FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 1998 Commission file number 2-80339
FARMERS NATIONAL BANC CORP.
(Exact name of registrant as specified in its charter)
OHIO 34-1371693
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
20 South Broad Street
Canfield, OH 44406
(Address of principal executive offices) (Zip Code)
(330) 533-3341
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at June 30, 1998
Common Stock, No Par Value 3,540,624 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
Included in Part I of this report:
Farmers National Banc Corp. and Subsidiary
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-11
PART II - OTHER INFORMATION
Other Information and Signatures 11-13
<TABLE>
CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
<CAPTION>
June 30, December 31,
1998 1997
(In Thousands of Dollars)
<S> <C> <C>
ASSETS
Cash & due from banks $15,332 $13,480
Federal funds sold 562 5,702
TOTAL CASH AND CASH EQUIVALENTS 15,894 19,182
Securities available for sale 69,250 66,620
Other securities 2,215 1,686
Loans 298,266 275,094
Less allowance for credit losses 3,616 3,429
NET LOANS 294,650 271,665
Premises and equipment, net 6,136 6,025
Other assets 3,498 3,271
$391,643 $368,449
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits (all domestic):
Noninterest-bearing $27,171 $26,282
Interest-bearing 276,501 279,548
TOTAL DEPOSITS 303,672 305,830
U. S. Treasury interest-bearing demand note 818 559
Securities sold under repurchase agreements 18,702 14,659
Short-term borrowings 21,974 0
Long-term borrowings 754 4,612
Other liabilities and deferred credits 1,815 1,866
TOTAL LIABILITIES 347,735 327,526
Stockholders Equity:
Common Stock - no par value; authorized 5,000,000
shares; issued and outstanding 3,540,624 in 1998
and 3,491,137 in 1997 26,638 24,792
Retained earnings 16,995 15,717
Unrealized appreciation on debt securities,
net of applicable income taxes 275 414
TOTAL STOCKHOLDERS EQUITY 43,908 40,923
$391,643 $368,449
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
(In Thousands except Per Share Data)
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $6,140 $5,797 $12,069 $11,474
Interest and dividends on securities:
Taxable interest 888 792 1,779 1,367
Nontaxable interest 137 114 265 226
Dividends 29 25 58 49
Interest on federal funds sold 86 114 168 262
TOTAL INTEREST INCOME 7,280 6,842 14,339 13,378
INTEREST EXPENSE
Deposits 2,867 2,709 5,787 5,356
Borrowings 268 268 502 455
TOTAL INTEREST EXPENSE 3,135 2,977 6,289 5,811
NET INTEREST INCOME 4,145 3,865 8,050 7,567
Provision for credit losses 210 200 420 350
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 3,935 3,665 7,630 7,217
OTHER INCOME
Service charges on deposit accounts 295 288 581 564
Investment security gains 0 0 5 3
Other operating income 128 114 256 198
TOTAL OTHER INCOME 423 402 842 765
OTHER EXPENSES
Salaries and employee benefits 1,284 1,256 2,565 2,567
Net occupancy expense of premises 142 138 282 281
Furniture and equipment expense,
including depreciation 126 121 267 251
Intangible and other taxes 145 134 298 275
Other operating expenses 756 659 1,474 1,371
TOTAL OTHER EXPENSES 2,453 2,308 4,886 4,745
INCOME BEFORE FEDERAL INCOME TAXES 1,905 1,759 3,586 3,237
FEDERAL INCOME TAXES 612 572 1,151 1,041
NET INCOME $1,293 $1,187 $2,435 $2,196
* NET INCOME PER SHARE $0.37 $0.35 $0.69 $0.65
<FN>
*Adjusted to reflect weighted average shares outstanding
and 2% stock dividend, without audit and before adjustments.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
Six Months Ended
June 30, June 30,
1998 1997
(In Thousands of Dollars)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Interest received $14,782 $13,626
Fees and commissions received 828 763
Interest paid (6,358) (5,756)
Cash paid to suppliers and employees (4,219) (4,760)
Income taxes paid (1,103) (1,005)
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,930 2,868
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 8,927 8,578
Proceeds from sales of investment securities available for sale 1,023 103
Purchases of other securities and securities available for sale (13,468) (25,429)
Net increase in loans made to customers (23,130) (4,525)
Purchases of premises and equipment (327) (98)
NET CASH USED IN INVESTING ACTIVITIES (26,975) (21,371)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 5,240 (2,103)
Net increase (decrease) in time deposits (3,491) 7,934
Net increase in Federal Home Loan Bank borrowings 15,016 8,594
Net increase in federal funds purchased 3,100 0
Dividends paid (1,954) (970)
Proceeds from sale of common stock 1,846 1,478
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,757 14,933
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,288) (3,570)
CASH AND CASH EQUIVALENTS
Beginning of period 19,182 18,969
End of period $15,894 $15,399
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
Net income $2,435 $2,196
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 206 197
Amortization and accretion 681 572
Provision for credit losses 420 350
Gain on sale of investment securities (5) (3)
Decrease (Increase) in prepaid expenses 298 (286)
Other (105) (158)
NET CASH PROVIDED BY OPERATING ACTIVITIES $3,930 $2,868
</TABLE>
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management Representation:
The financial statements for June 30, 1998 and 1997 have
been prepared by management without audit and, therefore, have
not been certified by our Independent Certified Public
Accountants.
