<PAGE>
UNITED STATES
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 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to _________________
Commission file number 2-76280
FARMERS NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
MARYLAND 52-1241460
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 CHURCH CIRCLE, ANNAPOLIS, MARYLAND 21401 21401
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (410) 263-2603
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No .
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Corporation's voting stock held by
non-affiliates of the registrant as of March 1, 1994, was $89,068,848. The
number of shares outstanding of the registrant's common stock, as of March
1,1994, was 2,699,056.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1993 are incorporated by reference into Parts II and IV of this Report.
Portions of the annual proxy statement prepared for the 1994 annual
meeting of stockholders are incorporated by reference into Part III of this
Report.
The exhibit index is located on page 52.
<PAGE>
PART I
ITEM I. BUSINESS
Farmers National Bancorp ("Bancorp"), located at 5 Church Circle,
Annapolis, Maryland 21401, telephone (410) 263-2603, was incorporated
under the laws of the State of Maryland on December 9, 1981. Bancorp
is a multibank holding company registered under the Bank Holding
Company Act of 1956 and owns all of the outstanding shares of capital
stock of Farmers National Bank of Maryland ("FNB"), established in
1805, The Caroline County Bank ("CCB"), established in 1902, and
Atlantic National Bank ("ANB"), established in 1973. Bancorp
additionally owns all of the outstanding shares of capital stock of
Farmers National Land Corporation ("FNLC"), formed in 1983; and Farmers
National Mortgage Corporation ("FNMC"), formed in 1988.
BUSINESS OF FARMERS NATIONAL BANK (FNB)
GENERAL - FNB, established in 1805 as the Farmers Bank of Maryland, was
chartered as a national bank in 1865 under the name Farmers National
Bank of Annapolis. After the acquisition of the Millington Bank in
1976, the present name was adopted. FNB is a full service commercial
bank offering a complete line of personal and commercial banking and
trust services. The majority of FNB's business is in the retail or
personal area, and includes checking accounts, passbook and statement
savings accounts, money market deposit accounts, NOW accounts,
certificates of deposit, cash management services, individual
retirement accounts (IRAs), safe deposit facilities, travelers checks,
certified checks, money orders, money wire transfers, 24 hour
depository services, ATMs, and electronic banking services. FNB makes
a variety of personal loans, including installment loans for
automobiles, boats and other personal property, time loans, home
improvement loans, home equity loans and residential mortgages. FNB
extends personal lines of credit and offers check overdraft protection
plans. FNB's commercial customers are primarily small businesses,
including retail and wholesale merchants, manufacturers, builders,
contractors, farmers, marine dealers and distributors, and state,
county and local authorities. FNB accepts credit card deposits from
merchants among its commercial customers and extends secured and
unsecured lines of credit for short-term accounts receivable,
inventory, working capital, floor plan and equipment financing. It
also provides commercial mortgage loans, time notes and letters of
credit.
BRANCHES - FNB maintains fifteen retail banking offices. Its main
banking office is located in downtown Annapolis. Five branch offices
also are located in Annapolis, seven other branch offices are located
in Anne Arundel County and one branch office is located in each of Kent
and Queen Anne's Counties.
<PAGE>
EMPLOYEES - At December 31, 1993, Farmers National Bank had 56
officers and 236 other employees.
COMPETITION - FNB is subject to competition in all aspects of its
commercial banking business. Other commercial banking institutions
based in Maryland conduct business in the market areas served by FNB.
Additionally, commercial banking institutions based in Washington, D.C.
and other locations outside Maryland compete for loans and other
banking business in the market area served by FNB. Savings and loan
associations, insurance companies, mutual savings banks, small loan
companies, credit unions, and other financial institutions also compete
with FNB.
The table below presents information concerning deposits of FNB and
other commercial banks operating in market areas served by FNB.
<TABLE>
<CAPTION>
COMMERCIAL
COMMERCIAL BANKING TOTAL
MARKET AREAS BANKS OFFICES DEPOSITS
(dollars in thousands)
<S> <C> <C> <C>
Anne Arundel County (a):
County Totals 22 113 $4,426,041
FNB Totals 1 13 488,369
FNB Market Share 11.0%
Kent County (b):
County Totals 4 8 $310,112
FNB Totals 1 1 18,439
FNB Market Share 6.0%
Queen Anne's County (c):
County Totals 7 11 $311,278
FNB Totals 1 1 15,028
FNB Market Share 4.8%
<FN>
_____________
(a) Anne Arundel County 1992 population - 438,511; Annapolis (County
seat) 1992 population - 30,919
(b) Kent County 1992 population - 18,193; Millington 1992 population -
588
(c) Queen Anne's County 1992 population - 35,251; Centreville 1992
population - 2,424
</TABLE>
<PAGE>
BUSINESS OF THE CAROLINE COUNTY BANK (CCB)
GENERAL - CCB is a commercial bank incorporated in 1902 under laws of
the State of Maryland. The majority of CCB's business is also in the
retail or personal area, and includes checking accounts, passbook
savings accounts, NOW accounts, certificates of deposit, individual
retirement accounts (IRAs), safe deposit facilities, travelers checks,
certified checks, money orders, and ATMs. CCB makes a variety of
personal loans, including residential mortgage loans, installment loans
for automobiles, boats and other personal property, time loans, home
improvement loans and personal lines of credit. CCB makes commercial
loans consisting mainly of farm production loans, short-term working
capital loans, business mortgages, and equipment financing.
BRANCHES - CCB operates one banking office which is located in
Greensboro, Maryland.
EMPLOYEES - At December 31, 1993, The Caroline County Bank had 3
officers and 9 other employees.
COMPETITION - CCB is subject to competition in all aspects of its
commercial banking business. Other commercial banking institutions
based in Maryland conduct business in the market area served by CCB.
Savings and loan associations, insurance companies, small loan
companies, credit unions and other financial institutions also compete
with CCB.
The table below presents information concerning the deposits of
CCB and other commercial banks operating in the market area served
by CCB.
<TABLE>
<CAPTION>
MARKET AREA: COMMERCIAL
CAROLINE COMMERCIAL BANKING TOTAL
COUNTY BANKS OFFICES DEPOSITS
(dollars in thousands)
<S> <C> <C> <C>
County Totals 7 12 $217,343
CCB Totals 1 1 22,889
CCB Market Share 10.5%
<FN>
_____________
Caroline County 1992 population - 27,783;
Greensboro 1992 population - 1,596
</TABLE>
<PAGE>
BUSINESS OF ATLANTIC NATIONAL BANK (ANB)
GENERAL - ANB was established under a national bank charter in 1973.
ANB is a full service commercial bank offering a complete line of
personal and commercial services. The majority of ANB's business is in
the commercial area. ANB's customers are primarily small businesses,
including several hotels and motels, restaurants, amusement and real
estate agencies. ANB accepts credit card deposits from merchants among
its commercial customers and extends secured and unsecured lines of
credit for short-term accounts receivable, inventory, working capital
and equipment financing. ANB also provides commercial mortgage loans,
time notes, and letters of credit. In the retail or personal area
ANB's business includes checking accounts, passbook savings accounts,
money market deposits, NOW accounts, certificates of deposit,
individual retirement accounts (IRAs), safe deposit facilities,
travelers checks, ATMs and 24 hour depository service. ANB makes a
variety of personal loans, including installment loans for automobiles,
boats and other personal property, time loans and both primary and
secondary mortgage loans.
BRANCHES - ANB maintains four retail banking offices. Its main office
is located in Ocean City. Two branch offices are located in Salisbury
and one is located in Ocean Pines.
EMPLOYEES - At December 31, 1993, Atlantic National Bank had 12
officers and 22 other employees.
COMPETITION - ANB is subject to competition in all aspects of its
commercial banking business. Other commercial banking institutions
based in Maryland conduct business in the market area served by ANB.
Additionally, other institutions located outside Maryland compete for
loans and other banking business in the market area served by ANB.
Savings and loan associations, insurance companies, mutual savings
banks, small loan companies, credit unions, and other financial
institutions also compete with ANB.
The table below presents information concerning deposits of ANB
and other commercial banks operating in the market area served by ANB.
<TABLE>
<CAPTION>
COMMERCIAL
COMMERCIAL BANKING TOTAL
MARKET AREA: BANKS OFFICES DEPOSITS
(dollars in thousands)
<S> <C> <C> <C>
Wicomico County (a)
County Totals 11 37 $956,363
ANB Totals 1 2 19,623
ANB Market Share 2.1%
Worcester County (b)
County Total 8 32 $608,326
ANB Total 1 2 26,967
ANB Market Share 4.4%
<FN>
______________
(a) Wicomico County 1992 population - 76,303;
Salisbury 1992 population - 20,886
(b) Worcester County 1992 population - 35,904;
Ocean City 1992 population - 5,439
Ocean Pines 1990 population - 4,251
</TABLE>
<PAGE>
BUSINESS OF FARMERS NATIONAL LAND CORPORATION (FNLC)
FNLC is a wholly owned subsidiary of Bancorp, formed November 28, 1983,
for the purpose of leasing property, land and premises to others within
the holding company. FNLC currently leases or holds (for future
expansion) property, land and premises to or for others within the
holding company. In addition, FNLC leases property, land or premises
to the general public if not currently needed by other members of the
holding company, and holds certain real property acquired by deed in lieu
of foreclosure in connection with a loan to a third party originally made
by FNB.
BUSINESS OF FARMERS NATIONAL MORTGAGE CORPORATION (FNMC)
FNMC is a wholly owned subsidiary of Bancorp, formed February 23, 1988.
FNMC is a mortgage banking corporation formed for the purpose of
originating, selling and servicing mortgage loans and to engage in any
other activities incident to mortgage banking.
During 1989, due to the lack of mortgage loan generation, the
company was put in an inactive status. All mortgages were sold and the
mortgage banking office was closed.
<PAGE>
SUPERVISION AND REGULATION
Bancorp, as a registered bank holding company, is subject to regulation
and examination by the Board of Governors of the Federal Reserve System
(the "Board") under the Bank Holding Company Act of 1956 (the "Act"),
and is required to file with the Board an annual report and such
additional information as the Board may require pursuant to the Act.
The Board may also examine Bancorp and each of its subsidiaries. The
Act generally restricts all activities of all bank holding companies
and their subsidiaries to banking, and the business of managing and
controlling banks, and to other activities which are determined by the
Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. The Act generally requires
prior approval by the Board of the acquisition by Bancorp of more than
five percent of the voting shares of any bank and limits the
acquisition of shares of a bank located outside the state unless
permitted by state law. With certain exceptions, the Act prohibits
Bancorp from acquiring direct or indirect ownership or control of more
than five percent of the voting shares of any company which is not a
bank or bank holding company, unless the Board determines by order or
regulation that the company's activities are so closely related to
banking or managing or controlling banks as to be a proper incident
thereto. Subsidiary banks of a bank holding company are subject to
certain restrictions imposed by the Federal Reserve Act on extensions
of credit to, and certain other transactions with, the bank holding
company and its nonbank affiliates.
In January 1989, the Board adopted risk-based capital guidelines
applicable to bank holding companies, which were fully implemented at
year end 1992. These guidelines categorize the components of capital
into core capital (Tier 1) and supplementary capital (Tier 2). Total
capital is the combination of both Tier 1 and Tier 2 capital. Tier 1
consists primarily of common equity less goodwill and Tier 2 consists
of certain qualifying debt instruments and a qualifying portion of the
allowance for loan losses. As of December 31, 1992 minimum capital
ratios of 4% for Tier 1 capital and 8% for total capital were required.
Bancorp's ratios of core (Tier 1) and total capital to risk weighted
assets as of December 31, 1993 were 18.3%, and 19.5%, respectively,
exceeding the minimums required at year-end 1992. In addition, the
Board has established a minimum leverage capital ratio (core capital to
total assets) of 3% to 5%. Bancorp's leverage capital ratio was 9.8%
on December 31, 1993.
In 1989, The President of the United States signed into law the
Financial Institutions Reform, Recovery and Enforcement Act of 1989.
This legislation, among other things, expanded the scope of regulatory
enforcement powers and increased deposit insurance premiums for banks.
In 1991, the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") of 1991 was signed into law. This legislation, among other
things, requires federal (or state) regulators to perform annual on-
site examinations for all banks, establishes a Prompt Regulatory Action
program based on five capital categories, amends the Federal Deposit
Insurance Act to require uniform accounting standards for all financial
<PAGE>
institutions, and establishes new uniform disclosure requirements for
interest rates and terms of deposits on savings instruments.
None of the implemented regulations have had a material effect on the
financial condition of Bancorp and management does not believe that
any of the scheduled regulations will have a material effect on the
financial condition or operations of Bancorp.
Farmers National Bank and Atlantic National Bank are national
banking associations subject to regulation and regular examination by
the Office of the Comptroller of the Currency, in addition to
regulation and examination by the Board of Governors of the Federal
Reserve System and the Federal Deposit Insurance Corporation (the
"FDIC"). FNB and ANB are subject to provisions of Section 23A of the
Federal Reserve Act that limit the amount of loans or extensions of
credit to, investments in, and certain other transactions involving
Bancorp and its affiliates.
The Caroline County Bank is a state bank subject to the banking
laws of the State of Maryland and to regulation by the State Bank
Commissioner of Maryland, who is required by statue to make at least
one examination of CCB in each twelve month period. CCB is also
subject to regulation and examination by the FDIC and to federal laws
and regulations pertaining to federally insured banking institutions.
CCB is subject to provisions of Section 23A of the Federal Reserve Act
that limit the amount of loans or extensions of credit to, investments
in, and certain other transactions involving Bancorp and its
affiliates.
As nonbanking subsidiaries of Bancorp, Farmers National Land
Corporation and Farmers National Mortgage Corporation are subject to
examination by the Board and as Maryland corporations are subject to
the laws of the state of Maryland. Also, as affiliates of FNB, ANB and
CCB, FNLC and FNMC are subject to examination by the FDIC and subject
to the provisions of Section 23A of the Federal Reserve Act that limit
the amount of loans or extensions of credit to, investments in, and
certain other transactions involving Bancorp and its affiliates.
EFFECTS OF GOVERNMENTAL MONETARY POLICIES
All commercial banking operations are affected by the policies of
monetary authorities, including the Board of Governors of the Federal
Reserve System, and these policies change from time to time. A
function of the Federal Reserve System is to regulate the national
supply of bank credit in order to achieve economic results deemed
appropriate by its Board of Governors, including efforts to combat
unemployment, recession, or inflationary pressures. Among the
instruments of monetary policy used to implement these objectives are
open market operations in U.S. Government securities, changes in the
discount rate on member bank borrowings, and changes in reserve
requirements against bank deposits. These means are used in varying
combinations to influence overall growth of bank loans, investments,
and deposits and they also affect interest rates charged on loans or
paid on deposits.
The monetary policies of bank regulatory and other authorities
have affected the operating results of banks in the past and are
expected to continue to do so in the future. No prediction can be made
on the effect governmental monetary policies will have on Bancorp, in
view of changing conditions in the national economy, in the money
markets, and in the relationships of international currencies, as well
as the effect of legislation and of actions by monetary and fiscal
authorities.
<PAGE>
STATISTICAL INFORMATION
The following tables present statistical information relating to
Bancorp and affiliates, on a consolidated basis in thousands of
dollars. Interest income on tax-free loans and securities is presented
on a fully taxable equivalent basis. This adjustment is made since
income on loans to, and securities of states and political subdivisions
is not subject to Federal income taxes.
<PAGE>
AVERAGE BALANCE SHEET
The following table presents the distribution of the average
consolidated balance sheets for the years indicated:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Assets
Interest earning assets:
Loans $ 302,455 $ 296,726 $ 273,944
Taxable investment securities 252,853 238,495 158,321
Non-taxable investment securities 63,341 48,103 33,224
Federal funds sold and securities
purchased under agreement
to resell 25,790 34,678 93,310
Interest-bearing deposits
with banks 3,403 5,374 5,352
------------ ----------- ------------
Total interest-earning assets 647,842 623,376 564,151
Cash and due from banks 29,599 25,454 21,086
Other assets 23,052 20,276 18,565
Less: allowance for loan losses (5,395) (4,551) (4,290)
------------ ----------- ------------
Total assets $ 695,098 $ 664,555 $ 599,512
============ =========== ============
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits $ 204,521 $ 191,029 $ 152,136
Savings deposits 150,055 121,728 95,426
Time deposits 177,113 201,381 214,591
Short-term borrowings 13,537 15,347 12,114
Long-term debt 152 196 237
------------ ----------- ------------
Total interest-bearing
liabilities: 545,378 529,681 474,504
Noninterest-bearing demand deposits 75,985 68,457 63,155
Other liabilities 6,976 7,278 7,999
------------ ----------- ------------
Total liabilities 628,339 605,416 545,658
Stockholders' equity 66,759 59,139 53,854
------------ ----------- ------------
Total liabilities and
stockholders' equity $ 695,098 $ 664,555 $ 599,512
============ =========== ============
<FN>
NOTE: 1. Non-accrual loans are included in the average balances.
Interest income on nonaccrual loans has not been included.
</TABLE>
<PAGE>
NET INTEREST EARNINGS
The following table summarizes interest income and interest expense by
major source and the ratio of net interest earned to average interest
earning assets for the past three years.
