-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WUzntPSvJXDVDwc5os3uZT9lH4J80xNktxPPV4pIscH6SKyAX6F7QrT8vH39lh8B hYYdALv2yUFCzdd7yMmhKg== 0000709337-98-000002.txt : 19980313 0000709337-98-000002.hdr.sgml : 19980313 ACCESSION NUMBER: 0000709337-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980312 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS NATIONAL BANC CORP /OH/ CENTRAL INDEX KEY: 0000709337 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341371693 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12055 FILM NUMBER: 98564572 BUSINESS ADDRESS: STREET 1: 20 S BROAD STREET STREET 2: P O BOX 555 CITY: CANFIELD STATE: OH ZIP: 44406 BUSINESS PHONE: 2165333341 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (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, 1997 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 0-12055 Farmers National Banc Corp. (Exact name of registrant as specified in its charter) Ohio 34-1371693 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 20 South Broad Street Canfield, Ohio 44406 44406 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 330-533-3341 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 registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [ ] The registrant estimates that as of February 24, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant (including 254,241 shares held by officers and directors of the registrant) was approximately $122,189,795. As of February 24, 1998, the registrant had outstanding 3,491,137 shares of common stock having no par value. DOCUMENTS INCORPORATED BY REFERENCE Parts of Form 10-K into which Document Document is Incorporated 1997 Annual Report to Shareholders II Definitive proxy statement for the 1997 Annual Meeting of Shareholders to be held on March 26, 1998 III Form 10-K Cross Reference Index to Annual Report to Shareholders Part I Item 1 - Business Description of Business 7 Average Balance Sheets/Yields/Rates 11 Rate and Volume Analysis 12 Securities 18 Loans 15-16 Risk Elements of Loan Portfolio 17 Loan Loss Experience 16 Deposits 19 Financial Ratios 10 Short-Term Borrowings 31 Part II Item 5 Market For Registrant's Common Stock and Related Stockholder Matters 21 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20 Item 8 Financial Statements and Supplementary Data 23-36 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - None Part IV Report of Hill, Barth & King, Inc., Independent Auditors 22 Financial Statements: Consolidated Balance Sheets - December 31, 1997 and 1996 23 Consolidated Statements of Income - Calendar Years 1997, 1996 and 1995 24 Consolidated Statement of Stockholders' Equity - Calendar Years 1997, 1996 and 1995 25 Consolidated Statements of Cash Flows - Calendar Years 1997, 1996 and 1995. 26 Notes to Consolidated Financial Statements 27-36 FARMERS NATIONAL BANC CORP. FORM 10-K 1997 INDEX Part I. Page Item 1. Business: General I-2 Item 2. Properties I-6 Item 3. Legal Proceedings I-6 Item 4. Submission of Matters to a Vote of Security Holders I-6 Part III. Item 10. Directors and Executive Officers of the Registrant III-1 Item 11. Executive Compensation III-2 Item 12. Security Ownership of Certain Beneficial Owners and Management III-2 Item 13. Certain Relationships and Related Transactions III-2 Part IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K IV-1 Signatures IV-3 Index to Exhibits IV-4 Part I Item 1. Business General The Corporation The registrant, Farmers National Banc Corp. (herein sometimes referred to as the Corporation), is a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended. The only subsidiary is The Farmers National Bank of Canfield, which was acquired March 31, 1983. The Corporation and its subsidiary operate in one industry, domestic banking. The Corporation conducts no business activities except for investment in securities permitted under the Bank Holding Company Act. Bank holding companies are permitted under Regulation Y of the Board of Governors of the Federal Reserve System to engage in other activities such as leasing and mortgage banking. The Bank The Bank is a full-service national bank engaged in commercial and retail banking in Mahoning and Columbiana Counties, Ohio. The Bank's commercial banking services include checking accounts, savings accounts, time deposit accounts, commercial, mortgage and installment loans, home equity loans, home equity lines of credit, night depository, safe deposit boxes, money orders, bank checks, automated teller machines and travelers checks, "E" Bond transactions, utility bill payments, MasterCard and Visa credit cards, and other miscellaneous services normally offered by Commercial Banks. In addition, the Bank offers Discount Brokerage Service. Supervision and Regulation The Corporation is a one bank holding company and is regulated by the Federal Reserve Bank (the "FRB"). The bank is a national bank and is regulated by the Office of the Comptroller of the Currency (the "OCC"), as well as the Federal Deposit Insurance Corporation (the "FDIC"). Changes have developed over the past several years regarding minimum capital requirements for financial institutions. A listing of the minimum requirements for capital and the Corporation's capital position as of December 31, 1997 are presented in Note J on page 32 of the annual report to shareholders for the year ended December 31, 1997 and is hereby incorporated by reference. The Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended. This Act restricts the geographic and product range of bank holding companies by defining the types and locations of institutions the holding companies can own or acquire. This act also regulates transactions between the Corporation and the bank and generally prohibits tie-ins between credit and other products and services. Supervision and Regulation (Continued) The bank is subject to regulation under the National Banking Act and is periodically examined by the OCC and is subject to the rules and regulations of the FRB. As an insured institution and member of the Bank Insurance Fund ("BIF"), the bank is also subject to regulation by the FDIC. Establishment of branches is subject to approval of the OCC and geographic limits established by state law. Ohio branch banking law permits a bank having its principal place of business in the State of Ohio to establish branch offices in any county in Ohio without geographic restrictions. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and several other federal banking statutes. Among other things, FDICIA requires federal banking agencies to broaden the scope of corrective action taken with respect to banks that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. FDICIA established five capital tiers: "well capitalized"; "adequately capitalized"; "undercapitalized"; "significantly undercapitalized"; and "critically undercapitalized" and imposes significant restrictions on the operations of a depository institution that is not in either of the first two of such categories. A depository institution's capital tier will depend upon the relationship of its capital to various capital measures. A depository institution will be deemed to be "well capitalized" if it significantly exceeds the minimum level required by regulation for each relevant capital measure, "adequately capitalized" if it meets each such measure, "undercapitalized" if it is significantly below any such measure and "critically undercapitalized" if it fails to meet any critical capital level set forth in regulations. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating or is deemed to be in an unsafe or unsound condition or to be engaging in unsafe or unsound practices. Under regulations adopted under these provisions, for an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier I risk-based capital ratio of at least 6% and a Tier I leverage ratio of at least 5% and not be subject to any specific capital order or directive. For an institution to be adequately capitalized, it must have a total risk-based capital ratio of at least 8%, a Tier I risk-based capital ratio of at least 4% and a Tier I leverage ratio of at least 4% (or in some cases 3%). Under the regulations, an institution will be deemed to be undercapitalized if the bank has a total risk-based capital ratio that is less than 8%, a Tier I risk-based capital ratio that is less than 4% or a Tier I leverage ratio of less than 4% (or in some cases 3%). An institution will be deemed to be significantly undercapitalized if the bank has a total risk-based capital ratio that is less than 6%, a Tier I risk-based capital ratio that is less than 3%, or a leverage ratio that is less than 3% and will be deemed to be critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2%. Supervision and Regulation (Continued) FDICIA generally prohibits a depository institution from making a capital distribution (including payment of dividends) or paying management fees to any entity that controls the institution if it thereafter would be undercapitalized. If an institution becomes undercapitalized, it will be generally restricted from borrowing from the Federal Reserve, increasing its average total assets, making any acquisitions, establishing any branches or engaging in any new line of business. An undercapitalized institution must submit an acceptable capital restoration plan to the appropriate federal banking agency, which plan must, in the opinion of such agency, be based on realistic assumptions and be "likely to succeed" in restoring the institution's capital. In connection with the approval of such a plan, the holding company of the institution must guarantee that the institution will comply with the plan, subject to a limitation of liability equal to a portion of the institution's assets. If an undercapitalized institution fails to submit an acceptable plan or fails to implement such a plan, it will be treated as if it is significantly undercapitalized. Under FDICIA, bank regulators are directed to require "significantly undercapitalized" institutions, among other things, to restrict business activities, raise capital through a sale of stock, merge with another institution and/or take any other action which the agency determines would better carry out the purposes of FDICIA. Within 90 days after an institution is determined to be "critically undercapitalized", the appropriate federal banking agency must, in most cases, appoint a receiver or conservator for the institution or take such other action as the agency determines would better achieve the purposes of FDICIA. In general, "critically undercapitalized" institutions will be prohibited from paying principal or interest on their subordinated debt and will be subject to other substantial restrictions. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits. Undercapitalized institutions are prohibited from offering interest rates on deposits significantly higher than prevailing rates. The provisions of FDICIA governing capital regulations became effective on December 19, 1992. FDICIA also directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, a maximum ratio of classified assets to capital, a minimum ratio of market value to book value for publicly traded shares (if feasible) and such other standards as the agency deems appropriate. Supervision and Regulation (Continued) FDICIA also contains a variety of other provisions that could affect the operations of the Corporation, including new reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch, limitations on credit exposure between banks, restrictions on loans to a bank's insiders and guidelines governing regulatory examinations. Pursuant to FDICIA, the FDIC has developed a transitional risk-based assessment system, under which, beginning on January 1, 1993, the assessment rate for an insured depository institution varied according to its level of risk. An institution's risk category will depend upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized and whether it is assigned to Subgroup A, B or C. Subgroup A institutions are financially sound institutions with few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the area of weakness. Based on its capital and supervisory subgroups, each BIF member institution will be assigned an annual FDIC assessment rate per $100 of insured deposits. INTERSTATE BANKING AND BRANCHING LEGISLATION The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") authorizes interstate acquisitions of banks and bank holding companies without geographic constraint beginning September 29, 1995. Beginning June 1, 1997, the IBBEA also authorizes banks to merge with banks located in another state provided that neither state has "opted out" of interstate branching between September 29, 1994 and May 31, 1997. States also may enact legislation permitting interstate merger transactions prior to June 1, 1997. After acquiring interstate branches through a merger, a bank may establish additional branches in that state at the same locations as any bank involved in the merger could have established branches under state and federal law. In addition, a bank may establish a de novo branch in another state that expressly permits the establishment of such branches. A bank that establishes a de novo interstate branch may thereafter establish additional branches on the same basis as a bank that has established interstate branches through a merger transaction. If a state "opts out" of interstate branching, no bank from another state may establish a branch in that state, whether through a merger or de novo establishment. Item 2. Properties Farmers National Banc Corp.'s Properties The Farmers National Banc Corp. owns no property. Operations are conducted at 20 South Broad Street, Canfield, Ohio. Bank Property The Main Office is located at 20 S. Broad Street, Canfield, Ohio. The other nine offices of the bank are: Austintown Office 22 N. Niles-Canfield Rd., Youngstown, Ohio Lake Milton Office 17817 Mahoning Avenue, Lake Milton, Ohio Cornersburg Office 3619 S. Meridian Rd., Youngstown, Ohio Colonial Plaza Office 401 E. Main St., Canfield, Ohio Western Reserve Office 102 W. Western Reserve Rd., Youngstown, Ohio Salem Office 1858 E. State Street, Salem, Ohio Columbiana Office 340 State Rt. 14, Columbiana, Ohio Leetonia Office 16 Walnut St., Leetonia, Ohio Damascus Office 29053 State Rt. 62 Damascus, Ohio The bank owns the Main Office, Austintown, Cornersburg, Lake Milton, Salem, Columbiana, Leetonia and Damascus Offices. The Colonial Plaza and Western Reserve offices are occupied under operating leases expiring at various times to 1999. All of the leases provide for renewal options in favor of the bank. Item 3. Legal Proceedings There are no material pending legal proceedings to which the registrant or its subsidiary is a party or of which any of its property is subject, except proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material affect on the consolidated financial position of the registrant or its subsidiary. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of 1997. PART III Item 10. Directors and Executive Officers of the Registrant Information relating to Directors is set forth in the registrant's definitive proxy statement, which was used in connection with its annual meeting of shareholders which will be held March 26, 1998. The proxy statement is attached hereto. Executive Officers of the Registrant The names, ages and positions of the executive officers as of March 1, 1998: Name Age Position Held William D. Stewart 68 Chairman Richard L. Calvin 71 Vice Chairman Frank L. Paden 47 President and Secretary Carl D. Culp 34 Executive Vice President and Treasurer Donald F. Lukas 51 Senior Vice President Officers are elected annually by the Board of Directors immediately following the annual meeting of shareholders. The term of office for all the above executive officers is for the period ending with the next annual meeting. Principal Occupation and Business Experience of Executive Officers Mr. William D. Stewart has served as Chairman since March 1996. Prior to that time, he was President and Secretary since the inception of registrant on March 31, 1983, was President of the Bank since 1972 and has held various other executive positions with the Bank. Mr. Richard L. Calvin has served as Vice Chairman since March 1996. Prior to that time, he was Executive Vice President and Treasurer of the registrant since its inception on March 31, 1983, was Executive Vice President of the bank since 1972 and has held various other executive positions with the Bank. Mr. Frank L. Paden has served as President and Secretary since March 1996. Prior to that time he was Executive Vice President of the registrant since March 1995, was Executive Vice President of the Bank since March 1995 and has held various other executive positions with the Bank. PART III, (Continued) Mr. Carl D. Culp has served as Executive Vice President and Treasurer since March 1996. Prior to that time he was Controller of the registrant since November 1995 and was Controller of the Bank since November 1995. Mr. Donald F. Lukas has served as Senior Vice President of the registrant since March 1996. Prior to that time, he was Vice President of the Bank since March 1987. Item 11. Executive Compensation Information regarding this item is set forth in the registrant's definitive proxy statement, which will be used in connection with its annual meeting of shareholders to be held March 26, 1998. The proxy statement is attached hereto. Item 12. Security Ownership of Certain Beneficial Owners and Management Information relating to this item is set forth in the registrant's definitive proxy statement, which will be used in connection with its annual meeting of shareholders to be held March 26, 1998. The proxy statement is attached hereto. Item 13. Certain Relationships and Related Transactions Information regarding this item is set forth in the registrant's definitive proxy statement, which will be used in connection with its annual meeting of shareholders to be held March 26, 1998. The proxy statement is attached hereto. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)1. Financial Statements Included in Part II of this report Item 8., Financial Statements and Supplementary Data is set forth in the registrant's 1997 Annual Report to Shareholders and is incorporated by reference in Part II of this report (a)2. Financial Statement Schedules Page Accountant's consent IV-2 All schedules are omitted because they are not applicable. (a)3. Exhibits The exhibits filed or incorporated by reference as a part of this report are listed in the Index of Exhibits, which appears at page IV-4 hereof and is incorporated herein by reference. (b) Report on Form 8-K No reports were filed for three months ended December 31, 1997. INDEPENDENT AUDITORS' CONSENT FARMERS NATIONAL BANC CORP.: We hereby consent to the incorporation by reference in this Registration Statement of our report dated January 23, 1998, relating to the consolidated financial statements of Farmers National Banc Corp. and subsidiary. HILL, BARTH & KING, INC. Warren, Ohio March 10, 1998 SIGNATURES Pursuant to the requirements of Section 13 or 15(D) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the under signed, thereunto duly authorized. Farmers National Banc Corp. Farmers National Banc Corp. by /s/Frank L. Paden by /s/Carl D. Culp President and Secretary Executive Vice President and Treasurer /s/William D. Stewart Chairman March 10, 1998 /s/Benjamin R. Brown Director March 10, 1998 /s/Richard L. Calvin Vice Chairman March 10, 1998 /s/Joseph O. Lane Director March 10, 1998 /s/David C. Myers Director March 10, 1998 /s/Edward A. Ort Director March 10, 1998 /s/Frank L. Paden President March 10, 1998 and Director /s/Ronald V. Wertz Director March 10, 1998 INDEX TO EXHIBITS The following exhibits are filed or incorporated by references as part of this report: 2. Not applicable. 3(i). Not applicable. 3(ii). Not applicable. 4. The registrant agrees to furnish to the Commission upon request copies of all instruments not filed herewith defining the rights of holders of long-term debt of the registrant and its subsidiaries. 9. Not applicable. 10. Not applicable. 11. Not applicable. 12. Not applicable. 13. Annual Report to security holders (filed herewith). 16. Not applicable. 18. Not applicable. 21. Subsidiaries of the registrant (filed herewith). 22. Not applicable. 23. Not applicable. 24. Not applicable. 27. Financial Data Schedule (filed herewith) 99. Definitive Proxy Statement (filed herewith) Copies of any exhibits will be furnished to shareholders upon written request. Request should be directed to Carl D. Culp, Executive Vice President, Farmers National Banc Corp., 20 S. Broad Street, Canfield, Ohio 44406. EX-13 2 INSIDE FRONT COVER BOARD OF DIRECTORS Picture of Board of Directors William D. Stewart, Chairman of Farmers National Banc Corp. and of the Farmers National Bank of Canfield Richard L. Calvin, Vice Chairman of Farmers National Banc Corp. and of the Farmers National Bank of Canfield Frank L. Paden, President and Secretary of Farmers National Banc Corp; President and Chief Executive Officer of the Farmers National Bank of Canfield Benjamin R. Brown, President - Castruction Co. Joeseph O. Lane, President - Lane Funeral Homes, Inc. and Lane Life Corp. David C. Myers, President - Myers Equipment Corp. Edward A. Ort, President - Ort Furniture Manufacturing Co. Ronald V. Wertz, President - Boyer Insurance Inc. HIGHLIGHTS OF 1997 Selected Financial Data (In Thousands except Per Share Data)
Percent For the Year 1997 1996 Change Net Income $4,742 $4,131 14.79% Return on Average Assets 1.34% 1.27% 5.51% Return on Average Equity 12.67% 11.60% 9.22% Per Share Net Income $1.39 $1.20 15.83% Book Value 11.72 10.51 12.05% Balances at Year-End Assets $368,449 $338,112 8.97% Securities 68,306 47,080 45.09% Net Loans 271,665 263,504 3.10% Deposits 305,830 283,810 7.76% Stockholders Equity 40,923 34,809 17.56% Shares Outstanding 3,491 3,311 5.44% Cash Dividends 1,958 1,455 34.57% * Adjusted to reflect weighted outstanding shares and adjusted for stock dividends.