In the opinion of the management of the registrant, the
accompanying consolidated financial statements for the six month
period ending June 30, 1998 and 1997 include all adjustments,
consisting of only normal recurring adjustments necessary for a
fair statement of the results for the periods.
Notes:
(In Thousands of Dollars)
Six Months Ended
June. 30, June 30,
1998 1997
(1) Federal Income Tax
Income before Federal Income Tax $3,586 $3,237
Less nontaxable interest and dividends 265 226
Taxable Income 3,321 3,011
Federal Income Tax $1,151 $1,041
(2) Stockholders Equity Six Months Ended
June 30, 1998
(In Thousands of Dollars)
Common Stock
Balance 1/1/98 $24,792
49,487 shares sold 1,846
Balance 6/30/98 26,638
Retained Earnings
Balance 1/1/98 15,717
Net Income 2,435
Dividends Declared: $.33 Cash dividends on common
stock (1,157)
Balance 6/30/98 16,995
Unrealized Appreciation On Debt Securities
Balance 1/1/98 414
Net change in unrealized depreciation on debt
securities, net of income taxes (139)
Balance 6/30/98 275
Total Stockholders Equity at 6/30/98 $43,908
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following financial review presents an analysis of the
assets and liability structure of the Corporation and a
discussion of the results of operations for each of the periods
presented in this quarterly report, liquidity, capital and
credit quality. Certain statements in this report that relate
to Farmers National Banc Corp.'s plans, objectives, or future
performance may be deemed to be forward-looking statements
within the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations.
Actual strategies and results in future periods may differ
materially from those currently expected because of various
risks and uncertainties.
Results of Operations
The Corporation's net income for the first six months of
1998 was $2.435 million, or $.69 per share. This compares
favorably to the $2.196 million, or $.65 per share reported for
the first six months of 1997. Net income for the second quarter
of 1998 was $1.293 million or $.37 per share, which is a 8.9%
increase compared with the $1.187 million or $.35 per share
earned during the same period last year. Return on average
assets and return on average equity for the first six months of
1998 were 1.31% and 11.33% respectively, compared to 1.28% and
12.33% for the same period in 1997.
The increase in net income for the first six months of 1998
was primarily the result of an increase in net interest income.
The Corporation's net interest income increased $483 thousand,
or 6.38% from $7.567 million for 1997 to $8.050 million for the
same period in 1998. Total interest income is up 7.2% compared
to the same six months of last year. Some of this increase is a
result of an increase in loans outstanding. Increasing demand
in the Corporation's commercial real estate and residential real
estate loan products has increased average balances in the total
loan portfolio by 4.9%. This growth has contributed to the
increase in loan income of $595 thousand or 5.2%. Funds not
used for loan growth have been used to purchase investment
securities. The Corporation's average balance of securities
available for sale has increased 21.1% from June, 1997 to June, 1998.
This growth has increased income on securities by $366 thousand
or 19.22%, comparing the first six months of 1998 to the first
six months of 1997. Total interest expense is 8.23% higher for
the half of 1998 compared to the first half of 1997. This
increase is the result of growth of 8.7% in the average balance
of time deposits, as well as an overall increase in the rates
paid on interest-bearing liabilities.
Provision for credit losses increased from $350 thousand in
the first six months of 1997 to $420 thousand in the first six
months of 1998. The provision was increased to cover the growth
of balances in the bank's loan portfolio.
Other income increased 10.1% from $765 thousand in 1997 to
$842 thousand in 1998, as a result of increased fees from bank
services. The Corporation's total other expenses for the first
six months of 1998 increased 3.0% from $4.745 million in 1997
to $4.886 million in 1998. The increase in other operating
expenses is due primarily to asset growth and the increased
volume of the operations of the bank. Management will continue
to closely monitor and keep the increases in noninterest
expenses to a minimum.