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Interest earned on:
Loans $ 27,638 $ 28,600 $ 30,021
Taxable investment securities 13,182 14,540 12,243
Non-taxable investment securities 4,383 3,823 3,105
Federal funds sold and securities
purchased under agreement
to resell 767 1,228 5,319
Interest-bearing deposits
with banks 139 339 421
--------- --------- ---------
Total interest earned 46,109 48,530 51,109
--------- --------- ---------
Interest paid on:
Interest-bearing demand deposits 5,304 6,671 7,502
Savings deposits 4,541 4,525 4,603
Time deposits 6,874 10,367 14,932
--------- --------- ---------
Total deposits 16,719 21,563 27,037
Short-term borrowings 307 417 573
Long-term debt 14 18 21
--------- --------- ---------
Total interest paid 17,040 21,998 27,631
--------- --------- ---------
Net interest earned $ 29,069 $ 26,532 $ 23,478
========= ========= =========
Average interest-earning assets $647,842 $623,376 $564,151
========= ========= =========
Net yield on interest-earning assets 4.5% 4.3% 4.2%
========= ========= =========
<FN>
NOTE: 1. The indicated income and annual rate are presented on a
taxable-equivalent basis using the federal marginal rate of 34%.
2. Loan fees included in interest income for 1993, 1992 and 1991 were
$283,000, $290,000, and $362,000, respectively.
3. Non-accrual loans are included in the average balances. Interest
income on nonaccrual loans has not been included.
</TABLE>
<PAGE>
AVERAGE RATES EARNED AND PAID
The following table summarizes the average interest rates
earned on a fully taxable equivalent basis and the average
interest rates paid for the periods indicated.
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Average rates earned:
Loans 9.1% 9.6% 11.0%
Taxable investment securities 5.2 6.1 7.7
Non-taxable investment securities 6.9 7.9 9.3
Federal funds sold and securities
purchased under agreement to
resell 3.0 3.5 5.7
Interest-bearing deposits with banks 4.1 6.3 7.9
Composite rate earned 7.1% 7.8% 9.0%
Average rates paid:
Interest-bearing demand deposits 2.6% 3.5% 4.9%
Savings deposits 3.0 3.7 4.8
Time deposits 3.9 5.1 7.0
Short-term borrowings 2.3 2.7 4.7
Long-term debt 9.2 9.2 8.9
Composite rate paid 3.1% 4.2% 5.8%
Net interest spread 4.0% 3.6% 3.2%
Net yield on average earning
assets and net interest income 4.5% 4.3% 4.2%
<FN>
NOTE: 1. The indicated income and annual rate are presented on a
taxable-equivalent basis using the federal marginal rate
of 34%.
2. Loan fees included in interest income for 1993, 1992, and
1991 were $283,000, $290,000, and $362,000, respectively.
3. Non-accrual loans are included in the average balances.
Interest income on nonaccrual loans has not been included.
</TABLE>
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents changes in interest income and interest
expense for the two years ended December 31, 1993. The change in interest
due to both rate and volume has been allocated to change due to volume and
change due to rate in proportion to the relationship of the absolute dollar
amount of change in each.
<TABLE>
<CAPTION>
1993 Over (Under) 1992
------------------------------
Due to Variances in
------------------------------
Rate Volume Total
------------------------------
<S> <C> <C> <C>
Interest income from
earning assets:
Loans $(1,507) $ 545 $ (962)
Taxable investment
securities (2,197) 839 (1,358)
Non-taxable investment
securities (540) 1,100 560
Federal funds sold and
securities purchased under
agreement to resell (177) (284) (461)
Interest-bearing
deposits with banks (98) (102) (200)
-------- -------- --------
Total interest income $(4,519) $ 2,098 $(2,421)
-------- -------- --------
Interest expense on deposits
and borrowed funds:
Interest-bearing
demand deposits $(1,812) $ 445 $(1,367)
Savings deposits (928) 944 16
Time deposits (2,345) (1,148) (3,493)
Short-term borrowings (64) (46) (110)
Long-term debt -- (4) (4)
Total interest -------- -------- --------
expense $(5,149) $ 191 $(4,958)
-------- -------- --------
Net interest income $ 630 $ 1,907 $ 2,537
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1992 Over (Under) 1991
------------------------------
Due to Variances in
------------------------------
Rate Volume Total
------------------------------
<S> <C> <C> <C>
Interest income from
earning assets:
Loans $(3,794) $ 2,373 $(1,421)
Taxable investment
securities (2,977) 5,274 2,297
Non-taxable investment
securities (517) 1,235 718
Federal funds sold and
securities purchased under
agreement to resell (1,538) (2,553) (4,091)
Interest-bearing
deposits with banks (84) 2 (82)
-------- -------- --------
Total interest income $(8,910) $ 6,331 $(2,579)
Interest expense on deposits -------- -------- --------
and borrowed funds:
Interest-bearing
demand deposits $(2,488) $ 1,657 $ (831)
Savings deposits (1,188) 1,110 (78)
Time deposits (3,691) (874) (4,565)
Short-term borrowings (283) 127 (156)
Long-term debt -- (3) (3)
Total interest -------- -------- --------
expense $(7,650) $ 2,017 $(5,633)
-------- -------- --------
Net interest income $(1,260) $ 4,314 $ 3,054
======== ======== ========
<FN>
NOTE: 1. The indicated income and annual rate are presented on a
taxable-equivalent basis using the federal marginal rate
of 34%.
2. Loans fees included in interest income for 1993, 1992, and
1991 were $283,000, $290,000, and $362,000, respectively.
3. Non-accrual loans are included in the average balances.
Interest income on nonaccrual loans has not been included.
</TABLE>
<PAGE>
INVESTMENT PORTFOLIO
The following table shows the book value of investment securities held
to maturity at the dates indicated.
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury and Government agencies $ 70,496 $ 155,300 $148,392
States and political subdivisions 76,822 53,431 43,061
Corporate securities 10,562 10,836 12,591
Mortgage-backed securities 58,357 77,189 48,128
Equity securities -- 10,169 5,704
--------- ---------- --------
Total $ 216,237 $ 306,925 $257,876
========= ========== ========
</TABLE>
The following table shows the book value of investment securities
available for sale at the dates indicated.
<TABLE>
<CAPTION>
1993
----
<S> <C>
U.S. Treasury and Government agencies $ 62,854
Mortgage-backed securities 31,021
Equity securities 6,760
---------
Total $ 100,635
=========
</TABLE>
The amortized costs, gross unrealized gains and losses, and the
fair values of investments held to maturity were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1993 Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and Government agencies $ 70,496 $ 373 $ 53 $ 70,816
States and political subdivisions 76,822 1,070 172 77,720
Corporate securities 10,562 128 3 10,687
Mortgage-backed securities 58,357 315 116 58,556
--------- ---------- -------- ---------
Total $ 216,237 $ 1,886 $ 344 $ 217,779
========= ========== ======== =========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1992 Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and Government agencies $ 155,300 $ 1,845 $ 296 $ 156,849
States and political subdivisions 53,431 929 115 54,245
Corporate securities 10,836 210 16 11,030
Mortgage-backed securities 77,189 236 381 77,044
Equity securities 10,169 30 25 10,174
--------- ---------- -------- ---------
Total $ 306,925 $ 3,250 $ 833 $ 309,342
========= ========== ======== =========
</TABLE>
The amortized costs, gross unrealized holding gains and losses, and the
fair values of investment securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
December 31, 1993 Cost Gains Losses Value
- ------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and Government agencies $ 62,854 $ 168 $ 160 $ 62,862
Mortgage-backed securities 31,021 71 141 30,951
Equity securities 6,760 66 -- 6,826
--------- -------- -------- ---------
Total $ 100,635 $ 305 $ 301 $ 100,639
========= ======== ======== =========
</TABLE>
<PAGE>
The breakdown of Bancorp's total investment portfolio held to maturity
December 31, 1993 by maturity and yield is shown in the table below.
Estimated prepayment assumptions have been incorporated into the maturities
for collateralized mortgage obligations based on historical trends.
<TABLE>
<CAPTION>
Greater
Under 1-5 5-10 Than No Stated
Amount 1 Year Years Years 10 Yrs Maturity Total
------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Government agencies $ 55,548 $ 14,948 $ -- $ -- $ -- $ 70,496
States and political subdivisions 13,052 39,520 24,250 -- -- 76,822
Corporate securities 8,040 2,522 -- -- -- 10,562
Mortgage-backed securities 41,617 13,838 2,902 -- -- 58,357
---------- ----------- --------- ---------- ---------- ---------
Total $ 118,257 $ 70,828 $ 27,152 $ -- $ -- $216,237
========== =========== ========= ========== ========== =========
Greater
Under 1-5 5-10 Than No Stated
Weighted average yield 1 Year Years Years 10 Yrs Maturity Total
------- ------- ------- ------- ------- -------
U.S. Treasury and Government agencies 5.17 % 4.20 % -- % -- % -- % 4.96 %
States and political subdivisions 7.80 6.68 6.45 -- -- 6.80
Corporate securities 6.42 4.93 -- -- -- 6.06
Mortgage-backed securities 4.63 5.33 5.67 -- -- 4.85
---------- ----------- -------- --------- --------- --------
Total 5.36 % 5.83 % 6.37 % -- % -- % 5.64 %
========== =========== ======== ========= ========= ========
</TABLE>
The breakdown of Bancorp's total investment portfolio available for sale
December 31, 1993 by maturity and yield is shown in the table below.
Estimated prepayment assumptions have been incorporated into the maturities
for collateralized mortgage obligations based on historical trends.
<TABLE>
<CAPTION>
Greater
Under 1-5 5-10 Than No Stated
Amount 1 Year Years Years 10 Yrs Maturity Total
------- ------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Government agencies $ 2,008 $ 51,017 $ 9,837 $ -- $ -- $ 62,862
Mortgage-backed securities 4,727 25,677 547 -- -- 30,951
Equity securities -- -- -- -- 6,826 6,826
---------- ----------- --------- ---------- ---------- ---------
Total $ 6,735 $ 76,694 $ 10,384 $ -- $ 6,826 $100,639
========== =========== ========= ========== ========== =========
Greater
Under 1-5 5-10 Than No Stated
Weighted average yield 1 Year Years Years 10 Yrs Maturity Total
------- ------- ------- ------- --------- -------
U.S. Treasury and Government agencies 4.95 % 4.41 % 5.50 % -- % -- % 4.60 %
Mortgage-backed securities 4.30 4.78 4.67 -- -- 4.70
Equity securities -- -- -- -- 2.97 2.97
---------- ----------- -------- --------- --------- --------
Total 4.49 % 4.53 % 5.46 % -- % 2.97 % 4.52 %
========== =========== ======== ========= ========= ========
<FN>
NOTE: The weighted average yield has been computed on a taxable equivalent
basis using the federal marginal rate of 34%.
</TABLE>
<PAGE>
The amortized cost and fair value of debt securities held to maturity at
December 31, 1993 and 1992, by contractual maturity, are shown below.
Expected maturities will differ from the contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
---------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Due in one year or less $ 76,640 $ 77,281 $ 82,040 $ 83,373
Due after one year through five years 56,990 57,537 128,457 129,474
Due after five years through ten years 24,250 24,405 9,070 9,277
--------- ---------- --------- ----------
Subtotal 157,880 159,223 219,567 222,124
Mortgage-backed securities 58,357 58,556 77,189 77,044
--------- ---------- --------- ----------
Total debt securities $ 216,237 $ 217,779 $296,756 $ 299,168
========= ========== ======== =========
</TABLE>
The amortized cost and fair value of debt securities available for sale
at December 31, 1993, by contractual maturity, are shown below. Expected
maturities will differ from the contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1993
-----------------------
Amortized Fair
Cost Value
------- -------
<S> <C> <C>
Due in one year or less $ 2,000 $ 2,008
Due after one year through five years 51,071 51,017
Due after five years through ten years 9,783 9,837
--------- ----------
Subtotal 62,854 62,862
Mortgage-backed securities 31,021 30,951
--------- ----------
Total debt securities $ 93,875 $ 93,813
========= ==========
</TABLE>
At December 31, 1993 and 1992, the carrying value of no single issurer
exceeded ten percent of stockholders equity.
At December 31, 1993 and 1992, securities held to maturity with a book
value $29,713,000 and $48,625,000; and securities available for sale at
December 31, 1993 with a book value of $3,250,000, respectively, were pledged
as collateral for borrowings and certain government deposits as required by
law.
There were no sales of debt securities during 1993,1992 or 1991. Gains
of $11,000 and $22,000 on debt securities were recognized in 1992 and 1991,
respectively, as a result of premiums paid on called debt securities.
<PAGE>
LOAN PORTFOLIO
The following table categorizes loans at the dates indicated:
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 35,859 $ 40,153 $ 42,400 $ 52,611 $ 52,601
Real estate - construction 19,807 18,489 24,168 25,007 14,807
Real estate - other 223,784 214,831 182,027 163,230 133,916
Consumer loans 25,546 26,753 31,175 34,115 30,024
----------- --------- --------- --------- -----------
Total loans, gross 304,996 300,226 279,770 274,963 231,348
Less: Unearned income (1,573) (1,637) (1,035) (1,155) (1,031)
Allowance for loan losses (5,558) (5,034) (3,955) (3,865) (3,021)
----------- --------- --------- --------- -----------
Total loans, Net $ 297,865 $ 293,555 $ 274,780 $ 269,943 $ 227,296
=========== ========= ========= ========= ===========
</TABLE>
The following table presents a maturity distribution of
selected loans at December 31, 1993. Real estate mortgage
loans and installment loans are excluded from this table.
<TABLE>
<CAPTION>
Under 1-5 Over
1 Year Years 5 Yrs Total
------ ----- ----- -----
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 24,297 $ 10,044 $ 1,518 $ 35,859
Real estate - construction 12,660 7,147 -- 19,807
----------- --------- --------- ---------
Total $ 36,224 $ 17,191 $ 1,518 $ 55,666
=========== ========= ========= =========
Loans maturing after one year:
Predetermined interest rates $ 11,777 62.95%
Floating interest rates 6,932 32.05%
----------- ---------
Total $ 18,709 100.00%
=========== =========
</TABLE>
<PAGE>
The following table shows information concerning the aggregate amount
of risk elements. Risk elements comprise (1) loans accounted for on a
non-accrual basis; (2) loans contractually past due ninety days or more
as to interest or principal payments [exclusive of loans in (1) above];
(3) loans which have been restructured because of deterioration in the
financial position of the borrower including: (a) loans in which terms
have been renegotiated to provide a reduction in stated interest rates;
(b) loans in which terms have been renegotiated to provide an extension
of maturity at a favorable interest rate; (c) loans in which terms have
been renegotiated to provide a reduction in the face amount of the
debt; (d) loans in which terms have been renegotiated to provide a
reduction in accrued interest [exclusive of loans in (1) or (2) above].
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $2,654 $3,176 $ - $445 $ 886
Loans contractually
past due as to
interest or
principal 220 328 1,256 623 102
Loans classified as
troubled debt
restructured - - - - -
------ ------ ------ ------ ------
Totals $2,874 $3,504 $1,256 $1,068 $ 988
====== ====== ====== ====== ======
</TABLE>
During 1993, the gross amount of interest income that would have been
recorded at the original rate for nonaccrual loans was $359,000. The
interest included in 1993 income for these loans was $160,000; therefore
the impact on interest revenue was $199,000.
Loans, other than those secured by marketable collateral, or in the process
of collection, are put on a nonaccrual status when principal or interest
becomes ninety days delinquent. A loan may be put on a nonaccrual status
sooner than this standard if, in management's judgement, that loan may be
uncollectible. Placing a loan on nonaccrual is a determination that interest
may not be collected in the current period and therefore should be reported
as income only when collected. Until the loan becomes current as to
principal and interest, and the borrower has demonstrated the ability
to continue such payments, interest is included in income only to the
extent received in cash.
As of the end of the most recent reported period, there is no
concentration of loans exceeding 10% of total loans which are not
otherwise disclosed as a category of loans on page 28 of this report.
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loan losses is the amount estimated to adequately
cover future losses (charge offs) on loans outstanding and is
established through charges to earnings by a provision for loan losses.
The amount charged to earnings is based on several factors and includes
growth and diversity of loan portfolio, historical loan loss
experience, current and future economic conditions and the level of
nonperforming and underperforming credits.
Loans are charged to the reserve when collection results would be
inadequate to recover principal and interest. Subsequent recovery of a
loan previously charged off is credited to the reserve.
A summary of the loan loss experience, changes in the reserve for
loan losses and other related data is presented in the following table.