FORM 10-K A copy of the Annual Report filed with the Securities and Exchange Commission will be available on April 1, 1998 without charge upon written request to: Mr. Carl D. Culp, Treasurer Farmers National Banc Corp. 20 South Broad St. P.O. Box 555 Canfield, Ohio 44406 Mailing address and phone: Farmers National Banc Corp. 20 South Broad St. P.O. Box 555 Canfield, Ohio 44406 Phone: (330) 533-3341 The Annual Meeting of the Shareholders of Farmers National Banc Corp. will be held at Colonial Catering at 429 Lisbon St. Canfield, Ohio on Thursday, March 26, 1998 at 3:30 p.m. TABLE OF CONTENTS Highlights of 1997 1 Report to Stockholders 2-5 Officers 6 Description of Business 7 Graphs & Charts 8-9 Selected Financial Data 10-11 Rate & Volume Analysis 12 Management's Discussion 13-20 Stock Prices and Dividends 21 Accountant's Report 22 Financial Data 23-36 PRESIDENT'S LETTER TO STOCKHOLDERS Dear Shareholders: In last year's annual report , my message told our shareholders of the history of growth and success that we have experienced during the first 109 years of existence. As we plan and prepare for the 21st Century, we will look to our history to help guide us into the future. Nineteen hundred ninety-seven was truly a year of significant accomplishments for the Farmers National Banc Corp. Record earnings, increased cash dividends, another new community branch bank location, and a new management team committed to the corporate mission . . . " to maximize shareholder value and act as the financial leader in the communities we serve as a locally owned, independent community banking organization." Your Board of Directors and Management are pleased with our 1997 results and we are very optimistic as we develop a vision for the future. It is with great pleasure that I share some of the highlights and accomplishments of your company that were attained in 1997. FINANCIAL PERFORMANCE Net income for the year reached a record high of $4.74 million, up 14.8 percent over 1996. Total assets for Farmers National Banc Corp. at year-end were $368 million, an increase of 8.9 percent over year-end 1996. The net income was $1.39 per share for 1997 as compared to $1.20 per share in 1996. This represents a 15.8 percent increase. Cash dividends paid on Farmers National Banc Corp. common stock were $.58 per share in 1997, representing a 31.8 percent increase over a year ago. In addition to the cash dividends, the Corporation also paid shareholders a 2% stock dividend in October 1997. That stock dividend represents the twenty-second consecutive year that your Directors approved and paid a stock dividend. Equity, in the form of capital ratios, is a measure used in defining safety within the banking industry. The $40.9 million in Shareholder Equity gives the Corporation an 11.1 percent total capital to asset ratio -- well above regulatory measures and near the top percentile in comparison to our peer group of banks. Shareholder participation in the Corporation's Dividend Reinvestment Plan continues to provide a source of additional capital to the Corporation. During 1997, shareholders reinvested cash dividends of $1.1 million and made additional cash contributions in the amount of $1.9 million, totaling $3 million, that was used to purchase shares of common stock in Farmers National Banc Corp. The market value of our common stock was $22.25 per share following the two-for-one stock split in January 1997. This market value has increased to a year-end value of $30.75 per share, a 38 percent increase during 1997. Our common stock is quoted on the OTC Bulletin Board under the symbol FMNB. As I reported to you in the quarterly reports, both positive earnings and growth trends were attained throughout the year. The higher earnings and returns were a result of several factors. Net interest income is the major factor that affects net income. In 1997, net interest income, before provision for loan losses, was $15.5 million as compared to $14.1 million in 1996. This 9.4 percent increase is one of the reasons for the favorable results for 1997. Total loans increased to $275.1 million at year-end 1997, a modest 3.15 percent increase from 1996. Other factors attributing to our successful results for 1997 were a 21.8 percent increase in investment income and a 19.3 percent increase in non-interest income. With management's ability to increase the sources of income, we were also able to control the non-interest expenses. The corporation's efficiency ratio increased by nearly 180 basis points from 56.5 percent in 1996 to 54.7 percent in 1997. You will note from the financial information outlined in this report that Farmers National Banc Corp.'s operating and performance measurements identify continuing positive trends. Nineteen hundred and ninety-seven was a financially successful year and is detailed in the accompanying financial review, analysis and graphs which summarize the careful management of operating fundamentals, size of our Corporation and shareholder return. OPERATIONS In January 1997, Farmers National Bank opened a branch banking office in Damascus, Ohio. The location represents the ninth community branch banking office for Farmers National Bank. This branch has been graciously accepted by the community. The growth in deposits and loans both exceeded our expectations. This branch alone represented approximately twenty percent of the growth in deposits that the entire Corporation experienced in 1997. To better serve the demands of the community, we will be installing a 24 hour ATM at this site during the first quarter of 1998. During the summer of this past year, our Austintown Branch Bank went through a major exterior capital improvement project. These improvements included a new gable style roof replacing a flat roof that had been on the building since 1959. Other improvements were new windows & doors, a renovated entrance area and a completely new exterior finish to the entire building. This new look clearly adds to our strong commitment to the Austintown community. Additional interior improvements are planned for the near future. Farmers National Bank introduced "The Common Sense Card" during the first quarter of 1997. This debit card product has been well accepted by our customers as evidenced by the number of transactions completed through the ATM and merchant network. I encourage you to take advantage of this product as a way to automate your transactions and eliminate the need to write checks. Plans for 1998 will include the introduction of an automated phone system that will allow our customers to inquire about their accounts, transfer funds between accounts, make loan and utility payments and get current information concerning interest rates and bank products. With the development of the automated phone system to allow banking transactions, our efforts will be turned to alternative ways to deliver bank products and services. Home banking through your personal computer and/or Internet banking are two issues that are currently under strong consideration by our operations staff. It is our strategy to fully evaluate the viability of these products and how they will compliment the current products and services we make available though our network of branches. Customers expect to be able to obtain products and services any time and any place. We are committed to have systems in place to meet these expectations. Technology continues to have an effect on all business entities. The ability to manage this technology is a major challenge today. It is our strategy to position our bank to provide the most efficient means of distributing and delivering our financial products and services through the mix of modern technology and common sense banking. Another product that was completed in 1997 is our own WEB SITE page on the Internet. You are currently able to access various information about the bank on the Internet -- our domain name is www.fnb-canf.com. During 1998, we plan to enhance this web page and give the visitors additional options to link to other services and communicate directly with our bank through electronic mail. Our long range plan is to provide our customers access to the Internet through a server that will be located in our bank allowing customers to conduct all their banking over the Internet. A non-financial goal for 1997 was to develop and introduce a new deposit product that was designed for individuals who find value in an investment product that offers accessibility, stability and an exceptional return on investment. The Money Market Index Account was introduced to the public in September and we now have nearly $2 million in deposit balances. In planning for 1998, I am pleased to report that we will open a full-service branch bank located within the Village limits of Poland, Ohio. This site will be our tenth community branch office and our fourth expansion project within the last three years. This project is currently in process and it is our goal to open in the fall of this year. Much planning has been put into the design and appearance of this branch, which we feel will be the premier banking facility located in Poland Village. Our banking family was saddened by the deaths of three Bank Officers during 1997. Mr. Charles Burgoyne, Mr. Larry Staub and Ms. Adrianne Kempers all suddenly passed away during this past year. Charles Burgoyne, a valued friend, had served the bank in excess of thirty-nine years in various positions, retiring in May 1997 as Assistant Vice President/Loan Review Officer and Compliance Officer. His dedicated service and leadership are well known and his valued contributions to Farmers National Bank will be greatly missed. Larry Staub had been with the bank over eight years and served in the capacity of Branch Manager at our Cornersburg and Western Reserve branch offices. Larry's management ability, organizational skills, and compassion for fellow employees are qualities that cannot be replaced. Adrianne Kempers was employed with the bank for the past two years as our Internal Auditor for both the Bank and the Bank holding company. She was a member of the Operations Committee and served as an Executive Officer of the Bank. Adrianne's professional vocation as a CPA and her sincere commitment to community service best exemplified her role with our bank. These three individuals will be greatly missed as friends and as co-workers. Each contributed to our success in their own way. In closing, I would like to offer special thanks to our shareholders, directors, officers, employees and customers for their loyal patronage of our services and steadfast commitment to our bank. We are extremely confident as we prepare for the twenty-first century, and we welcome you to be a part of it. Sincerely, Frank L. Paden President & CEO Farmers National Banc Corp. Officers William D. Stewart Richard L. Calvin Chairman Vice Chairman Frank L. Paden Carl D. Culp President and Secretary Executive Vice President & Treasurer Donald F. Lukas Senior Vice President Farmers National Bank of Canfield Officers & Management Frank L. Paden Andrew A. Baird President & CEO Asst. Cashier, Manager-Data Center Carl D. Culp Joseph E. Chapman Executive Vice President, Assistant Cashier, Cashier & CFO Manager - Collection Department Donald F. Lukas Janine M. Cox Senior Vice President, Assistant Cashier, Credit Admin. Bank Systems Charlene K. Daugherty Mark L. Graham Assistant Cashier/Human Resources Vice President/Loan Administrator Merle Garritano Bradley S. Henderson Assistant Cashier/Consumer Loans Vice President, Branch Administration & Security Linda Liston Compliance Officer Anthony F. Peluso Vice President/Human Resources Joanie Orr General Ledger Accounting Officer Alfred F. Ridel Vice President/Consumer Loans Gary J. Rosati Staff Legal Counsel Daniel G. Cerroni Assistant Vice President, Diane Moran Main Office Loan Department Mortgage Loan Department Barbara C. Fisher Anita L. Jarvis Assistant Vice President, Internal Auditor Marketing & Deposit Operations Rob Mort Roy A. Jackson Corporate Financial Accountant Assistant Vice President,/Indirect Lending Dorothy J. Weeden Fred Kotheimer Assistant Cashier, Assistant Vice President/Loan Review Manager - Main Office Susan E. Miller Pamela J. Cleghorn Assistant Vice President, Assistant Cashier, Corporate Services Administration Manager, Colonial Plaza Phyllis A. Welton Keith A. Leonard Assistant Vice President, Assistant Cashier Manager - Bookkeeping Dept. Manager - Austintown Office Patricia C. Rosko Larry E. White Asst. Manager, Austintown Office Assistant Vice President, Manager - Salem Office Dennis S. Vitt Assistant Cashier, Gregory Walla Manager - Lake Milton Office Asst. Manager, Salem Office Jennifer Tikkanen Geraldine J. Gbur Asst. Manager, Lake Milton Office Assistant Cashier, Manager - Columbiana Office Robert L. Rozeski Assistant Cashier, Jane C. Logan Manager, Cornersburg Office Asst. Manager, Columbiana Office Barbara L. Sitler Kay A. Hedl Asst. Manager, Cornersburg Manager, Leetonia Office Clare F. Baldwin Lynnita J. Kaschak Asst. Manager, Western Reserve Office Asst. Manager, Leetonia Michele M. Ossoff Assistant Cashier, Manager, Damascus Office Brief Description of Business Farmers National Banc Corp. Farmers National Banc 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 Farmers National Bank of Canfield, which was acquired March 31, 1983. Presently the Corporation and its subsidiary operate in one industry, domestic banking. The Corporation conducts no business activities except for investment 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 William D. Stewart, Chairman, Richard L. Calvin, Vice Chairman, Frank L. Paden, President and Secretary, Carl D. Culp, Executive Vice President and Treasurer and Donald F. Lukas, Senior Vice President. 