Liquidity
The Corporation maintains, in the opinion of management,
liquidity sufficient to satisfy depositors' requirements and
meet the credit needs of customers. The Corporation depends on
its ability to maintain its market share of deposits as well as
acquiring new funds. The Corporation's ability to attract
deposits and borrow funds depends in large measure on its
profitability, capitalization and overall financial condition.
Principal sources of liquidity for the Corporation include
assets considered relatively liquid such as short-term
investment securities, federal funds sold and cash and due from
banks.
Cash flows generated from operating activities increased to
$3.930 million compared to $2.868 million for the same period in
1997. This increase of $1.062 million is primarily the result
of increased levels of interest income and a decrease in
non-interest expenses. Net cash flows used in investing
activities amounted to $26.975 million. Most of these funds
were used to fund new loans made to customers, which increased
$23.130 million during the first six months of 1998.
During the quarter ended June 30, 1998, approximately $17.5
million in new loans were made to customers for the purpose of
purchasing stock in a local savings and loan institution's
initial public offering. As of the July 31, 1998, repayments
have reduced the balance on these loans from $17.5 million to
$3.4 million.
Net cash flows provided by financing activities were
$19.757 million compared to $14.933 million in 1997. $15.016
million of funds were generated from an increase in Federal
Home Loan Bank Borrowings, which were used to fund the loan
increase.
Capital Resources
The capital management function is a continuous process
which consists of providing capital for both the current
financial position and the anticipated future growth of the
Corporation. As of June 30, 1998, the corporation's total
risk-based capital ratio stood at 17.38%, and the Tier I
risk-based capital ratio and Tier I leverage ratio were at
16.13% and 11.60%, respectively. Regulations established by
the Federal Deposit Insurance Corporation Improvement Act
require that for a bank to be considered well capitalized,
it must have a total risk-based capital ratio of 10%, a Tier I
risk-based capital ratio of 6% and a Tier I leverage ratio of 5%.
Loan Portfolio
The following shows the composition of loans at the dates
indicated:
(In Thousands of Dollars)
June 30, Dec. 31,
1998 1997
Commercial, financial and agricultural $11,498 $10,784
Residential mortgage loans 112,365 108,077
Nonresidential mortgage loans 42,667 39,902
Installment loans to individuals 131,736 116,331
Total loans $298,266 $275,094
Risk Elements
The following table sets forth aggregate loans in each of the
following categories for the dates indicated:
(In Thousands of Dollars)
June 30, Dec. 31,
1998 1997
Loans accounted for on a nonaccrual basis $400 $493
Loans contractually past due 90 days or
more as to interest or principal payments
(not included in nonaccrual loans above) 317 402
Loans considered troubled debt restructurings
(not included in nonaccrual or contractually
past due above) 0 0
Management knows of no loans not included in the table above
where serious doubt exists as to the ability of the borrower to
comply with the current loan repayment terms.
The following shows the amounts of contracted interest income
and interest income reflected in income on loans accounted for
on a nonaccrual basis and loans considered troubled debt
restructuring for the periods indicated:
(In Thousands of Dollars)
June 30, Dec. 31,
1998 1997
Gross interest that would have been recorded
if the loans had been current in accordance
with their original terms $11 $9
Interest income included in income on the loans 4 13
A loan is placed on a nonaccrual basis whenever sufficient
information is received to question the collectibility of the
loan. Generally, once a loan is placed on a nonaccrual basis,
interest that may be accrued and not collected on the loan is
charged against earnings.
As of June 30, 1998, there were no concentrations of loans
exceeding 10% of total loans which are not disclosed as a
category of loans. As of that date also, there are no other
interest-earning assets that are either nonaccrual, past due or
restructured.
Summary of Credit Loss Experience
The following is an analysis of the allowance for credit losses
for the periods indicated:
(In Thousands of Dollars)
Six Months Year
Ended Ended
June 30, Dec. 31,
1998 1997
Balance at beginning of period $3,429 $3,198
Loan losses:
Commercial, financial & agricultural (21) 0
Real estate - mortgage 0 0
Installment loans to individuals (365) (824)
(386) (824)
Recoveries on previous loan losses:
Commercial, financial & agricultural 0 3
Real estate - mortgage 4 40
Installment loans to individuals 149 157
153 200
Net loan losses (233) (624)
Provision charged to operations (1) 420 855
Balance at end of period $3,616 $3,429
Ratio of net credit losses to average net
loans outstanding .08% .23%
(1) The provision for possible credit losses charged to
operating expense is based on management's judgment after taking
into consideration all factors connected with the collectibility
of the existing loan portfolio. Management evaluates the loan
portfolio in light of economic conditions, changes in the nature
and volume of the loan portfolio, industry standards and other
relevant factors. Specific factors considered by management in
determining the amounts charged to operating expenses include
previous credit loss experience, the status of past due interest
and principal payments, the quality of financial information
supplied by loan customers and the general condition of the
industries in the community to which loans have been made.
