statements of Farmers and Security and their subsidiaries after giving
effect to the pro forma adjustments described in the notes to "Unaudited Pro
Forma Condensed Combined Financial Statements." For a description of
pooling-of-interests accounting with respect to the merger, see "Accounting
Treatment."
The pro forma combined selected financial data should be read in
conjunction with the historical consolidated statements of Farmers and Security,
including the respective notes thereto, certain of which are incorporated by
reference in and certain of which are attached to this joint proxy
statement/prospectus, and in conjunction with the consolidated historical
financial data and pro forma combined financial information, including the notes
thereto, appearing elsewhere in this joint proxy statement/prospectus. See
"Where You Can Find More Information" and "Unaudited Pro Forma Condensed
Combined Financial Statements."
The pro forma financial data are not necessarily indicative of the results
that would have occurred had the merger been consummated in the past or that may
be obtained in the future. In addition, the pro forma data and ratios set forth
in the following tables do not reflect one time charges for merger transaction
costs and other special charges anticipated to be incurred by Farmers and
Security or the anticipated cost savings. As a result of these and other factors
that may occur, the combined financial condition and results of operations of
Farmers as of and after the effective date of the merger may be materially
different from that reflected herein. See "Management and Operations Following
the Merger."
14
<PAGE> 18
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
------------------ -----------------------------
2000 1999 1999 1998 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income................................... $22,514 $20,914 $42,631 $41,884 $40,424
Interest expense.................................. 10,289 9,066 18,653 19,228 18,457
Net interest income............................... 12,225 11,848 23,978 22,656 21,967
Provision for loan losses......................... 720 940 1,810 3,107 2,105
Noninterest income before investment security
gains (losses).................................. 1,316 1,207 2,554 2,526 2,678
Investment security gains (losses)................ (26) 10 (4) 56 31
Noninterest expense............................... 8,610 7,973 15,864 14,544 13,702
Income taxes...................................... 1,239 1,257 2,695 2,319 2,809
Net income........................................ 2,946 2,895 6,159 5,268 6,060
Cash dividends.................................... 2,023 1,541 3,564 2,841 2,334
PER SHARE DATA (1)
Net income:
Basic Diluted..................................... $ 0.27 $ 0.27 $ 0.58 $ 0.50 $ 0.59
Cash dividends (Farmers only)..................... 0.25 0.20 0.42 0.34 0.29
Book value, end of period close................... 6.24 5.97 6.12 5.95 5.54
Market value (Farmers end of period close)........ 9.875 37.00 13.875 42.00 31.50
</TABLE>
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
-------------------- --------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
AT PERIOD END
Assets....................................... $613,650 $580,037 $603,798 $573,695 $535,707
Loans........................................ 435,413 410,840 431,753 397,557 387,523
Deposits..................................... 470,488 464,405 476,829 470,435 451,182
Long-term debt............................... 23,593 11,043 17,354 1,697 0
Stockholders' equity......................... 67,530 63,620 66,235 62,018 55,556
AVERAGE FOR THE PERIOD
Assets....................................... $610,002 $575,582 $586,562 $549,482 $516,317
Earning Assets............................... 575,450 541,228 551,299 518,272 487,500
Loans (2).................................... 433,326 399,940 412,047 390,792 384,703
Deposits..................................... 474,603 464,025 469,112 454,281 434,067
Interest-bearing deposits.................... 428,399 418,125 420,472 410,431 392,952
Repurchase agreements and other short-term
borrowing.................................. 42,537 35,053 35,152 27,903 26,270
Long-term debt............................... 21,678 9,440 11,908 4,233 1,813
Stockholders' equity......................... 66,293 62,939 64,011 58,571 50,836
FINANCIAL RATIOS (ANNUALIZED)
Return on average:
Stockholders' equity......................... 8.89% 9.20% 9.62% 8.99% 11.92%
Earning Assets............................... 1.02% 1.07% 1.12% 1.02% 1.24%
Assets....................................... 0.97% 1.01% 1.05% 0.96% 1.17%
Average stockholders' equity/average
assets..................................... 10.87% 10.93% 10.91% 10.66% 9.85%
Dividend payout rate......................... 92.59% 74.07% 72.41% 68.00% 49.15%
-------- -------- -------- -------- --------
</TABLE>
---------------
(1) All share and per share data has been restated for the effect of common
stock dividends and splits.
(2) Average loans include nonaccrual loans.
15
<PAGE> 19
HISTORICAL AND PRO FORMA PER SHARE DATA FOR FARMERS AND SECURITY
We have calculated the pro forma combined per share data for net income
using the weighted average number of shares of Farmers common stock outstanding
for the periods presented, increased by the weighted average number of shares of
Security common stock outstanding for the periods presented multiplied by an
assumed exchange ratio of 8.621 shares of Farmers common stock for each share of
Security common stock, as if these shares were outstanding for each period
presented. This exchange ratio was calculated in accordance with the terms of
the merger agreement. The pro forma combined per share data for dividends
declared represents the historical dividends for Farmers common stock. The pro
forma combined book value per share has been calculated using shares of
outstanding Farmers common stock increased by the shares of outstanding Security
common stock multiplied by an assumed exchange ratio of 8.621 for each share of
Security common stock as if these shares were outstanding as of the dates
presented.
The pro forma Security shares information has been calculated by
multiplying the pro forma combined per share information by an assumed exchange
ratio of 8.621.
<TABLE>
<CAPTION>
EQUIVALENT
AMOUNT OF
FARMERS SECURITY PRO FORMA SECURITY
COMMON STOCK COMMON STOCK COMBINED FINANCIAL CORP.
------------ ------------ --------- ---------------
<S> <C> <C> <C> <C>
Book Value per common share:
June 30, 2000....................... $6.92 $39.52 $6.24 $53.80
June 30, 1999....................... 6.66 41.31 5.97 51.47
December 31, 1999................... 6.77 39.64 6.12 52.76
Tangible Book Value per common share:
June 30, 2000....................... 6.89 38.19 6.19 53.36
June 30, 1999....................... 6.62 36.04 5.90 50.86
December 31, 1999................... 6.74 38.21 6.05 52.16
Dividends declared:
June 30, 2000....................... 0.25 0.64 0.25 2.16
June 30, 1999....................... 0.20 0.62 0.20 1.72
December 31, 1999................... 0.42 1.24 0.42 3.62
December 31, 1998................... 0.34 1.20 0.34 2.93
December 31, 1997................... 0.29 1.09 0.29 2.50
Net income
Basic:
June 30, 2000....................... 0.37 0.28 0.27 2.33
June 30, 1999....................... 0.35 0.78 0.27 2.33
December 31, 1999................... 0.73 1.77 0.58 5.00
December 31, 1998................... 0.70 0.43 0.50 4.31
December 31, 1997................... 0.67 3.89 0.59 5.09
Diluted:
June 30, 2000....................... 0.37 0.28 0.27 2.43
June 30, 1999....................... 0.35 0.78 0.27 2.43
December 31, 1999................... 0.73 1.77 0.58 5.00
December 31, 1998................... 0.70 0.43 0.50 4.31
December 31, 1997................... 0.67 3.89 0.59 5.09
</TABLE>
16
<PAGE> 20
RISK FACTORS
In deciding whether to vote in favor of the merger, shareholders of
Security and Farmers should consider the following factors, in addition to the
other matters described or incorporated by reference in this document:
MERGER RISK FACTORS
THE FINANCIAL CONDITION OF FARMERS AND SECURITY MAY BE NEGATIVELY IMPACTED BY
WORSENING ECONOMIC CONDITIONS, RISING INTEREST RATES OR ACTS OF NATURE
The loan portfolios of Farmers and Security are partially dependent on real
estate. At December 31, 1999, real estate served as the principal source of
collateral with respect to approximately 77% of Security's loan portfolio, 54%
of Farmers' loan portfolio and 60% of pro forma combined Farmers and Security's
loan portfolio. A worsening of current economic conditions or rising interest
rates could have an adverse effect on the demand for new loans, the ability of
borrowers to repay outstanding loans, the value of real estate and other
collateral securing loans and the value of the available-for-sale investment
portfolio, as well as Farmers' and Security's financial condition and results of
operations in general and the market value for Farmers common stock and Security
common stock. Acts of nature, including earthquakes and floods, which may cause
uninsured damage and other loss of value to real estate that secures these
loans, may also negatively impact Farmers' and Security's financial condition.
CUSTOMERS AND EMPLOYEES OF SECURITY DOLLAR BANK MAY NOT BE RETAINED
Upon the consummation of the merger, Security will be merged with and into
Farmers. At that time, it is anticipated that the Security Dollar Bank will
merge with and into Farmers National Bank of Canfield ("FNBC"). The offices of
Security Dollar Bank will continue to operate in the markets they have
traditionally served. Management of Farmers expects that Farmers will be able to
serve customers of Security Dollar Bank at its existing branches. Farmers also
anticipates that, after the effective time of the merger, most of Security
Dollar Bank's existing employees and customers will choose to remain employees
and customers of the combined entity.
There are no assurances that Security Dollar Bank customers will not move
their banking relationships to other financial institutions and that a greater
than anticipated number of Security Dollar Bank employees will elect not to
remain employed by Farmers after the merger.
THE PRICE OF FARMERS COMMON STOCK MAY DECLINE
The merger consideration the Security shareholders will receive may be
affected by potential changes in the market price of Farmers common stock. If
the number of shares of Farmers common stock to be received for each share of
Security is less than 7.200 or greater than 9.742, the merger may be terminated
or the value of the number of shares may be less than $90.00. This means that at
the time of the special meetings, the Security shareholders may not know the
exact value of the Farmers common stock that they will receive when the merger
is completed. The market price of Farmers common stock when the merger takes
place may vary from the price at the date of this document and at the date of
the special meetings. Such variations in the market price of Farmers common
stock may result from changes in the business, operations or prospects of
Farmers, Security or the combined company, market assessments of the likelihood
that the merger will be consummated and the timing thereof, regulatory
considerations, general market and economic conditions and other factors. We
urge you to obtain current market quotations for Farmers common stock. See "The
Merger -- Purchase Price and Potential Adjustments."
FARMERS COMMON STOCK IS TRADED ON THE OVER-THE-COUNTER MARKET, BUT AN ACTIVE
TRADING MARKET MAY NOT DEVELOP
The common stock of Farmers is not listed or traded on an exchange or in
any established public trading market. Based on periodic trading activity
reported to NASDAQ, Farmers believes an average of approximately 35,440 shares
of Farmers common stock are traded per month. Because Farmers does not expect to
list its
17
<PAGE> 21
common stock on any exchange or seek quotation of its common stock on the Nasdaq
Stock Market in the near future, no established public trading market for the
Farmers common stock is expected to develop for the foreseeable future.
THE COMBINED COMPANIES WILL BE IMPACTED BY COMPETITION FROM MANY OTHERS
The commercial banking business is extremely competitive. Many of the
competitors of the combined companies are, or are affiliates of, enterprises
that have greater resources than the combined companies.
Through their various businesses, the combined companies will compete with
many different institutions, including:
- other banks and thrift institutions;
- credit unions; and
- mortgage companies.
Some of the combined companies' competitors are not regulated as
extensively as Farmers and Security are and, therefore, may have greater
flexibility in competing for business. Some of these competitors are subject to
similar regulation but have the advantages of established customer bases, higher
lending limits, extensive branch networks, numerous automated teller machines or
other factors. The failure of the combined companies to compete effectively in
the markets they serve could have an adverse effect on their financial
condition.
In addition to traditional competitive forces in the banking industry, the
passage of the Gramm-Leach-Bliley Act of 1999 may accelerate trends toward
larger financial services companies offering a wider range of products and
services. This major banking legislation now permits affiliation among
depository institutions and entities whose activities are considered "financial
in nature." Activities which are expressly considered financial in nature
include securities and insurance underwriting and agency, investment management
and merchant banking. The affiliated entities resulting from this legislation
may have increased resources and market power which may adversely affect the
ability of the combined companies to compete effectively.
ADDITIONAL SHARES OF FARMERS COMMON STOCK COULD BE ISSUED WHICH COULD RESULT IN
A DECLINE IN THE MARKET PRICE OF SUCH STOCK
Shares of Farmers common stock eligible for future sale could have a
dilutive effect on the market for Farmers common stock and could adversely
affect the market price. The Articles of Incorporation of Farmers authorizes the
issuance of 12,500,000 shares of common stock, without par value. As of June 30,
2000, 7,689,807 shares of common stock were outstanding. Pursuant to its stock
option plans, at May 11, 2000, Farmers had outstanding options to purchase an
aggregate of 38,000 shares of Farmers common stock. As of June 30, 2000, 337,000
shares of Farmers common stock remained available for option grants under
Farmers' stock option plans. The merger agreement does not restrict Farmers'
ability to grant additional options under Farmers' stock option plan or with
respect to a takeover proposal to which Farmers is a party. See "The
Merger -- Purchase Price and Potential Adjustments." Sales of substantial
amounts of Farmers common stock in the public market following the merger could
adversely affect the market price of Farmers common stock.
There are no restrictions in the merger agreement preventing Farmers from
issuing additional shares of Farmers common stock after the merger. There can be
no assurance given as to the market value of Farmers common stock after the
merger based on future acquisitions, if any, or other factors, including but not
limited to, general economic conditions or fluctuating interest rates.
BANKING INDUSTRY RISK FACTORS
ANY CHANGES IN INTEREST RATES OR THE COST OF FUNDS MAY ADVERSELY AFFECT THE
COMBINED COMPANIES' EARNINGS AND FINANCIAL CONDITION
Changes in interest rates will affect the operating performance and
financial condition of the combined companies in diverse ways. The profitability
of the combined companies will depend in substantial part on the "net interest
spread," which is the difference between the rates received on loans and
investments and the rates
18
<PAGE> 22
paid for deposits and other sources of funds. The net interest spread of the
combined companies will depend on many factors that are partly or entirely
outside their control, including competition, federal economic, monetary and
fiscal policies, and economic conditions generally. Historically, net interest
spreads for many financial institutions have widened and narrowed in response to
these and other factors, which are often collectively referred to as "interest
rate risk." We intend to try to minimize the combined companies' exposure to
interest rate risk, but we will be unable to eliminate it.
In their banking operations, the combined companies will be subject to
interest rate risk on loans and investments held in their portfolios arising
from mismatches (i.e., the interest rate sensitivity gap) between the dollar
amount of repricing or maturing assets and liabilities, which is measured in
terms of the ratio of the interest rate sensitivity gap to total assets. A
higher level of assets repricing or maturing than liabilities over a given time
frame is considered asset-sensitive and is reflected as a positive gap. In
contrast, a higher level of liabilities repricing or maturing than assets over a
given time frame is considered liability-sensitive and is reflected as a
negative gap. An asset-sensitive position (i.e., a positive gap) will generally
enhance earnings in a rising interest rate environment and will negatively
impact earnings in a falling interest rate environment. A liability-sensitive
position (i.e., a negative gap) will generally enhance earnings in a falling
interest rate environment and negatively impact earnings in a rising interest
rate environment. Fluctuations in interest rates are not predictable or
controllable. We cannot give any assurance that a sudden or significant change
in prevailing interest rates will not have a material adverse effect on the
combined companies' operating results.
IF BORROWERS DO NOT REPAY LOANS IT WILL ADVERSELY AFFECT THE COMBINED COMPANIES
Some borrowers may not repay loans that the combined companies make to
them. This risk is inherent in the commercial banking business. If a significant
amount of loans are not repaid, it would have an adverse effect on the combined
companies' earnings and overall financial condition, and could cause the
insolvency of the combined companies. The combined companies will maintain an
allowance for loan losses to provide for loan defaults and nonperformance. The
allowance for loan losses will be maintained at a level management believes is
adequate to absorb losses inherent in the loan portfolio, an evaluation that
will be primarily based upon a review of the combined companies' and the banking
industry's historical loan loss experience, known and inherent risks contained
in the loan portfolio, composition, and growth of the loan portfolio, and
current and projected economic factors. However, the combined companies'
allowance for loan losses may not be adequate to cover actual losses, and future
provisions for loan losses may adversely affect the combined companies'
earnings. In addition, various regulatory agencies, as an integral part of the
examination process, will periodically review the combined companies' loan
portfolios. No such agencies may require the combined companies to add to the
allowance for loan losses based on their judgments and interpretations of
information available to them at the time of their examinations.
THE BUSINESS OF THE COMBINED COMPANIES WILL BE SUBJECT TO SIGNIFICANT GOVERNMENT
REGULATION
On March 17, 2000, the Board of Directors of Security Dollar Bank approved
and entered into a written regulatory agreement between Security Dollar Bank and
its regulators, the Federal Reserve Bank of Cleveland and the Ohio Division of
Financial Institutions. This agreement requires the Board of Directors of
Security Dollar Bank to adopt a plan and implement policies and procedures, the
purposes of which are to provide greater Board of Director oversight, control
and supervision of Security Dollar Bank's senior management and major operations
and activities in the general areas of: operations, lending, liquidity, interest
rate risk positions, internal controls, record keeping , internal audit
functions, risk management, management structure, capital levels, operating
performance and periodic reporting. The agreement also provides that Security
Dollar Bank will only pay dividends with the prior written approval of its
primary regulators. The agreement was executed in accordance with current
banking regulations and will remain in effect until terminated or suspended by
Security Dollar Bank's regulators. Non compliance with the agreement could
result in additional constraints on the conduct of business by Security Dollar
Bank. To date, Security Dollar Bank has complied with all requirements of the
written regulatory agreement. It is anticipated by Farmers that Security Dollar
Bank will be merged with and into Farmers National Bank of Canfield. Farmers
anticipates that upon the merger of the banks being consummated, the written
regulatory agreement will be terminated.
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<PAGE> 23
The banking industry is heavily regulated. The success of the combined
companies will depend not only on competitive factors but also on the cost of
complying with state and federal regulations affecting banks and bank holding
companies. The combined companies will be subject to regulation by the Ohio
Division of Financial Institutions, the Office of the Comptroller of the
Currency, and the Board of Governors of the Federal Reserve System. These
regulations will put the combined companies at a competitive disadvantage
compared to less regulated competitors such as finance companies, mortgage
banking companies and leasing companies. Banking industry regulations are
primarily intended to protect depositors, not shareholders, and are subject to
continuous change. The ultimate effect of regulatory change cannot be predicted
with certainty. Additional statutes affecting financial institutions may be
proposed and enacted in the future. There can be no assurance that the cost of
complying with government regulations will not adversely affect the business or
economic performance of the combined companies.
The Gramm-Leach-Bliley Act was signed into law on November 12, 1999. This
major banking legislation now permits affiliation among depository institutions
and entities whose activities are considered "financial in nature." Activities
which are expressly considered financial in nature include securities and
insurance underwriting and agency, investment management and merchant banking.
With certain exceptions, this act similarly expanded the authorized activities
of subsidiaries of national banks and, indirectly, through the provisions of
state law, Ohio banks. In general, these expanded powers are reserved to bank
holding companies and banks where all depository institutions affiliated with
them are well capitalized and well managed based on applicable banking
regulation. These provisions became effective March 11, 2000. The act clarifies
the regulation by states of insurance products sold by depository institutions,
imposes rules on data privacy and repeals some of the exemptions enjoyed by
banks under federal securities laws relating to the offering of securities and
the licensing of broker-dealers and investment advisors. This act will be the
subject of extensive rule making by federal banking regulators and others.
Although the effects of this legislation will only begin to be understood over
the next several years and cannot presently be predicted with any certainty, it
may accelerate trends toward larger financial services companies offering a
wider range of products and services. Firms of this type may have increased
resources and market power which may adversely affect the ability of the
combined companies to compete effectively.
SIGNIFICANT COSTS MAY BE INCURRED IF THE COMBINED COMPANIES FORECLOSE ON
ENVIRONMENTALLY CONTAMINATED REAL ESTATE
If the combined companies foreclose on a defaulted real estate loan to
recover an investment in such real estate loan, there may be significant
environmental liabilities in connection with the underlying real property. These
liabilities could exceed the fair value of the real property. It is also
possible that hazardous substances or wastes, contaminants, pollutants or their
sources (as defined by state and federal laws and regulations) may be discovered
on properties during the combined companies' ownership or after they are sold to
a third party. If they are discovered on a property that the combined companies
have acquired through foreclosure or otherwise, the combined companies may be
required to remove those substances and clean-up the property. The combined
companies may have to pay for the entire cost of any removal and clean-up
without the contribution of any other third parties. These costs may also exceed
the fair value of the property. The combined companies may also be liable to
tenants and other users of neighboring properties. In addition, the combined
companies may find it difficult or impossible to sell the property prior to or
following any such clean-up.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus contains forward-looking statements
regarding each of Security and Farmers and the combined company following the
merger, including statements relating to:
- the financial condition, results of operations and business of Farmers
following completion of the merger, and
- enhanced revenues and accretion to reported earnings that are expected to
be realized from the merger.
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<PAGE> 24
These forward-looking statements involve certain risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities:
- revenues following the merger are lower than expected or deposit
withdrawals, operating costs or customer loss and business disruption
following the merger may be greater than expected;
- competitive pressures among depository and other financial services
companies increase significantly;
- costs or difficulties related to the integration of the businesses of
Farmers and Security are greater than expected;
- changes in the interest rate environment reduce interest margins, cause
an increase in the prepayment rate on mortgages and other loans or reduce
the demand for new loans;
- general economic or business conditions, either internationally,
nationally or in the states in which the combined company will be doing
business, are less favorable than expected, resulting in, among other
things, a deterioration in credit quality or a reduced demand for credit;
- legislation or regulatory requirements or changes adversely affect the
businesses in which the combined company would be engaged;
- technology-related changes may be harder to make or more expensive than
expected;
- changes in the securities market; and
- timing of completion of the merger may be delayed, due to regulatory
requirements or other factors which may delay, restrict or prohibit new
operations.
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<PAGE> 25
INTRODUCTION
THE SPECIAL MEETINGS: DATES, TIMES AND PLACES
FARMERS. The special meeting of Farmers National Banc Corp. ("Farmers")
will be held at Colonial Catering, 429 Lisbon Street, Canfield, Ohio 44406, at
9:00 a.m., local time, on , 2000.
SECURITY. The special meeting of Security Financial Corp. ("Security") will
be held at the , at .m., local time, on ,
2000.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
FARMERS. At Farmers' special meeting, holders of Farmers common stock are
being asked to approve the merger agreement. See "The Merger."
SECURITY. At Security's special meeting, holders of Security common stock
are being asked to approve the merger agreement. See "The Merger."
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
FARMERS. Only holders of record of Farmers common stock at the close of
business on , 2000, the record date for Farmers' special meeting,
are entitled to receive notice of and to vote at Farmers' special meeting. On
the record date, approximately shares of Farmers common stock were issued
and outstanding and held by approximately holders of record. A majority of
the shares of Farmers common stock issued and outstanding and entitled to vote
on the record date must be represented in person or by proxy at Farmers' special
meeting in order for a quorum to be present for purposes of transacting business
at Farmers' special meeting. In the event that a quorum is not present at
Farmers' special meeting, it is expected that the meeting will be adjourned or
postponed to solicit additional proxies. Holders of record of Farmers common
stock on the record date are each entitled to one vote per share on each matter
to be considered at Farmers' special meeting.
SECURITY. Only holders of record of Security common stock at the close of
business on , 2000, the record date for Security's special
meeting, are entitled to receive notice of and to vote at Security's special
meeting. On the record date, approximately shares of Security common
stock were issued and outstanding and held by approximately holders of
record. A majority of the shares of Security common stock issued and outstanding
and entitled to vote on the record date must be represented in person or by
proxy at Security's special meeting in order for a quorum to be present for
purposes of transacting business at Security's special meeting. In the event
that a quorum is not present at Security's special meeting, it is expected that
the meeting will be adjourned or postponed to solicit additional proxies.
Holders of record of Security common stock on the record date are each entitled
to one vote per share on each matter to be considered at Security's special
meeting.
VOTES REQUIRED
FARMERS. The approval of the merger agreement and the issuance of the
shares of Farmers common stock to Security's shareholders requires the
affirmative vote of the holders of record of a two-third's majority of the
shares of Farmers common stock outstanding on the record date for the Farmers
special meeting. An abstention or a broker non-vote will be included in
determining the number of shares present at the meeting for the purpose of
determining the presence of a quorum. Abstentions and broker non-votes will not,
however, be counted in determining the vote to approve the merger agreement. See
"-- Voting of Proxies -- Abstentions and Broker Non-Votes."
SECURITY. The approval of the merger agreement requires the affirmative
vote of the holders of record of at least a majority of the shares of Security
common stock outstanding on the record date for Security's special meeting. An
abstention or a broker non-vote will be included in determining the number of
shares present and voting at a meeting for the purpose of determining the
presence of a quorum. Such abstentions and broker non-votes will have the same
effect as votes against the merger agreement and consummation of the merger. See
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<PAGE> 26
"-- Voting of Proxies -- Abstentions and Broker Non-Votes" and "Dissenters'
Rights of Appraisal -- Appraisal Rights of Security Shareholders."
SHARE OWNERSHIP OF MANAGEMENT
FARMERS. At the close of business on the record date, directors and
executive officers of Farmers and their affiliates beneficially owned and were
entitled to vote approximately shares of Farmers common stock, which
represented approximately % of the shares of Farmers common stock
outstanding on that date. Each of those directors and executive officers has
agreed to vote, or cause to be voted, the Farmers common stock owned by him or
her FOR approval of the merger agreement at Farmers' special meeting.
As of the record date, the directors and executive officers of Farmers
beneficially owned shares of Farmers common stock as described in the following
table. Unless otherwise indicated, each director and executive officer listed
below possesses sole voting power and sole investment power. All of the shares
shown in the following table are owned both of record and beneficially except as
indicated in the notes to the table.
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF SHARES PERCENT OF
NAME POSITION BENEFICIALLY OWNED (A) OUTSTANDING SHARES
---- -------- -------------------------- ------------------
<S> <C> <C> <C>
Benjamin R. Brown........... Director 49,453 .65%
Richard L. Calvin........... Director 68,650 .90%
Joseph D. Lane.............. Director 8,015 .01%
David C. Myers.............. Director 48,409 .63%
Edward A. Ort............... Director 14,188 .19%
Frank L. Paden.............. Director, President, Secretary 18,716 .25%
William D. Stewart.......... Director 58,059 .76%
Ronald V. Wertz............. Director 58,905 .77%
Executive Officers as a
Group..................... 25,857(B) .34%
All Directors and Executive
Officers as a Group....... 331,536 4.08%
</TABLE>
---------------
(A) Information relating to beneficial ownership is based upon information
available to Farmers and uses "Beneficial Ownership" concepts set forth in
the rules of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended. Under such rules, Beneficial Ownership
includes those shares over which an individual has sole or shared voting,
and/or investment powers such as beneficial interest of a spouse, minor
children, or other relatives living in the home of the named individual,
trusts, estates and certain affiliated companies.
(B) Includes 18,716 shares held by Frank L. Paden, President and CEO of Farmers
National Bank of Canfield and President and Secretary of Farmers.
SECURITY. As of the record date, the directors and executive officers of
Security beneficially owned shares of Security common stock as described in the
following table. Unless otherwise indicated, each director and executive officer
listed below possesses sole voting power and sole investment power. All of the
shares shown in
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<PAGE> 27
the following table are owned both of record and beneficially except as
indicated in the notes to the table. The address for beneficial owners is the
address of Security, One South Main, Niles, Ohio 44446.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER POSITION BENEFICIAL OWNERSHIP (A)(B) PERCENT OF CLASS
------------------------ -------- --------------------------- ----------------
<S> <C> <C> <C>
Robert I. Griffith, Jr............... Director 2,993(C)(G) .83%
Robert J. McClurkin.................. Director 3,573(D)(G) .99%
Peter P. Rossi, Jr................... Director 9,693(E)(G) 2.68%
Christopher J. Shaker................ Director 7,945(G) 2.20%
Stephen K. Miller.................... Executive Manager 110(F) .03%
All Directors and Executive Officers
as a Group (5 persons)............. 24,314 6.72%
</TABLE>
---------------
(A) Less than 1%: Pursuant to the rules of the Securities and Exchange
Commission, certain shares of Common Stock which a person has the right
to acquire within 60 days pursuant to the exercise of stock options and
warrants are deemed to be outstanding for the purpose of computing
beneficial ownership and the percentages of ownership of that person, but
are not deemed outstanding for the purposes of computing the percentage
ownership of any other person. All directors and officers as a group hold
options to purchase an aggregate of shares of Common
Stock.
(B) Unless otherwise indicated, the named person has sole voting and
dispositive power for all shares shown.
(C) Includes 11 in the name of The Griffith Agency, 56 shares held for the
benefit of children, 611 shares held by spouse and spouse's IRA and 710
held by an IRA for the benefit of the named person.
(D) Includes 1,209 held jointly with spouse, 854 held jointly with children,
and 850 held by spouse.
(E) Includes 5,028 shares held jointly with spouse and 2,142 held by
controlled company.
(F) Includes 8 shares held jointly with spouse, and 102 shares held by an IRA
for the benefit of the named person.
(G) Includes shares of common stock subject to options granted pursuant to
the 1997 Stock Option Plan for which options are exercisable within 60
days of the voting record date.
VOTING OF PROXIES
Submitting Proxies. Farmers and Security shareholders may vote their shares
in person by attending their respective special meeting or vote their shares by
proxy by completing the enclosed proxy card, signing and dating it and mailing
it in the enclosed postage-paid envelope. IF A WRITTEN PROXY CARD IS SIGNED BY A
SHAREHOLDER AND RETURNED WITHOUT INSTRUCTIONS, THE SHARES REPRESENTED BY THE
PROXY WILL BE VOTED FOR THE PROPOSALS PRESENTED AT FARMERS' SPECIAL MEETING OR
FOR THE PROPOSALS PRESENTED AT SECURITY'S SPECIAL MEETING, AS APPLICABLE.
Farmers and Security shareholders whose shares are held in "street name" (i.e.,
in the name of a broker, bank or other record holder) must either direct the
record holder of their shares as to how to vote their shares or obtain a proxy
from the record holder to vote at their respective special meeting.
Revoking Proxies. Farmers and Security shareholders of record may revoke
their proxies at any time before the time their proxies are voted at Farmers'
special meeting or Security's special meeting, respectively. Proxies may be
revoked by written notice, including by telegram or telecopy, to the Corporate
Secretary of Farmers or Security, as applicable, by a later-dated proxy signed
and returned by mail or by attending Farmers' special meeting or Security's
special meeting, as applicable, and voting in person. Attendance at Farmers'
special meeting or Security's special meeting will not in and of itself
constitute a revocation of a proxy. The shareholder must inform the secretary at
the special meeting, prior to the vote, that he or she wants to revoke his or
her proxy
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<PAGE> 28
and vote in person. Any written notice of a revocation of a proxy must be sent
so as to be delivered before the taking of the vote at the applicable special
meeting as follows:
<TABLE>
<S> <C>
For Farmers Shareholders, To: For Security Shareholders, To:
Farmers National Banc Corp. Security Financial Corp.
20 South Broad Street One South Main Street
Canfield, Ohio 44406 Niles, Ohio 44446
Attention: Frank L. Paden Attention: Lynn M. Bowers
</TABLE>
Abstentions and Broker Non-Votes. The presence, in person or by properly
executed proxy, of the holders of a majority of the outstanding shares is
necessary to constitute a quorum at each of Farmers' special meeting and
Security's special meeting. Abstentions and broker non-votes (as described
below) will be counted solely for the purpose of determining whether a quorum is
present. Under the applicable rules of the National Association of Securities
Dealers, Inc., brokers or members who hold shares in street name for customers
who are the beneficial owners of such shares are prohibited from giving a proxy
to vote those shares with respect to the approval of the merger agreement in the
absence of specific instructions from such customers. We refer to these as
"broker non-votes." Abstentions and broker non-votes will have the same effect
as a vote against the merger agreement at the Security special meeting but will
not be counted in determining the vote to approve the merger agreement at the
Farmers special meeting. Abstentions and broker non-votes will not, however,
have the effect of establishing appraisal rights of Security shareholders or
dissenters' rights of Farmers' shareholders. See "Dissenters' Rights of
Appraisal -- Dissenters' Rights of Farmers Shareholders and Appraisal Rights of
Security Shareholders."
If any other matters are properly presented for consideration at Farmers'
special meeting, in the case of the Farmers shareholders, or at Security's
special meeting, in the case of the Security shareholders, the persons named in
the enclosed form of proxy will have discretion to vote or not vote on those
matters in accordance with their best judgment, unless authorization to use that
discretion is withheld. If a proposal to adjourn Farmers' special meeting or
Security's special meeting is properly presented, however, the persons named in
the enclosed form of proxy will not have discretion to vote in favor of the
adjournment proposal any shares which have been voted against the proposal(s) to
be presented at the respective special meetings.
Neither Farmers nor Security is aware of any matters expected to be
presented at its respective special meeting other than as described in their
respective notice of special meeting. The cost of solicitation of proxies will
be paid by Farmers and Security, as applicable. In addition to solicitation by
mail, the directors, officers and employees of Farmers and Security may also
solicit proxies from shareholders by telephone, facsimile, telegram or in
person. Arrangements will also be made with brokerage houses and other
custodians, nominees and fiduciaries to send the proxy materials to beneficial
owners; and Farmers or Security, as the case may be, will, upon request,
reimburse those brokerage houses and custodians for their reasonable expenses in
so doing. Neither Farmers nor Security has retained a proxy solicitor.
Shareholders who submit proxy cards should not send in any stock
certificates with their proxy cards. A letter of transmittal with instructions
for the surrender of certificates representing shares of Security common stock
will be mailed by Farmers to former Security shareholders shortly after the
merger is completed. See "The Merger -- Exchange of Security Stock Certificates;
Fractional Interests."
RECOMMENDATION OF THE FARMERS BOARD OF DIRECTORS AND SECURITY BOARD OF
DIRECTORS. EACH OF THE FARMERS BOARD OF DIRECTORS AND SECURITY BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER DESCRIBED ABOVE AND UNANIMOUSLY
RECOMMENDS THAT THEIR RESPECTIVE SHAREHOLDERS VOTE FOR THE MERGER AT THEIR
RESPECTIVE SPECIAL MEETINGS.
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<PAGE> 29
FARMERS NATIONAL BANC CORP.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
This section presents selected historical financial information of Farmers.
You should read carefully Farmers' financial statements incorporated by
reference in this prospectus, including the notes to the financial statements.
The selected information in this section is not intended to replace the
financial statements. The information below also should be read in conjunction
with "Unaudited Pro Forma Condensed Combined Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated by reference in this prospectus.
Farmers derived the selected consolidated statement of income information
presented below for each of its 1999, 1998, 1997, 1996 and 1995 years and the
balance sheet data at December 31, 1999, 1998, 1997, 1996 and 1995 from its
audited consolidated financial information.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED
JUNE 30 FISCAL YEAR ENDED DECEMBER 31
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Net interest income.......................... $ 9,177 $ 8,739 $ 17,937 $ 16,491 $ 15,447 $ 14,121 $ 12,272
Provision for possible loan or lease
losses..................................... 420 420 840 840 855 655 270
Other income................................. 916 803 1,634 1,698 1,768 1,478 1,342
Other expense................................ 5,582 5,295 10,663 9,815 9,418 8,883 8,118
-------- -------- -------- -------- -------- -------- --------
Income before income taxes................... 4,091 3,827 8,068 7,534 6,942 6,061 5,226
Income taxes................................. 1,247 1,210 2,544 2,419 2,200 1,930 1,650
-------- -------- -------- -------- -------- -------- --------
Net income................................... $ 2,844 $ 2,617 $ 5,524 $ 5,115 $ 4,742 $ 4,131 $ 3,576
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:(1)
Net Income per share-basic................... $ 0.37 $ 0.35 $ 0.73 $ 0.70 $ 0.67 $ 0.58 $ 0.51
Net Income per share-diluted................. 0.37 0.35 0.73 0.70 0.67 0.58 0.51
Cash dividends per share..................... 0.25 0.20 0.42 0.34 0.29 0.22 0.20
Book value per common share.................. 6.92 6.66 6.77 6.47 5.86 5.26 5.17
Tangible book value per common share......... 6.90 6.62 6.74 6.42 5.82 5.20 5.11
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets..................................... $447,841 $408,408 $431,130 $401,621 $368,449 $338,112 $314,229
Loans and leases........................... 331,480 304,106 322,635 286,802 275,094 266,702 232,160
Allowance for loan losses.................. 4,397 3,877 4,128 3,689 3,429 3,198 2,911
Deposits................................... 330,194 318,474 331,463 321,518 305,830 283,810 267,955
Long-term obligations...................... 22,593 8,043 14,354 1,697 0 0 0
Shareholders' equity....................... 53,233 49,236 51,894 47,274 40,923 34,809 33,976
Average balance sheet amounts:
Assets................................... $440,140 $404,453 $412,802 $381,078 $354,005 $325,537 $297,159
Loans and leases (2)..................... 326,442 291,882 303,914 281,660 268,581 250,616 221,955
Earning assets........................... 418,443 382,803 391,068 361,840 337,289 308,890 281,569
Interest-bearing liabilities............. 356,634 326,322 332,595 307,694 291,375 265,771 242,481
Shareholders' equity..................... 51,996 48,349 49,512 43,888 37,431 35,629 31,177
SELECTED RATIOS:
Return on average equity..................... 11.00% 10.91% 11.16% 11.65% 12.67% 11.60% 11.45%
Return on average tangible equity............ 11.05 10.93 11.22 11.73 12.78 11.71 11.57
Return on average assets..................... 1.30 1.30 1.34 1.34 1.34 1.27 1.20
Efficiency ratio (non-interest expense as a
percentage of total revenues).............. 55.31 55.49 54.48 53.96 54.71 56.50 59.63
Average equity to average assets............. 11.81 11.95 11.99 11.52 10.57 10.94 10.49
Leveraged capital ratio...................... 11.37 11.17 11.47 10.85 9.89 10.18 10.69
Cost of interest-bearing liabilities......... 4.07 3.76 3.78 4.14 4.16 4.05 4.00
Net interest margin.......................... 4.53 4.68 4.68 4.64 4.65 4.65 4.44
Nonperforming loans and leases to total loans
and leases................................. 0.31 0.25 0.23 0.35 0.33 0.79 0.68
Nonperforming assets to total assets......... 0.23 0.18 0.17 0.25 0.24 0.62 0.5
Net chargeoffs (recoveries) to average loans
and leases................................. 0.09 0.16 0.13 0.21 0.23 0.15 0.05
Allowance for loan or lease losses to total
loans and leases........................... 1.33 1.27 1.28 1.29 1.25 1.20 1.25
</TABLE>
---------------
(1) All share and per share data have been restated for the effect of common
stock dividends and splits.
(2) Average loans include nonaccrual loans.
26
<PAGE> 30
SECURITY FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
This section presents selected historical financial information of
Security. You should read carefully Security's financial statements contained in
this prospectus, including the notes to the financial statements. The selected
information in this section is not intended to replace the financial statements.
The information below also should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Security Financial Corp." appearing in Security's Form 10-KSB,
attached as Annex D.
Security derived the selected consolidated statement of income information
presented below for each of its 1999, 1998, 1997, 1996 and 1995 years and the
balance sheet data at December 31, 1999, 1998, 1997, 1996 and 1995 from audited
consolidated financial information. Selected consolidated statement of income
information presented below for each of its 1997, 1996 and 1995 years and
balance sheet data as of December 31, 1997, 1996 and 1995 were derived from
audited financial statements that are not included herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED
JUNE 30, FISCAL YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Net interest income............... $ 3,048 $ 3,109 $ 6,041 $ 6,165 $ 6,520 $ 5,812 $ 4,752
Provisions for possible loan or
lease losses.................... 300 520 970 2,267 1,250 668 198
Non-interest income............... 374 414 916 885 941 827 750
Non-interest expense.............. 3,028 2,678 5,201 4,730 4,284 4,186 3,832
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes........................... 94 325 786 53 1,927 1,785 1,472
Income tax expense (benefit)...... (8) 47 151 (100) 609 543 422
-------- -------- -------- -------- -------- -------- --------
Net income........................ $ 102 $ 278 $ 635 $ 153 $ 1,318 $ 1,242 $ 1,050
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Net income per share-basic........ $ 0.28 $ 0.78 $ 1.77 $ 0.43 $ 3.89 $ 4.22 $ 3.65
Net income per share-diluted...... 0.28 0.78 1.77 0.43 3.89 4.22 3.65
Cash dividends per share.......... 0.32 0.31 1.24 1.20 1.09 0.94 0.84
Book value per common share....... 39.52 40.11 39.64 41.25 41.40 36.37 33.42
Tangible book value per common
share........................... 38.21 39.75 38.23 39.63 39.55 33.92 33.42
BALANCE SHEET DATA:
Balance sheet totals-end of
period:
Assets.......................... $165,809 $171,629 $172,667 $172,074 $167,258 $152,899 $127,064
Loans........................... 103,933 106,734 109,118 110,755 112,429 114,989 83,227
Allowance for loan losses....... (1,793) (1,863) (1,650) (1,803) (1,678) (1,679) (1,239)
Deposits........................ 140,294 145,931 145,366 148,917 145,352 129,670 109,571
Long-term obligations........... 1,000 3,000 3,000 0 0 0 1,900
Shareholders' equity............ 14,297 14,384 14,341 14,744 14,633 10,779 9,789
Average balance sheet amounts:
Assets.......................... $169,862 $171,129 $173,760 $168,404 $162,312 $139,982 $117,472
Loans........................... 106,884 108,058 108,133 109,132 116,122 99,108 75,507
Earning assets.................. 157,007 158,425 160,231 156,432 150,211 130,039 108,471
Interest-bearing liabilities.... 135,980 136,296 137,532 134,873 129,660 112,625 94,644
Shareholders' equity............ 14,297 14,590 14,499 14,683 13,405 10,284 9,089
SELECTED RATIOS:
Return on average equity.......... 1.43% 3.84% 4.38% 1.04% 9.83% 12.14% 12.51%
Return on average tangible
equity.......................... 1.94 4.34 4.55 1.09 10.36 12.86 11.55
Return on average assets.......... 0.12 0.33 0.37 0.09 0.81 0.86 0.90
Efficiency ratio (non-interest
expense......................... 88.49 76.01 74.76 67.09 57.42 63.05 69.65
as a percentage of total
revenues)
Average equity to average
assets.......................... 8.42 8.53 8.34 8.72 8.26 7.12 7.19
Leveraged capital ratio........... 8.33 7.91 8.47 8.12 8.52 6.18 7.32
Cost of interest-bearing
liabilities..................... 4.54 4.41 4.42 4.81 4.88 4.85 4.48
Net interest margin............... 3.91 3.98 3.77 4.08 4.34 4.47 4.38
Nonperforming loans and leases to
total........................... 1.12 1.38 1.12 1.22 2.48 1.82 0.63
loans and leases
Nonperforming assets to total
assets.......................... 0.70 0.85 0.72 0.95 1.69 1.39 0.77
Net chargeoffs (recoveries) to
average loans and leases........ 0.30 0.11 1.04 1.96 1.08 0.23 0.50
Allowance for loan or lease losses
to total loans and leases....... 1.73 1.75 1.51 1.63 1.49 1.46 1.49
</TABLE>
---------------
(1) All share and per share data has been restated for the effect of common
stock dividends and splits.
(2) Average loans include nonaccrual loans.
27
<PAGE> 31
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Combined Statements of Income
for the six-month periods ended June 30, 2000 and 1999 and for the years ended
December 31, 1999, 1998 and 1997 present the combined results of operations of
Farmers and Security as if the merger had been effective at the beginning of
each period. The Unaudited Pro Forma Condensed Combined Balance Sheets as of
June 30, 2000 and December 31, 1999, combine the historical consolidated balance
sheets of Farmers and Security as if the merger had been effective on June 30,
2000 and December 31, 1999, respectively. The Unaudited Pro Forma Condensed
Combined Financial Information has been prepared from, and should be read in
conjunction with, the historical consolidated financial statements and notes
thereto of Farmers and Security.
The Unaudited Pro Forma Condensed Combined Financial Information and
accompanying notes reflect the application of the pooling of interests method of
accounting for the merger. Under this method of accounting, the recorded assets,
liabilities, shareholders' equity, income and expenses of Farmers and Security
are combined and reflected at their historical amounts.
The pro forma combined figures shown in the Unaudited Pro Forma Condensed
Combined Financial Information are simply arithmetical combinations of Farmers'
and Security's separate financial results; you should not assume that Farmers
and Security would have achieved the pro forma combined results if they had
actually been combined during the periods presented.
28
<PAGE> 32
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FARMERS SECURITY ADJUSTMENTS 6/30/00
------- -------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans....................... $13,746 $4,581 $18,327
Interest and dividends on securities:
Taxable interest............................... 1,913 1,027 2,940
Nontaxable interest............................ 380 161 541
Dividends...................................... 141 48 189
Interest-bearing deposits in other banks......... 0 12 12
Interest on federal funds sold................... 216 289 505
------- ------ -- -------
TOTAL INTEREST INCOME..................... 16,396 6,118 $0 22,514
------- ------ -- -------
INTEREST EXPENSE
Deposits......................................... 5,765 2,804 8,569
Borrowings....................................... 1,454 265 1,719
------- ------ -- -------
TOTAL INTEREST EXPENSE.................... 7,219 3,069 0 10,288
------- ------ -- -------
NET INTEREST INCOME....................... 9,177 3,049 0 12,226
Provision for credit losses...................... 420 300 720
------- ------ -- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES............... 8,757 2,749 0 11,506
------- ------ -- -------
OTHER INCOME
Service charges on deposit accounts.............. 627 277 904
Investment security gains (losses)............... 0 (26) (26)
Gain on sale of mortgage loans, net.............. 0 3 3
Brokerage income................................. 0 101 101
Other operating income........................... 289 18 307
------- ------ -- -------
TOTAL OTHER INCOME........................ 916 373 0 1,289
------- ------ -- -------
9,673 3,122 0 12,795
------- ------ -- -------
OTHER EXPENSES
Salaries and employee benefits................... 3,009 1,450 4,459
Net occupancy expense of premises................ 300 187 487
Furniture and equipment expense, including
depreciation................................... 320 208 528
State and local taxes............................ 289 89 378
Other operating expenses......................... 1,664 1,094 2,758
------- ------ -- -------
TOTAL OTHER EXPENSES...................... 5,582 3,028 0 8,610
------- ------ -- -------
INCOME BEFORE FEDERAL INCOME TAXES........ 4,091 94 0 4,185
FEDERAL INCOME TAXES............................. 1,247 (8) 1,239
------- ------ -- -------
NET INCOME................................ 2,844 102 0 2,946
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains (losses) on securities.......... 15 (29) (14)
------- ------ -- -------
COMPREHENSIVE INCOME...................... $ 2,859 $ 73 $0 $ 2,932
======= ====== == =======
Earnings Per Share:(1)
Basic............................................ $ 0.37 $ 0.28 $ 0.27
Diluted.......................................... $ 0.37 $ 0.28 $ 0.27
</TABLE>
---------------
(1) All share and per share data have been restated for the effect of common
stock dividends and splits.
29
<PAGE> 33
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FARMERS SECURITY ADJUSTMENTS 6/30/99
------- -------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans....................... $12,358 $4,697 $17,055
Interest and dividends on securities:
Taxable interest............................... 1,890 969 2,859
Nontaxable interest............................ 339 215 554
Dividends...................................... 82 49 131
Interest-bearing deposits in other banks......... 0 31 31
Interest on federal funds sold................... 154 130 284
------- ------ -- -------
TOTAL INTEREST INCOME..................... 14,823 6,091 $0 20,914
------- ------ -- -------
INTEREST EXPENSE
Deposits......................................... 5,349 2,804 8,153
Borrowings....................................... 735 178 913
------- ------ -- -------
TOTAL INTEREST EXPENSE.................... 6,084 2,982 0 9,066
------- ------ -- -------
NET INTEREST INCOME....................... 8,739 3,109 0 11,848
Provision for credit losses...................... 420 520 940
------- ------ -- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES............... 8,319 2,589 0 10,908
------- ------ -- -------
OTHER INCOME
Service charges on deposit accounts.............. 563 319 882
Investment security gains (losses)............... 3 7 10
Gain on sale of mortgage loans, net.............. 0 10 10
Brokerage income................................. 0 58 58
Other operating income........................... 237 19 256
------- ------ -- -------
TOTAL OTHER INCOME........................ 803 413 0 1,216
------- ------ -- -------
9,122 3,002 0 12,124
------- ------ -- -------
OTHER EXPENSES
Salaries and employee benefits................... 2,789 1,303 4,092
Net occupancy expense of premises................ 287 191 478
Furniture and equipment expense, including
depreciation................................... 312 228 540
State and local taxes............................ 297 98 395
Other operating expenses......................... 1,610 857 2,467
------- ------ -- -------
TOTAL OTHER EXPENSES...................... 5,295 2,677 0 7,972
------- ------ -- -------
INCOME BEFORE FEDERAL INCOME TAXES........ 3,827 325 0 4,152
FEDERAL INCOME TAXES............................. 1,210 47 1,257
------- ------ -- -------
NET INCOME................................ 2,617 278 0 2,895
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized losses on securities.................. (786) (613) (1,399)
------- ------ -- -------
COMPREHENSIVE INCOME...................... $ 1,831 ($ 335) $0 $ 1,496
======= ====== == =======
Earnings Per Share:(1)
Basic............................................ $ 0.35 $ 0.78 $ 0.27
Diluted.......................................... $ 0.35 $ 0.78 $ 0.27
</TABLE>
---------------
(1) All share and per share data have been restated for the effect of common
stock dividends and splits.
30
<PAGE> 34
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FARMERS SECURITY ADJUSTMENTS 12/31/99
------- -------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans...................... $25,763 $ 9,342 $35,105
Interest and dividends on securities:
Taxable interest.............................. 3,616 1,864 5,480
Nontaxable interest........................... 712 417 1,129
Dividends..................................... 168 95 263
Interest-bearing deposits in other banks........ 0 51 51
Interest on federal funds sold.................. 252 351 603
------- ------- -- -------
TOTAL INTEREST INCOME.................... 30,511 12,120 $0 42,631
------- ------- -- -------
INTEREST EXPENSE
Deposits........................................ 10,786 5,655 16,441
Borrowings...................................... 1,788 424 2,212
------- ------- -- -------
TOTAL INTEREST EXPENSE................... 12,574 6,079 0 18,653
------- ------- -- -------
NET INTEREST INCOME...................... 17,937 6,041 0 23,978
------- ------- -- -------
Provision for credit losses..................... 840 970 1,810
------- ------- -- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES.............. 17,097 5,071 0 22,168
------- ------- -- -------
OTHER INCOME
Service charges on deposit accounts............. 1,163 626 1,789
Investment security gains....................... (11) 7 (4)
Gain on sale of mortgage loans, net............. 0 12 12
Brokerage income................................ 0 148 148
Other operating income.......................... 482 123 605
------- ------- -- -------
TOTAL OTHER INCOME....................... 1,634 916 0 2,550
------- ------- -- -------
18,731 5,987 0 24,718
------- ------- -- -------
OTHER EXPENSES
Salaries and employee benefits.................. 5,616 2,629 8,245
Net occupancy expense of premises............... 572 381 953
Furniture and equipment expense, including
depreciation.................................. 664 438 1102
State and local taxes........................... 593 190 783
Other operating expenses........................ 3,218 1,563 4,781
------- ------- -- -------
TOTAL OTHER EXPENSES..................... 10,663 5,201 0 15,864
------- ------- -- -------
INCOME BEFORE FEDERAL INCOME TAXES....... 8,068 786 0 8,854
FEDERAL INCOME TAXES............................ 2,544 151 2,695
------- ------- -- -------
NET INCOME............................... 5,524 635 0 6,159
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized losses on securities................. (1,168) (899) (2,067)
------- ------- -- -------
COMPREHENSIVE INCOME..................... $ 4,356 $ (264) $0 $ 4,092
======= ======= == =======
Earnings Per Share: (1)
Basic........................................... $ 0.73 $ 1.77 $ 0.58
Diluted......................................... $ 0.73 $ 1.77 $ 0.58
</TABLE>
---------------
(1) All share and per share data have been restated for the effect of common
stock dividends and splits.
31
<PAGE> 35
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FARMERS SECURITY ADJUSTMENTS 12/31/98
------- -------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans...................... $24,585 $ 9,855 $34,440
Interest and dividends on securities:
Taxable interest.............................. 3,558 2,041 5,599
Nontaxable interest........................... 539 422 961
Dividends..................................... 137 74 211
Interest-bearing deposits in other banks........ 0 33 33
Interest on federal funds sold.................. 408 232 640
------- ------- -- -------
TOTAL INTEREST INCOME.................... 29,227 12,657 $0 41,884
------- ------- -- -------
INTEREST EXPENSE
Deposits........................................ 11,589 6,174 17,763
Borrowings...................................... 1,147 318 1,465
------- ------- -- -------
TOTAL INTEREST EXPENSE................... 12,736 6,492 0 19,228
------- ------- -- -------
NET INTEREST INCOME...................... 16,491 6,165 0 22,656
Provision for credit losses..................... 840 2,267 3,107
------- ------- -- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES.............. 15,651 3,898 0 19,549
------- ------- -- -------
OTHER INCOME
Service charges on deposit accounts............. 1,175 596 1,771
Investment security gains....................... 5 51 56
Gain on sale of mortgage loans, net............. 0 46 46
Brokerage income................................ 0 95 95
Other operating income.......................... 518 96 614
------- ------- -- -------
TOTAL OTHER INCOME....................... 1,698 884 0 2,582
------- ------- -- -------
OTHER EXPENSES
Salaries and employee benefits.................. 5,143 2,543 7,686
Net occupancy expense of premises............... 567 328 895
Furniture and equipment expense, including
depreciation.................................. 549 410 959
State and local taxes........................... 578 198 776
Other operating expenses........................ 2,978 1,250 4,228
------- ------- -- -------
TOTAL OTHER EXPENSES..................... 9,815 4,729 0 14,544
------- ------- -- -------
INCOME BEFORE FEDERAL INCOME TAXES....... 7,534 53 0 7,587
FEDERAL INCOME TAX EXPENSE (BENEFIT)............ 2,419 (100) 2,319
------- ------- -- -------
NET INCOME............................... 5,115 153 0 5,268
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains (losses) on securities......... (138) 127 (11)
------- ------- -- -------
COMPREHENSIVE INCOME..................... $ 4,977 $ 280 $0 $ 5,257
======= ======= == =======
Earnings Per Share: (1)
Basic........................................... $ 0.70 $ 0.43 $ 0.50
Diluted......................................... $ 0.70 $ 0.43 $ 0.50
</TABLE>
---------------
(1) All share and per share data have been restated for the effect of common
stock dividends and splits.
32
<PAGE> 36
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FARMERS SECURITY ADJUSTMENTS 12/31/97
------- -------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans...................... $23,487 $10,636 $34,123
Interest and dividends on securities:
Taxable interest.............................. 3,017 1,732 4,749
Nontaxable interest........................... 463 194 657
Dividends..................................... 106 71 177
Interest-bearing deposits in other banks........ $ 0 20 20
Interest on federal funds sold.................. 503 195 698
------- ------- -- -------
TOTAL INTEREST INCOME.................... 27,576 12,848 $0 40,424
------- ------- -- -------
INTEREST EXPENSE
Deposits........................................ 11,105 5,991 17,096
Borrowings...................................... 1,024 337 1,361
------- ------- -- -------
TOTAL INTEREST EXPENSE................... 12,129 6,328 0 18,457
------- ------- -- -------
NET INTEREST INCOME...................... 15,447 6,520 0 21,967
Provision for credit losses..................... 855 1,250 2,105
------- ------- -- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES.............. 14,592 5,270 0 19,862
------- ------- -- -------
OTHER INCOME
Service charges on deposit accounts............. 1,176 634 1,810
Investment security gains....................... 6 25 31
Gain on sale of mortgage loans, net............. 0 62 62
Other operating income.......................... 586 220 806
------- ------- -- -------
TOTAL OTHER INCOME....................... 1,768 941 0 2,709
------- ------- -- -------
16,360 6,211 0 22,571
------- ------- -- -------
OTHER EXPENSES
Salaries and employee benefits.................. 5,059 2,247 7,306
Net occupancy expense of premises............... 561 312 873
Furniture and equipment expense, including
depreciation.................................. 491 358 849
State and local taxes........................... 532 140 672
Other operating expenses........................ 2,775 1,227 4,002
------- ------- -- -------
TOTAL OTHER EXPENSES..................... 9,418 4,284 0 13,702
------- ------- -- -------
INCOME BEFORE FEDERAL INCOME TAXES....... 6,942 1,927 0 8,869
FEDERAL INCOME TAXES............................ 2,200 609 2,809
------- ------- -- -------
NET INCOME............................... 4,742 1,318 0 6,060
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains on securities.................. 305 107 412
------- ------- -- -------
COMPREHENSIVE INCOME..................... $ 5,047 $ 1,425 $0 $ 6,472
======= ======= == =======
Earnings Per Share: (1)
Basic........................................... $ 0.67 $ 3.89 $ 0..59
Diluted......................................... $ 0.67 $ 3.89 $ 0.59
</TABLE>
---------------
(1) All share and per share data have been restated for the effect of common
stock dividends and splits.
