-----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, HxfgBLqTdJBDMHOZ9gla0onk3tktEM1kOWB0r4tlrW6tzHuAZRzH9LFwrYljdzlc 4gf1FI2CI2fCxq65lAZjUQ== 0000950152-03-003522.txt : 20030327 0000950152-03-003522.hdr.sgml : 20030327 20030327142328 ACCESSION NUMBER: 0000950152-03-003522 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 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: 1934 Act SEC FILE NUMBER: 000-12055 FILM NUMBER: 03620550 BUSINESS ADDRESS: STREET 1: 20 S BROAD STREET STREET 2: P O BOX 555 CITY: CANFIELD STATE: OH ZIP: 44406 BUSINESS PHONE: 3305333341 10-K 1 l99108ae10vk.htm FARMERS NATIONAL BANC CORP. | FORM 10-K Farmers National Banc Corp. | Form 10-K
 

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, 2002
     
    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
incorporation or organization)
  (I.R.S. Employer Identification No.)
     
20 South Broad Street
Canfield, Ohio 44406
  44406

(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:     330-533-3341    

Securities registered pursuant to Section 12(b) of the Act:     None    

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No       

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes   X   No       

The registrant estimates that the aggregate market value of the voting stock held by non-affiliates of the registrant (including 413,184 shares held by executive officers and directors of the registrant) was approximately $143,756,746 based upon the last sales price as of June 30, 2002.

As of June 30, 2002, the registrant had outstanding 12,131,371 shares of common stock having no par value.

 


 

DOCUMENTS INCORPORATED BY REFERENCE

         
    Parts of Form 10-K    
    into which    
Document   Document is Incorporated  

 
 
2002 Annual Report to Shareholders
  II
Definitive proxy statement for the 2002 Annual Meeting of Shareholders to be held on March 27, 2003
  III

 


 

Form 10-K Cross Reference Index to Annual Report to Shareholders

             
Part I
       
 
Item 1 - Business
       
   
Description of Business
  Inside front cover
   
Average Balance Sheets/Yields/Rates
    8  
   
Rate and Volume Analysis
    9  
   
Securities
    14-15  
   
Loans
    12-13  
   
Risk Elements of Loan Portfolio
    14  
   
Loan Loss Experience
    13  
   
Deposits
    15  
   
Financial Ratios
    7  
   
Short-Term Borrowings
    27  
 
Part II
       
 
Item 5
       
   
Market For Registrant’s Common Stock and Related Stockholder Matters
    17  
 
Item 6
       
   
Selected Financial Data
    7  
 
Item 7
       
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    9-17  
 
Item 7A
       
   
Quantitative and Qualitative Disclosures About Market Risk
    11  
 
Item 8
       
   
Financial Statements and Supplementary Data
    17, 20-33  
 
Part IV
       
   
Management Report
    18  
   
Report of Hill, Barth & King LLC
Independent Auditors
    19  
   
Financial Statements:
       
   
Consolidated Balance Sheets - December 31, 2002 and 2001
    20  
   
Consolidated Statements of Income & Comprehensive Income — Calendar Years 2002, 2001 and 2000
    21  
   
Consolidated Statement of Stockholders’ Equity —
Calendar Years 2002, 2001 and 2000
    22  
   
Consolidated Statements of Cash Flows —
Calendar Years 2002, 2001 and 2000
    23  
   
Notes to Consolidated Financial Statements
    24-33  

 


 

FARMERS NATIONAL BANC CORP.
FORM 10-K
2002

INDEX

                 
            Page
           
Part I.
       
Item 1
  Business:        
 
  General     I-2  
Item 2
  Properties     I-6  
Item 3
  Legal Proceedings     I-7  
Item 4
  Submission of Matters to a Vote of Security Holders     I-7  
Part II.
       
Item 5
  Market for Registrant's Common Equity and Related        
 
  Stockholder Matters     I-7  
Item 9
  Changes in and Disagreements with Accountants        
 
  on Accounting and Financial Disclosure     I-7  
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
Item 14
  Controls and Procedures   III-2
 
               
Part IV.
       
Item 15
  Exhibits, Financial Statement Schedules, and Reports        
 
  on Form 8-K   IV-1
Accountant’s Consent
  IV-2
Signatures
  IV-3
Index to Exhibits
  IV-4

I-1


 

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, Trumbull and Columbiana Counties in 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, brokerage services 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, 2002 are presented in Note K on page 29 of the annual report to shareholders for the year ended December 31, 2002 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.

I-2


 

Supervision and Regulation (Continued)

     The bank is subject to regulation under the National Banking Act and is periodically examined by the OCC and is subject to the rules and regulations of the FRB. As an insured institution and member of the Bank Insurance Fund (“BIF”), the bank is also subject to regulation by the FDIC. Establishment of branches is subject to approval of the OCC and geographic limits established by state law. Ohio branch banking law permits a bank having its principal place of business in the State of Ohio to establish branch offices in any county in Ohio without geographic restrictions.

FDICIA

     The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and several other federal banking statutes. Among other things, FDICIA requires federal banking agencies to broaden the scope of corrective action taken with respect to banks that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC.

     FDICIA established five capital tiers: “well capitalized”; “adequately capitalized”; “undercapitalized”; “significantly undercapitalized”; and “critically undercapitalized” and imposes significant restrictions on the operations of a depository institution that is not in either of the first two of such categories. A depository institution’s capital tier will depend upon the relationship of its capital to various capital measures. A depository institution will be deemed to be “well capitalized” if it significantly exceeds the minimum level required by regulation for each relevant capital measure, “adequately capitalized” if it meets each such measure, “undercapitalized” if it is significantly below any such measure and “critically undercapitalized” if it fails to meet any critical capital level set forth in regulations. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating or is deemed to be in an unsafe or unsound condition or to be engaging in unsafe or unsound practices.

Under regulations adopted under these provisions, for an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier I risk-based capital ratio of at least 6% and a Tier I leverage ratio of at least 5% and not be subject to any specific capital order or directive. For an institution to be adequately capitalized, it must have a total risk-based capital ratio of at least 8%, a Tier I risk-based capital ratio of at least 4% and a Tier I leverage ratio of at least 4% (or in some cases 3%). Under the regulations, an institution will be deemed to be undercapitalized if the bank has a total risk-based capital ratio that is less than 8%, a Tier I risk-based capital ratio that is less than 4% or a Tier I leverage ratio of less than 4% (or in some cases 3%). An institution will be deemed to be significantly undercapitalized if the bank has a total risk-based capital ratio that is less than 6%, a Tier I risk-based capital ratio that is less than 3%, or a leverage ratio that is less than 3% and will be deemed to be critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2%.

     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.

I-3


 

Supervision and Regulation (Continued)

     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.

     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.

I-4


 

Supervison and Regulation (Continued)

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.

GRAHAM-LEACH-BLILEY ACT

     The Graham-Leach-Bliley Act of 1999 (the “GLB Act”) allows new opportunities for banks, other depository institutions, insurance companies and securities firms to combine to form a single financial services organization to offer customers a broader choice of financial products and services. The GLB Act (which became effective March 11, 2000), authorizes the Federal Reserve Board to oversee all regulatory activities through the financial holding company, while the functional regulation of operating subsidiaries will remain with their primary functional regulator. The GLB Act requires institutions to maintain Community Reinvestment Act ratings of satisfactory or higher in order to engage in any new financial activities. This act also establishes a federal right to privacy of non-public personal information of individual customers.

I-5


 

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 17 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
     
Niles Office   1 South Main Street, Niles, Ohio
     
Niles Drive Up   170 East State Street, Niles, Ohio
     
Girard Office   121 North State Street, Girard, Ohio
     
Eastwood Office   5845 Youngstown-Warren Rd, Niles, Ohio
     
Warren Office   2910 Youngstown-Warren Rd, Warren, Ohio
     
Mineral Ridge Office   3826 South Main Street, Mineral Ridge, Ohio
     
Niles Operation Center   51 South Main Street, Niles, Ohio
     
Canfield Operation Office   7131 Akron-Canfield Rd, Canfield, Ohio

The bank owns all locations except the Colonial Plaza and Canfield Operation Office. The Colonial Plaza is occupied under an operating lease expiring in 2004. The Canfield Operation Office is under a month-to-month lease.

I-6


 

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 2002.

Part II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

                         
Equity Compensation Plan Information
                Number of
                securities
                remaining available
    Number of           for future issuance
    securities to be           under equity
    issued upon   Weighted-average   compensation plans
    exercise of   exercise price of   (excluding
    outstanding   outstanding   securities
    options, warrants   options, warrants   reflected in column
    and rights   and rights   (a))
Plan category   (a)   (b)   (c)

 
 
 
Equity compensation plans approved by security holders
    55,500     $11/share     319,500  

Information regarding the equity (stock-based) compensation plan is set forth in the registrant’s annual report in Notes A and J in the Notes to Consolidated Financial Statements. The annual report is attached hereto.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On March 27, 2003, the Corporation determined to engage Crowe, Chizek and Company LLP (“Crowe Chizek”) as its independent public accountants for the 2003 fiscal year. Crowe Chizek replaces Hill, Barth & King LLC (“Hill, Barth & King”). The Corporation’s Board of Directors, upon recommendation by the Audit Committee of the Board of Directors, approved the change in independent public accountants. The change in independent accountants becomes effective with the filing of this Annual Report on Form 10-K.

I-7


 

Item 9 (Continued)

During the fiscal years ended December 31, 2002 and December 31, 2001, and during the subsequent interim period through March 27, 2003, there were no disagreements between the Corporation and Hill, Barth & King on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Hill, Barth & King’s satisfaction,would have caused Hill, Barth & King to make reference to the subject matter of the disagreement in connection with its reports on the Corporation’s consolidated financial statements for such periods.

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 27, 2003. The proxy statement is attached hereto.

Executive Officers of the Registrant

The names, ages and positions of the executive officers as of March 1, 2003:

             
Name   Age   Position Held

 
 
William D. Stewart     73     Chairman
Frank L. Paden     52     President and Secretary
Carl D. Culp     39     Executive Vice President and Treasurer
Donald F. Lukas     56     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. 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.

III-1


 

Item 10 (Continued)

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 27, 2003. 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 27, 2003. 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 27, 2003. The proxy statement is attached hereto.

Item 14. Controls and Procedures

     Based on their evaluation, as of a date within 90 days of the filing of this Form 10-K, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

III-2


 

PART IV

Item 15. 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 2002 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, 2002.

IV-1


 

INDEPENDENT AUDITOR’S CONSENT

FARMERS NATIONAL BANC CORP.:

     We hereby consent to the incorporation by reference in this Annual Report (Form 10-K) of our report dated January 17, 2003, relating to the consolidated financial statements of Farmers National Banc Corp. and subsidiary.

/s/ HILL, BARTH & KING LLC
Warren, Ohio
March 24, 2003

IV-2


 

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.
 
/s/ Frank L. Paden
Frank L. Paden
President and Secretary
March 27, 2003
  /s/ Carl D. Culp
Carl D. Culp
Executive Vice President and
Treasurer
March 27, 2003
         
/s/ William D. Stewart
William D. Stewart
  Chairman   March 27, 2003
 
/s/ Benjamin R. Brown
Benjamin R. Brown
  Director   March 27, 2003
 
/s/ Joseph D. Lane
Joseph D. Lane
  Director   March 27, 2003
 
/s/ Ralph D. Macali
Ralph D. Macali
  Director   March 27, 2003
 
/s/ David C. Myers
David C. Myers
  Director   March 27, 2003
 
/s/ Edward A. Ort
Edward A. Ort
  Director   March 27, 2003
 
/s/ Frank L. Paden
Frank L. Paden
  President
and Director
  March 27, 2003
 
/s/ Ronald V. Wertz
Ronald V. Wertz
  Director   March 27, 2003

IV-3


 

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 (Subsidiary of the registrant is incorporated by reference in Part I, Item 1 of this report).
 
22.   Not applicable.
 
23.   Not applicable.
 
24.   Not applicable.
 
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.

IV-4


 

CERTIFICATIONS

Certification of Chief Executive Officer
CERTIFICATION FOR ANNUAL REPORT ON FORM 10-K

I, Frank L. Paden, Chief Executive Officer of the Corporation, certify that:

1) I have reviewed this annual report on Form 10-K of Farmers National Banc Corp. (the “Corporation”);

2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3) Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

     b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

     c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

     a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in the internal controls; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6) The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Frank L. Paden

Frank L. Paden
Chief Executive Officer
March 27, 2003

 


 

Certification of Chief Financial Officer
CERTIFICATION FOR ANNUAL REPORT ON FORM 10-K

I, Carl D. Culp, Chief Financial Officer of the Corporation, certify that:

1) I have reviewed this annual report on Form 10-K of Farmers National Banc Corp. (the “Corporation”);

2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3) Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

     b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

     c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

     a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in the internal controls; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6) The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Carl D. Culp

Carl D. Culp
Chief Financial Officer
March 27, 2003

  EX-13 3 l99108aexv13.htm EX-13 ANNUAL REPORT TO SECURITY HOLDERS EX-13 Annual Report

 

FARMERS NATIONAL BANC CORP.
 

FARMERS

ROCK SOLID SINCE 1887

FARMERS NATIONAL BANC CORP.
ANNUAL REPORT 2002

[FARMERS NATIONAL BANK LOGO}

 


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

BUSINESS DESCRIPTION

     Farmers National Banc Corp. is a one-bank holding company headquartered in Cannfield, OH. Its principal subsidiary is 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 main office is located at 20 South Broad Street, Canfield, Ohio. Business is conducted at a total of sixteen (16) offices located in the counties of Mahoning, Trumbull and Columbiana. 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.

ROCK SOLID

     In a modern business world often characterized by companies driven toward short-term profits at the expense of long-term value, what does one make of an institution that has been in business since 1887?

Do you call that institution’s philosophy, old-fashioned?

We call it rock solid.

     Rock Solid Since 1887, the theme of Farmers National Banc Corp’s 2002 Annual Report, expresses both the longevity of your company and the solidity of its business practices and philosophy.

     The images on the front of this annual report and throughout its pages convey the rock-hewn solidity with which your company has been built over the years.

     If a business is built upon solid, common sense principles it will endure for—and serve the needs of many—generations. At the core of Farmers National Bank’s principles is our belief that a community bank thrives by keeping its focus on the best interests of the communities it serves.

     Due to this philosophy, your company begins this 21st Century with more strength and brighter prospects than when we entered the 20th Century.

 


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
HIGHLIGHTS OF 2002

         
Highlights of 2002     1  
President’s Letter     2-3  
The Year in Review     4-6  
Selected Financial Data     7-9  
Management’s Discussion     9-17  
Stock Prices and Dividends     17  
Accountant’s Report     19-33  
Board of Directors     34  
Officers     35  

SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)

                         
FOR THE YEAR   2002   2001   PERCENT CHANGE
                         
Net Income
  $ 7,934     $ 7,290       8.83 %
Return on Average Assets
    1.12 %     1.14 %`     -1.75 %
Return on Average Equity
    10.27 %     9.88 %     3.95 %
                         
PER SHARE
                       
Net Income
  $ 0.64     $ 0.60 *     6.67 %
Book Value
    6.51       6.25       4.16 %
                         
BALANCES AT YEAR-END
                       
Assets
  $ 748,098     $ 656,694       13.92 %
Securities
    251,089       143,575       74.88 %
Net Loans
    442,914       429,028       3.24 %
Deposits
    588,254       503,644       16.80 %
Stockholders Equity
    80,952       75,718       6.91 %
Shares Outstanding
    12,436       12,111       2.68 %
Cash Dividends
    6,924       6,243       10.91 %
*Restated to reflect weighted average shares outstanding adjusted for stock dividends.
                                 