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 Farmers National Bank of Canfield The Bank is a full service national bank engaged in commercial and retail banking with the exception of trust services. The Bank's commercial banking services include checking accounts, savings accounts, time deposit accounts, commercial, mortgage and installment loans, night depository, automatic teller machines, safe deposit boxes, money order services, travelers checks, government bond sales, food stamp redemption, utility bill payments, MasterCard and Visa Credit Cards, and other miscellaneous services normally offered by commercial banks. In addition, the Bank offers discount brokerage service through a correspondent bank. The Bank's main office is located at 20 South Broad Street, Canfield, Ohio. Business is conducted at a total of ten (10) offices located in the counties of Mahoning and Columbiana in Ohio. As a national banking association, the Bank is a member of the Federal Reserve System, subject to supervision and regulation of the Comptroller of the Currency and its deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law. The Bank is affected also by the monetary and fiscal policies of the United States and of various regulatory agencies. The Bank competes with state and national banks located in Mahoning and Columbiana counties. The Bank also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions and commercial finance and leasing companies, for deposits, loans and service business. Money market mutual funds, brokerage houses and similar institutions provide, in a relatively unregulated environment, many of the financial services offered by the Bank. In the opinion of management, the principal methods of competition are the rates of interest charged for loans, the rates of interest paid for funds, the fees charged for services and the availability of services. As of December 31, 1997, the Corporation and its subsidiary had 180 employees. The bank considers its relations with its employees to be satisfactory. Picture of Exterior of Main Office GRAPHS AND CHARTS Bar Graph Depicting Total Deposits in Thousands Year Amount 1993 $240,440 1994 $244,302 1995 $267,955 1996 $283,811 1997 $305,830 Bar Graph Depicting Return on Average Equity Year Amount 1993 12.85% 1994 12.58% 1995 11.45% 1996 11.60% 1997 12.67% Bar Graph Depicting Return on Average Assets Year Amount 1993 1.16% 1994 1.22% 1995 1.20% 1996 1.27% 1997 1.34% Bar Graph Depicting Net Income in Thousands Year Amount 1993 $3,160 1994 $3,424 1995 $3,576 1996 $4,131 1997 $4,742 Bar Graph Depicting Net Loans in Thousands Year Amount 1993 $200,993 1994 $214,988 1995 $229,249 1996 $263,504 1997 $271,665 Bar Graph Depicting Net Income Per Share Year Amount 1993 $1.02 1994 $1.06 1995 $1.07 1996 $1.20 1997 $1.39 Bar Graph Depicting Loans Loss Provision/Non-Performing Loans Year Amount 1993 97.35% 1994 154.63% 1995 192.87% 1996 152.42% 1997 383.13% Bar Graph Depicting Total Stockholders Equity in Thousands Year Amount 1993 $25,996 1994 $28,915 1995 $33,976 1996 $34,809 1997 $40,923 SELECTED FINANCIAL DATA (In Thousands except Per Share Data)
For the Years Ending 1997 1996 1995 1994 1993 Summary of Earnings Total Interest Income (including fees on loans) $27,576 $24,877 $21,960 $19,731 $20,166 Total Interest Expense 12,129 10,756 9,688 8,000 8,738 Net Interest Income 15,447 14,121 12,273 11,731 11,428 Provision for Credit Losses 855 655 270 330 620 Total Other Income 1,768 1,478 1,342 1,357 1,298 Total Other Expense 9,418 8,883 8,118 7,755 7,473 Income Before Federal Income Taxes 6,942 6,061 5,226 5,003 4,633 Federal Income Taxes 2,200 1,930 1,650 1,579 1,473 NET INCOME 4,742 4,131 3,576 3,424 3,160 Per Share Data (Note) Net Income 1.39 1.20 1.07 1.06 1.02 Cash Dividends Paid 0.58 0.44 0.40 0.40 0.38 Book Value at Year-End 11.72 10.51 10.33 9.29 8.90 Balances at Year-End Total Assets 368,449 338,112 314,229 284,445 275,385 Earning Assets 349,102 319,449 294,122 268,724 260,965 Total Deposits 305,830 283,810 267,955 244,302 240,440 Net Loans 271,665 263,504 229,249 214,988 200,993 Total Stockholder's Equity 40,923 34,809 33,976 28,915 25,996 Average Balances Total Assets 354,005 325,537 297,159 279,839 273,257 Total Stockholder's Equity 37,431 35,629 31,177 27,221 24,557 Significant Ratios Return on Average Assets (ROA) 1.34% 1.27% 1.20% 1.22% 1.16% Return on Average Equity (ROE) 12.67 11.60 11.45 12.58 12.85 Average Earning Assets/Average Assets 95.28 94.88 94.75 94.91 94.55 Net Loans/Deposits 88.83 92.85 85.56 88.00 83.59 Allowance for Credit Losses/Total Loans 1.25 1.20 1.25 1.26 1.29 Allowance for Credit Losses/Nonperforming Loans 383.13 152.42 192.87 154.63 97.35 Efficiency Ratio 54.71 56.50 59.63 59.66 58.98 Cash Dividends as a Percentage of Net Income 41.29 35.22 35.46 34.45 33.41 Dividends Per Share to Net Income Per Share 41.73 36.07 36.04 34.96 33.94 Note: Per share data is based on weighted average shares outstanding adjusted for stock dividends.
Average Balance Sheets and Related Yields and Rates (In Thousands of Dollars)
Years ended December 31, 1997 1996 1995 EARNING ASSETS AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE Loans $268,581 $23,487 8.74% $250,616 $21,519 8.59% $221,955 $18,580 8.37% Taxable securities 51,520 3,123 6.06 40,334 2,352 5.83 39,167 2,183 5.57 Tax-exempt securities 8,072 712 8.82 7,434 683 9.19 7,266 670 9.22 Federal funds sold 9,116 503 5.52 10,506 562 5.35 13,181 761 5.77 Total earning assets 337,289 27,825 8.25 308,890 25,116 8.13 281,569 22,194 7.88 NONEARNING ASSETS Cash and due from banks 11,001 11,310 11,437 Premises and equipment 5,647 5,597 4,671 Allowance for Loan Losses (3,282) (2,946) (2,897) Other assets 3,350 2,686 2,379 Total Assets $354,005 $325,537 $297,159 INTEREST-BEARING LIABILITIES Time deposits $141,659 $8,094 5.71% $122,973 $7,095 5.77% $108,626 $6,205 5.71% Savings deposits 74,117 1,870 2.52 76,182 1,931 2.53 74,752 1,986 2.66 Demand deposits 54,560 1,141 2.09 51,890 1,092 2.10 48,267 1,009 2.09 Repurchase agreements 15,039 676 4.49 12,075 497 4.12 10,032 440 4.39 Borrowings 6,000 348 5.80 2,651 142 5.36 804 48 5.97 Total Interest-Bearing Liabilities 291,375 12,129 4.16 265,771 10,757 4.05 242,481 9,688 4.00 NONINTEREST-BEARING LIABILITIES Demand deposits 21,868 22,979 20,631 Other Liabilities 3,331 1,158 2,870 Stockholder's equity 37,431 35,629 31,177 Total Liabilities and Stockholders' Equity $354,005 $325,537 $297,159 Net interest income $15,696 $14,359 $12,506 Net interest income to earning assets 4.65% 4.65% 4.44% Fully taxable equivalent basis computed at 35% in 1997, 1996 and 1995.
Rate and Volume Analysis The following table analyzes by rate and volume the dollar amount of changes in the components of the interest differential: (In Thousands of Dollars)
1997 change from 1996 1996 change from 1995 Net Change Due Change Due Net Change Due Change Due Change To Volume To Rate Change To Volume To Rate Tax Equivalent Interest Income Loans $1,968 $1,554 $414 $2,939 $2,393 $546 Taxable securities 771 653 118 169 65 104 Tax-exempt securities 29 58 (29) 13 15 (2) Federal funds sold (59) (74) 15 (199) (154) (45) Total interest income $2,709 $2,191 $518 $2,922 $2,319 $603 Interest Expense Time deposits $999 $1,081 ($82) $890 $817 $73 Savings deposits (61) (53) (8) (55) 41 (96) Demand deposits 49 55 (6) 83 77 6 Repurchase agreements 179 123 56 57 90 (33) Borrowings 206 26 180 94 110 (16) Total interest expense $1,372 $1,232 $140 $1,069 $1,135 ($66) Increase in tax equivalent net interest income $1,337 $1,853 The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the relative size of the rate and volume changes.
MANAGEMENT'S DISCUSSION ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Corporation's net income totaled $4.742 million during 1997, an increase of 14.79% from $4.131 million for 1996. On a per share basis, net income was $1.39 for 1997 as compared to $1.20 for 1996 and $1.07 for 1995. Common comparative ratios for results of operations include the return on average assets and return on average stockholders equity. For 1997, the return on average equity was 12.67% as compared to 11.60% for 1996 and 11.45% for 1995. The return on average assets was 1.34% for 1997 as compared to 1.27% and 1.20% for 1996 and 1995, respectively. These results of operations are the direct result of management's concerted efforts to control expenses and increase interest from our interest bearing assets. Overall growth in deposits and the use of those funds in the investment and loan portfolio, particularly commercial, commercial real estate and home equity loans, together with control over the bank's general expenses have produced these results. Net Interest Income Net interest income, the principal source of the Corporation's earnings, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. For 1997, net interest income increased $1.326 million or 9.39% over 1996. The increase for 1996 was $1.849 million or 15.06% over 1995. Interest-earning assets averaged $337.289 million during 1997 representing a 9.19% increase over 1996, while 1996 averaged $308.890 million or a 9.70% increase over 1995. The Corporation 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. The profit margin, or spread, on invested funds is a key performance measure. The Corporation monitors two key performance indicators - net interest spread and net interest margin. The net interest spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin represents the overall profit margin: net interest income as a percentage of total interest-earning assets. This performance indicator gives effect to interest earned for all investable funds including the substantial volume of interest-free funds. For 1997 and 1996 the net interest margin, measured on a fully taxable equivalent basis was 4.65% in comparison to 4.44% for 1995. Total interest income was $27.576 million for 1997 as compared to $24.877 million and $21.960 million for 1996 and 1995, respectively. The 10.85% increase in interest income is attributed to a 3.1% increase in net loans and an increase in the interest rate earned from 8.59% to 8.74%. Net loans were $271.665 million at year-end 1997 as compared to $263.504 million at year-end 1996. Interest and dividends on securities also increased 21.8% from $3.358 million in 1996 to $4.089 million in 1997. The increase was also attributable to a 46.05% increase in the balance of securities available for sale, as well as an increase in the overall yield on these assets. Total interest expense amounted to $12.129 million for 1997, representing a 12.76% increase from 1996 while interest expense of $10.756 million for 1996 represents a 11.03% increase from 1995. The increase in interest expense is primarily due to an increase in the level of borrowings and the average rate paid on these liabilities. The average balances for time deposits increased by 15.2% over 1996, but the interest rate paid on those deposits decreased by 6 basis points. Other Income Other income increased $290 thousand or 19.62% from 1996. Total other income for 1996 increased $136 thousand or 10.13% from 1995. The increase in other income is a result of increased levels of service charges and fees related to deposit accounts. Management continues to explore new products and services that could increase other income in future years. Other Expenses Total other expenses for 1997 increased 6.03% over 1996 as compared to an increase of 9.41% from 1996 over 1995. The rise in other expenses is primarily due to salary and employee benefits, which increased $280 thousand or 5.86% from 1996. This increase is the result of hiring additional employees to staff the new branch offices. The Corporation's other operating expenses also increased $232 thousand or 9.12% over 1996. These expenses are increasing each year due primarily to asset growth and the increased volume of the operations of the bank. Management will continue to closely monitor and keep the increases in other expenses to a minimum. Income Taxes Federal income taxes are computed using the appropriate effective tax rates for each period. The effective tax rates are less than the statutory tax rate primarily due to nontaxable interest and dividend income. The effective federal income tax rate was 32% for the periods ending 1997, 1996 and 1995. Asset/Liability Management Important considerations in asset/liability management are liquidity, the balance between interest rate sensitive assets and liabilities and the adequacy of capital. Interest rate sensitive assets and liabilities are those which have yields on rates subject to change within a future time period due to maturity of the instrument or changes in market rates. While liquidity management involves meeting the funds flow requirements of the Corporation, the management of interest rate sensitivity focuses on the structure of these assets and liabilities with respect to maturity and repricing characteristics. Balancing interest rate sensitive assets and liabilities provides a means of tempering fluctuating interest rates and maintaining net interest margins through periods of changing interest rates. Although the Corporation does not match each of its interest sensitive assets against specific interest sensitive liabilities, it does monitor total assets and liabilities to determine the overall interest rate position over various time frames. As of year-end 1997, the Corporation had a negative gap at both three month and twelve month time periods. This liability sensitive position typically produces a favorable contribution to earnings during a period of decreasing rates. Although in general rates may rise, the Corporation has the capacity to take steps to minimize the negative effect of such movement. With the largest amount of interest sensitive assets and liabilities maturing within twelve months, the Corporation monitors this area most closely. The Corporation does not emphasize interest sensitivity analysis beyond this time frame because it believes various unpredictable factors could result in erroneous interpretations. Early withdrawal of deposits, prepayments of loans and loan delinquencies are some of the factors that could have such an effect. In addition, changes in rates on interest sensitive assets and liabilities may not be equal, which could result in a change in net margin. Interest Rate Sensitivity
(In Thousands of Dollars) December 31, 1997 December 31, 1996 December 31, 1995 Total Within Total Within Total Within 3 month 12 month 3 month 12 month 3 month 12 month Total Interest-Sensitive Assets $43,489 $117,790 $36,137 $105,161 $44,064 $100,658 Total Interest-Sensitive Liabilities 70,990 129,809 56,249 112,027 55,706 103,701 Total Sensitivity Gap (27,501) (12,019) (20,112) (6,866) (11,642) (3,043) Ratio of Interest-Sensitive Assets to Interest-Sensitive Liabilities 0.61 0.91 0.64 0.94 0.79 0.97