33
<PAGE> 37
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FARMERS SECURITY ADJUSTMENTS 6/30/00
-------- -------- ----------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks................. $17,205 $ 7,420 $ 24,625
Federal funds sold...................... 227 9,347 9,574
Short-term interest bearing deposits.... 0 199 199
-------- -------- -------- --------
Cash and cash equivalents.......... 17,432 16,966 34,398
-------- -------- -------- --------
Long-term interest bearing deposits..... 0 299 299
Securities available for sale........... 87,516 39,475 126,991
Other securities........................ 2,651 0 2,651
Loans................................... 331,480 103,933 435,413
Less allowance for loan losses.......... 4,397 1,793 6,190
-------- -------- -------- --------
Net loans.......................... 327,083 102,140 429,223
-------- -------- -------- --------
Premises and equipment, net............. 7,998 4,807 12,805
Accrued interest and other assets....... 5,161 2,122 7,283
-------- -------- -------- --------
Total Assets.................. $447,841 $165,809 $613,650
======== ======== ======== ========
LIABILITIES & CAPITAL
Deposits
Noninterest-bearing................... $30,013 $19,388 $ 49,401
Interest-bearing...................... 300,181 120,906 421,087
-------- -------- -------- --------
Total deposits................ 330,194 140,294 470,488
-------- -------- -------- --------
Short term borrowings................... 35,337 9,865 45,202
Federal home loan bank advances......... 26,206 1,000 27,206
Other liabilities....................... 2,871 352 3,223
-------- -------- -------- --------
Total liabilities............. 394,608 151,511 546,119
-------- -------- -------- --------
Shareholders' Equity
Common stock, no par value............ 38,764 7,861 46,625
Retained earnings..................... 16,521 7,111 23,632
Accumulated other comprehensive
loss............................... (877) (674) (1,551)
Treasury stock........................ (1,175) 0 (1,175)
-------- -------- -------- --------
Total shareholders' equity.... 53,233 14,298 67,531
-------- -------- -------- --------
Total liabilities and
shareholders' equity........ $447,841 $165,809 $613,650
======== ======== ======== ========
</TABLE>
34
<PAGE> 38
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FARMERS SECURITY ADJUSTMENTS 12/31/99
-------- -------- ----------- ---------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks....................... $ 19,846 $ 8,111 $ 27,957
Federal funds sold............................ 3,821 8,950 12,771
Short-term interest bearing deposits.......... 0 298 298
-------- -------- -------- --------
Cash and cash equivalents.............. 23,667 17,359 41,026
-------- -------- -------- --------
Long-term interest bearing deposits........... 0 199 199
Securities available for sale................. 73,659 40,544 114,203
Other securities.............................. 2,618 0 2,618
Loans......................................... 322,635 109,118 431,753
Less allowance for loan losses................ 4,128 1,650 5,778
-------- -------- -------- --------
Net loans.............................. 318,507 107,468 425,975
-------- -------- -------- --------
Premises and equipment, net................... 8,103 4,899 13,002
Accrued interest and other assets............. 4,576 2,199 6,775
-------- -------- -------- --------
Total Assets........................... $431,130 $172,668 $603,798
======== ======== ======== ========
LIABILITIES & CAPITAL
Deposits
Noninterest-bearing......................... $ 29,343 $ 18,320 $ 47,663
Interest-bearing............................ 302,120 127,046 429,166
-------- -------- -------- --------
Total deposits......................... 331,463 145,366 476,829
-------- -------- -------- --------
Short term borrowings......................... 28,811 9,406 38,217
Federal home loan bank advances............... 15,936 3,000 18,936
Other liabilities............................. 3,026 555 3,581
-------- -------- -------- --------
Total liabilities...................... 379,236 158,327 537,563
-------- -------- -------- --------
Shareholders' Equity
Common stock, no par value.................. 37,294 7,861 45,155
Retained earnings........................... 15,584 7,125 22,709
Accumulated other comprehensive loss........ (892) (645) (1,537)
Treasury stock.............................. (92) 0 (92)
-------- -------- -------- --------
Total shareholders' equity............. 51,894 14,341 66,235
-------- -------- -------- --------
Total liabilities and shareholders'
equity.............................. $431,130 $172,668 $603,798
======== ======== ======== ========
</TABLE>
35
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Common stock outstanding as of December 31, 1999 is calculated on the basis
of 8.621 shares of Farmers common stock to one share of Security common stock.
<TABLE>
<S> <C>
Farmers........................... 7,658,832 Shares
Security.......................... 3,162,778 Shares
Pro forma combined................ 10,287,297 Shares
</TABLE>
Reclassification. The Consolidated Statements of Income and Comprehensive
Income of Security have been reclassified to conform with the presentation of
Farmers. Such reclassification had no effect on net results of operations.
SUPERVISION AND REGULATION
Security Dollar Bank, the wholly owned subsidiary of Security is subject to
state and federal banking laws and regulations; Farmers National Bank of
Canfield is subject to federal banking laws and regulations; these banking laws
and regulations impose specific requirements or restrictions on and provide for
general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
Security Dollar Bank or Farmers National Bank of Canfield. The numerous
regulations and policies promulgated by the regulatory authorities creates a
difficult and ever-changing atmosphere in which to operate. Security and Farmers
commit substantial resources in order to comply with these statutes, regulations
and policies. Security and Farmers are unable to predict the nature or the
extent of the effect on its business and earnings that fiscal or monetary
policies, economic control, or new federal or state legislation may have in the
future.
GOVERNMENT REGULATION
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to such
statutory or regulatory provisions.
GENERAL
We are subject to the supervision of the Federal Reserve Board and are
required to file with the Federal Reserve Board reports and other information
regarding our business operations and the business operations of our
subsidiaries. We are also subject to examination by the Federal Reserve Board.
We are required to obtain Federal Reserve Board approval prior to acquiring
direct or indirect ownership or control of voting shares of any bank, if after
such acquisition, we would own or control more than 5% of the voting stock of
such bank.
Under legislation effective March 11, 2000 (see "Gramm-Leach-Bliley Act of
1999" below), bank holding companies may elect to become financial holding
companies. A financial holding company may engage in activities that are
financial in nature, incidental to such financial activities, or complementary
to a financial activity and do not pose safety and soundness risks. A financial
holding company may, in general, engage in these activities with only a 30 day
after-the-fact notice to the Federal Reserve Board.
Neither Farmers nor Security has elected to become a financial holding
company. As a bank holding company, Farmers may only engage in, or own or
control companies that engage in, activities deemed by the Federal Reserve Board
to be closely related to banking. Farmers may, in most cases, commence
permissible new non-banking business activities from a start-up stage with only
subsequent notice to the Federal Reserve Board. In addition, Farmers may
acquire, subject to regulatory constraints, smaller companies that engage in
permissible non-banking activities under an expedited procedure requiring only
12 business days notice to the Federal Reserve Board.
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<PAGE> 40
Our respective national bank subsidiary is subject to supervision,
examination, and regulation by the Office of the Comptroller of the Currency.
Both Farmers National Bank of Canfield and Security Dollar Bank have deposits
insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation.
HOLDING COMPANY STRUCTURE
Our subsidiary is subject to affiliate transaction restrictions under
federal law which limit the transfer of funds by a subsidiary bank to the parent
or any subsidiaries of the parent. The transfer of funds may take the form of
loans, extensions of credit, investments, or asset purchases. Such transfers by
a subsidiary bank to its parent corporation or to any individual subsidiary of
the parent are limited in amount to:
- with respect to any single subsidiary bank, 10% of the subsidiary bank's
capital and surplus and,
- with respect to the parent together with all its subsidiaries, an
aggregate of 20% of the subsidiary bank's capital and surplus.
Such loans and extensions of credit are also required to be secured in
specified amounts. In addition, all affiliate transactions must be conducted on
terms and under circumstances that are substantially the same as such
transactions with unaffiliated entities. Although a financial institution's
non-bank subsidiaries are not counted as affiliates for purposes of analyzing
restrictions on affiliate transactions, under the Gramm-Leach-Bliley Act, any
financial subsidiary of Farmers National Bank of Canfield will be considered an
affiliate subject to these rules. Under applicable regulations, at June 30,
2000, approximately $5.1 million was available for loans to Farmers from Farmers
National Bank of Canfield, and approximately $1.4 million was available for
loans to Security from Security Dollar Bank.
The Federal Reserve Board has a policy to the effect that a bank holding
company is expected to act as a source of financial and managerial strength to
each of its subsidiary banks and to commit resources to support each such
subsidiary bank. Under the source of strength doctrine, the Federal Reserve
Board may require a financial or bank holding company to make capital injections
into a troubled subsidiary bank. The Federal Reserve Board may also charge such
holding company with engaging in unsafe and unsound practices for failure to
commit resources to such a subsidiary bank. This capital injection may be
required at times when we do not have the resources to provide it.
Any loans by a holding company to its subsidiary banks are subordinate in
right of payment to deposits and to certain other indebtedness of such
subsidiary bank. Moreover, in the event of a financial or bank holding company's
bankruptcy, any commitment by such holding company to a federal bank regulatory
agency to maintain the capital of a subsidiary bank will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
Moreover, the claims of an insured depository institution's receiver for
administrative expenses and the claims of holders of deposit liabilities of such
an institution are accorded priority over the claims of general unsecured
creditors of such an institution, in the event of a liquidation or other
resolution of such institution. As a result of such legislation, claims of a
receiver for administrative expenses and claims of holders of deposit
liabilities of our depository subsidiaries would receive priority over the
holders of notes and other senior debt of such subsidiary in the event of a
liquidation or other resolution and over our respective interests as the sole
shareholder of our banking subsidiary.
Federal law permits the OCC to order the pro rata assessment of
shareholders of a national bank whose capital stock has become impaired, by
losses or otherwise, in order to relieve a deficiency in such national bank's
capital stock. This statute also provides for the enforcement of any such pro
rata assessment to cover such impairment of capital stock by sale, to the extent
necessary, of the capital stock of any assessed shareholder failing to pay the
assessment. We, as the sole shareholder of our respective subsidiary bank, are
subject to such provisions.
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<PAGE> 41
DIVIDEND RESTRICTIONS
Dividends from our subsidiary bank are a significant source of funds for
payment of dividends to our respective shareholders. In the year ended December
31, 1999, Farmers declared cash dividends to its shareholders of approximately
$3.118 million, and Security declared cash dividends to its shareholders of
approximately $446,000. There are, however, statutory limits on the amount of
dividends that our respective depository institution subsidiaries can pay to us
without regulatory approval.
Our respective subsidiary banks may not pay a dividend in an amount greater
than such bank's undivided profits. In addition, the prior approval of the OCC
is required for the payment of a dividend by a national bank if the total of all
dividends declared by the bank in a calendar year would exceed the total of its
retained net income for the year combined with its retained net income for the
two preceding years. Further, unless a national bank's capital surplus equals or
exceeds the capital stock of the bank, before the bank can declare an annual
dividend, it must transfer 10% of its net income for the preceding four quarters
to capital surplus. In the case of a semi-annual or special dividend, the
required time period is shortened to the preceding two quarters. Under these
provisions, Farmers National Bank of Canfield could, without regulatory
approval, declare dividends to Farmers in 2000 of approximately $9.305 million
plus an additional amount equal to its net profits during 2000.
If, in the opinion of the applicable regulatory authority, a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), such regulatory authority may require, after notice
and hearing, that such bank cease and desist from such practice. The Federal
Reserve Board and the OCC have issued policy statements that provide that
insured banks and bank holding companies should generally only pay dividends out
of current operating earnings.
CAPITAL REQUIREMENTS
The Federal Reserve Board has issued risk-based capital ratio and leverage
ratio guidelines for financial and bank holding companies. These guidelines are
applicable to both Farmers and Security. The risk-based capital ratio
guidelines:
- establish a systematic analytical framework that make regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations,
- take off-balance sheet exposures into explicit account in assessing
capital adequacy, and
- minimize disincentives to holding liquid, low-risk assets.
Under the guidelines and related policies, holding companies must maintain
capital sufficient to meet both a risk-based capital ratio test and a leverage
ratio test on a consolidated basis. The risk-based ratio is determined by
allocating assets and specified off-balance sheet commitments into four weighted
categories, with higher weighting being assigned to categories perceived as
representing greater risk. A bank holding company's capital (as described below)
is then divided by total risk weighted assets to yield the risk-based ratio. The
leverage ratio is determined by relating core capital (as described below) to
total assets adjusted as specified in the guidelines. Both Farmers National Bank
of Canfield and Security Dollar Bank are subject to substantially similar
capital requirements.
Generally, under the applicable guidelines, a financial institution's
capital is divided into two tiers. Institutions that must incorporate market
risk exposure into their risk-based capital requirements may also have a third
tier of capital in the form of restricted short-term subordinated debt. "Total
capital" is the sum of Tier 1 and Tier 2 capital. "Tier 1", or core capital,
includes:
- common shareholders' equity,
- noncumulative perpetual preferred stock (including related surplus)
subject to specified limitations, and
- minority interests in equity accounts of consolidated subsidiaries,
38
<PAGE> 42
less goodwill and, with certain limited exceptions, all other intangible assets.
Holding companies, however, may include cumulative preferred stock in their Tier
1 capital, up to a limit of 25% of such Tier 1 capital. "Tier 2", or
supplementary capital, includes, among other things:
- perpetual preferred stock and related surplus,
- hybrid capital instruments,
- mandatory convertible securities,
- qualifying subordinated debt, and
- the allowance for loan and lease losses, subject to certain limitations.
The Federal Reserve Board and the other federal banking regulators require
that all intangible assets, with certain limited exceptions, be deducted from
Tier 1 capital. Under the Federal Reserve Board's rules, the only types of
intangible assets that may be included in (i.e., not deducted from) a holding
company's capital are originated or purchased mortgage servicing rights,
non-mortgage servicing assets, and purchased credit card relationships, which we
refer to as MSRs, NMSAs, and PCCRs, respectively. In the aggregate, however, the
total amount of MSRs, NMSAs, and PCCRs included in capital cannot exceed 100% of
Tier 1 capital. NMSAs and PCCRs are subject to a separate aggregate sublimit of
25% of Tier 1 capital.
The amount of MSRs, NMSAs, and PCCRs that a holding company may include in
its capital, which is determined on a quarterly basis, is limited to the lesser
of:
- 90% of such assets' fair market value (as determined under the
guidelines), or
- 100% of such assets' book value.
Intangible assets other than goodwill and other than MSRs, NMSAs, and
PCCRs, including core deposit intangibles, acquired on or before February 19,
1992 (the date the Federal Reserve Board issued its original proposal for public
comment), generally will not be deducted from capital for supervisory purposes.
These identifiable intangible assets will continue to be deducted for purposes
of evaluating applications filed by financial and bank holding companies.
Under the risk-based guidelines, financial institutions are required to
maintain a risk-based ratio (total capital to risk-weighted assets) of 8%, of
which 4% must be Tier 1 capital. The appropriate regulatory authority may set
higher capital requirements when an institution's circumstances warrant.
Under the leverage guidelines, financial institutions are required to
maintain a leverage ratio (Tier 1 capital to adjusted total assets, as specified
in the guidelines) of at least 3%. The 3% minimum ratio is applicable only to
financial institutions that meet certain specified criteria, including:
- excellent asset quality,
- high liquidity,
- low interest rate risk exposure, and
- the highest regulatory rating.
Financial institutions not meeting these criteria are required to maintain
a leverage ratio that exceeds 3% by a cushion of at least 100 to 200 basis
points.
The guidelines also provide that financial institutions experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory level.
Furthermore, the Federal Reserve Board's guidelines indicate that the Federal
Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" in
evaluating proposals for expansion or new activities. The tangible Tier 1
leverage ratio is the ratio of an institution's Tier 1 capital, less all
intangibles, to total assets, less all intangibles.
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<PAGE> 43
Failure to meet applicable capital guidelines could subject the financial
institution to a variety of enforcement remedies available to the federal
regulatory authorities, including:
- limitations on the ability to pay dividends,
- the issuance by the regulatory authority of a capital directive to
increase capital,
- the termination of deposit insurance by the FDIC, and
- other measures described below under "Federal Deposit Insurance
Corporation Improvement Act of 1991" as applicable to undercapitalized
institutions.
As of June 30, 2000, our Tier 1 risk-based capital ratios, total risk-based
capital ratios, and Tier 1 leverage ratios were as follows:
<TABLE>
<CAPTION>
REQUIREMENT HISTORICAL PRO FORMA (1) SECURITY
----------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio............. 4.00% 16.60% 16.10% 14.45%
Total Risk-Based Capital Ratio.............. 8.00% 17.85% 17.36% 15.77%
Tier 1 Leverage Ratio....................... 3.00% 12.08% 11.13% 8.62%
</TABLE>
---------------
(1) Includes Farmers and Security on a pro forma combined basis.
As of June 30, 2000, our respective bank subsidiaries also had capital in
excess of the minimum requirements. The risk-based capital standards of the
Federal Reserve Board and the OCC specify that evaluations by the banking
agencies of a bank's capital adequacy will include an assessment of the exposure
to declines in the economic value of the bank's capital due to changes in
interest rates. These banking agencies issued a joint policy statement on
interest rate risk describing prudent methods for monitoring such risk that rely
principally on internal measures of exposure and active oversight of risk
management activities by senior management.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
The Federal Deposit Insurance Corporation Improvement Act of 1991, which we
refer to as FDICIA, substantially revised the bank regulatory and funding
provisions of the Federal Deposit Insurance Act and made revisions to several
other federal banking statutes. Among other things, FDICIA requires federal
banking regulatory authorities to take "prompt corrective action" with respect
to depository institutions that do not meet minimum capital requirements. For
these purposes, FDICIA establishes five capital tiers:
- well capitalized,
- adequately capitalized,
- undercapitalized,
- significantly undercapitalized, and
- critically undercapitalized.
The federal banking regulatory agencies have adopted regulations to
implement the prompt corrective action provisions of FDICIA. Among other things,
the regulations define the relevant capital measures for the five capital
categories:
- An institution is deemed to be "well capitalized" if it has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and
is not subject to a regulatory order, agreement, or directive to meet and
maintain a specific capital level for any capital measure.
- An institution is deemed to be "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital
ratio of 4% or greater, and, generally, a Tier 1 leverage ratio of 4% or
greater and the institution does not meet the definition of a "well
capitalized" institution.
- An institution that does not meet one or more of the "adequately
capitalized" tests is deemed to be "undercapitalized".
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<PAGE> 44
- If the institution has a total risk-based capital ratio that is less than
6%, a Tier 1 risk-based capital ratio that is less than 3%, or a Tier 1
leverage ratio that is less than 3%, it is deemed to be "significantly
undercapitalized."
- Finally, an institution is deemed to be "critically undercapitalized" if
it has a ratio of tangible equity (as defined in the regulations) to
total assets that is equal to or less than 2%.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a cash dividend) or paying any management fee
to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized institutions are subject to growth
limitations and are required to submit a capital restoration plan. If any
depository institution subsidiary of a holding company is required to submit a
capital restoration plan, the holding company would be required to provide a
limited guarantee regarding compliance with the plan as a condition of approval
of such plan by the appropriate federal banking agency. If an undercapitalized
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized.
Significantly undercapitalized institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized institutions may not, beginning 60 days after becoming
critically undercapitalized, make any payment of principal or interest on their
subordinated debt. In addition, critically undercapitalized institutions are
subject to appointment of a receiver or conservator within 90 days of becoming
critically undercapitalized.
Under FDICIA, a depository institution that is not well capitalized is
generally prohibited from accepting brokered deposits and offering interest
rates on deposits higher than the prevailing rate in its market. We expect that
the FDIC's brokered deposit rule will not adversely affect the ability of our
subsidiary to accept brokered deposits. Under the regulatory definition of
brokered deposits, both FNBC and Security Dollar Bank had no brokered deposits
at June 30, 2000.
FDICIA, as amended, directs that each federal banking regulatory agency
prescribe standards, by regulation or guideline, for depository institutions
relating to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
compensation, asset quality, and earnings. The Federal Reserve Board and other
federal banking agencies have adopted a regulation in the form of guidelines
covering most of these items. We believe that the regulation and guidelines will
not have a material effect on the operations of our subsidiaries.
INTERSTATE BRANCHING AND CONSOLIDATIONS
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
provides for nationwide interstate banking and branching. Under the law,
interstate acquisitions of banks or bank holding companies in any state by bank
holding companies in any other state became permissible in 1995. Interstate
branching and consolidations of existing bank subsidiaries in different states
became permissible in 1997.
GRAMM-LEACH-BLILEY ACT OF 1999
The United States Congress in 1999 enacted major financial services
modernization legislation, known as the "Gramm-Leach-Bliley Act of 1999". This
Act was signed into law on November 12, 1999. Under the new law, banks are no
longer prohibited by the Glass-Steagall Act from associating with, or having
management interlocks with, a business organization engaged principally in
securities activities. By qualifying as a new entity known as a "financial
holding company", a bank holding company may acquire new powers not otherwise
available to it. The repeal of the Glass-Steagall Act and the availability of
new powers became effective on March 11, 2000.
In order for a bank holding company to qualify as a financial holding
company, all of its depository subsidiaries must be both well capitalized and
well managed, and must be meeting their Community Reinvestment Act obligations.
The bank holding company must also declare its intention to become a financial
holding company to the Federal Reserve Board and certify that its depository
subsidiaries meet the capitalization and management requirements.
41
<PAGE> 45
A depository institution is well capitalized if it has a Tier 1 risk-based
capital ratio of at least 6%, a total risk-based capital ratio of at least 10%,
a leverage ratio of at least 5%, and is not subject to any formal supervisory
action. A depository institution is well managed if it has received a
satisfactory rating in its most recent supervisory examination or subsequent
review and at least a "satisfactory" rating for management, if such a rating is
given. A depository institution is deemed to be meeting its CRA obligations if
it has received a rating of "satisfactory" or better in its most recent
examination for compliance with the Community Reinvestment Act. Depository
institutions acquired by the financial holding company within twelve months
prior to the date on which the election is filed will be excluded from this test
even if they have less than a satisfactory CRA rating as long as the financial
holding company has submitted a plan to the applicable federal banking agency to
improve the acquired depository institution's CRA rating and the federal banking
agency has accepted such plan.
Financial holding company powers relate to "financial activities" that are
either specified in a statute or are determined by the Federal Reserve Board, in
coordination with the Secretary of the Treasury, to be financial in nature,
incidental to an activity that is financial in nature, or complementary to a
financial activity (provided that the complementary activity does not pose a
safety and soundness risk). Activities defined in the statute as financial in
nature include:
- underwriting insurance or annuities;
- providing financial or investment advice;
- underwriting, dealing in, or making markets in securities;
- merchant banking, subject to significant limitations;
- insurance portfolio investing, subject to significant limitations; and
- any activities previously found by the Federal Reserve Board to be
closely related to banking.
Other provisions of the new Act:
- establish a system of functional regulation for financial holding
companies and banks involving the Securities and Exchange Commission, the
Commodity Futures Trading Commission, and state securities and insurance
regulators;
- deal with bank insurance sales and title insurance activities in relation
to state insurance regulation;
- prescribe consumer protection standards for insurance sales; and
- establish minimum federal standards of privacy to protect the
confidentiality of the personal financial information of consumers and
regulate its use by financial institutions.
A financial holding company's depository institution subsidiaries must
continue to meet the well capitalized and well managed tests in order to
continue engaging in the full range of financial and incidental activities
permitted by the new Act. If the Federal Reserve Board determines that a
financial holding company no longer satisfies the well capitalized and well
managed tests, it will be required to enter into an agreement within 45 days
with the Federal Reserve Board to correct these conditions. If the conditions
are not corrected within 180 days after the Federal Reserve Board first notified
the financial holding company of its failure to meet the well capitalized or
well managed tests, the Federal Reserve Board may require the financial holding
company to either divest any depository institution subsidiaries it controls or
cease to engage in any financial or incidental activity that is not permissible
for bank holding companies. The new Act permits the financial holding company to
elect which of the two alternative courses of action it will pursue, and also
permits the Federal Reserve Board to extend the 180 day cure period indefinitely
if the Federal Reserve Board, in its discretion, determines such extensions to
be appropriate.
In addition, the new Act provides that a financial holding company may not
commence any new financial activity or activity incidental to such financial
activity, or acquire any company engaged in such financial or incidental
activities (other than investments made in connection with certain previously
commenced merchant banking and insurance company portfolio investment
activities), if any insured depository institution subsidiary of such financial
holding company has received a rating of less than satisfactory in its last CRA
examination. A similar restriction applies to insured depository institutions
that conduct financial and incidental activities through
42
<PAGE> 46
financial subsidiaries permitted by the new Act in the event such institution
receives less than a satisfactory CRA examination rating.
In January 2000, the Federal Reserve Board and the OCC issued,
respectively, an interim and a proposed rule governing the application process
for becoming a financial holding company or a financial subsidiary. Additional
regulations are expected from these agencies during the year 2000 for the
implementation of the new Act.
Under the BHCA, Security is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in, nonbanking activities, unless the Federal Reserve, by order
or regulation, has found those activities to be so closely related to banking or
managing or controlling banks as to be a related activity. Some of the
activities that the Federal Reserve has determined by regulation to be proper
incidents to the business of banking include investment in and management of
Small Business Investment Companies, making or servicing loans and certain types
of leases, engaging in certain insurance and brokerage activities, performing
data processing services, acting in certain circumstances as a fiduciary or
investment or financial advisor, owning savings associations, and making
investments in limited projects designed primarily to promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, Security is expected to act as a source of financial strength to
Security Dollar Bank and to commit resources to support Security Dollar Bank in
circumstances in which Security might not otherwise do so. Under the BHCA, the
Federal Reserve may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal Reserve's determination that such activity or control
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution of a bank holding company. Further, federal
bank regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition.
BANK REGULATION
General. Farmers is the holding company for Farmers National Bank of
Canfield. Farmers National Bank of Canfield is a member of the Federal Reserve
system. The Office of the Comptroller of the Currency (OCC) is the primary
regulator for FNBC. The OCC regulates or monitors all areas of FNBC's
operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuance of securities, payment of dividends, interest rates payable on
deposits, interest rates or fees chargeable on loans, establishment of branches,
corporate reorganizations, maintenance of books and records, and adequacy of
staff training to carry on safe lending and deposit gathering practices. FNBC
must maintain certain capital ratios and is subject to limitations on aggregate
investments in real estate, bank premises, and furniture and fixtures.
All insured institutions must undergo regular on-site examinations by their
appropriate bank regulatory agencies. The cost of examinations of insured
depository institutions and any affiliates may be assessed by the appropriate
agency against each institution or affiliate as it deems necessary or
appropriate. Insured institutions are required to submit annual and quarterly
reports to their appropriate regulatory agencies.
Transactions With Affiliates and Insiders. FNBC is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. In addition, most
of these loans and certain other transactions must be secured in prescribed
amounts. FNBC is also subject to the provisions of Section 23B of the Federal
Reserve Act that, among other things, prohibit an institution from engaging in
certain transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable to such institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies. FNBC is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and
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collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
that, in connection with examinations of financial institutions within its
jurisdiction, the OCC shall evaluate the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility. FNBC has a
satisfactory rating under CRA.
Other Regulations. Interest and certain other charges collected or
contracted for by FNBC are subject to state usury laws and certain federal laws
concerning interest rates. FNBC's loan operations are also subject to certain
federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves; the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit; the Fair Credit Reporting Act of 1978 governing the
provision of information to credit reporting agencies; the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies; and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of FNBC also are subject to the Right to Financial Privacy Act, which
imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial
records, and the Electronic Funds Transfer Act and Regulation E issued by the
Federal Reserve Board to implement that act, which governs automatic deposits to
and withdrawals from deposit accounts and customers' rights and liabilities
arising from the use of automated teller machines and other electronic banking
services.
The deposits of Farmers National Bank of Canfield and Security Dollar Bank
are currently insured by the FDIC to a maximum of $100,000 per depositor,
subject to certain aggregation rules. The FDIC establishes rates for the payment
of premiums by federally insured banks for deposit insurance. An insurance fund
is maintained for commercial banks, with insurance premiums from the industry
used to offset losses from insurance payouts when banks fail. The FDIC has
adopted a risk-based deposit insurance premium system for all insured depository
institutions, including FNBC, which requires premiums from a depository
institution based upon its capital levels and risk profile, as determined by its
primary federal regulator on a semiannual basis.
INFORMATION ABOUT FARMERS AND ITS AFFILIATES
Farmers is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended (the "BHC Act"). Farmers was incorporated under the laws
of the State of Ohio on August 4, 1982. Its principal office is located at 20
South Broad Street, Canfield, Ohio 44406 and its telephone number is (330)
533-3341.
Farmers owns 100% of the issued and outstanding shares of FNBC. FNBC was
chartered in 1887 and commenced business in Canfield, Ohio shortly thereafter.
FNBC offers a broad range of commercial and personal banking services to its
customers. Loans include commercial, commercial real estate, financial and
industrial development, real estate construction and development, residential
real estate and consumer loans which are made primarily to owners and affiliates
of its commercial customers. Other services include cash management, Automated
Clearing House, safe-deposit box, lock box and online banking services.
INFORMATION ABOUT SECURITY AND ITS AFFILIATES
Security is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). Security was incorporated under
the laws of the State of Delaware on November 23, 1987, at the direction of
management of Security Dollar Bank for the purpose of becoming a bank holding
company by acquiring all of the outstanding shares of Security Dollar Bank. In
March 1988, Security became the sole
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shareholder of Security Dollar Bank. The principal office of Security is located
at One South Main, Niles, Ohio 44446-0228.
Security, through its affiliate, conducts the business of a commercial
banking organization. At June 30, 2000, Security and its subsidiary had
consolidated total assets of approximately $165.8 million, consolidated total
deposits of approximately $140.3 million and consolidated total equity of
approximately $14.3 million.
Security, through its banking affiliates, offers a broad range of banking
services to the commercial, industrial and consumer markets which it serves.
Services include commercial, real estate and personal loans, checking, savings
and time deposits and other customer services such as safe deposit facilities.
Security does not have any foreign operations, assets or investments.
Security Dollar Bank is a state banking corporation. Security Dollar Bank
is regulated by the Ohio Division of Financial Institutions ("ODFI") and the
Federal Reserve Bank, and its deposits are insured by the Federal Deposit
Insurance Corporation to the extent permitted by law.
Security Dollar Bank is headquartered in Niles, Ohio, which is located in
the northeast portion of Ohio, in the County of Trumbull. Trumbull County has a
population of approximately 227,000. Over the past 10 years less dependence on
the steel industry has occurred with a resulting increase in service related
businesses. The area's largest single employer is General Motors, which operates
an assembly facility within Trumbull County. Security Dollar Bank provides
customary retail and commercial banking services to its customers, including
checking and savings accounts, time deposits, NOW accounts, safe deposit
facilities, real estate mortgage loans and installment loans. Security Dollar
Bank also makes secured and unsecured commercial loans.
The largest category of loans comprising the Security Dollar Bank's loan
portfolio is residential real estate loans. These loans are primarily single
family residential real estate loans secured by a first mortgage on the
dwelling. The risks associated with these loans are primarily the risk of
default in repayment and inadequate collateral. The next largest loan segment of
Security Dollar Bank's loan portfolio is the commercial category. The loans
comprising this category represent loans to business interests, located
primarily within Security Dollar Bank's defined market areas, with no
significant industry concentration. Commercial loans include both secured and
unsecured loans. The risks associated with these loans are principally the risk
in default of the payment of principal resulting from economic problems of the
commercial customer, economic downturn affecting the market in general and in
the case of secured loans, inadequate collateral. Consumer and credit card loans
comprise the third largest area of Security Dollar Bank's loan portfolio. These
loans include consumer installment including automobile loans as well as
personal loans and credit card loans. The risks inherent in these loans include
the risk of default in principal, repayment and in the case of secured loans,
the risk of inadequate collateral.
As of June 30, 2000, Security Dollar Bank had 82 full-time and 16 part-time
employees. Security Dollar Bank provides a number of benefits for its full-time
employees, including health and life insurance, retirement plan, workers'
compensation, social security, paid vacations and numerous bank services.
The commercial banking business in the market areas served by Security
Dollar Bank is very competitive. Security Dollar Bank is in competition with
commercial banks located in their own service areas. Some competitors of
Security Dollar Bank are substantially larger than Security Dollar Bank. In
addition to local bank competition, Security Dollar Bank competes with larger
commercial banks located in metropolitan areas, savings banks, savings and loan
associations, credit unions, finance companies and other financial institutions
for loans and deposits.
Security Dollar Bank owns and operates its main office located at One South
Main Street in Niles, Ohio. Security Dollar Bank also owns and operates four (4)
other branch offices. The locations of the four offices are as follows:
Girard Office, 121 North State Street, Girard, Ohio 44420
422 Office, 5845 Youngstown-Warren Road, Niles, Ohio 44446
Youngstown Road Office, 2910 Youngstown Road, Warren, Ohio 44484
Mineral Ridge Office, 3826 Main Street, Mineral Ridge, Ohio 44440
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LEGAL PROCEEDINGS
The nature of Security's business results in a certain amount of
litigation. Accordingly, Security and its subsidiary, Security Dollar Bank, are
subject to various pending and threatened lawsuits in which claims for monetary
damages are asserted. This occurs in the ordinary course of business. While any
litigation involves an element of uncertainty, in the opinion of management of
Security, liabilities, if any, arising from such litigations or threat thereof
will not result in a material loss or have a material effect on Security.
Management of Security believes that a loss, if any, will be paid by applicable
insurance contracts.
ON MARCH 17, 2000, THE BOARD OF DIRECTORS OF SECURITY DOLLAR BANK APPROVED
AND ENTERED INTO A WRITTEN REGULATORY AGREEMENT BETWEEN SECURITY DOLLAR BANK AND
ITS REGULATORS, THE FEDERAL RESERVE BANK OF CLEVELAND AND THE OHIO DIVISION OF
FINANCIAL INSTITUTIONS. THIS AGREEMENT REQUIRES THE BOARD OF DIRECTORS OF
SECURITY DOLLAR BANK TO ADOPT A PLAN AND IMPLEMENT POLICIES AND PROCEDURES, THE
PURPOSES OF WHICH ARE TO PROVIDE GREATER BOARD OF DIRECTOR OVERSIGHT, CONTROL
AND SUPERVISION OF SECURITY DOLLAR BANK'S SENIOR MANAGEMENT AND MAJOR OPERATIONS
AND ACTIVITIES IN THE GENERAL AREAS OF: OPERATIONS, LENDING, LIQUIDITY, INTEREST
RATE RISK POSITIONS, INTERNAL CONTROLS, RECORD KEEPING , INTERNAL AUDIT
FUNCTIONS, RISK MANAGEMENT, MANAGEMENT STRUCTURE, CAPITAL LEVELS, OPERATING
PERFORMANCE AND PERIODIC REPORTING. THE AGREEMENT ALSO PROVIDES THAT SECURITY
DOLLAR BANK WILL ONLY PAY DIVIDENDS WITH THE PRIOR WRITTEN APPROVAL OF ITS
PRIMARY REGULATORS. THE AGREEMENT WAS EXECUTED IN ACCORDANCE WITH CURRENT
BANKING REGULATIONS AND WILL REMAIN IN EFFECT UNTIL TERMINATED OR SUSPENDED BY
SECURITY DOLLAR BANK'S REGULATORS.
DESCRIPTION OF SECURITY'S COMMON STOCK
Security has 1,500,000 shares of authorized no par value common stock of
which 362,448 shares are currently issued and outstanding.
The holders of the common stock have no pre-emptive right to acquire other
or additional shares which may, from time to time, be authorized and issued by
Security.
Each share of common stock of Security entitles the holder thereof to (1)
vote on all matters. Shareholders of Security do not have cumulative voting
rights in the election of directors.
The Certificate of Incorporation of Security contains provisions providing
for indemnification of Security's directors and officers and the purchase of
insurance in connection with such indemnification.
The Certificate of Incorporation also contains certain provisions to
protect the interest of Security and its shareholders from any hostile takeover
attempts. A vote of 75 percent of the outstanding shares, in the aggregate, are
required to authorize the merger, consolidation or other business combination
with another entity or the disposition of all or substantially all of the assets
of Security or Security Dollar Bank to a person who owns five percent or more of
the shares of Security unless in each such case the matter has been approved and
recommended by vote of the directors. These provisions and limitations will make
it more difficult for companies or persons to acquire control of Security
without the support of the Board of Directors of Security. However, these
provisions also could deter offers for shares in Security which might be viewed
by certain shareholders not to be in their best interest.
SELECTION OF AUDITORS
Crowe, Chizek and Company LLP was appointed to serve as the Independent
Auditor for Security and its subsidiary for the fiscal year ended December 31,
1999. SR Snodgrass, A.C. acted as independent auditors for the fiscal year ended
December 31, 1998. During the two most recent fiscal years, there have been no
disagreements with Crowe, Chizek and Company LLP or SR Snodgrass, A.C. on any
matter of accounting principles or practice, financial statement disclosure, or
auditing scope or procedure or any reportable events. SR Snodgrass, A.C.'s
report on the financial statements for 1998 and prior years contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
Additional information regarding Security is contained on Form 10-KSB which
is contained in this joint proxy statement/prospectus as Annex D.
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THE MERGER
The following information describes the material information pertaining to
the merger. This description is not complete and is qualified by the more
detailed Appendices to this document which are incorporated by reference,
including the Agreement and Plan of Merger in Annex A. We urge you to read the
Appendices in their entirety.
OVERVIEW
The Agreement and Plan of Merger provides for a transaction in which
Security will merge with and into Farmers. Farmers will be the surviving
corporation of the merger. At the effective time of the merger, each share of
issued and outstanding Security common stock will cease to be outstanding and
will be converted into a number of shares of Farmers common stock equal to $90
divided by the average closing price of Farmers common stock for the thirty
trading days preceding the day prior to the effective date of the merger,
subject to a minimum of 7.200 shares of Farmers common stock for each share of
Security common stock and a maximum of 9.742 shares of Farmers common stock for
each share of Security common stock. The minimum ratio of 7.200 would apply when
such average last sale price of Farmers common stock exceeds $12.50 and the
maximum ratio of 9.742 would apply when such average last sale price of Farmers
common stock is less than $9.24. Following the merger, Farmers intends to merge
Security Dollar Bank into its subsidiary, FNBC.
BACKGROUND OF THE MERGER
Security was formed as the holding company for Security Dollar Bank in
March, 1988. Security Dollar Bank was chartered in November, 1904. Security
Dollar Bank currently operates five offices located in Niles, Girard, Mineral
Ridge and Warren, Ohio.
During the first quarter of 2000, the Board of Directors of Security began
the process of exploring its strategic alternatives. Security had experienced
significant growth through its subsidiary, Security Dollar Bank in certain
indirect loan programs which were implemented in 1995. These loan programs
proved to be initially profitable for Security; however, the program eventually
suffered an inordinate amount of loan losses. These loan losses eventually
resulted in an inordinate amount of charge-offs to the loan loss reserve and a
required increase to the loan loss reserve. Security also entered into
agreements with its regulators to undertake corrective actions so that such
losses would not be sustained in the future. These agreements were entered into
in the first quarter of 2000. These circumstances required Security to make
dramatic changes in its internal procedures and administration.
In evaluating the future direction of Security, the board identified two
basic paths as an independent organization. The first involved operating in a
more conservative, slower growth mode while concentrating on reforming the
procedures and administration of its operations. This path would also result in
slower growth of earnings and potentially effect the profitability of Security.
The second was to affiliate through a merger with a complimentary organization
which would allow Security to implement the changes it needed with the
assistance of the acquiring organization and to continue to grow earnings and
profit through the efficiencies gained in the affiliation. The board believed
that it was appropriate to evaluate the current franchise value of Security to
assist in its decision making process. An additional factor considered by the
board involved the perceived efforts by the Financial Accounting Standards Board
to abolish the pooling-of-interests method of accounting for mergers, and the
potential adverse effect of this change on the premiums paid in bank merger
transactions.
The board engaged the investment banking and consulting firm of Austin
Associates, Inc. ("Austin Associates") with a view to evaluate Security's
franchise value. The board met with Austin Associates on January 28, 2000 to
discuss the bank merger and acquisition market in the Niles, Ohio and
surrounding markets, the potential effect of the elimination of pooling
accounting on bank mergers, the potential value of Security in a sale
transaction and the range of potential purchasers of Security. Security formally
retained Austin Associates to serve as financial advisor on February 2, 2000.
Austin Associates began contacting a selected group of banking
organizations in March, 2000 regarding their potential interest in acquiring
Security. Parties expressed an interest in receiving more information and
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entered into confidentiality agreements with Security. On March 30, 2000, a
confidential memorandum containing financial and market information regarding
Security and Security Dollar Bank was sent to the interested parties to assist
in their evaluation. During April 2000, Austin Associates met and/or had
discussions with senior executives of all 17 interested parties related to the
business and operations of Security. Austin Associates requested that formal
indications of interest be submitted by April 28, 2000.
Of the 17 organizations that requested the confidential information
memorandum, 8 submitted offers, including Farmers. On May 9, 2000, Austin
Associates met with the board of directors of Security to review and evaluate
the status of the process. The presentation included an updated overview of the
bank merger market, a summary of the offers received, a comparison of the
potential acquirers in terms of financial and stock data, and a presentation
regarding bank stock prices generally and the decline in overall market values
across the banking sector.
The board of directors thoroughly reviewed the information provided by
Austin Associates and there was a full discussion regarding the specific terms
of the respective offers. The board of directors also considered the effect of
the proposals on Security Dollar Bank's employees and officers. To provide all
directors with adequate time to fully consider the range of issues involved in
this type of transaction as compared to remaining independent, the board of
directors addressed this issue at its regularly scheduled meeting on May 25,
2000, before making any final decisions. On May 26, 2000, at a special meeting
of the board of directors met with a representative of Austin Associates. The
board of directors determined that Farmers' offer was superior and represented
the best transaction for Security's shareholders, and authorized Austin
Associates to proceed with negotiations with Farmers with a view to Farmers
completing due diligence and entering into a definitive Agreement and Plan of
Merger.
Farmers completed its due diligence and upon doing so, Farmers amended its
offering price. Through additional negotiations between the Board of Security,
with the assistance of Austin Associates and representatives of Farmers, an
amended price was negotiated, as well as all other terms of the Agreement and
Plan of Merger. At a special board of directors meeting held on May 29, 2000,
the board of directors was advised that Austin Associates believed the financial
terms of the Agreement and Plan of Merger were fair, from a financial point of
view, to shareholders of Security. The board of directors, with legal counsel,
then considered the overall terms of the proposed transaction with Farmers,
including the provisions of the Agreement and Plan of Merger, and voted
unanimously to approve the Agreement and Plan of Merger. The Agreement and Plan
of Merger was executed immediately following the meeting. Each member of the
board of directors separately and individually agreed to vote all their shares
of Security common stock in favor of the merger.
REASONS OF SECURITY FOR THE MERGER
The Security Board of Directors, with the assistance of outside financial
and legal advisors, evaluated the financial, legal and market considerations
bearing on the decision to recommend the merger. The terms of the merger,
including the purchase price, are a result of arm's-length negotiations between
the representatives of Security and Farmers. In reaching its conclusion that the
merger agreement is in the best interest of Security and its shareholders, the
Security Board of Directors carefully considered the following material factors:
(1) the exchange ratio of the proposed merger, including the fact that
Security shareholders will not recognize any gain or loss for federal
income tax purposes on the receipt of Farmers common stock in the merger;
(2) a comparison of the terms of the proposed merger with comparable
transactions;
(3) information concerning the business, financial condition, results
of operations and prospects of Security and Farmers;
(4) competitive factors and trends towards consolidation in the
banking industry;
(5) the potential for increased access to the public capital markets,
stock liquidity and dividends to the shareholders of Security resulting
from the merger;
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(6) the review by the Security Board of Directors with its legal and
financial advisors of the provisions of the merger agreement;
(7) the opinion rendered by Austin Associates to the Security Board of
Directors that the terms of the merger agreement are fair, from a financial
point of view, to Security and its shareholders;
(8) alternatives to the merger, including continuing to operate
Security as an independent banking organization; and
(9) the value to be received by the Security shareholders in the
merger in relation to the historical trading prices, book value, earnings
and dividends per share of Security common stock.
The Security Board of Directors believes that by becoming a part of a
larger community bank with complementary geographic markets and greater
resources, Security will be able to expand more rapidly, serve its customers and
communities better and provide a broad array of services that will be
competitive in the Mahoning and Trumbull County, Ohio markets.
While each member of the Security Board of Directors individually
considered the foregoing and other factors, the Board did not collectively
assign any specific or relative weights to the factors considered and did not
make any determination with respect to any individual factor. The Security Board
of Directors collectively made its determination with respect to the merger
based on the conclusion reached by its members, in light of the factors that
each of them considered appropriate, that the merger is in the best interests of
Security's shareholders.
SECURITY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
THE MERGER.
OPINION OF SECURITY'S FINANCIAL ADVISOR
Austin Associates is an investment banking and consulting firm specializing
in community bank mergers and acquisitions. Austin Associates is not affiliated
with Farmers' Financial Advisor, Austin Financial Services, Inc. Security
retained Austin Associates, pursuant to an engagement letter dated January 31,
2000 and accepted February 2, 2000, to provide financial advisory services in
connection with the potential sale of Security. Security selected Austin
Associates as its financial advisor on the basis of Austin Associates' prior
relationship with Security, and Austin Associates' experience and expertise in
representing community banks in similar transactions.
On May 26, 2000, Austin Associates delivered to Security's Board its
opinion to the effect that the Exchange Ratio provided for in the merger
agreement is fair, from a financial point of view, to the shareholders of
Security.
You should consider the following when reading the discussion of Austin
Associates' opinion in this document:
- The summary of Austin Associates' opinion set forth in this joint proxy
statement/prospectus is qualified in its entirety by reference to the
full text of the opinion that is attached as Annex B to this document.
You should read the opinion in its entirety for a full discussion of the
procedures followed, assumptions made, matters considered and
qualifications and limitations of the review undertaken by Austin
Associates in connection with its opinion.
- Austin Associates' opinion is addressed to Security's Board and is
substantially identical to the written opinion delivered to Security's
Board dated May 26, 2000.
- Austin Associates expressed no opinion as to the price at which Farmers'
common stock would actually trade at any time in the future.
- Austin Associates' opinion does not address the relative merits of the
merger and the other business strategies considered by Security's Board,
nor does it address other reasons considered by the Security Board in
reaching the decision to proceed with the merger.
- Austin Associates' opinion to Security's Board rendered in connection
with the merger does not constitute a recommendation to any Security
shareholder as to how he or she should vote at the special meeting.
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No limitations were imposed by Security's Board or its management upon
Austin Associates with respect to the investigations made or the procedures
followed by Austin Associates in rendering its opinion.
The preparation of a financial fairness opinion involves various
determinations as to the most appropriate methods of financial analysis and the
application of those methods to the particular circumstances. It is, therefore,
not readily susceptible to partial analysis or summary description. In
connection with rendering its opinion, Austin Associates performed a variety of
financial analyses. Austin Associates believes that its analyses and the facts
considered in its analyses, without considering all other factors and analyses,
could create an incomplete or inaccurate view of the analyses and the process
underlying the rendering of Austin Associates' opinion.
In performing its analyses, Austin Associates made numerous assumptions
with respect to industry performance, business and economic conditions, and
other matters, many of which are beyond the control of Farmers and Security and
may not be realized. Any estimates contained in Austin Associates' analyses are
not necessarily predictive of future results or values, which may be
significantly more or less favorable than the estimates. Estimates of values of
companies do not purport to be appraisals or necessarily reflect the prices at
which the companies or their securities may actually be sold. Except as
described below, none of the analyses performed by Austin Associates was
assigned a greater significance by Austin Associates than any other. The
relative importance or weight given to these analyses by Austin Associates is
not effected by the order of the analyses (and the corresponding results). The
summaries of financial analyses include information presented in tabular format.
The tables should be read together with the text of those summaries.
Austin Associates has relied, without independent verification, upon the
accuracy and completeness of the information it reviewed for the purpose of
rendering its opinion. Austin Associates did not undertake any independent
evaluation or appraisal of the assets and liabilities of Farmers or Security,
nor was it furnished with any appraisals.
Austin Associates is not an expert in the evaluation of loan portfolios,
including under-performing or non-performing assets, charge-offs or the
allowance for loan losses. Austin Associates has not reviewed any individual
credit files of Farmers or Security and has assumed that Farmers' and Security's
allowances are, in the aggregate, adequate to cover losses. Austin Associates'
opinion is necessarily based on economic, market and other conditions existing
on the date of its opinion, and on information as of various earlier dates made
available to it which is not necessarily indicative of current market
conditions.
In rendering its opinion, Austin Associates made the following assumptions:
- that the merger will be accounted for as a pooling-of-interest in
accordance with generally accepted accounting principles;
- that all material governmental, regulatory and other consents and
approvals necessary for the consummation of the merger would be obtained
without any adverse effect on Security, Farmers or on the anticipated
benefits of the merger;
- that Security has provided all information, prepared by Security or its
other representatives, that might be material to Austin Associates in its
review; and
- that the financial projections reviewed were reasonably prepared and
reflect the best currently available estimates and judgment of the
management of Security as to the future operating and financial
performance of Security.
In connection with its opinion, Austin Associates reviewed:
- the merger agreement;
- audited financial statements of Farmers for the five years ended December
31, 1999;
- audited financial statements of Security for the five years ended
December 31, 1999;
- unaudited financial statements of Farmers and Security for the first six
months of 2000 ending June 30, 2000;
- financial and operating information with respect to the business,
operations and prospects of Farmers and Security.
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In addition, Austin Associates:
- held discussions with members of the senior management of Farmers and
Security regarding the historical and current business operations,
financial condition and future prospects of their respective companies;
- reviewed the historical market prices and trading activity for the common
stock of Farmers and the limited information available regarding the
infrequent trades of Security common stock, and compared the market
activity of Farmers' common stock with that of certain publicly traded
companies which it deemed to be relevant;
- compared the results of operations of Farmers with those of certain
financial institutions which it deemed to be relevant;
- compared the financial terms of the merger with the financial terms, to
the extent publicly available, of other recent business combinations of
financial institutions;
- analyzed the proforma equivalent financial impact of the merger to
Security's per share data; and
- conducted such other studies, analyses, inquiries and examinations as
Austin Associates deemed appropriate.
The following is a summary of all material analyses performed by Austin
Associates in connection with its opinion provided to the Security Board of
Directors as of May 26, 2000. The summary does not purport to be a complete
description of the analyses performed by Austin Associates.
The process for Soliciting Indications of Interest. After analysis and
discussions with Security's Board, Austin Associates contacted seventeen banking
organizations based on quality and level of overall financial performance, asset
size, stock trading activity and geographic scope of operations. Fifteen
organizations executed confidentiality agreements and requested the confidential
information memorandum that provided detailed information regarding the business
and operations of Security. Each organization was requested to submit a specific
proposal to acquire Security. Five written and three verbal offers were
received. Based on a review of the proposals, Security determined that the
financial terms of the Farmers proposal were superior to the other seven offers
received.
Summary of Financial Terms of Agreement. Austin Associates reviewed the
financial terms of the proposed transaction, including the form of
consideration, the exchange ratio, and the resulting price per share of Security
common stock pursuant to the proposed merger. Under the terms of the merger
agreement, each outstanding share of Security common stock shall be converted
into Farmers common stock based on an exchange ratio. The numerator of the
exchange ratio shall be $90.00 and the denominator of the exchange ratio shall
be the average Farmers common stock price for the 30 trading days two days prior
to the Effective Date of the merger.
However, if the average Farmers stock price exceeds $12.50 per share, the
exchange ratio shall be fixed at 7.200 shares of Farmers for each share of
Security. If the average Farmers stock price is less than $9.24 per share, the
exchange ratio shall be fixed at 9.742 shares of Farmers for each share of
Security. The effect of these provisions is that each Security common share
shall receive $90.00 in value of Farmers common stock provided that the average
closing price of Farmers common stock is between $9.24 and $12.50 per share. If
the Farmers stock price exceeds $12.50 as of the Effective Date of the merger,
the transaction value to Security will exceed $90.00 per share, and if the
Farmers stock price is less than $9.24 per share, the transaction value will be
less than $90.00 per share. Security has certain termination rights if Farmers'
average closing price (as defined in the Agreement) is less than $7.50 provided
that Farmers elects not to increase the exchange ratio to reach a per share
value of $73.07.
As of August 10, 2000, Farmers common stock closing price was $9.50 per
share. Based on this closing price, the value of the transaction to Security
shareholders would be $90.00 per share and the exchange ratio would equal 9.474.
Based on 361,776 outstanding common shares of Security and its outstanding
options, the aggregate value of the transaction is approximately $32.8 million.
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Austin Associates calculated that the indicated value of $32.8 million
represented:
- 229 percent of book value at June 30, 2000;
- 237 percent of tangible book value at June 30, 2000;
- 70.9 times diluted earnings per share for the twelve month period ending
June 30, 2000;
- 27.30 times normalized diluted earnings per share for the twelve month
period ending June 30, 2000. Normalized earning per share excludes
nonrecurring items and reduction in certain operating expenses of
Security. Based on these assumptions, Security's normalized earnings per
share for the twelve month period ending March 31, 2000 is approximately
$3.30; and
- a 11.5 percent premium over tangible book value as a percent of total
tangible assets as of June 30, 2000, (the aggregate transaction value
minus tangible book value divided by total tangible assets).
Industry Comparative Analysis. In connection with rendering its opinion,
Austin Associates compared selected results of Farmers to those of twenty-seven
other publicly traded Ohio and Pennsylvania-based banking organizations having
assets between $350 and $600 million.
Austin Associates considers this group of financial institutions comparable
to Farmers as to financial characteristics, geographic focus and stock trading
volume. Austin Associates compared selected balance sheet data, asset quality,
capitalization, profitability ratios and market statistics as of August 10,
2000. Selected results of this comparison are set forth below:
<TABLE>
<CAPTION>
MEDIAN OH/PA
FARMERS PEER GROUP
LTM (1) LTM (1)
-------- ------------
<S> <C> <C>
Return on Average Assets................................... 1.35% 1.12%
Return on Average Equity................................... 11.25% 12.49%
Total Assets ($millions)................................... $447.8 $449.6
Leverage Ratio............................................. 11.37% 8.42%
Nonperforming Assets/Assets................................ 0.23% 0.47%
</TABLE>
---------------
(1) Last twelve months ending June 30, 2000
This summary indicates that Farmers outperformed the Ohio/Pennsylvania peer
group in return on average assets, capital adequacy and asset quality for the
twelve month period ending June 30, 2000. Farmers is below the peer group in
return on average equity performance.
The Austin Associates analysis also indicated the following comparative
stock multiples, as of August 10, 2000:
<TABLE>
<CAPTION>
MEDIAN OH/PA
FARMERS PEER GROUP
---------- ------------
<S> <C> <C>
Market Price to Earnings................................. 12.7 times 11.9 times
Market Price to Tangible Book Value...................... 138% 159%
</TABLE>
This comparison indicated that Farmers traded at a premium to the
Ohio/Pennsylvania peer group as measured by price to earnings and at a discount
to the peer group's price to tangible book market valuation measure.
Comparable Transaction Analysis. Austin Associates reviewed certain
information relating to selective bank sale transactions. Three groups of
transactions were reviewed: (1) twelve announced transactions during 1996 to
1999 in Ohio with the seller's assets between $50 million and $300 million; (2)
nine announced transactions since 1998, in the Midwest, with the seller's assets
between $50 million and $300 million, and seller's return on average assets
between 0.00% and 0.75%; and (3) nine announced transactions since 1999 in all
states, with the seller's assets between $75 million and $300 million, seller's
return on average assets between 0.00% and 0.75%, and seller's tangible equity
to tangible assets between 6.0% and 10.0%. Austin Associates
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<PAGE> 56
compared the financial performance of the sellers in these selected transactions
as compared to the financial performance of Security, as follows:
<TABLE>
<CAPTION>
LTM OH MIDWEST
6/30/00 SELECTED SELECTED ALL STATES
SECURITY DEALS DEALS SELECTED DEALS
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
Total Assets ($millions)................. $165.8 $115.4 $111.5 $127.1
Leverage Ratio........................... 8.33% 9.69% 7.30% 7.62%
Return on Average Assets................. 0.27% 1.12% 0.53% 0.38%
Return on Average Equity................. 3.20% 10.50% 6.63% 4.31%
Efficiency Ratio......................... 81.0% 62.60% 75.21% 77.00%
Nonperforming Assets/Assets.............. 0.70% 0.14% 0.39% 0.60%
</TABLE>
Austin Associates compared the prices paid in these transactions as
compared to the transaction multiples being paid by Farmers for Security, as
follows:
<TABLE>
<CAPTION>
FARMERS/ OH MIDWEST
SECURITY SELECTED SELECTED ALL STATES SELECTED
TRANSACTION DEALS DEALS DEALS
----------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Price/Earnings Multiple (X)......... 70.9 21.9 30.8 35.8
Price/Tangible Book Value Ratio..... 237% 234% 174% 187%
</TABLE>
The multiples being paid by Farmers for Security exceeded the median
multiples for each selected group of transactions. However, a significant factor
not reflected by this comparison is the decline in the market prices and trading
multiples for banking organizations since June 30, 1999. Between June 30, 1999
and April 28, 2000 (the date that offers for Security were received), the SNL
Index of all publicly traded banks declined 16.0 percent. This is relevant
because acquirers in stock transactions can generally afford to pay higher
stated deal values if their own stock trades at relatively high price/book and
price/earnings multiples.
Of the 12 comparable Ohio transactions reviewed, six involved
price/tangible book value ratios in excess of approximately 245 percent at
announcement. Each of these six transactions involved stock as the only form of
consideration paid. Austin Associates calculated the price/book value ratio for
these six transactions as of the date the transaction was announced and then
updated the price/tangible book value ratio as of April 27, 2000, based solely
on the decline in the acquirer's market price during this time period. The
illustration below reflects the decline in market value that shareholders of the
selling companies, on average, would have experienced had they retained their
equity interest in the acquiring company through April 27, 2000.
<TABLE>
<CAPTION>
ADJUSTED PRICE/
ASSETS TANGIBLE BOOK VALUE AT
SELLING BANK ($MILLIONS) 04/27/00
------------ ----------- ----------------------
<S> <C> <C>
SNB Corp., Greenville............................... $293.6 222%
U.B. Bancshares, Bucyrus............................ $175.8 218%
Chippewa Valley, Rittman............................ $133.3 165%
Unibank, Steubenville............................... $193.9 190%
Farmers State Bank, New Washington.................. $153.9 209%
Summit Bancorp, Akron............................... $ 79.2 175%
------ ---
Average............................................. $171.6 197%
</TABLE>
This illustration shows that previously announced transactions in Ohio
(based on seller's assets between $50 million to $300 million) show adjusted
valuation multiples below that achieved by Security from Farmers as of August
10, 2000. The price/tangible book value being paid by Farmers equals 237 percent
of Security's June 30, 2000 tangible book value.
Contribution Analysis. Austin Associates compared the pro forma ownership
interest in Farmers that Security shareholders would receive, in the aggregate,
to the contribution by Security to certain balance sheet and income statement
measures of Farmers on a pro forma basis. The following table compares the range
of pro
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<PAGE> 57
forma ownership of Security and Farmers shareholders in the combined company,
based upon the minimum and maximum exchange ratios, with each company's
respective contribution of various selected measures:
<TABLE>
<CAPTION>
PRO FORMA
OWNERSHIP
-------------------
SECURITY FARMERS
-------- -------
<S> <C> <C>
Minimum 7.200 exchange ratio................................ 25.7% 74.3%
Maximum 9.742 exchange ratio................................ 31.9% 68.1%
</TABLE>
<TABLE>
<CAPTION>
RELATIVE CONTRIBUTION
PERCENTAGE
---------------------
INCOME STATEMENT SECURITY FARMERS
---------------- -------- --------
<S> <C> <C>
1999 Actual Net Income...................................... 10.3% 89.7%
LTM Normalized Net Income (1)............................... 17.3% 82.7%
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET AS OF MARCH 31, 2000
----------------------------------
<S> <C> <C>
Total Assets................................................ 27.0% 73.0%
Total Deposits.............................................. 29.8% 70.2%
Tangible Shareholders' Equity............................... 20.7% 79.3%
</TABLE>
---------------
(1) Based on normalized net income of $1.2 million at Security and $5.8 million
at Farmers.
Pro Forma Earnings and Book Value Per Share. Austin Associates also
reviewed the pro forma effect of the proposed transaction to Security's earnings
per share and June 30, 2000 book value per share. Austin Associates calculated
the pro forma effect using both the minimum and maximum exchange ratios of 7.200
and 9.742, respectively.
Security recorded earnings per share of $0.28 during the six month period
ending June 30, 2000 and Farmers' earnings measured $0.37 per share. Giving
effect to the merger, the equivalent Security earnings would have equaled $2.02
per share at the minimum exchange ratio and $2.53 per share at the maximum
exchange ratio, an increase of between 621 percent and 804 percent over actual
results.