1998   1999   2000   2001   2002
$0.46
  $ 0.52     $ 0.48     $ 0.60     $ 0.64  

NET INCOME PER SHARE

                                 
1998   1999   2000   2001   2002
$5,268
  $ 6,159     $ 5,748     $ 7,290     $ 7,934  

NET INCOME (IN THOUSANDS)

  1


 

 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
PRESIDENT’S LETTER

[PICTURE OF Frank L. Padem, President & CEO] Dear Shareholders,

     We are pleased to report that 2002 was another solid year for Farmers National Banc Corp. Our Net Income increased by 8.8 percent over the year 2001 and we grew your company internally with a 13.9 percent increase in total assets reaching a record level of $748 million.

     During the past two years, the business climate has not been one that would permit any business to conduct business “as usual”. These economic conditions have challenged our industry and, specifically, our management team and employees to remain focused and on course to another year of exceptional performance and accomplishments.

     As the cover of this year’s Annual Report shows—“Rock Solid since 1887” is most appropriate in these uncertain times. We have remained steadfast and concentrated on our community-based banking philosophy and beliefs to continue to build on our growth, our profitability and a rock solid balance sheet.

     During the course of 2002, we have moved forward with a strategic initiative that we believe will enhance shareholder value for years to come. The guiding principles that we modeled our business plan upon are to build long-term shareholder value though the effective management of risk, strive for a consistent and diversified source of income, and maintain a planned growth pattern for this company with the right formula of personal customer service mixed with superior technical support.

     We ended 2002 with $748 million in total assets and a market capitalization of approximately $180 million. In 2002, our net income per share increased 6.7 percent to $.64 or a record $7.9 million in after tax earnings. These results represent a return on average assets (ROA) of 1.12 percent and a return on average shareholders equity (ROE) of 10.27 percent. The Corporation’s total capital was $80.9 million at December 31, 2002, representing a book value per share of $6.51.

     Farmers National Banc Corp.’s common stock closed the year at $14.45 per share, compared to 2001’s closing price of $11.25, which translates into a 28.4 percent increase in market value over those twelve months. Total cash dividends paid per share were $.57 and additionally our shareholders received a 2 percent stock dividend in November.

     During this past year, Farmers National Bank, the wholly owned subsidiary of Farmers National Banc Corp. was recognized by a national ranking service. Weiss Ratings, Inc., a Florida-based rating group that evaluates the financial strength of more than 15,000 banks, insurance companies, savings and loans and brokerage firms, gave Farmers an A- rating in its annual evaluation. This superior rating gained national attention with the release of “Conquer the Crash,” a financial advice book by Robert R. Prechter Jr. The book names the top two safest banks in each state, which lists Farmers National Bank in that table for the state of Ohio—based on Weiss Ratings. Factors such as asset quality, strength in capital and liquidity are part of the equation that forms this safety ranking.

     The Youngstown/Warren Regional Chamber of Commerce also recognized Farmers in this year’s “2002 Salute to Business Awards.” 2002 marked the 115th year anniversary of Farmers National Bank’s existence. The Chamber’s award recognized the bank for its contributions to the economic growth and well being of the greater Mahoning Valley.

With growth comes expansion. Last fall we announced and started a major building project to be located on the green in Canfield. After many years of planning and the development of

  2


 


FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
PRESIDENT’S LETTER

a master real estate plan for our real estate holdings in Canfield, our plans will became a reality. We are in the initial construction stage of a new 20,000 square foot admin-istration/office building that will be located just south of the main banking office on Broad Street. This new facility will be separate from the main banking office and will house all administrative offices, provide meeting and training rooms, and will relocate some departmental personnel that are currently located at other locations. This project is expected to be complete later in 2003.

     Over the next few pages, we have given you a summary of the year in review along with Management’s Discussion and Analysis of Financial Condition and Results of Operations. Please take the time to review this information along with the Independent Auditor’s Report.

     I would like to thank our customers for their continued confidence in our products and services, our employees for their dedication and hard work and our shareholders for your interest and loyal support. A special thanks to our dedicated board members for their guidance of the Corporation as we move to the next level.

     I will reaffirm our commitment to maintain the highest levels of integrity and to a work ethic that has given us a strong community banking franchise prepared for the future — allowing us to sustain the long-term value for all our shareholders. It is with great pleasure that we have this opportunity to share our 2002 results with you in this year’s Annual Report—and hope you have the opportunity to attend our Annual Shareholders Meeting in March.

   Sincerely,

   /s/ Frank L. Paden, President & CEO

  3


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
THE YEAR IN REVIEW

PROFITABILITY

     Net income for the year reached a record high of $7.93 million, up 8.8% over 2001. Interest income from earning assets generated $44.9 million during 2002. Total interest expense, or the cost of our interest bearing liabilities was $17.3 million. Net interest income for the year was $27.7 million, up 8.2%, or $2.1 million greater last year. The net interest margin was 4.16% as compared to 4.24% in 2001. The net income was $.64 per share for 2002 as compared to $.60 per share in 2001, representing a 6.7% increase.

STRENGTH IN CAPITAL

     Shareholder’s Equity increased by 6.9% during 2002 up to $80.9 million at the end of the year. As of December 31, 2002, the Corporation had a 10.8 percent capital to asset ratio and the Corporation’s Tier I Risk Based Capital Ratio was 16%.

     The total capital continues to grow annually through earnings and from the strong support and participation of our shareholders in the Corporation’s Dividend Reinvestment Plan. Approximately 84% of our registered shareholders participate in this Plan. During 2002, participating shareholders reinvested cash dividends of $2.8 million and made additional cash contributions of $1.2 million for a total of $4.0 million, which purchased 323,828 shares of common stock at an average weighted price of $12.15 per share.

ACHIEVING GROWTH

     As of December 31, 2002, total assets of the Corporation were $748.1 million, an increase of $91.4 million, or 13.9% over the totals at the end of 2001. Net Loans, which make-up approximately 59% of the Corporation’s total assets, increased by $13.9 million or 3.2% during 2002. Most of that growth was in residential real estate loans and commercial real estate loans. The Investment/Securities Portfolio increased to $251.1 million on December 31, 2002 as compared to $143.6 million at the end of 2001. These investments, which are comprised mainly of various U.S. Government Agency and Municipal Securities, are strategically purchased with maturities and interest rates that fit into the bank’s asset/liability and interest rate models.

     Total deposits increased 16.8%, or $84.6 million during this past year. This growth was predominantly in the tiered balance money market index account category, which gives depositors more liquidity and fiexibility should interest rates move upward in 2003.

ASSET QUALITY AND RISK MANAGEMENT

     In light of the weak economic market conditions and other factors, prudent risk management is necessary to monitor the credit quality within our loan portfolio and support the balance of our loan loss reserve account. Three key ratios that we use to monitor our adequacy of loan loss reserve – the Allowance for Loan Losses to Total Loans was 1.51%; the percent of Allowance for Loan Losses to Non-performing Loans was 393%; and the Net Losses to Average Loans was .17%. As a comparison, these same three ratios in December 2001 were 1.48%, 226% and .17%.

ENHANCING SHAREHOLDER VALUE

     Cash dividends paid on Farmers National Banc Corp. common stock during 2002 were $.57 per share as compared to the $.53 per share paid during 2001. This marks the seventh consecutive year that our Directors have increased

4


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
THE YEAR IN REVIEW

the annual cash dividend. In addition, our Board declared and paid a 2% stock dividend, marking the twenty-seventh consecutive year for paying an annual stock dividend.

     Our common stock closed the year at $14.45 per share versus $11.25 per share in December 2001. The corresponding graph shows the average weighted price for all shares of common stock that traded during the last five calendar quarters. During 2002, through our Stock Repurchase Plan, we have re-purchased shares totaling approximately $2.8 million at an average cost of $11.79 per share. Shares purchased under this plan are being treated as Treasury Stock on the corporate balance sheet.

OPERATIONAL INITIATIVES

     Our two-year branch capital improvement project was completed during this last spring. We installed new drive-up ATMs at four of our Trumbull County offices along with some lobby remodeling and site improvements—all to enhance our customer service at those locations. Part of our annual business plan was to enhance our efforts to get our core customer base to take advantage of and increase the usage of the many products and services that we make available to them on a daily basis.

     PrimeVest Financial Services @ Farmers National Bank is now available in all sixteen banking locations within Mahoning, Trumbull and Columbiana Counties. During 2002, our gross revenue in this line of business increased by 39% over what was generated in 2001. Our mission with PrimeVest is to continue to give our customers additional options for enhancing personal wealth and to compliment the traditional bank deposit products we have always made available for our customers.

                                 
12/01   03/02   06/02   09/02   12/02
$10.79
  $ 11.37     $ 11.44     $ 11.78     $ 13.19  

AVERAGE WEIGHTED PRICE PER SHARE
Common Stock (FMNB)

                                 
1998     1999     2000     2001     2002
$573,695
  $ 603,798     $ 626,122     $ 656,694     $ 748,098  

TOTAL ASSETS
(In Thousands)

5


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
THE YEAR IN REVIEW

TECHNOLOGY

     Our Electronic Banking products continue to be well received by our customers. Usage of the On-Line Banking, Phone Banking and Corporate Cash Management increased by 37% during 2002. On-Line Banking products were enhanced to give the user the opportunity to view and print an imaged copy of their check directly from their home or office computers.

     Keeping with our long-term strategic commitment regarding superior technology support, in early 2002, we completed the conversion to our IMAGE ADVANTAGE product. IMAGE ADVANTAGE converts paper checks to a digital format stored on our core processing system. Deposit customers now receive all their cancelled checks in this new format along with their regular monthly statement. This was a major commitment and another step in the process to prepare for anticipated changes of processing paper checks through the Federal Reserve Bank’s payment and check systems.

COMMUNITY REINVESTMENT

     Farmers National Bank’s commitment to community development is evidenced by our participation in two specific programs directed to first-time homeowners as well as applicants in the low-to-moderate income levels. Farmers National Bank participates in The Welcome Home Program, which provides financial assistance to qualifying applicants through a cooperative effort by and between Farmers National Bank and the Federal Home Loan Bank of Cincinnati—helping deserving families to acquire homes. The bank’s own Affordable Housing Program has been very successful in giving financial assistance to applicants that possibly would not have qualified for conventional mortgage loans. Funds remain available in these programs for qualified applicants.

                                 
1998   1999   2000   2001   2002
$0.34
  $ 0.42     $ 0.51     $ 0.53     $ 0.57  

CASH DIVIDENDS PER SHARE

                                 
1998   1999   2000   2001   2002
$62,018
  $ 66,235     $ 70,833     $ 75,718     $ 80,952  

TOTAL SHAREHOLDERS EQUITY
(IN THOUSANDS)

  6


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


SELECTED FINANCIAL DATA
                                           
      (In Thousands except Per Share Data)
For the Years Ending   2002   2001   2000   1999   1998
 
 
Summary of Earnings
                                       
 
Total Interest Income (including fees on loans)
  $ 44,012     $ 45,686     $ 45,842     $ 42,631     $ 41,884  
 
Total Interest Expense
    17,290       21,003       21,550       18,653       19,228  
 
 
 
Net Interest Income
    26,722       24,683       24,292       23,978       22,656  
 
Provision for Credit Losses
    1,080       1,080       865       1,810       3,107  
 
Total Other Income
    3,192       3,419       2,992       2,550       2,582  
 
Total Other Expense
    17,563       16,818       18,023       15,864       14,544  
 
 
 
Income Before Income Taxes
    11,271       10,204       8,396       8,854       7,587  
 
Income Taxes
    3,337       2,914       2,648       2,695       2,319  
 
 
 
NET INCOME
  $ 7,934     $ 7,290     $ 5,748     $ 6,159     $ 5,268  
 
 
Per Share Data (Note)
                                       
 
Net Income
  $ 0.64     $ 0.60     $ 0.48     $ 0.52     $ 0.46  
 
Cash Dividends Paid
    0.57       0.53       0.51       0.42       0.34  
 
Book Value at Year-End
    6.51       6.25       6.10       5.91       5.74  
Balances at Year-End
                                       
 
Total Assets
  $ 748,098     $ 656,694     $ 626,122     $ 603,798     $ 573,695  
 
Earning Assets
    705,319       620,588       589,829       561,544       535,305  
 
Total Deposits
    588,254       503,644       468,336       476,829       470,435  
 
Net Loans
    442,914       429,028       444,596       425,975       392,065  
 
Total Stockholder’s Equity
    80,952       75,718       70,833       66,235       62,018  
Average Balances
                                       
 
Total Assets
  $ 707,341     $ 637,877     $ 616,059     $ 586,562     $ 549,482  
 
Total Stockholder’s Equity
    77,286       73,780       68,639       64,011       58,571  
Significant Ratios
                                       
 
Return on Average Assets (ROA)
    1.12 %     1.14 %     0.93 %     1.05 %     0.96 %
 
Return on Average Equity (ROE)
    10.27       9.88       8.37       9.62       8.99  
 
Average Earning Assets/Average Assets
    94.20       94.60       94.65       93.99       94.32  
 
Average Equity/Average Assets
    10.93       11.57       11.14       10.91       10.66  
 
Net Loans/Deposits
    75.29       85.18       94.93       89.33       83.34  
 
Allowance for Credit Losses/Total Loans
    1.51       1.48       1.36       1.34       1.38  
 
Allowance for Credit Losses/Nonperforming Loans
    392.53       226.51       458.74       292.71       201.70  
 
Efficiency Ratio
    59.17       60.08       66.14       59.80       57.63  
 
Dividend Payout Rate
    87.27       85.64       82.99       57.87       53.93  

Note: Per share data has been restated for the effect of common stock dividends, splits and merger accounted for as pooling-of-interests.