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net of
unearned income $ 302,455 $ 296,726 $ 273,944 $ 253,220 $ 221,004
========== ========== ========== ========== ==========
Reserve balance at beginning of year $ 5,034 $ 3,955 $ 3,865 $ 3,021 $ 2,578
Loans charged off:
Commercial, financial and agricultural 217 203 1,288 324 704
Real estate - construction -- -- -- -- --
Real estate - other 933 1,080 26 327 25
Consumer loans 223 182 165 204 78
---------- ---------- ---------- ---------- ----------
Total loans charged off: 1,373 1,465 1,479 855 807
Recoveries of loans previosly charged off: ---------- ---------- ---------- ---------- ----------
Commercial, financial and agricultural 37 35 58 2 10
Real estate - construction -- -- -- -- --
Real estate - other 18 6 88 -- --
Consumer loans 21 58 82 39 24
---------- ---------- ---------- ---------- ----------
Total recoveries 76 99 228 41 34
---------- ---------- ---------- ---------- ----------
Net loans charged off 1,297 1,366 1,251 814 773
Provision charged to operating expenses 1,821 2,445 1,341 1,658 1,216
---------- ---------- ---------- ---------- ----------
Reserve balance at end of year $ 5,558 $ 5,034 $ 3,955 $ 3,865 $ 3,021
========== ========== ========== ========== ==========
Ratio of net charge offs during year to
average loans outstanding 0.43% 0.46% 0.46% 0.32% 0.35%
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Bancorp has allocated the Reserve for Loan Losses to the various
categories of loans. This allocation does not limit the amount of the reserve
available to absorb losses from any type of loan and should not be viewed as
an indicator of the specific amount or specific loan categories in which
future charge offs may ultimately occur. The table below presents this
allocation along with the percentage of loan amounts in each category, at the
dates indicated.
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
------------- ------------- ------------- ------------- -------------
% of % of % of % of % of
Resv. loan Resv. loan Resv. loan Resv. loan Resv. loan
Amt. to tot. Amt. to tot. Amt. to tot. Amt. to tot. Amt. to tot.
loans loans loans loans loans
---- ------- ---- ------- ---- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve amount allocated
Commercial, financial, and
agricultural loans $ 516 11.8 $ 445 13.4 $1,275 15.2 $1,908 19.1 $1,500 22.7
Real estate - construction 421 6.5 115 6.2 273 8.6 168 9.1 300 6.4
Real estate - other 3,230 73.3 4,145 71.5 906 65.1 610 59.4 150 57.9
Consumer loans 281 8.4 296 8.9 274 11.1 273 12.4 421 13.0
Unallocated 1,110 -- 33 -- 1,227 -- 906 -- 650 --
-------------- -------------- -------------- -------------- --------------
Total $ 5,558 100.0 $5,034 100.0 $3,955 100.0 $3,865 100.0 $3,021 100.0
============== ============== ============== ============== ==============
</TABLE>
<PAGE>
DEPOSITS
The following table presents the classification of average deposits for
the periods indicated:
<TABLE>
<CAPTION>
1993 1992 1991
------------- ------------- -------------
Average Avg Average Avg Average Avg
Amount Rate Amount Rate Amount Rate
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-
bearing demand
deposits $ 75,985 - $ 68,457 - $ 63,155 -
Interest-bearing
demand deposits 204,521 2.6% 191,029 3.5% 152,136 4.9%
Savings deposits 150,055 3.0% 121,728 3.7% 95,426 4.8%
Time deposits 177,113 3.9% 201,381 5.1% 214,591 7.0%
-------- -------- --------
Average deposits $607,674 $582,595 $525,308
======== ======== ========
</TABLE>
At December 31, 1993, the maturity distribution for time deposit
issued in amounts of $100,000 or more was:
<TABLE>
<CAPTION>
Certificates Other Time
of Deposit Deposits Total
------------ ---------- -------
<S> <C> <C> <C>
Time remaining to maturity
Less than 3 months $12,605 $ 127 $12,732
3 to 6 months 3,343 279 3,622
6 to 12 months 10,247 224 10,471
Over 12 months 3,039 101 3,140
------- ----- -------
Total $29,234 $ 731 $29,965
======= ===== =======
</TABLE>
<PAGE>
RETURN ON EQUITY AND ASSETS
The following table shows net income as a percent of average
stockholders' equity and average total assets, as well as certain other
ratios for the periods indicated.
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Return on stockholders'
equity:
Average stockholders'
equity $66,759 $59,139 $53,854
Net income before
accumulative effect of
accounting change $9,508 $7,794 $6,950
Cumulative effect of
accounting change $ 1,431 -0- -0-
Net income after
cumulative effect of
accounting change $10,939 $7,794 $6,950
Return on average
stockholders' equity
on net income before
cumulative effect of
accounting change 14.2% 13.2% 12.9%
Return on average
stockholder's equity
on net income after
cumulative effect of
accounting change 16.4% 13.2% 12.9%
Return on total assets:
Average total assets $695,099 $664,555 $599,512
Return on average
total assets on net
income before
cumulative effect of
accounting change 1.4% 1.2% 1.2%
Return on average
total assets after
cumulative effect of
accounting change 1.6% 1.2% 1.2%
Average stockholders'
equity as a percent
of average total assets 9.6% 8.9% 9.0%
Dividend payout ratio:
Total dividend declared $2,834 $2,375 $2,186
Percent of dividends
declared on net income 25.9% 30.5% 31.5%
</TABLE>
<PAGE>
SHORT-TERM BORROWINGS
Short-term borrowings, which consist primarily of securities sold
under agreements to repurchase and the U.S. Treasury demand note were
as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Amount outstanding
at year-end $17,329 $14,019 $17,333
Weighted average
interest rate
at year-end 2.4% 2.2% 3.2%
Maximum amount
outstanding at
any month-end $17,565 $17,474 $17,333
Average amount
outstanding $13,537 $15,347 $12,114
Weighted average
interest rate
during the year 2.3% 2.7% 4.7%
</TABLE>
<PAGE>
ITEM 1(a). EXECUTIVE OFFICERS OF BANCORP
The current executive officers of Bancorp, their ages and current
offices or positions with Bancorp and their business experience during
the past five years is set forth below. Information concerning an
officer's service as a director of Bancorp includes service as a
director of FNB prior to the formation of Bancorp and its acquisition
of FNB on August 1, 1982.
<TABLE>
<S> <C> <C>
Name and Position Business Experience During
with Bancorp Age the Past Five Years
Charles L. Schelberg 68 Chairman of the Board since
Chairman of the Board 1982; Director since 1965;
Director President of FNB from 1971-1986
John M. Suit,II 49 Elected President and Chief
President and Executive Officer in August 1989;
Chief Executive Officer Executive Vice President and a
Director of Annapolis Banking &
Trust until 1989.
Joseph B. Riddleberger 73 Vice President since 1983;
Vice President Director of CCB and Executive
Vice President of CCB
(retired 1982).
Louis A. Supanek 52 Vice President and Treasurer
Vice President, since 1982; Executive Vice
Treasurer President, Cashier and Chief
Financial Officer of FNB since
1990; Senior Vice President and
Cashier of FNB 1982 - 1989.
Frank T. Lowman, III 50 Vice President since 1992;
Vice President Executive Vice President of FNB
since 1990; Senior Vice President
of FNB 1980 - 1989; Director of
CCB since 1982.
Norma K. Behlke 49 Secretary since 1984; Assistant
Secretary Vice President of FNB since 1987.
</TABLE>
<PAGE>
ITEM 2. PROPERTIES
FNB owns the following properties:
Main Office 5 Church Circle, Annapolis, Maryland
Parole Office 2015 West Street, Annapolis, Maryland
Arnold Office Arnold Road and Ritchie Highway, Anne
Arundel County, Maryland
Pasadena Office 3030 Mountain Road, Anne Arundel
County, Maryland
Millington Office Millington, Kent County, Maryland
Centreville Office Centreville, Queen Anne's County,
Maryland
The following properties are leased by FNB or owned subject to land
lease:
Eastport Office Eastport Shopping Center, Annapolis,
Maryland
City Dock Office 91 Main Street, Annapolis, Maryland
Hillsmere Office 101 Hillsmere Drive, Annapolis,
Maryland
Heritage Harbour Compass Way, Annapolis, Maryland
Severna Park Office Severna Park Shopping Village, Anne
Arundel County, Maryland
Edgewater Office Route 2 and Maryland Avenue, Anne
Arundel County, Maryland
Wayson's Corner Office 5401 Southern Maryland Boulevard,
Anne Arundel County, Maryland
Benfield Road Office Benfield and Jumpers Hole Roads, Anne
Arundel County, Maryland
Central Avenue Office 52 West Central Avenue, Anne Arundel
County, Maryland
Operations-Data Center McGuckian Street and Chinquapin Round
Road, Annapolis, Maryland
CCB owns the following property:
Main Office Sunset and Main Streets, Greensboro,
Maryland
Operations Center Main Street, Greensboro, Maryland
ANB owns the following property:
Ocean Pines Office 11111 Racetrack Road, Ocean Pines,
Maryland
Salisbury Office 528 Riverside Drive, Salisbury,
Maryland
<PAGE>
The following properties are leased by ANB or owned subject to land
lease:
Main Office 4604 Coastal Highway, Ocean City,
Maryland
N. Salisbury Office 2400 N. Salisbury Blvd, Salisbury,
Maryland
FNLC owns the following property:
Commercial Building McGukian Street and Chinquapin Round
Road, Annapolis, Maryland
Commercial Building and 23 West Street, Annapolis, Maryland
Parking Lot
Banking Office 4604 Coastal Highway, Ocean City,
Maryland
Commercial Building and 33-41 West Street, Annapolis,
Parking Lot Maryland
Commercial Parking Lot George Avenue and Chinquapin Round
Road, Annapolis, Maryland
Commercial Building 203 N. Commerce Street, Centreville,
Maryland
Commercial Building and 104 Cathedral Street, Annapolis,
Parking Lot Maryland
Land (other real Bywater Road, Annapolis, Maryland
estate owned)
Commercial Building 15 West Street, Annapolis, Maryland
The following properties are leased by FNLC or owned subject to
land lease:
Pad Site Ritchie Highway, Severna Park, Maryland
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Bancorp and its subsidiaries are at times, in the ordinary course of
business, subject to legal actions. Management is of the opinion that
losses, if any, resulting from such matters will not have a material
adverse effect on Bancorp's consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information set forth under the caption "Common Stock Price and
Dividend History" on page 13 of the Annual Report to Stockholders,
which contains information concerning the market price of Bancorp and
its affiliates for the past two years and the dividend record with
respect thereto for the past two years, is incorporated herein by
reference. As of March 1, 1994, it was determined by a count of
registered shareholders that there were approximately 1,400 holders of
common stock.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data"
on page 3 of the Annual Report to Stockholders, which contains a
summary of operations, per share data, return on equity and assets,
dividend payout ratio and other data for the past five years, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations on pages 4 through 13 of the Annual Report to
Stockholders, which contains information with respect to Bancorp's
financial condition and results of operations (including liquidity,
interest rate sensitivity and inflation, and capital resources), is
incorporated herein by reference.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Bancorp and its
subsidiaries, included in the Annual Report to Stockholders on pages 14
through 24 are incorporated herein by reference:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1993 and 1992.
Consolidated Statements of Income - Years ended December 31, 1993,
1992, and 1991.
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 1993, 1992, and 1991.
Consolidated Statements of Cash Flows - Years ended December 31, 1993,
1992, and 1991.
Notes to Consolidated Financial Statements - Years ended December 31,
1993, 1992, and 1991.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pages 1 through 4 of Bancorp's definitive Proxy Statement prepared for
the 1994 annual meeting of stockholders, which contains information
concerning the Directors of Bancorp, are incorporated herein by
reference.
Information concerning the Executive Officers of Bancorp is
included on page 38 in Part I of the report.
ITEM 11. EXECUTIVE COMPENSATION
Except for information under the caption "Report of Personnel Committee
of Farmers National on Executive Compensation" and the performance
graph on page 11 of Bancorp's definitve proxy statement that is
required by paragraphs (k)(l) of item 402, the information contained on
pages 7 through 11 of Bancorp's definitive proxy statement prepared for
the 1994 annual meeting of stockholders, which contains information
concerning current remuneration of Bancorp's officers and directors and
transactions with management, are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Pages 5 through 6 of Bancorp's definitive proxy statement prepared for
the 1994 annual meeting of stockholders, which contains information
concerning ownership of Bancorp equity securities, are incorporated
herein by reference.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" appearing on page 11 of Bancorp's definitive
proxy statement prepared for the 1994 annual meeting of stockholders,
which contains information concerning transactions with directors and
officers, is incorporated herein by reference.
The information set forth under the caption "Related Party
Transactions" on page 23 of the Annual Report to stockholders which
contains information concerning indebtness of management is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS,FINANCIAL STATEMENT SCHEDULES,AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report:
1. The following financial statements included in the Annual
Report, for the year ended December 31, 1993, at pages 14 through 24
thereof, are incorporated by reference in Item 8.
Independent Auditors' Report.
Consolidated Balance Sheets - December 31, 1993 and 1992.
Consolidated Statements of Income - Years ended December 31, 1993,
1992, and 1991.
Consolidated Statements of Change in Stockholders' Equity -
Years ended December 31, 1993, 1992, and 1991.
Consolidated Statements of Cash Flows - Years ended December 31, 1993,
1992, and 1991.
Notes to Consolidated Financial Statements - Years ended December 31,
1993, 1992, and 1991.
2. All schedules for which provision is made in the accounting
regulation of the Commission are not applicable or are not required
under the related instruction and have therefore been omitted.
3. Exhibits required by Item 601 of Regulation S-K:
Exhibit 3A - Charter of the Registrant, as amended, is
incorporated by reference to Exhibit 3A of Form 10-K for the fiscal
year ended December 31, 1993, of the Registrant.
Exhibit 3B - By-Laws of the Registrant, as amended, is
incorporated by reference to Exhibit 3B of Form 10-K for the fiscal
year ended December 31, 1993, of the Registrant.
Exhibit 10A - Farmers National bank of Maryland Executive Benefits
Plan, as amended, is incorporated by reference to Exhibit 10A of Form
10-K for the fiscal year ended December 31, 1993, of the Registrant.
<PAGE>
Exhibit 10B - Executive Benefits Plan Participation Agreement
(Charles L. Schelberg), as amended, is incorporated by reference to
Exhibit 10B of Form 10-K for the fiscal year ended December 31, 1993,
of the Registrant.
Exhibit 10C - Executive Benefit Plan Participation Agreement
(Louis A. Supanek), as amended, is incorporated by reference to Exhibit
10C of Form 10-K for the fiscal year ended December 31, 1993, of the
Registrant.
Exhibit 10D - Executive Benefit Plan Participation Agreement
(John M. Suit, II), is incorporated by reference to Exhibit 10D of Form
10-K for the fiscal year ended December 31, 1993, of the Registrant.
Exhibit 10E - Executive Benefit Plan Participation Agreement
(Frank T. Lowman, III), as amended, is incorporated by reference to
Exhibit 10E of Form 10-K for the fiscal year ended December 31, 1993,
of the Registrant.
Exhibit 13 - 1993 Annual Report of the Registrant, filed herewith.
Exhibit 22 - Subsidiaries of the Registrant, filed herewith.
Exhibit 23 - Registrant's Proxy Statement for the 1994 Annual
Meeting of Stockholders is incorporated by reference.
Exhibit 24 - Consent of Independent Certified Public Accountants,
filed herewith.
Exhibit 25 - Power of Attorney, filed herewith.
All other required Exhibits are not applicable to the Registrant.
(b) Farmers National Bancorp filed no reports on Form 8-K during
the last quarter ended December 31, 1993.
(c) Exhibits - The Exhibits required by Item 601 of Regulation S-
K are filed herewith or are incorporated by reference.
(d) Financial Statement Schedules - All required Schedules are
not applicable to the Registrant.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereonto duly
authorized.
FARMERS NATIONAL BANCORP
\s\Charles L. Schelberg
___________________________________
Charles L. Schelberg
Chairman of the Board March 8, 1994
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Principal Executive Officer
\s\John M. Suit, II
___________________________________
John M. Suit, II
President and
Chief Executive Officer March 8, 1994
Principal Financial Officer
\s\Louis A. Supanek
___________________________________
Louis A. Supanek
Vice President & Treasurer March 8, 1994
Principal Accounting Officer
\s\Louis A. Supanek
___________________________________
Louis A. Supanek
Vice President & Treasurer March 8, 1994
<PAGE>
SIGNATURES
Majority of the Board of Directors
* Charles L. Schelberg
* John M. Suit, II
* L. Tayloe Lewis, Jr.
* Louis Hyatt
* Alexander V. Sandusky
* Raymond C. Shockley
* Joseph S. Quimby
* John B. Melvin
* W. Robert Newnam
* M. Virginai Meredith
* Donald S. Taylor
* Cary L. Meredith
* William W. Simmons
* James D. Edwards
* W. Calvin Gray, Jr.
*Signed by the undersigned as attorney in fact for the persons
indicated.