Security's tangible book value per share equaled $38.21 as of June 30, 2000
and Farmers' tangible book value measured $6.90 per share. Giving effect to the
merger, the equivalent Security tangible book value would have equaled $46.51
per share at the minimum exchange ratio and $57.77 per share at the maximum
exchange ratio, an increase of between 22 percent and 51 percent over actual
results.
Pro Forma Equivalent Dividends. Austin Associates reviewed the 1999 cash
dividends paid by Farmers and Security. Actual cash dividends paid by Farmers in
1999 measured $0.42 per share. Actual dividends paid by Security in 1999
measured $1.24 per share. Based on the range of possible exchange ratios of
7.200 to 9.742, equivalent dividends to Security shareholders would have ranged
from $3.02 to $4.09 for 1999. The pro forma equivalent dividend range
approximates an increase between 144 percent to 230 percent over Security's 1999
actual dividend.
The current quarterly dividend rate of Farmers is $0.13 per share, or $0.52
per share on an annualized basis. Equivalent dividends to Security shareholders
presently range from $3.74 to $5.07 annually, assuming the minimum and maximum
exchange ratios, respectively.
The opinion expressed by Austin Associates was based on market, economic
and other relevant considerations as they existed and could be evaluated as of
the date of the opinion. Events occurring after the date of issuance of the
opinion, including but not limited to, changes affecting the securities markets,
the results of operations or material changes in the financial condition of
either Farmers or Security could materially affect the assumptions used in
preparing this opinion.
Security has agreed to pay Austin Associates customary fees for its
services as financial advisor in connection with the merger. In addition to its
fees and regardless of whether the merger is consummated, Security has agreed to
reimburse Austin Associates for its reasonable out-of-pocket expenses, and to
indemnify Austin Associates against certain liabilities, including liabilities
under securities laws.
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<PAGE> 58
REASONS OF FARMERS FOR THE MERGER
The long term strategy of the Board of Directors of Farmers recognizes that
further consolidation will occur in the banking and financial service
industries. To enhance the long term value for Farmers' Shareholders, Farmers
must be in a position to take advantage of this trend. Farmers has developed
certain acumen with its mix of products and services. To take the best advantage
of the offering of these products and services the Board recognizes that managed
geographic expansion of Farmers' marketplace is necessary. The Board also
recognizes that Farmers can expand its geographic marketplace through de novo
branching, or through acquisitions. The Board has also examined its geographic
marketplace to determine where expansion for Farmers would result in the
continued development of its business franchise and ultimately result in the
best value for its shareholders. The marketplace of Security was determined to
be a strategic opportunity for Farmers. Upon examining the Niles and Warren,
Ohio marketplace, it became apparent to the Board of Farmers that acquiring
Security would be the most time and cost efficient method of expanding into this
marketplace. This determination was made during the last quarter of 1999, prior
to Security being offered for sale.
Security was then offered for sale in the second quarter of 2000. At the
time Security was being offered for sale through its investment banker, the
Board had already determined that Security was a desirable strategic acquisition
target. The Board and management of Farmers, with the assistance of outside
financial and legal advisors, evaluated the financial, legal and market
considerations of Security and this transaction and concluded that the merger is
fair and in the best interest of Farmers' Shareholders. At its May 31, 2000
meeting, the Farmers Board approved the merger proposal and its related
transactions. In reaching the conclusion that the merger is fair and in the best
interest of the Shareholders of Farmers, in addition to the analysis and
discussion of Farmers with its financial and legal advisors, Farmers received
from AFSI an opinion dated May 26, 2000 as to the fairness of the merger from a
financial point of view. The AFSI furnished opinion determined that as of the
May 26, 2000, the date the Agreement and Plan of Merger was executed, the merger
was fair to the Shareholders of Farmers from a financial point of view. Since
the date of the AFSI opinion, the average price of Farmers common stock
calculated in accordance with the Agreement and Plan of Merger (average of the
prior 30 trading days) has decreased from $12.31 to 10.44 per share. Because of
this decrease, AFSI has informed Farmers that it is unable to render a fairness
opinion as of the date of this joint proxy statement/prospectus. Shareholders of
Farmers should consider this fact in their assessment of the analysis contained
in the AFSI opinion attached as Annex C to this joint proxy
statement/prospectus. The Board of Directors of Farmers continues to recommend
that the Shareholders of Farmers adopt the Agreement and Plan of Merger based
upon all of the factors set forth herein. We have set forth below the material
factors that the Farmers Board considered in reaching its decision to approve
the merger proposal and to unanimously recommend that Farmers Shareholders vote
to approve and adopt the Agreement and Plan of Merger:
- This transaction fits Farmers long term business strategy to grow the
company through near-market branch and whole bank acquisitions. In the
current economic environment, expansion through acquisition of another
financial institution is most economically advantageous to the Farmers
Shareholders when compared to other alternatives, such as de novo branch
openings or branch acquisitions.
- Information with respect to historical trading ranges and multiples of
Farmers common stock, and possible trading ranges and multiples for
Farmers stock on a stand alone basis and on a combined basis with
Security and the evaluation by the Board of Directors of the financial
terms of the Merger and their effect on the Shareholders of Farmers and
the belief of the Board that such terms are fair to Farmers and its
Shareholders.
- The opportunity to acquire and develop Security's attractive deposit and
loan customer base and obtain the services of Security's staff of branch,
lending and support personnel;
- Farmers Board's familiarity with and review of Security's business,
financial condition, results of operations and prospect, including but
not limited to its potential growth, development, productivity and
profitability;
- The expectation that the merger would provide economies of scale,
expanded product offerings, expanded opportunities for cross-selling,
cost savings opportunities and enhanced opportunities for growth and
expansion;
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<PAGE> 59
- The similarity between Farmers and Security's philosophy and commitments
to their respective employees, suppliers, creditors and customers and the
effect of the merger on the constituencies and other community and
societal considerations;
- The recognition of various financial benefits accompanying the merger,
including the belief that the merger would be accretive to long term
projected earnings per share, that the combined organization would be
well capitalized and have strong asset quality and that the combined
organization may have a higher potential for earnings and book value
multiples in expansion.
- The recognition of the adjacency of markets served and the diverse
products offered by Farmers and Security;
- The opportunity to consolidate and expand the geographic markets with
greater resources to better serve its customers and communities that will
be competitive in the Mahoning, Columbiana and Trumbull County, Ohio
markets;
- The knowledge of the current prospective environment in which Farmers and
Security operates, the competitive environment for banks and other
financial institutions generally, the increased regulatory burden on
financial institutions, and the trend toward consolidation and increased
competition in the financial services industry;
- The opportunity that the merger provides to strengthen and deepen the
management team of the combined entity.
- The expectation that for federal income tax purposes the Merger will
constitute tax-free reorganization to Farmers and its Shareholders.
- The expectation that the Merger will be accounted for under the
pooling-of-interests method of accounting.
- The terms and conditions of the merger agreement and the related
agreements.
- The likelihood of the Merger being approved by the appropriate regulatory
authorities.
- The structure of the Merger and the resulting corporate entity.
Because of the variety of factors considered in connection with its
evaluation of the merger, the Farmers Board did not find it practical to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination.
THE BOARD OF DIRECTORS OF FARMERS UNANIMOUSLY RECOMMENDS THAT THE MERGER
AGREEMENT AND THE ISSUANCE OF FARMERS COMMON STOCK IN CONNECTION THEREWITH BE
APPROVED BY THE FARMERS SHAREHOLDERS.
OPINION OF FARMERS FINANCIAL ADVISOR
Austin Financial Services, Inc. is a nationally recognized investment
banking firm specializing in the banking and financial services industry. AFSI
is continually engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, private placements and valuations for
estate, corporate and other purposes. AFSI does not contemplate any future
business with Farmers or Security arising from this engagement, nor has its
opinion concerning the fairness, from a financial point of view, of the terms of
the proposed merger been subject to indications of future business with either
Farmers or Security.
AFSI rendered its opinion to Farmers' Board of Directors to the effect that
the terms of the proposed merger are fair, from a financial point of view, to
the shareholders of Farmers. The written opinion was dated May 26, 2000, the
date of the merger agreement and was delivered shortly thereafter to Farmers'
Board of Directors. No limitations were imposed by the Board of Directors of
Farmers upon AFSI with respect to the investigations made or procedures followed
by AFSI in rendering its opinion. The full text of the May 26, 2000 opinion of
AFSI, which set forth assumptions made, matters considered and limits on the
review undertaken by AFSI, is attached as Annex C. FARMERS SHAREHOLDERS ARE
URGED TO READ THIS OPINION IN ITS ENTIRETY.
AFSI's opinion is directed only to the fairness, from a financial point of
view, of the terms of the proposed merger and does not constitute a
recommendation to any Farmers' shareholder as to how such shareholders should
vote at the special meeting of Farmers shareholders or any other matter. SINCE
THE DATE OF THE AFSI
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<PAGE> 60
OPINION, THE AVERAGE PRICE OF FARMERS COMMON STOCK CALCULATED IN ACCORDANCE WITH
THE AGREEMENT AND PLAN OF MERGER (AVERAGE OF THE PRIOR 30 TRADING DAYS) HAS
DECREASED FROM $12.31 TO 10.44 PER SHARE. BECAUSE OF THIS DECREASE, AFSI HAS
INFORMED FARMERS THAT IT IS UNABLE TO RENDER A FAIRNESS OPINION AS OF THE DATE
OF THIS JOINT PROXY STATEMENT/PROSPECTUS. SHAREHOLDERS OF FARMERS SHOULD
CONSIDER THIS FACT IN THEIR ASSESSMENT OF THE ANALYSIS CONTAINED IN THE AFSI
OPINION ATTACHED AS ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
In connection with its opinion, AFSI reviewed material bearing upon the
financial operating condition of Security and its wholly-owned subsidiary,
Security Dollar Bank ("Security Dollar") including, but not limited to: (1)
Security's 1999 Annual Report; (2) Security Dollar's Uniform Bank Performance
Report as of March 31, 2000; (3) Security Dollar's Consolidated Reports of
Condition and Income for the years 1998-1999 and March 31, 2000; (4) Security's
and Security Dollar's statement of financial condition as of May 31, 2000; (5)
SEC form 10QSB of Security for the first quarter of 2000; (6) Security Dollar's
budget as of May 31, 2000; (7) Written Agreement by and among Security Dollar,
the Federal Reserve Bank of Cleveland ("FRB"), and the Ohio Division of
Financial Institutions as of March 17, 2000; (8) Memorandum of Understanding by
and between Security Dollar and the FRB as of March 30, 2000; (9) other
internally-prepared financial and operating information of Security; (10)
publicly available data concerning certain other regional banks/thrifts and
bank/thrift holding companies merger and acquisition transactions believed
relevant to its inquiry; and (11) the merger agreement.
AFSI did not perform an independent evaluation of the assets and
liabilities of Security, but relied upon the accuracy and completeness of all of
the financial and other information provided to it by Security or from public
sources. Nor did AFSI independently verify the adequacy of the aggregate
allowances for loan losses set forth in the balance sheet of Security at May 31,
2000, and assumed on this date that such allowances complied fully with
applicable law, regulatory policy, and sound banking practice. However, AFSI did
perform the following due diligence of Security on May 12, 2000: (1) review of
Security's watch loan list; (2) review of litigation matters involving alleged
claims against Security; (3) review of Security's previous two years of
regulatory examinations; (4) review of historical and recent reported price and
trading activity for Security's common stock; (5) review of Security's corporate
minutes; and (6) discussion of the foregoing as well as questions to Security's
management and representatives concerning matters that could have a material
impact on the future value of Security's common stock.
AFSI also reviewed material bearing upon the financial operating condition
of Farmers and its wholly-owned subsidiary, Farmers National Bank including, but
not limited to: (1) Farmers National Bank's Consolidated Reports of Condition
and Income for the years 1998-1999 and March 31, 2000; (4) Farmers's
consolidated statement of financial condition as of May 31, 2000; (5) SEC form
10Q of Farmers for the first quarter of 2000; (6) other internally-prepared
financial and operating information, including projected financial statements of
Farmers. AFSI also discussed, and came to an understanding, with Farmers'
management and representatives, regarding the expected cost savings to be
realized by the reorganization proposed under the terms of the Agreement.
Furthermore, AFSI took into account its assessment of general economic,
market and financial conditions and its familiarity in other transactions, as
well as its experience in securities valuation and general knowledge of the
banking industry. AFSI's opinion was based upon conditions as they existed and
could be evaluated on the date of the opinion and the information made available
to AFSI through that date.
In its analyses, AFSI made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of Farmers and Security. Any estimates contained in
AFSI's analyses do not necessarily denote future results since many unforeseen
occurrences could affect or alter such estimates.
The following is a brief description of the analysis used in determining
the maximum exchange ratio of shares of Farmers common stock for shares of
Security common stock that could be attained without diluting Farmers'
stand-alone estimated earnings per share (based on the written opinion delivered
on May 26, 2000).
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<PAGE> 61
AFSI calculated five years of pro forma financial statements for Farmers
and Security starting at June 1, 2000. Utilizing the pro forma financial
statements, AFSI incorporated the expected cost savings from the proposed
reorganization. AFSI then compared the estimated earnings per share expected
from the proposed reorganization to the estimated earnings per share of Farmers
on a stand-alone basis. AFSI estimates that Farmers' assets will grow at an
average of five percent over each of the next five years with an average return
on assets of 1.32 percent. AFSI estimates that Security's assets will grow at an
average 4.45 percent over each of the next five years with an average return on
assets of 1.32 percent (incorporating the estimated cost savings expected from
the reorganization).
Based on the terms of the Agreement, the weighted average price of a share
of Farmers common stock during the period of 30 trading days beginning two days
prior to May 26, 2000, the estimated earnings projections determined by AFSI,
the reorganization would result in earnings per share accretion for holders of
common stock of Farmers. In other words, no earnings per share dilution is
expected from the first projected year and forward. Therefore, the exchange
terms of the Agreement would be fair, from a financial standpoint, to holders of
common stock of Farmers.
For comparison purposes and not as another method to value Security, AFSI
analyzed certain other mergers and acquisitions that were announced between
November 1, 1999 and May 31, 2000, in the states of Indiana, Ohio, Illinois, and
Michigan involving target financial institutions with assets under $850 million
in assets. AFSI compared the mean multiples of the price paid in relation to
earnings and book value of the other financial institutions analyzed to the same
multiples produced by the terms of this proposed reorganization. See Annex C for
more details.
AFSI analyzed certain other mergers and acquisitions that have consummated
over the past nineteen months in Ohio as well as other nearby states (including
the states of Indiana, Pennsylvania and Michigan) involving target financial
institutions with assets under $1 billion in assets. AFSI compared the mean
multiples of the price paid to both earnings and book value of the other
financial institutions analyzed to the same multiples produced by this
reorganization. See Annex C for more details.
Summarizing the contractual relationship between Farmers and AFSI, the fee
for AFSI's opinion is a contractual $12,500 plus out of pocket expenses. In
addition, Farmers also has agreed to indemnify AFSI and its officers, directors,
shareholders, employees and agents for all of its time, expenses, and any
liability incurred as a result of AFSI's proposed engagement by means of legal
action, administrative proceedings or threat thereof, unless such action,
pending or threat thereof is caused by AFSI's own unlawful conduct, breach of
duty or negligence during the course of performing AFSI's services.
AFSI, in rendering its opinion, has assumed that the transaction will be a
tax-free reorganization with no material adverse tax consequences to any of the
parties involved. In addition, AFSI has assumed that in the course of obtaining
the necessary regulatory approvals for the transaction, no condition will be
imposed upon Farmers or Security that will have a materially adverse impact on
the contemplated benefits of the proposed transaction to Farmers and Security
and their shareholders.
Based upon AFSI's analysis and subject to the qualifications described
herein, considering all circumstances known to us and based upon other matters
considered relevant, AFSI believes that as of May 26, 2000, the terms of the
merger agreement, from a financial point of view, are fair to Farmers and its
shareholders.
EFFECTIVE DATE AND TIME OF THE MERGER
The merger agreement provides that the merger will be effective upon the
date of the filing with the Ohio Secretary of State of a duly executed agreement
of merger pursuant to Section 1701.81 of the Ohio General Corporation Law, or at
such time thereafter as is provided by mutual agreement in the merger agreement.
The date and time on which the merger is effective as specified in the merger
agreement is referred to in this document as the effective date and effective
time, respectively. Although the parties have not adopted any formal timetable,
it is presently anticipated that the merger will be consummated during the
fourth quarter of 2000, assuming all of the conditions set forth in the merger
agreement are theretofore satisfied or waived. Farmers and Security each
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<PAGE> 62
has the right, acting unilaterally, to terminate the merger agreement if the
merger is not completed by May 31, 2001.
PURCHASE PRICE AND POTENTIAL ADJUSTMENTS
Each share of Security common stock issued and outstanding prior to the
effective time (other than shares as to which appraisal rights have been
perfected) shall be converted into the right to receive that number of shares of
Farmers common stock equal to a number obtained by dividing $90.00 by the
average closing price of Farmers common stock for the thirty trading days
immediately preceding the day prior to the effective date of the merger;
provided, however, that the exchange ratio shall not be less than 7.200 shares
of common stock, nor greater than 9.742, plus cash in lieu of fractional shares.
The exchange ratio is subject to adjustment if the average closing price of
Farmers common stock is less than $7.50, Security provides notice to terminate
the transaction and Farmers elects to adjust the exchange ratio to the number
resulting from dividing $73.07 by the average closing price.
CONVERSION OF SHARES OF SECURITY COMMON STOCK
At the effective time, by virtue of the merger and without any action on
the part of the holders of Security common stock, each issued and outstanding
share of Security common stock (other than dissenting and fractional shares)
will be converted into the right to receive the per share consideration of
Farmers common stock as discussed above. See "-- Purchase Price and Potential
Adjustments." All such shares of Security common stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each certificate previously representing any such shares shall
thereafter represent the shares of Farmers common stock into which such shares
of Security common stock have been converted. Certificates previously
representing shares of Security common stock shall be exchanged for certificates
representing whole shares of Farmers common stock issued in consideration
therefore upon the surrender of such certificates. Cash will be paid in lieu of
any fractional share of Farmers common stock. See "--Exchange of Security Stock
Certificates; Fractional Interests." From and after the effective date, the
holders of certificates formerly representing shares of Security common stock
shall cease to have any rights with respect to such shares.
EXCHANGE OF SECURITY STOCK CERTIFICATES; FRACTIONAL INTERESTS
Prior to the effective date, Farmers has agreed to appoint FNBC as exchange
agent (the "Exchange Agent") for the purpose of exchanging certificates
representing shares of Farmers common stock, and at and after the effective
date, Farmers will issue and deliver to the Exchange Agent certificates
representing the shares of Farmers common stock to be delivered to holders of
shares of Security common stock. As soon as practicable after the effective
date, each holder of shares of Security common stock, upon surrender to the
Exchange Agent of one or more certificates for such shares of Security common
stock for cancellation, will be entitled to receive a certificate representing
the number of shares of Farmers common stock into which such number of shares of
Security common stock will have been converted and a payment in cash with
respect to fractional shares, if any.
No dividends or other distributions of any kind which are declared payable
to shareholders of record of the shares of Farmers common stock after the
effective date will be paid to persons entitled to receive such certificates for
shares of Farmers common stock until such persons surrender their certificates
representing shares of Security common stock. Upon surrender of certificates
representing shares of Security common stock, the holder thereof will be paid,
without interest, any dividends or other distributions with respect to the
shares of Farmers common stock as to which the record date and payment date
occurred on or after the effective date and on or before the date of surrender.
If any certificate for shares of Farmers common stock is to be issued in a
name other than that in which the certificate for shares of Security common
stock surrendered in exchange therefor is registered, it will be a condition of
such exchange that the person requesting such exchange will pay to the Exchange
Agent any transfer costs, taxes or other expenses required by reason of the
issuance of certificates for such shares of Farmers common stock in a name other
than the registered holder of the certificate surrendered, or such persons will
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<PAGE> 63
establish to the satisfaction of Farmers and the Exchange Agent that such costs,
taxes or other expenses have been paid or are not applicable.
All dividends or distributions, and any cash to be paid in lieu of
fractional shares, if held by the Exchange Agent for payment or delivery to the
holders of unsurrendered certificates representing shares of Security common
stock and unclaimed at the end of six months from the effective date, will
(together with any interest earned thereon) at such time be paid or redelivered
by the Exchange Agent to Farmers, and after such time any holder of a
certificate representing shares of Security common stock who has not surrendered
such certificate to the Exchange Agent will, subject to applicable law, look as
a general creditor only to Farmers for payment or delivery of such shares of
Farmers common stock and dividends or distributions or cash, as the case may be.
No fractional shares of Farmers common stock will be issued to holders of
shares of Security common stock. In lieu thereof, each such holder entitled to a
fraction of a share of Farmers common stock will receive, at the time of
surrender of the certificate or certificates representing such holder's shares
of Security common stock, an amount in cash equal to the average price of
Farmers common stock multiplied by the fraction of a share of Farmers common
stock to which such holder otherwise would be entitled. The average price of
Farmers common stock is calculated using the closing price of the Farmers common
stock for the 30 trading days ending two business days before the closing. No
such holder will be entitled to dividends, voting rights, interest on the value
of, or any other rights in respect of, a fractional share.
TREATMENT OF STOCK OPTIONS
On or prior to the effective time, all outstanding options to purchase
shares of Security must be exercised by the holder of such options in accordance
with the terms of the Security Stock Option Plan or such options will be
forfeited.
CONDITIONS TO COMPLETION OF THE MERGER
Security's and Farmers' obligations to complete the merger are subject to
the satisfaction or written waiver of the following conditions:
- approval of the merger agreement by Security's shareholders;
- approval of the merger agreement by Farmers' shareholders;
- receipt of the required regulatory approvals described below under
"Regulatory Approvals;"
- the absence of any action by any court or regulatory authority
prohibiting the completion of the merger;
- the continued effectiveness of the registration statement of which this
joint proxy statement/prospectus is a part and no stop order being issued
or threatened;
- receipt of all permits or authorizations under state securities laws
necessary to complete the merger;
- the continued truth and accuracy of the representations and warranties of
each party except for any inaccuracies which would not have a material
adverse effect on the financial condition, results of operations,
businesses or prospects of the party by whom such representations and
warranties were made, and the performance by each party in all material
respects of all of the obligations required to be performed by it
pursuant to the merger agreement, and the delivery of officers'
certificates confirming satisfaction of the foregoing requirements;
- receipt by Security of an opinion of Bischoff, Kenney & Niehaus as to
certain tax matters;
- receipt by Security of an opinion of Bischoff, Kenney & Niehaus as to the
good standing of Farmers, the legality and compliance with applicable
securities laws of the shares of Farmers to be issued to shareholders of
Security;
- receipt by Farmers of an opinion of Bischoff, Kenney & Niehaus as to
certain tax matters; and
- receipt by Farmers of an opinion of Werner and Blank as to the good
standing of Security, the legality and compliance with applicable
securities laws of the shares of Security.
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We cannot predict if or when the conditions precedent to the merger can or
will be satisfied or waived by the appropriate party. However, as of the date of
this joint proxy statement/prospectus, neither Farmers nor Security has any
reason to believe that any of these conditions will not be satisfied.
REGULATORY APPROVALS
Federal Reserve Board. The merger is subject to prior approval by the
Federal Reserve Board under Section 3 of the Bank Holding Company ("BHC") Act of
1956. The BHC Act requires the Federal Reserve Board, when considering a
transaction such as this merger, to take into consideration the financial and
managerial resources (including the competence, experience and integrity of the
officers, directors and principal shareholders) and future prospects of the
institutions and the convenience and needs of the communities to be served. In
addition, under the Community Reinvestment Act of 1977, as amended, the Federal
Reserve Board must take into account the record of performance of the acquiring
institution in meeting the credit needs of the entire community, including
low-and moderate-income neighborhoods, served by the institution.
The BHC Act also prohibits the Federal Reserve Board from approving a
merger if it would result in a monopoly or be in furtherance of any combination
or conspiracy to monopolize or attempt to monopolize the business of banking, in
any part, of the United States, or if its effect in any section of the country
would be substantially to lessen competition or to tend to create a monopoly, or
if it would in any other manner result in a restraint of trade, unless the
Federal Reserve Board finds that the anticompetitive effects of the merger are
clearly outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the communities to be
served.
Pursuant to the BHC Act, the merger may not be consummated until 30 days
after Federal Reserve Board approval, during which time the United States
Department of Justice may challenge the merger on antitrust grounds. The
commencement of an antitrust action would stay the effectiveness of the Federal
Reserve Board's approval unless a court specifically ordered otherwise. With the
approval of the Federal Reserve Board and the concurrence of the Department of
Justice, the waiting period may be reduced to no less than 15 days. Farmers and
Security believe that the merger does not raise substantial antitrust or other
significant regulatory concerns and that they will be able to obtain all
requisite regulatory approvals on a timely basis without the imposition of any
condition that would have a material adverse effect on Farmers.
Status of Regulatory Approvals. Farmers and Security have filed all of the
required applications and notices with respect to the merger and will promptly
take other appropriate action with respect to any requisite approvals or other
action of any governmental authority.
THE MERGER CANNOT PROCEED IN THE ABSENCE OF THE REQUISITE REGULATORY
APPROVALS. WE DO NOT KNOW IF OR WHEN ALL OF THESE REGULATORY APPROVALS WILL BE
OBTAINED. ALSO, THESE APPROVALS MAY CONTAIN A CONDITION, RESTRICTION OR
REQUIREMENT THAT CAUSES THESE APPROVALS TO FAIL TO SATISFY THE CONDITIONS FOR
THE MERGER.
AMENDMENT, WAIVER AND TERMINATION
Prior to or at the effective time, any provision of the merger agreement
may be either waived by the party benefited by such provision or amended or
modified by written agreement between Farmers and Security. The merger agreement
may be terminated, and the merger abandoned, at any time prior to the effective
time by the mutual consent of Security and Farmers. In addition, the merger
agreement may be terminated, and the merger abandoned, prior to the effective
time by either Farmers or Security if:
- the other party breaches a representation, warranty, covenant or other
agreement contained in the merger agreement that has a material adverse
effect on the breaching party, and the breach cannot be or has not been
cured within 30 days of the notice having been given to the breaching
party;
- the merger is not completed by May 31, 2001;
- a governmental authority denies a requisite approval for completion of
the merger by final non-appealable action; or
- the Security shareholders or Farmers shareholders fail to approve the
merger agreement.
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CONDUCT OF BUSINESS PENDING THE MERGER
The following is a summary of the agreements Security and Farmers have made
regarding actions prior to the merger.
SECURITY. Security has agreed that it will operate its business and the
businesses of its subsidiaries in the ordinary course through the effective time
of the merger. In addition, it has agreed that it will not, without first
obtaining Farmers' consent:
- issue any additional shares of Security common stock, any other Security
capital stock or any rights to acquire Security equity stock, except
pursuant to pre-existing rights to acquire Security equity stock;
- make any distributions with respect to Security common stock or any other
Security equity stock or change its capital structure. However, Security
may make (1) quarterly dividends on Security common stock in an amount
not to exceed $0.32 per share with record and payment dates consistent
with past practice and pay (2) dividends from its wholly owned subsidiary
to Security on or in respect of shares of Security common stock;
- enter into or amend any employment related agreements, grant any salary
or wage increase or increase any employee related benefits except in the
ordinary course of business, as previously disclosed to or agreed with
Farmers, or as required by law;
- enter into or amend any employee related benefit plan or take any action
to accelerate the vesting or exerciseability of any benefits payable
under any employee-related benefit plans, except as may be required by
law or contemplated by the merger agreement;
- sell, encumber or otherwise dispose of any material amount of its
properties except in the ordinary course of business;
- acquire any material assets, business, deposits or properties of any
other entity except in the ordinary course of business;
- amend Security's Certificate of Incorporation, Security's Bylaws or the
Certificate of Incorporation or Bylaws (or similar governing documents)
of Security's subsidiary;
- make any change in its accounting principles, practices or methods, other
than as may be required by GAAP or applicable regulatory agencies;
- enter into, terminate or amend any material contract, except in the
ordinary course of business;
- settle any material claim or proceeding, except in the ordinary course of
business consistent with past practice, that does not involve or create
precedent for claims, actions or proceedings that are reasonably likely
to be material to Security and its subsidiaries;
- take any action which is reasonably likely to prevent or impede the
merger from qualifying for pooling of interest accounting treatment, as a
reorganization under Section 368 of the U.S. tax code or knowingly take
any action which would materially interfere with the merger agreement;
- change materially its interest rate and other risk management policies,
procedures or practices as applied to the operations of Security or fail
to follow its existing policies or practices with respect to managing its
exposure to interest rate and other risk management policies, except as
required by law;
- borrow money other than in the ordinary course of business;
- make or change any material tax-related practice other than in the
ordinary course of business; or
- agree or commit to do any of the foregoing.
Security has also agreed that it will not, nor ask anyone to, initiate or
solicit any inquiries or any offer relating to a merger, consolidation or
similar transaction involving Security or Security Dollar Bank. This type of
proposal is referred to in this document as an "acquisition proposal." In
addition, Security will not negotiate or provide any confidential information or
data to, or have any discussions with, any person relating to an acquisition
proposal, or otherwise facilitate an acquisition proposal, except as legally
required for the discharge by the Security Board of its fiduciary duties.
Security has agreed to promptly advise Farmers following the
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receipt by Security of any acquisition proposal and to immediately advise
Farmers of any developments relating to any acquisition proposal.
FARMERS. Farmers has agreed that it will not, before the effective time,
without first obtaining Security's consent:
- take any action which is reasonably likely to prevent or impede the
merger from qualifying for pooling of interest accounting treatment,
qualify as a reorganization under Section 368 of the U.S. tax code or
take any action which would materially interfere with the merger
agreement.
FEES AND EXPENSES
Termination Fees. Security is required to pay Farmers a $2 million fee if
Security elects to enter into an agreement with a third party relating to a
takeover proposal where 10% or more of the shares of common stock of Security or
its subsidiary or 10% or more of the consolidated assets of Security or its
subsidiary are transferred or disposed of through tender or exchange offer,
sale, merger, consolidation, business combination or similar transaction.
General Expenses. Other than in the situations described above, whether or
not the merger is completed in accordance with the merger agreement, all costs
and expenses incurred in connection with the merger agreement and the
transactions covered by the merger agreement will be paid by the party incurring
those expenses.
AMENDMENT
The merger agreement may be amended by the parties at any time before or
after approval of the merger agreement by the shareholders of Farmers and
Security. However, after the approval by the shareholders of Farmers and
Security, no amendment shall be made which by law requires further approval by
such shareholders without such further approval. The merger agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties.
EXTENSION; WAIVER
At any time prior to the closing of the merger, the parties, by action
taken or authorized by their respective boards of directors, may, to the extent
legally allowed, (1) extend the time for the performance of any of the
obligations or other acts of the other parties, (2) waive any inaccuracies in
the representations and warranties contained in the merger agreement or in any
document delivered pursuant to it, and (3) waive compliance with any of the
agreements or conditions contained in the merger agreement. To "waive" means to
give up rights.
Any agreement on the part of a party to the merger agreement to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of such party.
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
Upon the consummation of the merger, Security will merge into Farmers. The
Articles of Incorporation and Code of Regulations of Farmers in effect
immediately prior to the effective date shall be and continue to be the Articles
of Incorporation and Code of Regulations of Farmers following the merger. The
directors and executive officers of Farmers prior to the effective date will be
the directors and executive officers of Farmers following the merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax consequences of the merger. This discussion does not address all
aspects of United States federal taxation that may be relevant to you, and it
may not be applicable to Security shareholders who, for United States federal
income tax purposes, are nonresident alien individuals, foreign corporations,
foreign partnerships, foreign trusts or foreign estates, or who acquired their
Security common stock pursuant to the exercise of Security stock options or
otherwise as
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compensation. You should consult your own tax advisor as to the particular tax
consequences of the merger to you.
This discussion is based on the Internal Revenue Code of 1986, as amended,
regulations thereunder, current administrative rulings and practice, and
judicial precedent, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax consequences to you as
discussed in this joint proxy statement/prospectus. This discussion assumes that
you hold your Security common stock as a capital asset within the meaning of
section 1221 of the Internal Revenue Code.
Farmers is not required to complete the merger unless Farmers receives an
opinion of Bischoff, Kenney & Niehaus, counsel to Farmers, based upon certain
customary assumptions and representations made by Farmers and Security, and to
the effect that under currently applicable law for United States federal income
tax purposes:
- The merger will constitute a reorganization within the meaning of section
368(a) of the Internal Revenue Code; and
- Farmers and Security will each be a party to that reorganization within
the meaning of section 368(b) of the Internal Revenue Code.
Security's obligation to complete the merger is conditioned upon Security
receiving an opinion of Farmers counsel, Bischoff, Kenney & Niehaus, or other
law or accounting firm reasonably acceptable to Farmers, based upon certain
customary assumptions and representations made by Farmers and Security, and to
the effect that under currently applicable law for United States federal income
tax purposes:
- The merger should constitute a reorganization within the meaning of
section 368(a) of the Internal Revenue Code;
- Farmers and Security should each be a party to that reorganization within
the meaning of section 368(b) of the Internal Revenue Code;
- Except for any cash received in lieu of any fractional share, no gain or
loss should be recognized by the holders of Security common stock who
receive Farmers common stock in exchange for the Security common stock
which they hold;
- The holding period of the Farmers common stock exchanged for Security
common stock should include the holding period of the Security common
stock for which it is exchanged, assuming the shares of Security common
stock are capital assets in the hands of the holder thereof at the
effective time; and
- The basis of the Farmers common stock received in the exchange should be
the same as the basis of the Security common stock for which it was
exchanged, less any basis attributable to fractional shares for which
cash is received.
Bischoff, Kenney & Niehaus has indicated that it expects to be able to
deliver its tax opinion. No ruling has been or will be obtained from the
Internal Revenue Service in connection with the merger. Opinions of counsel are
not binding on the Internal Revenue Service or the courts.
Although not explicitly addressed in the Bischoff, Kenney & Niehaus
opinion, the federal income tax consequences described below will occur to you
as a result of the merger being classified as a reorganization within the
meaning of section 368(a) of the Internal Revenue Code. Neither Farmers nor
Security will recognize gain or loss solely as a result of the merger. In
addition, if you receive cash in the merger instead of a fractional share of
Farmers common stock, then you will be treated as if you received the fractional
share in the merger and then Farmers redeemed the fractional share in exchange
for the cash. You will generally be required to recognize gain or loss equal to
the difference between the amount of cash received and the portion of your
adjusted tax basis in the shares of Farmers common stock allocable to the
fractional share.
You will recognize no gain or loss if you receive solely Farmers common
stock in exchange for shares of Security common stock you hold, except with
respect to cash received instead of fractional shares of Farmers common stock.
- The holding period of the shares of Farmers common stock you receive in
the merger (including any fractional share of Farmers common stock deemed
to be received by you, as described below), will
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include the holding period of the shares of Security common stock you
exchange for the shares of Farmers common stock; and
- The aggregate adjusted tax basis of the shares of Farmers common stock
you receive in the merger (including any fractional share of Farmers
common stock deemed to be received by you, as described below), will be
equal to the aggregate adjusted tax basis of the shares of Security
common stock surrendered by you for the shares of Farmers common stock.
The foregoing is a general discussion of the material United States federal
income tax consequences of the merger and is included for general information
only. The foregoing discussion does not take into account the particular facts
and circumstances of your status and attributes. As a result, the United States
federal income tax consequences addressed in the foregoing discussion may not
apply to you. In view of the individual nature of income tax consequences, you
are urged to consult your own tax advisor to determine the specific tax
consequences of the merger to you, including the application and effect of
United States federal, state, local and other tax laws and the possible effects
of changes in United States federal and other tax laws.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the merger is intended to
be treated as a pooling of interests of Security by Farmers under generally
accepted accounting principles. Under the pooling-of-interests accounting
method, the historical basis of the assets and liabilities of Farmers and
Security will be combined at the effective date of the merger and carried
forward at their previously recorded amounts and the shareholders' equity
accounts of Farmers and Security will be combined on Farmers' consolidated
balance sheet. Income and other financial statements of Farmers issued after the
closing of the merger will be restated retroactively to reflect the combined
operations of Farmers and Security as if the merger had taken place prior to the
periods covered by those financial statements. In order for the merger to
qualify for pooling-of-interests accounting treatment, 90% or more of the
outstanding Security common shares must be exchanged for Farmers common shares
with substantially similar terms. Other criteria must also be satisfied in order
for the merger to qualify as a pooling-of-interests, some of which criteria
cannot be satisfied until after the effective time of the merger. For example, a
company is generally precluded from using pooling accounting for a
just-completed merger if treasury shares acquired within six months after the
effective time of the merger, when combined with shares otherwise considered to
preclude pooling treatment, exceed 10% of the number of shares issued in the
merger, unless the acquisition of such shares is part of a previously
established systematic plan meeting appropriate criteria. Furthermore, in order
to qualify for pooling-of-interests accounting treatment, no affiliate of either
Farmers or Security may reduce his or her risk relative to Farmers common shares
until financial results covering at least 30 days of post-merger combined
operations have been published. In the event these conditions are not met, the
merger would not be closed unless the treatment as a pooling-of-interests was
waived by Farmers and Security. In that event, this joint proxy
statement/prospectus would need to be redistributed to reflect the accounting
for the transaction as a purchase. The unaudited pro forma combined financial
information contained in this joint proxy statement/prospectus have been
prepared using the pooling-of-interests method of accounting to account for the
merger. See "Summary--Selected Historical and Pro Forma Financial Data" and
"Unaudited Pro Forma Condensed Combined Financial Information."
TRADING MARKETS FOR STOCK
The common stock of Farmers is not listed or traded on an exchange. Farmers
is traded in the local market by various broker-dealers, although, to the
knowledge of Farmers, no broker-dealer holds inventory of its shares or provides
services as a market maker. Farmers is aware of periodic trading activity in its
stock which is reported to the Nasdaq, though there may be transactions from
time to time at prices that are not known to Farmers. Farmers does not expect to
list its common stock on any exchange or seek quotation of its common stock on
the Nasdaq in the near future. No change in the established public trading
market for the Farmers common stock is expected following the merger.
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The common stock of Security is not listed or traded on an exchange.
Security has utilized the services of a market maker. The service of the market
maker includes the purchase of shares from the market, holding inventory of such
shares and selling shares to the market.
RESALES OF FARMERS COMMON STOCK
The Farmers common stock issued pursuant to the merger will be freely
transferable under the Securities Act, except for shares issued to any Security
shareholder who may be deemed to be an "affiliate" of Farmers or Security for
purposes of Rule 145 under the Securities Act. Each director and executive
officer of Security is deemed to be such an affiliate.
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DISSENTERS' RIGHTS OF APPRAISAL
DISSENTERS' RIGHTS OF FARMERS SHAREHOLDERS
Holders of Farmers common stock who so desire are entitled to relief as
dissenting shareholders under Section 1701.84 of the Ohio Revised Code. A
shareholder of Farmers, however, will be entitled to such relief only if he
complies strictly with all of the procedural and other requirements of Section
1701.85 of the Ohio Revised Code. The following summary does not purport to be a
complete statement of the method of compliance with Section 1701.85 and is
qualified in its entirety by reference to the copy of Section 1701.85 attached
hereto as Annex F.
A holder of Farmers common stock who wishes to perfect his rights as a
dissenting shareholder in the event the merger agreement is adopted:
(a) must have been a record holder of the Farmers common stock as to
which he seeks relief as of the Farmers record date;
(b) must not have voted his Farmers common stock in favor of adoption
of the merger agreement; and
(c) must deliver to Farmers, not later than ten days after the Farmers
meeting, a written demand for payment of the fair cash value of the shares
as to which he seeks relief. This written demand must state the name of the
shareholder, his address, the number and class of shares as to which he
seeks relief, and the amount claimed as the fair cash value thereof.
A vote against adoption of the merger agreement will not satisfy the
requirements of a written demand for payment. Any written demand for payment
must be mailed or delivered to Frank Paden, Secretary, Farmers National Banc
Corp., 20 South Broad Street, Canfield, Ohio 44406. As the written demand must
be delivered within the ten-day period following the Farmers meeting, it is
recommended, although not required, that a shareholder using the mails should
use certified or registered mail, return receipt requested, to confirm that he
has made a timely delivery.
If Farmers sends the dissenting shareholder, at the address specified in
his demand, a request for the certificate(s) representing his shares, the
shareholder must deliver the certificate(s) within 15 days of the sending of
such request. Farmers may endorse the certificate(s) with a legend to the effect
that the shareholder has demanded the fair cash value of the shares represented
by the certificate(s). Failure to deliver the certificate(s) within 15 days of
the request terminates the shareholder's rights as a dissenting shareholder.
Farmers must notify the shareholder of its election to terminate his rights as a
dissenting shareholder within 20 days after the lapse of the 15 day period.
Unless the dissenting shareholder and Farmers shall agree on the fair cash
value per share of the Farmers common stock, either may, within three months
after the service of the written demand by the shareholder, file a petition in
the Court of Common Pleas of Mahoning County, Ohio. If the court finds that the
shareholder is entitled to be paid the fair cash value of any shares, the court
may appoint one or more appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value.
Fair cash value: (a) will be determined as of the day prior to the Farmers
meeting, (b) will be the amount a willing seller and willing buyer would accept
or pay with neither being under compulsion to sell or buy, (c) will not exceed
the amount specified in the shareholder's written demand, and (d) will exclude
any appreciation or depreciation in market value resulting from the merger. The
court shall make a finding as to the fair cash value of a share and render
judgment against Farmers for its payment with interest at such rate and from
such date as the court considers equitable. The costs of proceedings shall be
assessed or apportioned as the court considers equitable.
The rights of any dissenting shareholder will terminate if (a) he has not
complied with Section 1701.85, unless Farmers by its Board of Directors waives
such failure, (b) Farmers abandons or is finally enjoined or prevented from
carrying out, or the shareholders of Farmers rescind their adoption of, the
merger, (c) the dissenting shareholder withdraws his written demand, with the
consent of Farmers, by its Board of Directors, or (d) Farmers and the dissenting
shareholder shall not have agreed upon the fair cash value per share of the
Farmers
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common stock, respectively, and neither shall have timely filed or joined in a
petition in an appropriate court for a determination of the fair cash value of
the shares.
Because a proxy which does not contain voting instructions will be voted
for adoption of the merger agreement, a shareholder who wishes to exercise his
dissenters' rights must either not sign and return his proxy or, if he signs and
returns his proxy, vote against or abstain from voting on the adoption of the
merger agreement.
APPRAISAL RIGHTS OF SECURITY SHAREHOLDERS
Under the Delaware General Corporation Law, any holder of Security stock
who does not wish to accept the merger consideration in respect of his shares of
common stock has the right to dissent from the merger and to seek an appraisal
of and to be paid the fair cash value (exclusive of any element of value arising
from the accomplishment or expectation of the merger) for his or her shares of
stock, judicially determined, and paid to the stockholder in cash, together with
a fair rate of interest, if any, provided that the stockholder fully complies
with the provisions of Section 262 of the Delaware General Corporation Law.
The following summary does not purport to be a complete statement of the
method of compliance with Section 262 of the Delaware General Corporation Law
and is qualified in its entirety by reference to the copy of Section 262
attached hereto as Annex G.
Appraisal Rights Procedures. If you are a Security stockholder and you wish
to exercise your appraisal rights, you must satisfy the provisions of Section
262 of the Delaware General Corporation Law. Section 262 requires the following:
- You Must Make A Written Demand for Appraisal: You must deliver a written
demand for appraisal to Security before the vote on the merger agreement
is taken at the special meeting. This written demand for appraisal must be
separate from your proxy. A vote against the merger agreement will not
alone constitute demand for appraisal.
- You Must Refrain From Voting For Approval of the Merger: You must not
vote for approval of the merger agreement. If you vote, by proxy or in
person, in favor of the merger agreement, this will terminate your right
to appraisal. You can also terminate your right to appraisal if you return
a signed proxy and (1) fail to vote against approval of the merger, or (2)
fail to note that you are abstaining from voting. Your appraisal rights
will be terminated even if you previously filed a written demand for
appraisal.
- You Must Continuously Hold Your Security Shares: You must continuously
hold your shares of Security stock, from the date you make the demand for
appraisal through the closing of the merger. If you are the record holder
of Security stock on the date the written demand for appraisal is made but
thereafter transfer the shares prior to the merger, you will lose any
right to appraisal in respect of those shares. You should read the
paragraphs below for more details on making a demand for appraisal.
A written demand for appraisal of Security stock is only effective if it is
signed by, or for, the stockholder of record who owns such shares at the time
the demand is made. The demand must be signed as the stockholder's name appears
on their shares of Security common stock certificate(s). If you are the
beneficial owner of Security stock, but not the stockholder of record, you must
have the stockholder of record sign a demand for appraisal.
If you own Security stock in a fiduciary capacity, such as a trustee,
guardian or custodian, you must disclose the fact that you are signing the
demand for appraisal in that capacity.
If you own Security stock with more than one person, such as in a joint
tenancy or tenancy in common, all of the owners must sign, or have signed for
them, the demand for appraisal. An authorized agent, which could include one or
more of the joint owners, may sign the demand for appraisal for a stockholder of
record; however, the agent must expressly disclose who the stockholder of record
is and that the agent is signing the demand as that stockholder's agent.
If you are a record owner, such as a broker, who holds Security stock as a
nominee for others, you may exercise a right of appraisal with respect to the
shares held for one or more beneficial owners, while not exercising such right
for other beneficial owners. In such case, you should specify in the written
demand the
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number of shares as to which you wish to demand appraisal. If you do not
expressly specify the number of shares, we will assume that your written demand
covers all the shares of Security stock that are in your name.
If you are a Security stockholder who elects to exercise appraisal rights,
you should mail or deliver a written demand to: Security Financial Corp., One
South Main Street, Niles, Ohio 44446, Attention: Stephen K. Miller.
It is important that Security receive all written demands before the vote
concerning the merger agreement is taken at the special meeting. As explained
above, this written demand should be signed by, or on behalf of, the stockholder
of record. The written demand for appraisal should specify the stockholder's
name and mailing address, the number of shares of stock owned, and that the
stockholder is thereby demanding appraisal of that stockholder's shares.
If you fail to comply with any of these conditions and the merger becomes
effective, you will only be entitled to receive the merger consideration
provided in the merger agreement.
Written Notice. Within 10 days after the closing of the merger, Security
must give written notice that the merger has become effective to each
stockholder who has fully complied with the conditions of Section 262.
Petition with the Chancery Court. Within 120 days after the merger, either
the surviving corporation or any stockholder who has complied with the
conditions of Section 262, may file a petition in the Delaware Court of
Chancery. This petition should request that the chancery court determine the
value of the shares of stock held by all of the stockholders who are entitled to
appraisal rights. If you intend to exercise your rights of appraisal, you should
file such a petition in the chancery court. Security has no intention at this
time to file such a petition. Because Security has no obligation to file such a
petition, if you do not file such a petition within 120 days after the closing,
you will lose your rights of appraisal.
Withdrawal of Demand. If you change your mind and decide you no longer want
appraisal rights, you may withdraw your demand for appraisal rights at any time
within 60 days after the closing of the merger. You may also withdraw your
demand for appraisal rights after 60 days after the closing of the merger, but
only with the written consent of Security. If you effectively withdraw your
demand for appraisal rights, you will receive the merger consideration provided
in the merger agreement.
Request for Appraisal Rights Statement. If you have complied with the
conditions of Section 262, you are entitled to receive a statement from
Security. This statement will set forth the number of shares that have demanded
appraisal rights, and the number of stockholders who own those shares. In order
to receive this statement, you must send a written request to Security within
120 days after the merger. After the merger, Security has 10 days after
receiving a request to mail you the statement.
Chancery Court Procedures. If you properly file a petition for appraisal in
the chancery court and deliver a copy to Security, Security will then have 20
days to provide the chancery court with a list of the names and addresses of all
stockholders who have demanded appraisal rights and have not reached an
agreement with Security as to the value of their shares. The chancery court will
then send notice to all of the stockholders who have demanded appraisal rights.
If the chancery court thinks it is appropriate, it has the power to conduct a
hearing to determine whether the stockholders have fully complied with Section
262 of the Delaware General Corporation Law and whether they are entitled to
appraisal rights under that section. The chancery court may also require you to
submit your stock certificates to the Registry in Chancery so that it can note
on the certificates that an appraisal proceeding is pending. If you do not
follow the chancery court's directions, you may be dismissed from the
proceeding.
Appraisal of Shares. After the chancery court determines which stockholders
are entitled to appraisal rights, the chancery court will appraise the shares of
stock. To determine the fair value of the shares, the chancery court will
consider all relevant factors except for any appreciation or depreciation due to
the anticipation or accomplishment of the merger. After the chancery court
determines the fair value of the shares, it will direct Security to pay that
value to the stockholders who are entitled to appraisal rights. The chancery
court can also direct Security to pay interest, simple or compound, on that
value if the chancery court determines that interest is appropriate. In order to
receive payment for your shares, you must then surrender your stock certificates
to Security.
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The chancery court could determine that the fair value of shares of stock
is more than, the same as, or less than the merger consideration. In other
words, if you demand appraisal rights, you could receive less consideration than
you would under the merger agreement. You should also be aware that an opinion
of an investment banking firm that the merger is fair is not an opinion that the
merger consideration is the same as the fair value under Section 262.
Costs and Expenses of Appraisal Proceeding. The costs of the appraisal
proceeding may be assessed against Security and the stockholders participating
in the appraisal proceeding, as the chancery court deems equitable under the
circumstances. You can request that the chancery court determine the amount of
interest, if any, Security should pay on the value of stock owned by
stockholders entitled to the payment of interest. You may also request that the
chancery court allocate the expenses of the appraisal action incurred by any
stockholder pro rata against the value of all of the shares entitled to
appraisal.
Loss of Stockholder's Rights. If you demand appraisal rights, after the
closing of the merger you will not be entitled to:
- for any purpose, vote the shares of stock for which you have demanded
appraisal rights;
- receive payment of dividends or any other distribution with respect to
such shares, except for dividends or distributions, if any, that are
payable to holders of record as of a record date prior to the effective
time of the merger; or
- receive the payment of the consideration provided for in the merger
agreement (unless you properly withdraw your demand for appraisal).
If no petition for an appraisal is filed within 120 days after the closing
of the merger, your right to an appraisal will cease. You may withdraw your
demand for appraisal and accept the merger consideration by delivering to
Security a written withdrawal of your demand, except that (1) any attempt to
withdraw made more than 60 days after the closing of the merger will require the
written approval of Security, and (2) an appraisal proceeding in the chancery
court cannot be dismissed unless the chancery court approves.
If you fail to comply strictly with the procedures described above you will
lose your appraisal rights. Consequently, if you wish to exercise your appraisal
rights, we strongly urge you to consult a legal advisor before attempting to
exercise your appraisal rights.
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MARKET PRICE AND DIVIDEND INFORMATION
MARKET PRICE DATA
As of , 2000, there were approximately holders of
record of Farmers common stock and approximately holders of record of
Security common stock.
Neither the common stock of Farmers nor Security is listed or traded on an
exchange or in any established public trading market. Each of Farmers and
Security is aware of periodic trading activity in its stock which is reported to
Nasdaq. The following table describes historical per share high and low sale
prices for Farmers common stock based solely upon information made available
from Nasdaq and for Security common stock based solely on information made
available to Farmers and Security from a limited number of buyers and sellers.
There may have been other transactions at other prices not known to Farmers or
Security. The table also sets forth per share cash dividends declared for the
quarters indicated.
<TABLE>
<CAPTION>
FARMERS BANC CORP. (2) SECURITY FINANCIAL CORP. (3)
----------------------------- -----------------------------
MARKET PRICE MARKET PRICE
---------------- DIVIDENDS ---------------- DIVIDENDS
HIGH LOW DECLARED HIGH LOW DECLARED
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
2000
First Quarter..................... $14.00 $13.50 $0.12 $73.12 $70.12 $0.32
Second Quarter.................... 14.00 7.25 0.13 78.00 71.00 0.32
1999
First Quarter..................... $44.00 $41.00 $0.19 $70.06 $69.57 $0.31
Second Quarter.................... 43.50 33.00 0.20 70.25 69.83 0.31
Third Quarter..................... 37.00 29.50 0.21 70.54 70.25 0.31
Fourth Quarter (1)................ 33.00 24.76 0.12 73.12 70.39 0.31
1998
First Quarter..................... $40.00 $32.00 $0.16 $66.59 $63.26 $0.30
Second Quarter.................... 40.00 38.13 0.17 66.76 66.59 0.30
Third Quarter..................... 44.50 41.00 0.17 69.24 66.76 0.30
Fourth Quarter.................... 44.00 41.00 0.18 69.57 69.24 0.30
1997
First Quarter..................... $26.75 $23.13 $0.13 $54.00 $54.00 $0.28
Second Quarter.................... 27.25 25.00 0.14 59.12 54.00 0.28
Third Quarter..................... 29.00 25.63 0.15 60.31 59.12 0.28
Fourth Quarter.................... 33.00 27.38 0.16 65.16 60.31 0.31
</TABLE>
---------------
(1) Adjusted for stock spits and dividends.
(2) At the close of business on May 26, 2000, immediately prior to the first
public announcement of the merger, the most recent sale price known to
management for Farmers common stock was $10.75.
(3) At the close of business on May 26, 2000, immediately prior to the first
public announcement of the merger, the most recent sale price known to
management for Security common stock was $74.00.
DIVIDENDS AND DIVIDEND POLICY
FARMERS. Farmers' Board of Directors considers the advisability and amount
of proposed dividends each year. Future dividends will be determined after
consideration of Farmers' earnings, financial condition, future capital funds,
regulatory requirements and such other factors as the Board of Directors may
deem relevant. Farmers' primary source of funds for payment of dividends to its
shareholders will be receipt of dividends from FNBC. The payment of dividends by
a bank is subject to various legal and regulatory restrictions.
Farmers has paid quarterly cash dividends on its outstanding shares of
common stock totaling $0.58 per share in 1997, $0.68 per share in 1998 and $0.72
per share in 1999. It is the intention of Farmers to continue to pay cash
dividends, subject to the restrictions on the payment of cash dividends as
described above, depending
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upon the level of earnings, management's assessment of future capital needs and
other factors considered by the Board of Directors.
Holders of Farmers common stock are entitled to receive dividends as and
when declared by the Board of Directors of Farmers out of funds legally
available therefore under the laws of the State of Ohio. The Ohio General
Corporation Law provides that a corporation may make a distribution to its
shareholders out of its surplus (the excess of the corporation's net assets over
its capital), or if there is no surplus, out of its net profits for the year in
which the dividend is declared and/or its preceding fiscal year.
The Federal Reserve Board generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowing or other
arrangements that might adversely affect a bank holding company's financial
position. The Federal Reserve Board's policy is that a bank holding company
should not continue its existing rate of cash dividends on its common stock
unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset quality and overall financial condition.
Under the merger agreement, Farmers is prohibited from declaring or paying
any dividends on or making other distributions in respect of any of its capital
stock, except (1) cash dividends in an amount substantially equivalent to
dividends paid in the 12 months prior to the date of the merger agreement and
(2) dividends paid to Farmers from a wholly-owned subsidiary. The merger
agreement also requires each party to coordinate with the other party the
declaration of, and record and payment dates for, any dividend in respect of its
common stock.
Security. Holders of Security common stock are entitled to receive
dividends as and when declared by the Security Board of Directors out of funds
legally available therefore under the laws of the State of Delaware. The
Delaware General Corporation Law provides that a corporation may make a
distribution to its shareholders out of its surplus (the excess of the
corporation's net assets over its capital), or if there is no surplus, out of
its net profits for the year in which the dividend is declared and/or its
preceding fiscal year.
The Federal Reserve Board generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowing or other
arrangements that might adversely affect a bank holding company's financial
position. The Federal Reserve Board's policy is that a bank holding company
should not continue its existing rate of cash dividends on its common stock
unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset quality and overall financial condition.
Security has paid quarterly cash dividends on its outstanding shares of
common stock totaling $1.09 per share in 1997, $1.20 per share in 1998, and
$1.24 per share in 1999. Under the merger agreement, Security is prohibited from
declaring or paying any dividends on or making other distributions in respect of
any of its capital stock, except (1) cash dividends in an amount substantially
equivalent to dividends paid in the 12 months prior to the date of the merger
agreement and (2) dividends paid to Security from a wholly-owned subsidiary. The
merger agreement also requires each party to coordinate with the other party the
declaration of, and record and payment dates for, any dividend in respect of its
common stock.
COMPARISON OF SHAREHOLDER RIGHTS
GENERAL
Farmers is incorporated under and subject to the provisions of the Ohio
General Corporation Law. Security is incorporated under and subject to the
provisions of the Delaware General Corporation Law.
Upon consummation of the merger, except for those persons, if any, who
perfect appraisal rights (see "Dissenters' Rights of Appraisal"), the
shareholders of Security will become shareholders of Farmers.
Farmers is an Ohio corporation and, accordingly, is governed by the Ohio
General Corporation Law and by its Articles of Incorporation (the "Farmers
Articles") and Code of Regulations (the "Farmers Regulations"). Security is a
Delaware corporation and, accordingly, is governed by the Delaware General
Corporation Law, its Certificate of Incorporation (the "Security Certificate")
and Bylaws (the "Security Bylaws").
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The following is a general comparison of certain similarities and material
differences between the rights of Farmers and Security shareholders under their
respective governing Certificate or Articles of Incorporation and Regulations or
Bylaws. This discussion is only a summary of certain provisions and does not
purport to be a complete description of such similarities and differences, and
is qualified in its entirety by reference to the Ohio General Corporation Law
and the common law thereunder, the Delaware General Corporation Law and the
common law thereunder, and the full text of the Farmers Articles, Farmers
Regulations, Security Certificate and Security Bylaws.
CERTAIN ANTI-TAKEOVER MEASURES
FARMERS. Some of the provisions in the Farmers Articles and the Farmers
Regulations may deter efforts to obtain control of Farmers on a basis which some
shareholders might deem favorable.
Pre-Emptive Rights. Farmers' shareholders have the right to buy shares of
the same class that are to be sold for cash by the corporation in an amount
equal to their proportionate share of currently owned stock; however, there are
no pre-emptive rights when the corporation issues or offers securities in
exchange for the outstanding securities of another corporation and said
pre-emptive rights apply only when the corporation sells, or offers for sale,
securities for cash.
Control Share Acquistions. Article XV of the Farmers Articles requires the
shareholders to approve an acquisition of shares of Farmers which would entitle
the acquiring entity to exercise 10% or more of the voting power of the
corporation. If Farmers' Board, by a vote of at least two-thirds of the entire
Board, determines that the proposed share acquisition will be made on a uniform
and fair basis, the proposed share acquisition must be approved by the holders
of 66 2/3% of the shares of the corporation. Unless such determination is made
by the Board, the proposed share acquisition must be approved by holders of 80%
of the shares of the corporation. Any share acquisition which is approved by the
shareholders must be consummated within 180 days following such shareholder
approval.