7


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


AVERAGE BALANCE SHEETS AND
RELATED YIELDS AND RATES
                                                                           
      (In Thousands of Dollars)
Years ended December 31,   2002   2001   2000
 
EARNING ASSETS                                                                        
  AVERAGE                   AVERAGE                   AVERAGE                
      BALANCE   INTEREST   RATE   BALANCE   INTEREST   RATE   BALANCE   INTEREST   RATE
     
 
Loans
  $ 443,838     $ 34,424       7.76 %   $ 443,316     $ 37,052       8.36 %   $ 438,163     $ 37,252       8.50 %
 
Taxable securities
    152,983       7,637       4.99       105,458       6,605       6.26       104,799       6,382       6.09  
 
Tax-exempt securities
    32,596       2,285       7.01       26,776       2,022       7.55       23,462       1,764       7.52  
 
Federal funds sold
    36,582       617       1.69       27,864       909       3.26       16,688       1,041       6.24  
 
 
 
Total earning assets
    665,999       44,963       6.75       603,414       46,588       7.72       583,112       46,439       7.96  
NONEARNING ASSETS
                                                                       
 
Cash and due from banks
    23,133                       20,379                       21,289                  
 
Premises and equipment
    12,964                       12,615                       12,823                  
 
Allowance for Loan Losses
    (6,629 )                     (6,379 )                     (6,228 )                
 
Other assets
    11,874                       7,848                       5,063                  
 
 
 
Total Assets
  $ 707,341                     $ 637,877                     $ 616,059                  
 
 
INTEREST-BEARING LIABILITIES
                                                                       
 
Time deposits
  $ 188,179     $ 8,105       4.31 %   $ 228,855     $ 12,729       5.56 %   $ 217,979     $ 12,269       5.63 %
 
Savings deposits
    212,332       5,063       2.38       131,906       3,493       2.65       128,006       3,834       3.00  
 
Demand deposits
    94,997       979       1.03       80,112       1,238       1.55       77,998       1,286       1.65  
 
Repurchase agreements
    53,579       1,661       3.10       42,287       1,605       3.80       39,705       2,020       5.09  
 
Borrowings
    27,184       1,482       5.45       30,268       1,938       6.40       32,579       2,141       6.57  
 
 
 
Total Interest-Bearing Liabilities
    576,271       17,290       3.00       513,428       21,003       4.09       496,267       21,550       4.34  
NONINTEREST-BEARING LIABILITIES
                                                                       
 
Demand deposits
    46,564                       44,329                       46,948                  
 
Other Liabilities
    7,220                       6,340                       4,205                  
 
Stockholder’s equity
    77,286                       73,780                       68,639                  
 
 
 
Total Liabilities and Stockholders’ Equity
  $ 707,341                     $ 637,877                     $ 616,059                  
 
 
Net interest income
          $ 27,673                     $ 25,585                     $ 24,889          
 
 
Net interest income to earning assets
                4.16 %                 4.24 %                 4.27 %

Fully taxable equivalent basis computed at 35% in 2002, 2001 and 2000.

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FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


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)
      2002 change from 2001   2001 change from 2000
      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
  $ (2,628 )   $ 42     $ (2,670 )   $ (200 )   $ 429     $ (629 )
 
Taxable securities
    1,032       2,975       (1,943 )     223       42       181  
 
Tax-exempt securities
    263       439       (176 )     258       250       8  
 
Federal funds sold
    (292 )     283       (575 )     (132 )     697       (829 )
 
 
 
Total interest income
  $ (1,625 )   $ 3,739     $ (5,364 )   $ 149     $ 1,418     $ (1,269 )
 
 
Interest Expense
                                               
 
Time deposits
  $ (4,624 )   $ (2,267 )   $ (2,357 )   $ 460     $ 616     $ (156 )
 
Savings deposits
    1,570       2,139       (569 )     (341 )     119       (460 )
 
Demand deposits
    (259 )     232       (491 )     (48 )     33       (81 )
 
Repurchase agreements
    56       430       (374 )     (415 )     131       (546 )
 
Borrowings
    (456 )     (197 )     (259 )     (203 )     (152 )     (51 )
 
 
 
Total interest expense
  $ (3,713 )   $ 337     $ (4,050 )   $ (547 )   $ 747     $ (1,294 )
 
 
Increase in tax equivalent net interest income
  $ 2,088     $ 3,402     $ (1,314 )   $ 696     $ 671     $ 25  
 
 

     The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the relative size of the rate and volume changes.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

     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.

     Among the important factors that could cause actual results to differ materially are interest rates, changes in the mix of the company’s business, competitive pressures, general economic conditions and the risk factors detailed in the company’s other periodic reports and registration statements filed with the Securities and Exchange Commission.

Results of Operations

Comparison of Operating Results for the Years Ended December 31, 2002 and 2001.

     The Corporation’s net income totaled $7.934 million during 2002, an increase of 8.83% from $7.29 million for 2001. On a per share basis, net income was $.64 for 2002 as compared to $.60 for 2001. Common comparative ratios for results of operations include the return on average assets and return on average stockholders equity. For 2002 the return on average equity was 10.27% compared to 9.88% for 2001. The return on average assets was 1.12% for 2002 and 1.14% for 2001.

     These results of operations are the direct result of management’s concerted efforts to control expenses and increase interest from our interest bearing assets. Strong growth in interest-bearing deposits and the effective use of those funds in the loan and investment security portfolios 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 2002,

9


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


MANAGEMENT’S DISCUSSION

taxable equivalent net interest income increased $2.088 million or 8.16% over 2001. Interest-earning assets averaged $665.999 million during 2002 representing a 10.37% increase over 2001. The Corporation’s interest-bearing liabilites increased 12.24% from $513.428 million in 2001 to $576.271 million in 2002.

     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 2002 the net interest margin, measured on a fully taxable equivalent basis was 4.16%, down slightly in comparison to 4.24% in 2001.

     Total interest income was $44.963 million for 2002, which is $1.625 million or 3.49% less than the $46.588 million reported in 2001. This decrease is primarily the result of the continuing effect of the lowering of interest rates beginning in 2001 and into 2002. Average loans are slightly higher in 2002, but the yields decreased from 8.36% in 2001 to 7.76% in 2002. Income from securities and federal funds sold increased $1.003 million or 10.5%, however the Corporation saw its yields on these assets decline from 5.95% in 2001 to 4.74% in 2002. This drop in yield was offset by a 38.77% increase in average balances of investment securities and federal funds sold, as the Corporation experienced an increase in customer deposit balances.

     Total interest expense amounted to $17.290 million for 2002, a 17.68% decrease from $21.003 million reported in 2001. The decrease in 2002 is primarily the result of lower rates of interest paid on deposits, repurchase agreements and borrowings. The cost of interest-bearing liabilities dropped from 4.09% in 2001 to 3.00% in 2002.

Other Income

     Total other income decreased in 2002 by $227 thousand or 6.64% to $3.192 million. Some of this decrease is attributable to lower levels of overdraft and return check fees. This decrease was partially offset by $232 thousand earned on gains from the sale of investment securities. Management continues to explore new products and nontraditional banking services that could increase other income in future years.

Other Expenses

     Total other expenses for 2002 increased 4.43% or $745 thousand from 2001. Most of this increase is due to higher levels of employee benefits and salaries. Included in these expenses, the Corporation experienced a $392 thousand or 37% increase in employee health insurance costs. Salaries and temporary wages increased $279 thousand or 4.06%, primarily due to a higher number of full time equivalent employees and salary merit increases. Management will continue to closely monitor and keep the increases in other expenses to a minimum.

Income Taxes

     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 income tax rate was 30% and 29% for the periods ending 2002 and 2001, respectively.

Comparison of Operating Results for the Years Ended December 31, 2001 and 2000.

     The Corporation’s net income totaled $7.29 million during 2001, an increase of 26.83% from $5.748 million for 2000. On a per share basis, net income was $.60 for 2001 as compared to $.48 for 2000. For 2001, the return on average equity was 9.88% as compared to 8.37% for 2000. The return on average assets was 1.14% for 2001 and .93% for 2000.

     The Corporation’s operating earnings, which exclude the after-tax non-recurring items, increased 8.18% to $7.29 million in 2001, compared to $6.739 million in 2000. Stated on a per share basis, operating earnings were $.61 per share in 2001, compared to $.58 per share in 2000. The after-tax non-recurring expense in 2000, which amounted to $991 thousand, was merger related expense.

Net Interest Income

     For 2001, taxable equivalent net interest income increased $696 thousand or 2.8% over 2000. Interest-earning assets averaged $603.414 million during 2001 representing a 3.48% increase over 2000.

     For 2001 the net interest margin, measured on a fully taxable equivalent basis was 4.24% in comparison to 4.27% for 2000.

     Total interest income was $46.588 million for 2001 increasing slightly compared to $46.439 million for 2000. Average loans increased 1.18% during the past year, but this growth was offset by a decrease in yields from 8.50% in 2000 to 8.36% in 2001. Income from securities and federal funds sold increased $349 thousand or 3.38%, however the Corporation saw its yields on these assets decline from 6.34% in 2000 to 5.95% in 2001. This drop in yield was offset by a 10.45% increase in average balances of investment securities and federal funds sold.

     Total interest expense amounted to $21.003 million for 2001, representing a 2.54% decrease from 2000. The decrease in 2001 is primarily the result of lower rates of interest paid on deposits, repurchase agreements and borrowings. The cost of interest-bearing liabilities dropped from 4.34% in 2000 to 4.09% in 2001.

Other Income

     Total other income increased in 2001 by $427 thousand or 14.27% to $3.419 million. Most of this increase is the result of an increase in service charges on deposit products and fees from other banking products and services.

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FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


MANAGEMENT’S DISCUSSION

Other Expenses

     Total other expenses for 2001 decreased 6.69% or $1.205 million from 2000. Merger related expenses in 2000 amounted to $1.192 million compared to none in 2001.

Income Taxes

     The effective income tax rate was 29% and 32% for the periods ending 2001 and 2000, respectively.

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 and the net present value of equity in the event of a sudden and sustained 200 basis point increase or decrease in market interest rates:

                     
Changes In                
Interest Rate           ALCO
(basis points)   Result   Guidelines

Net Interest
               
Income Change
               
+200
    1.75 %     7.50 %
-200
    -1.32 %     7.50 %
Net Present Value Of Equity Change
               
+200
    -8.28 %     20.00 %
-200
    6.84 %     20.00 %

     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 near 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.

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, 2002, 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, 2002 amounted to $23.022 million.

     Cash flows generated from operating activities increased 5.02% to $11.321 million in 2002 compared to $10.78 million in 2001. This increase is primarily the result of lower amounts of interest paid on customer deposits and other borrowings. Cash flows used in investing activities increased to $120.229 million in 2002 compared to $2.286 million in 2001. Most of this increase is attributable to $138.188 million of investment security purchases, compared to $50.924 million in 2001. Cash flows provided from financing activities increased to $79.236 million as compared to $22.211 million in 2001. Most of this increase resulted from a $84.619 million net growth in deposits, compared to a $35.324 million increase in the prior year. Some of the increase in deposits were used to payoff Federal Home Loan Bank borrowings, which decreased $3.81 million in 2002.

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FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


MANAGEMENT’S DISCUSSION

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,   2002   2001   2000   1999   1998
 
Commercial, Financial and Agricultural
  $ 17,185       3.8 %   $ 18,856       4.3 %   $ 17,916       4.0 %   $ 17,710       4.1 %   $ 21,140       5.3 %
Real Estate — Mortgage
    288,907       64.3       261,268       60.0       267,529       59.3       257,246       59.6       230,664       58.0  
Installment Loans to Individuals
    143,601       31.9       155,346       35.7       165,266       36.7       156,797       36.3       145,753       36.7  
 
 
Total Loans
  $ 449,693       100.0 %   $ 435,470       100.0 %   $ 450,711       100.0 %   $ 431,753       100.0 %   $ 397,557       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, 2002:

                         
    (In Thousands of Dollars)
Types of Loans   1 Year or less   1 to 5 Years   Over 5 Years
Commercial, Financial and Agricultural
  $ 6,967     $ 8,217     $ 2,001  
 
 

     The amounts of commercial, financial and agricultural loans as of December 31, 2002, 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
  $ 5,391     $ 2,383     $ 7,774  
Fixed Rates of Interest
    1,576       7,835       9,411  
 
 
Total Loans
  $ 6,967     $ 10,218     $ 17,185  
 
 

Loan Portfolio

     Total loans were $449.693 million at year-end 2002 compared to $435.47 million at year-end 2001. This represents an increase of $14.223 million or 3.26%. Loans comprised 66.6% of the Bank’s average earning assets in 2002, compared to 73.5% in 2001. The product mix in the Loan Portfolio includes Commercial Loans comprising 3.8%, Real Estate Mortgage Loans (Residential and Commercial) 64.3% and Installment Loans to Individuals 31.9% at December 31, 2002 compared with 4.3%, 60% and 35.7%, respectively, at December 31, 2001.

     Loans contributed 76.6% of total interest income in 2002 and 79.5% in 2001. Loan yield was 7.76% in 2002, 101 basis points greater than the average rate for total earning assets. Management recognizes that while the Loan Portfolio holds some of the Bank’s highest yielding assets, it is inherently the most risky portfolio. Accordingly, Management attempts to balance credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function which monitors credits during and after the approval process. To minimize risks associated with changes in the borrower’s future repayment capacity, the Bank generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral.

     Installment Loans to Individuals decreased from $155.346 million on December 31, 2001 to $143.601 million on December 31, 2002 representing a 7.6% decrease. Management continues to target the automobile dealer network to purchase indirect Installment Loans. Dealer paper was purchased using strict underwriting guidelines with an emphasis on quality. Indirect Loans comprise 87.9% of the Installment Loan Portfolio. Net loan losses on the Installment Loan portfolio were $699 thousand in 2002 as compared to $675 thousand in 2001. When these net loan losses are stated as a percentage of average installment loans outstanding, the Bank reported an increase from .42% in 2001 to .47% in 2002.

     Real Estate Mortgage Loans increased to $288.907 million at December 31, 2002, an increase of 10.58% from 2001. This increase resulted from a $20 million increase in commercial real estate loans and a $9.9 million increase in residential real estate loans. This portfolio consists of $172.368 million of 1-4 family and multi-family residential properties and $116.539 million in non-residential real estate properties, generally made within the Bank’s primary market area. The corporation originated both fixed rate and adjustable rate mortgages during 2002. 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, 2002 decreased 8.86% from year-end 2001 with outstanding balances of $17.185 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.

12


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


MANAGEMENT’S DISCUSSION

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,   2002   2001   2000   1999   1998
 
Balance at Beginning of Year
  $ 6,442     $ 6,115     $ 5,778     $ 5,492     $ 5,107  
 
Loan Losses:
                                       
 
Commercial, Financial and Agricultural
    (5 )     (61 )     (50 )     (395 )     (379 )
 
Real Estate-Mortgage
    (42 )     (51 )     (343 )     (117 )     (78 )
 
Installment Loans to Individuals
    (1,133 )     (1,151 )     (1,250 )     (1,531 )     (2,671 )
 
 
Total Loan Losses
    (1,180 )     (1,263 )     (1,643 )     (2,043 )     (3,128 )
Recoveries on Previous Loan Losses:
                                       
 
Commercial, Financial and Agricultural
    1       0       23       15       3  
 
Real Estate-Mortgage
    2       34       8       32       9  
 
Installment Loans to Individuals
    434       476       1,084       472       394  
 
 
Total Recoveries
    437       510       1,115       519       406  
 
Net Loan Losses
    (743 )     (753 )     (528 )     (1,524 )     (2,722 )
Provision Charged to Operations (1)
    1,080       1,080       865       1,810       3,107  
 
Balance at End of Year
  $ 6,779     $ 6,442     $ 6,115     $ 5,778     $ 5,492  
 
Ratio of Net Loan Losses to Average
                                       
 
Net Loans and Leases Outstanding
    0.17 %     0.17 %     0.12 %     0.37 %     0.70 %

     (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 amounted to $1.08 million in 2002 and 2001. The balance in the allowance for credit losses is $6.779 million or 1.51% of loans at December 31, 2002. This ratio has increased from the 1.38% reported five years ago at December 31, 1998. The allowance for credit losses as a percentage of nonperforming loans has increased from 226.51% at December 31, 2001 to 392.53% in 2002.

