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 Sept. 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 September 30, 1998
Common Stock, No Par Value 3,633,890 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>
September 30 December 31,
1998 1997
(In Thousands of Dollars)
<S> <C> <C>
ASSETS
Cash & due from banks $12,155 $13,480
Federal funds sold 4,040 5,702
TOTAL CASH AND CASH EQUIVALENTS 16,195 19,182
Securities available for sale 67,886 66,620
Other securities 2,586 1,686
Loans 286,070 275,094
Less allowance for credit losses 3,666 3,429
NET LOANS 282,404 271,665
Premises and equipment, net 6,502 6,025
Other assets 3,419 3,271
$378,992 $368,449
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits (all domestic):
Noninterest-bearing $26,430 $26,282
Interest-bearing 281,405 279,548
TOTAL DEPOSITS 307,835 305,830
U. S. Treasury interest-bearing demand note 273 559
Securities sold under repurchase agreements 18,530 14,659
Short-term borrowings 3,774 0
Long-term borrowings 713 4,612
Other liabilities and deferred credits 1,891 1,866
TOTAL LIABILITIES 333,016 327,526
Stockholders Equity:
Common Stock - no par value; authorized 5,000,000
shares; issued and outstanding 3,633,890 in 1998
and 3,491,137 in 1997 30,672 24,792
Retained earnings 14,650 15,717
Unrealized appreciation on debt securities,
net of applicable income taxes 654 414
TOTAL STOCKHOLDERS EQUITY 45,976 40,923
$378,992 $368,449
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30 September 30 September 30 September 30
1998 1997 1998 1997
(In Thousands except Per Share Data)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $6,286 $6,039 $18,355 $17,513
Interest and dividends on securities:
Taxable interest 888 810 2,667 2,177
Nontaxable interest 136 115 401 340
Dividends 39 29 97 78
Interest on federal funds sold 65 114 233 376
TOTAL INTEREST INCOME 7,414 7,107 21,753 20,484
INTEREST EXPENSE
Deposits 2,870 2,813 8,657 8,168
Borrowings 314 330 816 786
TOTAL INTEREST EXPENSE 3,184 3,143 9,473 8,954
NET INTEREST INCOME 4,230 3,964 12,280 11,530
Provision for credit losses 210 240 630 590
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 4,020 3,724 11,650 10,940
OTHER INCOME
Service charges on deposit accounts 301 304 882 869
Investment security gains 0 3 5 6
Other operating income 137 126 393 324
TOTAL OTHER INCOME 438 433 1,280 1,199
OTHER EXPENSES
Salaries and employee benefits 1,284 1,239 3,849 3,806
Net occupancy expense of premises 148 139 430 420
Furniture and equipment expense,
including depreciation 136 124 403 374
Intangible and other taxes 134 128 432 403
Other operating expenses 780 666 2,254 2,038
TOTAL OTHER EXPENSES 2,482 2,296 7,368 7,041
INCOME BEFORE FEDERAL INCOME TAXES 1,976 1,861 5,562 5,098
FEDERAL INCOME TAXES 637 606 1,788 1,647
NET INCOME $1,339 $1,255 $3,774 $3,451
* NET INCOME PER SHARE $0.37 $0.36 $1.05 $0.99
<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
<CAPTION>
Nine Months Ended
September 30 September 30
1998 1997
(In Thousands of Dollars)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Interest received $23,285 $20,858
Fees and commissions received 1,262 1,193
Interest paid (9,542) (8,895)
Cash paid to suppliers and employees (6,723) (6,817)
Income taxes paid (1,746) (1,611)
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,536 4,728
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 10,536 10,333
Proceeds from sales of investment securities available for sale 1,023 2,105
Purchases of other securities and securities available for sale (14,322) (27,133)
Net increase in loans made to customers (12,366) (7,787)
Purchases of premises and equipment (803) (214)
NET CASH USED IN INVESTING ACTIVITIES (15,932) (22,696)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 3,844 (3,895)
Net increase in time deposits 2,030 16,061
Net increase (decrease) in Federal Home Loan Bank borrowings (125) 3,594
Dividends paid (2,138) (1,519)
Proceeds from sale of common stock 2,798 2,166
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,409 16,407
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,987) (1,561)
CASH AND CASH EQUIVALENTS
Beginning of period 19,182 18,969
End of period $16,195 $17,408
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
Net income $3,774 $3,451
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 310 295
Amortization and accretion 1,728 876
Provision for credit losses 630 590
Gain on sale of investment securities (5) (5)
Decrease (Increase) in prepaid expenses 153 (166)
Other (54) (313)
NET CASH PROVIDED BY OPERATING ACTIVITIES $6,536 $4,728
</TABLE>
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management Representation:
The financial statements for September 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 nine
month period ending September 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)
Nine Months Ended
Sept. 30, Sept. 30,
1998 1997
(1) Federal Income Tax
Income before Federal Income Tax $5,562 $5,098
Less nontaxable interest and dividends 401 340
Taxable Income 5,161 4,758
Federal Income Tax $1,788 $1,647
(2) Stockholders Equity Nine Months Ended
September 30, 1998
(In Thousands of Dollars)
Common Stock
Balance 1/1/98 $24,792
71,500 shares sold 2,798
71,253 shares issued as a stock dividend 3,082
Balance 9/30/98 $30,672
Retained Earnings
Balance 1/1/98 15,717
Net Income 3,774
Dividends Declared: $.50 Cash dividends on
common stock (1,759)
Stock Dividend (3,082)
Balance 9/30/98 14,650
Unrealized Appreciation On Debt Securities
Balance 1/1/98 414
Net change in unrealized depreciation on
debt securities, net of income taxes 240
Balance 9/30/98 654
Total Stockholders Equity at 9/30/98 $45,976
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 nine months of
1998 was $3.774 million, or $1.05 per share. This compares
favorably to the $3.451 million, or $.99 per share reported for
the first nine months of 1997. Net income for the third quarter
of 1998 was $1.339 million or $.37 per share,
which is a 6.7% increase compared with the $1.255 million or
$.36 per share earned during the same period last year. Return
on average assets and return on average equity for the first
nine months of 1998 were 1.34% and 11.27% respectively, compared
to 1.32% and 12.58% for the same period in 1997.
