-----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, LWwoHfXvnkcjcXk24ljytf3dOKxRwNM+saL5eFLYQw3PKR+6C3/zLF38FUw5d8lB q6c8fa1ajxSqjbV1EnMxmw== 0000709337-99-000004.txt : 19990317 0000709337-99-000004.hdr.sgml : 19990317 ACCESSION NUMBER: 0000709337-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990316 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: 99566463 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, 1998 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 (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 25, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant (including 243,681 shares held by officers and directors of the registrant) was approximately $154,520,418. As of February 25, 1999, the registrant had outstanding 3,657,288 shares of common stock having no par value. DOCUMENTS INCORPORATED BY REFERENCE Parts of Form 10-K into which Document Document is Incorporated 1998 Annual Report to Shareholders II Definitive proxy statement for the 1998 Annual Meeting of Shareholders to be held on March 25, 1999 III Farmers National Banc Corp 1999 Stock Option Plan III Form 10-K Cross Reference Index to Annual Report to Shareholders Part I Item 1 - Business Description of Business 9 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 30-31 Part II Item 5 Market For Registrant's Common Stock and Related Stockholder Matters 21 Item 6 Selected Financial Data 10-12 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, 1998 and 1997 23 Consolidated Statements of Income & Comprehensive Income - Calendar Years 1998, 1997 and 1996 24 Consolidated Statement of Stockholders' Equity - Calendar Years 1998, 1997 and 1996 25 Consolidated Statements of Cash Flows - Calendar Years 1998, 1997 and 1996. 26 Notes to Consolidated Financial Statements 27-36 FARMERS NATIONAL BANC CORP. FORM 10-K 1998 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 II Item 7a. Quantitative and Qualitative Disclosures About Market Risk II-1 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. 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, 1998 are presented in Note K on page 32 of the annual report to shareholders for the year ended December 31, 1998 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. 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%. 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 ten 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 Poland Office 106 McKinley Way West, Poland, Ohio The bank owns the Main Office, Austintown, Cornersburg, Lake Milton, Western Reserve, Salem, Columbiana, Leetonia, Damascus and Poland Offices. The Colonial Plaza is occupied under an operating lease expiring in 2004. 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 1998. Part II Item 7A Quantitative and Qualitative Disclosures About Market Risk 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. The Corporation monitors interest rate sensitive assets and liabilities to determine the overall interest rate position over various time frames. The Corporation considers the primary market exposure to be interest rate risk. Simulation analysis is used to monitor the Corporation's exposure to changes in interest rates, and the effect of the change to net interest income. The following table shows the effect on net interest income in the event of a sudden and sustained 100 or 200 basis point increase or decrease in market interest rates: Changes In Change In % Change Interest Rate Net Interest In Net (basis points) Income Interest Income -200 359 2.14% -100 179 1.07% 100 -327 -1.95% 200 -653 -3.89% The results of this analysis comply with internal limits established by the Corporation. A report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly basis. The Corporation has no market risk sensitive instruments held for trading purposes, nor does it hold derivative financial instruments, and does not plan to purchase these instruments in the future. 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 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. 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 will be used in connection with its annual meeting of shareholders which will be held March 25, 1999. The proxy statement is attached hereto. Executive Officers of the Registrant The names, ages and positions of the executive officers as of March 1, 1999: Name Age Position Held William D. Stewart 69 Chairman Richard L. Calvin 72 Vice Chairman Frank L. Paden 48 President and Secretary Carl D. Culp 35 Exec. Vice Pres. and Treasurer Donald F. Lukas 52 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. 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 25, 1999. 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 25, 1999. 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 25, 1999. 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 1998 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, 1998. INDEPENDENT AUDITORS' CONSENT FARMERS NATIONAL BANC CORP: We hereby consent to the incorporation by reference in this Registration Statement of our report dated January 19, 1999, relating to the consolidated financial statements of Farmers National Banc Corp. and subsidiary. HILL, BARTH & KING, INC. Warren, Ohio March 16, 1999 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 16, 1999 /s/ Benjamin R. Brown Director March 16, 1999 /s/Richard L. Calvin Vice Chairman March 16, 1999 /s/Joseph O. Lane Director March 16, 1999 /s/David C. Myers Director March 16, 1999 /s/Edward A. Ort Director March 16, 1999 /s/Frank L. Paden President March 16, 1999 and Director /s/Ronald V. Wertz Director March 16, 1999 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 FARMERS NATIONAL BANC CORP AND SUBSIDIARY HIGHLIGHTS OF 1998 Selected Financial Data (In Thousands except Per Share Data)
Percent For the Year 1998 1997 Change Net Income $5,115 $4,742 7.87% Return on Average Assets 1.34% 1.34% 0.00% Return on Average Equity 11.65% 12.67% -8.05% Per Share Net Income $1.42 $1.36 4.41% Book Value 12.93 11.72 10.32% Balances at Year-End Assets $401,621 $368,449 9.00% Securities 84,319 68,306 23.44% Net Loans 283,113 271,665 4.21% Deposits 321,518 305,830 5.13% Stockholders Equity 47,274 40,923 15.52% Shares Outstanding 3,657 3,491 4.76% Cash Dividends 2,413 1,958 23.24% * 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, 1999 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 25, 1999 at 3:30 p.m. TABLE OF CONTENTS Highlights of 1998 1 Board of Directors 2 Report to Stockholders 3-7 Officers 8 Description of Business 9 Selected Financial Data 10-12 Management's Discussion 13-20 Stock Prices and Dividends 21 Accountant's Report 22 Financial Data 23-36 BOARD OF DIRECTORS Picture of Board of Directors Board of Directors for Farmers National Banc Corp. and The Farmers National Bank of Canfield William D. Stewart, Chairman of Farmers National Banc Corp. Richard L. Calvin, Vice Chairman of Farmers National Banc Corp. Frank L. Paden, President and Secretary of Farmers National Banc Corp.; President and CEO of the Farmers National Bank of Canfield Benjamin R. Brown, President - Castruction Co. Joseph 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 - C.P.C.U., C.I.C., Vice President - Acordia of Ohio, Inc. PRESIDENT'S LETTER TO STOCKHOLDERS Dear Shareholders: The cover of this year's annual report symbolizes the long-term strategy of your corporation and its proven soundness. The families who founded your corporation lived in an economic and business environment that is in many ways different from our own. But, the values and principles of commerce they held to be true remain constant in the conduct of your corporation today. As this century comes to a close and we prepare for the next, we will continue to seek, evaluate and embrace new technologies and methods of operation. However, our growth strategy and its success has its roots in that which was originally sown 111 years ago. In 1998, Farmers National Banc Corp. completed another year of results befitting the mission statement and vision for the company. Profitability -- net earnings in excess of $5 million; Growth -- assets now exceeding $400 million; and Strength & Safety -- shareholder equity of $47 million. Your Board of Directors and Management are pleased with our 1998 results and we remain very optimistic for the continued success of these strategies as we move into the future. It is with pleasure that I share some of the highlights and accomplishments of your company that were attained in 1998. Bar Graph Depicting Net Income in Thousands Year Amount 1994 $3,424 1995 $3,576 1996 $4,131 1997 $4,742 1998 $5,115 FINANCIAL PERFORMANCE Net income for the year reached a record high of $5.1 million, up 7.87 percent over 1997. Interest income from earning assets - -- loans and investments, is the major component that drives the earnings of the company. Earning assets generated $29.5 million in interest income during 1998. Total interest expense, or cost of our interest bearing liabilities was $12.7 million. Net interest income for the year was $16.7 million, up 7 percent, or $1.1 million from last year. The net interest margin on these assets and liabilities was 4.64 percent as compared to 4.65 percent in 1997. Net income was $1.42 per share for 1998 as compared to $1.36 per share in 1997. This represents a 4.41 percent increase. The corresponding graph depicts a favorable trend in earnings per share increasing from $1.04 per share in 1994 to the current level of $1.42 per share. Bar Graph Depicting Net Income Per Share Year Amount 1994 $1.04 1995 $1.05 1996 $1.18 1997 $1.36 1998 $1.42 Cash dividends paid on Farmers National Banc Corp. common stock were $.68 per share in 1998, representing a 17.24 percent increase over the $.58 per share paid a year ago. In addition to the cash dividends, the Corporation also paid shareholders a 2 percent stock dividend in October 1998. This year marks the third consecutive year of increased cash dividends and the twenty-third consecutive year that your Directors approved and paid a stock dividend. Shareholders Equity is a measure used in defining safety within the banking industry. The $47.3 million in Shareholder Equity gives the Corporation an 11.8 percent total capital to asset ratio -- well above regulatory measures and near the top percentile in comparison to our peer group of banks. Bar Graph Depicting Total Stockholders Equity in Thousands Year Amount 1994 $28,915 1995 $33,976 1996 $34,809 1997 $40,923 1998 $47,274 Shareholder participation in the Corporation's Dividend Reinvestment Plan continues to provide a source of additional capital to the Corporation. During 1998, shareholders reinvested cash dividends of $1.3 million and made supplemental cash contributions in the amount of $2.4 million, totaling $3.7 million that was used to purchase 94,889 shares of common stock in Farmers National Banc Corp. at an average weighted purchase price of $39.91 per share. Farmers National Banc Corp.'s common stock finished the year at $42.25 per share as quoted on the OTC Bulletin Board. This represents a 37 percent increase over 1997's year end quote of $30.75 per share. Our common stock can be located under the symbol FMNB. Stockholders Equity per share was $12.93 as of December 31, 1998 as compared to $11.72 at the end of 1997. The graph to the left gives a five year history on the book value versus the quoted market value. These numbers have been adjusted for previous stock dividends and stock splits. Bar Graph Depicting Book Value and Market Value of Stock Book Market Year Value Value 1994 $9.29 $14.75 1995 $10.33 $19.70 1996 $10.46 $23.13 1997 $11.72 $30.75 1998 $12.93 $42.25 As disclosed in the quarterly reports, we have been able to achieve both positive earnings and growth trends throughout the year. As of December 31, 1998, total assets for the corporation are reported as $401.6 million, an increase of 9 percent from 1997. Net loans, which comprise approximately 71% of the total assets of the corporation increased to $283.1 million representing a 4.21 percent increase over the year end in 1997. Securities increased 23 percent to $84.3 million on December 31, 1998. Total deposits also increased approximately $15.7 million or 5.13 percent from $305.8 million in 1997 to $321.5 million at year end December 31, 1998. Bar Graph Depicting Total Loans in Thousands Year Amount 1994 $214,988 1995 $229,249 1996 $263,504 1997 $271,665 1998 $283,113 You will note from the financial information outlined in this report that Farmers National Banc Corp.'s operating and performance measures identify continuing positive trends. Nineteen hundred and ninety-eight, a financially successful year, is detailed in the accompanying financial review and discussion which summarize the careful management of operating fundamentals, size of our Corporation and shareholder return. OPERATIONS In January 1999, Farmers National Bank opened a new branch banking office in Poland Village. This new facility, representing our tenth community branch banking office, marks the fourth new full service branch location that Farmers National Bank has established in the past three years. The newly constructed building includes approximately 3,500 square feet of retail and commercial banking space along with four drive-up teller lanes and a 24 hour Automatic Teller Machine conveniently located in a drive-up lane. This branch is staffed to accommodate new account openings and is able to process any type of loan application. Bar Graph Depicting Total Assets in Thousands Year Amount 1994 $284,445 1995 $314,229 1996 $338,112 1997 $368,449 1998 $401,621 Picture of Exterior of Poland Branch To improve customer service during 1998, we also made other capital improvements to other branch locations. The 24 hour ATM at our Cornersburg Office was reconfigured from a walk-up ATM to a drive-up unit located on the north side of the building. This move offers more convenience to our customers, and enhances their safety while using that machine. We also installed new drive-up ATM machines at our Damascus and Leetonia branches. Both communities lacked this type of banking service. 