     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,   2002   2001   2000   1999   1998

            Loans           Loans           Loans           Loans           Loans
            to Total           to Total           to Total           to Total           to Total
    Amount   Loans   Amount   Loans   Amount   Loans   Amount   Loans   Amount   Loans

Commercial, Financial and Agricultural
  $ 1,950       3.8 %   $ 1,841       4.3 %   $ 549       4.0 %   $ 1,182       4.1 %   $ 1,156       5.3 %
Real Estate-Mortgage
    2,088       64.3 %     1,881       60.0 %     2,878       59.3 %     1,493       59.6 %     1,302       58.0 %
Installment Loans to Individuals
    2,741       31.9 %     2,720       35.7 %     2,688       36.7 %     3,103       36.3 %     3,034       36.7 %
 
 
 
  $ 6,779       100.0 %   $ 6,442       100.0 %   $ 6,115       100.0 %   $ 5,778       100.0 %   $ 5,492       100.0 %
 
 

     The allocation of the allowance as shown in the table above should not be interpreted as an indication that charge-offs in 2003 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.

13


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


MANAGEMENT’S DISCUSSION

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,   2002   2001   2000   1999   1998
 
Loans Accounted For on a Nonaccrual Basis
  $ 1,265     $ 1,669     $ 664     $ 1,351     $ 1,876  
Loans Contractually Past Due 90 Days or More as to Interest or Principal Payments (Not Included in Nonaccrual Loans Above)
    461       1,175       669       623       847  
Loans Considered Troubled Debt Restructuring (Not Included in Nonaccrual Loans or Contractually Past Due Above)
    0       0       0       0       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.

     Nonaccrual 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, 2002, 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:

                                         
    (In Thousands of Dollars)
December 31,   2002   2001   2000   1999   1998
 
Gross Interest Income That Would have been Recorded if the Loans had been Current in Accordance with Their Original Terms
  $ 76     $ 50     $ 107     $ 137     $ 197  
Interest Income Included in Income on the Loans
    0       0       4       73       44  

Investment Securities

     The investment securities portfolio increased 74.88% or $107.514 million in 2002. As additional funds flowed into the Corporation from increases in customer deposit accounts, management prudently invested these funds in investment securities. Most of this increase was experienced in mortgage-backed securities, which grew $61.695 million. Government agency securities also increased $34.272 million or 45.68%. Investments in securities of states and political subdivisions increased $7.239 million. The Corporation uses these tax-exempt municipal securities to increase investment yields and as a vehicle to lower our overall income tax rate.

     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,   2002   2001   2000
 
   U.S. Treasury Securities and Government Agencies
  $ 109,291     $ 75,019     $ 59,982  
   Mortgage-Backed Securities
    80,814       19,119       25,948  
   Obligations of States and Political Subdivisons
    37,277       30,038       22,917  
   Other Securities
    23,707       19,399       18,914  
 
 
 
  $ 251,089     $ 143,575     $ 127,761  
 
 

14


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


MANAGEMENT’S DISCUSSION

     A summary of debt securities held at December 31, 2002, 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, 2002
                Weighted
        Fair   Average
        Value   Yield (1)
       
U.S. Treasury and U.S. Government Agency Securities:
               
   
Maturing Within One Year
$ 21,126       4.72 %
   
Maturing After One Year But Within Five Years
  86,023       4.55 %
   
Maturing After Five Years But Within Ten Years
  371       5.15 %
   
Maturing After Ten Years
    1,771       4.18 %
 
   
         
   
Total U.S. Treasury and U.S. Government Agency Securities:
  $ 109,291       4.58 %
 
   
         
Mortgage-Backed Securities
               
   
Maturing Within One Year
  $ 19       7.97 %
   
Maturing After One Year But Within Five Years
    20,433       4.14 %
   
Maturing After Five Years But Within Ten Years
    39,229       4.46 %
   
Maturing After Ten Years
    21,133       4.84 %
 
   
         
   
Total Mortgage-Backed Securities:
  $ 80,814       4.48 %
 
   
         
Obligations of States and Political Subdivisions
               
   
Maturing Within One Year
  $ 442       7.32 %
   
Maturing After One Year But Within Five Years
    4,081       6.02 %
   
Maturing After Five Years But Within Ten Years
    15,967       6.61 %
   
Maturing After Ten Years
    16,787       7.35 %
 
   
         
   
Total Obligations of States and Political Subdivisions
  $ 37,277       6.95 %
 
   
         
Corporate Debt Securities
               
   
Maturing Within One Year
  $ 2,017       7.38 %
   
Maturing After One Year But Within Five Years
    4,436       6.31 %
   
Maturing After Ten Years
    272       7.70 %
 
   
         
   
Total Corporate Debt Securities
  $ 6,725       6.69 %
 
   
         

     (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 $16.215 thousand, $64.034 thousand, $240.61 thousand and $397.723 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 average total deposits increased 11.72% from $485.202 million in 2001 to $542.072 million in 2002. Most of this increase took place in Savings Deposits, especially in the Corporation’s “Money Market Index Account”, which increased $95 million. Some of this increase was the result of new money deposited from outside of the bank. Many of our customers who had maturing time deposits moved the proceeds into shorter term liquid accounts, such as the “Money Market Index Account.” As a result of this strategy by our customers, the Corporation saw its average time deposit balances decrease from $228.855 million in 2001 to $188.179 million in 2002.

Average Deposits

     The following table shows the classification of average deposits for the periods indicated:

                         
    (In Thousands of Dollars)
   
Average Balances                        
on December 31,   2002   2001   2000
 
Noninterest-Bearing Demand Deposits
  $ 46,564     $ 44,329     $ 46,948  
Interest-Bearing Demand Deposits
    94,997       80,112       77,998  
Savings Deposits
    212,332       131,906       128,006  
Time Deposits
    188,179       228,855       217,979  
 
 
Total Average Deposits
  $ 542,072     $ 485,202     $ 470,931  
 
 

     The following shows the average rate paid on the following deposit categories for the periods indicated:

                         
Years ended December 31,   2002   2001   2000
 
Interest-Bearing Demand Deposits
    1.03 %     1.55 %     1.65 %
Savings
    2.38 %     2.65 %     3.00 %
Time Deposits
    4.31 %     5.56 %     5.63 %

     The steady increase in total deposits over the years reflects managements’ efforts to continue to insure the growth of the bank and to maintain a viable banking institution. During 2002, 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 2002.

15


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


MANAGEMENT’S DISCUSSION

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 10.27%, 9.88% and 8.37% for 2002, 2001 and 2000, respectively. Total cash dividends declared in 2002 represented 87.27% of net income as compared to 85.64% in 2001 and 82.99% in 2000. The resulting internal equity growth percentage amounted to 1.31% in 2002 and 1.42% in 2001 and 2000.

     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, 2002 the bank subsidiary had $37.42 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, 2002, 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 15.80% and 17.05% respectively. The bank subsidiary’s leverage ratio at December 31, 2002 was 9.87%.

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 non-employee 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 five meetings during 2002.

Compliance

     There are many activities in today’s banking that are subject to compliance regulations. The bank’s policies and procedures govern the way departments function and ensure fair, consistent and sound banking practices. When those policies and procedures are affected by new regulations, or regulation changes, the Compliance Department is responsible to change those policies involved, and is responsible to inform and train personnel. For example, many of the forms used in opening deposit accounts and loan accounts must subscribe to standards of format that are designed to protect and to inform the customer.

     Compliance is an ongoing effort that requires continuous training. New regulations are introduced, changes to existing regulations are made, employees change positions, and new employees are hired. Assessment is made for the training needs of the bank and then clearly communicated to all appropriate bank employees through training programs. Quite often, several sessions are required to reach all persons who need training due to conflicting schedules.

     From training, compliance objectives follow to monitoring or testing procedures. Monitoring can focus on a broad range of compliance issues and procedures, or it can be applied to limited areas. Often, the extent of monitoring relates to the complexity or length of the regulation. Upon the completion of monitoring projects, areas where training is needed may be revealed. The cycle of training, to monitoring, to training is ever continuing.

     It is our bank’s mission to keep our employees well informed. We urge them to ask questions and to use initiative in becoming informed, as compliance regulations have become very complex. This all translates in efficient and better service for our customers.

16


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


QUARTERLY FINANCIAL DATA
                                   
      (In Thousands except Per Share Data)
Quarter Ended 2002   March 31   June 30   September 30   December 31
 
Total interest income
  $ 10,666     $ 10,936     $ 11,181     $ 11,229  
Total interest expense
    4,611       4,552       4,218       3,909  
 
 
Net interest income
    6,055       6,384       6,963       7,320  
Provision for credit losses
    270       270       270       270  
Non-interest income
    773       801       864       754  
Non-interest expense
    4,322       4,368       4,375       4,498  
 
 
Income before federal income taxes
    2,236       2,547       3,182       3,306  
Federal income taxes
    633       735       941       1,028  
 
 
Net income
  $ 1,603     $ 1,812     $ 2,241     $ 2,278  
 
 
Per share data:
                               
 
Net income
  $ 0.13     $ 0.15     $ 0.18     $ 0.18  
 
Dividends
  $ 0.14     $ 0.14     $ 0.14     $ 0.15  

                                   
      (In Thousands except Per Share Data)
Quarter Ended 2001   March 31   June 30   September 30   December 31
 
Total interest income
  $ 11,492     $ 11,578     $ 11,490     $ 11,126  
Total interest expense
    5,547       5,322       5,185       4,949  
 
 
Net interest income
    5,945       6,256       6,305       6,177  
Provision for credit losses
    270       270       270       270  
Non-interest income
    722       882       927       888  
Non-interest expense
    4,028       4,141       4,177       4,472  
 
 
Income before federal income taxes
    2,369       2,727       2,785       2,323  
Federal income taxes
    688       805       776       645  
 
 
Net income
  $ 1,681     $ 1,922     $ 2,009     $ 1,678  
 
 
Per share data:
                               
 
Net income
  $ 0.14     $ 0.16     $ 0.16     $ 0.14  
 
Dividends
  $ 0.13     $ 0.13     $ 0.13     $ 0.14  

Information as to Stock Prices and Dividends

     The common stock of the Corporation trades on the OTC Bulletin Board under the symbol FMNB. There are approximately eleven local and/or regional brokerage firms that are known to be relatively active in trading the Corporation’s common stock. 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, 2002, there were 3,686 shareholders of record of common stock.

Market and Dividend Summary

                         
Dividend Date   High   Low   Dividend

March 2001
  $ 9.00     $ 7.13     $ 0.13  
June 2001
    10.60       8.00       0.13  
September 2001
    10.50       9.70       0.13  
November 2001
                  2% Stock Dividend
December 2001
    11.75       10.06       0.14  

March 2002
  $ 12.00     $ 11.05     $ 0.14  
June 2002
    11.85       11.10       0.14  
September 2002
    13.00       10.75       0.14  
November 2002
                  2% Stock Dividend
December 2002
    14.50       11.50       0.15  

17


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


MANAGEMENT REPORT
[FNBC logo]

January 17, 2003

INTERNAL CONTROL OVER FINANCIAL REPORTING

     Management of Farmers National Banc Corp. and subsidiary is responsible for preparing the Bank’s annual financial statements. Management is also responsible for establishing and maintaining effective internal control over financial reporting presented in conformity with both U.S. generally accepted accounting principles and regulatory in conformity with the Federal Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and Income (call report instructions.) The Bank’s internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified.

     There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

     Management assessed the Bank’s internal control over financial reporting presented in conformity with both U.S. generally accepted accounting principles and call report instructions as of December 31, 2002. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2002, Farmers National Banc Corp. and subsidiary maintained effective internal control over financial reporting presented in conformity with both U.S. generally accepted accounting principles and call report instructions.

COMPLIANCE WITH LAWS AND REGULATIONS

     Management is responsible for compliance with all designated laws and regulations, and in particular, those laws and regulations concerning loans to insiders and dividend restrictions designated by the FDIC as safety and soundness laws and regulations. The federal laws concerning loans to insiders are codified at 12 USC 375a and 375b, and the federal regulations are set forth at 12 CFR 23.5, 31 and 215. The federal laws concerning dividend restrictions are codified at 12 USC 56, 60 and 1831o, and the federal regulations are set forth at 12 CFR 5.61, 5.62, 6.6 and 7.6120.

     Management assessed compliance by Farmers National Banc Corp. and subsidiary with the designated laws and regulations relating to safety and soundness. Based on this assessment, management believes the Bank complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2002.

  FARMERS NATIONAL BANC CORP.
AND SUBSIDIARY

  /s/ Frank L. Paden, President and Secretary

  /s/ Carl D. Culp, Executive Vice President and Treasurer

20 South Broad Street - P.O. Box 555 - - Canfield, Ohio 44406
330-533-3341 - Toll free: 888-988-3276 - Fax: 330-533-0451 www.fnbcanfield.com - E Mail: exec@fnbcanfield.com

18


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


INDEPENDENT AUDITORS’ REPORT
[HBK logo]

January 17, 2003

260 Niles Cortland Road NE
Warren, Ohio 44484
(330) 856-2733 PHONE
(330) 856-5487 FAX
www.hbkcpa.com

Shareholders and 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, 2002 and 2001 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, 2002. 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 U.S. 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, 2002 and 2001 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2002 in conformity with U.S. generally accepted accounting principles.