The increase in net income for the first nine months of
1998 was primarily the result of an increase in net interest
income. The Corporation's net interest income increased $750
thousand, or 6.50% from $11.530 million for 1997 to $12.280
million for the same period in 1998. Total interest income is
up 6.2% compared to the same nine months of last year. Some of
this increase is a result of the growth 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 5%. This growth has
contributed to the increase in loan income of $842 thousand or
4.8%. 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 24.3% from
September, 1997 to September, 1998. This growth has increased
income on securities by $427 thousand or 14.37%, comparing the
first nine months of 1998 to the first nine months of 1997.
Total interest expense is 5.8% higher for the first nine months
of 1998 compared to the first nine months of 1997. This
increase is the result of growth of 6.2% 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 $590 thousand in
the first nine months of 1997 to $630 thousand in the first
nine months of 1998. The provision was increased to cover the
growth of balances in the bank's loan portfolio.
Other income increased 6.7% from $1.199 million in 1997 to
$1.280 million in 1998, as a result of increased fees from bank
services. The Corporation's total other expenses for the first
nine months of 1998 increased 4.6% from $7.041 million in 1997
to $7.368 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
$6.536 million compared to $4.728 million for the same period in
1997. This increase of $1.808 million is primarily the result
of increased levels of interest income. Net cash flows used in
investing activities amounted to $15.932 million. Most of these
funds were used to purchase investment securities, which
increased 13.78% in the last twelve months, and to fund loans
made to customers, which increased 5% since September 30, 1997.
Net cash flows provided by financing activities were $6.409
million in 1998 compared to $16.407 million in 1997. $5.874
million of these funds in 1998 and $12.166 million in 1997 were
generated from increases in customer deposits.
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 September 30, 1998, the corporation's total
risk-based capital ratio stood at 18.82%, and the Tier I
risk-based capital ratio and Tier I leverage ratio were at
17.57% and 11.97%, 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)
Sept. 30, Dec. 31,
1998 1997
Commercial, financial and agricultural $9,922 $10,784
Residential mortgage loans 112,770 108,077
Nonresidential mortgage loans 42,891 39,902
Installment loans to individuals 120,487 116,331
Total loans $286,070 $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)
Sept. 30, Dec. 31,
1998 1997
Loans accounted for on a nonaccrual basis $716 $493
Loans contractually past due 90 days or
more as to interest or principal payments
(not included in nonaccrual loans above) 374 402
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)
Sept. 30, Dec. 31,
1998 1997
Gross interest that would have been recorded
if the loans had been current in accordance
with their original terms $10 $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 September 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)
Nine Months Year
Ended Ended
Sept. 30, Dec. 31,
1998 1997
Balance at beginning of period $3,429 $3,198
Loan losses:
Commercial, financial & agricultural (26) 0
Real estate - mortgage (4) 0
Installment loans to individuals (573) (824)
(603) (824)
Recoveries on previous loan losses:
Commercial, financial & agricultural 0 3
Real estate - mortgage 7 40
Installment loans to individuals 203 157
210 200
Net loan losses (393) (624)
Provision charged to operations (1) 630 855
Balance at end of period $3,666 $3,429
Ratio of net credit losses to average net
loans outstanding .19% .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)
Sept. 30, Dec. 31,
Types of Loans 1998 1997
Commercial, financial & agricultural $883 $1,928
Real estate - mortgage 910 275
Installment 1,873 1,226
Total $3,666 $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:
Sept. 30, Dec. 31,
Types of Loans 1998 1997
Commercial, financial & agricultural 3.5% 3.9%
Residential mortgage loans 39.5% 39.3%
Nonresidential mortgage loans 14.9% 14.5%
Installment loans to individuals 42.1% 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 nine months ended
September 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: 11/06/98
/s/Frank L. Paden
President and Secretary
Dated: 11/06/98
/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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,155
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,040
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,886
<INVESTMENTS-CARRYING> 2,586
<INVESTMENTS-MARKET> 2,586
<LOANS> 286,070
<ALLOWANCE> 3,666
<TOTAL-ASSETS> 378,992
<DEPOSITS> 307,835
<SHORT-TERM> 22,577
<LIABILITIES-OTHER> 1,891
<LONG-TERM> 713
0
0
<COMMON> 30,672
<OTHER-SE> 15,304
<TOTAL-LIABILITIES-AND-EQUITY> 378,992
<INTEREST-LOAN> 18,355
<INTEREST-INVEST> 3,398
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,753
<INTEREST-DEPOSIT> 8,657
<INTEREST-EXPENSE> 9,473
<INTEREST-INCOME-NET> 12,280
<LOAN-LOSSES> 630
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 7,368
<INCOME-PRETAX> 5,562
<INCOME-PRE-EXTRAORDINARY> 5,562
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,774
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 8.19
<LOANS-NON> 716
<LOANS-PAST> 374
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,429
<CHARGE-OFFS> 603
<RECOVERIES> 210
<ALLOWANCE-CLOSE> 3,666
<ALLOWANCE-DOMESTIC> 3,666
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