1998 marked the twentieth anniversary at our Boardman branch location at Western Reserve Road and Market Street. During the past year, this branch went through a major capital improvement project that truly enhanced the appearance and efficiency of the building. The improvements included an addition, a new gable style roof, a newly configured customer service lobby and the relocation of the 24 hour ATM to a drive-up unit with a separate auto lane on the west side of the building. Picture of Exterior of Boardman Branch During 1998, Farmers National Bank was selected as one of 32 member institutions to participate in the Welcome Home Program sponsored by the Federal Home Loan Bank of Cincinnati. This program is designed to serve the owner-occupied housing needs of low and moderate income residents located within our lending areas. Funds provided through this program can be used for down payments and closing costs incurred in conjunction with the acquisition of owner-occupied housing units by low and moderate income home buyers. Farmers National Bank also participated in the Greater Salem Area Habitat for Humanity program in Columbiana County. This particular program was expanded this year and our bank was pleased to assist in the building and funding for two homes in Columbiana County. A complete review of 1998 could not be complete without a report on the bank's progress on the Year 2000 (Y2K) issue as part of the Year 2000 Information and Readiness Disclosure Act. Much has been written about this topic during the past year and how it can affect the banking industry. Your Board of Directors and the Senior Management team have given the Y2K issue top priority during 1998 and are fully committed to using commercially reasonable efforts to ensure that all internal systems will be Y2K compliant. As part of a detailed project management plan, I am pleased to report that we have nearly completed our Y2K testing of all "mission critical" inventory items. Additional testing with third party vendors will continue during 1999 along with an aggressive customer awareness program to better prepare the public for this issue and the potential effects on our financial communities. In addition, we are working to have contingency plans in place to mitigate any Y2K problems that may be caused by circumstances beyond the bank's control, such as power or communications malfunctions. The scope of the Y2K challenge itself is something we cannot control, but we can control the way we manage the problem. As interested citizens, dependable business professionals, leaders in the community and caring family members, it is our duty to raise the awareness of this problem in our communities and offer help where we feel competent to do so. While numbers usually dominate any President's message to his shareholders, the story behind those numbers is always one involving human beings. On March 25, 1999, Mr. Joseph O. Lane will officially retire from the Board of Directors, a position he has held since December 20, 1965. Joe was appointed to the Board of Directors at the time Farmers National Bank consisted of two offices, Canfield and Austintown, with total assets of $15 million. During his tenure as Director, he has participated in leading and guiding this corporation as it expanded to ten community branch offices and total assets in excess of $400 million. His commitment to our community is enduring and he has always been one of our bank's most influential boosters. We will truly miss his vision and business talents that he so heartily committed to our board for the past thirty-four years. A sincere "Thank You" and best wishes to Joe and his wife Gerri. Picture of Joseph O. Lane, Director In closing, I would like to offer special thanks to our shareholders, directors, officers and employees 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 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 Joseph E. Chapman President & CEO Assistant Cashier, Manager - Collection Department Carl D. Culp Executive Vice President, Janine M. Cox Cashier & CFO Assistant Cashier, Credit Administration Donald F. Lukas Charlene K. Daugherty Senior Vice President, Assistant Cashier, Human Resources and Bank Systems Branch Administration Mark L. Graham Merle C. Garritano Vice President/Loan Administrator Assistant Cashier/Consumer Loans Bradley S. Henderson Linda M. Liston Vice President, Compliance Officer Branch Administration & Security Joanie F. Orr Anthony F. Peluso General Ledger Accounting Officer Vice President/Human Resources Gary J. Rosati Alfred F. Ridel Staff Legal Counsel Vice President/Consumer Loans Anita L. Jarvis Daniel G. Cerroni Internal Auditor Assistant Vice President, Main Office Loan Department Rob L. Mort Corporate Financial Accountant Barbara C. Fisher Y2K Project Manager Assistant Vice President, Marketing & Deposit Operations Dorothy J. Weeden Assistant Cashier, Roy A. Jackson Manager - Main Office Assistant Vice President,Indirect Lending Rhonda R. Learn Frederick M. Kotheimer Manager - Colonial Plaza Assistant Vice President/Loan Review Keith A. Leonard Susan E. Miller Assistant Cashier, Assistant Vice President, Manager - Austintown Office Corporate Services Administration Jennifer C. Tikkanen Phyllis A. Welton Asst. Manager - Austintown Office Assistant Vice President, Manager - Bookkeeping Dept. Patricia C. Rosko Manager - Lake Milton Office Andrew A. Baird Assistant Cashier, Manager - Data Center Geraldine J. Gbur Assistant Cashier, Barbara L. Sitler Manager - Columbiana Office Manager - Cornersburg Office Jane C. Logan Sharyn Staffrey Asst. Manager - Columbiana Office Asst. Manager - Cornersburg Office Robert L. Rozeski Lynnita J. Kaschak Assistant Cashier, Manager - Western Reserve Office Manager - Leetonia Office Clare F. Baldwin Mellisa K. Woak Asst. Manager - Western Reserve Office Asst. Manager - Leetonia Office Larry E. White Michele M. Ossoff Assistant Vice President, Assistant Cashier, Manager - Salem Office Manager - Damascus Office Pamela J. Cleghorn Dennis S. Vitt Assistant Cashier, Assistant Cashier, Asst. Manager - Salem Office Manager - Poland Office Gregory V. Walla Diane C. Moran Asst. Manager - Salem Office Asst. Manager - Poland 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, electronic payments, Visa Deibt Cards, MasterCard and Visa Credit Cards, and other miscellaneous services normally offered by commercial banks. The Bank's main office is located at 20 South Broad Street, Canfield, Ohio. Business is conducted at a total of eleven (11) 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, 1998, the Corporation and its subsidiary had 193 employees. The bank considers its relations with its employees to be satisfactory. SELECTED FINANCIAL DATA (In Thousands except Per Share Data)
For the Years Ending 1998 1997 1996 1995 1994 Summary of Earnings Total Interest Income (including fees on loans) $29,227 $27,576 $24,877 $21,960 $19,731 Total Interest Expense 12,736 12,129 10,756 9,688 8,000 Net Interest Income 16,491 15,447 14,121 12,272 11,731 Provision for Credit Losses 840 855 655 270 330 Total Other Income 1,698 1,768 1,478 1,342 1,357 Total Other Expense 9,815 9,418 8,883 8,118 7,755 Income Before Federal Income Taxes 7,534 6,942 6,061 5,226 5,003 Federal Income Taxes 2,419 2,200 1,930 1,650 1,579 NET INCOME 5,115 4,742 4,131 3,576 3,424 Per Share Data (Note) Net Income 1.42 1.36 1.18 1.05 1.04 Cash Dividends Paid 0.68 0.58 0.44 0.40 0.40 Book Value at Year-End 12.93 11.72 10.51 10.33 9.29 Balances at Year-End Total Assets 401,621 368,449 338,112 314,229 284,445 Earning Assets 377,115 349,102 319,449 294,122 268,724 Total Deposits 321,518 305,830 283,810 267,955 244,302 Net Loans 283,113 271,665 263,504 229,249 214,988 Total Stockholder's Equity 47,274 40,923 34,809 33,976 28,915 Average Balances Total Assets 381,078 354,005 325,537 297,159 279,839 Total Stockholder's Equity 43,888 37,431 35,629 31,177 27,221 Significant Ratios Return on Average Assets (ROA) 1.34% 1.34% 1.27% 1.20% 1.22% Return on Average Equity (ROE) 11.65 12.67 11.60 11.45 12.58 Average Earning Assets/Average Assets 94.95 95.28 94.88 94.75 94.91 Net Loans/Deposits 88.06 88.83 92.85 85.56 88.00 Allowance for Credit Losses/Total Loans 1.29 1.25 1.20 1.25 1.26 Allowance for Credit Losses/Nonperforming Loans 364.39 383.13 152.42 192.87 154.63 Efficiency Ratio 53.96 54.71 56.50 59.63 59.66 Cash Dividends as a Percentage of Net Income 47.17 41.29 35.22 35.46 34.45 Dividends Per Share to Net Income Per Share 47.89 41.73 36.07 36.04 34.96 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, 1998 1997 1996 EARNING ASSETS AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE Loans $281,660 $24,585 8.73% $268,581 $23,487 8.74% $250,616 $21,519 8.59% Taxable securities 62,864 3,695 5.88 51,520 3,123 6.06 40,334 2,352 5.83 Tax-exempt securities 9,700 817 8.42 8,072 712 8.82 7,434 683 9.19 Federal funds sold 7,616 408 5.36 9,116 503 5.52 10,506 562 5.35 Total earning assets 361,840 29,505 8.15 337,289 27,825 8.25 308,890 25,116 8.13 NONEARNING ASSETS Cash and due from banks 12,509 11,001 11,310 Premises and equipment 6,433 5,647 5,597 Allowance for Loan Losses (3,598) (3,282) (2,946) Other assets 3,894 3,350 2,686 Total Assets 381,078 354,005 325,537 INTEREST-BEARING LIABILITIES Time deposits 148,569 8,407 5.66 141,659 8,094 5.71 122,973 7,095 5.77 Savings deposits 76,720 1,984 2.59 74,117 1,870 2.52 76,182 1,931 2.53 Demand deposits 58,143 1,198 2.06 54,560 1,141 2.09 51,890 1,092 2.10 Repurchase agreements 18,059 790 4.37 15,039 676 4.49 12,075 497 4.12 Borrowings 6,203 357 5.76 6,000 348 5.80 2,651 142 5.36 Total Interest-Bearing Liabilities 307,694 12,736 4.14 291,375 12,129 4.16 265,771 10,757 4.05 NONINTEREST-BEARING LIABILITIES Demand deposits 25,002 21,868 22,979 Other Liabilities 4,494 3,331 1,158 Stockholder's equity 43,888 37,431 35,629 Total Liabilities and Stockholders' Equity 381,078 354,005 325,537 Net interest income 16,769 15,696 14,359 Net interest income to earning assets 4.64% 4.65% 4.65% Fully taxable equivalent basis computed at 35% in 1998, 1997 and 1996.
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)
1998 change from 1997 1997 change from 1996 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 $1,098 $1,134 ($36) $1,968 $1,554 $414 Taxable securities 572 686 (114) 771 653 118 Tax-exempt securities 105 144 (39) 29 58 (29) Federal funds sold (95) (83) (12) (59) (74) 15 Total interest income $1,680 $1,881 ($201) $2,709 $2,191 $518 Interest Expense Time deposits $313 $391 ($78) $999 $1,081 ($82) Savings deposits 114 63 51 (61) (53) (8) Demand deposits 57 74 (17) 49 55 (6) Repurchase agreements 114 136 (22) 179 123 56 Borrowings 9 11 (2) 206 26 180 Total interest expense $607 $675 ($68) $1,372 $1,232 $140 Increase in tax equivalent net interest income $1,073 $1,337 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.