Business Combinations. A business combination is defined in Farmers'
Articles as (i) a merger or consolidation of the corporation, (ii) any sale or
disposition of all or substantially all of the assets of the corporation, (iii)
the adoption of any plan of liquidation or dissolution of the corporation and
(iv) any reclassification, recapitalization or reorganization which would
increase directly or indirectly the proportionate equity interest or control by
an acquiring entity. The consummation of any business combination requires the
approval of the holders of 80% of the shares of the corporation; provided,
however, that a business combination which has been approved by a vote of at
least two-thirds of the disinterested directors of the corporation, and which
has been determined by such directors to be fair and equitable to all
shareholders of the corporation, may be consummated with approval of the holders
of 66 2/3% of the shares of the corporation.
Amendment of Article XV. Article XV may only be amended by the affirmative
vote of the holders of 75% of the shares of the corporation.
SECURITY. Some of the provisions in the Security Certificate and the
Security Bylaws may deter effects to obtain control of Security on a basis which
some shareholders might deem favorable.
Business Combination Transactions. A business combination is described in
the Security Certificate as (i) any merger or consolidation involving the
corporation, (ii) any sale or disposition of all or substantially all of the
assets of the corporation, (iii) any recapitalization or reclassification of the
corporation's securities or other transaction that would have the effect of
increasing the voting power of a related person to the corporation, (iv) any
liquidation, spin-off, split-up, or dissolution of the corporation and (v) any
agreement or contract providing for any of the above transactions. The Board of
Directors of the corporation has the authority to determine what is in the best
interest of the corporation when evaluating a Business Combination Transaction
except in Business Combination Transactions with a related person to the
corporation, in which case the approval of the holders of 75% of the shares of
the corporation is required to approve the Business Combination Transaction.
When evaluating a Business Combination Transaction the Board of Directors must,
in addition to considering the adequacy of the amount to be paid in connection
with any such transaction, consider all of the following factors and other
factors which it deems relevant: (i) the social and economic effects of the
transaction
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on the corporation and its subsidiaries, employees, depositors, loan and other
customers, creditors and other elements of the communities in which the
corporation and its subsidiaries operate or are located; (ii) the business and
financial conditions and earnings prospects of the acquiring person or persons,
including, but not limited to, debt service and other existing or likely
financial obligations of the acquiring person or persons, and the possible
effect of such conditions upon the corporation and its subsidiaries and the
other elements of the communities in which the corporation and its subsidiaries
operate or are located, and (iii) the competence, experience, and integrity of
the acquiring person or persons and its or their management. A related person
includes (i) any person or entity which, together with its affiliates, is the
owner of not less than 10% of the voting stock of the corporation (a) at the
time the definitive agreement was entered into, (b) at the time a resolution
approving the Business Combination Transaction was approved by the Board of
Directors of the corporation, or (c) as of the record date of the stockholders
of record entitled to notice of and to vote on the Business Combination
Transaction. The 75% voting requirement is not applicable if the continuing
directors, who at the time constitute at least a majority of the Board, have
expressly approved the Business Combination Transaction by at least a two-
thirds vote of such continuing directors.
Classified Board of Directors. The Board of Directors of Security is
divided into three classes with the term of office of one class expiring each
year.
QUORUM REQUIREMENTS
FARMERS. At any meeting for the determination of the number of directors,
or the election of directors, or for the consideration and action upon reports
required to be laid before the meeting, the shareholders present in person or by
proxy constitute a quorum. At any meeting called for any other purpose, the
holders of shares entitling them to exercise a majority of the voting power of
the corporation, present in person or by proxy, constitute a quorum.
SECURITY. At any meeting of the stockholders, the holders of a majority of
all of the shares of stock entitled to vote at the meeting, present in person or
by proxy, constitute a quorum.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Overview of Ohio Law. Under Ohio law, Ohio corporations are authorized to
indemnify directors, officers, employees, and agents within prescribed limits
and must indemnify them under certain circumstances. Ohio law does not provide
statutory authorization for a corporation to indemnify directors, officers,
employees, and agents for settlements, fines, or judgments in the contest of
derivative suits. It provides, however, that directors (but not officers,
employees, and agents) are entitled to mandatory advancement of expenses,
including attorneys' fees, incurred in defending any action, including
derivative actions, brought against the director, provided the director agrees
to cooperate with the corporation concerning the matter and to repay the amount
advanced if it is proved by clear and convincing evidence that his act or
failure to act was done with deliberate intent to cause injury to the
corporation or with reckless disregard for the corporation's best interests.
Ohio law does not authorize payment of expenses or judgments to a director,
officer, employee, or agent after a finding of negligence or misconduct in a
derivative suit absent a court order. Indemnification is required, however, to
the extent such person succeeds on the merits. In all other cases, if a
director, officer, employee, or agent acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, indemnification is discretionary except as otherwise provided by a
corporation's articles, code of regulations, or by contract and except with
respect to the advancement of expenses of directors.
Under Ohio law, a director is not liable for monetary damages unless it is
proved by clear and convincing evidence that his action or failure to act was
undertaken with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interests of the corporation. There is, however,
no comparable provision limiting the liability of officers, employees, or agents
of a corporation. The statutory right to indemnification is not exclusive in
Ohio, and Ohio corporations may, among other things, procure insurance for such
persons.
FARMERS. Farmers' Articles state that the corporation shall have power to,
and may (in addition to such other power conferred by law) indemnify any
shareholder, officer, or director of the corporation who was or is a
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party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, administrative, or
investigative, by reason of the fact that he is or was a director of the
corporation, or any corporation (hereinafter referred to as "subsidiary
corporation") of which more than 50% of the issued and outstanding shares of
common stock was or is owned by the corporation at the time such person was or
is serving as such director of the "subsidiary corporation," against expenses
(including those reasonably incurred by him) in connection with such action,
suit, and proceeding if the principal issue of such action, suit, or proceeding
involved or involves a contract or transaction by and between the corporation
and such "subsidiary corporation" and if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
"subsidiary corporation." Any indemnification as above provided (unless ordered
by a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification is proper in the circumstances
because the standard of conduct set forth above has been met. Such determination
shall be made (a) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding;
or (b) if such a quorum is not obtainable, or even if obtainable, if a majority
vote of a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (c) by a majority of a quorum of the
shareholders of the corporation consisting of shareholders who were not parties
to such action suit or proceeding.
Farmers has obtained directors and officers liability insurance covering,
subject to certain exceptions, actions taken by Farmers' directors and officers
in their capacities as such.
Overview of Delaware Law. Under Sections 102(b)(7) and 145 of the Delaware
General Corporation Law ("DGCL"), Security has broad power to indemnify and
insure its directors and officers against liabilities they may incur in their
capacities as such. Section 102(b)(7) of the DGCL permits a corporation to adopt
a provision in its certificate of incorporation eliminating or limiting the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director, except that such
provision shall not limit the liability of a director for: (i) any breach of the
director's duty of loyalty to the corporation or its shareholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) liability under Section 174 of the DGCL for unlawful
payment of dividends or stock purchases or redemptions; or (iv) any transaction
from which the director derived an improper personal benefit. Under Section 145
of the DGCL, a corporation may indemnify any person made a party or threatened
to be made a party to any type of proceeding (other than an action by or in the
right of the corporation) because he is or was an officer, director, employee or
agent of the corporation, or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or entity, against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such proceeding: (i) if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation; or (ii) in the case of a criminal proceeding, he
had no reasonable cause to believe that his conduct was unlawful. A corporation
may indemnify any person made a party or threatened to be made a party to any
threatened, pending or completed action or suit brought by or in the right of
the corporation because he was an officer, director, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other entity,
against expenses actually and reasonably incurred in connection with such action
or suit if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation, except that there
may be no such indemnification if the person is found liable to the corporation
unless, in such a case, the court determines the person is entitled thereto. A
corporation must indemnify a director, officer, employee or agent against
expenses actually and reasonably incurred by him who successfully defends
himself in a proceeding to which he was a party because he was a director,
officer, employee or agent of the corporation. Expenses incurred by an officer
or director (or other employees or agents as deemed appropriate by the Board of
Directors) in defending a civil or criminal proceeding may be paid by Security
in advance of the final disposition of such proceeding upon delivery of a
written affirmation by the director of his good faith belief that the standard
of conduct necessary for indemnification has been met and upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation. The Delaware law indemnification and expense advancement
provisions are not exclusive of any other rights which may be granted by the
bylaws, a vote of shareholders or disinterested directors, agreement or
otherwise.
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SECURITY. Security's Certificate states that the corporation shall
eliminate the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of his fiduciary duty as a
director. Said elimination does not apply and does not eliminate personal
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) for illegal distribution of dividends, or (iv) for any transaction from
which the director derived an improper personal benefit. Security's Bylaws state
the that each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative ("proceeding"), by reason of the fact
that he or she or a person for whom he or she is the legal representative is or
was a director or officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director or officer, employee or
agent of another corporation, or if a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the corporation law, as the same exists or extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent such amendment permits the
corporation to provide broader indemnification rights than said law permitted
the corporation to provide prior to such amendment) against all expenses,
liability and loss (including attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith. Such right shall be
a contract right and shall include the right to be paid by the corporation
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that the payment of such expenses incurred by a
director or officer of the corporation in his or her capacity while a director
or officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of such
proceeding, shall be made only upon delivery to the corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it should be determined ultimately that such director or officer
is not entitled to be indemnified under this section or otherwise.
The corporation may maintain insurance, at its expense, to protect itself
and any such director, officer, employee or agent of the corporation or another
corporation, partnership, joint venture, trust or other enterprise against any
such expense, liability or loss, whether or not the corporation would have the
power to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law.
Security has obtained directors and officers liability insurance covering,
subject to certain exceptions, actions taken by Securities' directors and
officers in their capacities as such.
Under the merger agreement, from and after the effective time of the merger
Farmers will indemnify and hold harmless each present director, officer and
employee of Security and its subsidiaries against costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages or
liabilities incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative arising
out of actions or omissions occurring on or prior to the Effective Time to the
fullest extent that Security is required to indemnify (and advance expenses to)
its directors, officers and employees under the laws of the State of Delaware
and the Security Certificate.
Additionally, Farmers will maintain Security's directors' and officers'
liability insurance policy for a period of three years following the Effective
Time of the merger, provided that Farmers may substitute policies providing at
least equivalent coverage which is no less advantageous to Security's current
officers and directors.
Overview of Federal Law. Federal law authorizes the FDIC to limit, by
regulation or order, the payment of indemnification by insured banks or bank
holding companies to their directors and officers. Pursuant to this authority,
the FDIC has enacted a regulation that permits the payment of indemnification by
banks and bank holding companies to institution-affiliated directors, officers
and other parties only if certain requirements are satisfied. This regulation
permits an institution to make an indemnification payment to, or for the benefit
of, a director, officer or other party only if the institution's Board of
Directors, in good faith, certifies in writing that the individual has a
substantial likelihood of prevailing on the merits and that the payment of
indemnification will
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not adversely affect the institution's safety and soundness. An institution's
Board of Directors is obligated to cease making or authorizing indemnification
payments in the event that it believes, or reasonably should believe, that the
conditions discussed in the preceding sentence are no longer being met. Further,
an institution's Board of Directors must provide the FDIC and any other
appropriate bank regulatory agency with prior written notice of any
authorization of indemnification. In addition, indemnification payments related
to an administrative proceeding or civil action instituted by an appropriate
federal bank regulatory agency are limited to the payment or reimbursement of
reasonable legal or other professional expenses. Finally, the director, officer
or other party must agree in writing to reimburse the institution for any
indemnification payments received should the proceeding result in a final order
being instituted against the individual assessing a civil money penalty,
removing the individual from office, or requiring the individual to cease and
desist from certain institutional activities.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
SHAREHOLDER MEETINGS AND ACTION BY WRITTEN CONSENT
FARMERS. The Farmers Regulations authorize shareholder action by written
consent upon the approval of all of the holders of shares who would be entitled
to notice of meeting of the shareholders held for such purpose.
SECURITY. Under Delaware Law, shareholders may authorize actions by written
consent upon the approval of the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. Security's Bylaws are silent on the issue of shareholder
action without meeting.
AMENDMENT OF BYLAWS; NUMBER OF DIRECTORS
FARMERS. The Farmers Regulations may be amended or repealed at any meeting
of shareholders by the affirmative vote of the holders of a majority of the
shares of the corporation or without a meeting, by an action by written consent
of the holders of 66 2/3% of the shares of the corporation. The Farmers Articles
and Farmers Regulations establish the number of directors of Farmers at eight.
SECURITY. Security's Bylaws may be amended or repealed in whole or in part
by an 80% vote of the whole Board of Directors at any meeting of the Board.
Stockholders may amend or repeal the Bylaws in whole or in part by approving
such amendment or repeal at a meeting of stockholders entitled to vote on such
issue unless, the specific Bylaw proposed for amendment or repeal has been
previously amended or repealed by the Board of Directors, then such amendment or
repeal must be approved by a 66 2/3% majority of the stockholders entitled to
vote on such amendment or repeal. The Security Bylaws state that the whole Board
shall consist of not less than one (1) nor more than twenty-five (25) directors.
Currently, the Board consists of four (4) members.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
FARMERS. The Farmers Regulations provide that vacancies occurring on the
Farmers Board of Directors may be filled by a vote of a majority of the
remaining directors until the successor or successors are elected at a
shareholder meeting.
SECURITY. The Security Bylaws provide that in the case of death or
resignation of one or more of the Security directors, a majority of the
surviving or remaining directors may fill the vacancy or vacancies until the
successor or successors are elected at a shareholders meeting. In addition, the
Delaware General Corporation Law provides that if, at the time of filling any
vacancy or any newly created directorship, the directors then in office who have
been elected by shareholders constitute less than a majority of the whole board,
the Delaware Court of Chancery may, upon application of any shareholder or
shareholders holding at least 10% of the total number of shares outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office.
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CALL OF SPECIAL MEETING OF SHAREHOLDERS
FARMERS. The Farmers Bylaws provide that a special meeting of the
shareholders may be called at any time by the Chairman of the Board of
Directors, President, Vice President or a majority of the Farmers Board of
Directors or upon written request of the holders of at least 25% of all of the
issued and outstanding shares entitled to vote.
SECURITY. The Security Bylaws provide that a special meeting of
stockholders may be called at any time by the Board of Directors, or by any
three (3) or more stockholders owning, in the aggregate, not less than fifteen
percent (15%) of the stock of the corporation.
CLASSIFIED BOARD PROVISIONS
FARMERS. The Farmers Regulations provide for a single class of directors to
hold office for a one year term.
SECURITY. The Security Certificate provides that the Board of Directors is
divided into three (3) classes with the term of office of one class expiring
each year.
DESCRIPTION OF FARMERS CAPITAL STOCK
The authorized capital stock of Farmers consists of 12,500,000 shares of
common stock, without par value. As of June 30, 2000, 7,689,807 shares of
Farmers common stock were outstanding and an additional 375,000 shares of the
authorized Farmers common stock were available for future grant and reserved for
issuance to holders of outstanding stock options under Farmers' stock option
plans.
Holders of Farmers common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. A simple
majority is required to take action by shareholders with the exception of the
approval of control share acquisitions and business combinations. If Farmers'
Board, by a vote of at least two-thirds of the entire Board, determines that a
proposed share acquisition will be made on a uniform and fair basis, the
proposed share acquisition must be approved by the holders of 66 2/3% of the
shares of the corporation. Unless such determination is made by the Board, the
proposed share acquisition must be approved by holders of 80% of the shares of
the corporation. The consummation of any business combination, including a
merger or consolidation, requires the approval of the holders of 80% of the
shares of the corporation; provided, however, that a business combination which
has been approved by a vote of at least two-thirds of the disinterested
directors of the corporation, and which has been determined by such directors to
be fair and equitable to all shareholders of the corporation, may be consummated
with approval of the holders of 66 2/3% of the shares of the corporation.
Shareholders are entitled to receive ratably such dividends as may be legally
declared by Farmers' Board of Directors. There are legal and regulatory
restrictions on the ability of Farmers to declare and pay dividends. See "Market
Price and Dividend Information--Dividends and Dividend Policy." In the event of
a liquidation, common shareholders are entitled to share ratably in all assets
remaining after payment of liabilities and liquidation preference for securities
with a priority over the Farmers common stock. Shareholders of Farmers common
stock have pre-emptive rights. Farmers common stock is not subject to calls or
assessments. Farmers does not have a classified Board of Directors. Farmers'
shareholders do not have the right to vote cumulatively in the election of
directors. Farmers common stock may be redeemed by a vote of the shareholders at
a regularly or specially called meeting for said purpose. The transfer agent and
registrar for Farmers common stock is FNBC.
DESCRIPTION OF SECURITY CAPITAL STOCK
The authorized capital stock of Security consists of 1,500,000 shares of
common stock. As of August 22, 2000, 362,448 shares of Security common stock
were outstanding. Each share of common stock is entitled to one vote on all
matters submitted to shareholders. In the event of a liquidation, dissolution or
winding up of Security, the holders of the common stock are entitled to receive
a pro-rata share of the assets of Security which are legally available for
distribution to such stockholders.
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EXPERTS
The Consolidated Financial Statements of Farmers incorporated in this joint
proxy statement/prospectus by reference from Farmers' annual report on Form 10-K
for the year ended December 31, 1999 have been audited by Hill, Barth & King,
LLC, independent auditors, as stated in their report which is included herein.
Such statements have been included herein in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The Consolidated Financial Statements for Security as of December 31, 1999
and for the year then ended, included in the registration statement of which
this document is a part, have been so incorporated in reliance upon the report
of Crowe, Chizek and Company LLP, as set forth in its report thereon. The
financial statements audited by Crowe, Chizek and Company LLP have been included
in reliance upon such report given upon their authority as an expert in
accounting and auditing.
The Consolidated Financial Statements for Security as of December 31, 1998
and for the year then ended, included in the registration statement of which
this document is a part, have been so incorporated in reliance upon the report
of SR Snodgrass, A.C., as set forth in its report thereon. The financial
statements audited by SR Snodgrass, A.C. have been included in reliance upon
such report given upon their authority as an expert in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Farmers common stock offered hereby and
certain legal matters in connection with the merger will be passed upon for
Farmers by Bischoff, Kenney & Niehaus, Sylvania, Ohio.
SOLICITATION OF PROXIES
Each of Farmers and Security will bear the cost of the solicitation of
proxies from their respective shareholders. In addition to solicitation by mail,
the directors, officers and employees of Farmers or Security may solicit proxies
from their respective shareholders by telephone or telegram or in person. Such
persons will not be additionally compensated, but will be reimbursed for
reasonable out-of-pocket expenses incurred in connection with such solicitation.
Arrangements will also be made with brokerage firms, nominees, fiduciaries and
other custodians, for the forwarding of solicitation materials to the beneficial
owners of shares held of record by such persons, and Farmers or Security, as
applicable, will reimburse such persons for their reasonable out-of-pocket
expenses in connection therewith.
WHERE YOU CAN FIND MORE INFORMATION
Farmers files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information that Farmers files at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. You may also obtain copies of this information by mail from
the Public Reference Section of the SEC, 450 5th Street, NW, Room 1024,
Washington, D.C. 20549 at prescribed rates. Please call the Commission at (800)
SEC-0330 for further information on the public reference rooms. The Commission
also maintains an Internet World Wide Web site at "http://www.sec.gov" at which
reports, proxy and information statements and other information regarding
Farmers are available.
Farmers has filed with the Securities and Exchange Commission a
registration statement on Form S-4 under the Securities Act relating to the
shares of Farmers common stock to be issued in connection with the merger. This
joint proxy statement/prospectus also constitutes the prospectus of Farmers
filed as part of the registration statement and does not contain all the
information set forth in the registration statement and exhibits thereto. You
may copy and read the registration statement and its exhibits at the public
reference facilities maintained by the Commission at the public reference rooms
specified above.
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The SEC allows Farmers to "incorporate by reference" information into this
joint proxy statement/prospectus, which means that Farmers can disclose
important information to you by referring you to another document filed
separately with the Commission. The information incorporated by reference is
deemed to be a part of this joint proxy statement/prospectus, except for any
information superseded by information contained directly in this joint proxy
statement/prospectus. This joint proxy statement/prospectus incorporates by
reference the documents set forth below that Farmers has previously filed with
the Commission. These documents contain important information about Farmers and
its financial condition.
FARMERS SEC FILINGS (FILE NO. 000-12055)
<TABLE>
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1999
Proxy Statement on Schedule 14A Filed March 23, 2000
Quarterly Report on Form 10-Q Filed August 9, 2000
Current Reports on Form 8-K Filed June 2, 2000
</TABLE>
Farmers incorporates by reference any additional documents that it may file
with the Commission between the date of this joint proxy statement/prospectus
and the date of the Farmers special meeting. These include periodic reports,
such as annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, as well as proxy statements.
Farmers has supplied all information contained or incorporated by reference
in the joint proxy statement/prospectus relating to Farmers.
This joint proxy statement/prospectus incorporates by reference documents
relating to Farmers which are not presented in this joint proxy
statement/prospectus or delivered herewith. Those documents relating to Farmers
are available from Farmers without charge, excluding all exhibits unless
specifically incorporated by reference in this joint proxy statement/prospectus,
by requesting them in writing or by telephone from Farmers Banc Corp., 20 South
Broad Street, Canfield, Ohio 44406, Attention: Frank L. Paden, (330) 533-3341.
If you would like to request documents from Farmers, please do so by
, 2000 in order to receive them before the special meeting.
In deciding how to vote on the merger, you should rely only on the
information contained or incorporated by reference in this joint proxy
statement/prospectus. Neither Farmers nor Security has authorized any person to
provide you with any information that is different from what is contained in
this joint proxy statement/prospectus. This joint proxy statement/prospectus is
dated , 2000. You should not assume that the information contained
in this joint proxy statement/prospectus is accurate as of any date other than
such date, and neither the mailing to you of this joint proxy
statement/prospectus nor the issuance to you of shares of Farmers common stock
will create any implication to the contrary. This joint proxy
statement/prospectus does not constitute an offer to sell or a solicitation of
any offer to buy any securities, or the solicitation of a proxy in any
jurisdiction in which, or to any person to whom, it is unlawful.
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ANNEX A
AGREEMENT AND PLAN OF MERGER
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AGREEMENT AND PLAN OF MERGER
DATED AS OF
MAY 26, 2000
BY AND BETWEEN
FARMERS NATIONAL BANC CORP.
AND
SECURITY FINANCIAL CORP.
A-2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I -- DEFINITIONS.................................... A-5
1.01 Definitions......................................... A-5
ARTICLE II -- THE MERGER.................................... A-8
2.01 The Merger.......................................... A-8
2.02 Effectiveness of Merger............................. A-8
2.03 Effective Date and Effective Time................... A-9
2.04 Bank Merger......................................... A-9
ARTICLE III -- CONSIDERATION; EXCHANGE PROCEDURES........... A-9
3.01 Merger Consideration................................ A-9
3.02 Rights as Shareholders; Stock Transfers............. A-9
3.03 Fractional Shares................................... A-10
3.04 Exchange Procedures................................. A-10
3.05 Anti-Dilution Provisions............................ A-11
ARTICLE IV -- ACTIONS PENDING ACQUISITION................... A-11
4.01 Forbearances of Security............................ A-11
4.02 Forbearances of Farmers............................. A-13
ARTICLE V -- REPRESENTATIONS AND WARRANTIES................. A-14
5.01 Disclosure Schedules................................ A-14
5.02 Standard............................................ A-14
5.03 Representations and Warranties of Security.......... A-14
5.04 Representations and Warranties of Farmers........... A-23
ARTICLE VI -- COVENANTS..................................... A-25
6.01 Reasonable Best Efforts............................. A-25
6.02 Carry on Business in Normal Manner.................. A-25
6.03 Shareholder Approval................................ A-26
6.04 Registration Statement.............................. A-26
6.05 Press Releases...................................... A-27
6.06 Access; Information................................. A-27
6.07 Acquisition Proposals............................... A-27
6.08 Affiliate Agreements................................ A-28
6.09 Takeover Laws....................................... A-28
6.10 Farmers Common Stock Listing........................ A-28
6.11 Regulatory Applications............................. A-28
6.12 Cooperation with Filings............................ A-29
6.13 Indemnification..................................... A-29
6.14 Opportunity of Employment; Employee Benefits........ A-29
6.15 Notification of Certain Matters..................... A-30
6.16 Dividend Coordination............................... A-30
6.17 Security Common Stock Options....................... A-30
6.18 Accounting and Tax Treatment........................ A-30
6.19 No Breaches of Representations and Warranties....... A-30
6.20 Consents............................................ A-30
6.21 Insurance Coverage.................................. A-30
6.22 Correction of Information........................... A-30
6.23 Supplemental Assurances............................. A-31
6.24 Farmers Acquisition Proposal........................ A-31
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE VII -- CONDITIONS TO CONSUMMATION OF THE MERGER..... A-31
7.01 Conditions to Each Party's Obligation to Effect the
Merger............................................... A-31
7.02 Conditions to Obligation of Security................ A-32
7.03 Conditions to Obligation of Farmers................. A-33
ARTICLE VIII -- TERMINATION................................. A-34
8.01 Termination......................................... A-34
8.02 Effect of Termination and Abandonment; Enforcement of
Agreement............................................ A-34
ARTICLE IX -- MISCELLANEOUS................................. A-35
9.01 Survival............................................ A-35
9.02 Waiver; Amendment................................... A-35
9.03 Counterparts........................................ A-35
9.04 Governing Law....................................... A-35
9.05 Expenses............................................ A-35
9.06 Notices............................................. A-35
9.07 Entire Understanding; No Third Party Beneficiaries... A-35
9.08 Interpretation; Effect.............................. A-36
9.09 Waiver of Jury Trial................................ A-36
9.10 Successors and Assigns.............................. A-36
</TABLE>
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AGREEMENT AND PLAN OF MERGER, dated as of May 26, 2000 (this "Agreement"),
is by and between Farmers National Banc Corp. ("Farmers") and Security Financial
Corp. ("Security").
RECITALS
A. Security. Security is an Delaware corporation, having its principal
place of business in Niles, Ohio.
B. Farmers. Farmers is an Ohio corporation, having its principal place of
business in Canfield, Ohio.
C. Intentions of the Parties. It is the intention of the parties to this
Agreement that the business combination contemplated hereby be accounted for
under the "pooling-of-interests" accounting method and that it be treated as a
"reorganization" under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
D. Board Action. The respective Boards of Directors of each of Farmers and
Security have determined that it is in the best interests of their respective
companies and their shareholders to consummate the strategic business
combinations provided for herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein the
parties agree as follows:
ARTICLE I
DEFINITIONS
1.01 DEFINITIONS. The following terms are used in this Agreement with the
meanings set forth below:
"Acquisition Proposal" means any tender or exchange offer, proposal for a
merger, consolidation or other business combination involving Security or any of
its subsidiaries or any proposal or offer to acquire in any manner 20% or more
of the outstanding shares of any class of voting securities of, or 15% or more
of the assets or deposits of, Security or any of its subsidiaries, other than
the transactions contemplated by this Agreement.
"Affiliate" means with respect to any Person, any other Person who directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with the first Person, including without limitation
all directors and executive officers of the first Person.
"Agreement" means this Agreement, as amended or modified from time to time
in accordance with Section 9.02.
"Average Closing Price" has the meaning set forth in Section 8.01(e).
"Bank" means Security Dollar Bank, a wholly-owned subsidiary of Security.
"BHCA" means the Bank Holding Company Act of 1956, as amended.
"Code" means the Internal Revenue Code of 1986, as amended.
"Compensation and Benefit Plans" has the meaning set forth in Section
5.03(m).
"Consultants" has the meaning set forth in Section 5.03(m).
"Costs" has the meaning set forth in Section 6.13(a).
"DGCL" means the Delaware General Corporation Law.
"DSS" means Office of the Secretary of State of the State of Delaware.
"Determination Date" has the meaning set forth in Section 8.01(e).
"Directors" has the meaning set forth in Section 5.03(m).
"Disclosure Schedule" has the meaning set forth in Section 5.01.
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"Dissenting Shares" means any shares of Security Common Stock held by a
holder who properly demands and perfects appraisal rights with respect to such
shares in accordance with applicable provisions of the DGCL and any shares of
Farmers Common Stock held by a holder who properly demands and perfects
appraisal rights with respect to such shares in accordance with applicable
provisions of the OGCL.
"Effective Date" means the date on which the Effective Time occurs.
"Effective Time" means the effective time of the Merger, as provided for in
Section 2.03.
"Employees" has the meaning set forth in Section 5.03(m).
"Environmental Laws" means all applicable local, state and federal
environmental, health and safety laws and regulations, including, without
limitation, the Federal Resource Conservation and Recovery Act, the Federal
Comprehensive Environmental Response, Compensation and Liability Act, the
Federal Clean Water Act, the Federal Clean Air Act, and the Federal Occupational
Safety and Health Act, each as amended, regulations promulgated thereunder, and
state counterparts.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 5.03(m).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exchange Agent" has the meaning set forth in Section 3.04.
"Exchange Fund" has the meaning set forth in Section 3.04.
"Exchange Ratio" has the meaning set forth in Section 3.01.
"Farmers" has the meaning set forth in the preamble to this Agreement.
"Farmers Articles" means the Articles of Incorporation of Farmers, as
amended.
"Farmers Bank" means Farmers National Bank of Canfield.
"Farmers Board" means the Board of Directors of Farmers.
"Farmers Code" means the Code of Regulations of Farmers, as amended.
"Farmers Common Stock" means the common shares, without par value, of
Farmers.
"Farmers SEC Documents" has the meaning set forth in Section 5.04(f).
"Governmental Authority" means any court, administrative agency or
commission or other federal, state or local governmental authority or
instrumentality.
"Hazardous Substances" means (a) any "hazardous substance" as defined in
sec. 101(14) of the Comprehensive Environmental Response, Compensation and
Liability Act or regulations promulgated thereunder, (b) any "solid waste,"
"hazardous waste," or "infectious waste," as such terms are defined in any other
Environmental Law as of the date of this Agreement; and (c) asbestos,
urea-formaldehyde, polychlorinated biphenyls ("PCBs"), nuclear fuel or material,
chemical waste, radioactive material, explosives, known carcinogens, petroleum
products and by-products, and other dangerous, toxic or hazardous pollutants,
contaminants, chemical, materials or substances listed or identified in, or
regulated by, any Environmental Law.
"Indemnified Party" has the meaning set forth in Section 6.13(a).
"IRS" has the meaning set forth in Section 5.03(m).
The term "knowledge" means, with respect to a party hereto, actual
knowledge after undertaking a reasonable investigation of any officer of that
party with the title of not less than a senior vice president and that party's
in-house counsel, if any.
"Lien" means any charge, mortgage, pledge, security interest, restriction,
claim, lien, or encumbrance.
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"Material Adverse Effect" means, with respect to Farmers or Security, any
effect, change, event, occurrence or state of facts that (i) is material and
adverse to the financial position, results of operations or business of Farmers
and its subsidiaries taken as a whole, or Security and its subsidiaries taken as
a whole, respectively, or (ii) would materially impair the ability of either
Farmers or Security to perform its obligations under this Agreement or otherwise
materially threaten or materially impede the consummation of the Merger and the
other transactions contemplated by this Agreement; provided, however, that
Material Adverse Effect shall not be deemed to include the impact of (a) changes
in banking and similar laws of general applicability or interpretations thereof
by courts or governmental authorities or other changes affecting depository
institutions generally, changes in prevailing interest and deposit rates, (b)
any modifications or changes to valuation policies and practices in connection
with the Merger directed by Farmers or restructuring charges taken in connection
with the Merger directed by Farmers, in each case in accordance with generally
accepted accounting principles, (c) changes resulting from expenses (such as
legal, accounting and investment bankers' fees) incurred and Previously
Disclosed in connection with this Agreement or the transactions contemplated
herein, and (d) actions or omissions of a party which have been waived in
accordance with Section 9.02 hereof.
"Merger" has the meaning set forth in Section 2.01.
"Merger Consideration" has the meaning set forth in Section 2.01.
"New Certificate" has the meaning set forth in Section 3.04.
"ODFI" means The Ohio Division of Financial Institutions.
"OGCL" means the Ohio General Corporation Law.
"Old Certificate" has the meaning set forth in Section 3.04.
"OSS" means the Office of the Secretary of State of the State of Ohio.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means any individual, bank, corporation, partnership, limited
liability company, association, joint-stock company, business trust or
unincorporated organization.
"Pension Plan" has the meaning set forth in Section 5.03(m).
"Previously Disclosed" by a party shall mean information set forth in its
Disclosure Schedule.
"Proxy/Prospectus" has the meaning set forth in Section 6.04.
"Proxy Statement" has the meaning set forth in Section 6.04.
"Registration Statement" has the meaning set forth in Section 6.04.
"Regulatory Authority" has the meaning set forth in Section 5.03(i).
"Representatives" means, with respect to any Person, such Person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"Rights" means, with respect to any Person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any person any
right to subscribe for or acquire, or any options, calls or commitments relating
to, or any stock appreciation right or other instrument the value of which is
determined in whole or in part by reference to the market price or value of,
shares of capital stock of such person.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Security" has the meaning set forth in the preamble to this Agreement.
"Security Articles" means the Articles of Incorporation of Security, and
any amendment thereto.
"Security Affiliate" has the meaning set forth in Section 6.08(a).
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"Security Board" means the Board of Directors of Security.
"Security Bylaws" means the bylaws adopted by the directors of Security and
any amendments thereto.
"Security Common Stock" means the common stock, no par value per share, of
Security.
"Security SEC Documents" has the meaning set forth in Section 5.03(g).
"Security Meeting" has the meaning set forth in Section 6.03.
"Security Properties" has the meaning set forth in Section 5.03(p).
"Security Special Event" has the meaning set forth in Section 6.07(b).
"Security Common Stock Option" and collectively "Security Common Stock
Options" have the meanings set forth in Section 6.17.
"Security Common Stock Option Plans" has the meaning set forth in Section
6.17.
"Subsidiary" and "Significant Subsidiary" have the meanings ascribed to
them in Rule 1-02 of Regulation S-X of the SEC.
"Superior Proposal" shall have the meaning set forth in Section 6.07(c).
"Surviving Corporation" has the meaning set forth in Section 2.01.
"Takeover Laws" has the meaning set forth in Section 5.03(o).
"Tax" and "Taxes" means all federal, state, local or foreign taxes,
charges, fees, levies or other assessments, however denominated, including,
without limitation, all net income, gross income, gains, gross receipts, sales,
use, ad valorem, goods and services, capital, production, transfer, franchise,
windfall profits, license, withholding, payroll, employment, disability,
employer health, excise, estimated, severance, stamp, occupation, property,
environmental, unemployment or other taxes, custom duties, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority whether
arising before, on or after the Effective Date.
"Tax Returns" means any return, amended return or other report (including
elections, declarations, disclosures, schedules, estimates and information
returns) required to be filed with respect to any Tax.
"Treasury Stock" shall mean issued shares of Security Common Stock held by
Security or any of its subsidiaries other than in a fiduciary capacity or as a
result of debts previously contracted in good faith.
ARTICLE II
THE MERGER
2.01 THE MERGER. At the Effective Time, Security shall merge with and into
Farmers (the "Merger"), the separate corporate existence of Security shall cease
and Farmers shall survive and continue to exist as an Ohio corporation (Farmers,
as the surviving corporation in the Merger, sometimes being referred to herein
as the "Surviving Corporation"). Farmers may at any time prior to the Effective
Time change the method of effecting the Merger (including, without limitation,
the provisions of this Article II) if and to the extent it deems such change to
be necessary, appropriate or desirable; provided, however,that no such change
shall (i) alter or change the amount or kind of consideration to be issued to
holders of Security Common Stock as provided for in this Agreement (the "Merger
Consideration"), (ii) adversely affect the tax treatment of Security's
shareholders as a result of receiving the Merger Consideration or the Merger
qualifying for "pooling-of-interests" accounting treatment or (iii) materially
impede or delay consummation of the transactions contemplated by this Agreement.
2.02 EFFECTIVENESS OF MERGER. Subject to the satisfaction or waiver of the
conditions set forth in Article VII, the Merger shall become effective upon the
occurrence of the filing in the offices of the OSS and the DSS certificates of
merger in accordance with the OGCL and the DGCL or such later date and time as
may be set forth in such filings. The Merger shall have the effects prescribed
in the OGCL and the DGCL.
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2.03 EFFECTIVE DATE AND EFFECTIVE TIME. Subject to the satisfaction or
waiver of the conditions set forth in Article VII, the parties shall cause the
effective date of the Merger (the "Effective Date") to occur on (i) the day
designated by Farmers which day shall not be earlier than the third business day
to occur after the last of the conditions set forth in Article VII shall have
been satisfied or waived in accordance with the terms of this Agreement or later
than the last business day of the month in which such third business day occurs;
provided, no such election shall cause the Effective Date to fall after the date
specified in Section 8.01(c) hereof or after the date or dates on which any
Regulatory Authority approval or any extension thereof expires, or (ii) such
other date to which the parties may agree in writing. The time on the Effective
Date when the Merger shall become effective is referred to as the "Effective
Time."
2.04 BANK MERGER. Farmers intends to merge Bank with and into Farmers Bank
resulting in a single national banking association which shall be Farmers Bank
("Bank Merger") after the Effective Time. The Bank Merger will be effective
pursuant to a Merger Agreement (the "Bank Merger Agreement") in the form
required by the National Bank Act, as amended and the laws in the State of Ohio,
and by any other applicable laws, containing terms and conditions by Farmers,
not inconsistent with this Agreement. The Bank Merger shall only occur if the
Merger is consummated, and it shall become effective immediately after the
effective time or such later time as may be determined by Farmers. To obtain the
necessary regulatory approval for the Bank Merger to occur immediately after the
Effective Time, Security and Bank shall approve, adopt, execute and deliver the
Bank Merger Agreement and take all other reasonable steps requested by Farmers
prior to the Effective Time to effect the Bank Merger; provided that neither
Security nor the Bank shall be required to incur any material cost or take any
irrevocable action in connection with its obligations under this section.
ARTICLE III
CONSIDERATION; EXCHANGE PROCEDURES
3.01 MERGER CONSIDERATION. Subject to the provisions of this Agreement, at
the Effective Time, automatically by virtue of the Merger and without any action
on the part of any Person:
(a) Outstanding Security Common Stock and Security Rights. Each share,
excluding Treasury Stock, of Security Common Stock issued and outstanding
immediately prior to the Effective Time and each share of Security Common
Stock covered by a Security Common Stock Option exercised as of or prior to
the Effective Time shall be cancelled and extinguished and, in substitution
and exchange therefor, the holders shall be entitled to receive that number
of shares of Farmers Common Stock (the "Exchange Ratio") equal to a number
(rounded to the nearest thousandth) obtained by dividing $90.00, by the
Farmers Common Stock Average Closing Price; provided however, that the
Exchange Ratio shall not be less than 7.200, nor greater than 9.742, shares
of Farmers Common Stock for each one share of Security Common Stock,
subject to adjustment as set forth in Section 3.05. Security Common Stock
held by Farmers or any of its subsidiaries for its own account, and not in
a fiduciary or representative capacity for a person other than Farmers or
any of its subsidiaries shall be cancelled and no consideration shall be
issuable or payable with respect to any such share.
(b) Treasury Stock. Each share of Security Common Stock held as
Treasury Stock immediately prior to the Effective Time shall be canceled
and retired at the Effective Time and no consideration shall be issued in
exchange therefor.
(c) Outstanding Farmers Common Stock. Each share of Farmers Common
Stock issued and outstanding immediately prior to the Effective Time shall
remain issued and outstanding and unaffected by the Merger.
3.02 RIGHTS AS SHAREHOLDERS; STOCK TRANSFERS. At the Effective Time,
holders of Security Common Stock shall cease to be, and shall have no rights as,
shareholders of Security, other than to receive any dividend or other
distribution with respect to such Security Common Stock with a record date
occurring prior to the Effective Time and the consideration provided under this
Article III, and appraisal rights in the case of Dissenting Shares. After 3
business days prior to the Effective Time, there shall be no transfers on the
stock transfer books of Security or the Surviving Corporation of any shares of
Security Common Stock.
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3.03 FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of Farmers Common Stock and no certificates or scrip therefor,
or other evidence of ownership thereof, will be issued in the Merger. Such
fractional share interests shall not entitle the owner thereof to vote or to any
rights of a shareholder of the Surviving Corporation. Farmers shall pay to each
holder of Security Common Stock who would otherwise be entitled to a fractional
share of Farmers Common Stock (after taking into account all Old Certificates
delivered by such holder) an amount in cash (without interest) determined by
multiplying such fractional share of Farmers Common Stock to which the holder
would be entitled by the Average Closing Price of Farmers Common Stock.
3.04 EXCHANGE PROCEDURES. (a) At or prior to the Effective Time, Farmers
shall deposit, or shall cause to be deposited, with Farmers National Bank of
Canfield (in such capacity, the "Exchange Agent"), for the benefit of the
holders of certificates formerly representing shares of Security Common Stock
("Old Certificates"), for exchange in accordance with this Article III,
certificates representing the shares of Farmers Common Stock ("New
Certificates") and an estimated amount of cash (such cash and New Certificates,
together with any dividends or distributions with a record date occurring on or
after the Effective Date with respect thereto (without any interest on any such
cash, dividends or distributions), being hereinafter referred to as the
"Exchange Fund") to be paid pursuant to this Article III in exchange for
outstanding shares of Security Common Stock.
(b) As promptly as practicable after the Effective Date, Farmers shall send
or cause to be sent to each former holder of record of shares of Security Common
Stock immediately prior to the Effective Time transmittal materials for use in
exchanging such shareholder's Old Certificates for the consideration set forth
in this Article III. The transmittal material shall include material for use in
exchanging Old Certificates for New Certificates or book entry shares registered
on Security's stock transfer record (Book Entry Shares) for new stock
certificates representing the number of shares of Farmers' stock to which such
holders shall be entitled. Such materials shall also include enrollment
materials in the Farmers dividend reinvestment plan and related instructions for
enrollment therein. Farmers shall cause the New Certificates into which shares
of a shareholder's Security Common Stock are converted on the Effective Date
and/or any check in respect of any fractional share interests or dividends or
distributions which such person shall be entitled to receive to be delivered to
such shareholder upon delivery to the Exchange Agent of Old Certificates
representing such shares of Security Common Stock (or security or an indemnity
affidavit reasonably satisfactory to Farmers and the Exchange Agent, if any Old
Certificates are lost, stolen or destroyed) owned by such shareholder. No
interest will be paid on any such cash to be paid in lieu of fractional share
interests or in respect of dividends or distributions which any such person
shall be entitled to receive pursuant to this Article III upon such delivery.
Farmers shall cause the exchange agent to promptly register the shares of
Farmers common stock issuable to Security's holders of record in such manner, in
the names and to the addresses that appear on Security stock records as of the
Effective Time or in such other name to such other address as may be specified
by the holder of record in transmittal documents received by the exchange agent;
provided, however, that with respect to each Security stockholder, the exchange
agent shall have received all of the Old Certificates held by that stockholder,
or an affidavit of loss and indemnity bond for such certificate or such
certificates, together with properly executed transmittal materials; and such
certificates, transmittal materials, affidavits and bonds in a form and
condition reasonably acceptable to Farmers and the exchange agent.
(c) Notwithstanding the foregoing, neither the Exchange Agent, if any, nor
any party hereto shall be liable to any former holder of Security Common Stock
for any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(d) No dividends or other distributions with respect to Farmers Common
Stock with a record date occurring on or after the Effective Date shall be paid
to the holder of any unsurrendered Old Certificate representing shares of
Security Common Stock converted in the Merger into the right to receive shares
of such Farmers Common Stock until the holder thereof shall be entitled to
receive New Certificates in exchange therefor in accordance with the procedures
set forth in this Section 3.04. After becoming so entitled in accordance with
this Section 3.04, the record holder thereof also shall be entitled to receive
any such dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of Farmers Common Stock
such holder had the right to receive upon surrender of the Old Certificates.
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(e) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of Security for six months after the Effective Time shall be
delivered to Farmers. Any shareholders of Security who have not theretofore
complied with this Article III shall thereafter look only to Farmers for payment
of the shares of Farmers Common Stock, cash in lieu of any fractional shares and
unpaid dividends and distributions on Farmers Common Stock deliverable in
respect of each share of Security Common Stock such shareholder holds as
determined pursuant to this Agreement, in each case, without any interest
thereon.
(f) Farmers may from time to time, in the case of one or more Persons,
waive one or more of the rights provided to it in this Article III of this
Agreement to withhold certain payments, deliveries and distributions; and no
such waiver shall constitute a waiver of its rights thereafter to withhold any
such payment, delivery or distribution in the case of any Person.
(g) Anything contained in this Agreement or elsewhere to the contrary
notwithstanding, if any person shall perfect dissenters' rights in respect of
one or more Dissenting Shares in accordance with sec. 1701.85 of the OGCL
(sometimes hereafter called the "Ohio Dissenter's Statute") or sec. 262 of the
DGCL (sometimes hereafter called the "Delaware Dissenter's Statute"), then:
(a) Each such Dissenting Share shall nevertheless be deemed to be
extinguished at the Effective Time as provided elsewhere in this Agreement;
(b) Each person perfecting such dissenter's rights with respect to
Security Common Stock shall thereafter have only such rights (and shall
have such obligations) as are provided in the Delaware Dissenter's Statute,
and unless such rights and such obligations of such person are terminated
in accordance with the provisions of the Delaware Dissenter's Statute
Farmers shall not be required to deliver any Farmers Common Stock or cash
payments to such person in substitution for each such Dissenting Share in
accordance with this Agreement.
(c) Each person perfecting such dissenter's rights with respect to
Farmers' Common Stock shall thereafter have only such rights (and shall
have such obligations) as are provided in the Ohio Dissenter's Statute.
No person entitled to relief as a dissenting shareholder with respect to
Security Common Stock shall be entitled to submit a letter of transmittal,
and any letter of transmittal submitted by such a dissenting shareholder
shall be invalid.
3.05 ANTI-DILUTION PROVISIONS. In the event Farmers changes (or establishes
a record date for changing) the number of shares of Farmers Common Stock issued
and outstanding between the date hereof and the Effective Date as a result of a
stock split, stock dividend, recapitalization, reclassification, split up,
combination, exchange of shares, readjustment or similar transaction with
respect to the outstanding Farmers Common Stock and the record date therefor
shall be prior to the Effective Date, the Exchange Ratio shall be
proportionately adjusted. Shares issued pursuant to the requirements of the
Farmers Dividend Reinvestment Plan shall not effect the Exchange Ratio.
ARTICLE IV
ACTIONS PENDING ACQUISITION
4.01 FORBEARANCES OF SECURITY. From the date hereof until the Effective
Time, except as expressly contemplated by this Agreement and/or disclosed on the
Security Disclosure Schedule, without the prior written consent of Farmers,
Security will not, and will cause each of its subsidiaries not to:
(a) Ordinary Course. Except as otherwise provided in this Section
4.01, conduct the business of Security and its subsidiaries other than in
the ordinary and usual course including compliance with the internal
policies, lending limits, authorizations and conduct as was established and
adopted immediately prior to execution of this Agreement and which are not
inconsistent with the Policies of Farmers as are previously disclosed, or
fail to use reasonable efforts to perform its obligations, to preserve
intact their business organizations and assets and maintain their rights,
franchises and existing relations with customers,
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suppliers, employees and business associates, or voluntarily take any
action which, at the time taken, is reasonably likely to have an adverse
effect upon Security's ability to perform any of its obligations under this
Agreement or enter into new activities or lines of business not consistent
with past practices.
(b) Capital Stock. Other than pursuant to Rights Previously Disclosed
and outstanding on the date hereof, (i) issue, sell or otherwise permit to
become outstanding, or authorize the creation of, any additional shares of
Security Common Stock or any Rights, (ii) enter into any agreement with
respect to the foregoing, or (iii) permit any additional shares of Security
Common Stock to become subject to new Security Common Stock Options, other
Rights or similar stock-based employee Rights.
(c) Dividends, Etc. (i) Make, declare, pay or set aside for payment
any dividend, other than (A) quarterly cash dividends on Security Common
Stock in an amount not to exceed $0.32 per share, with record and payment
dates as indicated in Section 6.16 hereof, and (B) dividends from wholly
owned subsidiaries to Security, or (ii) directly or indirectly adjust,
split, combine, redeem, reclassify, exchange, purchase or otherwise
acquire, any shares of its capital stock.
(d) Compensation; Employment Agreements; Etc. Enter into or amend or
renew any employment, consulting, severance or similar agreements or
arrangements with any director, officer or employee of Security or its
subsidiaries, or grant any salary or wage increase or increase any employee
benefit, (including incentive or bonus payments) except (i) for normal
individual increases in compensation to employees in the ordinary course of
business consistent with past practice, (ii) for other changes that are
required by applicable law, or (iii) to satisfy Previously Disclosed
contractual obligations existing as of the date hereof.
(e) Benefit Plans. Enter into, establish, adopt or amend any pension,
retirement, stock option (except that Security may amend its Stock Option
Plan to provide that the execution of this Agreement shall constitute an
"Applicable Event" as defined is such plan), stock purchase, savings,
profit sharing, deferred compensation, consulting, bonus, group insurance
or other employee benefit, incentive or welfare contract, plan or
arrangement, or any trust agreement (or similar arrangement) related
thereto, in respect of any director, officer or employee of Security or its
subsidiaries, or take any action to accelerate the vesting or
exercisability of stock options, restricted stock or other compensation or
benefits payable thereunder; provided that Security may (i) take such
actions in order to satisfy either applicable law or Previously Disclosed
contractual obligations existing as of the date hereof or regular annual
renewal of insurance contracts; (ii) pay cash bonuses on the Closing Date
in the amounts accrued by Security as of the Closing Date as set forth in
Section 401(e) of the Disclosure Schedule; (iii) terminate its defined
contribution 401k plan at any time before the Effective Time, with benefit
distributions deferred until the IRS issues a favorable determination with
respect to the terminating plan's tax-qualified status upon termination and
with Security and Farmers to cooperate in good faith to apply for such
approval and to agree upon associated plan termination amendments that
shall, among other things, provide for the application of all assets of a
terminating plan for its participants, and allow plan participants not only
to receive lump-sum distributions of their benefits, but also to transfer
those benefits to the tax-qualified 401k plan that Farmers maintains for
its employees.
(f) Dispositions. Sell, transfer, mortgage, encumber or otherwise
dispose of or discontinue any of its assets, deposits, business or
properties except in the ordinary course of business.
(g) Acquisitions, Reorganizations. Acquire (other than by way of
foreclosures or acquisitions of control in a bona fide fiduciary capacity
or in satisfaction of debts previously contracted in good faith, in each
case in the ordinary and usual course of business consistent with past
practice) all or any portion of, the assets, business, deposits or
properties of any other entity; or merge or consolidate with any other
Person or otherwise reorganize.
(h) Governing Documents. Amend the Security Articles, Security Bylaws
or adopt regulations for Security or amend the articles of incorporation or
code of regulations (or similar governing documents) of any of Security's
subsidiaries.
(i) Accounting Methods. Implement or adopt any change in its
accounting principles, practices or methods, other than as may be required
by generally accepted accounting principles.
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(j) Contracts. Enter into or terminate any contract requiring the
payment or receipt of $10,000 or more in any 12 month period or amend or
modify in any material respect any of its existing material contracts,
other than loans and contracts of deposit made by the Bank. Farmers will
not unreasonably withhold its consent to a request by Security for Security
to enter into, terminate, amend or modify such a contract.
(k) Claims. Settle any claim, action or proceeding, except for any
claim, action or proceeding which does not involve precedent for other
material claims, actions or proceedings and which involves solely money
damages in an amount, individually, not exceeding $10,000.
(l) Adverse Actions. (a) Take any action that would, or is reasonably
likely to, prevent or impede the Merger from qualifying (i) for
"pooling-of-interests" accounting treatment or (ii) as a reorganization
within the meaning of Section 368(a) of the Code; or (b) take any action
that is intended or is reasonably likely to result in (i) any of its
representations and warranties set forth in this Agreement being or
becoming untrue in any material respect at any time at or prior to the
Effective Time, (ii) any of the conditions to the Merger set forth in
Article VII not being satisfied or (iii) a violation of any provision of
this Agreement except, in each case, as may be required by applicable law
or regulation.
(m) Risk Management. Except as required by applicable law or
regulation, (i) implement or adopt any material change in its interest rate
risk management and other risk management policies, procedures or
practices; (ii) fail to follow its existing policies or practices with
respect to managing its exposure to interest rate and other risk; or (iii)
fail to use commercially reasonable means to avoid any material increase in
its aggregate exposure to interest rate risk.
(n) Indebtedness. Incur any indebtedness for borrowed money or incur
any material obligation or liability other than in the ordinary course of
business.
(o) Capital Expenditures. Make any capital expenditures in excess of
$25,000 in the aggregate or for any item in excess of $5,000.
(p) Maintenance of Insurance. Fail to maintain insurance described in
Section 5.03(t).
(q) Maintenance of Property. Fail to maintain its property and
facilities in their present condition and working order, ordinary wear and
tear excepted.
(r) Compliance with Agreements. Take any action that would not or is
reasonably likely not to comply in all material respects with all laws,
regulations, agreements, court orders, administrative orders, memorandums
of understanding and formally adopted internal policy and procedures
applicable to the conduct of its business.
(s) Commitments. Agree or commit to do any of the foregoing.
4.02 FORBEARANCES OF FARMERS. From the date hereof until the Effective
Time, except as expressly contemplated by this Agreement, without the prior
written consent of Security, Farmers will not, and will cause each of its
subsidiaries not to:
(a) Performance of Obligations. Take any action which, at the time
taken, is reasonably likely to have a material adverse affect upon
Farmers's ability to perform any of its material obligations under this
Agreement.
(b) Adverse Actions. (a) Take any action while knowing that such
action would, or is reasonably likely to, prevent or impede the Merger from
qualifying (i) for "pooling of interests" accounting treatment or (ii) as a
reorganization within the meaning of Section 368(a) of the Code; or (b)
knowingly take any action that is intended or is reasonably likely to
result in (i) any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect at any time at
or prior to the Effective Time, (ii) any of the conditions to the Merger
set forth in Article VII not being satisfied, or (iii) a material violation
of any provision of this Agreement except, in each case, as may be required
by applicable law or regulation.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01 DISCLOSURE SCHEDULES. On or prior to the date hereof, Security has
delivered to Farmers a schedule (respectively, its "Disclosure Schedule")
setting forth, among other things, items, the disclosure of which are necessary
or appropriate either in response to an express disclosure requirement contained
in a provision hereof or as an exception to one or more representations or
warranties contained in Section 5.03 or to one or more of its respective
covenants contained in Article IV and Article VI; provided, that (a) no such
item is required to be set forth in a Disclosure Schedule as an exception to a
representation or warranty if its absence would not be reasonably likely to
result in the related representation or warranty being deemed untrue or
incorrect under the standard established by Section 5.02, and (b) the mere
inclusion of an item in a Disclosure Schedule as an exception to a
representation or warranty shall not be deemed an admission by a party that such
item represents a material exception or fact, event or circumstance or that such
item is reasonably likely to have or result in a Material Adverse Effect on the
party making the representation. Security's representations, warranties and
covenants contained in this Agreement shall not be deemed to be untrue,
incorrect or to have been breached as a result of effects on Security arising
solely from actions taken in compliance with a written request of Farmers.
5.02 STANDARD. No representation or warranty of Security or Farmers
contained in Section 5.03 or 5.04 (other than those paragraphs for which this
standard shall not apply) shall be deemed untrue or incorrect, and no party
hereto shall be deemed to have breached a representation or warranty, as a
consequence of the existence of any fact, event or circumstance unless such
breach of representation or warranty contained in Section 5.03 or 5.04 has had,
or is reasonably likely to have, a Material Adverse Effect. The standard set
forth in this Section 5.02 shall not apply to paragraphs (a), (b), (c), (d) or
(g) of Section 5.03 or paragraphs (a), (b), (d) or (f) of Section 5.04.
5.03 REPRESENTATIONS AND WARRANTIES OF SECURITY. Subject to Sections 5.01
and 5.02 and except as Previously Disclosed in a paragraph of its Disclosure
Schedule corresponding to the relevant paragraph below, Security hereby
represents and warrants to Farmers:
(a) Organization, Standing and Authority. Security is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and any foreign jurisdictions where its ownership or
leasing of property or assets or the conduct of its business requires it to
be so qualified. Security is registered as a bank holding company under the
BHCA. Bank is an Ohio chartered state banking corporation duly organized,
validly existing and in good standing under the laws of the state of Ohio.
As a state bank, Bank is qualified to do business where it does business.
Security has delivered to Farmers accurate and complete copies of the
Security Articles and Security Bylaws and the Bank's articles of
incorporation and code of regulations.
(b) Capital Structure of Security. The authorized capital stock of
Security consists solely of 1,500,000 shares of Security Common Stock, no
par value, of which 361,780 shares are outstanding. The outstanding shares
of Security Common Stock have been duly authorized, are validly issued and
outstanding, fully paid and nonassessable, and were not issued in violation
of any preemptive rights. Except as Previously Disclosed in its Disclosure
Schedule, (i) there are no shares of Security Common Stock authorized and
reserved for issuance, (ii) Security has no Rights issued or outstanding
with respect to Security Common Stock, and (iii) Security has no commitment
to authorize, issue or sell any Security Common Stock or Rights, except
pursuant to this Agreement. All Security Common Stock has been issued in
full compliance with all applicable federal and state securities laws.
(c) Subsidiaries. (i)(A) Security has Previously Disclosed a list of
all of its subsidiaries together with the jurisdiction of organization of
each such subsidiary, (B) except as Previously Disclosed, Security owns of
record and beneficially all the issued and outstanding equity securities of
each of its subsidiaries, (C) except as Previously Disclosed, no equity
securities of any of its subsidiaries are or may become required to be
issued (other than to it or its wholly-owned subsidiaries) by reason of any
Right or otherwise, (D) except as Previously Disclosed, there are no
contracts, commitments, understandings or arrangements by which any of such
subsidiaries is or may be bound to sell or otherwise transfer any equity
securities of any
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such subsidiaries (other than to it or its wholly-owned subsidiaries), (E)
except as Previously Disclosed, there are no contracts, commitments,
understandings, or arrangements relating to Security's rights to vote or to
dispose of such securities and (F) except as Previously Disclosed, all the
equity securities of each subsidiary held by Security or its subsidiaries
are fully paid and nonassessable and are owned by Security or its
subsidiaries free and clear of any Liens.
(ii) Each of Security's subsidiaries has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of
its organization, and is duly qualified to do business and in good
standing in the jurisdictions where its ownership or leasing of property
or the conduct of its business requires it to be so qualified.
(d) Corporate Power. Each of Security and its subsidiaries has full
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and Security has the
corporate power and authority to execute, deliver and perform its
obligations under this Agreement.
(e) Corporate Authority; Authorized and Effective Agreement. Subject
to receipt of the requisite adoption of this Agreement by the holders of a
majority of the outstanding shares of Security Common Stock entitled to
vote thereon, this Agreement and the transactions contemplated hereby have
been authorized by all necessary corporate action of Security and the
Security Board prior to the date hereof. This Agreement is a valid and
legally binding obligation of Security, enforceable in accordance with its
terms (except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and similar
laws of general applicability relating to or affecting creditors' rights or
by general equity principles).