\s\Charles L. Schelberg
___________________________________
* Charles L. Schelberg
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1993
FARMERS NATIONAL BANCORP
EXHIBIT INDEX
Exhibit 13 1993 Annual Report of the Registrant
Exhibit 22 Subsidiaries of the Registrant
Exhibit 24 Consent of Independent Certified Public Accountants
Exhibit 25 Power of Attorney
<PAGE>
1
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERCENT
INCREASE
YEARS ENDED DECEMBER 31, 1993 1992 (DECREASE)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Interest income $ 44,572 $ 47,180 (5.5)%
Interest expense 17,040 21,998 (22.5)
Net interest income 27,532 25,182 9.3
Income before cumulative effect of accounting
change 9,508 7,794 22.0
Cumulative effect of accounting change 1,431 -- --
Net income 10,939 7,794 40.4
Cash dividends declared 2,834 2,375 19.3
- ------------------------------------------------------------------------------
AVERAGE
Total assets $695,098 $664,555 4.6%
Total deposits 607,674 582,595 4.3
Total loans 302,455 296,726 1.9
Stockholders' equity 66,759 59,139 12.9
- ------------------------------------------------------------------------------
AT YEAR END
Total assets $714,209 $690,210 3.5%
Total deposits 619,957 607,103 2.1
Total loans 303,423 298,589 1.6
Stockholders' equity 69,940 61,883 13.1
- ------------------------------------------------------------------------------
PER SHARE
Income before cumulative effect of accounting
change $ 3.52 $ 2.89 22.0%
Cumulative effect of accounting change .53 -- --
Net income 4.05 2.89 40.4
Cash dividends declared 1.05 .88 19.3
Book value at year-end 25.91 22.91 13.1
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Table of Contents
- -----------------------------------------------------------------------------------
<S> <C>
Financial Highlights 1
Message to Shareholders 2
Selected Financial Data 3
Management's Discussion and Analysis of Financial
Condition and Results of Operations 4
Consolidated Financial Statements 14
Notes to Consolidated Financial Statements 17
Report of Management 25
Independent Auditors' Report 25
Directors and Officers 26
Principal Affiliates 27
Shareholder Information 29
</TABLE>
<PAGE>
2
MESSAGE TO SHAREHOLDERS
It is a pleasure to report that Farmers National Bancorp achieved record growth
in operating earnings for 1993. Net income for the year, before recording a one
time accounting change, totaled $9.5 million, compared to $7.8 million for 1992,
an increase of 22 percent. On a per share basis, earnings were $3.52 compared to
$2.89 the previous year. A one time accounting change was recorded during the
first quarter of 1993, representing the effect of implementing the Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes,"
which added $1.4 million or $.53 per share to earnings. As a result, 1993 net
income totaled $10.9 million or $4.05 per share compared to $7.8 million or
$2.89 per share for the same period a year ago. Bancorp increased it's quarterly
dividend during the fourth quarter to $.30 per share, a 20 percent increase over
$.25 per share declared the prior quarter.
Total assets at year-end were $714 million compared to $690 million at
year-end 1992, a gain of $24 million or 3.5 percent. After several years of
substantial increases, deposits grew slightly to $620 million during 1993 due
primarily to the current low interest rate environment. Equity capital increased
by 13.1 percent to $70 million. Loans grew a modest 1.6 percent to $303 million,
reflecting slow economic recovery and low consumer and business demand for
credit.
We expect the economic recovery to become more evident during 1994. We
anticipate both our net charge-off ratio and non-performing asset ratio to
decline as the financial condition of our customers improves. Loan growth should
be stronger in 1994 and we will continue to be aggressive in seeking new
business. Additional loan origination and business development personnel will be
added to the staff in 1994 to help develop loan business while maintaining
excellent service and credit quality.
Technology advances in 1993 were primarily directed toward customer service
areas, with the installation of state-of-the-art ATM machines at all affiliate
banks, and the development of a new PC based teller and platform system designed
to improve customer service in branch lobbies. Installation at all Farmers
National Bank branches is scheduled for completion in 1994. The new technology
is designed to increase the efficiency of our staff by increasing the
information available, and thereby enabling them to serve our customers faster
and have access to an expanded product base.
We continue to place high importance on our involvement in the communities
we serve. Many of our officers and employees participate and serve in various
community activities and functions.
Our challenge is to maximize the value of our holding company for our
shareholders. In order to broaden the scope of our banking franchise, we
continue to look for opportunities of growth and expansion through the possible
acquisition of small banks that fit into our corporate strategy.
We enter 1994 with one of the strongest equity capital positions in the
industry. We anticipate further success in 1994 and are grateful to you, our
shareholders, for your continued, strong support.
On behalf of the Board of Directors and staff, we thank you.
/s/ John M. Suit, II
John M. Suit, II
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
3
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 44,572 $ 47,180 $ 49,923 $ 46,436 $ 43,460
Interest expense 17,040 21,998 27,631 24,823 23,081
- ------------------------------------------------------------------------------------------------------------------
Net interest income 27,532 25,182 22,292 21,613 20,379
Provision for loan losses 1,821 2,445 1,341 1,658 1,216
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 25,711 22,737 20,951 19,955 19,163
Noninterest income 4,472 4,331 4,337 3,688 3,568
Noninterest expense 17,117 15,980 15,249 13,443 12,444
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,066 11,088 10,039 10,200 10,287
Applicable income taxes 3,558 3,294 3,089 3,511 3,271
- ------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting
change 9,508 7,794 6,950 6,689 7,016
Cumulative effect of accounting change 1,431 - - - -
- ------------------------------------------------------------------------------------------------------------------
Net income $ 10,939 $ 7,794 $ 6,950 $ 6,689 $ 7,016
- ------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Income before cumulative effect of accounting
change $ 3.52 $ 2.89 $ 2.58 $ 2.48 $ 2.60
Cumulative effect of accounting change .53 - - - -
Net income 4.05 2.89 2.58 2.48 2.60
Cash dividends declared 1.05 .88 .81 .77 .73
Book value 25.91 22.91 20.90 19.14 17.43
RETURN ON EQUITY AND ASSETS
Average stockholders' equity 66,759 59,139 53,854 49,748 44,866
Return on average stockholders' equity before
cumulative effect of accounting change 14.2% 13.2% 12.9% 13.4% 15.6%
Return on average stockholders' equity 16.4% 13.2% 12.9% 13.4% 15.6%
Average total assets $ 695,098 $ 664,555 $ 599,512 $ 497,975 $ 460,599
Return on average total assets before cumulative
effect of accounting change 1.4% 1.2% 1.2% 1.3% 1.5%
Return on average total assets 1.6% 1.2% 1.2% 1.3% 1.5%
Average stockholders' equity to average assets 9.6% 8.9% 9.0% 10.0% 9.7%
Average shares outstanding 2,699,056 2,699,056 2,699,056 2,699,056 2,699,056
DIVIDEND PAYOUT RATIO
Total dividends declared $ 2,834 $ 2,375 $ 2,186 $ 2,079 $ 1,970
Percent of dividends declared to net income 25.9% 30.5% 31.5% 31.1% 28.1%
OTHER DATA (AT YEAR END)
Total assets $ 714,209 $ 690,210 $ 650,988 $ 545,376 $ 471,835
Total deposits 619,957 607,103 569,077 473,862 410,023
Total loans 303,423 298,589 278,735 273,808 230,317
Total stockholders' equity 69,940 61,833 56,414 51,650 47,040
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of the financial condition and results of
operation of Farmers National Bancorp and affiliates is intended to cover the
significant factors affecting the corporation's financial statements for the
past several years. It should be read in conjunction with the Consolidated
Financial Statements and their related notes. Tabular information is presented
in thousands of dollars.
PERFORMANCE OVERVIEW
Net income for 1993 was $10.94 million compared with $7.79 million in 1992, an
increase of 40.4 percent. On a per share basis, 1993 earnings were $4.05
compared to $2.89 the preceding year.
In 1993 Bancorp affiliates adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). The adoption of
SFAS No. 109 resulted in an additional after-tax benefit of $1.43 million. The
effect of this change added $.53 to earnings per share. Excluding the effect of
the change in accounting principle, net income was $9.51 million, or $3.52 per
share, an increase of 22.0 percent over the comparative net income earned in
1992.
Returns on average earning assets and average stockholder's equity for 1993
(excluding the benefit of the accounting change) were 1.4 percent and 14.2
percent respectively. These compare favorably to 1.2 percent and 13.2 percent
for 1992. These performance measurements continue to remain above those of other
banking companies of similar asset size.
Through monitoring of asset quality, a continued conservative lending
policy, and control of noninterest expenses Bancorp continues to maintain
financial ratios which compare very favorably to other financial institutions in
terms of capitalization, asset quality, liquidity and returns on assets and
equity capital. Emphasis on quality customer service, expansion of product
lines, and continued enhancement of technology are reflective of the commitment
of each affiliate bank to serve its respective customers.
NET INTEREST INCOME
Net interest income is the difference between interest income generated by
earning assets which include loans and investments, and interest expense paid
for funds which include deposits and borrowings. It is the principal source and
largest component of earnings for Bancorp. Net interest income is analyzed on a
tax equivalent basis, a measure which adjusts interest income to reflect the
federal income tax effects of holdings of tax-free loans and investments. Net
interest income on a tax-equivalent basis was $29.1 million in 1993 compared
with $26.5 million in 1992 and $23.5 million in 1991, respective increases of
9.6 percent and 13.0 percent.
The discussion of net interest income should be read in conjunction with
Table 2 which presents a summary of Bancorp's average earning assets and
interest-bearing liabilities together with the tax equivalent yield earned and
rates paid for each major category of asset and liability, and Table 3 which
attributes changes in net interest income to either changes in the volume of
average balances or to changes in the yield earned on earning assets and rates
paid on interest-bearing liabilities.
Improved net interest income in 1993 was primarily the effect of a
declining rate environment which caused the interest paid on interest-bearing
liabilities to decline more than the reduction in the interest earned on assets.
Although the yield on earning assets decreased 70 basis points, the rate paid on
interest-bearing liabilities fell 110 points which resulted in a 40 basis point
increase in the net interest spread. Also contributing to the increase was a
greater volume of average earning assets which grew 3.9 percent in 1993.
Net interest margin is net interest income on a fully taxable-equivalent
basis calculated as a percent of average earning assets. The net interest margin
in 1993 was 4.5 percent compared to 4.3 percent in 1992 and 4.2 percent in 1991.
The continued upward trend in the margin during the past two years is primarily
the result of a widening net interest spread.
TABLE 1 -- Net Interest Margin
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yield on earning assets 7.1% 7.8% 9.0%
Rate paid on interest-bearing liabilities 3.1 4.2 5.8
- ------------------------------------------------------------------------------------------------------------
Net interest rate spread 4.0 3.6 3.2
Effect of noninterest-bearing liabilities 0.5 0.7 1.0
- ------------------------------------------------------------------------------------------------------------
Net interest margin 4.5% 4.3% 4.2%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
5
TABLE 2 -- Consolidated Average Balances, Yields and Rates
<TABLE>
<CAPTION>
1993 1992 1991
-------------------------- -------------------------- --------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
YEARS ENDED DECEMBER 31, BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest income from earning assets:
Loans $302,455 $27,638 9.1% $296,726 $28,600 9.6% $273,944 $30,021 11.0%
Taxable investment securities 252,853 13,182 5.2 238,495 14,540 6.1 158,321 12,243 7.7
Non-taxable investment securities 63,341 4,383 6.9 48,103 3,823 7.9 33,224 3,105 9.3
Federal funds sold and securities
purchased under agreement to resell 25,790 767 3.0 34,678 1,228 3.5 93,310 5,319 5.7
Interest-bearing deposits with banks 3,403 139 4.1 5,374 339 6.3 5,352 421 7.9
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $647,842 $46,109 7.1% $623,376 $48,530 7.8% $564,151 $51,109 9.0%
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Cash and due from banks 29,599 25,454 21,086
Other assets 23,052 20,276 18,565
Less: allowance for loan losses (5,395) (4,551) (4,290)
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $695,098 $664,555 $599,512
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest expense on deposits and
borrowed funds:
Interest-bearing demand deposits $204,521 $ 5,304 2.6% $191,029 $ 6,671 3.5% $152,136 $ 7,502 4.9%
Savings deposits 150,055 4,541 3.0 121,728 4,525 3.7 95,426 4,603 4.8
Time deposits 177,113 6,874 3.9 201,381 10,367 5.1 214,591 14,932 7.0
Short-term borrowings 13,537 307 2.3 15,347 417 2.7 12,114 573 4.7
Long-term debt 152 14 9.2 196 18 9.2 237 21 8.9
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $545,378 $17,040 3.1% $529,681 $21,998 4.2% $474,504 $27,631 5.8%
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits 75,985 68,457 63,155
Other liabilities 6,976 7,278 7,999
Stockholders' equity 66,759 59,139 53,854
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $695,098 $664,555 $599,512
- ------------------------------------------------------------------------------------------------------------------------------
Net interest-earnings/spread $29,069 4.0% $26,532 3.6% $23,478 3.2%
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.5% 4.3% 4.2%
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
Non-accrual loans are included in the average balances. Loan fees included in
interest income for 1993, 1992, and 1991 were $283,000, $290,000 and $362,000,
respectively. The indicated income and annual rate are presented on a taxable
equivalent basis using the federal marginal rate of 34%.
</TABLE>
<PAGE>
6
TABLE 3 -- Rate/Volume Variance Analysis
<TABLE>
<CAPTION>
1993 OVER (UNDER) 1992 1992 OVER (UNDER) 1991
----------------------------- -----------------------------
CAUSED BY CAUSED BY
TOTAL ------------------ TOTAL ------------------
VARIANCE RATE VOLUME VARIANCE RATE VOLUME
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income from earnings
assets:
Loans $ (962) $ (1,507) $ 545 $ (1,421) $ (3,794) $ 2,373
Taxable investment
securities (1,358) (2,197) 839 2,297 (2,977) 5,274
Non-taxable investment
securities 560 (540) 1,100 718 (517) 1,235
Federal funds sold and
securities purchased
under agreement to resell (461) (177) (284) (4,091) (1,538) (2,553)
Interest-bearing deposits
with banks (200) (98) (102) (82) (84) 2
- --------------------------------------------------------------------------------------------
Total interest income $ (2,421) $ (4,519) $ 2,098 $ (2,579) $ (8,910) $ 6,331
- --------------------------------------------------------------------------------------------
Interest expense on deposits
and borrowed funds:
Interest-bearing demand
deposits $ (1,367) $ (1,812) $ 445 $ (831) $ (2,488) $ 1,657
Savings deposits 16 (928) 944 (78) (1,188) 1,110
Time deposits (3,493) (2,345) (1,148) (4,565) (3,691) (874)
Short-term borrowings (110) (64) (46) (156) (283) 127
Long-term debt (4) -- (4) (3) -- (3)
- --------------------------------------------------------------------------------------------
Total interest expense $ (4,958) $ (5,149) $ 191 $ (5,633) $ (7,650) $ 2,017
- --------------------------------------------------------------------------------------------
Net interest income $ 2,537 $ 630 $ 1,907 $ 3,054 $ (1,260) $ 4,314
- --------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses is the charge to current earnings for potential
losses associated with lending activities. Its purpose is to maintain the
allowance for possible loan losses at a level adequate to cover potential losses
in the loan portfolio. Changes in the mix and volume of the loan portfolio,
delinquent and nonperforming loan portfolio totals, and economic conditions are
considered when management evaluates the adequacy of the allowance for loan
losses.
In 1993 the provision for loan losses totaled $1,821,000, compared to
$2,445,000 in 1992 and $1,341,000 in 1991. A detailed analysis of the allowance
for possible loan losses is included with the discussion of loan quality
beginning on page nine.
NONINTEREST INCOME
Noninterest income is composed of trust income, various service charges and
fees, and other miscellaneous income items. As shown in Table 4, total
noninterest income of $4.5 million increased 3.3 percent in 1993 over the 1992
total of $4.3 million. Service charges on deposit accounts, the largest
component in the category, decreased slightly during the past year, and is
attributable to customers maintaining higher balances and therefore assessed
lower service charges and overdraft fees.
Trust income was $472 thousand in 1993, an increase of 21.0 percent over
1992. A portion of trust fee income is based on the income generated by the
assets under management. As interest rates dropped in 1992 and 1993, the income
earned on these portfolios declined, which offset some of the income generated
by new business and estate settlements. Bancorp did not realize any gains or
losses on security transactions in 1993, whereas the gains in 1992 and 1991 were
due to bonds called above par. The category of other income, which consists of
safe deposit box fees, rental income generated by a non-banking affiliate,
increased cash value of life insurance policies, and profit on the sale of
mortgages, increased 9 percent in 1993. Farmers National Bank began to originate
and sell mortgages in the secondary market during the past year which generated
most of the increased fee income.
TABLE 4 -- Noninterest Income
<TABLE>
<CAPTION>
CHANGE FROM PRIOR YEAR
-------------------------------------------
YEARS ENDED 1993/92 1992/91
---------------------- ------------------ ---------------------
1993 1992 1991 AMOUNT PERCENT AMOUNT PERCENT
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trust department income $ 472 $ 390 $ 519 $ 82 21.0% $ (129) (24.9)%
Service charges on deposit accounts 2,589 2,653 2,538 (64) (2.4) 115 4.5
Other service charges, commissions and fees 499 440 412 59 13.4 28 6.8
Gains on sales of securities -- 11 22 (11) (100.0) (11) (50.0)
Other income 912 837 846 75 9.0 (9) (1.1)
- ------------------------------------------------------------------------------------------------------------------------
Total $4,472 $4,331 $4,337 $ 141 3.3% $ (6) (0.1)%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
7
NONINTEREST EXPENSE
Noninterest expense totaled $17.1 million in 1993, an increase of 7.1 percent
over the 1992 total of $16.0 million. Table 5 details the various categories of
noninterest expense. Salaries and employee benefits, which comprise 55.1% of
noninterest expense, increased $611 thousand in 1993. The largest portion of the
increase is attributable to the increased cost of employee benefits, including
medical insurance, payroll taxes, and profit sharing and retirement plans. Full
time equivalent employees totaled 310 at December 31, 1993 compared to 307 the
previous year.