QUARTERLY FINANCIAL DATA (In Thousands except Per Share Data)
Quarter Ended 1998 March 31 June 30 September 30 December 31 Total interest income $7,059 $7,280 $7,414 $7,474 Total interest expense 3,154 3,135 3,184 3,263 Net interest income 3,905 4,145 4,230 4,211 Provision for credit losses 210 210 210 210 Non-interest income 419 423 438 418 Non-interest expense 2,433 2,453 2,482 2,447 Income before federal income taxes 1,681 1,905 1,976 1,972 Federal income taxes 539 612 637 631 Net income $1,142 $1,293 $1,339 $1,341 Per share data: Net income $0.32 $0.36 $0.37 $0.37 Dividends $0.16 $0.17 $0.17 $0.18 (In Thousands except Per Share Data) Quarter Ended 1997 March 31 June 30 September 30 December 31 Total interest income $6,536 $6,842 $7,107 $7,091 Total interest expense 2,834 2,977 3,143 3,175 Net interest income 3,702 3,865 3,964 3,916 Provision for credit losses 150 200 240 265 Non-interest income 363 402 433 569 Non-interest expense 2,437 2,308 2,296 2,377 Income before federal income taxes 1,478 1,759 1,861 1,843 Federal income taxes 469 572 606 553 Net income $1,009 $1,187 $1,255 $1,290 Per share data: Net income $0.29 $0.34 $0.36 $0.37 Dividends $0.13 $0.14 $0.15 $0.16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following financial review presents an analysis of the assets and liability structure of the Corporation and a discussion of the results of operations for each of the periods presented in this annual report of liquidity, capital and credit quality. Certain statements in this report that relate to Farmers National Banc Corp.'s plans, objectives, or future performance may be deemed to be forward-looking statements within the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations. Actual strategies and results in future periods may differ materially from those currently expected because of various risks and uncertainties. Results of Operations The Corporation's net income totaled $5.115 million during 1998, an increase of 7.87% from $4.742 million for 1997. On a per share basis, net income was $1.42 for 1998 as compared to $1.36 for 1997 and $1.18 for 1996. Common comparative ratios for results of operations include the return on average assets and return on average stockholders equity. For 1998, the return on average equity was 11.65% as compared to 12.67% for 1997 and 11.60% for 1996. The return on average assets was 1.34% for 1998 and 1997 as compared to 1.27% for 1996. 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 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 1998, net interest income increased $1.044 million or 6.76% over 1997. The increase for 1997 was $1.326 million or 9.39% over 1996. Interest-earning assets averaged $361.840 million during 1998 representing a 7.28% increase over 1997, while 1997 averaged $337.289 million or a 9.19% increase over 1996. 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 1998 the net interest margin, measured on a fully taxable equivalent basis was 4.64% in comparison to 4.65% for 1997 and 1996. Total interest income was $29.227 million for 1998 as compared to $27.576 million and $24.877 million for 1997 and 1996, respectively. The 5.99% increase in interest income is largely attributed to a $1.098 million or 4.67% increase in income from loans. Average loans increased 4.87% during the past year, while the overall yield dropped slightly from 8.74% to 8.73%. Income from securities increased $648 thousand or 18.07%, which was driven by a 22.58% increase in the balance of securities available for sale. The drop in the overall rate environment caused the tax equated yields in securities to drop from 6.43% in 1997 to 6.22% in 1998. Total interest expense amounted to $12.736 million for 1998, representing a 4.97% increase from 1997 while interest expense of $12.129 million for 1997 represents a 12.76% increase from 1996. The increase in interest expense is primarily due to a $16.319 million or 5.6% increase in the level of average interest-bearing liabilities. This increase in interest-bearing liabilities was offset by a decrease in the overall cost of these funds, which dropped from 4.16% in 1997 to 4.14% in 1998. Other Income Other income decreased $70 thousand or 3.96% from 1997. Total other income for 1997 increased $290 thousand or 19.62% from 1996. The decrease in other income is a result of a 35% decrease in miscellaneous income. Management continues to explore new products and non-traditional banking services that could increase other income in future years. Other Expenses Total other expenses for 1998 increased 4.22% over 1997 as compared to an increase of 6.03% from 1997 over 1996. The rise in other expenses is primarily due to other operating expenses, which increased $203 thousand or 7.32% from 1997. These expenses are increasing each year due primarily to asset growth and the increased volume of the operations of the bank. Salaries and employee benefits also increased $84 thousand or 1.66%. This increase is the result of hiring additional employees to staff the new branch offices. 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 1998, 1997 and 1996. 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. The Corporation monitors interest rate sensitive assets and liabilities to determine the overall interest rate position over various time frames. As of year-end 1998, 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, 1998 December 31, 1997 December 31, 1996 Total Within Total Within Total Within 3 month 12 month 3 month 12 month 3 month 12 month Total Interest-Sensitive Assets $43,976 $107,360 $43,489 $117,790 $36,137 $105,161 Total Interest-Sensitive Liabilities 63,695 125,304 70,990 129,809 56,249 112,027 Total Sensitivity Gap (19,719) (17,944) (27,501) (12,019) (20,112) (6,866) Ratio of Interest-Sensitive Assets to Interest-Sensitive Liabilities .69 .86 0.61 0.91 0.64 0.94
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, 1998, 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, 1998 amounted to $5.343 million. Cash flows generated from operating activities increased 6.53% to $7.502 million in 1998 compared to $7.042 million in 1997. 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 6.44% to $30.098 million in 1998 compared to $32.171 million in 1997. This decrease in cash used resulted from an smaller net increase in investment securities in 1998 compared to 1997. Cash flows provided from financing activities amount to $26.094 million as compared to $25.342 million in 1997. This 2.97% increase is primarily the result of an increase in deposits. 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, 1998 1997 1996 1995 1994 Commercial, Financial and Agricultural $10,885 3.8% $10,784 3.9% $8,454 3.1% $19,842 8.6% $22,465 10.3% Real Estate - Mortgage 157,918 55.1 147,979 53.8 136,212 51.1 110,870 47.9 102,322 47.0 Installment Loans to Individuals 117,999 41.1 116,331 42.3 122,036 45.8 100,748 43.5 92,947 42.7 Total Loans $286,802 100.0% $275,094 100.0% $266,702 100.0% $231,460 100.0% $217,734 100.0%
The following schedule sets forth maturities based on remaining scheduled repayments of principal for various categories of loans listed above as of December 31, 1998:
(In Thousands of Dollars) Types of Loans 1 Year or less 1 to 5 Years Over 5 Years Commercial, Financial and Agricultural $3,608 $5,846 $1,431
The amounts of commercial, financial and agricultural loans as of December 31, 1998, 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 $2,417 $1,866 $4,283 Fixed Rates of Interest 1,191 5,411 6,602 Total Loans $3,608 $7,277 $10,885
Loan Portfolio Total net loans were $283.113 million at year-end 1998 compared to $271.665 million at year-end 1997. This represents an increase of $11.448 million or 4.21%. Loans comprised 77.8% of the Bank's average earning assets during 1998, compared to 79.6% in 1997. The product mix in the Loan Portfolio shows Commercial Loans comprising 3.8%, Real Estate Mortgage Loans (Residential and Commercial) 55.1% and Installment Loans to Individuals 41.1% at December 31, 1998 compared with 3.9%, 53.8% and 42.3%, respectively, at December 31, 1997. Loans contributed 84.1% of total interest income in 1998 compared to 85.2% in 1997. Loan yield was 8.73% in 1998, 58 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 increased slightly from $116.331 million on December 31, 1997 to $117.999 million on December 31, 1998 which represents a 1.4% increase. 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 84.5% of the Installment Loan Portfolio. Net loan losses on the Installment Loan portfolio were $487 thousand in 1998 as compared to $667 thousand in 1997. This represents .41% of total Installment Loans outstanding for 1998 and .57% for 1997. Management attributes these losses 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 $157.918 million at December 31, 1998, an increase of 6.7% over 1997. Most of this increase took place in home equity lines of credit and non-residential real estate loans, which increased $6.609 million and $4.468 million respectively. This portfolio consists of $113.548 million of 1-4 family residential properties and $44.370 million in non-residential real estate properties, all made within the Bank's primary market area. The corporation originated both fixed rate and adjustable rate mortgages during 1998. All mortgage loans made in 1998 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, 1998 increased slightly from year-end 1997 with outstanding balances of $10.885 million. 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, 1998 1997 1996 1995 1994 Balance at Beginning of Year $3,429 $3,198 $2,911 $2,746 $2,621 Loan Losses: Commercial, Financial and Agricultural (63) 0 (75) (1) (185) Real Estate-Mortgage (39) 0 (22) 0 0 Installment Loans to Individuals (772) (824) (455) (275) (202) Total Loan Losses (874) (824) (552) (276) (387) Recoveries on Previous Loan Losses: Commercial, Financial and Agricultural 0 3 9 44 39 Real Estate-Mortgage 9 40 15 0 0 Installment Loans to Individuals 285 157 160 127 143 Total Recoveries 294 200 184 171 182 Net Loan Losses (580) (624) (368) (105) (205) Provision Charged to Operations (1) 840 855 655 270 330 Balance at End of Year $3,689 $3,429 $3,198 $2,911 $2,746 Ratio of Net Loan Losses to Average Net Loans and Leases Outstanding 0.21% 0.23% 0.15% 0.05% 0.10% (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 decreased from $855 thousand in 1997 to $840 thousand in 1998. The balance in the allowance for credit losses has increased substantially since 1994 to $3.689 million or 1.29% of loans at December 31,1998. This ratio has increased from the 1.25% reported at December 31, 1997. The allowance for credit losses as a percentage of nonperforming loans decreased from 383.13% at December 31, 1997 to 364.39% at December 31, 1998. 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, 1998 1997 1996 1995 1994 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 $812 3.8% $1,928 3.9% $1,873 3.1% $1,800 8.6% $1,700 10.3% Real Estate-Mortgage 1,017 55.1% 275 53.8% 263 51.1% 250 47.9% 200 47.0% Installment Loans to Individuals 1,860 41.1% 1,226 42.3% 1,062 45.8% 861 43.5% 846 42.7% $3,689 100.0% $3,429 100.0% $3,198 100.0% $2,911 100.0% $2,746 100.0% The allocation of the allowance as shown in the table above should not be interpreted as an indication that charge-offs in 1999 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, 1998 1997 1996 1995 1994 Loans Accounted For on a Nonaccrual Basis $576 $493 $0 $125 $302 Loans Contractually Past Due 90 Days or More as to Interest or Principal Payments (Not Included in Nonaccrual Loans Above) 435 402 2,098 1,384 1,475 Loans Considered Troubled Debt Restructuring (Not Included in Nonaccrual Loans or Contractually Past Due Above) 0 0 0 75 0 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, 1998, 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 non-performing. 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:
December 31, 1998 1997 1996 1995 1994 Gross Interest Income That Would have been Recorded if the Loans had been Current in Accordance with Their Original Terms $27 $9 $7 $5 $21 Interest Income Included in Income on the Loans 1 13 0 0 0
Investment Securities The investment securities portfolio increased 23.44% in 1998. Most of this increase occurred in U.S. Treasury and U.S. Government agencies, which grew $15.1 million in 1998. 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, 1998 1997 1996 U.S. Treasury Securities and Government Agencies $68,593 $53,449 $31,449 Obligations of States and Political Subdivisons 11,067 9,145 7,501 Other Securities 4,659 5,712 8,130 $84,319 $68,306 $47,080