Interest rate sensitivity management provides some degree of protection against net interest income volatility. It is not possible or necessarily desirable to attempt to eliminate this risk completely by matching interest sensitive assets and liabilities. Other factors, such as market demand, interest rate outlook, regulatory restraint and strategic planning also have an effect on the desired balance sheet structure. Liquidity The Corporation maintains, in the opinion of management, liquidity sufficient to satisfy depositors' requirements and meet the credit needs of customers. The Corporation depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Corporation's ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition. Principal sources of liquidity for the Corporation include assets considered relatively liquid such as short-term investment securities, federal funds sold and cash and due from banks. Along with its liquid assets, the Corporation has additional sources of liquidity available which help to insure that adequate funds are available as needed. These other sources include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at three major domestic banks. At December 31, 1997, the Corporation had not borrowed against these lines of credit. Management feels that its liquidity position is more than adequate and will continue to monitor the position on a monthly basis. The Corporation also has additional borrowing capacity with the Federal Home Loan Bank of Cincinnati, as well as access to the Federal Reserve Discount Window, which provides an additional source of funds. Advances outstanding from the Federal Home Loan Bank at December 31, 1997 amounted to $4.612 million. Cash flows generated from operating activities increased 12.01% to $7.043 million in 1997 compared to $6.288 million in 1996. This increase is a result of an increase in total interest received, as explained in the Net Interest Income section of this report. Cash flows used in investing activities decreased 9.92% to $32.171 million in 1997 compared to $35.715 million in 1996. This decrease in cash used resulted from an increase in proceeds from sales of investment securities of $3.106 million. Although the net increase in loans made to customers dropped from $35.031 million in 1996 to $10.464 million in 1997, this was offset by a corresponding increase in purchases of investment securities, which increased from $14.467 million in 1996 to 38.547 million in 1997. Cash flows provided from financing activities amount to $25.341 million as compared to $19.000 million in 1996. This 33.38% increase is primarily the result of treasury stock transactions in 1996 and 1997. The Corporation's net increase in Federal Home Loan Bank Borrowings also grew by $1.812 million. Maturities and Sensitivities of Loans to Interest Rates The following schedule shows the composition of loans and the percentage of loans in each category at the dates indicated:
(In Thousands of Dollars) Years Ended December 31, 1997 1996 1995 1994 1993 Commercial, Financial and Agricultural $10,784 3.9% $8,454 3.1% $19,842 8.6% $22,465 10.3% $21,026 10.4% Real Estate - Mortgage 147,979 53.8 136,212 51.1 110,870 47.9 102,322 47.0 92,115 45.2 Installment Loans to Individuals 116,331 42.3 122,036 45.8 100,748 43.5 92,947 42.7 90,473 44.4 Total Loans $275,094 100.0% $266,702 100.0% $231,460 100.0% $217,734 100.0% $203,614 100.0%
The composition of loans for 1993 through 1996 have been reclassified to conform with the presentation for 1997. Such reclassification had no effect on results of operations. The following schedule sets forth maturities based on remaining scheduled repayments of principal for various categories of loans listed above as of December 31, 1997: (In Thousands of Dollars) Types of Loans 1 Year or less 1 to 5 Years Over 5 Years Commercial, Financial and Agricultural $5,314 $4,117 $1,353 The amounts of commerical, financial and agricultural loans as of December 31, 1997, based on remaining scheduled repayments of principal, are shown in the following table: (In Thousands of Dollars) Loan Sensitivities 1 Year or less Over 1 Year Total Floating or Adjustable Rates of Interest $4,360 $1,031 $5,391 Fixed Rates of Interest 954 4,439 5,393 Total Loans $5,314 $5,470 $10,784 Loan Portfolio Total net loans were $271.665 million at year-end 1997 compared to $263.504 million at year-end 1996. This represents an increase of $8.161 million or 3.10%. Loans comprised 79.6% of the Bank's average earning assets during 1997, compared to 81.1% in 1996. The product mix in the Loan Portfolio shows Commercial Loans comprising 3.9%, Real Estate Mortgage Loans (Residential and Commercial) 53.8% and Installment Loans to Individuals 42.3% at December 31, 1997 compared with 3.1%, 51.1% and 45.8%, respectively, at December 31, 1996. Loans contributed 84.4% of total interest income in 1997 compared to 86.5% in 1996. Loan yield was 8.74% in 1997, 49 basis points greater than the average rate for total earning assets. Management recognizes that while the Loan Portfolio holds some of the Bank's highest yielding assets, it is inherently the most risky portfolio. Accordingly, Management attempts to balance credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function which monitors credits during and after the approval process. To minimize risks associated with changes in the borrower's future repayment capacity, the Bank generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral. Installment Loans to Individuals decreased from $122.036 million on December 31, 1996 to $116.331 million on December 31, 1997 which represents a 4.9% decrease. Management continues to target the automobile dealer network to purchase indirect Installment Loans. Dealer paper was purchased using strict underwriting guidelines with an emphasis on quality. Indirect Loans comprise 87.4% of the Installment Loan Portfolio. Net loan losses on the Installment Loan portfolio were $667 thousand in 1997 as compared to $295 thousand in 1996. This represents .57% of total Installments Loans outstanding for 1997 and .24% for 1996. Management attributes the increase in net losses in 1997 to the national trend in the economy, indicating high consumer debt and an increased number of personal bankruptcy filings. Real Estate Mortgage Loans increased to $147.979 million at December 31, 1997, an increase of 8.6% over 1996. This portfolio consists of $108.077 million of 1-4 family residential properties and $39.902 million in commercial real estate properties, all made within the Bank's primary market area. The corporation originated both fixed rate and adjustable rate mortgages during 1997. All mortgage loans made in 1997 are held in the Mortgage Loan portfolio and are not sold on the secondary market. Fixed rate terms are limited to fifteen year terms while adjustable rate products are offered with maturities up to thirty years. Commercial Loans at December 31, 1997 increased from year-end 1996 with outstanding balances of $10.784 million. This portfolio is comprised of primarily variable rate loans. The Bank's commercial loans are granted to customers within the immediate trade area of the Bank. The mix is diverse, covering a wide range of borrowers and business types. The Bank 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. Summary of Loan Loss Experience The following is an analysis of the allowance for loan losses for the periods indicated:
(In Thousands of Dollars) Years Ended December 31, 1997 1996 1995 1994 1993 Balance at Beginning of Year $3,198 $2,911 $2,746 $2,621 $2,274 Loan Losses: Commercial, Financial and Agricultural 0 (75) (1) (185) (69) Real Estate-Mortgage 0 (22) 0 0 (16) Installment Loans to Individuals (824) (455) (275) (202) (351) Total Loan Losses (824) (552) (276) (387) (436) Recoveries on Previous Loan Losses: Commercial, Financial and Agricultural 3 9 44 39 36 Real Estate-Mortgage 40 15 0 0 7 Installment Loans to Individuals 157 160 127 143 120 Total Recoveries 200 184 171 182 163 Net Loan Losses (624) (368) (105) (205) (273) Provision Charged to Operations (1) 855 655 270 330 620 Balance at End of Year $3,429 $3,198 $2,911 $2,746 $2,621 Ratio of Net Loan Losses to Average Net Loans and Leases Outstanding 0.23% 0.15% 0.05% 0.10% 0.14% (1) The provisions for possible credit 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 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 increased from $655 thousand in 1996 to $855 thousand in 1997. The provision charged to operations was increased to offset an increase in net loan losses in 1997. The balance in the allowance for credit losses has increased substantially since 1993 to $3.429 million or 1.25% of loans at December 31,1997. This ratio has increased from the 1.20% reported at December 31, 1996. The allowance for credit losses as a percentage of nonperforming loans increased substantially from 152.42% at December 31, 1996 to 383.13% at December 31, 1997. The allowance for possible credit losses has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans as of the dates indicated:
(In Thousands of Dollars) December 31, 1997 1996 1995 1994 1993 Loans to Loans to Loans to Loans to Loans to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Commercial, Financial and Agricultural $1,928 3.9% $1,873 3.1% $1,800 8.6% $1,700 10.3% $1,692 10.4% Real Estate-Mortgage 275 53.8 263 51.1 250 47.9 200 47.0 170 45.2 Installment Loans to Individuals 1,226 42.3 1,062 45.8 861 43.5 846 42.7 759 44.4 $3,429 100.0% $3,198 100.0% $2,911 100.0% $2,746 100.0% $2,621 100.0% The allocation of the allowance as shown in the table above should not be interpreted as an indication that charge-offs in 1997 will occur in the same proportions or that the allocation indicates future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.
Loan Commitments and Lines of Credit In the normal course of business, the banking subsidiary has extended various commitments for credit. Commitments for mortgages, revolving lines of credit and letters of credit generally are extended for a period of one month up to one year. Normally no fees are charged on any unused portion. Normally, an annual fee of two percent is charged for the issuance of a letter of credit. Risk Elements The following table sets forth aggregate loans in each of the following categories for the years indicated:
(In Thousands of Dollars) December 31, 1997 1996 1995 1994 1993 Loans Accounted For on a Nonaccrual Basis $493 $0 $125 $302 $349 Loans Contractually Past Due 90 Days or More as to Interest or Principal Payments (Not Included in Nonaccrual Loans Above) 402 2,098 1,384 1,475 2,343 Loans Considered Troubled Debt Restructuring (Not Included in Nonaccrual Loans or Contractually Past Due Above) 0 0 75 0 108 Management is not aware of any loans not included in the table above where serious doubt exists as to the ability of the borrower to comply with the current loan repayment terms.
Non-accrual loans are loans which are 90 days past due and with respect to which, in Management's opinion, collection of interest is doubtful. These loans no longer accrue interest and are accounted for on a cash basis. Loans which are 90 days or more past due but continue to accrue interest are loans which, in Management's opinion, are well secured and are in the process of collection. As of December 31, 1997, there were no concentrations of loans exceeding 25% of total loans which are not disclosed as a category of loans. As of that date also, there were no other interest-earning assets that are either nonaccrual, past due, restructured or nonperforming. The following shows the amounts of contracted interest income and interest income reflected in income on loans accounted for on a nonaccrual basis and loans considered troubled debt restructuring for the periods indicated:
(In Thousands of Dollars) December 31, 1997 1996 1995 1994 1993 Gross Interest Income That Would have been Recorded if the Loans had been Current in Accordance with Their Original Terms $9 $7 $5 $21 $40 Interest Income Included in Income on the Loans 13 0 0 0 0
Investment Securities The investment securities portfolio increased 45.08% in 1997. Most of this increase occurred in U.S. Treasury and U.S. Government agencies, which grew $22 million in 1997. The increase is primarily attributable to excess funds resulting from deposit growth outpacing the current year loan demand. Our objective in managing the investment portfolio is to preserve and enhance corporate liquidity through investment in short and intermediate term securities which are readily marketable and of the highest credit quality. 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 book value of investment securities by type of obligation at the dates indicated:
Type (In Thousands of Dollars) December 31, 1997 1996 1995 U.S. Treasury Securities and Government Agencies $53,449 $31,449 $31,692 Obligations of States and Political Subdivisons 9,145 7,501 6,943 Other Securities 5,712 8,130 8,698 $68,306 $47,080 $47,333
A summary of securities held at December 31, 1997, classified according to maturity and including weighted average yield for each range of maturities is set forth below:
(In Thousands of Dollars) Type and Maturity Grouping December 31, 1997 Book Value Weighted Average Yield (1) U.S. Treasury and U.S. Government Agency Securities: Maturing Within One Year $11,529 5.51% Maturing After One Year But Within Five Years 31,518 6.14% Maturing After Ten Years 10,402 6.47% Total U.S. Treasury and U.S. Government Agency Securities: $53,449 6.06% Obligations of States and Political Subdivisions Maturing Within One Year $323 8.62% Maturing After One Year But Within Five Years 2,165 9.10% Maturing After Five Years But Within Ten Years 2,606 8.31% Maturing After Ten Years 4,051 8.60% Total Obligations of States and Political Subdivisions $9,145 8.63% Other Securities Maturing Within One Year $2,008 6.61% Maturing After One Year But Within Five Years 3,704 6.22% Total Other Securities $5,712 6.42% (1) The weighted average yield has been computed by dividing the total interest income adjusted for amortization of premium or accretion of discount over the life of the security by the par value of the securities outstanding. The weighted average yield of tax-exempt obligations of states and political subdivisions has been calculated on a fully taxable equivalent basis. The amounts of adjustments to interest which are based on the statutory tax rate of 34% were $9.371 thousand, $63.771 thousand, $72.803 thousand and $116.151 thousand for the four ranges of maturities.