The 13.7 percent increase in net occupancy expense reflects increased
maintenance and repair costs at various branch locations and non-banking
properties. The cost of replacement of all existing automated teller machines
(ATMs) as well as the installation of units at several new locations is
reflected in the increase to furniture and equipment expense. However, the new
units will enable the banks to offer greater convenience and expanded automated
services to their customers.
While the Federal Deposit Insurance assessment rate remained unchanged from
1992 to 1993, increased deposit growth generated higher premium expense. In
1992, the increased premium expense was attributable to higher premium
assessments and a larger deposit base.
Other expenses, which includes advertising, supplies, communication,
postage, legal and professional services and other miscellaneous items rose 4.7
percent in 1993 over the previous year due primarily to increased business
volumes and higher supplier costs.
TABLE 5 -- Noninterest Expense
<TABLE>
<CAPTION>
CHANGE FROM PRIOR YEAR
-----------------------------------
YEARS ENDED 1993/92 1992/91
------------------------- ---------------- ----------------
1993 1992 1991 AMOUNT PERCENT AMOUNT PERCENT
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 9,435 $ 8,824 $ 8,600 $ 611 6.9% $ 224 2.6%
Net occupancy expense 1,177 1,035 1,029 142 13.7 6 0.6
Equipment expense 1,277 1,136 1,241 141 12.4 (105 ) (8.5)
FDIC insurance expense 1,354 1,284 1,014 70 5.5 270 26.6
Other expenses 3,874 3,701 3,365 173 4.7 336 10.0
- ----------------------------------------------------------------------------------------------
Total $17,117 $15,980 $15,249 $1,137 7.1% $ 731 4.8%
- ----------------------------------------------------------------------------------------------
</TABLE>
INCOME TAXES
The Corporation's effective income tax rate for 1993 was 27.2 percent, a slight
decrease from the 1992 rate of 29.7 percent. The reduction is attributable to an
increase in tax exempt municipal bond income and the effect of the
implementation of SFAS No. 109 on current earnings.
This statement requires an asset and liability approach for financial
accounting and reporting for income taxes. The objective of accounting for
income taxes under this statement is to recognize the amount of taxes payable or
refundable for the current year and the deferred tax assets and liabilities for
future tax consequences of existing differences between the financial reporting
and tax reporting bases. The statement requires that deferred tax assets and
liabilities be adjusted whenever tax rates or other provisions of the tax law
change.
BALANCE SHEET REVIEW
At December 31, 1993 Bancorp had total assets of $714 million compared to $690
million the previous year, and $651 million at year-end 1991. This reflects
increases of 3.5 percent and 6.0 percent, respectively. Average total assets
were $695 million in 1993 and $665 million and $600 million for the two previous
years. The growth in assets was funded primarily from increased deposits which
averaged $608 million, $583 million and $525 million for the last three years.
The following section will discuss funding sources and application of the funds
in the asset mix.
INVESTMENT SECURITIES
The investment security portfolio is used to furnish liquidity, supply
securities to pledge as collateral for public monies and other borrowings, and
to serve as a major source of revenue. Bancorp invests in high quality
securities with relatively short maturities, thereby insulating the market value
of the portfolio from interest rate volatility.
Effective December 31, 1993, Bancorp adopted the Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS No. 115) which revised its accounting policy with
respect to investment securities. As a result, Bancorp now classifies its
investment portfolio in two
<PAGE>
8
categories. Securities are classified as "Held to Maturity" if it is Bancorp's
intent and ability to hold the investments until maturity and are carried on the
books at amortized cost. The remaining portfolio is classified as "Available for
Sale" and carried on the books at fair value. This classification is based in
part on management's expectations of future interest rates, and includes those
securities which are used as part of our asset/liability strategy. It also
enables management to respond to changes in interest rates, prepayment risk and
other interest rate related factors. Bancorp does not maintain a trading account
for investment securities.
At December 31, 1993, the total investment security portfolio was $317
million, compared to $307 million in 1992, an increase of $10 million or 3.3
percent. Due to weak loan demand and continued low federal funds rates, funds
were employed in the investment portfolio to increase earnings while maintaining
low risk, high credit quality and liquidity.
Proceeds from maturities as well as new funds were invested in all classes
of securities during the past year. Short term U.S. Treasury and Agency
securities were purchased pending the availability of higher yielding
alternatives as rates begin to rise in 1994. Tax-free municipal bonds were
purchased in anticipation of increased tax rates in the future which would
increase the effective yield on those investments. The remainder of funds were
invested in mortgage-backed securities (MBSs) and collateralized mortgage
obligations (CMOs) which are guaranteed by Federal agencies, and are generally
purchased with relatively short average lives and provide liquidity through
periodic principal repayments while generating slightly higher yields.
The breakdown of Bancorp's total investment portfolio at December 31, 1993
by classification, maturity and yield is shown in Table 6. Estimated prepayment
assumptions have been incorporated into the maturities for MBSs and CMOs based
on historical trends.
TABLE 6 -- Investment Securities
<TABLE>
<CAPTION>
Available for Sale UNDER 1 1-5 5-10 NO STATED
DECEMBER 31, 1993 YEAR YEARS YEARS MATURITY TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and Government agencies
Carrying value $ 2,008 $51,017 $9,837 $ -- $62,862
Yield 4.95% 4.41% 5.50% --% 4.60%
Mortgaged-backed securities
Carrying value 4,727 25,677 547 -- 30,951
Yield 4.30 4.78 4.67 -- 4.70
Equity securities
Carrying value -- -- -- 6,826 6,826
Yield -- -- -- 2.97 2.97
- ------------------------------------------------------------------------------------------------------------
Total carrying value $ 6,735 $76,694 $10,384 $ 6,826 $100,639
- ------------------------------------------------------------------------------------------------------------
Weighted average yield 4.49% 4.53% 5.46% 2.97% 4.52%
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Held to Maturity UNDER 1 1-5 5-10 NO STATED
DECEMBER 31, 1993 YEAR YEARS YEARS MATURITY TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and Government agencies
Carrying value $55,548 $14,948 $ -- -- $70,496
Yield 5.17% 4.20% --% -- 4.96%
States and political subdivisions
Carrying value 13,052 39,520 24,250 -- 76,822
Yield 7.80 6.68 6.45 -- 6.80
Corporate securities
Carrying value 8,040 2,522 -- -- 10,562
Yield 6.42 4.93 -- -- 6.06
Mortgage-backed securities
Carrying value 41,617 13,838 2,902 -- 58,357
Yield 4.63 5.33 5.67 -- 4.85
- ------------------------------------------------------------------------------------------------------------
Total carrying value $118,257 $70,828 $27,152 -- $216,237
- ------------------------------------------------------------------------------------------------------------
Weighted average yield 5.36% 5.83% 6.37% -- 5.64%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
9
LOANS
The average level of loans outstanding during 1993 was $302 million, an increase
of $5 million, or 1.7 percent, from the $297 million reported in 1992. The
modest growth in the loan portfolio during 1993 was due in part to the current
economic environment. The activity for new commercial and consumer loans was
slow, while demand increased for new mortgage loans, both residential and
commercial. The average loans outstanding in 1993 comprised 46.7 percent of
average earnings assets, compared to 47.6 percent in 1992 and 48.6 percent in
1991.
At December 31, 1993, total loans were $303 million, a 1.6 percent increase
over the 1992 total of $299 million, which in turn was a 7.1 percent increase
over the 1991 total of $279 million. At year-end 1993, the loan portfolio
contained $244 million of loans secured by real estate, representing 79.9
percent of the total loans outstanding. However, a significant portion of the
real estate loans consists of mortgages to individuals on their residences.
Commercial mortgage loans represent primarily owner-occupied properties and
income properties in our local trade areas. The decline in the sale of
automobiles and other consumer-durable goods continues to have an adverse impact
on the consumer loan portfolio, which decreased 14.2 percent in 1992 and 4.5
percent during the past year. The composition of the entire loan portfolio for
the past five years is summarized in Table 7.
The increase in average total loans in 1993 was insufficient to offset a
decrease in the yields realized on loans, which decreased 50 basis points in
1993 to 9.1 percent, reflective of the lower overall interest rate environment.
As a result, taxable equivalent interest income from loans in 1993 totaled $27.6
million, 3.4 percent below the $28.6 million realized in 1992.
TABLE 7 -- Loan Portfolio
<TABLE>
<CAPTION>
DECEMBER 31, 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and financial $ 35,859 $ 40,153 $ 42,400 $ 52,611 $ 52,601
Real estate - construction 19,807 18,489 24,168 25,007 14,807
Real estate - other 223,784 214,831 182,027 163,230 133,916
Consumer loans 25,546 26,753 31,175 34,115 30,024
- ------------------------------------------------------------------------------------------------------------------
Total loans 304,996 300,226 279,770 274,963 231,348
Less: unearned income 1,573 1,637 1,035 1,155 1,031
- ------------------------------------------------------------------------------------------------------------------
Total net loans $ 303,423 $ 298,589 $ 278,735 $ 273,808 $ 230,317
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
LOAN QUALITY
Bancorp affiliates continued to maintain strong loan quality in 1993. The
lending process is administered through a uniform loan policy which contains
guidelines on lending limits, credit exposure limits, and loan administration.
In addition, Bancorp has a centralized loan review function. Its
responsibilities include reviewing credits, classifying them according to
internal ratings and reporting information to management on an impartial and
continuing basis.
Each banking affiliate provides an allowance for possible loan losses which
is maintained to absorb potential future losses. In order to evaluate the
adequacy of this allowance, it is necessary to consider the growth and diversity
of the loan portfolio, historical loan loss experience, current and future
economic conditions, and the level of nonperforming and under-performing
credits. These items are periodically reviewed by management to determine the
adequacy of the allowance. At December 31, 1993, the percentage of the allowance
for loan losses to net loans was 1.83 percent compared to 1.69 percent the
previous year-end. The details of the allowance for possible loan losses are
shown in Table 8.
<PAGE>
10
TABLE 8 -- Allowance for Loan Losses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $302,455 $296,726 $273,944 $253,220 $221,004
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at beginning of year $ 5,034 $ 3,955 $ 3,865 $ 3,021 $ 2,578
Loans charged-off:
Commercial and financial 217 203 1,288 324 704
Real estate - construction -- -- -- -- --
Real estate - other 933 1,080 26 327 25
Consumer loans 223 182 165 204 78
- -----------------------------------------------------------------------------------------------------------------------
Total loans charged-off 1,373 1,465 1,479 855 807
- -----------------------------------------------------------------------------------------------------------------------
Recoveries on loans previously charged-off:
Commercial and financial 37 35 58 2 10
Real estate - construction -- -- -- -- --
Real estate - other 18 6 88 -- --
Consumer loans 21 58 82 39 24
- -----------------------------------------------------------------------------------------------------------------------
Total recoveries 76 99 228 41 34
- -----------------------------------------------------------------------------------------------------------------------
Net loans charged-off 1,297 1,366 1,251 814 773
Provision for credit losses 1,821 2,445 1,341 1,658 1,216
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 5,558 $ 5,034 $ 3,955 $ 3,865 $ 3,021
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net charged-off loans to average loans
outstanding 0.43% 0.46% 0.46% 0.32% 0.35%
- -----------------------------------------------------------------------------------------------------------------------
Ratio of allowance to loans at year-end 1.83% 1.69% 1.42% 1.41% 1.31%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING LOANS
Nonperforming loans consist of nonaccrual loans and loans contractually past due
90 days or more. It is management's policy to place loans on a nonaccrual status
when principal or interest payments become 90 days past due. Loans in excess of
90 days past due will remain accruing only if the loans are well secured and
collection is in process. A loan may be put on nonaccrual status sooner than
this standard if, in management's judgement, that loan may be uncollectible. A
breakdown of Bancorp's nonperforming loans as of the end of each of the past
five years is shown in Table 9. The increase in total nonperforming loans during
previous years is reflective of the decline in general economic conditions, and
especially the local real estate markets. As of December 31, 1993, total
nonperforming loans decreased 18.0 percent from the previous year and now total
.95 percent of total loans.
TABLE 9 -- Nonperforming Loans
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans not accruing interest $ 2,654 $ 3,176 $ -- $ 445 $ 886
Accruing loans 90 days past due 220 328 1,256 623 102
- ---------------------------------------------------------------------------------------------------------------------------
Totals $ 2,874 $ 3,504 $ 1,256 $ 1,068 $ 988
- ---------------------------------------------------------------------------------------------------------------------------
As a percent of loans .95% 1.17% .45% .39% .43%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
11
FUNDING SOURCES
Deposits are the primary funding source for Bancorp's affiliate banks. At
December 31, 1993, total deposits were $620 million compared to $607 million the
prior year-end. Average deposits for 1993 were $608 million, an increase of $25
million or 4.3 percent over the previous year. Table 10 presents the composition
of Bancorp's average deposit mix during the past five years.
TABLE 10 -- Deposits
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 75,985 $ 68,457 $ 63,155 $ 67,199 $ 68,056
Interest-bearing demand deposits 204,521 191,029 152,136 111,132 103,096
Savings deposits 150,055 121,728 95,426 79,787 74,312
Time deposits 177,113 201,381 214,591 175,618 145,446
- ------------------------------------------------------------------------------------------------------------------
Total average deposits $ 607,674 $ 582,595 $ 525,308 $ 433,736 $ 390,910
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Bancorp's affiliate banks rank high in financial soundness when compared to
peers, which contributed to the continued growth in deposited funds. The
substantial growth in both interest bearing demand and savings deposits more
than offset the decline in time deposit balances. Declining certificates of
deposit balances are due primarily to the low interest rate environment and
customer preference for shorter maturities. In 1994, Bancorp expects continued
moderate growth in deposits and will concentrate on pricing its core deposits
relative to market rates.
The affiliate banks do not rely on borrowed funds or large denomination
time deposits to fund their earning assets. Time deposits in excess of $100,000
totaled $30.0 million at year-end 1993 and $33.7 million in 1992. A maturity
distribution of time deposits over $100,000 at December 31, 1993 is shown in the
accompanying table. Short-term borrowings at December 31, 1993 included $9.2
million in repurchase agreements and $6.8 million in U.S. Treasury tax and loan
deposits.
TABLE 11 -- Time Deposits Over $100,000
<TABLE>
<CAPTION>
CERTIFICATES OTHER TIME
DECEMBER 31, 1993 OF DEPOSIT DEPOSITS TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less $ 12,605 $ 127 $ 12,732
Over three months to six months 3,343 279 3,622
Over six months to twelve months 10,247 224 10,471
Over twelve months 3,039 101 3,140
- ------------------------------------------------------------------------------------------------------------------------
Total deposits greater than $100,000 $ 29,234 $ 731 $ 29,965
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSET/LIABILITY MANAGEMENT
The principal objective of asset/liability management is to provide maximum
levels of net interest income while maintaining acceptable levels of interest
rate and liquidity risk and to facilitate the funding needs of Bancorp. To
achieve this objective, a combination of selected investments and funding
sources with various maturity structures is utilized.
Administration of this objective is the function of the Asset and Liability
Management Committee ("ALCO"). The committee measures interest rate risk,
liquidity and capital levels through regular review and analysis of deposit and
loan trends, projections of cash flows in various categories of loans and
investment securities, and management of interest rate spreads. It attempts to
identify and control the potential impact that changes in market interest rates
have on the net interest spread.
LIQUIDITY
A well structured balance sheet provides liquidity, which is the ability to
manage assets and liabilities in a manner that most efficiently meets the cash
flow requirements of customers, whether in the form of loan demand or deposit
activity. Meeting the challenge of providing liquidity in a profitable manner is
especially important in today's volatile money markets. Bancorp's financial
obligations could be met either through the reduction or maturity of existing
assets or by the acquisition of additional funding. ALCO formulates the funding
and investment strategies necessary to maintain an appropriate balance between
interest sensitive assets and liabilities, which is important to the maintenance
of adequate liquidity.
<PAGE>
12
Bancorp's excellent liquidity position is the result of a high percentage
of core deposits and equity capital coupled with a short-term investment
portfolio and a moderate-sized loan portfolio. At December 31, 1993, the loan to
deposit ratio was 48.9 percent. During the year, excess funds attained from
deposit growth were employed in the investment portfolio with relatively short
term maturities and in overnight federal funds. In 1993 Farmers National Bank
applied to join the Federal Home Loan Bank System, and received membership
approval during the first quarter of 1994. Membership will provide a potential
source of liquidity and interest rate risk management.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is related to liquidity in that each is affected by
maturing assets and sources of funds. However, interest sensitivity also
recognizes that certain assets and liabilities have interest rates that are
subject to change prior to maturity. Interest rate sensitivity refers to the net
interest income volatility resulting from changes in interest rates, product
spread variability and mismatches in the repricing between interest rate
sensitive assets and liabilities. Bancorp is committed to avoidance of
speculative interest rate positions and places primary focus on an appropriate
balance of period gaps between rate sensitive assets and liabilities. Due to the
continuing philosophy of maintaining liquidity while matching both rate
sensitivity and maturities of assets and liabilities, ALCO believes the Company
is reasonably well positioned for subsequent interest rate movements.