A summary of securities held at December 31, 1998, 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, 1998 Book Value Weighted Average Yield (1) U.S. Treasury and U.S. Government Agency Securities: Maturing Within One Year $20,010 5.46% Maturing After One Year But Within Five Years 35,906 5.57% Maturing After Ten Years 12,677 6.41% Total U.S. Treasury and U.S. Government Agency Securities $68,593 5.69% Obligations of States and Political Subdivisions Maturing Within One Year $349 9.73% Maturing After One Year But Within Five Years 2,150 8.49% Maturing After Five Years But Within Ten Years 2,544 8.18% Maturing After Ten Years 6,024 7.92% Total Obligations of States and Political Subdivisions $11,067 8.15% Other Securities Maturing Within One Year $4,659 6.22% (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 $11.444 thousand, $59.932 thousand, $70.069 thousand and $158.803 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 $305.830 million in 1997 to $321.518 million in 1998, which equates to an increase of 5.13%. Most of this growth occurred in time deposits, which increased in average balances from $141.659 million in 1997 to $148.569 million in 1998, or 4.88%. Average Deposits The following table shows the classification of average deposits for the periods indicated:
(In Thousands of Dollars) Average Balances on December 31, 1998 1997 1996 Noninterest-Bearing Demand Deposits $25,002 $21,868 $22,979 Interest-Bearing Demand Deposits 58,143 54,560 51,890 Savings Deposits 76,720 74,117 76,182 Time Deposits 148,569 141,659 122,973 Total Average Deposits $308,434 $292,204 $274,024
The following shows the average rate paid on the following deposit categories for the periods indicated:
Years ended December 31, 1998 1997 1996 Interest-Bearing Demand Deposits 2.06% 2.09% 2.10% Savings 2.59% 2.52% 2.53% Time Deposits 5.66% 5.71% 5.77%
A summary of time deposits of $100,000 or more as of December 31, 1998 by maturity range is shown below: (In Thousands of Dollars) 3 Months or Less Remaining Until Maturity $7,752 3 to 6 Months Remaining Until Maturity 4,406 6 to 12 Months Remaining Until Maturity 13,090 Over 12 Months Remaining Until Maturity 6,959 Total Outstanding $32,207 The steady increase in total deposits over the years reflects managements' efforts to continue to insure growth of the bank and to maintain a viable banking institution. During 1998, 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 1998. 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 11.65%, 12.67% and 11.60% for 1998, 1997 and 1996, respectively. Total cash dividends declared in 1998 represented 47.17% of net income as compared to 41.29% in 1997 and 35.22% in 1996. The resulting internal equity growth percentage amounted to 6.15% in 1998 as compared to 7.44% in 1997 and 7.51% in 1996. 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). As of December 31, 1998 the bank subsidiary had $14.92 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, 1998, 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 15.85% and 17.10% respectively. The bank subsidiary's leverage ratio at December 31, 1998 was 10.85%. Audit The Company's 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 Company utilizes the services of an internal audit outsourcing firm to assist the internal auditor in developing and implementing a comprehensive internal audit plan and program. 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 1998. Compliance Our institution is committed to maintain a high level of compliance with various laws and regulations. We recognize that the laws and regulations are important tools in federal efforts to give guidelines in order to comply within the standards of today's banks. Failure to comply with regulations can result in significant and often costly penalties or mandated actions from regulatory agencies. Policies and procedures have been set forth to govern the way departments function and ensure fair, consistent and sound banking practices. Changes to the polices and procedures are made when new regulations, or changes to regulations, have been made. The Compliance Department is interested in seeing that the institution adopts and follows sound written policies as part of the compliance management program. The training segment of compliance has become extremely important in the past few years and it is very important to communicate the appropriate responsibilities to each area of the bank. Training is available to personnel in order to assure that they understand their compliance responsibilities and the importance of achieving a high level of compliance with laws and regulations. The Compliance Department administers an effective system of monitoring, or testing, procedures in several areas to ensure that compliance of the regulations and laws are within compliance standards. Upon the completion of monitoring projects, areas where training are needed may be revealed. We urge employees to ask questions and to use initiative in becoming informed, as it is our bank's mission to keep our employees well informed of the laws and regulations. We train our personnel in order to help them understand their compliance responsibilities and the importance of achieving a high level of compliance with laws and regulations. This all translates in efficient and better service for our customers. Year 2000 The Year 2000 issue 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 the date as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Federal Financial Institutions Examination Council recognizes five phases that banks must complete to achieve Year 2000 readiness: 1) Awareness of the potential risks associated with Year 2000; 2) Assessment of all information and environmental systems needing enhancements; 3) Renovation of the systems that are not Year 2000 ready; 4) Validation of the renovated systems to assure Year 2000 readiness; and 5) Implementation of the renovated product into the ongoing operations. The Corporation has completed the Awareness, Assessment and Renovation phases and has substantially completed the validation of it's mission critical systems for Year 2000 readiness. At this time it is not expected that expenses to address year 2000 issues will materially impact future operating results. The Corporation has substantially completed a year 2000 contingency plan to address the possible risks that may be faced within and outside of the Corporation's control. 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, 1998, there were 2,585 shareholders of record of common stock. Market and Dividend Summary Dividend Date High Low Dividend 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 March 1998 40.00 32.00 0.16 June 1998 40.00 38.13 0.17 September 1998 44.50 41.00 0.17 October 1998 2% Stock Dividend December 1998 44.00 41.00 0.18 Hill, Barth & King, Inc. Park Place South, Suite 200 155 South Park Avenue Warren, Ohio 44481 (330) 394-3773 PHONE (330) 395-3713 FAX www.hbkcpa.com January 19, 1999 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, 1998 and 1997 and the related consolidated statements of income and comprehensive income, stockholders equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated 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, 1998 and 1997 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Hill, Barth & King, Inc. Certified Public Accountants CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars) December 31, 1998 1997 ASSETS Cash & due from banks $16,686 $13,480 Federal funds sold 5,994 5,702 TOTAL CASH AND CASH EQUIVALENTS 22,680 19,182 Securities available for sale - NOTE B 81,664 66,620 Other securities 2,655 1,686 Loans - NOTE C 286,802 275,094 Less allowance for credit losses - NOTE D 3,689 3,429 NET LOANS 283,113 271,665 Premises and equipment, net - NOTE E 7,785 6,025 Other assets 3,724 3,271 $401,621 $368,449 LIABILITIES AND STOCKHOLDERS EQUITY Deposits (all domestic): Noninterest-bearing $29,380 $26,282 Interest-bearing - NOTE F 292,138 279,548 TOTAL DEPOSITS 321,518 305,830 Borrowings: U. S. Treasury interest-bearing demand note 72 559 Securities sold under repurchase agreements - NOTE G 24,473 14,659 Federal Home Loan Bank advances - NOTE H 5,343 4,612 TOTAL BORROWINGS 29,888 19,830 Other liabilities and deferred credits 2,941 1,866 TOTAL LIABILITIES 354,347 327,526 Commitments and contingent liabilities - NOTE I Stockholders Equity - NOTES J, K: Common Stock - Authorized 5,000,000 shares; issued and outstanding 3,657,288 in 1998 and 3,491,137 in 1997 31,661 24,792 Retained earnings 15,337 15,717 Accumulated other comprehensive income 276 414 TOTAL STOCKHOLDERS EQUITY 47,274 40,923 $401,621 $368,449 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In Thousands except Per Share Data) Years ended December 31, 1998 1997 1996 INTEREST INCOME Interest and fees on loans $24,585 $23,487 $21,519 Interest and dividends on securities: Taxable interest 3,558 3,017 2,257 Nontaxable interest 539 463 444 Dividends 137 106 95 Interest on federal funds sold 408 503 562 TOTAL INTEREST INCOME 29,227 27,576 24,877 INTEREST EXPENSE Deposits 11,589 11,105 10,118 Short-term borrowings 1,147 1,024 638 TOTAL INTEREST EXPENSE 12,736 12,129 10,756 NET INTEREST INCOME 16,491 15,447 14,121 Provision for credit losses 840 855 655 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 15,651 14,592 13,466 OTHER INCOME Service charges on deposit accounts 1,175 1,176 1,090 Investment security gains 5 6 0 Other operating income 518 586 388 TOTAL OTHER INCOME 1,698 1,768 1,478 17,349 16,360 14,944 OTHER EXPENSES Salaries and employee benefits - NOTE L 5,143 5,059 4,779 Net occupancy expense of premises 567 561 525 Furniture and equipment expense, including depreciation 549 491 521 State and local taxes 578 532 515 Other operating expenses 2,978 2,775 2,543 TOTAL OTHER EXPENSES 9,815 9,418 8,883 INCOME BEFORE FEDERAL INCOME TAXES 7,534 6,942 6,061 FEDERAL INCOME TAXES - NOTE M 2,419 2,200 1,930 NET INCOME 5,115 4,742 4,131 OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized gains (losses) on securities (138) 305 (107) COMPREHENSIVE INCOME $4,977 $5,047 $4,024 NET INCOME PER SHARE $1.42 $1.36 $1.18 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands of Dollars) Years ended December 31, 1998 1997 1996 COMMON STOCK Balance at beginning of year $24,792 $24,254 $4,111 71,253 shares issued as a 2% stock dividend in 1998, and 33,729 in 1996, including fractional shares 3,082 0 1,501 Excess of fair value of shares sold over treasury stock cost 0 15 0 Excess of fair value of shares issued as a stock dividend over treasury stock cost 0 51 0 94,899 shares sold in 1998, 15,335 shares sold in 1997 and 59,618 in 1996 3,787 472 2,583 Transfer of additional paid-in capital to common stock 0 0 16,059 Balance at end of year 31,661 24,792 24,254 ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 0 0 16,059 Transfer of balance to common stock 0 0 (16,059) Balance at end of year 0 0 0 RETAINED EARNINGS Balance at beginning of year 15,717 14,766 13,591 Net income 5,115 4,742 4,131 Dividends declared: $.68 cash dividends per share in 1998, $.58 in 1997 and $.88 in 1996 (2,413) (1,958) (1,455) Stock dividends (3,082) (1,833) (1,501) Balance at end of year 15,337 15,717 14,766 ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of year 414 109 215 Net change in unrealized appreciation (depreciation) on debt securities, net of income taxes (138) 305 (107) Balance at end of year 276 414 108 TREASURY STOCK, AT COST Balance at beginning of year 0 (4,319) 0 Purchase of treasury stock 0 0 (4,319) 67,907 shares reissued as a 2% stock dividend in 1997, including fractional shares 0 1,783 0 Sale of treasury stock 0 2,536 0 Balance at end of year 0 0 (4,319) TOTAL STOCKHOLDERS EQUITY AT END OF YEAR $47,274 $40,923 $34,809 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars) Years ended December 31, 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Interest received $30,376 $28,327 $25,979 Fees and commissions received 1,670 1,723 1,418 Interest paid (12,769) (12,012) (10,759) Cash paid to suppliers and employees (9,382) (8,777) (8,275) Income taxes paid (2,393) (2,219) (2,075) NET CASH PROVIDED BY OPERATING ACTIVITIES 7,502 7,042 6,288 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities available for sale 18,260 14,479 14,329 Proceeds from sales of investment securities available for sale 1,023 3,106 0 Purchases of other securities and securities available for sale (35,852) (38,547) (14,467) Net increase in loans made to customers (11,973) (10,464) (35,031) Purchases of premises and equipment (1,556) (745) (546) NET CASH USED IN INVESTING ACTIVITIES (30,098) (32,171) (35,715) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts 13,818 3,115 (906) Net increase in time deposits 10,528 17,848 21,381 Net increase in Federal Home Loan Bank Borrowings 731 3,212 1,400 Sale (Purchase) of Treasury Stock 0 2,537 (4,319) Dividends paid (2,770) (1,858) (1,138) Proceeds from sale of common stock 3,787 488 2,582 NET CASH PROVIDED BY FINANCING ACTIVITIES 26,094 25,342 19,000 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,498 213 (10,427) CASH AND CASH EQUIVALENTS Beginning of year 19,182 18,969 29,396 End of year $22,680 $19,182 $18,969 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS Net income $5,115 $4,742 $4,131 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 423 398 394 Amortization and accretion 1,353 1,228 1,178 Provision for credit losses 840 855 655 Gain on sale of investment securities (5) (6) 0 Deferred income taxes (84) (77) (70) Other (140) (98) 0 NET CASH PROVIDED BY OPERATING ACTIVITIES $7,502 $7,042 $6,288 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS Supplemental schedule of noncash investing and financing activities: Unrealized loss on available for sale securities $322 $42 $48 Real estate acquired by issuing note payable 650 0 0 See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Farmers National Banc Corp. and Subsidiary December 31, 1998, 1997, and 1996 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 eleven (11) 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 reserve for loan losses related to loans that are considered impaired is 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. 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 3,599,096 for 1998, 3,490,644 for 1997 and 3,514,619 for 1996. Comprehensive Income: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards no. 130, "Reporting Comprehensive Income" ("SFAS 130") which establishes new rules for the reporting and display of comprehensive income and its components. The adoption had no impact on the company's net income or stockholders equity. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. NOTE B - SECURITIES AVAILABLE FOR SALE Securities available for sale at December 31, 1998 and 1997 are summarized as follows:
(In Thousands of Dollars) 1998 1997 U.S. Treasury and U.S. Government agencies $68,593 $53,449 Corporate debt securities 2,004 4,026 Obligations of states and political subdivisions 11,067 9,145 TOTALS $81,664 $66,620
Net unrealized gains (losses) for securities available for sale at December 31, 1998 and 1997 are summarized below:
(In Thousands of Dollars) UNREALIZED UNREALIZED NET UNREALIZED December 31, 1998 GAINS LOSSES GAINS (LOSSES) U.S. Treasury and U.S. Government agencies $594 ($274) $320 Corporate debt securities 2 (8) (6) Obligations of states and political subdivisions 144 (40) 104 TOTALS $740 ($322) $418 December 31, 1997 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
The fair value and book value of securities available for sale by contractual maturities at December 31, 1998 are summarized below:
(In Thousands of Dollars) FAIR VALUE BOOK VALUE Due in 1 year or less $22,363 $22,278 Due after one year through five years 38,057 37,683 Due after five years through ten years 2,544 2,522 Due after ten years 18,700 18,763 TOTALS $81,664 $81,246
Securities with a carrying value of $42 million at December 31, 1998 and $35 million at December 31, 1997 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, 1998 1997 Real Estate - Mortgage $158,700 $148,740 Installment Loans to Individuals 116,164 114,470 Commercial, Financial and Agricultural 10,884 10,784 Subtotal 285,748 273,994 Net origination and deferred loan fees 1,054 1,100 TOTAL LOANS $286,802 $275,094 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) 1998 1997 1996 Balance at beginning of year $3,429 $3,198 $2,911 Additions: Provision for credit losses 840 855 655 Recoveries on loans previously charged off 294 200 184 TOTAL ADDITIONS 4,563 4,253 3,750 Credits charged off (874) (824) (552) Balance at end of year $3,689 $3,429 $3,198 The allowance for federal income tax purposes amounted to $753 thousand at December 31, 1998, which is $2.936 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, 1998 1997 Land $2,046 $1,631 Premises 6,622 5,129 Equipment 3,896 3,625 Leasehold Improvements 185 180 12,749 10,565 Less accumulated depreciation (4,964) (4,540) NET BOOK VALUE $7,785 $6,025 Depreciation expense was $423 thousand for the year ended December 31, 1998, $398 thousand for 1997 and $394 thousand for 1996. NOTE F - INTEREST-BEARING DEPOSITS Following is a summary of scheduled maturities of certificates of deposit during the years following December 31, 1998: (In Thousands of Dollars) 1999 $109,869 2000 22,216 2001 5,850 2002 5,635 2003 and thereafter 7,987 TOTAL $151,557 Following is a summary of certificates of deposit of $100 thousand or more by remaining maturities as of December 31, 1998: (In Thousands of Dollars) Three months or less $7,752 Three to six months 4,406 Six to twelve months 13,090 Over twelve months 6,959 TOTAL $32,207 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 $17.511 million for the year ended December 31, 1998 and $15.593 million for 1997. The market value was $17.780 million for 1998 and $15.709 million for 1997. At December 31, 1998, these agreements had a weighted average interest rate of 5.27% and will mature January through March 1999. The securities, although held in safekeeping outside the bank subsidiary, were under the bank subsidiary's control. Securities sold under repurchase agreements averaged monthly $18.397 million in 1998 and $14.887 million in 1997. Maximum amounts outstanding at any month end during 1998 and 1997 were $25.792 million and $16.211 million, respectively. The bank subsidiary has access to borrowing facilities at the Federal Home Loan Bank, which totaled $31.766 million at December 31, 1998. NOTE H - FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank advances at December 31, 1998 are secured by a blanket pledge of residential mortgage loans totaling $8.014 million. December 31, 1998 1997 Weighted Weighted Average Average (In Thousands of Dollars) Amount Rate Amount Rate Fixed-rate advances $1,440 5.80% $ 0 0.00% Variable-rate advances 3,903 5.28% 4,612 5.84% Total advances $5,343 5.42% $4,612 5.84% Scheduled repayments of FHLB advances are as follows: (In Thousands of Dollars) Maturing in: 1999 $3,646 2000 257 2001 273 2002 289 2003 218 Later years 660 Total $5,343 NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES The bank subsidiary utilizes equipment and leases a branch location under a noncancelable operating lease extending to 2004. Rental expense charged to operations totaled $ 82 thousand for 1998, $114 thousand for 1997 and $125 thousand for 1996. 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, 1998: (In Thousands of Dollars) Year ending: December 31, 1999 $ 36 December 31, 2000 36 December 31, 2001 36 December 31, 2002 36 December 31, 2003 36 Later years 30 TOTAL $ 210 The bank subsidiary is required to maintain noninterest-bearing reserve balances with the Federal Reserve Bank. The average reserve balance was $7.677 million for 1998. 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 $ 28,475 Standby letters of credit and financial guarantees written $ 473 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. As the year 2000 approaches, the company recognizes the need to ensure its operations will not be adversely impacted by year 2000 software failures. The Company is addressing this issue to ensure the availability and integrity of its financial systems and the reliability of its operational systems. The Company has and will continue to make expenditures necessary to ensure that its software systems and applications continue to function before, during and after the year 2000. These expenses have not been and are not expected to be material to the Company's financial position or results of operations. NOTE J - 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 K - 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). As of December 31, 1998, the bank subsidiary had $2.032 million of retained earnings available for distribution and $14.92 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, 1998, that the bank subsidiary meets all capital adequacy requirements to which it is subject. As of December 31, 1998, 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, 1998 Total Capital (to Risk-Weighted Assets) $45,724 17.10% $21,393 8.00% Tier I Capital (to Risk-Weighted Assets) $42,377 15.85% $10,697 4.00% Tier I Capital (to Average Assets) $42,377 10.85% $15,621 4.00% 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%
NOTE L - 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 $207 thousand, $203 thousand and $179 thousand for the years ended December 31, 1998, 1997 and 1996 respectively. NOTE M - FEDERAL INCOME TAXES The provision for income taxes (credit) consists of the following:
(In Thousands of Dollars) Years ended December 31 1998 1997 1996 Current $2,503 $2,277 $2,000 Deferred (84) (77) (70) TOTALS $2,419 $2,200 $1,930
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 1998 1997 1996 Percent of Percent of Percent of Amount pretax inc Amount pretax inc Amount pretax inc Statutory tax $2,637 35% $2,429 35% $2,122 35% Effect of nontaxable interest (189) (3) (162) (2) (156) (3) Other (29) 0 (67) (1) (36) 0 ACTUAL TAX $2,419 32% $2,200 32% $1,930 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 1998 1997 1996 Depreciation ($1) $41 $42 Provision for credit losses (89) (78) (98) Deferred loan fees and origination costs 29 2 (13) Federal Home Loan Bank dividends 32 26 0 Deferred compensation (80) (67) 0 Other (25) (1) (1) TOTALS ($84) ($77) ($70)
Deferred tax liabilities (assets) are comprised of the following at December 31:
(In Thousands of Dollars) Deferred tax assets: 1998 1997 Allowance for credit losses ($985) ($896) Deferred compensation (210) (130) Deferred loan fee income (31) (59) Gross deferred tax assets (1,226) (1,085) Deferred tax liabilities: Depreciation 480 481 Mark-to-market adjustment - securities available for sale 139 213 Federal Home Loan Bank dividends 77 45 Gross deferred tax liabilities 696 739 ($530) ($346) No valuation allowance for deferred tax assets was recorded at December 31, 1998 and 1997. Federal income taxes applicable to investment securities gains in 1998 and 1997 were $2 thousand each year. Federal income taxes (benefit) applicable to other comprehensive income were $(71) thousand, $157 thousand and $(55) thousand for 1998, 1997 and 1996, respectively.
NOTE N - LOANS TO RELATED PARTIES Certain directors, executive officers and associates of such persons were loan customers during 1998. 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 1998: (In Thousands of Dollars) Total loans at December 31, 1997 $ 864 New loans 481 Repayments 237 Total loans at December 31, 1998 $ 1,108 NOTE O - 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, 1998: 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, 1998 and 1997 are as follows:
(In Thousands of Dollars) 1998 1997 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Financial assets: Cash and cash equivalents $22,680 $22,680 $19,182 $19,182 Investment securities: Available for sale 81,664 81,440 66,620 66,720 Other securities 2,655 2,655 1,686 1,686 Loans - Net 283,113 288,356 271,665 272,442 TOTAL FINANCIAL ASSETS $390,112 $395,131 $359,153 $360,030 Financial liabilities: Deposits $321,518 $323,898 $305,830 $306,611 Securities sold under repurchase agreements 24,473 24,473 14,659 14,659 Short term borrowings 5,415 5,415 5,171 5,171 TOTAL FINANCIAL LIABILITIES $351,406 $353,786 $325,660 $326,441 Unrecognized financial instruments: Commitments to extend credit $29,504 $29,504 $14,479 $14,479 Standby letters of credit and financial guarantees 473 473 406 406
NOTE P - 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, 1998 December 31, 1997 BALANCE SHEETS Assets: Cash $764 $5,186 Investment in bank subsidiary 42,667 36,373 Securities available for sale 3,830 0 Other securities 435 54 Other 71 8 $47,767 $41,621 Liabilities: Accounts payable $763 $1,112 Stockholders equity: Common stock 31,661 24,792 Retained earnings 15,337 15,717 Unrealized appreciation of debt securities, net of applicable income taxes 6 0 TOTAL STOCKHOLDERS EQUITY 47,004 40,509 $47,767 $41,621
STATEMENTS OF INCOME (In Thousands of Dollars) Years ended December 31, 1998 December 31, 1997 December 31, 1996 Income: Equity in net income of subsidiary $5,021 $4,819 $4,194 Interest and dividends on securities 209 0 0 TOTAL INCOME 5,230 4,819 4,194 Other expenses (115) (77) (63) NET INCOME $5,115 $4,742 $4,131
STATEMENTS OF CASH FLOWS (In Thousands of Dollars) Years ended December 31, 1998 December 31, 1997 December 31, 1996 Cash flows from operating activities: Net income $5,115 $4,742 $4,131 Adjustments to reconcile net income to net cash provided by operating activities: Income from subsidiary (5,021) (4,819) (4,194) Dividends received from subsidiary 0 5,977 6,027 Other (59) 2 (1) NET CASH PROVIDED BY OPERATING ACTIVITIES 35 5,902 5,963 Cash flows from investing activities: Investment in subsidiary (1,273) (3,025) (2,582) Purchases of other securities and securities available for sale (4,201) (54) 0 NET CASH USED IN INVESTING ACTIVITIES (5,474) (3,079) (2,582) Cash flows from financing activities: Purchase of treasury stock 0 0 (4,319) Proceeds from sale of treasury stock 0 2,536 0 Dividends paid (2,770) (1,858) (1,138) Proceeds from sale of common stock 3,787 488 2,582 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,017 1,166 (2,875) NET INCREASE (DECREASE) IN CASH (4,422) 3,989 506 CASH Beginning of year 5,186 1,197 692 End of year $764 $5,186 $1,197 Cash dividends of $0, $5.976 million and $6.027 million were recevied from the bank subsidiary in 1998, 1997 and 1996, respectively.