(f) Regulatory Approvals; No Defaults. (i) No consents or approvals
of, or filings or registrations with, any Governmental Authority or with
any third party are required to be made or obtained by Security or any of
its subsidiaries in connection with the execution, delivery or performance
by Security of this Agreement or to consummate the Merger except for (A)
filings of applications and notices, as applicable, with and the approval
of certain federal and state banking authorities, (B) filings with the SEC
and state securities authorities, and (C) the filing of the certificates of
merger with the OSS and DSS pursuant to the OGCL and the DGCL. As of the
date hereof, Security is not aware of any reason why the approvals set
forth in Section 7.01(b) will not be received without the imposition of a
condition, restriction or requirement of the type described in Section
7.01(b).
(ii) Subject to receipt of the regulatory and shareholder approvals
and other actions referred to in paragraphs 5.03(e) and (f) above and
expiration of related regulatory waiting periods, and required filings
under federal and state securities laws, the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby and thereby do not and will not (A) constitute a
breach or violation of, or a default under, or give rise to any Lien,
any acceleration of remedies or any right of termination under, any law,
rule or regulation or any judgment, decree, order, governmental permit
or license, or agreement, indenture or instrument of Security or of any
of its subsidiaries or to which Security or any of its subsidiaries or
properties is subject or bound, (B) constitute a breach or violation of,
or a default under, the Security Articles or the Security Code, or (C)
require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental permit or license, agreement,
indenture or instrument.
(g) Financial Reports and SEC Documents; Material Adverse Effect. (i)
Security's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1999, Security's Quarterly Report on Form 10-QSB for the quarters ended
March 31, 2000, and all other reports, registration statements, definitive
proxy statements or other statements filed or to be filed by it or any of
its subsidiaries with the SEC subsequent to December 31, 1999 under the
Securities Act, or under Section 13, 14 or 15(d) of the Exchange Act, in
the form filed or to be filed (collectively, "Security SEC Documents") as
of the date filed, (A) complied or will comply in all material respects
with the applicable requirements under the Securities Act or the Exchange
Act, as the case may be, and (B) did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; and each of
the balance sheets or statements
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of condition contained in or incorporated by reference into any such
Security SEC Document (including the related notes and schedules thereto)
fairly presents, or will fairly present, the consolidated financial
position of Security and its subsidiaries as of its date, and each of the
statements of income or results of operations and changes in shareholders'
equity and cash flows or equivalent statements in such Security SEC
Documents (including any related notes and schedules thereto) fairly
presents, or will fairly present, the consolidated results of operations,
changes in shareholders' equity and cash flows, as the case may be, of
Security and its subsidiaries for the periods to which they relate, in each
case in accordance with generally accepted accounting principles
consistently applied during the periods involved, except in each case as
may be noted therein, subject to normal year-end audit adjustments and the
absence of footnotes in the case of unaudited statements.
(ii) Since March 31, 2000, Security and its subsidiaries have not
incurred any material liability not disclosed in Security's SEC
Documents, other than in the ordinary course of business consistent with
past practice.
(iii) Since March 31, 2000, except as disclosed in the Security SEC
Documents, (A) Security and its subsidiaries have conducted their
respective businesses in the ordinary and usual course consistent with
past practice (excluding matters related to this Agreement and the
transactions contemplated hereby); (B) no event has occurred or
circumstance arisen that, individually or taken together with all other
facts, circumstances and events (described in any paragraph of Section
5.03 or otherwise), is reasonably likely to have a Material Adverse
Effect with respect to Security or the Bank; and (C) neither Security
nor any of its subsidiaries has taken any action or failed to take any
action which would have violated Section 4.01 if this Agreement had been
entered into on March 31, 2000.
(iv) Since January 1, 1997, Security and its subsidiaries have
timely filed all material reports and statements, together with any
amendments required to be made with respect thereto, that it is required
to file with any applicable federal or state securities or bank
authorities, except failures to file which are not reasonably likely to
have, individually or in the aggregate, a material adverse effect on
Security. As of their respective dates, each of such reports and
documents, including the financial statements, exhibits and schedules
thereto, and including call reports, complied in all material with
respects to all applicable laws. As of its respective date, each such
report and document did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
(h) Litigation. Except as Previously Disclosed, no litigation, claim
or other proceeding before any court or governmental agency is pending
against Security or any of its subsidiaries and, to Security's knowledge,
no such litigation, claim or other proceeding has been threatened. Security
has provided a copy of each audit letter response received by Security from
Attorneys for Security or its subsidiaries in connection with the
preparation of the financial statements of Security or otherwise since
December 31, 1997, relating to any litigation pending as of the date of
this Agreement, to which Security or its subsidiaries is a party and which
names Security or a subsidiary as a defendant, cross defendant or a brief
summary report of any such litigation that is not discussed in such audit
letter responses.
(i) Regulatory Matters. Except as Previously Disclosed, neither
Security nor any of its subsidiaries or Security's or their properties is a
party to or is subject to any order, judgment, decree, agreement,
memorandum of understanding or similar arrangement with, or a commitment
letter or similar submission to, or extraordinary supervisory letter from,
any court or federal or state governmental agency or authority, including
any such agency or authority charged with the supervision or regulation of
financial institutions (or their holding companies) or issuers of
securities or engaged in the insurance of deposits (including, without
limitation, the Ohio Division of Financial Institutions, the Federal
Reserve System and the FDIC) or the supervision or regulation of it or any
of its subsidiaries (collectively, the "Regulatory Authorities").
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(j) Compliance with Laws. Each of Security and its subsidiaries:
(i) has been in compliance with all applicable federal, state,
local and foreign statutes, laws, regulations, ordinances, rules,
judgments, orders or decrees applicable thereto or to the employees
conducting such businesses, including, without limitation, the Equal
Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment
Act, the Home Mortgage Disclosure Act and all other applicable fair
lending laws and other laws relating to discriminatory business
practices;
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations
with, all Governmental Authorities that are required in order to permit
them to own or lease their properties and to conduct their businesses as
presently conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and, to
Security's knowledge, no suspension or cancellation of any of them is
threatened; and
(iii) has received no notification or communication from any
Governmental Authority (A) asserting that Security or any of its
subsidiaries is not in compliance with any of the statutes, regulations,
or ordinances which such Governmental Authority enforces or (B)
threatening to revoke any license, franchise, permit, or governmental
authorization (nor, to Security's knowledge, do any grounds for any of
the foregoing exist).
(k) Material Contracts; Defaults. Except for this Agreement and as
Previously Disclosed, neither Security nor any of its subsidiaries is a
party to, bound by or subject to any agreement, contract, arrangement,
commitment or understanding (whether written or oral) (i) that is a
"material contract" within the meaning of Item 601(b)(10) of the SEC's
Regulation S-K or (ii) that restricts or limits in any way the conduct of
business by it or any of its subsidiaries (including without limitation a
non-compete or similar provision) or (iii) constitutes a power of attorney.
Neither Security nor any of its subsidiaries, nor any other party to such
contracts, is in default under any contract, agreement, commitment,
arrangement, lease, insurance policy or other instrument to which it is a
party, by which its respective assets, business, or operations may be bound
or affected in any way, or under which it or its respective assets,
business, or operations receive benefits, and there has not occurred any
event that, with the lapse of time or the giving of notice or both, would
constitute such a default.
(l) No Brokers. Except for the engagement of Austin Associates, Inc.,
no action has been taken by Security that would give rise to any valid
claim against any party hereto for a brokerage commission, finder's fee or
other like payment with respect to the transactions contemplated by this
Agreement.
(m) Employee Benefit Plans. (i) Section 5.03(m)(i) of Security's
Disclosure Schedule contains a complete and accurate list of all bonus,
incentive, deferred compensation, pension (including, without limitation,
Pension Plans), retirement, profit-sharing, thrift, savings, employee stock
ownership, stock bonus, stock purchase, restricted stock, stock option,
severance, welfare (including, without limitation, "welfare plans" within
the meaning of Section 3(1) of ERISA), fringe benefit plans, employment or
severance agreements and all similar practices, policies and arrangements
maintained or contributed to (currently or within the last six years) by
(a) Security or any of its subsidiaries and in which any employee or former
employee (the "Employees"), consultant or former consultant (the
"Consultants") officer or former officer (the "Officers"), or director or
former director (the "Directors") of Security or any of its subsidiaries
participates or to which any such Employees, Consultants, Officers or
Directors either participate or are a party or (b) any ERISA Affiliate
(collectively, the "Compensation and Benefit Plans"). Neither Security nor
any of its subsidiaries has any commitment to create any additional
Compensation and Benefit Plan or to modify or change any existing
Compensation and Benefit Plan, except as otherwise contemplated by Section
4.01(e) of this Agreement.
(ii) Each Compensation and Benefit Plan has been operated and
administered in all material respects in accordance with its terms and
with applicable law, including, but not limited to, ERISA, the Code, the
Securities Act, the Exchange Act, the Age Discrimination in Employment
Act, or any regulations or rules promulgated thereunder, and all
filings, disclosures and notices required by ERISA, the Code, the
Securities Act, the Exchange Act, the Age Discrimination in Employment
Act and any
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other applicable law have been timely made. Each Compensation and
Benefit Plan which is an "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA (a "Pension Plan") and which is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter (including a determination that the
related trust under such Compensation and Benefit Plan is exempt from
tax under Section 501(a) of the Code) from the Internal Revenue Service
("IRS"), and Security is not aware of any circumstances likely to result
in revocation of any such favorable determination letter. There is no
material pending or, to the knowledge of Security, threatened legal
action, suit or claim relating to the Compensation and Benefit Plans
other than routine claims for benefits thereunder. Neither Security nor
any of its subsidiaries has engaged in a transaction, or omitted to take
any action, with respect to any Compensation and Benefit Plan that would
reasonably be expected to subject Security or any of its subsidiaries to
a tax or penalty imposed by either Section 4975 of the Code or Section
502 of ERISA, assuming for purposes of Section 4975 of the Code that the
taxable period of any such transaction expired as of the date hereof.
(iii) No liability (other than for payment of premiums to the PBGC
which have been made or will be made on a timely basis) under Title IV
of ERISA has been or is expected to be incurred by Security or any of
its subsidiaries with respect to any ongoing, frozen or terminated
"single-employer plan," within the meaning of Section 4001(a)(15) of
ERISA, currently or formerly maintained by any of them, or any
single-employer plan of any entity (an "ERISA Affiliate Plan") which is
considered one employer with Security under Section 4001(a)(14) of ERISA
or Section 414(b), (c) or (m) of the Code (an "ERISA Affiliate"). None
of Security, any of its subsidiaries or any ERISA Affiliate has
contributed, or has been obligated to contribute, to a multiemployer
plan under Subtitle E of Title IV of ERISA (as defined in ERISA Sections
3(37)(A) and 4001(a)(3)) at any time since September 26, 1980. No notice
of a "reportable event", within the meaning of Section 4043 of ERISA for
which the 30-day reporting requirement has not been waived, has been
required to be filed for any Compensation and Benefit Plan or by any
ERISA Affiliate Plan within the 12-month period ending on the date
hereof, and no such notice will be required to be filed as a result of
the transactions contemplated by this Agreement. The PBGC has not
instituted proceedings to terminate any Pension Plan or ERISA Affiliate
Plan and, to Security's knowledge, no condition exists that presents a
material risk that such proceedings will be instituted. To the knowledge
of Security, there is no pending investigation or enforcement action by
the PBGC, the Department of Labor (the "DOL") or IRS or any other
governmental agency with respect to any Compensation and Benefit Plan.
Under each Pension Plan and ERISA Affiliate Plan, as of the date of the
most recent actuarial valuation performed prior to the date of this
Agreement, the actuarially determined present value of all "benefit
liabilities", within the meaning of Section 4001(a)(16) of ERISA (as
determined on the basis of the actuarial assumptions contained in such
actuarial valuation of such Pension Plan or ERISA Affiliate Plan), did
not exceed the then current value of the assets of such Pension Plan or
ERISA Affiliate Plan and since such date there has been neither an
adverse change in the financial condition of such Pension Plan or ERISA
Affiliate Plan nor any amendment or other change to such Pension Plan or
ERISA Affiliate Plan that would increase the amount of benefits
thereunder which reasonably could be expected to change such result.
(iv) All contributions required to be made under the terms of any
Compensation and Benefit Plan or ERISA Affiliate Plan or any employee
benefit arrangements under any collective bargaining agreement to which
Security or any of its subsidiaries is a party have been timely made or
have been reflected on Security's financial statements. Neither any
Pension Plan nor any ERISA Affiliate Plan has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA and all required payments to the PBGC
with respect to each Pension Plan or ERISA Affiliate Plan have been made
on or before their due dates. None of Security, any of its subsidiaries
or any ERISA Affiliate (x) has provided, or would reasonably be expected
to be required to provide, security to any Pension Plan or to any ERISA
Affiliate Plan pursuant to Section 401(a)(29) of the Code, and (y) has
taken any action, or omitted to take any action, that has resulted, or
would reasonably be expected to result, in the imposition of a lien
under Section 412(n) of the Code or pursuant to ERISA.
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(v) Except as disclosed in Section 5.03(m)(v) of Security's
Disclosure Schedule, neither Security nor any of its subsidiaries has
any obligations to provide retiree health and life insurance or other
retiree death benefits under any Compensation and Benefit Plan, other
than benefits mandated by Section 4980B of the Code. Except as disclosed
in Section 5.03(m)(v) of Security's Disclosure Schedule, there has been
no communication to Employees by Security or any of its subsidiaries
that would reasonably be expected to promise or guarantee such Employees
retiree health or life insurance or other retiree death benefits on a
permanent basis.
(vi) Security and its subsidiaries do not maintain any Compensation
and Benefit Plans covering foreign Employees.
(vii) With respect to each Compensation and Benefit Plan, if
applicable, Security has provided or made available to Farmers, true and
complete copies of existing: (A) Compensation and Benefit Plan documents
and amendments thereto; (B) trust instruments and insurance contracts;
(C) two most recent Forms 5500 filed with the IRS; (D) most recent
actuarial report and financial statement; (E) most recent summary plan
description; (F) forms filed with the PBGC within the past year (other
than for premium payments); (G) most recent determination letter issued
by the IRS; (H) any Form 5310, Form 5310A, Form 5300, or Form 5330 filed
within the past year with the IRS; and (I) most recent nondiscrimination
tests performed under ERISA and the Code (including but not limited to
Code Section 401(k) and 401(m) tests).
(viii) Except as disclosed on Section 5.03(m)(viii) of Security's
Disclosure Schedule, the consummation of the transactions contemplated
by this Agreement would not, directly or indirectly (including, without
limitation, as a result of any termination of employment prior to or
following the Effective Time) reasonably be expected to (A) entitle any
Employee, Consultant or Director to any payment (including severance pay
or similar compensation) or any increase in compensation, (B) result in
the vesting or acceleration of any benefits under any Compensation and
Benefit Plan or (C) result in any material increase in benefits payable
under any Compensation and Benefit Plan.
(ix) Except as disclosed on Section 5.03(m)(ix) of Security's
Disclosure Schedule, neither Security nor any of its subsidiaries
maintains any compensation plans, programs or arrangements the payments
under which would not reasonably be expected to be deductible as a
result of the limitations under Section 162(m) of the Code and the
regulations issued thereunder.
(x) Except as disclosed on Section 5.03(m)(x) of Security's
Disclosure Schedule, as a result, directly or indirectly, of the
transactions contemplated by this Agreement (including, without
limitation, as a result of any termination of employment prior to or
following the Effective Time), none of Farmers, Security or the
Surviving Corporation, or any of their respective subsidiaries will be
obligated to make a payment that would be characterized as an "excess
parachute payment" to an individual who is a "disqualified individual"
(as such terms are defined in Section 280G of the Code) of Security on a
consolidated basis, without regard to whether such payment is reasonable
compensation for personal services performed or to be performed in the
future.
(n) Labor Matters. Neither Security nor any of its subsidiaries is a
party to or is bound by any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization,
nor is Security or any of its subsidiaries the subject of a proceeding
asserting that it or any such subsidiary has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or
seeking to compel Security or any such subsidiary to bargain with any labor
organization as to wages or conditions of employment, nor is there any
strike or other labor dispute involving it or any of its subsidiaries
pending or, to Security's knowledge, threatened, nor is Security aware of
any activity involving its or any of its subsidiaries' employees seeking to
certify a collective bargaining unit or engaging in other organizational
activity. Except as Previously Disclosed, neither Security nor any of its
subsidiaries is a party to any employment or consulting agreement not
terminable at will.
(o) Takeover Laws. Security has taken all action required to be taken
by it in order to exempt this Agreement and the transactions contemplated
hereby from, and this Agreement and the transactions
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contemplated hereby are exempt from, the requirements of any "moratorium",
"control share", "fair price", "affiliate transaction", "business
combination" or other antitakeover laws and regulations of any state or the
Articles or Bylaws of Security (collectively, "Takeover Laws") applicable
to it.
(p) Environmental Matters. Neither the conduct nor operation of
Security or its subsidiaries nor any condition of any property presently or
previously owned, leased or operated by any of them (including, without
limitation, in a fiduciary or agency capacity), or on which any of them
holds a Lien ("Security Properties"), violates or violated Environmental
Laws, no condition has existed or event has occurred with respect to any of
them or any Security Property that, with notice or the passage of time, or
both, is reasonably likely to result in liability under Environmental Laws.
Neither Security nor any of its subsidiaries has received any notice from
any person or entity that Security or its subsidiaries or the operation or
condition of any property ever owned, leased, operated, or held as
collateral or in a fiduciary capacity by any of them are or were in
violation of or otherwise are alleged to have liability under any
Environmental Law, including, but not limited to, responsibility (or
potential responsibility) for the cleanup or other remediation of any
pollutants, contaminants, or hazardous or toxic wastes, substances or
materials at, on, beneath, or originating from any such property. None of
the Security Properties has asbestos, urea formaldehyde, or lead paint.
None of the Security Properties is on any state or federal list of
properties suspected to contain hazardous wastes or Hazardous substances,
or has or currently contain any underground storage tanks, above ground
storage tanks, manufactured gas activities, industrial/manufacturing
activities, or the storage of any Hazardous substances (except in small
quantities used in compliance with all Environmental Laws for residential
or commercial cleaning purposes). None of the Security Properties is known
by Security or any of its subsidiaries to be within 500 feet of any
property which has or had underground storage tanks, above ground storage
tanks, manufactured gas activities, industrial/manufacturing activities, or
the storage of any Hazardous substances (except in small quantities used in
compliance with all Environmental Laws for residential or commercial
cleaning purposes). Neither Security nor any of its subsidiaries has
participated in the management of any business or property owned, leased or
controlled by any third party which generated, managed, stored, treated or
disposed of any Hazardous substances. Upon requests by Farmers, Security
shall provide to Farmers a Phase I Environmental Assessment Report on any
properties, which, upon investigation by Farmers, indicate a potential
presence of materials which are likely to result in a violation of
Environmental Laws, in the reasonable judgment of Farmers.
(q) Tax Matters. (i) All Tax Returns that are required to be filed by
or with respect to Security and its subsidiaries have been duly and timely
filed, and all such Tax Returns are true, correct and complete (ii) all
Taxes shown to be due on the Tax Returns referred to in clause (i) have
been paid in full, (iii) the Tax Returns referred to in clause (i) have not
been examined by the Internal Revenue Service or the appropriate state,
local or foreign taxing authority, and no such examination has been
threatened (iv) except for Tax Returns for fiscal years ended on or after
December 31, 1995, the period for assessment of the Taxes in respect of
which such Tax Returns were required to be filed has expired, (v) all
deficiencies asserted or assessments made as a result of such examinations
have been paid in full, (vi) no issues that have been raised by the
relevant taxing authority in connection with the examination of any of the
Tax Returns referred to in clause (i) are currently pending, and (vii) no
waivers of statutes of limitation have been given by or requested with
respect to any Taxes of Security or its subsidiaries. Security has made or
will make available to Farmers true and correct copies of the United States
federal income Tax Returns filed by Security and its subsidiaries for each
of the three most recent fiscal years ended on or before December 31, 1999.
Neither Security nor any of its subsidiaries has any liability with respect
to Taxes that accrued on or before the end of the most recent period
covered by the Security SEC Documents in excess of the amounts accrued with
respect thereto that are reflected in the Security SEC Documents. As of the
date hereof, neither Security nor any of its subsidiaries has any reason to
believe that any conditions exist that might prevent or impede the Merger
from qualifying as a reorganization within the meaning of Section 368(a) of
the Code. Security and its subsidiaries have withheld or collected and paid
over to the appropriate governmental authorities or are properly holding
for such payment all Taxes required by law to be withheld or collected.
There are no Liens for Taxes upon the assets of Security or any of its
subsidiaries, other than Liens for current Taxes not yet due and payable.
Neither Security nor any of its subsidiaries has agreed to make, or is
required to make, any adjustment under Section 481(a) of the Code. Neither
Security nor any of its subsidiaries is a party to any
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agreement, contract, arrangement or plan that has resulted, or could
result, individually or in the aggregate, in the payment of "excess
parachute payments" within the meaning of Section 280G of the Code. Neither
Security nor any of its subsidiaries has ever been a member of an
affiliated group of corporations, within the meaning of Section 1504 of the
Code, other than an affiliated group of which Security is or was the common
parent corporation.
(ii) No Tax is required to be withheld pursuant to Section 1445 of
the Code as a result of the transfer contemplated by this Agreement.
(iii) Security and its subsidiaries will not be liable for any
Taxes as a result of the transfer contemplated by this Agreement.
(r) Risk Management Instruments. All material interest rate swaps,
caps, floors, option agreements, futures and forward contracts and other
similar risk management arrangements, whether entered into for Security's
own account, or for the account of one or more of Security's subsidiaries
or their customers (all of which are listed on Security's Disclosure
Schedule), were entered into (i) in accordance with prudent business
practices and all applicable laws, rules, regulations and regulatory
policies and (ii) with counterparties believed to be financially
responsible at the time; and each of them constitutes the valid and legally
binding obligation of Security or one of its subsidiaries, enforceable in
accordance with its terms (except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles), and is in full force
and effect. Neither Security nor its subsidiaries, nor to Security's
knowledge any other party thereto, is in breach of any of its obligations
under any such agreement or arrangement.
(s) Books and Records. The books and records, including Shareholder
information, of Security and its subsidiaries have been fully, properly and
accurately maintained, have been maintained in accordance with sound
business practices and there are no inaccuracies or discrepancies of any
kind contained or reflected therein and they fairly reflect the substances
of events and transactions included therein.
(t) Insurance. Security's Disclosure Schedule sets forth all of the
insurance policies, binders, or bonds maintained by Security or its
subsidiaries and a description of all claims filed against the insurers of
Security and its subsidiaries since December 31, 1997. Security and its
subsidiaries are insured with reputable insurers against such risks and in
such amounts as are customary and adequate for comparable entities engaged
in the same business and industry. Management of Security has, after
reasonable investigation, determined that the amount of insurance is
adequate to satisfy any current potential losses or claims now pending or
claims anticipated by Management of Security which may be filed against
such policies. All such insurance policies are in full force and effect;
Security and its subsidiaries are not in material default thereunder; and
all claims thereunder have been filed in due and timely fashion.
(u) Accounting Treatment. As of the date hereof, after reasonable
investigation, it is aware of no reason why the Merger will fail to qualify
for "pooling-of-interests" accounting treatment.
(v) Disclosure. The representations and warranties contained in this
Section 5.03, the Security Disclosure Schedule, and the other written
materials furnished by Security to Farmers pursuant to this Agreement do
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements and information
contained therein not misleading in light of the circumstances under which
such statements were made.
(w) Year 2000. Neither Security nor any of its subsidiaries has
received, or has reason to believe that it will receive, a written rating
of less than "satisfactory" on any Year 2000 Report of Examination of any
Regulatory Authority.
(x) Material Adverse Change. Security has not, on a consolidated
basis, suffered a change in its business, financial condition or results of
operations since March 31, 2000 that has had a Material Adverse Effect on
Security.
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(y) Absence of Undisclosed Liabilities. Neither Security nor any of
its subsidiaries has any liability (contingent or otherwise), except as
disclosed in the Security SEC Documents and except for liabilities and
obligations incurred since the March 31, 2000, in the ordinary course of
business.
(z) Properties. Security and its subsidiaries have good and marketable
title, free and clear of all liens, encumbrances, charges, defaults or
equitable interests to all of the properties and assets, real and personal,
reflected in the Security SEC Documents as being owned by Security as of
March 31, 2000, or acquired after such date, except (i) liens for current
taxes in amounts not yet due and payable, (ii) pledges to secure deposits
and other liens incurred in the ordinary course of banking business, (iii)
such imperfections of title, easements, encumbrances, liens, charges,
defaults or equitable interests, if any, as do not affect the use of
properties or assets subject thereto or affected thereby or otherwise
impair business operations at such properties, (iv) dispositions and
encumbrances in the ordinary course of business none of which exceed
$25,000 in the aggregate, and (v) liens on properties acquired in
foreclosure or on account of debts previously contracted. All leases
pursuant to which Security or any of its subsidiaries, as lessee, leases
real or personal property (except for leases that have expired by their
terms or that Security or any such subsidiary has agreed to terminate since
the date hereof) are valid without default thereunder by the lessee or, to
Security's knowledge, the lessor. All of the assets of Security and its
subsidiaries are in good operating condition and repair, ordinary wear and
tear excepted, and are adequate to continue to conduct the business of
Security and its subsidiaries as such businesses are presently being
conducted. All buildings and improvements of Security are in good condition
(normal wear and tear excepted), are structurally sound and are not in need
of material repairs, are fit for their intended purposes and are adequately
serviced by all utilities necessary for the effective operation of business
as presently conducted at that location. No real property of Security or
its subsidiaries is in material violation of any zoning regulation,
building restriction, restrictive covenant, ordinance, or other law, order,
regulation or requirement relating to any Security real property. There is
no proposal under active consideration by any public or governmental
authority or entity to acquire Security real property for any governmental
purpose. No real property is the subject of any condemnation action.
(aa) Loans. Each loan reflected as an asset or which makes up a part
of the assets in the Security SEC Documents as of March 31, 2000, and each
balance sheet date subsequent thereto, other than loans the unpaid balance
of which does not exceed $300,000 in the aggregate, (i) is evidenced by
notes, agreements or other evidences of indebtedness which are true,
genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interest which have been perfected, and
(iii) is the legal, valid and binding obligation of the obligor named
therein, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(bb) Allowance for Loan Losses. The allowance for loan losses
reflected in the Security SEC Documents, as of their respective dates, is
adequate under the requirements of generally accepted accounting principles
and as determined by Management, after reasonable investigation, to provide
for reasonably anticipated losses on outstanding loans. The Security
Disclosure Schedule sets forth all loans, leases, advances, credit
enhancements, other extensions of credit, commitments and interest-bearing
assets of Security and its subsidiaries that have been classified as "other
loans specifically mentioned", "special mention", "substandard",
"doubtful", "loss", "classified", "criticized", "credit risk assets",
"concern loans", or words of similar import in the aggregate amount
thereunder of each such category or type.
(cc) Repurchase Agreements. With respect to all agreements pursuant to
which Security or any of its subsidiaries has purchased securities subject
to an agreement to resell, if any, Security or such subsidiary, as the case
may be, has a valid, perfected first lien or security interest in or
evidence of ownership in book entry form of the government securities or
other collateral securing the repurchase agreement, and the value of such
collateral equals or exceeds the amount of the debt secured thereby.
(dd) Deposit Insurance. The deposits of Bank are insured by the FDIC
in accordance with The Federal Deposit Insurance Act ("FDIA"), and Bank has
paid all assessments and filed all reports required by the FDIA.
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(ee) Indemnification Claim. To the knowledge of Security, there is no
event, action or omission by or with respect to any director, officer,
employee, trustee, agent or other person who may be entitled to receive
indemnification or reimbursement, claim, loss or expense under agreement,
contract or arrangement providing corporate indemnification or
reimbursement of any such person.
5.04 REPRESENTATIONS AND WARRANTIES OF FARMERS. Subject to Sections 5.01
and 5.02 and except as Previously Disclosed in a paragraph of its Disclosure
Schedule, if any, corresponding to the relevant paragraph below, Farmers hereby
represents and warrants to Security as follows:
(a) Organization, Standing and Authority. Farmers is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Ohio. Farmers is duly qualified to do business and is in good
standing in the State of Ohio and any foreign jurisdictions where its
ownership or leasing of property or assets or the conduct of its business
requires it to be so qualified. Farmers is registered as a bank holding
company under the BHCA.
(b) Capital Structure of Farmers. (i) As of the date of this
Agreement, the authorized capital stock of Farmers consists of 12,490,000
common shares, without par value, of which 7,642,959 shares are were issued
and outstanding. As of the date of this Agreement, except as set forth in
the Farmers SEC Documents and options granted by Farmers since March 31,
2000, Farmers does not have any Rights issued or outstanding with respect
to Farmers Common Stock and Farmers does not have any commitment to
authorize, issue or sell any Farmers Common Stock or and Farmers Serial
Preferred Shares or Rights, except pursuant to this Agreement. The
outstanding shares of Farmers Common Stock have been duly authorized and
are validly issued and outstanding, fully paid and nonassessable, and were
not issued in violation of any preemptive rights.
(ii) The shares of Farmers Common Stock to be issued in exchange
for shares of Security Common Stock in the Merger, when issued in
accordance with the terms of this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and subject to no
preemptive rights.
(c) Corporate Power. Each of Farmers and its subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and Farmers has the
corporate power and authority to execute, deliver and perform its
obligations under this Agreement and to consummate the transactions
contemplated hereby.
(d) Corporate Authority; Authorized and Effective Agreement. Subject
to receipt of the requisite adoption of this Agreement by the holders of a
majority of the outstanding shares of Farmers Common Stock entitled to vote
thereon, this Agreement and the transactions contemplated hereby have been
authorized by all necessary corporate action of Farmers and the Farmers
Board prior to the date hereof. This Agreement is a valid and legally
binding agreement of Farmers, enforceable in accordance with its terms
(except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and similar
laws of general applicability relating to or affecting creditors rights or
by general equity principles).
(e) Regulatory Approvals; No Defaults. (i) No consents or approvals
of, or filings or registrations with, any Governmental Authority or with
any third party are required to be made or obtained by Farmers or any of
its subsidiaries in connection with the execution, delivery or performance
by Farmers of this Agreement or to consummate the Merger except for (A) the
filing of applications or notices, as applicable, with and the approval of
certain federal banking authorities; (B) the filing and declaration of
effectiveness of the Registration Statement; (C) the filing of the
certificates of merger with the OSS and the DSS pursuant to the OGCL and
DGCL; (D) such filings as are required to be made or approvals as are
required to be obtained under the securities or "Blue Sky" laws of various
states in connection with the issuance of Farmers Common Stock in the
Merger; and (E) receipt of the approvals set forth in Section 7.01(b). As
of the date hereof, Farmers is not aware of any reason why the approvals
set forth in Section 7.01(b) will not be received without the imposition of
a condition, restriction or requirement of the type described in Section
7.01(b).
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(ii) Subject to receipt of the regulatory and shareholder approvals
and other actions referred to in paragraphs 5.04(d) and (e) and
expiration of the related waiting periods, and required filings under
federal and state securities laws, the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (A) constitute a breach or
violation of, or a default under, or give rise to any Lien, any
acceleration of remedies or any right of termination under, any law,
rule or regulation or any judgment, decree, order, governmental permit
or license, or agreement, indenture or instrument of Farmers or of any
of its subsidiaries or to which Farmers or any of its subsidiaries or
properties is subject or bound, (B) constitute a breach or violation of,
or a default under, the articles of incorporation or Code of Regulations
(or similar governing documents) of Farmers or any of its subsidiaries,
or (C) require any consent or approval under any such law, rule,
regulation, judgment, decree, order, governmental permit or license,
agreement, indenture or instrument.
(f) Financial Reports and SEC Documents; Material Adverse Effect. (i)
Farmers's Annual Report on Form 10-K for the fiscal year ended December 31,
1999, Farmers's Quarterly Report on Form 10-Q for the quarters ended March
31, 2000, and all other reports, registration statements, definitive proxy
statements or other statements filed or to be filed by it or any of its
subsidiaries with the SEC subsequent to December 31, 1999 under the
Securities Act, or under Section 13, 14 or 15(d) of the Exchange Act, in
the form filed or to be filed (collectively, "Farmers SEC Documents") as of
the date filed, (A) complied or will comply in all material respects with
the applicable requirements under the Securities Act or the Exchange Act,
as the case may be, and (B) did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; and each of
the balance sheets or statements of condition contained in or incorporated
by reference into any such Farmers SEC Document (including the related
notes and schedules thereto) fairly presents, or will fairly present, the
consolidated financial position of Farmers and its subsidiaries as of its
date, and each of the statements of income or results of operations and
changes in shareholders' equity and cash flows or equivalent statements in
such Farmers SEC Documents (including any related notes and schedules
thereto) fairly presents, or will fairly present, the consolidated results
of operations, changes in shareholders' equity and cash flows, as the case
may be, of Farmers and its subsidiaries for the periods to which they
relate, in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except in each
case as may be noted therein, subject to normal year-end audit adjustments
and the absence of footnotes in the case of unaudited statements.
(ii) Since March 31, 2000, Farmers and its subsidiaries have not
incurred any material liability not disclosed in the Farmers SEC
Documents, other than in the ordinary course of business consistent with
past practice.
(iii) Except for its obligations pursuant to this Agreement, since
March 31, 2000, no event has occurred or circumstance arisen that,
individually or taken together with all other facts, circumstances and
events (described in any paragraph of Section 5.04 or otherwise), is
reasonably likely to have a Material Adverse Effect with respect to
Farmers.
(g) Brokerage and Finder's Fees. Farmers has not employed any broker,
finder, or agent, or agreed to pay or incurred any brokerage fee, finder's
fee, commission or other similar form of compensation in connection with
this Agreement or the transactions contemplated hereby.
(h) Takeover Laws. Farmers has taken all action required to be taken
by it in order to exempt this Agreement and the transactions contemplated
hereby from, and this Agreement and the transactions contemplated hereby
are exempt from, the requirements of any Takeover Laws applicable to
Farmers.
(i) Environmental Matters. Neither the conduct nor operation of
Farmers or its subsidiaries nor any condition of any property presently or
previously owned, leased or operated by any of them (including, without
limitation, in a fiduciary or agency capacity), or on which any of them
holds a Lien ("Farmers Properties"), violates or violated Environmental
Laws, no condition has existed or event has occurred with respect to any of
them or any Farmers Property that, with notice or the passage of time, or
both, is
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reasonably likely to result in liability under Environmental Laws. Neither
Farmers nor any of its subsidiaries has received any notice from any person
or entity that Farmers or its subsidiaries or the operation or condition of
any property ever owned, leased, operated, or held as collateral or in a
fiduciary capacity by any of them are or were in violation of or otherwise
are alleged to have liability under any Environmental Law, including, but
not limited to, responsibility (or potential responsibility) for the
cleanup or other remediation of any pollutants, contaminants, or hazardous
or toxic wastes, substances or materials at, on, beneath, or originating
from any such property. None of the Farmers Properties has asbestos, urea
formaldehyde, or lead paint. None of the Farmers Properties is on any state
or federal list of properties suspected to contain hazardous wastes or
Hazardous substances, or has or currently contain any underground storage
tanks, above ground storage tanks, manufactured gas activities,
industrial/manufacturing activities, or the storage of any Hazardous
substances (except in small quantities used in compliance with all
Environmental Laws for residential or commercial cleaning purposes). None
of the Farmers Properties is known by Farmers or any of its subsidiaries to
be within 500 feet of any property which has or had underground storage
tanks, above ground storage tanks, manufactured gas activities,
industrial/manufacturing activities, or the storage of any Hazardous
substances (except in small quantities used in compliance with all
Environmental Laws for residential or commercial cleaning purposes).
Neither Farmers nor any of its subsidiaries has participated in the
management of any business or property owned, leased or controlled by any
third party which generated, managed, stored, treated or disposed of any
Hazardous substances.
(j) Accounting Treatment. As of the date hereof, Farmers is aware of
no reason why the Merger will fail to qualify for "pooling-of-interests"
accounting treatment.
(k) Disclosure. The representations and warranties contained in this
Section 5.04 do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements and
information contained in this Section 5.04 not misleading in light of the
circumstances under which such statements were made.
(l) Year 2000. Neither Farmers nor any of its subsidiaries has
received, or has reason to believe that it will receive, a written rating
of less than "satisfactory" on any Year 2000 Report of Examination of any
Regulatory Authority.
(m) Material Adverse Change. Farmers has not, on a consolidated basis,
suffered a change in its business, financial condition or results of
operations since March 31, 2000, that has had a Material Adverse Effect on
Farmers.
(n) Deposit Insurance. The deposits of Farmers's bank subsidiaries are
insured by the FDIC in accordance with The Federal Deposit Insurance Act
("FDIA"), and said banks have paid all assessments and filed all reports
required by the FDIA.
ARTICLE VI
COVENANTS
6.01 REASONABLE BEST EFFORTS. Subject to the terms and conditions of this
Agreement, each of Security and Farmers agrees to use its reasonable best
efforts in good faith to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or desirable, or advisable under
applicable laws, so as to permit consummation of the Merger as promptly as
practicable and otherwise to enable consummation of the transactions
contemplated hereby and shall cooperate fully with the other party hereto to
that end.
6.02 CARRY ON BUSINESS IN NORMAL MANNER. From the date of this Agreement to
the Effective Date, Security shall carry on its business in substantially the
same manner as heretofore and, without the written consent of Farmers, Security
shall not (a) do any of the things which Security represents and warrants herein
have not been done since March 31, 2000, or the date hereof, as the case may be,
except as necessary to carry out this Agreement on the part of Security; (b)
take any action which would be inconsistent with any representation or warranty
of Security set forth herein or which would cause a breach of any such
representation or warranty if made at or immediately following such action; or
(c) engage in any lending activities other than in the ordinary
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course of business consistent with past practice. Security shall send to Farmers
via facsimile transmission a copy of all loan presentations made to Security's
Board at the same time as such presentations are transmitted to said board and
all other proposals for loans including refinanced loans in excess of $50,000 to
enable one of Farmers's senior loan committee members to review, comment and
make reasonable recommendations to the loan committee with respect to such loan
presentations. Security shall consult with Farmers prior to (x) hiring any full-
time officer, other than replacement employees for positions then existing and
(y) purchasing any investment securities in an amount exceeding $50,000 per
transaction. Security will use its reasonable best efforts to keep its business
organizations intact, to keep available the services of present employees, and
to preserve the goodwill of customers, suppliers, and others having business
relations with them.
6.03 SHAREHOLDER APPROVAL. Security and Farmers agree to take, in
accordance with applicable law and their respective Articles, Bylaws or Code of
Regulations, all action necessary to convene an appropriate meeting of their
shareholders to consider and vote upon the adoption of this Agreement and any
other matters required to be approved or adopted by their respective
shareholders for consummation of the Merger (including any adjournment or
postponement, the "Security Meeting" and "Farmers Meeting"), as promptly as
practicable after the Registration Statement is declared effective. Each of
Security and Farmers shall recommend that its shareholders adopt this Agreement
at the their respective meetings unless otherwise necessary under the applicable
fiduciary duties as determined in good faith after consultation with and based
upon advice of independent legal counsel.
6.04 REGISTRATION STATEMENT. (a) Farmers agrees to prepare pursuant to all
applicable laws, rules and regulations a registration statement on Form S-4 (the
"Registration Statement") to be filed by Farmers with the SEC in connection with
the issuance of Farmers Common Stock in the Merger (including the proxy
statement and prospectus and other proxy solicitation materials of Security
constituting a part thereof (the "Proxy Statement") and all related documents).
Security agrees to cooperate, and to cause its subsidiaries to cooperate, with
Farmers, its counsel and its accountants, in preparation of the Registration
Statement and the Proxy Statement; and provided that Security and its
subsidiaries have cooperated as required above, Farmers agrees to file the
Registration Statement, which will include the Proxy Statement (together, the
"Proxy/Prospectus") with the SEC as promptly as reasonably practicable. Each of
Security and Farmers agrees to use all reasonable efforts to cause the
Proxy/Prospectus to be declared effective under the Securities Act as promptly
as reasonably practicable after filing thereof. Farmers also agrees to use all
reasonable efforts to obtain, prior to the effective date of the Registration
Statement, all necessary state securities law or "Blue Sky" permits and
approvals required to carry out the transactions contemplated by this Agreement.
Security agrees to furnish to Farmers all information concerning Security, its
subsidiaries, officers, directors and shareholders as may be reasonably
requested in connection with the foregoing.
(b) Each of Security and Farmers agrees, as to itself and its subsidiaries,
that none of the information supplied or to be supplied by it for inclusion or
incorporation by reference in (i) the Registration Statement will, at the time
the Registration Statement and each amendment or supplement thereto, if any,
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
which they were made, not misleading, and (ii) the Proxy Statement and any
amendment or supplement thereto will, at the date of mailing to the Security
shareholders and at the time of the Security Meeting, as the case may be,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading. Each of Security and Farmers further agrees, if it shall become
aware prior to the Effective Date of any information furnished by it that would
cause any of the statements in the Registration Statement and the Proxy
Statement to be false or misleading with respect to any material fact, or to
omit to state any material fact necessary to make the statements therein not
false or misleading, to promptly inform the other party thereof and to take the
necessary steps to correct the Registration Statement and the Proxy Statement.
(c) Farmers agrees to advise Security, promptly after Farmers receives
notice thereof, of the time when the Registration Statement has become effective
or any supplement or amendment has been filed, of the issuance of any stop order
or the suspension of the qualification of Farmers Common Stock for offering or
sale in any jurisdiction, of the initiation or threat of any proceeding for any
such purpose, or of any request by the SEC for the amendment or supplement of
the Registration Statement or for additional information.
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6.05 PRESS RELEASES. Each of Security and Farmers agrees that it will not,
without the prior approval of the other party, issue any press release or
written statement for general circulation relating to the transactions
contemplated hereby, except as otherwise required by applicable law.
6.06 ACCESS; INFORMATION. (a) Security agrees that upon reasonable notice
and subject to applicable laws relating to the exchange of information, it shall
afford Farmers and Farmers's officers, employees, counsel, accountants and other
authorized representatives, such access during normal business hours throughout
the period prior to the Effective Time to the books, records (including, without
limitation, tax returns and work papers of independent auditors), properties,
personnel and to such other information as Farmers may reasonably request and,
during such period, Security shall furnish promptly to Farmers (i) a copy of
each material report, schedule and other document filed by it pursuant to
federal or state securities or banking laws, and (ii) all other information
concerning the business, properties and personnel of Security as Farmers may
reasonably request.
(b) Each of Security and Farmers agrees that it will not, and will cause
its representatives not to, use any confidential information obtained pursuant
to this Agreement (as well as any other information obtained prior to the date
hereof in connection with the entering into of this Agreement) for any purpose
unrelated to the consummation of the transactions contemplated by this
Agreement. Subject to the requirements of law, each party will keep
confidential, and will cause its representatives to keep confidential, all
information and documents obtained pursuant to this Agreement (as well as any
other information obtained prior to the date hereof in connection with the
entering into of this Agreement) unless such information (i) was already known
to such party, (ii) becomes available to such party from other sources not known
by such party to be bound by a confidentiality obligation, (iii) is disclosed
with the prior written approval of the party to which such information pertains
or (iv) is or becomes readily ascertainable from published information or trade
sources. In the event that this Agreement is terminated or the transactions
contemplated by this Agreement shall otherwise fail to be consummated, each
party shall promptly cause all copies of documents or extracts thereof
containing information and data as to another party hereto to be returned to the
party which furnished the same. No investigation by either party of the business
and affairs of the other shall affect or be deemed to modify or waive any
representation, warranty, covenant or agreement in this Agreement, or the
conditions to either party's obligation to consummate the transactions
contemplated by this Agreement.
(c) During the period from the date of this Agreement to the Effective
Time, Security shall promptly furnish Farmers with copies of all monthly and
other interim financial statements produced in the ordinary course of business
as the same shall become available.
6.07 ACQUISITION PROPOSALS. (a) Security agrees that it shall not, and
shall cause its subsidiaries and its and its subsidiaries' officers, directors,
agents, advisors and affiliates not to, solicit or encourage inquiries or
proposals with respect to, or engage in any negotiations concerning, or provide
any confidential information to, or have any discussions with, any person
relating to, any Acquisition Proposal, subject to the extent that the Security
Board determines in good faith, after consultations with independent legal
counsel that it is required by its fiduciary duties to do so. It shall
immediately cease and cause to be terminated any activities, discussions or
negotiations conducted prior to the date of this Agreement with any parties
other than Farmers with respect to any of the foregoing and shall use its
reasonable best efforts to enforce any confidentiality or similar agreement
relating to an Acquisition Proposal. Security shall promptly (within 24 hours)
advise Farmers following the receipt by Security of any inquiries or information
concerning an Acquisition Proposal and the substances thereof (including the
identity of the person making such Acquisition Proposal), and advise Farmers of
any material developments with respect to such Acquisition Proposal immediately
upon the occurrence thereof.
(b) Special Fee. In order to induce Farmers to enter into this Agreement
and to compensate Farmers for the time and expenses incurred in connection with
this Agreement and the transactions contemplated by this Agreement and the
losses suffered by Farmers from foregone opportunities, if the Effective Time
has not occurred on or before May 31, 2001, and a "Security Special Event" (as
defined below) has occurred, Security shall pay to Farmers on May 31, 2001,
$2,000,000 in immediately available funds; provided, however, that if prior to
May 31, 2001, Security notifies Farmers that it cannot consummate the Merger
because of a Security Special Event, then Security shall pay to Farmers
$2,000,000 in immediately available funds within three business days following
the date of such notice.
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For purposes of the foregoing, "Security Special Event" shall mean any of
the following to occur on or prior to May 31, 2001: (i) a Person which is not an
Affiliate of Farmers has publicly announced or proposed, or consummated a
purchase, exchange or tender offer for shares of Security Common Stock
representing, on a fully diluted basis, more than 10% of the outstanding shares
of Security Common Stock, which causes the Merger not to be consummated; or (ii)
a Person that is not an Affiliate of Farmers has entered into an agreement with
respect to a merger, share exchange, consolidation, reorganization, combination
or similar transaction involving Security or the Bank or a purchase, lease or
other acquisition of all or any significant portion of the assets of, or an
equity interest (or an option, warrant or securities convertible into an equity
interest) from, Security or the Bank; or (iii) Security shall have caused the
Merger not to be consummated by May 31, 2001, for the purposes of pursuing any
proposal by any Person concerning (i) or (ii) above; (iv) failure of Security
directors to recommend the Merger or withdrawal or modification or announced
intention to not recommend the Merger; (v) recommendation or approval by the
Security Directors of another Acquisition Proposal; or (vi) failure of Security
to solicit proxies in favor of the Merger.
(c) (i) Notwithstanding any other provisions of this Agreement, prior to
the receipt of the approval of the Security shareholders described in 7.01(a)
the Board of Directors of Security, to the extent required by its fiduciary
obligations, as determined in good faith by the Board of Directors based on the
advice of counsel, may withdraw or modify its approval of the recommendation of
this Agreement or the Merger, approve or recommend any Superior Proposal, enter
into an agreement with respect to such Superior Proposal and terminate this
Agreement, so long as concurrently with entering into any agreement with respect
to a Superior Proposal, Security pays, or causes to be paid, to Farmers the
Special Fee described in Section 6.07(b) hereof. "Superior Proposal" as used
herein means any bona fide written Acquisition Proposal made by a third party
which the Board of Directors of Security determines in its good faith judgement
is reasonably capable of being completed and that, taking into account all
legal, financial, regulatory and other aspects of the proposal and the Person
making the proposal would, if consummated, be more favorable to the Security
shareholders from a financial point of view than the Merger.
(ii) Prior to receipt of the Security shareholder approval described in
Section 7.01(a) hereof, to the extent required by the fiduciary obligations of
the Board of Directors of Security, Security may, upon receipt of an unsolicited
Acquisition Proposal, and in response to it, (i) furnish information with
respect to Security and the Bank to any Person pursuant to a customary
confidentiality agreement (as determined by Security's counsel) and answer
questions about such information and (ii) participate in negotiations regarding
such unsolicited Acquisition Proposal.
6.08 AFFILIATE AGREEMENTS. (a) In the Security Disclosure Schedule and not
later than the 15th day prior to the mailing of the Proxy Statement, Security
shall deliver to Farmers a schedule of each person that, to the best of its
knowledge, is or is reasonably likely to be, as of the date of the Security
Meeting, deemed to be an "affiliate" of Security (each, a "Security Affiliate")
as that term is used in Rule 145 under the Securities Act or SEC Accounting
Series Releases 130 and 135. Security shall use its reasonable best efforts to
cause each person who may be deemed to be a Security Affiliate (who has not
executed and delivered to Farmers concurrently with the execution of this
Agreement) to execute and deliver to Security on or before the date of mailing
of the Proxy Statement an agreement in the form attached hereto as Exhibit A.
6.09 TAKEOVER LAWS. No party hereto shall take any action that would cause
the transactions contemplated by this Agreement to be subject to requirements
imposed by any Takeover Law and each of them shall take all necessary steps
within its control to exempt (or ensure the continued exemption of) the
transactions contemplated by this Agreement from, or if necessary challenge the
validity or applicability of, any applicable Takeover Law, as now or hereafter
in effect.
6.10 FARMERS COMMON STOCK LISTING. Shares of Farmers Common Stock are not
listed on any exchange. The NASD reports trading prices for Farmers Common Stock
on the inter-dealer Bulletin Board.
6.11 REGULATORY APPLICATIONS. Farmers and Security and their respective
subsidiaries shall cooperate and use their respective reasonable best efforts to
prepare all documentation, to timely effect all filings and to obtain all
permits, consents, approvals and authorizations of all third parties and
Governmental Authorities necessary to consummate the transactions contemplated
by this Agreement. Each of Farmers and Security shall have the right
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to review in advance, and to the extent practicable each will consult with the
other, in each case subject to applicable laws relating to the exchange of
information, with respect to, and shall be provided in advance so as to
reasonably exercise its right to review in advance, all material written
information submitted to any third party or any Governmental Authority in
connection with the transactions contemplated by this Agreement. In exercising
the foregoing right, each of the parties hereto agrees to act reasonably and as
promptly as practicable. Each party hereto agrees that it will consult with the
other party hereto with respect to the obtaining of all material permits,
consents, approvals and authorizations of all third parties and Governmental
Authorities necessary or advisable to consummate the transactions contemplated
by this Agreement and each party will keep the other party apprised of the
status of material matters relating to completion of the transactions
contemplated hereby.
6.12 COOPERATION WITH FILINGS. Each party agrees, upon request, to furnish
the other party with all information concerning itself, its subsidiaries,
directors, officers and shareholders and such other matters as may be reasonably
necessary or advisable in connection with any filing, notice or application made
by or on behalf of such other party or any of its subsidiaries to any third
party or Governmental Authority.
6.13 INDEMNIFICATION. (a) Following the Effective Date, Farmers shall
indemnify, defend and hold harmless the present directors, officers and
employees of Security and its subsidiaries (each, an "Indemnified Party")
against costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities (collectively, "Costs") incurred
in connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of actions or
omissions occurring on or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement) to the fullest
extent that Security is required to indemnify (and advance expenses to) its
directors, officers, and employees under the laws of the State of Delaware and
the Security Articles as in effect on the date hereof; provided that any
determination required to be made with respect to whether an officer's,
director's or employee's conduct complies with the standards set forth under
Delaware's law and the Security Articles shall be made by the court in which the
claim, action, suit or proceeding was brought or by independent counsel (which
shall not be counsel that provides material services to Farmers) selected by
Farmers and reasonably acceptable to such officer, director or employee.
(b) For a period of three years from the Effective Time, Farmers shall use
its reasonable best efforts to provide that portion of director's and officer's
liability insurance that serves to reimburse the present and former officers and
directors of Security or any of its subsidiaries (determined as of the Effective
Time) (as opposed to Security) with respect to claims against such directors and
officers arising from facts or events which occurred before the Effective Time,
on terms no less favorable than those in effect on the date hereof; provided,
however, that Farmers may substitute therefor policies providing at least
comparable coverage containing terms and conditions no less favorable than those
in effect on the date hereof; provided, however that in no event shall Farmers
be required to expend, in the aggregate, more than 300 percent of the current
annual amount expended by Security (the "Insurance Amount") to maintain or
procure such directors and officers insurance coverage for the three year period
provided for herein; provided, further that if Farmers is unable to maintain or
obtain the insurance called for by this Section 6.13(b), Farmers shall use its
reasonable best efforts to obtain as much comparable insurance as is available
for the Insurance Amount; and provided, further, that officers and directors of
Security or any subsidiary may be required to make application and provide
customary representations and warranties to Farmers's insurance carrier for the
purpose of obtaining such insurance.
(c) Any Indemnified Party wishing to claim indemnification under Section
6.13(a), upon learning of any claim, action, suit, proceeding or investigation
described above, shall promptly notify Farmers thereof; provided that the
failure so to notify shall not affect the obligations of Farmers under Section
6.13(a) unless and to the extent that Farmers is actually prejudiced as a result
of such failure.
(d) If Farmers or any of its successors or assigns shall consolidate with
or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any entity, then and in each case, proper provision shall
be made so that the successors and assigns of Farmers shall assume the
obligations set forth in this Section 6.13.
6.14 OPPORTUNITY OF EMPLOYMENT; EMPLOYEE BENEFITS. The existing employees
of Security may have the opportunity to continue as employees of Farmers or one
of its subsidiaries, on the Effective Date; subject,
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however, to the right of Farmers and its subsidiaries to terminate any such
employees. It is understood and agreed that nothing in this Section 6.14 or
elsewhere in this Agreement shall be deemed to be a contract of employment or be
construed to give said employees any rights other than as employees at will
under applicable law and said employees shall not be deemed to be third-party
beneficiaries of this provision. From and after the Effective Time, Security
employees shall continue to participate in the Security employee benefit plans
in effect at the Effective Time unless and until Farmers, in its sole
discretion, shall determine that Security employees shall, subject to applicable
eligibility requirements, participate in employee benefit plans of Farmers and
that all or some of the Security plans shall be terminated or merged into
certain employee benefit plans of Farmers. Notwithstanding the foregoing,
subject to the requirements and restrictions of Farmers' employee benefits
plans, each Security employee shall be credited with years of Security (or
predecessor) service for purposes of eligibility and vesting (but not for
benefit accrual purposes) in the employee benefit plans of Farmers, and shall
not be subject to any exclusion or penalty for pre-existing conditions that were
covered under Security's welfare plans immediately prior to the Effective Date,
or to any waiting period relating to such coverage. If, after the Effective
Date, Farmers adopts a new plan or program for its employees or executives, then
to the extent its employees or executives receive past service credits for any
reason, Farmers shall credit similarly-situated employees and executives of
Security with equivalent credit for service with Security or its predecessors.
The foregoing covenants shall survive the Merger, and Farmers shall before the
Effective Time adopt resolutions that amend its tax-qualified retirement plans
to provide for Security service credits referenced herein.
6.15 NOTIFICATION OF CERTAIN MATTERS. Security shall give prompt notice to
Farmers of any fact, event or circumstance known to Security that (i) is
reasonably likely, individually or taken together with all other facts, events
and circumstances known to it, to result in any Material Adverse Effect with
respect to it or (ii) would cause or constitute a material breach of any of its
representations, warranties, covenants or agreements contained herein.
6.16 DIVIDEND COORDINATION. It is agreed by the parties hereto that they
will cooperate to assure that as a result of the Merger, during any applicable
period, there shall not be a payment of both a Farmers and a Security dividend
to former Security shareholders.
6.17 SECURITY COMMON STOCK OPTIONS. On or prior to the Effective Date, all
outstanding options to purchase shares of Security Common Stock ("Security
Common Stock Options") under the Security Financial Corp. 1997 Stock Option Plan
shall be exercised by the holder, or, surrendered by the holder for a cash
payment in accordance with the terms of such plan.
6.18 ACCOUNTING AND TAX TREATMENT. Each of Farmers and Security agrees not
to take any actions subsequent to the date of this Agreement that would
adversely affect the ability to treat the Merger as a "pooling-of-interests" in
accordance with GAAP or Security or the shareholders of Security to characterize
the Merger as a tax-free reorganization under Section 368(a) of the Code, and
each of Farmers and Security agrees to take such action as may be reasonably
required, if such action may be reasonably taken to reverse the impact of any
past actions which would adversely impact the ability of Farmers or Security (as
the case may be) to treat the Merger as a "pooling-of-interests" for accounting
purposes or for the Merger to be characterized as a tax-free reorganization
under Section 368(a) of the Code.
6.19 NO BREACHES OF REPRESENTATIONS AND WARRANTIES. Between the date of
this Agreement and the Effective Time, without the written consent of the other
party, each of Farmers and Security will not do any act or suffer any omission
of any nature whatsoever which would cause any of the representations or
warranties made in Article V of this Agreement to become untrue or incorrect in
any material respect.
6.20 CONSENTS. Each of Farmers and Security shall use its best efforts to
obtain any required consents to the transactions contemplated by this Agreement.
6.21 INSURANCE COVERAGE. Security shall cause the policies of insurance
listed in the Disclosure Schedule to remain in effect between the date of this
Agreement and the Effective Date. In the discretion of Farmers, Security shall
cooperate to obtain "tail coverage" insurance on any policy deemed advisable by
Farmers.
6.22 CORRECTION OF INFORMATION. Each of Farmers and Security shall promptly
correct and supplement any information furnished under this Agreement (including
supplements to Disclosure Schedules) so that such
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information shall be correct and complete in all material respects at all times,
and shall include all facts necessary to make such information correct and
complete in all material respects at all times.
6.23 SUPPLEMENTAL ASSURANCES. (a) On the date the Registration Statement
becomes effective and on the Effective Date, Security shall deliver to Farmers a
certificate signed by its principal executive officer and its principal
financial officer to the effect, to such officers' knowledge, that the
information contained in the Registration Statement relating to the business and
financial condition and affairs of Security, does not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
(b) On the date the Registration Statement becomes effective and on the
Effective Date, Farmers shall deliver to Security a certificate signed by its
chief executive officer and its chief financial officer to the effect, to such
officers' knowledge, that the Registration Statement (other than the information
contained therein relating to the business and financial condition and affairs
of Security) does not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
6.24 FARMERS ACQUISITION PROPOSAL. Farmers shall not accept any offer from
any Person regarding an Acquisition Proposal (as defined in Section 1.01,
however, references therein to Security shall be deemed for purposes of this
section to refer to Farmers) unless such offer is expressly conditioned upon or
the offeror agrees to the performance by Farmers or its successor in interest of
its obligations under this Agreement. Farmers acknowledges that the restrictions
and agreements contained in this section are reasonable and necessary to protect
the legitimate interests of Security and that any violation of this section will
cause substantial and irreparable injury to Security that would not be
quantifiable and for which no adequate remedy would exist at law and agrees and
consents to, in addition to all other remedies which may be available to
Security, the entry of an injunction by any court of competent jurisdiction
against consummation of any transaction involving Farmers and another Person
which does not comply with this section until such transaction does comply with
this section.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each of Farmers and Security to consummate the Merger
is subject to the fulfillment or written waiver by Farmers and Security prior to
the Effective Time of each of the following conditions:
(a) Shareholder Approval. This Agreement (including the Plan of
Merger) shall have been duly adopted by the requisite vote of the
shareholders of Security and Farmers.