Interest rate risk arises from mismatches between the repricing or maturity
characteristics of assets and liabilities, and the impact of a rising or falling
rate environment. A static repricing gap report provides a measure of interest
rate risk as of a particular point in time. Risk factors not reflected in gap
analysis include differences in the speed and amount of response by the specific
types of assets and liabilities to a change in general market rates. The gap
presented at any one point in time is one measure of the risk inherent in the
existing balance sheet structure as it relates to potential changes in net
interest income. Table 12 shows the estimated repricing gap position of Bancorp
as of December 31, 1993. In all periods under one year there is a positive
cumulative interest rate sensitivity gap, which positions the Company to
maximize interest margins during a period of rising rates, as anticipated in
1994. The distribution in the table is based on a combination of maturities,
call provisions, repricing frequencies and prepayment patterns. Interest-bearing
demand and savings deposits are estimated to exhibit some interest rate
sensitivity based on management's analysis of historical trends. As with all
techniques for measuring interest rate risk, assumptions must be made about the
repricing characteristics of certain assets and liabilities. Gap alone does not
accurately measure the degree of change in net interest income since changes in
interest rates do not alone affect all categories of assets and liabilities
equally or simultaneously.
TABLE 12 -- Interest Rate Sensitivity
(RATE SENSITIVE ASSETS AND LIABILITIES)
<TABLE>
<CAPTION>
1 TO 91 TO 181 TO 1 - 5 OVER
DECEMBER 31, 1993 90 DAYS 180 DAYS 365 DAYS YEARS 5 YEARS TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and other short-term
investments $ 42,400 $ -- $ 2,328 $ -- $ -- $44,728
Investment securities 66,840 38,371 44,114 132,808 34,049 316,182
Loans 111,663 11,717 22,109 128,977 28,957 303,423
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets $220,903 $ 50,088 $68,551 $261,785 $ 63,006 $664,333
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES
Interest-bearing deposits $167,519 $ 69,215 $58,760 $ 89,394 $ 150,389 $535,277
Borrowed funds 17,329 -- -- 128 -- 17,457
- ----------------------------------------------------------------------------------------------------------------------
Total interest sensitive liabilities $184,848 $ 69,215 $58,760 $ 89,522 $ 150,389 $552,734
- ----------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 36,055 $ (19,127) $ 9,791 $172,263 $(87,383)
- -----------------------------------------------------------------------------------------------------------
Cumulative interest rate sensitivity gap $ 36,055 $ 16,928 $26,719 $198,982 $ 111,599
- -----------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage of interest
earning assets 5.4% 2.6% 4.0% 30.0% 16.8%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
13
INFLATION
The majority of the assets and liabilities of Bancorp are monetary in nature,
and therefore differ greatly from those of companies that have sufficient
investments in fixed assets or inventories. Financial institutions have greater
exposure to losses from rapidly changing interest rates than from reductions in
purchasing power. Management believes that the most significant impact on its
financial results is Bancorp's ability to react to interest rate changes, rather
than changes in the general level of prices.
CAPITAL RESOURCES
A strong capital base provides for growth and expansion activities, gives
stability to current operations, and adds to public confidence in the
Corporation. Capital resources are also very important to a financial
institution because they provide a measure of protection against unanticipated
declines in asset value and thereby help safeguard the funds of depositors.
Management believes that given the quality of Bancorp's assets, the structure of
its balance sheet, and its ability to generate and retain earnings, our capital
is adequate and will provide for future growth.
Minimum required levels of capital for financial institutions are
determined by the Federal Reserve Board and appropriate regulatory agencies.
Under current regulatory rules, risk-based capital ratios of 4% for tier 1
capital and 8% for total capital are required. As of December 31, 1993,
Bancorp's tier 1 risk-adjusted capital ratio was 18.3 percent and the total
capital ratio was 19.5 percent, both well above the regulatory requirements.
Table 13 compares Bancorp's capital ratios to those required by current
regulatory standards.
TABLE 13 -- Capital Ratios
<TABLE>
<CAPTION>
RISK-BASED RISK-BASED
CAPITAL CAPITAL REGULATORY
DECEMBER 31 1993 1992 REQUIREMENTS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital $ 68,841 $ 60,669
Tier 2 capital 4,707 4,525
- -----------------------------------------------------------------------------
Total capital $ 73,548 $ 65,194
Risk-adjusted assets $376,570 $362,009
Risk-based capital ratios:
Tier 1 18.3% 16.8% 4.0%
Total capital (Tier 1 plus Tier 2) 19.5% 18.0% 8.0%
- -----------------------------------------------------------------------------
Tier 1 capital $ 68,841 $ 60,669
Total adjusted assets $701,592 $679,158
Leverage capital ratio 9.8% 8.9% 3.0% to 5.0%
- -----------------------------------------------------------------------------
</TABLE>
Total equity capital at year-end was $69.9 million, an $8.1 million
increase over the prior year. This increase resulted from the net retention of
earnings after all dividend distributions. Strong core earnings allowed for the
continuation of annual dividend increases as well as continued growth in book
value. During the fourth quarter of 1993, the Board of Directors voted to
increase the quarterly dividend from $.25 to $.30 per share, which on an
annualized basis represents a 20.0 percent increase. Book value per share at the
end of 1993 was $25.91, an increase of 13.1 percent over the previous year.
Table 14 shows dividends per share on a quarterly basis. The range of high and
low quotations of per share market value supplied by local brokerage firms is
also tabulated. Bancorp's common stock is traded lightly in the over-the-counter
market.
TABLE 14 -- Common Stock Price and Dividend History
<TABLE>
<CAPTION>
CASH
DIVIDENDS
HIGH LOW DECLARED
- -----------------------------------------------------------
<S> <C> <C> <C>
1991
First quarter $30 $27 $.20
Second quarter 30 1/2 27 1/2 .20
Third quarter 30 27 1/2 .20
Fourth quarter 29 26 .21
- -----------------------------------------------------------
1992
First quarter $27 1/2 $27 $.21
Second quarter 29 1/2 28 .21
Third quarter 31 1/2 28 .21
Fourth quarter 30 29 .25
- -----------------------------------------------------------
1993
First quarter $30 $30 $.25
Second quarter 31 1/4 30 .25
Third quarter 31 29 3/4 .25
Fourth quarter 32 30 .30
- -----------------------------------------------------------
</TABLE>
<PAGE>
14
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1993 1992
- ------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 30,460 $ 30,282
Interest-bearing time deposits with banks 2,328 4,316
Federal funds sold 42,400 33,800
Investment securities:
Available for sale 100,639 --
Held to maturity -- fair value of $217,779 (1993) and
$309,342 (1992) 216,237 306,925
Loans 303,423 298,589
Less: allowance for loan losses (5,558) (5,034)
- ------------------------------------------------------------------------------------
Net loans 297,865 293,555
Premises and equipment, net 9,182 8,128
Other real estate owned 2,100 2,100
Accrued income and other assets 12,998 11,104
- ------------------------------------------------------------------------------------
Total assets $ 714,209 $ 690,210
- ------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 84,680 $ 78,268
Interest-bearing demand deposits 204,481 203,074
Savings deposits 162,175 138,576
Time deposits 168,621 187,185
- ------------------------------------------------------------------------------------
Total deposits 619,957 607,103
Short-term borrowings 17,329 14,019
Long-term debt 128 175
Accrued expenses and other liabilities 6,855 7,080
- ------------------------------------------------------------------------------------
Total liabilities 644,269 628,377
- ------------------------------------------------------------------------------------
Commitments and contingencies (Footnote 15)
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share;
shares authorized 10,000,000; shares issued 2,699,056 2,699 2,699
Surplus 29,728 29,728
Retained earnings 37,511 29,406
Net unrealized holding gains on investment securities
available for sale 2 --
- ------------------------------------------------------------------------------------
Total stockholders' equity 69,940 61,833
- ------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 714,209 $ 690,210
- ------------------------------------------------------------------------------------
<FN>
See accompanying notes.
</TABLE>
<PAGE>
15
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 27,485 $ 28,444 $ 29,795
Interest on time deposits with banks 139 339 421
Interest on federal funds sold 767 1,228 5,319
Interest and dividends on investment securities:
Taxable interest and dividend income 13,182 14,540 12,243
Tax-exempt interest and dividend income 2,999 2,629 2,145
- --------------------------------------------------------------------------------------
Total interest income 44,572 47,180 49,923
- --------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 16,719 21,563 27,037
Interest on short-term borrowings 307 417 573
Interest on long-term debt 14 18 21
- --------------------------------------------------------------------------------------
Total interest expense 17,040 21,998 27,631
- --------------------------------------------------------------------------------------
Net interest income 27,532 25,182 22,292
Provision for loan losses 1,821 2,445 1,341
- --------------------------------------------------------------------------------------
Net interest income after provision for loan losses 25,711 22,737 20,951
- --------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 472 390 519
Service charges on deposit accounts 2,589 2,653 2,538
Other service charges and commissions 499 440 412
Gains on investment securities -- 11 22
Other income 912 837 846
- --------------------------------------------------------------------------------------
Total noninterest income 4,472 4,331 4,337
- --------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 9,435 8,824 8,600
Net occupancy expense 1,177 1,035 1,029
Furniture and equipment expense 1,277 1,136 1,241
FDIC insurance expense 1,354 1,284 1,014
Other expenses 3,874 3,701 3,365
- --------------------------------------------------------------------------------------
Total noninterest expense 17,117 15,980 15,249
- --------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change 13,066 11,088 10,039
Income taxes 3,558 3,294 3,089
- --------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 9,508 7,794 6,950
Cumulative effect of accounting change 1,431 -- --
- --------------------------------------------------------------------------------------
NET INCOME $ 10,939 $ 7,794 $ 6,950
- --------------------------------------------------------------------------------------
PER SHARE AMOUNTS
Income before cumulative effect of accounting change $ 3.52 $ 2.89 $ 2.58
Cumulative effect of accounting change .53 -- --
- --------------------------------------------------------------------------------------
NET INCOME $ 4.05 $ 2.89 $ 2.58
- --------------------------------------------------------------------------------------
<FN>
See accompanying notes.
</TABLE>
<PAGE>
16
CONSOLIDATED STATEMENTS
OF CASH FLOWS
----------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,939 $ 7,794 $ 6,950
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change (1,431) -- --
Provision for loan losses 1,821 2,445 1,341
Depreciation and amortization 1,162 975 1,110
Provision for deferred income taxes (606) (576) (277)
Decrease (increase) in accrued income and
other assets 78 386 (1,177)
Increase (decrease) in accrued expenses and
other liabilities (225) (866) 437
Other, net 2,025 1,492 610
- --------------------------------------------------------------------------------
Net cash provided by operating activities 13,763 11,650 8,994
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing
balances with banks 1,988 4,498 (5,207)
Maturities, sales and principal payments of
investment securities 149,811 138,377 66,828
Funds invested in investment securities (161,709) (188,796) (189,319)
Net (increase) in loans (6,207) (23,442) (6,406)
Expenditures for premises and equipment (2,151) (663) (591)
Proceeds from sales of premises and equipment -- -- 32
- --------------------------------------------------------------------------------
Net cash (applied to) investing activities (18,268) (70,026) (134,663)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 12,854 38,026 95,215
Net increase (decrease) in short-term
borrowings 3,310 (3,314) 5,235
Repayments of long-term debt (47) (43) (39)
Cash dividends (2,834) (2,375) (2,186)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 13,283 32,294 98,225
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 8,778 (26,082) (27,444)
Cash and cash equivalents at beginning of year 64,082 90,164 117,608
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 72,860 $ 64,082 $ 90,164
- --------------------------------------------------------------------------------
NONCASH INVESTING ACTIVITIES
Transfer from loans to other real estate owned $ -- $ 2,100 $ --
Net unrealized holding gains on investment
securities available for sale 2 -- --
- --------------------------------------------------------------------------------
<FN>
See accompanying notes.
</TABLE>
<PAGE>
17
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
HOLDING GAINS
ON SECURITIES
YEARS ENDED DECEMBER 31, 1993, 1992 COMMON RETAINED AVAILABLE
AND 1991 STOCK SURPLUS EARNINGS FOR SALE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1991 $2,699 $29,728 $ 19,223 $ --
Net income -- -- 6,950 --
Cash dividends ($.81 per share) -- -- (2,186) --
- --------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1991 2,699 29,728 23,987 --
Net income -- -- 7,794 --
Cash dividends ($.88 per share) -- -- (2,375) --
- --------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1992 2,699 29,728 29,406 --
Net income -- -- 10,939 --
Cash dividends ($1.05 per share) -- -- (2,834) --
Cumulative effect, net of income
taxes, of the initial application
of Statement of Financial
Accounting Standards No. 115 -- -- -- 2
- --------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1993 $2,699 $29,728 $ 37,511 $ 2
- --------------------------------------------------------------------------------
<FN>
See accompanying notes.
</TABLE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE_1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Farmers National
Bancorp ("Bancorp"), its affiliated banks, Farmers National Bank of Maryland,
The Caroline County Bank and Atlantic National Bank, and other affiliates
Farmers National Land Corporation and Farmers National Mortgage Corporation,
with all significant intercompany transactions eliminated. The investment in
affiliates is recorded on the books of the holding company on the basis of its
equity in the net assets of the affiliates.
Bancorp and its affiliates use the accrual basis of accounting, except
for trust income which is recorded on the cash basis. Assets (other than cash)
held for others under fiduciary and agency relationships are not included in the
accompanying consolidated balance sheets since they are not assets of Bancorp or
its affiliates. Certain reclassifications have been made to amounts previously
reported to conform with the classifications made in 1993.
INVESTMENT SECURITIES
Investment securities available for sale are stated at fair value based on
quoted market prices. They represent those securities which management may sell
as part of its asset/ liability strategy or which may be sold in response to
changing interest rates, changes in prepayment risk or similar factors. Gains
and losses on the disposition of investment securities available for sale are
shown separately in the consolidated statements of income. The cost of
securities sold is determined by the specific identification method.
Investment securities held to maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts. Bancorp has the ability and
the intent to hold such investments to maturity.
INTEREST AND FEES ON LOANS
Interest income on loans is accrued at the contractual rate on the principal
amount outstanding. When scheduled principal or interest payments are past due
90 days or more on any loan not fully secured by marketable collateral, the
accrual of interest income is discontinued and recognized only as collected. The
loan is restored to an accruing status when all amounts past due have been paid
and the borrower has demonstrated the ability to continue such payments. Loan
origination and commitment fees and
<PAGE>
18
certain direct loan origination costs are being deferred and the net amount
amortized over the contractual life of the loan as an adjustment to the loan's
yield.
ALLOWANCE FOR LOAN LOSSES
The determination of the balance of allowance for loan losses is based on an
analysis of the loan portfolio, past loan experience and current economic
conditions and reflects an amount which, in management's judgment, is adequate
to provide for potential loan losses. Provisions for loan losses are charged to
operating expenses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization computed predominantly by accelerated methods over the estimated
useful lives of the properties. Expenditures for maintenance, repairs and minor
renewals are charged to operations; expenditures for betterments are charged to
the property accounts. Upon retirement or other disposition of the properties,
the carrying value and the related accumulated depreciation are removed from the
accounts.
OTHER REAL ESTATE OWNED
Assets acquired through foreclosure proceedings, acceptance of deed in lieu of
foreclosure or transfer in exchange for an outstanding loan are carried at the
lower of cost or fair value minus estimated costs to dispose. Cost includes loan
principal, accrued interest and subsequent expenditures. Any excess of cost over
the carrying value at the time of acquisition is charged to the allowance for
loan losses. The estimated fair value is reviewed periodically by management and
any valuation adjustments are reflected in the income statement.
INCOME TAXES
Income taxes are based on income and expense amounts in the statement of income.
Under the liability method, deferred taxes are determined based on the
differences between the tax and financial accounting bases of assets and
liabilities and are measured at the enacted tax rates expected to be in effect
at the time these differences are reversed.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares
outstanding of 2,699,056.
CASH FLOWS
Bancorp has defined cash and cash equivalents as those amounts included in the
balance sheet captions "Cash and due from banks" and "Federal funds sold." For
the years ended December 31, 1993, 1992, and 1991 Bancorp paid interest and
income taxes as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest $17,532 $23,525 $27,546
Taxes $ 4,283 $ 3,651 $ 3,602
- -------------------------------------------------------------------------------------------
</TABLE>
PROSPECTIVE ACCOUNTING CHANGES
In November 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits." Statement 112 establishes accounting standards for
employers who provide benefits to former or inactive employees after employment
but before retirement. This Statement is effective for fiscal years beginning
after December 15, 1993. The adoption of statement No. 112 will have no effect
on Bancorp's financial statements.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan." Statement 114 applies to loans that are considered impaired, where
it is probable that the creditor will not collect all principal and interest
payments according to the loan's contractual terms. Under Statement 114,
impaired loans must be measured by methods that consider the present value of
the expected future cash flows discounted at the loan's effective interest rate,
the observable market price of the loan, or the fair value of the collateral. If
the measure of an impaired loan is less than the carrying value, a valuation
allowance must be established. The Statement is effective for fiscal years
beginning after December 15, 1994. The effect of adopting Statement 114 is
currently under review.