/s/ Hill, Barth & King LLC
Certified Public Accountants

19


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS
                             
                (In Thousands of Dollars)
    December 31,           2002   2001
 
         
ASSETS
                       
 
Cash and due from banks
          $ 31,204     $ 23,871  
 
Federal funds sold
            4,537       41,542  
 
         
TOTAL CASH AND CASH EQUIVALENTS
      35,741       65,413  
 
         
 
Securities available for sale
            251,089       143,575  
 
Loans
            449,693       435,470  
 
Less allowance for credit losses
            6,779       6,442  
 
         
NET LOANS
      442,914       429,028  
 
         
 
Premises and equipment, net
            12,892       13,009  
 
Other assets
            5,462       5,669  
 
         
 
          $ 748,098     $ 656,694  
LIABILITIES AND STOCKHOLDERS EQUITY
         
 
Deposits (all domestic):
                       
   
Noninterest-bearing
          $ 51,001     $ 52,754  
   
Interest-bearing
            537,253       450,890  
 
         
TOTAL DEPOSITS
      588,254       503,644  
 
         
 
Borrowings:
                       
   
U. S. Treasury interest-bearing demand note
            810       141  
   
Securities sold under repurchase agreements
            51,117       47,444  
   
Federal Home Loan Bank advances
            23,022       26,832  
 
         
TOTAL BORROWINGS
      74,949       74,417  
 
         
 
Other liabilities and deferred credits
            3,943       2,915  
 
         
TOTAL LIABILITIES
      667,146       580,976  
 
         
 
Stockholders Equity
Common Stock — Authorized 25,000,000 shares; issued and outstanding 12,435,578 in 2002 and 12,111,331 in 2001
            62,631       55,419  
 
Retained earnings
            18,404       20,672  
 
Accumulated other comprehensive income
            4,887       1,741  
 
Treasury stock, at cost; 418,774 shares in 2002 and 176,351 shares in 2001
            (4,970 )     (2,114 )
 
         
TOTAL STOCKHOLDERS EQUITY
      80,952       75,718  
 
         
 
          $ 748,098     $ 656,694  
 
         

See accompanying notes to consolidated financial statements

20


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
                                     
                In Thousands except Per Share Data)
    Years ended December 31,           2002   2001   2000
 
         
INTEREST INCOME
                               
 
Interest and fees on loans
          $ 34,424     $ 37,052     $ 37,252  
 
Interest and dividends on securities:
                               
   
Taxable interest
            6,752       5,483       5,733  
   
Nontaxable interest
            1,508       1,334       1,167  
   
Dividends
            711       897       627  
 
Interest-bearing deposits in other banks
            0       11       22  
 
Interest on federal funds sold
            617       909       1,041  
 
         
TOTAL INTEREST INCOME
      44,012       45,686       45,842  
 
         
INTEREST EXPENSE
                               
 
Deposits
            14,147       17,460       17,389  
 
Borrowings
            3,143       3,543       4,161  
 
         
TOTAL INTEREST EXPENSE
      17,290       21,003       21,550  
 
         
NET INTEREST INCOME
      26,722       24,683       24,292  
 
Provision for credit losses
            1,080       1,080       865  
 
         
NET INTEREST INCOME AFTER
                         
PROVISION FOR CREDIT LOSSES
      25,642       23,603       23,427  
 
         
OTHER INCOME
                               
 
Service charges on deposit accounts
            1,868       2,098       1,857  
 
Investment security gains
            232       112       34  
 
Gain on sale of mortgage loans, net
            0       0       4  
 
Brokerage income
            168       121       210  
 
Other operating income
            924       1,088       887  
 
         
TOTAL OTHER INCOME
      3,192       3,419       2,992  
 
         
 
            28,834       27,022       26,419  
OTHER EXPENSES
         
 
Salaries and employee benefits
            9,661       9,002       8,870  
 
Net occupancy expense of premises
            1,062       1,055       1,039  
 
Furniture and equipment expense, including depreciation
            1,223       1,261       1,179  
 
State and local taxes
            850       856       767  
 
Merger related expense
            0       0       1,192  
 
Other operating expenses
            4,767       4,644       4,976  
 
         
TOTAL OTHER EXPENSES
      17,563       16,818       18,023  
 
         
INCOME BEFORE INCOME TAXES
      11,271       10,204       8,396  
INCOME TAXES
            3,337       2,914       2,648  
 
         
NET INCOME
      7,934       7,290       5,748  
OTHER COMPREHENSIVE INCOME, NET OF TAX:
                               
 
Unrealized gains on securities
            3,146       1,369       1,909  
 
         
COMPREHENSIVE INCOME
    $ 11,080     $ 8,659     $ 7,657  
 
         
NET INCOME PER SHARE
          $ 0.64     $ 0.60     $ 0.48  
 
         

See accompanying notes to consolidated financial statements

21


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
                               
                  (In Thousands of Dollars)        
    Years ended December 31,   2002   2001   2000
 
 
COMMON STOCK
                       
 
Balance at beginning of year
  $ 55,419     $ 49,451     $ 45,155  
 
Stock options exercised
    0       0       89  
 
Stock dividend, including fractional shares
    3,278       2,601       1,461  
 
Common stock issued
    3,934       3,367       2,746  
 
 
 
Balance at end of year
    62,631       55,419       49,451  
RETAINED EARNINGS
 
 
Balance at beginning of year
    20,672       22,226       22,709  
 
Net income
    7,934       7,290       5,748  
 
Dividends declared:
                       
   
$.57 cash dividends per share in 2002, $.53 in 2001 and $.51 in 2000
    (6,924 )     (6,243 )     (4,770 )
 
Stock dividends
    (3,278 )     (2,601 )     (1,461 )
 
 
 
Balance at end of year
    18,404       20,672       22,226  
ACCUMULATED OTHER COMPREHENSIVE INCOME
 
 
Balance at beginning of year
    1,741       372       (1,537 )
 
Net change in unrealized appreciation on available for sale securities, net of income taxes
    3,146       1,369       1,909  
 
 
 
Balance at end of year
    4,887       1,741       372  
 
 
TREASURY STOCK, AT COST
                       
 
Balance at beginning of year
    (2,114 )     (1,216 )     (92 )
 
Treasury shares acquired
    (2,856 )     (898 )     (1,124 )
 
 
 
Balance at end of year
    (4,970 )     (2,114 )     (1,216 )
 
 
     
TOTAL STOCKHOLDERS EQUITY AT END OF YEAR
  $ 80,952     $ 75,718     $ 70,833  
 
 

See accompanying notes to consolidated financial statements

22


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 
                    (In Thousands of Dollars)        
    Years ended December 31,   2002   2001   2000
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
                       
 
Interest received
  $ 45,585     $ 48,196     $ 47,373  
 
Fees and commissions received
    2,960       3,380       2,929  
 
Mortgage loans originated for sale
    0       0       (205 )
 
Proceeds from sales of mortgage loans
    0       0       209  
 
Interest paid
    (17,863 )     (21,268 )     (21,249 )
 
Cash paid to suppliers and employees
    (16,642 )     (16,209 )     (16,927 )
 
Income taxes paid
    (2,719 )     (3,319 )     (3,021 )
 
 
     
NET CASH PROVIDED BY OPERATING ACTIVITIES
    11,321       10,780       9,109  
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
Decrease in interest-bearing time deposits maturing in more than 90 days
    0       99       100  
 
Proceeds from maturities and repayments of securities available for sale
    33,419       27,301       23,534  
 
Proceeds from sales of securities available for sale
    1,518       9,395       2,483  
 
Purchases of securities available for sale
    (138,188 )     (50,924 )     (34,921 )
 
Net decrease (increase) in loans made to customers
    (16,178 )     13,152       (20,940 )
 
Purchases of premises and equipment
    (800 )     (1,309 )     (697 )
 
 
       
NET CASH USED IN INVESTING ACTIVITIES
    (120,229 )     (2,286 )     (30,441 )
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
Net increase (decrease) in deposits
    84,619       35,324       (9,162 )
 
Net increase in short-term borrowings
    4,282       7,421       1,891  
 
Net increase (decrease) in Federal Home Loan Bank Borrowings
    (3,810 )     (16,743 )     24,639  
 
Purchase of Treasury Stock
    (2,855 )     (898 )     (1,088 )
 
Dividends paid
    (6,934 )     (6,260 )     (4,101 )
 
Proceeds from stock options
    0       0       89  
 
Proceeds from sale of common stock
    3,934       3,367       2,746  
 
 
       
NET CASH PROVIDED BY FINANCING ACTIVITIES
    79,236       22,211       15,014  
 
 
       
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (29,672 )     30,705       (6,318 )
CASH AND CASH EQUIVALENTS
                       
 
Beginning of year
    65,413       34,708       41,026  
 
 
 
End of year
  $ 35,741     $ 65,413     $ 34,708  
 
 
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
                       
 
Net income
  $ 7,934     $ 7,290     $ 5,748  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
     
Depreciation
    839       794       864  
     
Amortization and accretion
    2,091       2,158       2,242  
     
Provision for credit losses
    1,080       1,080       865  
     
Gain on sale of investment securities
    (232 )     (112 )     (34 )
     
Other
    (391 )     (430 )     (575 )
 
 
       
NET CASH PROVIDED BY OPERATING ACTIVITIES
  $ 11,321     $ 10,780     $ 9,109  
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
 
 
Supplemental schedule of noncash investing and financing activities:
                       
   
Unrealized loss on available for sale securities
  $ 73     $ 444     $ 734  
   
Merger related transfer of equity securities to treasury stock
    0       0       37  

See accompanying notes to consolidated financial statements

23


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002, 2001 and 2000

     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 seventeen (17) locations.

Estimates:

     The preparation of financial statements in conformity with U.S. 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. Areas involving the use of management’s estimates and assumptions include the allowance for loan losses, fair values of financial instruments, the realization of deferred tax assets, the carrying value of impaired loans, the carrying value and amortization of intangibles and depreciation of premises and equipment. 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. Interest Income includes amortization of purchase premium or discount. The company does not utilize a trading account.

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 loans. Loans held for sale are reported at the lower of cost or market, on an aggregate basis.

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.

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.

     A loan is impaired when full payment under the loan terms is not expected. 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.

Premises and Equipment:

     Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets.

Intangibles:

     Identified purchased intangibles, primarily core deposits, are recorded at cost and amortized on a straight-line basis over 8 years. Unidentified purchased intangibles related to branch acquisitions are recorded at cost and amortized on a straight-line basis over 15 years. Intangible amortization of $97 thousand was recorded in 2002, 2001 and 2000.

Income Taxes:

     Income taxes, based on filing a consolidated return with the Company’s subsidiary, are provided for amounts currently due and deferred amounts computed based on the expected future tax consequences of temporary differences between the financial accounting and income tax basis of assets and liabilities. A valuation allowance, if needed, reduces deferred tax assets to the amounts expected to be realized.

24


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Financial Instruments:

     Fair value of financial instruments are estimated using relevant market information and other assumptions as more fully disclosed in Note N. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Stock-Based Compensation:

     The company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, under which no compensation cost for stock options is recognized for stock option awards granted at or above fair market value. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As options are granted, the company has elected to remain on its current method of accounting as described above, and has adopted the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123.

                           
        (In Thousands of Dollars)
December 31,   2002   2001   2000
 
 
Net income, as reported
  $ 7,934     $ 7,290     $ 5,748  
Less: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects
    (31 )     (19 )     0  
 
 
Pro forma net income
  $ 7,903     $ 7,271     $ 5,748  
Earnings per share:
 
 
As reported
  $ 0.64     $ 0.60     $ 0.48  
 
 
 
Pro forma
  $ 0.64     $ 0.60     $ 0.48  
 
 

Advertising:

     The company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2002, 2001 and 2000 was $468 thousand, $428 thousand and $399 thousand, respectively.

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 12,344,857 for 2002, 12,196,689 for 2001 and 11,905,188 for 2000.

Comprehensive Income:

     Comprehensive income consists of net income and other comprehensive income. Other comprehensive income consists solely of unrealized gains and losses on securities available for sale.

New Accounting Pronouncements:

     In October 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 147 (SFAS 147), “Acquisitions of Certain Financial Insitutions”, which amended SFAS 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions’. SFAS 72 excluded banking and thrift institutions from the scope of SFAS 142, “Goodwill and Other Intangible Assets” which states that goodwill arising from business combinations will no longer be amortized but rather will be assessed to earnings in the period identified. SFAS 147 states that the carrying amount of an unidentifiable intangible asset will continue to be amortized according to SFAS 72 unless it was created as a result of a business combination. In which case, the unidentifiable intangible asset would be reclassified to goodwill and accounted for according to SFAS 142. SFAS 147 states that unidentified intangibles and identified intangibles, primarily core deposits, arising from branch acquisitions do not constitute a business combination and therefore may continue to be amortized over their estimated lives. The Company’s unidentifiable intangible assets relate to branch acquisitions, therefore, the adoption of this statement did not impact the Company’s financial condition and results of operations.

     During 2002, FASB issued SFAS No. 144 which covers the accounting for the impairment or disposal of long-lived assets. FASB also issued SFAS No. 145 which covers accounting for debt extinguishments and modifications to lease agreements and SFAS No. 146 which covers accounting for costs associated with exit or disposal activities, such as lease termination costs or employee severance costs. The Company presently has no activities within the scope of these Standards.

NOTE B — SECURITIES AVAILABLE FOR SALE

Securities available for sale at December 31, 2002 and 2001 are summarized as follows:

                 
    (In Thousands of Dollars)
    2002   2001
 
 
U.S. Treasury and U.S. Government agencies
  $ 109,291     $ 75,019  
Corporate debt securities
    6,725       4,593  
Mortgage-backed securities
    80,814       19,119  
Obligations of states and political subdivisions
    37,277       30,038  
 
 
Total debt securities
    234,107       128,769  
Equity securities
    16,982       14,806  
 
 
TOTALS
  $ 251,089     $ 143,575  
 
 

25


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Net unrealized gains (losses) for securities available for sale at December 31, 2002 and 2001 are summarized below:

                           
              (In Thousands of Dollars)        
                      NET
                      UNREALIZED
      UNREALIZED   UNREALIZED   GAINS
December 31, 2002   GAINS   LOSSES   (LOSSES)
 
 
U.S. Treasury and U.S. Government agencies
  $ 4,646     $ (19 )   $ 4,627  
Corporate debt securities
    229       0       229  
Mortgage-backed securities
    1,243       (19 )     1,224  
Obligations of states and political subdivisions
    1,114       (35 )     1,079  
 
 
Total debt securities
    7,232       (73 )     7,159  
Equity securities
    245       0       245  
 
 
 
TOTALS
  $ 7,477     $ (73 )   $ 7,404  
 
 
December 31, 2001
                       
U.S. Treasury and U.S. Government agencies
  $ 2,050     $ (101 )   $ 1,949  
Corporate debt securities
    178       (40 )     138  
Mortgage-backed securities
    343       (43 )     300  
Obligations of states and political subdivisions
    248       (251 )     (3 )
 
 
Total debt securities
    2,819       (435 )     2,384  
Equity securities
    273       (9 )     264  
 
 
 
TOTALS
  $ 3,092     $ (444 )   $ 2,648  
 
 

The fair value and amortized cost of debt securities available for sale by contractual maturities at December 31, 2002 are summarized below. Mortgage-backed securities are not due at a single maturity date; periodic payments are received on the securities based on the payment patterns of the underlying collateral. For purposes of the maturity table, mortgage-backed securities have been allocated over the maturity groupings based on the final maturities of the securities. These securities may mature earlier than their final maturities because of principal prepayments.

                   
      (In Thousands of Dollars)
      FAIR   AMORTIZED
      VALUE   COST
 
 
Due in 1 year or less
  $ 23,604     $ 23,132  
Due after one year through five years
    114,973       110,152  
Due after five years through ten years
    55,567       54,510  
Due after ten years
    39,963       39,154  
 
 
 
TOTALS
  $ 234,107     $ 226,948  
 
 

     Securities with a carrying value of $97 million at December 31, 2002 and $77 million at December 31, 2001 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,   2002   2001
 
 
Real Estate — Mortgage
  $ 289,930     $ 261,929  
Installment Loans to Individuals
    141,538       154,584  
Commercial, Financial and Agricultural
    17,185       17,187  
 
 
 
Subtotal
    448,653       433,700  
Net origination and deferred loan fees
    1,040       1,770  
 
 
   
TOTAL LOANS
  $ 449,693     $ 435,470  
 
 

     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.