(b) Regulatory Approvals. All regulatory approvals required to
consummate the transactions contemplated hereby shall have been obtained
and shall remain in full force and effect and all statutory waiting periods
in respect thereof shall have expired and no such approvals or statute,
rule, or order shall contain any conditions, restrictions or requirements
which Farmers reasonably determines would either before or after the
Effective Time (i) have a Material Adverse Effect on Farmers and its
subsidiaries taken as a whole after giving effect to the consummation of
the Merger; or (ii) prevent Farmers from realizing the major portion of the
economic benefits of the Merger and the transactions contemplated thereby
that Farmers currently anticipates obtaining.
(c) No Injunction. No Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced, threatened, commenced a
proceeding with respect to or entered any statute, rule, regulation,
judgment, decree, injunction or other order (whether temporary, preliminary
or permanent) prohibiting or delaying consummation of the transactions
contemplated by this Agreement.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
SEC.
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(e) Blue Sky Approvals. All permits and other authorizations under
state securities laws necessary to consummate the transactions contemplated
hereby and to issue the shares of Farmers Common Stock to be issued in the
Parent Merger shall have been received and be in full force and effect.
(f) Accounting Treatment. Farmers shall have received from Hill, Barth
& King, LLC, Farmers's independent auditors, a letter, dated the date of or
shortly prior to the Effective Date, stating its opinion that the Merger
shall qualify for pooling-of-interests accounting treatment.
7.02 CONDITIONS TO OBLIGATION OF SECURITY. The obligation of Security to
consummate the Merger is also subject to the fulfillment or written waiver by
Security prior to the Effective Time of each of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Farmers set forth in this Agreement shall be true and correct, subject
to Section 5.02, as of the date of this Agreement and as of the Effective
Date as though made on and as of the Effective Date (except that
representations and warranties that by their terms speak as of a specific
date shall be true and correct as of such date), and Security shall have
received a certificate, dated the Effective Date, signed on behalf of
Farmers by the Chief Executive Officer and the Chief Financial Officer of
Farmers to such effect.
(b) Performance of Obligations of Farmers. Farmers shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time, and Security
shall have received a certificate, dated the Effective Date, signed on
behalf of Farmers by the Chief Executive Officer and the Chief Financial
Officer of Farmers to such effect.
(c) Tax Opinion. Security shall have received an opinion of counsel to
Farmers, dated the Effective Date, to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, (i) the
Merger constitutes a "reorganization" within the meaning of Section 368 of
the Code and (ii) no gain or loss will be recognized by shareholders of
Security who receive shares of Farmers Common Stock in exchange for shares
of Security Common Stock, and cash in lieu of fractional share interests,
other than the gain or loss to be recognized as to cash received in lieu of
fractional share interests. In rendering its opinion, counsel to Farmers
will require and rely upon representations contained in letters from
Security and Farmers.
(d) Opinion of Farmers's Counsel. Security shall have received an
opinion of Bischoff, Kenney & Niehaus, counsel to Farmers, dated the
Effective Date, to the effect that, on the basis of the facts,
representations and assumptions set forth in the opinion, (i) Farmers is a
corporation in good standing under the laws of the State of Ohio, (ii) this
Agreement has been duly approved by the Farmers's Board and duly adopted by
the shareholders of Farmers (iii) this Agreement has been duly executed by
Farmers and constitutes the binding obligation of Farmers, enforceable in
accordance with its terms against Farmers, except as the same may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium, and other similar laws relating to or affecting the enforcement
of creditors' rights generally, by general equitable principles (regardless
of whether enforceability is considered in a proceeding in equity or at
law) and by an implied covenant of good faith and fair dealing (iv) that
the Farmers Common Stock to be issued as Merger Consideration, when issued,
shall be duly authorized, fully paid and non-assessable, (v) that upon the
filing of the certificates of merger with the OSS and the DSS, the Merger
shall become effective and (vi) the shares of Farmers to be issued in the
exchange to Security Shareholders have been registered under the Securities
Act of 1933, as amended, and applicable Blue Sky laws.
(e) Fairness Opinion. Security shall have received a fairness opinion
from Austin Associates, Inc., financial advisor to Security, dated as of a
date reasonably proximate to the date of the Proxy Statement, stating that
the Merger Consideration is fair to the shareholders of Security from a
financial point of view.
(f) Corporate Resolutions. Security shall have received from Farmers
copies of resolutions adopted by the directors and shareholders of Farmers
approving and adopting this Agreement and authorizing the consummation of
the transactions described herein accompanied by a certificate of the
secretary or assistant secretary of Farmers dated as of the Effective Date
and certifying (1) the date and manner of adoption of
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each such resolution; and (2) that each such resolution is in full force
and effect, without amendment, as of the Effective Date.
7.03 CONDITIONS TO OBLIGATION OF FARMERS. The obligation of Farmers to
consummate the Merger is also subject to the fulfillment or written waiver by
Farmers prior to the Effective Time of each of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Security set forth in this Agreement shall be true and correct, subject
to Section 5.02, as of the date of this Agreement and as of the Effective
Date as though made on and as of the Effective Date (except that
representations and warranties that by their terms speak as of a specific
date shall be true and correct as of such date) and Farmers shall have
received a certificate, dated the Effective Date, signed on behalf of
Security by the Chief Executive Officer and the Chief Financial Officer of
Security to such effect.
(b) Performance of Obligations of Security. Security shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time, and Farmers
shall have received a certificate, dated the Effective Date, signed on
behalf of Security by the Chief Executive Officer and the Chief Financial
Officer of Security to such effect.
(c) Tax Opinion. Farmers shall have received an opinion of its
counsel, dated the Effective Date, to the effect that, on the basis of
facts, representations and assumptions set forth in such opinion, the
Merger constitutes a "reorganization" within the meaning of Section 368 of
the Code. In rendering its opinion, counsel to Farmers will require and
rely upon representations contained in letters from Security and Farmers.
(d) Opinion of Security's Counsel. Farmers shall have received an
opinion of Werner & Blank Co., LPA, counsel to Security, dated the
Effective Date, to the effect that, on the basis of the facts,
representations and assumptions set forth in the opinion, (i) Security is a
corporation in good standing under the laws of the State of Delaware, (ii)
this Agreement has been duly approved by the Security Board and duly
adopted by the shareholders of Security, (iii) this Agreement has been duly
executed by Security and constitutes a binding obligation on Security,
enforceable in accordance with its terms against Security, except as the
same may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium, and other similar laws relating to or affecting
the enforcement of creditors' rights generally, by general equitable
principles (regardless of whether enforceability is considered in a
proceeding in equity or at law) and by an implied covenant of good faith
and fair dealing, (iv) that upon the filing of the certificate of merger
with the OSS and the DSS, the Merger shall become effective and (v) the
Shares of Security to be exchanged pursuant to the Merger have been
properly registered under the 1933 Securities Act, as amended, and
applicable Blue Sky laws.
(e) Certificate of Merger. Farmers shall have received from Security
certificates of merger duly executed by Security in accordance the
requirements of the OGCL and DGCL and in appropriate form for filing with
the OSS and DSS.
(f) Corporate Resolutions. Farmers shall have received from Security
copies of resolutions adopted by the directors and shareholders of Security
approving and adopting this Agreement and authorizing the consummation of
the transactions described herein accompanied by a certificate of the
secretary or assistant secretary of Security dated as of the Effective Date
and certifying (1) the date and manner of adoption of each such resolution;
and (2) that each such resolution is in full force and effect, without
amendment, as of the Effective Date.
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ARTICLE VIII
TERMINATION
8.01 TERMINATION. This Agreement may be terminated, and the Acquisition may
be abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the
mutual consent of Farmers and Security, if the Board of Directors of each
so determines by vote of a majority of the members of its entire Board.
(b) Breach. At any time prior to the Effective Time, by Farmers or
Security, in the event of either: (i) a breach by the other party of any
representation or warranty contained herein (subject to the standard set
forth in Section 5.02); or (ii) a breach by the other party of any of the
covenants or agreements contained herein, which breach cannot be or has not
been cured within 30 days after the giving of written notice to the
breaching party of such breach, provided that such breach would be
reasonably likely, individually or in the aggregate with other breaches, to
result in a Material Adverse Effect.
(c) Delay. At any time prior to the Effective Time, by Farmers or
Security, if its Board of Directors so determines by vote of a majority of
the members of its entire Board, in the event that the Merger is not
consummated by May 31, 2001, except to the extent that the failure of the
Merger then to be consummated arises out of or results from the knowing
action or inaction of the party seeking to terminate pursuant to this
Section 8.01(c).
(d) No Approval. By Security or Farmers, in the event (i) the approval
of any Governmental Authority required for consummation of the Merger and
the other transactions contemplated by this Agreement shall have been
denied by final nonappealable action of such Governmental Authority; (ii)
the shareholders of Security or Farmers fail to adopt this Agreement at the
Security Meeting or the Farmers Meeting, respectively; or (iii) any of the
closing conditions have not been met as required by Article VII hereof.
(e) Farmers Common Stock. By notice given by Security to Farmers if
the Farmers Common Stock Average Closing Price on the Determination Date
shall be less than $7.50; except that the termination notice by Security
shall not be effective and this Agreement shall not be terminated by such
notice if Farmers agrees to adjust the Exchange Ratio to that number
resulting from dividing $73.07 by the Farmers Common Stock Average Closing
Price.
For purposes of this Section 8.01(e), the following terms shall have the
meanings indicated:
"Average Closing Price" shall mean the weighted average price (using
actual trading volume and prices as determined by a mutually agreeable
source) of a share of Farmers Common Stock during the period of 30 trading
days ending on the trading day prior to the Determination Date, rounded to
the nearest whole cent.
"Determination Date" shall mean the date immediately prior to the
Effective Date.
8.02 EFFECT OF TERMINATION AND ABANDONMENT; ENFORCEMENT OF AGREEMENT. In
the event of termination of this Agreement and the abandonment of the Merger
pursuant to this Article VIII, no party to this Agreement shall have any
liability or further obligation to any other party hereunder except (i) as set
forth in Section 9.01 and (ii) that termination will not relieve a breaching
party from liability for any breach of this Agreement giving rise to such
termination. Notwithstanding anything contained herein to the contrary, the
parties hereto agree that irreparable damage will occur in the event that a
party breaches any of its obligations, duties, covenants and agreements
contained herein. It is accordingly agreed that the parties shall be entitled to
an injunction or injunctions to prevent breaches or threatened breaches of this
Agreement and to enforce specifically the terms and provisions of this Agreement
in any court of the United States or any state having jurisdiction, this being
in addition to any other remedy to which they are entitled by law or in equity.
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ARTICLE IX
MISCELLANEOUS
9.01 SURVIVAL. No representations, warranties, agreements and covenants
contained in this Agreement shall survive the Effective Time (other than
Sections 6.13, 6.14 and 6.17 and this Article IX which shall survive the
Effective Time) or the termination of this Agreement if this Agreement is
terminated prior to the Effective Time (other than Sections 6.04(b), 6.05,
6.06(b), 6.07, 8.02, and this Article IX which shall survive such termination).
9.02 WAIVER; AMENDMENT. Prior to the Effective Time, any provision of this
Agreement may be (i) waived by the party benefited by the provision, or (ii)
amended or modified at any time, by an agreement in writing between the parties
hereto executed in the same manner as this Agreement, except that after the
Security Meeting, this Agreement may not be amended if it would violate the DGCL
or the federal securities laws.
9.03 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.04 GOVERNING LAW. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of Ohio applicable to contracts made and
to be performed entirely within such State (except to the extent that mandatory
provisions of Federal law are applicable).
9.05 EXPENSES. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby. All
fees to be paid to Regulatory Authorities and the SEC in connection with the
transactions contemplated by this Agreement shall be borne by Farmers.
9.06 NOTICES. All notices, requests and other communications hereunder to a
party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto.
If to Security, to:
Security Financial Corp.
1 South Main Street
Niles, OH 44446
Atten: C. James Bess
With a copy to:
Werner & Blank Co., LPA
7205 West Central Avenue
Toledo, Ohio 43617
Attn: Martin D. Werner
If to Farmers, to:
Farmers National Banc Corp.
20 S. Broad Street
P.O. Box 555
Canfield, OH 44406
Atten: Frank L. Paden
With a copy to:
Bischoff, Kenney & Niehaus
5630 N. Main Street
Sylvania, OH 43560
Atten: Charles D. Niehaus
9.07 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Agreement
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and this Agreement supersedes any and all other
oral or written agreements heretofore made. The Disclosure Schedules shall be
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deemed to be a part of this Agreement and shall not be amended without the prior
written consent of the other party hereto. Nothing in this Agreement, whether
express or implied, is intended to confer upon any person, other than the
parties hereto or their respective successors, any rights, remedies, obligations
or liabilities under or by reason of this Agreement.
9.08 INTERPRETATION; EFFECT. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of, or
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and are not part of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
9.09 WAIVER OF JURY TRIAL. Each of the parties hereto hereby irrevocably
waives any and all right to trial by jury in any legal proceeding arising out of
or related to this Agreement or the transactions contemplated hereby.
9.10 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, including but not limited to, with respect to Farmers, any acquiring
party pursuant to Section 6.25 hereof.
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS AGREEMENT TO BE EXECUTED
IN COUNTERPARTS BY THEIR DULY AUTHORIZED OFFICERS, ALL AS OF THE DAY AND YEAR
FIRST ABOVE WRITTEN.
FARMERS NATIONAL BANC CORP.
By: /s/ Frank L. Paden
------------------------------------
Frank L. Paden
President & CEO
SECURITY FINANCIAL CORP.
By: /s/ Christopher J. Shaker
------------------------------------
Christopher J. Shaker
Chairman
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May 26, 2000
Farmers National Banc Corp.
20 S. Broad Street
P.O. Box 555
Canfield, OH 44406
Attn: Frank L. Paden
Gentlemen:
In connection with the proposed business combination in which Security
Financial Corp. ("Security") will be merged with and into Farmers National Banc
Corp. ("Farmers"), in consideration of the exchange of Farmers Common Stock for
Security Common Stock, the undersigned hereby represents and agrees that he or
she will not (a) offer, sell or transfer any Farmers Common Stock (including any
securities which may be paid as a dividend or otherwise distributed thereon) to
be so received pursuant to the business combination; or (b) offer, sell or
transfer any Farmers Common Stock received pursuant to the exercise of stock
options, except that the undersigned may offer, sell or transfer such Farmers
Common Stock: (i) pursuant to a then-current effective registration under the
Securities Act of 1933 ("1933 Act"); (ii) in a transaction permitted by the
Securities and Exchange Commission's Rule 145; or (iii) in a transaction which,
in the opinion of counsel satisfactory to Farmers, is not required to be
registered under the 1933 Act.
In addition to the above, the undersigned also agrees that in order to
preserve pooling of interests accounting treatment for this transaction, he or
she, as an affiliate of Security will not sell or otherwise reduce his or her
risk with respect to any (a) shares of Farmers Common Stock received in the
transaction or otherwise acquired in any other manner or (b) shares of Security
Common Stock (however acquired) for a period beginning 30 days prior to the
consummation of such acquisition by merger and ending on the date the financial
results covering at least 30 days of post-acquisition combined operations of
Farmers and Security have been published in accordance with Section 6.08 of the
Agreement and Plan of Merger between Security and Farmers dated as of May 26,
2000.
The undersigned acknowledges that the above agreements are supported by
valid consideration.
Very truly yours,
------------------------------------
[Title] ________________________
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ANNEX B
FAIRNESS OPINION OF AUSTIN ASSOCIATES, INC.
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<PAGE> 122
May 26, 2000
Board of Directors
Security Financial Corporation
1 South Main Street
Niles, OH 44446
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to Security Financial Corporation ("Security") and its shareholders of
the terms of the Agreement and Plan of Merger dated as of May 26, 2000 ("Merger
Agreement") between Security and Farmers Banc Corporation, Canfield, Ohio
("Farmers"). The terms of the Merger Agreement provide for the acquisition of
Security by Farmers (the "Acquisition"). The Acquisition will be completed
through a merger of Security with and into Farmers.
The terms of the Merger Agreement provide for each outstanding share of
Security common stock and each Security common stock option exercised, as of or
prior to the effective date, to be converted into shares of Farmers common
stock. The number of shares of Farmers stock into which each Security share will
be converted shall be equal to $90.00 divided by the Market Value of Farmers
common stock, subject to a minimum of 7.200 and a maximum of 9.742 shares of
Farmers for each share of Security. The Market Value will be determined by
calculating the weighted average price (using actual trading volume and prices)
of Farmers common stock for the 30 trading days ending two days prior to the
effective date. The Board of Directors of Security have certain termination
rights if Farmers' average closing price (as defined in the Agreement) is less
than $7.50 and Farmers does not increase the exchange ratio to reach a per share
value of $73.07.
In carrying out our engagement, we have reviewed and analyzed material
bearing upon the financial and operating condition of Security and Farmers,
including but not limited to the following: (i) the Merger Agreement; (ii) the
audited and unaudited financial statements of Security and Farmers for the
period 1995 through March 31, 2000; (iii) certain other publicly available
information regarding Security and Farmers; (iv) publicly available information
regarding the performance of certain other companies whose business activities
were believed by Austin Associates to be generally comparable to those of
Security and Farmers; (v) the financial terms, to the extent publicly available,
of certain comparable transactions; and (vi) such other analysis and information
as we deemed relevant.
In our review and analysis, we relied upon and assumed the accuracy and
completeness of the financial and other information provided to us or publicly
available, and have not attempted to verify the same. We have made no
independent verification as to the status of individual loans made by Security
or Farmers, and have instead relied upon representations and information
concerning loans of Security and Farmers in the aggregate. In rendering our
opinion, we have assumed that the transaction will be a tax-free reorganization
with no material adverse tax consequences to Security or Farmers, or to Security
shareholders receiving Farmers stock. In addition, we have assumed in the course
of obtaining the necessary approvals for the transaction, no condition will be
imposed that will have a material adverse effect on the contemplated benefits of
the transaction to Security and its shareholders.
Based upon our analysis and subject to the qualifications described herein,
we believe that as of the date of this letter, the terms of the Merger Agreement
are fair, from a financial point of view, to Security and its shareholders.
For our services in rendering this opinion, Security will pay us a fee and
indemnify us against certain liabilities.
Austin Associates, Inc.
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<PAGE> 123
ANNEX C
FAIRNESS OPINION OF
AUSTIN FINANCIAL SERVICES, INC.
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<PAGE> 124
May 26, 2000
Board of Directors
Farmers National Banc Corp.
20 S. Broad Street
Canfield, Ohio 44406-0555
Members of the Board:
You have requested our opinion, from a financial point of view, as to the
fairness to the holders of common stock of Farmers National Banc Corp. ("Farmers
National"), Canfield, Ohio of the terms of the Agreement and Plan of Merger
("Agreement") between Farmers National and Security Financial Corp. ("Security
Financial"), Niles, Ohio. The reorganization will result in the merger of
Security Financial with and into Farmers National, the separate corporate
existence of Security Financial shall cease and Farmers National shall survive
and continue to exist as an Ohio corporation.
Austin Financial Services, Inc., ("Austin Financial") is a nationally
recognized investment banking firm specializing in the banking and financial
services industry. Austin Financial is continually engaged in the valuation of
businesses and securities in connection with mergers and acquisitions, private
placements and valuations for estate, corporate and other purposes. Austin
Financial does not contemplate any future business with Farmers National or
Security Financial arising from this engagement, nor has its opinion concerning
the fairness, from a financial point of view, of the terms of the Agreement been
subject to indications of future business with either Farmers National or
Security Financial.
In connection with its opinion, Austin Financial reviewed material
information concerning both Farmers National and Security Financial. Both
institutions were analyzed in order to determine, based on the terms of the
Agreement, whether the exchange ratio of shares of Farmers National common stock
for shares of Security Financial common stock could be attained without diluting
Farmers National's stand-alone estimated earnings per share. Furthermore, if it
was determined that the reorganization could result in earnings per share
dilution then the term in years of the dilution must be taken into account.
Austin Financial considers dilution in excess of five years to be significant
and usually unacceptable.
Austin Financial reviewed material bearing upon the financial operating
condition of Security Financial and its wholly-owned subsidiary, Security Dollar
Bank ("Security Dollar") including, but not limited to: (1) Security Financial's
1999 Annual Report; (2) Security Dollar's Uniform Bank Performance Report as of
March 31, 2000; (3) Security Dollar's Consolidated Reports of Condition and
Income for the years 1998-1999 and March 31, 2000; (4) Security Financial's and
Security Dollar's statement of financial condition as of May 31, 2000; (5) SEC
form 10Q of Security Financial for the first quarter of 2000; (6) Security
Dollar's budget as of May 31, 2000; (7) Written Agreement by and among Security
Dollar, the Federal Reserve Bank of Cleveland ("FRB"), and the Ohio Division of
Financial Institutions as of March 17, 2000; (8) Memorandum of Understanding by
and between Security Dollar and the FRB as of March 30, 2000; (9) other
internally-prepared financial and operating information of Security Financial;
(10) publicly available data concerning certain other regional banks/thrifts and
bank/thrift holding companies merger and acquisition transactions believed
relevant to its inquiry; and (11) the Agreement.
Austin Financial did not perform an independent evaluation of the assets
and liabilities of Security Financial, but relied upon the accuracy and
completeness of all of the financial and other information provided to it by
Security Financial or from public sources. Nor did Austin Financial
independently verify the adequacy of the aggregate allowances for loan losses
set forth in the balance sheet of Security Financial at May 31, 2000, and
assumed on this date that such allowances complied fully with applicable law,
regulatory policy, and sound banking practice. However, Austin Financial did
perform the following due diligence of Security Financial on May 12, 2000: (1)
reviewed Security Financial's watch loan list; (2) reviewed litigation matters
involving alleged claims against Security Financial; (3) reviewed Security
Financial's previous two years of regulatory examinations; (4) reviewed
historical and recent reported price and trading activity for Security
Financial's common stock; (5) reviewed Security Financial's corporate minutes;
and (6) discussed the foregoing as well as posed several questions to Security
Financial's management and representatives concerning matters that could have a
material impact on the future value of Security Financial's common stock.
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Austin Financial also reviewed material bearing upon the financial
operating condition of Farmers National and its wholly-owned subsidiary, Farmers
National Bank including, but not limited to: (1) Farmers National Bank's
Consolidated Reports of Condition and Income for the years 1998-1999 and March
31, 2000; (4) Farmers National's consolidated statement of financial condition
as of May 31, 2000; (5) SEC form 10Q of Farmers National for the first quarter
of 2000; (6) other internally-prepared financial and operating information,
including projected financial statements of Farmers National. Austin Financial
also discussed, and came to an understanding, with Farmers National's management
and representatives, the expected cost savings to be realized by the
reorganization proposed under the terms of the Agreement.
Furthermore, Austin Financial took into account its assessment of general
economic, market and financial conditions and its familiarity in other
transactions, as well as its experience in securities valuation and general
knowledge of the banking industry. Austin Financial's opinion was based upon
conditions as they existed and could be evaluated on the date of the opinion and
the information made available to Austin Financial through that date.
In its analyses, Austin Financial made numerous assumptions with respect to
industry performance, business and economic conditions, and other matters, many
of which are beyond the control of Farmers National and Security Financial. Any
estimates contained in Austin Financial's analyses do not necessarily denote
future results since many unforeseen occurrences could affect or alter such
estimates.
Under the terms of the Agreement, each share, excluding treasury stock, of
Security Financial common stock issued and outstanding immediately prior to the
consummation of the merger and each share of Security Financial common stock
covered by a Security Financial common stock option exercised as of or prior to
the consummation of the merger shall be cancelled and extinguished and, in
substitution and exchange therefor, the holders shall be entitled to receive
that number of shares of Farmers National common stock equal to a number
obtained by dividing $90.00, by the weighted average price of a share of Farmers
National common stock during the period of 30 trading days ending two days prior
to the consummation of the merger, rounded to the nearest whole cent; provided
however, that the exchange ratio shall not be less than 7.200, nor greater than
9.742, shares of Farmers National common stock for each one share of Security
Financial common stock, subject to adjustment as set forth in Section 3.05 of
the Agreement.
The following is a brief description of the analysis used in determining
the maximum exchange ratio of shares of Farmers National common stock for shares
of Security Financial common stock that could be attained without diluting
Farmers National's stand-alone estimated earnings per share.
Austin Financial calculated five years of pro forma financial statements
for Farmers National and Security Financial starting at June 1, 2000. Utilizing
the pro forma financial statements, Austin Financial incorporated the expected
cost savings from the proposed reorganization. Austin Financial then compared
the estimated earnings per share expected from the proposed reorganization to
the estimated earnings per share of Farmers National on a stand-alone basis.
Austin Financial estimates that Farmers National's assets will grow at an
average of five percent over each of the next five years with an average return
on assets of 1.32 percent. Austin Financial estimates that Security National's
assets will grow at an average 4.45 percent over each of the next five years
with an average return on assets of 1.32 percent (incorporating the estimated
cost savings expected from the reorganization).
Based on the terms of the Agreement, the weighted average price of a share
of Farmers common stock during the period of 30 trading days beginning two days
prior to May 26, 2000 (the date the Agreement was signed), the estimated
earnings projections determined by Austin Financial, the reorganization would
result in earnings per share accretion for holders of common stock of Farmers
National. In other words, no earnings per share dilution is expected from the
first projected year and forward. Therefore, the exchange terms of the Agreement
would be fair, from a financial standpoint, to holders of common stock of
Farmers National.
Austin Financial collected data on seventeen other mergers and acquisitions
that were announced between November 1, 1999 and May 31, 2000, in the states of
Indiana, Ohio, Illinois, and Michigan involving target financial institutions
with assets under $850 million in assets. Of the seventeen other mergers and
acquisitions, Austin Financial selected nine target financial institutions that
were essentially comparable in return on assets and return on equity with
Security Financial. Austin Financial calculated the mean multiples of the price
paid in
C-3
<PAGE> 126
relation to earnings and book value of the nine selected institutions and
compared the results to the same multiples produced by the terms of the proposed
reorganization. Set forth below are the transaction multiples:
<TABLE>
<CAPTION>
SELECTED
BANK/THRIFT
ACQUISITIONS SECURITY FINANCIAL
------------ ------------------
<S> <C> <C>
Price/Earnings Multiple.......................... 27.26 65.40
Price/Book Value Multiple........................ 165.16 244.01
</TABLE>
The financial institution acquisition transactions included in the above
multiples are:
<TABLE>
<CAPTION>
BUYER (CITY, ST) TARGET (CITY, ST)
---------------- -----------------
<S> <C>
BancFirst Ohio Corp. (Zanesville, OH) Milton Federal Financial Corp. (West Milton, OH)
First Community Bancshares (Bargersville, IN) Blue River FSB (Edinburgh, IN)
German American Bancorp (Jasper, IN) Holland Bancorp Inc. (Holland, IN)
Hemlock Federal Financial Corp. (Oak Forest,
IL) Midwest Savings Bank (Bolingbrook, IL)
Midland States Bancorp, Inc. (Effingham, IL) CSB Financial Group, Inc. (Centralia, IL)
Old National Bancorp (Evansville, IN) Permanent Bancorp, Inc. (Evansville, IN)
Jacksonville Savings Bank (Jacksonville, IL) Chapin State Bank (Chapin, IL)
Park National Corporation (Newark, OH) U.B. Bancshares Inc. (Bucyrus, OH)
Southern Michigan Bancorp Inc. (Coldwater, Sturgis Bank & Trust Company (Sturgis, MI)
MI)
</TABLE>
The results produced in this analysis do not purport to be indicative of
actual value or expected value of Security Financial shares of common stock. Any
financial institution or transaction utilized in Austin Financial's analyses for
comparison purposes were not identical to Farmers National, Security Financial
or the terms of the Agreement. Accordingly, such analyses are not based solely
on arithmetic calculations; rather, they involve complex considerations and
judgments by Austin Financial concerning differences in financial and operating
characteristics of the relevant financial institutions, the timing of the
relevant transactions and prospective buyer interest, as well as other factors
that could affect the public trading markets of the financial institution or
financial institutions to which they are being compared. The disparity in the
above multiples may, in part, be explained by Security Financial's significant
loan charge-offs and the need to dramatically increase its loan loss reserve.
Farmers National and Austin Financial have entered into an arrangement
relating to the services to be provided by Austin Financial in connection with
the Agreement. In regards to Austin Financial's services in determining an
opinion as to the fairness, from a financial point of view, of the terms of the
Agreement, the cost is a contractual $12,500 plus out of pocket expenses. In
addition, Farmers National also has agreed to indemnify Austin Financial and its
officers, directors, shareholders, employees and agents for all of its time,
expenses, and any liability incurred as a result of Austin Financial's proposed
engagement by means of legal action, administrative proceedings or threat
thereof, unless such action, pending or threat thereof is caused by Austin
Financial's own unlawful conduct, breach of duty or negligence during the course
of performing Austin Financial's services.
Austin Financial, in rendering its opinion, has assumed that the
transaction will be a tax-free reorganization with no material adverse tax
consequences to any of the parties involved. In addition, Austin Financial has
assumed that in the course of obtaining the necessary regulatory approvals for
the transaction, no condition will be imposed upon Farmers National or Security
Financial that will have a materially adverse impact on the contemplated
benefits of the proposed transaction to Farmers National and Security Financial
and their shareholders.
Based upon Austin Financial's analysis and subject to the qualifications
described herein, considering all circumstances known to us and based upon other
matters considered relevant, Austin Financial believes that as of the date of
the Agreement, the terms of the Agreement, from a financial point of view, were
fair to Farmers National and its shareholders.
On behalf of Austin Financial Services, Inc.
---------------------------------------------------------
Dr. Douglas V. Austin
President and CEO
C-4
<PAGE> 127
ANNEX D
SECURITY FINANCIAL CORP.
1999 FORM 10-KSB
<PAGE> 128
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 000 -- 24157
------------------------
SECURITY FINANCIAL CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 34-1579662
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1 SOUTH MAIN STREET, NILES, OHIO 44446-0228
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
ISSUERS'S TELEPHONE NUMBER, INCLUDING AREA CODE (330) 544-7400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenue for its most recent fiscal year $13,036,000
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing market price as of March 15, 2000 was $23.9
million
As of March 15, 2000, there were 361,776 shares of no par value common stock
issued and outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1999. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended December 31, 1999. (Part III)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 129
INDEX
<TABLE>
<S> <C> <C>
PART I
Item 1. Business.................................................... 3
Selected Financial Data..................................... 8
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 21
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................... 21
Item 7. Financial Statements........................................ 21
Report of Independent Auditors
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 21
PART III
Item 9. Directors and Executive Officers of the Registrant.......... 21
Item 10. Executive Compensation...................................... 22
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................. 22
Item 12. Certain Relationships and Related Transactions.............. 22
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 22
Signatures............................................................ 23
</TABLE>
2
<PAGE> 130
PART I
ITEM 1. BUSINESS
The purpose of the Security Financial Corp. (the "Company") is to engage in
any lawful act or activity for which corporations may be organized under the
General Company Law of Delaware.
FORWARD LOOKING STATEMENTS
Security Financial Corporation may from time to time make written or oral
"forward-looking statements," including statements contained in the Company's
filings with the Securities and Exchange Commission (including this Annual
Report on Form 10-KSB and the exhibits thereto), in its reports to stockholders
and in other communications by the Company, which are made in good faith by the
Company pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users; including the features, pricing and quality compared to
competitors' products and services; the willingness of the users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services laws and
regulations (including laws concerning taxes, banking, securities, and
insurance); technological changes, acquisitions; changes in consumer spending
and savings habits; and the success of the Company at managing the risks
involved in the foregoing.
The Company does not undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time by or on behalf of
the Company.
GENERAL
The Company was incorporated under the laws of the State of Delaware on
November 23, 1987, at the direction of management of Security Dollar Bank ("the
Bank"), for the purpose of becoming a bank holding company by acquiring all of
the outstanding shares of the Bank. In March 1988, the Company became the sole
shareholder of the Bank. The Bank carries on business under the name "Security
Dollar Bank." The principal office of the Company is located at 1 South Main
Street, Niles, Ohio 44446-0228.
The Company, through its affiliate, conducts the business of a commercial
banking organization. At December 31, 1999, the Company and its subsidiary had
consolidated total assets of approximately $172.7 million, consolidated total
deposits of approximately $145.4 million and consolidated total equity of
approximately $14.3 million.
The Company, through its banking affiliate, offers a broad range of banking
services to the commercial, industrial and consumer markets which it serves.
Services include commercial, real estate and personal loans; checking, savings
and time deposits and other customer services such as safe deposit facilities.
The Company does not have any foreign operations, assets or investments.
The Bank is a state banking corporation. The Bank is regulated by the Ohio
Division of Financial Institutions ("ODFI") and the Federal Reserve Bank and its
deposits are insured by the Federal Deposit Insurance Corporation to the extent
permitted by law.
3
<PAGE> 131
The Bank is headquartered in Niles, Ohio, which is located in the northeast
portion of Ohio, in the County of Trumbull. Trumbull County has a population of
approximately 227,000. Over the past 10 years less dependence on the steel
industry has occurred with a resulting increase in service related businesses.
The area's largest single employer is General Motors, which operates an assembly
facility within Trumbull County. The Bank provides customary retail and
commercial banking services to its customers, including checking and savings
accounts, time deposits, NOW accounts, safe deposit facilities, real estate
mortgage loans and installment loans. The Bank also makes secured and unsecured
commercial loans.
The largest category of loans comprising the Bank's loan portfolio is
residential real estate loans. These loans are primarily single family
residential real estate loans secured by a first mortgage on the dwelling. The
risks associated with these loans are primarily the risk of default in repayment
and inadequate collateral. The next largest loan segment of the Bank's loan
portfolio is the commercial category. The loans comprising this category
represent loans to business interests, located primarily within the Bank's
defined market areas, with no significant industry concentration. Commercial
loans include both secured and unsecured loans. The risks associated with these
loans are principally the risk in default of the payment of principal resulting
from economic problems of the commercial customer, economic downturn affecting
the market in general and in the case of secured loans inadequate collateral.
Consumer and credit card loans comprise the third largest area of the Bank's
loan portfolio. These loans include consumer installment including automobile
loans as well as personal loans and credit card loans. The risks inherent in
these loans include the risk of default in principal, repayment and in the case
of secured loans the risk of inadequate collateral.
EMPLOYEES
As of December 31, 1999, the Bank had 80 full-time and 24 part-time
employees. The Bank provides a number of benefits for its full-time employees,
including health and life insurance, retirement plan, workers' compensation,
social security, paid vacations, and numerous bank services.
COMPETITION
The commercial banking business in the market areas served by the Bank is
very competitive. The Company and the Bank are in competition with commercial
banks located in their own service areas. Some competitors of the Company and
the Bank are substantially larger than the Bank. In addition to local bank
competition, the Bank competes with larger commercial banks located in
metropolitan areas, savings banks, savings and loan associations, credit unions,
finance companies and other financial institutions for loans and deposits.
CERTAIN REGULATORY CONSIDERATIONS
The following is a summary of certain statutes and regulations affecting
the Company and its subsidiaries. This summary is qualified in its entirety by
such statutes and regulations.
THE COMPANY
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, ("BHC Act") and as such is subject to
regulation by the Federal Reserve Board. A bank holding company is required to
file with the Federal Reserve Board quarterly reports and other information
regarding its business operations and those of its subsidiaries. A bank holding
company is subject to examination by the Federal Reserve Board.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve Board before acquiring substantially all the
assets of any bank or bank holding company or ownership or control of any voting
shares of any bank or bank holding company, if, after such acquisition, it would
own or control, directly or indirectly, more than five percent (5%) of the
voting shares of such bank or bank holding company.
In approving acquisitions by bank holding companies of companies engaged in
banking-related activities, the Federal Reserve Board considers whether the
performance of any such activity by a subsidiary of the holding company
reasonably can be expected to produce benefits to the public, such as greater
convenience, increased
4
<PAGE> 132
competition, or gains in efficiency, which outweigh possible adverse effects,
such as over concentration of resources, decrease of competition, conflicts of
interest, or unsound banking practices.
Bank holding companies are restricted in, and subject to, limitations
regarding transactions with subsidiaries and other affiliates.
In addition, bank holding companies and their subsidiaries are prohibited
from engaging in certain "tie in" arrangements in connection with any extensions
of credit, leases, sales of property, or furnishing of services.
THE COMPANY'S SUBSIDIARY
The Company operates a single bank, namely, Security Dollar Bank. As an
Ohio state chartered commercial bank the Bank is supervised and regulated by the
ODFI, and subject to laws and regulations applicable to Ohio banks.
CAPITAL
The Federal Reserve Board, ODFI, and FDIC require banks and holding
companies to maintain minimum capital ratios.
The Federal Reserve Board adopted final "risk-adjusted" capital guidelines
for bank holding companies. The guidelines became fully implemented as of
December 31, 1992. The ODFI and FDIC have adopted substantially similar
risk-based capital guidelines. These ratios involve a mathematical process of
assigning various risk weights to different classes of assets, then evaluating
the sum of the risk-weighted balance sheet structure against the Company's
capital base. The rules set the minimum guidelines for the ratio of capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) at 8%. At least half of the total capital is to be
composed of common equity, retained earnings, and a limited amount of perpetual
preferred stock less certain goodwill items ("Tier 1 Capital").
The remainder may consist of a limited amount of subordinated debt, other
preferred stock, or a limited amount of loan loss reserves.
In addition, the federal banking regulatory agencies have adopted leverage
capital guidelines for banks and bank holding companies. Under these guidelines,
banks and bank holding companies must maintain a minimum ratio of three percent
(3%) Tier 1 Capital (as defined) to total assets. The Federal Reserve Board has
indicated, however, that banking organizations that are experiencing or
anticipating significant growth, are expected to maintain capital ratios well in
excess of the minimum levels.
Regulatory authorities may increase such minimum requirements for all banks
and bank holding companies or for specified banks or bank holding companies.
Increases in the minimum required ratios could adversely affect the Company and
the Bank, including their ability to pay dividends.
ADDITIONAL REGULATION
The Bank is also subject to federal regulation as to such matters as
required reserves, limitation as to the nature and amount of its loans and
investments, regulatory approval of any merger or consolidation, issuance or
retirement of their own securities, limitations upon the payment of dividends
and other aspects of banking operations. In addition, the activities and
operations of the Bank are subject to a number of additional detailed, complex
and sometimes overlapping laws and regulations. These include state usury and
consumer credit laws, state laws relating to fiduciaries, the Federal
Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act
and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, the
Community Reinvestment Act, anti-redlining legislation and antitrust laws.
DIVIDEND REGULATION
The ability of the Company to obtain funds for the payment of dividends and
for other cash requirements is largely dependent on the amount of dividends
which may be declared by the Bank. Generally, the Bank may not
5
<PAGE> 133
declare a dividend, without the approval of the ODFI, if the total of dividends
declared in a calendar year exceeds the total of its net profits for that year
combined with its retained profits of the preceding two years.
Subsequent to December 31, 1999, the Company entered into a formal
regulatory agreement with its primary regulators, The Federal Reserve and The
Ohio Division of Financial Institutions which, among other things, requires
regulatory approval for any payment of dividends by the Bank to the Company.
GOVERNMENT POLICIES AND LEGISLATION
The policies of regulatory authorities, including the ODFI, Federal Reserve
Board, FDIC and the Depository Institutions Deregulation Committee, have had a
significant effect on the operating results of commercial banks in the past and
are expected to do so in the future. An important function of the Federal
Reserve System is to regulate aggregate national credit and money supply through
such means as open market dealings in securities, establishment of the discount
rate on member bank borrowings, and changes in reserve requirements against
member bank deposits. Policies of these agencies may be influenced by many
factors, including inflation, unemployment, short-term and long-term changes in
the international trade balance and fiscal policies of the United States
government.
In November of 1999, the Gramm-Leach-Bliley, or Financial Services
Modernization Act, was enacted, amending the Bank Holding Company Act of 1956
and modernizing the laws governing the financial services industry. This Act
contains a variety of provisions of benefit to the banking industry, including
language which greatly expands the powers of banks and bank holding companies by
authorizing a bank holding company to affiliate with any financial company and
cross-sell an affiliate's products, thus allowing such a company to offer its
customers any financial product or service. The Act expands the number of
permissible activities to include a wide variety of financial activities; any
activity in the future not already included in the list that the Federal Reserve
and the Treasury Department consider financial in nature or incidental to
financial activities; and any activity that the Federal Reserve determines is
complementary to a financial activity and which does not pose a substantial
safety and soundness risk. In addition, the Act fully closes the unitary thrift
loophole which permits commercial companies to own and operate thrifts, reforms
the Federal Home Loan Bank System to significantly increase community banks'
access to loan funding and protects banks from discriminatory state insurance
regulation. The Act also includes new provisions in the privacy area,
restricting the ability of financial institutions to share nonpublic personal
information with third parties. The specific effects of the enactment of the
Financial Services Modernization Act on the banking industry in general and on
Security Financial Corp. and Security Dollar Bank in particular have yet to be
determined due to the fact that the Financial Services Modernization Act was
only recently adopted.
DEPOSIT INSURANCE
The Federal Deposit Insurance Company Improvement Act of 1991 ("FDICIA")
was enacted in 1991. Among other things, FDICIA requires federal bank regulatory
authorities to take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, FDICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
As an FDIC-insured institution, the Bank is required to pay deposit
insurance premium assessments to the FDIC. The amount each institution pays for
FDIC deposit insurance coverage is determined in accordance with a risk-based
assessment system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Institutions classified as
well-capitalized (as defined by the FDIC) and considered healthy pay the lowest
premium while institutions that are less than adequately capitalized (as defined
by the FDIC) and considered substantial supervisory concerns pay the highest
premium. Because the Bank is "well-capitalized," it currently pays less than the
maximum deposit insurance premiums.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition
6
<PAGE> 134
imposed in writing by, or written agreement with, the FDIC. The FDIC may also
suspend deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital. Management
of the Company is not aware of any activity or condition that could result in
termination of the deposit insurance of the Bank.
PROPOSED LEGISLATION
In addition to the above, there have been proposed a number of legislative
and regulatory proposals designed to strengthen the federal deposit insurance
system and to improve the overall financial stability of the U.S. banking
system. It is impossible to predict whether or in what form these proposals may
be adopted in the future, and if adopted, what their effect would be on the
Company.
SELECTED FINANCIAL INFORMATION
The following table sets forth certain information concerning the
consolidated financial position of the Company at the dates indicated:
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information of the Corporation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Total interest income.............. $ 12,120 $ 12,657 $ 12,848 $ 11,269 $ 8,995
Total interest expense............. 6,079 6,492 6,328 5,457 4,243
-------- -------- -------- -------- --------
Net interest income................ 6,041 6,165 6,520 5,812 4,752
Provision for loan losses.......... 970 2,267 1,250 668 198
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses.................. 5,071 3,898 5,270 5,144 4,554
Securities gains, net.............. 7 51 25 26 22
Other noninterest income........... 909 834 916 801 728
Other noninterest expenses......... 5,201 4,730 4,284 4,186 3,832
Federal income tax expense
(benefit)........................ 151 (100) 609 543 422
-------- -------- -------- -------- --------
Net income....................... $ 635 $ 153 $ 1,318 $ 1,242 $ 1,050
======== ======== ======== ======== ========
PER SHARE OF COMMON STOCK: (1)
Net income......................... $ 1.77 $ .43 $ 3.89 $ 4.22 $ 3.65
Dividends.......................... 1.24 1.20 1.09 .94 .84
Book value......................... 39.64 41.25 41.40 36.37 33.42
Average common shares
outstanding...................... 359,212 355,009 330,354 285,730 279,356
YEAR-END BALANCES:
Loans, net......................... $107,468 $108,952 $110,751 $113,310 $ 81,988
Securities......................... 40,544 44,360 41,639 26,691 18,737
Total assets....................... 172,667 172,074 167,258 152,899 127,064
Cash and cash equivalents.......... 17,359 10,733 8,906 6,868 6,189
Deposits........................... 145,366 148,917 145,352 129,670 109,571
Borrowings......................... 12,406 7,649 6,524 11,754 7,246
Stockholders' equity............... 14,341 14,744 14,633 10,799 9,789
</TABLE>
7
<PAGE> 135
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
Return on average assets (net
income divided by average total
assets).......................... 0.37% .09% .81% .86% .90%
Return on average equity (net
income divided by average
equity).......................... 4.38 1.04 9.83 12.14 12.51
Dividend payout ratio (dividends
declared per share divided by net
income per share)................ 70.06 279.07 27.98 22.35 23.26
Equity to assets ratio (average
equity divided by average total
assets).......................... 8.34 8.72 8.26 7.12 7.19
Allowance for loan losses to
nonperforming loans.............. 109.80 133.97 64.51 85.75 236.45
</TABLE>
---------------
(1) All share and per share data has been restated for the effect of common
stock dividends and splits.
SECURITIES
The securities portfolio decreased by $3.8 million or 8.6% in 1999. Most of
the decrease occurred in mortgage-backed securities and obligations of states
and political subdivisions, which decreased by $3.5 million and $720,000,
respectively.
In general investment in securities is limited to those funds the bank
feels it has in excess of funds used to satisfy loan demand and operating
considerations.
The following table shows the amortized cost and estimated market value of
investment securities by type of obligation at the dates indicated.
<TABLE>
<CAPTION>
1999
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and Government Agency
securities................................. $ 7,145,502 $ 16,952 $ (139,750) $ 7,022,704
Obligations of states and political
subdivisions............................... 9,117,043 4,590 (613,220) 8,508,413
Corporate obligations........................ 195,109 -- (7,296) 187,813
Mortgage-backed securities................... 23,618,028 27,176 (509,988) 23,135,216
----------- -------- ----------- -----------
Total debt securities........................ 40,075,682 48,718 (1,270,254) 38,854,146
Equity securities............................ 1,444,938 244,648 -- 1,689,586
----------- -------- ----------- -----------
Total investment securities.................. $41,520,620 $293,366 $(1,270,254) $40,543,732
=========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and Government Agency
securities................................. $ 6,824,464 $ 15,258 $ (3,187) $ 6,836,535
Obligations of states and political
subdivisions............................... 9,182,033 105,136 (59,101) 9,228,068
Mortgage-backed securities................... 26,499,393 339,260 (164,157) 26,674,496
----------- -------- ----------- -----------
Total investment securities.................. 42,505,890 459,654 (226,445) 42,739,099
Equity securities............................ 1,468,638 158,793 (6,716) 1,620,715
----------- -------- ----------- -----------
Total investment securities.................. $43,974,528 $618,447 $ (233,161) $44,359,814
=========== ======== =========== ===========
</TABLE>
8
<PAGE> 136
The Company's investment securities portfolio at December 31, 1999 did not
contain securities of any issuers with an aggregate book value in excess of 10%
of the Company's equity, excluding those issued by the United States Government
or its agencies.
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
securities portfolio at December 31, 1999.
<TABLE>
<CAPTION>
ONE YEAR ONE TO FIVE TO MORE THAN
AND LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL SECURITIES
------------------ ------------------ ------------------ ------------------ ---------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
agency
securities......... $2,343 5.87% $2,568 6.16% $ $ 2,112 7.21% $ 7,023 6.37%
Obligations of states
and political
subdivisions....... 251 4.70 1,815 5.54 6,442 5.37% 8,508 5.39
Corporate
obligations........ 188 6.50 188 6.50
Mortgage-backed
securities......... 16 10.54 1,756 9.32 2,023 9.12 19,340 7.28 23,135 7.75
Equity securities.... 1,690 N/A -- -- -- -- -- -- 1,690 N/A
------ ----- ------ ---- ------ ---- ------- ---- ------- ----
Total................ $4,300 5.78% $6,139 6.82% $8,653 6.03% $21,452 7.27% $40,544 6.96%
====== ===== ====== ==== ====== ==== ======= ==== ======= ====
</TABLE>
LOAN PORTFOLIO
Historically, loans have been originated by the Company to customers in
northeast Ohio. Loans have been originated primarily through direct loans to the
existing customer base, with new customers generated by referrals from real
estate brokers, building contractors, attorneys, accountants and existing
customers. The Company also generates indirect loans through new and used car
dealers in the primary lending area.
All lending is governed by a lending policy which is developed and
maintained by management and approved by the Board of Directors. The Company's
lending policy regarding real estate loans is that generally the maximum
mortgage granted on owner-occupied residential property is 85% of the appraised
value or purchase price (whichever is lower) when secured by the first mortgage
on the property. Home equity lines of credit or second mortgage loans are
generally originated subject to maximum mortgage liens against the property of
85% of the current appraised value. The maximum term for mortgage loans is 30
years for one- to four-family residential property and 15 years for commercial
and vacation property.
As shown in the following table, total loans declined by $1.6 million in
1999, or 1.48%, compared to a $1.7 million or 1.49% decrease during 1998. The
product mix in the loan portfolio shows commercial loans comprising 5.55%, real
estate mortgage loans (residential and commercial) 77.28% and installment loans
to individuals 17.17% at December 31, 1999 compared with 9.26%, 65.68% and
25.06%, respectively at December 31, 1998.
Real estate mortgage loans increased to $84.3 million at December 31, 1999,
an increase of $11.6 million over 1998. This growth centered principally in the
commercial real estate market which increased $7.8 million due to the economic
health within the Company's market area. The real estate portfolio consists of
$51.2 million of 1-4 family residential properties and $32.6 million and
$567,000 in commercial real estate and construction properties, respectively.
The Company originated both fixed rate and adjustable rate mortgages during
1999. Fixed rate loans that are maintained in the portfolio are limited to
fifteen-year terms while adjustable rate products are offered with maturities up
to thirty years.
Commercial loans at December 31, 1999 decreased $4.2 million to $6.1
million compared to $10.3 million at December 31, 1998. Commercial loans, which
are comprised primarily of variable rate loans, are granted to customers within
the immediate trade area of the Company. The mix is diverse, covering a wide
range of borrowers and business types. The Company monitors and controls
concentrations within a particular industry or segment of the economy. These
loans are made for purposes such as equipment purchases, capital and leasehold
improvements, the purchase of inventory, general working capital purposes and
small business lines of credit.
9
<PAGE> 137
Installment loans to individuals decreased from $27.8 million on December
31, 1998 to $18.7 million on December 31, 1999 which represents a 32.49%
decrease. Although management continues to target the automobile dealer network
to originate indirect installment loans, the Company has experienced significant
loan losses in relation to this portfolio. In an effort to remedy this
situation, management has been stringently enforcing existing underwriting
guidelines which has led to a reduction in the number of indirect installment
loans originated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1999 1998
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Type of loan Real estate loans:
Construction...................................... $ 567 0.52% $ 454 .41%
One to four family................................ 51,192 46.92 47,501 42.89
Commercial........................................ 32,562 29.84 24,791 22.38
Commercial........................................ 6,060 5.55 10,255 9.26
Consumer loans.................................... 18,737 17.17 27,754 25.06
-------- ------ -------- ------
Total loans....................................... 109,118 100.00% 110,755 100.00%
Less:
Allowance for loan losses......................... (1,650) (1,803)
-------- --------
Total loans, net.................................. $107,468 $108,952
======== ========
</TABLE>
Loan maturities and rate sensitivity of the loan portfolio, exclusive of
real estate mortgage loans, and consumer installment loans, at December 31,
1999, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WITHIN ONE TO
ONE YEAR FIVE YEARS TOTAL
-------- ---------- ------
<S> <C> <C> <C>
Construction................................................ $ 567 $ -- $ 567
Commercial, financial, and agricultural..................... 3,640 2,420 6,060
------ ------ ------
Total....................................................... $4,207 $2,420 $6,627
====== ====== ======
Loans at fixed interest rates............................... $1,071 $1,323 $2,394
Loans at variable interest rates............................ 3,136 1,097 4,233
------ ------ ------
Total....................................................... $4,207 $2,420 $6,627
====== ====== ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses charged to operating expense is based on
management's judgment after taking into consideration all factors connected with
the collectability 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 are 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.
Provisions charged to operations decreased from $2.27 million in 1998 to
$970,000 in 1999. The provision charged to operations was decreased as a result
of the lower levels of charge-offs in 1999 compared to 1998. Net loans charged
off during 1999 amounted to $1.12 million and were primarily made up of consumer
indirect automobile loans. During 1997, the Company began to experience higher
levels of nonperforming consumer loans than anticipated. Management took
immediate measures to implement more stringent underwriting guidelines
associated with these loans.
10
<PAGE> 138
The Company initiated an indirect lending portfolio in 1995, which grew to
$24.0 million by the end of 1996 and has subsequently declined to $10.0 million
at December 31, 1999. As a result of this level of growth coupled with the
knowledge that indirect loans inherently possess a higher degree of risk of loss
than most other loans, management began to increase the provision for loan
losses. As the Company began to experience higher levels of nonperforming
indirect loans, management determined that such loans contained common
characteristics and implemented underwriting guidelines to address those
specific issues. A former officer of the Bank granted loans that were outside
the policy guidelines implemented. The significant provisions for loan losses
recorded in 1999 and 1998 have primarily been attributed to the indirect
automobile loans.
The allowance for loan losses as a percent of total loans decreased to
1.51% at December 31, 1999 from 1.63% at December 31, 1998, while total loans
declined by $1.7 million from $110.8 million at December 31, 1998 to $109.1
million at December 31, 1999. The allowance for loan losses as a percent of
nonperforming loans has decreased from 133.97% at December 31, 1998 to 109.80%
at December 31, 1999. This decrease is the result of the reduction in the
allowance for loan losses.
Management uses the aforementioned review and analysis to determine the
adequacy of the allowance for loan losses on a quarterly basis. The provision
for loan losses represents an amount that is intended to be sufficient to
maintain the allowance for loan losses at a level necessary to meet present risk
characteristics of the loan portfolio. Management believes the allowance for
loan losses at December 31, 1999 of $1.6 million is adequate to cover losses
inherent in the portfolio. However, there can be no assurances that additional
losses will not be sustained in future periods, which could be substantial in
relation to the size of the allowance for loan losses at December 31, 1999.
The allowance for possible loan losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the following categories of loans as of the dates
indicated:
The distribution of the Company's allowance for loan losses at the dates
indicated are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1999 1998
-------------------------- --------------------------
PERCENT OF LOANS PERCENT OF LOANS
IN EACH CATEGORY IN EACH CATEGORY
AMOUNT TO TOTAL LOANS AMOUNT TO TOTAL LOANS
------ ---------------- ------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial................................. $ 307 5.55% $ 344 9.26%
Mortgage:
Commercial................................. 204 29.84 187 22.38
One to four family......................... 110 46.92 98 42.89
Construction............................... -- 0.52 -- .41
Consumer................................... 914 17.17 1,174 25.06
Unallocated................................ 115 -- -- --
------ ------ ------ ------
Total...................................... $1,650 100.00% $1,803 100.00%
====== ====== ====== ======
</TABLE>
11
<PAGE> 139
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated.
Loans accounted for on a non-accrual basis:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loans
One to four family.......................................... $ -- $ 191
Commercial.................................................. 667 478
Consumer.................................................... 299 239
Commercial.................................................. 75 392
------ ------
Total non-accrual loans..................................... 1,041 1,300
Accruing loans greater than 90 day past due:
Mortgage loans:
One to four family.......................................... 156 138
Commercial.................................................. -- --
Consumer.................................................... 28 274
Commercial.................................................. --
------ ------
Total accruing loans greater than 90 day past due........... 184 412
------ ------
Total non-performing loans.................................. 1,225 1,712
Other non-performing assets................................. 22 283
------ ------
Total non-performing assets................................. $1,247 $1,995
====== ======
Total non-performing loans to total loans................... 1.12% 1.55%
====== ======
Total non-performing loans to total assets.................. .71% 0.99%
====== ======
Total non-performing assets to total assets................. .72% 1.16%
====== ======
</TABLE>
Interest income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was $124,000 for the
year ended December 31, 1999 and $70,000 was collected and included in the
Company's interest income from non-accrual loans for the year ended December 31,
1999.
The policy for placing loans on nonaccrual is to cease accruing interest on
loans when management believes that the collection of interest is doubtful,
generally when loans are past due as to principal or interest 90 days or more.
When loans are charged-off, any accrued interest recorded in the current fiscal
year is charged against interest income. The remaining balance is treated as a
loan charge-off.
At December 31, 1999, there were $ 3.3 million of loans not otherwise
identified above which were included on management's watch list. Management's
watch list includes both loans which management has some doubt as to the
borrowers' ability to comply with the present repayment terms and loans which
management is actively monitoring due to changes in the borrowers' financial
condition. Included in watch list loans were $834,000 of indirect loans which
were past due more than 30 days. The potential problem loans and their potential
loss exposure have been considered in management's analysis of the adequacy of
the allowance for loan losses.
12
<PAGE> 140
The following table sets forth information with respect to the Bank's
allowance for loan loses at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total loans outstanding..................................... $109,118 $110,754
Average loans outstanding................................... 108,133 109,132
Allowance balance (at beginning of period).................. $ 1,803 $ 1,678
Provision:.................................................. 970 2,267
Charge-offs:
Residential................................................. (42) (39)
Consumer.................................................... (917) (1,899)
Commercial.................................................. (368) (316)
Recoveries:
Residential................................................. -- --
Consumer.................................................... 201 109
Commercial.................................................. 3 3
-------- --------
Allowance balance (at end of period)........................ $ 1,650 $ 1,803
======== ========
Allowance for loan losses as a percent of total loans
outstanding............................................... 1.51% 1.63%
Net loans charged off as a percent of average loans
outstanding............................................... 1.04% 1.96%
</TABLE>
As of December 31, 1999, there were no concentrations of loans greater than
10% of total loans which are not otherwise disclosed as a category of loans in
the table previously presented.
As of December 31, 1999, there are no other interest earning assets that
would be required to be disclosed if such assets were loans.
DEPOSITS
Deposits represent the Company's principal source of funds. The deposit
base consists of demand deposits, savings and money market accounts and other
time deposits. During the year, the Company's total deposits went from $148.9
million in 1998 to $145.4 million in 1999, which equates to a decrease of 2.38%.
The company continued to experience growth in its tiered money market product
which was introduced in 1998 and which attracted local deposits from a variety
of competitors, and coupled with the maturing of certificates of deposits,
resulted in an increase of $6.9 million in money market accounts during 1999.
The following table represents the average deposits and average rate paid
for the years ended:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1999 1998
------------------------ ------------------------
AVERAGE RATE AVERAGE RATE
AMOUNT PAID AMOUNT PAID
------ ------------ ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DEPOSITS:
Noninterest-bearing demand.................. $ 19,438 N/A $ 18,680 N/A
Interest-bearing demand..................... 8,930 2.44% 8,051 2.42%
Money market................................ 14,799 4.16% 5,705 3.56%
Savings..................................... 26,699 2.93% 27,294 2.94%
Time........................................ 76,425 5.28% 85,949 5.79%
-------- ---- -------- ----
Total deposits.............................. $146,291 $145,679
======== ========
</TABLE>
13
<PAGE> 141
The following table indicates the amount of the Company's time deposits of
$100,000 or more by time remaining until maturity as of December 31, 1999.