Deposits Deposits represent the Corporation'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 Corporation's total deposits grew from $283.810 million in 1996 to $305.830 million in 1997, which equates to an increase of 7.76%. Most of this growth occurred in time deposits, which increased from $129.650 million in 1996 to $147.841 million in 1997. This increase is primarily the result of two special rate offerings on certificates of deposit occurring in the first and third quarters of the year which generated approximately $10 million in new time deposit money to the Corporation. Average Deposits The following table shows the classification of average deposits for the periods indicated:
(In Thousands of Dollars) Average Balances on December 31, 1997 1996 1995 Noninterest-Bearing Demand Deposits $21,868 $22,979 $20,631 Interest-Bearing Demand Deposits 54,560 51,890 48,267 Savings Deposits 74,117 76,182 74,752 Time Deposits 141,659 122,973 108,626 Total Average Deposits $292,204 $274,024 $252,276
The following shows the average rate paid on the following deposit categories for the periods indicated:
Years ended December 31, 1997 1996 1995 Interest-Bearing Demand Deposits 2.09% 2.10% 2.09% Savings 2.52% 2.53% 2.66% Time Deposits 5.71% 5.77% 5.71%
A summary of time deposits of $100,000 or more as of December 31, 1997 by maturity range is shown below: (In Thousands of Dollars) 3 Months or Less Remaining Until Maturity $11,735 3 to 6 Months Remaining Until Maturity 8,159 6 to 12 Months Remaining Until Maturity 5,225 Over 12 Months Remaining Until Maturity 5,525 Total Outstanding $30,644 The steady increase in total deposits over the years reflects managements' efforts to continue to insure the growth of the bank and to maintain a viable banking institution. During 1997, the bank has attracted deposits due to its effort to remain competitive in the local community as to rates paid for all types of deposits particularly in the time deposit area. The bank has been at or near the top in interest rates paid to depositors throughout 1997. Capital Resources The capital management function is a continuous process which consists of providing capital for both the current financial position and the anticipated future growth of the Corporation. Important to this process is internal equity generation, particularly through earnings retention. Internal capital generation is measured as the percent of return on equity multiplied by the percent of earnings retained. The return on average equity was 12.67%, 11.60% and 11.45% for 1997, 1996 and 1995, respectively. Total cash dividends declared in 1997 represented 41.29% of net income as compared to 35.22% in 1996 and 35.46% in 1995. The resulting internal equity growth percentage amounted to 7.44% in 1997 as compared to 7.51% in 1996 and 7.39% in 1995. The bank subsidiary, as a national bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. The Comptroller of the Currency must approve declaration of any dividends in excess of the sum of profits for the current year and retained net profits for the preceding two years (as defined). In 1997, the bank subsidiary received approval from the Comptroller of the Currency to exceed its maximum amount of retained earnings available for distribution by $635 thousand. As of December 31, 1997 the bank subsidiary had $12.133 million not available for distribution to the company as dividends without prior approval of the Comptroller of the Currency. The bank subsidiary is also required to maintain minimum amounts of capital to total "risk weighted" assets, as defined by the banking regulators. At December 31, 1997, the bank subsidiary is required to have a minimum Tier 1 and Total Capital ratios of 4.00% and 8.00%, respectively. The bank subsidiary's actual Tier 1 and Total Capital ratios at that date were 14.29% and 15.55% respectively. The bank subsidiary's leverage ratio at December 31, 1997 was 9.89%. Audit The Company's acting internal auditor, who is responsible to the Audit Committee of the Board of Directors, reviews the results and performance of operating units within the Company for adequacy, effectiveness and reliability of accounting and reporting systems, as well as managerial and operating controls. The Audit Committee consists of four nonemployee directors whose duties include: consideration of the adequacy of the internal controls of the Company and the objectivity of financial reporting; inquiry into the number, extent, adequacy and validity of regular and special audits conducted by independent public accountants and the internal auditors; the recommendation to the Board of Directors of independent accountants to conduct the normal annual audit and special purpose audits as may be required; and reporting to the Board of Directors the Committee's findings and any recommendation for changes in scope, methods or procedures of the auditing functions. The Audit Committee held four meetings during 1997. Compliance Compliance is an important element of a financial institution's ongoing operation with various laws and regulations. Failure to comply with regulations can result in significant and often costly penalties or mandated actions from regulatory agencies. Therefore, policies and procedures are set forth to govern the way departments function and ensure fair, consistent and sound banking practices. When those policies and procedures are affected by new regulations, or regulations change, the Compliance Department is responsible to change those policies involved, and is responsible to inform and train personnel. The task of training is large, particularly considering the length and complexity of various regulations. The bank's management depends on the Compliance Department to communicate with the appropriate responsibilities to each area. The training segment of compliance has become extremely important in recent years. Monitoring, or testing, procedures are also focused upon in several areas to ensure that compliance of the regulations and laws are within compliance standards. Often, the extent of monitoring relates to the complexity or length of the regulation. Upon the completion of monitoring projects, areas where training are needed may be revealed. It is our bank's mission to keep our employees well informed. We urge them to ask questions and to use initiative in becoming informed, as compliance regulations have become very complex. This all translates in efficient and better service for our customers. Bank Information Systems The Corporation has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Corporation's programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Corporation presently believes that, with modifications to existing software and converting to new software, the Year 2000 problem will not pose significant operational problems for the Corporation's computer systems as so modified and converted. At this time, it is not expected that expenses to address Year 2000 issues will materially impact future operating results. Information as to Stock Prices and Dividends The common stock of the Corporation is traded mostly through a local brokerage firm and some private sales. Set forth in the accompanying table are per share prices at which common stock of the Corporation has actually been purchased and sold in transactions during the periods indicated, to the knowledge of the corporation. Also included in the table are dividends per share paid on the outstanding common stock and any stock dividends paid. As of December 31, 1997, there were 2,128 shareholders of record of common stock. Market and Dividend Summary Dividend Date High Low Dividend March 1996 $40.00 $39.50 $0.20 June 1996 42.25 40.00 0.22 September 1996 44.50 42.25 0.22 October 1996 2% Stock Dividend December 1996 46.25 44.50 0.24 December 1996 2-for-1 Stock Split March 1997 26.75 23.13 0.13 June 1997 27.25 25.00 0.14 September 1997 29.00 25.63 0.15 October 1997 2% Stock Dividend December 1997 33.00 27.38 0.16 Bar Graph Depicting Market Value and Book Value of Common Stock Market Book Value Value Year 1993 $10.50 $8.90 1994 $14.75 $9.29 1995 $19.70 $10.33 1996 $23.13 $10.51 1997 $30.75 $11.72 Hill, Barth & King, Inc. Certified Public Accountants Park Place South, Suite 200 155 South Park Avenue Warren, Ohio 44481 Telephone (330) 394-3773 FAX (330) 395-3713 January 23, 1998 Board of Directors Farmers National Banc Corp. Canfield, Ohio Independent Auditors' Report We have audited the accompanying consolidated balance sheets of Farmers National Banc Corp. and subsidiary as of December 31, 1997 and 1996 and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the period ended December 31, 1997. 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Farmers National Banc Corp. and subsidiary as of December 31, 1997 and 1996 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Hill, Barth & King, Inc. Certified Public Accountants CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars) December 31, 1997 1996 ASSETS Cash & due from banks $13,480 $13,302 Federal funds sold 5,702 5,667 TOTAL CASH AND CASH EQUIVALENTS 19,182 18,969 Securities available for sale - NOTE B 66,620 45,612 Other securities 1,686 1,468 Loans - NOTE C 275,094 266,702 Less allowance for credit losses - NOTE D 3,429 3,198 NET LOANS 271,665 263,504 Premises and equipment, net - NOTE E 6,025 5,697 Other assets 3,271 2,862 $368,449 $338,112 LIABILITIES AND STOCKHOLDERS EQUITY Deposits (all domestic): Noninterest-bearing $26,282 $23,468 Interest-bearing - NOTE F 279,548 260,342 TOTAL DEPOSITS 305,830 283,810 Borrowings: U. S. Treasury interest-bearing demand note 559 622 Securities sold under repurchase agreements - NOTE G 14,659 15,749 Federal Home Loan Bank advances 4,612 1,400 TOTAL BORROWINGS 19,830 17,771 Other liabilities and deferred credits 1,866 1,722 TOTAL LIABILITIES 327,526 303,303 Commitments and contingent liabilities - NOTE H Stockholders Equity - NOTES I, J: Common Stock - Authorized 5,000,000 shares; issued and outstanding 3,491,137 in 1997 and 3,311,268 in 1996 24,792 24,254 Retained earnings 15,717 14,766 Unrealized appreciation on debt securities, net of applicable income taxes 414 108 Treasury stock, at cost; 164,544 shares in 1996 0 (4,319) TOTAL STOCKHOLDERS EQUITY 40,923 34,809 $368,449 $338,112 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands except Per Share Data) Years ended December 31, 1997 1996 1995 INTEREST INCOME Interest and fees on loans $23,487 $21,519 $18,580 Interest and dividends on securities: Taxable interest 3,017 2,257 2,154 Nontaxable interest 463 444 439 Dividends 106 95 26 Interest on federal funds sold 503 562 761 TOTAL INTEREST INCOME 27,576 24,877 21,960 INTEREST EXPENSE Deposits 11,105 10,118 9,200 Short-term borrowings 1,024 638 488 TOTAL INTEREST EXPENSE 12,129 10,756 9,688 NET INTEREST INCOME 15,447 14,121 12,272 Provision for credit losses 855 655 270 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 14,592 13,466 12,002 OTHER INCOME Service charges on deposit accounts 1,176 1,090 972 Investment security gains 6 0 0 Other operating income 586 388 370 TOTAL OTHER INCOME 1,768 1,478 1,342 16,360 14,944 13,344 OTHER EXPENSES Salaries and employee benefits - NOTE K 5,059 4,779 4,127 Net occupancy expense of premises 561 525 540 Furniture and equipment expense, including depreciation 491 521 463 State and local taxes 532 515 440 Other operating expenses 2,775 2,543 2,548 TOTAL OTHER EXPENSES 9,418 8,883 8,118 INCOME BEFORE FEDERAL INCOME TAXES 6,942 6,061 5,226 FEDERAL INCOME TAXES - NOTE L 2,200 1,930 1,650 NET INCOME $4,742 $4,131 $3,576 NET INCOME PER SHARE $1.39 $1.20 $1.07 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands of Dollars) Years ended December 31, 1997 1996 1995 COMMON STOCK Balance at beginning of year $24,254 $4,111 $3,892 33,729 shares issued as a 2% stock dividend in 1996, and 31,956 in 1995, including fractional shares. 0 1,501 80 Excess of fair value of shares sold over treasury stock cost 15 0 0 Excess of fair value of shares issued as a stock dividend over treasury stock cost 51 0 0 15,335 shares sold in 1997, 59,618 shares sold in 1996 and 55,611 in 1995 472 2,583 139 Transfer of additional paid-in capital to common stock 0 16,059 0 Balance at end of year 24,792 24,254 4,111 ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 0 16,059 13,301 Excess proceeds over par value of shares sold in 1995 0 0 1,735 Excess of fair value over par value of shares issued as stock dividends in 1995, including fractional shares 0 0 1,023 Transfer of balance to common stock 0 (16,059) 0 Balance at end of year 0 0 16,059 RETAINED EARNINGS Balance at beginning of year 14,766 13,591 12,385 Net income 4,742 4,131 3,576 Dividends declared: $.58 cash dividends per share in 1997, $.88 in 1996 and $.80 in 1995. (1,958) (1,455) (1,268) Stock dividends (1,833) (1,501) (1,102) Balance at end of year 15,717 14,766 13,591 UNREALIZED APPRECIATION (DEPRECIATION) ON DEBT SECURITIES Balance at beginning of year 109 215 (663) Net change in unrealized appreciation (depreciation) on debt securities, net of income taxes. 305 (107) 878 Balance at end of year 414 108 215 TREASURY STOCK, AT COST Balance at beginning of year (4,319) 0 0 Purchase of treasury stock 0 (4,319) 0 67,907 shares reissued as a 2% stock dividend in 1997, including fractional shares 1,783 0 0 Sale of treasury stock 2,536 0 0 Balance at end of year 0 (4,319) 0 TOTAL STOCKHOLDERS EQUITY AT END OF YEAR $40,923 $34,809 $33,976 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars) Years ended December 31, 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Interest received $28,327 $25,979 $22,785 Fees and commissions received 1,723 1,418 1,342 Interest paid (12,012) (10,759) (9,400) Cash paid to suppliers and employees (8,777) (8,275) (7,779) Income taxes paid (2,219) (2,075) (1,685) NET CASH PROVIDED BY OPERATING ACTIVITIES 7,042 6,288 5,263 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities available for sale 14,479 14,329 18,140 Proceeds from maturities of investment securities held to maturity 0 0 2,343 Proceeds from sales of investment securities available for sale 3,106 0 2,000 Purchases of other securities and securities available for sale (38,547) (14,467) (18,114) Purchases of investment securities held to maturity 0 0 (2,639) Net increase in loans made to customers (10,464) (35,031) (16,080) Purchases of premises and equipment (745) (546) (1,583) Proceeds from sale of other real estate 0 0 252 NET CASH USED IN INVESTING ACTIVITIES (32,171) (35,715) (15,681) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts 3,115 (906) (3,149) Net increase in time deposits 17,848 21,381 27,746 Net increase in Federal Home Loan Bank Borrowings 3,212 1,400 0 Sale (purchase) of Treasury Stock 2,537 (4,319) 0 Dividends paid (1,858) (1,138) (1,167) Proceeds from sale of common stock 488 2,582 1,875 NET CASH PROVIDED BY FINANCING ACTIVITIES 25,342 19,000 25,305 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 213 (10,427) 14,887 CASH AND CASH EQUIVALENTS Beginning of year 18,969 29,396 14,509 End of year $19,182 $18,969 $29,396 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS Net income $4,742 $4,131 $3,576 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 398 394 379 Amortization and accretion 1,228 1,178 967 Provision for credit losses 855 655 270 Gain on sale of investment securities (6) 0 0 Deferred income taxes (77) (70) (13) Other (98) 0 84 NET CASH PROVIDED BY OPERATING ACTIVITIES $7,042 $6,288 $5,263 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS Supplemental schedule of noncash investing and financing activities: Unrealized loss on available for sale securities $42 $48 $68 Transfer of investment securities available for sale 0 0 4,664 Land exchanged for other borrowing 0 0 250 See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Farmers National Banc Corp. and Subsidiary December 31, 1997, 1996, and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principals of Consolidation: The consolidated financial statements include the accounts of the company and its wholly-owned subsidiary, The Farmers' National Bank of Canfield. All significant intercompany balances and transactions have been eliminated. Nature of Operations: The company's wholly owned subsidiary, The Farmers National Bank of Canfield, operates under a national bank charter and provides full banking services. As a national bank, the Bank is subject to regulation of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The area served by the Bank is the northeastern region of Ohio and service is provided at ten (10) locations. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Securities Available for Sale: Securities available for sale are carried at fair value. Fair value is based on market price if available. If market price is not available, fair value is based on broker quotations. Deferred income taxes are provided on any unrealized appreciation or decline in value. Such appreciation or decline in value, net of deferred taxes, is reflected as a separate component of stockholders equity. Gains and losses are determined using the specific identification method. The company does not utilize a trading account. Other Securities: Other securities include stock in the Federal Reserve Bank and the Federal Home Loan Bank and are recorded at amortized cost. Loans: Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest income is ordinarily discontinued when a loan becomes 90 days past due as to principal or interest; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. When interest accruals are discontinued, interest credited to income in the current year is reversed. When the loan is determined to be uncollectible, interest accrued in prior years and the principal are charged to the allowance for loan losses. This policy applies to the bank's installment, real estate and commercial and industrial loans. Loan Origination Fees and Costs: Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. Impaired Loans: Impaired loans are classified according to the Financial Accounting Standards Board Statement 114, "Accounting by creditors for impairment of loans". Under this standard, the 1997 reserve for loan losses related to loans that are considered impaired would be based on discounted cash flows using the loan's initial effective interest rate and the fair value of the collateral for certain collateral dependent loans. At the present time, management did not have any loans it considers to be impaired. Allowance for Credit Losses: the allowance for credit losses represents the amounts which, in management's judgment, are adequate to absorb charge-offs of existing loans which may become uncollectible. The allowance is based on management's judgment taking into consideration past loss experience, reviews of individual credits, current economic conditions and other factors considered relevant by management at the financial statement date. While management uses the best information available to establish the allowance, future adjustments to the allowance may be necessary, which may be material, if economic conditions differ substantially from the assumptions used in estimating the allowances. If additions to the original estimate of the allowance for credit losses are deemed necessary, they will be reported in earnings in the period in which they become reasonably estimable. Premises and Equipment: Premises and equipment are stated at cost. Depreciation is computed on the straight-line method. Income Taxes: Income taxes, based on filing a consolidated return with the company's subsidiary, are provided for amounts currently due and deferred amounts arising from temporary differences between the financial accounting and income tax basis of assets and liabilities. Deferred taxes are computed on the liability method as prescribed in Statement of Financial Accounting Standards (SFAS) no. 109, "Accounting for Income Taxes". Per Share Amounts: Earnings per share are based on weighted average shares outstanding. Average shares outstanding, per share amounts and reference to number of shares in notes to consolidated financial statements have been restated to give effect to stock dividends. Weighted average shares outstanding were 3,422,200 for 1997, 3,445,705 for 1996 and 3,348,340 for 1995. Reclassifications: The consolidated financial statements for 1996 have been reclassified to conform with the presentation for 1997. Such reclassifications had no effect on net results of operations. NOTE B - SECURITIES AVAILABLE FOR SALE Securities available for sale at December 31, 1997 and 1996 are summarized as follows:
(In Thousands of Dollars) 1997 1996 U.S. Treasury and U.S. Government agencies $53,449 $31,449 Corporate debt securities 4,026 6,662 Obligations of states and political subdivisions 9,145 7,501 TOTALS $66,620 $45,612
Net unrealized gains (losses) for securities available for sale at December 31, 1997 and 1996 are summarized below:
(In Thousands of Dollars) UNREALIZED UNREALIZED NET UNREALIZED December 31, 1997 GAINS LOSSES GAINS (LOSSES) U.S. Treasury and U.S. Government agencies $531 ($23) $508 Corporate debt securities 12 (15) (3) Obligations of states and political subdivisions 126 (4) 122 TOTALS $669 ($42) $627 December 31, 1996 U.S. Treasury and U.S. Government agencies $82 ($37) $45 Corporate debt securities 42 (10) 32 Obligations of states and political subdivisions 88 (1) 87 TOTALS $212 ($48) $164
The fair value and book value of securities available for sale by contractual maturities at December 31, 1997 are summarized below:
(In Thousands of Dollars) FAIR VALUE BOOK VALUE Due in 1 year or less $13,881 $13,861 Due after one year through five years 35,655 35,320 Due after five years through ten years 2,631 2,610 Due after ten years 14,453 14,203 TOTALS $66,620 $65,994
Securities with a carrying value of $35 million at December 31, 1997 and $30 million at December 31, 1996 were pledged to secure deposits in accordance with federal and state requirements and to secure repurchase agreements sold. NOTE C - LOANS Following is a summary of loans:
(In Thousands of Dollars) December 31, 1997 1996 Real Estate - Mortgage $148,740 $136,849 Installment Loans to Individuals 114,470 120,069 Commercial, Financial and Agricultural 10,784 8,522 Subtotal 273,994 265,440 Net origination and deferred loan fees 1,100 1,262 TOTAL LOANS $275,094 $266,702 Nonperforming loans have not been separately classified because such loans are not material compared to total loans and nonaccrued interest is not material in relation to net income.
NOTE D - ALLOWANCE FOR CREDIT LOSSES Following is an analysis of changes in the allowance for credit losses for the years ended December 31:
(In Thousands of Dollars) 1997 1996 1995 Balance at beginning of year $3,198 $2,911 $2,746 Additions: Provision for credit losses 855 655 270 Recoveries on loans previously charged off 200 184 171 TOTAL ADDITIONS 4,253 3,750 3,187 Credits charged off (824) (552) (276) Balance at end of year $3,429 $3,198 $2,911 The allowance for federal income tax purposes amounted to $753 thousand at December 31, 1997, which is $2.676 million less than the allowance for financial accounting purposes.
NOTE E - PREMISES AND EQUIPMENT Following is a summary of premises and equipment: (In Thousands of Dollars) December 31, 1997 1996 Land $1,631 $1,205 Premises 5,129 4,987 Equipment 3,625 3,481 Leasehold Improvements 180 180 10,565 9,853 Less accumulated depreciation (4,540) (4,156) NET BOOK VALUE $6,025 $5,697 Depreciation expense was $398 thousand for the year ended December 31, 1997, $394 thousand for 1996 and $379 thousand for 1995. NOTE F - INTEREST-BEARING DEPOSITS Following is a summary of scheduled maturities of certificates of deposit during the years following December 31, 1997: (In Thousands of Dollars) 1998 $105,573 1999 20,608 2000 10,310 2001 4,353 2002 and thereafter 10,217 TOTAL $151,061 Following is a summary of certificates of deposit of $100 thousand or more by remaining maturities as of December 31, 1997. (In Thousands of Dollars) Three months or less $11,735 Three to six months 8,159 Six to twelve months 5,225 Over twelve months 5,525 TOTAL $30,644 NOTE G - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND UNUSED LINES OF CREDIT The bank subsidiary enters into sales of securities under repurchase agreements (reverse repurchase agreements). Securities underlying the agreements are U.S. Government securities with a book value including accrued interest of $15.593 million for the year ended December 31, 1997 and $16.925 million for 1996. The market value was $15.709 million for 1997 and $16.923 million for 1996. At December 31, 1997, these agreements had a weighted average interest rate of 4.43% and will mature January through March 1998. The securities, although held in safekeeping outside the bank subsidiary, were under the bank subsidiary's control. Securities sold under repurchase agreements averaged monthly $14.887 million in 1997 and $11.692 million in 1996. Maximum amounts outstanding at any month end during 1997 and 1996 were $16.211 million and $15.749 million, respectively. The bank subsidiary has access to borrowing facilities at the Federal Home Loan Bank, which totaled $13.9 million at December 31, 1997. At December 31, 1997, the bank had two advances from the Federal Home Loan Bank in the amounts of $3.074 million at 5.78% and $1.538 million outstanding at 5.97%, both maturing in April 1999, and were collateralized by a blanket pledge of residential mortgage loans. NOTE H - COMMITMENTS AND CREDIT RISK The bank subsidiary utilizes equipment and conducts certain of its branch operations under noncancelable operating leases extending to 1999. The building leases include options for renewal in five to ten year increments. Rental expense charged to operations totaled $114 thousand for 1997, $125 thousand for 1996 and $121 thousand for 1995. Following is a summary of future minimum rental payments under operating leases that have initial or remaining noncancelable terms in excess of one year as of December 31, 1997: (In Thousands of Dollars) Year ending: December 31, 1998 $57 December 31, 1999 30 TOTAL $87 The bank subsidiary is required to maintain noninterest-bearing reserve balances with the Federal Reserve Bank. The average reserve balance was $6.184 million for 1997. The bank subsidiary is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the bank subsidiary has in particular classes of financial instruments. The bank subsidiary's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The bank subsidiary uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. (In Thousands of Dollars) CONTRACT OR NOTIONAL AMOUNT Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $14,479 Standby letters of credit and financial guarantees written $406 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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The bank subsidiary evaluates customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the bank subsidiary upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the bank subsidiary to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Most of the bank subsidiary's business activity is with a diversified customer base located within Mahoning and Columbiana Counties in Ohio. The concentrations of credit by type of loan are presented in Note C. NOTE I - STOCKHOLDERS EQUITY On March 28, 1996, the shareholders of the company approved a resolution which amended the company's Restated Articles of Incorporation to increase the number of authorized shares of common stock from 2.4 million shares, par value $2.50, to 5 million shares, without par value. The additional paid-in capital account has been combined with common stock as presented in the Consolidated Statements of Stockholders Equity. NOTE J - REGULATORY MATTERS The bank subsidiary, as a national bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. The Comptroller of the Currency must approve declaration of any dividends in excess of the sum of profits for the current year and retained net profits for the preceding two years (as defined). The bank subsidiary received approval from the Comptroller of the Currency to exceed its maximum amount of retained earnings available for distribution by $635 thousand. As of December 31, 1997, the bank subsidiary had $12.133 million not available for distribution to the company as dividends without prior approval of the Comptroller of the Currency. The bank subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the bank subsidiary's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the bank subsidiary must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The bank subsidiary's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the bank subsidiary to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the bank subsidiary meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Office of the Comptroller of the Currency categorized the bank subsidiary as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. The following table reflects various measures of capital at year-end:
(In Thousands of Dollars) Requirement For Capital Actual Adequacy Purposes: Amount Ratio Amount Ratio As of December 31, 1997 Total Capital (to Risk-Weighted Assets) $39,215 15.55% $20,181 8.00% Tier I Capital (to Risk-Weighted Assets) $36,058 14.29% $10,090 4.00% Tier I Capital (to Average Assets) $36,058 9.89% $14,589 4.00% As of December 31, 1996 Total Capital (to Risk-Weighted Assets) $37,199 15.34% $19,399 8.00% Tier I Capital (to Risk-Weighted Assets) $34,166 14.09% $9,700 4.00% Tier I Capital (to Average Assets) $34,166 10.18% $13,424 4.00%
NOTE K - RETIREMENT PLANS The company has a qualified 401(k) deferred compensation, noncontributory Retirement Savings Plan. All employees of the bank who have completed at least one year of service and meet certain other eligibility requirements are eligible to participate in the plan. Under the terms of the Plan, employees may voluntarily defer a portion of their annual compensation, not to exceed 15%, pursuant to section 401(k) of the Internal Revenue Code. The company matches a percentage of the participants' voluntary contributions up to 6% of gross wages. In addition, at the discretion of the Board of Directors, the company may make an additional profit sharing contribution to the plan. Total contributions to company retirement plans were $203 thousand, $179 thousand, and $156 thousand for the years ended December 31, 1997, 1996 and 1995 respectively. NOTE L - FEDERAL INCOME TAXES The provision for income taxes (credit) consists of the following:
(In Thousands of Dollars) Years ended December 31 1997 1996 1995 Current $2,277 $2,000 $1,663 Deferred (77) (70) (13) TOTALS $2,200 $1,930 $1,650
Following is a reconciliation between federal income taxes at statutory rates and actual taxes based on income before federal income taxes:
(In Thousands of Dollars) Years ended December 31 1997 1996 1995 Percent of Percent of Percent of Amount pretax income Amount pretax income Amount pretax income Statutory tax $2,429 35% $2,122 35% $1,829 35% Effect of nontaxable interest (162) (2) (156) (3) (152) (3) Other (67) (1) (36) 0 (27) 0 ACTUAL TAX $2,200 32% $1,930 32% $1,650 32%
Deferred taxes (credit) result from certain temporary differences in the recognition of income and expenses for financial reporting and income tax purposes. The sources and tax effects of significant temporary differences are as follows:
(In Thousands of Dollars) Years ended December 31 1997 1996 1995 Depreciation $41 $42 $17 Provision for credit losses (78) (98) (58) Deferred loan fees and origination costs 2 (13) 29 Federal Home Loan Bank dividends 26 0 0 Deferred compensation (67) 0 0 Other (1) (1) (1) TOTALS ($77) ($70) ($13)
Deferred tax liabilities (assets) are comprised of the following at December 31:
(In Thousands of Dollars) Deferred tax assets: 1997 1996 Allowance for credit losses ($896) ($818) Deferred compensation (130) (62) Deferred loan fee income (59) (134) Gross deferred tax assets (1,085) (1,014) Deferred tax liabilities: Depreciation 481 442 Prepaid loan origination costs 0 50 Mark-to-market adjustment - securities available for sale 213 56 Federal Home Loan Bank dividends 45 20 Other 0 42 Gross deferred tax liabilities 739 610 ($346) ($404) No valuation allowance for deferred tax assets was recorded at December 31, 1997. Federal income taxes applicable to investment securities gains in 1997 were $2 thousand.