     Certain directors, executive officers and associates of such persons were loan customers during 2002. Such loans were made in the ordinary course of business under normal credit terms and do not represent more than 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 2002:

         
    (In Thousands of Dollars)
Total loans at December 31, 2001
  $ 2,439  
New loans
    2,385  
Repayments
    (1,500 )
 
 
Total loans at December 31, 2002
  $ 3,324  
 
 

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)        
        2002   2001   2000
 
 
Balance at beginning of year
  $ 6,442     $ 6,115     $ 5,778  
Additions:
                       
 
Provision for credit losses
    1,080       1,080       865  
 
Recoveries on loans previously charged off
    437       510       1,115  
 
 
   
TOTAL ADDITIONS
    7,959       7,705       7,758  
Credits charged off
    (1,180 )     (1,263 )     (1,643 )
 
 
Balance at end of year
  $ 6,779     $ 6,442     $ 6,115  
 
 

     The allowance for federal income tax purposes amounted to $1.8 million at December 31, 2002, which is $4.979 million less than the allowance for financial accounting purposes.

26


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E — PREMISES AND EQUIPMENT

     Following is a summary of premises and equipment:

                   
      (In Thousands of Dollars)
December 31,   2002   2001
 
 
Land
  $ 2,713     $ 2,665  
Premises
    11,841       11,476  
Equipment
    7,051       6,852  
Leasehold Improvements
    198       195  
 
 
 
    21,803       21,188  
Less accumulated depreciation
    (8,911 )     (8,179 )
 
 
 
NET BOOK VALUE
  $ 12,892     $ 13,009  
 
 

     Depreciation expense was $839 thousand for the year ended December 31, 2002, $794 thousand for 2001 and $864 thousand for 2000.

NOTE F — INTEREST-BEARING DEPOSITS

     Following is a summary of scheduled maturities of certificates of deposit during the years following December 31, 2002:

           
      (In Thousands of Dollars)
2003
  $ 76,390  
2004
    72,992  
2005
    31,890  
2006
    3,380  
2007 and thereafter
    7,502  
 
 
 
TOTAL
  $ 192,154  
 
 

     Following is a summary of certificates of deposit of $100 thousand or more by remaining maturities as of December 31, 2002:

           
      (In Thousands of Dollars)
Three months or less
  $ 14,012  
Three to six months
    1,889  
Six to twelve months
    3,802  
Over twelve months
    30,432  
 
   
 
 
TOTAL
  $ 50,135  
 
   
 

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). The securities, although held in safekeeping outside the bank subsidiary, were under the bank subsidiary’s control. The outstanding balances and related information are summarized as follows:

                 
    (In Thousands of Dollars)
    2002   2001
   
Book value including accrued interest
  $ 65,442     $ 58,545  
Market value
    67,786       59,424  
Maximum month end balance during the year
    59,979       47,444  
Average balance during the year
    53,579       42,287  
Average year end interest rate
    3.10 %     3.12 %
Average interest rate during the year
    3.10 %     3.80 %

     The bank subsidiary has access to borrowing facilities at the Federal Home Loan Bank, which totaled $93.114 million at December 31, 2002.

NOTE H — FEDERAL HOME LOAN BANK ADVANCES

     Federal Home Loan Bank advances at December 31, 2002 are secured by a blanket pledge of residential mortgage loans totaling $93.114 million and the Bank’s investment in FHLB stock.

                                 
            December 31,        
    2002   2001
 
 
            Weighted           Weighted
            Average           Average
(In Thousands of Dollars)   Amount   Rate   Amount   Rate
 
 
Fixed-rate advances
  $ 22,222       5.30 %   $ 25,603       6.45 %
Variable-rate advances
    800       1.95 %     1,229       2.71 %
 
 
Total advances
  $ 23,022       5.19 %   $ 26,832       6.28 %
 
 

     Scheduled repayments of FHLB advances are as follows:

           
Maturing in:   (In Thousands of Dollars)
2003
  $ 3,691  
2004
    7,507  
2005
    2,305  
2006
    2,188  
2007
    2,843  
Later years
    4,488  
 
   
 
 
TOTAL
  $ 23,022  
 
   
 

27


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $75 thousand for 2002, $44 thousand for 2001 and $36 thousand for 2000. 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, 2002:

           
Year ending:   (In Thousands of Dollars)
December 31, 2003
  $ 43  
December 31, 2004
    37  
 
   
 
 
TOTAL
  $ 80  
 
   
 

     The bank has entered into contracts to construct a new main office complex in Canfield, Ohio. The estimated cost of the project is $3 million, the majority of which is expected to be incurred in 2003.

     The bank subsidiary is required to maintain noninterest-bearing reserve balances with the Federal Reserve Bank. The average reserve balance was $12.309 million in 2002 and $9.602 million in 2001.

     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)        
      2002   2001
CONTRACT OR   Fixed   Variable   Fixed   Variable
NOTIONAL AMOUNT   Rate   Rate   Rate   Rate
     
Financial instruments whose contract amounts represent credit risk:
                               
Commitments to extend credit
  $ 28,088     $ 18,263     $ 29,736     $ 13,515  
Standby letters of credit and financial guarantees written
            1,379               1,053  

     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, Trumbull and Columbiana Counties in Ohio. The concentrations of credit by type of loan are presented in Note C.

NOTE J — STOCKHOLDERS EQUITY

     On March 30, 2001, 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 12.5 million shares to 25 million shares.

     In December 1998, the Board of Directors adopted an incentive stock option plan for the Directors, officers and employees which was approved by stockholders at their annual meeting on March 25, 1999. An aggregate of 375,000 common shares were reserved for future issuance under the plan. The incentive stock options have expiration terms of ten years subject to certain extensions and early terminations. The per share exercise price of an incentive stock option shall be, at a minimum, equal to the fair value of a share of common stock on the date the incentive stock option is granted.

     At December 31, 2000, no options were outstanding. Stock options exercised in 2000 and 1999 were from the stock option plan of Security Financial Corp., which terminated upon its merger with the company.

     On November 13, 2001, incentive stock options were granted for the purchase of 56,000 shares, exercisable at the market price of $11 per share. The recipients of the stock options vest over a five-year period. Options expire 90 days after termination of employment. During 2002, 500 options expired due to termination of employment. At December 31, 2002, 11,100 stock options were exercisable, and 55,500 stock options granted remained outstanding.

28


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2002, the bank subsidiary had $10.60 million of retained earnings available for distribution and $37.42 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.

     The following table reflects various measures of capital at year-end:

                                                 
                    (In Thousands of Dollars)                
                    Requirement   To be "Well Capitalized"
                    For Capital   Under Prompt Corrective
    Actual   Adequacy Purposes:   Action Provisions:
   
    Amount   Ratio   Amount   Ratio   Amount   Ratio
   
As of December 31, 2002
                                               
Total Capital (to Risk-Weighted Assets)
  $ 78,626       17.05 %   $ 36,884       8.00 %   $ 46,106       10.00 %
Tier I Capital (to Risk-Weighted Assets)
  $ 72,850       15.80 %   $ 18,442       4.00 %   $ 27,663       6.00 %
Tier I Capital (to Average Assets)
  $ 72,850       9.87 %   $ 29,530       4.00 %   $ 36,912       5.00 %
As of December 31, 2001
                                               
Total Capital (to Risk-Weighted Assets)
  $ 76,290       17.49 %   $ 34,888       8.00 %   $ 43,609       10.00 %
Tier I Capital (to Risk-Weighted Assets)
  $ 70,827       16.24 %   $ 17,444       4.00 %   $ 26,166       6.00 %
Tier I Capital (to Average Assets)
  $ 70,827       10.99 %   $ 25,778       4.00 %   $ 32,223       5.00 %

     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, 2002, that the bank subsidiary meets all capital adequacy requirements to which it is subject.

     As of December 31, 2002, 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 capital category.

29


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE L — RETIREMENT PLAN

     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 were $381 thousand, $390 thousand and $386 thousand for the years ended December 31, 2002, 2001 and 2000, respectively. In 2000, these contributions included the cost of Security Dollar Bank’s retirement plan, which was merged into the company’s plan.

NOTE M — INCOME TAXES

     The provision for income taxes (credit) consists of the following:

                                 
            (In Thousands of Dollars)
Years ended December 31,   2002   2001   2000
 
         
Current
          $ 3,398     $ 3,105     $ 2,733  
Deferred
            (61 )     (191 )     (85 )
 
         
 
  TOTALS   $ 3,337     $ 2,914     $ 2,648  
 
         

     Following is a reconciliation between income taxes at statutory rates and actual taxes based on income before income taxes:

                                                   
Years ended                   (In Thousands of Dollars)                
December 31,   2002   2001   2000
 
 
              Percent           Percent           Percent
              of Pretax           of Pretax           of Pretax
      Amount   Income   Amount   Income   Amount   Income
 
 
Statutory tax
  $ 3,945       35 %   $ 3,571       35 %   $ 2,938       35 %
Effect of nontaxable interest
    (584 )     (5 )     (548 )     (5 )     (378 )     (4 )
Other
    (24 )     0       (109 )     (1 )     88       1  
 
 
 
ACTUAL TAX
  $ 3,337       30 %   $ 2,914       29 %   $ 2,648       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,   2002   2001   2000
 
 
Depreciation
  $ 106     $ 105     $ (43 )
Provision for credit losses
    (208 )     (173 )     (115 )
Deferred loan fees and origination costs
    10       (179 )     (53 )
Federal Home Loan Bank dividends
    54       75       71  
Deferred compensation
    (9 )     11       (16 )
Other
    (14 )     (30 )     71  
 
 
 
TOTALS
  $ (61 )   $ (191 )   $ (85 )
 
 

     Deferred tax liabilities (assets) are comprised of the following at December 31:

                     
        (In Thousands of Dollars)
        2002   2001
 
 
Deferred tax assets:
               
 
Allowance for credit losses
    ($1,517 )     ($1,461 )
 
Deferred compensation
    (259 )     (250 )
 
Other
    (52 )     (55 )
 
 
 
Gross deferred tax assets
    ($1,828 )     ($1,766 )
 
 
Deferred tax liabilities:
               
 
Depreciation
    673       567  
Mark-to-market adjustment-securities available for sale
    2,517       907  
Federal Home Bank dividends
    404       349  
 
Other
    29       36  
 
 
 
Gross deferred tax liabilities
    3,623       1,859  
 
 
   
NET DEFERRED TAX LIABILITY
  $ 1,795     $ 93  
 
 

     No valuation allowance for deferred tax assets was recorded at December 31, 2002 and 2001. Income taxes (benefit) applicable to investment securities gains in 2002 and 2001 were $79 thousand and $38 thousand, respectively. Income taxes (benefit) applicable to other comprehensive income were $1.610 million, $715 thousand and $984 thousand for 2002, 2001 and 2000, respectively.

NOTE N — DISCLOSURE ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 2002:

Cash and cash equivalents:

     The carrying amounts in the consolidated balance sheets of cash and cash equivalents approximates their fair value.

Long-term interest bearing deposits:

     The carrying amount is a reasonable estimate of 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.

30


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 agreements approximates their fair value.

Federal Home Loan Bank advances:

     The fair values of the advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates for similar types of borrowing arrangements.

Accrued interest:

     The carrying amounts of accrued interest approximate 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, 2002 and 2001 are as follows:

                                             
                        (In Thousands of Dollars)        
                2002   2001
 
         
                CARRYING   FAIR   CARRYING   FAIR
                AMOUNT   VALUE   AMOUNT   VALUE
 
         
Financial assets:
                                       
 
Cash and cash equivalents
          $ 35,741     $ 35,741     $ 65,413     $ 65,413  
 
Investment securities:
                                       
   
Available for sale
            251,089       251,074       143,575       144,007  
 
Loans — Net
            442,914       445,904       429,028       453,748  
 
Accrued interest receivable
            4,058       4,058       3,637       3,637  
 
         
TOTAL FINANCIAL ASSETS
    $ 733,802     $ 736,777     $ 641,653     $ 666,805  
 
         
Financial liabilities:
                                       
 
Deposits
          $ 588,254     $ 584,088     $ 503,644     $ 507,664  
 
Securities sold under repurchase agreements
            51,117       51,117       47,444       47,444  
 
Federal Home Loan Bank advances
            23,022       23,053       26,832       28,993  
 
Accrued interest payable
            713       713       1,287       1,287  
 
         
TOTAL FINANCIAL LIABILITIES
    $ 663,106     $ 658,971     $ 579,207     $ 585,388  
 
         
Unrecognized financial instruments:
                                       
 
Commitments to extend credit
          $ 46,351     $ 46,351     $ 43,251     $ 43,251  
 
Standby letters of credit and financial guarantees
            1,379       1,379       1,053       1,053  

31


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE O — CONDENSED FINANCIAL INFORMATION

     Below is condensed financial information of Farmers National Banc Corp. (parent company only). In this information, the parent’s investment in bank subsidiary is stated at cost plus equity in undistributed earnings of the subsidiary since acquisition. This information should be read in conjunction with the consolidated financial statements and related notes.

                     
        (In Thousands of Dollars)
        December 31, 2002   December 31, 2001
 
 
BALANCE SHEETS
               
Assets:
               
 
Cash
  $ 3,244     $ 1,858  
 
Investment in bank subsidiary
    73,333       71,416  
 
Securities available for sale
    1,699       1,699  
 
Other securities
    477       561  
 
Other
    45       41  
 
 
 
  $ 78,798     $ 75,575  
Liabilities:
 
 
Accounts payable
  $ 2,589     $ 1,417  
Stockholders equity:
               
 
Common stock
    62,631       55,419  
 
Retained earnings
    18,404       20,672  
 
Unrealized appreciation of available for sale securities, net of applicable income taxes
    144       181  
 
Treasury stock, at cost; 418,774 shares in 2002 and 176,351 shares in 2001
    (4,970 )     (2,114 )
 
 
   
TOTAL STOCKHOLDERS EQUITY
    76,209       74,158  
 
 
 
  $ 78,798     $ 75,575  
 
 

32


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             
STATEMENTS OF INCOME           (In Thousands of Dollars)        
Years ended   December 31, 2002   December 31, 2001   December 31, 2000
 
 
Income:
                       
 
Equity in net income of subsidiary
  $ 1,917     $ 3,298     $ 5,388  
 
Dividends from subsidiary bank
    5,966       4,099       1,140  
 
Interest and dividends on securities
    52       103       188  
 
Investment security gains
    153       0       72  
 
 
   
TOTAL INCOME
    8,088       7,500       6,788  
Other expenses
    (154 )     (210 )     (1,063 )
Income tax benefit
    0       0       23  
 
 
   
NET INCOME
  $ 7,934     $ 7,290     $ 5,748  
 
 
                                 
STATEMENTS OF CASH FLOWS           (In Thousands of Dollars)        
Years ended   December 31, 2002   December 31, 2001   December 31, 2000
 
 
Cash flows from operating activities:
                       
   
Net income
  $ 7,934     $ 7,290     $ 5,748  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Income from subsidiary
    (1,917 )     (3,298 )     (5,388 )
   
Other
    1,023       263       (78 )
 
 
       
NET CASH PROVIDED BY OPERATING ACTIVITIES
    7,040       4,255       282  
 
 
Cash flows from investing activities:
                       
Proceeds from maturities of investment securities available for sale
    1,702       1,800       3,080  
Proceeds from sales of investment securities available for sale
    241       0       176  
Proceeds from return of capital on other securities
    0       0       3  
Purchases of other securities and securities available for sale
    (1,741 )     (1,671 )     (973 )
 
 
       
NET CASH PROVIDED BY INVESTING ACTIVITIES
    202       129       2,286  
 
 
Cash flows from financing activities:
                       
   
Purchase of treasury stock
    (2,856 )     (898 )     (1,088 )
   
Dividends paid
    (6,934 )     (6,260 )     (4,101 )
   
Proceeds from sale of common stock
    3,934       3,367       2,835  
 
 
     
NET CASH USED IN FINANCING ACTIVITIES
    (5,856 )     (3,791 )     (2,354 )
 
 
       
NET INCREASE IN CASH
    1,386       593       214  
CASH
                       
 
Beginning of year
    1,858       1,265       1,051  
 
 
 
End of year
  $ 3,244     $ 1,858     $ 1,265  
 
 

33


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
BOARD OF DIRECTORS
[Picture of Board of Directors]

Standing Left to Right: Benjamin R. Brown, President and Owner-Castruction Co., David C. Myers, President-Myers Equipment Corp., Frank L Paden, President & CEO-Farmers National Bank, President & Secretary-Farmers National Banc Corp., William D. Stewart, Chairman-Farmers National Banc Corp.