INSIDE BACK COVER Drawing of Map of Ohio Highlighting Branch Locations MAIN OFFICE 20 S. Broad St. Canfield, OH 44406 533-3341 AUSTNTOWN 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 POLAND 106 McKinley Way West Poland, OH 44514 757-7508 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 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 16,686 0 5,994 0 81,664 2,655 2,655 286,802 3,689 401,621 321,518 27,362 2,941 2,526 0 0 31,661 15,613 401,621 24,585 4,642 0 29,227 11,589 12,736 16,491 840 5 9,815 7,534 7,534 0 0 5115 1.42 1.42 8.15 576 435 0 0 3,429 874 294 3,689 3,689 0 0
EX-99 4 DEFINITIVE PROXY STATEMENT SCHEDULE 14A 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 Sec. Act Rel No. 7331; Exch. Act Rel. No. 37692, eff 10/7/96) FARMERS NATIONAL BANC CORP. 20 SOUTH BROAD STREET CANFIELD, OHIO 44406 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON THURSDAY, MARCH 25, 1999 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 25, 1999 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. AMENDMENT TO ARTICLE IV. To approve the proposal to amend Article IV of the Corporation's Articles of Incorporation to increase the authorized number of shares of common stock, no par value, of the Corporation from 5,000,000 to 12,500,000. 3. APPROVAL OF THE 1999 STOCK OPTION PLAN AND RELEASE OF PREEMPTIVE RIGHTS AS TO THE SHARES ISSUED UNDER THE PLAN. To approve the adoption of the Farmers National Banc Corp. 1999 Stock Option Plan and release of preemptive rights as to shares issued under the Plan. A copy of the Stock Option Plan is included as Exhibit 'A' to the Proxy Statement accompanying this Notice. 4. 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 5, 1999 are the only shareholders entitled to notice of and to vote at the Annual Shareholders Meeting. By Order of the Board of Directors /s/Frank L. Paden, President & Secretary Canfield, Ohio March 4, 1999 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 25, 1999 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 25, 1999 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 statement and the form of proxy are being mailed on March 4, 1999 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 1998 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 5, 1999 will be entitled to vote at the meeting. As of February 5, 1999, Farmers had issued and outstanding 3,657,289 shares of common stock with no par value held by approximately 2,586 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. 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 accordance with the instructions indicated in such proxy. If no instructions are indicated, shares represented by proxy will be voted "FOR" the election of each of the Directors as described herein under Proposal 1, "FOR" approval of the amendment to Article IV of the Corporation's Articles of Incorporation as described herein under Proposal 2, and "FOR" approval of the 1999 Stock Option Plan and release of preemptive rights as to shares issued under the plan as described herein under Proposal 3. 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 the 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. PROPOSAL 1: 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. With the exception of Mr. Joseph D. Lane, each of the nominees currently serves as a Director of Farmers. Election of Directors by shareholders shall be determined by a plurality of the votes cast by the shareholders who are entitled to vote at the meeting, present in person or by proxy. 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 53 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, 72 1975 Executive Vice President/Cashier of Farmers National Bank since 1972 and Executive Vice President/ Treasurer of Farmers National Banc Corp. since 1983. Joseph D. Lane Attorney and Principal of Lane & 46 N/A Rusu Co. L.P.A. since 1995. Vice President of Lane Funeral Homes, Inc. since 1975 and Vice President of Lane Life Paramedics Ambulance Services since 1985. David C. Myers President and Owner of Myers 70 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. 69 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 47 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, 69 1972 President of Farmers National Bank since 1972 and President & Secretary of Farmers National Banc Corp. since 1983. Ronald V. Wertz C.P.C.U., C.I.C., Vice President 52 1989 with Acordia Insurance since 1998. Previously was President and Owner of Boyer Insurance, Inc. since 1981. (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. PROPOSAL 2: PROPOSAL TO AMEND ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED NUMBER OF COMMON SHARES. The Articles of Incorporation of the Corporation presently authorize 5,000,000 shares, no par value. The Corporation's Board of Directors unanimously adopted a resolution proposing and declaring it advisable that Article IV of the Corporation's Articles of Incorporation (the "Articles") be amended in order to increase the authorized number of shares of the Corporation to 12,500,000 shares, no par value ("Common Shares"), and recommending to the shareholders of the Corporation the approval of the proposed amendment. Of the Corporation's presently authorized 5,000,000 Common Shares, as of December 31, 1998, 3,657,289 shares were outstanding. The Board of Directors believes that it is desirable and in the best interests of the Corporation and its shareholders to increase the number of Common Shares that the Corporation is authorized to issue. This will ensure that the Corporation will have a sufficient number of authorized Common Shares available in the future to provide it with the desired flexibility necessary to meet its business needs. If this proposal is approved by the shareholders, the additional Common Shares will be available for a variety of corporate purposes, including for example, the declaration and payment of share dividends to the Corporation's shareholders; issuance of shares under the Dividend Reinvestment Plan; share splits; use in the financing of expansion or future acquisitions; issuance pursuant to the terms of employee benefit plans; and use in other possible further transactions of a currently undetermined nature. If the proposed amendment is adopted, the Corporation would be permitted to issue the additional authorized Common Shares without further shareholder approval, except to the extent otherwise required by the Articles, by law or by any securities exchange on which the Common Shares may be listed at the time. The authorization of additional Common Shares will enable the Corporation, as the need may arise, to take timely advantage of market conditions and the availability of favorable opportunities without the delay and expense associated with the holding of a special meeting of its shareholders. It is the belief of the Board of Directors that the delay necessary for shareholder approval of a specific issuance could be detrimental to the Corporation and its shareholders. The Board of Directors does not intend to issue any Common Shares except on terms which the Board deems to be in the best interests of the Corporation and its shareholders. Shareholders of the Corporation may have preemptive rights to purchase Common Shares issued in the future, unless such rights are specifically limited by the Articles. Depending on the terms thereof, the issuance of the Common Shares may or may not have a dilutive effect on the Corporation's then-existing shareholders. Other than the Common Shares which may be acquired pursuant to the Corporation's existing Dividend Reinvestment Plan and Stock Option Plan (see Proposal No. 3), the Corporation presently has no plans, agreements or understandings to issue any of the newly authorized Common Shares. If the amendment is approved, it will become effective upon the filing of a Certificate of Amendment to the Corporation's Articles with the Ohio Secretary of State, which is expected to be accomplished as promptly as practicable after such approval is obtained. ADOPTION OF THE PROPOSED AMENDMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF TWO THIRDS (2/3) OF THE COMMON SHARES. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE AMENDMENT. PROPOSAL 3: APPROVAL OF THE ADOPTION OF THE FARMERS NATIONAL BANC CORP. 1999 STOCK OPTION PLAN AND RELEASE OF PREEMPTIVE RIGHTS AS TO SHARES ISSUED UNDER THE PLAN. The following is a summary of the material provisions of the Farmers National Banc Corp. 1999 Stock Option Plan (the "Plan") which is attached as Exhibit `A' to this Proxy Statement and is incorporated by reference into this summary description. This summary is qualified entirely by reference to the Plan. Any capitalized terms which are used in this summary description but not defined have the meanings assigned to them in the Plan. Introduction. On December 15, 1998, the Board of Directors adopted the Plan. The Board of Directors urges stockholders to read the Plan in its entirety. The Plan provides stock-based compensation to eligible employees, including incentive and nonqualified stock options and stock appreciation rights. Stock-based compensation will typically be issued in consideration for the performance of services to the Corporation. The Board of Directors believes that the Plan will optimize the profitability and growth of the Corporation through incentives that link the interests of the Plan participants with those of the Corporation's stockholders. The Board further believes that the Plan will enable the Corporation to attract, retain and motivate employees capable of making significant contributions to the Corporation's success and to allow employees to share in the success of the Corporation. The Board of Directors expects the Plan to link the interests of participants with those of the Corporation's stockholders by giving participants an incentive to perform at a superior level consistent with the Corporation's goals. The Board of Directors believes that approval of the Plan is, therefore, in the stockholders best interests. Release of Preemptive Rights. Holders of Common Shares are generally entitled to preemptive rights, subject to certain exceptions described in Article XIII of the Corporation's Articles of Incorporation. Consistent with the General Corporation Law of Ohio, Article XIII allows for the release of preemptive rights on shares issued under a stock option plan if the release is approved by the affirmative vote of the holders of a majority of the shares entitled to such preemptive rights. If the holders of a majority of the common shares of the Corporation vote "FOR" this proposal, shareholders will not have preemptive rights on shares issued under the Plan. While the release of preemptive rights may have a dilutive effect on the holders of Common Shares, the Board of Directors feels that it would not be practicable to implement a Stock Option Plan with such shares subject to preemptive rights. Administration. The Plan shall be administered by the Compensation Committee of the Board or, alternatively at the discretion of the Board, the Board may appoint a Stock Option Plan Committee consisting of not less than two nor more than five members to administer the Plan (collectively referred to as the "Committee"). All Committee members shall be disinterested directors qualified to serve pursuant to Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934, as amended and in effect from time to time. Subject to the express provisions of the Plan, the Committee shall have sole discretion and authority to determine from time to time the individuals to whom Options may be granted, the terms of the Stock Option Agreement with the Optionee, including but not limited to, the number of shares of Stock to be subject to each Option, the period during which such Option may be exercised and the price at which such Option may be exercised. Eligibility. Directors and Officers of the Corporation and its subsidiaries and such other employees, consultants or other individuals the Board of Directors may from time to time designate, shall be eligible to participate in the Plan. Options. The Committee has discretion to award incentive stock options ("ISOs"), which are intended to comply with Section 422 of the Internal Revenue Code, or nonqualified stock options ("NQSOs"), which are not intended to comply with Section 422 of the Internal Revenue Code. Each option issued under the Plan must be exercised within a period of ten years from the date of grant, and the exercise price of an option may not be less than the fair market value of the underlying shares of the Corporation's Common Stock on the date of grant. At the time of exercise, the full exercise price for a stock option must be paid in cash or, if the Committee so provides, in shares of the Corporation's Common Stock. Subject to the specific terms of the Plan, the Committee has discretion to set such additional limitations on option grants (including expiration or termination provisions) as it deems appropriate. Options become exercisable according to the following vesting schedule: 20% after one year from the date of grant 40% after two years from the date of grant 60% after three years from the date of grant 80% after four years from the date of grant 100% after five years from the date of grant Stock Appreciation Rights. The Committee may grant Stock Appreciation Rights (SAR) to participants under the Plan. A SAR may be granted simultaneously with or subsequent to the option to which the right is related, but each SAR must relate to a particular option. In exchange for the surrender in whole or in part of the related option to purchase shares of Common Stock, the exercise of a SAR shall entitle a Participant to an amount equal to the appreciation in value of the shares to which the related option is being surrendered pursuant to such exercise. Such appreciation in value shall be equal to the excess of the Fair Market Value of such shares. Option Grant. Options granted under the Plan will be evidenced by written Stock Option Agreements specifying the number of shares covered thereby and the option price, the exercise period and all other terms, restrictions and conditions of the option. The exercise price of all stock options granted under the Plan must be at least equal to the Fair Market Value of such shares on the date of grant. With respect to any Optionee who owns stock possessing more than 10% of the voting rights of the Corporation's outstanding Common Stock, the exercise price of any stock option must be not less than 110% of the Fair Market Value on the date of grant for ISO's. Number of Available Shares. Up to 375,000 shares of the Corporation's Common Stock are authorized for issuance through the Plan. The Plan provides for appropriate adjustments in the number of shares of the Corporation's Common Stock subject to awards and available for future awards in the event of changes in outstanding Common Stock by reason of a merger, stock split or certain other events. Amendment and Termination. The Board of Directors may modify, amend or terminate the Plan at any time. However, no such action may materially increase either the benefits to Participants under the Plan or the number of shares that may be issued under the Plan, materially modify the eligibility requirements, reduce the Option Price or impair any outstanding option or SAR. The Board of Directors will seek stockholder approval of an amendment if necessary under Internal Revenue Service Regulations or any applicable law. Subject to the right of the Board of Directors to modify, amend or terminate the Plan, the Plan will remain in effect until all options and rights granted thereunder have been exercised or expired in accordance with the terms of the Plan. However, in no event will the Board of Directors grant awards under the Plan on or after December 15, 2008. Federal Income Tax Consequences. The following description of Federal Income Tax Consequences is based upon existing statutes, regulations and interpretations as of the date of this Proxy Statement. Because the currently applicable rules are complex and the tax laws may change and because income tax consequences may vary depending upon the particular circumstances of each participant, each participant should consult his or her own tax advisor concerning Federal (and any state and local) Income Tax Consequences. The following discussion does not purport to describe state or local income tax consequences. Options so designated under the Option Plan are intended to qualify as Incentive Stock Options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code"). All Options that are not designated as ISOs are intended to be Non-Qualified Stock Options ("NQSO"). Incentive Stock Options. The Optionee will recognize no income upon the grant of an ISO and incur no tax on its exercise (unless the Optionee is subject to the alternative minimum tax). If the Optionee holds the stock acquired upon exercise of an ISO (the "ISO Shares") for more than one year after the date the option was exercised and for more than two years after the date the option was granted, the Optionee generally will realize long-term capital gain or loss (rather than ordinary income or loss) upon disposition of the ISO Shares. This gain or loss will be equal to the difference between the amount realized upon such disposition and the amount paid for the shares. If the Optionee disposes of ISO Shares prior to the expiration of either holding period (a "disqualifying disposition"), then gain realized upon such disposition, up to the difference between the Fair Market Value of the shares on the date of exercise (or, if less, the amount realized on a sale of such shares) and the option exercise price, will be treated as ordinary income. Any additional gain will be long-term or short-term capital gain, depending upon the amount of time the ISO Shares were held by the Optionee. Non-Qualified Stock Options. An Optionee will not recognize any taxable income at the time a NQSO is granted. However, upon exercise of a NQSO, the Optionee will include in income as compensation an amount equal to the difference between the Fair Market Value of the shares on the date of exercise (or, in the case of exercise for stock subject to a substantial risk of forfeiture, at the time such forfeiture restriction lapses) and the amount paid for that stock upon exercise of the NQSO. In the case of stock subject to a substantial risk of forfeiture, if the Optionee makes an 83(b) election, the included amount will be based on the difference between the Fair Market Value on the date of exercise and the Option exercise price. The included amount will be treated as ordinary income by the Optionee and will be subject to income tax withholding by the Corporation (either by payment in cash by the Optionee or withholding out of the Optionee's salary). Upon sale of the shares by the Optionee, any appreciation or depreciation in the value of the shares will be treated as capital gain or loss (either long- or short-term, depending upon the time the Optionee holds the shares after exercising the NQSO). Tax Treatment of the Corporation. The Corporation will be entitled to a deduction in connection with the exercise of a NQSO by a domestic employee or Director to the extent that the Optionee recognizes ordinary income and the Corporation withholds tax. The Corporation will be entitled to a deduction in connection with the disposition of ISO Shares only to the extent that the Optionee recognizes ordinary income on a disqualifying disposition of the ISO Shares. ADOPTION AND APPROVAL OF THE FARMERS NATIONAL BANC CORP. 1999 STOCK OPTION PLAN REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE COMMON SHARES. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth information regarding beneficial ownership as of December 31, 1998, of the Corporation's common shares of each Director and all Executive Officers as a group. Aggregate Number of Percent of Shares Beneficially Outstanding Name Owned (A) Shares Benjamin R. Brown 28,543 .78% Richard L. Calvin 33,652 .92% Joseph O. Lane 83,378 2.28% David C. Myers 22,982 .63% Edward A. Ort 6,562 .18% Frank L. Paden 8,861 .24% William D. Stewart 29,001 .79% Ronald V. Wertz 27,536 .75% Executive Officers as a Group 12,027 (B) .33% All Directors and Executive Officers as a Group 243,681 6.66% (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 8,861 shares held by Frank L. Paden, President and CEO of Farmers National Bank of Canfield and President and Secretary of the Corporation. 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 1998, all Section 16(a) filing requirements applicable to its officers, Directors and greater than 10% beneficial owners were complied with. 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 26, 1998, the following committees were appointed by the Chairman: EXECUTIVE COMPENSATION AND EMPLOYEES SALARY COMMITTEE: Joseph O. Lane, Chairman; Benjamin R. Brown, Richard L. Calvin, David C. Myers, Edward A. Ort, William D. Stewart 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 1998. 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 1998. 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 met one time in 1998. 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 1998. 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 1998. 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 1998. During 1998, 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 1998. Members of the Board of Directors receive $500.00 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 1998 118,917 0 7,975 383 1997 103,665 0 7,486 1,098 1996 86,318 0 4,749 1,038 (a) The amount of Director Fees included in this annual amount is as follows: Paden ($9,300, $7,900 and $6,250). (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, 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 exists for The Farmers National Bank of Canfield and although the Farmers National Banc Corp. 1999 Stock Option Plan has been approved by the Board of Directors on December 15, 1998, no Options or Stock Appreciation rights have been granted in 1998. 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 1998, the largest aggregate extensions of credit to executive officers, Directors and their associates during the year ended December 31, 1998 was $1,514,016 or 3.20% 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, Richard L. Calvin, David C. Myers, Edward A. Ort, William D. Stewart 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 1998, 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, 1993, 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 12/93 12/94 12/95 12/96 12/97 12/98 Farmers National Banc Corp. 100 131 192 251 350 499 NASDAQ Stock Mkt-US 100 98 138 170 209 293 NASDAQ Bank 100 100 148 196 328 325 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, 1999. Hill, Barth and King also served as the Corporation's independent public accountant for the fiscal year ended December 31, 1998. 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 1999 Annual Meeting to be held in March 2000 must be received by the Corporation no later than December 1, 1999. 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 1998 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 5, 1999, at the Annual Meeting of its Shareholders to be held at Colonial Catering, 429 Lisbon Street, Canfield, Ohio 44406, on Thursday, March 25, 1999, 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 4, 1999 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 D. Lane, David C. Myers, Edward A. Ort, Frank L. Paden, William D. Stewart, Ronald V. Wertz 2. AMENDMENT TO ARTICLE IV: To approve the proposal to amend Article IV of the Corporation's Articles of Incorporation to increase the authorized number of common shares, no par value, of the Corporation from 5,000,000 to 12,500,000. ( ) FOR ( ) AGAINST ( ) ABSTAIN 3. APPROVAL OF THE 1999 STOCK OPTION PLAN AND RELEASE OF PREEMPTIVE RIGHTS AS TO THE SHARES ISSUED UNDER THE PLAN. To approve the adoption of the Farmers National Banc Corp. 1999 Stock Option Plan and release of preemptive rights as to shares issued under the Plan. ( ) FOR ( ) AGAINST ( ) ABSTAIN 4. SUCH OTHER BUSINESS as may properly come before the meeting or any adjournment thereof. IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY, THIS PROXY CONFERS AUTHORITY TO VOTE AND WILL BE VOTED "FOR" EACH PROPOSITION LISTED. 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 ________________________________________ ________________________________________ ________________________________________ 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. The following exhibits are filed or incorporated by reference as part of this report: 1. Farmers National Banc Corp. 1999 Stock Option Plan (filed herewith).
EX-1 5 FARMERS NATIONAL BANC CORP. 1999 STOCK OPTION PLAN ARTICLE I THE PLAN Section 1.1 Name. This plan shall be known as the "Farmers National Banc Corp. 1999 Stock Option Plan." Section 1.2 Purpose. The purpose of the Plan is to advance the interests of Farmers National Banc Corp. (the "Company") and its shareholders by affording to Directors and officers of the Company and Farmers National Bank (the "Bank") an opportunity to acquire or increase their proprietary interest in the Company by the grant to such persons of (a) options to purchase shares of the Company's common stock and (b) Stock Appreciation Rights related to the Options under the terms set forth herein. By encouraging such persons to become owners of the Company, the Company seeks to attract, motivate, reward and retain those highly competent individuals upon whose judgment, initiative, leadership and efforts the success of the Company depends. It is intended that certain Options granted under this Plan will qualify and that certain other Options will not qualify as incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and the terms of the Options shall be interpreted in accordance with their designation in the Option Agreement. Section 1.3 Effective Date and Term. The Plan was approved by the Board of Directors of the Company on December 15, 1998, and shall be effective March 25, 1999, subject to approval and ratification by a majority of the shareholders of the Company, present in person or by proxy, at the annual meeting of shareholders of the Company to be held in 1999. The Plan shall terminate upon the tenth (10th) anniversary of the Effective Date. ARTICLE II DEFINITIONS Section 2.1 Definitions. As used herein, the following terms shall have the meaning set forth below, unless the context clearly requires otherwise: (a) "Bank" shall mean the Farmers National Bank. (b) "Board" shall mean the Board of Directors of the Company. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statutes. (d) "Committee" shall mean the Compensation Committee of the Board, or the Stock Option Plan Committee if one is appointed by the Board to administer the Plan. (e) "Company" shall mean Farmers National Banc Corp. (f) "Director" shall mean a member of the Board of Directors of the Company and, or the Bank. (g) "Effective Date" with respect to the Plan shall mean the date specified in Section 1.3 as the Effective Date. (h) "Fair Market Value" with respect to a share of Stock shall mean the Fair Market Value of the Stock as determined by the Committee on the basis of such factors as they deem appropriate; provided, however, that if at the time the determination of fair market value is made, those shares are admitted to trading on a national securities exchange for which sales prices are regularly reported the fair market value of those shares shall not be less than the mean of the high and low asked or closing sales price reported for the Common Stock on that exchange on the day or most recent trading day preceding the date on which the Option is granted. For purposes of this Section 2.1(h), the term "national securities exchange" shall include the National Association of Securities Dealers Automated Quotation System and the over-the-counter market. (i) "ISO" shall mean any Option under this Plan which is to be an incentive stock option under Code Sections 422. (j) "NQSO" shall mean any Option granted under this Plan which is not intended to qualify as an incentive stock option under Code Section 422. (k) "Option" shall mean a stock option, whether an ISO or NQSO, granted pursuant to this Plan. (l) "Optioned Stock" shall mean the Stock subject to an Option or Stock Appreciation Right. (m) "Optionee" or "Participant" shall mean a Director, officer or employee of the Bank or the Company to whom an Option has been granted. (n) "Plan" shall mean the Farmers National Banc Corp. 1999 Stock Option Plan, the terms of which are set forth herein. (o) "SEC" shall mean the Securities and Exchange Commission. (p) "Plan Year" shall mean the twelve-month period beginning on the Effective Date, and each twelve-month period thereafter beginning on the anniversary date of the Effective Date. (q) "Stock" shall mean the Common Stock of the Company or, in the event that the outstanding shares of Stock are changed into or exchanged for shares of a different stock or securities of the Company or some other entity, such other stock or securities. (r) "SAR" or "Stock Appreciation Right" shall mean a right to receive cash in an amount equal to the excess of the fair market value of a share of Stock on the exercise date over the fair market value of a share of Stock on the date the Stock Appreciation Right is granted pursuant to the provisions of the Plan. (s) "Stock Option Agreement" shall mean the agreement between the Company and the Optionee under which the Optionee may purchase Stock pursuant to the terms of the Plan. ARTICLE III CHARACTERIZATION OF OPTIONS Section 3.1 Characterization of Options. Options granted in accordance with the terms hereof within the limits prescribed by Article VII hereof and which are specified in the Option Agreement as intended to be incentive stock options, are to be incentive stock options as provided in Code Section 422. All other Options granted hereunder shall be nonqualified options. ARTICLE IV ADMINISTRATION Section 4.1 Administration. (a) The Plan shall be administered by the Compensation Committee of the Board or, alternatively at the discretion of the Board, the Board may appoint a Stock Option Plan Committee consisting of not less that two nor more than five members to administer the Plan. All Committee members shall be disinterested directors qualified to serve pursuant to Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934, as amended and in effect from time to time. (b) Subject to the express provisions of the Plan, the Committee shall have sole discretion and authority to determine from time to time the individuals to whom Options may be granted, the terms of the Stock Option Agreement with the Optionee, including but not limited to, the number of shares of Stock to be subject to each Option, the period during which such Option may be exercised and the price at which such Option may be exercised. (c) Meetings of the Committee shall be held at such times and places as shall be determined from time to time by the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business and the vote of a majority of those members present at any meeting shall decide any question brought before the meeting. In addition, the Committee may take any action otherwise proper under the Plan by the affirmative vote, taken without a meeting, of a majority of the members. (d) No member of the Committee shall be liable for any act or omission of any other member of the Committee or for any act or omission on his own part, including, but not limited to, the exercise of any power or discretion given to him under the Plan, except those resulting from his own gross negligence or willful misconduct. All questions of interpretations and application with respect to the Plan or Options granted thereunder shall be subject to the determination, which shall be final and binding, of a majority of the whole Committee. (e) In addition, the Committee shall have the sole discretion and authority to determine whether an Option shall be an Incentive Stock Option or a Non-qualified Stock Option, or both types of options, provided that Incentive Stock Options may be granted only to persons who are employees of the Company or the Bank. Section 4.2 Company Assistance. The Company and the Bank shall supply full and timely information to the Committee on all matters relating to eligible employees, their employment, death, retirement, disability or other termination of employment and such other pertinent facts as the Committee may require. The Company and the Bank shall furnish the Committee with such clerical and other assistance as is necessary in the performance of its duties. ARTICLE V OPTIONEES Section 5.1 Eligibility. Directors and officers of the Company and the Bank and such other employees, consultants, or other individuals as the Board of Directors may from time to time designate shall be eligible to participate in the Plan. The Committee may grant Options to any eligible individual subject to the provisions of Section 6.1. ARTICLE VI SHARES SUBJECT TO PLAN Section 6.1 Stock Available for Options. Subject to adjustment pursuant to the provisions of Section 9.2 hereof, the number of shares with respect to which Options may be granted during the term of the Plan shall not exceed 375,000 shares of Company Stock provided, however, that the number of shares which may be designated as Incentive Stock Options shall be limited to 375,000, subject to adjustment in accordance with paragraph 9.2 hereof. Shares with respect to which Options may be granted may be either authorized and unissued shares or shares issued and thereafter acquired by the Company. Section 6.2 Options Under the Plan. Shares of Stock with respect to which an Option granted hereunder shall have been exercised shall not again be available for grant hereunder. If Options granted hereunder shall expire, terminate or be canceled for any reason without being wholly exercised, new Options may be granted hereunder covering the number of shares to which such Option expiration, termination or cancellation relates. Section 6.3 Adjustments in Authorized Shares. In the event of any change in corporate capitalization, such as a stock split, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368) or any partial or complete liquidation of the Company, such adjustment shall be made in the number of Shares which may be delivered under Section 6.1, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Option shall always be a whole number. ARTICLE VII OPTIONS Section 7.1 Terms and Conditions of Options. Each Option shall be evidenced by a Stock Option Agreement which shall contain such terms and conditions consistent with the provisions of the Plan as may be approved by the Committee and shall be signed by an officer of the Company and the Optionee. The Stock Option Agreement shall specify the Option