<TABLE>
<CAPTION>
MATURITY PERIOD TIME DEPOSITS
--------------- -------------
(IN THOUSANDS)
<S> <C>
Within three months...................................... $ 1,897
More than three through six months....................... 3,340
More than six through twelve months...................... 3,795
Over twelve months....................................... 3,082
-------
Total............................................... $12,114
=======
</TABLE>
NET INTEREST INCOME
The most significant source of revenue is net interest income, the amount
by which interest earned on interest-bearing assets exceeds interest expense on
interest-bearing liabilities. Factors which influence net interest income are
changes in volume of interest-bearing assets and liabilities as well as changes
in the associated interest rates.
The Company finances its earning assets with a combination of
interest-bearing and interest-free funds. The interest-bearing funds are
composed of deposits, short-term borrowings and long-term debt. Interest paid
for the use of these funds is the second factor in the net interest income
equation. Interest-free funds, such as demand deposits and stockholders equity,
require no interest expense and, therefore, contribute significantly to net
interest income.
Total interest income, which remained relatively stable, was $12.1 million
for 1999 as compared to $12.7 million for 1998. This decrease resulted from
declines in interest income on loans of $513,000 and securities of $143,000
partially offset by an increase in interest income on federal funds sold of
$119,000. This fluctuation in interest income is due to a decrease in the
average balance of loans of $1.0 million combined with a 39 basis point decline
in loan yields (100 basis points equal 1.0%).
Total interest expense amounted to $6.1 million for 1999, representing a
6.4% decrease from $6.5 million for 1998. The decrease in interest expense is
primarily due to a decrease in the average balance of deposits of $146,000
combined with a decrease in the cost of funds for deposits of 49 basis points.
The table below sets forth information regarding changes in interest income
and interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate) and (ii) changes in rate (changes in rate multiplied by
old volume).
14
<PAGE> 142
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 VS 1998
INCREASE (DECREASE) DUE TO (1)
------------------------------
VOLUME RATE NET
-------- ------- -------
<S> <C> <C> <C>
INTEREST EARNED ON:
Loans....................................................... $ (90) $(423) $(513)
Taxable investment securities............................... 54 (192) (138)
Tax-exempt investment securities............................ 80 (85) (5)
Federal funds sold.......................................... 142 (23) 119
----- ----- -----
186 (723) (537)
----- ----- -----
INTEREST PAID ON:
Demand deposits............................................. 21 2 23
Money market accounts....................................... 373 40 413
Savings deposits............................................ (17) (2) (19)
Time deposits............................................... (524) (412) (936)
Short-term borrowings....................................... 8 (23) (15)
Long-term borrowings........................................ 121 -- 121
----- ----- -----
(18) (395) (413)
----- ----- -----
Total....................................................... $ 204 $(328) $(124)
===== ===== =====
</TABLE>
---------------
(1) The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
15
<PAGE> 143
The following table sets forth a summary of average balances of assets,
liabilities and stockholder's equity, as well as average yield and cost
information. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE(2) BALANCE INTEREST RATE(2)
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans (1).......................... $108,133 $9,342 8.64% $109,132 $9,855 9.03%
Taxable investment securities...... 35,883 2,010 5.60% 34,987 2,148 6.14%
Tax-exempt investment securities... 9,133 417 6.92% 8,060 422 7.93%
Federal funds sold................. 7,082 351 4.96% 4,253 232 5.45%
-------- ------ ------ -------- ------ ------
Total interest-earning assets...... 160,231 12,120 7.56% 156,432 12,657 8.23%
Noninterest-earning assets......... 13,529 11,972
-------- --------
$173,760 $168,404
======== ========
LIABILITIES AND SHAREHOLDER'S
EQUITY
Interest-bearing liabilities:
Demand deposits.................... $ 8,930 218 2.44% $ 8,051 195 2.42%
Money market accounts.............. 14,799 616 4.16% 5,705 203 3.56%
Savings deposits................... 26,699 783 2.93% 27,294 802 2.94%
Time deposits...................... 76,425 4,038 5.28% 85,949 4,974 5.79%
Short-term borrowings.............. 8,084 303 3.75% 7,874 318 4.04%
Long-term borrowings............... 2,595 121 4.66% -- -- --
-------- ------ ------ -------- ------ ------
Total interest-bearing
Liabilities...................... 137,532 6,079 4.42% 134,873 6,492 4.81%
-------- ------ ------ -------- ------ ------
Noninterest-bearing liabilities.... 21,729 18,848
Stockholder's equity............... 14,499 14,683
-------- --------
$173,760 $168,404
======== ========
Net interest income................ $6,041 $6,165
====== ======
Net yield on interest-earning
assets (3)....................... 3.77% 4.08%
Interest rate spread (4)........... 3.14% 3.42%
Ratio of average interest-earning
assets to average
interest-bearing liabilities..... 116.50% 115.99%
</TABLE>
---------------
(1) Average balances include nonaccrual loans.
(2) Tax equivalent adjustments have been made to yields on loans and securities
that are exempt from federal income tax.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the cost of interest-bearing liabilities.
16
<PAGE> 144
The following table set forth information concerning borrowings during the
periods indicated.
<TABLE>
<CAPTION>
SHORT-TERM BORROWINGS 1999 1998
--------------------- ---------- -----------
<S> <C> <C>
Ending...................................................... $9,405,994 $ 7,649,027
Maximum month-end balance during the year................... 9,653,054 10,509,123
Average balance during the year............................. 8,084,747 7,874,000
Average year end interest rate.............................. 3.49% 3.47%
Average interest rate during the year....................... 3.75% 4.04%
</TABLE>
ITEM 2. DESCRIPTION OF PROPERTY
(a) Property. The Bank owns and operates its main office at 1 South Main
Street in Niles, Ohio. The Bank also operates four branches. The following is a
breakdown of the branch offices owned:
<TABLE>
<CAPTION>
BRANCHES OWNED:
---------------
<S> <C>
Girard Office Youngstown Road Office
121 North State St. 2910 Youngstown Road
Girard, OH 44420 Warren, OH 44484
422 Office Mineral Ridge Office
5845 Youngstown-Warren Rd. 3826 Main Street
Niles, OH 44446 Mineral Ridge, OH 44440
</TABLE>
(b) Investment policies. See "Note 1 -- Summary of Significant Accounting
Policies" in the Annual Report to Stockholders incorporated by reference herein
for a description of the Bank's investment policy. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(c) Description of Real Estate and Operating Data.
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
The nature of the Company's business results in a certain amount of
litigation. Accordingly, the Company and its subsidiaries are subject to various
pending and threatened lawsuits in which claims for monetary damages are
asserted in the ordinary course of business. While any litigation involves an
element of uncertainty, in the opinion of management, liabilities, if any,
arising from such litigation or threat thereof will not have a material effect
on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained under the section captioned "Stock Market
Information" of the Company's Annual Report to Stockholders for the fiscal year
ended December 31, 1999 (the "Annual Report") is incorporated herein by
reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The information contained in the section captioned "Management's Discussion
and Analysis" in the Annual Report is incorporated herein by reference.
17
<PAGE> 145
ITEM 7. FINANCIAL STATEMENTS
The Registrant's financial statements listed under Item 13 are incorporated
herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT'S ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information contained in the section captioned "Selection of Auditors"
in the Company's 2000 definitive proxy statement for the Company's 2000 Annual
Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information contained under the sections captioned "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" and "Proposal for the
Election of Directors and Information with Respect to Directors and
Officers -- Information with Respect to Nominees," "Information with Respect to
Directors not Standing for Reelection" and "Security Ownership of Management" in
the Proxy Statement is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the section captioned "Proposal for the
Election of Directors and Information with Respect to Directors and Officers
-Committees and Compensation of the Board of Directors" and "Executive
Compensation and Other Information" in the Proxy Statement is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
in the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the chart in the section captioned "Proposal for the Election of
Directors and Information with Respect to Directors and
Officers -- Information with Respect to Nominees" and "Security
Ownership of Management" in the Proxy Statement.
(c) Management of the Registrant knows of no arrangement, including any
pledge by any person of securities of the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section captioned "Executive Compensation and Other
Information -- Certain Relationships and Related Transactions" in the Proxy
Statement.
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and exhibits filed as part of
this report.
18
<PAGE> 146
The following consolidated financial statements of the Company and its
subsidiaries are filed as part of this document under Item 7, incorporated by
reference:
-- Report of Independent Auditors
-- Consolidated Balance Sheets as of December 31, 1999 and 1998
-- Consolidated Statements of Income for the years ended December 31,
1999 and 1998
-- Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999 and 1998
-- Consolidated Statements of Cash Flows for the years ended December
31, 1999 and 1998
-- Notes to Consolidated Financial Statements
2. Schedules omitted as they are not applicable.
(b) Reports on Form 8-K filed during the last quarter of 1999. No reports
were filed on Form 8-K during the last quarter of 1999.
(c) The following exhibits are included in this Report or incorporated
herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
3.1.1 Certificate of Incorporation of Security Financial Corp. (1)
3.1.2 Bylaws of Security Financial Corp. (1)
10.1 Written Agreement (4)
11 Statement Re: Computation of Per Share Earnings (2)
13.0 1999 Annual Report to Stockholders
16.1 Letter on Change of Certifying Accountants (3)
21.0 Subsidiaries of the Registrant (See "Item 1 -- Description
of Business")
23.0 Consent of Crowe, Chizek and Company LLP
23.1 Consent of S.R. Snodgrass, A.C.
27 Financial Data Schedule (electronic filing only)
</TABLE>
---------------
(1) Incorporated by reference into this document from Exhibits filed with the
Registration Statement on Form 10-SB, and any amendments thereto,
Registration No. 033-18566
(2) Statement regarding Computation of Per Share Earnings included in Note 1 to
Consolidated Financial Statements, 1999 Annual Report to Stockholders' under
the caption "Earnings Per Common Share"
(3) Incorporated by reference to the Form 8-K filed with the SEC on March 2,
1999
(4) Incorporated by reference to the Form 8-K filed with the SEC on March 22,
2000
19
<PAGE> 147
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Security Financial Corp.
(Registrant)
<TABLE>
<S> <C> <C>
Date: March 30, 2000 By:
----------------------------------------------------
Glenn E. Griffiths,
President & CEO
Date: March 30, 2000 By: /s/ Stephen K. Miller
----------------------------------------------------
Stephen K. Miller,
Treasurer
Date: March 30, 2000 By: /s/ Gary A. Clayman
----------------------------------------------------
Gary A. Clayman,
Director
Date: March 30, 2000 By: /s/ Robert I. Griffith, Jr.
----------------------------------------------------
Robert I. Griffith, Jr.,
Director
Date: March 30, 2000 By: /s/ Robert J. McClurkin
----------------------------------------------------
Robert J. McClurkin,
Director
Date: March 30, 2000 By:
----------------------------------------------------
Douglas J. Neuman,
Director
Date: March 30, 2000 By: /s/ Peter P. Rossi, Jr.
----------------------------------------------------
Peter P. Rossi, Jr.,
Director
Date: March 30, 2000 By: /s/ Christopher J. Shaker
----------------------------------------------------
Christopher J. Shaker,
Director
</TABLE>
20
<PAGE> 148
SECURITY FINANCIAL CORP.
Niles, Ohio
ANNUAL REPORT
December 31, 1999 and 1998
<PAGE> 149
EXHIBIT 13
HIGHLIGHTS OF 1999 AND 1998
SECURITY FINANCIAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
PERCENT
1999 1998 CHANGE
------------ ------------ -------
<S> <C> <C> <C>
FOR THE YEAR
Net Income....................................... $ 635,202 $ 152,808 315.69%
Return on Average Assets......................... 0.37% 0.09% 311.11%
Return on Equity................................. 4.38% 1.04% 321.15%
YEAR END
Assets........................................... $172,667,293 $172,073,780 0.34%
Securities....................................... 40,543,732 44,359,814 -8.60%
Net Loans........................................ 107,467,850 108,952,155 -1.36%
Deposits......................................... 145,365,974 148,916,886 -2.38%
Stockholders' Equity............................. 14,340,628 14,744,280 -2.74%
Shares Outstanding............................... 361,780 357,387 1.23%
Book Value....................................... 39.64 41.25 -3.90%
</TABLE>
"This financial information has not been reviewed or confirmed for accuracy
or relevance by the Federal Reserve System."
TABLE OF CONTENTS
<TABLE>
<S> <C>
Highlights of 1999.......................................... 1
Report to Stockholders...................................... 2
Directors and Officers...................................... 3
Description of Business..................................... 4
Selected Financial Data..................................... 5-6
Management's Discussion..................................... 7-13
Accountant's Report......................................... 14
Consolidated Balance Sheet.................................. 15
Consolidated Statement of Income............................ 16
Consolidated Statement of Changes in Stockholders' Equity... 17
Consolidated Statement of Cash Flows........................ 18
Notes to Consolidated Financial Statements.................. 19-39
Office Locations............................................ 40
</TABLE>
FORM 10-K SB
A copy of Security Financial Corp.'s Annual Report filed with the
Securities and Exchange Commission will be available on March 31, 2000 upon
written request to: Lynn M. Bowers, Corporate Secretary, Security Financial
Corp., 1 South Main Street, Niles, Ohio 44446
MEMBER FEDERAL DEPOSIT INSURANCE CORPORATION/FEDERAL RESERVE SYSTEM
1
<PAGE> 150
REPORT TO STOCKHOLDERS
Security Financial Corp. and Subsidiary
[LOGO]
SECURITY FINANCIAL CORP.
1 South Main Street P.O. Box 228
Niles, Ohio 44446-0228 Phone (330) 544-7400
TO OUR STOCKHOLDERS:
Before we comment on results for 1999, all of us with the Security
Financial family wish Glenn Griffiths a speedy recovery from his recent surgery.
As many of you are aware, Glenn successfully completed his scheduled surgery in
March and is presently on medical leave. Please keep Glenn and his family in
your thoughts and prayers.
The Board of Directors has retained Jim Bess as Interim President and CEO.
Jim is a highly experienced bank executive and started with the Company shortly
before Glenn began his medical leave. Officers and staff have responded well to
the transition and the Board is confident Jim will provide outstanding
leadership for the Company. If you have not already met Jim, please take a
moment at the Annual Meeting to introduce yourself and welcome Jim to Security
Financial.
1999 was a challenging year for the Company and for the banking industry as
a whole. Much of the year was devoted to Y2K preparedness activities. The
tireless efforts of our officers and staff resulted in all systems working
perfectly at the onset of the new millennium. Most of the difficulties
associated with our indirect loan portfolio were successfully resolved and
overall loan quality is at the healthiest levels in several years. The Board of
Directors recently entered into a written agreement with its state and federal
regulatory agencies to address several conditions noted in the last regulatory
exam completed during the fourth quarter. The agreement seeks to strengthen
several areas of administration and management of the bank. The Board of
Directors and management are committed to improving all areas of bank
administration.
Net income in 1999 improved to $635,202, a significant improvement from
$152,808 in 1998, but well below our goals for the year. Ongoing legal expenses
in our litigation regarding the indirect auto loan losses continued to be a drag
on earnings. Improved credit quality did allow us to reduce our provision for
loan losses by approximately 57% in 1999. We expect to be able to reduce the
provision again in the year 2000. We are pleased to have been able to once again
increase our cash dividend in 1999.
On behalf of the Board of Directors, we want to thank you for your support
and assure you that the Board is striving for the best interests of all
shareholders. We look forward to seeing you at the Annual Meeting.
FOR THE BOARD OF DIRECTORS
/s/Christopher J. Shaker
CHRISTOPHER J. SHAKER
CHAIRMAN
2
<PAGE> 151
DIRECTORS AND OFFICERS
Security Financial Corp. and Subsidiary
BOARD OF DIRECTORS OF SECURITY FINANCIAL CORP.
AND THE SECURITY DOLLAR BANK
<TABLE>
<S> <C>
GARY A. CLAYMAN ROBERT I. GRIFFITH, JR.
GLENN E. GRIFFITHS ROBERT J. MCCLURKIN
DOUGLAS J. NEUMAN
</TABLE>
CHRISTOPHER J. SHAKER -- CHAIRMAN
PETER P. ROSSI, JR. -- VICE CHAIRMAN
OFFICERS OF SECURITY FINANCIAL CORP.
<TABLE>
<S> <C> <C>
GLENN E. GRIFFITHS STEPHEN K. MILLER LYNN M. BOWERS
President/CEO Treasurer Secretary
</TABLE>
OFFICERS OF SECURITY DOLLAR BANK
<TABLE>
<S> <C> <C> <C>
GLENN E. GRIFFITHS STEPHEN K. MILLER FREMONT J. CAMERINO PHILLIP M. SUAREZ
President/CEO CFO & Treasurer Senior Vice President Senior Vice President
Head of Lending
KEVIN T. LAMAR ROBERT E. TRUE LYNN M. BOWERS THOMAS G. HATHHORN
Vice President Vice President Secretary Vice President
Senior Loan Officer Business Development Commercial Lending
RICHARD G. FERRARO PAUL D. RHODES RICHARD R. LYTLE ROSE ANN LUBERT
Vice President Vice President Asst. Vice President Assistant Vice
& Loan Officer Collection Dept. Manager 422 Office President
Branch Coordinator
</TABLE>
<TABLE>
<S> <C> <C>
R. KEITH PRICE JAMES G. SWIFT ARMETA E. CORDELL
Assistant Vice President Assistant Vice President Assistant Secretary
Human Resources & Controller
</TABLE>
3
<PAGE> 152
SECURITY FINANCIAL CORP.
Security Financial Corp. (the "Corporation") is a one-bank holding company
formed under the Bank Holding Company Act of 1956, as amended, operating under
regulations of the Board of Governors of the Federal Reserve System. Its
principal subsidiary is The Security Dollar Bank of Niles. Presently the
Corporation and its subsidiary operate in one industry, domestic banking.
The Corporation conducts no business activities except for investments in
securities permitted under the Bank Holding Company Act. The Board of Directors
of the Corporation and the Bank are identical. The officers of the Corporation
are Glenn E. Griffiths, President/CEO; Stephen K. Miller, Treasurer; and Lynn M.
Bowers, Secretary. Bank holding companies are permitted under Regulation Y of
the Board of Governors of the Federal Reserve System to engage in other
activities considered closely related to banking such as leasing and mortgage
banking. The Corporation has no other subsidiaries engaged in such activities at
this time.
THE SECURITY DOLLAR BANK
The Bank is a full service state-chartered bank engaged in commercial and
retail banking with the exception of trust services. The Bank's banking services
include checking accounts, savings accounts, time deposit accounts, commercial,
mortgage, installment and home equity loans, night depository, automatic 24-hour
teller machines, safe deposit boxes, money orders, travelers checks, government
bond sales, utility bill payments, IRA accounts, MasterCard and Visa Credit
Cards and other services normally offered by banks.
The Bank's main office is located at 1 South Main Street, Niles, Ohio.
Business is conducted at a total of five (5) offices located in Trumbull County.
As a state banking association and member of the Federal Reserve System, the
Bank is subject to supervision and regulation by the Ohio Division of Banks and
the Federal Reserve Bank of Cleveland. Deposits are insured by the Federal
Deposit Insurance Corporation (FDIC) to the extent provided by law.
As of December 31, 1999, the Corporation and its subsidiary had 104 full
and part-time employees, and considers its relations with its employees to be
satisfactory.
4
<PAGE> 153
SELECTED FINANCIAL INFORMATION
The following table sets forth certain information concerning the
consolidated financial position of the Company at the dates indicated:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSAND, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Interest income.................... $ 12,120 $ 12,657 $ 12,848 $ 11,269 $ 8,995
Interest expense................... 6,079 6,492 6,328 5,457 4,243
-------- -------- -------- -------- --------
Net interest income................ 6,041 6,165 6,520 5,812 4,752
Provision for loan losses.......... 970 2,267 1,250 668 198
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses.................. 5,071 3,898 5,270 5,144 4,554
Securities gains, net.............. 7 51 25 26 22
Other noninterest income........... 909 834 916 801 728
Other noninterest expense.......... 5,201 4,730 4,284 4,186 3,832
Federal income tax expense
(benefit)........................ 151 (100) 609 543 422
-------- -------- -------- -------- --------
Net income......................... $ 635 $ 153 $ 1,318 $ 1,242 $ 1,050
======== ======== ======== ======== ========
PER SHARE OF COMMON STOCK (1):
Net income......................... $ 1.77 $ 0.43 $ 3.89 $ 4.22 $ 3.65
Dividends.......................... 1.24 1.20 1.09 0.94 0.84
Book value......................... 39.64 41.25 41.40 36.37 33.42
Average common shares
outstanding...................... 359,212 355,009 330,354 285,730 279,356
YEAR-END BALANCES:
Loans receivable, net.............. $107,468 $108,952 $110,751 $113,310 $ 81,988
Securities available for sale...... 40,544 44,360 41,639 26,691 18,737
Total assets............. 172,667 172,074 167,258 152,899 127,064
Cash and cash equivalents.......... 17,359 10,733 8,906 6,868 6,189
Deposits........................... 145,366 148,917 145,352 129,670 109,571
Borrowings......................... 12,406 7,649 6,524 11,754 7,246
Stockholder's equity............... 14,341 14,744 14,633 10,779 9,789
KEY OPERATING RATIOS:
Return on average assets (net
income divided by average total
assets).......................... 0.37% 0.09% 0.81% 0.86% 0.90%
Return on average equity (net
income divided by average
equity).......................... 4.38 1.04 9.83 12.14 12.51
Dividend payout ratio (dividends
declared per share divided by net
income per share)................ 70.06 279.07 27.98 22.35 23.26
Equity to assets ratio (average
equity divided by average total
assets).......................... 8.34 8.72 8.26 7.12 7.19
Allowance for loan losses to
nonperforming loans.............. 109.80 133.97 64.51 85.75 236.45
</TABLE>
---------------
(1) All share and per share data has been restated for the effect of common
stock dividends and splits.
STOCK MARKET INFORMATION
There is no established public trading market for the Company's common
stock and the shares of the Company are not listed on any exchange. Sale price
information is based on information reported to the Company
5
<PAGE> 154
by individual buyers and sellers of the Company stock. The following table
summarizes the high and low prices and dividend information for 1999 and 1998,
adjusted for a three percent stock dividend on December 14, 1999. Cash dividends
are paid on a quarterly basis.
<TABLE>
<CAPTION>
CASH
DIVIDENDS -----------------------------
QUARTER ENDED HIGH LOW PAID
------------- ------ ------ -----
<S> <C> <C> <C>
1999 March 31................................. $70.06 $69.57 $0.31
June 30....................................... 70.25 69.83 0.31
September 30.................................. 70.54 70.25 0.31
December 31................................... 73.12 70.39 0.31
1998 March 31................................. 66.59 63.26 0.30
June 30....................................... 66.76 66.59 0.30
September 30.................................. 69.24 66.76 0.30
December 31................................... 69.57 69.24 0.30
</TABLE>
At December 31, 1999 the Company had approximately 603 stockholders of
record.
The Bank is subject to legal limitations on the amount of dividends it can
pay as a state-chartered member of the Federal Reserve Bank System. Prior
approval of the Federal Reserve Board is required if the total of all dividends
declared by the Bank in any calendar year exceeds net profits, as defined for
the year, combined with its retained net profits for the two preceding calendar
years less any required transfers to surplus. Restrictions on the amount of
dividends allowable by the Bank could, as a practical matter, restrict the
Company's ability to pay dividends to shareholders.
The following is management's discussion and analysis of the financial
condition and results of the operations of Security Financial Corp.. It is
intended to explain certain financial information regarding the Company and
should be read in conjunction with the consolidated Financial Statements,
related Notes, and the Five Year Summary of Selected Data included in this
report.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts
are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "expects,"
"believes," "estimate" or "projected" and similar expressions as they relate to
Security Financial Corp. or its management are intended to identify such forward
looking statements. Security Financial Corp.'s actual results, performance or
achievements may materially differ from those expressed or implied in the
forward looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited to, general
economic conditions, interest rate environment, competitive conditions in the
financial services industry, changes in law, governmental policies and
regulations, and rapidly changing technology affecting financial services.
FINANCIAL CONDITION
Total assets amounted to $172,667,000 at December 31, 1999, an increase of
$593,000 or less than 1% from $172,074,000 at December 31, 1998. Short-term
liquid investments consisting of cash and due from banks, federal funds sold,
and interest-bearing deposits in other banks, increased in the aggregate by
$6,427,000 or 57.7% as management increased liquidity in preparation for Year
2000 and the uncertainty related to the potential increased demand for currency
by the Company's customers.
Investment securities decreased $3,816,000, or 8.6%, to $40,544,000 at
December 31, 1999 from $44,360,000 at December 31, 1998. This decrease was due
to maturities, calls and paydowns during the year. Funds from these events were
used to help fund the growth in commercial real estate loans and to increase
short-term liquid investments.
6
<PAGE> 155
Net loan receivables decreased $1,484,000 or 1.4% from $108,952,000 at
December 31, 1998 to $107,468,000 at December 31, 1999. During 1999, there was a
strong demand for commercial real estate loans, which generated approximately
$7,769,000 in loan growth; however, more than offsetting this increase was a
decline in the installment loan portfolio and more specifically in the indirect
automobile loan portfolio. As discussed below, the Company has experienced
significant loan losses in relation to this portfolio and management has been
stringently enforcing existing underwriting guidelines, which has resulted in a
reduction in loan originations. Indirect automobile loans have a three to five
year average life and the repayment of these loans has outpaced the new loan
originations during the current period.
Deposits decreased by $3,551,000, or 2.4%, to $145,366,000 at December 31,
1999 from $148,917,000 at December 31, 1998. This decrease represents increases
in money market deposit accounts of $6,858,000 which were more than offset by a
decline in certificates of deposit of $7,973,000. The Company has developed a
new tiered money market product and experienced a continuation of a change in
the deposit portfolio mix, with funds moving from certificates of deposit to
money market deposits.
Short-term borrowings increased $1,757,000, or 23.0%, from $7,649,000 at
December 31, 1998 to $9,406,000 at December 31, 1999. The increase is a result
of an increase in repurchase agreements. Management believes such accounts are a
stable source of funds as they represent substitutes for core deposits for
larger commercial and governmental agency customers. The Company also obtained
$3,000,000 of advances from the FHLB during 1999. Management views these funds
as an alternative to time deposit funds and was able to extend the maturity of
the liabilities more than would have been possible with retail deposits.
Equity capital decreased by $404,000 for the year ended December 31, 1999
due to the increase in the unrealized loss on securities available for sale of
$899,000 and dividends paid of $446,000. These events were partially offset by
an increase in equity from net income of $635,000 and the purchase of common
shares through the dividend reinvestment plan totaling $281,000. Through
December 31, 1999, the Company paid dividends of $1.24 per share, while
maintaining capital ratios in excess of regulatory guidelines. The Board of
Directors will determine future dividend policies in light of the earnings and
financial condition of the Company including applicable governmental regulations
and policies.
RESULTS OF OPERATIONS
Comparison of results from operations from December 31, 1999 to December
31, 1998:
Net income increased by $482,000 to $635,000 or $1.77 per share. Net income
increased mainly as a result of the decline in the provision for loan losses of
$1,297,000 or 57.2%, which was offset by a decline in net interest income of
$124,000 and an increase in operating expenses of $471,000.
NET INTEREST INCOME
Net interest income decreased $124,000, or 2.0%, to $6,041,000 for the year
ended December 31, 1999 compared to $6,165,000 for 1998. Interest income and
expense decreased by $537,000 and $413,000, respectively.
The decrease in interest income resulted primarily from a decrease in
earnings on loans of $513,000 or 5.2%, and a decrease in interest income on
investments of $143,000. The decrease in interest income was partially offset by
an increase in income on federal funds sold amounting to $119,000. The decrease
in interest income on loans was due to a decrease in the average principal
balances for loans of $1.0 million coupled with a decline in the yields on loans
of 39 basis points. The decline in interest income on securities was also due to
a decline in the yield on securities which was slightly offset by an increase in
the average balance of securities during the year. The increase in interest
income from federal funds sold was due to the increase in the average balance
outstanding of $2.8 million which was partially offset by a decline in yield of
49 basis points.
Interest expense on deposits decreased by $519,000. This decrease results
from a slight decrease of $146,000 in the average balance for the period and a
decrease in the cost of funds for deposits of 40 basis points. The decrease in
interest expense on deposits was partially offset by the increase in the
interest expense from the $3 million of FHLB advances obtained during 1999.
7
<PAGE> 156
The following table sets forth information regarding changes in interest
income and interest expense in 1999 compared to 1998. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate), (ii) changes in rate (changes in rate multiplied by old
volume), and (iii) the change in interest due to both volume and rate, which has
been allocated to volume and rate changes in proportion to the relationship of
the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1999 VS 1998
----------------------------
INCREASE (DECREASE) DUE TO
----------------------------
VOLUME RATE NET
------ ----- -----
<S> <C> <C> <C>
INTEREST EARNED ON:
Loans.......................................... $ (90) $(423) $(513)
Taxable investment securities.................. 54 (192) (138)
Tax-exempt investment securities............... 80 (85) (5)
Federal funds sold............................. 142 (23) 119
----- ----- -----
Total.......................................... 186 (723) (537)
----- ----- -----
INTEREST PAID ON:
Demand deposits................................ 21 2 23
Money market accounts.......................... 373 40 413
Savings deposits............................... (17) (2) (19)
Time deposits.................................. (524) (412) (936)
Short-term borrowings.......................... 8 (23) (15)
Long-term borrowings........................... 121 -- 121
----- ----- -----
Total.......................................... (18) (395) (413)
----- ----- -----
GRAND TOTAL.................................... $ 204 $(328) $(124)
===== ===== =====
</TABLE>
PROVISION FOR LOAN LOSSES
During 1999 and 1998 the Company's earnings have been adversely affected by
significant provisions for loan losses. In 1995 the Company initiated an
indirect automobile loan program within its immediate market area. This program
experienced significant growth in 1996 and continued through May 1997. During
this period, management and the Board of Directors initiated and modified
certain policies and procedures to protect asset quality in this higher risk
loan category. A former officer of the Bank granted loans that were outside the
policy guidelines implemented. The significant provisions for loan losses
recorded in 1999 and 1998 have primarily been attributed to the indirect
automobile loans.
Management has monitored and implemented additional control procedures to
protect asset quality. Management has determined that substantially all
automobile repossessions have occurred in loans that were granted on terms and
conditions that were outside of the policy limits established. These losses were
provided for from current earnings of the Company, which reduced the earnings
for 1999 and 1998. The former officer of the Bank was dismissed in 1997 and the
Company has initiated a claim with its blanket bond insurance carrier asserting
wrongful conduct on part of the Bank Officer in making these loans. The Board of
Directors intends to continue to pursue the bond claim to recover losses
realized and to recover any future chargeoffs that may occur in association with
the loans granted outside the limitations established by the Board of Directors.
Management's evaluation of the allowance for loan losses encompasses the
overall risk characteristics of the various portfolio segments, past experience
with losses, the impact of economic conditions on borrowers, and other relevant
factors. The provision for loan losses decreased by $1.3 million for the year
ended December 31, 1999 compared to the same period ended 1998 primarily due to
the $1.0 million decline in net loan charge-offs in 1999 compared to 1998.
8
<PAGE> 157
OTHER INCOME
Noninterest income, which is comprised principally of service charges on
deposit accounts and brokerage income, increased $31,000 or 3.5%. Service
charges on deposit accounts increased $30,000, a result of the bank
restructuring service charges. In addition, brokerage income increased $52,000
or 54.8% in 1999 from 1998.
OTHER EXPENSES
Noninterest expense increased by $471,000, or 10.0%, from $4,730,000 for
the year ended December 31, 1998 compared to $5,201,000 for the year ended
December 31, 1999. Salaries and employee benefits increased $95,000 or 3.6% as a
result of normal pay increases during the year. Occupancy and equipment expense
increased $101,000 or 14.5% due primarily to the impact of the new operations
center which opened in November, 1998 as well as additional costs related to the
computer systems. Other expenses increased $281,000 or 19.5%. The largest single
increase was from professional fees which increased $119,000 primarily due to
litigation involving problem loan situations.
PROVISION FOR INCOME TAXES
Income tax expense increased $251,000 to $151,000 for the year ended
December 31, 1999 compared to a benefit of $100,000 for the year ended December
31, 1998 due to the increase in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to efficiently meet normal
cash flow requirements of both borrowers and depositors. To maintain proper
liquidity, the Company uses asset liability management policies along with its
investment policies to assure it can meet its financial obligations to
depositors, credit customers and shareholders. Liquidity is needed to meet
depositors' withdrawal demands, extend credit to meet borrowers' needs, provide
funds for normal operating expenses and cash dividends, and fund other capital
expenditures.
Liquidity management is influenced by cash generated by operating
activities, investing activities and financing activities. The most important
source of funds is the deposits which are primarily core deposits (deposits from
customers with other relationships). Short-term debt from the Federal Home Loan
Bank supplements the Company's availability of funds.
At December 31, 1999, the Company and its Bank subsidiary exceeded all of
its regulatory capital requirements. The Company had total risk-based capital of
$15.9 million, or 15.1% which is above the $8.4 million, or 8% required; Tier I
risk-based capital of $14.5 million, or 13.7% which is above the $4.2 million or
4% required for capital adequacy purposes; and a leverage capital of $14.5
million, or 8.5% which is above the $6.8 million or 4% required for capital
adequacy purposes.
Subsequent to year end, the Company entered into a formal regulatory
agreement with its primary regulators, The Federal Reserve and The Ohio Division
of Financial Institutions which, among other things, requires regulatory
approval for any payment of dividends. In addition, subsequent to December 31,
1999, the Board of Directors voted to suspend the Dividend Reinvestment Plan.
During 1999, approximately $281,000 or 63% of the $446,000 paid in cash
dividends was used to purchase shares of common stock as part of the dividend
reinvestment plan.
INTEREST RATE RISK MANAGEMENT
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks associated
with maximizing income through interest sensitivity imbalances and the market
value risk of assets and liabilities. Asset/liability management includes GAP
measurement that determines, over various time periods, interest-earning assets
and interest-bearing liabilities which are due to reprice at current market
rates. A financial institution will have a negative interest rate sensitivity
GAP for a given period of time if the amount of its interest-bearing liabilities
maturing or repricing within that period is greater than the total of the
interest-earning assets maturing or repricing within the same period. When
interest rates increase, financial institutions with a negative interest rate
sensitivity GAP will be more likely to experience
9
<PAGE> 158
increases in the cost of their liabilities faster than the corresponding yields
generated by their earning assets. Following the same concept, as interest rates
decrease, the cost of funds of financial institutions with a negative
interest-rate sensitivity GAP usually will decrease more rapidly than the yields
on the earning assets. As a general rule, the same changes in interest rate will
usually have the opposite effect on financial institution structured with a
positive interest-rate sensitivity GAP.
Interest rate sensitivity varies with various types of interest-earning
assets and interest-bearing liabilities. The primary components of
interest-sensitive assets include adjustable-rate loans and investments, loan
repayments, investment maturities and money market investments. The primary
components of interest-sensitive liabilities include maturing certificates of
deposit, IRA certificates of deposit (individuals over 59 1/2 have the option of
changing their interest rate annually) money market accounts, and short-term
borrowings. Savings deposits and NOW accounts are considered core deposits and
are not short-term interest sensitive.
At December 31, 1999, the company was in a negative GAP position in the one
year time horizon and is therefore more likely to be negatively impacted by
interest rate increases in the near term.
YEAR 2000 COMPLIANCE
Management devoted significant time and attention during 1999 to the task
of ensuring the Company was "Year 2000" compliant prior to December 31, 1999. At
the present time, the Company has not experienced and management does not
anticipate any negative effects from "Year 2000" issues.
REGULATORY ACTION
On March 17, 2000, the Board of Directors entered into a written regulatory
agreement between Security Dollar Bank and the Federal Reserve Bank of Cleveland
and the Ohio Division of Financial Institutions. The agreement remains
enforceable until terminated or suspended by the regulatory agencies and
requires prior regulatory approval before any dividends can be paid by the Bank.
In addition, the agreement requires specific actions be undertaken by management
and the Bank's Board of Directors which are intended to improve and strengthen
the Bank's operations, oversight, risk management and internal control. The
agreement establishes specific time frames for the completion of various action
items and requires written progress reports be furnished to the Bank's
regulators on a quarterly basis detailing the actions taken to secure compliance
with the agreement. Management anticipates that both Company management and the
Board of Directors will devote significant time and attention during 2000 to
complete the detailed requirements of the agreement. In addition, management
anticipates the Company will incur costs for outside consulting engagements
required under specific terms of the agreement. The costs for those services is
not currently known.
IMPACT OF INFLATION
Consolidated financial data included herein has been prepared in accordance
with generally accepted accounting principles (GAAP). Presently, GAAP requires
the Company to measure financial position and operating results in terms of
historical dollars, except for securities available for sale which are carried
at fair value. Changes in the relative value of money due to inflation or
recession are generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of the Company to a far greater degree than changes in the inflation
rate. While interest rates are greatly influenced by changes in the inflation
rate, they do not move concurrently. Rather, interest rate volatility is based
on changes in the expected rate of inflation, as well as changes in monetary and
fiscal policy. A financial institution's ability to be relatively unaffected by
changes in interest rates is a good indicator of its capability to perform in a
volatile economic environment. In an effort to protect itself from the effects
of interest rate volatility, the Company reviews its interest rate risk position
frequently, monitoring its exposure and taking necessary steps to minimize any
detrimental effects on the Company's profitability.
10
<PAGE> 159
Average Balance Sheet And Interest Rate Analysis. The following table sets
forth a summary of average balances of assets and liabilities as well as average
yield and cost information. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE(2) BALANCE INTEREST RATE(2)
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets
Loans(1)......................... $108,133 $9,342 8.64% $109,132 $9,855 9.03%
Taxable investment securities.... 35,883 2,010 5.60% 34,987 2,148 6.14%
Tax-exempt investment
securities..................... 9,133 417 6.92% 8,060 422 7.93%
Federal funds sold............... 7,082 351 4.96% 4,253 232 5.45%
-------- ------ ------ -------- ------ ------
Total interest-earning assets.... 160,231 12,120 7.56% 156,432 12,657 8.23%
Noninterest-earning assets....... 13,529 11,972
-------- --------
$173,760 $168,404
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Demand deposits.................. $ 8,930 218 2.44% $ 8,051 195 2.42%
Money market accounts............ 14,799 616 4.16% 5,705 203 3.56%
Savings deposits................. 26,699 783 2.93% 27,294 802 2.94%
Time deposits.................... 76,425 4,038 5.28% 85,949 4,974 5.79%
Short-term borrowings............ 8,084 303 3.75% 7,874 318 4.04%
Long-term borrowings............. 2,595 121 4.66% -- -- --
-------- ------ ------ -------- ------ ------
Total interest-bearing
liabilities.................... 137,532 6,079 4.42% 134,873 6,492 4.81%
-------- ------ ------ -------- ------ ------
Noninterest-bearing
liabilities.................... 21,729 18,848
Stockholders' equity............. 14,499 14,683
-------- --------
$173,760 $168,404
======== ========
Net interest income.............. $6,041 $6,165
====== ======
Net yield on interest-earning
assets(3)...................... 3.77% 4.08%
Interest rate spread (4)......... 3.14% 3.42%
Ratio of average interest-earning
assets to average
interest-bearing liabilities... 116.50% 115.99%
</TABLE>
---------------
(1) Average balances include nonaccrual loans.
(2) Tax equivalent adjustments have been made to yields on loans and securities
that are exempt from federal income tax.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the cost of interest-bearing liabilities.
11
<PAGE> 160
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders Security Financial Corp.
Niles, Ohio
We have audited the accompanying consolidated balance sheet of Security
Financial Corp. as of December 31, 1999 and the related statements of income,
changes in stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The 1998 financial statements were audited by other auditors whose
report dated January 22, 1999 expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Financial Corp. as
of December 31, 1999, and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Cleveland, Ohio
February 10, 2000, except for Notes 14 and 18,
as to which the date is March 17, 2000
12
<PAGE> 161
SECURITY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 8,110,768 $ 8,056,009
Federal funds sold.......................................... 8,950,000 1,781,000
Short-term interest bearing deposits........................ 298,000 896,000
------------ ------------
Cash and cash equivalents................................. 17,358,768 10,733,009
Long-term interest bearing deposits......................... 199,000 398,000
Investment securities available for sale.................... 40,543,732 44,359,814
Loans....................................................... 109,117,665 110,754,928
Less allowance for loan losses.............................. 1,649,815 1,802,773
------------ ------------
Net loans................................................... 107,467,850 108,952,155
Premises and equipment, net................................. 4,899,155 4,967,839
Accrued interest and other assets........................... 2,198,788 2,662,963
------------ ------------
Total assets...................................... $172,667,293 $172,073,780
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand................................. $ 18,319,669 $ 21,178,516
Interest bearing demand..................................... 9,894,059 7,980,918
Money market................................................ 17,052,311 10,194,276
Savings..................................................... 25,085,927 26,576,390
Time........................................................ 75,014,008 82,986,786
------------ ------------
Total deposits.................................... 145,365,974 148,916,886
Short-term borrowings....................................... 9,405,994 7,649,027
FHLB advances............................................... 3,000,000 --
Accrued interest payable and other liabilities.............. 554,697 763,587
------------ ------------
Total liabilities................................. 158,326,665 157,329,500
------------ ------------
Commitments and contingencies
Common stock, without par value, 1,500,000 shares
authorized; 361,780 and 346,978 shares issued............. 7,860,674 6,794,102
Retained earnings........................................... 7,124,702 7,695,892
Accumulated other comprehensive income...................... (644,748) 254,286
------------ ------------
Total stockholders' equity........................ 14,340,628 14,744,280
------------ ------------
Total liabilities and stockholders' equity... $172,667,293 $172,073,780
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 162
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans.................................. $9,342,188 $9,855,641
Securities:
Taxable..................................................... 1,958,712 2,115,073
Tax exempt.................................................. 416,635 421,742
Interest-bearing deposits in other banks.................... 51,322 32,701
Federal funds sold.......................................... 350,856 231,838
---------- ----------
Total interest income............................. 12,119,713 12,656,995
---------- ----------
INTEREST EXPENSE
Deposits.................................................... 5,654,758 6,173,623
Short-term borrowings....................................... 302,662 318,388
FHLB advances............................................... 121,350 --
---------- ----------
Total interest expense............................ 6,078,770 6,492,011
---------- ----------
Net interest income......................................... 6,040,943 6,164,984
Provision for loan losses................................... 970,000 2,267,000
---------- ----------
Net interest income after provision for loan losses......... 5,070,943 3,897,984
---------- ----------
OTHER INCOME
Service charges on deposit accounts......................... 626,088 595,678
Investment securities gains, net............................ 7,468 51,167
Gain on sales of mortgage loans, net........................ 11,683 46,428
Brokerage income............................................ 147,732 95,438
Other income................................................ 122,981 95,941
---------- ----------
Total other income................................ 915,952 884,652
---------- ----------
OTHER EXPENSES
Salaries and employee benefits.............................. 2,684,919 2,590,383
Occupancy and equipment..................................... 796,557 695,417
Other expenses.............................................. 1,719,129 1,443,912
---------- ----------
Total other expense............................... 5,200,605 4,729,712
---------- ----------
Income before income taxes.................................. 786,290 52,924
Income tax expense (benefit)................................ 151,088 (99,884)
---------- ----------
Net Income.................................................. $ 635,202 $ 152,808
========== ==========
Weighted average shares outstanding:
Basic..................................................... 359,212 355,009
Diluted................................................... 359,541 355,399
Earnings Per Share:
Basic..................................................... $ 1.77 $ 0.43
Diluted................................................... 1.77 0.43
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 163
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME TOTAL
---------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1998................... $ 832,910 $4,977,246 $8,695,696 $ 127,031 $14,632,883
Reclassification for
change to no par common
stock.................. 4,977,246 (4,977,246) --
Net income............... 152,808 152,808
Other comprehensive
income................. 127,255 127,255
--------- -----------
Total comprehensive
income................. 280,063
Cash dividends ($1.20 per
share)................. (428,265) (428,265)
Dividend reinvestment and
stock purchase plan.... 262,156 262,156
Three percent stock
dividend including cash
paid for fractional
shares................. 721,790 (724,347) (2,557)
---------- ---------- -----------
Balance, December 31,
1998................... 6,794,102 -- 7,695,892 254,286 14,744,280
Net income............... 635,202 635,202
Other comprehensive
income (loss).......... (899,034) (899,034)
--------- -----------
Total comprehensive
income (loss).......... (263,832)
Cash dividends ($1.24 per
share)................. (446,452) (446,452)
Stock options exercised
(424 shares)........... 26,784 26,784
Issue of 52 common
shares................. 3,583 3,583
Dividend reinvestment and
stock purchase plan.... 280,815 280,815
Three percent stock
dividend including cash
paid for fractional
shares................. 755,390 (759,940) (4,550)
---------- ---------- -----------
Balance, December 31,
1999................... $7,860,674 $ -- $7,124,702 $(644,748) $14,340,628
========== ========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 164
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 AND 1998
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 635,202 $ 152,808
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 346,534 385,186
Net amortization of security premiums..................... 259,348 472,245
Investment securities gains, net.......................... (7,468) (51,167)
Provision for loan losses................................. 970,000 2,267,000
Deferred federal income taxes............................. 6,824 51,854
Mortgage loans originated for sale........................ (315,850) (2,402,039)
Proceeds from sales of mortgage loans..................... 181,850 2,448,467
Gain on sales of mortgage loans, net...................... (11,683) (46,428)
Decrease (increase) in accrued interest receivable........ 114,601 (27,329)
Increase (decrease) in accrued interest payable........... (6,055) (45,849)
Other, net................................................ 302,258 23,797
------------ ------------
Net cash from operating activities........................ 2,475,561 3,228,545
------------ ------------
INVESTMENT ACTIVITIES
Decrease (increase) in interest-bearing time deposits
maturing in more than 90 days............................. 199,000 (398,000)
Investment securities available for sale:
Proceeds from sales....................................... 6,487,590 4,365,457
Proceeds from maturities and principal repayments......... 9,076,280 12,165,746
Purchases................................................. (13,376,777) (19,480,782)
Net decrease (increase) in loans............................ 636,622 (1,379,969)
Purchase of premises and equipment.......................... (205,850) (1,447,700)
Proceeds from sale of repossessed assets.................... 270,684 253,212
------------ ------------
Net cash from investing activities........................ 3,087,549 (5,922,036)
------------ ------------
FINANCING ACTIVITIES
Net (decrease) increase in deposits......................... (3,550,912) 3,564,425
Net increase in short-term borrowings....................... 1,756,964 1,124,341
FHLB advances............................................... 3,000,000 --
Dividends paid on common stock.............................. (451,002) (430,822)
Proceeds from stock options................................. 26,784 --
Proceeds from dividend reinvestment and stock purchase
plan...................................................... 280,815 262,156
------------ ------------
Net cash from financing activities..................... 1,062,649 4,520,100
------------ ------------
Increase in cash and cash equivalents..................... 6,625,759 1,826,609
Cash and cash equivalents at beginning of year.............. 10,733,009 8,906,400
------------ ------------
Cash and cash equivalents at end of year.................... $ 17,358,768 $ 10,733,009
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 165
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include Security Financial Corp.
("Company") and its wholly-owned subsidiary, Security Dollar Bank ("Bank").
Significant intercompany transactions and balances are eliminated in
consolidation.
The Company is a Delaware corporation organized as holding company of the
Bank. The Bank is a state-chartered commercial bank located in Northeast Ohio.
The Company and its subsidiary derive substantially all their income from
banking and bank-related services which include interest earnings on commercial
and consumer loan financing as well as interest on securities and a variety of
deposit services to its customers through five locations. The Company and the
Bank are supervised by the Federal Reserve Board, while the Bank is also subject
to regulation and supervision by the Ohio Division of Financial Institutions.
Use of Estimates: To prepare financial statements in conformity with
generally accepted accounting principles, 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, fair
values of financial instruments, and status of contingencies are particularly
subject to change.
Cash Flow Information: For purposes of reporting cash flows, cash and cash
equivalents include cash and due from banks, federal funds sold, and
interest-bearing deposits in other banks with a maturity less than 90 days.
Cash payments for interest in 1999 and 1998 were $6,071,102 and $6,537,860,
respectively. Cash received from a refund of prior income taxes paid was
$100,431 in 1999. Cash payments for income taxes paid were $140,000 for 1998.
Securities: The Company has classified debt and equity securities as
available for sale to serve principally as a source of liquidity. Unrealized
holding gains and losses for available for sale securities are reported as a
separate component of stockholders' equity, net of tax, until realized. Realized
securities gains and losses are computed using the specific identification
method. Interest and dividends on investment securities are recognized as income
when earned. Interest income includes amortization of purchase premiums or
discounts
Common stock of the Federal Home Loan Bank, Federal Reserve Bank, and
Independent State Bank of Ohio are accounted for at cost and are classified with
equity securities available for sale.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an allowance for
loan losses. Loans held for sale are reported at the lower of cost or market, on
an aggregate basis.
Interest on loans is recognized as income when earned on the accrual
method. The Company's general policy has been to stop accruing interest on loans
when it is determined that reasonable doubt exists as to the collectibility of
additional interest. Interest payments received on nonaccrual loans is recorded
as income or applied against principal according to management's judgment as to
the collectibility of the related loans. Loan origination fees and certain
direct loan origination costs are being deferred and the net amount amortized as
an adjustment of the related loan yield. The Company is amortizing these amounts
over the contractual lives of the related loans.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions,
17
<PAGE> 166
and other factors. Allocations of the allowance may be made for specific loans,
but the entire allowance is available for any loan that, in management's
judgment, should be charged-off.
A loan is considered impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an individual
loan basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. The definition
of "impaired loans" is not the same as the definition of "nonaccrual loans,"
although the two categories overlap. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired. Factors considered by management in
determining impairment include payment status and collateral value.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets. Expenditures for maintenance and
repairs are charged against income as incurred. Costs of major additions and
improvements are capitalized.
Intangibles: Purchased intangibles, primarily goodwill and core deposit
value, are recorded at cost and amortized over the estimated life. Goodwill is
being amortized over 15 years and the core deposit is being amortized over 8
years. Intangible amortization of $72,000 was recorded in both 1999 and 1998.
Long-Term Assets: Premises and equipment and other long-term assets are
reviewed for impairment when events indicate their carrying amount may not be
recoverable from future undiscounted cash flows. If impaired, the assets are
recorded at discounted amounts.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Profit Sharing Plan: Profit sharing expense is the amount of the
contribution determined by a formula which is based on the achievement of
certain operating levels and performance ratios.
Stock Compensation: Employee compensation expense under stock option plans
is reported if options are granted below market price at grant date. Pro forma
disclosures of net income and earnings per share are shown using the fair value
method of SFAS No. 123 to measure expense for the options, using an option
pricing model to estimate fair value.
Income Taxes: Income tax expense is the total of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Financial Instruments: Financial instruments include off-balance sheet
credit instruments, such as commitments to make loans and standby letters of
credit, issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.
Earnings per Common Share: Basic earnings per common share is net income
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share includes the dilutive effect of
additional potential common shares issuable under stock options. Earnings and
dividends per share have been restated for all stock dividends.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity.
18
<PAGE> 167
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but the effect will depend on derivative holdings when
this standard applies.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Dividend Restriction: Banking regulations require maintaining certain
capital levels and may limit the dividends paid by the bank to the holding
company or by the holding company to shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Business Segments: While the Company's chief decision-makers monitor the
revenue streams of the various Company products and services, operations are
managed and financial performance is evaluated on a company-wide basis.
Accordingly, all of the Company's banking operations are considered by
management to be aggregated in one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
NOTE 2 -- SECURITIES
The amortized cost and estimated market values of securities available for
sale are as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and Government
agency securities.............. $ 7,145,502 $ 16,952 $ (139,750) $ 7,022,704
Obligations of states and
political subdivisions......... 9,117,043 4,590 (613,220) 8,508,413
Corporate obligations............ 195,109 -- (7,296) 187,813
Mortgage-backed securities....... 23,618,028 27,176 (509,988) 23,135,216
----------- -------- ----------- -----------
Total debt securities............ 40,075,682 48,718 (1,270,254) 38,854,146
Equity securities................ 1,444,938 244,648 -- 1,689,586
----------- -------- ----------- -----------
Total............................ $41,520,620 $293,366 $(1,270,254) $40,543,732
=========== ======== =========== ===========
</TABLE>
19
<PAGE> 168
<TABLE>
<CAPTION>
1998
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and Government
agency securities............... $ 6,824,464 $ 15,258 $ (3,187) $ 6,836,535
Obligations of states and
political subdivisions.......... 9,182,033 105,136 (59,101) 9,228,068
Mortgage-backed securities........ 26,499,393 339,260 (164,157) 26,674,496
----------- -------- --------- -----------
Total debt securities............. 42,505,890 459,654 (226,445) 42,739,099
Equity securities................. 1,468,638 158,793 (6,716) 1,620,715
----------- -------- --------- -----------
Total............................. $43,974,528 $618,447 $(233,161) $44,359,814
=========== ======== ========= ===========
</TABLE>
The amortized cost and estimated market values of debt securities at
December 31, 1999, by contractual maturity, are shown below. The Company's
mortgage-backed securities have contractual maturities ranging from one to
thirty years. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less............................ $ 2,650,028 $ 2,594,109
Due after one year through five years.............. 4,552,324 4,383,045
Due after five years through ten years............. 7,159,690 6,629,728
Due after ten years................................ 2,095,612 2,112,048
Mortgage-backed securities......................... 23,618,028 23,135,216
----------- -----------
Total.................................... $40,075,682 $38,854,146
=========== ===========
</TABLE>
The following is a summary of proceeds received, gross gains, and gross
losses realized on the sale of securities:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Proceeds from sales.................................. $6,487,590 $4,365,457
Gross gains.......................................... 29,280 51,167
Gross losses......................................... 21,812 --
</TABLE>
Securities with carrying values of $21,433,459 and $22,615,602 at December
31, 1999 and 1998, respectively, were pledged to secure public deposits,
securities sold under agreements to repurchase, and other purposes as required
by law.
20
<PAGE> 169
NOTE 3 -- LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Real estate mortgages:
Residential...................................... $ 51,759,229 $ 47,954,511
Commercial....................................... 32,560,547 24,791,286
Commercial, financial, and agricultural.......... 6,060,456 10,255,062
Consumer loans................................... 16,619,461 25,177,883
Other............................................ 2,117,972 2,576,186
------------ ------------
$109,117,665 $110,754,928
============ ============
</TABLE>
Activity in the allowance for loan losses for the year was as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balance, January 1................................... $1,802,773 $1,677,651
Add:
Provisions charged to operations..................... 970,000 2,267,000
Recoveries........................................... 204,383 112,173
Less loans charged off............................... 1,327,341 2,254,051
---------- ----------
Balance, December 31................................. $1,649,815 $1,802,773
========== ==========
</TABLE>
Impaired loans were as follows.
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Year-end loans with no allocated allowance for loan
losses............................................... $115,773 $ 422,387
Year-end loans with allocated allowance for loan
losses............................................... 234,124 524,124
-------- ----------
Total........................................ $349,897 $ 946,511
======== ==========
Amount of the allowance for loan losses allocated...... $ 80,000 $ 238,000
Average of impaired loans during the year.............. $724,018 $1,113,000
Interest income recognized during impairment........... $ 5,929 $ 10,894
Cash-basis interest income recognized.................. 5,929 10,894
</TABLE>
Nonperforming loans were as follows.
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Loans past due over 90 days still on accrual........... $ 184,000 $412,000
Nonaccrual loans....................................... 1,041,569 933,675
</TABLE>
Nonperforming loans includes substantially all impaired loans and smaller
balance homogeneous loans, such as residential mortgage and consumer loans, that
are collectively evaluated for impairment.
21
<PAGE> 170
NOTE 4 -- PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land................................................. $ 576,173 $ 576,173
Buildings............................................ 4,845,116 4,883,483
Furniture, fixtures, and equipment................... 3,565,448 3,321,227
---------- ----------
8,986,737 8,780,883
Less: Accumulated depreciation....................... 4,087,582 3,813,044
---------- ----------
Total................................................ $4,899,155 $4,967,839
========== ==========
</TABLE>
Depreciation charged to operations was $274,534 in 1999 and $313,186 in
1998.
NOTE 5 -- DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000
or more. Such deposits aggregated $12,114,475 and $13,487,912 at December 31,
1999 and 1998, respectively.
Scheduled maturities of time deposits for the next five years were as
follows.
<TABLE>
<S> <C>
2000........................................................ $53,134,221
2001........................................................ 15,870,453
2002........................................................ 3,734,306
2003........................................................ 1,264,834
2004........................................................ 651,784
Thereafter.................................................. 358,410
-----------
............................................................ $75,014,008
===========
</TABLE>
NOTE 6 -- SHORT TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to
repurchase and federal funds purchased. The outstanding balances and related
information for short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Short-term borrowings:
Ending balance....................................... $9,405,994 $7,649,027
Maximum month-end balance during the year............ 9,653,054 10,509,123
Average balance during the year...................... 8,084,000 7,874,000
Average year end interest rate....................... 3.49% 3.47%
Average interest rate during the year................ 3.75% 4.05%
</TABLE>
Average amounts outstanding during the year represent daily averages.
Average interest rates represent interest expense divided by the related average
balances. The Company has pledged investment securities with carrying values of
$16,820,000 and $16,825,000 as of December 31, 1999 and 1998, respectively, as
collateral for the repurchase agreements.
At December 31, 1999 and 1998, the Company maintained unsecured lines of
credit with various financial institutions which totaled $15,000,000,
respectively. All lines were unused at December 31, 1999 and 1998, and
22
<PAGE> 171
are available to support general corporate purposes. There are no fees to
maintain these lines and no interest was paid.
NOTE 7 -- FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1999, advances from the Federal Home Loan Bank were as
follows.
<TABLE>
<S> <C>
Maturities January 2009 through March 2009, at rates from
4.5% to 4.86%, averaging 4.65%............................ $3,000,000
==========
</TABLE>
Currently, only interest payments are due on the FHLB advances. The
advances are convertible fixed rate advances and convert within 2 years from
date of issue at which point the Bank has the option to pay off the balances
without penalty or convert the advances. The advances were collateralized by
$4,500,000 of first mortgage loans under a blanket lien arrangement at year-end
1999. At December 31, 1999, the Bank had a borrowing capacity of approximately
$18.9 million with the FHLB. There were no such borrowings at December 31, 1998.
NOTE 8 -- PROFIT SHARING
The Company maintains a trusteed, Section 401(k) profit sharing plan with
contributions matching those by eligible employees to a maximum of 140 percent
of employee contributions annually, to a maximum of 5 percent of annual salary.
The Company may also provide for a discretionary profit sharing contribution.
All employees at least 20 1/2 years of age who have completed one year of
service are eligible to participate in the plan. The Company's contribution to
this plan was $105,824 in 1999 and $96,990 in 1998.