Seated Left to Right: Joseph D. Lane, Vice President-Lane Funeral Homes, Inc., Attorney and Principal-Lane & Rusu Co. L.P.A., Edward A. Ort, President-Ort Furniture Mfg., Co., Ronald V. Wertz, CPCU, CIC, Vice President-Acordia of Ohio Inc., Ralph D. Macali, Vice-President-Palmer J. Macali, Inc.

Annual Meeting Notice
The annual meeting of Shareholders will be held at Kenneth F. McMahon Hall at the Mill Creek MetroParks Experimental & Educational Building at 7574 Columbiana-Canfield Rd., Canfield, OH 44406, at 10:30 a.m. local time, on Thursday, March 27, 2003.

Common Stock Listing
Farmers National Banc Corp. common stock trades on the OTC Bulletin Board under the symbol FMNB.OB. At December 31, 2002, there were 12,435,578 shares outstanding and approximately 3,686 shareholders.

Dividend Payments
Subject to the approval of the Board of Directors, quarterly cash dividends are customarily payable on or about the 30th day of March, June, September and December.

Dividend Reinvestment Plan (DRIP)
Registered shareholders can purchase additional shares of Farmers’ common stock through Farmers Dividend Reinvest-ment Plan. Participation is voluntary and allows for auto-matic reinvestment of cash dividends, supplemental cash contributions not to exceed $1,000 per quarter and the safe-keeping of stock certificates. To obtain our Plan prospectus, contact Susan Miller at Toll Free 1-888-988-3276 or email exec@fnbcanfield.com.

Direct Deposit of Cash Dividends
Shareholders have the option of having their cash dividends sent directly to their financial institution for deposit into their savings or checking account.

Stock Transfer Agent
Farmers National Bank
Attention: Susan Miller, AVP, Corporate Services Administration
P.O. Box 555
Canfield, OH 44406
Toll Free 1-888-988-3276

Form 10-K
A copy of the Annual Report filed with the Securities and Exchange Commission will be provided to any shareholder on request to the Corporation, to the attention:

Mr. Carl D. Culp, Treasurer
Farmers National Banc Corp.
20 South Broad Street, P.O. Box 555
Canfield, OH 44406
Toll Free 1-888-988-3276

  34


 

FARMERS NATIONAL BANC CORP.
OFFICERS

William D. Stewart
Chairman

Frank L. Paden
President & Secretary

Carl D. Culp
Executive Vice President & Treasurer

Donald F. Lukas
Senior Vice President

Farmers National Bank Officers

Frank L. Paden
President & CEO

Carl D. Culp
Executive Vice President
Cashier & CFO

Donald F. Lukas
Senior Vice President
Bank Systems

Mark L. Graham
Vice President
Loan Administrator

Bradley S. Henderson
Vice President
Branch Adm. & Security

Anthony F. Peluso
Vice President
Human Resources

Barbara C. Fisher
Vice President
Deposit Operations & Marketing

Fremont J. Camerino
Vice President
Niles

Daniel G. Cerroni
Vice President
Niles Loans

Joseph E. Chapman
Vice President
Niles Collections

Richard G. Ferraro
Vice President
Niles

Thomas G. Hathhorn
Vice President
Niles

Roy A. Jackson
Vice President
Indirect Lending

Frederick M. Kotheimer
Vice President
Loan Review

Kevin T. Lamar
Vice President
Niles

Alfred F. Ridel
Vice President
Consumer Loans

James G. Swift
Vice President
Niles Operations Center

Robert E. True
Vice President
Niles

Keith A. Leonard
Assistant Vice President
Canfield Loans

Richard R. Lytle
Assistant Vice President
Youngstown Rd.

Susan E. Miller
Assistant Vice President
Corporate Services Administration

Mary Jane Naples
Assistant Vice President
Niles Operations Center

Phyllis A. Welton
Assistant Vice President
Niles Operations Center

Andrew A. Baird
Assistant Cashier
Canfield Data Center

Pamela J. Cleghorn
Assistant Cashier
Niles

Matthew W. Close
Assistant Cashier
Damascus

Janine E. Cox
Assistant Cashier
Credit Administration

Charlene K. Daugherty
Assistant Cashier
Human Resources

David E. Enterline
Assistant Cashier
Network Administrator

Merle C. Garritano
Assistant Cashier
Canfield Loans

Geraldine J. Gbur Polas
Assistant Cashier
Columbiana

Lynnita J. Himes
Assistant Cashier
Western Reserve

Diane C. King
Assistant Cashier
Girard

Rob L. Mort
Corporate Acct. Officer
Canfield

Joanie F. Orr
Assistant Cashier
Accounting

Patricia C. Rosko
Assistant Cashier
Austintown

Robert L. Rozeski
Assistant Cashier
Leetonia

Barbara L. Sitler
Assistant Cashier
Cornersburg

Deborah N. Testa
Assistant Cashier
Eastwood

Dennis S. Vitt
Assistant Cashier
Poland

Dorothy J. Weeden
Assistant Cashier
Canfield

  35


 

FARMERS NATIONAL BANCORP. AND SUBSIDIARY
BRANCH LOCATIONS

Austintown 22 North Niles-Canfield Road • Youngstown, OH 44515 • 792-1411
Boardman 102 West Western Reserve Road • Boardman, OH 44512 • 726-8896
Canfield, Main Office 20 South Broad Street • Canfield, OH 44406 • 533-3341
Colonial Plaza 401 East Main Street • Canfield, OH 44406 • 533-2686
Columbiana 340 State Rt. 14 • Columbiana, OH 44408 • 482-1974
Cornersburg 3619 S. Meridian Road • Youngstown, OH 44511 • 793-3971
Damascus 29053 State Rt. 62 • Damascus, OH 44619 • 537-4004
Girard 121 North State Street • Girard, OH 44420 • 545-9791
Lake Milton 17817 Mahoning Avenue • Lake Milton, OH 44429 • 654-3351
Leetonia 16 Walnut Street • Leetonia, OH 44431 • 427-2436
Mineral Ridge 3826 South Main Street • Mineral Ridge, OH 44440 • 544-7430
Niles 1 South Main Street • Niles, OH 44446 • 544-7400
Niles Drive Up 170 East State Street • Niles, OH 44446 • 544-7420
Niles Operations Center 51 South Main Street • Niles, OH 44446 • 544-7400
Niles 5845 Youngstown-Warren Road • Niles, OH 44446 • 544-7410
Poland 106 West McKinley Way • Poland, OH 44514 • 757-7508
Salem 1858 East State Street • Salem, OH 44460 • 332-1558
Warren 2910 Youngstown Road • Warren, OH 44484 • 369-5400

[GRAPHIC OF MAP OF OHIO]
[GRAPHIC OF TRUMBULL COUNTY MAP]
[GRAPHIC OF MAHONING COUNTY MAP]
[GRAPHIC OF COLUMBIANA COUNTY MAP]

  36


 

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

AUSTINTOWN
CANFIELD. MAIN OFFICE
COLUMBIANA
DAMASCUS
LAKE MILTON
MINERAL RIDGE
NILES DRIVE UP
NILES
SALEM
BOARDMAN
COLONIAL PLAZA
CORNERSBURG
GIRARD
LEETONIA
NILES
NILES OPERATIONS CENTER
POLAND
WARREN

 [18 GRAPHICS OF DIFFERNT BANKS]


 

FARMERS NATIONAL BANC CORP. [WHEAT LOGO]

FARMERS
NATIONAL
BANC
CORP.
20 SOUTH BROAD STREET
P.O. BOX 555
CANFIELD, OHIO 44406

  EX-99 4 l99108aexv99.htm EX-99 DEFINITIVE PROXY STATEMENT EX-99 Definitive Proxy

Table of Contents

SCHEDULE 14 INFORMATION

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )

Filed by the Registrant [X]
Filed by a Party other than the Registrant [   ]
Check the appropriate box:
[   ] Preliminary Proxy Statement
[   ] Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[   ] Definitive Additional Materials
[   ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12

Farmers National Banc Corp.

(Name of Registrant of Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[   ]  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11:
 
  1. Title of each class of securities to which transaction applies:
 
 
  2. Aggregate number of securities to which transaction applies:
 
 
  3. 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):
 
 
  4. Proposed maximum aggregate value of transaction:
 
 
  5. 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:
 
 


NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
PROPOSAL NO. 1:
INFORMATION WITH RESPECT TO NOMINEES
SECURITY OWNERSHIP OF MANAGEMENT
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
COMMITTEES OF THE BOARD OF DIRECTORS
SUMMARY COMPENSATION TABLE
FARMERS NATIONAL BANC CORP. 1999 STOCK OPTION PLAN
INDEBTEDNESS OF MANAGEMENT
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
EMPLOYMENT CONTRACTS OF EXECUTIVES
PERFORMANCE GRAPH
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
PRINCIPAL ACCOUNTING FIRM FEES
SHAREHOLDER PROPOSALS
ANNUAL REPORT ON FORM 10-K
EX-13 Annual Report to Security Holders
EX-99 Definitive Proxy Statement
EX-99.1 Certification of CEO
EX-99.2 Certification of CFO


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FARMERS NATIONAL BANC CORP.
20 SOUTH BROAD STREET
CANFIELD, OHIO 44406

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, MARCH 27, 2003

TO THE HOLDERS OF SHARES OF COMMON STOCK:

     NOTICE IS HEREBY GIVEN that pursuant to call of its Board of Directors, the Annual Meeting of the Shareholders of FARMERS NATIONAL BANC CORP., Canfield, Ohio will be held at Kenneth F. McMahon Hall at the Mill Creek MetroParks Experimental & Educational Building at 7574 Columbiana-Canfield Rd., Canfield, Ohio 44406 on Thursday, March 27, 2003 at ten-thirty o’clock (10:30) A.M., Eastern Standard Time, for the purpose of considering and voting upon the following matters:

  1.   ELECTION OF DIRECTORS. The election of three (3) director persons listed in the accompanying Proxy Statement for terms expiring in 2006.
 
  2.   TO TRANSACT SUCH OTHER BUSINESS as may properly come before the Meeting or any adjournment thereof.

     Shareholders of record at the close of business on February 7, 2003 are the only shareholders entitled to notice of and to vote at the Annual Shareholders Meeting.

  By Order of the Board of Directors,

   
 
 
 
Frank L. Paden, President & Secretary

Canfield, Ohio
March 6, 2003

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.


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FARMERS NATIONAL BANC CORP.
CANFIELD, OHIO 44406

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS

MARCH 27, 2003

     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 27, 2003 at 10:30 A.M., Eastern Standard Time, at Kenneth F. McMahon Hall at the Mill Creek MetroParks Experimental & Educational Building at 7574 Columbiana-Canfield Rd., 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 6, 2003 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 or other forms of direct communication.

     The 2002 Annual Report, including the required audited financial statements of the Corporation and related financial information, is enclosed with this proxy statement and form of proxy.

VOTING RIGHTS

     Only shareholders of record at the close of business on February 7, 2003 will be entitled to vote at the meeting. As of February 7, 2003, Farmers had issued and outstanding 12,408,114 shares of common stock with no par value held by approximately 3,708 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. 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 a 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.


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     The Board of Directors knows of no other business that will be presented for consideration at the 2002 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 NO. 1:

     ELECTION OF DIRECTORS

       The Board of Directors of the Corporation currently consists of eight (8) directors and is divided into three (3) Classes. Three (3) directors are in Class II whose terms expire March 2003 and are up for election this year, three (3) directors are in Class III whose terms expire March 2004, and two (2) directors are in Class I whose terms expire March 2005. Pursuant to the Code of Regulations, the authorized number of directors has been set at eight (8). The Board of Directors has nominated the three (3) persons named below to serve as directors in accordance with the proposal. The class in which each director is designated is identified below. Each of the nominees is presently a member of the Board of Directors and has consented to serve another term as director if re-elected. If any of the nominees should be unavailable to serve for any reason (which is not anticipated), the Board of Directors may designate a substitute nominee or nominees (in which case the persons named on the enclosed proxy card will vote all valid proxy cards for the election of such substitute nominee or nominees), allow the vacancy or vacancies to remain open until a suitable candidate or candidates are located, or approve a resolution that provides 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 three (3) nominees proposed for election at this Annual Meeting are Benjamin R. Brown, Edward A. Ort and William D. Stewart.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” ELECTION OF THE THREE NOMINEES NAMED IN THIS PROXY STATEMENT.


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INFORMATION WITH RESPECT TO NOMINEES

     The following table sets forth, as of the Record Date, the names of the nominees and the continuing directors, as well as their ages, a brief description of their recent business experience, including occupations and employment, the year in which each director became a director of the Corporation and the year in which their terms (or in the case of the nominees, proposed terms) as director of the Corporation expire.

             
    Principal Occupation and Five Year Business       Director
Name   Experience   Age   Since (A)

Nominees            

Benjamin R. Brown   President and Owner of Castruction Company, incorporated   57   1991
Class II Director   in 1965. The Company designs and manufactures pre-cast        
Three Year Term   shapes and associated products for the steel industry.        
Expires 2006            
 
Edward A. Ort   President of Ort Furniture Mfg. Co. since 1973. The   73   1993
Class II Director   Company manufactures upholstered furniture, which is        
Three Year Term   shipped to retail furniture stores in northeastern        
Expires 2006   United States since 1957.        
 
William D. Stewart   Chairman since 1996, formerly, President of Farmers   73   1972
Class II Director   National Bank from 1972 to 1996 and President &        
Three Year Term   Secretary of Farmers National Banc Corp. from 1983 to 1996.        
Expires 2006
 

Continuing Directors

Joseph D. Lane   Attorney and Principal of Lane & Rusu Co. L.P.A. since   50   1999
Class I Director   1995. President & CEO of Lane Funeral Homes, Inc. since        
Three Year Term   2002 and Lane Life Paramedics Ambulance Services since        
Expires 2005   1985.        
 
Ralph D. Macali   Vice President of Palmer J. Macali, Inc. since 1986.   46   2001
Class III Director   The Company operates a Giant Eagle retail grocery        
Three Year Term   store. Mr. Macali is a partner in P.M.R.P. Partnership,        
Expires 2004   a real estate investment company since 1996 and is a
limited partner in the Macali Family Limited Partnership since 1998.
       