Price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Committee shall determine. The Stock Option Agreement shall specify whether the Option is intended to be an ISO or a NQSO. Each Option granted under the Plan shall be subject to such terms and conditions as follows: (a) Terms of ISO's. ISO's granted hereunder shall be subject to the terms and conditions contained in subparagraphs (i)-(v) below of this Plan and to such other terms and conditions as the Committee may deem appropriate contained in the Stock Option Agreement with the Optionee; provided, however, that no Option that is intended to qualify as an ISO shall be subject to any condition that is inconsistent with the provisions of Code Section 422(b). In the event that any condition imposed hereunder on an Option intended to qualify as an ISO is at any time determined by the Internal Revenue Service or a court of competent jurisdiction to be inconsistent with Code Section 422, then such Option shall be deemed to have been granted without such conditions as may be applicable as if the invalid condition had not been included. (i) Option Period. Each Stock Option Agreement shall specify the period during which the ISO thereunder is exercisable (which shall not exceed ten years from the date of grant) and shall provide that the ISO shall expire at the end of such period. (ii) Option Price. The Option Price per share shall be determined by the Committee at the time any ISO is granted and shall not be less than one hundred percent (100%) of the Fair Market Value of a share of Stock on the day that the ISO is granted. Such price shall be subject to adjustment as provided in Section 9.2. (iii) Ten Percent Stockholders. ISO's shall not be granted to any person who, immediately before the ISO is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of Stock of the Company; provided, however, that this prohibition shall not apply if at the time such ISO is granted the Option Price is at least one hundred ten percent (110%) of the Fair Market Value of the stock and such ISO is not exercisable after the expiration of five (5) years from the date such ISO is granted. (iv) Limit on Incentive Stock Options. To the extent the aggregate Fair Market Value of the shares (valued at the time of grant in accordance with subparagraph (ii) above) with respect to which ISO's (determined without regard to this subparagraph (iv) are exercisable for the first time by any individual during any calendar year (under all stock option plans of the Company) exceeds $100,000.00, such ISO's in excess of $100,000.00 shall be treated as Options which are NQSO's. This subparagraph (iv) shall be applied by taking ISO's into account in the order in which they were granted. (v) Period to Exercise Option. Any ISO granted hereunder may, prior to its expiration or termination, be exercised from time to time, in whole or in part, up to the total number of shares with respect to which it shall have then become exercisable. An ISO granted hereunder may become exercisable in installments as determined by the Committee; provided, however, that if the Committee grants an ISO or ISO's exercisable in more than one installment, and if the employment of an Optionee holding such ISO is terminated, the ISO shall be exercisable in accordance with the terms of the Option Agreement only as to such number of shares as to which the Participant had the right to exercise the ISO on the date of termination of employment. (b) Terms of NQSO's. NQSO's granted hereunder shall be subject to the terms and conditions contained in subparagraphs (i)-(iii) below and to such other terms and conditions as the Committee may deem appropriate which shall be contained in the Stock Option Agreement. (i) Option Period. Each Stock Option Agreement shall specify the period during which the Option thereunder is exercisable, (which shall not exceed ten years from the date of grant) and shall provide that the NQSO shall expire at the end of such period. (ii) Option Price. The Committee shall determine the Option Price per Share at the time any NQSO is granted. Such price shall be subject to adjustment as provided in Section 9.2. (iii) Period to Exercise Option. Any NQSO granted hereunder may, prior to its expiration or termination, be exercised from time to time, in whole or in part, up to the total number of Shares with respect to which it shall have then become exercisable. A NQSO granted hereunder may become exercisable in installments as determined by the Committee; provided, however, that if the Committee grants an Option exercisable in more than one installment, and if the employment of an Optionee holding such Option is terminated, the Option shall be exercisable in accordance with the terms of the Option Agreement only as to such number of shares as to which the Optionee had the right to exercise the Option on the date of termination of Employment. Section 7.2 Option Exercise. (a) The Company shall not be required to sell or issue shares under any Option if the issuance of such shares shall constitute or result in a violation by the Optionee or the Company of any provisions of any law, statute or regulation of any governmental authority. Specifically, in connection with the Securities Act of 1933, (the "Act"), upon exercise of any Option, the Company shall not be required to issue such shares unless the Committee has received evidence satisfactory to it to the effect that registration under the Act and applicable state securities laws is not required, unless the offer and sale of securities under the Plan is registered or qualified under the Act and applicable state laws. Any determination in this connection by the Committee shall be final, binding and conclusive. If shares are issued under any Option without registrations under the Act or applicable state securities laws, the Optionee may be required to accept the shares subject to such restrictions on transferability as may in the reasonable judgment of the Committee be required to comply with exemptions from registrations under such laws. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Act of applicable state securities laws. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of an Option or the issuance of shares pursuant thereto to comply with any law or regulation of any governmental authority. (b) Subject to Section 7.2(c) and such terms and conditions as may be determined by the Committee in its sole discretion upon the grant of an Option, an Option may be exercised in whole or in part and from time to time by delivering to the Company at its principal office written notice of intent to exercise the Option with respect to a specified number of shares. In the case of an ISO, the aggregate Fair Market Value of the Stock (under all plans of the Company), with respect to which such options are exercisable for the first time by an Optionee during any calendar year may not exceed $100,000.00. The aggregate fair market value of the shares is determined at the date of grant. (c) Options shall be exercisable according to the following vesting schedule: 20% after one year from the date of grant 40% after two years from the date of grant 60% after three years from the date of grant 80% after four years from the date of grant 100% after five years from the date of grant (d) Subject to such terms and conditions as may be determined by the Committee in its sole discretion upon grant of any Option, payment for the shares to be acquired pursuant to exercise of the Option shall be made as follows: 1. by delivering to the Company at its principal office a check payable to the order of the Company, in the amount of the Option price for the number of shares of Stock with respect to which the Option in then being exercised; or 2. by delivering to the Company at its principal office certificates representing Stock, duly endorsed for transfer to the Company, having an aggregate Fair Market Value as of the date of exercise equal to the amount of the Option price, for the number of shares of Stock with respect to which the Option is then being exercised; or 3. by any combination of payments delivered pursuant to paragraphs (d)(1) and (d)(2) above. Section 7.3 Rights as Shareholder. An Optionee shall have no SAR as a Shareholder with respect to any share subject to such Option prior to the exercise of the Option and the purchase of such shares. Section 7.4 Termination of Employment. Each Participant's Stock Option Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following the termination of the Participant's employment with the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Stock Option Agreement entered into with each Participant, need not be uniform among all Options issued pursuant to this Article 6, and may reflect distinctions based on the reasons for termination of employment. Section 7.5 Committee Discretion. Option Agreements need not contain provisions identical to or similar to other Option Agreements. The Committee may, in its discretion, vary among Participants and among Options granted to the same Participant any and all of the terms and conditions of Options granted under the Plan, including the term during which and the amounts in which and dates at or after which such Options may be exercised. ARTICLE VIII STOCK APPRECIATION RIGHTS Section 8.1 Stock Appreciation Rights. The Committee may grant Stock Appreciation Rights to individuals granted related Options under the Plan. A SAR may be granted simultaneously with or subsequent to the Option to which the right is related, but each SAR must relate to a particular Option. In exchange for the surrender in whole or in part of the related Option to purchase shares of Common Stock, the exercise of a SAR shall entitle a Participant to an amount equal to the appreciation in value of the shares to which the related Option is being surrendered pursuant to such exercise. Such appreciation in value shall be equal to the excess of the Market Value of such shares. Upon the exercise of a SAR, payment by the Company may be made in cash and partly in share of Common Stock as determined by the Committee. If payment is made in shares of Common Stock, such shares shall be valued at their Market Value as of the date of surrender of the Option. Section 8.2 Terms and Conditions of Stock Appreciation Rights. The grant of SARs shall be evidenced by written agreements (which may also be Option Agreements) containing such terms and conditions, consistent with the provisions of this Plan, as the Committee shall from time to time determine. SARs shall be exercisable in whole or in part in such amounts and at or after such dates as may be specified in the agreement; provided, however, that SARs may be exercised only when the related Option could be exercised and only when the Market Value of the Common Stock subject to the Option exceeds the Option Price. In no event, however, shall any SAR be exercisable after the expiration of ten years from the date of grant. The Committee may in its discretion require a Participant to continue his service with the Company and its Subsidiaries for a certain length of time prior to the SARs becoming exercisable. Unless otherwise provided in the written agreement, a SAR shall be deemed outstanding until it either expires, is canceled by mutual consent, or is exercised in full. As described above in Section 7.5 with respect to Options, the Committee may also vary, among the Participants and among SAR granted to the same Participants, any and all of the terms and conditions of SAR granted under the Plan. Neither SARs nor any related Option issued to Directors and officers subject to Section 16 of the Securities and Exchange Act of 1934 shall be exercisable during the first six months of their respective terms. ARTICLE IX TERMINATION, AMENDMENT AND MODIFICATION OF PLAN Section 9.1 Termination and Amendment. The Board may terminate or suspend the Plan at any time, or may from time to time amend the Plan as it deems proper and in the best interests of the Company, provided that no such amendment may materially increase either the benefits to Participants under the Plan or the number of shares that may be issued under the Plan, materially modify the eligibility requirements, reduce the Option Price (except pursuant to adjustments under Section 9.2) or impair any outstanding Option or SAR. 9.2 Adjustment of Options Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Options in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 6.3 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. ARTICLE X MISCELLANEOUS Section 10.1 Transferability During the Grantee's Lifetime. Any Option or Stock Appreciation SAR may be exercised only by the Grantee or any guardian or legal representative of the Grantee, and the Option shall not be transferable except, with respect to both NQSOs and ISOs, in case of the death of the Grantee, by will or the laws of descent and distribution, and with respect to NQSO; (i) as specifically permitted by and solely to the extent permitted in the Stock Option Agreement, or (ii) to an immediate family member, a partnership consisting solely of immediate family members or trusts for the benefit of immediate family members. Section 10.2 Designation of Beneficiary. A participant may file a written designation of a beneficiary who is to receive any stock and/or cash. Such designation of beneficiary may be changed by the participant at any time by written notice to the Treasurer of the Company. Upon the death of a participant and upon receipt by the Company of proof of identity and existence at the participant's death of a beneficiary validly designated by him under the Plan, the Company shall deliver such stock and/or cash to such beneficiary. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such stock and/or cash to the executor or administrator of the estate of the participant or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such stock and/or cash to the spouse or to any one or more dependents of the participant as the Company may designate. No beneficiary shall, prior to the death of the participant by whom he has been designated, acquire any interest in the stock or cash credited to the participant under the Plan. Section 10.3 Application of Funds. The proceeds received by the Company from the sale of Stock pursuant to Options shall be used for general corporate purposes. Section 10.4 Tenure. Nothing in the Plan or in any Option or SAR granted hereunder or in any Stock Option Agreement or SAR Agreement relating thereto shall confer upon any Director, or upon any officer or employee, the right to continue in such position with the Company or the Bank. Section 10.5 Other Compensation Plans. The adoption of the Plan shall not affect any other stock option or incentive or other compensation plans in effect for the Company or the Bank, nor shall the Plan preclude the Company or the Bank from establishing any other forms of incentive or other compensation for Directors, officers or employees of the Company or the Bank. Section 10.6 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld or deducted with respect to any taxable event arising as a result of this Plan. Section 10.7 Share Withholding. With respect to withholding required upon the exercise of Options or SARs or upon any other taxable event arising as a result of Awards granted hereunder, Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All such elections shall be irrevocable, made in writing, signed by the Participant, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate. Section 10.8 Indemnification. Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any actions taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other right of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws. Section 10.9 Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and SAR will be assumed or an equivalent Option and SAR substituted by the successor corporation or a Parent or Subsidiary of the successor corporation (the "Successor Corporation"), unless the Successor Corporation refuses to assume or substitute for the Option and SAR, in which case the Optionee shall have the right to exercise the Option and SAR as to all of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. If an Option or SAR is exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Committee shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option and SAR shall be considered assumed if, following the merger or sale of assets, the option and SAR confers the right to purchase or receive, for each share of Optioned Stock subject to the Option or SAR immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the Successor Corporation, the Committee may, with the consent of the Successor Corporation, provide for the consideration to be received upon the exercise of the Option or SAR, for each Share of Optioned Stock subject to the Option or SAR, to be solely common stock of the Successor Corporation equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. Section 10.10 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. Section 10.11 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. Section 10.12 Requirements of the Law. The granting of awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. Section 10.13 Governing Law. To the extent not preempted by Federal Law, the Plan, an all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Ohio. BY ORDER OF THE BOARD OF DIRECTORS FRANK L. PADEN, PRESIDENT & SECRETARY -----END PRIVACY-ENHANCED MESSAGE-----