NOTE_2
ADOPTION OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1993, Bancorp adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement requires that deferred income taxes reflect the future years' tax
consequences of differences between the tax and financial accounting bases of
assets and liabilities. Prior to 1993, deferred income taxes were provided for
timing differences between items of income or expense reported in the financial
statements and those reported for income tax purposes.
The cumulative effect at January 1, 1993 of adopting Statement No. 109
totaled $1,431,000 and is included in determining net income for 1993.
On December 31, 1993, Bancorp adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This statement requires Bancorp to
<PAGE>
19
identify and segregate its investment securities portfolio into those securities
it intends to hold to maturity and those securities which are available for
sale. Investment securities held to maturity are carried at amortized cost while
investment securities available for sale are carried at fair value. Net
unrealized holding gains and losses on securities available for sale are
reported as a separate component of stockholders' equity, net of related income
taxes.
The initial application of Statement No. 115 resulted in recording a net
unrealized gain of $2,000 (net of income taxes of $2,000) relating to Bancorp's
investments securities available for sale.
NOTE_3
RESTRICTIONS ON CASH AND DUE FROM BANKS
The Federal Reserve requires banks to maintain certain minimum cash balances
consisting of vault cash and deposits in the Federal Reserve Bank or in other
commercial banks. The amounts of such reserves are based on percentages of
certain deposit types and totaled $9,208,000 at December 31, 1993. At that date,
compensating balances of $5,755,000 were being maintained with correspondent
banks to cover the costs of services provided.
NOTE_4
INVESTMENT SECURITIES -- AVAILABLE FOR SALE
The amortized cost, gross unrealized holding gains and losses and fair values of
investment securities available for sale were as follows:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
HOLDING
(DOLLARS IN THOUSANDS) AMORTIZED -------------- FAIR
DECEMBER 31, 1993 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
Government agencies $ 62,854 $ 168 $ 160 $62,862
Mortgage-backed securities 31,021 71 141 30,951
- -------------------------------------------------------------------------------------------
Total debt securities 93,875 239 301 93,813
Equity securities 6,760 66 -- 6,826
- -------------------------------------------------------------------------------------------
Total $ 100,635 $ 305 $ 301 $100,639
- -------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of debt securities available for sale at
December 31, 1993, by contractual maturity, are shown below. Expected maturities
will differ from the contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties. The
average life of mortgage-backed securities is estimated to be less than five
years based on historical prepayment patterns; however, the actual maturity of
the portfolio may be shorter or longer due to prepayment fluctuations.
<TABLE>
<CAPTION>
AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due in one year or less $ 2,000 $ 2,008
Due after one year through five years 51,071 51,017
Due after five years through ten years 9,783 9,837
- -------------------------------------------------------------------------------------------
Subtotal 62,854 62,862
Mortgage-backed securities 31,021 30,951
- -------------------------------------------------------------------------------------------
Total debt securities $ 93,875 $93,813
- -------------------------------------------------------------------------------------------
</TABLE>
Securities available for sale with a book value of $3,250,000 were pledged at
December 31, 1993 as collateral for borrowings and certain government deposits
as required or permitted by law.
NOTE_5
INVESTMENT SECURITIES -- HELD TO MATURITY
The amortized cost, gross unrealized gains and losses and fair values of
investment securities held to maturity were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
(DOLLARS IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1993 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
Government agencies $ 70,496 $ 373 $ 53 $ 70,816
States and political subdivisions 76,822 1,070 172 77,720
Corporate securities 10,562 128 3 10,687
Mortgage-backed securities 58,357 315 116 58,556
- -------------------------------------------------------------------------------------------
Total $ 216,237 $ 1,886 $ 344 $217,779
- -------------------------------------------------------------------------------------------
<CAPTION>
GROSS GROSS
(DOLLARS IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1992 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
U.S. Treasury and
Government agencies $ 155,300 $ 1,845 $ 296 $156,849
States and political subdivisions 53,431 929 115 54,245
Corporate securities 10,836 210 16 11,030
Mortgage-backed securities 77,189 236 381 77,044
- -------------------------------------------------------------------------------------------
Total debt securities 296,756 3,220 808 299,168
Equity securities 10,169 30 25 10,174
- -------------------------------------------------------------------------------------------
Total $ 306,925 $ 3,250 $ 833 $309,342
- -------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of debt securities held to maturity at
December 31, 1993 and 1992, by contractual maturity, are shown below. Expected
maturities will differ from the contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. The average life of mortgage-backed securities is estimated to be
less than five years based on historical prepayment patterns; however, the
actual maturity of the portfolio may be shorter or longer due to prepayment
fluctuations.
<PAGE>
20
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Due in one year or less $ 76,640 $ 77,281 $ 82,040 $ 83,373
Due after one year through five years 56,990 57,537 128,457 129,474
Due after five years through ten years 24,250 24,405 9,070 9,277
- -------------------------------------------------------------------------------------------
Subtotal 157,880 159,223 219,567 222,124
Mortgage-backed securities 58,357 58,556 77,189 77,044
- -------------------------------------------------------------------------------------------
Total debt securities $ 216,237 $217,779 $ 296,756 $299,168
- -------------------------------------------------------------------------------------------
</TABLE>
There were no sales of debt securities during 1993, 1992 or 1991. Gains of
$11,000 and $22,000 on debt securities were recognized in 1992 and 1991,
respectively, as a result of premiums paid on called debt securities.
Securities held to maturity with a book value of $29,713,000 and
$48,265,000 were pledged at December 31, 1993 and 1992, respectively, as
collateral for borrowings and certain government deposits as required or
permitted by law.
At December 31, 1993 and 1992, the carrying value of no single issuer
exceeded ten percent of stockholders' equity.
NOTE_6
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans were classified as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate loans:
Construction $ 19,807 $ 18,489
Other 223,784 214,831
Commercial, financial and agricultural 35,859 40,153
Consumer loans 25,546 26,753
- -------------------------------------------------------------------------------------------
Total loans 304,996 300,226
Unearned income (1,573) (1,637)
- -------------------------------------------------------------------------------------------
Total loans -- net of unearned income $303,423 $298,589
- -------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, $2,654,000 of loans were considered nonaccrual loans
(loans on which interest income is recognized only as collected). At the end of
1992 there were $3,176,000 of loans classified nonaccrual.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1 $ 5,034 $ 3,955 $ 3,865
Provision charged to operating expenses 1,821 2,445 1,341
Recoveries 76 99 228
Loans charged off (1,373) (1,465) (1,479)
- -------------------------------------------------------------------------------------------
Balance at December 31 $ 5,558 $ 5,034 $ 3,955
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE_7
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 2,096 $ 1,987
Buildings and leasehold improvements 8,120 7,922
Equipment 7,233 5,913
- -----------------------------------------------------------------------------------------------------
Total premises and equipment 17,449 15,822
Accumulated depreciation and amortization (8,267) (7,694)
- -----------------------------------------------------------------------------------------------------
Premises and equipment, net $ 9,182 $ 8,128
- -----------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense on premises, equipment and leasehold
improvements amounted to $1,097,000 in 1993, $910,000 in 1992 and $1,037,000 in
1991.
Bancorp's affiliates lease certain bank premises and equipment under
various lease agreements. The initial terms of the branch banking leases range
from 5 to 20 years. Most of the leases on premises contain options which enable
the affiliates to renew the lease for periods of 5 to 20 years. In addition to
minimum rentals, certain leases have escalation clauses based upon price indices
and include provisions for additional payments to cover taxes, insurance and
maintenance.
Total rental expense for 1993, 1992 and 1991 was:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premises $308 $303 $283
Equipment 16 13 14
- -------------------------------------------------------------------------------------------
Total rental expense $324 $316 $297
- -------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, required minimum annual rentals due on noncancelable
operating leases having terms in excess of one year were $449,000. Minimum
annual rentals for each of the years 1994 through 1998 are $188,000, $94,000,
$38,000, $17,000 and $17,000, respectively.
NOTE_8
DEPOSITS
Included in interest-bearing deposits are certificates of deposit in
denominations of $100,000 or more which totaled $29,234,000 and $33,664,000 at
December 31, 1993 and 1992, respectively.
Interest on deposits consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-bearing demand accounts $ 5,304 $ 6,671 $ 7,502
Savings accounts 4,541 4,525 4,603
Certificates of deposit
($100,000 or more) 1,159 1,613 2,458
Other time deposits 5,715 8,754 12,474
- -------------------------------------------------------------------------------------------
Total interest on deposits $16,719 $21,563 $27,037
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
21
NOTE_9
SHORT-TERM BORROWINGS
Short-term borrowings, which consist primarily of securities sold under
agreements to repurchase and the U.S. Treasury demand note, were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amount outstanding at year-end $17,329 $14,019 $17,333
Weighted average interest rate at year-end 2.4% 2.2% 3.2%
Maximum amount outstanding
at any month-end $17,565 $17,474 $17,333
Average amount outstanding $13,537 $15,347 $12,114
Weighted average interest rate
during the year 2.3% 2.7% 4.7%
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE_10
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8.0% Mortgage note due November 30, 1995 $ 43 $ 62
9.5% Mortgage note due July 1, 1996 85 113
- -------------------------------------------------------------------------------------------
Total long-term debt $ 128 $ 175
- -------------------------------------------------------------------------------------------
</TABLE>
The 8% mortgage note, payable in monthly installments of $2,000, is secured by a
first deed of trust on bank premises which had a net book value of $185,000 at
December 31, 1993.
The 9.5% mortgage note, payable in monthly installments of $3,000 is
secured by a first deed of trust on real property. The property has a net book
value of $334,000 at December 31, 1993.
NOTE_11
PENSION AND PROFIT SHARING PLANS
Bancorp's banking affiliates sponsor defined benefit pension plans covering
substantially all employees. Benefits are based on years of service and the
employee's compensation during the last five years of employment. The Banks'
funding policies are to contribute the maximum amount deductible for federal
income tax purposes. Contributions provide not only for benefits attributed for
service to date, but also for those expected to be earned in the future. Net
pension cost for 1993, 1992 and 1991 includes the following components:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost-benefits earned during year $ 415 $ 402 $ 347
Interest cost on projected benefit obligation 364 304 340
Actual return on plan assets (403) (413) (851)
Net amortization and deferral (42) (40) 457
- -------------------------------------------------------------------------------------------
Net pension cost $ 334 $ 253 $ 293
- -------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.00% for 1993 and 7.75% for 1992
and 1991. The expected long-term rate of return on assets was 7.50% for 1993 and
8.00% for 1992 and 1991.
The following table sets forth the plans' funded status and amounts
recognized in Bancorp's financial position at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$3,763 and $2,810 in 1993 and 1992, respectively $ 4,123 $ 3,056
- -------------------------------------------------------------------------------------------
Projected benefit obligation for services rendered to date $ 6,187 $ 5,159
Plan assets at fair value, primarily listed stocks and fixed
income securities 5,729 5,426
- -------------------------------------------------------------------------------------------
Plan assets in excess of (less than) projected benefit
obligation (458) 267
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions (599) (950)
Prior service cost not yet recognized in net periodic pension
cost -- --
Unrecognized net obligation at January 1, 1987 being
recognized over 15 years (322) (362)
- -------------------------------------------------------------------------------------------
Accrued pension cost at December 31 $(1,379) $(1,045)
- -------------------------------------------------------------------------------------------
</TABLE>
Farmers National Bank of Maryland has a qualified noncontributory profit sharing
plan covering all employees who meet certain service requirements.
Contributions made to the plan for the years ended December 31, 1993,
1992 and 1991, were $673,000, $555,000, and $555,000, respectively.
NOTE_12
SUPPLEMENTAL RETIREMENT PLANS
Farmers National Bank of Maryland has entered into agreements with certain of
its executive officers to provide certain supplemental benefits upon their
retirement, death, or disability. The present value of these benefits is being
accrued over the number of years remaining to their respective retirement dates.
The amounts included in operating expenses for 1993, 1992, and 1991 were
$186,000, $134,000 and $211,000, respectively.
NOTE_13
STOCK OPTION PLAN
Bancorp's stockholders, at their meeting of April 28, 1992, approved a stock
option plan under which 50,000 shares of common stock have been reserved for
issuance to officers and key employees of Bancorp and its subsidiaries. Options
to purchase shares of common stock are granted at a price not less than the fair
market value of the stock at the date of grant and may extend for a period of up
to 10 years from the date of grant. To date, no options were granted under this
plan.
<PAGE>
22
NOTE_14
INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $3,886 $3,684 $2,619
State 278 186 747
- -------------------------------------------------------------------------------------------
Total current income taxes 4,164 3,870 3,366
- -------------------------------------------------------------------------------------------
Deferred:
Federal (496) (472) (227)
State (110) (104) (50)
- -------------------------------------------------------------------------------------------
Total deferred income taxes (606) (576) (277)
- -------------------------------------------------------------------------------------------
Total income taxes $3,558 $3,294 $3,089
- -------------------------------------------------------------------------------------------
</TABLE>
The components of deferred income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for loan losses $ (296) $ -- $ --
Deferred compensation (69) (60) (92)
Loan fees and costs (21) (212) 41
Pension expense (129) (97) (113)
Depreciation (11) (6) (5)
Loan income (31) -- --
Discount accretion (20) (50) (41)
Other, net (29) (151) (67)
- -------------------------------------------------------------------------------------------
Total deferred tax (benefit) $ (606) $ (576) $ (277)
- -------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of income taxes computed at the maximum statutory federal tax
rate to total income taxes is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
(DOLLARS IN THOUSANDS) AMOUNT AMOUNT AMOUNT
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax computed at statutory rate (34.0%) $ 4,442 $ 3,770 $ 3,413
Tax exempt interest income (1,125) (1,005) (887)
State income taxes, net of federal income tax benefit 111 54 460
Nondeductible provision for credit losses -- 367 22
Nondeductible interest expense 112 114 112
Other, net 18 (6) (31)
- -------------------------------------------------------------------------------------------
Total income taxes $ 3,558 $ 3,294 $ 3,089
- -------------------------------------------------------------------------------------------
Effective tax rate 27.2% 29.7% 30.8%
- -------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, net deferred tax assets total $3,832,000 and consist of
the following:
<TABLE>
<CAPTION>
DEFERRED TAX
-----------------
(DOLLARS IN THOUSANDS) ASSET LIABILITY
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses $2,052 $ --
Deferred compensation 655 --
Loan fees and costs 591 --
Pension expense 532 --
Depreciation -- 82
Loan income 76 --
Discount accretion -- 36
Net unrealized holding gains on securities
available for sale -- 2
Other 46 --
- -------------------------------------------------------------------------------------------
Total deferred taxes $3,952 $ 120
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE_15
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Bancorp's affiliated banks are party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments to
extend credit and standby letters of credit. The exposure to credit loss in the
event of nonperformance by the other party to these financial instruments is
represented by the contractual amount of the instruments. The same credit
policies are used in making commitments and conditional obligations as for
on-balance-sheet instruments.
The banking affiliates generally require collateral or other security to
support financial instruments with credit risk on the same basis as it does for
on-balance-sheet instruments. The amount of collateral or other security is
determined based on management's credit evaluation of the counterparty.
At December 31, 1993 and 1992 financial instruments whose contract
amounts represented credit risk included $4,407,000 and $2,804,000 of standby
letters of credit and $65,768,000 and $65,082,000 of commitments to extend
credit. Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to a customer. 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 amount does not necessarily represent future cash
requirements. Each customer's creditworthiness is evaluated on a case-by-case
basis.
NOTE_16
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures
about Fair Value of Financial Instruments," requires Bancorp to disclose fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Estimated fair values have
been determined by Bancorp using the best available data and an estimation
methodology suitable for each category of financial instruments. The methods and
assumptions used to estimate the fair value of each class of financial
instruments are discussed below. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In
<PAGE>
23
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of Bancorp.
CASH AND DUE FROM BANKS, INTEREST-BEARING TIME
DEPOSITS WITH BANKS AND FEDERAL FUNDS SOLD
For these instruments, the carrying amount approximates the fair value.
INVESTMENT SECURITIES AVAILABLE FOR SALE AND
HELD TO MATURITY
For these instruments the fair value is based on quoted market prices or dealer
quotes when available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOANS
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The remainder of the
loan portfolio has been valued using present value discounted cash flows. The
rates used in these present value calculations are current rates at which
similar loans would be made to borrowers with similar credit ratings.
NON-INTEREST BEARING DEPOSITS
The fair value of these instruments, by SFAS No. 107 definition, is the amount
payable on demand at the reporting date.
INTEREST-BEARING DEPOSITS
The fair value of interest-bearing demand deposits, savings deposits and money
market deposits with no defined maturity, by SFAS No. 107 definition, is the
amount payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using a present value discounted cash flow
with a discount rate approximating current market rates.
SHORT-TERM BORROWINGS
For these instruments, the carrying amount approximates the fair value.
LONG-TERM DEBT
For these instruments, estimates made by discounting the future cash flows using
rates currently available to Bancorp for debt with similar terms and remaining
maturities were used.