The allowance for possible credit losses has been allocated
according to the amount deemed to be reasonably necessary to
provide for the possibility of losses being incurred within the
following categories of loans as of the dates indicated.
(In Thousands of Dollars)
June 30, Dec. 31,
Types of Loans 1998 1997
Commercial, financial & agricultural $993 $1,928
Real estate - mortgage 1,090 275
Installment 1,533 1,226
Total $3,616 $3,429
The allocation of the allowance as shown above should not be
interpreted as an indication that charge-offs in 1998 will occur
in the same proportions or that the allocation indicates future
charge-off trends. Furthermore, the portion allocated to each
loan category is not the total amount available for future
losses that might occur within such categories since the total
allowance is a general allowance applicable to the entire
portfolio.
The percentage of loans in each category to total loans is
summarized as follows:
June 30, Dec. 31,
Types of Loans 1998 1997
Commercial, financial & agricultural 3.9% 3.9%
Residential mortgage loans 37.7% 39.3%
Nonresidential mortgage loans 14.3% 14.5%
Installment loans to individuals 44.1% 42.3%
100.0% 100.0%
Year 2000
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Corporation's programs that have
time sensitive software may recognize the date as the year 1900
rather than the year 2000. This could result in a major system
failure or miscalculations. The Federal Financial Institutions
Examination Council recognizes five phases that banks must
complete to achieve Year 2000 readiness: 1) Awareness of the
potential risks associated with Year 2000; 2) Assessment of all
information and environmental systems needing enhancements;
3) Renovation of the systems that are not Year 2000 ready;
4) Validation of the renovated systems to assure Year 2000
readiness; and 5)Implementation of the renovated product into
the ongoing operations. The Corporation has completed the
Awareness, Assessment and Renovation phases and is currently in
the process of validating it's core processing systems for Year
2000 readiness. At this time it is not expected that expenses to
address year 2000 issues will materially impact future operating
results. The Corporation is in the process of completing a year
2000 contingency plan to address the possible risks that may be
faced within and outside of the Corporation's control.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which
the registrant or its subsidiary is a party, or of which any of
their property is the subject, except proceedings which arise in
the ordinary course of business. In the opinion of management,
pending legal proceedings will not have a material effect on the
consolidated financial position of the registrant and its
subsidiary.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed or incorporated by
references as part of this report:
2. Not applicable.
3(i). Not applicable.
3(ii). Not applicable.
4. The registrant agrees to furnish to the Commission
upon request copies of all instruments not filed herewith
defining the rights of holders of long-term debt of the registrant
and its subsidiaries.
10. Not applicable.
11. Not applicable.
15. Not applicable.
18. Not applicable.
19. Not applicable.
22. Not applicable.
23. Not applicable.
24. Not applicable.
27. Financial Data Schedule (filed herewith)
99. Not applicable.
(b) - Reports on Form 8-K
No reports on Form 8-K were filed for the six months ended
June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
FARMERS NATIONAL BANC CORP.
Dated: 8/13/98
/s/Frank L. Paden
President and Secretary
Dated: 8/13/98
/s/Carl D. Culp
Executive Vice President
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000709337
<NAME> FARMERS NATIONAL BANC CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 15,332
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 562
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,250
<INVESTMENTS-CARRYING> 2,215
<INVESTMENTS-MARKET> 2,215
<LOANS> 298,266
<ALLOWANCE> 3,616
<TOTAL-ASSETS> 391,643
<DEPOSITS> 303,672
<SHORT-TERM> 41,494
<LIABILITIES-OTHER> 1,815
<LONG-TERM> 754
0
0
<COMMON> 26,638
<OTHER-SE> 17,270
<TOTAL-LIABILITIES-AND-EQUITY> 391,643
<INTEREST-LOAN> 12,069
<INTEREST-INVEST> 2,270
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,339
<INTEREST-DEPOSIT> 5,787
<INTEREST-EXPENSE> 6,289
<INTEREST-INCOME-NET> 8,050
<LOAN-LOSSES> 420
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 4,886
<INCOME-PRETAX> 3,586
<INCOME-PRE-EXTRAORDINARY> 3,586
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,435
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
<YIELD-ACTUAL> 8.14
<LOANS-NON> 400
<LOANS-PAST> 317
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,429
<CHARGE-OFFS> 386
<RECOVERIES> 153
<ALLOWANCE-CLOSE> 3,616
<ALLOWANCE-DOMESTIC> 3,616
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