NOTE 9 -- OTHER EXPENSE
The following is an analysis of other expense:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Stationery, printing, and supplies................... $ 148,933 $ 158,648
Professional fees.................................... 410,450 290,953
Data processing...................................... 126,031 125,958
Franchise tax........................................ 200,245 197,526
Postage and courier.................................. 161,072 151,098
Other................................................ 672,398 519,729
---------- ----------
Total................................................ $1,719,129 $1,443,912
========== ==========
</TABLE>
NOTE 10 -- INCOME TAXES
The federal income tax expense (benefit) consist of:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Current................................................. $144,264 $(151,738)
Deferred................................................ 6,824 51,854
-------- ---------
Tax expense (benefit)................................... $151,088 $ (99,884)
======== =========
</TABLE>
23
<PAGE> 172
The components of the net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan loses................................ $205,116 $ 301,745
Intangible amortization................................. 28,171 21,566
Deferred compensation................................... 8,417 11,895
Net unrealized loss on securities....................... 332,142 --
Other................................................... 28,261 --
-------- ---------
Total......................................... 602,107 335,206
-------- ---------
Deferred tax liabilities:
Premises and equipment.................................. 56,421 53,021
Investment securities discount accretion................ 37,239 55,796
Loan origination fees, net.............................. 245,754 310,638
Net unrealized gain on securities....................... -- 130,997
FHLB stock dividends.................................... 86,771 65,147
-------- ---------
Total......................................... 426,185 615,599
-------- ---------
Net deferred tax asset (liability)...................... $175,922 $(280,393)
======== =========
</TABLE>
The following is a reconciliation between income tax expense and the
amounts of income taxes which would have been provided at statutory rates:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
% OF % OF
PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Provision at statutory rate.......... $ 267,339 34.0% $ 17,995 34.0%
Effect of tax-exempt income.......... (147,859) (18.8) (152,058) (287.3)
Nondeductible interest expense....... 22,946 2.9 18,484 34.9
Other, net........................... 8,662 1.1 15,695 29.7
--------- ----- --------- ------
Tax expense (benefit) and effective
rates.............................. $ 151,088 19.2% $ (99,884) (188.7)%
========= ===== ========= ======
</TABLE>
NOTE 11 -- DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company maintains a dividend reinvestment plan. Participation is
available to all common stockholders who are residents of the state of Ohio. The
plan provides each participant with a simple and convenient method of purchasing
additional common shares without payment of any brokerage commission or other
service fees. A participant in the plan may elect to reinvest dividends on all
or part of their shares to acquire additional common stock. In addition, the
plan provides for the optional purchase of shares of the Company's common stock
up to a maximum of $4,000 per year. A participant may withdraw from the plan at
any time. Stockholders purchased 3,982 shares in 1999 and 3,854 shares in 1998
through the plan. Subsequent to December 31, 1999, the Board of Directors
authorized the suspension of the dividend reinvestment plan.
NOTE 12 -- STOCK OPTIONS
Options to buy stock may be granted to directors, officers and employees
under the Employee Stock Option Plan, which provides for the issuance of up to
21,218 options. The exercise price shall be, at a minimum, the market price on
the date of grant. The maximum option term is ten years, and qualified options
vest over five years and nonqualified options vest over three years.
24
<PAGE> 173
A summary of the activity in the plan is as follows.
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year....... 8,487 $62.27 --
Granted................................ -- 8,487 $62.27
Exercised.............................. (424) 63.12 --
Forfeited.............................. (848) 64.82 --
------ ------ ------ ------
Outstanding at end of year............. 7,215 $61.84 8,487 $62.27
====== ====== ====== ======
Options exercisable at year-end........ 1,272
Weighted-average fair value of
options granted during year....... -- $ 7.42
</TABLE>
Options outstanding at year-end 1999 were as follows.
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED
REMAINING AVERAGE
CONTRACTUAL EXERCISE
NUMBER LIFE NUMBER PRICE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Nonqualified............. 6,154 8.0 1,060 $61.42
Qualified................ 1,061 8.5 212 64.82
------ ----- ----- ------
Outstanding at year
end.................... 7,215 8.1 1,272 $61.84
====== ===== ===== ======
</TABLE>
Had compensation cost for stock options been measured using FASB Statement
No. 123, net income and earnings per share would have been the pro forma amounts
indicated below. The pro forma effect may increase in the future if more options
are granted.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net income as reported.................................. $635,202 $152,808
Pro forma net income.................................... 623,403 141,009
Basic earnings per share as reported.................... $ 1.77 $ 0.43
Pro forma basic earnings per share...................... 1.74 0.40
Diluted earnings per share as reported.................. 1.77 0.43
Pro forma diluted earnings per share.................... 1.74 0.40
</TABLE>
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED
--------- -------------
<S> <C> <C>
Risk-free interest rate................................ 5.51% 5.70%
Expected option life................................... 6 years 3 years
Expected stock price volatility........................ 4.51% 4.51%
Dividend yield......................................... 2.00% 2.00%
</TABLE>
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments
and contingent liabilities not reflected in the accompanying consolidated
financial statements. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Standby letters of
25
<PAGE> 174
credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. These commitments were comprised of
the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commitments to extend credit.......................... $10,843,000 $17,098,019
Standby letters of credit and financial guarantees.... 827,000 837,102
----------- -----------
Total................................................. $11,670,000 $17,935,121
=========== ===========
</TABLE>
The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheet. The Company uses the same credit policies in making commitments
and conditional obligations as it does for instruments on the balance sheet.
Generally, collateral is not required to support these financial instruments.
The terms are typically for a one-year period with an annual renewal option
subject to prior approval by management.
The district Federal Reserve Bank requires the Bank to maintain certain
average reserve balances. As of December 31, 1999 and 1998, the Bank had
required reserves of $813,000 and $716,000 respectively, comprised of vault cash
and a depository amount held with the Federal Reserve Bank. These assets do not
earn interest.
The Company and Bank are involved in various legal actions from normal
business activities. Management believes the liability, if any, arising from
such litigation will not have a material adverse effect on the Company's
financial position.
NOTE 14 -- REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by the regulators that if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the entities' assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting, and
other factors.
Quantitative measures established by the regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined) and Tier 1 capital to average assets (as defined).
Management believes as of December 31, 1999 that the Company and the Bank meet
all capital adequacy requirements to which they are subject.
As of December 31, 1999 and 1998, the Company and Bank were considered well
capitalized under the regulatory framework for prompt corrective action. There
have been no conditions or events that management believes have changed the
Company's or the Bank's category.
26
<PAGE> 175
The following table reflects the capital ratios and minimum requirements as
of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
TO BE "WELL
CAPITALIZED"
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
---------------- --------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999 (in
thousands)
Total Capital (to Risk Weighted
Assets) Consolidated............. $15,908 15.10% $8,429 8.0% $10,536 10.0%
Bank............................... $15,060 14.34% $8,400 8.0% $10,500 10.0%
Tier I Capital (to Risk Weighted
Assets) Consolidated............. $14,477 13.74% $4,214 4.0% $ 6,322 6.0%
Bank............................... $13,743 13.09% $4,200 4.0% $ 6,300 6.0%
Tier I Capital (to Average Assets)
Consolidated..................... $14,477 8.47% $6,838 4.0% $ 8,547 5.0%
Bank............................... $13,743 7.91% $6,953 4.0% $ 8,691 5.0%
As of December 31, 1998 (in
thousands):
Total Capital (to Risk Weighted
Assets) Consolidated............. $15,253 14.25% $8,566 8.0% $10,708 10.0%
Bank............................... $14,476 13.60% $8,517 8.0% $10,646 10.0%
Tier I Capital (to Risk Weighted
Assets) Consolidated............. $13,909 12.99% $4,282 4.0% $ 6,423 6.0%
Bank............................... $13,139 12.34% $4,258 4.0% $ 6,388 6.0%
Tier I Capital (to Average Assets)
Consolidated..................... $13,909 8.12% $6,856 4.0% $ 8,570 5.0%
Bank............................... $13,139 7.69% $6,833 4.0% $ 8,541 5.0%
</TABLE>
Federal law prevents Security Financial Corp. from borrowing from the Bank
unless the loans are secured by specific collateral. Further, such secured loans
are limited in amount to ten percent of the Bank's capital.
The Bank is subject to legal limitations on the amount of dividends it can
pay as a state-chartered member of the Federal Reserve Bank System. In
accordance with the regulatory agreement described in Note 18, the Bank may not
declare or pay and dividends without prior written approval by the Federal
Reserve Bank of Cleveland and the Ohio Division of Financial Institutions.
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..... $ 17,358,768 $ 17,359,000 $ 10,733,009 $ 10,733,000
Long-term interest bearing
deposits.................... 199,000 199,000 398,000 398,000
Securities available for
sale........................ 40,543,732 40,544,000 44,359,814 44,360,000
Net loans..................... 107,467,850 107,271,000 108,952,155 109,797,000
Accrued interest receivable... 954,720 955,000 1,069,321 1,069,000
</TABLE>
27
<PAGE> 176
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits...................... (145,365,974) (145,295,000) (148,916,886) (149,031,000)
Short-term borrowings......... (9,405,994) (9,406,000) (7,649,027) (7,649,000)
FHLB advances................. (3,000,000) (2,991,000) -- --
Accrued interest payable...... (286,795) (287,000) (292,850) (293,000)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Long-term Interest Bearing Deposits: The carrying amount is a reasonable
estimate of fair value.
Securities: For securities, fair values are based on quoted market prices
or dealer quotes. The estimated fair value of Federal Home Loan Bank and Federal
Reserve Bank stock is considered to approximate cost since it may be redeemed at
par under certain circumstances.
Loans: The fair value of loans is estimated by discounting future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposit Liabilities: The fair value of demand deposits and savings accounts
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting future cash
flows using the rates currently offered for deposits of similar remaining
maturities.
Short Term Borrowings: The fair value of short term borrowings is the
amount payable at the reporting date.
Federal Home Loan Bank Advances: The fair value of Federal Home Loan Bank
advances is estimated by discounting future cash flows using the rates currently
offered for similar borrowings of similar remaining maturities.
Accrued Interest Receivable and Accrued Interest Payable: For these assets
and liabilities, the carrying amount is a reasonable estimate of fair value.
Off Balance Sheet Commitments: The fair value of off balance sheet
commitments to extend credit is not material.
While these estimates of fair value are based on management's judgment of
the most appropriate factors as of the balance sheet date, there is no assurance
that the estimated fair values would have been realized if the assets were
disposed of or the liabilities settled at that date, since market values may
differ depending on various circumstances. The estimated fair values would also
not apply to subsequent dates. In addition, other assets and liabilities that
are not financial instruments, such as premises and equipment, are not included
in the above disclosures. Also, non-financial instruments typically not
recognized on the balance sheet may have value but are not included in the above
disclosures. These include, among other items, the estimated earning power of
core deposits, the trained workforce, customer goodwill, and similar items.
28
<PAGE> 177
NOTE 16 -- PARENT COMPANY
Following are condensed parent-only financial statements for Security
Financial Corp.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash on deposit in subsidiary bank................. $ 407,150 $ 347,711
Interest-bearing deposit in other banks............ 100,000 100,000
Investment in subsidiary bank...................... 13,445,586 13,874,166
Securities available for sale...................... 465,936 463,365
Other assets....................................... -- 10,744
----------- -----------
Total assets....................................... $14,418,672 $14,795,986
=========== ===========
Liabilities........................................ $ 78,044 $ 51,706
Stockholders' Equity............................... 14,340,628 14,744,280
----------- -----------
Total liabilities and stockholders' equity......... $14,418,672 $14,795,986
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
INCOME
Dividends from subsidiary bank.......................... $125,000 $125,000
Dividend income......................................... 18,755 13,754
-------- --------
Total income............................................ 143,755 138,754
EXPENSE
Operating expense....................................... 63,579 62,205
-------- --------
Income before equity in undistributed earnings of
subsidiary............................................ 80,176 76,549
Income tax expense (benefit)............................ (23,476)
Equity in undistributed earnings of subsidiary.......... 531,550 76,259
-------- --------
Net income.............................................. $635,202 $152,808
======== ========
</TABLE>
29
<PAGE> 178
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Operating activities
Net income.................................................. $ 635,202 $ 152,808
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiary............ (531,550) (76,259)
Change in other assets and liabilities...................... 9,189 --
--------- ---------
Net cash from operating activities.......................... 112,841 76,549
Investing activities
Return of capital on equity investment...................... 90,001 --
Purchase of investment securities available for sale........ -- (177,259)
--------- ---------
Net cash from investing activities.......................... 90,001 (177,259)
Financing activities
Proceeds from dividend reinvestment and stock purchase
plan...................................................... 280,815 262,156
Proceeds from stock options................................. 26,784 --
Dividends paid on common stock.............................. (451,002) (430,822)
--------- ---------
Net cash from financing activities.......................... (143,403) (168,666)
Increase (decrease) in cash................................. 59,439 (269,376)
Cash at beginning of year................................... 347,711 617,087
--------- ---------
Cash at end of year......................................... $ 407,150 $ 347,711
========= =========
</TABLE>
NOTE 17 -- OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
<TABLE>
<CAPTION>
1999 1998
----------- --------
<S> <C> <C>
Unrealized holding gains (losses) on available-for-
sale securities..................................... $(1,354,705) $243,978
Less reclassification adjustments for gains recognized
in income........................................... 7,468 51,167
----------- --------
Net unrealized gains and losses....................... (1,362,173) 192,811
Tax effect............................................ 463,139 65,556
----------- --------
Other comprehensive income (loss)..................... $ (899,034) $127,255
=========== ========
</TABLE>
NOTE 18 -- SUBSEQUENT EVENT -- REGULATORY AGREEMENT
On March 17, 2000, the Board of Directors approved and entered into a
written regulatory agreement between Security Dollar Bank and the Federal
Reserve Bank of Cleveland and the Ohio Division of Financial Institutions. The
agreement was executed in accordance with current banking regulations and will
remain enforceable until terminated or suspended by the Bank's regulators. The
agreement restricts the payment of dividends by the Bank without the prior
approval of its primary regulators. In addition, the agreement requires specific
actions by the Bank's management and the Board of Directors which are intended
to improve and strengthen the Bank's operations, oversight, risk management and
internal control.
30
<PAGE> 179
Exhibit 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 filed on or about
November 15, 1999 of Security Financial Corp, of our report dated February 10,
2000, except for Notes 14 and 18, as to which the date is March 17, 2000,
related to the consolidated balance sheet of Security Financial Corp, as of
December 31, 1999 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year ended December 31, 1999, which
report is incorporated by reference in this Form 10-KSB.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio
March 29, 2000
<PAGE> 180
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 filed on or about
November 15, 1999 of Security Financial Corp, of our report dated January 22,
1999, related to the consolidated balance sheet of Security Financial Corp. as
of December 31, 1998 and the related consolidated statements of income, changes
in stockholders' equity and cash flows for the year ended December 31, 1998,
which report is incorporated by reference in this Form 10-KSB.
/s/ S.R. Snodgrass, A.C.
S.R. Snodgrass, A.C.
Wexford, PA
March 29, 2000
<PAGE> 181
ARTICLE 9
LEGEND
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
LEGEND
CIK 0000825392
NAME SECURITY FINANCIAL CORP.
MULTIPLIER 1,000
<TABLE>
<S> <C> <C>
PERIOD-TYPE 12-MOS
FISCAL-YEAR-END DEC-31-1999
PERIOD-START JAN-01-1999
PERIOD-END DEC-31-1999
CASH 8,111
INT-BEARING-DEPOSITS 497
FED-FUNDS-SOLD 8,950
TRADING-ASSETS 0
INVESTMENTS-HELD-FOR-SALE 40,544
INVESTMENTS-CARRYING 0
INVESTMENTS-MARKET 0
LOANS 109,118
ALLOWANCE 1,650
TOTAL-ASSETS 172,667
DEPOSITS 145,366
SHORT-TERM 9,406
LIABILITIES-OTHER 555
LONG-TERM 3,000
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 7,861
OTHER-SE 6,480
TOTAL-LIABILITIES-AND-EQUITY 172,667
INTEREST-LOAN 9,342
INTEREST-INVEST 2,375
INTEREST-OTHER 402
INTEREST-TOTAL 12,120
INTEREST-DEPOSIT 5,655
INTEREST-EXPENSE 6,079
INTEREST-INCOME-NET 6,041
LOAN-LOSSES 970
SECURITIES-GAINS 7
EXPENSE-OTHER 5,201
INCOME-PRETAX 786
INCOME-PRE-EXTRAORDINARY 786
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 635
EPS-BASIC 1.77
EPS-DILUTED 1.77
YIELD-ACTUAL 3.77
LOANS-NON 1,042
LOANS-PAST 184
LOANS-TROUBLED 0
LOANS-PROBLEM 3,300
ALLOWANCE-OPEN 1,803
CHARGE-OFFS 1,327
RECOVERIES 204
ALLOWANCE-CLOSE 1,650
ALLOWANCE-DOMESTIC 1,650
ALLOWANCE-FOREIGN 0
ALLOWANCE-UNALLOCATED 115
</TABLE>
<PAGE> 182
ANNEX E
SECURITY FINANCIAL CORP.
JUNE 30, 2000 FORM 10-QSB
E-1
<PAGE> 183
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
<TABLE>
<CAPTION>
(MARK ONE)
<C> <S>
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
(MARK ONE)
<C> <S>
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-24157
------------------------
SECURITY FINANCIAL CORP.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 34-1579662
-------------------------------------------- --------------------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
ONE SOUTH MAIN STREET, NILES, OHIO 44446-0228
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(330) 544-7400
------------------------
(ISSUER'S TELEPHONE NUMBER)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
<TABLE>
<S> <C>
Class: Outstanding at July 31, 2000
Common stock, no par value 361,776 common shares
</TABLE>
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
E-2
<PAGE> 184
SECURITY FINANCIAL CORP.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements Consolidated Balance Sheets,
as of June 30, 2000 and December 31, 1999............. 3
Consolidated Statements of Income for the three and six
months Ended June 30, 2000 and 1999................... 4
Consolidated Statements of Comprehensive Income for the
three and six Months ended June 30, 2000 and 1999..... 6
Consolidated Statement of Changes in Stockholders'
Equity For the six months ended June 30, 2000......... 7
Condensed Consolidated Statements of Cash Flows for the
six Months ended June 30, 2000 and 1999............... 8
Notes to Consolidated Financial Statements............. 9
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
PART II --
Other Information........................................... 20
Signatures.................................................. 22
</TABLE>
E-3
<PAGE> 185
PART I. FINANCIAL INFORMATION
SECURITY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks................................... $ 7,420,270 $ 8,110,768
Federal funds sold........................................ 9,347,000 8,950,000
Short-term interest-bearing deposits...................... 199,000 298,000
------------ ------------
Cash and cash equivalents.............................. 16,966,270 17,358,768
Long-term interest-bearing deposits....................... 299,000 199,000
Securities available for sale............................. 39,474,647 40,543,732
Loans..................................................... 103,933,256 109,117,665
Less allowance for loan losses............................ 1,792,862 1,649,815
------------ ------------
Net loans.............................................. 102,140,394 107,467,850
Premises and equipment, net............................... 4,806,696 4,899,155
Accrued interest and other assets......................... 2,121,565 2,198,788
------------ ------------
Total assets...................................... $165,808,572 $172,667,293
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non interest-bearing demand............................... $ 19,388,271 $ 18,319,669
Interest-bearing demand................................... 10,792,028 9,894,059
Money market.............................................. 17,816,846 17,052,311
Savings................................................... 24,629,417 25,085,927
Time...................................................... 67,667,096 75,014,008
------------ ------------
Total deposits.................................... 140,293,658 145,365,974
Short-term borrowings....................................... 9,865,528 9,405,994
FHLB advances............................................... 1,000,000 3,000,000
Accrued interest payable and other liabilities.............. 351,926 554,697
------------ ------------
Total liabilities................................. 151,511,112 158,326,665
Commitments and Contingencies
Common stock, no par value 1,500,000 shares authorized;
361,776 and 361,780 shares issued......................... 7,860,674 7,860,674
Retained earnings........................................... 7,110,648 7,124,702
Accumulated other comprehensive income (loss)............... (673,862) (644,748)
------------ ------------
Total stockholders' equity........................ 14,297,460 14,340,628
------------ ------------
Total liabilities and stockholders' equity... $165,808,572 $172,667,293
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-4
<PAGE> 186
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans........... $2,250,669 $2,336,487 $4,581,361 $4,696,932
Securities:
Taxable......................... 516,410 483,085 1,027,022 968,536
Tax exempt...................... 98,632 133,933 208,945 264,430
Interest-bearing deposits in other
banks.............................. 5,850 14,568 11,988 31,497
Federal funds sold................... 153,921 91,188 289,315 130,102
---------- ---------- ---------- ----------
Total interest income........... 3,025,482 3,059,261 6,118,631 6,091,497
INTEREST EXPENSE
Deposits............................. 1,376,833 1,389,284 2,804,409 2,804,101
Short-term borrowings................ 126,678 68,389 231,751 127,308
FHLB borrowings...................... 11,219 34,779 34,200 51,026
---------- ---------- ---------- ----------
Total interest expense.......... 1,514,730 1,492,452 3,070,360 2,982,435
---------- ---------- ---------- ----------
NET INTEREST INCOME....................... 1,510,752 1,566,809 3,048,271 3,109,062
Provision for loan losses................. 150,000 220,000 300,000 520,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................. 1,360,752 1,346,809 2,748,271 2,589,062
OTHER INCOME
Service charges on deposit
accounts........................... 139,218 174,016 277,345 318,726
Investment securities gains (losses),
net................................ (25,781) 157 (25,781) 7,269
Gain on sale of loans, net........... 1,184 7,984 2,872 10,404
Other income......................... 55,295 38,021 119,243 77,076
---------- ---------- ---------- ----------
Total other income.............. 169,916 220,178 373,679 413,475
OTHER EXPENSE
Salaries and employee benefits....... 760,276 682,259 1,483,360 1,337,175
Occupancy and equipment.............. 150,279 175,322 318,384 360,381
Other expense........................ 614,596 480,115 1,226,660 980,013
---------- ---------- ---------- ----------
Total other expense............. 1,525,151 1,337,696 3,028,404 2,677,569
</TABLE>
E-5
<PAGE> 187
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAX........................ $ 5,517 $229,291 $ 93,546 $324,968
Income tax expense (benefit).................... (22,666) 51,650 (8,167) 46,585
-------- -------- -------- --------
NET INCOME...................................... $ 28,183 $177,641 $101,713 $278,383
======== ======== ======== ========
Basic and diluted earnings per share............ $ .08 $ .50 $ .28 $ .78
</TABLE>
See accompanying notes to consolidated financial statements.
E-6
<PAGE> 188
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2000 1999 2000 1999
------- --------- -------- ---------
<S> <C> <C> <C> <C>
NET INCOME..................................... $28,183 $ 177,641 $101,713 $ 278,383
Other comprehensive income, net of tax
Unrealized gain (loss) on securities
available for sale arising during the
period....................................... (42) (394,890) (46,129) (618,447)
Less: Reclassified adjustment for accumulated
gains (losses) included in net income..... (17,015) 104 (17,015) 4,798
------- --------- -------- ---------
Unrealized gains (losses) on securities, net
of tax.................................... 16,973 (394,786) (29,114) (613,649)
------- --------- -------- ---------
COMPREHENSIVE INCOME (LOSS).................... $45,156 $(217,145) $ 72,599 $(335,266)
======= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
E-7
<PAGE> 189
SECURITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME TOTAL
---------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 2000.............. $7,860,674 $7,124,702 $(644,748) $14,340,628
Cash dividends ($.32 per share)....... (115,767) (115,767)
Comprehensive income:
Net income.......................... 101,713 101,713
Net unrealized loss on securities
available for sale, net of tax... (29,114) (29,114)
-----------
Total comprehensive
income.................... 72,599
---------- ---------- --------- -----------
Balance, June 30, 2000................ $7,860,674 $7,110,648 $(673,862) $14,297,460
========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
E-8
<PAGE> 190
SECURITY FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash from operating activities..................... $ 307,887 $ 1,315,686
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in long-term interest-bearing deposits........... (100,000) --
Securities available for sale:
Proceeds from sales.................................... 1,200,000 5,105,590
Proceeds from maturities and principal repayments...... 2,481,777 3,536,625
Purchases.............................................. (2,485,000) (11,975,777)
Net decrease in loans..................................... 5,027,456 3,800,853
Purchase of premises and equipment........................ (96,069) (115,991)
----------- ------------
Net cash from investing activities..................... 6,028,164 351,300
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits.................................. (5,072,316) (2,986,228)
Increase in short-term borrowings......................... 459,534 128,493
Increase in FHLB advances................................. -- 3,000,000
Repayment of FHLB advances................................ (2,000,000) --
Cash dividends paid on common stock....................... (115,767) (111,115)
Proceeds from dividend reinvestment plan.................. -- 86,522
----------- ------------
Net cash from financing activities..................... (6,728,549) 117,672
----------- ------------
Net increase (decrease) in cash and cash equivalents........ (392,498) 1,784,658
Cash and cash equivalents at beginning of period............ 17,358,768 11,131,009
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $16,966,270 $ 12,915,667
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
E-9
<PAGE> 191
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The consolidated financial statements include Security Financial Corp.
("Company") and its wholly-owned subsidiary, Security Dollar Bank ("Bank").
Significant intercompany transactions and balances are eliminated in
consolidation.
These interim financial statements reflect all adjustments of a normal
recurring nature which, in the opinion of management, are necessary to present
fairly the consolidated financial position of Security Financial Corp. at June
30, 2000, and its results of operations and cash flows for the periods
presented. The accompanying consolidated financial statements do not purport to
contain all the necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the circumstances and
are not necessarily indicative of the results to be expected for the full year.
The Annual Report for Security Financial Corp. for the year ended December 31,
1999, contains consolidated financial statements and related notes which should
be read in conjunction with the accompanying consolidated financial statements.
The Company is a Delaware corporation organized as holding company of the
Bank. The Bank is a state-chartered commercial bank located in Northeast Ohio.
The Company and its subsidiary derive substantially all their income from
banking and bank-related services which include interest earnings on commercial
and consumer loan financing as well as interest on securities and a variety of
deposit services to its customers through five locations. The Company and the
Bank are supervised by the Federal Reserve Board, while the Bank is also subject
to regulation and supervision by the Ohio Division of Financial Institutions.
USE OF ESTIMATES
To prepare financial statements in conformity with generally accepted
accounting principles, 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 and status of contingencies
are particularly subject to change.
SECURITIES
The Company has classified debt and equity securities as available for sale
to serve principally as a source of liquidity. Unrealized holding gains and
losses for available for sale securities are reported as a separate component of
stockholders' equity, net of tax, until realized. Realized securities gains and
losses are computed using the specific identification method. Interest and
dividends on investment securities are recognized as income when earned.
Interest income includes amortization of purchase premiums or discounts.
Common stock of the Federal Home Loan Bank, Federal Reserve Bank, and
Independent State Bank of Ohio are accounted for at cost and are classified with
equity securities available for sale.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an allowance for
loan losses. Loans held for sale are reported at the lower of cost or market, on
an aggregate basis.
Interest on loans is recognized as income when earned on the accrual
method. The Company's general policy has been to stop accruing interest on loans
when it is determined that reasonable doubt exists as to the collectibility of
additional interest. Interest payments received on nonaccrual loans is recorded
as income or applied against principal according to management's judgment as to
the collectibility of the related loans. Loan origination fees and certain
direct loan origination costs are being deferred and the net amount amortized as
an
E-10
<PAGE> 192
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustment of the related loan yield. The Company is amortizing these amounts
over the contractual lives of the related loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation allowance for probable
incurred credit losses, increased by the provision for loan losses and decreased
by charge-offs less recoveries. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off.
A loan is considered impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an individual
loan basis for other loans. If a loan is impaired, a portion for the allowance
is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan's exiting rate or at the fair value
of collateral if repayment is expected solely from the collateral. The
definition of "impaired loans" is not the same as the definition of "nonaccrual
loans," although the two categories overlap. The Company may choose to place a
loan on nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan impaired. Factors considered by
management in determining impairment include payment status and collateral
value.
EARNINGS PER COMMON SHARE
Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share includes the dilutive effect of additional potential common
shares issuable under stock options. Earnings and dividends per share have been
restated for all stock dividends. The basic weighted average shares were 361,776
and 358,041 and diluted weighted average shares were 362,598 and 358,401 for
June 30, 2000 and 1999.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale which are also recognized as separate components of equity.
LOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood of
loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there now are such matters that will have a material
effect on the financial statements.
DIVIDEND RESTRICTION
Banking regulations require maintaining certain capital levels and may
limit the dividends paid by the bank to the holding company or by the holding
company to shareholders.
INCOME TAXES
Income tax expense (benefit) is based on the effective tax rate expected to
be applicable for the entire year. The Corporation follows the liability method
of accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded at enacted tax rates based on the difference
between the tax basis of
E-11
<PAGE> 193
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets and liabilities and their carrying amounts for financial reporting
purposes, referred to as "temporary differences." A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
NOTE 2 -- SECURITIES
The amortized cost and estimated market values of securities available for
sale are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and Government agency
securities............................. $ 9,403,485 $ 17,576 $ (203,985) $ 9,217,076
Obligations of states and political
subdivisions........................... 8,075,181 10,826 (397,201) 7,688,806
Corporate obligations.................... 195,490 -- (16,677) 178,813
Mortgage-backed securities............... 21,443,564 34,440 (599,222) 20,878,782
----------- -------- ----------- -----------
Total debt securities.......... 39,117,720 62,842 (1,217,085) 37,963,477
Equity securities........................ 1,377,929 140,003 (6,762) 1,511,170
----------- -------- ----------- -----------
$40,495,649 $202,845 $(1,223,847) $39,474,647
=========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury and Government agency
securities............................. $ 7,145,502 $ 16,952 $ (139,750) $ 7,022,704
Obligations of states and political
subdivisions........................... 9,117,043 4,590 (613,220) 8,508,413
Corporate obligations.................... 195,109 -- (7,296) 187,813
Mortgage-backed securities............... 23,618,028 27,176 (509,988) 23,135,216
----------- -------- ----------- -----------
Total debt securities.......... 40,075,682 48,718 (1,270,254) 38,854,146
Equity securities........................ 1,444,938 244,648 -- 1,689,586
----------- -------- ----------- -----------
$41,520,620 $293,366 $(1,270,254) $40,543,732
=========== ======== =========== ===========
</TABLE>
E-12
<PAGE> 194
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Real estate mortgages:
Residential........................................ $ 50,564,919 $ 51,759,229
Commercial......................................... 32,029,967 32,560,547
Commercial, financial, and agricultural............... 6,192,278 6,060,456
Consumer loans........................................ 13,267,646 16,619,461
Other................................................. 1,878,446 2,117,972
------------ ------------
103,933,256 109,117,665
Less allowance for loan losses........................ 1,792,862 1,649,815
------------ ------------
$102,140,394 $107,467,850
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Balance at beginning of period.............................. $1,649,815 $1,802,773
Provision charged to income............................... 300,000 520,000
Charge-offs............................................... (304,000) (511,624)
Recoveries charge-offs.................................... 147,047 51,602
---------- ----------
Balance at end of period.................................. $1,792,862 $1,862,751
========== ==========
</TABLE>
NOTE 4 -- REGULATORY AGREEMENT
On March 17, 2000, the Board of Directors approved and entered into a
written regulatory agreement between Security Dollar Bank and the Federal
Reserve Bank of Cleveland and the Ohio Division of Financial Institutions. The
agreement was executed in accordance with current banking regulations and will
remain enforceable until terminated or suspended by the Bank's regulators. The
agreement restricts the payment of dividends by the Bank without the prior
approval of its primary regulators. In addition, the agreement requires specific
actions by the Bank's management and the Board of Directors which are intended
to improve and strengthen the Bank's operations, oversight, risk management and
internal control.
NOTE 5 -- MERGER
On May 26, 2000, the Company and Farmers National Banc Corp. (Farmers)
entered into an agreement to merge. The transaction is structured as a tax-free
exchange of stock and is expected to be accounted for using the
pooling-of-interests method of accounting. The ratio at which Company shares
will be exchanged for the shares of Farmers will be calculated by dividing $90
by an average of the price of farmers' shares just prior to the closing of the
transaction, provided that the ratio shall not be less than 7.20, nor greater
than 9.742, shares for each Company share subject to certain conditions and
adjustments. Should the Farmers "Closing Price" (as defined by the average
closing price per share reported in a mutually agreeable source for the most
recent 30 days on which actual trades of shares occur, ending on the second day
immediately preceding the closing date) be less than $7.50, the Company may
propose to terminate the agreement. The shares to be issued to the Company
shareholders will be registered with the Securities and Exchange Commission. The
merger is expected to be consummated in the fourth calendar quarter of 2000 and
is subject to approvals by various regulatory authorities and by the
shareholders of the Company and Farmers.
E-13
<PAGE> 195
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
FINANCIAL CONDITION
Total assets decreased by approximately $6.9 million or 3.97% from December
31, 1999 to June 30, 2000, primarily as a result of the decrease in the loan
portfolio. Gross loans decreased by approximately $5.2 million or 4.81% during
the first six months of 2000. Decreases occurred in the residential real estate
and consumer portfolios which combined to decrease approximately $4.5 million
during the first six months of 2000. A large part of the consumer portfolio
decrease was due to management's plan to change the mix of the loan portfolio
and de-emphasize indirect lending.
Total securities available for sale decreased by approximately $1.1 million
or 2.64% to $39.5 million at June 30, 2000 from $40.5 million at December 31,
1999.
Total deposits decreased by approximately $5.1 million or 3.49%, during the
first six months of 2000. Decreases occurred in the savings and time deposit
portfolios during the first six months of 2000, and were partially offset by an
increase in money market, non-interest and interest bearing deposit accounts.
During the first half of 2000, Management restructured the interest rates
offered on its time deposits in order to extend the duration of its liabilities,
thus reducing the Bank's level of interest rate risk. Interest rates are
generally set to be competitive in the local market for the desired maturity
ranges, without leading the market. While this decision has resulted in a
decrease in the overall level of time deposits, Management considers this course
of action to be in the Bank's best interests in terms of interest rate risk,
future earnings potential and liquidity.
During the first quarter of 1999, the Bank borrowed a total of $3 million
in three separate transactions from the Federal Home Loan Bank of Cincinnati
("FHLB"). Each of these $1 million borrowings carried a low fixed rate for an
initial time period, after which the interest rate would become variable. Two of
these borrowings converted to variable rates during the first quarter of 2000,
and Management elected to repay these borrowings at that time. The remaining $1
million will convert to a variable rate in the first quarter of 2001. Management
will continue to utilize FHLB borrowings when they represent the best available
funding source.
Stockholders' equity decreased by approximately $43,000 for the six month
period ended June 30, 2000, due to net income of approximately $102,000 which
was offset by net unrealized losses on securities increasing by approximately
$29,000 and payment of cash dividends of approximately $116,000.
RESULTS OF OPERATIONS
Net income for the six-month period ending June 30, 2000 amounted to
$102,000, compared to $278,000 during the same period in 1999. Net income for
the three-month period ending June 30, 2000 amounted to $28,000, compared to
$178,000 during the same period in 1999. Discussed below are the major factors
which have influenced these operating results. Net interest income, the primary
source of earnings, is the amount by which interest and fees on loans and
investments exceed the interest cost of deposits and other borrowings obtained
to fund them. Net interest income is affected by the volume and composition of
earning assets and interest-bearing liabilities as well as the level of
non-interest-bearing demand deposits and stockholders' equity. Also impacting
net interest income is the susceptibility of interest-earning assets and
interest-bearing liabilities to changes in the general market level of interest
rates. Management attempts to manage the repricing of assets and liabilities so
as to achieve a stable level of net interest income and reduce the effect of
significant changes in the market level of interest rates. This is accomplished
through the pricing and promotion of various loan and deposit products as well
as the active management of the Bank's portfolio of investment securities
available for sale.
Interest income for the first half of 2000 totaled $6,119,000 compared to
$6,091,000 during the same period in 1999, an increase of $28,000. During the
same time period, interest expense increased $88,000 from $2,982,000 in 1999 to
$3,070,000 in 2000. Interest income for the three months ended June 30, 2000
decreased $34,000 or 1.1% from $3,059,000 during the same period in 1999. During
the same time period, interest expense increased $22,000 to $1,515,000. The
increase in interest income for the first half of 2000 is primarily the result
E-14
<PAGE> 196
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the increase in the average balance and rate earned on federal funds compared
to the same period in 1999 which was partially offset by a decline in the yield
on loans from 1999 to 2000. The decrease in interest income for the three months
ended June 30, 2000 is a result of the decrease in the average balance on loans
and tax-exempt securities. The primary increase in interest expense, for both
the six and three month ended, was due to the increase in the average balance
and rate for money market accounts and repurchase agreements. The increase was
partially offset by the decrease in the average balance of time deposits from
the same period in 1999.
The provision for loan losses for the three months ended June 30, 2000 was
$300,000, compared to $520,000 for the six months ended June 30, 1999. The
decrease in the provision, related primarily to a decrease in net loan
charge-offs for the six months ended June 30, 2000 compared to the same period
in 1999, as well as management's overall evaluation of the adequacy of the level
of the allowance, in relation to non-performing loans and total loans. The
overall level of non-performing loans declined from $1,471,000 at June 30, 1999
to $1,167,000 at June 30, 2000. The adequacy of the allowance for possible loan
losses is evaluated by management on a quarterly basis. This review includes an
assessment of problem loans and probable unknown losses based on current
economic conditions, the regulatory environment and historical experience. The
provision for loan losses represents charges to operations necessary to maintain
the allowance at a level which management believes will be adequate to absorb
losses. Management believes that the allowance for possible loan losses is
adequate. While management evaluates the allowance for loan losses based upon
available information, future additions to the allowance may be necessary.
Additionally, regulatory agencies review the Company's allowance for loan losses
as part of their examination process. Such agencies may require the Company to
recognize additions to the allowance based on judgments which may be different
from those of management.
Non-interest income, which is comprised principally of service charges on
deposit accounts, decreased 9.6% and 22.8%, or $39,000 and $50,000 from $413,000
and $220,000 for the six and three months ended June 30, 1999 to $374,000 and
$170,000 for the six and three months ended June 30, 2000. The majority of the
decrease is due to the net loss realized on the sale of securities when compared
to the same period in 1999 and a reduction in the gain on sale of loans from
1999 to 2000.
Non-interest expense increased $350,000 and $187,000 or 13.1% and 14.0% to
$3,028,000 and $1,525,000 for the six and three months ended June 30, 2000 from
$2,678,000 and $1,338,000 for the six and three months ended June 30, 1999. Of
the increase, $146,000 and $78,000 related to increases in salaries and benefits
expenses the six and three months ended June 30, 2000 when compared to the same
period in 1999. Also, additional expenses were incurred due to the outside
consulting engagements due to the regulatory agreement and proposed merger. The
remaining amount of the increase in non-interest expense is due to the general
increase in other general operating expenses including increases in professional
fees, collection expense and FDIC insurance.
RISK ELEMENTS
Nonperforming Assets
The following schedule presents information concerning nonperforming assets
including nonaccrual loans, loans 90 days or more past due, and other real
estate owned at June 30, 2000 and December 31, 1999. A loan is classified as
nonaccural when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest is
discontinued, future income is recognized only when cash is received.
E-15
<PAGE> 197
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans on nonaccrual basis................................... $ 951 $1,041
Loans past due 90 days or more and still accruing........... 216 184
------ ------
Total non-performing loans.................................. 1,167 1,225
Other non-performing assets................................. 16 22
------ ------
Total non-performing assets................................. $1,183 $1,247
====== ======
Total non-performing loans to total loans................... 1.12% 1.12%
Total non-performing loans to total assets.................. .70% .71%
Total non-performing assets to total assets................. .71% .72%
</TABLE>
LIQUIDITY
Liquidity is a measure of the Company's ability to efficiently meet normal
cash flow requirements of both borrowers and depositors. To maintain proper
liquidity, the Company uses asset liability management policies along with its
investment policies to assure it can meet its financial obligations to
depositors, credit customers and shareholders. Liquidity is needed to meet
depositors' withdrawal demands, extend credit to meet borrowers' needs, provide
funds for normal operating expenses and cash dividends, and fund other capital
expenditures.
Liquidity management is influenced by cash generated by operating
activities, investing activities and financing activities. The most important
source of funds is the deposits which are primarily core deposits (deposits from
customers with other relationships). Short-term borrowings from the Federal Home
Loan Bank supplements the Company's availability of funds.
REGULATORY ACTION
On March 17, 2000, the Board of Directors entered into a written regulatory
agreement between Security Dollar Bank and the Federal Reserve Bank of Cleveland
and the Ohio Division of Financial Institutions. The agreement remains
enforceable until terminated or suspended by the regulatory agencies and
requires prior regulatory approval before any dividends can be paid by the Bank.
In addition, the agreement requires specific actions be undertaken by management
and the Bank's Board of Directors which are intended to improve and strengthen
the Bank's operations, oversight, risk management and internal control. The
agreement establishes specific time frames for the completion of various action
items and requires written progress reports be furnished to the Bank's
regulators on a quarterly basis detailing the actions taken to secure compliance
with the agreement. Management anticipates that both Company management and the
Board of Directors will devote significant time and attention during 2000 to
complete the detailed requirements of the agreement. In addition, management
anticipates the Company will incur costs for outside consulting engagements
required under specific terms of the agreement.
MERGER
On May 26, 2000, the Company and Farmers National Banc Corp. (Farmers)
entered into an agreement to merge. The transaction is structured as a tax-free
exchange of stock and is expected to be accounted for using the
pooling-of-interests method of accounting. The merger is expected to be
consummated in the fourth quarter of 2000 and is subject to approvals by various
regulatory authorities and by the shareholders of the Company and Farmers. The
Company will incur various costs, such as: Fee to investment banker; attorney
fees and other miscellaneous costs, at the close of the merger. All of these
costs have not been determined at this time.
E-16
<PAGE> 198
SECURITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL RESOURCES
Under regulations issued by federal banking agencies, banks and bank
holding companies are required to maintain certain minimum capital ratios known
as the risk-based capital ratio and the leverage ratio. At June 30, 2000, the
Company's Tier 1 Capital (to average assets), Tier 1 Capital (to risk-weighted
assets) and total risk-based capital ratios were 8.62%, 14.45% and 15.77%,
respectively, compared to 8.47%, 13.74% and 15.10% at December 31, 1999,
respectively. The Company has exceeded all required regulatory capital ratios
for each period presented and is considered "well capitalized" under all federal
banking agency regulations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars, without
consideration for changes in the relative purchasing power of money over time
caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Bank's assets and
liabilities are critical to the maintenance of acceptable performance levels.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts
are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "expects,"
"believes," and similar expressions as they relate to the Company or its
management are intended to identify such forward looking statements. The
Company's actual results, performance or achievements may materially differ from
those expressed or implied in the forward looking statement. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, interest rate
environment, competitive conditions in the financial services industry, changes
in law, governmental policies and regulations, and rapidly changing technology
affecting financial services.
E-17
<PAGE> 199
SECURITY FINANCIAL CORP.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2000
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS.
The nature of the Company's business results in a certain amount of
litigation. Accordingly, the Company and its subsidiaries are subject to various
pending and threatened lawsuits in which claims for monetary damages are
asserted in the ordinary course of business. While any litigation involves an
element of uncertainty, in the opinion of management, liabilities, if any,
arising from such litigation or threat thereof will not have a material effect
on the Company.
ITEM 2 -- CHANGES IN RIGHTS OF THE COMPANY'S SECURITY HOLDERS.
None.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Security Financial Corp. held its Annual Meeting of Shareholders on April
25, 2000 for the purpose of electing two directors and to transact such other
business as would properly come before the meeting. Results of shareholder
voting on these individuals were as follows:
<TABLE>
<CAPTION>
CHRISTOPHER J. SHAKER ROBERT I. GRIFFITH, JR.
--------------------- -----------------------
<S> <C> <C>
For............................................ 234,815 235,285
Withheld Authority............................. 4,717 4,242
</TABLE>
ITEM 5 -- OTHER INFORMATION.
None.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a.)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
11.1 Statement Re Computation of Earnings per common Share
</TABLE>
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding during the period, as restated for shares
issued in business combinations accounted for as pooling-of-interests, stock
splits and stock dividends. Diluted earnings per share is computed using the
weighted average number of shares determined for the basic computation plus the
number of shares of common stock that would be issued assuming all contingently
issuable shares having a dilutive effect on earnings per share were outstanding
for the period.
Earnings per share data have also been restated for the 3% stock dividend
declared and paid December 31, 1999.
E-18
<PAGE> 200
The weighted average number of common shares outstanding for basic and
diluted earnings per share computations were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income.............................. $101,713 $278,383 $28,183 $177,641
Denominator:
Weighted-average common shares
outstanding (basic).................. 361,776 358,041 361,776 348,139
Exercise of options..................... 822 360 822 360
Weighted-average common shares
outstanding (diluted)................ 362,598 358,401 362,598 348,499
Earnings per share:
Basic................................... $ 0.28 $ 0.78 $ 0.08 $ 0.50
Diluted................................. $ 0.28 $ 0.78 $ 0.08 $ 0.50
</TABLE>
<TABLE>
<C> <S>
27 Financial Data Schedule for the six months ended June 30,
2000(1)
(b.) Reports on Form 8-K -- on June 5, 2000, the issuer filed a
Form 8-K. The information reported is as follows:
</TABLE>
Security Financial Corp. ("Company") executed a definitive Agreement and
Plan of Merger ("Agreement") with Farmers National Banc Corp. ("Farmers")
dated May 26, 2000. Under the terms of the Agreement, shareholders of the
Company will receive $90 in consideration, payable in shares of Farmers'
Common stock, for each share of the Company on the Merger of the Company
with and into Farmers (the "Merger").
---------------
(1) Filed only in electronic format.
E-19
<PAGE> 201
SECURITY FINANCIAL CORP.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C>
SECURITY FINANCIAL CORP.
--------------------------------------------
(Registrant)
Date: August 10, 2000 /s/C. James Bess
--------------------------------------------
C. James Bess
President and Chief Executive Officer
Date: August 10, 2000 /s/Stephen K. Miller
--------------------------------------------
Stephen K. Miller
Treasurer
</TABLE>
E-20
<PAGE> 202
[ARTICLE] 9
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION QUARTERLY REPORT ON FORM
10-QSB FOR THE FISCAL QUARTER IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
[LEGEND]
[MULTIPLIER] 1
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-START] JAN-01-2000
[PERIOD-END] JUN-30-2000
[CASH] 7,420,270
[INT-BEARING-DEPOSITS] 498,000
[FED-FUNDS-SOLD] 9,347,000
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 39,474,647
[INVESTMENTS-CARRYING] 0
[INVESTMENTS-MARKET] 0
[LOANS] 103,933,256
[ALLOWANCE] 1,792,862
[TOTAL-ASSETS] 165,808,572
[DEPOSITS] 140,293,658
[SHORT-TERM] 9,865,528
[LIABILITIES-OTHER] 351,926
[LONG-TERM] 1,000,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 7,860,674
[OTHER-SE] 6,436,786
[TOTAL-LIABILITIES-AND-EQUITY] 165,808,572
[INTEREST-LOAN] 4,581,361
[INTEREST-INVEST] 1,235,967
[INTEREST-OTHER] 301,303
[INTEREST-TOTAL] 6,118,631
[INTEREST-DEPOSIT] 2,804,409
[INTEREST-EXPENSE] 3,070,360
[INTEREST-INCOME-NET] 3,048,271
[LOAN-LOSSES] 300,000
[SECURITIES-GAINS] (25,781)
[EXPENSE-OTHER] 3,028,404
[INCOME-PRETAX] 93,546
[INCOME-PRE-EXTRAORDINARY] 93,546
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 101,713
[EPS-BASIC] .28
[EPS-DILUTED] .28
[YIELD-ACTUAL] 3.91
[LOANS-NON] 951,000
[LOANS-PAST] 216,000
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 11,000,209
[ALLOWANCE-OPEN] 1,649,815
[CHARGE-OFFS] 304,000
[RECOVERIES] 147,047
[ALLOWANCE-CLOSE] 1,792,862
[ALLOWANCE-DOMESTIC] 1,655,586
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 137,276
</TABLE>
E-21
<PAGE> 203
ANNEX F
SECTIONS 1701.84 AND 1701.85
OF THE OHIO REVISED CODE
DISSENTER'S RIGHTS
F-1
<PAGE> 204
SEC. 1701.84 PERSONS ENTITLED TO RELIEF AS DISSENTING SHAREHOLDERS.
Text of Statute
The following are entitled to relief as dissenting shareholders under
section 1701.85 of the Revised Code:
(A) Shareholders of a domestic corporation that is being merged or
consolidated into a surviving or new entity, domestic or foreign, pursuant
to section 1701.78, 1701.781 [1701.78.1], 1701.79, 1701.791 [1701.79.1], or
1701.801 [1701.80.1] of the Revised Code;
(B) In the case of a merger into a domestic corporation, shareholders
of the surviving corporation who under section 1701.78 or 1701.781
[1701.78.1] of the Revised Code are entitled to vote on the adoption of an
agreement of merger, but only as to the shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation that is being merged into the domestic or foreign
parent corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the
shares so entitling them to vote;
(E) Shareholders of a domestic subsidiary corporation into which one
or more domestic or foreign corporations are being merged pursuant to
section 1701.801 [1701.80.1] of the Revised Code.
SEC. 1701.85 DISSENTING SHAREHOLDER'S DEMAND FOR FAIR CASH VALUE OF SHARES.
Text of Statute
(A)(1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the dissenting
shareholder shall deliver to the corporation a written demand for payment with
the same information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that the corporation may forthwith endorse on them
a legend to the effect that demand for the fair cash value of such shares has
been made. The corporation promptly shall return such endorsed certificates to
the dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting
F-2
<PAGE> 205
shareholder, at the option of the corporation, exercised by written notice sent
to the dissenting shareholder within twenty days after the lapse of the
fifteen-day period, unless a court for good cause shown otherwise directs. If
shares represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the record
holder of uncertificated securities, the corporation shall make an appropriate
notation of the demand for payment in its shareholder records. If uncertificated
shares for which payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend required for
certificated securities as provided in this paragraph. A transferee of the
shares so endorsed, or of uncertificated securities where such notation has been
made, acquires only such rights in the corporation as the original dissenting
holder of such shares had immediately after the service of a demand for payment
of the fair cash value of the shares. A request under this paragraph by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505. of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or otherwise
to prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken and, in
the case of a merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of the
Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the day before the
F-3
<PAGE> 206
adoption of the agreement of merger by the directors of the particular
subsidiary corporation. The fair cash value of a share for the purposes of this
section is the amount that a willing seller who is under no compulsion to sell
would be willing to accept and that a willing buyer who is under no compulsion
to purchase would be willing to pay, but in no event shall the fair cash value
of a share exceed the amount specified in the demand of the particular
shareholder. In computing such fair cash value, any appreciation or depreciation
in market value resulting from the proposal submitted to the directors or to the
shareholders shall be excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive such
fair cash value and to sell such shares as to which he seeks relief, and the
right and obligation of the corporation to purchase such shares and to pay the
fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind
their adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent
of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder
nor the corporation has filed or joined in a complaint under division (B)
of this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
F-4
<PAGE> 207
ANNEX G
SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW
APPRAISAL RIGHTS
G-1
<PAGE> 208
SEC. 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the
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procedures of this section, including those set forth in subsections (d) and (e)
of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
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date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without
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limitation, reasonable attorney's fees and the fees and expenses of experts, to
be charged pro rata against the value of all the shares entitled to an
appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Overview of Ohio Law. Under Ohio law, Ohio corporations are authorized to
indemnify directors, officers, employees, and agents within prescribed limits
and must indemnify them under certain circumstances. Ohio law does not provide
statutory authorization for a corporation to indemnify directors, officers,
employees, and agents for settlements, fines, or judgments in the contest of
derivative suits. It provides, however, that directors (but not officers,
employees, and agents) are entitled to mandatory advancement of expenses,
including attorneys' fees, incurred in defending any action, including
derivative actions, brought against the director, provided the director agrees
to cooperate with the corporation concerning the matter and to repay the amount
advanced if it is proved by clear and convincing evidence that his act or
failure to act was done with deliberate intent to cause injury to the
corporation or with reckless disregard for the corporation's best interests.
Ohio law does not authorize payment of expenses or judgments to a director,
officer, employee, or agent after a finding of negligence or misconduct in a
derivative suit absent a court order. Indemnification is required, however, to
the extent such person succeeds on the merits. In all other cases, if a
director, officer, employee, or agent acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, indemnification is discretionary except as otherwise provided by a
corporation's articles, code of regulations, or by contract and except with
respect to the advancement of expenses of directors.
Under Ohio law, a director is not liable for monetary damages unless it is
proved by clear and convincing evidence that his action or failure to act was
undertaken with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interests of the corporation. There is, however,
no comparable provision limiting the liability of officers, employees, or agents
of a corporation. The statutory right to indemnification is not exclusive in
Ohio, and Ohio corporations may, among other things, procure insurance for such
persons.
Farmers' Articles state that the corporation shall have power to, and may
(in addition to such other power conferred by law) indemnify any shareholder,
officer, or director of the corporation who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, administrative, or investigative, by reason of the
fact that he is or was a director of this corporation, or any corporation
(hereinafter referred to as "subsidiary corporation") of which more than 50% of
the issued and outstanding shares of common stock was or is owned by the
corporation at the time such person was or is serving as such director of the
"subsidiary corporation," against expenses (including those reasonably incurred
by him) in connection with such action, suit, and proceeding if the principal
issue of such action, suit, or proceeding involved or involves a contract or
transaction by and between the corporation and such "subsidiary corporation" and
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the "subsidiary corporation." Any
indemnification as above provided (unless ordered by a court) shall be made by
the corporation only as authorized in the specific case upon a determination
that indemnification is proper in the circumstances because the standard of
conduct set forth above has been met. Such determination shall be made (a) by
the Board of Directors by a majority vote of a quorum consisting of directors
who were not parties to such action, suit or proceeding; or (b) if such a quorum
is not obtainable, or even if obtainable, if a majority vote of a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) by a majority of a quorum of the shareholders of the corporation
consisting of shareholders who were not parties to such action suit or
proceeding.
Farmers has obtained directors and officers liability insurance covering,
subject to certain exceptions, actions taken by Farmers' directors and officers
in their capacities as such.
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<PAGE> 213
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<S> <C>
Exhibit 2 Agreement and Plan of Merger
Exhibit 3.1 Articles of Incorporation
Exhibit 3.2 Code of Regulations
Exhibit 5 Legal Opinion - Bischoff, Kenney & Niehaus
Exhibit 8 Tax Opinion - Bischoff, Kenney & Niehaus
Exhibit 13.1 Farmers National Banc Corp. 1999 Form 10-K
Exhibit 13.2 Farmers National Bank Corp. March 31, 2000 Form 10-Q
Exhibit 23.1 Consent of Austin Associates
Exhibit 23.2 Consent of Austin Financial Services, Inc.
Exhibit 23.3 Consent of Crowe, Chizek and Company LLP
Exhibit 23.4 Consent of Hill, Barth & King, LLC
Exhibit 23.5 Consent of SR Snodgrass, A.C.
Exhibit 24.1 Power of Attorney of Benjamin R. Brown
Exhibit 24.2 Power of Attorney of Richard L. Calvin
Exhibit 24.3 Power of Attorney of Joseph D. Lane
Exhibit 24.4 Power of Attorney of David C. Myers
Exhibit 24.5 Power of Attorney of Edward A. Ort
Exhibit 24.6 Power of Attorney of William D. Stewart
Exhibit 24.7 Power of Attorney of Ronald V. Wertz
Exhibit 99.1 Farmers National Banc Corp. Proxy Card
Exhibit 99.2 Security Financial Corp. Proxy Card
</TABLE>
(B) Financial Statement Schedules.
N/A
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
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<PAGE> 214
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(B) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(C) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes as follows: that prior to
any public re-offering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such re-offering prospectus will contain the information
called for by the applicable registration form with respect to re-offerings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(4) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (3) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(6) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(7) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Canfield, State of Ohio, on the 22(nd) day of August,
2000.
<TABLE>
<S> <C>
FARMERS NATIONAL BANC CORP. FARMERS NATIONAL BANC CORP.
By: /s/ Frank L. Paden By: /s/ Carl D. Culp
----------------------------------------------------- -----------------------------------------------------
Frank L. Paden Carl D. Culp
President and Secretary Executive Vice President and Treasurer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on August 22, 2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
/s/ Frank L. Paden President, Secretary and Director
-----------------------------------------------------
Frank L. Paden
/s/ Carl D. Culp Executive Vice President and Treasurer
-----------------------------------------------------
Carl D. Culp
/s/ William D. Stewart Chairman of the Board of Directors
-----------------------------------------------------
William D. Stewart
/s/ Benjamin R. Brown Director
-----------------------------------------------------
Benjamin R. Brown
/s/ Richard L. Calvin Vice Chairman of the Board of Directors
-----------------------------------------------------
Richard L. Calvin
/s/ Joseph D. Lane Director
-----------------------------------------------------
Joseph D. Lane
/s/ David C. Myers Director
-----------------------------------------------------
David C. Myers
/s/ Edward A. Ort Director
-----------------------------------------------------
Edward A. Ort
/s/ Frank L. Paden Director
-----------------------------------------------------
Frank L. Paden
/s/ Ronald V. Wertz Director
-----------------------------------------------------
Ronald V. Wertz
</TABLE>
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EXHIBITS
TABLE OF CONTENTS
<TABLE>
<S> <C>
Exhibit 2 Agreement and Plan of Merger
Exhibit 3.1 Articles of Incorporation
Exhibit 3.2 Code of Regulations
Exhibit 5 Legal Opinion - Bischoff, Kenney & Niehaus
Exhibit 8 Tax Opinion - Bischoff, Kenney & Niehaus
Exhibit 13.1 Farmers National Banc Corp. 1999 Form 10-K
Exhibit 13.2 Farmers National Bank Corp. March 31, 2000 Form 10-Q
Exhibit 23.1 Consent of Austin Associates, Inc.
Exhibit 23.2 Consent of Austin Financial Services, Inc.
Exhibit 23.3 Consent of Crowe, Chizek and Company LLP
Exhibit 23.4 Consent of Hill, Barth & King, LLC
Exhibit 23.5 Consent of SR Snodgrass, A.C.
Exhibit 24.1 Power of Attorney of Benjamin R. Brown
Exhibit 24.2 Power of Attorney of Richard L. Calvin
Exhibit 24.3 Power of Attorney of Joseph D. Lane
Exhibit 24.4 Power of Attorney of David C. Myers
Exhibit 24.5 Power of Attorney of Edward A. Ort
Exhibit 24.6 Power of Attorney of William D. Stewart
Exhibit 24.7 Power of Attorney of Ronald V. Wertz
Exhibit 99.1 Farmers National Banc Corp. Proxy Card
Exhibit 99.2 Security Financial Corp. Proxy Card
</TABLE>
II-5