COMMITMENTS TO EXTEND CREDIT AND STANDBY AND
COMMERCIAL LETTERS OF CREDIT
For these instruments the fair values are based on the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The estimated fair values of Bancorp's financial instruments required to
be disclosed under SFAS No. 107:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------ ------------------
CARRYING FAIR CARRYING FAIR
(DOLLARS IN THOUSANDS) VALUE VALUE VALUE VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 30,460 $ 30,460 $ 30,282 $ 30,282
Interest-bearing time deposits with
banks 2,328 2,328 4,316 4,316
Federal funds sold 42,400 42,400 33,800 33,800
Investment securities:
Available for sale 100,639 100,639 -- --
Held to maturity 216,237 217,779 306,925 309,342
Loans 303,423 303,816 298,589 301,368
- -------------------------------------------------------------------------------------------
LIABILITIES
Noninterest-bearing demand deposits $ 84,680 $ 84,680 $ 78,268 $ 78,268
Interest-bearing demand deposits 204,481 204,481 203,074 203,074
Savings deposits 162,175 162,175 138,576 138,576
Time deposits 168,621 168,672 187,185 187,717
Short-term borrowings 17,329 17,329 14,019 14,019
Long-term debt 128 143 175 183
- -------------------------------------------------------------------------------------------
OFF-BALANCE-SHEET INSTRUMENTS
Credit risk financial instruments $25 $16
- -------------------------------------------------------------------------------------------
</TABLE>
NOTE_17
RELATED PARTY TRANSACTIONS
In the ordinary course of business, loans are made to officers and directors of
Bancorp and its affiliates. These loans are made on substantially the same terms
and conditions as those prevailing at the time for comparable transactions with
outsiders and are not considered to involve more than the normal risk of
collectibility. Direct and indirect loans outstanding to directors, executive
officers, principal shareholders, their associates and affiliates in excess of
an aggregate total of $60,000 each totaled $14,958,000 as of December 31, 1992.
During 1993 additions of $3,566,000, repayments of $4,163,000, and reductions of
$1,364,000 as a result of changes in directors, brought the total to $12,997,000
at year end.
<PAGE>
24
NOTE_18
PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Farmers National Bancorp (Parent Company
only) is as follows:
CONDENSED BALANCE SHEETS
----------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 43 $ 31
Securities purchased under agreements to resell 2,091 1,181
Investment securities -- fair value of $453 (1993) and $391
(1992) 453 387
Investment in bank subsidiaries 64,070 57,129
Investment in nonbank subsidiaries 1,435 1,411
Advance to subsidiary 2,650 2,350
Other assets 40 38
- -------------------------------------------------------------------------------------------
Total Assets $70,782 $62,527
- -------------------------------------------------------------------------------------------
LIABILITIES
Other liabilities $ 842 $ 694
- -------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 2,699 2,699
Surplus 29,728 29,728
Retained earnings 37,511 29,406
Net unrealized holding gains on investment securities
available for sale 2 --
- -------------------------------------------------------------------------------------------
Total Stockholders' Equity 69,940 61,833
- -------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $70,782 $62,527
- -------------------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
-----------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income:
Cash dividends from subsidiaries $ 3,995 $ 2,639 $ 2,371
Other income 16 19 28
- -------------------------------------------------------------------------------------------
Total Income 4,011 2,658 2,399
Interest and other expenses 108 114 97
- -------------------------------------------------------------------------------------------
Income before income tax benefit and equity in
undistributed income of subsidiaries 3,903 2,544 2,302
Income tax benefit 33 34 25
- -------------------------------------------------------------------------------------------
Income before equity in undistributed income of
subsidiaries 3,936 2,578 2,327
Equity in undistributed income of subsidiaries 5,572 5,216 4,623
- -------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 9,508 7,794 6,950
Cumulative effect of accounting change 1,431 -- --
- -------------------------------------------------------------------------------------------
Net Income $10,939 $ 7,794 $ 6,950
- -------------------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
---------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1993 1992 1991
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $10,939 $ 7,794 $ 6,950
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change (1,431) -- --
Equity in undistributed income of subsidiaries (5,572) (5,216) (4,623)
Net (increase) in advances to subsidiary (300) (300) --
Other, net 120 237 (9)
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,756 2,515 2,318
- -------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net (increase) in securities
purchased under agreements
to resell (910) (131) (125)
- -------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends (2,834) (2,375) (2,186)
- -------------------------------------------------------------------------------------------
Net increase in cash 12 9 7
Cash January 1 31 22 15
- -------------------------------------------------------------------------------------------
Cash December 31 $ 43 $ 31 $ 22
- -------------------------------------------------------------------------------------------
</TABLE>
The amount of dividends that Bancorp's affiliates could have paid to the holding
company without approval from bank regulators was $18,440,000 at December 31,
1993.
<PAGE>
25
REPORT OF MANAGEMENT
The management of Farmers National Bancorp has the responsibility for preparing
the accompanying financial statements, along with other information contained in
this annual report. The financial statements have been prepared in conformity
with generally accepted accounting principles appropriate in all material
respects to reflect events and transactions which have occurred and include
amounts which have been based upon management's best estimates and judgements.
The Board of Directors operating through its Audit Committee, which is
composed entirely of directors who are not officers of the Company or its
affiliates, provides oversight for the financial reporting process. The Audit
Committee annually recommends the appointment of an independent public
accountant and submits its recommendation to the Board of Directors, and to the
shareholders of Bancorp, for approval. The Audit Committee meets on a scheduled
basis with the independent public accountants and the internal auditor, approves
the overall scope of audit work and reviews audit reports and findings. The
independent public accountants and the internal auditor each have free access to
the Audit Committee, without management present, to discuss the results of their
audit work and their evaluations of the adequacy of internal control systems and
the quality of financial reporting.
The financial statements contained in this annual report have been audited
by the Company's independent public accounting firm, Stegman and Company, which
was given unrestricted access to all financial records and related data. The
Company believes that all representations made to the independent public
accountants during their audits were valid and appropriate. Their report on the
financial statements is presented herewith.
/s/ John M. Suit, II /s/ Louis A. Supanek
John M. Suit, II Louis A. Supanek
President and Vice President and
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Farmers National Bancorp
We have audited the accompanying consolidated balance sheets of Farmers
National Bancorp and Affiliates as of December 31, 1993 and 1992, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 financial position of Farmers
National Bancorp and Affiliates as of December 31, 1993 and 1992, and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, the Company adopted two
new accounting standards in 1993, changing its methods of accounting for income
taxes and investment securities.
/s/ Stegman & Company
Towson, Maryland
February 11, 1994
<PAGE>
26
DIRECTORS AND OFFICERS
FARMERS NATIONAL BANCORP
DIRECTORS
Jesse L. Adams
PRESIDENT
Terrace Garden Building Corp.
and Real Estate Investments
James D. Edwards
PRESIDENT
J.D. Edwards, Inc.
VICE PRESIDENT
SUMAD, Inc.
W. Calvin Gray, Jr.
PRESIDENT
Gray and Smith Builders, Inc.
and Gray Developers, Inc.
Louis Hyatt
PRESIDENT
Hyatt Real Estate
Edward B. Lauer
PRESIDENT
Riviera Beach SuperMarket, Inc.
and the Pasadena Investment Corp.
L. Tayloe Lewis, Jr.
DIRECTOR AND CHAIRMAN OF THE BOARD
The Caroline County Bank
RETIRED
Johnson & Lewis Insurance Co.
John B. Melvin
RETIRED CHAIRMAN OF THE BOARD
Coca-Cola Bottling Co. of
Annapolis, Maryland, Inc.
Cary L. Meredith, Jr.
RETIRED VICE PRESIDENT
Basil-Voges, Inc. (Insurance
brokerage)
M. Virginia Meredith
RETIRED ADMINISTRATIVE ASSISTANT
Anne Arundel County Department
of Health
W. Robert Newnam, Jr.
RETIRED FARMER
Joseph S. Quimby, Jr.
FARMER
Alexander V. Sandusky
RETIRED FROM DEPARTMENT OF
NATURAL RESOURCES
Charles L. Schelberg
CHAIRMAN OF THE BOARD
Raymond C. Shockley
DIRECTOR AND CHAIRMAN OF THE BOARD
Atlantic National Bank
ATTORNEY AT LAW
Moore, Shockley & Harrison, P.A.
William W. Simmons
RETIRED DIRECTOR AND VICE PRESIDENT
Fawcett Boat Supplies, Inc.
John M. Suit, II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Donald S. Taylor
ASSOCIATE
John M. Taylor Funeral Home, Inc.
OFFICERS
Charles L. Schelberg
CHAIRMAN OF THE BOARD
John M. Suit, II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Frank T. Lowman, III
VICE PRESIDENT
Joseph B. Riddleberger
VICE PRESIDENT
Louis A. Supanek
VICE PRESIDENT AND TREASURER
Norma K. Behlke
SECRETARY
FARMERS NATIONAL LAND
CORPORATION
- --------------------
DIRECTORS
Jesse L. Adams
W. Calvin Gray, Jr.
Louis Hyatt
Charles L. Schelberg
John M. Suit, II
<PAGE>
27
PRINCIPAL AFFILIATES
FARMERS NATIONAL BANK OF MARYLAND
ESTABLISHED 1805
ANNAPOLIS
5 Church Circle
91 Main Street, City Dock
Eastport Shopping Center
2015 West Street, Parole
101 Hillsmere Drive
Compass Way, Heritage
Harbour
ARNOLD
2 Arnold Road at Ritchie Highway
CENTREVILLE
102 Broadway
EDGEWATER
52 W. Central Avenue
Route 2 and Maryland Avenue
MILLINGTON
Cypress and Sassafras Streets
PASADENA
3030 Mountain Road
SEVERNA PARK
Severna Park Shopping Village
Benfield and Jumpers Hole Road
WAYSON'S CORNER
Routes 4 and 408, Lothian
DIRECTORS:
Jesse L. Adams
James D. Edwards
W. Calvin Gray, Jr.
Louis Hyatt
Edward B. Lauer
John B. Melvin
Cary L. Meredith, Jr.
W. Robert Newnam, Jr.
Alexander V. Sandusky
Charles L. Schelberg
William W. Simmons
John M. Suit, II
Donald S. Taylor
DIRECTOR EMERITUS:
Joseph N. Shumate
EXECUTIVE OFFICERS:
John M. Suit, II
President and CEO
Frank T. Lowman, III
Executive Vice President
Louis A. Supanek
Executive Vice President,
Cashier and Chief
Financial Officer
Carl O. Brudin, Jr.
Senior Vice President
and Senior Trust Officer
Phillip R. Forman
Senior Vice President,
Branch Administration
Karen B. Klingelhoeffer
Senior Vice President
and Controller
Sharon L. Kreske
Senior Vice President,
Bank Operations
Twaun D. Oakes
Senior Vice President,
Loan Administration
Ross J. Selby
Senior Vice President,
Chief Lending Officer
<TABLE>
<CAPTION>
BALANCE SHEET
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS LIABILITIES
Cash and due from banks $ 31,209 Total deposits $ 544,870
Federal funds sold 37,400 Short-term borrowings 22,459
Investment securities 292,946 Other liabilities 5,351
Loans 255,797 Common stock 3,000
Allowance for credit loss (4,825) Surplus 3,716
Other assets 15,999 Retained earnings 49,130
--------- ---------
Total assets $ 628,526 Total liabilities and equity $ 628,526
- ------------------------------------------------- -------------------------------------------------
Net income for year $ 9,873
-------------------------------------------------
</TABLE>
<PAGE>
28
THE CAROLINE COUNTY BANK
ESTABLISHED 1902
Greensboro
Sunset and Main Street
DIRECTORS:
Charles E. Emerson, Jr.
Edgar B. Harman
W. Lawrence Hignutt, Sr.
L. Tayloe Lewis, Jr.
Frank T. Lowman, III
R. Irving Ober, Sr.
Joseph B. Riddleberger
EXECUTIVE OFFICERS:
J. Richard Harris, Jr.
President and CEO
Peggy M. Butler
Cashier
Robert L. Ebling
Loan Officer
<TABLE>
<CAPTION>
BALANCE SHEET
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS LIABILITIES
Cash and due from banks $ 788 Total deposits $ 24,533
Federal funds sold 3,200 Short-term borrowings --
Investment securities 10,305 Other liabilities 127
Loans 14,013 Common stock 196
Allowance for credit loss (244) Surplus 1,000
Other assets 647 Retained earnings 2,853
--------- ---------
Total assets $ 28,709 Total liabilities and equity $ 28,709
- ----------------------------------------------- -----------------------------------------------
Net income for year $ 512
-----------------------------------------------
</TABLE>
ATLANTIC NATIONAL BANK
ESTABLISHED 1973
OCEAN CITY
4604 Coastal Highway
OCEAN PINES
11111 Racetrack Road
SALISBURY
528 Riverside Drive
2400 N. Salisbury Blvd.
DIRECTORS:
C.A. Anthony
John P. Charrier, Jr.
Robert A. Eaton
C. Terry Hough
Philip A. Long
John W. McCabe
Alfred V. Melson
Shirley Phillips
James Y. Pigg
R. Hursey Porter, Jr.
Raymond C. Shockley
Adam L. Showell
D. Timothy Stoner
EXECUTIVE OFFICERS:
John P. Charrier, Jr.
President and CEO
Colleen W. Bunting
Senior Vice President
Donna M. Savko
Senior Vice President/Cashier
H. Stephen Price
Senior Vice President
<TABLE>
<CAPTION>
BALANCE SHEET
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS LIABILITIES
Cash and due from banks $ 3,226 Total deposits $ 53,045
Federal funds sold 4,545 Short-term borrowings 134
Investment securities 13,172 Other liabilities 407
Loans 34,987 Common stock 428
Allowance for credit loss (488) Surplus 886
Other assets 1,933 Retained earnings 2,475
--------- ---------
Total assets $ 57,375 Total liabilities and equity $ 57,375
- ----------------------------------------------- -----------------------------------------------
Net income of year $ 588
-----------------------------------------------
</TABLE>
<PAGE>
SHAREHOLDER INFORMATION
ANNUAL MEETING TRANSFER AGENT/DIVIDEND
The annual shareholders DISBURSING AGENT
meeting will be held Farmers National Bank of
Tuesday, April 26, 1994, Maryland
at 11:00 a.m. in the Bay Trust Department
Ridge Inn, Herndon Ave., 5 Church Circle
Annapolis, MD. All Annapolis, MD 21401
shareholders are invited
to attend CERTIFIED PUBLIC
ACCOUNTANTS
FORM 10-K Stegman & Company
A copy of the Professional Association
Corporation's Form 10-K Towson, MD
Annual Report as filed
with the Securities and GENERAL INFORMATION
Exchange Commission may For additional
be obtained by information about
contacting: Farmers National Bancorp
Mr. Louis A. Supanek or its affiliates please
Vice President and contact:
Treasurer Ms. Cheryl Anderson-Neff
Farmers National Bancorp Investor Relations
5 Church Circle Farmers National Bancorp
Annapolis, MD 21401 5 Church Circle
Phone (410) 626-2211 Annapolis, MD 21401
Phone (410) 626-2221
<PAGE>
Exhibit 22 SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation
Farmers National Bank of Maryland United States
The Caroline County Bank Maryland
Atlantic National Bank United States
Farmers National Land Corporation Maryland
Farmers National Mortgage Corporation Maryland
<PAGE>
EXHIBIT 24 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Form 10-K
of Farmers National Bancorp for the year ended December 31, 1993 of
our report dated February 11, 1994 which appears on page 25 of the
1993 Annual Report to Stockholders.
STEGMAN & COMPANY
/s/ Stegman & Company
TOWSON, MARYLAND
March 28, 1994
<PAGE>
EXHIBIT 25 POWER OF ATTORNEY
FARMERS NATIONAL BANCORP POWER OF ATTORNEY
We, the undersigned Directors of Farmers National Bancorp, a
Maryland corporation ("Bancorp"), hereby constitute and appoint
Charles L. Schelberg our true and lawful agent and
attorney-in-fact with the full power to sign for us, in our names
and in the capacities indicated below, and Annual Report on Form 10-K,
for the fiscal year ended December 31, 1993, for the purpose of filing
an Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Signature Title Date
\s\ L. Tayloe Lewis, Jr.
_____________________________ Director March 8, 1994
L. Tayloe Lewis, Jr.
\s\ Louis Hyatt
_____________________________ Director March 8, 1994
Louis Hyatt
\s\ Alexander V. Sandusky
_____________________________ Director March 8, 1994
Alexander V. Sandusky
\s\ John M. Suit, II
_____________________________ Director March 8, 1994
John M. Suit II
\s\ Raymond C. Shockley
_____________________________ Director March 8, 1994
Raymond C. Shockley
\s\ Joseph S. Quimby
_____________________________ Director March 8, 1994
Joseph S. Quimby
\s\ John B. Melvin
_____________________________ Director March 8, 1994
John B. Melvin
\s\ W. Robert Newnam
_____________________________ Director March 8, 1994
W. Robert Newnam
\s\ M. Virginia Meredith
_____________________________ Director March 8, 1994
M. Virginia Meredith
\s\ Donald S. Taylor
_____________________________ Director March 8, 1994
Donald S. Taylor
\s\ Cary L. Meredith
_____________________________ Director March 8, 1994
Cary L. Meredith
\s\ William W. Simmons
_____________________________ Director March 8, 1994
William W. Simmons
\s\ James D. Edwards
_____________________________ Director March 8, 1994
James D. Edwards
\s\W. Calvin Gray, Jr.
_____________________________ Director March 8, 1994
W. Calvin Gray, Jr.