 
David C. Myers   President and Owner of Myers Equipment Corp. since   74   1988
Class III Director   1955. The Company sells truck equipment and school        
Three Year Term   buses. Mr. Myers has operated a 2,000 acre farm since        
Expires 2004   1946.        
 
Frank L. Paden   President & CEO of Farmers National Bank since 1996 and   51   1992
Class III Director   EVP/Sr. Loan Officer since 1991. President & Secretary        
Three Year Term   of Farmers National Banc Corp. since 1996.        
Expires 2004            
 
Ronald V. Wertz   CPCU, CIC, Vice President with Acordia Insurance since   56   1989
Class I Director   1998. Previously was President and Owner of Boyer        
Three Year Term   Insurance, Inc. since 1981.        
Expires 2005

(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.


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SECURITY OWNERSHIP OF MANAGEMENT

     The following table sets forth information regarding beneficial ownership as of December 31, 2002, of the Corporation’s common shares of each Director and each Executive Officer and all Directors and Executive Officers as a group.

                 
    Aggregate Number of        
    Shares Beneficially   Percent of
Name   Owned (A)   Outstanding Shares

Benjamin R. Brown
    58,047       .47 %
Joseph D. Lane
    10,425       .08 %
Ralph D. Macali
    90,822       .73 %
David C. Myers
    61,520       .49 %
Edward A. Ort
    20,059       .16 %
Frank L. Paden
    24,759       .20 %
William D. Stewart
    59,774       .48 %
Ronald V. Wertz
    91,823       .74 %
Carl D. Culp, EVP & CFO
    1,766       .01 %
Donald F. Lukas, Senior VP
    438       .00 %
All Directors and Executive Officers as a Group
    419,433 (B)     3.37 %

(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 24,759 shares held by Frank L. Paden; 1,766 shares held by Carl D. Culp and 438 shares held by Donald F. Lukas.

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 2002, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with.


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COMMITTEES OF THE BOARD OF DIRECTORS

     During 2002, the Board of Directors of the Corporation held twelve regular monthly meetings and three special meetings. All directors attended at least 75% of the aggregate number of meetings of the Board of Directors and the respective committees on which they serve. Members of the Board of Directors receive $500 for each board meeting they attend, and $300 for each committee meeting they attend with the exception of Mr. Paden who does not receive any compensation for committee meetings.

     At the director’s organizational meeting, held immediately following the last Annual Shareholders Meeting of the Farmers National Banc Corp., held on March 28, 2002, the following committees were appointed by the President & Secretary:

     The Board of Directors has an Audit Committee consisting of Messrs. Myers, Brown, Ort and Wertz. Each of the members is independent from the Company, in accordance with the requirements of the National Association of Securities Dealers. The Audit Committee met five times in 2002. Included in the functions performed by the Audit Committee are (i) review the internal auditing procedures and controls of the Corporation and its subsidiary; (ii) review reports prepared by the internal and external auditor; (iii) formally report to the full Board of Directors its evaluations, conclusions and recommendations with respect to the Corporation’s implementation of its policies, practices and controls; (iv) hold discussions with external auditors regarding the quality of the Corporation’s financial reporting; (v) recommend to the Board of Directors that the Corporation’s financial statements be included in the annual report in Form 10-K filing; and (vi) review and discuss audited financial statements with management. The Audit Committee received a letter from its external auditor containing the disclosures required by the Independence Standards Board (ISB) Standard No. 1, and had discussion with the auditor regarding the auditor’s independence.

     The Board of Directors has a Discount Loan Committee consisting of all the directors. The function of this committee is to review all loans made during the previous week and to approve any new loan applications or loan commitments which are greater than the lending limits of specific loan officers or the Executive Loan Committee. This committee meets on a regular weekly basis with three members of the bank’s Executive Loan Committee.

     The Board of Directors has a Building Committee consisting of all the directors. The function of this committee is to oversee site selection for new offices, remodeling projects and any other modifications to the Corporation’s buildings. This committee met once in 2002.

     The Board of Directors has a Long Range and Strategic Planning Committee consisting of all the directors. This committee is responsible for the formulation and implementation of the Corporation’s long range Strategic Plan and short term Business Plan. This committee did not meet in 2002.

     The Board of Directors has a Risk Management and Insurance Committee consisting of Messrs. Wertz, Brown, Macali and EVP/CFO Culp. The function of this committee is to annually review all insurance protection and coverage maintained by the Corporation. This committee met once in 2002.

     The Board of Directors has an Executive Compensation and Employees Salary Committee consisting of Messrs. Brown, Macali, Lane, Myers, Ort, Stewart and Wertz. During 2002, this Compensation Committee met once. Duties of this committee include reviewing the performance of and establishing compensation for the officers of the Corporation’s subsidiary, Farmers National Bank of Canfield. The Compensation Committee also administers the Farmers National Banc Corp. 1999 Stock Option Plan.

     The Board of Directors has a Nominating Committee consisting of all the directors. During 2002, the Nominating Committee met once. This committee is responsible for selecting and


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recommending to the Board of Directors with respect to: (a) nominees for election at the Annual Meeting of the shareholders; (b) nominees to fill Board vacancies; and (c) the composition of membership of the various other standing board committees. The Nominating Committee will consider director nominees recommended by shareholders, provided these nominations are in accordance with the procedures set forth in the Corporation’s Code of Regulations.

     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

                                           
              Annual Salary   401(k)           All Other
Name and Principal           and Director Fees   Corporation           Compensation
Position   Year   (a)   Contribution (b)   Bonus   (c)

Frank L. Paden
    2002       188,750       12,600       0       718  
 
President & CEO
    2001       169,750       12,400       0       718  
 
    2000       155,500       11,680       0       715  
 
Carl D. Culp, EVP & CFO
    2002       102,000       7,140       0       281  
 
    2001       92,500       7,400       7,708       256  
 
    2000       82,500       6,600       0       224  
 
Donald F. Lukas
    2002       106,000       7,420       0       1,341  
 
Senior Vice President
    2001       97,900       7,832       8,158       1,305  
 
    2000       90,000       7,200       0       632  

(a)  The amount of Director Fees included in this annual amount is as follows: Paden ($8,750, $9,750 and $9,500 for 2002, 2001 and 2000 respectively).
(b)  In May 1996, the Corporation adopted a 401(k) Profit Sharing 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 Bank 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 Bank may make an additional profit sharing contribution to the Plan. The Bank’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 their respective services in all capacities, specifically setting forth the direct compensation to the President & CEO and Executive Officers who received cash and cash equivalent compensation in excess of $100,000. The compensation set forth above has been approved by the Compensation Committee of the Board of Directors.

     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 and Mr. Lukas. As a result, the Bank has entered into Deferred Compensation Agreements with certain of its executive officers, including Mr. Paden and Mr. Lukas. Under the terms of the Deferred Compensation Agreements, Mr. Paden will receive monthly payments of $930.00 and Mr. Lukas will receive monthly payments of $815.00. The monthly payments will commence with their retirement age of 65 and will continue for a period of 204 months. These agreements also provide that these executive officers will be available to perform consulting services for the Bank during the period


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he is receiving these payments, and prohibits him from entering into competition with the Bank 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 if he retires after the age of 65. These Agreements are funded by life insurance policies owned by the Bank, on which the Bank is the beneficiary and on which the Bank pays the premiums.

FARMERS NATIONAL BANC CORP. 1999 STOCK OPTION PLAN

     The following table sets forth the incentive stock options granted to the Corporation’s President & CEO and Executive Officers under the Farmers National Banc Corp. 1999 Stock Option Plan. Under Securities and Exchange Commission regulation, companies are required to project an estimate of appreciation of the underlying shares of stock during the option term. The Corporation has chosen the “five percent/ten percent” formula approved by the SEC. However, the ultimate value will depend on the market value of the Corporation’s stock at a future date, which may not correspond to the projections below. The grants of incentive stock options described below have been approved by the Compensation Committee of the Board of Directors.

                                                   
                                      Potential Realizable Value
                                      at Assumed Annual Rates
                        of Stock Price
                                      Appreciation
      Individual Grants                   for Option Term

              % of Total                                
              Options   Exercise                        
      Options   Granted to   Price (2)                        
Name   Granted   Employees   Per share   Expiration Date   5%   10%
  (1)          
Frank L. Paden
    7,500       13.39 %   $ 11.00       11/09/2009     $ 121,890     $ 176,846  
Carl D. Culp
    3,000       5.35 %   $ 11.00       11/09/2009     $ 48,756     $ 70,738  
Donald F. Lukas
    3,000       5.35 %   $ 11.00       11/09/2009     $ 48,756     $ 70,738  

(1)  Options granted in 2001 are incentive stock options, which are exercisable equally over a five-year vesting period; however, all options become immediately exercisable in the event of a change in control of the Corporation. These options were granted for a term of eight years, subject to earlier termination in certain events related to termination of employment.
(2)  Exercise price is the fair market value on the date of the grant.

     The following table sets forth the number and value of all unexercised incentive stock options held by the Corporation’s President & CEO and Executive Officers at year-end. The value of “in-the-money” options refers to options having an exercise price, which is less than the market price of the Corporation’s stock on December 31, 2002. In addition, the table sets forth the number of options exercised, if any, during the year and indicates the amount of value realized upon such exercise.

                                   
                              Value ($) of
                      Number (#) of   Unexercised
                      Unexercised Options   Options on
                      on 12/31/02   12/31/02 (2)
      Shares Acquired on   Net Value($)   Exercisable/   Exercisable/
Name   Exercise   Realized(1)   Unexercisable   Unexerciable

Frank L. Paden
    0     $ 0       0/7,500     $0/$0
Carl D. Culp
    0     $ 0       0/3,000     $0/$0
Donald F. Lukas
    0     $ 0       0/3,000     $0/$0

(1)  Represents estimated market value of the Corporation’s common stock at exercise date, less the exercise price.
(2)  Represents estimated market value of the Corporation’s common stock at December 31, 2002 less the exercise price.


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INDEBTEDNESS OF MANAGEMENT

     The Bank 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 2002, the largest aggregate extensions of credit to executive officers, directors and their associates during the year ended December 31, 2002 was $3,324,000 or 4.11% of Equity Capital Accounts. In the opinion of the management of the Bank, these transactions do not involve more than a normal risk of collection or present any 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 compensation increases in the aggregate for all staff, reviews performance of executive officers and sets their salaries for the coming year. The committee also negotiated the terms of the executive contracts referred to at Employment Contracts of Executives, below. 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. Successful bank operations are contingent upon accomplishment in all areas and integration with the business community’s direction and success in the Bank’s 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 officers 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 members of the Compensation Committee are Benjamin R. Brown, Chairman; Ralph D. Macali, Joseph D. Lane, David C. Myers, Edward A. Ort, William D. Stewart and Ronald V. Wertz. No member has registered a disagreement with the above report.


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EMPLOYMENT CONTRACTS OF EXECUTIVES

     The Corporation has entered into employment contracts with Frank L. Paden, Carl D. Culp, and Donald F. Lukas. The Corporation desires to provide for the continued employment of these executives resulting in continuity of management for the future. Each executive has entered into an employment contract on or about March 29, 2001. Each employment contract for each respective executive provides the following terms and conditions of employment:

    Each executive shall have a term of employment commencing on the date of the employment contract and continuing until that annual meeting which takes place during the third calendar year following the date of the agreement. At each successive annual meeting after the date of execution, the term of employment is renewed for an additional three-year period of time. The agreement shall continue until terminated pursuant to its terms.
 
    The executive can only be terminated by the Corporation for cause, as that term is described in the agreement. If terminated, the executive shall be paid his salary for his remaining term of employment. Such payment shall be made in lump sum.
 
    If a change in control of the Corporation shall occur and the executive leaves the employment of the Corporation within eighteen (18) months following the change of control, in addition to the above compensation, the employee shall receive a lump sum payment of three (3) times his prior year’s compensation.
 
    If the executive is terminated without cause, or leaves the Corporation within eighteen (18) months following a change of control, or if the board fails to elect the executive to a position of comparable duties and responsibilities then being served by the executive, all stock options previously granted to the executive shall become immediately exercisable and vested.

     The Compensation Committee of the Board of Directors approved the terms of the employment contracts.

Compensation Committee Interlocks and Insider Participation

     No member of the Compensation Committee is currently or was at any time during 2002, 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.


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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 Bank Index for purposes of this performance comparison. The Performance Graph set forth below, assumes an investment of $100 on December 31, 1997 and compares year-end totals shareholder returns, assuming dividends are reinvested, for a five-year period ending December 31, 2002.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

AMONG FARMERS NATIONAL BANC CORP., THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE
NASDAQ BANK INDEX

[GRAPHIC]

                                                 
    Dec-97   Dec-98   Dec-99   Dec-00   Dec-01   Dec-02
FARMERS NATIONAL BANC CORP
    100       143       104       60       91       125  
NASDAQ STOCK MARKET (U.S.)
    100       141       261       157       125       86  
NASDAQ BANK
    100       99       96       109       118       121  

RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS

     Hill Barth and King LLC has served as the Corporation’s independent public accountant for the fiscal year ending December 31, 2002. They have served in that capacity since 1983. Hill Barth and King LLC is expected to have a representative present at the Annual Meeting and will be available to respond to shareholders’ questions and if it desires, will have an opportunity to make any statement it considers appropriate.

PRINCIPAL ACCOUNTING FIRM FEES

     The following table sets forth the aggregate fees billed to Farmers National Banc Corp. for the fiscal year ended December 31, 2002 by the Corporation’s principal accounting firm, Hill Barth & King LLC:

         
Audit Fees
  $ 115,663  
All Other Fees *
  $ 22,445  
 
   
 
 
  $ 138,108  

•     The Audit Committee has considered whether the provision of these services is compatible with maintaining the principal accountant’s independence.


Table of Contents

SHAREHOLDER PROPOSALS

     Any Shareholder proposal intended to be placed in the Proxy Statement for the 2003 Annual Meeting to be held in March 2004 must be received by the Corporation no later than December 1, 2003. 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 2002 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


Table of Contents

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 7, 2003, at the Annual Meeting of its Shareholders to be held at Kenneth F. McMahon Hall at the Mill Creek MetroParks Experimental & Educational Building at 7574 Columbiana-Canfield Rd., Canfield, Ohio 44406 on Thursday, March 27, 2003 at ten-thirty o’clock (10:30) A.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 three (3) persons listed in the Proxy Statement dated March 6, 2003 accompanying the notice of said meeting.

             
FOR   AGAINST   WITHHOLD    
                                                 Benjamin R. Brown
                                                  Edward A. Ort
                                                  William D. Stewart

  2.   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” THE LISTED PROPOSITION. 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 holders must sign. EX-99.1 5 l99108aexv99w1.htm EX-99.1 CERTIFICATION OF CEO EX-99.1 Certification of CEO

 

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Farmers National Banc Corp. (the “Corporation”) on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Frank L. Paden, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2)  The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Frank L. Paden

Frank L. Paden
Chief Executive Officer
March 27, 2003

EX-99.2 6 l99108aexv99w2.htm EX-99.2 CERTIFICATION OF CFO EX-99.2 Certification of CFO

 

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Farmers National Banc Corp. (the “Corporation”) on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Carl D. Culp, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2)  The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Carl D. Culp

Carl D. Culp
Chief Financial Officer
March 27, 2003

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