NOTE M - LOANS TO RELATED PARTIES Certain directors, executive officers and associates of such persons were loan customers during 1997. Such loans were made in the ordinary course of business under normal credit terms and do not represent more that a normal risk of collection. Following is an analysis of the amount of loans in which the aggregate of the loans to any such person exceeded $60 thousand during 1997: (In Thousands of Dollars) Total loans at December 31, 1996 $1,063 New loans 411 Repayments 621 Total loans at December 31, 1997 $853 NOTE N - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 1997: Cash and cash equivalents: The carrying amounts in the consolidated balance sheets of cash and cash equivalents approximates their fair value. Investment securities: The fair value of securities available for sale equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: For certain homogeneous categories of loans, such as credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the 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. Deposits: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Securities sold under repurchase agreements: The carrying amount for securities sold under repurchase agreement approximates their fair value. Short-term borrowings: The carrying amounts of short-term borrowings approximates their fair value. Commitments to extend credit, standby letters of credit and financial guarantees written: The fair value of commitments is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The estimated fair values of the company's financial instruments as of December 31, 1997 and 1996 are as follows:
(In Thousands of Dollars) 1997 1996 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Financial assets: Cash and cash equivalents $19,182 $19,182 $18,969 $18,969 Investment securities: Available for sale 66,620 66,720 45,612 45,859 Other securities 1,686 1,686 1,468 1,468 Loans - Net 271,665 272,442 263,504 263,590 TOTAL FINANCIAL ASSETS $359,153 $360,030 $329,553 $329,886 Financial liabilities: Deposits $305,830 $306,611 $283,811 $284,578 Securities sold under repurchase agreements 14,659 14,659 15,749 15,749 Short term borrowings 5,171 5,171 2,022 2,022 TOTAL FINANCIAL LIABILITIES $325,660 $326,441 $301,582 $302,349 Unrecognized financial instruments: Commitments to extend credit $14,479 $14,479 $9,791 $9,791 Standby letters of credit and financial guarantees 406 406 237 237
NOTE O - CONDENSED FINANCIAL INFORMATION Below is condensed financial information of Farmers National Banc Corp. (parent company only). In this information, the parent's investment in bank subsidiary is stated at cost plus equity in undistributed earnings of the subsidiary since acquisition. This information should be read in conjunction with the consolidated financial statements and related notes.
(In Thousands of Dollars) December 31, 1997 December 31, 1996 BALANCE SHEETS Assets: Cash $5,186 $1,197 Receivables 8 8 Investment in bank subsidiary 36,373 34,506 Other securities 54 0 $41,621 $35,711 Liabilities: Accounts payable $1,112 $1,010 Stockholders equity: Common stock 24,792 24,254 Retained earnings 15,717 14,766 Treasury Stock 0 (4,319) TOTAL STOCKHOLDERS EQUITY 40,509 34,701 $41,621 $35,711
STATEMENTS OF INCOME (In Thousands of Dollars) Years ended December 31, 1997 December 31, 1996 December 31, 1995 Income: Equity in net income of subsidiary $4,819 $4,194 $3,622 Other expenses (77) (63) (46) NET INCOME $4,742 $4,131 $3,576
STATEMENTS OF CASH FLOWS (In Thousands of Dollars) Years ended December 31, 1997 December 31, 1996 December 31, 1995 Cash flows from operating activities: Net income $4,742 $4,131 $3,576 Adjustments to reconcile net income to net cash provided by operating activities: Increase (Decrease) in deferred director fees 2 (1) (1) Income from subsidiary (4,819) (4,194) (3,622) Dividends received from subsidiary 5,977 6,027 1,267 NET CASH PROVIDED BY OPERATING ACTIVITIES 5,902 5,963 1,220 Cash flows from investing activities: Investment in subsidiary (3,025) (2,582) (1,875) Purchase of other investments (54) 0 0 NET CASH USED IN INVESTING ACTIVITIES (3,079) (2,582) (1,875) Cash flows from financing activities: Purchase of treasury stock 0 (4,319) 0 Proceeds from sale of treasury stock 2,536 0 0 Dividends paid (1,858) (1,138) (1,168) Proceeds from sale of common stock 488 2,582 1,875 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,166 (2,875) 707 NET INCREASE IN CASH 3,989 506 52 CASH Beginning of year 1,197 692 640 End of year $5,186 $1,197 $692 Cash dividends of $5.976 million, $6.027 million and $1.267 million were recevied from the bank subsidiary in 1997, 1996 and 1995, respectively.
INSIDE BACK COVER Drawing of Map of Ohio Highlighting Branch Locations MAIN OFFICE 20 S. Broad St., Canfield, OH 44406 533-3341 AUSTINTOWN 22 N. Niles-Canfield Rd., Youngstown, OH 44515 792-1411 COLONIAL PLAZA 401 E. Main St. Canfield, OH 44406 533-2686 CORNERSBURG 3619 S. Meridian Rd. Youngstown, OH 44511 793-3971 LAKE MILTON 17817 Mahoning Ave. Lake Milton, OH 44429 654-3351 SALEM 1858 E. State St. Salem, OH 44460 332-1558 BOARDMAN 102 W. Western Reserve Rd. Youngstown, OH 44514 726-8896 COLUMBIANA 340 State Rt. 14 Columbiana, OH 44408 482-1974 LEETONIA 16 Walnut St. Leetonia, OH 44431 427-2436 DAMASCUS 29053 State Rt. 62 Damascus, OH 44619 537-4004 EX-27 3
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000709337 FARMERS NATIONAL BANC CORP 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 13,480 0 5,702 0 66,620 1,686 1,686 275,094 3,429 368,449 305,830 15,218 1,866 4,612 0 0 24,792 16,131 368,449 23,487 4,089 0 27,576 11,105 12,129 15,447 855 6 9,418 6,942 6,942 0 0 4,742 1.39 1.39 8.25 493 402 0 0 3,198 824 200 3,429 3,429 0 0
EX-99 4 DEFINITIVE PROXY STATEMENT SCHEDULE 14A-INFORMATION REQUIRED IN PROXY STATEMENT (Last amended in Exch Act Rel No. 35113, Eff. 1/3/95) SCHEDULE 14 INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No.) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12 Farmers National Banc Corp. (Name of Registrant of Specified in its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11: Title of each class of securities to which transaction applies: ................................................................. .................................................... Aggregate number of securities to which transaction applies: ................................................................. ................................................... Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ................................................................. ................................................... Proposed maximum aggregate value of transaction: ................................................................. ................................................... Total fee paid: ................................................................. ............................ [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number or the Form or Schedule and the date of its filing. 1. Amount Previously Paid: ...................................................... 2. Form, Schedule or Registration Statement No.: ...................................................... 3. Filing Party: ...................................................... 4. Date Filed: ...................................................... (Amended by Exch Act Rel No.35113, eff 1/30/95) FARMERS NATIONAL BANC CORP. 20 SOUTH BROAD STREET CANFIELD, OHIO 44406 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON THURSDAY, MARCH 26, 1998 TO THE HOLDERS OF SHARES OF COMMON STOCK: NOTICE IS HEREBY GIVEN that pursuant to call of its Directors, the Annual Meeting of the Shareholders of FARMERS NATIONAL BANC CORP., Canfield, Ohio will be held at Colonial Catering located at 429 Lisbon Street, Canfield, Ohio 44406 on Thursday, March 26, 1998 at three-thirty o'clock (3:30) P.M., Eastern Standard Time, for the purpose of considering and voting upon the following matters: 1. ELECTION OF DIRECTORS. The election of the eight (8) persons listed in the accompanying Proxy Statement. 2. TO TRANSACT SUCH OTHER BUSINESS as may properly come before the Meeting or any adjournment thereof. Shareholders of record at the close of business on February 6, 1998 are the only shareholders entitled to notice of and to vote at the Annual Shareholders Meeting. By Order of the Board of Directors Frank L. Paden, President & Secretary Canfield, Ohio March 5, 1998 IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE. FARMERS NATIONAL BANC CORP. CANFIELD, OHIO 44406 PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS MARCH 26, 1998 Farmers National Banc Corp., herein referred to as "Farmers" or the "Corporation" is furnishing this Proxy Statement to its shareholders in connection with the solicitation, by order of the Board of Directors of Farmers, of proxies to be used at the Annual Meeting of Shareholders to be held on Thursday, March 26, 1998 at 3:30 P.M., Eastern Standard Time, at Colonial Catering, 429 Lisbon Street, Canfield, Ohio 44406, and at any adjournments thereof. The Corporation is a one-bank holding company of which The Farmers National Bank of Canfield is the wholly owned subsidiary. The cost for solicitation of proxies will be borne by Farmers. Brokerage firms and other custodians, nominees and fiduciaries may be requested to forward soliciting material to their principals and to obtain authorization for the execution of proxies. Farmers will, upon request, reimburse brokerage firms, and other custodians, nominees and fiduciaries for the execution of proxies and for their expenses in forwarding proxy material to their principals. The proxy statements and the form of proxy are being mailed on March 5, 1998 or as soon thereafter as practicable to all shareholders entitled to vote at the meeting. In addition to use of mails, proxies may be solicited by officers, directors, and employees of Farmers by personal interview, telephone and telegraph. The 1997 Annual Report, including the required audited financial statements of the Corporation and related financial information, is enclosed with this proxy soliciting material. VOTING RIGHTS Only shareholders of record at the close of business on February 6, 1998 will be entitled to vote at the meeting. As of February 6, 1998, Farmers had issued and outstanding 3,491,137 shares of common stock with no par value held by approximately 2,128 holders of record eligible to vote. Each outstanding share entitles the recordholder to one vote. The number of shares present at the meeting in person or by proxy will constitute a quorum for the transaction of business. A plurality of the votes duly cast is required for the election of Directors (i.e., the nominees receiving the greatest number of votes will be elected). It is important that your stock be represented at the meeting, regardless of the number of shares you may own. We would appreciate your signing and returning the enclosed proxy. The shares represented by each proxy, which is properly executed and returned to Farmers, will be voted in the manner described in this proxy statement and the proxy. In the absence of instructions, the proxy will be voted "For" the election of the eight (8) persons listed in this Proxy Statement. The proxy may be revoked at any time prior to its exercise, by delivering notice of revocation or a duly executed proxy bearing a later date to the Treasurer of the Corporation at any time before the proxy is voted. Shareholders who attend the meeting in person may vote their stock even though they may have sent in a proxy. No officer or employee of Farmers may be named as a proxy. If you received two or more proxy forms because of difference in addresses or registration of shareholdings, each should be executed and returned in order to assure a complete tabulation of shares. The corporation will appoint two officers to act as inspectors for purpose of tabulating the votes cast by proxy. Broker non-votes and abstentions are not treated as votes cast for purposes of any of the matters to be voted on at the meeting. The Board of Directors knows of no other business that will be presented for consideration at the 1998 Annual Meeting other than the matters described in this Proxy Statement. If any other matters should come before the meeting, the proxy holders will vote upon them in accordance with their best judgment. ELECTION OF DIRECTORS Pursuant to the Code of Regulations, the authorized number of directors of Farmers has been set at eight (8). The Board of Directors has nominated the eight (8) persons named below to serve as directors until the next Annual Meeting or until their earlier death, resignation or removal from office. Each of the eight (8) nominees is presently a member of the Board of Directors and has consented to serve another term as Director if re-elected. If any of the nominees should be unavailable to serve for any reason (which is not anticipated), the Board of Directors may designate a substitute nominee or nominees (in which case the persons named on the enclosed proxy card will vote all valid proxy cards for the election of such substitute nominee or nominees), allow the vacancy or vacancies to remain open until a suitable candidate or candidates are located, or by resolution provide for a lesser number of directors. It is presently anticipated that each person elected as a Director of the Corporation at the annual meeting will be elected by the Corporation as a Director of the Corporation's wholly-owned subsidiary, Farmers National Bank of Canfield. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ELECTION OF THE EIGHT NOMINEES LISTED BELOW. INFORMATION WITH RESPECT TO NOMINEES Certain information in the following tabulation has been furnished to Farmers by the respective nominees for director. Principal Occupation and Director Name Five Year Business Experience Age Since (A) Benjamin R. Brown President and Owner of Castruction 52 1991 Company, Incorporated in 1965. The Company designs and manufactures pre-cast shapes and associated products for the steel industry. Richard L. Calvin Vice Chairman since 1996, formerly, 71 1975 Executive Vice President/Cashier of Farmers National Bank since 1972 and Executive Vice President/ Treasurer of Farmers National Banc Corp. since 1983. Joseph O. Lane President and Owner of Lane Funeral 73 1965 Homes, Inc. since 1950, Lane Life Paramedics, Inc. and Lane Monument Co. Mr. Lane operates three funeral homes, an EMT and ambulance service. David C. Myers President and Owner of Myers 69 1988 Equipment Corp. since 1955. The Company sells truck equipment and school buses. Mr. Myers has operated a 2,000 - acre farm since 1946. Edward A. Ort President of Ort Furniture Mfg. Co. 68 1993 since 1973. The Company manufactures upholstered furniture which is shipped to retail furniture stores in northeastern United States since 1957. Frank L. Paden President & CEO of Farmers National 46 1992 Bank since 1996 and EVP/Sr. Loan Officer since 1991. President & Secretary of Farmers National Banc Corp. since 1996. William D. Stewart Chairman since 1996, formerly, 68 1972 President of Farmers National Bank since 1972 and President & Secretary of Farmers National Banc Corp. since 1983. Ronald V. Wertz President and Owner of Boyer 51 1989 Insurance Inc. since 1981. The Company provides risk management analysis and policies for individuals, families and business insurance plans, including property, liability, health, life and bonding. (A) Includes the period served as a director of The Farmers National Bank of Canfield prior to its reorganization into a wholly owned subsidiary of this Corporation in 1983. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors and executive officers, and persons who own more than 10% of a registered class of the Corporation's equity securities, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Corporation. Officers, Directors and greater than 10% stockholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. To the Corporation's knowledge, based solely on a review of the copies of such reports furnished to the Corporation and written representations that no other reports were required, during 1997, all Section 16(a) filing requirements applicable to its officers, Directors and greater that 10% beneficial owners were complied with. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth information regarding beneficial ownership as of December 31, 1997, of the Corporation's common shares of each Director and all Executive Officers as a group. Name Aggregate Number of Percent of Shares Beneficially Outstanding Owned (A) Shares Benjamin R. Brown 28,848 .83% Richard L. Calvin 39,060 1.12% Joseph O. Lane 83,973 2.41% David C. Myers 26,307 .75% Edward A. Ort 7,140 .20% Frank L. Paden 8,470 .24% William D. Stewart 30,942 .89% Ronald V. Wertz 26,325 .75% Executive Officers as a Group 11,646 (B) .33% All Directors and Executive Officers as a Group 254,241 7.28% (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 8,470 shares held by Frank L. Paden, President and CEO of Farmers National Bank of Canfield and President and Secretary of the Corporation. COMMITTEES OF THE BOARD OF DIRECTORS At the Directors' organizational meeting, held immediately following the last annual shareholders' meeting of The Farmers National Banc Corp. held on March 27, 1997, the following committees were appointed by the Chairman: EXECUTIVE COMPENSATION AND EMPLOYEES SALARY COMMITTEE: Joseph O. Lane, Chairman; Benjamin R. Brown, David C. Myers, Edward A. Ort, and Ronald V. Wertz. The Executive Compensation and Employees Salary Committee reviews the compensation of the official staff and makes recommendations regarding all employee benefits to the Board of Directors. This committee met one time in 1997. AUDIT & EXAMINING COMMITTEE: David C. Myers, Chairman; Benjamin R. Brown, Edward A. Ort, and Ronald V. Wertz. The Audit and Examining Committee directs the activities of the internal audit staff, reviews the internal auditor's reports, reviews all examinations of the Comptroller of the Currency and makes recommendations to the Board regarding the engagement of an external auditing firm to perform the annual audit and prepare income tax returns. This committee met four times in 1997. DISCOUNT LOAN COMMITTEE: Frank L. Paden, Chairman; Benjamin R. Brown, Richard L. Calvin, Joseph O. Lane, David C. Myers, Edward A. Ort, William D. Stewart, and Ronald V. Wertz. The Discount Loan Committee meets weekly to review all loans made during the previous week and to approve all loan commitments which are either above the assigned lending limits of the loan officers or are not in keeping with existing bank policy. BUILDING COMMITTEE: Richard L. Calvin, Chairman; Ad Hoc. The Building Committee oversees site selection, office additions and modifications. This committee did not specifically meet in 1997, however, the chairman did report to the directors at other meetings. LONG RANGE AND STRATEGIC PLANNING COMMITTEE: Frank L. Paden, Chairman; Benjamin R. Brown, Richard L. Calvin, Joseph O. Lane, David C. Myers, Edward A. Ort, William D. Stewart, and Ronald V. Wertz. The Long Range and Strategic Planning Committee is responsible for formulation and implementation of the Strategic Plan for the operation of the Corporation. This committee met once in 1997. NOMINATING COMMITTEE: Frank L. Paden, Chairman; Benjamin R. Brown, Richard L. Calvin, Joseph O. Lane, David C. Myers, Edward A. Ort, William D. Stewart, and Ronald V. Wertz. The Nominating Committee makes decisions with respect to: (a) nominees for election as director at the annual meeting of shareholders; (b) nominees to fill Board vacancies between annual meetings; and (c) the composition of membership of the various other standing committees. This committee met once in 1997. RISK MANAGEMENT AND INSURANCE COMMITTEE: Ronald V. Wertz, Chairman; Benjamin R. Brown, Richard L. Calvin, and Carl D. Culp, EVP/Cashier/CFO. The Risk Management and Insurance Committee is responsible for reviewing coverage and protection levels of insurance maintained by the Bank. The committee met once in 1997. During 1997, each Director standing for re-election, was present for more that 75% of the combined number of meetings of the Board of Directors and of each committee of the Board on which such director served. There were twelve regular and six special meetings of the Board of Directors in 1997. Members of the Board of Directors receive $400.00 for each board meeting they attend, and $300.00 for each committee meeting they attend with the exception of inside Directors who receive no compensation for committee meetings. NOTE: THE ABOVE COMMITTEES ARE COMMITTEES OF THE FARMERS NATIONAL BANK OF CANFIELD (THE BANK), A WHOLLY OWNED SUBSIDIARY OF FARMERS NATIONAL BANC CORP. CURRENTLY, THE MEMBERS OF FARMERS' BOARD OF DIRECTORS ALSO SERVE AS THE DIRECTORS OF THE BANK, AND ATTEND BOARD MEETINGS FOR BOTH FARMERS AND THE BANK. ALTHOUGH THESE MEETINGS ARE CONDUCTED SEPARATELY ON THE SAME DAY, A MEMBER RECEIVES COMPENSATION (WHICH IS PAID BY FARMERS) FOR ONLY ONE MEETING, CONSEQUENTLY, MEMBERS ATTENDING A MEETING OF THE BOARDS OF BOTH FARMERS AND THE BANK ON A SINGLE DAY ARE CREDITED WITH ONE BOARD MEETING FOR ATTENDANCE AND COMPENSATION PURPOSES. SUMMARY COMPENSATION TABLE
Name and Principal Position Year Annual Salary Bonus 401(k) All Other and Director Corporation Compensation Fees (a) Contribution (c) (b) Frank L. Paden, President & CEO 1997 103,665 0 7,486 1,098 1996 86,318 0 4,749 1,038 1995 75,883 2,000 0 659 (a) The amount of Director Fees included in this annual amount is as follows: Paden ($7,900, $8,250 and $6,700). (b) In May, 1996, the Corporation adopted a 401(k) Profit Sharing Retirement Savings Plan. All employees of Farmers National Bank who have completed at least one year of service and meet certain other eligibility requirements are eligible to participate in the Plan. Under the terms of the Plan, employees may voluntarily defer a portion of their annual compensation, not to exceed 15%, pursuant to Section 401(k) of the Internal Revenue Code. The Corporation matches a percentage of the participants' voluntary contributions up to 6% of gross wages. In addition, at the discretion of the Board of Directors, the Corporation may make an additional profit sharing contribution to the Plan. The Corporation's contributions are subject to a vesting schedule and the Plan meets the requirements of Section 401(a) of the Internal Revenue Code and Department of Labor Regulations under ERISA. (c) Amounts represent cost of group term life insurance and other benefits.
Listed is the total compensation paid by the Corporation's subsidiary, The Farmers National Bank of Canfield during the latest fiscal year to the named person(s) for services in all capacities, specifically setting forth the direct compensation to the President & CEO. No other executive officer of Farmers receives the total annual salary and bonus in excess of $100,000. In 1991, as a result of certain changes in the Internal Revenue Code, the Bank's pension plan was amended to reduce significantly the benefits of several key employees, including those of Mr. Paden. As a result, the Bank has entered into Deferred Compensation Agreements with certain of its executive officers, including Mr. Paden. Under the terms of the Deferred Compensation Agreement, they he will receive monthly payments of $930.00 for a period of two hundred and four (204) months, commencing with retirement age of 65. This agreement also provides that these executive officers will be available to perform consulting services for the Bank during the period he is receiving these payments, and prohibits him from entering into competition with the Corporation during that same period. In the event that any payments should still remain due and payable to the executive officer under the Agreement at the time of his death, those payments would be made to his surviving spouse. In the event that any payment should still remain due and payable to either the executive officer or his spouse under the Agreement at the death of the survivor of them, those payments would be reduced to their then present value at a predetermined rate of interest and paid to the estate of the survivor in a lump sum. Payments will be prorated in the event the employee retires before the age of 65, and will be increased proportionately if he retires after the age of 65. The Agreement is funded by a life insurance policy owned by the bank, on which the Bank is the beneficiary and the premiums of which are paid by the Bank. NOTE: Tables containing disclosures of Stock Appreciation Rights and Plans and Long Term Incentive Plans have been omitted because no such programs exist for either Farmers National Banc Corp. or The Farmers National Bank of Canfield. No Employment Contracts or Golden Parachute Agreements exist between any executive officer and either Farmers National Banc Corp. or The Farmers National Bank of Canfield. INDEBTEDNESS OF MANAGEMENT Farmers has had, and expects to have in the future, banking transactions in the ordinary course of business with Directors, executive officers and their associates on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. Since the beginning of 1997, the largest aggregate extensions of credit to officers, directors and their associates during the year ended December 31, 1997 was $1,175,249 or 2.87% of Equity Capital Accounts. In the opinion of the management of Farmers, these transactions do not involve more than a normal risk of collectability or present other unfavorable features. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors is made up of all of the outside Directors of Farmers. No officers of the corporation sit on this committee. This committee reports back to the full board but its decisions are not subject to full board approval. The committee has the purpose and responsibility of providing the Bank, its staff and the communities it serves with consistent long-term leadership of the highest quality possible while protecting the interests of the shareholders. The committee sets the limits for increases in the aggregate for all staff, reviews performance of executive officers and sets their salaries for the coming year. In addition, any incentive/bonus program is set by the board based on the recommendation of the compensation committee. The committee takes a straightforward approach to the review of executives and bases its consideration of salaries on specific job performance, contribution to target levels of growth, profitability, stability, capital and return on equity (ROE) and return on assets (ROA). Also considered is the executive's contribution to the general success of the Bank and its business plan and community standing, which cannot necessarily be quantified in an appropriated manner but is weighted heavily in a community bank, which is located exclusively in small communities. Successful bank operations are contingent upon accomplishment in all areas and integration with the business community's direction and success in our market areas. Executive performance must therefore be evaluated by using these factors as well. Specific results of each executive's area of responsibility are evaluated and considered, but would not be appropriately discussed here as a matter of confidentiality. The committee evaluates the President on the same basis as other executive offices with weight being given to the achievement of target levels of growth, capital and return on equity and, in addition, specific target goals of the overall strategic plan of the Bank. The accomplishment of meeting the goals and targets are reflected in the Summary Compensation Table. The members of the Compensation Committee are Joseph O. Lane, Chairman; Benjamin R. Brown, David C. Myers, Edward A. Ort, and Ronald V. Wertz. None has registered a disagreement with the above report. Compensation Committee Interlocks and Insider Participation No member of the Compensation Committee is currently or was at any time during 1997, an officer or an employee of, or had an employment agreement with the Corporation or the Bank. No corporate or committee interlocks exist which require disclosure under SEC regulations. PERFORMANCE GRAPH The Securities and Exchange Commission requires a line graph presentation comparing cumulative, five-year shareholder returns on an indexed basis with a broad equity market index and either a nationally recognized industry standard or an index of peer companies selected by the Corporation. The Corporation has selected the NASDAQ Stock Market US Index and the NASDAQ Banks Index for purposes of this performance comparison which appears below. The Performance Graph presents a comparison which assumes $100 invested on December 31, 1992, in the Corporation's common stock, The NASDAQ Stock Market US Index and the NASDAQ Banks Index. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN * AMONG FARMERS NATIONAL BANC CORP., THE NASDAQ STOCK MARKET - US INDEX AND THE NASDAQ BANKS INDEX [PERFORMANCE GRAPH PAPER COPY MAILED TO SEC] TOTAL RETURN GRAPH DATA 12/92 12/93 12/94 12/95 12/96 12/97 Farmers National Banc Corp. 100 139 182 267 350 487 NASDAQ Stock Mkt-US 100 115 112 159 195 240 NASDAQ Bank 100 114 114 169 223 377 RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors has elected Hill, Barth and King to serve as the Corporation's independent public accountant for the fiscal year ending December 31, 1998. Hill, Barth and King also served as the Corporation's independent public accountant for the fiscal year ended December 31, 1997. Hill, Barth and King is expected to have a representative present at the annual meeting and will be available to respond to shareholders' questions and if they desire, will have an opportunity to make any statement they consider appropriate. SHAREHOLDER PROPOSALS Any Shareholder proposal intended to be placed in the Proxy Statement for the 1998 annual meeting to be held in March 1999 must be received by the Corporation no later than December 1, 1998. Written proposals should be sent to Carl D. Culp, Executive Vice President and Treasurer, Farmers National Banc Corp., 20 South Broad Street, P.O. Box 555, Canfield, Ohio 44406. Each proposal submitted should be accompanied by the name and address of the shareholder submitting the proposal and the number of shares owned. If the proponent is not a shareholder of record, proof of beneficial ownership should also be submitted. All proposals must be a proper subject for action and comply with the proxy rules of the Securities and Exchange Commission. Reference is made to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, for information concerning the content and form of such proposal and the manner in which such proposal must be made. ANNUAL REPORT ON FORM 10-K A copy of the Corporation's 1997 report filed with the Securities and Exchange Commission, on Form 10-K, will be available without charge to shareholders upon written request to Carl D. Culp, Executive Vice President and Treasurer, Farmers National Banc Corp., 20 South Broad Street, P.O. Box 555, Canfield, Ohio 44406. BY ORDER OF THE BOARD OF DIRECTORS FRANK L. PADEN, PRESIDENT & SECRETARY FARMERS NATIONAL BANC CORP. 20 South Broad St., P.O. Box 555, Canfield, Ohio 44406 PROXY FOR ANNUAL MEETING SOLICITED BY THE BOARD OF DIRECTORS KNOW ALL MEN BY THESE PRESENT, that I, the Undersigned Shareholder of Farmers National Banc Corp. of Canfield, Ohio, do hereby nominate and appoint William D. Calhoun, Ronald V. Wertz and David W. Yeany (no officer or employee of the Corporation may be named as proxy) or any one of them (with full power to act alone), my true and lawful attorney(s) with full power of substitution, for me and in my name, place and stead to vote all the Common Stock of said Corporation standing in my name on its books on February 6, 1998, at the annual meeting of its Shareholders to be held at Colonial Catering, 429 Lisbon Street, Canfield, Ohio 44406, on Thursday, March 26, 1998, at 3:30 P.M., Eastern Standard Time, or any adjournment thereof with all the powers the undersigned would possess if personally present as follows: 1. ELECTION OF DIRECTORS: The election of the eight (8) persons listed in the Proxy Statement dated March 5, 1998 accompanying the notice of said meeting. FOR (all nominees except as indicated below) ______ WITHHOLD AUTHORITY (as to all nominees) _____ To withhold your vote from certain nominees, strike a line through their name. Benjamin R. Brown, Richard L. Calvin, Joseph O. Lane, David C. Myers, Edward A. Ort, Frank L. Paden, William D. Stewart, Ronald V. Wertz 2. SUCH OTHER BUSINESS as may properly come before the meeting or any adjournment thereof. THIS PROXY CONFERS AUTHORITY TO VOTE "FOR" EACH PROPOSITION LISTED UNLESS OTHERWISE INDICATED. If any other business is presented at said meeting, this Proxy shall be voted in accordance with the recommendations of The Board of Directors. The Board of Directors recommends a vote "For" each of the listed propositions. This proxy is solicited on behalf of The Board of Directors and may be revoked prior to its exercise. WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE (whether or not you plan to attend the meeting in person). IF YOU DO ATTEND THE MEETING, YOU MAY THEN WITHDRAW YOUR PROXY. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE. DATED _________________________________________ NUMBER OF SHARES HELD__________________________ _______________________________________________ _______________________________________________ Signature of Shareholder(s) * *When signing as attorney, executor, administrator, trustee or guardian, please give full title. If more than one trustee, all should sign. All joint others must sign. -----END PRIVACY-ENHANCED MESSAGE-----